LL Flooring Holdings, Inc.
Q4 2015 Earnings Call Transcript

Published: 29 Feb 2016

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Lumber Liquidators Fourth Quarter and Full Year 2015 Earnings Call. With us today from Lumber Liquidators is Mr. John Presley, CEO and Mr. Greg Whirley, CFO. As a reminder, ladies and gentlemen, this conference call 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 of FTI Consulting. Please go ahead.

[Steve Calk:]

Thank you, Operator. Good morning, everyone, and thank you for joining us. Let me take a moment to reference the Safe Harbor provisions in the United States 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 in the forward-looking statements are included in Lumber Liquidators filings with the SEC. The information contained in the call is accurate only as of the date discussed. Investors should not assume that the statements will remain operative at a later time. Lastly, Lumber Liquidators undertakes no obligation to update any information discussed in this call. Now, I'm pleased to introduce Mr. John Presley, CEO of Lumber Liquidators. John, please go ahead.

[John Presley:]

Thank you, Steve, and good morning, everyone. Thank you for joining us for our fourth quarter 2015 earnings call. We have a lot to get to today, but as we begin let me address the recent CDC report. We believe there was substantial confusion in the market place after the CDC updated its report to correct an error in its calculation. The facts were as follows

[Greg Whirley:]

Thank you John and good morning everyone. Today I will provide details on our results for the fourth quarter and full year of 2015. Note that unless otherwise specified, my references to percentage and basis points changes are in comparison to the prior year period. For the fourth quarter, net sales were $234.8 million, representing a decrease of $37.2 million or 13.7% over the prior year period. Within our comparable stores, net sales for the quarter decreased 17.2%, due to a 15.6% decrease in the number of customers invoice and a 1.6% decrease in average sales. Non-comparable store net sales increased $9.6 million. We believe these declines were directly related to the stories in the media over the past year and the reputational impact related to products which we no longer sell. As John mentioned, we’re aggressively moving forward with initiatives to communicate the value proposition of our products to our customers. We are also taking another step forward to move past these legacy issues, with our decision to write down the Chinese laminate inventory. During the fourth quarter, we also saw a few encouraging trends. We were able to restore our stock of laminated inventories using alternative suppliers from North America and Europe. As a result, laminates as a percentage of total sales grew sequentially in Q4 and represented approximately 16.2% of our sales mix in the period, compared to 13.3% in Q3. We’re also working hard, as we discussed on our last call to be more strategic in our promotional strategy. Based on early results, we believe our customers continued to respond to our promotional efforts in our simplified assortment in a good, better, best format. Finally, as part of our plan to engage the do-it-for-me customer, more effectively, we increased our focus on installation. As a result, in the fourth quarter, installation sales increased to $10 million compared to $5.8 million in the prior year period. Turning to our store network, we have significantly limited new store opening as we focused on improving the performance of our existing locations, hence strengthening our core business. That’s said; we did open five stores in the fourth quarter and expect to open up to three stores in the first quarter of 2016. A majority of these stores increased our penetration in existing markets. We will selectively evaluate store openings in 2016, but again we are focused more on improving our existing store performance. Now let’s look at gross margin, which came in at 23% in Q4. During the quarter, we determine that we would not sell our current inventory of laminate product floors from China in our stores. As a result of this decision, we recorded a lower cost-to-market adjustment to reduce the carrying value of this product and related moldings to its net realizable value zero, resulting in a charge to cost of goods sold of approximately $22.2 million. Excluding this lower cost to market adjustment, gross margin in Q4 was 32.4% compared to 39.2% in the prior year period, and an increase sequentially compared to Q3 gross margin. We told you last quarter that we plan to be more strategic and selective in our promotional [case]. We began that process in Q4 and on the whole realized pricing increases of about 100 basis points for the quarter, compared to Q3. We encourage with the outcome of these efforts in an inept way, we will continue to monitor the effectiveness of our pricing strategy at the store level and adjust accordingly. Moving on to year-over-year comparison, although we were more strategic in our promotional strategy sequentially, our retail prices remained low on a year-over-year basis, which continued to negatively impact our gross margin. Gross margin was also impacted by cost associated with changes to our sourcing related to our laminate product category and to a lesser extent higher transportation cost. Turning to SG&A; SG&A expenses for Q4 increased by approximately $7.7 million or 9.9% to $85.5 million. As a percentage of net sales, SG&A increased to 36.4% from 28.6% during the prior year period. When excluding $6.5 million in legal and professional fees and related accruals connected to our defense of certain legal and regulatory matters, SG&A expense increased by 1.5%. Within our SG&A, advertising expenses came in at approximately $16 million, 8% lower than the 17.4 million in the prior year period, but approximately 40 basis points higher in terms of percentage of net sales year-over-year. Additionally, occupancy cost of $11.4 million were roughly consistent with the prior year period, and as a percentage of net sales increased by approximately 70 basis points to 4.9%, due to lower net sales year-over-year. Our net loss was $19.8 million or a loss of $0.73 per diluted share based on approximately 27.1 million weighted average diluted shares outstanding. Now I’d like to summarize our results for the full year. Net sales for 2015 decreased by $68.6 million or 6.6% to $978.8 million, with non-comparable stores adding $47.6 million, which was more than fully offset by the decline in comparable stores of 11.1% or $116.2 million. This was driven by an 8% in the number of customers invoiced, a 3.1% decline in average sales. During 2015, the company reduced the selling price of its product on average by 6%. These price decreases applied to most of our products, and were in response to negative allegations impacting the company’s reputation. Gross profit in 2015 decreased 33.3% to $278.9 million from $418.2 million at 2014. We attribute this decline to a number of factors, primarily resulting from changes in the company’s business in response to allegations impacting our reputation. These include certain planned reductions in retail prices implemented in late 2014 and greater promotional pricing beginning in March 2015 to drive customer traffic and reduce inventory. Cost of $9.4 million related to the company’s indoor air quality testing program and the LCM adjustment related to the previously discussed Chinese laminate product sold in $22.5 million. Turning to SG&A expenses, SG&A increased by 15.3% to $362.1 million in 2015, compared to $314.1 million in 2014. Notable items impacting SG&A include $23.8 million in legal and professional fees related to our defense of various legal and regulatory matters; $13.2 million associated with the DOJ settlement related to Lacey Act compliance; $5.3 million in incremental expense related to employee retention incentives and $4.3 million in asset impairment charges related to the discontinuing of certain non-core investments. Operating income for 2015 decreased a 187.3 million to a loss of $83.2 million, from a $104.1 million in 2014. Operating income as a percentage of net sales was negative 8.5% for fiscal 2015 compared to 9.9% in 2014. The effective tax rate for 2015 was 32.4% down from 38.8% in 2014. Net loss for the year was $56.4 million, a decrease of 119.8 million compared to 2014. Turning to our financial position, liquidity and capital resources; cash and cash equivalents were $26.7 million at the end of 2015, as operations for the year produced $9.2 million and capital expenditures were $22.5 million. We had 20 million outstanding on our asset based revolving credit facility at the end of the year with 67.2 million available under this facility. During the first quarter of 2016, we borrowed an additional $10 million against our asset based revolving credit facility to fund additional inventory purchases in advance of the higher volume spring flooring season. Merchandize inventory was $244.4 million including the previously discussed adjustment to the value of laminate floors of China. This amount was down from $314.4 million as of December 31, 2014. Available inventory per store was approximately $577,000 as of December 31, 2015 down from approximately $756,000 at the same time last year and below the September 30, 2015 level. Given uncertainty related to customer demand, our long purchase cycle and outstanding legal and regulatory issues, we are not able to provide an outlook for 2016 at this time. As we look forward, we remain focused on improving the parts of the business that are within our control in order to rebuild our brand and drive improved performance in our core business. I believe we are making the right decisions in instilling increased accountability and discipline across all levels of the organization. We believe that if we can execute on these strategic initiatives, we can strengthen the business, reinstate the value of our brand and improve our financial result in 2016. I would now like to turn the call back over to John, for his closing remarks.

[John Presley:]

Thanks Greg. The team and I have taken the last few months to both assess where we are and lay the groundwork for a healthy 2016. As we see it, there are four main areas, which we believe with solid execution, will get us back on track and growing again. Operationally, the number one place where we can make a difference is in store performance. Here’s what I mean by that; our store model is right, the customer gets much wider selection at a much better price. Our individual stores are profitable as the model has worked for us. It is clear to me; we are missing opportunity to close sales at the store level. Part of our historical value proposition has been our stores ability to interact with the customers in an appealing environment, to provide a dice about style, type and performance specifically tailored to each customers need. This is critical to attracting customers as well as closing sales, and so we want to ensure we are delivering on this priority as we move forward. While I’m on this point, we are extremely pleased to have someone of Dennis’s caliber join our team and I believe his store operation and home improvement expertise will position us to deliver even better service to our customers and drive value for all of our stakeholders. We are also executing a number of initiatives, one of which is sales [earning], to help deliver improved services to customers. This isn’t about pressure sale or it is to get the customer to do what you want. This is about helping the customer get what they want. And that is a skill actually an asset that all of our associates want to embody. We’ve also been refocusing on our compensation structure for our store personnel. The old system were complex and confusing to our associate. We have simplified that system with an increased focus on driving higher gross margin dollars. Those are just two examples of how we are focusing on the individual store performance and there are more. The thing I want you to know is that when we communicated to our associates at Lumber Liquidators University a few weeks ago, the response was overwhelming. Our people have craved accountability, they have missed the [product] they used to have in their company and they are freshly motivated to drive our transformation to a better Lumber Liquidators. I could not be more pleased with their response, and I join them with their fresh enthusiasm. The second area of focus is the strength of our value proposition. The store at Lumber Liquidators has posted impressive growth, in part because of our wide product selection. We spent the last half of 2015 reviewing our product assortment and accessing the right mix of products in the store so that customers would have clear options to consider or perhaps a more important element of our value proposition is the knowledge base of our store --. For instance, we know from customer feedback that we are one of the few places you can go to get clear, informed advice about the flooring you’re going to install in your home, flooring you will be living with for many years. Over the last few years, I believe we have lost focus on this critical element of customer engagement. The way we held our Lumber Liquidators University, we were all about training. Training on the products we’d sell, on the rooms and homes where these product perform best and how to better help customers make the best decision possible. Yes, customers appreciate our wide selection and prices, but our true value-add is that customers know that their money is invested in a product that will serve them for many years to come. Our third area, where we will be relentless in 2016 is a responsible sourcing and compliance. As I have mentioned, our goal is to have such a robust system and reliable accountability that we can source from anywhere, anytime the right way. One of the provisions of the DOJ settlement is that we require not only to strengthen the compliance we have in place, but also to add audit procedures to ensure we’d remain diligent. And with leadership of Jill Witter and the commitment of our management team, we will be. We are also re-qualifying every vendor we do business with to ensure maximum quality of sourcing throughout the world. Our customers deserve this attention to quality as do our employees and our shareholders. The fourth area, where we see real opportunity is the now produced opportunistic expansion of our business. The primary component of that is a renewed emphasis on installations. If you have followed us for a while, you know that the consumer market consist of the classic do-it-yourself customers and the do-it-for-me customer, those that value professional installation. Historically, we are endeared towards the do-it-yourself customer, but we know there is still significant opportunity in the professional installation, which calls for affordable, convenient installation services. In Q4, we increased our focus on coordinating these services and some of our installation revenue increased 73% quarter-over-quarter. The numbers are small at this point, but we are pretty excited about our trajectory in this space. So, those are the four broad areas in which we see the best potential and for which our focus will be in 2016. Our management team is very confident in the potential of our core business model, as we move forward. We believe we will achieve serious progress in rebuilding customer trust in the underlying value of Lumber Liquidators. I also talked last quarter about discipline and controlling cost. That is an exhaustive process that you might expect. But we made progress in SG&A and other parts of the business. The discipline is paying off and as we’ve been evaluating all expense line and the diligence about where we spend. As we close, I want you to know that this team is aligned, we are motivated, we have a business model and a plan that works. I believe we can make good progress in 2016, as we stay focused and stay on a mission. With that operator, we are now ready for questions.

[Operator:]

[Operator Instructions] our first question comes from the line of Budd Bugatch with Raymond James. Please proceed with your question.

[Unidentified Analyst:]

This is David on for Budd. Could you describe in a little bit more detail some of the initiatives you’ve taken to imitate the value proposition and how it’s changed, how it’s going to change going forward versus what it was in the past.

[John Presley:]

It’s really not changed a lot in the past, it’s just more emphasis on what we’re doing out in the stores. I think we a negative publicity that we’ve had over the past several months, we just had to get better at the front line in the stores of engaging our customers. So, we’ve really had to focus on training on conversion of sales, giving the customer the advice that they need. It has started with Lumber Liquidators University and some of the training that we did there. So I would say more of focusing, of getting back to the basics of giving the advice to customers who come in to many of the stores that they need along with the price and along with the selection that we offer.

[Unidentified Analyst:]

And also moving on the gross margin line; I was wondering if you could give a little bit of a walk there on what the impact was from lower prices, transportation year-over-year during the quarter?

[Greg Whirley:]

Sure, this is Greg. When you step back, again the biggest impact for the quarter with respect to gross margin within price. We’re still trying to, as we mention before, be more strategic in our pricing, but doing so is going to take us a little bit of time to build back the price that we got. I’ll just remind you though that we’ve got a strong business model in place. The directives that John mentioned, we expect to help us lead our return as we move forward. But the improvement is not going to happen overnight, but we think that making the right choices right now will help us. As we talked about when you look at fourth quarter compared to third quarter, our pricing strategy the one that we talked to you last quarter has helped us improve by 100 basis points compared to third quarter. And we think that’s the right thing to do. We’re going to focus on our sourcing and the returns from that are going to take some time, but we expect to see it as we move forward. And the good, better, best pricing format that we put out is resonating with our customers and with our associates. They understand it and we’re selling in that line.

[Unidentified Analyst:]

And last question from me and then I’ll proceed to the rest of the queue. What quarter did you take the 4.9 million reserve estimate for anti-dumping and countervailing?

[Greg Whirley:]

Of-the-top I believe that would be second quarter of this year.

[Operator:]

Our next question comes from the line of Dan Binder with Jefferies. Please proceed with your question.

[Dan Binder:]

My question is two-fold, first, just if you could speak to the cadence of the quarter, and what you’ve seen in terms of the second or third airing I guess on 60 minutes. And then maybe if any color you can give us around how sample requests are looking year-over-year currently.

[Greg Whirley:]

Again I think we’ve got a strong business model in place. Our stores are staffed with a knowledgeable team, they can best support our customers and execute on that value prop. We intend to invest in them and I’m actually excited to see what Dennis and that team will produce as we move forward this year. We do think we’re making the right decisions though to improve sales. We’ve got a full assortment in laminates available as we talked about just a minute ago that good, better, best pricing strategy is having a positive impact, and we’re going to continue to promote our products and we think our promotions are helping us drive traffic in to the stores. As you look at the cadence during the quarter, the first half of the year, our first half of the quarter was better than the second half from a comp perspective. But I will remind you that last year this time the company went on a different pricing strategy, different philosophy. We lowered our prices in order to drive more significant traffic; we are now following that same path this time, but didn’t follow that same path in 2015. So that’s some of the view and for the change there.

[John Presley:]

I’d just like to add to your first part of question of the latest bit of publicity. All I’ll say about that is, I’m extremely pleased with how our stores and all of our associates handle this latest round. This just starts with a degree of professionalism that I’ve not seen many times in my career and really worked hard over the last week to serve the customers and answer questions that were obviously generated by them. As it relates to cadence in the current quarter, as you know, in fact this quarter is now over, March is always an important month for us as we enter in to the spring selling season. So we’re not commenting as to what we’ve done so far this quarter, because we have a very important mark left ahead of us.

[Dan Binder:]

And then just a quick follow-up, you did say you plan to expand with up to three stores in Q1, any additional color on next store openings for the balance of the year?

[Greg Whirley:]

At this point, what we’re looking to do is focus on our current store base. We believe that there’s opportunity for us to work in our existing stores. We won’t shut off our new store openings, but the expectation is that any stores that we do open in 2016 are going to have to pass what we consider a pretty high hurdle for us to open.

[Operator:]

Our next question comes from the line of Matthew Fassler with Goldman Sachs. Please proceed with your question.

[Matthew Fassler:]

My first question relates to your thoughts on ultimate cost of goods that you implement some of the sourcing changes you’ve made whether it’s sourcing of laminate, thinking about some of the duties and other ongoing regulatory dynamics in this space. And also just thinking about where any of that higher priced product or higher cost product might be in the supply chain obviously it has to - you’ve booked those higher costs just to sell them through. And also by the way if there are offsetting impacts that might help enhance your gross margin and offset some of those sourcing dynamics.

[Greg Whirley:]

There’s a lot moving in the margin. We’ve got a lot that we’re building on. But as a step back again and kind of think of where we are, we are in a position right now where we are working to improve our sourcing capabilities to make sure that our clients are second to none. And in doing that that will allow us to source from anywhere. So if you step back and say where are we today? Certainly we’ve got products [assuming] laminates etcetera in the queue that are higher cost than may be what we had a year or so ago. But as we step back and think through it the sourcing issue, we expect that there will be a return from that in the future. Again it’s not going to be immediate, but we’re expecting to see a return. So where is the top? It’s hard to say. We certainly don’t believe right now that (inaudible) business that we’ll return to the 40 margins that we’ve had in the past vis-à-vis we think that we can do just fine with a slightly lower [volume].

[Matthew Fassler:]

And if you think about pricing and promotion, it sounds like you’ve decided to move to a less promotional cadence than you have been at. Would you say that, if you think about the promotional cadence in Q4 relative to, if you’re sustainable, if you say that you’re going to get promotional in the future, would you say that you’ve pulled back to the degree. Well obviously I know there’s incentive to try that continue to drive traffic and reinvigorate the franchise. And I really think that you can get higher than the 32.4 that you’ve reached on an underlying basis, but is the pricing and promotional component of that in your view at a baseline level?

[Greg Whirley:]

Sure. It’s a difficult question to answer, but one that will. We obviously owe you and we’ll give it to you and if there’s -- look we’re working very hard on our pricing. The strategy that we put in place and talk to you about (inaudible) those improvements are going to take some time, whereas the top - we don’t know, but what we’re looking to do is make sure that we’re continuing to monitor what happens with respect to traffic in relation to our pricing and we’re going to be smart about how we do it, how we adjust prices going forward. It’s again - we think there’s more room for us to move, but where that stops at, we’ll need to keep continually evaluating throughout the quarter.

[John Presley:]

Matt, I would add that promotional pricing is always going to be a part of our business to drive traffic. What is different today, a couple of things that we think will have a positive impact on margins going forward. One is, the segregation of our good, better, best pricing to give our associates more options in which to give our customers and our customers more options at which to buy. That is also supported by our new incentive plan, which drives we think better behavior towards higher margins. And then the other thing that we’ve implemented, that we’re seeing some effect in the fourth quarter is discipline around pricing and discounting as a counter. So we believe those things on the front line will help margin going forward as well as all of the efforts that Jill and her team are doing to make sure we can source from anywhere in the world. So I think Greg is right. I don’t know that we’ll return to the 40% margin, but we’re optimistic that there’s some upside from where we ended up in the fourth quarter.

[Matthew Fassler:]

And my last quick question hopefully of broader interest, can you give us two expense items, the advertising and occupancy. There are two others that are significant. Just want to try to understand what they were, is it the payroll piece and then the other expenses in cost piece and frankly that would be the one of greatest interest to us. You talked about the increase year-on-year related to some items. Any breakout would be super helpful if that’s the way we’ve all modeled the business in the past.

[Greg Whirley:]

Sure. Again what we try to do in calling those out is to give you some of the unusual items. Payroll for the quarter as a percentage of sales was roughly 14%, and I can’t remember what the other one you just asked for.

[Matthew Fassler:]

It is what you guys used to call other expenses and cost which a year ago was $11.4 million. I know the lever would be in there, but if you have the totality of that number if you’re still thinking about it in that way.

[Greg Whirley:]

We can try and get that for you and hand it out, but I don’t have that number handy. We’re again right now focused on making sure that we’re controlling all cost across the chain or across the income statement. Usually it’s focused that way. It’s hard to pull it out, but what we’re trying to do is highlight those one-time items, but we’re trying.

[Operator:]

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

[Joshua Siber:]

This is Joshua Siber on for Simeon. You mentioned that you’re missing an opportunity of the closed sales at store level, just curious how you diagnosed this and how much of it is related to sales peoples’ ability to provide POS discounting.

[John Presley:]

I will address, then Greg perhaps you might want to jump in. How we identify that? We know we drive a lot of traffic in our stores, and we’ve done that historically and we’re still seeing that traffic come in, we’re still seeing the traffic at our websites and we’re still seeing the traffic on a sample request. So we know that our marketing and our advertising works, it also drives traffic. We spend a lot of time out in the stores, we see the traffic coming in. And we just believe that it ends with negative publicity and relatively high turnover that we’ve had over the past year or so. We believe there’s opportunity with new associates and older associates to refocus on the core of the [advice] part of our business. So, we believe that in the past, we’ve had tremendous opportunity to drive sales through that traffic coming in to our stores. Maybe in the past we’ve not had to be as good by conversion and as good as closing, as we need to be today and these better than worse we wanted a little bit more scrutiny. So we’re going a step back and focus on the training aspect. Thus far we’ve focused on the incentive plans and the compensation plans, and we have a task force out there today that have identified a number of our stores that provide a [release] and are not performing up to their historical standards. So that taskforce is out working with the regional managers on a specific store level till you find out what’s going on in that particular store and fix it. So it’s really more a function of realizing the time we’re in, the scrutiny we’re under. And when you enter this type of scrutiny you’ve got to be better at what you do, and we think we’re making great progress in doing that.

[Joshua Siber:]

And my follow-up related to that is on turnover. So how are you managing employee retention and how is the turnover trending over the last few quarters?

[John Presley:]

Turnover last year was higher than we wanted, as we mentioned in the last quarters call, while we added retention of cash to the monetary retention plan in place. We think that that is done well with most employees. What we’re really focused on in 2016 started in January at Lumber Liquidators University. Now we’re going to really attack the culture, really attach who we are, who we are trying to be, who we want to be going forward and what kind of company we’re going to be, and create culturally a place that people are proud to work. And so it’s less about monetary in 2016. It’s more about creating the culture of Lumber Liquidators and who we are going to be as a company and as an employer going forward. The feedback we’ve gotten so far has been incredibly positive. We’re talking to our associates out in the stores a lot. We hear from them. We think that enthusiasm out there right now is not as high as it will be, but it’s certainly on demand and its certainly building. And I am pretty enthused about that.

[Joshua Siber:]

My last question is related to the spread between the best performing stores and the worst performing stores. Is there anything that explains the difference between the groups?

[Greg Whirley:]

We’re obviously working very hard to understand that. A couple of things that I’ll share with you; one, on a four wall basis, basically all of our stores remain profitable. And we’ve obviously been dealing with a lot of unusual items or unusual expenses during the year. Certainly certain markets are performing better than others that could be a function of just those environments in different part of the country seeing better economic conditions that sort of thing. But as a whole, all of our stores are profitable, and we continue to believe it makes sense to invest in our store-base and our employees specifically in our store base. Now I’ll follow-up on one thing that John started to touch on and that’s when you really step back, I want to highlight for you that we believe one of the reasons that we can and John stress the point of focusing on execution in the stores. One of the reasons we believe that will work is because, we know we’ve got the best team out there supporting our customers. The team that we have on this deal, the guys in the stores know our business, they understand it, and while we’ve had some turnover, we still believe we got the best team we’re going to invest in order to make better strength of the company as we move forward.

[Operator:]

Our next question comes from the line of Oliver Wintermantel with Evercore ISI. Please proceed with your question.

[Oliver Wintermantel:]

How should we think about the working capital dynamics in 2016, it looks like 2015 inventory was a big help for working capital. So just wanted to see the dynamics in 2016 as you see it?

[Greg Whirley:]

We believe we have the liquidity necessary to operate the business and effective turnaround for the company. As John mentioned, we are going to be focused on store performance as well as our value prop for the customers, and those are just a few of the things that we’re working on. But now we understand that as we working to fix the topline, we have to manage our expenses. That can take us some time, but we are spending more wisely. And I’ll highlight a couple of things for you; first, we are focusing on our existing stores which we talked about before and less on new store expansion right now. We believe it’s going to benefit us, and I said, I won’t commit to no new store, and in fact that they refer to a couple that we opened or opened in Q1. But any new stores that we open are going to have to pass a high level of scrutiny. The idea here is again in 2016 we are going to make sure that we’re managing our expenses to keep the liquidity equation equal for the company or at least on the positive side.

[Oliver Wintermantel:]

Do you have a CapEx number for 2016 for us?

[Greg Whirley:]

I think we gave out somewhere in between $10 million and $20 million.

[Oliver Wintermantel:]

Got it. And just lastly on the revolver details with your asset backed revolver and the write down of the inventories, does that have any consequence on the revolver?

[Greg Whirley:]

A couple of things I’ll point there. We have had as of the balance sheet date roughly $67 million available under the revolver. It didn’t have the write down of the Chinese laminates, it didn’t have an impact on that $67 million. And then I will note just to put full clarity here, we mentioned that in the first quarter we borrowed an additional $10 million to fund inventory purchases. So that availability would be about 57 million through today.

[Operator:]

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

[Seth Basham:]

My first question is around trends on returns and cancellations. Is there any color you can provide to how those trended sequentially from Q2, Q3, Q4 and in to the current quarter?

[Greg Whirley:]

Sure. With the respect to returns and cancellations, if you’re looking at the year 2015 obviously the farther this company gets away from the original 60 minutes article the less of an impact it had on our business. Right after the event happened we saw higher amount of returns and cancellation, as you might expect. There’s lot of confusion around our products. And I’d stop there before we finish even answering your question. There’s been a lot of confusion around our products, and I think John mentioned it. The questions around the CDC, the CPSC are unrelated to any of the products that we sell currently. And so when we sell to our customers they understand today what they’re buying. They are not buying products that are being questioned in any sort and they are getting a great value. And so we have seen a decline compared to early in 2015 with respect customer returns.

[Seth Basham:]

And over the course of the past week after the recent airing on 60 minutes, have you seen another jump in returns and cancellations from the trend earlier this quarter?

[Greg Whirley:]

It’s hard to say after one week of time. We’ve had a lot of interest, certainly customers calling in trying to understand what it means. I think you’ve seen some of the advertisements that we put out with respect to trying to help explain for our customers what the CPSC or CDC’s report really meant. We emailed all our customers and did that, and then over the weekend you probably saw that we had some specific newspaper taken out again explaining the company’s value proposition, explaining our brand. But that wasn’t done in response to concerns about returns. It was done because we felt a need to alleviate concerns related to our customers and help with the confusion that’s out in the market place.

[Seth Basham:]

I know that you don’t want to give specific numbers, but can you provide any trends per day on open orders or anything like that to give us a sense of how the business is moving?

[Greg Whirley:]

Open orders are difficult because of the long period and long cycle that we’ve got. We typically don’t go in to that measure. Again as John mentioned, we continue to see people coming in to the stores, but March is really the key month for the first quarter. It’s been really the start of that spring selling season and so we’re working hard to make that good for the company as we can.

[Seth Basham:]

And then my final question is, you’ve taken a number of accruals for potential and expected legal and regulatory issues. As you think about the balance of the year from a liquidity standpoint, do you have any contingency plans should you have to take additional accruals?

[Greg Whirley:]

Sorry to mention some of that before. Accruals don’t directly equate to cash, but your point’s well taken. Look, we’ve got a number of things out there and we’re focused on our liquidity going forward. And the things that I mentioned, whether are really going to help you. We think we’ve got the liquidity right now to run the business and work through those issues. We talked a little bit about store openings, we’re cutting back to new store openings to really focus on our core right now. And I will mention, if we’re not going to be able to generate cash the way we did in 2015 from inventory reductions, so this company is focused right now on profitable sales. But yes we are working on contingency plans to make sure that in the event that sales don’t come in as we would like, we are managing the other side of the balance sheet or income statement as well.

[Operator:]

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

[Peter Keith:]

I was curious just on the management positions; with the hiring of Dennis that was announced today, do you guys have other areas within the organization that you’re looking to hire people into?

[John Presley:]

First of all, we are extremely excited about Dennis coming in. I think I mentioned last quarter that the store operation was some place that we needed to fill in, in the organization. It’s a position that we identified early on is something that we needed to consolidate and we restarted a search back in November for that position. It was a nationwide search and we looked for and talked to a number of different candidates and we just feel very, very fortunate that somebody of Dennis’s caliber, his background in home improvement industry is willing to join us. So that was a major position that we’re looking for. We feel like if that addition really strengthens our management team. We feel very good about the management team that we’ve got in place. We’ve talked in the third quarter about making sure that we had to manage the team in place to make sure that we had a strong succession plans going forward, and we think we’ve made progress on it. So we are very pleased with this move. It doesn’t mean there might be other moves that we might make in the future. But right now we think this was a very good move for the company. We’re very excited about Dennis being on board and we will go from there if you will.

[Peter Keith:]

And then following up on some commentary around gross margin; Greg to the best of your ability, outside of maybe some regulatory decisions. It sounds like gross margin has effectively bottomed out from the various initiatives around pricing clearance. Is that the right to think about it that what’s in your control sequentially you think gross margins would slowly get better?

[Greg Whirley:]

That’s what we are driving for. Again with expectation that we are going to be pricing more effectively, strategically that will help us on the top line and then we’re looking to manage to be those cost on the bottom as well. So, that’s our goal, we’re going to drive profitable sales in 2016.

[Peter Keith:]

One last question just regarding the test kits that you guys had commented on in previous quarters, I was looking at the 10-K that was just filed. It didn't look like there was any increase in the number of kits sent out, but a question regarding the various phase one, two and three levels. There is no reserve for phase three, but I was curious if you had people reach that phase three where you have paid for their flooring replacement. If there is a number that you could quantify it for us.

[Greg Whirley:]

We have no reserve for phase three and that we are required under the accounting rules to essentially evaluate any past and occurrences of payments to people when that would drive kind of how we’d look at the future. So in that I’d tell you that there’s been no expenditures of the latest of the phase three portion of the test kit program at this point.

[Operator:]

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

[Nick Zangler:]

This is Nick Zangler in for Rick. Just quickly regarding the findings and recommendations we have here from the CDC, do you see these having any impact on any decisions from CARB? I know you've maintained that you've always been compliant with CARB, but are we waiting for acknowledgment from them, are they running their own tests, should we expect an update from them anytime soon?

[John Presley:]

We are still working diligently with CARB towards a solution. We are cooperating with them fully, and those discussions are ongoing.

[Nick Zangler:]

Just curious hoping to get an updated snapshot of product mix, you said 16.2% of mix is coming from laminates from alternative sourcing. Can you provide the remaining profile to see where we are at and how things have changed?

[Greg Whirley:]

Generally, I think the way to think about that is, you look forward as to think about it in the context of how we were in 2014 and 2013. 2015 is a little bit of a different year as you might expect, because of the suspension of the Chinese laminate for a significant portion of the year. We have seen an increase as we talked about in our installation business as a percentage of our total sales put on the hold from a product category standpoint. I think the best way to think about it is in the context of what we did in 2013 and ’14.

[Nick Zangler:]

And then quickly at the peak if you have it offhand, what percent of sales did Chinese laminates represent, at its height?

[Greg Whirley:]

I don’t have that number handy, but I think 19% to 20% is a reasonable number to use. Again I would to clarify I wouldn’t say at its peak, just Chinese laminates, the laminate category that we have before would have been 19% to 20%, not necessarily just Chinese laminates.

[Nick Zangler:]

Okay, and that's down (inaudible) now.

[Greg Whirley:]

That’s right.

[Operator:]

Ladies and gentlemen, we are coming to the end of our time for questions. Our final question is from the line of John Baugh with Stifel. Please proceed with your question.

[John Baugh:]

You mentioned laminate costs are up year-over-year. Are the costs of engineered wood or any other products up year-over-year, due to increased compliance or sourcing changes?

[Greg Whirley:]

Again stepping, we are as we look at our cost structure that one of the things that obviously has been that related is compliance as you noted. Our compliance costs are going to be a little bit higher in the short run, but what we’re expecting long term is that we’ll be able to source product from anywhere. And with the ability to source product from anywhere, we don’t really have an expectation that we have to have no return on that investment. We believe being able to have our best-in-class compliance program is going to be beneficial to us --. Specific products in terms of cost that sort of thing is somewhat difficult to do. So it depends where we’re buying product from. But on a whole the biggest movement you should be aware of is just between the cost of Chinese laminates and where we’re now sourcing.

[John Baugh:]

Just quickly LVT, could you comment on how much that is of your mix currently, roughly or plans to grow it, and does it increase or decrease average ticket?

[Greg Whirley:]

We’re not going to comment specifically on the percentage of [LVT] product. We are certainly looking at that product as it seems to be a hot part vinyl within our mix is actually growing. So we are seeing some increases in (inaudible) vinyl as a portion of our [whole]. But where do we see that, we are obviously going to be working very hard with our sourcing and merchandizing team to make sure our stores have that product to sell.

[Operator:]

Thank you. Ladies and gentlemen, we have come to the end of our time for questions. I’ll now turn the floor back to Mr. Presley for a final remark.

[John Presley:]

Again, thank you for joining us on today’s call. I want to thank our Lumber Liquidators team for your hard work. We couldn’t do any of this without you. I also want to thank our customers for your continuing support. And finally, on a personal note, I want to say thank you for your encouragement and positive thoughts during this season. I’m feeling good, I’m optimistic about the future, and we look forward to speaking with you all again next quarter. Thank you.

[Operator:]

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