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Edited Transcript of LL earnings conference call or presentation 30-Apr-19 12:00pm GMT

Q1 2019 Lumber Liquidators Holdings Inc Earnings Call

TOANO May 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Lumber Liquidators Holdings Inc earnings conference call or presentation Tuesday, April 30, 2019 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

* Danielle O'Brien

Lumber Liquidators Holdings, Inc. - IR Executive

* Dennis R. Knowles

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

* Timothy J. Mulvaney

Lumber Liquidators Holdings, Inc. - Interim CFO & CAO

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Conference Call Participants

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* Beryl Bugatch

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

* David Leonard Bellinger

Oppenheimer & Co. Inc., Research Division - Associate

* Geoffrey R. Small

Citigroup Inc, Research Division - Senior Research Associate

* Joshua Kamboj

Morgan Stanley, Research Division - Research Associate

* Laura Allyson Champine

Loop Capital Markets LLC, Research Division - MD

* Nels Richard Nelson

Stephens Inc., Research Division - MD

* Oliver Wintermantel

Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst

* Robert Samuel Aurand

Longbow Research LLC - Analyst

* Seth Mckain Basham

Wedbush Securities Inc., Research Division - MD Of Equity Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to Lumber Liquidators First Quarter 2019 Earnings Conference Call. 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 Danielle O'Brien. Please, go ahead, sir.

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Danielle O'Brien, Lumber Liquidators Holdings, Inc. - IR Executive [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 law 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 its -- in this call is accurate only as of the date discussed. Investors should not assume that the 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, Danielle, and good morning, everyone. Today, I'm joined by Charles Tyson, our chief Customer Experience Officer; and Tim Mulvaney, our Interim Chief Financial Officer. As we began 2019, we set the foundation for success to grow our business. Our new marketing agency is now on board, and we continue to make investments as we evolve our omni-channel approach with a sharper focus on customer engagement, particularly in our Pro and Installations businesses. Additionally, with the solid liquidity position in front of us and the settlement of legacy product issues behind us, we are confident that we are in the best position to execute our transformation strategy.

Turning to our first quarter results, we reported net sales of $266 million, an increase of 2% over Q1 of 2018. Comparable store sales were down 0.8%, which is in line with the guidance we provided last quarter. The business saw momentum through the quarter as we ramped up our digital marketing and introduced promotions with our new advertising agency. As we indicated in our last call, we are facing headwinds in Texas due to difficult comparisons from the hurricane season and these impacted comps by more than 100 basis points. Additionally, we continue to encounter weakness in our bamboo category, which is approximately 7% of our business. Bamboo products are facing a secular shift in consumer demand and that is not unique to Lumber Liquidators.

Merchandise sales were up nominally and traffic was down 1%. We continued enhancing the value proposition for both our Pro and Install customers and Installation was up 13% and Pro penetration topped 30% of sales. Sales growth for these areas continue to outpace the overall company. As we drive top line growth, we are also focused on improving profitability through a number of initiatives focused on sourcing, transportation, assortment and pricing. Tim will go into details on our margins but tariffs themselves remain a headwind for us, amounting to roughly 200 basis points in the quarter. However, margins were up 10 basis points sequentially, as the tariff impact was offset by our cost mitigation and other inventory elements. Our expectations for tariffs remain unchanged in the immediate turn, and we remained focused on efforts to counter these impacts. As we mentioned last quarter, we expect incremental improvement in margins throughout the remainder of the year.

We have spoken about our core strategic priorities for 2019 that are focused on growing the business, enhancing the customer experience and ultimately, driving margin expansion even in the face of tariffs. We are executing on these priorities and are seeing success even in the earliest stages of these plans. The first quarter was highlighted by modernized and improved marketing and promotional efforts with our new advertising agency, digital advancements, strong growth in Pro and Install and early success in our new store format. First, as previously discussed, we onboarded our new advertising agency in March to help bolster our marketing efforts. This put advertising in a transitory period and as a result drove higher spin throughout the quarter. We're pleased with the early results from their work, which drove sales during some of our largest promotional events. We'll continue to work on optimizing our advertising and promotional activity. We remain confident that with the right marketing mix, we'll see significant brand awareness among customers that drive traffic and growth to our business.

Second, our digital efforts both in-store and online continue to be the primary component of our enhanced customer experience. Under Charles' leadership, the team has grown our product display capabilities and positioned us as a stronger competitor. Our omni-channel approach ensures that we can meet our customers need at every touch point and instantly deliver the information they need, whether they are physically in our store or shopping online from the comfort of their own home.

To that end, we are excited that we have recently launched our new Picture It! floor visualizer tool, which is both an online tool as well as and in-store resource for our associates. I've personally watched our associates utilize this new tool to aid customers and I believe this existing technology will drive sales. Charles will speak more about this, but I'm incredibly pleased with the capabilities that we're bringing to our sales force and the experience we are delivering to our customers. We believe the compilation of our digital and technology enhancements will drive traffic and accelerate revenue growth.

Third, our Installation and Pro business remains growth drivers for us and are significant contributors to our comparable store sales. We expect this to continue as our knowledgeable associates work to cross sell our Installation Services. We will also continue to grow our Pro business by broadening through shops in our stores. Through our enhanced capabilities and unique customer experience, we are bringing in interior designers, influencers, contractors and others who haven't previously experienced our unique offering.

Finally, I want to highlight the success of our new store format in Altamonte Springs, Florida and our plans to leverage the learnings from this store. Given this layout is a first for Lumber Liquidators, we have the opportunity to bring the best parts of our Altamonte Springs location and make any appropriate tweaks where we feel they are needed in 4 additional locations we plan to open or retrofit this year. It's still early in the journey, but we like what we're seeing, and the store format is accomplishing our desired goals of exposing consumers to more product and driving traffic.

As we look out to the remainder of 2019 and beyond, we're excited about what lies ahead for Lumber Liquidators. Our transformational work over the last 12 months has helped us set the foundation for success. Our settlement of cumbersome legacy product issues has provided us with much welcome clean air and is allowing us to focus on accelerating our strategy to unlock value within the business. In the near term, we will move quickly in implementing our modernized marketing and digital initiatives, expanding our Pro and Installation capabilities and leveraging our new store format to help us better engage with our customers and ultimately drive market share and revenue growth. At the same time, we will be disciplined in our cost structure to ensure our sales growth is most effectively leveraged against a reasonable SG&A. We believe the output of our strategy will yield an improving financial profile. In the near term, we are reiterating our full year 2019 guidance which commits to the incremental improvement in revenue growth and margins throughout the year.

Lastly, we will be hosting an Investor Day later this year, where we will provide insights into our updated 2021 financial guidance. We're excited for the opportunity to engage with our shareholders and unveil our roadmap into our long-term growth outlook. I will now turn the call over to Charles.

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Charles E. Tyson, Lumber Liquidators Holdings, Inc. - Chief Customer Experience Officer [4]

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Thank you, Dennis. As we continue to execute our strategy to improve our customer experience and drive traffic, I'm very pleased with the results that our digital team is delivering from an omni-channel perspective, which have resulted in an increase in customer acquisition, user conversion rates and average order size.

Importantly, we've driven an increase in online penetration of total sales for approximately 4% in the first quarter of 2018 to 6% in the first quarter of 2019, which shows our investments in digital are beginning to yield positive results.

Let me walk you through some of our biggest achievements to date. We launched our first digital catalog to enhance the online experience for our customers. As a result, we experienced increased online engagement and traffic and drove greater efficiency through our marketing spend for the quarter. The digital team also launched our Picture It! floor visualizer tool on April 1 in all of our stores and online after beta testing in the first quarter. The response from our customers and store associates has been tremendous. This tool is helping our customers more easily envision how a new floor will look in their home by superimposing our floors onto pictures of the customer's rooms. It also enhances the customer experience by enabling rapid viewing of multiple floor selections during the selling process, allowing for faster conversion both online and in-store. Our store associates have quickly adopted this tool as they find it helps close sales when customers can more effectively visualize the product in their home. While we are early in the rollout, we are excited by the revenue conversion this tool is driving, and our marketing teams are currently developing plans to further promote awareness of this unique customer offering.

We are beginning to transition to more contemporary digital-focused marketing channels, which is guided by consumer demand for more personalized experiences. We continued to refine our media mix through the quarter, and we're pleased with the acceleration in new orders as we move into the back half of the quarter. We are testing our way into a more productive media spend, with a focus on a hyper local strategy both on and offline.

Regarding the work we're doing on our brand strategy, we are making solid progress and are anticipating the execution of some market testing late in the fourth quarter or early in the first quarter of 2020. We also spoke about our sourcing efforts driving cost reductions in the face of tariffs. We're beginning to see the benefits of our cost mitigation work in cost of goods and our sourcing teams continue to execute on our expanded multi-country sourcing strategy to drive longer-term growth margin improvements.

Our Head of Sourcing has extensive experience managing multilayered projects and finding cost-efficient solutions. He's already made immediate positive impact to our sourcing functions.

Turning to our products in stores, we've been pleased by the performance of our new AquaSeal brand, and we'll be expanding of our assortment in this brand as we move through the upcoming quarters. We also believe we're outpacing the industry growth in our Vinyl category. Our teams are continuing to innovate and introduce new SKUs to the category to help offset weak performance we're experiencing in bamboo.

Finally, we are pleased to see strong early performance from our new store -- prototype store in Altamonte Springs, Florida. As a reminder, it has a larger footprint, larger sample boards, deeper number of SKUs in stock and caters to Pros and has a design center. The enhanced store experience, specifically the larger sample displays, are driving positive sales outcomes as well as the broader assortment of stock products, which is driving higher conversion. The ability of the customer to easily access a wide assortment of accessories is also driving higher attachments, enhancing margin performance. Our goal will be to open 2 additional stores and remodel 2 existing stores this calendar year using our best learnings and insights from our Florida prototype to enhance the customer experience. This test is in its initial stages, but early traction leads us to believe that this store will deliver higher sales per square foot on an annualized basis, well beyond our current prototype.

As we continue to focus on increasing the conversion of our foot traffic, we will also be testing a number of new stocking strategies in the coming quarters. This will increase the availability of the breadth of our offerings in our stores. Further, our teams will begin refining our end-to-end supply chain,, with specific focus on improving inventory performance and opening capacity to focus on new categories. Our merchants are beginning to explore additional product categories that are adjacent to our customer offerings. We are also exploring partnerships where we can leverage our brand, knowledgeable associates and product assortment. Overall, we have a number of exciting initiatives to fortify the way we do business and interact with our customers while yielding the highest possible return on our investments. I will now turn it over to Tim.

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Timothy J. Mulvaney, Lumber Liquidators Holdings, Inc. - Interim CFO & CAO [5]

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Thanks, Charles. Good morning, everyone. In the first quarter, net sales were $266 million, an increase of 1.7% over last year with comparable store sales down 0.8%. The overall net sales increase was driven by 13% growth in Installation sales, supplemented by a 0.7% uptick in merchandise sales. The overall 0.8% comp decline was driven by a 1% decrease in traffic that was slightly offset by a small increase in our average transactional value. Merchandise sales were negatively impacted in the Texas market, where we compared against the peak of the Harvey storm recovery in the prior year period. In terms of category performance, we continued to see strong growth in Vinyl products with offsetting softness in exotic solids, most notably in bamboo. Without these items, comparable store sales would have been positive. Gross margin for the first quarter of 2019 was 35.2%, compared to 36.3% in the equivalent quarter a year ago. The 110 basis point drop was more than fully explained by the 200-plus basis points of tariff cost, partially offset by our cost mitigation efforts and a favorable mix towards Vinyl. Merchandise warranty costs were also favorable in the first quarter of this year. Gross margin was sequentially up 10 basis points from the fourth quarter's 35.1% adjusted gross margin. The improvement was comprised of more than 100 basis points of incremental negative tariff effect, more than offset by small benefits across several elements, including cost mitigation efforts, transportation and merchandise warranty. There remains a small incremental tariff headwind. However, as our cost mitigation efforts roll fully through inventory, the higher tariffs and our cost mitigation efforts should nearly offset each other, and we should see incremental improvement in the gross margin through the rest of the year. As a reminder, we typically are bit more promotional in Q2 and in Q4, which will have a tempering effect.

Turning to SG&A expense for the first quarter. This was $97 million compared to $96 million in the first quarter last year. SG&A in the recent quarter included incremental legal and other costs of $1.8 million related to the DOJ, SEC investigations and certain other legal matters. Costs related to these items in last year's first quarter were $3.3 million. Both periods' items are tabled out in the press release. When excluding these items for both periods, adjusted SG&A expense for the quarter was $95 million or 35.8% of sales, an increase of $2.1 million or 20 basis points from a year earlier. It was driven by higher payroll and occupancy costs related to the opening of 22 new stores in 2018.

In addition, as previously announced, the company ceased finishing floors at its facility in Toano. The net effect of this was to move certain allocated cost from gross margin to SG&A with ultimately no effect on the bottom line. These were all offset by approximately $2 million in lower advertising spend, which reflects our transition to a new advertising agency and efforts to reduce resources in areas we assess as less effective.

For the quarter, we recorded an operating loss of $3.4 million, compared to an operating loss of $1.4 million in Q1 of 2018. We had an adjusted operating loss of $1.6 million in the quarter, compared to last year's $1.9 million adjusted operating profit. The tariff impact was the single largest contributor to this decline.

Before moving on to our expectations for the remainder of 2019, let me address our liquidity. Subsequent to quarter end and as previously announced, we paid $33 million related to the DOJ and SEC settlements. Our expectation related to the previously announced Gold settlement remains the same. We will fund $1 million of the $14 million cash portion upon the court's preliminary approval expected in the next few months. The funding of the remaining $13 million depends on the court's final approval. If that is granted in 2019, our funding would consist of 2 installments: $6 million funded upon final approval as early as September; and the remaining $7 million in January of 2020. If the final approval isn't granted until 2020, our funding would happen in a single lump sum at that time.

On March 29, 2019, the company amended its credit agreement, consistent with the terms that we previously announced and providing additional borrowing capacity of up to $50 million while extending the maturity until 2024. As a reminder, this credit agreement includes a base term loan of $25 million and a revolving credit agreement with $42 million drawn as of March 31, 2019. We had liquidity of $130 million, consisting of availability under our credit agreement of $113 million and cash on our balance sheet of $17 million.

Our liquidity at year-end was approximately $80 million, but this was prior to the amendment. Subsequent to quarter end, we did borrow to pay that $33 million related to the DOJ and SEC settlements. As we said we would, during the first quarter, we reduced inventory to approximately $300 million, and we paid down accounts payable to take advantage of discounts available to us. These 2 largely offset. We did grow customer deposits by 18% during the quarter -- first quarter as business accelerated as the quarter progressed.

We are reiterating our 2019 guidance and expect revenue to be up in the mid-single digits and comps to be flat to up in the low single digits for the year. This is driven by the full anniversary of our Installation expansion, tougher comparisons against the Hurricane Harvey storm benefited markets in 2018 as well as forecasted slower industry growth.

In terms of adjusted operating margins for the year, we are targeting flat to 50 basis points expansion, which would put us in the 1.9% to 2.4% range. Our 2019 guidance assumes the 10% tariffs remain in place. Movement in either direction could meaningfully impact the numbers.

In addition, as previously noted, we have included $2.3 million of nonrecurring expenses in 2019, weighted toward the back half of the year related to the relocation of our corporate headquarters.

Finally, we envision a return to operating profitability on an adjusted basis in Q2, as the cost mitigation initiatives catch up with the tariff impact more fully in Q2 and early in Q3, as these items turn through our inventory cycle. On the investing side, we plan to open 10 to 15 new stores in 2019. We expect capital spending to be $15 million to $18 million. We anticipate cash paid for taxes will remain nominal and that the valuation allowance on our deferred tax assets will remain in place for the year. We see cash paid for interest to be in the $3.5 million to $4 million range. Thank you all for your time this morning. With that, I'll hand it back to the moderator to open the call for 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 Geoff Small with Citi.

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Geoffrey R. Small, Citigroup Inc, Research Division - Senior Research Associate [2]

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I just wanted to delve into the same-store sales result in the first quarter. Can you all help us understand how merchandise sales evolved through the quarter, how you're seeing overall comp sales trend early in 2Q? And just curious if you did in fact see an impact from the announced litigation settlements on your top line results?

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

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Good morning, Geoff, this is Dennis. The comps were bit clunky through the quarter. With a relatively good January, February was probably our worst month in comparison, and we saw that improve into March, as Charles mentioned, with -- as the new agency come on board. And we saw that acceleration in both the comp sales from February and in new orders. As it relates to the merchandise comps, we were pretty pleased. We continue to see the strength in Vinyl categories, as Tim mentioned. Bamboo continues to be drag for us. It's -- I said on the -- in my prepared remarks, it's about 7% of our business, and it's going through kind of a secular shift that we're -- it's going from a solid to an engineered.

And at one point, we had a pretty large amount of our assortment sales that were in the solid categories. So as we work to mitigate the headwinds we're facing there with the other categories, we're seeing that -- we're seeing our performance improve. But really think that's going to be -- we're going to face that headwind on bamboo till about the third quarter this year. As it relates to the litigation headwinds or being in the news, we were actually pretty pleased not to see any kind of impact that we thought was material. In fact, as you heard Tim say, we actually -- our new orders started to accelerate towards the end of the quarter. So I would say that we felt very prepared to handle the news been out there about the settlements. I felt like we had our stores prepared to answer any questions as well as our corporate team. So all in all, we were pleased with how things landed.

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Geoffrey R. Small, Citigroup Inc, Research Division - Senior Research Associate [4]

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Understood. Very helpful.

The new larger format store in Florida sounds encouraging. Just curious if you can comment on the quantitative performance of that location year-to-date. And I believe as you mentioned in the prepared remarks, you're planning to remodel 2 locations to that new this year. Just curious if you can help us understand the capital cost associated with that process?

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Charles E. Tyson, Lumber Liquidators Holdings, Inc. - Chief Customer Experience Officer [5]

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Yes, so from a performance perspective, this store will trend to the high end of our store portfolio from a growth perspective. I think there are a couple of things that are important to note. In the past, we've had stores that are in warehouse locations, and we are opening these stores in high-traffic locations to really benefit from higher degrees of visibility. The store itself is a different experience if you haven't seen it. The interaction from a design center and the picture and technology that we have allows customer to see the product -- the larger product. And those SKUs that are displayed with larger display boards are contributing a higher balance of sale. And as you see is the trend in flooring business, wider board, 7-inch, 9-inch boards, it's much easier for the customer to really envision what that product looks like in our stores. So we're seeing good positive results from the impact of larger displays. The fact that we have all of our accessories out on the floor allows for higher conversion. And we're seeing that and that also impacts obviously the overall average ticket and the gross margin performance of that ticket. So the store design itself has got specific things that are different than what we do today that are driving the overall positive financial performance and the top line of that store.

We're in the middle of the looking at both of those remodels to look at the implication of capital required to remodel them. We believe that we will get a positive ROI on that, I'm not going to share specific dollar numbers on the remodel from self. But we've run those numbers. We believe that the model works based on the volume increase and the gross margin performance that we expect to get through the remodel.

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [6]

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Geoff, I would -- this is Dennis. I would also add, and to Charles' point, so the store is beating our projections, I would say, what we have planned. But being the first store, there's a lot of things we did that we probably won't repeat in other stores and there are some things we wish we would have done. So we're -- as far as the capital outlay for the stores, it's still work in progress. And our second store will give us a lot of insight. We're actually meeting at this new store to make sure we walk through with the team to kind of look for areas where we can reduce some of the capital expansion and make sure we don't -- make sure that the customer experience doesn't suffer. And then on the -- to Charles' point on the remodels, we also -- we have a number of stores in the company that we feel we can convert to this new format, but we need to get a couple of them done that as Charles said, make sure we understand what the costs are, how much of the disruption it is to the business while we do it. So both early on the test, but so far we're really pleased with what we see.

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Operator [7]

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Our next question comes up the line of Budd Bugatch with Raymond James Financial.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [8]

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Let's talk a little bit about the backlog if we could. The backlog was up, as you said, meaningfully, I think $7 million or thereabouts. Can you tell us what that looks like? I mean that was customer deposit number. What does the backlog look like year-over-year in terms of growth? And when will that be satisfied?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [9]

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It's up, it's up. And when you -- well, I won't share what the new orders were. As Tim said, we had good acceleration in new orders towards end of the month, in March that continued into our April sales. So we're -- this was the first time that our new agency did our media buying and planning. So we had 2 promotions in March. Well, in the first quarter we ran our Presidents' Day sale, and we ran our spring Black Friday event, both were really successful and kind of started to build that momentum towards the end of the quarter. But that's where you saw it show up in the customer deposits.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [10]

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Dennis, is the typical backlog still -- is it still the customer deposits about 50% of orders. Does that metric hold for what's shown on the balance sheet?

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Timothy J. Mulvaney, Lumber Liquidators Holdings, Inc. - Interim CFO & CAO [11]

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It's a little less than that, but it's not appreciably so.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [12]

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Okay. And let's talk a little bit about the bamboo decline. I think, solids and engineered were down about 15.4% in the quarter year-over-year. How much more was bamboo down? How did that part of that category -- can you give us some metrics on that?

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

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Substantially more. And it's most -- like I said on our remarks, it's mostly attributed to the decline in solid bamboo. There's also this -- I think it's also -- part of the decline also is just the move toward the water resistant, waterproof products, whether that be Vinyl or water resistant laminate. I think all of the wood business, even the solid domestic is experiencing that pressure. So I would tell you that the bamboo was down substantially more but -- and like I said, we kind of expect to face that headwind until kind of the mid- to latter part of the third quarter.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [14]

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And why does it end in the third quarter? What happens...

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [15]

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Well, I think that's when -- as when we start to realize, we started feeling it really towards the middle of the year, towards the second quarter last year. And so as I've seen in the comps in December and January and February and March, it's kind of starting to stabilize. So as you look at -- and there's a lot of changes to the bamboo category. It's still a great category. We still have a lot of interest in it, it's still a pretty good category for us. But we're moving a lot of our business into the engineered, and we're even testing an engineered bamboo on an SPC core, which was kind of a stone core, so gives it the water resistant capabilities or characteristics that the customers are looking for. So I think just the assortment kind of stabilizing, starting to phase what we're now seeing as more normalized sales volume and the emerging items that Charles and the teams are bringing on as it relates to the engineered and SPC cores.

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Operator [16]

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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 - MD Of Equity Research [17]

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My first question is making sure I understand the cadence of the core a bit better. As you saw the acceleration in trends in March into April, were you talking about positive comps that you're running now?

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

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In April, it's early on. April's trending better, so without disclosing how we're doing -- because April's not over for us yet. We still got a day left and a day can make a big difference, but we've been pleased with the momentum in April.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [19]

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Got it. Is it appropriate to consider you moving to your annual guidance of positive low single digit comps for the second quarter?

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

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Possible. I mean, it's possible. We -- I mean we know that we -- to achieve our guidance, we're going to need to drive positive comps. We still believe most of our comp performance will be back half weighted though.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [21]

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Got it. And then secondly, thinking about some of the changes that you've made to your promotions as well as pricing. Were the promotions that you talked about in March comp events? And do you get more aggressive on any of those promotions? Or how do they change year-over-year?

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Charles E. Tyson, Lumber Liquidators Holdings, Inc. - Chief Customer Experience Officer [22]

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Yes. So Seth, couple of things. The promotions themselves were slightly more aggressive, not from a depth of this kind of perspective, but from a breadth of offering perspective to make sure that all of the different categories that customers are looking at were represented in the 2 events. Both events were anniversaried from a year ago. And media mix, as we talked about previously, was different with a higher penetration of our digital spend, which is consistent with the strategy that we say we're executing to. And also a lot of good work in analytics being done by our new agency on our media mix program. And so we were happy with the productivity of both of those events.

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [23]

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One thing I would say, Seth, it's -- that's really helped us and it's been a struggle for LL for a long time as being a national marketer, in the past, we really didn't have good analytical tools to understand where we were performing as it relates to the geography. Over the last 3 years, we've been installing traffic counters. And our new agency can kind of give us a view now into how we're performing from a geographic perspective and we can match that up. So it gives Charles the ability also to make sure that we're a little more focused with -- a little more precision as it relates to certain parts of the country. So that's going to be a benefit for us as we get more time under our belt with this new agency. But I would tell you early reads from them have been so much more helpful and helping us understand the Charles point, how deep we need to go, how broad across the categories and where we need to make sure that we're focused. So it's -- those are learnings that we haven't really had in the past.

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Operator [24]

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Our next question comes from the line of Simeon Gutman with Morgan Stanley.

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Joshua Kamboj, Morgan Stanley, Research Division - Research Associate [25]

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This is Joshua Kamboj on for Simeon. You mentioned earlier in the year when you laid out your guidance that you were expecting a 1 to 2 point deceleration in the macro backdrop? Is that still the same expectation or are you seeing anything different on that front?

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

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You were talk -- could you repeat the question please?

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Joshua Kamboj, Morgan Stanley, Research Division - Research Associate [27]

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You mentioned earlier when you laid out your guidance that it embedded the 1 to 2 point deceleration in the macro backdrop. Is that still the same expectation or are you seeing something different on that front?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [28]

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Yes. We're still -- the guidance we're looking at and the industry is still growing, but not growing quite as fast as it was a year ago and 1 to 2 points is about right.

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Joshua Kamboj, Morgan Stanley, Research Division - Research Associate [29]

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All right. And can you remind us what the attach rate on your current Installation sales is? What strategies might be in place to drive that higher? And if you have a target you can share where you think it might go over time?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [30]

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It was at 13% for the first quarter. And that's -- again that's like I before, we originally set this to be somewhere between 7% to 10%, so we're pleased with that. And it seems to -- for 2 quarters in a row, it's kind of maintained that 12% to 13% range, and we've now fully anniversaried it. And as our stores get more and more comfortable, what we kind of think about it as a second -- or as an additional product category. So it's -- that the -- and I expect this to continue to get traction. One of the things that if you notice our current promotion that's out there on television, we're really starting to really talk about that service more as it relates to our products and service offerings. So I have no reason to believe that it couldn't continue to accelerate as a percent of our total.

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Joshua Kamboj, Morgan Stanley, Research Division - Research Associate [31]

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All right. If I could quickly squeeze one more in. How do you think you fare on selling accessories? How much of an opportunity is that. Charles, I think I heard you mention that in the new stores, you can see all of the accessories out on the floor now. Just maybe some comments around that, where that can go?

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Charles E. Tyson, Lumber Liquidators Holdings, Inc. - Chief Customer Experience Officer [32]

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Yes, so I think there are a couple things. Clearly, getting that assortment out on the floor, there's 2 things. One, many of our Pros come in and don't realize that we're carrying these products. And so part of the benefit that we're seeing in this test is higher attach for Pros when they need fill ins, not just when they are buying the core floor, but as they are going to the job sites and they have to pick up accessories they come in, it could be underlayment, it could be adhesives. And then it helps our sales teams on the floor drive conversion. They can take our customer over the wall, they can explain a good, better, best in underlayment, so it really helps drive the selling process. And we intend to look at other opportunities to expand not just within the new store prototype, but how do we take a greater advantage of our accessory business. So yes, there's work for us there to drive benefit.

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Operator [33]

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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 [34]

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So on inventory levels and how that relates to your promotion in April. So obviously you've done a good job burning through some inventory without being overly promotional but still ended the quarter above where I think your target is. How did that impact your promotions in April? And maybe if you can help us frame up how much of your inventory is in the bamboo category?

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

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Sure. So for 2019, we were -- we bought some inventory in advance of the potential of the 25% tariff coming in. And we had expected to pay that down and get down below $300 million by the end of the second quarter, is what I think we said earlier. We actually got to about $300 million at the end of the first quarter as we sold through that. So the inventory levels are about where we expect them, maybe even teeny bit lower. We expect that level to continue maybe down a little bit further, but say something in the $285 million to $305 million range for the remainder of the year. And so we did not have to go especially deep as part of the 20 -- I mean the 2019 April sale. We did not do anything particularly special there.

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Laura Allyson Champine, Loop Capital Markets LLC, Research Division - MD [36]

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Got it. And then on the bamboo side, what percentage of inventory is in bamboo right now?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [37]

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We haven't usually given out the percentages by different categories, but we feel good about -- we have been anticipating and watching this and so we're buying accordingly and so we're not expecting to have any issues being able to sell through what we have.

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Operator [38]

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Our next question comes from the line of David MacGregor with Longbow Research.

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Robert Samuel Aurand, Longbow Research LLC - Analyst [39]

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Rob Aurand on for David MacGregor this morning. So I wanted to ask you about your sales. Comps were actually a little better than what we are thinking. But it seems to be offset by a little bit of weaker new store productivity. Just can you talk about what you are seeing there in the quarter and how we should read into that?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [40]

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Well, actually our new store performance, I actually kind of accelerated towards the end of the quarter as well, I think just responding as our other stores did. But I would also tell you that we had a lot of new stores in the southern part of the country and I think -- we had a few impacts from Harvey on our new stores but nothing that would have materially impacted the new store performance. So I would tell you that they probably were just -- I think the same wall that we saw in the month of January or the month of January and February when they started to really kind of accelerate again in March too. So I think that they're responding well with our new marketing agency as well. So I don't know there's anything that we did differently. We didn't staff them differently, we didn't assort them differently. And so I would tell you that I think they kind of performed as alongside the rest of the chain.

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Robert Samuel Aurand, Longbow Research LLC - Analyst [41]

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All right. And I guess on the new store format, I know you're exploring the 2 renovations this calendar year. Can you talk about, in your overall store base, what percentage could be converted over time?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [42]

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I'm not sure that we've disclosed that. We think we've got -- I want to say there's probably about 50-plus stores that we could convert that have a big enough footprint for us to do that.

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Operator [43]

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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 [44]

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You mentioned that 30% of your sales were derived from the Pro at this point and the larger store formats are getting a higher proportion of sales. If you could give us an idea where that proportion is at and the economics associated with Pro versus the DIY?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [45]

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Well, I don't know that we've really talked to -- I assume you're talking about gross margin with the Pro. I don't know that we've ever really disclosed our margin, but I would tell you, Rick, that it's a solid margin. It's -- they're -- the benefit from the Pro that we get is just the frequency and that's where our focus is. We know they make more trips or their tickets are bigger, and we're really pleased with the gross margin rate that we get, it's not as high as the total store, as you could imagine, but it's not an embarrassing rate by any stretch of the imagination. It's a solid margin.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [46]

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The bigger stores -- the proportion of the Pro sales in those stores?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [47]

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There's really no correlation that we've seen. This particular new store, I would believe, is because it's got an expanded assortment, it's got more inventory depth and I think that's attractive to the Pro. And we haven't really disclosed the penetration, but I would tell you that is higher than our company penetration.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [48]

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Also looks like there were some sales challenges in the moldings and accessories category, down 7% year-over-year. If you could provide some color around that?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [49]

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It's mostly adhesive and its adhesives are associated with the sales of bamboo where the trams and moldings -- and as Charles said, we're exploring some opportunities to do -- take some of the things that we're learning from our Altamonte Springs location and roll that back into some of our existing footprints to drive higher attachments. We've -- one -- that's one thing we've seen as a result of this store that having all those out on the floor just brings greater awareness and we think we've got an opportunity to kind of backfill some of our existing legacy stores with that to help drive attachment.

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Operator [50]

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Our next question comes from the line of Gregory Melich with Evercore ISI.

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Oliver Wintermantel, Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst [51]

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This is Oliver Wintermantel from Evercore ISI. I just had a question regarding the tariffs, did you raise prices because of the tariffs? And if they are going away, do you see any pressure on pricing?

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Dennis R. Knowles, Lumber Liquidators Holdings, Inc. - President, CEO & Director [52]

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I think it's a great question. It's -- and I would say yes. We raised some prices, we lowered some prices, and we want to make sure that we maintain the competitive position. So I -- our hope is that the tariffs go away and it gives us the opportunity to make sure not -- in addition make -- expand our margin, but also to make sure that it's just another competitive headwind, I don't think anybody in the industry want. So we've managed it as we could and should as it relates to whether we were able to move the product, mitigate the cost of the tariff increase or follow-up competition. So and I would tell you we raised and lowered prices and we monitor it every day. Charles, I don't know if you want to add any color.

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Charles E. Tyson, Lumber Liquidators Holdings, Inc. - Chief Customer Experience Officer [53]

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Yes, Oliver, just one thing. I think in the way that our pricing market strategy is from a high low versus many of the people we compete against on (inaudible). We make sure that we are highly competitive when we promote. And so we want to make sure that we give the right product quality and value offering to our customers and we follow our CPI against our competitor very closely to make sure that we remain competitive.

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Oliver Wintermantel, Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst [54]

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Got it. And you mentioned that there was a production shift and so it took from cost of good sales and shifted to SG&A. Could you quantify that for the first quarter and what do you expect for the coming quarters please?

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Timothy J. Mulvaney, Lumber Liquidators Holdings, Inc. - Interim CFO & CAO [55]

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Yes. It's $1 million or $2 million and it should be about the same for the rest of the year.

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Operator [56]

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

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David Leonard Bellinger, Oppenheimer & Co. Inc., Research Division - Associate [57]

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It's David Bellinger. A couple of questions on the digital side. Your online penetration, 6% this quarter. I know it's early in the process here but are you seeing any indications of new customers into the brand, your incremental sales in some way coming online? Or is it some type of shift that you're seeing where spending is moving out of stores more towards digital?

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Charles E. Tyson, Lumber Liquidators Holdings, Inc. - Chief Customer Experience Officer [58]

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So I think the answer to that question is a little bit of both. The reality is that a high percent of the digital customers we acquired in the quarter were new customers to the brand. The fact of the matter is that customers are spending more time online researching before they go to our stores to make the purchase. So in all omni-channel environments, you're seeing channel shift. You're seeing particularly younger customers much more comfortable with making that purchase online than going -- versus going to the store. We have a lot of customers that want to go to the store. They still want to require a sample, or they use our picture it tool to look at multiple floors and how they'll look in their homes. So we don't see it as an either/or. This is -- has to be an omni-channel strategy that captures the customer at the beginning of the funnel and then helps drive them through the purchase funnel whether they use the store environment to conclude the acquisition of product or whether they purchase online. We want it to be the most convenient for our customers in terms of how we execute.

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David Leonard Bellinger, Oppenheimer & Co. Inc., Research Division - Associate [59]

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That's helpful, Charles. And just one more on the marketing spend. As you're tweaking, get away from the more traditional media, so how should we think about marketing spend dollars this year and potentially longer term?

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Charles E. Tyson, Lumber Liquidators Holdings, Inc. - Chief Customer Experience Officer [60]

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So I think what we've said is that as we see the effectiveness of our new mix begin to drive traffic, we're in the process where we're going through the litigation. We were cautious on how we were optimizing our marketing spend. And we see the opportunity in Q2 and Q3 to continue to lean into those new channels with a high level of spend. And that will then, as we start to see those results, frankly, we will look at our Q4 spend and what will our planned spend numbers be in 2020. So again, everything we're doing has got a lot of AV testing, testing control and we want to make sure that we're getting the right returns and that will start to inform us on how we'll start to plan the 2020.

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Operator [61]

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Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Knowles for any final comments.

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

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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 on our next quarter's performance. Thank you.

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Operator [63]

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