LL Flooring Holdings, Inc.
Q3 2017 Earnings Call Transcript

Published: 31 Oct 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Lumber Liquidators’ Third Quarter 2017 Earnings Conference Call. With us today from Lumber Liquidators is Mr. Dennis Knowles, Chief Executive Officer; 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 conference 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 Knowles:]

Thank you, Steve, and thank you all for joining our third quarter 2017 earnings call. Marty Agard, our Chief Financial Officer is with me here as well. As always, let me begin by expressing my appreciation for the Lumber Liquidators team both here at the corporate headquarters in our stores. And my visits to stores throughout the country, I continued to hear very positive feedback about the experiences our customers are having when they interact with you. That's the kind of Company we want to keep building, so keep up the good work. Now some quick highlights on our performance. In the third quarter, we reported net sales of $257.2 million and increased to 5.4% compared to the prior year period. Comparable store net sales increased 3.8%. We grew sales this quarter despite the fact that in Q3 of last year we were advertising more aggressively and clearing out old inventory to make room for the new assortment. I'd also note that we grew despite roughly 10% of our footprint being affected by severe hurricanes in Texas and Florida. We are thankful and inspired by the resiliency of our associates in these markets. They work tirelessly to ensure that we were there for our customers, our communities and our affected employees. We grew across all our key metrics as well, merchandise comps were up 1.8%, ticket up 3%, and traffic was up almost 1%. Installation continues to roll out on plan and we are still on track to have these valuable services available on all of our location by the end of the year. The Pro business continues to perform the plan above the Company average. I am also encouraged to see that we are growing in a smarter way. We are driving at profitable growth from assortment improvements, strategic promotional pricing, store improvements, better inventory allocation, and new channels. This balanced approach ensures that we do not have to rely simply on advertising or markdowns. Our focus on supply chain efficiency continues to pay dividends as well and we have decreased our overall inventory but increased our store in DC and stock position. None other indication is that Marco and his team were able to take our advertising to sales ratio down to about 7%, the best leverage we have seen for Q3. On top of these, we continue to see improvements in our associates and store staffing and we are continuing improvements in both training and retention. All together, we think we have a stronger more sustainable Lumber Liquidators as evidenced by the continued gains and efficiency, focused and profitability. I said last quarter that what we've accomplished in the last year has been for table stakes. We are now beginning to see the tangible benefited of that work and we are getting insights that will fuel opportunities to make Lumber Liquidators even better. Let me touch on a few more items before handing it over to Marty. First that has been really gratifying to see the positive response to our merchandise strategy. Customer feedback on our selection and styles have been encouraging across the Board and I believe it's not only driving traffic, but also changing the way people think about Lumber Liquidators. Customers found we are a source for new styles and hot trends like our Crushed Indigo stained bamboo. They also responded to our investment and in the growing vinyl category and wood look porcelain tile with water resistant products continuing to be a big drop for customers, particularly for those in storm prone areas. We're committed to continuing to stay trend forward in our assortment, while efficiently manage in our inventory and margin. In early October, we held our first ever vendor partners summit here in Virginia. It was great to host over 80 of our vendor partners for a day and a half to discuss the future of Lumber Liquidators and the critical role they play. I am thankful for their participation and attendance as many travels from as [far way is] Asia, South America and Europe. I was also this quarter validate our strategy to align our merchandising and marketing functions with a focus on store operations and customer experience. That process continues and we are actively learning what is most effective in each market. We are leveraging that learning across all our businesses, especially with the Pro and installation services, which are not as depended on marketing, spend. We were also pleased, last week to announce the execution of an MOU to settle the MDL cases. Under its terms, the Company will contribute $22 million and provide another $14 million and in-store credit vouchers. While there is a subsequent event, those numbers are reflected in our third quarter financials. The final definitive agreement will be subject to various approvals and contingency. There was still have some work to get it to the finish line, but we are gratified that we now have the framework on the cost and timeline to resolve these legacy matters. Stepping back for a minute, over the past few years, we have invested significant internal and external resources to ensure our products are safe, compliant and at the highest quality for all our customers. We are one of the first to offer – to say vinyl flooring. We have worked hard with our vendor partners to ensure that all of our floors are GREENGUARD Gold are FloorScore certified. We see our investment in these improved capabilities as an asset that can be leveraged in bringing innovative products to market and pursue sourcing flexibility. Another area of focus on the legal front that is still ongoing in the DOJ SEC investigation. There is nothing that at this time except that we remain committed to fully cooperating with the government on their investigation. That covers the third quarter. I'm very proud of the LL team and what we've accomplished over the past year. I'll be back in a moment to talk about our near-term initiatives, but will hand the call to Marty now to take us through the numbers. Marty?

[Martin Agard:]

Thank you, Dennis, and good morning, everyone. I'll start with a few comments about our sales results. For the third quarter net sales were $257.2 million, an increase of 5.4% over last year with comparable stores net sales up 3.8%. This consisted a merchandise comps up 1.8% and installation sales up 34%. The overall 3.8% comp growth was split between average ticket expansion of 3.0% and traffic growth of 0.8%. While these results were a little bit low our initial projection, we believe they were modestly impacted by the storm activity in September, particularly the consumer slowdown going into an after Irma's arrival in Florida. With Harvey in the Houston market, we had ten stores closed for an average of 3.7 days and so all sales differ two to three weeks. Sales of these stores are now running well ahead of pre-storm rate, but for the quarter the net impact was about neutral. In Florida, we had 28 stores closed for just over four days on average and these store sales have only recently returned to pre-storm rates. To give a gauge on the aggregate storm impact on our sales, we ran our comp store results excluding these markets and we also compared the post-storm sales pace in these markets to their pre-storm levels. These approaches are obviously imperfect, but resulted in an estimated negative impact of approximately 90 basis points to our reported comparable stores growth in this quarter. While we regret the pain and devastation the storm caused the people in these regions, we are taking aggressive measures to have stores well stocked and well staffed to both support these communities and their recoveries and to ensure we are there when they are able to rebuild. And an update on our installations program. Installed sales grew in our comp store set by 34% reflecting continued geographic expansion this quarter in the Arizona and New York areas along with double-digit growth in markets where we've been operating the installation program more than a year. I would like to put our topline results in some context, a year ago, we’re running heavy advertising and clearance activity as we both sort our first positive comp since 2014 and wanted to make room for the new assortment items we introduced in Q3 and on into Q4 of 2016. This dynamic is also reflected in the substantial improvement in gross margin from a year ago. So we are pleased with the quality of our sales in the face of both the storm impact and last year's discounting and clearance. With that, let's take a look at gross margin which came in at 36% for the quarter on a GAAP basis and was not impacted in either direction by unusual or legacy activity. Last year’s gross margin was 31.4% on a GAAP basis and also had no unusual activity affecting it, so the current quarter's gross margin was better by over 400 basis point driven by reduced clearance activity and the mix in higher margins of our newer manufactured product lines currently offset by the higher mix of installation sales that carries somewhat lower margins. Comparing sequentially gross margin was up 40 basis points from Q2 2017 when we exclude the test kit reserve and anti-dumping credits both of which favorably impacted that quarter's results. Please see the table in our press release and 10-Q for the specifics of these unusual items. Now let's look at SG&A. SG&A expense for Q3 was $110 million compared to $101 million in Q3 2016. SG&A in the quarter included an $18 million accrual related to the execution of the MOU last week. Incremental legal fees of $2.9 million and $1.5 million impairment related to a legacy vertical integration investments. The year ago quarter included unusual costs related to last year’s security settlement and incremental legal fees. These items were tabled out in the press release and in the 10-Q. When excluding these items, SG&A expense for the quarter was $87.6 million or 34.1% of sales and a decrease of nearly $2 million from a year ago. That reduction was driven by advertising, which was down from last year by about $3 million reflecting the year ago heavier spend to help restore traffic and stabilize sales. But I mentioned ad spending was close to Q2s level and does not reflect a material shift in strategy here. On the payroll side, we've largely anniversary the 2016 investments in core store staffing, our Pro sales and installations teams, and corporate capabilities. If compared sequentially and again excluding the items tabled in the press release and 10-Q, SG&A was down slightly going from $88.8 million in Q2 of this year to the $87.6 million in Q3. I'll move down the P&L to the operating profit. For the quarter, we recorded an operating loss of $17.3 million compared to an operating loss of $24 million in Q3 of 2016 and an operating profit of $5.1 million in Q2 of 2017. Both the current and year ago quarters had several unusual items that impacted these results as scheduled in our 10-Q and press release. And we think it's important to look at our results with these items set aside. When doing that, we had an operating profit of $5.1 million in line with our second quarter results and well ahead of last year's operating loss. One quick comment on taxes. You'll see that despite the pretax GAAP loss, we had tax expense. This mainly reflects the resolution of the IRS audit covering the four years 2013 through 2016. Given the span of this period and the amount of activity occurring in that window, we are pleased to emerge with so few adjustments and now put this in the growing list of things we have put behind us and can better focus on our future. Now let's look at liquidity and cash flow. As of September 30, we had total liquidity of $115 million, the highest it's been in some time in part a function of being at the seasonal low point in terms of working capital. Borrowings under our ABL facility were $32 million, which compares to $57 million drawn at the beginning of the quarter. Our inventory ended the quarter at $253 million, down from $275 million at the beginning of the quarter. Not to be overlooked through nine months of 2017 we have had positive cash flow from operating activity of over $20 million. As we anticipate the MDL settlement payment coming during Q2 of 2018 we are comfortable with our liquidity to satisfy this obligation while we preserve the option to use a mix of cash and stock. We will make a final decision about this financing as we get close to the funding date. On the investing side of things, we opened three stores during the quarter and closed one bringing us to a net four store addition year-to-date September and our total store count 387. We expect to open five to six new stores in the fourth quarter bringing us to nine to 10 net store addition this year. I’ll offer a few comments on guidance. As I stated earlier we estimate the storms cost us approximately 90 basis points in comp sales growth in Q3 but expect them to have a positive impact in the fourth quarter. Estimating the extent of this speculative and depends on both Houston continuing its acceleration and the Florida market ramping up which has been a little slower than our past experience might suggest. Regardless we are investing in those regions with personnel and inventory and wish the best for those families and communities and rebuilding. The storm tailwind should help us get to the mid-to-upper single-digits for comp sales growth in the fourth quarter. We expect gross margins to be similar to the last few quarters though with promotional mix in Q4 seasonally a little higher we may not see the same steady sequential improvement we've shown in the past four quarters. That said, we continue to target the upper 30's gross margin in the medium term. SG&A excluding the various types of special items we separately disclosed all year should remain in the $88 million to $90 million for quarter range for the next few quarters consistent with past guidance. To wrap it up for me, I am pleased we've taken a significant step on the MDL's and framing the potential settlement as we've done with the MOU and encourage by the continues effectiveness of our assortment and driving growth and profitability. That said we have plenty of work to do and continue to see opportunities in front of us. I’ll now turn the call back over to Dennis for his closing remarks.

[Dennis Knowles:]

Thank you, Marty. As we close, let me give you a quick update on our initiatives. These are consistent with what we've shared of the last few quarters and I believe our results demonstrate that we're right on track. First our performance, we've talked at length about the importance of training at the associate level. And well training never truly ends particularly as new associates join us. We believe the right structure is now in place across our entire network. Now we can concentrate on execution we want to consistent high quality experience for our customers. We are confident that focusing on our people will provide long-term value to the company, particularly as we increased touch points with customers in areas like installation and Pro sales. Our gap store program continues to increase our efficiency and by the end of the year we will also use that to evaluate our installation services execution and all of our locations. I mentioned last quarter that we rotate stores in and out of that program sharing best practices across regions and stores. Marty mentioned we closed one store this quarter. We open the store in 2012 in a small market. This quarter was not part of the larger program but rather due to shifting demographics and Pro location. We're still comfortable that we're on track for 500 stores by 2022 and we already have a nice pipeline in place for 2018. Second enhancing value to our customers, we believe we've been carrying the right mix to turn right products for a few quarters now. As we anniversary the full assortment in late Q4, 2017 will have the opportunities best responding in a way that we've not done before. Feedback continues to be positive and it's driving traffic, ticket and customer satisfaction. I told you last quarter that we are managing our assortment day-by-day and region-by-region now which is helping us better manage transportation costs and the inventory cycle. Third, responsible complaint sourcing, we believe we are operating effectively in this area too, but we are always looking to improve with our vendors. Many of us on the senior team are in Asia and Europe this past quarter building relationships and beginning new ones. We were pleased to see that these potential partners recognize our hard work and progress over the past few years and want to be part of the LL future. As we have said before, we now believe we can source from anywhere in the world with confident and we intend to keep it that way. Finally expanding our business, we've already talked about Pro sales, install, and our store network. These programs have good momentum and will continue to refine and improve. We are excited about 2018. Now with the fundamental model is operating properly, it is giving us the opportunity to reevaluate the whole business with fresh eyes. From the manufacturing source to the customer's floor, we've been working with our strategic planning team to layout our longer-term initiatives and we look forward to sharing that vision with you next quarter. As we close, let me say thanks again to the team, our vendors, our customers, and our shareholders for their continued support. With that, operator, we would like to open the call to question.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Simeon Gutman with Morgan Stanley. Please state your question.

[Simeon Gutman:]

Good morning. It’s Simeon Gutman. Good morning, Dennis and Marty. I wanted to ask you about the tradeoff between sales and margin. It's ongoing discussion and it's certainly a balance given some of the things that this business has gone through. So I wanted to get your sense of were you pleased this quarter with how that played out? And Dennis, you just feed up a couple things about 2018 and you said you get to rethink some things. My question is, now that the pieces are in place, especially the mix of products. Does it make sense to step on the marketing guess a little bit for next year, so that I guess the consumer can fully reengage with the brand again?

[Dennis Knowles:]

Yes. I think Simeon, we look at that – we looked at that really hard in Q3. And while our spin was down in the last year, as Marty said, we’re really – last year trying to accelerate the sale of product that we were getting out of to make room for the new assortment, so there was a little bit of noise in that in Q3. But really for the first time in Q4, we'll start to cycle through this full assortment and really understand how each category reacts. But we certainly are staying in tuned to that and we will make the necessary investments in the marketing spin that we need to as we see how these assortments react. But as I said – I think I said this on in the Q2 call, we also will ramp up grand opening advertising as we open new store. So we definitely are paying attention to how each category performs and what channels we choose to market in and we’ll act accordingly to make sure that we're driving the appropriate traffic in the store.

[Simeon Gutman:]

With regard to sales, and wherever the run rate of this business should be at this point is unclear, but if there is a holdback to the productivity at this point and I'm referring to the product sales. Is there a perception issue that still exists in the market? Is it a weirdish issue? Is it the competitive landscape? And I’m coming at it because it feels like the topline, I think you mentioned it performed well this quarter or in line with your expectation. It felt like at least with all the hurricane activity even excluding the 90 basis points, to us it could have been a little stronger, I mean maybe you disagree. But curious what the holdback of stronger sales could be at this point?

[Dennis Knowles:]

Well, we definitely – we had sales that were in line with our expectations. I think as I said in the Q2 call, would have been happy to somewhere between Q1 and Q2 sales or Q3 and Q3. And it was – it seem to heard us, I guess if there was anything in it was that what we saw happened in pre-hurricane. Hurricanes, there's a bit of slowdown that occurs before they hit because people are kind of focused on, securing their homes or if they have purchased floor and they certainly don't want it delivered in the midst of a hurricane coming on. So that was what we really felt was just kind of pre-hurricane and then obviously the post-hurricane activity, but borrowing that, our sales were on track with where we thought they would end up.

[Simeon Gutman:]

And just a big picture question forgetting about this quarter for a minute whether it’s marketing there is an opportunity whether it’s just an awareness perception. Can you touch on those as potential either hold back for opportunities for sales growth?

[Dennis Knowles:]

Simeon, I think what you're – when you talk about perception, Marco and his team have tracked consumer sentiment for the last two and a half years, particularly paying attention to how the brand shows up as it relates to awareness of 60 minutes of laminate, and in Q3, it was at an all time low, in fact, it was below any period since the original airing of 60 minutes. So now we feel like we're in a position where we really getting the MDLs behind us and really focusing on that brand building. So I think we're in a good spot. All indications are that we're in – this is within all time low and I know myself, and the team are focused on looking forward and making sure that we continue to grow in those particular areas, where we struggle before. So I think I answered your question, but if I didn't let me know.

[Simeon Gutman:]

Thanks a lot. Thanks, Dennis.

[Dennis Knowles:]

You bet.

[Operator:]

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

[Seth Basham:]

Hi, good morning. It’s Seth Basham.

[Dennis Knowles:]

Hi, Seth.

[Seth Basham:]

My first question is just understanding your fourth quarter trends to date and your guidance a little bit more. Marty, could you give us a little bit more color on how the business is trending for the first month of the quarter? And as you think about the mid to high single-digit comp guidance for the fourth quarter, how much of that is driven by boost from hurricanes in your estimation at this point?

[Martin Agard:]

Well, we’ve typically not broken out the monthly results haven’t for a while. I would say that the October yard sale went quite well, sets us up in line with that guidance and obviously that’s informing us as we set guidance like that, so I’d say that consistent of course. The storm piece, there is a range around the storm. We are comfortable with Harvey. In Houston, we're seeing those stores accelerate and that feels good. On Florida, we're still sort of making our way back, I guess I'd say and are not seeing a surge there yet, but it certainly could happen. We’ve modeled the Louisiana storms; a year ago we modeled Sandy. Both of those are kind of our example. There are fairly wide range of results from those two examples, but we've tried to pick [indiscernible] the storms in that context. I chose not to give a range related to the stores because it's a kind of a wide range, but let's say it's probably something more between 100 basis points and 300 basis points, probably at the lower end of that range again depending on how Florida goes. So that's included in that mid single-digit, upper single-digit guides that I gave you guys.

[Seth Basham:]

Got it. That's helpful. And then just a little bit more context around the sales in the third quarter in terms of the tradeoff between advertising and clearance. I'm not sure if you could desegregate any impact or any comp trends for non-clearance product. And then secondly relates to advertising, any sense what the decline in advertising year-over-year 30% pretty significant, what that may have done to your comps?

[Martin Agard:]

No, I would tell you that it's just a bit too speculative. Too many variables at play between the consumer overhang from a PR standpoint to some of the product assortment that was inconsistent a year ago to the advertising heavy ups that were going on. To try to break some of those pieces down is just too hard.

[Seth Basham:]

Fair enough. Thank you very much.

[Operator:]

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

[Matthew Fassler:]

Thanks so much. Good morning. My questions focus on the balance sheet, so the inventory ended up I think a bit lower than the range you said we might see, kind of curious how that related to sales trajectory, your purchasing patterns et cetera. And then related to that, the accounts payable came down substantially sequentially and from the prior year, so just any color on whether that related to if slowdown in recent purchases or some other proactive decision you made about inventory funding? Thank you.

[Martin Agard:]

Yes, Matt, it’s Marty. We've been talking all the way back when inventory peaked in the first quarter about bring it down to it I started with a range of $2.55 to $2.75 we narrow that $2.55 to I think $2.60 to $2.65 a last call. It came in just below that at $2.53 of course we feel good about how we are bringing that down our out of stock performance actually it has improved from a year ago we feel good about inventory availability and can operate at these levels. It is a seasonal low point we'll start to ramp it back up a little bit in the fourth quarter, but only into that to sort of $2.70 to $2.80 range. So we feel good about how it's come down I would say was planned all the way from back in February the shape of that bring down was particularly steeper later in the quarter and that left the AP cycle at particularly low levels. And you know back to pushing all the way through cash discounts and really sort of aggressively managing AP at this point from a discount standpoint. So I think that explains kind of both those numbers at the fair amount of seasonal pattern going on in there and but again as you think going forward I will say the inventory cycle will not be nearly as severe this time around the assortment change over it’s not as severe our vendors showed through the Chinese New Year thing that they could keep production flowing well. So we probably will not need to hedges much as we did earlier last year at this time around. So we like the balance sheet quite a bit.

[Matthew Fassler:]

If I could just follow-up to those answer so if we think about that payables as a percent of inventory going forward and has been kind of all over the map, but the mid-teens level that we show this quarter is at the low end of the range that we've seen over the past three or four years. The number has been as high as 40, but more often than not most quarters of have a two handle on it. Is that where you'd expect to see that payables ratio generally settle?

[Martin Agard:]

I think so I mean again I've only been through one cycle where we were building a particularly high level of pre-built around the inventory and we stretched AP a bit. With a stronger liquidity position and a more modest inventory build I would say it'll stay down at this lower end of the range yes.

[Matthew Fassler:]

Did the cash discounts that you received as you are paying a bit more quickly contribute to the gross margin as well?

[Martin Agard:]

Very modestly in the third quarter and I would say it's not going to be a big factor but it's a positive one and one where we are pursuing, but not so much in the third quarter really no.

[Matthew Fassler:]

Gotcha, and then one final one. So you talked about the anticipated impact of the storms for Q4. Given the kind of damage that was done in Houston and I know the Florida because I guess less foreign damage most likely. What's your sense of the duration of the rebuild effort in Houston as relates to the flooring business and other words how many quarters going forward? Do you think we'll be talking about this is being meaningful?

[Martin Agard:]

I think the next to really the fourth quarter and first quarter not that it will all be gone and done by then I you know we appreciate the rebuilding these guys have to do. But the meaningful sort of lift will be I would say a couple of quarters. In Florida of different you know Florida is going to take longer to be there it's dispersed geographically the damage was different to where it's going to take longer. So I don't know if we'll actually see a particular surge or rather we will just sort of feel some tailwind over a whole year, let's say I can see an example like that. So that's as clear [indiscernible]…

[Matthew Fassler:]

Gotcha. Thank you so much.

[Dennis Knowles:]

Thanks Matt.

[Operator:]

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

[Brian Nagel:]

Hi, good morning. Thanks for taking my questions.

[Dennis Knowles:]

Good morning, Brian.

[Brian Nagel:]

I want to start I guess the bigger picture but just discussed somewhat the overall competitive environments in your category. Have you seen some of the larger players push more aggressively into its smaller players and its action and did the Hurricanes that all in a very short-term basis effect that competition?

[Dennis Knowles:]

Well, I'll take a stab and this and then let Marty chime in, but I did feel like the competitive pressure picked up in Q3, particularly for just the flooring categories albeit whether carpet in our hard surface. But generally we see that as a helped synergies bring attention to the category and – but I did feel like one in particular of our competitors stepped up marketing for foreign in general. But we saw all this is good news for our career, particularly this were still kind of cycling the addition of vinyl and a lot of our waterproof categories. But and then as far I’ve really we know that everybody was impacted by the hurricanes in Texas and Florida to the extent, I really couldn't tell you. We were so focused on our stores making sure that we got our employees out of there safe and got our stores buttoned up, and then we're back in the markets as soon as we could be.

[Brian Nagel:]

I guess the second question I have with respect – as we look out with sales, there are some noise if you will, it recovery efforts going to weigh in Texas and Florida. Marty you would assume either couple quarters, but as we look out into 2018 and recognize you don’t have a longer term guidance you have, but how we think about the sustained sales trajectory into what extent is that – will that be depended upon new products introductions, in addition to what – the ships you’ve already made in the product mix?

[Martin Agard:]

It’s great question. As I mentioned in my prepared remarks, as we cycle through fourth quarter, we'll hit the first time that we had what I have called a healthy assortment and then we get into the daily, quarterly and monthly maintenance that goes on with managing an assortment and we have particularly paid attention to the waterproof categories and will continue to grow with those categories as we see opportunity. And as I mentioned there really is a lot of focus on the innovation in those categories whether that being textures and colors and styles and we really focused on making sure that we've got what we have called trend right product and will continue to lean into that. We're seeing real strength and innovation both in the laminate and in the vinyl category and all have made significant strides, over the past two quarters. So we'll continue with our normal cadence of our product line reviews and making sure that we're appropriately assorted both from a depth and breadth perspective.

[Brian Nagel:]

[Indiscernible] one real quickly, is there any new latest thoughts on resumption in more aggressive new store openings?

[Martin Agard:]

Yes, we talked about get into 500 by 2022 and have something in the 25-ish range that we think is a step and that should be the kind of pace of that and that would be kind of some range around that for next year. If you think about our fourth quarter, we talked about five or six in the fourth quarter, which is not the best quarter for opening stores, frankly we’d rather be doing it earlier in the year and away from the holidays and stuff. But we are going to get five or six open. We've opened two here in October, another one in early November. So we're going to start to feel and feel that we can open if that kind of clip. So yes, I guess you call it ramped up. It's been half that level over the last couple years.

[Brian Nagel:]

Got it, thank you.

[Dennis Knowles:]

Thank you, Brian.

[Operator:]

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

[Peter Keith:]

Hey, good morning guys. Question on the install service initiative, you had that in place now, you brand that up nicely, it's going to be in all stores by the end of the year. Does that now begin to slow as a benefit to your overall same-store sales or and we conversely there's a maturation dynamic to it and so the benefit could accelerate the overall content, curious how that we should think about that looking forward?

[Dennis Knowles:]

Exactly, Peter you're thinking about the way we are. We’ll see the growth continue as we enter the last two big stage for us is State of California and Florida and we’re well on track. Charles and his team are on track to have everything rolled out by the end of the year. But you're right in terms of kind of the maturation, there's two aspects that we focus on, number one is the training with a store employees as it relates to kind of creating a good customer experience for installation. The second piece of that is the work that Company is doing to make that an easier process both for the customer and the employee. So we expect to see the growth that comes as a result of the rollout, but also we're focused on increasing the penetration. So we feel like we've got a great deal of opportunity ahead of us in 2018.

[Peter Keith:]

Okay. Thanks, Dennis. Pivoting back to maybe – you just talked about just the mix of product in areas of outperformance. I think you mentioned laminate, vinyl as the areas that are doing well to innovation. Are those that the two categories that are outperforming the most right now and what is at the margin of those categories look like compared to the house average?

[Martin Agard:]

Yes. Really vinyl and I think tile have been the strongest. We brought a fuller line of engineered solids out that is also found its niche. So those are probably the strongest performing, the vinyl products have above average margins, but we really haven't gone into a lot of – any breakdown of the margin by category for anybody and I don't want to disclose that, but it's above average.

[Peter Keith:]

Okay. Maybe you need more simplistically to wrap it up. The categories are outperforming, adding a positive mix shift to your gross margin?

[Martin Agard:]

Yes, absolutely.

[Peter Keith:]

Okay. Thanks guys.

[Operator:]

Our next question is from Keith Hughes with SunTrust Robinson. Please state your question.

[Keith Hughes:]

Thank you. Kind of build on the last question on installation, you strip out installation, can you give us any sort of feel for what the ticket on product would look like in recent quarters your expectation of the team?

[Dennis Knowles:]

You are asking – the product ticket. I think our product ticket was up. I think I mentioned that and Marty did was up on an average sale basis. Is that what you are asking?

[Keith Hughes:]

Are you including that? You are including the installed sales not average ticket, or is that taken out.

[Dennis Knowles:]

Yes. That is included as is the Pro business and that's part of what pushes that up generally is both a combination of, in some cases just the install being attached and then the Pro ticket tends to be bigger, is bigger on average.

[Keith Hughes:]

Okay. So is there a way to get adjust the product that's kind of moving the number up? You don’t have it. I get it from your later.

[Dennis Knowles:]

Mathematically yes, we could get it that. I don't have it here in my finger tips.

[Keith Hughes:]

Okay. That’s fine. I’ll get it from you later. And you called out vinyl now for several quarters in a row being an outperformer as it is in the entire industry. I guess my question is, can you give us relative size what is vinyl represent of your business right now?

[Dennis Knowles:]

It's one of our strongest categories in performance as you said, but I would say it's probably – I don't know that we've ever really talked about the penetration of our total business, but it's one of our better performing categories as it relates to total penetration.

[Keith Hughes:]

Okay. And final question on that just pricing around vinyl. You are saying any change there ticks up, ticks down in addition to the shrink volume.

[Dennis Knowles:]

Not necessarily changes in pricing just the availability of price points. They've made great advances the manufacturers have over the course of the last year. And so we're seeing longer planks, wider planks, wide widths and texture. So it's opening up more price points for us, so that's what we're seeing in the expansion, but if you're talking about competitive pressure, we really haven't seen much as it relates to pricing.

[Keith Hughes:]

Is that your average selection there from a price perspective? I know you called it out as an enhancement to gross margin, but if we compare it to for example, say laminate, your laminate price is it still below kind of what you have an average for actual laminate price in the store?

[Dennis Knowles:]

It's about similar maybe even slightly above.

[Keith Hughes:]

Okay. Thank you very much.

[Dennis Knowles:]

You bet. Thank you.

[Operator:]

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

[Rick Nelson:]

Thanks. Good morning. I have two follow-up on the same-store sales guidance for the fourth quarter, and if you could provide some comments as to how you're tracking relatives to that guide in the early going to the fourth quarter?

[Martin Agard:]

Yes, we already just to reiterate what I said before. We don't want to get into that in the closing each month, but clearly we know how we're doing late into the month of October and feel like it's consistent with that guidance. So I just - that's as far as we want to go on the monthly breakdowns.

[Rick Nelson:]

Also on the installation business, can you quantify how much of your sales?

[Martin Agard:]

Yes, it’s approaching 10% let me find me this specific number here, yes, 8%.

[Rick Nelson:]

Any of time realize that’s lower gross margin category any other financial metrics around that business could be helpful for a model?

[Martin Agard:]

Yes, I'll give that some thought I don't have a particular idea in mind to help you there.

[Dennis Knowles:]

Yes, I would say, there are some metrics that we look at that we haven't shared. I would tell you that you know we look at the average labor per ticket and we also look at the number of measures sold. And we look at those internally because they're kind of leading indicators for us. The measure sold as you know when a customer comes in and request us to come in home and provide an estimate for installation. And so that's kind of the leading indicator for us we haven't shared that and to be honest with you I'm not really sure that I want to but we also look at the products sold with the installation, but that average isn't and we really haven't shared that as well but we'll give that some consideration and because we realize it is this central for you know understand that business a little better as it relates to Lumber Liquidators and have build that in your model, but not ready to share at this point.

[Rick Nelson:]

Okay. Fair enough. Also now with the MDL settlements how you know realize you still DOJ and SEC our litigation pending? Should we see a substantial call back now is professional legal fees or they going to remind elevate?

[Martin Agard:]

Yes, MDL was approximately has run year-to-date sort of approximately a third of that incremental legal fees that we flag and report separately. And it'll continue certainly through the year as we get the definitive agreement in place and deal with sort of getting through the funding stages. It probably on into the first half maybe of next year but then it should subside that third of it that MDL should subside substantially and as we've indicated all along alternately go away. The DOJ will continue to run, we not given guidance a little hard to gauge how that process will run, but it is certainly ongoing and we'll continue to separate that that legal fee and stuff the unusual stuff that that will ultimately go away when the cases are resolved we'll continue to flag that like we have.

[Rick Nelson:]

Okay. Fair enough. Thanks a lot and good luck.

[Dennis Knowles:]

Thank you.

[Operator:]

[Operator Instructions] Our next question is from Daniel Binder with Jefferies. Please state your question.

[Daniel Binder:]

Hi, it’s Dan Binder. Few questions; first, on product availability I know you said that that's looking pretty good. I'm just curious specifically in the market are you able to fill orders in a similar fashion with similar lead times that you do in non-storm market or is there product availability issues in there? And also I know you quantified roughly the comp impact there was just wondering if there was EPS impact is from SG&A standpoint from those storms in Q3?

[Dennis Knowles:]

Well, I will talk about the inventory availability in the storm markets and let Marty handle the EPAs impact. So having some history you may remember last year, there was a significant flooding in the Louisiana market and we had a great deal of learnings as a result of that that activity that took place down there, when we actually opened an incremental store to house additional inventory and we have done that in the Houston market as well. We have shared – I think in the past, we did a lot of work this year. We actually brought on that a VP of Inventory Management really help us to hone this skill set and in doing so, one thing I would reiterate is that while we lowered our inventory. We've actually increased our in stock position in our stores and in our distribution center as well as kind of projected based on our previous experience what the impact would be in those markets and wind into that and actually put additional inventory in the Houston market, so and are doing the same thing in the Florida market as well. It’s also looking for incremental locations where we feel we need to open an additional store to service those areas.

[Daniel Binder:]

Any EPS number, if there was one?

[Martin Agard:]

Yes, on the EPS side, other than the revenue and I would use average gross margin on that revenue, can – you wanted to determine a P&L impact. We incurred a little bit of cost as we just started to gear up for what I call the rebuild cycle, but not material amounts and I have not cabled them out separately. We didn't take any big charges. We didn't lose any meaningful levels of inventory or anything else. So I would say de minimis amounts of incremental SG&A. It would have gone with that. So generally speaking, it would be the 90 basis points of revenue at our average gross margin.

[Daniel Binder:]

Okay, and then I know services – the services rollout has been helping the business and presumably the comps as well. I'm just curious if you look at stores that have had services for more than a year, how those stores comping versus the rest of days?

[Martin Agard:]

Yes, the installs themselves are comping double-digits where they've been in place more than a year that's that comment that I make for you guys to know that beyond the geographic expansion how is the installed business doing. We don't want to get into the specifics of that and I've not run a subset of the stores where the installs are, but we do believe it's good for business. But I don't have a separate calculation of that comps.

[Daniel Binder:]

Okay. And then with regard to become about competitive environment, I'm just curious can you give us a little bit more color on how your Pro margins have been trending versus the overall improvement in the total company and whether or not there's an increase in in-store on the spot discounts to gain that business is in the current environment?

[Martin Agard:]

Yes, the Pro business has been growing up a bit faster than our overall average. The margin is very close to the average I would say. I think we've said before slightly below and that that remains the case. I don't know that its margin trend. It has deviated. It's followed the base business sort of gradually higher. And some of the slight lower margin is pricing in some cases, a lot of the time these are quantity types of deals where we are making concessions based on volume. But again it's you're talking about a very slight lower margin and the business is doing well, so.

[Dennis Knowles:]

Yes, I would just add that while, as Marty mentioned that the markdowns we haven't seen those elevate materially. There's always an opportunity for that. We don't want associate to walk away from a sale. We feel we've got an opportunity to get that business at a profitable margin level. While we don't share our Pro margins, I will tell you quarter-over-quarter, year-over-year is improved, as Marty said in line with our base margin, our total gross margin.

[Daniel Binder:]

And the target that you set for high 30s gross margin in the medium-term, just down with that means exact these things do you think medium-term is that kind of a target like you get by Q4, what they have next year?

[Dennis Knowles:]

I think that's - there's some chance that I’d say it's probably going to be more gradual than that. It's you know we're working on 20 different things each ones got 20 basis points that say and not all of them are going to click and you get a couple of 100 basis points out of that and that's going to be - we believe it's going to be a melt up kind of approach where each of those kind of walk our way there, love to get there by the end of next year, but I really can't tell you that it's going to be that timely.

[Daniel Binder:]

Great. Thanks for answering my question.

[Dennis Knowles:]

Thank you. End of Q&A

[Operator:]

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

[Dennis Knowles:]

Thank you all for joining us. We appreciate your interest as we continue to build a better Lumber Liquidators and we look forward to updating you next quarter. Thank you.

[Operator:]

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