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Lumber Liquidators Holdings, Inc. (NYSE:LL)

Q4 2013 Earnings Conference Call

February 19, 2014 10:00 ET

Executives

Ashleigh McDermott - Director of Financial Reporting

Rob Lynch - President, Chief Executive Officer

Dan Terrell - Chief Financial Officer

Analysts

Peter Keith - Piper Jaffray

Aram Rubinson - Wolfe Research

Keith Hughes - SunTrust

Brad Thomas - KeyBanc Capital Markets

Matthew Fassler - Goldman Sachs

Seth Basham - Wedbush Securities

Matt McGinley - ISI Group

Dan Binder - Jefferies & Company

Laura Champine - Canaccord

Operator

Good morning, ladies and gentlemen. And welcome to the Lumber Liquidators Fourth Quarter Earnings Call. With us today from Lumber Liquidators is Mr. Rob Lynch, President and CEO; and Mr. Dan Terrell, CFO.

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

I would like to now introduce Ms. Ashleigh McDermott, Director of Financial Reporting for the company. 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 the 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 time. 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 of Lumbar Liquidators. Rob?

Rob 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 the record results our team achieved in 2013, as well as our strategic priorities in 2014 and beyond.

For the past three years, I've spoken to you with excitement about the tremendous long-term potential and we believe Lumber Liquidators has to grow in a fragmented market and significantly expand operating margin. 2013 was another year in delivering on that potential and we believe there are many more to come. We have been relentless in driving continuous improvement in all that we do through our key multi-year strategic initiatives.

In the past year, we successfully broadened our potential customer base through our expanded advertising strategy, executed our sourcing strategy to eliminate middlemen and strengthen our direct-to-mill relationships, improved our real estate strategy and set a new standard for our showroom design, began strengthening our supply chain structure through significant investment in new facilities and invested in the best people and aligned our business focus across the organization.

With each success that we achieved, we have reinvested a portion in each of the five components of our value proposition. Price, selection, quality, availability, and people and funded our future growth initiatives.

As we look at our performance in 2013, it is clear that our strategic initiatives have really taken hold and have become firmly integrated into the Lumber Liquidators DNA. I could not be more proud of our outstanding and dedicated team, their coordinated efforts and commitment to our unified vision throughout the entire year.

Notably, the team's ongoing efforts to help drive the record results we achieved in the fourth quarter as we topped $1 billion in net sales. Crossing this milestone, particularly in light of the harsh winter weather we experienced in December, truly demonstrates that our key strategic initiatives have become a strong foundation to fuel our future success.

Turning to our financial highlights. Net sales for the quarter expanded 22.7% to $258.4 million and for the year we grew net sales 23% achieving $1 billion in sales. Comparable store net sales in the fourth quarter increased 15.6%, our tenth consecutive quarter of net sales increases in comparable stores.

Operating margin was 13.3% for the fourth quarter and increased 300 basis points to 12.6% for the full year. Net income for the quarter improved 50.6% to $20.8 million and for the year grew 64.4% to $77.4 million. And our diluted EPS for the quarter increased 48% to $0.74 bringing our full year EPS to a record $2.77.

We achieved a number of milestones and successes in 2013. We continued to roll-out our Store of the Future, through new store openings and remodels ending the year with 52 stores and more than 16% of our store base in this format. As planned, we added 19 of these expanded showrooms in the fourth quarter, our most ever in a single quarter.

Our success with these openings demonstrates our team's ability to smoothly ramp up our new store growth and we expect to further increase our pace of openings in the coming year. We continue to be very pleased with the results we are seeing now, more than two years into our reengineered real estate strategy.

A market-based approach and more retail-centric shopping locations have combined well with the expanded showrooms and better trained associates to serve the greater number of casual customers we are attracting.

New store productivity continues to climb in year-over-year comparisons. Our people are an essential component in driving our record results and investing in our talent has remained a critical ingredient to our secret sauce.

With our aggressive plans for the future, we have further strengthened our executive store leadership team by doubling our investment in the key management positions there including the addition of a new Senior Vice President of Sales. We are making significant investments in optimizing our supply chain initiatives to support the company's continued growth potential and expand our operating margin.

Our West Coast distribution center is nearly 100% operational and is already receiving and shipping product today. The consolidation of our existing East Coast distribution facilities into a single larger location is progressing well. We have broken ground on this project and we anticipate that this center will be fully operational late in the fourth quarter of this year. We expect these new facilities to benefit operating income once fully operational, ultimately strengthening our value proposition.

Before I turn the call over to Dan, I'd like to spend a few minutes now on our ongoing sourcing initiatives.

The direct sourcing relationships we have with our mills around the world have never been stronger, which enables us to offer the highest quality merchandise and the broadest assortment at the lowest prices. The mill community from Asia to the Americas is working with us on product development with new looks, stains and construction to meet customer demand.

We continue to invest in quality and assurance around the world with the goal to ensure our products exceed customers' expectations and lead the industry. I want to reiterate that we have always been and remain committed to uncompromising integrity and ethical business conduct across all areas of the company's operations.

We expect and require the same of our suppliers and work together to advance responsible for this management. We intend to lead our industry as new regulations are developed and assure all play by the same rules to achieve sustainable forestry and safe products.

In reference to the federal search warrant served at the end of September, we continue to cooperate by providing the information requested. There is no update or additional information to provide at this time. As most of you know, the sourcing practices at one of our Northern China mills was sided last fall in an environmental organizations report in combination with our internal team, we have engaged third party resources including forensic specialist to review our sourcing in Northern China.

These reviews efforts are in addition to our continuing investment in product sourcing processes and practices over the last two years. I remain confident in these processes and practices, which are designed to elicit adherence to our comprehensive standards for quality and compliance, which we believe exceed industry standards.

Overall, our direct sourcing model is intact and our diversified sourcing across more than 150 suppliers will continue to afford us the flexibility to add or remove vendors quickly, seamlessly and appropriately as needed.

And now, I'll turn things over to Dan. Dan?

Dan Terrell

Thank you, Rob, and good morning, everyone. I will provide details on our results for the fourth quarter and full year 2013 and update our outlook for 2014. As Rob noted, this was a special year for the company highlighted by a record fourth quarter.

In the fourth quarter, as you have all heard, our sales growth, gross margin expansion and record operating margin have come from a portfolio of initiatives, working individually and in combination. However, one thing underlies it all, our people working as a team with a unified vision, their focus, commitment and execution at our stores and across the organization helped deliver this record quarter and year.

For more than two years now, we have been working on the store support infrastructure which allows our motivated sales team to deliver outstanding results. Our direct-to-the-mill sourcing model has never been stronger and we believe our assortment, quality, pricing, and availability are growing competitive advantages. Our marketing continues to reach more customers and our real estate strategy in showroom design allow us to capture more of their demand.

Our supply chain operations are more efficient and more effective and structural improvement is on the way. We work on effective communication across the organization into the stores every day to emphasize our one team, one dream philosophy.

This is a support infrastructure that allows a better trained, more focused and motivated sales team to deliver record results in 2013 and beyond. As I go through the results for the quarter, note that my references to percentage and basis point changes are in comparison to the fourth quarter of 2012, unless otherwise noted.

Our fourth quarter net sales were $258.4 million, an increase of $47.8 million or 22.7% and included strong contributions from both comparable stores with an increase of $32.9 million and non-comparable stores, up $14.9 million. At comparable stores, net sales increased 15.6%, building on a prior year increase of 13.2% and driven by increases in both the number of customers invoiced, up 8.6% and the average sale up 7%.

We believe the number of customers invoiced in the fourth quarter increased as the greater reach and frequency of our advertising allowed our value proposition to resonate with a broader population of customers ranging from our longstanding base of passionate DIY customers to more recently the casual customer.

Our fourth quarter average sale reached approximately $1,750 up from $1,635 in the prior year and the highest fourth quarter ticket since 2007. We continue to see the average sale benefit from the attachment of moldings and accessories and the preference for premium products within a merchandise category.

In the fourth quarter, we believe the increasing number of casual customers resulted in record attachment of services including delivery and installation and certain shifts in our merchandise mix towards hardwoods, which we promoted during the quarter.

So every month during the quarter had a double-digit increase in comparable store net sales to weather related headwinds pose challenges, particularly as the quarter came to a close. The first was the impact of Hurricane Sandy. Through the first nine months of 2013, we estimated the incremental contribution from seven store, serving communities recovering from Hurricane Sandy had raised comparable store net sales by 90 basis points to 110 basis points.

We believe that the incremental contribution in the fourth quarter ended and had a certain portion of normalized demand pulled forward into the recovery period. As a result, we estimate these locations reduced comparable store net sales by 40 to 60 basis points in the fourth quarter.

Second, a large number of stores were adversely impacted by the unseasonably harsh and now well-publicized weather conditions beginning in late November. In these areas, we saw a dramatic change in customer traffic, which threatened fourth quarter sales. The increase in the number of customers invoiced in comparable stores was over 11% in the October, November period, but fell to an increase of 3% in December, primarily due to the weather impacted areas.

The exceptional service provided by our sales team, however, drove our average sale to $1,800 nearly 9% increase over December 2012 and the highest monthly level since June 2008. As Rob indicated, we opened 11 new stores in the fourth quarter including five in December all in our store of the Future Format, and we remodeled eight existing locations. These 19 total showrooms operating in our expanded format bring our total for the year to 52 or 16.4% of our 318 total stores with 30 new stores opened, and 22 existing stores remodeled in 2013.

A number of the remodeled stores were impacted by the difficult weather-related comparisons in the fourth quarter such that aggregate comparisons to the total were not meaningful. But overall, we continue to be pleased with the results of our stores in our expanded format, new and remodeled.

Turning now to our gross margin, which expanded 170 basis points to 40.8% in the fourth quarter. As most of you know, we segregate our gross margin drivers and to those associated with our product margin including our sales mix, those associated with transportation of our product and all other costs. In the fourth quarter, the product margin category drove 210 basis points of gross margin expansion, which was partially offset by 10 basis points of higher transportation costs and 30 basis points higher in the all other category.

Within product margin, our sourcing initiatives continue to lower net product cost and discipline at the point-of-sale exercised by our sales associates continue to produce a higher retail price. Sales mix shifts favorable to gross margin include an increase in the customer preference for certain premium products, and an increase in moldings and accessories which represented 18.4% of our net sales in the fourth quarter, up from 17.6% in the prior year.

Other sales mix shifts including increases in certain hardwood categories and greater attachment of non-merchandise services drove gross profit with higher than average retail price point, but did not benefit gross margin as these categories tend to have lower than average gross margin.

As I mentioned earlier, we believe our promotion of certain hardwood categories in the fourth quarter was the driving factor in the sales mix change over a general customer preference for hardwood. Within transportation costs, the benefits of generally lower international container rates lowered domestic fuel costs, lower third-party carrier rate and generally more efficient operations completely offset the cost of significantly higher domestic unit flow.

As we positioned inventory for full implementation of our West Coast facility, we incurred incremental domestic transportation costs of approximately $1.3 million, primarily due to the transfers between East and West Coast facilities and the building of in-store safety stock. Domestic unit flow from distribution centers to stores increased 30% in the fourth quarter.

Within the all other cost category, we saw a higher sample costs and a change in the timing of charges for inventory shrink and obsolescence. As we noted previously, we had a multi-year focus on better alignment of inventory with sales mix and greater control with regard to shrink. While we have levered the cost of shrink and obsolescence in each full year, the timing of charges across the 2013 quarters was more consistent than 2012 where the fourth quarter included a large benefit.

Turning to operating income, SG&A expenses for the quarter increased approximately $13.5 million or 23.3% to $71.3 million and as a percentage of net sales increased to 27.6% from 27.4% in the prior year. Salaries, commissions, and benefits increased approximately $5.8 million, but remain flat as a percentage of sales at 11.9%. Leverage of our corporate infrastructure offsets certain increases in warehouse operations including the West Coast distribution center, store operations including non-merchandised services and benefit costs including medical.

Advertising expenses increased 21% or approximately $2.8 million, but there as a percentage of net sales decreased 10 basis points to 6.3%. We increased our investment significantly in the first six weeks to seven weeks of the quarter and thereafter effectively adjusted our flexible spend to align with demand trends including those adversely impacted by harsh weather. Throughout the quarter, we levered our national advertising spend over our largest store base.

All remaining SG&A expenses including occupancy, depreciation and stock-based compensation increased approximately $4.9 million and as a percentage of net sales increased 30 basis points to 9.4%. Included in this increase were approximately $1.7 million of expenses related to the start up of the West Coast distribution center and certain legal and professional fees related to the federal search warrants executed in September 2013 and the two legal proceedings filed in the fourth quarter or later and referenced in our 10-K.

Our operating margin was a record 13.3% in the fourth quarter up 170 basis points from 11.6% in the prior year. The effective tax rate was 39.3% in the current quarter and 43.7% in the prior year. Net income increased 50.6% to $20.8 million or $0.74 per diluted share based on approximately $27.9 million weighted average diluted shares outstanding.

I'd now like to discuss our results for the full year. Net sales for 2013 increased $186.9 million or 23% to $1 billion with comparable stores increasing 15.8% on top of an 11.4% increase in the prior year. Non-comparable stores contributed $58.7 million to the increase as we opened 30 new stores, all in the U.S., 25 of which were in existing markets and five in new markets.

Gross margin for 2013 was a record 41.1%, an increase of 310 basis points over 2012. As Rob indicated, our entire team views gross margin expansion as a multi-year strategic focus with initiatives coordinated and implemented across the organization. As a result, gross margin has now expanded 580 basis points since 2011 with 530 from product margin and 50 from transportation.

SG&A expenses in 2013 increased 23.7% to $285 million and increased to 28.5% of net sales from 28.3% in 2012. Advertising expenses were 7.6% of net sales in 2013, 40 basis points higher than 2012.

Operating margin increased 300 basis points to a record 12.6% and over a two year period has expanded 640 basis points. The effective tax rate was 38.8% in 2013 compared to 40% in 2012. Net income increased 64.4% to $77. 4 million or $2.77 per diluted share based on approximately 27.9 million weighted average diluted shares outstanding.

Turning to our financial position, liquidity and capital resources our cash and cash equivalents increased to $80.6 million at the end of 2013, up from $64.2 million at the end of 2012. Merchandise inventories totaled $252.4 million at the end of 2013, up from $206.7 million at the end of 2012, as available per store inventory increased to $669,000 from $585,000. We anticipated this increase as we built inventory earlier than in prior years around known events and increased safety stock in anticipation of our West Coast facility becoming fully operational.

Capital expenditures were $28.6 million in 2013 up from $13.4 million in 2012, primarily due to our continuing store base expansion, the remodeling of existing stores and $10.5 million for property and equipment related to our new distribution centers.

Turning now to our outlook for full year 2014. We continue to expect net sales for the full year in the range of $1.15 billion to $1.2 billion with comparable store net sales increasing in the high single to low double-digit. We continue to expect operating margin expansion in the range of 13% to 13.8% resulting in 2014 earnings per diluted share in the range of $3.25 to $3.60 based on a diluted share count of approximately 28.1 million shares exclusive of any impact of our stock repurchase program.

We continue to plan for 30 to 40 new store locations and expect those openings to be weighted in the first half of the year. We continue to plan further remodeling of 25 to 35 existing stores weighted to the back half of the year. We expect our operating margin expansion to be driven by gross margin expansion partially offset by SG&A expenses that increased as a percentage of net sales compared to 2013.

Allow me to provide some color in our key areas of consideration. First, our operations have not been immune from unusually severe winter weather impacting a large percentage of the population. We believe unseasonal weather conditions in the past have generally impacted the timing of product demand as opposed to materially increasing or decreasing it.

Flooring is a well-researched large-ticket home improvement projects in which we believe our end customer invest up to 100 days or more from initial consideration to final installation. While certain adverse weather conditions like we have seen in 2014 to-date may actually encourage the online research most customers undertake, it has certainly challenged those next steps of visiting a store and working with our in-store expert.

As a result, we believe the purchase cycle has been disrupted across a number of markets and recovery will be uneven including potential surges of pent-up demand. Though we still have the most important 40 days of the first quarter ahead of us, customer demand may not normalize until the end of the second quarter.

As a result, we now expect total first quarter net sales to increase 10% to 15% over the first quarter of 2013 with comparable stores increasing 3% to 8%. For the full year 2014, we now expect advertising expenses to increase 20% to 30% over 2013 and up to 25% in comparing the first quarter.

For the full year 2014, we expect up to $7.5 million of incremental SG&A expenses related to the opening and continued operation of the West Coast distribution center and $2.5 million to $3.5 million of legal and professional fees relating to the federal search warrants and the two recently filed legal proceedings referenced in our 10-K, with nearly half incurred in the first quarter.

Finally, we expect capital expenditures between $80 million and $90 million including up to $50 million for supply chain investments.

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

Rob Lynch

Thanks, Dan.

As we look forward in 2014, our value proposition is more powerful and relevant than ever. To support our continuing growth, our planned capital investment in 2014, the largest in our history, with a significant investment in our distribution facilities and the continuing rollout of our Store of the Future. In addition, we are also excited to invest in our Toano facility to increase our finishing capacity and provide greater control over our supply chain for domestic hardwoods. These investments are aimed at long-term sustainable benefits enabling us to control the profit from the tree to the final wood plank and strengthening our dedication to product quality.

Our portfolio of key strategic initiatives is continuing to work individually and in combination with one another to fuel multi-year gross margin expansion. As we look forward in 2014, we anticipate continuing operating margin expansion as a result of improvement in our gross margin.

Our value proposition, our direct sourcing model and our best people are the foundation on which we are generating improved results. In the first week of March, we will hold our second annual national Lumber Liquidators University that brings all of our stores and leadership team together to further reinforce our unified long-term vision and reiterate the strategic priorities and objectives for the company.

This year we are focused on further enhancing selling techniques, which we believe will better arm our store sales teams with the right skills to continue to form long-lasting relationships with customers, ultimately helping to drive incremental sales. As we head into LLU, our teams dedication, sense of urgency, and commitment to delivering results is stronger than ever.

Finally, before we turn the call over for questions, I want to note that we are very pleased with the recent approval by our Board of Directors of $50 million increase in our share repurchase program. This action speaks to our commitment to continuing to return capital to and generate value for our shareholders.

Operator, we are now ready for questions.

Question-and-Answer Session

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from Peter Keith from Piper Jaffray. Please proceed with your question.

Peter Keith - Piper Jaffray

Hey, good morning, everyone. Congratulations on the nice quarter and a good year.

Rob Lynch

Thanks Peter.

Peter Keith - Piper Jaffray

I want to dig into the market guidance a little bit, so the op margin I think you are guiding up, if my math is correct about 40 to 120 basis points, it sounds like more than that will be gross margin. Could you guys’ layout kind of what you see going forward this year as some of your key gross margin drivers?

Dan Terrell

Sure, Peter. And your math is correct. Gross margin will lead and we expect somewhere around 30 basis points to deleverage out of SG&A. Gross margin drivers in 2014 same as we have had in 2013 and 2012, where they’re coming from the sourcing initiatives, lowering product cost, but also expanding the assortment putting premium products out there, attachment of moldings and accessories.

Within the transportation area, we are going to see some benefit certainly out of the more efficient operations that we continue to see within the group, but now structurally once the West Coast goes operational we'll expect to begin to see benefit in 2014 for that and certainly as we look into 2015 for the East Coast facility as well.

Have in-store discipline around the point-of-sale? Our store people work really hard on selling the entire value proposition to give the customer really what they need, it's not all about price, it's about the entire package. And they've worked on making sure they get a complete ticket and the right flooring for the customer including all the accessories there.

So Rob help me out, I think that the primary drivers that we'll see, just as we have seen each one has some juice going into 2014. And we’ll say we’ve seen the casual customer changed the sales mix a little bit with regard to services and we called that out in the prepared remarks and those services tend to have a lower than company average gross margin, they could put a little bit of a contraction on the margin until they agree we promote hardwoods and have the customer response to it, hardwoods drive gross profit but tend to contract gross margin a bit.

Rob Lynch

Yes. Peter, the only thing I would add is that, we're continued to be pleased with the efforts there. It's a coordinated effort across almost every function in the company and we have a nice portfolio of initiatives cross functioning that's driving that enhancement in the margin and that will continue to drive it.

I think, one thing I would like to point out, give a little credit to our field organization as well is just the fabulous job they did last year as we challenged them on the pricing -- this happened in LLU last year, I mean one of the major themes there was, as we were driving more centrally, driving pricing and promotions and coordinating up here and handing the ball off easier to the stores and operating more efficiently, the stores had less need to kind of discount and could firm up on their pricing disciplines. And they stepped up like everything, everything we challenged and would they step up for that challenge and they knocked out of the park, and it's absolutely our focus going forward.

So again, there is no super bullets in that. It's coming from a number of areas. I think over time certain things are leading more than others in terms of the margin enhancement but I think the main message is it will continue and it will continue for a while.

Peter Keith - Piper Jaffray

Okay. Dan, thanks that's a great summary. And maybe just two quick follow-ups, one for Rob and one for Dan. Rob, with the mixed solid hardwood from some of the promotions that you saw in the fourth quarter, is that – Dan certainly you felt like you drove that makeshift and would you anticipate that shift continuing on a go-forward basis?

And then, for Dan on some of the supply chain efficiencies, I think you guys historically run about 8% to 10% with transportation costs as a percent of sale. How much do you think you could take out of that with these – the new – the two new DCs and that better infrastructure?

Rob Lynch

Okay. Peter to your question about the mix, yes, absolutely that was intentional. Our merchants over the last year or so have been doing a lot of hard work, working on our solids, our exotics. As you know, we went direct there in South America, got much closer to the mills, really enhanced those relationships, enhanced the assortments and the product quality, driving the price down as well.

So that's an area that we've been rebuilding our assortments, it's a focus area that we drove in a promotion last quarter and its going to be a major focus on the re-launch that we discussed in our Lumber Liquidators University with the entire field organization and we'll absolutely be a theme this year all year out there in the stores and then our marketing and merchandising strategies.

Dan Terrell

And Peter on the transportation cost, you're right. It has typically run 8% to 10% of net sales and I've said a few times I think, we can take a 100 basis points out of that once the West Coast and East Coast are fully transitioned, fully operational, so once we get into 2015 and beyond. With the West Coast going fully operational in the first quarter, it's probably going to put another 15 points of drag in the Q1's gross margin. We may see that as a push in Q2 and then start to see anywhere from 20 basis points to 40 basis point of benefit as we go through the second half of the year.

And then, once we get a quarter out from the East Coast consolidation, we're able to see that – we should see the additional basis points coming to make up that 100.

Peter Keith - Piper Jaffray

Okay. Great ramp up. Thanks a lot. Good luck this coming year.

Rob Lynch

Thanks Peter.

Operator

Thank you. Our next question is coming from Aram Rubinson with Wolfe Research. Please proceed with your question.

Aram Rubinson - Wolfe Research

Hey. Good morning and thanks for taking the question.

Rob Lynch

Hi, Aram.

Aram Rubinson - Wolfe Research

Question circles around capital intensivity, the CapEx number obviously in 2014 is high. Can you help us look through the distribution center build and tell us what ongoing CapEx will look like maybe in 2015 and also along those lines, if you're looking at kind of getting more vertical over time, how we should think about that in terms of capital intensivity and then my follow-up will be on working capital?

Rob Lynch

Aram, that's the – you're dead on that. It's the structural changes in 2014. As we came into 2013, our cash was a little higher than we expected and our CapEx was a little lower because of some of the change in the timing of our East Coast facility. Unbelievably wet weather here in the Mid-Atlantic has delayed that schedule a bit. So we are now in the fourth quarter for that that benefited cash.

Lower 2013 CapEx, pushed some in 2014. Of the $80 million to $90 million, $50 million of it is going to be related to these facilities. Another $10 million is going towards our finishing capacity, looking at some vertical integration. But we do our finishing here of our Bellawood product in Toano. We are looking to expand that capacity and that will be about $10 million.

So when you take the $50 million and the $10 million together, that's about $60 million, that's more of a one-time event that would leave the other $20 million to $30 million continuing with about $10 million related to stores. The store of the future program, I think is we've allocated about $10 million towards that in 2014 between new store openings and the remodeling of existing stores.

Aram Rubinson - Wolfe Research

And just one clarification, and then I have that follow-up. But on the Store of the Future, I noticed in the 10-K, it's said that there are 16% of your store-base, but only 8% of your sales. Are those stores doing half the volume of your average or did I misread that?

Rob Lynch

No. You read it correctly. I mean it's the month of operation that matter there. The new stores, traditionally will – if we open with the uniform cadence, of course they'll have six months of operation in that first year, annualizing the second year. So of those 30, we actually – in 2013, we actually back weighted their opening. So our average non-comp base by the end of the year only had five months of operation in it.

On the remodelings, I think we did almost half of them in the last five months of the year, so they didn't have the same time to operate in the year as our average comp store, or average store did.

Aram Rubinson - Wolfe Research

And then just to finalize on working capital also your accounts payable days were down. Just tell us if there was any impact favorably to gross margin from that, or how we should think about that going forward and I appreciate it.

Rob Lynch

Yes. Just the timing of the build Aram. You notice that our AP was pretty comparable to last year at December. I think our in-transit inventory was pretty comparable to last December, even with the increased scale of our business. We brought end product earlier in the fourth quarter in anticipation of the first quarter than we had previously. We've been working to get in front of Chinese New Year, to get in front of the rainy season in Brazil and to build some safety stock related to the West Coast inventory. So all it really was the timing, when we decided to bring in that build, looking forward to the spring inventory.

Aram Rubinson - Wolfe Research

Thanks guys. Best of luck.

Rob Lynch

Thank you.

Dan Terrell

Thank you.

Operator

Thank you. And our next question is coming from Keith Hughes from SunTrust. Please proceed with your question.

Keith Hughes - SunTrust

Thank you. Doing into the ticket here, you have any sort of metrics on what your hardwood sales were year-over-year in terms of prices, is there any inflection off with some of this discipline at the sales counter that you had mentioned to earlier?

Dan Terrell

Yes. I could speak to that. Back to the focus with our sales associates in the field, as we focused them on pricing disciplines and driving, specifically driving their ASPs, their average selling price. And the real goal there is just to prevent to eliminate any unnecessary discounting and what I would tell you it has been something that – it's part of a culture of the company, its part of our selling process, but stores have had significant flexibility there.

And what I'll tell you is behind the scenes, and we talked about this a little bit, but the last three years or so we have done a really good job of upgrading the field organization. I talk about the investments we made into it recently. And as you look at – all of you work with many retailers out there, I've been in retail my entire carrier and I've never been in a retail company where the people are more important. That's what we talk about it all the time. And it's really about the purchase occasion and the average ticket and how discretionary this is and just how low and relatively low transaction count we are and how high ticket we are.

So your people are everything and the quality of those people, the way they are trained, incented, motivated, retained and compensated is one of the most important things that we do as a company and the culture around that is the icing on the cake.

So yes. I mean, we've really made some changes out there in the field from the top all the way down into the stores and say every person in the store. And when you have a retail concept like this that has an average of three, four, five people per store compared to a Wal-Mart with 350, one person makes a very major difference and then the leadership above that store is very critical.

So yes, our people are everything. They are a very much an intangible factor, but the things we focus them on, these improvements that you are seeing in our pricing disciplines, in our margins, our field operators are absolutely a major part of what we have been doing in China in terms of driving our margin particularly last year and more so going into the future.

Keith Hughes - SunTrust

And you mentioned on prepared comments, you ran some promotions in hardwood. So during this period did we actually see the average selling price go down in that category?

Dan Terrell

There was some pressure off of the list price. It was encouraging to see the customer take advantage of --

Rob Lynch

That was an intensive promotion.

Dan Terrell

Sure. Yes. And we put some of those out there before not been able to move the customer towards the hardwood. So the encouraging sign was that they did move towards it. But I did want to point out that this wasn't just the customer looking for hardwood, this was in response to a promotion.

Rob Lynch

And this is also like I mentioned on it earlier, but this is also related to a continuous improvement initiative relative to our assortment in those products categories. We are – we have a major initiative this year internal of the company we're calling the Bellawood relaunch, which is being launched at LLU in a couple of weeks with all of our sales associates. So this is all in combination with that. The merchant teams have been working on those categories for over a year. We have gone direct to the mills, changed out some of the vendors, enhanced products, changed some of the product categories, some of the finishes, really upgraded some of the products, and we are re-launching that this year with our associates.

Keith Hughes - SunTrust

And then final question, your accessory sales have been just fantastic again this year, two years of great growth or in the K, 18% of sales. How far can that go as a percentage of sales, how much more runaway is there?

Dan Terrell

There is still upside. I tell you though, you're right on to call it out. And this is a perfect example of the merchants putting the better assortment out there. They added tools. They added different underlay. They added different system. The category itself has continued to grow. The warehouse has to get it to the store accurately for the store to be able to sell it or they won't bother selling it. And then the store people have done such a good job of actually making sure the customer is taken care of.

So this is just a perfect area where we see coordination across the organization. When we look across the store base, we see stores that are still much higher than where they are. We've been work at LOUs, and online training on how to share best practices for attachment. So we still see years of upside there. Where the cap is? I couldn't tell you with any confidence that that we see a hard sealing.

Keith Hughes - SunTrust

Okay. Thank you.

Operator

Thank you. Our next question today is coming from Brad Thomas from KeyBanc Capital Markets. Please proceed with your question.

Brad Thomas - KeyBanc Capital Markets

Hey, good morning, Rob, Dan, and Ashleigh. And let me add my congratulations as well on a great year here.

Rob Lynch

Hey, thanks Brad.

Brad Thomas - KeyBanc Capital Markets

Wanted just follow upon on some of Dan's comments about recent trends in the first quarter expectations. We know this is a long selling process, as you mentioned Dan, as the customer browses and buys and then has to pick-up. As you look at the customer deposits, I think that was down about 13% year-over-year and down over 30% sequentially.

Could you just give us a little bit better sense of how things are running today and how you're coming up with that 3% to 8% comp guidance for the first quarter?

Dan Terrell

Yes, Brad. You're right it's a long considered purchase. The tough weather probably started in November. And as I said in the prepared remarks, the traffic tended to drop. The store people just did a great job with the average sale that carried to-date in December. It was certainly seeing difficult traffic in regions that are impacted to-date and some regions have just been so locked in that it's been a real tale of two cities.

One reason we're confident in still the 3% to 8% and the 10% to 15% overall is because when we look at our regions that have been impacted by weather and the regions we think that have not been impacted there is some traumatic differences and that's what's telling us that we still have a lot of confidence in the overall number, and just less certainly about the timing of recovery and whether that will come in the first quarter or not.

Customers have been out there trapped in their homes and doing a lot of online research, which is the norm. That may create even more of a short-burst surge once the weather does free up. But again, as I said, I don't think we're going to see normalized demand until we get all the way through the second quarter.

Brad Thomas - KeyBanc Capital Markets

Okay. Great. And then if I could just follow-up on sort of this margin sales balance, maybe looking at contribution margin, I think the last couple of years, you guys have come out in sort of mid-20s range for a flow through margin on incremental dollars of sales. Obviously, you do have a new distribution center opening here this year. Should we be thinking that things come in closer to the 20% range or is it possible that perhaps if you are successful with investment in advertising that we could continue to see things in the mid or high-20s again this year?

Dan Terrell

Yes, Brad. I think there's going to come a time where we return to our normal and then start improving on that. As you said, the early period is a little chunky here with the capital investments in the warehouse. You always get the SG&A expenses upfront with the occupancy to feeble the training. So its part of Rob's message has been, let's reinvest for the future, let's take that benefit and reinvest it. And this is just another example where we're making a pretty substantial structural investment into something that will benefit us over five and 10 years.

So just what you said early, it's going to be more difficult, but as we get through later in 2014 and into 2015, we should start seeing the benefit of those investments and revert back to the flow.

Rob Lynch

Let me chime in on that as well. That's really a tactical answer back from Dan on what we are looking at relative to a longer term strategy here, right. The thing that excites the team here and excites me very much is the growth potential we have in front of us, the opportunity for us to continue to grow given our market share. So that's why we – if you look at what we've done the last couple of years and what we're looking to do the next four or five, it's really been several years of driving significant continuous improvement in operations, creating benefit to drive earnings and fuel investment into the future.

This is like we're in the – we're kind of in the middle of that strategy right now. This year is really about investing in that value proposition, in the DC infrastructures, in the people, in the new stores and the Store of the Future, getting those infrastructure set in that capital out there for us to leverage over time.

And so as we look forward out of 2014, what we're going to see is continued growth, but then absolutely our strategy is to drive leverage off of those investments and just to drive leverage into the earnings as we look back from here three, four, five years. That's the long-term strategy as we grow into the capacity we're putting out there relative to stores and/or distribution centers.

Brad Thomas - KeyBanc Capital Markets

Very helpful. Thanks so much.

Rob Lynch

Thanks Brad.

Operator

Thank you. Our next question is coming from Matthew Fassler from Goldman Sachs. Please proceed with your question.

Matthew Fassler - Goldman Sachs

Thanks a lot. And good morning, everyone. My first question does go back to customer deposits. I think it came up in a prior question, I'm not sure that you address – that you're able to address it, that number was down a bit year-on-year. If you just discuss how that fits into other sales dynamics and incumbent dynamics that you share with us so far in the call, it'd be very helpful.

Rob Lynch

Sure. Yes, I think I missed answering that previously. The decline from the end of the third quarter to the end of the fourth quarter was definitely more of an ice cream scoop than we'd saw in 2012. But it's more than history we have seen 2007 through 2011, a lot of the deals with the timing and the way that promotions work, our in-stock position for the inventory we're promoting and how willing the customer is to take that product. And finally whether we are emphasizing and that it's a take it now to get the promotion or book the order to get the promotion.

Overall, at about $20 million, you think about that being half the order flow that's about $40 million in orders. So you're talking three weeks of January. Because it was a little bit more severe than last year, and really it's related to the lower traffic because of the weather and the way our promotional schedule went, certainly, got us off to a bit of a slower start in January, but usually that isn't for long. We recovered that after first two, three weeks of a month.

Matthew Fassler - Goldman Sachs

So you would say that your sales guidance is consistent with whatever forward that would point to?

Rob Lynch

Yes.

Dan Terrell

Yes.

Matthew Fassler - Goldman Sachs

Second question, it's sort of another tack on the whole sales theme. Obviously, you book delivered sales as revenue and it's not only a considered purchase for a customer but there is some – I guess some lag time between the moment of the order and fulfillment to the customer. So if you think about the cadence of sales through the year, to the extent that traffic is sluggish today, I guess that would have some impact on delivered sales, not only in Q1 but also in Q2. So is the sales cadence that you anticipate a 3% to 8% comp in Q1 and then something still on the south side of the annual guidance in Q2, or do you expect that your – that delivered sales will sort of catch up and reflect the research that people are doing in Q1 and get you back on plan for the second quarter overall?

Dan Terrell

Matt, the uncertainty that this has created has been the difficult thing for us. Just as you said, its where the sales process got interrupted. And in this case, we think people had even more time to consider the front part of the purchase, but left to go visit the store and certainly nobody is anxious to go pick it up, have it delivered and try and acclimate in this environment. We're anticipating -- the reason we like the full-year as we believe that we can – that the demand that we have lost here in the first quarter, we will catch up by the end of the second quarter. So while the first quarter maybe weaker, we're actually anticipating to get back and trying to maybe pick-up part of that demand in the second quarter.

Matthew Fassler - Goldman Sachs

Got it. Two very quick cleanup questions. At the end of your prepared remarks you made an impact – you rather you made a statement about the likely impact of the DC build out on SG&A for the year. Is that consistent with the initial guidance you've provided on the impact of the DC or is that incremental, that's what you previously talked about for 2014 given some of the timing issues that you discussed earlier?

Dan Terrell

For the year, I think it's consistent. I think we had about $7.5 million as the total incremental SG&A step-up and what that would be is though – that's first to start-up plus early operation and then it's just pure operational incremental cost in quarters two, three, and four.

Matthew Fassler - Goldman Sachs

Okay. And then last but not least, you had commented on answering a question on Store of the Future store count and sales just to be abundantly clear, the store count was basically a year-end number whereas the sales was the total number. So those numbers probably would not align, is that correct, it wouldn't be expected to?

Dan Terrell

Yes. That's correct.

Matthew Fassler - Goldman Sachs

Okay. Thanks so much, guys.

Dan Terrell

Thanks, Matt.

Operator

Thank you. Our next question today is coming from Seth Basham from Wedbush Securities. Please proceed with your question.

Seth Basham - Wedbush Securities

Good morning, nice quarter guys.

Rob Lynch

Thank you.

Seth Basham - Wedbush Securities

A big picture question for you first Rob, you guys mentioned that you're bringing a little bit more of your finishing in-house. Can you give some color as to what aspect of finishing are coming in-house?

And then secondly, on top of that, thinking about the opportunities for further vertical integration going forward, what's on your play, what are you considering?

Rob Lynch

So relative to the finishing investment, we're shy about that and I got to go back and I keep beating this dead horse, but we talk about continuous improvement all the time. So I got to give credit to our sourcing and supply chain teams that manage our finishing here in Virginia. We made some changes there, put some serous focus on at the last year. So and those teams have really driven significant improvement in our existing finishing operations in terms of our costs for the finishing.

And as a result of that, we began testing and thinking about some additional ways to kind of virtually integrate and take more advantage of that skill set. So that's what this is all about. This is just a natural progression upstream into very low risk vertical integration to take on more capacity for finishing of products, obviously, specific to Bellawood, really across many of our categories relative to our private label brands outside of Bellawood in terms of our Virginia Mill Works, other engineered products obviously any of the exotics coming from South America and absolutely with a focus on the domestic market as well.

And then relative to longer-term, I would tell you that nothing really to talk about now, but in the spirit of continuous gross margin enhancement and looking for ways to continuously get better as an organization and as a company to deliver better value and quality to our customers, we're going to continue to look in that area and experiment and test and investigate ways to drive our margins into the future.

Seth Basham - Wedbush Securities

Got you. Okay. And then a separate question regarding traffic versus ticket. It's been very well-balanced in 2013 each quarter. As you think about 2014, are you expecting a similar type of nice balance or do you expect ticket to be stronger driver of comp going forward as you see more trade up and what not?

Rob Lynch

Exactly, it turned out to be a nice balance in 2013, although we came in thinking traffic was going to dominate or going into 2014 thinking traffic will actually dominate, that's why we're so aggressive in our advertising and promotional spend as we still believe we're touching and have a broadening group of customers that are seeing our value proposition for perhaps the first time. So we still think in making that investment and driving that traffic will lead our comp sales. But certainly our people are delivering on the premium products, the best solution for the home and a complete ticket.

Seth Basham - Wedbush Securities

Got it. Thanks guys.

Operator

Thank you. Our next question today is coming from Matt McGinley from ISI Group. Please proceed with your question.

Matt McGinley - ISI Group

Good morning. My first question is on the inventory. Could you walk me through the moving pieces of that available for sale inventory you have -- I think it's 669 per store at year-end and you intend get that down to I think an average of 600 by year-end. Can you kind of walk me through the gating of that process and how we think about what a normalize level of inventory would be on a go forward basis?

Rob Lynch

Yes, Matt. We had said somewhere around 660 to 680 for the end of the year. Just as we kind of saw this inventory build, we're going to be heavier – even heavier than we're currently or as we were at the end of the fourth quarter probably as we go through the West Coast implementation in March that may even carry into the summer. It will probably have another mini build as we start to think about the safety stock around the East Coast transition, but once we get through the structural changes, we believe there is efficiency in inventory. Certainly, the West Coast facility puts a product assortment closer to the stores. You offset that, but you've got to carry duplication of some stock in both facilities, but we think overall, the efficiency of having it closer to the sale will allow us to reduce it.

So we're thinking in terms of the 580 to 620, 600 to 640 range as once we normalize depending on where the demand curve is, and what we see the customer selecting whether it's product they expect to carry out of the store that day or whether it's product that they expect to order and pick up three weeks from that date.

Matt McGinley - ISI Group

Okay. Got it. Then another question about the market share in your 10-K, you used a third-party to estimate what the market share is. And I think last year you said it was 10.5%, and this year it was a little bit lower than that at 10.2%. Maybe I am reading too much into that, but looks like you reported that you lost a little bit of share of hardwood. I am wondering when do you think that's actually correct? If so, why would that be? And is that potentially something that's fruitful and that you're encouraging sales on higher margin laminates and bamboo that actually are better for the overall company?

Rob Lynch

Matt, I think the kindest way to say there, I won't read too much into that. They are really hard numbers to put together. Our share of what we could measure against the hardwood and I think the laminates are in there, it keeps changing. And everyone has a hard time because of their fragmented market trying to figure out what the overall pace of increase is. And certainly, the group we cite does as well as anybody does. But I think as a group we don't feel that we necessarily surrender share. That means there is a different opportunity out there.

Matt McGinley - ISI Group

All right. Thanks, guys.

Operator

Thank you. Our next question is coming from Dan Binder from Jefferies & Company. Please proceed with your question.

Dan Binder - Jefferies & Company

Good morning. I had a couple of questions. First, on your comp assumptions for the first quarter, I was just curious if you could give us a little color on what the underlying ticket growth is in that 3% to 8%. And then also if you could comment on the kind of comp differences you're seeing in weather affected markets versus those that are not?

Dan Terrell

Dan, I'll give you a picture of that, we think ticket obviously is stronger in the early part of our the quarter, but it's going to – it's probably be traffic in the second half, just like we expect for the year once that demand is able to – or people are able to get out of their houses. One thing it's important to note is these next 40 days are so much more important than these previous 50, 53 have been just because of the way the quarter flows. January is the least consequential month. As you move through February, you begin to get that spring remodeling season underway, tax returns, common people coming out and they're looking for their projects.

So what's in front of us is still the most important time, so we would say by the time the quarter settles out, it's probably a balance, and the first quarter still looking for traffic overall year 2014. And we have seen – I'll just give you a snapshot thought of January was a double-digit increase in those comp market not impacted by weather and a double-digit decrease in those they were.

Dan Binder - Jefferies & Company

Okay. So that sort of implies that you're running flattish for the quarter to-date, is that right?

Dan Terrell

Right around that.

Dan Binder - Jefferies & Company

Okay. On a different topic, what are you expecting in terms of close rates for the Western regions once you get, it sounds like the DCs are already up and delivering. I would think that was product more available – there is less lead time, there is less issues around inventory in terms of satisfying the customer. What do you think that can do for close rates?

Rob Lynch

Great question. And absolutely, we are so excited about that. The only people more excited are our West Coast stores about having that DC out there. They are jumping up to bit for that thing to be 100%. But what I would tell you is specifically the lead time is not a good way to look at it because as we look at the product flow, particularly if you look at stuff coming from overseas and Asia, if it's coming to the East Coast then we go back versus going direct there through that DC, and as we can spot that DC not to mention, even a lot of the domestics that's coming from here that stores they have to wait for.

I mean we're going to see a pretty dramatic reduction in lead times almost cutting them in half for those stores. Just in terms of getting the freight out there through the distribution center, but what that – once that thing is fully stocked and operational, there are stores that are going to be able to get things in one, two, three days that sometimes we'll have to wait two, three, four weeks.

Dan Binder - Jefferies & Company

So if you look at your closed rates on the West Coast versus the East Coast today, is there – I would think there is a more meaningful difference. Can you kind of give us what the opportunity is in terms of getting the West Coast similar to the East Coast?

Rob Lynch

I think the real opportunity is going to be in some of those categories where when you look at what the customer is demanding, obviously, sometimes the customer wants to take it with them. So the really shining thing I think is the gain in – close rates will be improved significantly obviously. But I think the opportunity for growth and market share is going to be in some of those categories and some of those items where the customer is going to want it sooner than later where we don't have it in-stock out there in the store.

We're going to be able to deliver on that customers' requirement in lightning speed relative to what we've been doing in the past. I think that's what we're going to see out there is incremental gains relative to competitors by improving that part of our value proposition and the availability of the product of those items that customers have less of a – or let's just say more of a need to have it sooner than later.

Dan Binder - Jefferies & Company

And my final question is related to expenses. I imagine with all of the weather issues in terms of extreme cold and precipitation has probably added cost in the first quarter related to snow removal, utilities, and distribution delays and so forth. Is that a number that's quantifiable based on what you noted early and is it meaningful?

Rob Lynch

You're certainly dead-on that we're incurring higher occupancy cost because of that. It's not a cost that we broken out, if it continues on and may become material enough to breakout, but I mean it certainly there. It's impacted us in so many different ways and its hard toll on the stores, but right now it's not enough to call out.

Dan Binder - Jefferies & Company

Okay. Thank you.

Operator

Thank you. Our next question is coming from Laura Champine from Canaccord. Please proceed with your question.

Laura Champine - Canaccord

Good morning, guys. One number from the 10-K that we thought was interesting was you're only seeing installations on less than 8% of sales. And it also mentions that you might be doing some things to kind of take more control over that part of the business. Could you talk about that and what opportunity there is there?

Dan Terrell

Yes, Laura. I'll start with the numbers and let Rob talk a little bit about the strategy. But you're right, it's always been less than 8% and at one point much less than that. When we started working with the third-party provider to put some consistency out there as we open stores and what not. We began to see the attachment rate of installed go up. But the DIY customer just hasn't been interested in that. Only one in 10 customers opted for delivery in the past and at some points lower than that. So that gives you a picture of who that DIY customer is. They want to control the transaction, they come pick it up at the store and they put it in.

As we've attracted a more casual customer, we've seen those attachment rates change, and we think there's opportunity to continue to increase that attachment and installation and in delivery services as the customer continues the shift. Rob is investing in, can we control this transaction? Do we keep visibility to it? Can we provide a better level of service to really complete the transaction and that's kind of the theory and the strategy behind the testing of the new program.

Laura Champine - Canaccord

Thank you.

Operator

Thank you. In the interest of time that does conclude our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Rob Lynch

Thank you for joining us on today's call. We look forward to speaking with you again on our first quarter earnings call to review our continued progress in executing our strategic initiatives to achieve our long-term objectives. Thank you.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day. We thank you for your participation today.

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