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Lumber Liquidators Holdings (NYSE:LL)

Q1 2013 Earnings Call

April 24, 2013 10:00 am ET

Executives

Ashleigh McDermott

Robert M. Lynch - Chief Executive Officer, President, Director, Chief Executive Officer of Lumber Liquidators, Inc and President of Lumber Liquidators, Inc

Daniel E. Terrell - Chief Financial Officer and Principal Accounting Officer

Analysts

Gary Balter - Crédit Suisse AG, Research Division

Peter J. Keith - Piper Jaffray Companies, Research Division

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Zoran Miling - Longbow Research LLC

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Matthew McGinley - ISI Group Inc., Research Division

Laura A. Champine - Canaccord Genuity, Research Division

Joe Edelstein - Stephens Inc., Research Division

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

Operator

Good morning, ladies and gentlemen. Welcome to the Lumber Liquidators' First Quarter Earnings Call. With us today from Lumber Liquidators is Mr. Rob Lynch, President and CEO; Mr. Dan Terrell, CFO; and Ms. Ashleigh McDermott, Director of Financial Reporting.

As a reminder, ladies and gentlemen, this conference call is being recorded and may not be reproduced in whole or in part without permission from the company.

I would now like to introduce Ms. McDermott. Please go ahead.

Ashleigh McDermott

Thank you. Good morning, everyone, and thank you for joining us today. Before we begin, let me take a moment to reference the Safe Harbor provisions of the United States Security Laws for forward-looking statements.

This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating financial performance of Lumber Liquidators. Although Lumber Liquidators 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 Lumber Liquidators' filings with the SEC.

The information contained in the call is accurate only as of the date discussed. Investors should not assume that the statements will remain operative at a later date. Lastly, Lumber Liquidators undertakes no obligation to update any information discussed in this call.

Now I'm pleased to introduce Mr. Rob Lynch, President and CEO. Rob?

Robert M. Lynch

Thank you, Ashleigh, and good morning, everyone. I'm here with Dan Terrell, our CFO, and we are pleased to be speaking with you about our first quarter results which have 2013 off to strong start.

On our last earnings call, I spoke of solid foundation we had established in 2012 and the strength of our world-class team. I also noted that we had implemented key strategic initiatives to drive our top line, expand gross margin and leverage our investments with the goal to deliver sustainable increases in our operating margin for years to come. Our first quarter results reflect the continuing benefit of those efforts.

Within our first quarter results, I am most pleased that our strategic initiatives are integrated and working together, creating a cumulative benefit across the sales cycle and the business. While it sounds simple, it reflects the benefits of our focused efforts over the past year and is very exciting.

We believe that our value proposition is reaching more consumers interested in the hard surface flooring purchase as we broaden our advertising reach and frequency. Those customers select from our industry-best combination of assortment, quality, pricing and availability due to the efforts of our merchandising team and the strength of our direct sourcing relationships with our mills. The customer is then assisted by an expert sales force and support system, which have never been stronger due to our best-people initiatives.

We emphasize a complete ticket to satisfy the customers' needs from the flooring to the moldings, accessories and tools needed to install and maintain the floor. Finally, our products are delivered in a more timely, accurate and efficient manner due to our efforts to optimize our supply chain.

Successful implementation of any one of these initiatives will drive sales or grow operating margin but, working together, we believe they create a compounding benefit that we are seeing in our results. Our team is more passionate and energized than ever and is operating with a unified vision that we believe will allow us to realize the significant opportunity that lie ahead.

Further building on the solid foundation we've established across our organization, we also completed the rollout of our first stores in our store of the future design. Through March 31, we had opened 5 new stores in this enhanced format featuring a larger showroom and an expanded merchandise assortment. Additionally, we successfully remodeled 6 existing stores, including the relocation of 4 stores within their primary trade areas. While it's still early, we are pleased with the performance of these 11 stores and the group is providing us a valuable information on customer acceptance, conversion and operating efficiency.

Now turning to our results. Net sales for the first quarter of 2013 increased 22.5% to over $230 million. And comparable store net sales increased 15.2%, representing the largest quarterly increase since the second quarter of 2006. The power of our selling initiatives is clearly visible when looking at the drivers of comp sales with an equal contribution from increased traffic and higher ticket. We believe we are now reaching a more casual customer in addition to our core DIY-er and our message is resonating with both.

Our expert store sales teams, supported by our value proposition and equipped with improved selling strategies, is turning that interest into a more complete sale through greater conversion to premium products and the attachment of moldings and accessories to complete the ticket.

While stores across our comp base are performing very well, I want to note that there are a number of stores in the Northeast which we believe are benefiting from the recovery efforts from Hurricane Sandy. Dan will provide more detail around the estimated sales contribution but, more importantly, we are very pleased to be a long-term part of these communities and play a role in helping to rebuild our customers' homes.

Our gross margin improved 310 basis points to a record 40.4%, driven by a number of cross-functional strategic initiatives that we have been working on over time. These initiatives rely on both the strength of our team and our direct sourcing relationships with our mills. And we believe most if not all will yield cumulative multiyear benefits. We would not have achieved the level of performance in the first quarter that we did without our focus on continuous improvement, which, when combined with our initiatives to expand gross margin, drove operating margin up nearly 400 basis points to 11%. As a result, net income for the first quarter increased 92.5% to $15.8 million or $0.50 per diluted share.

I must say that I am very pleased with our team's performance in the first quarter across the board. As we look forward, we continue to be committed to investing in our core business and in the programs that will capture future share in our fragmented market. That said, our focus on continuous improvement ensures we are using resources efficiently and in a manner aimed at producing the greatest long-term returns.

With that, I'd like to pass the call over to Dan.

Daniel E. Terrell

Thank you, Rob. Good morning, everyone. I will provide additional details on our results for the first quarter and then update our outlook for the remainder of 2013. My references to percentage and basis point changes are in comparison to the first quarter of 2012 unless otherwise noted.

As Rob noted, net sales increased 22.5% to $230.4 million, with an increase of $28.5 million at comparable stores and $13.9 million at noncomparable stores. At comparable stores, the 15.2% increase in the current quarter follows a 7.5% increase in the first quarter of the prior year and we are particularly pleased to get a 7.3% increase in both the number of customers invoiced and the average sale. As we've discussed on previous calls, driving traffic has been a key strategic focus for more than 6 quarters now, and the current quarter increase follows an 8% increase in the first quarter of the prior year.

We continue to believe our efforts to expand our advertising reach and frequency have resulted in greater recognition of our value proposition, both by our core DIY customer and across a larger population of consumers considering a flooring project.

Our average sale in the first quarter was $1,620, with an increase from $1,510 in the prior year, primarily due to a 6.5% increase in the average retail price per unit sold. Changes in the sales mix of flooring products, including continued customer preference for premium products, increased discipline at the point of sale and increases in the sales mix of moldings and accessories all contributed to the increase in average retail price per unit sold.

A note on the impact of Hurricane Sandy. Within our comparable stores, we have identified 7 store locations serving communities recovering from the effects of Hurricane Sandy and, as a result, experiencing significant increases in net sales. We believe the incremental contribution to net sales from these store locations raised total comparable store net sales by 125 to 150 basis points in the first quarter of 2013.

Store base expansion is also driving our top line. We've opened 30 new locations since the beginning of 2012, including 5 in the first quarter of 2013, which compares to 4 in the first quarter of 2012. As Rob noted, all of the new stores opened to date in 2013 are the expanded showroom, store of the future design. These 5 locations were opened in existing markets in New York, Virginia, Texas and Tennessee. The results are very early but we are pleased with the performance and we are on plan with regard to location size and invested capital.

Within our comparable stores, we have remodeled 6 locations to the store of the future format, including the relocation of 4 stores within their primary trade areas; 1 rebuild in Atlantic City, which we have grouped with the Hurricane Sandy recovery stores; and 1 remodeled in place. Again, it is still early but, overall, we are pleased with the results and our transition teams have minimized interruption in the operations.

Turning now to our gross margin, which increased 310 basis points to 40.4% as net product margin contributed 350 basis points of improvement, transportation costs were neutral and all other costs reduced gross margin by 40 basis points. Within product margin we again see the beneficial impact of a number of initiatives working in unison, including sourcing initiatives, changes in our sales mix and a higher average retail price point per unit sold.

Within transportation, we generally saw higher rates for international containers and domestic fuel, offset by certain supply chain efficiencies, including lower delivery charges, greater unit efficiency from our distribution centers to our stores and a significant reduction in the number of units transferred between stores.

Finally, all other costs had a net adverse impact on gross margin of 40 basis points, primarily due to greater demand for flooring samples, our increasing commitment to product quality and a higher reserve for product obsolescence, due primarily to the launch of certain new products and mill transitions. These cost increases were partially offset by lower costs for inventory shrink, including reserves.

Selling, general and administrative expenses for the quarter increased approximately $10.8 million, or 19%, to $67.6 million, due primarily to higher net sales and growth in our store base but, as a percentage of net sales, fell 90 basis points to 29.3% from 30.2% in the prior year.

Salaries, commissions and benefits increased approximately $4.1 million but, as a percentage of net sales, fell 70 basis points to 12.4%. Leverage of our corporate infrastructure and distribution center operations was partially offset by greater expenses due to store base growth, higher commission rates earned by our store management, higher benefit costs and larger accruals for management bonuses.

Advertising expenses increased 29.7% or approximately $4.2 million and, as a percentage of net sales, increased 40 basis points to 8%. As both Rob and I have mentioned, we continue to reinvest in our value proposition and aggressively pursue market share by broadening our advertising reach and frequency. Partially offsetting these increases is leverage of our national advertising campaigns over a larger store base and allocation of our investment to more effective media channels.

All remaining SG&A expenses, including occupancy, depreciation, overhead and stock-based compensation, increased approximately $2.5 million but, as a percentage of net sales, decreased 60 basis points to 8.9%.

The effective tax rate was 38.4% in the first quarter of 2013 compared to 38.6% in the first quarter of 2012. Net income for the first quarter of 2013 increased 92.5% to $15.8 million or $0.57 per diluted share based on approximately 27.8 million weighted average diluted shares outstanding. Our cash and cash equivalents increased to $72.7 million at the end of March, up from $64.2 million at the end of December and $61.4 million at the end of March 2012.

Merchandise inventories totaled $210 million at March 31, 2013, an increase of 1.6% over the year-end level and 9.6% over prior year's quarter end. We built available inventory per store to $615,000 at the end of the first quarter, up from $578,000 at the end of March 2012 and, as a result, we are well prepared to meet the spring demand and potentially drive top line through enhanced availability of certain product categories. We are now targeting available inventory per store to end the year between $605,000 and $625,000, with variations based on seasonal demand and product availability.

Capital expenditures totaled $2.6 million for the first quarter, down from $3.2 million for the first quarter of 2012. During the quarter, we repurchased 70,600 shares of our common stock on the open market at an average price of $54.34 using $3.8 million of cash.

Turning now to our updated outlook for 2013. We now expect net sales for the full year in the range of $913 million to $942 million, up from our previous range of $885 million to $920 million. We expect that comparable store net sales increase in the mid- to high-single digits. We believe the store locations impacted by Hurricane Sandy will benefit comparable store net sales by approximately 60 to 100 basis points for the year.

We continue to anticipate opening 25 to 35 new store locations in 2013 and converting 20 to 25 existing stores to our store of the future format through a combination of remodel in place or relocation in the primary trade area. We now believe gross margin for 2013 will expand 100 to 160 basis points over the 2012 level.

Finally, we now expect 2013 earnings per diluted share in the range of $2.10 to $2.35 based on a diluted share count of approximately 28 million shares exclusive of any future impact of our stock repurchase program, up from our previous range of $1.90 to $2.15.

I'll now turn the call back over to Rob for his closing remarks.

Robert M. Lynch

Thanks, Dan. Again, we are pleased that 2013 has begun on a strong note but we continue to be just as excited about the future and the long runway of opportunities we believe we have ahead of us.

Our team is energized, united and focused. I felt that energy and passion at our Lumber Liquidators University held in February, our first that united all store managers throughout the company in one location. As one team, we set strategic goals, conducted enhanced sales training courses and grew even closer together.

We are seeing tangible results from our best-people initiative and we plan to continue investing in this initiative and conduct this event every year. We are confident that we have the right team and structure in place to best meet our customers' needs.

Further, we believe our business is positioned to capture significant share in our fragmented market in the future. Certain economic indicators suggest that home improvement is somewhere between the end of a more than 5-year contraction and the beginning of what could be a multiyear recovery. In any case, we anticipate that consumer demand may be volatile and we'll continue to be price sensitive. However, as we move forward, we believe we remain well-positioned to further expand our footprint and deliver multiyear expansion of our net sales and operating margin.

Before we turn the call over for your questions, I want to thank our entire team across the U.S., Canada and Shanghai for their dedication to strengthening our value proposition of price, selection, quality, availability and people and, most importantly, for their strong and united commitment to continuous improvement in all that we do.

Operator, we are now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Gary Balter with Credit Suisse.

Gary Balter - Crédit Suisse AG, Research Division

Just a couple of housekeeping or numbers questions and a bit of a longer term, just the 100 to 160 basis points in gross margin, because previously you were kind of like, "We've had these great gross margin improvements, we shouldn't assume that much". Obviously, you had a very strong Q1. What are your -- in your guidance, what do you assume, what are you thinking drives that? I won't say I think it will be higher but I'm just focused on the 100 to 160.

Robert M. Lynch

Gary, this is Rob. I'll start kind of big picture with some of the initiatives we're working and Dan can chime in. But what I would tell you is, going back a couple of years ago, when we first started talking about the opportunity for gross margin and the line reviews and the Sequoia acquisition, under our umbrella, driving continuous improvement in all that we do, we've expanded that. And what we have now, as I mentioned in my comments, is we have a number of strategic initiatives that go across almost every function in the company. They're all working together. As Dan mentioned, you heard that we're -- margin is being impacted by things that we're doing in merchandising, what we're doing in the stores in terms of the selling and the training there. You saw the average selling price was up this quarter. That was one of the positive surprises we saw and I think is a direct result of the Lumber Liquidators' training and the focus on our best people. The stores going back into the field and implementing those initiatives. So again, what I would tell you, it's a comprehensive set of strategic initiatives that go across almost every function within our business that can actually impact gross margin. So that's how we're looking at it and that's where we're getting some of the benefit -- extra benefit from.

Daniel E. Terrell

Yes, Gary, I would just add, when we put out our guidance after the last call, we felt like 140 was going to be the max input for the year. Q1 always had the greatest step-up built in just because on a 1-year and 2-year stack basis, it also -- it had the lowest increases. So we thought we would have a relatively strong Q1. The comparisons get a little harder for the next 9 months. But certainly, as Rob said, a lot of factors contributing, really pleased with what we saw and now it looks like 100 basis points to roughly 39 for the year is going to be the floor. And what we feel is about 39.6 [ph] or so on the upside.

Gary Balter - Crédit Suisse AG, Research Division

And then not strategic but just -- advertising, obviously, has been -- you've talked a lot about the push on advertising and it seems to be working in terms of driving in additional customers. How should we think about, going forward, advertising? Is there a point where you kind of picked it up to a level that you're more comfortable with and we start to see some positive leverage from it?

Robert M. Lynch

Gary, this is Rob again. We've been -- we were testing new concepts to drive our reach and frequency going back probably 5 or 6 quarters now and fully implemented those initiatives last year. And we're very pleased. So I think last year, in 1 of the quarters or so, as we were kind of learning and moving forward, there were a couple of quarters where we thought we might have left something on the table. I would tell you that I'm very pleased with the performance in the first quarter, with the balance of the spend on advertising, how aggressive we were going out there in terms of taking market share and expanding our message and in terms of the comp sales results. So based on that and what we've learned the last 6 or 7 quarters, I think we're going to kind of look to maintain going forward. And I'm pleased with kind of how that's looking in terms of the plans, initiatives and tactics underneath our merchandising team.

Gary Balter - Crédit Suisse AG, Research Division

And just on that, what are you learning? Is it bringing in customers that otherwise wouldn't be Lumber Liquidators customers, is that the primary?

Robert M. Lynch

I think that's one of it, but I would tell you -- the really exciting thing is it's really a testament of our value proposition, how relevant it is. That's what's made this company so strong. It was a powerful value proposition when I came to the company a couple of years ago and what we've been doing, very simply and basically, is focusing on that value proposition. Everything we talk about, every initiative that we describe to you here or we will describe to you is focused on investing in our value prop and focusing on it. And I think what's happening is strategically, last year, when we shifted from the tactic of leveraging advertising to going back on offense, anticipating our ability to grow our market share, given how low it was, that bet paid off. The marketing team has done a fabulous job in terms of implementing and using those extra dollars. And yes, our existing customer base is -- our value prop is resonating with them but also with new customers, as well.

Daniel E. Terrell

And they're coming in.

Robert M. Lynch

Yes. I mean, to make it simple, the marketing team is driving in more customers. Our sales force is getting increased training and they're converting and selling. Our assortments are better, our prices are better and that whole value proposition is working together, all of the initiatives, not just the marketing, to get these results.

Operator

Our next question comes from the line of Peter Keith with Piper Jaffray.

Peter J. Keith - Piper Jaffray Companies, Research Division

I wanted to ask about some chatter we're hearing about industry price increases. Certainly you and I'm sure myself and others get questions on the data point that lumber prices are going up. Curious that, that hasn't impacted you but we are now seeing that some of the other branded hardwood manufacturers are raising price. I note those aren't suppliers for you so just kind of wondering how -- are you being impacted or maybe does this put you in a better competitive position, if some of the other retailers around you are having to pass through those price increases?

Robert M. Lynch

Peter, this is Rob. I'll take a shot at that question. The first thing I would tell you is, our sourcing strategy and merchandising strategies are really focused on buying direct from the mill. No middlemen, going direct to them. So that's one thing that helps us. The other thing is, as you've noticed the last couple of years, we've been expanding our global sourcing operation, acquiring the office in China, we've diversified our mill base within China, within all of Asia. We did the same thing in Brazil -- in South America, I mean, taking over operations there and expanding to other countries within South America. And most recently, we've also expanded into Europe and are sourcing there now from several new partners. So again, the focus is on global sourcing, direct to the mill and having the best people managing those processes. Relative to the specific cost you're talking about, what we've seen is they're mostly in domestic hardwoods. One thing that insulates us from that is, again, we go direct to the mill. And it's only -- that's one category amongst the diversified mix that we've actually been expanding in our business, so it's a smaller component of our mix than mostly all of our other categories. And so we're not seeing much of a hit there in terms of the diversification of the mix.

Peter J. Keith - Piper Jaffray Companies, Research Division

On the -- are you seeing some of your competitors where you guys do, I know, active price checks that the competitors are having to raise price relative to yours?

Daniel E. Terrell

Peter, this is Dan. I don't think we've seen many of the primary competitors take price increases. They may be -- they may have some margin impact if they're getting a price increase but we haven't seen anything on the retail side.

Peter J. Keith - Piper Jaffray Companies, Research Division

Okay, great. And then I wanted to also ask about the mix shift within the moldings and accessories, looks like it was up 260 basis points year-on-year. So is it fair to say that, that mix shift is accelerating? And then I guess could you talk about, if so, what's driving that and do we have some sustainability in that mix shift?

Daniel E. Terrell

It has accelerated. We're pretty pleased with what's been taking place there. I would say that the #1 driver is our people, the processes that serve the people and then maybe some of our product introductions to expand the assortment in that order. The people, the training, the enthusiasm they have for completing the entire ticket, from moldings to the noise-reducing underlay to other accessories including tools now is certainly an important part of what we do. The supply chain, which has become far more efficient, more reliable, accurate, gives the stores the confidence to sell those moldings and accessories. And then the assortment of what we're selling has broadened over the last 2 years. So we're comfortable with all 3 working together and believe there's still upside to that number.

Operator

Our next question comes from the line of Matthew Fassler with Goldman Sachs.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

A couple of questions on the numbers. So you modulated ad spending such that it kind of grew a bit more than sales and presumably some of that was planned in front of the quarter and some of it was modeled -- some of it transpired as the quarter went on. How are you budgeting advertising expense relative to sales for the full year? Should it be level with a year ago? Would you expect it to leverage if the business remains this strong?

Daniel E. Terrell

We're modeling for some deleverage there, Matt. Certainly, there's an opportunity to bring it back to level with the prior year but our modeling is for a deleverage. One good thing about our ad spend is that it's dynamic and flexible so we can react within a quarter. We don't book a lot of programs multiple quarters in advance. So there's flexibility there but the way we're looking at it is this is the right time to gain that share, to press that advantage.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

And then a second question relates to store of the future and your new store program in general. By our calculation, your new space productivity was, as a percent of the base, was higher here in the first quarter than it has been in many, many years. And I realize that the store of the future prototype has only been open really recently and that calculation tracks the trailing 4-quarter number. So presumably, the bigger they are as a percent of that mix the more constructive they are. How -- what is the sales productivity of the store of the future like compared to, say, a mature store? So if you open up one of these new units and your average store across the chain is annualizing at a little under $3 million or, I guess, this year, a little over $3 million, what kind of year-one volumes do you expect or are you seeing from those boxes as best you can tell?

Daniel E. Terrell

Matt, I'll start, and maybe Rob can add in. We certainly are seeing increased new store productivity and it was a record for us. Part of that is because all of the stores were opened in existing markets, which tend to have a higher sales ramp and also a testament to the real estate strategy we've had in place for about 1.5 years or 2 years, just selecting better sites to deal with the more casual customer, less of a treasure seeker. With the store itself, we don't think a store of the future is going to exceed in an average comp store -- in an average mature store. Certainly been pleased with the performance but as these new store of the future formats go in both existing and new markets we just don't think it's going to be higher than an existing comp.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

But I guess saying it won't be higher, I mean, it sounds like the days of new space productivity in the 60s or maybe in the low 70s are probably behind us and that, so long as you roll these out there's a period of somewhat better productivity relative to the base?

Daniel E. Terrell

I think we're closer to making that assumption than we ever have been but we're going to need to see another couple of quarter's worth of activity.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Got it. And then just one follow-up on that. Obviously, the real estate costs are going to be somewhat higher and if you look at the first quarter, the occupancy cost per foot was up about 4%, which is also a bigger increase than you've had. So should we think about that kind of trend continuing or persisting through 2013 and beyond?

Daniel E. Terrell

I think that's fair.

Operator

Our next question comes from the line of David MacGregor with Longbow Research.

Zoran Miling - Longbow Research LLC

This is Zoran Miling in for David MacGregor. Just a few questions from me. I just -- with regard to the payroll, we certainly saw some leverage there over the last 2 quarters after a period of slight deleverage. Just as we look through the balance of the year, should we continue to expect that, that will be a source of leverage for you guys?

Daniel E. Terrell

It was in the first quarter but, when you look back at the first quarter of 2012, you saw that it had an unusually high expense percentage. So we were pleased with the leverage we did get on it but what we modeled for the rest of the year is roughly flat to the prior year.

Zoran Miling - Longbow Research LLC

Great. And then just with your advertising focus a little bit more on the casual consumer here, could you briefly talk about the differences between, say, the casual consumer and that core DIY-er, particularly as it relates to kind of the expected average ticket or any other metrics that you may look at? Is there any kind of material difference between those 2 customer segments?

Robert M. Lynch

Yes, they are different customer segments because the core DIY-er is a person that's more confident, takes on big projects on their own, has experience doing them. I think in the early days of the company and the industry, before the technology improved, it made it easier to kind of install it yourselves. That was the main focus of where we were targeting those customers. But the casual consumer is a very big market, actually bigger than the do-it-yourself-er. The exciting thing that we're seeing is, and learning from the advertising and even talking to these customers, is that our value proposition, as powerful as it is with the core DIY-er, it's actually more relevant with the casual consumer. So it's actually -- it's as good or a better fit and match. Because as they come in -- as the marketing team targets those folks and gets them into the stores, they come in, they actually need more personalized assistance with our world-class sales team. They need more help with the installation, with -- being engaged and qualified about what they're really looking for. A lot of them don't even understand the differences in a lot of hard surface flooring. So it's -- we're really happy with it. It's a pleasant surprise and our -- those customers are getting exactly what they need in our stores.

Operator

Our next question comes from the line of Brad Thomas with KeyBanc.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

I wanted to follow up about the line reviews. I think we're at the point now where you would have been anniversary-ing the initial China line reviews flowing through the P&L. Are we at the point where the initial reviews with China have now been anniversary-ed? And what are you seeing as you go back for kind of a second round of discussions in that region in particular?

Daniel E. Terrell

Brad, I'll start and let Rob fill in. The -- we are anniversary-ing really almost a second year of some of the initial line reviews. I think we did our first in early 2011. The -- specific to China, we've anniversary-ed a great amount of the impact from line reviews. We're certainly going to look at going back through our merchandise assortment over and over but certainly through the Asian source product the first time.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Okay, great. And then as a housekeeping item on the customer deposits, it looked like that was up about 9% year-over-year. Your comps obviously accelerated from the fourth quarter. Are you guys doing a better job of getting product to your customers faster? Or what's going on that would maybe lead to that discrepancy in growth?

Daniel E. Terrell

Yes. The customer deposit is always a snapshot in time. Part of it is a reflection of how we close out the quarter, whether we're having a promotion or not and whether that's an a, b or c event. But just as you said, certainly, our inventory levels were in much better shape. Going into the quarter, we were in front of Chinese New Year. We were prepared better to serve the beginning of the spring demand, and I think we did throughout the quarter a better job of satisfying that demand and reducing the age of the outstanding deposits and that's one of the reasons it went down.

Operator

Our next question comes from the line of Matthew McGinley with ISI Group.

Matthew McGinley - ISI Group Inc., Research Division

You had a comment in the Q that you have had higher sample costs due to more sample requests. And that -- while that comment isn't unique, I believe it was in there before and you've brought this up before in the call, I guess 2 things on that. One, you said a year ago when you were doing line reviews that vendors were going to provide more of these samples at cost or for free. So is more of that occurring? And then on the actual number of samples that have increased, I guess, how much have they increased? And as you look at this relationship in the past, without having context in terms of the number of samples in the past, does that -- how should we think about that correlating with your comps?

Daniel E. Terrell

Matt, the cost per sample has certainly gone down because more vendors have participated in the allowance program. And the fact that the expense overall has gone up will tell you that the unit growth has exceeded what the reduction in the cost was. So it's a sign of good things. Sample is one of the early indicators of demand. We believe if we put a sample in a customer's hand that we'll eventually get that sale. So we're really pleased with the sample volume we saw throughout the first quarter.

Matthew McGinley - ISI Group Inc., Research Division

Got it. And then on your cash balance. As you have the highest cash balance, I think, you've ever had, how much cash do you actually think you need to run this business? And how do you plan to, I guess, redeploy that at some point? It just continues to build. Are there acquisitions you would make? Do you have, I suppose, a targeted cash balance? Or do you plan to complete that $50 million or probably 45, now, million dollar repurchase authorization that you have sooner rather than later?

Daniel E. Terrell

Well, it is the highest cash balance we've had at the end of a reporting period and we are cash flow positive. We're fortunate our store model throws off as much cash as it does. That said, we're always looking to deploy capital first to the growth of the core business then look for other ways to enhance the business. We're always looking at strategic acquisitions. We haven't found one that has made sense other than the Sequoia acquisition in China. And we're pleased to have that share repurchase program in place to return excess cash flow to the long-term shareholders. And we think that's the strategy we'll continue to employ looking forward.

Matthew McGinley - ISI Group Inc., Research Division

How much cash do you think you actually need to run the business? Like if you look forward and said I have to have x amount on my balance sheet, what's that amount?

Daniel E. Terrell

There are some seasonal swings that give us more or less comfort but clearly where we are now provides us with enough comfort to operate the business.

Operator

Our next question comes from the line of Laura Champine with Canaccord.

Laura A. Champine - Canaccord Genuity, Research Division

We're trying to dig into the very strong gross margin that you reported and one number that we usually get, which I did not see, is the moldings and accessories as a percentage of the mix. Can you disclose that for this quarter?

Daniel E. Terrell

Yes. Laura, it was 17.6%, up from 15%.

Laura A. Champine - Canaccord Genuity, Research Division

And the 15%, I'm assuming that was year ago. Because I think, last quarter, you were 130 basis points lower than 17.6%, is that right?

Daniel E. Terrell

That's right, it's year-over-year.

Laura A. Champine - Canaccord Genuity, Research Division

Can you quantify how much -- because I know there are some other factors within mix than just this moldings and accessories number. I mean, how much did mix benefit gross margins year-on-year this quarter?

Daniel E. Terrell

In the first quarter, I'd say the mix was probably hand-in-hand with retail price discipline at the point of sale. And then probably the third factor was the lower product cost related to the sourcing initiatives. And again, the training and the programs working in unison, the efficiency of the supply chain and the excellent work they're doing to get it to the sales floor and the support that the sales floor is feeling and then the enhanced selling techniques and best practices are really looking to drive that average retail price point realized. So -- but that has been a strong contributor in Q1. The mix is along those same lines. Merchandising assortment is a much more logical, good, better [indiscernible] layout. The customers sees the price differences, the changes in quality through the assortment and the store is better able to communicate that and look to up-sell as well. So sales mix to premium products and attachment of moldings and accessories both probably still a function of continuous improvement and our focus on it.

Laura A. Champine - Canaccord Genuity, Research Division

Dan, it almost sounds from your answer like your efforts to -- like Lumber Liquidators' efforts to better train its sales force are driving more margin expansion than the line reviews at this stage. Is that a fair characterization?

Daniel E. Terrell

It's much stronger than it has been in the past. I mean, we've seen, with the launch of the best-people initiative, better training. And I think we were all really excited with what we saw at LLU that just the sharing of best practices throughout last year and again in the first quarter of this year, the feeling of everyone learning new selling techniques, how to better take care of the customer. It's certainly a strength that we see. It's probably -- we expected to see it. We probably saw it a little earlier than we anticipated.

Laura A. Champine - Canaccord Genuity, Research Division

Okay. And then one more question, I'll leave margin alone. The guidance that you've given this morning on the call implies a sequential decline in the gross margin rate. I don't understand why that would happen seasonally. Can you explain to me what might drive that?

Daniel E. Terrell

When you look back over time, Q2 has always been on the lowest gross margin of the year or traditionally has been the lowest gross margin of the year, mainly because of the big April sale that we run and there are some other Tier 1 promotions just as we go through that April, May, June time period. So I think if you look back over time, you're going to see Q2 has traditionally been weaker, Q3 can come back to Q1 and then Q4 is usually a little bit of a dip-off of Q3. We certainly anticipate cumulative, multiyear benefit for years of gross margin expansion. But Q1, the timing of some of the items was stronger than we expected and we don't see that same sequential build. So where we think Q1 may actually turn out to be the -- could be the high of the year.

Operator

Our next question comes from the line of Rick Nelson with Stephens Inc.

Joe Edelstein - Stephens Inc., Research Division

This is Joe Edelstein on for Rick. Could you perhaps talk us through the month-to-month trends, particularly as we saw housing turnover slow in March on the lower inventories?

Daniel E. Terrell

Joe, we really didn't see any dramatic shift through the quarter. It was consistently strong. We saw a nice pattern throughout and, for us, the spring remodeling traditionally starts in the second half of February towards the last week of February. March is one of the strongest organic months we have. And on a year-over-year percentage basis, we really didn't see much change through the quarter.

Joe Edelstein - Stephens Inc., Research Division

That's great to hear. And could you tell us just early indications of how sales are trending into April?

Daniel E. Terrell

We're not really talking a lot about April or the second quarter yet, except to say that we were consistent in the first quarter and certainly, the samples number was -- being up is a strong indicator that there is demand there.

Joe Edelstein - Stephens Inc., Research Division

That's great. And then just if I can ask another question, just broadly speaking on the competitive landscape. I think there was a question earlier about pricing and whether or not your competitors are starting to take up price. But are you seeing any irrational behavior of any sort or just generally how are you thinking about the growth that is occurring with some of your other competitors just relative to your own plans?

Robert M. Lynch

This is Rob. What I would tell you is, we definitely are very aware of our competition. We're out there shopping them all the time in the stores, me personally, as well. And what I would tell you is not -- to your question, not seeing anything really irrational, not a lot of significant change. We see different competitors focusing on the category at different parts of the year, seasonally, pretty consistent to what we've seen in the past. And we are -- we're excited about where we play, how relevant our value proposition is and we're excited about the low market share we have in this industry. It's a fragmented industry. We have a relatively low amount of market share, which is why we think our growth potential is significant for a number of years. That's why last quarter we raised our potential in terms of U.S. domestic store count and that's why we're on offense and aggressively pursuing new customers with our marketing.

Joe Edelstein - Stephens Inc., Research Division

And just as you think about where we are in the cycle, would you have an appetite to bring on any debt to help fund perhaps an accelerated store plan to get to that 600-store target?

Robert M. Lynch

This is Rob again. What I would tell you is, first of all, based on our business model and the way it generates cash, that would not be a constraint. The constraint would be really how our strategic plan's driven by our team's ability and the resources and the infrastructure you need to kind of ramp that up and do that. We are excited about our growth opportunity long term, in terms of the total number of stores. We're really excited about this new store of the future concept and what that's doing. We're being very thoughtful and focused on how we're testing that, where we're seeing the results the best. And that's going to drive our real estate strategy going forward in terms of the combination of new stores versus remodeling stores in place or relocating or remodeling stores. For us, it's a win-win. We've got opportunities in both areas in terms of new store growth and in investing in our existing asset base.

Joe Edelstein - Stephens Inc., Research Division

And if I may, just one more question here. You did mention the remodel opportunity. And so I'm just curious how much lift the remodeled stores provided perhaps above the chain average in the quarter.

Robert M. Lynch

Yes. I mean, I would tell you right now -- it's early to tell, right? We've got -- 11 of the store of the futures in place just in the first quarter. I would tell you that we're monitoring them carefully. Dan and his team is measuring the results. We're measuring the results in the new stores as we go into existing markets and we're also measuring the ones we've remodeled in place or we've remodeled within their primary trade area, where we relocated them. So I would say stay tuned. We're pleased, as we said. And we're going to stick to our strategy. As Dan mentioned, all new stores this year and all the remodeled stores will receive this format.

Daniel E. Terrell

Yes, and there's just one other thing to pay attention to in the remodel, that there's going to be some interruption in existing operations. If a store is relocated, if a showroom is being remodeled, there is some short-term pain, long-term gain. And as we roll through the quarters, we'll look at whether the stores are neutral in the quarter, if they're remodeled, whether they're positive or whether they're negative. And then to the degree that becomes material, we'll talk about it. But understand that there is some interruption to operations and, in my prepared remarks, I mean, our team has done an excellent job of trying to minimize that pain and certainly we'll continue to put resources toward it and learn as we go.

Operator

Our next question comes from the line of John Baugh with Stifel, Nicolaus.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

If you could comment at all, I know the new stores have a greater mix of accessories. Are you seeing a higher rate out of the gate of accessory sales there relative to the core stores?

Daniel E. Terrell

John, we're -- they do you have a broader assortment because of the additional square footage on the sales floor. I think the best way to say it is kind of stay tuned. We'll see how it goes once we see some of the results come in and it's early still, so the results are so young that it wouldn't make a lot of sense to comment on them here. But certainly with the store of the future format there is a broader assortment of accessories, as well as the hard surface flooring and staircases and butcher block and things we've carried all along.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then on pricing, the increases you referenced, is that a function of the discipline, i.e., you didn't discount? Were there products where you actually took price increases presumably because the cost inflated or was it the former?

Daniel E. Terrell

It's generally the price discipline. So it's not the average retail price offered but the average retail price sold. Stores just did a better job of communicating the value. Particularly as you attach moldings and accessories, as you sell premium products and, when you think about it, it all comes back to the supply chain. You don't have to discount retail price if the truck has the product you expected it to have on it. So a lot of our sales are booked in advance and then the product is shipped against those open -- that open demand. And reliability and accuracy are extremely important and you're able to hold the retail price if that truck is accurate and reliable.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

And then my last question is simply on the mix. Are you seeing continued gains by category, i.e., laminate versus hardwoods? Is that a positive mix influence still on gross margin or is it fairly neutral there but you're continuing to see within each substrate or category increasing mix?

Daniel E. Terrell

It's -- we haven't seen any kind of dramatic shift in the actual merchandise categories themselves. So it's really the -- just as you noted, it's the move to the premium products within each category.

Operator

Our next question comes from the line of Budd Bugatch with Raymond James.

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

It's TJ McConville filling in for Budd. Just a couple of nits, tough to find anything to pick at in here. But Dan, did notice the cannibalization ticked up modestly in the quarter and now, given the discussion we've been having on the productivity of the stores of the future, talk to us about what you expect that metric to look like as you open more and more of those over time, realizing that the emphasis on the real estate strategy takes that into account these days.

Daniel E. Terrell

Yes, TJ, the -- I tried to call out in my prepared remarks that all of our new stores in 2013 were opened in existing markets. When you look at the spread between new and existing markets over the rolling-12 period of what's in our non-comp base, if we skew more to existing markets, we're going to see some additional cannibalization. So even though the number went up, what we saw is, when you look period-over-period, that there are more stores operating in existing markets in that base than there -- in the non-comp base than there were at this time a year ago. And looking forward, again, it's hard to tell what store of the future will do, what the change in format will do to cannibalization, so I'll just have to say that's a stay tuned until we see more of the results come in.

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

Fair enough and then that's helpful, Dan. That makes a lot of sense. Just a couple of housekeeping -- on the Sandy benefit that we saw this quarter, realize that probably spills into the next couple of quarters as people continue to try and rebuild. What's built into the guidance from -- as far as benefit from the maybe those 7 stores goes or 5 stores that we talked about?

Daniel E. Terrell

TJ, it's 7 stores. And we think 60 to 100 basis points for the full year, which would include the first quarter being at 125 to 150.

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

Okay. And the last one for me on the balance sheet, the payables metrics, as far as days and ratio goes, it sounds like that may have been a function of timing in the Chinese New Year. But would you mind just confirming that for me, Dan? Or anything else going on there that we ought to know about?

Daniel E. Terrell

Yes, that's correct, timing. We just -- we felt like got in front of the inventory build for the spring merchandise season earlier. We were better prepared than ever and that obviously affected the AP balance.

Robert M. Lynch

Thank you for joining us on today's call. We look forward to speaking with you again on our second quarter earnings call to provide an update on our continued progress and executing our multiyear growth strategy and achieving our long-term objectives.

Operator

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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