Q2 2020 Lumber Liquidators Holdings Inc Earnings Call
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Corporate Center May have any please.
Our same David will assume round.
You still your one thing for me.
We are old W and where the color brown.
Oh.
And you're calling for the lumber Liquidators conference correct.
Yep.
And what company are you calling from.
Era A.I.E.R.A.
Okay, well connect you right away.
Thank you.
Pros and D. I want to customers during these difficult times.
Our results in Q2 wouldn't have been possible without the contribution of all associates have made and I'm thankful to be part of such a strong and dedicated team.
Now turning to the results in the quota.
Well I called the sales declined 21% in Q2, we continued making strides with our transformation plan and saw evidence of progress on multiple fronts as adjusted gross margin increased 309 basis points over last year's second quarter.
And adjusted SGN, a was down 16 million year over year.
This allowed us to live a 2.9 million improvement in adjusted operating income versus Q2 last year.
We continued to execute against our strategic pillars of improving the customer experience driving traffic and transactions in the stores and online.
And improving profitability.
Supporting our efforts to improve the customer experience, we leveraged our investments in digital to improve our online experience during the second quarter.
As we described on our law school, we experienced a significant shift towards online offering as customers reacted to covert concerns and local government mandates drove adoptions to our store operating model.
Web sales grew approximately 180% versus Q2 last year.
Due to limited availability of open showrooms as a result of cobot 19.
In line sales increased to approximately 15% of total sales in the quarter.
The vast majority of those sales were picked up at one of us stores.
Our investments in technology to improve the customer experience continue.
We saw increased utilization of the floor or find a picture it tools as customers continued to show up from home.
We expanded use of virtual sales consultation to more stores using video chat functionality to virtually what customers through our showrooms and successfully complete transactions.
Further to enhance our customer and partner experiences we continued to deliver a more technology driven installation experience as customers show a strong desire for convenient installation options.
In the fourth quarter of 2019, we launched the ability for customers to request a project assessment on our website.
Which is the first step in an installation project.
The Digitization of installation continued in Q2 with the launch of a portal for independent installation contractors, providing easiest scheduling invoicing and documentation.
The portal also allows contractors to accept or decline jobs online automating a previously manual process and speeding up our response times to customers.
We're continuing to focus on enhancing our installation experience as this is an important element of our value proposition supporting our customers and us stores.
Turning to our second strategic pillar driving traffic in transactions in our stores and online we continued to optimize our marketing program with greater utilization of digital media to efficiently and effectively reach and attract new customers.
During the quarter, we were particularly pleased with the increased user traffic, we generated from about digital marketing efforts as well as our conversion of that traffic into transactions.
We also made further enhancements to our product offering to ensure we provided full continuum to meet both our pro and DIY customer needs.
During the second quarter, we expanded our vinyl assortment continue to drive this fast growing category.
In addition investments in that acquisition laminate assortment drove higher category performance in the quarter.
Finally, a third strategic pillar is improving profitability.
In the second quarter, we delivered adjusted operating income of 6.5 million or 2.8 set of sales. Despite the negative impact of covert 19, driving a negative 21% comp for the quarter.
The result was driven by 309 basis points of adjusted gross margin improvement, making the third consecutive quarter of triple digit increases in year over year gross margin rate following the retroactive exclusion of tariffs on certain vital and engineered click products in November of 29.
Team.
In the quarter, we continue to develop our alternative country sourcing strategy as we diversify our purchases from China.
We also showed strong expense management in the quarter as we reacted to the cobot 19.
We pulled back on our marketing spend based on the bond negotiated rent abatements and deferrals on drove other areas of cost controls across the organization.
Now transitioning to our efforts to safely serve customers and the cobot 19 environment.
In Q2, we evolved operating models and implemented safety measures across our chain.
And as we reported in May we adjusted how we serve customers utilizing a variety of warehouse only appointment only a normal operating models as we complete filed with state and local orders work to sort of flooring customers.
As of June Thirtyth, approximately 93% of us stores were fully operational utilizing enhanced safety protocols and personal protective equipment for our associates and customers and utilization of buy online pickup in store remained higher than pre covered.
Levels.
As of today, approximately 99% of us stores and now fully operational.
As it relates to team members and as a previously announced in reaction to soft demand in April.
We followed approximately 300 store associates.
As demand return through the quarter, we began to recall associates and as of late June we had invited all furloughed employees back to work.
We have been very pleased with the level of retention, we've seen in bringing back our knowledgeable and experienced flooring experts as we continue to differentiate with exceptional service.
Cautious cobot aware consumers, we're clearly the primary driver sales declined in Q2.
But as traffic and sales softened in much and continued into April we chose to scale back on our advertising spend.
Including canceling a April sale, our largest event of the year. This decision impact to comps in both April and May.
Despite the challenging operating environment, we were encouraged by the sales trends, we saw that business through the quarter.
As reported on our Q1 cool quarter that eight comps were down approximately 30% through the week ending may 23rd.
Improving performance in June resulted in a negative 21.3 comp for the full quarter.
Digging a little deeper into the sales trends.
DIY sales showed relative strength in the second quarter, well installation and pro sales were relatively weaker.
We attribute that relative weakness to a general reluctance of consumers have anyone other than family members and close friends in the homes.
As a quarter progressed, we saw interest in a installation offerings improve as evidenced by increasing sales of our installation assessments.
Looking at our pro customers, we saw a soft demand through the quarter, which we believe was also attributable to cautious cobot aware consumers.
Comfortable having visitors in the home.
Now from a regional perspective in the second quarter, we saw a stronger demand in the south and mid Atlantic and generally weaker trends in California, New York, and New Jersey, aligning with areas of lesser a greater initial impact from Cove. It.
More broadly there is evidence of a cobot driven nesting phenomenon with consumers exhibiting a renewed focus on home improvement projects that creates an opportunity for industry.
That said, we continue to watch the many factors influencing demand in that category, including existing home sales mortgage rates and consumer confidence.
We will remain flexible to maximize opportunities, we see while ensuring we have the opportunity to quickly react should market conditions change.
I'm extremely pleased with how our teams have risen to the challenges presented by covert 19.
They have kept safety at the forefront of everything we do well add Charlie managing our operating models, keeping a tight hold on expenses to support liquidity and continuing to provide our customers a compelling value driven reason to shop Ll flooring for their hard surface flooring projects.
So while we have dedicated significant effort to successfully navigating the impact of covert at the same time, we remain focused on executing a transformation plan and making progress on our strategic pillars to position us for long term success.
Over the past six months following my employment as interim president and in May as CEO.
As I reviewed as strategic pillars to support our position as a specialty hard surface flooring provider.
It became clear to me that we needed to invest more in our teams.
As a result, I have introduced a fourth pillar to our previous strategic framework related to a people and culture agenda that will be a key component of our strategy as a specialty retail it defining a high touch service model.
A cornerstone of our people first strategy is our commitment to creating a diverse and inclusive workplace the values and leverages individual differences to accelerate the company's growth.
Our diversity and inclusion task force has developed a phased approach outlining a set of strategic objectives for building and supporting initiatives aimed at attracting developing and retaining diverse talent, while broadening that span of influence.
Also core to our people strategy is our goal of creating a high performance culture. The values collaboration and focuses on the customer.
We began in Q2 with the company's first associates survey aimed at understanding current cultural perceptions and articulating that future Aspirationally culture.
We will leverage these learnings to establish next steps in that companies journey.
Building on a diverse and inclusive team we are working to ensure that we have the right leaders in the right roles to effectively and consistently achieve our company's goals.
Narrowing spans of control and bringing greater focus to our pro business.
Additionally, we are committed to acquiring training and retaining the best talent in the hard surface flooring industry.
Our commitment to training was made clear in July when with the support of our vendors. We completed the first about planned quarterly national trading days that included old store team members focused on pro relationship selling and leadership development.
I look forward to providing additional updates on our people and culture agenda in coming quarters.
Shifting to improving our customer experience after a year of development. We're excited about the planned rollout of our digital platform in early Q4.
This launch will significantly improve the user experience on our website, especially for mobile users and give us better tools to leverage insights gained from customer interaction with our site.
The new platform is foundational and building out to E Commerce Omnichannel capabilities.
Turning to our objective of driving traffic and transactions to our stores and online as we shed on our Q1 cool.
Brad evolution continues.
We launched our interim brand of lumber Liquidators is now Ll flooring.
In April and ads and online and we've received an easy astec feedback from our associates.
In the coming months, we're planning a limited pilot of approximately 20, plus stores that will rebrand ll flooring for the purpose of learning and determining customer response.
It's important to note. The we expect no material capital operating expenses related to the rebranding of these stores in Twentytwenty.
Our focus on driving sales to pro continues as well with a foundational objective of building strong business relationships with pro customers. The company wide training. We executed in July is just one step in our effort to drive scale and on retention with these important customers.
Finally, thinking about our drive to improve profitability. We are in the midst of conducting a comprehensive review of our real estate portfolio.
That includes leveraging our recent success working without landlords to defer abatement rent payments to further more publicly low overall occupancy costs.
We will provide more details as this real estate portfolio review continues.
Also we continue to work to further optimize our advertising spend.
Migration to digital channels, including search and social has paid recent dividends and we're encouraged by the return on our advertising spend in Q2.
We expect to benefit from learnings as we execute additional channel specific tests in the second half for the year, which will help us advance our goal of leveraging SGN a overtime.
I'm confident that our continued focus on what is now a four pillar strategy on developing a strong people centric collaborative culture, improving our customer experience driving traffic in transactions in our stores and online and improving profitability will position us well for long term.
Success.
While we have specific goals related to our transformation plan and the execution of our strategic pillars. Our success will be owned one customer engagement at a time.
Just one example of the opportunities that are in front of us Daddy morale as our store manager and old Whitney, California recently had the opportunity to work with a pro customer who want a loyal home improvement shopper felt that value proposition did not fully meet is needs and came to our Albany store to give them a chance to earn its business.
Danny worked closely with the customer to understand his business and product needs and the customer expressed appreciation for the personalized service product knowledge and clear communication Danny provided.
Attributes that not being consistently available Tim at other retailers.
Like all customers. This pro wants to work with the store that appreciate his business due to Dan is focus and attention the customer had a fantastic initial experience even came back and just to show. The open. These store team how his first project went with us.
Recent feedback from this customer confirms that the Albany team has earned his business and as a result of the established relationship. The store has taken the additional steps of stocking the unique flooring moldings and accessories. He buys on a regular basis.
Through execution of our strategy I'm confident these pro customer experiences will become more and more common and we will be well positioned to gain share in the fragmented hard surface flooring industry.
Again, I would like to thank our employees for their flexibility ingenuity and dedication to serving our customers. During these unusual times I'd also like to reiterate my thanks to our vendors landlords and our business partners as we navigate the current environment just.
Through collaboration that we will ensure we continue to deliver the exceptional service and value customers expect from Ll flooring.
I will now turn the call over to Nancy Walsh to share the financial details of the quarter.
Nancy.
Thanks, Charles Good morning, everyone.
In the second quarter net sales for $230 million, a decrease of 20.2% versus last year.
Comparable store sales decreased 21.3% versus a year ago, primarily due to reduced demand related to cobot 19.
The overall net sales decrease resulted from a 16.2% decline in merchandise sales and a 46.6% decline in service sales as our installation sales experienced a larger decline as consumers reacted to kill that.
Our comp decrease was the result of a 14% decrease in our average transaction value and a 7.3% decrease in transaction count.
Weakness in our higher ticket installation sales as well as softness in pro sales drove the decline in average ticket in the quarter.
Comps improved through the quarter transaction count turn positive year over year in June.
Gross profit for the second quarter in 2020 decreased $14 million to $88 million from $102 million in the second quarter of 2019.
Q2, 2019 positively impacted by tariff classification adjustment and without this item adjusted gross profit decreased approximately $13 million.
Gross margin rate for the quarter increased 280 basis points to 38.3% compared to 35.5% in the second quarter a year ago.
Adjusted gross margin grew to 38.3% from 35.2% in the prior year period.
The increase in adjusted gross margin was primarily driven by our work to enhance margin through cost out and supply chain efficiency efforts, which became more apparent following the tariff exclusion as well as a larger mix of higher margin vinyl sales and a smaller mix lower margin installation labor sale.
These items were somewhat offset by a higher year over year inventory obsolescence charge and a higher customer delivery costs associated with deliberate promotion.
As a reminder, on the tariff exclusion on November seven 2019, U.S. trade representative granted a retroactive exclusion uncertain quick final and engineered products imported from China.
We are monitoring the expiration of this exclusion currently slated for August seven 2020.
Sure the tariff exclusion not be extended there'll be no impact to cash flow related to future product purchases, but the impact to gross margin will be delayed based primarily on the flow of inventory.
SGN expense for the second quarter with $82 million compared to $104 million in the second quarter last year.
SG in a in both quarters included incremental legal as well as other costs and recoveries related to losses investigations and certain other legal matters.
Both periods items, our adjusted in the non-GAAP reconciliation section of the press release.
When excluding these items from both periods adjusted SGN expense for the quarter was $82 million and equated to 35.5% of sales versus $98 million and 34% of sales in the last year second quarter down $16 million year over year, but de leveraged 150 basis points.
For sensor sales basis.
The reduction in adjusted EPS, Gionee with primarily driven by lower advertising expense as we pulled back on our promotional cadence in reaction to the pandemic lower payroll and benefits expense as we took steps to align staffing with demand levels well also implementing temporary salary reductions corporate office personnel and lower transaction.
Related costs due to lower sales.
In addition equity compensation supplies and teeny expenses were lower versus second quarter last year.
For the quarter, we recorded operating income of $6 million compared to an operating loss of $1.4 million in Q2 2019.
After adjusting for the unusual items previously noted we had increased operating income of $6.5 million in quarter, a 2.9 million dollar increase compared to adjusted operating income of $3.6 million last year.
The year over year increase was primarily driven by the work we've done to enhance gross margin while also diligently managing expenses.
We recorded an income tax expense of $2.2 million for the quarter variability of our tax rate in 2020 reflects the timing of deductions and the cared to act on our quarterly earnings.
Net income for the second quarter of 2020 increased $5.5 million to $2.6 million compared to a net loss of $2.9 million to the second quarter 2019.
While adjusted earnings non-GAAP measure for the second quarter of 2000 $23 million a year over year increase of $2.2 million compared to adjusted earnings of $820000, but the second quarter of 2019.
For the six months ended June 32020, net income was $15 million, a 23 million dollar increase versus a loss of $7.8 million in the first half of 2019.
And adjusted earnings were $16 million, a 19 million dollar increase versus an adjusted loss of $2.8 million in the comparable period of 2019.
Finally earnings per diluted share was nine cents for the quarter versus a loss per share of 10 cents in a year ago quarter.
On an adjusted basis Q2 earnings per diluted share increased seven cents to 10 cents. This year compared to an adjusted earnings per diluted share a three cents last year.
Turning to the balance sheet inventory at the end the second quarter was $249 million down $55 million from Q2, 2019 and down $21 million from Q1 2020.
The reduction in inventory from Q2 last year was primarily driven by the tariff exclusion on vinyl products imported from China as well as our efforts to support liquidity through diligent inventory management, we are confident our stores or wealth doctors to serve the current level of demand and our primary reductions in inventory occurred at our DC.
While we could experience some out of stock at the D. C level, we are in the process of replenishing inventory levels to align with higher demand and we expect our inventory balance to increase closer to historical levels as we move through Q3.
All in all we feel we have managed inventory well and appropriately balanced the goals of cash flow management and preserving liquidity, while also supporting customer demand.
We ended the quarter with $101 million, an outstanding debt under our credit agreement, which was unchanged since we announced our ABL Amendment in April but up $37 million from Q1.
Cash and cash equivalents balance increased by $105 million compared to Q1, 2020 and was $127 million at the end of the quarter.
The increasing cash came primarily from our focus on maximizing liquidity through expense and working capital management as well as the incremental borrowing when we amended our ABL in April.
We have chosen to maintain a high cash balance to provide flexibility as we managed to the current uncertain environment.
Looking at liquidity and cash flow net cash provided by operating activities was $106 million for the year to date inclusive of $70 million in the second quarter, an increase of $120 million over the equivalent period of the prior year.
The increase was primarily driven by strong working capital management, including adjusting inventory buying to reflect lower volumes activity and extending payment terms with vendors landlords and other service providers as well as growth in customer deposits.
In addition year to date cash flow benefited from lower year over year cash outflows related to legacy legal settlements, while the company also implemented tight expense controls, including reducing advertising and lowering payroll costs through furloughs and temporary salary reduction.
We also received approximately $8.9 million in Q2 related to tariff refunds and interest from the U.S. customs associated with the November 2019, retroactive Tehrik exclusion.
Vinyl and engineered products imported from China.
That brings year to date total receipt to $9.5 million would be approximately $27 million refund anticipated. We expect the balance of the refunds to be received in the second half of 2020.
Additionally in June we received the $5 million tax refund associated with provisions of the cares act and related to filing certain prior year returns described in our first quarter call.
Also mentioned on our last call, we expect to funds the remaining $13 million related to the gold settlement no earlier than the courts final approval hearing currently scheduled for September 24th 2020.
As of June 32020, accompany had $186 million and liquidity.
Apprised of $127 million up cash and cash equivalents and $59 million of excess availability under the credit agreement.
Our focus on liquidity over the past several months has allowed us to build a strong liquidity position to navigate the current cobot 19 environment.
Additionally, as demand trends have improved our business is generating solid cash flow.
As such effective July 1st corporate office employees and members of the board of Directors, who had received reduced pace. Since April have had their full salary reinstated and its Charles described we have recalled furloughed employees as our stores and distribution centers returned to more normal operation.
Despite our strong current position uncertainty in the near to medium term environment will require a continued focus on maximizing liquidity and flexibility.
We remain focused on reducing costs and managing inventory flow, while continuing to defer payments and delay or stopping non critical projects.
We also continue to work closely with our vendor partners and landlords to extend term and manage deferred payments to provide ample flexibility and preserve cash.
We benefited from employee retention credits during the second quarter and we'll utilize the provisions of the cares act to defer the employer portion of social security taxes for the remainder of 2020.
These deferred taxes will be repaid any equal installments at the end of 2021 and 2022 we.
We will continue to evaluate state orders for additional opportunities.
On April 17, we amended our credit facility and expanded our borrowing capacity to provide temporary additional liquidity if needed.
That amendment expires at the end of August, but any reduction of near term liquidity will be minimal as our diligent management of inventory enhanced liquidity, but limited the borrowing base calculation through the amendment period under the terms of Bbl.
Credit agreement and surety remains March of 2024 and contains no financial covenants, except for a fixed charge coverage ratio if borrowings exceed 90% of availability.
Our liquidity position remained strong through July, but we continue to model multiple financial scenarios to ensure we remain agile and maintain ample liquidity through the pandemic, including stress testing downside assumptions and contemplating various recovery trajectory.
Based on what we know today about the impact of covert 19, we believe that cash flows from operations together with liquidity under our credit agreement provides sufficient liquidity to navigate the current environment.
Should conditions change we have additional steps, we could take to further bolster our liquidity position.
As we described in our Q1 call the uncertainty surrounding the duration extension the pandemic, including its impact on our company associates customers and business partners makes it uniquely challenging to accurately forecast our future financial performance.
As a result, we're not providing annual financial guidance, but as a reminder for context. It's Q3 unfolds in last year's third quarter, we experienced a network security incident in August that negatively impacted quarterly sales.
In addition, we do expect open one new store in Q3, and our current plans, including opening a small number of stores in Q4 dependent on demand trend and ongoing liquidity considerations.
Our near term focus remains on maximizing financial and operational flexibility and preserving liquidity, while also monitoring the current landscape for opportunity.
Core to our work will be the continued execution of our strategic pillars, but we will also continue to take the steps necessary to whether the current pandemic as we learn more each week, we will adapt and evolve our business model and financial scenarios as conditions warrant.
I would like to reiterate Charles its thanks to our associates business partners and many other stakeholders, who are working collaboratively with us to navigate environment.
Through our collective efforts, we're making progress and building momentum and ingenuity of the team builds my confidence in our future.
Thank you all for your time this morning with that I'll ask the moderator to open the call two questions.
Thank you we will now be conducting a question and answer session. If he would like to ask the question. Please press star one on your telephone keypad a confirmation total indicate your line is any question can you May press star to if he would like to remove your question from the Q for participants using steeper equipment and maybe necessary to pick up your hands that before pressing the star he is.
One moment, please while we poll for questions.
Our first question comes from the line of signing good time with Morgan Stanley. Please proceed with your question.
Hi, This is Michael Kessler on for Simeon. Thanks for taking my questions first I wanted to ask just about a quarter to date sales trends anything you can provide there it looks like comps were down roughly your high single digits into you know through June. So I guess, you how things have trended since then to the extent that you can.
Can you call it would be the grid.
Hey, Michael Good morning. This is Charles Thanks for joining the call Yeah, Michael So if you go back.
Through Q1, we were really praise for their process well for where we're making progress through Q1 until.
Till the virus really impacted everyone dramatically in April and as we've said we were encouraged by the trend of our business as we progressed through Q2.
You know obviously.
We saw a significant impact from the DIY customer as we move through the quarter overly more important for US we look at the pro business through the quarter.
We track on our installation business, how customers are setting up appointments in the home to to look at getting an installation dropped on that's a good predictor of us of what future activity might look like and we were very pleased to see as we move through April obviously was tough forever.
Body, but when we got to June we saw generally around the country that opening back up again.
Obviously, there were certain parts of the country that we've said those those parts of the country that went into significant long tail.
People weren't able to go outerwear restricted to go out.
We saw a slow returned to a two to two volume.
But at this point as we've said in previous calls our policy going forward is we're not going to talk about actual results in the quarter. We're in we're going to what we're going to we're going to work on the quarter. We just produced and so we appreciate the support for where we are today.
Yes, no problem at all and so my follow up.
Just on on gross margin another great quarter in Q2 with the expansion following on Q1.
I, even just get a high level thinking about the go forward outlook. There on I guess my are kind of expectation would be to think Q3 could see another again another solid improvement expansion. It continues to roll through you flow have a bit of a tough compare and then I guess is that come at the right way to think about it and then just even longer term going forward. This is now running.
Right around roughly 30, 39% gross margin, which you haven't.
Run out for several years.
The enhancements you've made I does that mean this is this could be the gross margin rate on a go forward longer term basis.
Okay.
So as you mentioned our work when hands margins over the last 12 to 18 months really became visible once the three or one tariffs expired in November of 2019, and that's the primary driver that you're seeing on our year over year comparison remember that these tariffs are slated to expire on August seven and we do not know yet whats going to happen with.
So at this point in time, you know, we continue to works to offset potentially any impact that might occur from now but.
You know, we're not going to give specific numbers as Charles mentioned, you will remember that as part of the original Terex <unk> exploration or a tariff exemption excuse me in November of 2019 that there was a retroactive component in Q4 that goes back to September of 2018. So as you mentioned you need to.
Keep in mind, but at this point, we need to wait to see what happens with the tariffs and we will update you accordingly.
Hey, Michael if I could say.
Mike Let me just add on to that you know that's when we go back to our transformation I'd sort of hence you into three areas as well right that we think about in terms of driving top line and making sure that we're delivering on the profit line.
Merchants have done a lot of work around product development innovation design and bringing in product more quickly, bringing new product to market more quickly and.
Driving that through our strategic sourcing strategy you know those actions just will continue and not teams have made tremendous strides and.
That gives us sales force the confidence to sell a unique products. So the work we've done a solid wouldn't program with the Bellawood upgrades.
That seems have confidence I got one of the best solid wood programs in the country and so the selling against our value proposition, we're not selling against price. So again I want to connect things back to the work that we're doing inside our transformation, we continue around marketing optimization work.
Especially where we're leaning into digital and looking at more efficient ways to drive profitability.
So I think as you see the profitability progress that we made in Q1 in the profitability progress that we made in Q2, there a strong actions underpinning how we're thinking about positioning the company both for growth and profit hopefully that that call helps a little bit.
It does yes, great great progress, so far but rest here.
Thanks, Michael.
Here.
Thank you. Our 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, and congratulations on the profit improvement. My question is is about some some numbers disclosed in the in the Q. This morning, the customer count actually didn't decline much but the the average sale did in dollars can you comment on sort of.
What sort of consumer behavior that reflects and how that is changing as we move into Q3, just a little more detail on on why the sale is down but customer count stayed relatively strong and whether or not you think that trend is gonna be sustained in the back half.
Yes, Laura the thanks. Thanks appreciate the appreciate the question.
So we were excited about what what actually happened in the trend of transactions as we move through the quarter. Obviously, we had a fairly dramatic mix shift from our customer count perspective, obviously, our installation business. We are able to book, both the labor and the product cost and so as insult.
Patient took a pretty dramatic decline as at the beginning of the quarter.
That has a pretty dramatic impact on how we think about average ticket and obviously the mix.
I'm proud of D.R. why has an impact on average ticket.
He said you know with you all your questions and then my statement, we've been encouraged through the quarter on what we're seeing on assessments from a from a.
And installation perspective.
And obviously that would would be a good predictor for us as we move into Q3, if that if that was to continue obviously, we're being very sensitive to what's happening around the country with the virus and again, none of us can predict.
What we were looking at an April or more wells now looking at.
From the from the country opening back off but hopefully that gives you some color.
On on what impacted average sales versus what we see his work inside our transformation is beginning to pay off particularly with the digital transformation around customer transactions.
Got it thank you.
Thanks, Laura.
Thank you. Our next question comes from the line of Seth Basham, then with Wedbush Securities. Please proceed with your question.
Okay.
Hi, this is a nascent treatment on to assess thanks for taking my question.
But first is regarding gross margins you guys mentioned higher customer delivery cost associated with delivery promotions offsetting some of the gains you experience, which seems somewhat new new sure how much of an offset this was to gross margins and is this a new strategies that.
You guys are implementing and something that will persist going forward.
Thank you for the question Oh, we're not going to provide specific numbers around this as we mentioned yeah. There were number factors that impacted the margin we did see a very slight impact both on the obsolescence charge as well as the delivery cost and that was really a function of us responding to the Colgate transactions.
Oh, good hard that the obsolescence charges also something that was a factor for us to really the product transition that we were doing at the end of last year. Beginning this year to designed to improve our total offering that we see adjustment that we made up the delivery cost at this point, we continue to be flexible.
On operational model and trying to serve the customer in the best way. We can so I will continue evaluate that over the second half of this year.
Okay Fair enough and then my second question is regarding some of the initiatives that you guys are working on one that I Didnt hear was regarding your expanded.
Store format can you share the progression that you're making on this initiatives and what the appetite for this rollout is going forward given your initiatives surrounding their real estate portfolio optimization.
Yes, they said that does a great question.
We.
We rolled out five stores, we didnt complete that lost store until the very end of last year.
As you know based on you know ton of the inventory.
And now with the interruption of the covert virus it'll take us a little bit longer to really look at what is the net result of how we view those open format stores.
Nancy and the real estate team have spent the last three months really doing a very strategic geographical deep dive into where our longer term opportunities are around market type.
Potentially store type so I've asked the team to pull back obviously, we are limiting the number of stores that were opening this quarter and we're looking very strategically what should our real estate portfolio look like what does drive from a profitability perspective, and Nathan then as part of that we will look at.
What are the appropriate store formats, both from the learnings that we take from what we've done and the market types in which we may expand into into the future.
You got some really good on the learnings out about design center and you'll see that that is being moved we're going forward with that as an element in all new stores. So.
We're taking some of the learnings around technology that we put into those stores from a customer perspective, and virtual selling the virtual remote selling that we talked about.
We've expanded to a number of stores are now was learnings that we took out of our ultimate spring store in Florida. So the thing I would have you take away from this is we have good strategic work underway around the role that our real estate strategy will play in growth and profitability and from that will be the outcome of war kind of.
Prototype is the appropriate one dependent on a market type.
Okay. Thanks, and good luck in the second half the year. Thanks Nathan.
Thank you.
Thank you as a reminder, ladies and gentlemen, if he would like to ask a question. Please press star one on your telephone keypad. One moment. Please what we report for questions.
It appears we have no further questions at this time I'd like to turn the floor back over to Charles for closing comments.
Thank you operator, we continue to be encouraged by indications that our transformation plan is gaining traction as we execute on drive progress on a four pillars of cultivating a collaborative culture supported by a strong team improving our customer experience driving traffic I'm trying.
The actions in our stores and online as well as improving profitability.
Through this focus we will accelerate our penetration was the pro continue to evolve our digital presence and revitalize our brand and improved profitability through both margin enhancing and cost efficiency efforts. The progress. We've made on the results we've already begun to see give us great confidence in a few.
Sure.
Thanks, again to our associates, so making sacrifices for our company and to our vendors and other stakeholders, who are partnering with us to creatively navigate these uniquely challenging times.
By wishing everyone, good health and safety and we look forward to updating you on outperformance next quarter have a great day.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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