Lumber Liquidators Holdings Management Discusses Q2 2012 Results - Earnings Call Transcript

Lumber Liquidators Holdings (LL)

Q2 2012 Earnings Call

July 25, 2012 10:00 am ET

Executives

Ashleigh McDermott

Robert M. Lynch - Chief Executive Officer, President, Chief Executive Officer of Lumber Liquidators, Inc, President of Lumber Liquidators, Inc and Director

Daniel E. Terrell - Chief Financial Officer and Principal Accounting Officer

Analysts

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Peter J. Keith - Piper Jaffray Companies, Research Division

David S. MacGregor - Longbow Research LLC

Matthew McGinley - ISI Group Inc., Research Division

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Jason Smith

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

N. Richard Nelson - Stephens Inc., Research Division

Presentation

Operator

Good morning, ladies and gentlemen, welcome to the Lumber Liquidators Second Quarter Earnings Call. With us today from Lumber Liquidators is Mr. Rob Lynch, President and CEO; and Mr. Dan Terrell, CFO. 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 introduce Ms. Ashleigh McDermott. Please, miss, go ahead.

Ashleigh McDermott

Thank you. Good morning, everyone, and thank you for joining us today. Before we begin, let me take a moment to reference the Safe Harbor provisions of 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 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 the call is accurate only as of the date discussed. Investors should not assume that the statements will remain operative at a later date. Lastly, Lumber Liquidators undertakes no obligation to update any information discussed in this call.

Now, I'm pleased to introduce Mr. Rob Lynch, President and CEO of Lumber Liquidators. Rob?

Robert M. Lynch

Good morning, everyone. I'm here with Dan Terrell, our CFO, and we are pleased to be speaking with you about our second quarter 2012 results. Overall, our team continue to execute on our key strategic initiatives and by doing so, we captured market share, expanded operating margin and delivered record results through the important spring remodeling season. We continue to demonstrate a commitment to continuous improvement in all that we do, and operate it with a unified vision. We believe our coordinated efforts strengthened our industry best value proposition of best price, selection, quality, availability and people. Through this commitment and focus, we have built solid momentum over the last 4 quarters including increasing net sales to comparable stores, expanding gross margin and strengthening control over SG&A expenses. Highlights of our second quarter in comparison to the prior year include: a net sales increase of nearly 20%, comparable store net sales up 12.4%, gross margin increased 330 basis points to 37.3%, operating margin expanded 450 basis points to 9.4% and net income grew 130%.

We have consistently focused on key strategic initiatives, which we first outlined at the start of this year, which help drive our second quarter success and continued our momentum. To reiterate, our 5 key initiatives are: growing revenue, continuing to improve our sourcing, optimizing our supply chain, driving traffic through advertising reach and frequency and developing the best people to serve our customers. In terms of progress made on these initiatives, we drove consistently strong consumer demand during the second quarter through our efforts to expand the reach of frequency of our advertising. Traditionally, our messages more narrowly targeted core DIY customer and as we have previously discussed in the fourth quarter of 2011, we began testing programs to expand our reach to a more casual consumer. Building upon the success of those tests, we launched these programs on a broader scale to drive demand in the spring remodeling season and we increased the frequency of our call-to-action message.

Though we had planned our 2012 advertising spend as a percentage of net sales to approximate 2011, we are pleased to have achieved leverage through a strong top line in the second quarter. We are committed to reinvesting our national advertising leverage and programs to drive traffic. We are also focused on increasing the effectiveness of our total advertising spend.

Combined with strong store traffic in the second quarter, our average sale contributed to our top line growth. Our average sale in the second quarter improved more than 6% versus a year ago. We believe the increase is due largely to better servicing of our customers by our world-class sales force, reflecting strives made in our best people initiative. We have seen higher average retail prices per units sold, which indicates to us that consumers continue to prefer premium products across a wide range of categories. Further, we have continued to see solid sales of moldings and accessories, a category which includes an expanded assortment of flooring tools.

To update you on our store growth. We are still on track to open a total of 20 to 25 stores in 2012. We opened 10 stores in the second quarter, which brings us to a total of 14 openings in the first half of 2012. We are pleased to have seen increases in both total market penetration as well as second quarter comparable store net sales in our cannibalized markets.

In terms of our overall real estate strategy, we continue to utilize our enhanced site selection process and will appropriately balance our mix of new stores, relocations, remodels and assortment expansions as lease renewables come up. Importantly, we are also developing a store layout of the future, and we can roll out to both existing and new stores. We are in the very early stages of this process but we are excited and pleased with our initial progress.

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