Q2 2021 Lumber Liquidators Holdings Inc Earnings Call
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Good morning, My Name's Armando for your conference operator today at this time I would like to welcome everyone to the lumber Liquidators second quarter 2021 conference.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question answer session. If you'd like to ask a question. During this time simply price.
The fall followed by 1 on your telephone keypad, if you would like to withdraw your question. Please press star followed by Chi. Thank you Mitch.
Julian the maiden head of Investor Relations you May begin your conference.
Thank you operator, good morning, everyone and thank you for joining us.
Today, I am joined by Charles Tyson, Our President and Chief Executive Officer, and Nancy Walsh, Our Chief Financial Officer.
As we begin let me reference with Safe Harbor provision 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 uncertainty including.
Including the future operating and financial performance of <unk>.
Well for them.
Although <unk> believes that the expectations reflected in its forward looking statements are reasonable it.
It can give no assurance that.
Such expectations for.
Or any of its forward looking statements.
We 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.
Are included in the <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.
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.
In addition, during today's call we will be discussing our financial performance on both a 1 and 2 year basis.
Given that the second quarter of last year was severely impacted by COVID-19 closures.
The information contained in this call is accurate only as of the date discussed investors should not assume that the statements will remain operative after today.
<unk> 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.
Today's call I will review, our strong second quarter results.
Which reflect the continued progress we're making on our 4 strategic pillars people and culture, improving the customer experience driving traffic and transactions and improving profitability.
I'd like to thank all of our associates are doing a tremendous job navigating a dynamic supply chain environment to deliver outstanding customer service and impressive second quarter financial results.
We delivered strong second quarter sales and profitability growth with comp sales of 31, 3% versus last year.
10% on a 2 year stack basis.
Our strong comp growth was driven both by increasing traction on our transformation initiatives as well as the reopening of the economy compared to the COVID-19 shutdowns and effect for much of the second quarter of last year.
We believe the second quarter sales could have been higher if not for the global supply chain disruptions because of having widespread interest.
Second quarter operating margin of 5.5 for sample was up 290 basis points versus the second quarter of last year and up 6.
100 basis points on a 2 year basis.
Underscoring the great work and execution of our merchants and sourcing teams to mitigate firepower of materials and transportation costs.
And the organization is disciplined expense management.
On the other adjusted basis operating margin of 5.6% increased 280 <unk>.
440 basis points, respectively versus the second quarter of 'twenty and 2019.
We were pleased to report diluted EPS of <unk> 41.
Which was up 32 flow through for 2020.
51 versus 2019.
Adjusted earnings per diluted share of <unk> 41.
It was up 31 from 2020.
38 versus 2019.
Nancy will go into more details on the financial results during her remarks, including what we have done to strengthen our balance sheet and paid down all of that debt.
Taking a closer look at what drove the attractive quarter sales.
We were pleased with the increasing traction we are seeing from our investments in improving the customer experience.
These investments helped grow our sales with pro install and DIY customers.
But pros.
Growing our business with pros is a key component of our long term growth strategy.
We primarily work with flooring focused programs such as Remodels proper.
Property managers install of builder of pros working in public spaces.
We were very pleased to report that our pro comp sales growth during the quarter exceeded total company comp sales growth on both the 1 and 2 year basis.
We attribute the performance in pro sales growth through a combination of execution on our strategic pillar of improving the customer experience as well as achieving more balanced growth across each of the types of pro customers, we serve due to the reopening the economy.
We continue to build on the foundational program, we launched in the third quarter of 2020 to create stronger relationships with pros.
Better understanding their business. So we can provide better service and support them as a true partner.
This relationship approach has been consistently reinforced for that field.
Beginning to drive meaningful results.
We were pleased with the results we're seeing from our dedicated outside pro account Rep pilot and we'll continue to monitor this program throughout 2021.
Building on that in early June we reconfigure the National account Rep program. So the inside sales reps are now better aligned geographically with the field are now focused on building relationships with the pros and driving incremental growth.
In March 2021, we introduced every day competitive pricing for pros and we allowed for us to expand that pricing for that customer for a referral program.
This pricing and referral program has delivered by our dedicated web experience, we launched for pros in April of 2021.
The online experience also against pros access to real time inventory levels at nearby store.
We've received very positive feedback on these 2 new important value drivers for free.
Rose and we're continuing to build awareness for these services.
We plan to continue to enhance the pro web experience with additional services in the months ahead.
We believe the combination of of how we align and focus our sales organization to better serve the pro combined with introducing new valuable services dedicated for the pro will help us build richer and deeper relationships and grow our business with these important customers.
In addition to our success with growth our second quarter results were driven by a 107% increase the net services sales, which are largely comprised of installation sales.
The increase of installation sales versus last year, primarily reflects the consumer's conflict with having professionals and for their homes compared for the savanna shutdowns due to COVID-19 in the second quarter of last year.
On a 2 year basis net service sales were up 10% demonstrating the benefit from our investments in improving the installation customer experience.
We believe offering our customers the complete solution from inspiration to installation is the core competitive advantage for us we.
We also delivery and in home installation services through select third party installers for customers, who purchased that pool.
We plan to grow our installation sales by attracting new customers and automating much of the installation of experience to improve both the customer experience and increase store productivity.
Of this automation started in the second quarter of 2020, when we launched an independent installer of portal using this tool installation partners and better manage schedules financial estimates and other work flow items.
Of this management tool has helped many of our installers successfully grow that business well beyond the original expectations.
Building on that in December 2020, we rolled out an in store portal to enhance visibility for our customers installation projects increased.
The efficiency for our store associates.
And reduce turnaround time for our customers when quoting new jobs.
We plan to continue to add capabilities to the in store portal to make it a seamless.
<unk> and easiest possible could conduct installation business with us.
We also grew sales for the DIY customers in the second quarter of losses last year.
Our strategy to grow business with DIY customers is to deliver of convenience superior implied touch guided shopping experience that is both affordable and accessible.
Buying flooring is a complex transaction, we provide an end to end solution that starts with helping customers select the floor itself for the underlayment of matching accessories, and finally for installation services to complete the project.
Transformation initiatives supporting our DIY growth strategy.
<unk>, improving the customer experience and driving traffic and transactions more specifically generating demand with the brand that represents quality of guided experience of the trend right assortment.
Making it easier for retail customers to the vessels without through engaging digital tools and educational online content and creating a more convenient and engaging in store customer experience.
In May we launched our new Lola brand campaign, which repositions the L flooring brands highlight our expertise.
And high quality trend right assortment the.
Campaign reinforces our dedication to guiding customers through the entire flooring journey with the tagline from inspiration to installations get the floors, you love only at L. L flooring.
In July we began the broad scale rebranding of our stores, which we expect to be largely completed by the end of 2021.
Our new rebranded store format includes both new store experience and interior signage that creates an appealing environment.
Which better showcases the quality of our products.
And the expertise of our people.
We also further enhance on trend design product portfolio with the launch of new innovative wide width and water resistant flooring.
During the second quarter vinyl plank and solid hardwood for again, our top performing categories.
We now offer more of the 500 flooring skus the customers can easily discover for our E Commerce site, Inc.
<unk> of completely virtual online experience for in our stores.
Our digital experience is an important part of bringing more customers into the flooring journey.
During the second quarter of web sales were down 32% versus the second quarter of last year when Covid shutdowns were at the peak.
Up over 140% on a 2 year stack basis.
Customers were very engaged with a picture of it and flow of climate tools, which make it easy to imagine how the floor will look in the hopes the.
We plan to continue to enhance our digital experience and drive traffic to our E Commerce site and store through effective digital marketing.
We're also making it more convenient to shop with us by expanding our store footprint.
During the second quarter, we opened 4 new stores, bringing our total store count to 416 at the end of June.
In addition to opening traditional stores, we are further enhancing customer convenience and reinforcing of allo flooring brand proposition by piloting a test of showroom only locations.
We have 3 locations scheduled to open during the second half of 2021, and convenient and attractive retail car doors, and we look forward to sharing more on the pilots on future calls.
Including the 3 show remote locations.
We are on track to open 12 to 15, new stores in 2021.
Turning to our people and culture initiatives building a strong company culture is critically important and provides the foundation for all of that we do for our customers.
We've embraced diversity equity and inclusion as a core value of.
The building a scalable program to ensure that these values permeate throughout the organization.
Including our recently completed diversity equity and inclusion workshops.
We are also investing in attracting and retaining the talent.
We're creating an attractive professional development of career path for our associates.
In order to establish <unk> flooring as an employer of choice.
This includes new learning and development programs that are helping our associates deliver both an outstanding customer experience as well as develop leadership skills that can take them for the next level within the company.
At the end of June we launched a new program to increase our investment in our field team, including increasing store staffing levels and rising wages.
We believe all of these actions are critical components of our goal of building a high performing company culture that attracts and retain top talent.
And reinforces our value.
As we look ahead, we are encouraged by the traction we're gaining on the each of our strategic pillars people and culture, improving the customer experience driving traffic and transactions and improving profitability.
We believe the pillows will enable us to win with customers and drive sustainable long term growth.
From a consumer demand perspective, we remain encouraged by potential multiyear tailwind supportive of consumer spending on hard surface flooring.
Traditionally existing home sales of being an important driver of flooring project in June the inventory of existing home sales for the sale was $1.25 million, representing a 2.6 month supply, which was a slight improvement from may.
We are monitoring type how the inventory kind of affordability on continued existing home sales.
That said the new more flexible work environment post COVID-19 may motivate more consumers to remodel of our existing homes, if they cannot move.
So we of ultra motor hang the positive work from home impact of flooring remodeling projects.
In addition, we are monitoring the potential impact of the shift in consumer spending patterns in the second half of 2021.
Since may of the use the same consumers shift spending from durable goods for services as they prioritize leisure activities.
The home improvement projects.
In addition, inflationary pressure could cause consumers to postpone big ticket projects until the affordability improves.
Finally recently the Delta bearing of COVID-19 has caused an increase in cases in the U S and abroad, and we're monitoring the potential impact of sales from suppliers as well as consumer demand and a willingness to have contracted in the loans.
Turning now to the supply chain during the second quarter. We believe we could have captured more sales.
Inventories have been higher.
Our supply chain teams continue to do a great job, bringing in new inventory and the allocating it effectively across the store to help our customers complete the flooring projects.
In addition, consistent with our strategy of being a leader in delivering a trend right assortment. We currently offer over 500, Skus and we will continue to introduce new and innovative products sourced from across the world to help satisfy demand.
We believe our high level of service <unk>.
Collection and expertise is a key competitive advantage that allows us to win with customers in this challenging supply chain environment.
We expect the supply chain for remain constrained for the foreseeable future potentially continuing to limit inventory availability and increased materials and transportation costs.
From an international perspective, some of our sourcing partners across southeast Asia have experienced temporary shutdowns due to COVID-19 outbreak, which limited production of delayed international shipping we.
We also continue to navigate general limited international container availability and higher container costs.
Domestically, we do not expect the solid domestic hardwood supply the normalized until 2022 at the earliest.
We also continue to see availability constraints on domestic trucking, which is impacting our transportation costs.
We will look to continue to mitigate higher materials and transportation costs through pricing and promotional strategies, while monitoring the market to inform and guide our decisions.
We will also continue to execute disciplined expense management, increasing efficiency and productivity, while investing in our strategic growth pillars.
In summary, we demonstrated strong sales from profitability improvement in the second quarter on both the 1 and 2 year basis underscoring the traction we're gaining on our transformation initiatives.
We're particularly pleased with pro sales growth outpacing our overall growth and we look forward to building on this momentum.
While the near term operating environment poses challenges, we believe that transformation strategy will position us well for the long term.
I want to thank for all of our associates for the energy and dedication in delivering an outstanding experience for our customers.
I will now turn the call over to Nancy the share the financial details of the quarter.
Nancy.
Thanks, Charles Good morning, everyone in the second quarter net sales of $301.4 million increased $71.1 million for 39% versus the second quarter of 2020 due to a 23, 6% increase in net merchandise sales and a 106, 8%.
<unk> and net service sales.
We saw a 29, 4% increase in our average ticket, reflecting a greater mix of installation sales as well as higher merchandise average ticket and of 2% increase in transaction count compared to the same period in 2020.
When comparing to the second quarter of 2019 net sales increased 4.4% driven by 3.5% higher merchandise sales and 10, 4% higher net service sales.
Average ticket improved 11, 3% and transactions were down 1.3%.
As Charles noted second quarter 2021 comparable store sales increased 31, 3% versus the second quarter of 2020, and 10% on a 2 year stack basis.
We achieved these strong results despite continued supply chain constraints.
We feel good about the underlying demand for our flooring based on our customer deposits and our teams are doing a great job managing customer expectations and inventory across our network to fulfill customer orders.
Turning now to gross profit.
Gross profit increased 27, 7% in the second quarter of 2021 to a $112.7 million from $88.3 million in the comparable period of 2020 and increased 10% from $102.5 million in the second quarter of 2019.
Gross margin of 37, 4% in the second quarter of 2021 compared to 38, 3% in the second quarter of 2020, and 35, 5% in the second quarter of 2019 and.
The 90 basis point decrease in gross margin versus last year, primarily reflects higher tariffs on certain goods imported from China, and higher materials, and inbound transportation costs, which were partially offset by pricing promotions and sourcing strategies.
The second quarter of 2021, and 2020 had no non-GAAP adjustments to gross margin during.
During the second quarter of 2019 gross margin included a $780000 favorable adjustment for HTS duty categorization in prior periods.
Excluding that adjustment gross margin was 35, 2% for the second quarter of 2019.
The 220 basis point improvement in the second quarter of 2021, adjusted gross margin versus 2019 is particularly impressive given that the cost of merchandise sold on certain products imported from China included 25% tariff rate in the second quarter of 2021 compared to only 10% in the second quarter of <unk>.
2019.
Turning now to SG&A SG&A expense for the second quarter was $96.1 million or 31, 9 percentage of sales leveraging 380 basis points compared to $82.3 million or <unk> 35, 7 percentage of sales in the second quarter of 2020.
SG&A expense for the second quarter of 2019 was $103.9 million or 36% of sales.
SG&A in each quarter included certain costs related to legal matters and settlements when excluding these items from all periods adjusted SG&A expense for the second quarter of 2021 with $95.8 million compared to $81.8 million in 2020, and $98.1 million in 2019.
The higher adjusted SG&A expense in 2021 compared to 2020 reflected substantial adjustments made last year to address the COVID-19 pandemic.
When compared to 2019, the lower SG&A expense reflected more efficient marketing spend and disciplined expense management under the Companys profit improvement initiative.
Even with the rigorous cost controls, we continue to invest in our growth initiatives to fuel our top line performance.
As a percentage of sales adjusted SG&A of 31, 8% improved 370 basis points from 35, 5% of sales in the second quarter of 2020, and improved 220 basis points from 34 percentage of sales in the second quarter of 2019.
For the second quarter of 2021, we delivered operating income of $16.6 million, an increase of $10.6 million compared to $6 million in the second quarter of 2020, and an operating loss of $1.4 million in the second quarter of 2019.
Adjusted operating income in the second quarter of 2021, the $16.9 million up $10.4 million from $6.5 million for the prior year period, and up $13.3 million from 2019.
Adjusted operating margin for the second quarter of 2021 of 5.6% up 280 basis points from 2.8% in the second quarter of 2020, and up 440 basis points from 1.2% in 2019.
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 and higher transportation and material costs, our marketing teams deploy more efficient and effective marketing spend and our overall organization driving disciplined expense management.
In the second quarter of 2021 reported other expenses of 498000 compared to other expense of $1.1 million for the 3 months ended June 32020.
The decrease of $600000 was driven by lower interest and fees on our credit agreement due to the amendment in April 2021, and the paying down of our outstanding debt during the second quarter of 2021.
In the second quarter of 2021, we recognized income tax expense of $4.1 million or an effective tax rate of 25, 6% compared to income tax expense of $2.2 million.
Or an effective tax rate of 45, 7% for the second quarter of 2020 the.
The variability of our tax rate in 2020 reflects the impact of the cares Act last year.
For the second quarter of 2021, net income increased by $9.4 million to $12 million compared to net income of $2.6 million for the second quarter of 2020.
We reported a net loss of $2.9 million in 2019.
Adjusted earnings for the second quarter of 2021 were $12.2 million compared to adjusted earnings of $3 million for the second quarter of 2020 and $820000 in 2019.
Finally earnings per diluted share were <unk> 41 for the quarter versus earnings per diluted share of <unk> in the year ago quarter, and a loss of <unk> in 2019.
On an adjusted basis second quarter earnings per diluted share of <unk> 41.
Compared to adjusted earnings of <unk> 10 for the second quarter of 2020, and adjusted earnings of <unk> <unk> in 2019.
Turning to the balance sheet.
Inventory at the end of the second quarter was $224 million compared to $225 million at the end of March 2021, and $249 million at the end of June 2020.
The 10% year over year reduction in inventory was primarily driven by supply chain constraints on 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 $112 million compared to $170 million as of December 2020.
During the second quarter, we repaid all $101 million of our outstanding credit facility debt consistent with the plans we shared on our last call.
Net cash provided by operating activities was $53 million for the 6 months ended June 32021, primarily due to positive changes in working capital, reflecting continued inventory supply constraints as well as $23 million of net income.
We continue to work toward rebuilding our inventory to optimal levels as we are able to do so we would expect that to have an unfavorable impact on working capital and cash provided by operating activities.
As of June 32021, we had $241 million of liquidity comprised of $112 million of cash and cash equivalents and $129 million of excess availability under the credit agreement. This represents an increase in liquidity of $55 million from June 32020.
Turning now to the remainder of 2021 in the face of the dynamic operating environment. Our team remains dedicated to our transformation driving growth and improving profitability.
I would like to expand on some of the details of the Charles touched on at a high level.
We are pleased with the traction we are gaining on our transformation initiatives that said given the combination of increasingly challenging supply chain constraints on inventory replenishment potential consumer demand shifts and the potential impact of the COVID-19 Delta variant. We believe it is prudent to plan for slowing comparable sales on the 2 year stack basis for.
The second half of 2021 compared to the 10% we delivered in the second quarter.
We remain concerned that higher transportation of material costs will persist in the second half and we look to offset higher costs through pricing and promotion strategies, while monitoring the market to inform and guide our decision.
As we saw in the second quarter, 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 lower of the gross margin rate.
With respect to SG&A during the second half of 2021, we would expect adjusted SG&A spending to increase as a percentage of sales compared to the second quarter.
This is due primarily to the increasing investments in our field organization of Charles discussed as well as continued investment in our strategic initiatives to support our growth over the long term.
We still expect Capex investments of approximately $24 million for $28 million in 2021, primarily for the broad scale rebranding of our stores. The opening up of 12 to 15, new stores and investments in digital.
During the second quarter, we opened 4 new stores and.
In April we opened our Exton, Pennsylvania store in May we opened a new store in Medford, New York and in June we opened new stores in Hattiesburg, Mississippi, and Beckley West Virginia.
The new stores have the L. O flooring branding and we are excited about the opportunity to drive additional sales and profitability growth through the new location.
In summary, we delivered strong sales growth and profitability in the second quarter on both the 1 and 2 year basis, demonstrating solid progress on our transformation initiatives.
Our entire organization remains focused on driving growth and profitability in 2021, and our strong balance sheet and liquidity provide us with the financial flexibility to fund our strategic 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 to questions.
[noise] [noise] [noise]. Thank you at this time I would like to remind everyone in order to ask a question.
Okay.
Slide by 1 on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Our first question today comes from.
Laura Champine from loop capital markets.
Please go ahead your line is my wife and.
Great. Thanks for taking my question.
You mentioned that the increasing penetration of installation negatively impacts gross margin, which is not a surprise, but can you tell us how much that increase in installation impacted gross margin in Q2, and give us sort of a sense of the shape of the impacts as we move through the year.
Hi, Walter Good morning, how are you.
We have not shared a specific details around that what I will tell you, though is that the mix of our merchandise more than offset the installation increase for us so as a factor within the gross margin ahead of very minor impact in terms of the installation sales.
Okay should we expect the same in in the near term future quarters.
It would be consistent we are expecting installation sales to return to pre COVID-19 levels and we do as you saw in the Q are mixed between hardwood and vinyl that's really driving the increase for us in terms of the mix. So I would expect that to continue going forward.
Got it thank you.
Sure.
Our next question today comes from Seth Basham from Wedbush Securities of SaaS. Please go ahead. Your line is now.
Thanks, a lot of land and good morning.
Focus on the transaction trends that youre seeing it seems like relative to 2019 transactions were down in the second quarter.
I presume that is due to some of the limitations around supply chain for as you think about that line going forward. What do you expect transactions to begin to improve versus 2019 in the back half of the year and any other color around that would be helpful.
Good morning, Seth.
I'll start with 2021st that we did see that 29% increase in traffic and ticket and of 2% increase in transaction.
When we look at 2019, the tickets up about 11% and our transactions were down 1.3, and we do believe that the lower than optimal inventory is impacting our transaction, but based on the strength of our customer deposits. We feel really good about the underlying demand for our product.
So the customer deposits were flat ish in the second quarter relative to the first.
You have a balance of work those down any more quickly.
Look forward would you expect the cost for deposits to come in by the.
End of the third quarter, how you're thinking about that.
You know the timing Seth is as you would expect with what the supply chain situation looks like now it's really uncertain, but we're really pleased with what our teams have been doing to get inventory in and to continue to settle our customer deposits and we feel the strength of that and if you look at the Q you see the amount coming in as well as the amount that we're settling.
The consistent keeping that balance of pretty flat.
We also believe that repositioning the brand halo of flooring that we're attracting customers who value our expert service and quality of trend assortment and all of that is adding to that we feel good about the fact that.
Overall, we're going to continue to see inventory starting to improve as time goes on and settling those customer orders, but we were in a good position right now.
Yeah.
Are you seeing a higher rate of cancellations of orders because of delays in the mail to complete them.
No absolutely not.
I will turn out of the world.
Charles.
Okay, and then last 1 just thinking about bad debt the demand versus supply picture for the back half of the year momentum some headwinds.
Demand environment, including a shift of lack of services funding inflation.
It's really the Covid thorium.
We're thinking about those drivers which are the biggest ones that you can go in at the sales growth come back off and drive comps to be lower the pumps from the dose.
Mrs.
Yes look I think Thats a great question and I think everybody is asking themselves that question I think the issue of Seth I was just a lot of volatility right.
And nobody really knows where COVID-19 is going to land in terms of impact to consumers as we go into the fall.
We're going to watch all of those drivers.
In terms of potential headwinds as we continue to invest in our growth initiatives.
The drove drove our outcomes in Q2, so while we're being cautious on the road ahead in terms of those headwinds that you mentioned.
Also of being positive in terms of the investments that we've made in our initiatives earlier in the year and how we see the positive impact of those initiatives flowing through and we we clearly highlighted the positive benefit we're seeing from a protein or really doing good work in the field very happy with the execution from our field operators around us.
For the value proposition.
Yeah.
Thank you.
Thanks, Sean.
Just as a reminder, we take our next question. If he was shocked the question you can do so by pressing star followed by 1 of your kind of thing keypad.
Our next question comes from Brian Nagel from Oppenheimer.
Brian. Please go ahead your line is now items.
Alright, good morning.
Good morning, Brian a couple of questions good morning.
So you wanted to ask for.
To discuss more about the logistics environment today.
What your expectations for the duration of constraint to remain for the foreseeable future and how we should think about your inability of the inventory in light of the.
For the latter part of the year.
Yes look that's of Great question I think we were lucky the.
The teams did a great job 1 of the Lucky teams did a great job of of going into the market on the international freight side and really doing a lot of good work in terms of for costing around by country and region.
As you can read.
Publications and expect the supply chain constraint from a container availability perspective, and the cost environment.
Continue in the near future.
But the continues into 2022 Budd.
It is constrained from a container perspective.
And it is constraining from a from a cost environment perspective outside of core contracts.
That doesn't prevent us from really accelerating how we think about expanding our assortments as we said on the call. We now have 500 skus of allows for a lot of of.
A lot of ability for our teams to substitute between product.
Categories.
And we're also leveraging.
Great of areas around the globe for new product and we will continue to.
And introduce new product because we go through Q3, and Q4 of them or we feel very good about strategic partnerships with vendors that are bringing those new products. So it is the constrained environment, but our teams are doing great work in terms of how we think about alternative country sourcing to be offset with some of those headwinds may arise going into the future.
In terms of inventory, we plan to continue to.
Build our inventories as we move through the year to return to more normal levels. We're just being cautious just based on some of the unknowns in terms of specific Inc. Third.
Covid could have particularly as you saw a month or so ago major.
The distribution out of Asia, particularly in the Hong Kong area or what.
Frank didn't move for a few days because of Covid shutdowns in the port of none of US can control that so we just highlighted that as of as a potential headwind for the industry as we move for Covid through the rest of the ship.
Okay. Thank you the.
That's very helpful.
And the good segue for my next question, which is we can start keep per.
And you talked about tariffs impacting gross margin earlier.
Uh huh.
Again, I recognize youre not going to give official guidance for the back of the year.
But how should we think about like the impact of a pair.
Of those through the balance of <unk> and over time.
The COVID-19 disruption debate.
Yes, so I think a couple of things I would say the 1 the <unk>.
95 per cent tariffs came back on in August of 2020, so over the time of the inventory we will be fully anniversarying that as we move through.
Q3 and Q4.
Second as you can see from our Q.
Amount of product that we are purchasing from China, where the tariffs of Ron has come down.
Pretty dramatically and so our merchant teams are doing really good work on 2 fronts, 1 alternative country sourcing, which we've talked about of law in the past. The second we're spending a lot of time on product development and innovation, we believe that that new product positioning will also help us.
Offsetting some of that margin headwind that's flowing through.
We talked probably 9 months ago about how we've initiated a pricing practice, we now have a very sophisticated pricing tools that is helping us be a lot more focused and targeted in both.
Everyday pricing and promotional pricing to allow us to mix a bit.
Appropriately and <unk>.
Finally for all of this with most of them actually at the launch every day pro pricing, which we have instead of going to have a headwind on our margin structure and has really helped us all of them into a pro value proposition So wild.
Clearly the volatile environment, whether it's raw material the tariffs are the 2.
Teams are doing just a fantastic job on looking at how to innovate how to use the new tools that we've put in capability to manage through in the gross margin environment.
Okay. Thank you I appreciate the color.
Thanks, Paul.
Just as the final reminder, if you'd like to ask a question you can do say bypassing line.
The 1 on your telephone keypad now.
Yeah.
There are no further questions at this time, so I'll hand back for you for Tyson.
I'll hand, the call back of the tea.
Thank you operator, and thanks, everyone for joining us today I want to reiterate our excitement around the progress we're making on our transformation initiative and that's going to position us well for the long term success of our company. Our teams are intently focused on executing our growth strategies to drive sales and profitability in the psyche of.
The 2021 wishing everyone good health and safety and we look forward to updating you on our performance next quarter. Thank you.
Okay.
This concludes today's conference call you may now disconnect.
Yeah.