Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the lumber Liquidators fourth quarter and full year 2019 earnings conference call.
As a reminder, ladies and gentlemen, this conference is being recorded it may not be reproduced in full oren part without permission from the company.
I would now like to turn the conference over.
So Paul can you. Please go ahead Sir.
Thank you operator, and good morning, everyone and thank you for joining US today I'm joined by Nancy Taylor Chairperson of the board of Directors, Chas Tyson, our interim president and Chief customer experience officer, and Nancy Wall, Our Chief Financial Officer.
As we began I mean, you referenced the safe Harbor provisions of the U.S. Securities laws for forward looking statements.
This conference call may contain forward looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of lumber liquidators.
Although lumber liquidators believes the expectations reflected and its forward looking statements are reasonable they 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 FCC.
The information contained in this call is accurate only as of the date discussed.
Investors should not assume that the statements will remain operative at a later time and lumber liquidators undertakes no obligation to update any information discussed in this call.
Now I'm pleased to introduce mess Nancy Taylor chairperson of the lumber Liquidators Board of directors Nancy.
Thank you Paul and good morning, everyone as Paul said I'm, Nancy Taylor chairperson of the board of directors.
As announced on February six Dennis Knowles resigned from his position as president and CEO.
Behalf of the board I would like to express our appreciation for Dennis his commitment to the company over the last four years, and a steady hand, and tireless efforts and the pace of many challenges during his tenure as CEO.
We wish him well.
The board has committed to doing a thorough search of internal and external candidates to identify the best candidate to lead the company and create a path towards enhance shareholder value.
Until the news to yet was named Chas Tyson has been named interim President and principal Executive Officer. In addition to his role as chief customer experience officer.
Yeah, Nancy Walsh, our CFO have agreed to take on additional responsibilities during the search period.
The board appreciates, Charles and Nancy willingness to take on these additional responsibilities and we're confident in the senior leadership team's ability to God you organization I continue progress on the transformation strategy and key initiatives laid out by the company.
We are encouraged by the opportunities we see ahead to enhance shareholder value.
After the prepared remarks were completed I will remain on the call in case, there are a follow up questions regarding the leadership change that I'm able to answer.
As I'm sure you will understand at this time, there's not much that I can add given that we are in the early stages of this process.
On behalf of the board I would like to thank you for your interest in lumber Liquidators and I will now turn the call over to Charles.
Charles.
Thank you not see.
It's my honor and privilege to take on this interim role I would also like to thank goodness for his dedication to the company had his work to position us for success.
I'm excited about the opportunities I see for us to leverage our solid foundation.
It's acute transformation plan and deliver shareholder value.
We will act with urgency to drive both growth and improved profitability.
Establish our brand as a value leader in the hard surface flooring marketplace.
Now to the results.
Q4 sales were in line with that guidance as our overall value proposition resonates with consumers.
And we experienced a more supportive macro environment than in the first call for the as many housing metrics turned positive and foster tomorrow.
We saw continued strength in vinyl products with relative weakness in bamboo and laminate marrying recent industry trends.
As a result.
Much and broadened our vinyl selection drawing the quota.
Adding product that provides consumers with a compelling price and quality continue into spots growing and competitive category.
In addition, we recently launched a new hardwood set that office breast trend right style.
And positions us well to so those customers, who want the aesthetics and value of a hardwood floor.
These are just a couple of examples of the actions, we're taking to ensure a stores, how well position to capitalize on consumer preferences and brought up market trends.
We had a solid October you all itself, which is one of our two largest events of the yet.
I'm pleased with how this event leveraged our revolving marketing efforts to attract customers to us towards.
In addition, pro sales remain strong as we benefited from efforts by our retail sales team to develop stronger relationships without pros.
We're also focused on continuing to refine our assortment.
Specifically on project completed as to meet the needs of a pro.
These will focus areas and 29 team and they will remain so in twentytwenty and beyond.
Looking at a installation sales we continue to view a installation services as an important component about go forward brand value proposition as we work to broaden our consideration among flooring consumers.
When Hans I surface offering.
We mentioned last quarter, we rolled out online assessment tool automating the scheduling of the first step and then stalled project.
Following the launch in October we saw customers engaged through this channel and have seen encouraging results with its online service as we continue to make the process easier for our customers installers and employees.
On the margin front in 2019, we faced a challenging impact of tariffs on a significant percentage about product. We started the a with clear objectives to improve margin brew vendor negotiations and alternative country sourcing that would lead to lower costs.
We also had a specific initiative in place to deliver efficiency in our supply chain to enhance margins.
I teams made meaningful progress throughout the year working collaboratively with vendors to mitigate the tariff in addition to moving sourcing to lower cost lower tariff to countries.
As a result, we have a more diverse supply base a more options to further diversify.
For most of 2019 nearly all of the benefits gained from a margin enhancing efforts were offset by the negative impact of the tariffs.
The recent Powerup exclusions, however have allowed our efforts to be more apparent in our Q4 results.
In addition, I'm more traditional cost out efforts will continue in twentytwenty as we aim to further identify opportunities for alternative country sourcing and leverage out scale to support margin growth.
Our outlook anticipates the continuation of the current section 301 tariff as well as the continuation of the current exclusion on vinyl an engineer click products through the end of Twentytwenty.
However, 2019 proved we must remain nimble to react to changes in tariff as well as the impacts on the competitive marketplace.
That's just one example, we along with others in the industry have applied for additional exclusion on Chinese imports, a while not embedded in a outlook. These exclusions could further change the market dynamic if received during the year.
Through all of the changes in 29 team, we remain focused on ensuring we delivered solid value through competitive prices accessible expertise and a trend right assortment.
Our revolving marketing message is value driven no longer focus is only on price, but emphasizes quality service and selection in our stores and online.
We are receiving positive feedback on our new AD campaign, and we will continue to build on our marketing momentum and twentytwenty within the context about plans for overall brand evolution.
Finally, well also continue to develop and deliver digital tools that enhance the shopping experience and differentiate us from the competition.
Following the path of a flooring project journey. The recent launch of a floor find the digital tool simplifies the product selection process I'm once narrowed consumers can use the picture it visualize a tool digit digitally see selections in the own home.
Well, then informed view the customer can choose to schedule and installation assessment online or engage with our store associates, who can help refine the product selection and complete the sale.
Used together these tools engage customers early in that project.
Plus five that purchase decision and keep them engage throughout that flooring journey.
This allows customers the ability to make informed flooring decisions when and how they want.
As I reflect on 2019, we made progress in a transformational plan and had varying degrees of success without three key areas of focus increasing profitability driving traffic and transactions and enhancing the customer experience.
But on the profit fraud as I have described a merchant and sourcing teams worked diligently with our vendor partners to lower product costs and these assets became more apparent with the tariff exclusions.
Also work to rationalize SGN eighth route 29 team, we streamlined organizations and work to align our corporate structure without vision of the future.
Second our efforts to drive traffic on transactions fell short of what we had planned a transaction trends remained negative through the year.
Well the growth all by web and installed sales work against this metric we will still disappointed with our results. This will be a key focus for the management team over the coming yet.
So that we enhanced the customer experience through the work I described to improve at digital tools to engage customers early in the journey as well as I work to broaden the reach of our bread.
We also improved product availability through store specific inventory investments to increase the breadth of take with product.
And then we made progress in 2019, but we clearly have more work to do as such our initiatives are not changing and twentytwenty, specifically, we remain focused on improving operational effectiveness to drive bottom line profit improving our customer experience.
Driving traffic and transactions in our stores and online.
But operational effectiveness and enhanced profit will come from continued improvement in gross margins as well as diligent management of expenses. We are also committed to ensuring our capital investments deliver solid return to shareholders.
Second in the coming yet we are accelerating a efforts to improve our customer experience, including the continued revitalization of our bread.
Core to that effort is delivering a quality trend right assortment that often broad selection and great value.
In addition, we're focused on giving consumers the right guidance a partnership through every project by creating awareness off and access to expertise and knowledge, both installed and through digital tools.
As we've said a key priority going into Twentytwenty remains driving traffic and transactions in our stores.
That will come through successfully engaging in existing consumers at every step of that flooring journey and providing exceptional value in the marketplace.
Turning to our outlook for Twentytwenty, we expect to grow sales by executing on a transformational plan aided by a moderately more supportive macro economic environment than we experienced in 2019.
We also intend to open 15, new stores, and twentytwenty, bringing value to flooring customers in new markets and further penetrating existing markets.
Expected sales growth along with our work to expand gross margin and focus on managing expenses will yield a solid improvement in operating margin and twentytwenty.
Our expectation is that adjusted operating margin will grow to between 2.7% and 3.5% in Twentytwenty, which is up from 2.3% in 2019.
Before handing the call over to Nancy I wanted to briefly share of viewpoint on the Corona virus.
First our thoughts go out to those being partially impacted by this outbreak, including our representative office employees in Shanghai.
Thankfully none of our employees have been affected but like many others. The outbreak is causing meaningful disruption to daily life.
We obtained nearly half of our merchandise from Asia most of that is sourced from China.
As such we are closely monitoring the corona virus situation, including the actions taken by authorities to combat the spread of the virus, which includes extended quarantines and restrictions on travel of people and goods.
The near term risk is the potential disruption to our supply chain. We are currently unable to predict the full impact of these potential disruptions, how and what Matt competitors will be affected all the reaction of consumers.
Merchandise on hand, and already in route should allow us to avoid a material impact in the first quarter of Twentytwenty.
However, depending on the length and severity of the situation, we could see immaterial impact beginning as early as the second quarter.
And such impact could continue for weeks or months, we are monitoring on a daily basis, and evaluating what actions to take to respond to potential disruptions.
We are committed to executing the next steps of our transformational plan that includes ensuring we are responsive to market trends and customer preferences, while focusing on driving profitability.
Look forward to sharing our progress through the year.
I will now turn the call over to Nancy Walsh to share the financial details of the quarter Nancy.
Thank you Charles and good morning, everyone in the fourth quarter net sales were $274 million, an increase of 1.8% over last year and comparable store sales increased 8.4% versus a year ago.
The overall net sales increase was driven by 1.8% growth in merchandise sales and a 2.4% increase in service sales.
Our comp increase was the result of a 2.9% increase in our average transaction value offset by a 2.5% decrease in transaction count.
Gross profit for the fourth quarter of 2019 increased $16 million compared to the fourth quarter of 2018.
Q4, 2019 with negatively impacted by countervailing duty rate changes and Q4 2018 was positively impacted by classification adjustments related to the harmonized tariffs schedule without these items adjusted gross profit increased approximately $18 million.
Gross margin for the quarter was 40.9% compared to 35.7% in the same quarter a year ago. Adjusted gross margin grew to 41% from 35.1% in the prior year period.
Increasing adjusted gross margin was primarily driven by the tariff exclusion announced in November 2019, we recognized approximately $13 million of gross profit in the fourth quarter of 2019 related to recoveries associated with relevant product sold through November 2018, we also reduced the carrying cost of inventory.
By approximately $12 million related to relevant product held for sale as of December 1st which began benefiting adjusted gross profit in December as those products are sold Q4 was also favorably impacted by a larger mix of higher margin manufactured products reduced discounting in the stores may.
Touching dies in cost out efforts and retail price increases earlier in 2019.
Yes, DNA expense for the fourth quarter was $93 million compared to $151 million in the fourth quarter last year.
As you know in both quarters included incremental legal as well as other costs and credits related to lawsuit investigations and certain other legal matters with the most substantial being $61 million in accruals related to legal settlements recorded in Q4 of 2018.
Items for both periods, our adjusted in the non-GAAP reconciliation section of the press release.
When excluding these items from both periods adjusted EPS DNA expense for the quarter was $93 million or 33.9% of sales an increase of $5.4 million and up 130 basis points on a percent to sales basis versus the same quarter a year earlier.
The increase in adjusted EPS Gionee dollars was primarily due to higher advertising additional costs related to six net new stores compared to the fourth quarter, a year ago higher year over year incentive compensation and equity accruals and costs related to the corporate headquarters relocation that occurred in the fourth quarter of 2019.
We remain focused on identifying expense savings opportunities by finding synergies across the business and driving efficiency in everything we do.
For the fourth quarter, we recorded operating income of $19 million compared to an operating loss of $55 million in Q4 2018. After adjusting for the items noted previously adjusted operating income was $19 million in the fourth quarter compared to $6.7 million last.
Here.
The year over year increase was driven by the retroactive tariff exclusion as well as additional efforts to enhance gross profit partially offset by an increase in adjusted EPS Genie.
We recorded income tax expense of $2.4 million for the quarter up significantly from 2018, driven by an increase in taxable earnings leading to the complete depletion of the company's federal and Noel.
Finally earnings per diluted share were 57 cents for the quarter versus a loss per share of $1.99 in the year ago quarter.
On adjusted basis Q4 earnings per diluted share were 56 cents this year compared to 17 cents last year.
Looking briefly at full year results total sales increased 8.7% with a comp sales decline of 1% adjusted gross profit grew $17.8 million to 37% of sales.
Adjusted EPS Gionee grew $13.2 million to 34.7% of sales and adjusted operating profit grew $4.5 million approximately 40 basis points as a percent of sales to 2018.
Adjusted earnings per share was 58 cents versus 57 cents in 2018.
Turning to the balance sheet inventory at the end of the fourth quarter with $286.4 million down $20.5 million from Q3 and down $31.9 million from the end of 2018, the quarter over quarter and year over year reductions were driven by the impact of the tariff exclusions on.
The carrying cost of inventory as well as our ongoing operational efforts to improve inventory efficiency and drive improvement in inventory turnover.
We ended the quarter with $82 million outstanding under our credit agreement, which was down $7.5 million compared to Q3.
During the fourth quarter, we funded $1 million related to the gold settlement.
Looking forward bloody exact timing will be driven by the court. We currently expect to fund the remaining 13 million at the gold settlement as well as $4.75 million related to the Kramer settlement in Twentytwenty. In addition, we anticipate receiving a total of approximately $25 million from U.S. customs related to.
Tariff exclusion refunds those funds are expected to be received throughout the first half of 2020.
Our liquidity position remains strong as our core operations continue to generate solid cash flow as of December 31st we had liquidity of $111 million consisting of availability under our credit agreement of $102 million and cash of $9 million.
Cash generated by operations net of unusual items allows us to make strategic investments in the business, while also reducing debt and further improving liquidity over time.
Turning to our 2020 outlook, we expect low to mid single digit percentage growth in total sales compared to last year and comparable store sales growth in the low single digit.
Our sales outlook includes the positive impact of the leap year, which will benefit Q1, total and comp sales growth by approximately 80 to 100 basis points and full year growth by an estimated 20 to 25 basis points.
In addition, cycling the network security incident that occurred in Q3 of 2019 should benefit sales growth in Q3 2020 as the result of these two factors. We currently expect our 2020 sales and comp growth percentage to be higher in Q1 in Q3 relative to Q2 and Q4.
We expect to deliver adjusted operating margin of 2.7% to 3.5% of revenue as we deliver higher gross margin, reflecting the work of the team over the last 12 to 18 months to lower product costs.
In addition, we expect X gene a leveraged to sales to support adjusted operating margin growth.
Our outlook assumes the continuation of section 301 tariffs at 25% on currently tariffs Chinese imports, while also assuming tariff exclusions granted in 2019 on vinyl and engineered click products remain in effect for all of 2020.
On the investing side, we plan to open approximately 15, new stores in 2020, we expect capital spending of $19 million to $21 million as we open new stores and invest in revenue and profit driving initiatives.
We transitioned back to a federal cash taxpayer in 2019 and expect that to continue in 2020, as we completely depleted our offense federal and our wells in 2019 and expect taxable income to grow.
We currently anticipate an approximate 24% effective tax rate and cash taxes of approximately $11 million in 2020.
In addition, we expect cash paid for interest to being a $3 million to $3.5 million range.
Thank you all for your time this morning with that I'll hand, it back to the moderator to open the call to question.
Thank you at this time will be conducting a question and answer session. If you'd like to ask your question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Q.
You May press star to if you'd like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith 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, guys. This is actually Michael Castleman for semi and thanks for taking my questions.
First I wanted to ask on on the outlook di di 25 million in receivables at your booking right. Now for next year is that included just starts recovering that in your 2020 outlook and if it is would it be fair to for thinking about how the underlying or on a go forward EBIT margin too.
We would that 25 million and if we do is there anything else that we should be considering as we're going through that Matt that that works.
So the 25 million a receivable that we're planning is factored into the cash flow.
And we should use that as you're taking a look at 2020, we expect that to arrive on the first half of this year.
Okay. So say then just it just to confirm then the EBIT margin outlook that you're you're planning for next year would it is contemplating that youre.
Perceive that as a.
You know in next year as a.
Results.
It's the balance sheet items and the impact of the tariffs exemption that was identified in November that is contemplated to flow through 2020, we factored that into our forecast. So the margin impact that we're receiving from that is built into the guidance.
We've provided today.
Okay, all right got it that's helpful. Thanks, and just a follow up on the top line. So wanted to ask what I guess, what gives you confidence as far as your low single digit comp guide to accelerate from the slightly negative comp in 2019, a waste what are the key factors that you'd expect to drive that and as a reminder.
You can you, let us know if youve, if you've quantified how much 2019 comps benefited from higher retail doesn't result of terrorists. Thanks guys.
Hey, Michael its Charles Thanks for the question, yes, So we've been working diligently on our strategic pillars for the last 12 months and as the management team is focused on executing our current strategy, we see a number of drivers on the on the topline.
And they come in and a number of specific areas. We've talked a lot about both brand walk and digital work ensuring that the customer experience as a guide it experience, bringing customers into our brand and we're seeing good success in growth about digital business up 32% loss.
Yeah, and the teams are doing a lot of work both on re platforming to improve that experience as well as enhanced digital marketing capabilities.
85% of our customers start their journey online and so we see that as being an important part of our longer term growth strategy as well as the digital work that we're driving through install business, which today is continues to grow and will remain a growth driver for us next year, we've talked a lot about emphasis.
On a pro business and how we continue to build relationships around us stores, and we were happy with our pro penetration and growth.
In the fourth quarter and continue to build initiatives that will allow brand to be more relevant to pros as we move through next year.
Obviously, we continue with our new stores, we opened 15 stores in 19 in that comp benefit will start to flow through this year. We also have the one extra day at the end of this year, which is built into the comp performance and also anniversary.
Our event in August of last year from systems perspective that help us benefit, but I think the real thing I would have you focus on is that we are staying extremely focused on the initiatives that we've aligned around and getting our organization to focus with urgency and with accountability to deliver our plan and that works both from a corporate.
His perspective, and the field so hopefully Michael.
On says that part of your question in terms of.
In terms of what we see and pricing or we actually saw a moderate increase in our ASP in the fourth quarter and we continue to see rational pricing in the marketplace. Obviously, we will react to wherever we see changes from a competitive perspective to drive value per is positioned in the marketplace.
Thanks for your question.
Thank you.
Your next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning.
So I have a few of questions I'll.
<unk> quickly, but first off I guess more bigger just more bigger picture perspective.
How do you balance or how should we how should we expect you to balance.
The initiatives you continue to pursue against.
Securing new senior leadership in other words, what I'm, saying is.
It or you looking for you is there any holding back on some of these initiatives to die to wafer new leadership to sort of stick with their own stamp on this or or you are you pushing ahead with with everything you would plan previously.
Brian spread question I will tell you that the board and the senior leadership team are aligned on moving forward with our initiatives. We spent a lot of time discussing that as a group we aligned on our planning process for 2020.
Prioritizing, where our capital investment spend is going to be in our opex investment spend is going to be and we're not going to take out for it off the gas and delivering the.
The investments and the initiatives both from a steel perspective on a core purpose, but driven so you should feel confident that there's not going to be a pause button. Here. This is this is heads down driving with urgency to deliver an outcome for our plan and 2020 against the guidance that we've given you.
Got it is very helpful. Second question I appreciate the commentary you made booking to release in your prepared comments regarding.
The Corona virus in the supply chain disruptions.
Obviously is a very fluid situation I was wondering you can give a maybe a little more color just in terms of what you're seeing.
As far as activity or maybe said better re ramping activity at the supply partners you have within China.
Yep so.
We are working obviously on a daily basis with all of our supplies and we've really got a dedicated team on the ground and they obviously have been reacting and it's very difficult environment for them personally.
Im extremely pleased with how they've given us insights as to what is happening.
To your point, it's fluid, it's changing by the day.
You know I can confirm that all of that pre Christmas holiday shipments less Asia on time, and and we have received shipments post Chinese new year.
Clearly the same visibility the most indicators are reporting there is still a limit on transportation across provinces in China.
Our density in factories is fairly heavily concentrated around Shanghai, which has a different set of regulations on shipment than more broadly across China, and so we're watching delivery availability of drivers to be able to make containers to the port second does you can see and its publicly available.
The migration of factory workers has not.
Being completed this year you.
You can actually track online the difference between last year in this year most of our factories are up an operational but waiting for old full factory workers to return I think the third unknown and this is for every industry is our supplies are working with desktop supplies to understand their supply chains and.
We obviously a meeting on a daily basis to understand.
What that net supply chain looks like in terms of delivery of broader components to ensure that future orders are going to be executed.
As I said in my prepared remarks based on inventory on the water pre Chinese new year in our current on hands, we did not see any material impact in Q1, and we are managing.
The visibility as everyone else is across the whole of Asia.
To understand what potential impact will be and how we will react to that across what we have is a broad portfolio of products that are not solely reliant on on origination from Asia.
Hopefully that gives you a little insight Brian.
That's very helpful.
And then last question I have no. This will be a quick one but it was going to want to talk about weather and Oh, having won the warmest winters on record in the United States I know in the past weather weather has impacted sales trends. It lumber so any any commentary how how this weather has has it affected Q Q4.
Sales of what we're seeing so far in Q1.
Yes, so Brian as it just doesn't policy going forward, we're not going to comment intra quarter anymore on what's happening with a wood sales impact.
From my perspective in this business.
Yeah, you may have one or two days of snow days in a very tight regional area like Minnesota, but our teams are focused on on delivering particularly to our pros who keep the their inside a building projects restoration projects working through the winter So no material impact in the fourth quarter, plus or minus that was.
Attributable to weather.
Very helpful. Thanks.
Thanks, Brian.
Your next question comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question.
Thanks, a lot and good morning.
First question is around your margin guidance for 2020, you gave a little bit of color around your expectation for material improvements in gross margin. If you could give a little bit more color. There that would be helpful. In other words key walk us through the major puts and takes to gross margin improvement from 2019 to 2020.
Sure up for the quarter as we talked about we saw an increase from about 35% to 41% year over year for the quarters year over year. The majority of that obviously was driven by the tariff exclusion, but was also supported by the mix of higher margin products as well as all the good work we've been doing on the cost outs from a source.
In perspective, and then some reduced discounting in the stores for the full year. We saw say some of that same mix more heavily weighted toward add anything other than the tariffs as that was a Q4 primarily hit.
Right as we looked at 2020, Lebron and she can you walk us through the puts and takes to get to a year implied gross margin expectations.
I think from a margin perspective, that's not.
Only something that we provide from a guidance perspective, I think if you take a look at the margin assumptions that we have for the full year, because we put the cost.
Reduction a impact that was going in 12 to 18 months just at the beginning of the tariffs that now that good work is showing that can be representative of what we're looking for in 2020.
Okay, and a follow up question related to a that pricing and and your your product costs as you've seen the cost reductions associated with tariff exclusions are you capturing additional margin on those specific product still and you're expecting those.
Strong margins to persist through 2020 in your guidance.
Yeah, I'll I'll take that sorry, we didn't catch your name so I know this isn't Seth.
So what we are doing clearly is looking at the competitive pricing environment and as others have said there has been some pricing that has moved back to the street.
We've also been driving an initiative from a product cost out and an alternative country sourcing perspective that really has nothing to do with terrorists. This started 18 months ago in terms of looking at a long term view about profitability as a company and the sourcing teams on the merchant teams did an outstanding job.
All of working with our suppliers strategically.
To continue to improve our long term cost position and that work will continue as we move into 2020, obviously the tariffs put another.
Set of urgency around that work and we will where we'll continue to to work like we do strategically with all of a vendors on coming out with the best value proposition for our customers.
Got it.
As it relates the inventory position at your end right now or are you in line with your expectations for the ended the fourth quarter, excluding the reduction associated with the tariff exclusions and how does that leave you positioned as we think about a.
Second quarter, given the potential for limited supply.
Yes.
As it relates to our ending inventory positions.
Our inventory management teams and supply chain teams.
Did a good job of ensuring that we came slightly under our plan.
For 2019, we continue to work as we've talked about on previous calls on inventory rationalization projects across our supply chain and enough stores that continue to improve our inventory productivity and manage our inventory turns as I said before we're not going to discuss the detail of future.
Quotas, and where we're going to be against our plan. We have an inventory initiatives that initiative has been underway for the last six months and we're pleased with the progress that that team has made.
Got it last question for me bigger picture Charles as you.
Take on this interim role just trying to get a sense from you lumber liquidators means to you I mean, how is the value proposition evolved over time, and where do you ultimately onto go.
Yes, so that's a great question and I. Thank you for it so look when I started with the company I spent a lot of time in stores before even decided to join the company and the one thing that just excites me about Pos is our team members in the field experts and selling flooring and when you think about the core customer that were.
We're going after they value that expertise and so.
If you joined the company, where you have a energy level and expertise level and the leadership level that can engage with customers around that product and I see that everyday when I look at the reviews first thing I do in the morning has come in and look at a high reviews and send our comments do I feel.
We have customers are absolutely delighted both on the installation and on the DIY side and on the pro side and so as we build the capabilities around rebranding out marketing messaging as we build digital capabilities to enhance the the the customer experience, we build out a pro.
Programs to really drive.
Relationships and stickiness with pros around us stores I'm as excited today as I was when I joined the company 18 months ago. So hopefully that gives you a little bit of insight into the passion and energy that this management team has to execute against our plan.
Excellent Thanks, a lot and good luck.
Thank you.
Your next question comes from the line of Laura Champine with loop capital markets. Please proceed with your question.
Thanks for taking my question. This morning, if we look at the luxury vinyl tile luxury vinyl plane part of your business.
How much of that has production, which is at risk to disruption from Corona virus and do you have alternative sources for that product outside of China.
Yes, so so what we've said laura's in a manufacturer.
Categories that now represents about 41% penetration of our business.
The majority of our vinyl production is in China today.
And there is some alternatives that are outside of China, but the majority is in China. Obviously, we have a product portfolio approach to how we manage the business. We've been doing a lot of walk around hardwood business. No. This company had a legacy of hardwood we'd seen declining market share.
He said on previous calls for the last three years and we have taken share in wood over the last quarter. So we're looking at categories that customers.
Find us as a destination to lean into.
But as as as a 10-K shows 41% about product manufactured.
Product a portion of that is from China from a vital perspective, you didn't ask about laminate, where others do have a significant.
Importation of laminate from China, all of our laminate product is either from North America oil from Europe. So we're protected on our laminate business from that perspective.
Got it and then bigger picture question as the board considers candidates for CEO.
What are the on a permanent basis, what are the key factors what are the key back ground elements and skill sets that the board is looking for.
What I will assist Nancy Taylor.
Chair of the board I I don't want to get into you now specific criteria, but what I will say is that again.
Yeah. The board is supportive of the other transformation strategy and we're looking for leader.
Hi, can embrace sad and and.
Accelerate that that strategy.
Understood. Thank you.
Thanks, Laura.
Your next question comes from the line of Peter Keith with Piper Sandler. Please proceed with your question.
Hi, good morning, everyone.
Hi, Charles I wanted to ask you on the shift with the marketing strategy. We've talking throughout 2019 about a change in to content and then I believe was Q4 was going to see that the first stages of changing and the media mix.
So as we stand here today, your Q4 transaction comp still down two and a half kind of inline with prior quarters.
You feel like you should be seeing some benefit to traffic now and maybe yeah. One point is there in 2020 do you think about reevaluating that that marketing strategy.
Yes, so Pete a couple of things all of this work was deeply seeded and customer research and insights to identify those segments of customers that really value. What it is the lumber liquidators does really well and when we start to talk about our invested improve a customer that really.
Gives us credit for our high touch consultative selling we need to to be able to tell that for the story.
The data clearly shows that those customers that have experienced the brand have a high residents to the brand customers that have never experienced the Brian have a different attitude towards the brand. So moving a brand attitudinally takes time and so what the new marketing messaging is real.
Only focusing on is talking about quality its core it's talking about breadth of assortment and it's talking about service and also if you look historically, where this brand has driven it's been primarily around price and so as we start to remix until our brand story, along with competitive pricing.
We are getting positive feedback, particularly from a field organization on on the customers that they're seeing coming in reacting to our marketing and we will continue to build on those efforts along with the work that we're doing online from a digital perspective, so often the marketing you don't see because it's very targeted on how that.
Really defines our attack to drive traffic over time, both online and in our stores. So hopefully that gives you some insight about how we're thinking about both the strategy and the longer term execution outcomes of that strategy.
Hi, yes, it that is helpful and I know.
Over the last couple of years, there has been some discussion at least on these calls around lumber liquidators brand itself and the name of the company.
Is there any reconsideration of of rebranding the company today, just given the focus on did you say quality breadth and service where you have the name liquidators, almost so sort of screens a value on pricing.
Yes. So that's great question, so as I said before we've done a significant amount of work on research around the brand, which obviously includes the name, but it's not just about the name.
If you've been looking it up at a brand logos and if you've been looking at our advertising you will see we've added flooring company to make sure that does relevance between lumber liquidators and flooring, which is what we sell if you look online and in a television advertising, you'll see us using ll flaws dot com as a domain to drive attend.
Given to us as a foreign company.
Were continuing to drive our creative approaches I, just talked about and we are on the under discussions to look at how we want to evolve our brand into the future and as we come into future quarters, and we're doing that work we will have more discussions with you about the evolution of our Brian.
Okay. Thank you and I wanted to ask a financial question for Nancy just.
Just going back to the tariff exclusion. So we understand there was $13 million of a benefit from recoveries and then there was a portion of 12 million from reduced carrying cost can help us understand maybe what amount of that 12 million was recognized in the fourth quarters I understand what's going to flow through into 2020.
Well the 13 million was reflected in on the income statement and the 12 million was a reduction in our inventory cost, which based on what you saw year over year reduction Thats. The combination of what Charles just talked about as well as those reduce costs up from the inventory.
Does that answer your product sales well you said the product sales started in December on that on that reduced inventories, that's where I was thinking it was only a partial benefit and ER in Q4. So it's a partial benefit or was it full 12 million reflected in Q4, well is it went back to September of 2018 approximate.
In the 80% of the benefit we received in Q4 was related to historical periods.
20% roughly went into the actual quarter itself.
Okay.
And then lastly on that I guess, there's been some questions around what's going to drive your EBIT margin. This year, because I think it's coming in better than what the street expected.
The the challenge I think this would be in Q4 of lapping. This this large <unk> <unk> onetime benefit.
Is there any consideration how you get over that hurdle with Q4 or should we certainly plan for Q4 margins to be down to 2020.
Well again, I'm, not really going to break it out by quarter, but when we talk about the previous 12 to 18 months and all the efforts that were putting into cost reductions just about the time that the tariffs were hitting that kind of masked.
The work that we had done now that those tariffs have been excluded we're seeing really what we consider our real run rate and there may be some fluctuation throughout the year based on some of the information that you're talking about on a quarter basis, but again, if you look at the full year for 19, we believe because we've gone in and negotiated the cost reduced.
Options and really tried to make the supply chain efficient that that represents a.
Good run rate for us.
Okay. That's helpful. Thank you very much and good luck for the team.
Sped up.
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 all we pull for questions.
Your next question comes from line of John Winick with Clark Street Capital. Please proceed with your question.
Thank you.
Great turnaround I just had a quick question <unk> delve a little bit more into the process of hiring a new CEO timing.
So I just want to get a little more color on that and if you could give us any insight on Oh, Dennis his departure.
Oh this is a Nancy Taylor again, a lot. So we were as I said in my remarks for early in the process.
We have retained.
The search firm, it's difficult to say at this point, how long that process will take certainly a it'll be quite a number of months.
And.
I just not really a lot from me to add regarding Genesis departure again.
We're very appreciative of all the of the heavy lifting that dusted while he was.
Here as the CEO and as as we mentioned I think it we feel like it's a good time.
To transition to.
A new leadership.
And are you thinking it's going to be an external candidates sounds like figures.
Right now where we are we are doing a thorough search and we are considering internal and external candidates.
Including Mr. Tyson.
I'm not going to comment specifically on Canada.
Okay.
Thank you very much.
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. Chas Tyson for closing remarks.
Thank you operator, I'd like to thank all of a fantastic associates for their hard work during 2019 Anda vendor partners for their continued support again I'm honored and privileged to take all my interim role a lead us strong organization into new heights, and delivering against our goals for 2020.
Thank you again for your interest in lumber Liquidators, and we look forward to updating you on our progress next quarter have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
[music].
Mm.
[music].