Q2 2019 Earnings Call
First name.
Conversion and checkout speed, we do think we probably had an impact with some of our pro customers with our speed back in our stores.
It's a leg and we believe some of the traffic declines related to that but we're also focusing on a segment of our customer that.
We believe we can do a better job going after and that'd be that mid level mid range customer whose job is usually.
Thousand to $3000 in total sales.
We're currently testing different marketing strategies to go after that customer base with different content different pricing strategies digital content.
And that's where you see a little bit of increased media spend we know we've got a good strong hold around what we need to do with pro now were going after that medium level customer and I think thats going to help us pick up our traffic declines here in the back half of 2019.
Okay, and then and then kind of a different angle question, my last and I'll jump back, but obviously a lot of incremental investments over the last 12 to 18 months.
Not seeing return at this point at what point would you rather than kind of shifting or tweaking strategies say.
Now some of these initiatives some of these mid level managers incremental costs that we put on just aren't generating the return it and look at more cost reduction mode.
If you know.
The you don't continue to not see the return you expected.
Yeah, absolutely Dan as.
Judicial leader here I've got to make sure that we're always looking at our expense structure and we constantly are looking at what's working what's not and theres already been things that have taken place to make sure that we are financially responsible with these initial investments to make sure we get the most out of them without.
Leaving them are abandoning them, but making sure that we give him the best opportunity to.
Provide profits and so we look at every day and we take action every week. So we're already looking at that Dan.
All right I'll jump back thank you.
Thank you. Our next question is from Peter Keith from Piper Jaffray. Your line is now open.
Hi, Thanks, good morning, everyone.
I wanted to follow up on.
That last question, but maybe drill down specifically into the decision a year ago to pull pricing from your website.
You talked about challenges now with the mid size moderately affluent customer.
So to me, it's it's quite clear that the customer perhaps is intimidated by the lack of pricing and maybe isn't making the trip to the store.
Maybe I'm wrong, but is there a view that.
You need to wait till end of year or some type of timeframe when when that decision to pull pricing from the web is reevaluated.
Hey businesses Kabi, yes.
We are actively testing pricing on the website right now I don't know where you are in the country, but if you log in uncertain markets, we do have pricing online as of today.
So we're testing all different types of.
Digital means to drive traffic and convert that customer that's going from our website to get in our stores. So absolutely.
Okay.
And then I I wanted just to drill down to the Q1 to Q2 dynamic.
Last quarter, we spent a lot of time talking about the ERP challenges and and weather challenges.
And so now with Q2 you come in at relatively the same level.
Could you parse apart.
Perhaps maybe whats internal that's impacting you versus macro and do you believe that that the macro backdrop for your space slowed in the recent months.
Good morning, Peter Yeah, as always it's hard to.
Quantify all these things specifically, but.
I think the main thing is what kabi just talked about in the queue in a here and in prepared remarks, it's really just.
Soft traffic.
We do feel like we've improved our systems as we talked about in prepared remarks, and obviously, we're talking to people every single day throughout the day in various markets and stores and.
Making sure that there's anything we can do to further improve.
Our systems, whether it's speed or or any other type of functionality, we're doing that but we feel like we've made a lot of progress on that.
And I think we also feel good you know about retail customer satisfaction scores the customers who are in our stores.
Our our pretty happy customers were back to all time highs and so we feel like we're serving the customers.
Who are aware that we're here in our in our stores at a at a pretty high level and nothing with.
Systems or other things were doing internally is preventing us from doing that the main challenge is just getting more customers into the stores and.
No. It will acknowledge that we've always talked about existing home sales being a key metric for us and thats that metric in existing home sales year over year. The growth has been down for quite some time now and I don't think thats been helpful.
But at the same time, we've made so many investments we needed.
We need to overcome that we need to look for ways to start growing our sales and the key thing there is growing our traffic and we're going to work on a variety of different things to help us try to do that here in the coming months.
Okay, and then one last follow up just on the topic of trying to.
Again assess sort of the Q1 to Q2 trend.
Last quarter, you talked about.
20% increase in that order book, some delays of whether that perhaps shifted sales out of Q1 into Q2.
Now that those two quarters are complete can you can you quantify what you think that sales shift was between the quarters.
It was pretty modest Peter.
Are we tend to turn our orders over two times a month and so the elevated order bank. It then April Im sorry with end of March.
Once closed out in April we're now back to more normal levels levels for our open order bank, but it had a pretty.
Modest positive impact in April .
Okay. Thank you very much guys appreciate it.
Thank you. Our next question is from Anthony Chukumba from loop capital markets. Your line is now open.
Good morning, Thanks for taking my question.
Dig a little bit more into the issue with the pros.
Because it sounds like that.
It sounds like that hasn't necessarily abated, I guess I'm, just what I'm trying to figure out is.
If the pros are not going to you.
Where are they going and what do you need to do to win those pros back. Thank you.
Yes, thanks for the question Anthony.
We have our finger on the pulse of the pro.
Pretty tight right now we have daily communications with our pro market managers, who worked through different means of of data and communication strategies such as.
Our sales force functionality attrition reports and so we monitor the communications and what we're hearing is more so it was a shift in business for them as well we were hearing that pro slowed down a little bit but are picking back up. So we are happy to hear that.
We're expecting that to to roll into our stores, but with with pros, it's getting the message out there.
More clear about our pro rewards.
Benefit package and so we're seeing an uptick in people converting into our rewards program and it's getting our stores more.
To the cadence of exactly how you presented and so the pros that are rolling into this program, we're seeing more spend out of them. So we're going to continue to hyper focused on our rewards program working with our pro market managers, given the tools necessary because when we rolled out our ERP in Q1, we lost some of our some of our tools that we had for our pro market managers that they did not get back until Q2. So we're hoping that these tools that are running at high speed right now are going to help us bring more of the pros into our stores.
Got it that's helpful and just on the pro Pro rewards program can you just.
Give us.
Provide just.
Overview of some of the benefits to kind of at a high level for the pro.
Absolutely so there's different tiers gold platinum diamond and they get different discount depending on their spend and also other benefits that are included are sometimes free shipping.
So you're going to have a referral program. So they get a certain amount backing and cash if they have referrals that come into our stores that we now track.
So there's a lot of different things, where they can have direct communication with the pro market manager in their area.
Delivery like I said discounts.
And then referral cashback rewards as well.
That's helpful. Thank you.
Thank you. Our next question is from Joseph Feldman from Telsey. Please your line is now open.
Hi, guys. Thanks for taking the question. So I wanted to ask Terry you mentioned quite a few times, you're working on getting the message out there to the pro and even the consumer to just change the value perception can you give us a little more.
Or at least me better understanding of what that means I mean is it email marketing is it TV is it media should we see a big step up in advertising like how.
I guess I'm trying to get more at the tactics, how you're trying to get that message out there.
Sure Joe I appreciate the question.
You did see an increase in our media spend and what we're doing is testing a lot of different metrics. When it comes to content, what we're showing on the website. What we're delivering in emails. We are trying new benefits when it comes to our in store events. We've created our own Cu course, directed just for pros to come in and get actual credits, we don't have to use.
For instance in EPS I'd, we can give people credits by coming to our courses.
Partnering with all the different associations, the NK BA NTC a.
Tc anyway.
Yes, I'd and were working really close directly with the heads of these organizations to promote the value of doing business with the tile shop, because we support them they support us and in the long we continue to work with different suppliers, such as we'd be in hosting events and a lot of our stores as well and that channel, but what it comes down to is you got to test test test were not testing, we're not doing our job. So we're seeing a different shift with different tests in different markets and how do we capitalize on this so we're going to continue to test.
Am I.
The digital landscape for pros today is really transformed in the last 12 months about how they interact with with different brands and so.
You will see some different things on our web site and in our E mails to get them to trigger to do business with us.
Got it. Thank you and then I guess more broadly speaking you know I know, obviously, you guys had some pressure but.
Was this do you think some of this is industry wide are you know, obviously home sales or have been challenged.
But where is this like is the industry. When you look at industry sales are they up are they down a little bit or how would you view that.
Well Joel currently.
From what I view I monitor all of our competitors and I've seen some very heavy promotional activity going to the flooring sector I'm seeing.
Larger discounts sales free shipping more so than I've seen in previous years. So I believe it is an industry.
Issue right now.
And if I could just sneak one more in I wanted to ask him.
With China I understand you guys continue to shift supply away from there were.
Do you have a target in mind for 2019, if you were at 42% last year like should we see like mid Thirtys low thirtys for this year.
How should we think about that.
Well I don't like to give you a specific number we definitely want to get significantly lower than 43% were actively.
Doing that so we're going to continue to diversify our supply chain, we have great relationships all over the world and so I think this is an opportune time to do this and to capitalize on whats available outside of Asia.
Got it okay. Thanks, guys. Good luck with this quarter.
Thank you and show.
Thank you as a reminder, ladies and gentlemen, if you have a question. Please press. The Star then the number one key on your Touchtone telephone and our next question is from Justin Kleber from Baird. Your line is now open.
Yes, Hey, guys, it's Justin Klaver, thanks for taking the questions here.
Wanted to start on on the top line last quarter.
You mentioned the significant regional disparity.
And your sales performance with many stores in the south Comping positive, but curious how that regional spread look this quarter, particularly as weather.
I don't think should have been much of an issue into Q and then maybe as a part of that question just any color on the cadence of sales.
Throughout the quarter that stood out.
Sure just some thank you you know, it's it's kind of the same landscape, we have some markets comping and some not I mean, it's it's kind of all over the place right now.
We obviously focus on the ones that are struggling with our different media strategies and testing and watching that very closely.
But we don't really comment on the cadence of where we are currently so I'll leave it at that.
Okay and then.
I mean is there any color you guys can share with us just in terms of how you're thinking about the back half of the year I know, you're not providing specific guidance, but the comparisons get more difficult.
I mean is it reasonable to think comps actually get a bit weaker here in the near term or.
Do you expect some of these marketing.
Investments to just start to generate some payback for you.
Hey, Justin Good morning, It's a fair question, but I think it's very difficult for us to predict that and as you said, we're not we're not offering topline guidance.
At the moment and the key is religious traffic it really is.
I think.
We clearly need to start seeing a return here on the investments.
If you know if there is a little.
Industry softness due to existing home sales or whatever metric, we need to look for ways to overcome that and and that's what we're doing so we're doing a variety of things to try to increase traffic and that really is our primary focus and hopefully we'll be able to see a little improvement here as we move through the rest of the year.
Okay. Thanks Kirk.
Another question here on.
Gross margin expectations now that tariffs are at 25% do you still feel comfortable.
And the ability to maintain.
Around the 70% margin rate.
And then maybe any color you could share on what type of unity elasticity you guys have seen as I've seen you you've been raising some retail prices.
On products that have been hit with her.
Yeah.
Certainly I can again offer some points there Justin on that we continue to feel good about all the sourcing work that we've done and again as we've talked about with everybody. It's not something that just got started.
The latter part of last year, it's it's really been a a two year effort in journey and.
As can be talked about in his prepared remarks and diversification of our sourcing has a lot of benefits and.
Even with increased tariffs in China before that as Weve talked about many times costs have been going up in a variety of different costs, including labor costs and.
Freights always been expensive coming out of China. So there's just too many reasons to to do to diversify and and.
We do feel like we're we're in the latter stages of that effort and we continue to feel good about the diversification strategy that we deployed and and feel like it should insulate us from.
From all the changes that are that are happening with trade.
I think that.
Really the opportunity for us and again I. We we noted this in our prepared remarks.
Is to let customers know that we have a variety of high quality products at all different price points, we need to do a better job of of.
Educating our perspective retail customers and frankly, even some of our pros.
That we really do have a pretty nice set of good better and best price points to serve all customers both retail.
And pro and I think that's that's really going to consume most of our attention is getting the message out on that and hopefully hopefully we can do a better job of that here in the next couple of months and start to drive traffic.
Right that makes sense. Thanks for all the color guys best of luck guys in the back half of the year.
Thank you. Our next question is from Daniel Moore from CJS Securities. Your line is now fan.
Thank you again, just wanted to to maybe parse out a little bit more.
If you mentioned, Kevin you've got kind of stores Comping all over the board, presumably there is some stores or locations that are down you know, they're well below that 4% maybe closer to double digits any common denominators within sort of the the the regionally or the store base. That's may be performing at the lower end of that range.
And.
Any.
Thoughts around consolidation, a shrinkage closures et cetera.
Yeah, Dan Thank you.
You know what I've noticed in the trend is really the tenure of the market in some in most cases, not all cases, but when you have a longer tenured market you have longer tenured relationships with pros.
And so and I say, hey, there's some new markets that are performing great as well, but what you see is tenured markets, who have had a lot more pros who have a lot more history with us seem to weather the storm with traffic a little bit better than most.
And the only other comment I'll add to Cabbies point there Dan is just.
As we talked about on the April call. It was really the first time in the last five years at least that I can recall that you saw such a pronounced.
Difference between our southern store markets like we talked about on the call and upper Midwest and northeast. This this last 90 days. It's just as Cabbages said, it's just been more sort of up and down it's been.
You know a lot more varied like it usually is and obviously weve.
The negative four comp we've got more markets that are comping negative than we have markets that are comping positive but.
We certainly do have markets that are doing quite well and I I think caddy makes a great point those markets a lot of them tend to be more mature markets not all of the mature markets, but more mature markets, where we have a little bit higher pro mix and.
Perhaps deeper relationships with some of our customers.
Got it last for me and I'll jump in and I'll wrap up its capital allocation.
Obviously.
Declared dividends bought back about $10 million worth the stock.
Yeah that ticked up a little bit higher.
Sequentially, what's your comfort level.
With.
Debt can you continuing to move moderately higher.
Over the next couple of quarters, if we stay around sort of breakeven.
You know pre dividend.
Yeah, Dan <unk> capital structure is always something we just continue to evaluate on a quarterly basis with our board.
I think it's fair to say in the back half the year. Our main focus is going to be.
Increasing traffic and sales and hopefully pan down a little debt as well.
Okay. The expectation at least would be to be you know.
Solidly free cash flow positive and maybe pay down a little debt in the back half.
That's our goal you'll see capex come down pretty substantially from our run rate over the last four quarters. So so that'll that'll help for sure.
But then you know then it's just a function after that of.
Top line, which is really a function of traffic and our ability to increase traffic.
Got it understood appreciate the color.
Thank you. Our next question is from Peter Keith from Piper Jaffray. Your line is now open.
Oh, Thanks again guys.
I did want to get a question around the anti dumping and countervailing duty investigation for ceramic tile imported from China. If you could give us some updated thoughts there and.
Maybe some of the potential implications that could hit you get by the end of this year early next year.
If.
There's a final ruling on on anti dumping.
Hey, Peter Great question I thought this would come up yes anti dumping.
Is on ceramic tile.
Out of China, and we've we've been we've known about it we've actively been reacting to it.
Yes, we've placed the orders we need to place to avoid any such a ruling when it goes in probably in November but we're like I said before we have a lot of different suppliers and new suppliers all over the world that.
Quite honestly have favorable shipping of in freight rates.
And different structure set up when it comes to burden and duty that we're going to be able to hopefully avoid any and all of this I can't say that for sure, but that's where we're at right now we're trending in the right way and when it comes to our supply chain and avoiding any of that.
Anti dumping that may or probably will happen in November .
Thanks, Kevin you talked about that you have orders in place is does that mean, you're you've already.
Have orders in place in other countries outside of China.
That you can.
It had implemented before November .
Well, you always want to be.
Responsible when it comes to looking at when does anything hit you, meaning is it when it leaves the country when Atlanta, your DC, whereas the product coming from so what what I meant by that was if we need anything out of China to make sure. We're well supplied we're making sure. Those orders are in so we don't get hit with any anti dumping if we're resourcing to another country, we're making the right moves to make sure we have what we need in our stores at the right time.
Okay, I understand and lastly on this topic.
I'm certainly not an expert in the subject but.
It does seem like a time series look back periods 60 to 90 days.
So as you point out with maybe final determination around November is there any risk of a look back period that could impact that some of your direct imports from September October as well.
Peter I think its really difficult to predict that.
Obviously in the main thing we're trying to do in addition to what Kabi said is also again just diversify and.
And change our sourcing so that our replenishment going forward will be coming from other countries.
Most of it for ceramic tile and it's not something that again, we just started a few months ago. It's something we've been actively working on for nearly two years now so we're.
Were you know.
You can always be in a better position, but I think we havent been caught flat footed and.
We've been working on a very hard for quite some time so.
As as things play out and things get finalized we will certainly offer.
Additional commentary, but right now it's not it's not completely clear as you acknowledged in your question.
Okay. Thanks, a lot guys appreciate all the color.
Yes.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Mark Davis for closing remarks.
Thanks for listening to our earnings conference call, we look forward to providing our next update in October . Thank you for your interest in the tile shop and have a great day.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program you may now disconnect.