LL Flooring Holdings, Inc.
Q2 2017 Earnings Call Transcript

Published: 1 Aug 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Lumber Liquidators Second Quarter 2017 Earnings Conference Call. With us today from Lumber Liquidators is Mr. Dennis Knowles, Chief Executive Officer; and Martin Agard, Chief Financial Officer. As a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in whole or in part without permission from the company. I would now like to turn the call over to Steve Calk. Please go ahead, sir.

[Stephen Calk:]

Thank you, operator. Good morning, everyone, and thank you for joining us. Let me reference to 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 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?

[Dennis R. Knowles:]

Thank you, Steve, and thank you all for joining our second quarter 2017 earnings call. I am joined by Marty Agard, our Chief Financial Officer. I want to start the call by saying how much I value and appreciate our store and corporate teammates. To those of you listening, your diligence and hard work are paying off. This quarter, we posted our third highest revenue in company history. Thank you all very much and keep up the good work. I'd now like to give you some quick highlights on our performance. In the second quarter, we reported net sales of $263.5 million, an increase of 10.7% compared to the prior-year period. Comparable stores net sales increased 8.8% in the second quarter, driven by solid performance across the board. Merchandise was up 6%, traffic was up 5%, average ticket was up 3.5%, and our Pro and installed services continue to develop according to plan. In addition, the product mix is right and our store associates continue to improve their product knowledge and selling skills. I also believe the brand continues to improve as we focus as a team on developing and enhancing our position in the marketplace. We told you that we plan to offer installation in all of our stores by the end of 2017, and we're right on track to meet that goal. At the end of June, installation services were deployed in about 80% of our footprint and the offering is not only contributing to revenue growth, but also expanding our appeal to a wider customer set. We've also continued to enhance our relationship with the Pro customer, where our sales are growing ahead of our overall growth rate. In the second quarter, we achieved our goal to return to profitability for the first time since 2014. I'm encouraged that our efforts to balance top line growth and cost disciplines are yielding results. However, I want you to know that we are not taking a victory lap. In my view, these results reflect the benefit of executing on the basics, full employment at the stores, systematic training, smart pricing and the right mix of products and marketing without the overhang of negative media. Not easy to do, but easy to understand. So, as far as I'm concerned, execution thus far has been for table stakes. The real work of uncovering and enhancing the value of Lumber Liquidators lies ahead of us, and I'm excited to work with our team to realize those opportunities. Let me just mention a few more highlights before passing the call to Marty. Last quarter, I told you about the launch of our Dream Home Ultra X2O water-resistant laminate, a Lumber Liquidators exclusive and our new waterproof Click Ceramic Plank product. Customer feedback on this and other products we have recently introduced have been very positive and we believe they're helping us drive traffic, close sales and improve the overall brand. We also talked about marketing last quarter. We have made a lot of progress here. I believe we are marketing smarter and more strategically. As I've mentioned before, our goal was to better align our merchandising and marketing functions with our operations so that we are merchandise-driven and customer-focused, and we're making real strides on this front. We achieved solid top line growth in the second quarter whilst spending a little less on marketing than we did in the first quarter. Now, part of the drivers at our Pro and install business are not as dependent on the marketing spend, but is also the case that our spend and promotion intelligence continues to improve. Next, we continue to look for ways to sharpen our compliance efforts and operationalize our investments there. The hiring of Lee Reeves as our new Chief Legal Officer and Interim Chief Compliance Officer is a reflection of that focus. On the legal front, we continue to push forward on the MDLs. While we have nothing material to report this quarter and have made no changes to the reserves, we point out in our 10-Q that the court has taken some initiative to facilitate settlement discussions. That includes appointing a federal judge as a mediator and appointing settlement counsel for both the formaldehyde and durability plaintiff classes. While we view these developments positively, it's too early to comment on how it may affect the process. In late July, however, we were pleased to see the CPSC close its matter with the company. Marty will have more to say about that and will provide some financial context as well. The DOJ SEC investigation is ongoing, and there's nothing to add on that, other than to say that we continue to cooperate. Well, here is how I'd sum up the quarter. I'm proud of our team for a job well done, and I'm pleased with the step-up in terms of growth and profitability. However, I also believe we have a long way to go to unlock the full value of Lumber Liquidators. So our plan is to stay the course as we have previously outlined, narrow focus and strong execution. Marty, please take us through the numbers.

[Martin D. Agard:]

Thank you, Dennis, and good morning, everyone. Let's take a look at the numbers, starting at the top line. As Dennis stated for the second quarter, net sales were $263.5 million, an increase of 10.7% over last year, with comparable store's net sales up 8.8%, continuing our momentum in rebuilding our brand. While the comp growth is still heavily influenced by the expansion of our installation business, this quarter expanded on last quarter's positive merchandise comps and benefited for the first time in several years from positive traffic growth, as measured by customers invoiced. Breaking down the comp results a bit, merchandise comps for the quarter were positive 6.1%, and customer traffic growth was plus 5.3%. The installation business grew on our comp stores set by 60%, reflecting continued geographic expansion this quarter in the Northeast, along with strong growth in markets where we've been operating the installation program over the past year. In terms of mix, the comp sales growth within merchandise was driven by the expansion of our engineered vinyl plank business, as well as growth in our wood-look tile, engineered wood products, and moldings and accessories. In addition to the growth in customers invoiced, we also had a 3.5% growth in the average ticket, which reflects the expansion of installation as an attachment and the growth in our professional business, which also carries a higher average ticket. Before moving to gross margin, I should remind the audience that the 8.8% comp growth was comparing against the very challenging second quarter 2016 in the face of product safety concerns and media attention. So while we're pleased with our momentum, we do not expect this level of comparison in the next few quarters. Now let's take a look at gross margin, which came in at 37% for the quarter on a GAAP basis, but was positively impacted by favorable revisions to both antidumping duties previously accrued and to our test kit reserve. While both reflect positive development, these P&L impacts relate to estimates made in prior periods and are not reflective of current period operational performance, and so should be considered separately. Last year's gross margin was 29.7% on a GAAP basis, but was negatively impacted by both antidumping accruals and the test kit charges in that period. If you exclude these items from both periods, the current quarter's gross margin would have been 35.5%, compared to Q2 2016's gross margin of 33.3%. So this quarter was better by 220 basis points on an adjusted basis. Q2 2017's gross margin was also favorably impacted by the growth and improved margins of new products in the manufactured lines, improved attachments of non-foreign products with strong margins, and lower transportation cost. This was somewhat offset by the higher mix of installation sales, which carry lower margins but expand our customer market. Comparing sequentially to Q1 of 2017, which had no unusual items, its gross margin was 34.9%. So, excluding the estimate revisions for the test kits and antidumping duties in Q2's result, we improved by 60 basis points, with incremental improvements coming in several areas. In the context of guidance, we remain committed to the upper-30s-percent gross margin in the medium term, but will likely hold near current levels over the remaining quarters of 2017. Before turning to SG&A, I'd offer a little bit more on the test kit reserve change. At our request over the past few months, the CPSC reviewed the test data and program to-date and agreed to discontinue monitoring of the program and to close this case. We believe this reflects both the good test results produced, as well as the declining test kit requests by customers. We will continue to make these test kits available through our website and 800 number, but the combination of fewer requests and lower administrative costs of the program led to the reduction in the required reserve. More than the favorable financial impact, we see this as another positive step in resolving this legacy issue and moving forward. Now let's look at SG&A. SG&A expense for Q2 was $92.3 million, compared to $89.9 million in Q2 2016. SG&A in the quarter included incremental legal fees of $3.6 million, while the year-ago quarter included $8.3 million in incremental legal fees and $0.3 million in other related items. These items are tabled out in the press release and in the 10-Q. And just as a reminder, when I refer to incremental legal fees, I'm talking about only those fees related to the major legal matters, including the MDLs, the DOJ investigation, and certain resolved past matters. Those we see as both non-routine and we're at the point of resolution we'd expect the spend to stop. This is not referring to our normal course of business legal fees. When excluding these items, SG&A expenses for the quarter were $88.8 million, or 33.7% of sales, and an increase of $7.5 million from a year ago. This was heavily driven by increased payroll-based cost related to core store staffing improvements, investments in our ProSales and installations teams, and corporate capabilities. Advertising was also up from last year by about $1 million. If compared sequentially, and again excluding the items tabled in the press release and the 10-Q, SG&A decreased from $91.9 million in Q1 of this year to $88.8 million in Q2, largely due to lower advertising costs. While down from the seasonally heavier first quarter, advertising ran just under the $20 million per quarter recent average spend rate and does not signal a significant shift in our approach here. I'll move down the P&L to the operating profit. For the quarter, we recorded operating income of $5.1 million compared to an operating loss of $19.3 million in Q2 of 2016 and an operating loss of $25.4 million in Q1 of 2017. Both the current and year-ago quarters had several unusual items that impacted those results as scheduled in our 10-Q and press release. But it should be clear, both on a GAAP basis and when excluding the unique items we've tabled out for you, the business is making strides in terms of profitability through both revenue growth and margin expansion. Now, let's look at cash flow and liquidity. As of June 30, we had total liquidity of $83 million, consisting of cash and availability under our asset-based revolver, but not including the 2016 tax refund. Borrowings under our ABL facility were $57 million compared to $72 million drawn at the beginning of the quarter, reflecting the reduction in working capital. Our inventory ended the quarter at $275 million, down from $301 million at the beginning of the quarter. This is consistent with the past guidance that we expect inventory to decline through the third quarter to a range I'd now set at $255 million to $265 million. Lastly, as noted in the subsequent event footnote, since the end of the quarter, we have received the 2016 tax refund of approximately $29 million and reduced the drawn amount under the ABL facility to $42 million, while also building up our cash position. We remain comfortable with our liquidity. On the investing side of things, we did not open any stores during the calendar quarter, but have opened two in July, bringing us to four new stores year-to-date through July and our total store count to 387. We still expect to open a total of 10 to 12 new stores this year. To wrap it up for me, I am encouraged by how the business is improving and our balancing of (14

[Dennis R. Knowles:]

Thank you, Marty. I'm going to keep my closing remarks brief as our plans for the year are consistent with the last quarter and our progress is confirming that we're headed in the right direction. Store performance. As many of you know, we have rebuilt our associate ranks over the last year, while aligning the compensation structure with growth-oriented business objectives and we have added significant training programs. We are continuously improving our associate training and expanding those sessions to include installation, ProSales and many programs focused on selling skills. We're also continuing to expand and improve our secret shopper program, so that we have good data on how well our associates are doing around the country and where we can find the opportunities to enhance the customer experience. Our GAP Store (15

[Operator:]

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question is from Simeon Gutman with Morgan Stanley. Please state your question.

[Simeon Ari Gutman:]

Good morning, guys. It's Simeon Gutman. The first question is, can you remind us, just big picture, what the impediment is to getting gross margins into the high-30s? You may acknowledge it's a mix of things like sourcing, distribution, less promotions or mix. And I realized you may not share a timeframe with us. But is there an internal timeframe that you have where you expect to hit that goal?

[Martin D. Agard:]

Yeah. This is Marty, Simeon. So, we feel good about where we are in margins. We feel like we're on track. We worked on, have been working and will work in the near quarters around some of the, what I call, smaller tactical items that include things like price discipline, some of the operational elements getting the gross margin like warranty and obsolescence costs. Meanwhile, we've got a couple of longer-term things, longer term over, let's say, a series of quarters that push us into those upper-30s. So, as I said in my prepared remarks, we still have a target for that, have a plan to get there. We do have an internal, sort of, timeframe in mind. It's measured in quarters, not years, but it's not imminent. And at this point, in these next few quarters, there's still just a sense that, depending on how product mix plays out with some of those sort of seasonal variability, we're likely to be around these levels for a little while. So, that's kind of how I respond to that, I guess.

[Simeon Ari Gutman:]

And you started the answer with something on pricing. You mentioned discipline. I don't know if that means that you're not optimizing your pricing or that you're still promoting or there's still some discounting that could be taken away. And I just take that as being the key factor as opposed to something on the distribution side.

[Martin D. Agard:]

Really, not. I would say we are working on pricing along the lines of a little bit more surgical promotional activity and a little bit less markdown stuff going on at the stores. We think the product assortment is stronger now. We don't need to do as much of that. But it's really not the big mover that's going to get us into the upper-30s. That stuff is going to be more a couple of sourcing initiatives and more in the logistic supply chain space.

[Simeon Ari Gutman:]

Okay. And my one follow-up is, last quarter, the balance between sales and margin was improved. But I think, in our follow-up call, you also wouldn't take any victory lap to say that we're in the clear yet. This quarter, now, this is a seasonality bigger quarter, I think one of the biggest quarters of the year and the business showed even a better balance than it was in the prior. Do you feel that, outside of that seasonal bump that the business now is demonstrating, that it's in the clear as far as balancing that mix between sales and margin?

[Dennis R. Knowles:]

Yeah, I would say so. A lot of things, as Marty mentioned, when you think about what we're working on markdowns, we also – I won't say perfected, but spent a lot of time working on regional assortment and regional pricing. But the assortment is stable. We'll continue to tweak the assortment as any retailer would, which will afford us some more opportunities, I think, for expansion. But we also have spent, probably, the last 12 months working on our Pro business as well. And so, I think we're starting to see the balance stabilize, and we're kind of getting our operational muscle around that business as well. And as we continue to rollout the installation, as Marty has mentioned, there'll be some pressure on that. But we do feel like we're starting to see the stability between – and the balance that allows us to manage this on a day-to-day basis.

[Simeon Ari Gutman:]

Thank you.

[Dennis R. Knowles:]

Thank you.

[Operator:]

Our next question is from Dan Binder with Jefferies. Please state your question.

[Daniel Thomas Binder:]

Hi. It's Dan Binder. Thank you. You mentioned earlier about getting unit growth ramp back up possibly next year. I'm just curious what your current thinking is on unit growth this year. And if you were to, sort of, paint a picture that's more positive for Lumber Liquidators into the future next two, three years, what do you think ultimately the right unit growth rate is for this business given the competitive landscape and whitespace, et cetera?

[Dennis R. Knowles:]

Well, as we've mentioned, we still think – we're still targeting 500-plus stores by 2022. And there is a lot of markets out there where we currently don't have coverage. And then, there are some markets that we feel like we can backfill to make sure that we've got adequate coverage within the market. So, this year, we still are committed to the 10 to 12 stores. Obviously, as Marty mentioned in his prepared remarks, we didn't open any in Q2. However, we did open one in July and realized we got a lot of work to do in Q3 and Q4. But we still feel like we're on target to hit the 10 to 12 for 2017.

[Daniel Thomas Binder:]

And then, given some of the success from your competitors, particularly Floor & Décor, they become a bigger focus for investors with their IPO. I'm just curious. Can you give us a little bit of color on how you'd compete against them both on price and what the impact is in the market when they open up against you? It's certainly been a focus for questions for investors we have spoken to.

[Dennis R. Knowles:]

Sure. I'll start, and Marty may have something to add. We value really all competition because it helps us stay sharp. We've been pleased with how we go head-to-head with all of our competitors. As we look at the last two years, we performed relatively well, considering all of the challenges that we've had. And so, it gives us the confidence with a healthy business that we kind of earned our right to start thinking about store growth again. And our assortment has been healthy, and our stores are really coming on strong for us. And so, we feel good about how we're competing in the markets and we'll continue to stay aggressive to what's going on in all of our competitors. But I've been pleased with how we've performed in markets where we go head-to-head with all of the big-box competition.

[Daniel Thomas Binder:]

And one last question, if I could, on inventory. It's been coming down. You expect it to continue coming down. I think, historically, one of the bigger challenges for the consumer shopping lumber has been sometimes wait time. You've talked about your improvement in this area. Can you just reconcile with us how the inventory is coming down, where it's coming down and your ability to continue executing on in-stocks and shorter wait times?

[Martin D. Agard:]

Yeah. I think – this is Marty. Some of the decline is just from the seasonal pattern. We really got it full at the end of the year and into the early part of the season. Part of that was bringing out a range of new items that we brought out in the – earlier in the year and a broader assortment. So, we're coming down from a very elevated level. Now, at the same time, we are trying to push kind of at the margin (25

[Daniel Thomas Binder:]

Great. Thank you.

[Operator:]

Our next question is from Laura Champine with Roe Equity Research. Please state your question.

[Laura Champine:]

Good morning. Can I just get a clarification on the discussion of gross margins for the back half? When you say that, that should stay fairly consistent with what we've seen in Q2, are you referring to the 37% level or the level excluding sort of one-time items of more like 35.5%?

[Martin D. Agard:]

Yeah, the latter, more like they'd be, what we'd call, adjusted in the 35.5% range. We were at 34.9% on that measure in the first quarter. I said, at the time, we would expect some modest upward movement through the year. We kind of delivered, I'd say, on that, if not maybe came a little higher than some of that target, but still think we can stay at these ranges. And we're still working on moving it upward. It's just, at this point, those steps are going to be small enough to wear, depending on exactly how the mix plays out and so forth. I can't promise you a 50-basis-point up each quarter, that kind of thing. So – but it is – that discussion is on the adjusted number.

[Laura Champine:]

Understood. Thank you.

[Dennis R. Knowles:]

Thank you.

[Operator:]

Our next question is from Matthew Fassler with Goldman Sachs. Please state your question.

[Matthew J. Fassler:]

Thanks so much, and good morning. Two questions. The first relates to brand health metrics. As you take stock of the consumers' perspective on the brand, you moved further and further away from some of the reputational challenges the company confronted. How are you measuring where you stand, and how is that influencing your ad spend and the nature of your ad dollars? Is it a – just curious. Is it a situation where, the better they think of you, the more you want to pump into advertising because the brand has resonance? Or is it a situation of, if your reputation and all – if consumers' perceptions improved, you don't need to spend as much? And I'm asking that question as the ad spend remains quite well controlled relative to historical levels.

[Dennis R. Knowles:]

Matt, I would tell you that there are several factors that we look at. As I've mentioned before, two of our initiatives, our installation and our ProSales, those – both those customers are a little less dependent on advertising and we've seen that play out. We've really brought some discipline to the marketing team not just in how we go to market, but also understanding the success of our spend. So, that we're spending more than we need to, to drive the traffic where we need to. But the brand, from external measures, continues to improve and awareness is at an all-time low for us as it relates to our past. (29

[Matthew J. Fassler:]

Great. And then, my second question relates to inventory. I think you gave us some pretty direct guidance vis-à-vis Q3. Can you, unless (30

[Martin D. Agard:]

Yeah. So, by year-end, it should rise from the $255 million to $265 million range a bit, but I would say, not as much as it did last year. We had more sort of product changeover going on. We took probably a bit more conservative position relative to Chinese New Year interruptions and so forth. So, I would say, coming up from the $255 million, $265 million range at the end of Q3, maybe halfway or something like that towards where we finished last year, which is around $300 million. So maybe it's $275 million, $285 million.

[Matthew J. Fassler:]

At what point would you...

[Martin D. Agard:]

And then...

[Matthew J. Fassler:]

I'm sorry.

[Martin D. Agard:]

I was going to finish your question there. There will be a seasonal pattern and I would say, from the Q3 of this year, that lower range on up to Q4, maybe cycling down a little bit again towards Q3 of the following year, would be a normal seasonal pattern, but then I would say that whole pattern will flex a bit with sales. Yeah.

[Matthew J. Fassler:]

So I guess, Marty, in closing, my question, would you say that this is the first quarter here in Q2 that we could think about kind of being at a normal level, where all that's going to move it is seasonality, or is that going to be kind of Q3, where you get to the desired baseline?

[Martin D. Agard:]

I think we're close now. It might be a tad higher than what I would have said was the right baseline. And by Q3, yes, we're on the baseline.

[Matthew J. Fassler:]

Thank you so much.

[Dennis R. Knowles:]

Thank you.

[Operator:]

Our next question is from Peter Keith with Piper Jaffray. Please state your question.

[Peter Jacob Keith:]

Hey. Thanks. Good morning, guys, and great quarter here. Nice to see some positive results.

[Dennis R. Knowles:]

Yeah. Thanks.

[Peter Jacob Keith:]

Just to follow up on Matt's question with regard to the advertising and the brand continuing to prove, that's certainly what we see in our work. Could you talk about any view on perhaps just rebranding the company, particularly as consumer demand seems to be moving towards more non-wood products that you guys offer? Is there anything you're beginning to explore with the overall brand name?

[Dennis R. Knowles:]

We are. And as I've stated in the past, Peter, for us it's, when is the time right. And we want to have some of our legacy issues completely behind us. But as we start to think about that, and if you look at some of our marketing events as of late, we're starting to introduce some elements of that, when you hear us refer towards our Pro program as LL Pro Plus and LL Install Plus. So, we are starting to think about that. It is an expensive proposition when you think about rebranding the company, but it's – there – this is on our radar. And as we start to think about the future, the next three years, it's definitely something that we're working through, just kind of our thought process, our research, and really thinking about, when would the timing be right to do what we think is probably appropriate.

[Peter Jacob Keith:]

Okay. Thank you for that.

[Dennis R. Knowles:]

Okay.

[Peter Jacob Keith:]

And then, I know e-com is not a huge risk to your category at this point, but could you give us an update on your website, maybe where that represents as a percent of sales? And then, are you seeing a majority of those sales being picked up at the store?

[Dennis R. Knowles:]

Yeah. So, we do offer buy online, pick up in store. Our current business through the Web is about 5%. It's about 5% of our business. We are seeing growth in that area. We offer – you can buy online, pick up in store. You can buy online, ship to home. And buy online, ship to store. So, there's obviously – flooring is unusual in that's very heavy. And there's a high cost of freight associated with delivery. We deliver to our customers, both our Pro and our DIY customers, but we see a lot of activity. A lot of our traffic is on the weekends. And we have probably – I want to say about 80% of our customers that shop the Web end up making a purchase. So, we can link the purchase to a Web visit. And this is kind of our work to do as well, as we want to continue to improve the customer experience. Our focus on making sure that we got an experience that's either online or in-store or through our distribution channel that meets the needs of the customer, we know is an area that we can continue to improve in and make investments there in the near term and future to make sure that we're continuing to deliver that seamless experience for our customer.

[Peter Jacob Keith:]

Okay. Thanks a lot, and good luck at the back half.

[Dennis R. Knowles:]

Thanks, Peter.

[Operator:]

Our next question is from Rick Nelson with Stephens. Please state your question.

[Rick Nelson:]

Thanks. Good morning. Nice quarter.

[Dennis R. Knowles:]

Thank you.

[Rick Nelson:]

I'd like to ask you about kind of same-store sales, how that track during the quarter. I know in 1Q, you expressed some choppiness in sales during the quarter. I wonder if that was the case in Q2 as well.

[Dennis R. Knowles:]

It was not. We saw a sequential comp improvement through the quarter.

[Rick Nelson:]

And any comments on quarter-to-date sales? Are they tracking similar to what you posted in 2Q?

[Dennis R. Knowles:]

No. I mean, we continue to be pleased with the progression early in the quarter. But, yeah, we're seeing our traffic continue as well as response to our marketing events. So, we think – like Marty and I both said, Q2 is a little different in that we were going against some negative media last year. So, I think we'll both be pleased if we can be somewhere between Q1's results and Q2 results from a comp perspective. But we're still going against a little bit of noise from last year as it relates to the assortment. But we're confident that what we've been working on and our focus with the customer will continue to garner good results for us.

[Rick Nelson:]

Okay. Thanks. And from a promotional standpoint, could you add any events or are you, in fact, kind of pulling back on those events and you could play an incentive for the second half?

[Dennis R. Knowles:]

We'll be about flat. We typically spend less in the second half of the year and we'll stay with our spend. And as Martin and I both kind of stated, our quarterly spend is pretty consistent and we plan to stay the course of latter half of the year. And when I talked earlier about the effectiveness of our marketing spend, our internal intelligence is really helping us make sure that we're thinking about whether we advertise items or whether we advertise categories and how the customer reacts to that. So, we continue to use that intelligence to make sure that we're spending our money wisely and driving traffic, as well as store comp sales and managing our margin rate.

[Rick Nelson:]

Great. Also, I'd like to follow up on the kind of Pro side of that house here. It's a big strategy. Is there a way to measure kind of your success, percent of sales or some other metric with the Pros?

[Dennis R. Knowles:]

We pay attention to our penetration, our percent of sales. And as we've mentioned in the last call, we're not focused on the comp perspective as much as we are the contribution that makes the total. And it's running just north of 20%. We continue to make progress with that as we gain traction with that team. We feel that we've got a lot to offer to Pro customer and we've seen good response and are pleased with our progress.

[Rick Nelson:]

Okay. Thanks a lot and good luck.

[Dennis R. Knowles:]

Thank you.

[Operator:]

Our next question is from Seth Basham with Wedbush Securities. Please state your question.

[Seth M. Basham:]

Thanks a lot, and good morning.

[Dennis R. Knowles:]

Good morning, Seth.

[Martin D. Agard:]

Good morning, Seth.

[Seth M. Basham:]

My question is around the comp store traffic. Very strong improvement, a 5.3% increase in transactions in comparable stores. Can you give us a sense of whether or not that's been driven more so by footsteps in the store or conversion rates when the footsteps are in the store?

[Dennis R. Knowles:]

Yeah. Seth, I would tell you that it's a bit of both. As we talked last year, we installed traffic counters in our store. We're just about to anniversary that. But that has given us some more intelligence as well as it relates to what marketing events and how that's driving consumer response. But we had good traffic improvements sequentially across the quarter. And then, our effort to drive the install and the Pro business has helped average ticket. But I've also got to say that when you look at the work that Mark, our head of stores, and his divisional VPs and our regional managers are really focused on selling skills in our store. And so, we focus on things like attachment and selling up and selling additional rooms. So, we got to believe that the execution continues to improve and we see that across the board. So, I would tell you that it's a little bit of everything. We're seeing the growth in the Pro. We're seeing the growth in the installation and in the adoption, especially when you look at the number of measures that we get to perform installation. We're happy with the improvement there and we've been very cautious with growing that business because it's a complicated transaction when you're inside the home. And so, we're pleased with the progress we're making. It's additive to our ticket and attract traffic, and we still have got ways to go to complete the rollout. We feel like we'll be there, but I would tell you that I feel like all three elements have been additive to both ticket and traffic.

[Seth M. Basham:]

Got it. And when you think about growing (42

[Martin D. Agard:]

Yeah, there was. The install business had a nice rebound. I guess it got off to a little slower start in the first quarter, coming off the holidays and stuff and just the measure process and so forth. Whereas, in the second quarter, their expansion sort of caught sale and so it was a little bit higher mix. And therefore, the difference between total comps and merged comps is a little wider. If you went through the numbers, you'd see that gap being a little wider.

[Seth M. Basham:]

And how do you think about that trending in the back half of the year in terms of their contribution to comps from installation and Pro?

[Martin D. Agard:]

Yeah. This is Marty still. The install piece will continue. There's some chance it widens a little bit more, but I'd say the second quarter was pretty representative. And then, we'll anniversary that. We'll be fully expanded geographically by the end of the year. And then, as we get into next year, the contribution from installs will still be there, but it won't be quite as dramatic as it is now. So, that's kind of the turning point, I guess you'd say, when we're fully installed across the country.

[Seth M. Basham:]

Got it. Thanks a lot. Great results and good luck.

[Dennis R. Knowles:]

Thank you.

[Operator:]

Our next question is from Brian Nagel with Oppenheimer. Please state your question.

[Brian Nagel:]

Hi. Good morning.

[Martin D. Agard:]

Good morning, Brian.

[Dennis R. Knowles:]

Hey, Brian.

[Brian Nagel:]

Congrats on the quarter.

[Dennis R. Knowles:]

Thank you.

[Brian Nagel:]

So, couple of maybe longer-term modeling-type questions. But, clearly, sales are starting to rebound here. And as we look at the business now, there are new drivers of sales. But how should we think about potential per store volumes? With some of these new drivers, where we are now versus historical volumes. And I'll follow up with another question.

[Dennis R. Knowles:]

Well, obviously, we feel like we're starting to turn the corner as it relates to our per store volume. Not anywhere where we need to be or where we were historically, but we do feel like two of our initiatives, the install and the Pro business, will help us grow our average sales per box. We also believe, as we've stated in the past quarters, that it doesn't hurt having a healthy assortment and being relevant in the market. So, we won't fully anniversary a full assortment till the middle or the end of fourth quarter. So, we're still kind of seeing that play out. But from a geographic standpoint, we were pleased with our performance. And we've got some pockets where we believe we could add stores and really help drive overall awareness. So, we think we're on track, but like I said, we still got a lot of work to do and remain focused on a narrow set of execution steps to drive that volume per box. But that's been our focus with the regional teams as well as the store managers. So...

[Brian Nagel:]

Got it. And then, the second question on that is as we watch sales continue to build here, you've done a good job of leveraging expenses on the SG&A line. At what point or is there a point in which you can maybe – to continue to support better sales or have some additional investment in SG&A?

[Martin D. Agard:]

Yeah. I mean, there will be a point when we're driving that revenue per box where we need to flex a little bit the staffing in those stores, but we think there's some space between now and that point. I can't give you revenue per store, at which point we'd adjust that, but it is scalable enough to flex it and be able to drive the volume. And then a lot of those corporate capabilities in the Pro and install teams that I've referenced in the SG&A narrative are fairly scalable within sort of the medium term. So, we think SG&A is still scalable as revenue builds. I have talked about this 90-ish million dollar adjusted sort of per quarter rate and we stand by that. We're running a little under it now, but that again just allows a little bit of scaling of revenue against that number. So, it's got some scalability in the near term and then we can flex the store-level staffing just a bit, and I don't know that it's going to show up as a significant increase. So, we feel good about the flexibility of that.

[Brian Nagel:]

Got it. And then, well, maybe just one last question. I don't think it was asked yet. Any comment on sales so far here in the third quarter?

[Dennis R. Knowles:]

Yeah. Like I said earlier, we continue to feel like we're on track. It's awful early in third quarter, but we've got a lot going on in terms of rollout of installation and our focus on the Pro. So we're going to stay the course. And our expectation is that, as we said earlier, there's a lot going on in Q2 last year but didn't help us any. So, we've benefited from that. And we expect our comps to be somewhere between where we were in Q1 and how we finish in Q2, I'd say somewhere in the midrange. But so far, we're pleased with our progress in the quarter, but it's awful early.

[Brian Nagel:]

Okay. Well, congrats again.

[Dennis R. Knowles:]

Thank you very much.

[Martin D. Agard:]

Thanks, Brian.

[Operator:]

Our next question is from John Baugh with Stifel. Please state your question.

[John Baugh:]

Thank you, and congrats on a good quarter.

[Dennis R. Knowles:]

Thanks, John.

[John Baugh:]

Yeah. To clarify, wasn't totally clear on how much the install influenced the comp again here in Q2.

[Martin D. Agard:]

Yeah. So, John, it's Marty. The merch alone was 6.1%, and the total was 8.8%. So you got, what is that, 270 basis points. That is the effect of installs. And some of that is – as I said earlier in my prepared remarks, some of that is the geographic expansion. But I would say, even in markets where the install has been in place all along, it is comping higher than the 8.8%. So, depending on how you want to think about that, that's where – the installs was that 270-basis-point contribution. And like I said earlier as well, that's a little wider than it was in the previous quarters.

[John Baugh:]

That's helpful. And are you seeing in installs a different, i.e., better mix or a similar mix, for the rest of your sales?

[Dennis R. Knowles:]

I would say it's similar. We see a lot better attachment, as you would imagine, with an installed sale. As I've talked about in previous calls, one of the reasons, as an organization, that we made the decision to do the installation was to kind of have control of the process from beginning to end. And that affords us the opportunity to make sure that we're selling the complete sale and really taking – kind of managing that project for the customer. So, we're pleased with the progress that we're making there. As Marty mentioned, stores that have been doing installation year-over-year are outpacing our overall growth. Just meaning – to us, giving us the confidence that our store employees are getting comfortable with the process, and our installation team has done a nice job building our base of installers. So, we like what we see with the ticket. And probably I would say, the biggest surprise for me was the diversity of the product install. You would think, with installation, it would be more the complex projects, the solids and the bamboo, but we're installing manufactured categories as well. So, we remain pleased with that. We're focused on diligently rolling this program out, making sure that our employees are comfortable with it, and that we're getting good feedback from our customers.

[John Baugh:]

Thanks a lot. And then finally, on the Pro, every retailer we're talking to is talking about how strong the Pro is. And my question is – and you mentioned it's not as marketing-intensive, but I'm sure you're doing some things to move the Pro. And I'm just trying to maybe get a better understanding of what those might be, or are you just riding the wave that others are, that this mix is moving to Pro because they're just so – big jobs are so strong currently? Thanks.

[Dennis R. Knowles:]

That's a great question. It is interesting. You do hear the Pro come up on a lot of calls and earnings, that it was a segment of the business, for us, relatively untapped for a long time. Lumber Liquidators really didn't cater to the Pro. And we have a lot of the advantages that make doing business with us productive for the Pro. And we expanded those capabilities. As you've heard Marty talk about in the past, we have a one-to-one relationship with our Pro contact center, with our regions, and we've spent an entire year training our store associates at our national sales meetings and on our Saturday meetings, about how to cater to this customer. We have a lot of what I would call competitive advantages that we're able to leverage against that customer, and it was just a natural fit for us. So we have our DIY customers. We have our Pro customers. And then we have those customers who have a Pro. And understanding those three segments and how they need us to work for them has really been our work this last year, and understanding where we can really take advantage of what we have to offer, and this is a natural fit for us. So, it's a business that I think is – just in the hard surface flooring industry in general is growing, so is the opportunity for the Pros to take advantage of that. So, we're just really leveraging what was really there before.

[John Baugh:]

Thanks, and good luck.

[Dennis R. Knowles:]

Thank you.

[Operator:]

Our next question is from Budd Bugatch with Raymond James. Please state your question.

[Beryl Bugatch:]

Good morning, and thank you for taking my question, too. And maybe if this has been asked and I missed it, forgive me. Did you talk about what percentage of the sales in the stores that you're comping with on having installation are being installed, and what those changes are? And maybe what's the overall penetration of installation sales are for the company, in terms of transactions?

[Martin D. Agard:]

We haven't laid all that out super clear, but I guess I'll say it's around 10% in the markets where installs are offered. It's less than that, of course, across the total.

[Beryl Bugatch:]

And where do you think that can go, Marty?

[Martin D. Agard:]

Well, maybe that's for Dennis to answer. But I would say 15% something like that, I guess. I don't know that we've got a target in mind. We're letting the customer kind of dictate that a little bit. We're building the Pro business at the same time. So, we'll see how it evolves, I guess.

[Dennis R. Knowles:]

But I would tell you, just to add on Marty's comments, when I mentioned that we've seen – I guess the surprise for me is the diversity of product that we're installing. It's encouraging to me that we can run a higher penetration rate. We have two big states that we still haven't rolled out that are in the latter half of the year and my past history tells me that those are strong states for installation. And so, we'll kind of see – we should start to see that kind of level out probably around Q1. And we know that adoption in our stores takes a little time, but Charles and the installation team have done a great job with training. So, we're seeing our adoption to ramp up quicker once we do the rollout. So, I would be – I've said before, I'd love to install everything we sell, but I realized that's not going to happen. But probably somewhere between 10% to 15% I think would be a steady pace of installation for us. And we'll continue to make refinements to make that a more seamless experience for our customers and our store associates.

[Beryl Bugatch:]

And lastly for me, is there any symbiotic relationship between the Pro sales and the installed sales? Or your Pro is using some of your installers or has that get you two different Pro...

[Dennis R. Knowles:]

Exactly. That's a good way to think about it. We have Pros that use our installation services and we have Pros that do installation for us. So, we feel like it's kind of a nice fit and it just allows us – as you know, the importance of our relationship in that business. This allows us just one more way to stay connected to our Pro customers.

[Beryl Bugatch:]

Thank you very much.

[Dennis R. Knowles:]

Yeah. Thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back over to Dennis for closing remarks.

[Dennis R. Knowles:]

Thank you all again for joining us. We appreciate your support as we continue to build a better Lumber Liquidators. And we look forward to updating you on our progress next quarter.

[Operator:]

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