LL Flooring Holdings, Inc.
Q2 2020 Earnings Call Transcript

Published: 5 Aug 2020

[Operator:]

Good morning, ladies and gentlemen, and welcome to Lumber Liquidators Second Quarter 2020 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 of the Company. I would like to turn the conference over to Paul Taaffe. Please go ahead.

[Paul Taaffe:]

Thank you, operator. Good morning, everyone, and thank you for joining us. Today I’m joined by Charles Tyson, our President and Chief Executive Officer; and Nancy Walsh our Chief Financial Officer. As we begin, 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 the statements will remain operative after today and Lumber Liquidators undertakes no obligation to update any information discussed in this call. Now, I’m pleased to introduce President and CEO, Charles Tyson. Charles?

[Charles Tyson:]

Thank you, Paul. I would like to begin this morning by thanking our associates for their commitment, flexibility and dedication to providing outstanding service to our customers during the pandemic. Our teams and our stores, DCs and corporate centers have remained agile and creative, continuing to ensure they are delivering great quality service to our pros and DIY customers during these difficult times. Our results in Q2 wouldn’t have been plus [Ph] for without the contribution of all associates have made. And I am thankful to be part of such a strong and dedicated team. Now turning to the results in the quarter. While our comp sales declined 21% in Q2, we continued making strides with our transformation plan and so evidence of progress on multiple fronts as adjusted gross margin increased 309 basis points over last years’ second quarter. And adjusted SG&A was down $16 million year-over-year. This allowed us to deliver a $2.9 million improvement in adjusted operating income versus Q2 last year. We continued to execute against our strategic pillars of improving the customer experience, driving traffic and transactions in our stores and online and improving profitability. Reporting our efforts to improve the customer experience, we leveraged our investments in digital to improve our online experience during the second quarter. As we described on our last call, we experienced a significant shift towards our online offering as customers reacted to COVID concerns, and local government mandates drove adaptions to our store operating model. Web sales grew approximately 180% versus Q2 last year and due to limited availability of open showrooms. As a result of COVID-19, online sales increased to approximately 15% of total sales in the quarter. The vast majority of those sales were picked up at one of our stores. Our investments in technology to improve the customer experience continue. We saw increased utilization of our Floor Finder and Picture It! tools as customers continued to shop from home. And we expanded our use of virtual sales consultation to more stores using video chat functionality to virtually walk customers through our showrooms and successfully complete transactions. Further, to enhance our customer and partner experiences, we continued to deliver a more technology driven installation experience as customers show a strong desire for convenient installation options. In the fourth quarter of 2019, we launched the ability for customers to request a project assessment on our website, which is the first step in an installation project. The digitalization of installation continued in Q2 with the launch of a portal for our independent installation contractors, providing easiest scheduling, invoicing and documentation. The Portal also allows contractors to accept or decline jobs online, automating a previously manual process and speeding up our response times to customers. We're continuing to focus on enhancing our installation experience as this is an important element of a value proposition supporting our customers and stores. Turning to our second strategic pillar, driving traffic and transactions in our stores and online, we continued to optimize our marketing program with greater utilization of digital media to efficiently and effectively reach and attract new customers. During the quarter, we were particularly pleased with the increased user traffic we generated from our digital marketing efforts as well as our conversion of that traffic into transactions. We also made further enhancements to our product offerings to ensure we provide a full continuum to meet both our pro and DIY customer needs. During the second quarter, we expanded our vinyl assortment continue to drive this fast growing category. In addition, investments in aquaseal laminate assortment drove higher category performance in the quarter. Finally, a third strategic pillar is improving profitability. In the second quarter, we delivered adjusted operating income of $6.5 million or 2.8% of sales, despite the negative impact of COVID-19 driving a negative 21% comp for the quarter. The result was driven by 309 basis points of adjusted gross margin improvement, making the third consecutive quarter of triple digit increases in year-over-year gross margin rate, following the retroactive exclusion of tariffs on certain vinyl and engineered click products in November of 2019. In the quarter, we continued to develop alternative country sourcing strategy as we diversify our purchases from China. We also showed strong expense management in the quarter, as we reacted to the COVID-19. We pulled back on our marketing spend, based on demand, negotiated rent abatements and deferrals and drove other areas of cost controls across the organization. Now, transitioning to our efforts to safely serve customers in the COVID-19 environment. In Q2, we evolved operating models and implemented safety measures across our chain. And as we reported in May, we adjusted how we serve customers, utilizing a variety of warehouse only, appointment only, and normal operating models as we compiled with state and local orders, and work to serve flooring customers. As of June 30, approximately 93% of our stores were fully operational, utilizing enhanced safety protocols and personal protective equipment for our associates and customers. And utilization of buy online, pick up in store remained higher than pre-COVID levels. As of today, approximately 99% of us stores are now fully operational. As it relates to team members, and as previously announced in reaction to soft demand in April, we followed approximately 300 store associates. As demand returned for the quarter, we began to recall associates, and as of late June, we had invited all furloughed employees back to work. We have been very pleased with the level of retention we've seen in bringing back our knowledgeable and experienced flooring experts, as we continue to differentiate with exceptional service. Cautious, COVID aware consumers were clearly the primary driver of our sales decline in Q2. But as traffic and sales softened in March, and continued into April, we chose to scale back on our advertising spend, including cancelling our April sale, our largest event of the year. This decision impacted comps in both April and May. Despite the challenging operating environment, we were encouraged by the sales trends we saw in our business through the quarter. As reported on our Q1, quarter-to-date comps were down approximately 30% through the week ending May 23, improving performance in June resulted in a negative 21.3 comp for the full quarter. Digging a little deeper into the sales trends, DIY sales showed relative strength in the second quarter, while installation and pro sales were relatively weaker. We attribute that relative weakness to a general reluctance of consumers to have anyone other than family members and close friends in their homes. As a quarter progressed, we saw interest in our installation offerings improve, as evidenced by increasing sales of installation assessments. Looking at our pro customers, we saw a soft demand through the quarter, which we believe was also attributable to cautious COVID aware consumers uncomfortable having visitors in their home. Now from a regional perspective, in the second quarter, we saw stronger demand in the south and Mid Atlantic, and generally weaker trends in California, New York and New Jersey, aligning with areas of lesser and greater initial impact from COVID. More broadly, there is evidence of a COVID [Indiscernible] phenomenon, with consumers exhibiting a renewed focus on home improvement projects that creates an opportunity for industry. That said, we continue to watch the many factors influencing demand in that category, including existing home sales, mortgage rates, and consumer confidence. We will remain flexible to maximize opportunities we see, while ensuring we have the opportunity to quickly react should market conditions change. I'm extremely pleased with how our teams have risen to the challenges presented by COVID-19 They have kept safety at the forefront of everything we do, while agilely managing our operating models, keeping a tight hold on expenses to support liquidity, and continuing to provide our customers a compelling, value driven reason to shop LL Flooring for their hard surface flooring projects. So while we have dedicated significant effort to successfully navigating the impact of COVID, at the same time, we remain focused on executing our transformation plan and making progress on our strategic pillars to position us for long term success. Over the past six months, following my appointment as Interim President, and in May as CEO, as I reviewed our strategic pillars to support our position as a specialty, hard surface flooring provider, it became clear to me that we needed to invest more in our teams. As a result, I’ve introduced a fourth pillar to our previous strategic framework related to a people and culture agenda, that will be a key component of our strategy as a specialty retailer defining a high touch service model. A cornerstone of our people’s first strategy is our commitment to creating a diverse and inclusive workplace that values and leverages individual differences to accelerate the company's growth. Our Diversity and Inclusion taskforce has developed a phased approach, outlining a set of strategic objectives for building and supporting initiatives aimed at attracting, developing and retaining diverse talent while broadening their span of influence. Also core to our people strategy is our goal of creating a high performance culture, the values collaboration and focuses on the customer. We began in Q2 with the company's first associate survey aimed at understanding current, cultural perceptions and articulating the future aspirational culture. We will leverage these learnings to establish next steps in that company's journey. Building on a diverse and inclusive team, we are working to ensure that we have the right leaders in the right roles to effectively and consistently achieve a company's goals, narrowing spans of control and bringing greater focus to our pro business. Additionally, we are committed to acquiring, training and retaining the best talent in the hot surface flooring industry. Our commitment to training was made clear in July, when with the support of our vendors, we completed the first of our planned quarterly national training days that included old store team members focused on pro relationship selling, and leadership development. I look forward to providing additional updates on our people and culture agenda in coming quarters. Shifting to improving our customer experience. After a year of development, we're excited about the plan rollout of our digital platform in early Q4. This launch will significantly improve the user experience on our website, especially for mobile users and give us better tools to leverage insights gained from customer interaction with our site. The new platform is foundational in building our e-commerce omni-channel capabilities. Turning to our objective of driving traffic and transactions to our stores, and online, as we shed on Q1 call, our brand evolution continues. We launched our interim brand of Lumber Liquidators is now LL Flooring, in April in our adds and online. And we've received enthusiastic feedback from our associates. In the coming months, we are planning a limited pilot of approximately 20 plus stores that will rebrand LL Flooring for the purpose of learning and determining customer response. It's important to note that we expect no material capital or operating expenses related to the rebranding of these stores in 2020. Our focus on driving sales to pro continues as well with a foundational objective of building strong business relationships with pro customers. The company wide training we executed in July is just one step in our effort to drive scale and earn retention with these important customers. Finally, thinking about our drive to improve profitability. We are in the midst of conducting a comprehensive review of our real estate portfolio. That includes leveraging our recent success, working with our landlords to defer our abatement rent payments to further, and more firmly lower overall occupancy costs. We will provide more details as this real estate portfolio review continues. Also, we continue to work to further optimize our advertising spend, our migration to digital channels, including search and social has paid recent dividends. And we're encouraged by the return on our advertising spend in Q2. We expect to benefit from learnings as we execute additional channels specific tests in the second half of the year, which will help us advance our goal of leveraging SG&A overtime. I'm confident that our continued focus on what is now our four pillar strategy on developing a strong people centric, collaborative culture, improving our customer experience, driving traffic and transactions in our stores, and online, and improving profitability will position us well for long term success. While we have specific goals related to our transformation plan, and the execution of our strategic pillars, our success will be earned one customer engagement at a time. That’s just one example of the opportunities that are in front of us. Danny Mirallas [ph], our store manager in Albany, California, recently had the opportunity to work with a pro customer, who while a loyal Home Improvement shopper, felt that value proposition did not fully meet his needs, and came to our Albany store to give them a chance to earn his business. Danny worked closely with the customer to understand his business and product needs. And the customer expressed appreciation for the personalized service, product knowledge and clear communication Danny provided, attributes had not being consistently available to him other retailers. Like all customers, this pro wants to work with a store that appreciate business, and due to Danny's focus and attention, the customer had a fantastic initial experience. He even came back in just to show the Albany store team how his first project went with us. Recent feedback from this customer confirms that the Albany team has earned his business and as a result of the established relationship, the store has taken the additional steps of stocking the unique flooring, moldings and accessories he buys on a regular basis. Through execution of our strategy, I'm confident these pro customer experiences will become more and more common, and we will be well positioned to gain share in the fragmented hard surface flooring industry. Again, I would like to thank our employees for their flexibility, ingenuity and dedication to serving our customers during these unusual times. I'd also like to reiterate my thanks to our vendors, landlords and our business partners as we navigate the current environment. It is through collaboration that we will ensure we continue to deliver the exceptional service and value customers expect from LL Flooring. I will now turn the call over to Nancy Walsh to share the financial details of the quarter. Nancy?

[Nancy Walsh:]

Thanks, Charles. Good morning, everyone. In the second quarter, net sales were $230 million, a decrease of 20.2% versus last year. Comparable store sales decreased to 21.3% versus a year ago, primarily due to the reduced demand related to COVID-19. The overall net sales decrease resulted from a 16.2% decline in merchandise sales, and a 46.6% decline in service sales, as our installation sales experienced a larger decline as consumers reacted to COVID. Our comp decrease was a result of a 14% decrease in our average transaction value, and a 7.3% decrease in transaction counts. Weakness in our higher ticket installation sales, as well as softness in pro sales drove the decline in average ticket in the quarter. As comps improved through the quarter, transaction count turned positive year-over-year in June. Gross profit for the second quarter in 2020 decreased $14 million to $88 million from $102 million in the second quarter of 2019. Q2, 2019 was positively impacted by tariff classification adjustments, and without this item adjusted gross profit decreased approximately $13 million. Gross margin rate for the quarter increased 280 basis points to 38.3% compared to 35.5% in the second quarter a year ago. Adjusted gross margin grew to 38.3% from 35.2% in the prior year period. The increase in adjusted gross margin was primarily driven by our work to enhance margin through cost out and supply chain efficiency efforts, which became more apparent following the tariff exclusion, as well as a larger mix of higher margins, vinyl sales and a smaller mix of lower margin installation labor sales. These items were somewhat offset by a higher year-over-year inventory, obsolescence charge and a higher customer delivery costs associated with delivery promotions. As a reminder on the tariff exclusion, on November 07, 2019, the U.S. Trade Representative granted a retroactive exclusion on certain click vinyl and engineered products imported from China. We are monitoring the expiration of this exclusion currently slated for August 07, 2020. Should the tariff exclusion not be extended, there'll be an impact to cash flow related to future product purchases, but the impact of gross margin will be delayed based primarily on the flow of inventory. SG&A expense for the second quarter was $82 million compared to $104 million in the second quarter last year. SG&A in both quarters included incremental legal as well as other costs and recoveries related to lawsuits, investigations and certain other legal matters. Both periods items are adjusted in the non-GAAP reconciliation section of the press release. When excluding these items from both periods, adjusted SG&A expense for the quarter was $82 million and equated to 35.5% of sales versus $90 million and 34% of sales in the last year second quarter, down $16 million year-over-year, but deleveraged 150 basis points on a percent of sales basis. The reduction in adjusted SG&A was primarily driven by lower advertising expense as we pulled back on our promotional cadence in reaction to the pandemic, lower payroll and benefits expense as we took steps to align staffing with demand levels, while also implementing temporary salary reductions for corporate office personnel, and lower transaction related costs to the lower sales. In addition, equity compensation, supplies and T&E expenses were lower versus second quarter last year. For the quarter, we recorded operating income of $6 million, compared to an operating loss of $1.4 million in Q2 of 2019. After adjusting for the unusual items previously noted, we had increased operating income of $6.5 million in this quarter, a $2.9 million increase compared to adjusted operating income of $3.6 million last year. The year-over-year increase was primarily driven by the work we've done to enhance gross margin while also diligently managing expenses. We recorded an income tax expense of $2.2 million for the quarter. The variability of our tax rate in 2020 reflects the timing of deductions and the CARES Act on our quarterly earnings. Net income for the second quarter of 2020 increased $5.5 million to $2.6 million, compared to a net loss of $2.9 million for the second quarter of 2019. While adjusted earnings, a non-GAAP measure for the second quarter of 2020 was $3 million, a year-over-year increase of $2.2 million compared to adjusted earnings of $820,000 for the second quarter of 2019. For the six-months ended June 30, 2020 net income was $15 million, a $23 million increase versus a loss of $7.8 million in the first half of 2019. And adjusted earnings were $16 million, a $19 million increase versus an adjusted loss of $2.8 million in the comparable period of 2019. Finally, earnings per diluted share was $0.09 for the quarter versus a loss per share of $0.10 in the year ago quarter. On an adjusted basis, Q2 earnings per diluted share increased $0.07 to $0.10 this year, compared to an adjusted earnings per diluted share of $0.03 last year. Turning to the balance sheet, inventory at the end of the second quarter was $249 million, down $55 million from Q2, 2019 and down $21 million from Q1, 2020. The reduction in inventory from Q2 last year was primarily driven by the tariff exclusion on vinyl products imported from China, as well as our efforts to support liquidity through diligent inventory management. We are confident our stores are well stocked to serve the current level of demand and our primary reductions in inventory occurred at our DCs. While we could experience some out of stock at the DC level, we are in the process of replenishing inventory levels to align with higher demand and we expect our inventory balance to increase closely to historical levels as we move through Q3. All-in-all, we feel we have managed inventory well and appropriately balance the goals of cash flow management and preserving less liquidity, while also supporting customer demand. We ended the quarter with $101 million in outstanding debt under our credit agreement, which was unchanged since we announced our ABL amendment in April, but up $37 million from Q1. Cash and cash equivalents balance increased by $105 million compared to Q1, 2020 and was $127 million at the end of the quarter. The increase in cash came primarily from our focus on maximizing liquidity through expense and working capital management as well as the incremental borrowing when we amended our ABL in April. We have chosen to maintain a high cash balance to provide flexibility as we manage through the current uncertain environment. Looking at liquidity and cash flow, net cash provided by operating activities was $106 million for the year-to-date, inclusive of $70 million in the second quarter, an increase of $120 million over the equivalent period of the prior year. The increase was primarily driven by strong working capital management, including adjusting inventory buying to reflect lower volumes and activity, and extending payment terms with vendors, landlords and other service providers, as well as growth and customer deposits. In addition, year-to-date cash flow benefited from lower, year-over-year cash outflows related to legacy legal settlements, while the company also implemented tight expense controls, including reducing advertising and lowering payroll costs through furloughs and temporary salary reductions. We also received approximately $8.9 million in Q2 related to tariff refunds and interest from the U.S. Customs associated with the November 2019 retroactive tariff exclusion on quick vinyl and engineered products imported from China. That brings the year-to-date total receipts to $9.5 million of the approximately $27 million refunds anticipated. We expect the balance of the refunds to be received in the second half of 2020. Additionally, in June, we received the $5 million tax refund associated with provisions of the CARES Act and related to filing certain prior year returns described in our first quarter call. Also mentioned on our last call, we expect to funds remaining $13 million related to the Gold settlement no earlier than the courts final approval hearing currently scheduled for September 24, 2020. As of June 30 2020, the Company had $186 million in liquidity, comprised of $127 million of cash and cash equivalents and $59 million of excess availability under the credit agreement. Our focus on liquidity over the past several months has allowed us to build a strong liquidity position to navigate the current COVID-19 environments. Additionally, as demand trends have improved, our business is generating solid cash flow. As such, effective July 1 corporate office employees and members of the board of directors who had received reduced pay since April, have had their full salary reinstated. And as Charles described, we have recalled furloughed employees as our stores and distribution centers return to more normal operations. Despite our strong current position, uncertainty in the near-to-medium term environment will require a continued focus on maximizing liquidity and flexibility. We remain focused on reducing costs and managing inventory flow while continuing to defer payments and delay or stopping non-critical projects. We also continue to work closely with our vendor partners and landlords to extend terms and manage deferred payments, to provide ample flexibility and preserve cash. We benefited from employee retention credits during the second quarter, and will utilize the provisions of the CARES Act to defer the employer portion of social security taxes for the remainder of 2020. These deferred taxes will be repaid in equal instalments at the end of 2021 and 2022. We will continue to evaluate state orders for additional opportunities. On April 17, we amended our credit facility and expanded our borrowing capacity to provide temporary additional liquidity if needed. That amendment expires at the end of August. But any reduction of near term liquidity will be minimal as our diligent management of inventory enhanced liquidity, but limited the borrowing base calculation through the amendment period under the terms of the ABL. The credit agreement and charity remains March of 2024, and contains no financial covenants, except for a fixed charge coverage ratio if borrowings exceed 90% of availability. Our liquidity position remains strong through July, but we continue to model multiple financial scenarios to ensure we remain agile and maintain ample liquidity through the pandemic, including stress testing, downside assumptions and contemplating various recovery trajectories. Based on what we know today about the impact of COVID-19, we believe that cash flows from operations, together with liquidity under our credit agreement provides sufficient liquidity to navigate the current environment. Should conditions change, we have additional steps we could take to further bolster our liquidity position. As we described in our Q1 call, the uncertainty surrounding the duration and extent of the pandemic, including its impact on our company, associates, customers and business partners makes it uniquely challenging to accurately forecast our future financial performance. As a result, we are not providing annual financial guidance, but as a reminder and for context as Q3 unfolds, in last year's third quarter, we experienced the network security incident in August that negatively impacted quarterly sales. In addition, we do expect to open one new store in Q3 and our current plans including opening a small number of stores in Q4, dependent on demand trends and on-going liquidity considerations. Our near term focus remains on maximizing financial and operational flexibility and preserving liquidity, while also monitoring the current landscape for opportunity. Core to our work will be the continued execution of our strategic pillars, but we will also continue to take the steps necessary to weather the current pandemic. As we learn more each week, we will adapt and evolve our business models and financial scenarios as conditions warrant. I would like to reiterate Charles's thanks to our associates, business partners, and many other stakeholders who are working collaboratively with us to navigate this environment. Through our collective efforts, we are making progress in building momentum and the ingenuity of the team builds my confidence in our future. Thank you all for your time this morning. With that, I'll ask the moderator to open the call to question.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

[Michael Tessler:]

Hey guys, this is Michael Tessler on for Simeon. Thanks for your question. First, I wanted to ask just about the quarter to date sales trends and -- you can provide there, it looks like comps are down on roughly of high single digits into you know through June. So how things have trended since then to the extent that [Indiscernible].

[Charles Tyson:]

Hey, Michael. Good morning. This is Charles, thanks for joining the call. Yes Michael. So if you go back through Q1, we were really pleased with our process where we were making the progress from Q1 until till the virus really impacted everyone dramatically in April. And, as we've said, we were encouraged by the trend of our business as we progressed through Q2. Obviously, we saw significant impact from the DIY customers as we move through the quarter. And probably more important for us, we look at the pro business through the quarter, we track on our installation business, how customers are setting up appointments in the home, to look at getting an installation job done, that's a good predictor of us of what future activity might look like. And we were very pleased to see as we move through April obviously was tough for everybody. But when we got to June, we saw generally around the country that opening back up again. Obviously, there were certain parts of the country that we said, those parts of the country that went into significant lockdown, where people weren't able to go out or restricted to go out, we saw a slower return to, to the volume. But at this point, as we've said in previous calls, our policy on board is we're not going to talk about actual results in the quarter we're in. We're going to work on the quarter we just produced, and so we appreciate the support for where we are today.

[Michael Tessler:]

Yes, no problem at all. And so my follow up just on gross margin, another great quarter in Q2 with the expansion following on Q1. Even just high level thinking about the go-forward outlook there. I guess, our kind of expectation would be to think Q3 could see another again, another solid improved expansion as it continues to roll through, and then Q4, we'll have a bit of a tough compare. And then I guess, is that kind of the right way to think about it, and then just even long term going forward, this is you interrupting out running around roughly 38%, 39% gross margin, which you haven't run out for several years. The enhancements you've made, does that mean this is -- this could be the gross margin, rate kind of a go-forward longer term basis. Thank you.

[Nancy Walsh:]

So, as you mentioned, our work to enhance margins over the last 12 to 18 months really became visible once the 301 tariffs expired in November of 2019. And that's the primary driver that you're seeing on a year-over-year comparison. Remember, that these tariffs are slated to expire on August 7, and we do not know yet what's going to happen with those. So at this point in time, we continue to work to offset potentially any impact that might occur from those but we're not going to get specific numbers as Charles mentioned. You will remember that as part of the original tariff extent expiration, or a tariff exemption, excuse me, in November of 2019 that there was a retroactive component in Q4 that goes back to September of 2018. So as you mentioned, you need to keep that in mind. But at this point, we need to wait to see what happens with the tariffs. And we will update you accordingly.

[Charles Tyson:]

Michael, let me just add on to that. As when we go back to our transformation, I'd sort of hinge you into three areas as well, right, that we think about in terms of driving top line and making sure that we're delivering on the profit line. Our merchants have done a lot of work around product development, innovation and design, and bringing in product more quickly, bringing new product to market more quickly, and driving through a strategic sourcing strategy. You know, those actions just will continue and teams have made tremendous strides. And that gives our sales force the confidence to sell unique products. So the work we've done and our solid wood program with the Bellawood upgrades, that teams have confidence I've got one of the best solid wood programs in the country. And so they're selling against our value proposition. We're not selling against price. So again, I want to connect things back to the work that we're doing inside our transformation. We continue around our marketing optimization work, especially where we're leaning into digital and looking at more efficient ways to drive profitability. And so I think as you see the profitability progress that we made in Q1 and the profitability progress that we made in Q2, there are strong actions underpinning how we're thinking about positioning the company both for growth and profit. Hopefully that color helps a little bit.

[Michael Tessler:]

It does. Yes and great, great progress so far. Good luck for rest of the year.

[Charles Tyson:]

Thanks, Michael.

[Operator:]

Thank you. Our next question comes from the line of Laura Champine with Loop Capital Markets. Please proceed with your question.

[Laura Champine:]

Thanks for taking my question this morning and congratulations on the profit improvement. My question is about some numbers disclosed in the queue this morning. The customer count actually didn't decline much, but the average sale did in dollars. Can you comment on sort of what sort of consumer behavior that reflects, and how that is changing as we move into Q3 just a little more detail on why the sale is down, but customer count stayed relatively strong, and whether or not you think that trend is going to be sustained in the back half?

[Charles Tyson:]

Yes, Laura. Thanks. Appreciate the question. So we were excited about what actually happened in the trend of transactions as we move through the quarter. Obviously, we had a fairly dramatic mix shift from a customer account perspective, obviously, our installation business we are able to book both the labor and the product cost. And so as installation took a pretty dramatic decline at the beginning of the quarter, that has a pretty dramatic impact on how we think about average ticket. And obviously, the mix from Pro to DRY has an impact on average ticket. As I said, with the earlier questions, and in my statement, we've been encouraged through the quarter on what we're seeing on assessments from an installation perspective. And obviously, that would be a good predictor for us as we move into Q3, if that -- if that was to continue. Obviously, we're being very sensitive to what's happening around the country with the virus. And again, none of us can predict what we were looking at in April and what we're now looking at from the country opening back up. But hopefully that gives you some color on what impacted average sales versus what we see as work inside our transformation is beginning to pay off, particularly with a digital transformation around customer transactions.

[Laura Champine:]

Got it. Thank you.

[Charles Tyson:]

Thanks Laura.

[Operator:]

Thank you. Our next question comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question.

[Nathan Friedman:]

Hi, this is Nathan Friedman on for Seth. Thanks for taking my question. But first, regarding gross margins, you guys mentioned higher customer delivery costs associated with delivery promotions offsetting some of the games you experienced, which seems somewhat new, new [Indiscernible] how much of an offset this one to gross margins and is this a new strategy that you guys are implementing and something that will persist going forward?

[Nancy Walsh:]

Thank you for the question. We're not going to provide specific numbers around this. As we mentioned, there are a number of factors that impacted the margin. We did see a very slight impact, both on the obsolescence charge as well as the delivery cost. And that was really a function of us responding to the COVID crisis. The obsolescence charge is also something that was a factor for us to really product transition that we were doing at the end of last year in the beginning of this year to design to improve our total offering. That was the adjustment that we made. The delivery costs at this point, we continue to be flexible in our operational model and trying to serve the customer in the best way we can. So we'll continue to evaluate that over the second half of this year.

[Nathan Friedman:]

Okay, fair enough. And then my second question is regarding some of the initiatives that you guys are working on, one that I didn't hear was regarding your extended store format. Can you share the progression that you're making on this initiative? And what the appetite for this rollout is going forward, given your initiative surrounding the real estate portfolio optimization?

[Charles Tyson:]

Yes, Nathan, that's a great question. We rolled out five stores, we didn't complete that last store until the very end of last year. As you know based on turn of the inventory, and now with the interruption of the COVID virus, it'll take us a little bit longer to really look at what is the net result of how we view those open format stores. Nancy and the real estate team have spent the last three months really doing a very strategic, geographical deep dive into where our longer term opportunities are around market type and potentially store type. So I've asked the team to pull back, obviously we're limiting the number of stores that were opening this quarter. And we're looking very strategically at what should our real estate portfolio look like, what does that drive from a profitability perspective? And, and Nathan, then as part of that, we will look at what are the appropriate store formats, both from the learnings that we take from what we've done, and the market types in which we may expand into the future. We got some really good on the learnings out of that design center. And you'll see that, that is being moved. We're going forward with that as an element in all new stores. So we're taking some of the learnings around technology that we put into those stores from a customer perspective and virtual selling, the virtual remote selling that we talked about. We expanded to a number of stores and that was learnings that we took out of our ultimate spring store in Florida. So the thing I would have you take away from this is we have good strategic work underway around the role that our real estate strategy will play in growth and profitability. And from that will be the outcome of what kind of prototype is the appropriate one dependent on a market type.

[Nathan Friedman:]

Okay, thanks and good luck in the second half the year.

[Charles Tyson:]

Thanks, Nathan.

[Operator:]

Thank you. [Operator Instructions] One moment please while we repoll your questions. It appears we have no further questions at this time. I'd like to turn the floor back over to Charles for closing comments.

[Charles Tyson:]

Thank you operator. We continue to be encouraged by indications that our transformation plan is gaining traction as we execute to drive progress on our four pillars of cultivating a collaborative culture, supported by a strong team, improving our customer experience, driving traffic and transactions in our stores, and online, as well as improving profitability. Through this focus, we will accelerate our penetration with the pro, continue to evolve that digital presence and revitalize that brand and improve profitability for both margin enhancing and cost efficiency efforts. The progress we've made and the results we've already begun to see, give us great confidence in our future. Thanks again to our associates who are making sacrifices for our company, and to our vendors and other stakeholders who are partnering with us to creatively navigate these uniquely challenging times. I’m wishing everyone good health and safety, and we look forward to updating you on our performance next quarter. Have a great day.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.