Q3 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to lumber Liquidators third quarter 2019 earnings Conference call.
As a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in full oren part without permission from the company.
I would now like to turn the conference over to Danielle O'brien. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining on <unk>.
Let me referenced the safe Harbor provisions of the U.S. Securities laws for forward looking statement.
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 and its forward looking statements are reasonable it can give no assurance that such expectation or any other 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 FCC.
This information contained in this call is accurate only as of the data Scott.
There should not assume that the statements will remain operated 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. dunner snowfall CEO of lumber Liquidators Center.
Thank you Danielle and good morning, everyone today, I'm joined by Chas Tyson, our chief customer experience officer, and Nancy Walsh, Our recently appointed Chief Financial Officer.
We had a challenging third quarter that included soft demand in July as well as a network security incident in August .
These factors what the generally disappointing overall results for the quarter and as a result, we chose to lower our annual guidance, but we're encouraged by the sales trends experienced in September as we execute our transformation plan and make meaningful progress on many fronts.
First in September we took another step towards clearing the distractions caused by legacy product litigation Consummating a settlement agreement in the goal case that is consistent with the previously announced demo you and we now wait the courts final approval.
We continue to put those distractions behind us, we're making continued progress in transforming our business and further differentiating ourselves in a dynamic and growing hard surface flooring market place.
Second as we work to drive sustainable traffic to our stores, we developed updated creative content and launched new television ads in mid September that are more experiential and highlight product quality and differentiated service and the great value we offer.
Third we continue to make progress in our steps to drive gross margin by building expanded relationships with key vendors and implementing more robust vendor negotiations identifying alternative sources for supply and utilizing a portfolio approach to manage retail prices.
Finally, we remain focused on optimizing our cost structure to support the business, while identifying areas, where our cost can be taken out you'll hear more on these efforts later in our remarks.
Before diving into the results for the quarter I'd like to share a few comments about the network security incident, we previously disclosed.
Over the past two years, we've made investments in network security, which are aligned with the center for Internet Securities critical security control standards.
Despite these investments in late August we were impacted by network attack that encrypted certain I T systems and impacted our ability to electronically processed transaction for a period of six days.
Once we learn to the cyber attack our risk management team activated our business continuity plans and the entire organization took immediate steps to minimize the impact on the business.
These plans included taking manual steps to record transactions and ship product and allow us to keep our stores opened throughout the incident.
We also worked closely with third party firms that specialize in recovery and forensic analysis to restore our systems as quickly as possible, while ensuring we maintain data integrity.
Importantly, we found no evidence that any sensitive customer employee or company data was compromised or extracted from our systems.
Despite the commendable effort. So the team the event did impact our reported results in the quarter.
Well stores did have the ability to process transactions.
They were more difficult to execute especially those that are more complex like those requiring shipments from our dcs or scheduled installation.
Ultimately some customers chose not to complete the sale.
Well, it's challenging to know the precise revenue impacted the event, we think the approximate net impact to our total sales after attempting to account for customers who return when our systems came back up was approximately 68 million in the quarter and roughly a third of that negative revenue impact flowed through to the bottom line.
We have insurance that has already reimburse certain direct expenses related to the incident and we are in the process of documenting and submitting other cost in addition to establishing a business interruption claim under the terms of our policies.
Before moving to results I would like to thank our customers for their patients and understanding as we manage through the event as well as our associates in vendors, who worked diligently to overcome tremendous obstacles to meet the needs of our valued customers.
We experienced a negative 3.6% comp in the quarter comprised of a 1.7% increase in average ticket while transaction count which was negatively impacted by the network incident declined 5.2%.
On our second quarter call, we highlighted a weak performance in July which was due in part to a shift in our promotional cadence, but we also felt that we saw some evidence of generally weaker industry dynamics as many housing related metrics had posted several months of softness as a result, we chose to lower our full year guidance at the.
Hi.
In the first three weeks of August we saw improving comp trends compared to the july's lows, but on August 21st we experienced the network security incident, which resulted in a negative double digit comp for the month.
September trends improved significantly supported by successful promotions targeted pricing actions and to a much lesser extent recovery from the network answer that earlier in the month.
On the gross margin for <unk>, we made continued progress mitigating the impact of tariffs on the margin performance. Our three pronged approach of driving down first cost with our vendors shifting sourcing to countries less impacted by tariffs and utilizing selective retail price increases as well as a favorable mix of products sold help.
Deliver an increase in our adjusted gross margin despite the headwinds of tariffs.
Finally, we have completed a full review of our expense opportunity and are actively executing on our cost out initiative.
We remain focused on reducing costs to align our organization with our strategic path and today with a lot of legacy distractions behind us we have an opportunity to rightsize the organization and increase efficiency for the future.
As one example in late September I chose to flatten our store ops and strategy organizations, eliminating two senior positions and lowering our overall cost structure I.
Hi, I'm confident that we can continue to successfully execute our strategy with a scaled back senior management team.
As we look ahead encouragingly our October yard sale that ran from October 15th towards 22nd was successful and help continue the positive sales trends, we experienced in September although at a slower rate.
We also see encouraging signs a certain components of our omni channel strategy launch and begin to gain traction.
In addition, as we've described on past earnings calls the headwinds from the secular shift away from bamboo continues to abate.
We continue to see strong growth in pro sales as increased stock skews to serve same day demand and successful efforts to build stronger and more personal relationships between store employees and pro customers are generating solid results.
Installed performance also continues to outpace core growth and we are implementing automation in the fourth quarter to eight customers installers and employees with installed project process that will support this momentum.
We also see a more supportive macro backdrop as housing turnover strengthens home equity levels continue to rise in mortgage rates Tech lower unemployment remains strong.
Despite our recent momentum and what we view as a generally improving environment. We are lowering our full year 2019 sales and adjusted operating margin guidance to reflect our weaker than expected third quarter results that included the impact of the network security incident, Nancy will provide additional details in a moment.
Before concluding I would like to take a minute to officially welcome Nancy Walser, our new CFO to the lumber liquidators team.
Nancy joined in early September and brings an extensive retail background, which has allowed her to quickly come up to speed on the company and our opportunities. We're excited about the fresh perspective, she brings to our team and we look forward to leveraging her experience to make our company stronger.
I would also like to thank Tim Mulvaney for his service as our interim CFO for March to September this year, Tim as return to his role as Chief Accounting Officer and remains an important part of the finance team.
Over the past year, we've taken steps to strengthen our executive team, bringing in leaders with a significant relevant experience to execute our transformation drive shareholder value and position us for long term success and I am encouraged by the opportunities that we see ahead.
I will now turn the call over to Charles.
Thanks Dennis.
As mentioned after a weak July and a challenging August we saw evidence of building momentum late in the quarter.
Efforts to drive traffic and transactions began to show progress.
As we've highlighted on the second quarter coal, we purposely shifted some promotions out of July into August and September where we felt the AD spend could be more productive generally we were pleased with the net impact of that shift through the quarter.
We believe that shift drove some of the strength in September but we feel the continued positive comps in October reflects traction with our initiatives affirming demand environment overall.
We remain focused on executing a long term brand strategy and we continue to refine that marketing message as we've been working in partnership with our AD agencies to bring a fresh new message focused on value proposition than a tailored customer experience.
Additionally, our digital efforts continue and we're working to optimize the tools, we use to reach consumers, making tangible progress during the third quarter.
The Clearest example was the launch of a new television AD campaign in mid September .
New adds emphasize product quality user experience and consultative service in our stores, while also maintaining a price promotion message.
In development for several months in coordination with the agency partners were excited to gauge consumer reaction to these ads that are significantly different than the creative you've seen from us in recent years.
Our goal is to reposition our brand towards invested improve as and identified segment of customers who value the high touch consultative selling environment that is core of what our teams delivered to our customers every day.
On the digital front, we continue to be pleased with our online performance as web order penetration increased year over year.
We're making progress upgrading the replacing a digital platform and are excited to utilize the additional functionality. It provides us to effectively reach customers, while also improving usability of the site.
We expect to roll out the new platform in mid 2020 .
Utilization of our picture it floor visualize a continued to grow in the third quarter. Following its broad launch in July .
We see customers, increasing the exploring hard surface flooring and non typical rooms like bedrooms. Another second story rooms in the house.
This gives us confidence we can grow square footage penetration in the home where utilizing the information gathered from these online users to tailor our marketing programs to be more relevant to those consumers.
In addition, a key benefit from the utilization of the online visualize a tool is its impact on the length of the customers journey.
With the ability to see then new flawed in that own home visualization far beyond what a small sample can provide we're seeing a significant shortening of the overall decision making process.
We're also seeing evidence of the effectiveness of the tool through anecdotal stories from the store associates, who describe it as a great closing tool for them.
Building on the momentum of the picture it we expect to launch a new floor or find a tool and the fourth quarter.
As we previously described this tool designed to help consumers narrow the product selection process by answering a short there. It's a question that allow us to stare the customer to the flooring type the best fits that desired application.
We found that the often complex decision, where consumers way choices related to flooring material construction waterproof characteristics dimensions, and well as not to mention color in style can be overwhelming for many.
Floor or find a helps consumers navigate this decision tree, a narrow that choice to a manageable set of options.
Similar to the picture it tool we're optimistic that this tool will help consumers shorten that flooring project journey, where they're shopping online or in us stores.
We also launched a new capability in October that allows customers to purchase an installation assessment online, which is the first step and executing and installed flooring project.
After purchasing a project assessment of professional independent contractor contracts the customer directly to schedule an appointment on once the assessment is complete our team will contract the customer with a project quote if necessary that can be followed up with an in store consultation with one of our knowledge.
Hits to answer any remaining questions overcome any lost obstacles to closing the sale.
All of these tools support an overarching digital strategy of further our goal of engaging with customers earlier in that flooring project, making the project easier more convenient by allowing much of the product evaluation process to occur at home, helping minimize any competitive disadvantage reserve.
Shifting from in convenience store locations.
We look forward to providing updates on customer adoption of these tools in future quarters.
From a product perspective vinyl continues to be the area of strongest growth with substitution from solid products, including bamboo.
To ensure we remain on trend and priced right. We launched several new products during the quarter, including new engineered skews to serve that fast growing part of the market.
Our ultimate spring store continues to perform well we opened a second open concept store in Thornton, Colorado in early September .
We learned a tremendous amount from these store prototypes as well as other tests were performing.
Implementing some of those insights across the train to improve the overall shopping experience and drive incremental transactions.
Yes.
Shifting to margin we maintained our focus on mitigating the impact of terrorists during the quarter. We continue to work closely with our vendors strengthening relationships and consolidating supply to allow us to positively impact toughest costs.
Also we have seen growing momentum in production outside of China.
As I've described before many vendors were initially hesitant to make the significant capital investments required to move production from China. During the early days of the escalating tariff regime.
But as time as Pos and those towers have grown more and more supplies a building capacity in other south East Asian countries.
We have had success identifying new sources of supply of began receiving shipments from certain supplies in Q3.
But we expect significant additional ships and supply sources in Q1 of 2020.
Finally, we continue to use a portfolio approach to managing retail price increases as an additional tool to offset tariffs.
As we indicated on our second quarter coal, we implemented some price increases in June and made some additional refinements in Q3, as we closely monitor consumer reaction and the competitive environment.
We continue to monitor the competitive environment to ensure we are sordid price competitively to maintain our position as the value leader in the hard surface flooring industry.
In conclusion, we have had a challenging quota, but we're encouraged by recent trends and we remain focused on transforming our brand while delivering a match product quality and selection at a great value.
We are confident transformation plan will position us well to finished the year on a solid note as many initiatives gain traction and begin to deliver results.
I will now turn the call over to Nancy to share the financial details of the quarter.
Nancy.
Thanks, Charles Good morning, everyone I'm trying to be at lumber liquidators at this pivotal time in our journey I've only been officially on the job for two months, but I'm excited about the opportunities we have to better serve customers strengthen our competitive position and drive financial results that deliver shareholder value.
From a finance perspective, I feel we have a strong organization with the opportunity to build on the solid foundation established in recent years in the near term my focus is on fostering a culture of fact based decision making to support strategic management decision.
Leveraging tools and processes to drive efficiency and cost savings across the organization and developing the finance organization to promote a culture of stakeholder value and financial accountability.
I look forward to sharing more as we make progress.
Now to the results in the third quarter net sales for $264 million, a decrease of 2.4% over last year and comparable stores were down 3.6% versus a year ago influenced by a soft July in the network security incident Dennis discussed.
The overall net sales decline was driven by a 3% decline in merchandise sales offset by a 1.8% increase and installation sales our comp decline was the result of a 1.7% increase in our average transaction value offset by a 5.2% decrease in transaction count.
From a product perspective, we continue to see strong growth in vinyl products with continuing softness and exotic solid most notably in bamboo.
Gross profit for the third quarter 2019 declined $5 million compared to the third quarter of 2018, and both periods were impacted by out of period duty related adjustments.
Without these items adjusted gross profit declined approximately $1.4 million.
Gross margin for the quarter was 36.2% compared to 37.2% in the equivalent quarter a year ago I.
Adjusted gross margin grew to 36.5% from 36.2% in the prior year period, a more favorable mix toward higher margin vinyl along with our efforts to reduce first cost with vendors and ship sourcing to countries less impacted by tariffs. In addition to higher average selling prices drove the improvement over the third quarter.
A year ago adjusted margin increased 30 basis points, despite the growing impact of tariffs on product costs.
As described last quarter, we expected margin growth in Q3 as the margin rate benefited from our tariff mitigation efforts, but we expect Q4 margins to be tempered as inventory burden with the high tariff costs flow through our supply chain, causing some of our Q3 rate improvement to receipt from a timing and inventory turn perspective.
We expect to incur the full headwind of the 25% tariffs on Cogs late in Q4, but the offset resulting from a mitigation efforts to date will not be fully realized until Q1 of 2020.
SG any expense for the third quarter was $93.5 million compared to $94 million in the third quarter last year.
SG in a in both quarters included incremental legal and other costs related to lawsuits investigations and certain other legal matters and the third quarter of 2018 also included a loss related to certain equipment as we announced the intention to seize finishing our own floors.
Both periods items are adjusting in the non-GAAP reconciliations section of the press release.
When excluding these items from both periods adjusted SGN a expense for the quarter was 93.1 million or 35.3% of sales an increase of $3.9 million and up 230 basis points on a percent to sales basis versus the same quarter a year earlier.
The increase in adjusted SGN $8 was driven by costs related primarily to 10, new stores compared to the third quarter, a year ago higher year over year incentive and equity accruals driven by a reduction in last year's third quarter to align with lower performance expectations as well as severance expense recognized in this year's third quarter and.
Corporate headquarters relocation that will occur in the fourth quarter. These expenses were somewhat offset by lower credit card and bank fees in the quarter.
In addition, as announced in 2018, the company's ceased finishing floors at its facility in Toronto. The net effect of this was to move certain allocated overhead costs from gross margin to SGN, a with ultimately no impact on the bottom line, but negatively impacting SGN a relative to third quarter last year.
The expense de leverage to sales year over year was a function of these same factors, but exacerbated by the revenue impact of the network security incident.
Certain direct expenses related to the security incident have been reimbursed by insurance, while receivable has been established for other direct expenses for which we expect to be reimbursed in future periods.
We remain focused on identifying expense saving opportunities, including Rightsizing, our corporate staff as Denis described but also through finding cost synergies across the business and driving efficiency through everything we do we expect our ongoing evaluation of costs to deliver savings. This year, while also positioning us well for.
2020 and beyond.
For the quarter, we recorded operating income of $2.2 million compared to operating income of $6.7 million in Q3 of 2018.
After adjusting to the items noted previously we had adjusted operating income of $3.4 million in the quarter compared to last year's $8.6 million.
The year over year decline was driven by the higher operating expenses noted earlier as well as the impact of the network security incident.
Turning to the balance sheet inventory at the end of third quarter was $307 million up approximately $3 million from Q2 as the impact of higher tariffs added slightly to our inventory.
As that impact continues to grow we anticipate fourth quarter ending inventory in the $310 million to $320 million range. We ended the quarter with $89.5 million outstanding under our credit agreement, which was flat to Q2 as a reminder, this debt position is inclusive of $55 million.
Specific settlement related cash payments made since the fourth quarter of 2018.
Looking forward, although expense has been recorded in earlier periods for each of these items. We have a few additional settlement related cash payments on the horizon, while the exact payment timing will be driven by the court. We currently anticipate funding the 4.75 million dollar Kramer settlement and the $1 million of the gold settlement in the.
Fourth quarter and we currently expect to fund the remaining $13 million of the gold settlement in 2020.
Our liquidity position remains strong as our core operations continue to generate solid cash flow as of September Thirtyth, we had liquidity of $114 million consisting of availability under our credit agreement of $108 million and cash of $6 million.
Turning to our outlook, we are lowering our full year 2019 sales and operating margin guidance to reflect our weaker than expected third quarter results that included the impact of the network security incident. We now expect 2019 total revenue to be flat to slightly positive to last years versus.
Low single digit growth previously and comparable store sales to be between 2% decline and flat to 2018 versus an expectation of approximately flat previously.
As a result, we expect to deliver adjusted operating margin of 1% to 1.4% of revenue versus an expectation of 1.4% to 1.9% previously our current outlook also continues to assume the 25% tariff on Chinese import extends for at least the balance of 2019.
While we were encouraged by recent momentum in the business as well as signs of a more supportive macro economic outlook, we feel it's prudent to lower outlook at this time.
On the investing side, we plan to open 11, new stores in 2019, we expect capital spending of $15 million to $17 million.
We anticipate cash paid for taxes, we remain nominal and that the valuation allowance on a deferred tax assets remain in place for the year.
We see cash paid for interests to being a $3.5 million to $4 million range.
Before we open the call for questions I wanted to let you know that we have chosen to postpone the analyst conference that we had tentatively planned for the fourth quarter, while I have learned a tremendous amount about the company in my first two months additional time will allow me to entrenched myself in the business and have a deeper understanding of the expected long term financial expectations of our strong.
Energy execution.
The delay will also allow us to make additional progress on our initiatives and provide a long term financial outlook that is more informed by the trajectory of the business.
In addition, we will be potentially have a clearer view of the macroeconomic and Terra landscape, we will provide additional information when appropriate.
Thank you all for your time this morning with that I'll hand, it back to the moderator to open the call for questions.
Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone that would indicate your line is in the question in queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star piece one moment, please while we pull for questions.
Your first question comes from line of Simeon Gutman with Morgan Stanley . Please proceed with your question.
Hi, This is Josh how much emphasis and thanks for taking my question can you. Please talk about the trends in October during the weeks without the sales did you also can positively in those weeks ended they meet your expectations.
Yeah, I, we saw strength across entire month.
But it's a good yeah as as we've had in our prepared remarks, the October yard sale, such a big portion of the month.
Undoubtedly and impacts the entire month, but yes, we did.
Okay. Thank you and maybe can you talk about how promotional you were in the yard sale relative to prior years was was it more or less promotional.
[noise] Hey, Josh This is Charles Yeah, we were very comparable with both the breadth of assortment and the depth of the assortment.
What was different from last year was a creative positioning based on the new advertising work, we've done and a difference in the channels in terms of what we've pushed to online and digital radio.
And connected television versus lineal television.
All right. Thank you and I was just squeeze one more on quickly if you already seeing signs of the favorable housing data, you're talking about and everybody's monitor monitoring I'm, having a positive impacting your business or is that just more and expectations going forward I.
I think it's probably a little more the latter however, it seems like you know we talked about this extensively in Q2.
You know when when we talked about kind of the trajectory of the business. We felt like there were things on the horizon to impact the momentum, but that we had as interest rates for example.
You know the we'd had a lot of several months of I won't call it bad, but not real favorable news on the macro.
As it relates to housing.
We started with the end of Q2, we started that we had an interest rate drop of had another interest rate drops and I said in my remarks, you know the employment remains strong with one measure that we look at the remodeling industry a great deal for our you know kind of understanding the trajectory of our business and we've started to see some.
Positive momentum and things like cash out revise those are those are big driver for us and as we've always said you know the two biggest home improvement projects or our pain in the floors and or painting, the walls and such and change in the floors out so.
We feel like you know what we've seen in momentum in September and October , albeit October was a little slower than September .
We feel like it feels to us that there's a there's a shift in the consumers.
Direction towards doing more home improvement projects that lends well for us. So we're cautiously optimistic we feel like we've probably seen.
In the year would probably seeing the worst part of.
The economic impact behind us So we're cautiously optimistic about what we've got in front of us.
Great. Thank you good luck for Q4, thank you.
Your next question comes from a line of Oliver Wintermantel with Evercore ISI. Please proceed with your question.
Yeah. Good morning, Thank you and welcome Nancy.
Thank you I had a question regarding the improvement in September and then in the into October was that mostly driven by but ticket or a transactions.
Actually both we had strong transaction growth I'd say there was a myriad of factors that Charles talked about we had we had the new creative we continue get traction with the Visualizer.
It is just we've seen sequential improvement in the consumers interaction or our web.
Our web activity was up Charles I think you know that's pretty much what you saw on October as well that's correct.
Okay. Thank you and Oh My second question was regarding gross margins or actually inventory I think it. Thank you.
You said that he sold through most most of the inventory that you bought ahead of the 25%, there's a and I think Nancy you touched on it on to until Q4.
Gross margin line could you maybe give us a little bit more detail of.
Of how much you so through and and a is that 25 tariff now.
He did you mostly in Q4, thank you.
Yes, Oh. This is Charles you from an inventory turn perspective as you know, we tonner inventory about twice a year.
The category that took the most amount of tariff was the vinyl category, which is one of our fastest turning categories, but we don't expect the full impact of the 25% to a roll through all of inventory until first quarter. So there is still some headwind as Nancy talked about in her opening script to gross margin.
And so do it's going to roll through the back half of Q4 based on where the tariffs.
Landed but our mitigation will start to hit to correct I was in the first quarter I think what all they wanted to understand right was what have we fully seen the impact of the tire through the ton of the inventory.
And that is not the case, we do have risk mitigation that I talked about in my remarks that will impact us specifically with shipments increasing in Q1.
Got it thanks, very much and good luck.
Thanks Wally.
Your next question comes from the line of Peter Keith with Piper Jaffray. Please proceed with your question.
Hi, Thanks, Good morning, everyone. So just a follow up on the gross margin pressure from tariffs I understand that it will be late Q4, when the full pressure is hit but then you'd also made reference attack mitigation efforts picking up in Q1. So if we just look forward a couple of quarters, what what quarter is probably going to be the worst quarter from Uh huh.
Tariff gross margin pressure perspective.
We expect Q4 to be the worst in terms of taking the impact kind of presented the impact of the tariff and then starting to see the mitigation impact in Q1 going forward.
Peter as I think I might even talked about this little bit on the second quarter call.
Yes, there wasn't much chance to go out in Prebuy for the leg up from 10% to 25 so.
Pretty much any peos in flight.
We're going to be impacted by the tariff for most of that as Charles I think Charles said in his his remarks too is that we'll see we'll see the that's where we'll see more Nancy said it too I think is that the biggest impact that would be in Q4, and all of our mitigation moving now to country.
And negotiations with our vendors all those four Roland Appeals, we think started well should start rolling into Q1, where we start to see that benefit.
Okay. Thank you for that and then.
That's a separate question for you I just want to talk about compensation at the store level. So.
In the past lumber Liquidators had a commission heavy compensation structure, where I know store managers in the past could even make six figure annual income and I guess, we're just seeing some some post online that it seems like it's moved you guys have moved away from the commission structure to more of a store bonus dynamics. So I was hoping you could.
Just update us on kind of where the store compensation stands today.
And how it's evolved and maybe even if you're thinking about tweaking it going forward.
Great question.
As you May remember back in 2016, there were some.
There were some legislative changes that were.
Pending the actually never materialize that we're going to challenge the.
The.
Qualification for a a exempt status and we would not have we would not have qual past that qualification tests.
So proactively we chose to convert yeah, we did a lot of testing on our commission structure.
And a lot of this was in flight before even I got here.
That said determine whether you know we had some opportunity to change how we how would how the commission worked we ultimately ended up inverting where whereas.
We change you know we made more of a solid base you know a higher base and less commission structure and that was done in 2016.
We always make tweaks to our commission.
You know based on you know vendor funding or if we choose to.
You don't have a promotion aimed at a certain categories with vendor support we look at this all the time in fact, you know were and in the middle of working on compensation plans for next year, but we want our store and poised to make maximum income and to be motivated to sell.
And then and at the same time make sure that their preserving the bottom line.
So it's a delicate balance I would tell you that.
We constantly look at this and we do a review even with our compensation Committee on our board on an annual basis and.
We're in the Middle that review right now I don't anticipate huge structural changes, but we always want to make sure. We've got the most motivated salesforce in our stores.
We're selling company and.
We look at that.
We do an annual review as well as you know we have quarterly incentives and contest you know to help increase of store managers incentives. So I wouldn't say, we've gotten any dramatic.
Restructuring plans, but we look at it every year to make sure that we've got got that in place.
Okay. Thank you very much Dennis I appreciate the feedback you Matt.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please as we pull for more questions.
Your next question comes from a line of Laura Champine with loop capital. Please proceed with your question.
Thank you. So as you look at 220 20, Yeah. What are your thoughts in terms of store openings and what is driving your expectation for for new store openings next year.
Okay.
I think at this point, we're right in the planning process.
In here two months as my notes say, so were diving deep into a bottoms up plan and I prefer to talk about 2020, when we do the Q4 earnings call. So that we're not doing this piecemeal it I can.
Preparing in consolidated view of what 2020 looks like.
I don't think Laura we're thinking anything dramatically different from what we did this year, but where there is to tighten answers point, we're still we're we're right in the middle of the throws of our.
Our 2020 planning.
Understood. Thank you.
Your next question comes from the line of David Macgregor with Longbow Research. Please proceed with your question.
Hi, Good morning rubber is on for David Here I wanted to ask you about sourcing for China from China, you talked about vendors increasingly moving a building outside of China I'm in the past you had talked about you're getting down to a mid fortys percentage by the end of this year I guess with more vendors moving outside of China do you have any update on maybe where that could be next year.
Yeah, Rob This is Charles <unk> based on actions that we've taken as I said, we're already starting to move shipments and the third quarter.
Out of China.
I believe that by the middle of 2020 will be in the high Thirtys. So we continue to see improvement of moving that number down.
Obviously compliance team has done a great job in helping us work through making sure that these new vendors are on boarded the right way to meet all our stringent quality requirements and we probably take a little bit more time than others to do that but we want to make sure that when we execute.
We are absolutely confident in the quality about products. So we'll update next quota on other work that we have underway that we feel we will continue to improve our gross margins as we move product to other parts of southeast Asia.
Okay, and then just on the selective price increases you talked about are you seeing any less to see a demand are you seeing any you're mixing down as a result.
Yeah. So a couple of things you know in the quarter, we did move.
Promotional events.
So obviously that had some impact I was happy on.
What happened in September as we move some of that spend out of July .
You know, we optimize our pricing continually.
We're shopping across regions. We're looking at what competitors are doing from a reaction prospective and just by natural course of business. If we see elasticity opportunities. So improved gross margin dollars on top line sales or we will adjust prices, both up and down and we did some of that during the quarter.
Alright, Thank you very much for taking my questions.
As Rob.
[noise], ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr., Dennis Knowles for closing remarks.
Thank you operator, let me say, thanks again to the L.L. team, our vendors and our customers and our shareholders for your continued support we look forward to updating you next quarter. Thanks again for your interest in lumber liquidators and have a great day. Thanks.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.
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[noise].
[noise].
[noise] [noise].
[noise].