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Tile Shop Holdings, Inc. (NASDAQ:TTS)

Q1 2013 Earnings Call

May 1, 2013 05:00 pm ET

Executives

Bill Watts – Chairman of the Board

Bob Rucker – President & Chief Executive Officer

Tim Clayton – Senior Vice President & Chief Financial Officer

Carl Randazzo – Senior Vice President Retail

Joe Kinder – Senior Vice President Operations

Brad Cohen – ICR (Investor Relations)

Analysts

[Justin Claveron] – Robert W. Baird & Co.

Peter Keith – Piper Jaffray

Seth Sigman – Credit Suisse

Joan Storms – Wedbush Securities

Joe Feldman – Telsey Advisory Group

Daniel Moore – CJS Securities

Anthony Lebiedzinski – Sidoti & Company

Operator

Greetings, and welcome to the Tile Shop Q1 2013 Earnings Conference Call. (Operator instructions.) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Cohen of ICR. Thank you, Mr. Cohen, you may begin.

Brad Cohen

Thank you, Operator. Good afternoon, everyone. Thank you for joining us today for Tile Shop’s Q1 2013 conference call.

I want to remind you that certain statements made during the call today may constitute forward-looking statements made pursuant to and within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, as amended. Words such as but not limited to “plan,” “expect,” “anticipate,” “believe,” “goal,” “estimate,” “potential,” “may,” “will,” “might,” “could,” “target,” and other similar words could identify forward-looking statements.

Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the earnings press release issued today and in Tile Shop’s latest filing with the SEC. The forward-looking statements made today are as of the date of this call and the company does not undertake any obligation to update these forward-looking statements.

Also during the call today the company may be discussing adjusted EBITDA or EBITDA, which are both non-GAAP financial measures. Please see the company’s earnings release issued for a reconciliation of these non-GAAP financial measures to net income, the most directly comparable GAAP measure. If you do not have a copy of today’s press release you may obtain one by linking to the Investor Relations page on the company’s website at www.tileshop.com.

With that I’ll turn the call over to Tile Shop’s Chairman of the Board, Mr. Bill Watts. Bill?

Bill Watts

Good afternoon. I’m here with Bob Rucker, the company’s Founder and CEO; Carl Randazzo, Senior VP of Retail; and Tim Clayton, our CFO.

Let me start by focusing on what I think are the highlights of Q1. The company’s days as a SPAC are virtually over. This was a major milestone for the company and its shareholders. Tim will provide you with full details in his section of the call.

Same-store sales increased 10.4% on top of the 9.9% comp increase in last year’s Q1. I also want to point out that like many other retailers we also had two less selling days in this year’s Q1 versus last year, those two days being the 29th day of February as a result of leap year and the shift of Easter from Q2 into Q1 this year.

Adjusted EBITDA for the quarter was $16.4 million or 28.8% of sales. While that is a strong sequential increase over the Q4 margin of 25.9% we have historically seen stronger Q1 margins. Furthermore, let me point out that in addition to Q1 being typically among our highest in terms of EBITDA margins, this year was also positively influenced by the fact that only three new stores opened thus reducing the effect of preopening losses on the EBITDA margins.

The company’s adjusted EBITDA margins are extraordinary for a hard good retailer. Let me highlight why. The company’s unique sourcing model allows products to be procured directly where they are produced – there are no middlemen. The company’s ability to efficiently handle the logistics associated with transporting a highway product from multiple countries of origin is excellent.

This company also manufactures its own line of adhesives, grouts, and other key complementary products. Bob will provide you additional details on these manufacturing operations so that our shareholders better understand its significance. And finally, virtually everything the company sells is its own proprietary brand. Since January 1, 2012, the company has opened 19 new stores. We thought it might be helpful to give some perspective on how these stores are performing. Of the 19 stores, five are in existing markets and 14 in new markets.

The new markets include metro New York; Boston; Jacksonville, Florida; Philadelphia; Providence; Washington, D.C.; Buffalo; Knoxville; and Toledo. I give you the list of the new markets to validate the consistent performance of the new stores given the variability in the types of markets in which the company is entering. Remember that the company goes into these markets with virtually no built-in brand awareness and without significant advertising. To me, this consistency validates the strength of the Tile Shop’s retail concept.

Let me update you on the financial metrics of these 19 new stores, and keep in mind here that I’m using actuals where we have them or a combination of actuals plus projections where stores have not been open for a full year. First year revenue for those stores is averaging $1.9 million, in line with our earlier projections. On average, preopening losses have been approximately $85,000, within the $80,000 to $100,000 range we earlier forecasted.

The average cash cost of these stores –and I’m defining “cash cost” as furniture, fixtures, leasehold improvements, store-level inventory less tenant allowance – is $1.35 million, slightly better than the $1.40 million we had originally projected. The payback period on these new stores is 2.5 years – again, consistent with earlier projections; and the projected IRR over the life of the lease is still projected at 40%, again consistent with earlier forecasts.

Finally, in 2013 the company is on track to open 17 new stores as originally projected. With that let me now turn the call over to Bob Rucker.

Bob Rucker

Thank you, Bill. Let me start by reiterating that our direct sourcing model remains a material competitive advantage over the other players in the tile industry. While all of our competitors have product, we uniquely provide a tile solution for our customers and do it through our vertically integrated proprietary sourcing.

Since the last earnings call, my team and I have traveled to Vietnam, China, and Indonesia. Our focus continues to be on finding new and exciting products for us to bring to the consumer through our retail stores. To that point, we added 128 SKUs of tile in Q1, many of which we believe have real potential.

I just came back from the National Tile Covering Show in Atlanta. We attend this conference to see industry suppliers and to keep an eye on emerging trends. The show was well attended the mood among buyers and sellers was much more upbeat than in recent years. The fact that the market is stronger squares with our performance and bodes well for the future.

We also continue to focus on our product costs. Where there is ongoing upward pressure in China we are doing a very good job as a company of offsetting that by continuing to move more and more of our production from China to our lower cost producers such as Vietnam, Turkey, and Peru. To put this in perspective for you, three years ago over 70% of our product was sourced in China. Today that number is approximately 50% and will continue to decrease.

I’m feeling very good about finding additional resources in Vietnam, Indonesia and Turkey where detail and handwork are readily available. This is especially important for the stone side of the business. Regarding adequate supply of our product to support our expanding retail network, let me assure you again that we remain confident that we will be able to supply the ongoing planned retail expansion.

Another point I would like to make is that we continue to expand our in-house manufacturing for our extensive line of grouts, cements, adhesives, cleaners, etc. In Q1, our second complete manufacturing facility came online in Ridgeway, Virginia. To put this in perspective, these products represent approximately 10% of our total sales. The fact that we are vertically integrated in this category provides us with average gross profits in excess of 70% - virtually double what we would achieve if we bought and sold other companies’ branded products.

To support our ongoing expansion we are well on the way towards opening our new distribution center in Durant, Oklahoma. We now expect to be shipping product in July and expect to have our third adhesive manufacturing operation up and running at this facility during the fall. This supports our ability to begin to open stores in the strategic south central region of the country, highlighted by Texas and Colorado markets.

With that let me turn over the call to our Senior Vice President of Retail, Carl Randazzo.

Carl Randazzo

Thank you, Bob. Let me start by reiterating again how proud we are of our 10.4% comps in Q1, especially given the fact that last year’s Q1 comped at 9.9%. And as Bill has mentioned, we did this with two less days in the quarter.

As I know that you will ask me about tickets and traffic again, I need to let you know that I do not have exact data yet but we are getting close. That said, total sales were up 23.7% for Q1 versus last year. From the data that is available, that increase is driven approximately by two-thirds from ticket and one-third from increases in traffic.

Let me now discuss the progress we’re making towards our opening of 17 new stores this year. In Q1 we opened three stores – Natick, Massachusetts; Vienna, Virginia; and Langhorne, Pennsylvania. Further, in April we opened one more store in Warwick, Rhode Island. In addition to these four stores there are another five stores that are currently under construction. We also signed six leases for new stores that we are planning to open in the second half of the year, giving us clear visibility on 15 of the 17 stores we anticipate opening this year.

Also mentioned on earlier calls, we continue to upgrade our infrastructure to support our new store expansion. In Q1 we started a program of putting an experienced stores manager into each new store to help mentor and support the new store manager selected for that location. We found this to be very impactful, and that by increasing the training we rapidly increased the skills and knowledge of the new manager in each new location.

Let me finish out by touching again on the three competitive advantages we believe will continue to support consistent same-store sales growth and the 50% repeat business we currently enjoy. First is product assortment. We stock over 1900 tile selections with over 4200 SKUs – that’s everything and anything that a customer would need to fully complete a project using our product.

Second is how we present the product in our stores. In each store we have up to 60 vignettes or fully built-out rooms that bring our product to life. And third is our outstanding level of service. We have knowledgeable salespeople paid on a lucrative incentive system, an extended store hours which makes it especially convenient for contractors and installers, and a liberal return policy that builds customer loyalty. Best of all we offer ongoing education and design help that empowers the customer to do it yourself.

With that update let me turn the call over to Tim Clayton, our CFO.

Tim Clayton

Thanks, Carl, and good afternoon everyone. We are very pleased to report net sales of $56.8 million for Q1 2013 which represents a 23.7% increase over sales of $45.9 million in Q1 last year.

The $11 million improvement was driven by a 10.4% increase in comp store sales which accounted for $4.8 million of the increase. The remaining increase of $6.2 million was from sales at the 15 new stores that had been opened during the past year that are not in the comp store base. Five stores entered the comp store group during the quarter.

The 10.4% growth in comp store sales represents a meaningful improvement over comp store sales in Q1 2012 of 9.9% as well as an improvement from the same-store sales increase of 9.8% achieved in Q4 2012.

Gross profit increased $6.6 million or 19.8% for Q1 compared to the prior year. Our gross margin of 71% was lower than the prior year but right in line with the expectations previously communicated of 70% to 72%. The decrease in the gross margin levels achieved in 2012 of approximately 150 basis points can be attributed in roughly equal amounts to slight cost increases in product, freight, and distribution areas along with some increased promotional activity.

It should also be noted that a 1% change in our gross margin for the quarter translates into $570,000, so even small changes in each of the items noted above can impact our margins, given our size. As we grow these items will have less of an overall impact. Going forward we continue to expect that our gross margins will be in the 70% to 72% range.

Our selling, general, and administrative costs for the quarter were $28.3 million as compared to $22.1 million in Q1 last year, or an increase of $6.3 million. The costs in 2013 include twelve more stores than in Q1 2012, as well as a full quarter of costs associated with the six stores we opened during Q1 last year.

We also incurred $240,000 of unusual transaction costs associated with all of the warrant activities in this quarter; and incurred approximately $330,000 of preopening costs related to the stores we opened in this quarter. That compares to $450,000 of preopening costs in Q1 2012 when we opened six new stores.

When you factor out the warrant-related transactions and preopening costs, our SG&A was 49.5% of sales in the quarter this year compared to 47.8% in Q1 2012. This change reflects the public company growth-related infrastructure cost increases that we expected to incur. If we compare our SG&A costs to Q4 2012 our SG&A decreased as a percentage of sales from 55.4% to 49.5% this quarter. That reduction demonstrates the leverage that the company can achieve as our sales accelerate.

Adjusted EBITDA in the quarter was $16.4 million which represented an 18% increase over adjusted EBITDA of $13.9 million reported in Q1 2012. We derive adjusted EBITDA by adding back interest, taxes, depreciation, nonrecurring and noncash charges to our reported net income. In Q1, these adjustments included the change in the value of our outstanding warrants, stock-based compensation, and nonrecurring warrant-related transaction costs.

Our adjusted EBITDA margin in Q1 this year was 28.8% which is approximately 140 basis points down from the adjusted EBITDA margin of 30.2% achieved in Q1 2012. Again, this decrease from the prior-year margin levels is in the range we expected, as public company and other growth-related cost increases adversely impact our margins and will over the next 12 to 18 months.

The EBITDA margin this quarter was higher than Q4 2012 which was 25.9% due to the leverage that we achieve on our fixed costs as sales increase. The first quarter of the year has historically been our strongest quarter and that level of sales translates nicely into increased EBITDA performance. We do not expect that pattern to change in 2013.

Let me touch on a couple other items that I will address on more of a go-forward basis as historical amounts are somewhat unusual and not necessarily reflective of what we expect to happen in the future. As you can see from the adjusted EBITDA reconciliation, the stock-based compensation charge for the quarter is $1.1 million. We expect that the full year expense for stock-based compensation in 2013 will be in the range of $3.8 million to $4.0 million.

Due to required cliff vesting on our performance option, the expense related to the stock options granted in 2012 is amortized over a four-year period but the cost is more frontend loaded. Accordingly, our stock-based compensation costs will be higher this year than next and higher in the earlier quarters of the year than in the second half of the year.

Next is the warrant liability adjustment that we discussed at length last quarter. As you recall, the accounting rules for these warrants require that we adjust the value of any outstanding warrants to the market value of the warrant as of the period end date, and that we record the change in the value as a non-cash expense on our income statement. In addition the rules also require that we adjust the value of any warrant to market value and record and expense up to the point that the warrant is exercised. So even though a good number of warrants were exercised in the quarter we were still required to record an expense for these warrants up to the day that they were exercised.

It is at this point that the liability is reclassified into equity. We do not get to reverse the expense back into income when it is exercised. Because of this accounting requirement, we recorded a noncash expense of $51.8 million in the quarter due to the increase in the value of the stock during the quarter. We will have one more quarter to see this expense as all of the remaining warrants will be converted to stock in Q2 and no one will be happier to see this go away than me.

Another item to note is our tax rate. During the quarter we had an adjustment to our tax benefit associated with the merger transaction which resulted in a tax benefit being recorded in the quarter of approximately $500,000. Going forward, we would expect our normalized tax rate would be in the range of 40% to 41%.

In order to be more reflective of our expectations of normalized results, we have included in the press release a pro forma, non-GAAP net income presentation which adjusts our GAAP quarterly results by eliminating the noncash expense related to the warrant liability, the unusual warrant-related transaction cost, and which utilizes a normalized tax rate.

This non-GAAP pro forma presentation results in a pro forma net income for the quarter of $7 million, which translates into a basic and fully diluted earnings per share of $0.16 and $0.14 respectively. These amounts were computed using 44.9 million and 50.6 million equivalent shares outstanding for a basic and fully diluted calculation respectively. For earnings per share purposes the warrants are gradually included in the average share equivalent calculation based on the average stock price during the quarter and factoring in actual warrant exercises.

Now let me take a minute to provide some information on the status of our warrant exercise process and our expectations on longer-term perspective on shares outstanding. First, as you all know, on April 9, 2013, the company satisfied the conditions necessary to call for the redemption of any remaining outstanding warrants. The criteria that we needed to satisfy was for the stock price to exceed $18 for a period of 20 out of 30 days. As the stock price pushed past $18 per share and it was more and more apparent that we would satisfy the 20-day requirement, the pace of cash-based warrant exercises increased substantially.

In fact, in just the first ten days of April we received notices to exercise 3.2 million warrants and received $37.2 million in cash. This brought the total cash-based warrant exercises to 7.5 million warrants and total proceeds from cash-based warrant exercises to $86.4 million.

Through today, we have also processed the exercise of 6.3 million warrants on a cashless basis and have issued 2.6 million shares of stock in exchange for those warrants. There are 0.4 million warrants still outstanding that we would expect to convert into 0.2 million shares of stock in the next few days. Also, as you recall on March 27th the company announced that we repurchased 3.6 million warrants to minimize the dilution related to the cash-based warrant exercises. We used $30.1 million of warrant proceeds to repurchase these warrants.

So as we bring this chapter to a close let me summarize where we stand. First, the 17.8 million original warrants outstanding will ultimately be converted into 10.3 million shares of Tile Shop common stock. When added to the $42.8 million shares outstanding at the time of the merger we will have 53.1 million shares of stock outstanding.

Second, with respect to the cash side of the equation, we received a total of $86.4 million of cash to convert the warrants into shares. We utilized $30.1 million of this cash to repurchase warrants in March. We expect to keep $10 million of the cash received for use in operations or to reduce debt level. That leaves $46.3 million of cash available.

The Board of Directors is currently evaluating how to best utilize this cash in a manner that is in the best interests of the shareholders. While the warrant exercises have been larger than expected it has served to increase the level of public flow. At the time of the merger, approximately 14% of our stock was in the public flow. Now, after the warrant exercises and the secondary offering we completed in December, approximately 35% of our stock is in the flow.

With respect to the balance sheet, we ended the quarter with approximately $15.8 million of cash and $67.2 million of debt. Our long-term debt to trailing twelve-month adjusted EBITDA leverage ratio as of March 31 was approximately 1.3x. At quarter-end we had approximately $31 million of borrowings available to us under our long-term credit facility.

Cash flow from operations in Q1 was $18.2 million. Our working capita adjustment for the quarter was a source of cash of $5.5 million. Capital expenditures in the quarter were $11.1 million. Approximately $7.4 million of this was for new store build-out and remodels of existing stores, $3.2 million was for expansion of our distribution and manufacturing facilities, and the remainder was for general corporate purposes.

As we look forward, we continue to be comfortable with the 2013 initial expectations that were discussed during the February conference call. These expectations included a new store growth rate of 25% which translates into 17 new stores for 2013. We are very comfortable with opening 17 new stores this year.

In terms of comp store sales, we now believe that we should be able to exceed the 6.1% comp store sales guidance previously provided. In view of the Q1 results and the expectation of 17 new stores in 2013, we are also comfortable that we will exceed the revenue expectation of $222 million previously provided.

We also continue to be comfortable with the expectation of $60 million of adjusted EBITDA for the year. Capital expenditures for 2013 are expected to range from $30 million to $32 million, which primarily includes store-related capital expenditures and CAPEX related to expansion of our manufacturing and distribution capability. And with that, let’s open the call up for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator instructions.) Thank you. Our first question comes from the line of Peter Benedict with Robert W. Baird. Please proceed with your question.

[Justin Claveron] – Robert W. Baird & Co.

Hey guys, thanks for taking the question – it’s actually [Justin Claveron] for Pete. Congrats on the quarter. First off, just on the comps, any regional variability worth calling out as it relates to the performance, understanding that your newer markets are obviously comping at a higher rate?

Bob Rucker

No, I think all markets did fairly well overall. You’re asking me what market did better than most?

Carl Randazzo

Is there any one region that did better than others? I mean they’re pretty consistent. If you look at the averages they’re all really generally consistent from that perspective. There’s really no one region that would jump out.

Bill Watts

The one thing, Justin, that is obvious – it’s Bill – is that the new stores as I indicated are king of hitting the comps as we expected. The mature stores, four years and older, they’re performing at a level above what we expected so that seems to be the difference. There’s no geographic disparity there. They’re consistent everywhere.

Bob Rucker

Yeah, they’re pretty consistent across, yep.

[Justin Claveron] – Robert W. Baird & Co.

Okay, thanks for that color. And then a question on the gross margin, I guess I’m trying to understand the gross margin has consistently moved higher from 2007 to 2011. So what’s been the biggest change now driving the margin decline? Is it just the cost increases across products and distribution or is it more promotional activity?

Tim Clayton

I think as we indicated, Justin, it’s really the combination of kind of four things. And because of our size, relatively small dollar changes across those different items can have an impact. You know, so we’ve seen cost increases in the materials that we’re purchasing; we’ve seen some freight increases depending on the different places it’s getting shipped in from.

We’ve seen some increases in distribution costs and then we’ve seen some increases in promotional activity, and the promotional activity is actually skewed a little bit because we have so many new stores or newer stores in the totals if you will as a percentage. And in those stores obviously we’re doing more to make sure we solidify our base of business in those stores, and as Bob has said and tells the sales guys, and that Carl reinforces that we don’t lose a deal. So there’s probably some additional promotional activity and discounting that’s going on in those markets and that, as a percentage of our base being larger, would have an impact as well.

[Justin Claveron] – Robert W. Baird & Co.

Alright, that makes sense, Tim. I guess just lastly following up on that, I mean do you expect some incremental gross margin headwinds I guess in Q2 as the new DC kind of ramps up? And then how long before you can get leverage on that facility do you think?

Tim Clayton

Well, I think as we’ve communicated pretty clearly we continue to expect the margins to be in that 70% to 72% range. So we expect them to be kind of consistent with where they are in Q1. You know, if you look historically it’s kind of funny that we have a 72.5% or plus gross margins, we never indicated that we expect those to go up, right – I mean those are pretty strong as they are. So we think that 70% to 72% range is sustainable and that’s kind of where we expect to be going forward.

[Justin Claveron] – Robert W. Baird & Co.

Alright, perfect. Thanks guys, good luck.

Operator

Thank you. Our next question comes from the line of Peter Keith with Piper Jaffray. Please proceed with your question.

Peter Keith – Piper Jaffray

Hi, good afternoon, everyone, congratulations on the nice quarter. You talked a little bit about the economics around the stores that are in their first year. I’m curious about the five stores that just entered the comp base. I think most people are thinking that the stores in year two would run up about 25%. Are you still seeing that consistency as you’ve had this big slug of stores from last year enter the comp base?

Tim Clayton

Yeah, we’re seeing nice performance from those stores that entered the base. The five stores that entered in Q1, three of them entered in for one month of the quarter; two of them were two months of the quarter. All five of those have performed nicely, kind of right in line or a little better than the typical type of first-year comp numbers that we talk about. We always talked about the first year they’re in the comp base they would be in the 20% to 25% type of comp number, and since these are just entering that they’d probably be a little higher than that percentage in the first quarter they’re in and that’s what we’re seeing. So it’s really, as Bill said in his remarks the new stores are continuing to track right on line with what we’ve seen consistently.

Peter Keith – Piper Jaffray

Okay, that’s great. One thing that we never got a clear answer on, if you go back to last year’s Q1 and Q2 comp trend there was quite a large degree of variance. I think you had maybe suggested that there could have been some weather impact from storms. I guess now that you’re through April and you look back can you explain that variance and how that may impact the Q1 and Q2 comp dynamic this year?

Bob Rucker

Going back to Q1 of last year, right? I just remember Q1 of last year as being beautiful January through March and people still… I think it was an earlier spring rush and kind of when April hit it was 80 degrees in Minnesota. I don’t know what it was like in the rest of the country but it definitely, the water was shut off a little bit quicker in April and we had kind of worse weather this year throughout – probably your normal winter/spring-ish weather.

Tim Clayton

And if you looked at it, and again, Peter, we don’t expect to see that type of comp drop off from Q1 to Q2 this year at all. And you know, really I think if you look at it last year and the fact that the number of new stores that were kind of in those numbers previously was relatively low compared to the base, it really was much more of what I’d say a real comparable store-type of comparison. And in Q1 it was 9.9%, Q2 it was 3.3% I think and overall it was 6% - that blends out to about a 6% kind of number and that’s exactly what we expected for the year.

Peter Keith – Piper Jaffray

Okay, great. More of a strategic question for Bob or maybe for Bill, too – are there any thoughts here as you’re ramping up to adding to the bench, maybe some positions with regard to supply chain or merchandising or anything like that that you’d want to beef up the team with?

Bob Rucker

This is Bob, Peter. Yes. Supply chain I can speak to first – we’ve added three people there in the office. We’ve also added a person on the ground there in India. In IT we’ve just added two I guess very strategic people there, and as far as the bench goes Carl can speak to that but we’re feeling more confident in our sales bench than probably ever before. And I think that’s a function of growth and optimism. They’re lining up around the corner to get on board and get a shot at running these stores.

Carl Randazzo

Yeah, the store bench is very strong.

Bill Watts

I will say that again, it’s Bill, that the company is taking the right steps to ramp up the infrastructure to support the levels of the projected growth. At each turn, if we need it we’ve got the other manufacturing facility. We’ve got the other IT, we’ve added people in supply, we’ve added people in accounting. Carl’s added people in the field. So we’re doing what you need to do to ramp up the growth per the plan.

Peter Keith – Piper Jaffray

Okay, that’s good feedback. Thanks a lot, guys, and good luck for Q2.

Operator

Thank you. Our next question comes from the line of Seth Sigman with Credit Suisse. Please proceed with your question.

Seth Sigman – Credit Suisse

Okay, thank you and congrats on a great quarter. I just want to hit on two things that Bill discussed. First, in terms of advertising, I think one of the positives of the model has been just much lower advertising versus other companies. As you’ve recently accelerated the square footage growth, I mean do you feel like that low level is sustainable as you’re entering all these new markets?

Bill Watts

Yes, and again, what I said earlier, what has really impressed me when I look at the model is the consistency of the success. And again, keep in mind what I said earlier – these are all markets where the company has no brand awareness, you know, first store in. I read the list of the markets and the markets are all over the board, and [there’s] virtually no advertising to support the opening. And yet every one of those stores is tracking to the averages of the model that we’ve described.

So what that suggests is that the retail concept itself is the value proposition, the service, the way the product is displayed – the things that Carl has always talked about and Bob as the strength of the company – it’s clearly coming through to the consumer.

Seth Sigman – Credit Suisse

Okay, that’s helpful. And then I guess as you’ve entered some of these new markets and you bring the value as you mentioned, have you seen any major competitive responses?

Bob Rucker

Yeah. You know, you hear things from the field, from other competitors, from their customers that come in to us but our job is to go in there and make a presence. And it feels good to hear those things but you know, we just have to do our job in the store and take care of the customer walking in the door and that’s what we focus on.

Seth Sigman – Credit Suisse

Got it, alright. Just one more quick one on the average ticket. With two-thirds of the sales increase coming from ticket, what’s the right way to be thinking about that in terms of how much is related to maybe mix shift or how much is actual increases in pricing on like-for-like items? Thanks.

Carl Randazzo

From a pricing level, I think what we did focus on… What we’ve been focused on probably for the last two quarters is when the customer walks in the store and you take them on the tour, and you take them to the vignettes, you show them every product that we show them. And we want to get as many of our products as possible on that ticket, and I do think from field tile to accessories to setting materials we do a very, very good job doing that.

Bob Rucker

The whole goal, and it really reflects on margins, is to get the proper mix. So mix is a big deal and our training focus is around selling full tickets, making sure the customer goes out satisfied – making sure they have everything they need to do the job. It benefits them and it benefits us.

Seth Sigman – Credit Suisse

Alright, thank you. That’s helpful.

Operator

Thank you. Our next question comes from the line of Joan Storms with Wedbush Securities. Please proceed with your question.

Joan Storms – Wedbush Securities

Hi, good afternoon everybody. I have a question related to your comments earlier about the new SKUs that you added from your visits in different countries. Can you talk about how those SKUs moved in and out of the total SKU mix, and do you intend to sort of keep a steady sort of 4200 plus number, at least given the store size?

Bob Rucker

This is Bob, Joan. Yes, we would like to keep our SKU number steady. We’re raising it now because our sales are growing up and we’re anticipating growth. We raise the number of SKUs because we’re adding new suppliers to make sure that we have enough product to satisfy our needs. So I would say over the next period, the next couple years we will probably continue to add SKUs and with the constant eye to settle that down.

Joan Storms – Wedbush Securities

I guess also just given thoughts regarding that and your expansion into different geographies that are pretty far apart, what’s your ability to sort of tell regionalization (inaudible)? When you go to the Southwest and Arizona there’s obviously (inaudible) than New England, and what’s your ability to do that sort of from a systems standpoint and also just from… You’re the buyer, and the team being able to implement that.

Bob Rucker

The regionalized sales… Is that what you mean? Different desires in different areas of the country?

Joan Storms – Wedbush Securities

Right.

Bob Rucker

Okay. We do see some of that. We do show our entire mix in every store – we feel that’s important. What I’ve seen in these stores from the Midwest to the Northeast to the South is more consistency than you would think. The Midwest traditionally is more rustic; the Northeast would traditionally be more contemporary. But there’s such a mix everywhere in between. The South is more Southwest, more the earth tones, that kind of thing.

But we use the same product everywhere. There are slighter differences in sales than you would think. That would validate my thinking that we use the same thing. We can regionalize and we have no problem doing that. We’ve got the three major warehouses now – Detroit, Ridgeway and Durant – so we have that ability to do that if it looks like sales are partitioned out that way.

Joan Storms – Wedbush Securities

Okay, that’s great. And then one last question on, you know, you had talked a little bit in the last couple of calls maybe about store site selection and the markets that you’re picking, and essentially having some markets that were more densely populated and/or of a slightly higher demographic; and you were seeing better business from those stores. Is that still a strategy that you’re going after and how are those stores?

Bob Rucker

I think what you’re talking about is going into like a downtown; or going into Manhattan, going into Boston, into Philadelphia and those more highly dense areas, and we are very… We are working on it very hard to come up with a model that we can put in those areas right now.

Carl Randazzo

And the second part of your question, the stores in those higher – they are probably tracking slightly above the averages. But the aggregate of all the stores opened is right on the numbers we had predicted.

Joan Storms – Wedbush Securities

Okay, great. Well thank you very much.

Operator

Thank you. Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Please proceed with your question.

Joe Feldman – Telsey Advisory Group

Yeah, hi guys, good afternoon. I wanted to ask sort of a follow-up on that mix question. Are you guys seeing any difference in the types of purchases; meaning, has there been a shift towards more expensive items, like maybe a mix toward high-end stone versus ceramic? Any changes there? I know you said that the ticket is running a little higher – presumably that’s the case?

Bob Rucker

That’s our goal, Joe. Our goal is always to get our hands on that customer and move them into the nicest product that we can. And then when you talk about mix, we’ve made a business on accessories and accessorizing and fully fleshing out every sale. That’s really what the vignettes have done for us. We don’t just sell one or two sizes; we sell many different sizes of product. And then we accessorize it will all the trim pieces like the top cornice, the base pieces, the decorative accent pieces.

This is the kind of thing that the better the sales staff, the better the management, the longer the store is around will do more and more of that – and our margins climb with that. So our goal is to keep raising the bar there and getting the better mix into the hands of the consumer.

Joe Feldman – Telsey Advisory Group

Got it, that’s helpful, thanks. And then also, another question – you guys sort of touched on it briefly in the prepared remarks, sort of that local contractor or pro customer who would either come in themselves or recommend clients. I guess have you seen any change in the mix of that business? Has that been increasing? How long does it take to ramp in a new market when you go in?

Bob Rucker

Joe, that’s a really big deal for us. What we see in the more established markets, we’ve really developed a great contractor business. When we go into a newer market they’ve already beaten their path to wherever they’ve been going for the last ten, fifteen years so it’s tougher to convert them but we go all-out on that. We’d never let a deal go with a contractor. So yes, that is very important to us.

Joe Feldman – Telsey Advisory Group

Gotcha. And then one final question – we’ve been wondering in your older, more mature stores is there this kind of maximum throughput that you might get in the store; meaning you know, like on a busy Saturday the most you’re going to get you only have so many people staffing it… Is there a cap almost on the sales or is it sort of unlimited because the nature of this type of business just gets people frequently coming in and at different time periods?

Bob Rucker

I think there’s a limit but that limit is certainly going higher and higher. We saw, well we just ended the month. Okay, yeah – we’re seeing volume coming out of some of these stores that amazes us and that’s with opening up new stores in the market. So I guess that’s not a fear that we have right now but it’s certainly been on our thoughts – does it get to the point where you crack, so to speak? It doesn’t look like it so far.

Carl Randazzo

And it usually doesn’t happen overnight. You see it. It trends up and then you staff the store accordingly to the trends that you see in that store. And that’s what we do. We’re in the business of watching sales. We watch a sales number, we see the number of heads in a store. If we see it ramping up we add people as quick as we can. I think it was last quarter or the beginning of this quarter that we started our three-day training program which has really been beneficial to helping the staff ramp up. So we’re able to get guys on the floor selling tile a lot quicker in the stores that we see heavier traffic.

Bill Watts

Here’s a simple way to think about that: the average of the whole system is about $3.2 million a store, and the highest volume store is $7.5 million. So there’s a lot of capacity from average.

Bob Rucker

Our infrastructure has also ramped up dramatically over the last five years – we’ve gotten better and better. Carl’s turning his orders faster and faster. That material doesn’t just sit in these store warehouses – it moves out.

Joe Feldman – Telsey Advisory Group

Got it, that’s really helpful, guys, I appreciate it. And good luck with this quarter, thanks.

Operator

Thank you. (Operator instructions.) Thank you. Our next question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Daniel Moore – CJS Securities

Good afternoon, thanks for taking the question. Looking to Q2, given the slightly easier comps in addition to two additional selling days in Q2 this year versus last year, do you see comp store sales similar in those double-digit type growth rates this quarter?

Tim Clayton

Dan, we’re not going to give any specific guidance on a specific quarter. I think you can kind of look at where things are and the stores coming in, and we’re comfortable with the guidance that we’ve provided to this point. I think we’d ought to clarify the fact that we only view it as one incremental day in the quarter, not two, and with that being said we’ll just continue to kind of execute on a daily basis and I think we’ll be happy with the results at the end of the quarter.

Daniel Moore – CJS Securities

Very good, I appreciate it. And I appreciate the update with regard to the full-year guidance. Given your expectations for higher comp store sales as well as higher revenue, it sounds like you weren’t quite willing to go higher in terms of EBITDA. I’m just wondering if there’s a disconnect there.

Tim Clayton

We don’t vie a disconnect. I think I’ll just reiterate that we’re comfortable with the number that we’ve put out. We see some increase in the revenue side. We obviously have always communicated that the margin percentages, EBITDA margin percentages overall will come down from where they have been historically. And I think if you just kind of work on that math we’re very comfortable with the $16 million EBITDA number that we’ve talked about.

Daniel Moore – CJS Securities

And last is the EPS. Are you still, given the much higher share count are you still comfortable with a $0.50 type EPS number for the year?

Tim Clayton

We’ve never given an EPS guidance number, Dan, so I would tell you that we’re not really going to comment on it at this stage. We haven’t because of the share count numbers moving around and changes in tax rates, and a lot of variables, so that’s why we’ve always focused on EBITDA, adjusted EBITDA and that’s where we’re going to stay.

Daniel Moore – CJS Securities

Perfect, and lastly I’ll get off the guidance kick. Just in terms of the new stores, any noticeable differences? You talked a little bit about average ticket size, product mix, frequency of purchase – just anything qualitatively that you might be picking up in some of the newer stores, newer geographies?

Bill Watts

No. I think as Bob stated, wherever we go I think people really like our assortment and they like the way we present in the store. And nothing really surprises me anymore wherever we open up a store and what people are buying. On the East Coast I really thought they’d have a different taste for a different sector of our assortment but I was proven wrong a while ago on that. So I think we have a great assortment. I think it offers a lot of variety of people and yeah, I don’t see much of a big difference at all in where we put a stores and what they’re buying in it.

Bob Rucker

And that’s the strength of the model. You’re putting these stores anywhere. None of them are losing, and in aggregate – even with the disparity of the kinds of locations and new markets still hitting the metrics as forecasted.

Daniel Moore – CJS Securities

And lastly just a balance sheet clarification: the $46.3 million obviously the Board is evaluating what to do with that – that is in addition to the $15.0 million? Just looking at kind of current cash it’s in addition to the $15.7 million current cash at the end of the quarter, correct?

Tim Clayton

No, the $46 million is a different computation. The $46 million is what’s left from the warrant proceeds that we’ve received of $86 million – holding back $10 million for operation and using $30 million to buy warrants in that we did in Q1. So that’s just a mathematical computation of kind of the warrant proceeds that are left.

Obviously when that cash comes in we’ll do different things with it short term. We’ve paid down debt. We paid down debt we could pay down in Q1 with the excess cash that we had. Obviously we can still re-borrow that under our facility but there’s a little bit of a disconnect between that $46 million number you see and what is actually on the balance sheet as of March or as of today.

Daniel Moore – CJS Securities

Okay, I appreciate that, Tim. I hope you can get some sleep now that you’ve cleaned up the warrant issue. I appreciate the help.

Tim Clayton

Thanks.

Operator

Thank you. Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Please proceed with your question.

Anthony Lebiedzinski – Sidoti & Company

Good afternoon. Just wondering once you have the Oklahoma facility open, how many stores will you be able to operate in total with the extended distribution infrastructure?

Bill Watts

Wow. Lots.

Bob Rucker

Anthony, this is Bob. We’ve got a lot of capacity. Our Durant store will handle how many stores, Joe?

Joe Kinder

Up to 40, opening with 12.

Bob Rucker

12 up to 40. But really each DC has the capacity of 60 plus so we’ve got capacity to spare.

Bill Watts

We’ve got capacity for close to 200 stores once our Durant facility is online.

Anthony Lebiedzinski – Sidoti & Company

Okay, that’s helpful. And I’m just wondering with your private label credit card, has there been any notable penetration increase because of that?

Carl Randazzo

No, it’s been pretty stable probably over the last two or three quarters. I mean we’re doing very good with it but I mean we have the same repeat business from it. The metrics really haven’t changed that much over the past couple of quarters.

Anthony Lebiedzinski – Sidoti & Company

Okay. And once we get into 2014, 2015 you’ll already have a full year of operating as a public company this year. So kind of looking at it from a longer-term perspective, what kind of same-store sales will you need in order to leverage SG&A expenses?

Bob Rucker

Well, if you look at our typical expectation of increase in SG&A costs, those are pretty well limited to regular salary types of increases, operating supplies costs, things like that probably in the 3% to 5% range annually. So we would be able to see leverage on those costs with just a 5% type of comp, which is what we have seen over and over with just the stores that are over 36 months in operation.

Tim Clayton

And what we said when we did the initial deal was that you could expect EBITDA margins would come down 200 basis points to 300 basis points – they did. Then we said they would slowly accrete back up to the high 20%’s over 12 to 24 months – we still expect that to happen.

Anthony Lebiedzinski – Sidoti & Company

Okay, thank you.

Operator

Thank you. Our final question will be a follow-up from Joan Storms of Wedbush Securities. Please proceed with your question.

Joan Storms – Wedbush Securities

Okay, sorry guys – just two quick ones. One of your public company competitors reported last week and said that their stores that were sort of in the regions from Storm Sandy were benefiting incrementally. I was wondering if you were seeing a similar situation, and I know there’s just a few stores in those regions. But then just a general, broader macro picture, and everyone wants to know about how the housing market recovery is affecting you; and I was just wondering about what your thoughts are as a management team if you’re seeing any of that yet? Or what’s going on there?

Bill Watts

We’ve always said that we don’t track anything on the housing other than the pulse we keep on what’s going on in the stores. And no – it was a very, very good Q1. I don’t know if it was attributed to anything from the housing market. I’d like to think it was. But getting back to the Hurricane Sandy part of your question, yeah – our stores from New Jersey into New York… I guess I don’t hear about it a lot. Maybe I don’t ask how our customers found us or why they came in. We’ve heard a few hurricane stories here and there where people’s houses were damaged by the storm. But I think we did see some increased traffic from the storm definitely in our Long Island stores. And in New Jersey our stores are pretty much inland, so I would say our Long Island stores probably got the most benefit from any kind of increased business from it.

Tim Clayton

But keep in mind it’s only a couple of stores so it’s not impacting (inaudible). And back to the other part of your question on the housing, we’ve said all along that the two macro trends that influence this business are housing turnover – not housing starts, housing turnover – and as you’ve all seen those numbers continue to get better; and macro consumer confidence. Now that’s yo-yo’d around a little bit in Q1 but the general trend is still upward.

Joan Storms – Wedbush Securities

Thank you so much.

Operator

Thank you. Mr. Rucker I would like to turn the floor back over to you for closing comments.

Bob Rucker

Thank you again for joining our call and we look forward to updating the market on our progress the next quarter. Thank you.

Operator

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

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