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Edited Transcript of LL earnings conference call or presentation 31-Jul-18 12:00pm GMT

Q2 2018 Lumber Liquidators Holdings Inc Earnings Call

TOANO Aug 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Lumber Liquidators Holdings Inc earnings conference call or presentation Tuesday, July 31, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles E. Tyson

Lumber Liquidators Holdings, Inc. - Chief Customer Experience Officer

* Dennis R. Knowles

Lumber Liquidators Holdings, Inc. - President, CEO & Director

* Martin D. Agard

Lumber Liquidators Holdings, Inc. - CFO

* Steve Calk

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Conference Call Participants

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* Beryl Bugatch

Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research

* Brian William Nagel

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Gregory Scott Melich

MoffettNathanson LLC - Partner

* Laura Allyson Champine

Loop Capital Markets LLC, Research Division - MD

* Matthew Jeremy Fassler

Goldman Sachs Group Inc., Research Division - MD

* Nels Richard Nelson

Stephens Inc., Research Division - MD

* Peter Jacob Keith

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

* Seth Mckain Basham

Wedbush Securities Inc., Research Division - SVP of Equity Research

* Simeon Ari Gutman

Morgan Stanley, Research Division - Executive Director

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Lumber Liquidators Second Quarter 2018 Earnings Conference Call. With us today from Lumber Liquidators is Mr. Dennis Knowles, Chief Executive Officer; and Marty Agard, Chief Financial Officer.

As a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in full or in part without permission from the company.

I would now like to turn the conference over to Steve Calk. Please go ahead, sir.

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Steve Calk, [2]

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Thank you, operator. Good morning, everyone, and thank you for joining us. Let me reference the safe harbor provisions of the U.S. securities laws for forward-looking statements.

This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of Lumber Liquidators. Although Lumber Liquidators believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in Lumber Liquidators' filings with the SEC.

The information contained in this call is accurate only as of the date discussed. Investors should not assume that these statements will remain operative at a later time. And Lumber Liquidators undertakes no obligation to update any information discussed in this call.

Now I'm pleased to introduce Mr. Dennis Knowles, CEO of Lumber Liquidators. Dennis?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [3]

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Thank you, Steve, and good morning, everyone. As always, I'm joined by Marty Agard, our Chief Financial Officer.

First of all, I want to thank all of our associates for your hard work and for taking such good care of our customers day after day. Our customer feedback is telling us about the great work you're doing to drive a wonderful customer experience. Keep it up.

Now let me hit on a few high points for the quarter.

We reported net sales of $283.5 million, an increase of 7.6% over Q2 last year. Comparable store net sales were up 4.7% compared to last year. While profitability fell short of our expectations, we remain focused on pulling the levers that drive improvement and remain committed to our annual guidance.

Our work on margin improvement and leveraging SG&A are top priorities in the coming quarters. That said, our liquidity remains strong, and in the second quarter, we opened 8 new stores. So we're right on track for our expansion goals for 2018.

Our work on the Pro business continues to yield solid results. Growth in that area exceeded the company average, with Pro sales now representing more than 25% of our merchandise sales. Our Pro sales teams in the headquarters and in the field are doing a great job building lasting relationships with this important and growing customer base.

In addition, our Installation business posted strong results. In early Q2, we started to market that service nationwide for the first time, and customers are responding enthusiastically. This was our best quarter ever in terms of Installation revenues.

I mentioned last quarter that our April sale was strong, and it was. But I'm particularly excited about the momentum that we saw in our sales throughout the quarter. We continue to build our value proposition to the customer, covering the entire experience from inspiration, floor selection, project management and installation. We are marketing much more efficiently, our stocking strategy has improved and our engagement with the customer is better, both online and in the stores.

An increasing number of customers are coming to Lumber Liquidators because we offer great value, broad selection, knowledgeable associates and a superior support throughout the entire customer experience. As a result, we believe we are now appealing to a broader customer base, and that has positive implications across our entire business.

We are always looking for ways to get better, and our strategic plan is built on continuous improvement. I'm proud of what our team has accomplished in the last 18 months, but we realize there's still much work to do. Marty will take you through the financials, but first, let me touch on a few key items about the quarter that go beyond the numbers.

One of the most important steps we took this past quarter was solidifying key appointments on the senior management team in the second quarter. We appointed 2 key leaders: Jennifer Bohaty and Charles Tyson. Jennifer is now our Chief Ethics and Compliance Officer and brings a wealth of experience in retail product safety, quality and compliance from her years at Target and Toys "R" Us. We have made major investments in enhancing compliance at LL over the past few years, and to me, Jennifer's appointment is our capstone investment. We want to be an industry leader when it comes to comprehensive product quality, and Jennifer will help us realize that goal.

Charles joined us in May as our Chief Customer Experience Officer and is focused on enhancing the shopping experience. Charles brings 30 years of retail and commercial merchandise experience, most recently from Advance Auto Parts and OfficeMax. Charles will focus on creating a unique and seamless experience for our customers through all facets, whether in-store or supply chain, on the web or through our contact center.

The appointment of Jennifer and Charles marks the completion of our senior leadership team transformation. Over the past 2 years, we have recruited and appointed a total of 8 new accomplished professionals to lead the most critical functions of our company, from operation, to legal and compliance, to finance. I believe that together, we're building a sustainable, customer-focused, growing company for the long term.

On the product side, I'm excited to see the growth in our newly introduced products and styles. Our waterproof rigid vinyl product line performed real well. Also, the new styles of whitewood engineered hardwood are turning above our original expectations. We will continue to invest in these areas. Our focus is on bringing in trend-forward, customer-friendly designs, whether that is color, texture, attributes or layout. Our passion is to make beautiful flooring possible and easy for all customers.

In addition, our suppliers remain supportive of our initiatives and are partnering with us to enhance both our businesses. Our Pro sales and Install organizations are right on track, and our stores are doing great jobs supporting both initiatives. Our Pro customers are showing us they appreciate our small, intimate, designed-oriented store with knowledgeable employees and substantial warehouse inventory support. Our employees are developing stronger relationships with their Pro customers, and our Pro customers reward us with an increased share of their wallet.

We also saw that our customers are pleased with our ability to offer a full-service solution to their flooring projects, and we're excited to see our installed pickets grow. This has happened as our customers have taken advantage of our one-stop solution for their flooring product, finished materials and service needs.

I want to add some commentary on our announcement this morning regarding our headquarters and finishing operations.

Over the past 18 months, you've heard me talk regularly about reviewing every aspect of our business for opportunities to optimize and strengthen. For some time now, we have been looking particularly at our finishing operations. We have decided to exit that small part of our business so that we can focus more effectively on our core competencies, which are customer experience, merchandising and retail operations. Our entry into the finishing business was originally a first step taken several years ago in a more ambitious vertical integration strategy, but that strategy was quite capital-intensive and limited our flexibility in terms of style, innovation and sourcing. The finishing step alone really offered no cost advantage. Ultimately, we felt it was best to focus on our core competencies and to rely on our strong vendor network for innovation in cost-effective finishing that we can be -- integrate it into our manufacturing processes.

While the long-term financial impact of this decision is not material, we believe it will give us more flexibility and let us sharpen our focus on the true growth drivers of the company. Marty will provide additional financial details on this in a minute.

On the headquarters note, I want to say that Toano and Williamsburg communities have been a great home for us over the past 15 years. At the same time, with a completely new senior team and growing business, it is the right time for us to relocate to a facility in a metropolitan environment. With our lease in Toano expiring at the end of 2018, this is an opportunity to consolidate our corporate functions into a single, smaller facility, consolidate our customer contact teams in a nearby facility, providing the recruiting and retention benefits of a metro area talent pool, and it will drive operational efficiencies of co-location and provide growth capacity.

With our distribution center there and approximately half our corporate team living in the area, Richmond was a logical location for our new home. Fortunately, we were able to find an existing facility near our current satellite office that serves us in terms of size and functionality.

While the financial impact is small, we think it will improve our productivity, enhance our culture and support better internal communications. We look forward to expanding our presence and relationships with the city of Richmond and Henrico County.

So we are officially in the back half of 2018, and I'm excited about our progress. The new team is now fully in place, our strategies are bearing fruit and our customers are enthusiastic about what Lumber Liquidators has to offer.

Now let me hand it over to Marty to take us through the numbers. Marty?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [4]

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Thank you, Dennis, and good morning, everyone. Let me start by again covering the top line highlights.

For the second quarter, net sales were $283.5 million, an increase of 7.6% over last year with comparable stores net sales up 4.7%. This consisted of merchandise comps up 0.9% and installation sales up 51%. The overall 4.7% comp growth was affected by an average ticket expansion of 4.6% and transaction growth of 0.1%.

In terms of category performance, our manufactured category, particularly vinyl products with excellent aesthetics and resiliency attributes, continued to show strong growth and garner share for the wood and bamboo categories.

Our Pro customer segment also continues to grow well above the chain average and represented over 25% of our merchandise sales in the quarter.

Installation sales grew 51% in our comp store set and grew 15% in the markets it's been offered in for more than 13 months. Installation sales represented just shy of 11% of our sales in the quarter.

We opened 8 new stores in the quarter, bringing us to 13 year-to-date and remain on track to open 20 to 25 new stores this year.

Moving on to gross margin. This came in at 35.7% for the quarter, a decline of 130 basis points from last year's 37% gross margin. Similar to a year ago, during the quarter, we got a favorable final ruling on the antidumping and countervailing duty rates from prior periods. If we adjust both periods for these credits and last year's quarter also for the air quality test kit reserve adjustment, as tabled out in the 10-Q, the gross margin in this quarter was 35%, a decline of 50 basis points from last year's similarly adjusted 35.5%.

The margin decline versus last year reflects higher transportation costs, higher obsolescence cost related to assortment turnover, increased mix of Installation sales as well as select promotional increases. These unfavorable factors were partially offset by improved category mix fueled by the growth in vinyl products that carry higher margins.

Compared sequentially to the first quarter and again adjusting out the antidumping duty credit in this quarter's rate, gross margin was down 130 basis points from the first quarter, with about 2/3 of this coming from seasonally higher promotional activity and the balance from increased Installation mix and obsolescence costs also seen in the year-over-year comparison. Transportation costs were sequentially flat.

SG&A expense for the second quarter was $102.2 million compared to $92.3 million in the second quarter 2017. SG&A in the recent quarter included incremental legal and settlement costs of $6 million, while the year-ago quarter included $3.5 million in legal costs, in both cases related to the DOJ/SEC investigation and settlement activity related to the MDL. Both period items are tabled out in the press release and in the 10-Q. And when we exclude these items, adjusted SG&A expense for the quarter was $96.2 million, an increase of $7.4 million from a year ago.

The increase in spend included a higher payroll of $3.3 million due to a combination of sales commission increases behind increased volume, annual merit increases across the store and corporate organizations, Pro and Installation team growth, the addition of 21 stores since Q2 a year ago and other benefit of tax increases. Advertising was up from a year ago by $1.3 million, and the balance of the SG&A increase was in higher financing and card fees, depreciation and other various items. Adjusted SG&A was 33.9% of sales compared to 33.7% last year.

I'll move down the P&L to operating profits.

For the quarter, we recorded an operating loss of $0.9 million compared to operating income of $5.1 million in Q2 of 2017. If we exclude the unusual items that impacted these results, as shown in our 10-Q and press release, we had an adjusted operating profit of $3 million in the quarter compared to last year's $4.9 million similarly adjusted operating profit.

As Dennis commented, this isn't quite where we wanted to be given the headwinds on gross margin coupled with seasonally higher advertising expense. But we are making adjustments and expect to see gross margin improvement and SG&A leverage as we get into the second half of the year.

Turning to liquidity and cash flow.

As of June 30, we had total liquidity of $120 million, and we had borrowings under our revolving credit facility of $35 million, which compares to $26 million in borrowings at the beginning of the quarter.

Our inventory ended the quarter at $297 million, up from $273 million at the beginning of the quarter, driven by the combined effects of new stores and increases in breadth of items stocked in the stores.

With respect to guidance, we are maintaining both the comp store growth and profitability guidance for the year we've shared in the last 2 calls. Q2 sales were in line with our expectations and bring us to 3.8% comp store growth through 6 months. We continue to believe we can be in the mid-single digits for comp store growth in the back half of the year and for the full year.

In terms of operating profit margin expansion, Q1 was certainly the easiest comparison for us and, frankly, this Q2 the most challenging. We remain focused on bringing sequential modest lifts to gross margin and leverage to SG&A in the next 2 quarters and continue to look for the full year adjusted operating profit margin to be in the 2% to 3% range. We do acknowledge that with persistent transportation cost pressure and increased Installation mix, we have moved lower than this range. And just to be clear, this and my earlier comments about second half margins assume no meaningful tariff adoptions.

In terms of liquidity, we expect inventory to stay at its current level, $285 million to $300 million through the year. This is a little higher than previously guided as we've increased the breadth of floor stock in our stores.

We continue to fund the $21.5 million remaining cash payment contemplated in the MDL settlement in the fourth quarter of this year and to spend $15 million to $20 million in capital during the year.

It's been a while since we've talked on the call about the legal landscape, but things are still active on that front. While none of the matters I will comment on are new and each of them is detailed in the 10-Q, there are various developments to note.

So first, the DOJ/SEC investigation is ongoing. We continue to cooperate, and while our sense is both the DOJ and SEC are moving to conclude their investigations, we have to expect the legal spend rate to continue through the year and on into 2019.

On the MDL, you may have seen the court granted preliminary approval to our settlement agreement, which triggered the class notification process to begin. The direct mail and Internet notices are out and will run through the third quarter. Then the court will review participation, consider the final award and determine whether or not to issue final approval. That approval would then trigger our cash funding and the voucher distribution, which, as mentioned, we expect to fall in the fourth quarter.

In terms of P&L impacts, in addition to activity related to the MDL settlement, we've been working through individual MDL-related cases, and the collective legal fees and settlement costs from these are what you see impacting our P&L and identified separately in our unusual items disclosures. While I can't promise when this will phase out completely, I do expect to see both settlement costs and the legal spend ramp down in the second half.

The Gold bamboo case has been in our disclosure for some time. I just want to note that we participated in court-ordered mediation, though no resolution has been reached, and that we continue to prepare for trial scheduled for early 2019.

Lastly, before handing it back to Dennis, let me provide a little more color on the other announcements this morning in our filings.

The first of these is the decision to exit our finishing operation. As Dennis said, this is a small operation that encompasses only the final finishing step in the flooring production. It currently employs approximately 45 people.

In terms of financial impacts related to the change, we will receive $1.8 million in proceeds from the sale of production assets over approximately a year's time based on removal steps and incur an impairment of approximately $2 million in the third quarter. We will incur severance and other transition costs spread over the third and fourth quarters of this year that we don't expect to exceed $500,000. And in 2019, we have some -- we will have some unabsorbed occupancy costs prior to our exiting the Toano facility at the end of 2019. Some of this will be mitigated by lower cost of goods from the outsourcing, and certainly, beyond 2019, we expect to see savings through this transition, along with the sourcing and innovation opportunities as we leverage our vendors' capabilities.

On the headquarters relocation, again, this will mainly be a 2019 event. By getting an early start and selecting an existing building near our current Richmond satellite office, we can minimize the distraction and risk elements of this move.

Financially, there will be minimal impact in 2018, but we will have overlapping rent expense in the fourth quarter of 2019, relocation expense also in the fourth quarter of 2019 and some degree of employee retention and transition support expenses that will begin in late 2018 and run through 2019 and perhaps the first half of 2020.

Our goal is certainly to retain all our employees, but we understand the relocation will result in some attrition. We will also have modest incremental capital spending on furniture and equipment related to the new headquarters in 2019. On an ongoing basis, the new headquarters' occupancy cost will be below that of our renewed Toano lease, inclusive of the finishing operation space, and only slightly higher than the office portion of the Toano facility under our renewed lease.

Finally, on the updated severance agreements described in the 8-K. The Compensation Committee and the board conducted routine compensation reviews with advice from its compensation consultants and, as a result, adopted these agreements to offer market-level employment terms and provide consistency where gaps had emerged due to either new personnel or the lapsing of prior terms. The Compensation Committee and the board felt this was appropriate to attract and retain the right leadership for the company.

That's all I've got to cover, so I'll hand it back over to Dennis. Thanks again, everyone.

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [5]

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Thank you, Marty.

As we turn to the second half 2018, we are 100% focused on execution. We are still guided by our mission statement, which is: From inspiration to installation, our passion is to make beautiful flooring possible and easy for all. This means we continually remind ourselves that we serve 3 key customers: the DIY customer, the do-it-for-me customer and the professional installer. It is critical that we continue to identify these customers quickly, connect with them on their specific needs and articulate how we can deliver better than anyone else in the marketplace. We will continue to emphasize the knowledge of our store associates, the breadth of our assortment and the value we bring in terms of exclusive items. And we will continue to hone our growth strategy and integrated Installation Services.

Earlier, I talked about how our sales quality is improving, as is the breadth of our customer base. As we continue to build a reputation with these new customers, there are several things that we must maximize.

First, in terms of operational excellence, our customer feedback leap is drive action. We've talked about this before. Our new customer surveys are giving us a better understanding of our customers. But for us to effectively compete in the long run, we have to be the best at understanding purchase decisions, customer expectations and what attracts customers to our stores in the first place. We must also understand where we fall short and what we must do to improve. Charles brings a lot of muscle to the team on this, and we are already gaining insights from his experience and fresh perspective, both in terms of assortment and marketing.

We are working to align assortments to compete across all customer segments, from DIY to Pro customers. We also recognize there is opportunity for greater regionalization to meet the diverse lifestyle needs of all customers.

Additionally, the marketing team is working to reframe our brand promise and the role of the Lumber Liquidators name. We're also committed to building an enhanced omnichannel experience with greater digital capacity. This will allow us to capture and convert more customers from our website.

Currently, we are reevaluating media effectiveness and mix for the back half of 2018 and into 2019. We will leverage new and existing strategic partnerships to understand future home decor trends and align assortments and marketing to meet the needs and design of our customers in terms of their preferences.

Our second focus, enhancing the customer experience, will also be the priority for Charles and his team. The speed at which the customer shopping habits are evolving is astounding. We have to consistently stay ahead of this wave and ensure that our online, in-store and service platforms are integrated. We have to continue to expand the number of products and services available to our customers, both online and in-store.

Our third strategy, expanding our business, continues to drive us. Our new stores are opening more efficiently. New stores are equipped with strong leadership; a fully staffed, knowledgeable team; are stocked with products relevant to the local market; and receive proper advertising for opening day. Our approach to opening stores today is nothing like the way we did 3 years ago, and these new stores attract a more diversified customer. So while we remain methodical in our approach, we are now opening stores that are more competitive from day one.

As I mentioned earlier, we're now advertising Installation nationally, and we're already seeing the impact of our performance. Now that we are fully deployed, we are refining this service and learning from our customers and employees to ensure that we're improving this aspect of the customer experience. And once the customer has a great experience with us, the best marketing program in the world, the customer word of mouth, helps spread the word about Lumber Liquidators.

In terms of the Pro, we are seeing a similar pattern. Once a pro experiences our level of service and broad assortment, we tend to keep them as a repeat customer, and our reputation attracts new pros to our stories. I believe our Pro business will continue to outperform our standard customer growth for the next several years, particularly as we continue to expand our assortment, build capability and develop great associates and add locations.

Finally, on improving profitability. We remain on track to expand our operating margin by 1 to 2 points in the next few years through a combination of our initiatives at the gross margin level and SG&A. I did mention last quarter that we would likely be more assertive with our advertising dollars in 2018 now that our basic infrastructure is in place. And as I mentioned on our call last, we will be adding some dollars to spend -- to SG&A, both at the corporate and in IT, but these will be modest and we still expect to leverage SG&A.

As we execute on these plans over the next few years, I believe we can achieve continued improvement in our operating results, including annual comp store sales growth in mid-single digits, total annual sales growth in the mid to upper single digits and adjusted operating profit in the upper single digits.

The team and I are very excited about what we've accomplished and the opportunities that we see in front of us. There's a lot of energy and enthusiasm here at the headquarters, in our distribution centers and stores. In a lot of ways, it feels like a new Lumber Liquidators. And with experienced, well-rounded team and comprehensive commitment to excellence, sustainability and quality, we're optimistic about what we can accomplish in the coming years.

With that, operator, we would like to open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Simeon Gutman with Morgan Stanley.

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Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [2]

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I think the big questions will be about the second half and how you can get to your op -- your -- I guess your financial targets. Compares, get -- they don't get much easier. You'll be lapping some of the service or Installation comps in the back half. And so you mentioned you feel okay on -- that margin will start to improve. But how should that be if the top line doesn't meaningfully reaccelerate?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [3]

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Okay, I'll take a shot at this, Simeon. I -- we start -- we really don't start to comp the full deployment of Installation until the fourth quarter, most notably, I guess, in the last 1.5 months. But comparisons, as it relates to merchandise comps, are much softer in Q3 and Q4. And we had -- I would tell you from a promotional standpoint in Q2, it's always been our strongest promotional quarter as we have our April sale and such. So we traditionally see our margin improvement Q3 and Q4 and are already seeing that as we enter the month of July.

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Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [4]

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Okay. And if you look at the second quarter, you mentioned the profits fell short a little. Was it more or less gross margin versus SG&A or how you perform relative to plan?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [5]

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Yes, Simeon, it's Marty here. I would say probably a little bit more on the gross margin side. Part of the -- I don't want to say this was a total outlier, but it did have a couple of timing-oriented impacts to it. The mix was particularly strong around the Install business. That's part of why we got sort of stronger into the comp range was to build the Install business, and that had a bit of a dilutive effect. And while that will continue, it shouldn't get any worse, and so the year-over-year comparison should actually be a little bit less disadvantaged by that. We had this obsolescence charge in the quarter. That is a pure timing thing, really shouldn't repeat. And then we also had a little bit heavier promotional period, but second quarter is always a little heavier with the April sale. And then, we did a couple of extra things in this quarter that would not be expected in the back half. So we do expect that margin to kind of bounce back a bit. The easiest compare really to make up ground or continue to deliver on the full year guide that we talked about is in the fourth quarter maybe more so than the third quarter, but we still like how it's coming back. On top of those sort of timing issues getting past us, we also have some new items coming out in both laminate and some of the engineered and a couple other areas that should help as well that we're seeing some margin benefit from. So we still think we'll get the gross margin lift, but the second quarter was a little lower than we had expected.

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Operator [6]

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Our next question comes from the line of Brian Nagel with Oppenheimer.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [7]

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So my question is very much going to be a follow-up to what Simeon just asked with regard to the operating margin. If I'm doing the math correct, and I know there's a lot of moving pieces there, but the operating margin or adjusted operating margin in the first half of the year tracked at just less than 1%. And assuming a, per your guidance, low to mid-singles, says, 2% to 4%, that means to get to that guidance, again this is pretty simple math, you probably need a 3% to 5% somewhere in the second half. So that's, I guess, my first question, if those numbers are correct. But then maybe if we look at the components, how should we think about, within that guidance, what we should expect in both gross margin and then SG&A margin in the second half of the year?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [8]

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Yes, I think that math is right. I would say that if you ran -- as we think about our gross margin lifting back towards where it was, let's say, in the first quarter, somewhere sort of between the first quarter and the second, but it should get sort of steadily higher from there, and the fourth quarter's comparison looks the best to us. And that should, on the year, get you that 50-plus basis points of improvement year-over-year on that adjusted gross margin. And then on SG&A, we've guided typically more towards a dollar basis on a quarter. And I would say between the first quarter's $93 million and the second quarter's $96 million is a good range. And for us, that shows some pretty decent SG&A leverage and -- when you add that to the first half. I mean, we are -- when you add that to the first half, it does get you that 2% to 3% percent operating margin. And so that's how we see the math coming together. It is a stronger second half. We had a strong second half last year. And then -- and still on the gross margin side, even with that strong second half, we think there's some upside to that comparison in the fourth quarter. So yes, we think we get there that way.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [9]

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Okay, Marty. So let me ask this question as a follow-up to that. What -- if you lay that out and look at your plans, what is the biggest risk to that? Really what could go wrong?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [10]

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Well, I -- this is a little bit for Dennis to answer as well, but the balancing of margin and comps is always a tricky thing. And we think, with what I described before, some of the relieving of the promotional activity in the second quarter that's sort of seasonal in nature, the removal of the obsolescence, transportation costs that are flat. And we actually think there are some things we can do to improve the transportation cost structure in the back half. We do think we get that lift. But again, it's always just tricky to see whether as we get that kind of lift and bring margin-accretive products to bear, do we still get the same comp growth that we're looking for to get into that mid-single digits. So it's that interplay that's probably got the risk to it. The SG&A, we manage, and we kind of see where that's going. And we can divide it by the sales, and we can see the margin improvement there. That's not such an uncertain area, so.

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [11]

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Yes, Brian, I wouldn't add anything, I guess, additional to Marty's comments other than the risk as it relates to the back half was -- I mean, he -- as he mentioned, the balance between sales and gross margin always remain a big piece of work for us in the second half. We had a few things impact the business last year in the second half negatively that we're hoping not to repeat this year to mitigate any sales risk we have. But Charles and the merchant team are working on the gross margin. We've already kind of seen it snap back where we'd expect it to be in the month of July. So that's -- that risk, I think, as Marty said, we got to manage our obsolescence. We got to make sure that our promotional cadence makes sense in a way that continues to drive traffic but, at the same time, doesn't -- isn't a detriment to growth on the margin. So other than that, I feel that's our management and execution work to do in the second half.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [12]

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Great. And maybe if I could ask quickly -- then if I could just add one -- throw one more in just with regard to the top line. I mean, a bright spot here in the quarter. Can you discuss the trends in sales through Q2 and then into early -- at least during the first third of Q3 here, particularly as weather in your market's normalized because I know that was an issue you discussed a lot in the first quarter of the year.

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [13]

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Yes, Brian, our comp performance continued to accelerate through the quarter with improvement sequentially through all 3 months and so far carrying into the month of July. So sales trends are continuing to improve, and we like the trajectory of the business. And now it's just for Charles and [Mark] and the store teams to manage through the end of the second quarter. It's all -- we've still got a long way to go, but the sales trajectory was positive.

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Operator [14]

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Our next question comes from the line of Matt Fassler with Goldman Sachs.

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Matthew Jeremy Fassler, Goldman Sachs Group Inc., Research Division - MD [15]

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A couple questions. The first relates to your comments on promotions. You talked about the fact that your promotional cadence typically is strongest in the second quarter, but that would be the case most likely every year. So was there anything in the market that evolved or changed that drove more promotional activity than you had seen prior than perhaps you had expected?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [16]

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I wouldn't say necessarily, Matt, more than we expected, but we were a little deeper promotionally than we typically are. As Marty mentioned, in a couple of categories in particular, that we start to clear in some product line as we make room for new product line. We went deeper on a couple of product categories than we normally would.

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Matthew Jeremy Fassler, Goldman Sachs Group Inc., Research Division - MD [17]

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If you think about sort of the mix of business among customers and categories, so, obviously, Install strong, Pro strong, DIY comps presumably down a little bit. Is the promotional activity aimed at that DIY customer? And is there anything going on in the DIY market that suggests a softer tone? It would seem to be the case from your numbers and from the promotional cadence, but what's your read on the market more broadly?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [18]

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Well, it's -- the Pro -- as you mentioned, Pro and the Installation business has been strong. A disappointment for me if I were to look at the strength of our sales across the quarter, while, I mentioned to Brian we saw improving comps through the quarter and into July, we still seem to be lagging in the North Central. If you looked at the comp performance on our divisions, they were both -- or 3 of the 4 divisions were above the company's comps for the quarter with the North division still falling well behind the rest of the company. So it's hard to say weather in the middle of the summer, right? We're not saying that. It's just that haven't seen the North division come back like we would have expected it to once the weather broke. So I don't know that that's any indication of any macro impacts right now, but we're watching it closely, looking at -- Charles and his team are looking at the balance of promotional spend in that area to make sure that we're paying close attention to it. But it's pretty broad across that area. We're still seeing strength in the South. We saw kind of a renewed strength in the Eastern division, and then our Western division kind of held serve. So not really seeing -- our tickets are strong, our growth in average ticket to all 3 customer segments are still growing. So our stores are doing a good job. Our conversion is up. We're still seeing a healthy estimate file, indicating there's still a lot of people out there wanting to do the business. It's just a matter of conversion and then trying to figure out what's going on in that North Central part of the country.

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Matthew Jeremy Fassler, Goldman Sachs Group Inc., Research Division - MD [19]

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And my last question, if I could, relates to inventory. And so there should be a couple of different things happening. One is, you seem to want to carry more in stock. And I know that, that's a bit of a change in the way some of your competitors have come at the business, but also, I guess, the in-transit inventory was really where the pop was. So if you could talk about, I guess, the philosophy of carrying more in stock, and then also just how to think about the way you convert that in-transit inventory, whether that's kind of a temporary bulge that will move into the stores in short order.

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [20]

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Great question. I'll take the first part, and then if Marty wants to add anything as it relates to the in-transit inventory. For some time, at least at my time at Lumber, we've really tried to understand what -- how much of our business went out the door the day it was sold. We did -- I don't think that we truly had an appreciation for what was happening inside the product categories as the business migrated from what I would call more of a traditional solid hardwood floor to this manufactured categories, whether it be laminate or vinyl. And we've seen more and more migration into vinyl. Vinyl makes up between -- on our manufactured categories are well over 40% of our business now, and half of that goes out the door the day it's sold. So we're increasing our stocking categories as we broaden that assortment. And it has obvious positive implications: better sales, better margin mix for the company. And so we've really worked hard. And that was -- a bit of our transportation costs in the second quarter is moving more product into our stories so that we can take advantage of that cash, what I call cash and carry business. So our strategy is to make sure that we have as much of that available for the customer to take with and then our solids business, which is normally a business that has a little longer cycle time as it relates to the selling process in our distribution centers and ready-to-ship. Our stores in the East do more of that business and our stores in the Pacific Northwest will stock more of that product. As it relates to in-transit, as Marty mentioned, we have -- we brought in some additional depth that will be going to the stores, as well as some new products within those categories as it relates to the manufactured and some of the laminate SKUs.

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [21]

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And you might -- yes, Matt, in terms of the -- on that in-transit, that's just a bulge. Sometimes it's on the water, sometimes in the D.C. It all going to make its way, and we guide to the all-inclusive amount. So it's just a matter of where it is in the supply chain, but -- yes.

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Operator [22]

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Our next question comes from the line of Seth Basham with Wedbush Securities.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - SVP of Equity Research [23]

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My first question is just back on the issue of gross margins in the second quarter. Relative to your expectation, what 1 or 2 things are the ones you mentioned were the biggest sources of your miss?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [24]

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Yes, I would say -- it's Marty here, the obsolescence piece. We've been churning through a couple of categories from an assortment standpoint, but this is going from solid to engineered format that we got sort of pregnant on both sides because we weren't sure how quick adoption would be. And so as we sort of completed that process or at least stabilized where the engineered stuff has come on, we've started to deal with the -- what I call the leftover solid. So this has been a longer running sort of transition across a couple categories. And we thought we could move that stuff out more gradually and quicker and stuff, but at the end of the day we felt the need to take some of this charge. So that was one that frankly was a bit of an outlier. It's a onetime thing. It's kind of a noncash thing. So it's just one that we had to deal with. The strength of the top line included a little bit more install mix than we originally set out. So that had a slight impact on us. Those were the -- probably the 2 pieces. Transportation cost was -- is elevated, but I don't know it was much worse. If anything, there was a little bit more movement of goods as we pushed it out into the stores and increased those available in the store-type of inventory. That's kind of a onetime effort that -- we sort of knew we were doing that strategy, but it contributed a little bit to the margin pressure. So that's kind of the basic themes there.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - SVP of Equity Research [25]

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Got it. That's helpful. And my second question is around transaction growth. Obviously, you had a tough comparison, but still another quarter of flattish transaction comps. I presume the weakness is mostly in the North division as you called out that area as being soft. But what can you do to drive transactions going forward? Is it going to be more around promotion or more around marketing, particularly for that DIY customer?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [26]

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I've got Charles Tyson on the call with us. I'll let him take a stab at that and then I'll follow up.

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Charles E. Tyson, Lumber Liquidators Holdings, Inc. - Chief Customer Experience Officer [27]

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Yes Seth, good morning. So I think there are a couple of things, Seth. Clearly, as we know, most of our customers start their flooring journey online, and we have a lot of work to do to improve our online experience. We've got to be able to capture them when they're in the ideation phase. So enhancing our platform and enhancing our digital/visual merchandising online efforts. And probably more important in the short term, Seth, is how we actually approach our digital marketing. We're enhancing as we speak. We've got new team members coming in with new capabilities to really help us drive online traffic and conversion. We're partnering with a number of new channel partners to help us really connect with segments of customers that we don't believe we've been relevant with. As you know, our younger consumers who are homeowners are increasingly being disconnected from the cable. And so we've got to make sure that our media mix and our marketing approach is balanced both to our traditional customers, our very strong DIY base of customers, but also looking at segmentation of customers that we need to invest in more heavily than we've invested in the past. And we're going to be both testing and piloting programs in Q4 -- Q3 to accelerate into Q4 and with our plans in 2019 a much more robust digital marketing approach than one we've taken to date. So hopefully, that gives you some insights into how we want to think about both attracting customers to our brand and then getting customers to transact both online and in-store, which is a critical part of our value proposition. Now if I could take a minute. It's the first time I've been on this call, but one of the reasons I joined this company, I spend a lot of time in our stores. And we really have a competitive value proposition in terms of the level of experience that our team members bring when a customer walks through the door. So we've got to have a very strong omnichannel balance between an online experience that delights customers with the styles and products that we have, the new innovation that we have, connect that customary through into our store organization where they will get a different experience than many of the other players throughout in the marketplace. So I'm very excited to be here. I think we've got an amazing amount of opportunity. And hopefully -- that was a long-winded answer, Seth, but it gives you some insight.

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Operator [28]

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Our next question comes from the line of Laura Champine with Loop Capital Markets.

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Laura Allyson Champine, Loop Capital Markets LLC, Research Division - MD [29]

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It's on the gross margin line in the second quarter. How much of a hit did that line take from the increased penetration of Installation sales? And what was the offsetting benefit from increased sales of vinyl tile?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [30]

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Yes, Laura, it's Marty. The Install piece is -- in the year-over-year comparison is in the 20 basis-point range, and that has been sort of steady sort of year-over-year headwind as we've gone. The category mix -- and I won't just give you just on pure vinyl, but the category mix that is heavily influenced by that vinyl has been multiples of that to the positive. So we don't break all that detail out and stuff. We do give some visibility in the Install mix. But just realize the net of those has been meaningfully positive pretty steadily over the course of the last year, year-plus.

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Operator [31]

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Our next question comes from the line of Rick Nelson with Stephens Inc.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [32]

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Can you speak to the competitive environment and these stepped-up promotions that you talked about in select categories, what those categories would be?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [33]

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Sure. I -- as far -- as it relates to the competitive environment, I just think -- I don't know that in total, it's gotten more competitive. I think it's just a more -- there's more attention to the waterproof categories. We've seen that across all of our competitors, which, again, we like the attention in the space. It brings more attention to the categories and gives us a chance to showcase our product. As it relates to other categories, we were more promotional across the bamboo categories as we had -- as Marty mentioned, we had some obsolescence there that we're trying to move through in some of our other solid categories.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [34]

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All right. The hardwood and bamboo categories looked like they contribute to a decline year-over-year in same-store total sales. Is there anything kind of at the end of the tunnel to reverse course with those categories?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [35]

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I think Charles and the team -- and the store teams are focused on making sure that we've improved that experience. It's a much different selling process than some of the manufactured categories, so it takes some attention in the stores. We have to be competitive. And as Marty mentioned in his prepared comments, part of the reason for us exiting the finishing line was not only the fact that there was no cost benefit, it was also that it limited us in terms of being able to take advantage of an innovation in style and the capabilities that a larger company, say, in manufacture -- or focused on manufacturing can offer. So we've got some work to do as it relates to the assortment and the offering. And then again, it's not a competitive issue as much as it is just focusing on the trends of styles and making sure that our -- we've got folks in the stores focused on that as well. So I think we did see improvement in the solids in Q2. In fact, probably one of our better performing months as it relates to its performance year-over-year. There is continued migration to the manufactured categories and then the engineered continues to gain strength as well. So I think as we've got some new engineered SKUs coming in as well as some new solid SKUs, I think we'll start to see that improve here in the second half of the year as well.

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Charles E. Tyson, Lumber Liquidators Holdings, Inc. - Chief Customer Experience Officer [36]

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Yes, and Dennis, if I could add to that as well. We see a greater opportunity in the regionalization of our assortment. And certainly, when we think things like our engineered wood program, there's an opportunity for us to improve our penetration and our productivity. So we have a lot of focus around our hardwood program. For sure, vinyl is driving significant outcomes, but the hardwood program is important to us and one that we're going to intensely focus on.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [37]

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Got you. And the clearance activity is that now behind you, the obsolete product that you referenced?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [38]

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Yes, it's Marty here. Yes, generally, it is. I would say we -- from a charge like this, it's -- we don't expect this to recur. I'd say we still have a little bit of work to do just from a transitioning across those categories but shouldn't lead to these obsolescence charges.

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Operator [39]

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Our next question comes from the line of Greg Melich with MoffettNathanson.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [40]

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Had a couple of questions. One is on inflation. Did that have any impact in the average ticket growth? Or was it all mix?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [41]

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Yes. I mean, generally all mix-oriented. I would say we've had a little bit of inflation in the solid wood category. We pushed a little bit of pricing there, but that's a small piece of a smaller category. So I would say generally, this is mix. And the average ticket has been benefiting from the Pro growth. As we've talked on the call, the Pro business has a larger ticket than a DIY. And then the Install ticket, of course, is a considerably bigger ticket. It doubles because of the labor -- more than doubles because of the labor, and we also attach better and stuff. So you end up with a ticket that's quite a bit bigger than a DIY, and that mix has -- those 2 factors have been, by far, the biggest driver in the average ticket growth.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [42]

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Got it. And then second, sort of a follow-up to Charles. Charles, great to -- congrats. Great to hear your voice again.

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Charles E. Tyson, Lumber Liquidators Holdings, Inc. - Chief Customer Experience Officer [43]

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Thanks, Greg.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [44]

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You mentioned the real shift in terms of marketing and what you're thinking about. What is the digital mix today of the ad budget? And where do you expect it to be in 12, 18 months as you think about this?

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Charles E. Tyson, Lumber Liquidators Holdings, Inc. - Chief Customer Experience Officer [45]

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Greg, I'm not going to be specific on how we're allocating our dollars, but I will tell you that we are underpenetrated in our digital spend in terms of both new technology and existing linear television, for example. So I'll give you a unique example. So connected television, we had very little investment. In linear television, we had significant investment. And there are many customers that have migrated to connected television. And so we're in the middle of doing a really deep dive on what is the effectiveness and how are we spending our dollars against each line of the marketing P&L. And where do we see capability gaps that we need to close and new opportunities to market to new customers through those capabilities. So I would say, Greg, I see a greater opportunity for us to drive a different mix of our marketing. I'm not going to be specific on the dollars because frankly, we'd still beat in the analysis. We've brought some folks in who are helping us with that, and they've got very rich background in the digital space, which was a real gap here, and that's a good gap for us to close. So as we get into future quarters, I will go deeper on that.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [46]

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That's great. And then Marty, I guess on the guidance, I heard that tariffs are not included in what you're thinking for the back half. Could you remind us what percentage of your COGS are imported? What -- anything that you have on. What's directly imported versus indirectly or China as a proportion of those?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [47]

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Yes, they're -- it's in the 40% range that comes from China, but we have various appeals to those and then a range of ways we would try to manage it. So rather than speculate on what we'd include, what we wouldn't, what would impact margin and so forth, we're kind of sticking to the guidance that's kind of clean of that, and then we'll sort of cross those bridges as we go.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [48]

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And if China's 40%, but -- of COGS, but what about other imports? Is that a meaningful amount or is China still the bulk?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [49]

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No, I mean, we import from Europe and South America and so forth, yes, and there's a good distribution, and -- yes.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [50]

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And so as -- are most of your COGS imported at this point?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [51]

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I would say we -- we're about 40% U.S., probably about 20% in Europe and South America and then the balance in Asia.

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Operator [52]

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Our next question comes from the line of Peter Keith with Piper Jaffray.

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Peter Jacob Keith, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [53]

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I just want to circle back on this mix shift that you're experiencing away from some of the natural wood products and towards the manufactured products. It's been pretty dramatic and pretty consistent Q1 to Q2. Presumably, the manufactured has a lower ticket per square foot, so I'm wondering if we could frame up what you think the comp headwind is right now from this overall mix shift.

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [54]

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I mean, I don't know what -- that I would -- I mean, the average selling price is a bit lower, but its ticket is a bit higher. So we continue to lean into that manufactured business, particularly as it relates to the vinyl and the water-resistant laminates. So I don't know that we've really -- we don't see that big a headwind as we also -- as I mentioned, Peter, we're starting to see the wood business recover, albeit engineered categories. So -- and then the Installation business is offsetting. It's actually helping that ticket grow because we're attaching better with it.

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Peter Jacob Keith, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [55]

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Okay, fair enough. So like with the manufactured, I guess it is lower dollars per square foot, but people are doing larger jobs. So the ticket is kind of holding steady?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [56]

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Yes.

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Peter Jacob Keith, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [57]

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Okay.

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [58]

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Just for example, I'd tell you that our vinyl plank categories, our average selling price was up $0.14 in Q2, so -- and then our units were up significantly.

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Peter Jacob Keith, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [59]

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Okay. And Marty, when you were framing up the guidance for the margin of 2% to 3%, you did comment that you're trending more towards the lower end of that. And I think you had mentioned because of freight, did -- do we capture that? And I guess is the freight building as a headwind? Could you maybe frame that up how much? And is it self-inflicted or is it a higher cost overall?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [60]

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Yes, the transportation is in the 50 basis-point range year-over-year as a headwind. And we had some of that in the original guidance, and it's probably just been a little bit more persistent, a little bit more pronounced. And then again, as we talked about in the second quarter on kind of a more of a onetime basis, we pushed more inventory out to the stores to increase the on-hand availability, the breadth of on-hand availability. So that has been one of the things that's caused us to move sort of lower in that range. The obsolescence charge, okay, that's one quarter's worth, and that wasn't in the guidance either, but those are a couple of the pieces. The rest is generally on track, and -- yes.

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Peter Jacob Keith, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [61]

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Okay, good enough. Lastly for me. The Install benefit to comp was actually the strongest in quite some time, maybe the strongest ever. I guess do you guys feel that there's some maybe some good sustainability with Installs or you're probably comping that service on a per-store basis better?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [62]

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Yes, Peter, I'll -- I would say the strength has been really good, the momentum has been good throughout the quarter. Our penetration -- not only has the comp exceeded our expectation, the penetration has grown. And we continue -- the stores are just doing a great job with adoption, and our Install providers have been doing a great job as well. And so we pick -- as the stores mature and get more comfortable with that service, we -- and as I mentioned, we have not really -- really, Q2 is the first time that we were able to really start advertising that service nationally. So I'm excited about what that brings to bear for us here over the second half of the year.

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Operator [63]

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Ladies and gentlemen, our final question comes from the line of Budd Bugatch with Raymond James.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [64]

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I guess one, did you quantify the obsolescence charge there? If you did, I missed it.

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [65]

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Yes, it was in the 40 basis-point range.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [66]

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Okay. And I appreciate you going back over that. Can you give us maybe a little bit of an idea of color of the operating profit at the store level for the company versus last year, year-over-year? How does that look at 4-wall level?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [67]

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We have not been breaking that out. And frankly, some of what we charge the stores versus the kind of 4-wall versus corporate view has evolved a little bit based on how we manage reporting store incentives and things like that. So it's not a narrative, I guess, I'm really to fill out for people here. It's a little bit fluid and a bit more internally driven, I would say.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [68]

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I understand that, Marty. But I guess what I'm trying to get at, trying to understand the operating model of the company going forward and understanding what the ultimate profitability can look like and what the corporate overhead has grown, including the necessary compliance and all of those numbers. So trying to understand how that looks and if we can get a picture of that or even some flavor or some comment on that.

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [69]

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Well, the easiest thing for me to describe is that the direct 4-wall before any corporate allocation stuff, those stores are almost all consistently profitable. I mean, we have a very short list of stores with unusual issues that may get to where they're near breakeven or, on some rare case, they might actually lose money on a 4-wall contribution basis. We open stores, and they're quickly generating positive cash and paying back the investment in inventory and leasehold improvements. So how that's changed year-over-year in some specific way, I'm not prepared to answer. Maybe as we (inaudible).

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [70]

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Well, that is the history of Liquidators, you get to profitability at the direct level pretty quickly. And I was just trying to understand if that's changed and maybe what that growth looks like. So -- but appreciate your reluctance. The last thing for me is the antidumping. You've had some good news, I guess, coming with the latest audits, and there are a couple to go. What do you think is the -- what's left in the reserve that's in the future audits that haven't been done yet? And what do you think you'll gain from some of the reserve recalibration? Can you get to -- do you have any forward look on that?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [71]

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Well, the net on the balance sheet as a payable is about $6 million, I believe. And frankly, it wouldn't surprise me if over the next year or couple of years -- it might take 3 or 4 years, but we got it all back. I mean, the rates have been set near 0. And unless it's tangled up in some of the trade negotiations and saber rattling, it just -- we've had a couple of years now of favorable adjustments and believe this is going to end kind of well for us. That doesn't mean tariffs and other types of new issues will come in and create as big or bigger negative, but this particular legacy item seems to be moving in the right direction. And we'll see, as we go, when and how we take that back if that's what plays out. We'll be as transparent as we can like we have been the last couple of times this has happened.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [72]

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And with that -- excluding the trade issues, and I'm -- that we -- nobody has control over what's going on, but does that incline you to be more active in importing multi-wood layer floor from -- multilayered wood flooring from China again?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [73]

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I'm not sure I quite understood that question. Can you rephrase that or something?

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [74]

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Yes. I think that your -- I think your imports of engineered hardwood from China looks like about 8% or so now, I think that, that's in the Q. So it's been upwards. It was up at 11% back in past years. So I was curious if you -- with the antidumping going away, does that make you more inclined to go back to China and import some more of that goods?

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Martin D. Agard, Lumber Liquidators Holdings, Inc. - CFO [75]

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We have a breadth of engineering sources from the U.S. to China and elsewhere actually. So we are [centering] that in our sourcing decisions. We kind of take the current levels as an indication in the future. So I would say we are -- that does take away a disadvantage from certain vendors, we think, going forward, but we also have to be cognizant of the potential tariffs on Chinese imports. So this is a category we have some flexibility on, and we keep light on our feet and paying close attention to where regulations are going. I don't know if I have much more to say than that, I guess.

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [76]

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Yes, I would -- we continue to look to sourcing and where in the world. And obviously, we pay close attention to the vendors and manufacturers that were exempt from the antidumping and countervailing duties, but it hasn't really impacted our sourcing a lot. I mean, we've -- we'll source where we can get the best quality and the most innovative product. And so we've tried not to let that impact us a lot, but it does -- it is a consideration factor when we look at where we're going to source.

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Operator [77]

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Thank you. Mr. Knowles, there are no further questions at this time. I'll turn the floor back to you for any final comments.

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [78]

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Thank you, operator.

Let me say thanks again to the LL team, our vendors, our customers and our shareholders for your continued support. We look forward to updating you next quarter.

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Operator [79]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.