Q1 2021 Lumber Liquidators Holdings Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the lumber Liquidators first quarter 2021 earnings conference call. As a reminder of this conference is being recorded and may not be reproduced in whole or in part without permission from the company I would now like to turn the conference over to Julian that made it. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining us.
Today, I'm joined by Charles Tyson, Our President and Chief Executive Officer, and Nancy Walsh, Our Chief Financial Officer.
As we begin let me reference of 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.
Including the future operating and financial performance of L. L flooring.
Although the allo flooring believes that the expectations reflected in its forward looking statements are reasonable.
It can give no assurance that such expectations.
Or any of its forward looking statements will prove to be correct.
Important risk factors that could cause actual results to differ materially from those reflected in the forward looking statements are included in <unk> filings with the SEC.
During today's conference call management will be discussing results on an adjusted basis.
A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures.
And our explanation of why the non-GAAP financial measures may be useful are discussed in today's earnings release.
The information contained in this call is accurate only as of the day discussed investor.
Investors should not assume that the statements will remain operative after today.
And all of flooring undertakes no obligation to update any information discussed in this call.
Now I am pleased to introduce <unk>, President and CEO Charles Tyson Charles.
Thank you Julie.
Good morning, everyone.
On today's call I will review, our first quarter highlights and our progress towards realizing our vision to be the customers' first choice in hard surface flooring.
Providing the best experience from start to finish.
First I want to thank all of our associates for driving our growth and profitability strategies forward.
And providing a superior experience to our customers during the quarter.
Turning to our positive results in the quarter.
We delivered a six 9% increase in comp sales, which was driven by continued execution on our transformation initiatives strong demand from home improvement projects and accelerating year over year of growth in our installation business.
As well as the impact from the onset of COVID-19 shutdowns in March of 'twenty 'twenty.
During the first quarter, a big one to sell event directly overlap of the severe winter weather in February and compared unfavorably to a successful went to sell event in the first quarter of 2020.
In addition last year, we had one more day in the first quarter for leap year during which we also benefited from a successful sales event.
We feel good about the underlying demand in our business and the traction we are seeing in our initiatives, which we believe is not fully reflected in our first quarter comparable sales.
Our teams delivered outstanding profitability improvement, we reported operating income of $13 1 million up from $8 8 million in the first quarter of 2020.
On an adjusted basis operating income increased 5 million to $14 4 million in the first quarter of 2021 of five 1% of net sales versus three six per cent of net sales in the first quarter of 'twenty 'twenty.
The higher profitability reflects continued go to work from a much in the in sourcing teams and disciplined expense management across our organization.
Our cash flow and balance sheet is strong.
<unk> our company for long term success.
Our strong first quarter results reflect continued progress on our strategic pillars of people and culture, improving the customer experience driving traffic and transactions and improving profitability.
Our first strategic pillar people and culture is of critical driving force behind our transformation strategy.
The first quarter, we communicated our new vision and purpose of rolled out of new set of six core values and commitments across our organization, but directly shapes, how we will interact with our associates and customers.
We also reinforced our commitment to an inclusive diverse team kind of.
Culture, which understands values and adapt to the needs of our associates and customers.
We remain steadfast in this commitment to demonstrate respect and tolerance to old groups of our words and actions two of our associates and customers alike.
To support this diversity equity and inclusion task force has scheduled diversity workshops that will roll out through the organization over the coming months.
And we are fostering an open dialogue with our associates, we completed the company's first culture survey.
Have already begun to respond to recommendations and feedback as we build a cohesive inclusive of high performing team.
The second pillar is improving the customer experience.
Our customers expect the seamless omni channel experience.
One of the key benefits of our new digital platform is increased engagement on mobile.
Across the industry roughly 80% of customers start the flooring journey online and mobile is increasingly the preferred way to shop.
In February we launched our new mobile App, featuring our popular picture it and flow of find the tools and making it easy to all the installations.
We are pleased with the customer engagement and conversion we are generating through mobile.
Installation is of key service, we provide that enhances the customer experience.
First quarter installation sales increased year over year and the rate of year over year of growth accelerated sequentially from the fourth quarter of 2020, underscoring growing momentum in our installation business.
New installation of assessment trends indicate demand for installation services remains strong.
Providing a seamless installation experience for our customers has been facilitated by the new install of portal that we rolled out in December to enhance visibility into our customers' installation projects increased efficiency for our store associates.
Joost turnaround time for our customers when quoting new jobs.
In addition in mid March we launched a new installation services section of our website the centers around the customer ranging from easy to read content with useful tools and links to more detailed information for those interested in learning more.
It also features before and after customer project testimonials.
This educational content is helping drive stronger demand for installation of assessments.
Expanding our business with pro customers is foundational to our growth and transformation strategy.
Building strong relationships with pros is our top priority and we continue to reinforce that with our store associates are of trials scale and retention programs.
We continue to build our pro value proposition.
And as such we are making it easier for pros to engage with us.
For example in early March we launched new everyday pricing for pros, which of pros of telling us is highly valued it makes it easier for them to consistently quote jobs.
And we continued to execute our outside pro account Rep program.
While our first quarter protocol was flat versus last year, we saw higher sales in orders per pro that originated from our trials scale of retention program, reflecting the increasing quality and value of weird generating by building strong relationships with pros.
Turning to our third strategic pillar of driving traffic and transactions for the first quarter of web sales increased more than 70% plus the last year.
We're continually improving the features tools and online functionality.
L L flooring Doc called the digital platform to engage and delight shoppers and boost conversion.
The quality and value of the flooring assortment me off of is reflected in our recently launched spring seasonal catalog, which presents beautiful on trend and sophisticated flaws as.
Well as style insights we.
We are publishing weekly blogs of home decor inspiration throw of L. L style online content platform.
The trend right assortment makes us a leading destination for both retail and pro customers with more than 400 varieties of hard surface floors for reaching a range of quality styles, we continue to offer customers quality choices and.
The expert sales associates provide the high touch service and advice to help our customers achieve the flooring project needs.
We are driving innovation and delivering on trend flooring that resonates with how people want to experience the home environments today, whether that simple luxury or bold patterns and designs.
During the first quarter final playing consulted hardwood were again the top performers.
We've expanded the number of wide width skus in our vinyl category and the.
The best in class would assortment remains a key competitive advantage.
Our brand revitalization progressed during the first quarter, where the pilot stores trending ahead of comparable control stores in terms of new order dollars and pro new order dollars.
We continued to evolve the presentation of our new brand in our advertising.
With allo flooring moving to the primary position versus lumber liquidators and this helped drive key gains and awareness familiarity and consideration the L. O flooring based on our national track of which are important milestones to ensuring of much more relevant brand in hard surface flooring.
Fourth.
Improving profitability, our adjusted gross profit of 109 million for the first quarter of 'twenty, one improved 4 million from the first quarter of 2020.
And despite the reinstatement of section three of one tariffs our adjusted gross margin of 38, 5% was down only 80 basis points from the 39, 3% in the first quarter of 2020.
How much in the in sourcing teams executed well to partially offset the impact of the section three of one tariffs through pricing and promotion strategies and to a lesser extent alternative country sourcing efforts, reflecting continued progress on our strategy to diversify sourcing away from China.
In addition, we improved adjusted SG&A spend of 33, 4% of sales from 35, 7% in the first quarter of 2020, we continue to focus on more efficient digital marketing spend versus other traditional channels and we maintained disciplined expense management.
The first quarter adjusted operating profit was $14 4 million up from $9 6 million in the first quarter of 'twenty 'twenty and adjusted operating margin was $5 one per cent compared to three 6% in the first quarter of 2000 2019.
Nancy will share more details on the quarter in her remarks.
We remain focused on executing our transformation plan and making progress against that strategic pillars to position us for long term success.
One of the briefly update you on recent developments on the each of our four pillars.
First let's start with the people and culture.
We've selected a new learning management system to provide enhance training content across the organization for all associates to maximize performance improve the customer experience and strengthening our associates expertise.
Moving to improving the customer experience in April we launched the new pro web experience that allows pros to see their exclusive everyday competitive pricing allows them to extend that special pricing to their customers and give some visibility into our inventories and the job history.
Making the shopping experience easier and more compelling to pros strengthens our value proposition and reinforces L O flooring as the go to partner.
And we've received very positive feedback on this experience to date.
Turning to our objective of driving traffic and transactions, which strengthened our omni channel capabilities with new tools to help drive traffic and transactions with customers.
Some of US have responded extremely well to a picture of it and flow of find the tools, where they can find the floor. They like on our website or app take a picture of their room and see how the floor will look in that space.
We're enhancing these tools with additional functionality such as improved catalog and navigation.
We have just begun to take advantage of the power of our new digital platform and website that gives us more agility and speed to better showcase of flooring and service and drive traffic to our stores.
We're excited about our product innovation pipeline for 2020, one where the steady schedule of new product launches supported by digital campaigns website and in store promotions.
We are prioritizing digital marketing to tell the story of a new brand and expanding our efforts on search and social where our customers begin their inspiration journey.
During the first quarter, we produced a new brand campaign to introduce the next chapter in the L O flooring story.
Reinforcing of flooring expertise high quality trend right assortment and building familiarity around the new brand the.
The campaign kicks off this week and will be reinforced online and through an enhanced presence on social media.
We're looking forward to the broad scale rebranding of best of was that we anticipate will occur primarily in 'twenty 'twenty. One. This will include the new mark on the outside of the stores, replacing lumber liquidators with L. O flooring and every store will have updated and redesigned interior signage that reflects.
The new brand.
Finally, we continue to work on improving profitability.
There are numerous factors in the macro environment, making it hard to predict how consumer spending on home improvement will unfold in 2021.
Given the uncertainty caused by these factors, we are not providing financial guidance for 2021 at this time.
That said, we would like to share some color around the outlook and approach for the remainder of the year.
First on the positive side, we're seeing continued tailwind to existing and new home sales home valuation of appreciation and demand for homes exceeding available supply all of which we believe are supportive of home improvement projects.
In addition, U S consumers have healthy savings and increasing confidence based on recent stimulus measures and the strengthening job market.
That said when navigating current international supply chain disruptions container availability continues to be highly constrained.
We expect it to be volatile over the upcoming quarters, we're continuing to monitor this including the potential impact.
All of the recent Suez Canal disruption.
Domestically hardwood supply continues to be constrained similar to the fourth quarter of 'twenty 'twenty. We believe we could have captured more sales in the first quarter of 2021 if of inventories had been higher.
Our supply chain teams are working diligently to bring in new inventory and allocated effectively across all our stores.
In the second half of fiscal 2021 we will be up against more difficult sales comparisons with the third quarter and fourth quarter of 2020 comparable sales increases of 10, 9% and 10, 5% respectively.
The impact of COVID-19 is mixed on the positive side more than a 145 million in the U S have been vaccinated, which should underpin the sustained economic recovery in 2021 of them beyond.
However, we are monitoring the number of cases in the U S, which could dampen consumers' willingness to have pros and installers enter their homes.
There is still strong consumer demand for home improvement spending we are watching how much consumers may expand the spending into other areas such as travel and leisure is 2021 unfolds.
Amidst these positive factors and potential challenges our team is focused on driving execution of an outgrowth of unprofitability strategies.
We have a robust pipeline of new innovative products, we are generating strong installation sales growth and building our value proposition for pros of new digital platform is driving traffic and we're excited to expand the brand revitalization to more stores this year.
Opening new stores is an important part of our growth strategy. During the first quarter. We opened three new stores as part of our plan to open 12 to 15 new stores the ship.
Turning to gross margin as we demonstrated in the first quarter of merchant teams are working hard to mitigate the impact of section three of one tariffs. In addition to tariffs we expect gross margin pressure from higher transportation and raw material costs as we move through 2020 one.
To partially offset these headwinds we will continue to execute on mitigation strategies, which primarily consist of pricing and promotion strategies and alternative country sourcing strategies.
With respect to SG&A, we will maintain disciplined expense management.
We plan to leverage our base SG&A expense year over year of reinvest expense savings in our growth initiatives, including new technology to improve the customer experience investment in our teams the opening of new stores and investing in our pro customers.
In summary.
We are intently focused on executing our growth strategies to drive sales and profitability in 2020, one with more than 405 days of hard surface floors, featuring a range of quality styles and on trend designs. We continue to offer customers quality choices, while our supply chain teams work diligently.
The increase inventories.
We will continue to pursue gross margin rate mitigation strategies and disciplined expense management to optimize profitability, while investing in our strategies to position L. L flooring as the customers' first choice in hard surface flooring over the long term.
I will now turn the call over to Nancy to share of the financial details of the quarter.
Nancy.
Thanks, Charles and good morning, everyone in the first quarter net sales of $283 $5 million increased $16 $1 million or 6% versus the first quarter of 2020 due to a $4 seven per cent increase of net merchandise sales and a 16 point of.
8% increase in net service sales, which reflected accelerating year over year installation sales growth.
We saw a $4 four per cent increase in our average ticket due primarily to a higher merchandise average ticket and a 2.5 per cent increase in transaction count compared to the same period in 2020.
As Charles noted first quarter 2021 comparable store sales increased six 9% versus the first quarter of 2020 and.
In addition to what Charles shared about the impact of COVID-19, and our 2021 winter sales event compared to the sales events. During the first quarter of 2020, we also estimate the inventory constraints from supply chain disruptions represented a potential 8 million to $9 million in lost sales during the first quarter of 2021.
This was a similar impact of what we experienced during the fourth quarter of 2020.
Turning now to gross profit.
Gross profit increased $10 one per cent in the first quarter of 2021 $216 million from $105 million in the comparable period of 2020.
Gross margin of 48% in the first quarter of 2021 compared to 39.3 per cent in the first quarter of 2020.
During the first quarter of 2021 gross margin included a $6 $6 million benefit from anti dumping duty rate changes associated with applicable prior year shipments of engineered hardwood from China.
The first quarter of 2020 did not contain of comparable items.
When excluding this item from 2021 of Jeff.
The gross profit for the quarter was $109 million compared to $105 million in the prior year and adjusted gross margin was $38 five per cent compared to 39, 3% in the prior year.
Despite the reinstatement of tariffs in August of last year on certain flooring products imported from China, Inc.
Year over year decrease in adjusted gross margin was only 80 basis points, primarily due to solid execution on our mitigation strategies.
SG&A expense for the first quarter was $102 $5 million or 36, 2% of sales up 20 basis points compared to $96 $2 million or 36 per cent of sales in the first quarter of 2020.
SG&A in both quarters included certain costs related to legal matters.
In April 2021, we settled two employment litigation matters and as a result during the first quarter, we accrued a 7.7 million dollar liability with SG&A. So these litigation matters.
When excluding these items from both periods adjusted SG&A expense for the quarter was $94 $7 million $700000 lower than the $95 $4 million in the first quarter of 2020.
As a percentage of sales adjusted SG&A improved 230 basis points to $33 four per cent of sales from $35 seven per cent of sales in the first quarter of 2020.
For the quarter, we delivered operating income of $13 $1 million compared to $8 $8 million in the first quarter of 2020.
Adjusted operating income in the first quarter of 2021 was $14 $4 million up $4 $8 million from $9 $6 million from the prior year period.
And adjusted operating margin for the first quarter of 2021 was five 1% up 150 basis points from three six per cent in the first quarter of 2020.
The higher operating income and margin reflect good progress on our profit improvement initiatives with our merchant and sourcing teams implementing strategies to mitigate tariffs our marketing teams deploying more efficient and effective digital marketing spend and our overall organization driving disciplined expense management.
In the first quarter of 2021, we had other income of $800000 compared to other expense of $900000 for the three months ended March 31 2020.
Both years included interest on borrowings under our credit agreement.
The interest expense on borrowings in 2021 was offset by a favorable adjustment of $1 $8 million for the reversal of interest expense associated with the anti dumping duty rate changes Mister.
This reversal was excluded from adjusted earnings.
In the first quarter of 2021, we recognized income tax expense of $3.3 million or an effective tax rate of $23 four per cent compared to an income tax benefit of $4 $4 million or an effective tax rate of negative $55 two per cent for the first quarter of 2020 the.
Benefit in 2020 was driven by a $4 $7 million benefit related to the provisions of the cares Act.
But the first quarter of 2021 net income decreased by $1 $6 million to $10 $6 million compared to net income of $12 $2 million for the first quarter of 2020.
Adjusted earnings for the first quarter of 2021 were $10 $2 million compared to adjusted earnings of $12 $8 million for the first quarter of 2020, reflecting the income tax benefit in 2020.
Finally earnings per diluted share was 36 tenths of the quarter versus earnings per diluted share of <unk> 42 cents in the year ago quarter.
On an adjusted basis first quarter earnings per diluted share of 34 cents compared to adjusted earnings of 44 cents for the first quarter of 2020, reflecting the income tax benefit from 2020.
Turning to the balance sheet.
Inventory at the end of the first quarter was $225 million compared to $244 million at the end of December and $270 million at the end of March 2020.
The 16% year over year of reduction in inventory.
Really driven by managing our inventory purchases as a direct result of COVID-19, followed by supply chain constraints on the replenishment and strong sales of kept inventory below our targeted level.
Our balance sheet and liquidity are strong.
We ended the quarter with cash and cash equivalents of 200 of $9 million up of $186 million from a year ago and up $39 million from the December 2020.
Net cash provided by operating activities was $45 million for the first quarter of 2021 compared to $36 million in the first quarter of 2020.
The increase was driven by our disciplined working capital management program, and we have not yet been able to replenish inventory at the optimal levels due to continued supply chain constraints, which also contributed to our above average customer deposits and accounts payable during the first quarter of 2021.
These working capital factors favorably impacted our cash flow from operations in the first quarter of 2021.
As of March 31st 2021, we had $240 million in liquidity comprised of 200 of $9 million of cash and cash equivalents and $31 million of excess availability under the credit agreement.
This represents an increase in liquidity of 100 of $9 million from March 31 2020.
At quarter end, we had $101 million in outstanding debt under our credit agreement and this amount is unchanged since we announced our ABL Amendment in April 2020.
On April 30th we entered into a second amendment to our credit agreement. We were pleased to reduce our interest expense and fees extend our maturity date and increase our financial flexibility.
The total size of the credit agreement remained at $200 million as we converted $25 million in silo to the revolving credit facility and we still have an option to increase that to a maximum total amount of $250 million.
The maturity day of the credit agreement was extended to April 30th 2026.
We decreased the margin for LIBOR rate loans by 125 basis points over the applicable LIBOR rate reduced the LIBOR floor from one percentage point to five per cent and decrease the unused commitment fee by 25 basis points per annum.
Except as set forth in the second amendment, all other terms and conditions of the credit agreement remain in place.
We are monitoring the current macroeconomic conditions and the impact of COVID-19, especially the vaccine administration continues and we are considering the timing of repayment of some or all of our debt balance perhaps as soon as the end of the second quarter of 2021.
Turning now to the remainder of 2021.
Our team remains dedicated to our transformation driving growth and improving profitability.
To expand on some of the details of that Charles touched on at a high level.
During the first quarter, we opened three new stores in January we opened our Fort Smith, Arkansas store, which is a new market for us.
And in March we opened a new store in Rochester, New York, and Franklin, Tennessee, representing expansion of existing markets.
The new stores have the L. L flooring branding and we are excited about the opportunities to drive additional sales and profitability growth through these new locations.
We expect installation sales to return to a pre COVID-19 mix in 2021, as we execute our initiatives to attract more customers and as our customers are more comfortable having people enter their homes.
This will benefit gross margin dollars, but lower the gross margin rate.
With respect to SG&A, we plan to continue our expense management efforts and to invest behind our growth initiatives, including new technology in store service levels to improve the customer experience as well as the opening new stores.
With respect of cash flow given continued supply chain disruptions, we do not have full visibility into how soon we can increase our inventories to optimal levels, which could also continue to keep our customer deposits above historical levels.
In 2021, we still expect Capex investments of approximately $24 million to $28 million as our overall business. There's all the support the broad scale rebranding of our store fleet. The opening of 12 to 15, new stores and investments in digital.
In summary, we delivered strong sales growth and profitability in the first quarter. Our entire organization remains focused on continuing to execute our transformation initiatives to drive growth and profitability in 2021 and beyond.
And our strong balance sheet and liquidity provide us with the financial flexibility to fund our growth initiatives and position L. O flooring for long term success.
Thank you all for your time this morning with that I'll ask the moderator to open the call for questions.
Yeah.
And at this time of Woobie.
Conducting a question and answer session if you'd like to ask the question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue with participants.
Shipment.
The necessary to pick up your handset before Christmas Darkies.
One moment, please of all equals four questions.
Yeah.
Our first question is from Laura Champine with loop capital markets. Please proceed with your question.
Thanks for taking my question, it's on the supply chain issues that impacted sales and inventory in the quarter do you expect or when do you expect to see of resolution. There what is the resolution and how are the the sourcing issues impacting your approach to.
<unk> marketing.
Hey, Laura good morning.
For the question Yeah. So I think you've really got three different things in that question first of all of them.
Understanding of supply chain constraints are really two issues. One is the well known international constrained around container availability of debt, that's coming out of Asia, specifically and the the law.
Likely will be some continued delays also the the new so it's the shoe is created.
We see you know as others have reported supply chain environment continuing to be volatile.
And we expect that constraint to continue certainly through Q2, our current view is an improvement through the back half of the year, but I do want to qualify we're really looking at this week on week as we as we work with car is on on availability the second constrained as North American based and that's just in la.
The availability, we see saw mill output on hardwood lumber is still running at about 80% of capacity from pre COVID-19.
Suddenly has curtailed the amount of availability of through the domestic wood production. So two different issues that we're working I think you're asking how are we managing through that in North America with working strategically with our vendors from obviously of planning perspective, and we brought on a couple of new vendors to help and where.
Actually pleased without productivity on a on a solid wood domestic program are the that we produced in the quarter. So I think you know us.
The the loss of sales that we think and in first quarter was in the range of $8 million to $9 million. We continue to see constraint in the second quarter and our current view is improving through the back half of the year.
Got it and then any impacts that has on your marketing spend.
Yeah. So we've been optimizing our marketing spend over the last 12 months as we've moved more into the digital environment.
Clearly you know we're going through of rebranding with L. O flooring and that we're really excited about and getting great feedback from our customers. So we think the you know we have our marketing spend optimize the at the right levels going forward.
Thank you.
And our next question is from Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning.
So a couple of questions. If I could you first off and I know you discussed your results pretty extensively in the prepared comments, but just help me understand better if we look at the.
The moderation.
Top line expansion.
In Q1 versus what we saw.
For the Q4 Q3 of loss share and on one of your basically both of the bridge, how what's really which one of the key the key reasons behind that.
Yeah. Good morning, Brian Good to talk to you. So as we look at the sequential move from Q4 to Q1, you know overall with very positive on the outputs that were seeing from the investments that we've put into our initiatives, particularly with installation, which you see you know our service numbers.
Very strong for the quarter and those improved sequentially from Q4 into Q1, and we were also pleased with the underlying progress that we're making on our pro particularly around the T. S. All of program and two very important new initiatives that we launched in the quarter, which is every day pro pricing.
Which we are the feedback from pros it makes it easier for us to do business with as well as the proposal, but allows them to remotely work with us on the allows them to be much more efficient with that said there were a couple of events in the quarter of the leap year day was a big sales event for us a year ago and and impacted of the comparable.
Comps and then our largest sales of than was planned in February right in the middle of when the we had that major where the outlook kind of it wasn't just in Texas, the where all of the parts of the country.
Debt that had an impact and then obviously the inventory impacts of flowing forward. So the where a couple of events that were an anniversary from the year before the impact of the impact of the comps in the quarter I will say that we as you look at our strong customer deposits, which continued to build.
In the quarter and the the strong assessment demand that we're seeing in installed we believe on the demand side from the consumer debt the debt the home improvement appetite continues to be strong in the marketplace and so overall, we're positive on the quarter as we think about.
The longer term work that we're doing on transformation.
Got it that's very helpful.
The question I have with respect of tariffs you talked about the.
The tariffs impacted gross margins here in Q1 and disrupting the trend.
We're going to recognize you're not giving official guidance for the balance of you, but how should we think about just the impact of tariffs as we look through the balance of 2021.
Yeah. So a couple of things and maybe I'll have Nancy a comment the you know we anniversary those come the August timeframe, and we've really been working diligently on both our alternative country sourcing and the new pricing practice that really looks more strategically than the company has done historically at how we.
Rice to market. So I think the merchant teams have done a great job in the sourcing teams around the great job.
And you can see some of that in a per cent of revenue that we're shipping out of China.
And so you know we we will continue to work those issues as we work through the balance of this year and I'm pleased with the work the on the performance of the teams of delivering that and you can see some of that in the first quarter margin performance, but I'll ask Nancy if she wants to just chime in.
So I will add just a few points you know as we mentioned our gross margin was only down 80 basis points and we were partially offsetting the reinstatement of tariffs through pricing and promotion strategies, primarily into a lesser extent alternative country sourcing we're expecting the gross margin pressure from higher transportation and some of the raw material cost of the Charles just talked about.
And we're planning to continue to leverage those through the same strategies as we have been doing currently I will also point out debt. We showed in the Q that the percentage of goods sourced from China was the only 23 per cent in Q1 and that will fluctuate from quarter to quarter based on how we're balancing diversifying moving away from China.
Sourcing and optimizing the flexibility to navigate the supply chain disruptions as well as watch the trade negotiations that are taking place in Washington.
Very helpful. I appreciate all the color. Thank you.
Thanks, Brian.
Yeah.
Our next question is from Seth.
Basham with Wedbush Securities. Please proceed with your question.
A lot and good morning, My first questions of whether you can assess what the underlying demand or comp trend is right now relative to say 2019, and how you expect that to the progress going forward.
Hey, good morning debt.
Kind of speak specific to how we are going to project going forward. You know, we don't do that but as I said on the on the previous question. We see at least today, good continued strength and appetite for consumers on the home improvement and the willingness to even of constrained inventory.
And taking longer to fill their orders Fortunately, we have good visibility through our supply chain. So we can tell the customers one product is going to be available.
So we feel good about the strength of our customer deposits.
And with that being said, what we don't know is as the economy opens up as customers start to do things like vacationing or you know going back into the work force buying clothing is there an impact on an appetite to do home improvement projects, we think base.
On the housing market interest rates that.
That the this is going to continue.
Through the through the at least the back half of <unk> of this year, but again, we are cautiously watching how the consumer is going to react as we move through.
The vaccination levels and and folks changing after being in the homes for over a year.
Got it Okay and my second question is around gross margin lots of moving pieces here, but trying to think of that how much of pressure you guys might ex pats in the back half of year from everything from the type of transportation at your operation.
The offset by pricing et cetera.
The sales mix of pro sales mix.
All the categories sales of Mexican you would help us to put those things together and things of that how gross margin might trend.
Again, I'm not going to speak so much of the trending other than to say, we're continuing to expect you know pressure on the gross margin from everything that you've been hearing in the marketplace, which is pretty much impacting all industries and all culture of companies both the higher transportation costs from the raw material costs, and we're planning to leverage those true the.
Same pricing and promotion strategies that we've been using and as we continue the flexibility of sourcing our goods. You know there really is a lot of volatility out there. So it's very hard to factor in when that is going to abate and as Charles talked about you know what's going to happen with the demand afterwards.
In terms of all of our services margin, you'll remember Q2, and Q3 of last year, we had talked about when COVID-19 began that we had offered promotional pricing the deliberate that made it easier for customers during the COVID-19 crisis to be able to still shop with us.
In January of this year, we increased the delivery prices, but they still remain below pre COVID-19 levels. So you will see a slight difference in terms of the service margin ex U.
Looking through the Q.
I've forgotten what the rest of the questions are of Charles wanted to add anything else, but I can think of.
Picture it it's pretty much what we're considering more of a universal issue and we'll see.
How things turn out.
So Seth I would say a couple of things you know with the strong demand in the marketplace for home improvement. Unlike the lumber business I think when you look at the cost per square foot on the inflation side, which was your question.
We see the opportunity from a from a pricing perspective too.
Augment the margin headwind and I think on a on a cost per project basis that elasticity is not impacted that much by the amount of of cost increases the consumer's going to face across all of the flooring category.
Categories with the with the inflation flowing through and the.
The same thing with transportation you know we've been working on that for over six months in terms of offsetting a day.
Net inflationary impact on pro you know we've been working on a pro pricing for over a year of moving to every day pro pricing is really a very strong critical component of our value proposition and we've built that into our plans are as we went into 2021.
Alright very helpful color of just last follow up the next year I understand the dam of care around pricing do you feel like your pricing is as competitive or more competitive in the marketplace than it was a year ago and is there an opportunity given its really strong and the demand environment to take additional pricing to offset most of the gross margin headwind going forward.
Yes, so what I would say Seth is that we use you know new pricing tools to look competitively across the country to look at how we believe we should be price from a competitive standpoint, and we're very happy with our price positioning as a market leader.
And in the hard surface flooring space so.
That I believe the teams are doing a good job of both on the on the inflationary side as I just spoke to but also making sure the with very competitive particularly in per outlet with where we're pleased to be working at T. S. All of program and and we're getting good positive feedback both on the pro pricing and the web portal with launch of it really.
Excited about that work that the team of doing.
Michael Thank you very much.
Uh huh.
Yeah.
And as a reminder, if anyone has any questions you May press star one on your telephone keypad doing so ensure your spot in the question in the Asia Q.
Our next question is from Peter Keith with Piper Sandler. Please proceed with your question.
Hey, good morning, it's Bobby free near one for Peter Thanks for taking my questions first of all the background our gross sales.
So they're flat year over year for the second straight quarter of what we're seeing is holding back growth you're sort of it seems like pro customer sales in the industry are very strong not accelerating as consumers are in line, whereas back in their home and as you look forward with the improvements you're making around your pro online experience and customer service do you think you're now in the position to start day.
More of share.
Yeah the thing.
For for the question. Good morning, Yeah. So we've said the pro journey is a longer term relationship play.
And that frankly, just because we show up it doesn't mean, the pros will automatically change their buying behaviors, we have to those behaviors.
And changing behaviors and this T. S. A program that are proteins of working and we talked about the change in quality that we're seeing through that work now there's some headwind in public spaces.
And and as you know.
Particularly in things like retail, where those flooring project. So I'm just not in the market.
And we're even seeing in a in a small builder segment of build is delayed because of the overall cost of projects and are pushing those projects out. So theres. Some overall noise in the segments, but we're comfortable that the work the team of doing to create the relationships with those.
The pros who value what it is we do between our expertise of a high level of in stock a quality trend right assortment and our teams changing culturally on on how to build per our relationships moving from more of a DIY centric model. So the answer your question is I'm comfortable with the work the team of doing well.
Happy with the quality of the outcomes, we're seeing on per relationships and.
You know, we only just launched the this quarter of two very important components of our pro value proposition as you know pros want pricing every day to be from so that they can effectively quote the jobs to the customers not have to wait for us the decided to put something on the sale to make it relevant to them. So we feel very positive out of pro future.
And just one more of them.
Can you discuss some of the main trends youre seeing from of mixed standpoint is there any evidence that.
The strong housing backdrop in the U S consumer that consumers are asking for higher ASP proud of now.
Yeah. So that's a great question I would say.
From an overall mix perspective, when we think about labor in our business as well as product we feel really good about our installation business and the demand that we're seeing for a strong assessment so customers clearly open to.
The letting people back in the home I think as we've evolved and upgraded our assortments that team has done fantastic work in the solid domestic wood business on the engineered wood business yeah. The change in styles, absolutely, we're seeing our better and best products driving the demand.
And again, we were highly competitive against many of the independent space. So the extra wide boards extra.
Extra performance in the laminate category from a water resistant perspective, and obviously vinyl the the trend right assortment that we have today and the breadth of that assortment of playing into our premium segment is really helping us effectively drive the business. So I think customers are absolutely are taking the time to look at what that finish.
Product is going to look like and on the cost per square foot basis was so competitive in the premium segment, we're happy with the returns that we're seeing the.
Yeah.
Alright, Thanks, a lot.
Thanks.
And we have reached the end of the the question and answer session and I'll now turn the call over to Charles Tyson for closing remarks.
Alright. Thank you very much operator, we'd just like to first of all again, thank all of our team members for all of the support and hard work in executing our transformation strategy in the quarter. We'd also like to thank the support from all of the vendors, particularly in this supply chain constrained environment, where there.
Really working hard every day to meet the expectations of our customer was already happy with the first quarter performance and we look forward to talking to you all again at the end of second quarter. Thank you.
And this concludes today's conference and you may disconnect your lines of at this time.
You for your participation.
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