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Tile Shop Holdings, Inc. (NASDAQ:TTS)

Q4 2013 Earnings Conference Call

February 20, 2014 05:00 p.m. ET

Executives

Bob Rucker – Chief Executive Officer and President

Tim Clayton – CFO and Senior Vice President

Chris Homeister – COO

Analysts

Kate McShane – Citigroup

Justin Kleber – Robert W. Baird

Daniel Moore – CJS Securities

Peter J. Keith – Piper Jaffray

Joe Feldman – Telsey

Operator

Greetings and welcome to The Tile Shop’s Fourth Quarter and Year End 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. 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 fourth quarter and year end 2013 earnings conference call. Let me 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 not limited to, plan, expect, anticipate, believe, goal, estimate, potential, may, will, might, could, target and any other similar words identify forward-looking statements that may be made. 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 company’s earnings press release issued today and in the Tile Shop’s latest filings 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 non-GAAP financial measures. Please see the company’s earnings press 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 through 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 Chief Executive Officer, Mr. Bob Rucker. Bob?

Bob Rucker

Good afternoon. Today I am joined by Chris Homeister, our COO and Tim Clayton, our CFO.

Let me start by stating that we are very proud of the growth the company produced in 2013. While we did have challenges during the year, the full year result represented strong sales growth of 25.7% to almost $230 million and same-store sales that increased 12.4% on top of a 7.1% increase in 2012.

Even during the fourth quarter where weather impacted our business, we had same store sales growth over 10%. These results are due to the unique attributes of The Tile Shop and our approach to the business. We are continuing our drive to become the only national chain in the tile industry ultimately with hundreds of retail locations over the long term.

To that end, we opened 20 stores in 2013 with 7 stores in existing markets and 13 stores in new markets. The store base increase of almost 30%. At the end of the year, our store count was 88 stores located in 28 states. We also now have four distribution centers and three manufacturing facilities after opening our Durant, Oklahoma facility in 2013.

We know we generate high returns on new store investments and we will continue to focus on driving long term profitability which has been a cornerstone of this business. The long term strengths of our model remain in place. The strong and consistent performance of the company is being supported not only by our new stores but also by the consistent performance of our mature store base. We will continue to invest in areas that are critical to our success by deploying the right technology, sales support, merchandising, purchasing, accounting, marketing and human resources to support profitable growth.

The Tile Shop is making progress and remains committed to providing our customers with the highest quality natural stone, ceramic and glass tile products. We are enthusiastic about the opportunities to strengthen our leading position in the industry and broaden our reach across the country in the coming years.

I would now like to turn the call over to Chris Homeister. As you know, Chris joined the company in October and has an extensive retail, operational and financial background. Chris leads all operational groups for the company and he will discuss with you further on our 2013 results and 2014 key initiatives. Chris?

Chris Homeister

Thanks Bob. I’ll begin by briefly walking through a few key highlights and additional details of our fourth quarter and move onto some comments regarding our plans for 2014.

In the fourth quarter, the 10.1% comparable store sales growth was a result of strong customer traffic growth coupled with a slight increase in average ticket. Traffic level dropped and year-over-year growth slowed as we progressed throughout the quarter with the most noticeable decrease occurring when harsh weather conditions to cold in many important markets. Effect that weather can have on our business is multifaceted. It impacts customer traffic to browse and order and slow our ability to get product orders from our distribution centers to stores and finally can delay the completion of sales from customers taking longer than normal to pick up their purchase. This can potentially result in a more compounded impact -- perhaps stall [ph] other cash and carry retailers.

Historically, the sales tend to be deferred and not lost. The company is stronger than it was a year ago with strengthened infrastructure and processes. To that end, we will continue to invest in the company, putting in place additional operating, supply chain and financial controls to structurally enhance the business and this will represent incremental investments this coming year.

Moving onto our key initiatives for 2014. We anticipate opening 20 new stores ending the year with approximately 100 new store locations. These locations will be in 14 new and six existing markets as we work to build and extend our brand and value proposition in the tile space.

Through the quarter, the company opened eight new stores and through today we opened two in 2014 bringing the total open stores to 90. The new markets that we have entered are very diverse and included the greater New City area, Boston, Buffalo, Denver, Dallas and Jacksonville, Florida. All of the new stores are located in trade zones with at least 400,000 in gross population.

During the first quarter of 2014, we will open our first urban store in Chicago and are excited about the prospects of this store operating in a densely populated area to further increase our market penetration in a strong and existing market. With little to no brand awareness in new markets, the majority of our new stores are profitable within the first six months of actively open. This store operating model is proven and we will be disciplined in our approach to opening new stores and will help ensure that we will improve profitability and cash flow as we move ahead.

In addition to new locations, we will also drive growth by continuing to invest in our current store base with appropriate remodelling activities. Between 15 and 20 stores are scheduled for updates to binates [ph] flooring and merchandising configurations this year which is similar to previous years. We will also continue to invest in our tileshop.com store as it continues to be an important vehicle for our customers to research their specific projects as well as purchase directly from the company. We will be adding many new attributes and feature store Internet store front including the first time ability for our customers to ship their order directly to one of our stores for free eliminating a customer expense and barrier from purchasing in an online environment.

From an advertising perspective, we are modifying our approach to employ more dynamic messaging and personalized media capabilities to attract new customers and build loyalty in 2014 and beyond. Our target approach will result in fewer broad based marketing campaigns and instead we’ll focus and speak to customers when they are actively researching projects and deliver specific offers that will most appeal to our identified customer segments.

Gross margin is a key focus area for the operating team and store leadership in 2014. Careful examination of the cost-benefit relationship of promotional activities as well as opportunities and inventory management and customer freight should all contribute to consistent return to 78% gross margins.

Finally, the actions taken during the fourth quarter of 2013 created positive momentum on inventory levels that will service well in 2014. While we plan to open 20 new stores this year, our goal is to end the year with very modest growth in inventory from the 2013 year-end figure. Also we can effectively support current and new store locations with our existing distribution facilities and therefore do not have plans to open new facility in 2014.

We are committed to a best in class retailer of tile and related products and believe that many important steps have been put in place to ensure we reach this goal.

With that let me now pass the call to Tim.

Tim Clayton

Thanks, Chris. As you all know, we previously provided our preliminary results for the fourth quarter and the year in a press release we issued in late January. In that release, we reported net sales of $57.8 million for the fourth quarter of 2013 which represents growth of 25% over sales of $46.2 million in the same quarter of last year. Despite adverse weather in our key markets in December, we still achieved a 10.1% increase in comp store sales in that quarter and an increase of $11.6 million in sales in total over the fourth quarter of 2012. The 10.1% increase in comp store sales accounted for the $4.7 million of the overall increase in the quarter with the remaining increase of $6.9 million attributable to the 24 non-comp stores that have been opened in the past 13 months. Two stores entered the comp store group during the fourth quarter.

The 10.1% growth in comp store sales is on top of a 9.8% comp store sales increase in the fourth quarter of 2012. For the 12 months of 2013, our comp store sales increased 12.4%. This is on top of a 7.1% comp store increase for the full year of 2012.

As previously disclosed our fourth quarter revenues were impacted starting in mid-November due to a reduction in traffic, limited benefit of promotional activities and inclement weather in the company’s key upper Midwest and Northeast markets.

Gross profit increased $6.2 million or 18.4% in the fourth quarter compared to the prior year. Our gross profit margin in the quarter was 69% which was below the low end of our target range of 70% primarily as a result of cost increases, discounts and promotional activities. Cost of sales in the quarter also include certain cost of our new Durant Oklahoma distribution facility. For the full year, our gross margin was at 70%.

Our selling, general and administrative costs for the quarter were $36.8 million as compared to $26.1 million in the fourth quarter of last year, an increase of $10.7 million. This amount included $940,000 related to non-recurring items primarily special investigation costs.

On an adjusted basis, our SG&A costs in the fourth quarter were 62% of sales, compared with 56% on an adjusted basis in the fourth quarter of last year. The SG&A costs in 2013 however included the following items, which were not incurred in 2012. First and foremost and most significantly we have 24 more stores now than we did in the fourth quarter of last year. That includes the 20 stores we opened in 2013 and four stores that were opened in late December of 2012. This represents 27% of our total store count as of year end. As we open new stores, the store-related SG&A costs are disproportionately higher as a percentage of sales than our more mature stores.

Secondly, we have added 20 new employees since the end of the fourth quarter of 2012 to support our growth. In addition, the company incurred $1.1 million in the quarter related to a test advertising campaign.

Depreciation and amortization expense in the quarter was $1.2 million higher than D&A in the fourth quarter of 2012. Stock based compensation costs were $200,000 higher in the fourth quarter of this year versus last year. And finally, pre-opening costs in the quarter were $910,000 as compared to $366,000 in the fourth quarter of last year. All of these items are necessary investments for the future of the company.

Adjusted EBITDA was $9.4 million in the fourth quarter and $54.3 million for the full year of 2013. As of December 31, we had 24 stores that were opened less than one year and a total of 27 stores that were opened within the past 18 months. This represents 30% of our stores which while operating fully as expected produced results that are below the historical EBITDA four-wall margin levels of matured stores.

As we discussed on our last call there will be an EBITDA drag effect as the number of newer stores increases in relation to the total number of stores. With the expected opening of 20 stores in 2014, this drag effect will continue to impact 2014 results albeit at a lower rate. We expect this effect will begin to reverse late in 2014 as the number of new stores becomes a smaller percentage of the total.

We have also included a pro forma non-GAAP net income presentation in the press release which suggests our GAAP quarterly results by eliminating non-cash expenses related to the warrant liability unusual and non-recurring costs and which then utilizes a normal tax rate of about 40%.

This presentation results in pro forma net income for the quarter of approximately $2 million which translates into basic and fully diluted earnings per share of about $0.04. These amounts were computed using 51 million shares and 51.7 million shares for the basic and fully diluted calculation respectively. The 51 million shares used in the basic calculation represents the actual number of common shares outstanding at December 31, excluding only the restricted shares outstanding which have not yet fully vested. The fully diluted share count of 51.7 million shares includes a dilutive effect of outstanding options and the restricted stock. For the full year, the pro forma net income would have been approximately $20 million or $0.39 per diluted share.

Turning to our balance sheet as of December 31, we ended the quarter with $1.8 million of cash, $1 million of restricted cash, and $95.2 million of debt. The increase in debt in the quarter of approximately $5 million is the result of capital expenditures in the quarter.

Shifting to inventory, coming out of the third quarter, we took deliberate action and more effectively managed our inventory levels. I’m pleased to report that these actions were successful as we ended the year with $72 million in inventory which includes prepaid inventory, a reduction of $5 million or 6% from our inventory levels as of the end of the third quarter. This area will continue to be a focus for us in 2014.

Capital expenditures were $16.4 million in the quarter, related to new store buildouts, store remodelling, completion of the Durant manufacturing facility and corporate IT investments.

Our long-term debt to trailing 12 months adjusted EBITDA leverage ratio as of December 31 was approximately 1.75 times. At quarter end, we had approximately $18 million of borrowings available under our long-term credit facility.

With respect to cash flow, the company generated $8.1 million of cash from operations in the quarter. Working capital changes excluding taxes generated about $1 million of cash in the quarter as reductions in inventory were offset by reductions in accounts payable. For the year, the company generated $21.2 million of cash from operations and used $52.9 million of cash for capital expenditures.

Turning to guidance for 2014. Since the initial guidance we provided last month, it is important to note that the early part of our year has continued to be impacted by adverse weather across most of our markets. As was previously mentioned, historically weather-impacted sales are typically deferred and not lost. Consequently, because of the adverse weather situation, sales and earnings that would have occurred in the first quarter may well shift into later quarters.

However, the company continues to expect the following for the full year of 2014. Revenues to range from $285 million to $295 million, comparable stores sales growth will be in the range of 5% to 7%, earnings per share to range from $0.43 to $0.47 assuming approximately 70% gross profit margins and effective tax rate of 40% and 51.9 million fully diluted shares outstanding. We will open 20 new stores of which two have already been opened and of those 20 new stores we expect 14 will be in new markets and 6 will be in existing markets.

Depreciation and amortization is expected to be between $20 million and $22 million for the year and stock based compensation is expected to be between $5.6 million and $5.9 million.

And with that operator, we can open the call up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Peter Keith from Piper Jaffray. Please proceed with your question.

Peter J. Keith – Piper Jaffray

Hi, thanks. Good afternoon everyone. I wanted to ask you guys about the gross margin in the fourth quarter and then the outlook for the year. I know you had cited for the fourth quarter, you saw some cost increases and some increased productivity. Just wondering if you could provide a little more detail on the impacts of those two dynamics. And then if you could just help us get a little bit more comfortable with the guidance for a flat gross margin rate in ’14 and some of the initiatives that you might have in place that will –

Tim Clayton

We made losses there [indiscernible], Peter – this is Tim – I think we chatted about before the gross margin impact in the fourth quarter was adversely affected by a few items including, as we said – probably the decrease in the trend that we’ve had, which has been roughly about 70% for the year is a combination of both discounting promotions as well as cost increases some of which is Durant being kind of newer into the deal and needing to be more significantly utilized if you will, to spread those costs out over the inventory. There is also – this is the cost increases that would affect that and reduce that margin slightly below 70%.

I think Chris touched on a couple of things that we are looking at very carefully with respect to maintaining that gross margin level back to at least the 70% number, which includes much more discipline over discounting, and more incentives over commissions with respect to gross margins, and also more – things that might result in some increased costs and losses there. A number of different things that’s there on the agenda that are focused very intensely going into 2014. And Chris, I don’t know if you want to add any more to that.

Chris Homeister

No, I guess the only thing I would add is when we look at – I would share [ph] that we will continue to focus on a much more centralized approach to how we look at discounting, how we look at strength [ph] all the way through to the customer base. I think what you will see when I talked a little bit on my remarks around marketing is that we have many broad based marketing offers throughout the course of year and you will see us have a much more measured approach as we go forward and targeting customers when they are active in the marketplace and feel that the approach that we are – get to the marketplace will be effective and will be dynamic in nature and largely visible. So we feel that, that will be one of the cornerstone elements as we look at stabilizing and ultimately improving on the gross margin line of 70%.

Peter J. Keith – Piper Jaffray

Okay. That is helpful. Thank you. And then I guess a part of the question for some of these sales that are weather impacted, could you give us a little clarity if there is some disparity between your weather impacted, non-weather impacted regions or what you might be seeing in parts of business given your confidence on the flooring growth outlook for the year?

Chris Homeister

Well you certainly know our service well, -- looking to 90 stores across the country, they are largely in weather impacted areas, we are not in the West Coast, we are not in the Southwest and even in parts of the country that we didn’t have weather in the southeast part of the country because we certainly have weather in that part of the country as well. So certainly a large portion of our network of stores has had weather related issues of having days, or multiple days of being closed and as we sit here in between cities, [indiscernible]. With that said, when we have days where weather is not an issue, we remain very pleased about how the store chain performs on both new stores as well as existing stores. And that’s what really gives us the confidence into our full year guidance number that we talked about here today.

Peter J. Keith – Piper Jaffray

Okay. Thanks. And then one last question for Tim. Tim, I guess, if you said it and I missed it on CapEx spend for the coming year. I guess can you get us comfortable that you think there will be free cash flow positive in the coming year and then where you are with 18 million of debt capacity, do you feel the need to increase the total capacity or are you going to start paying down debt in the coming quarters?

Tim Clayton

Sure. Yes, we talked about a range of CapEx, I think it was in that 36 million, 40 million range, significantly lower than the current year. As you know we also had incremental cash usage during 2013 related to working capital use as well as pay-off of some old deferred comp liabilities. All of those cash uses from that standpoint are behind us, no new distribution center in 2014. If you look out with that level of CapEx and we anticipated earnings from the company that we are forecasting, we – and also with the very close monitoring of inventory that we are focused on this year as well as, Chris mentioned, our goal is have very modest increase if any in inventory for the year. That results in a meaningful generation of free cash flow as we go through the year, increasing as we get into Q4.

And just to touch on the other part of your question, the availability under our line of credit is more than adequate in our view, what we need to find in the near term and we should start to see some deleveraging of that as we get toward the end of 2014.

Operator

Our next question comes from line of Daniel Moore from CJS Securities.

Daniel Moore – CJS Securities

How should we think about the trajectory of gross margins in 2014? Should we expect some additional sequential declines in Q1 and then start improving back toward that 70% level particularly given the weather-related issues in the first quarter?

Tim Clayton

Well, Dan, I mean our expectation given the actions that we have taken early in the quarter here is that we would – that 70% guidance would be something that we would look to attain in the first quarter, obviously some of the weather impact and the volume might impact that slightly but we definitely think it's something that we would be able to get back to in the shorter term, and obviously we’re going to continue to try to thrive to improve that. That’s where our goals are set.

Daniel Moore – CJS Securities

And given where we stand today should we expect same store sales growth to be meaningfully below that 5% to 7% threshold for Q1?

Tim Clayton

We don’t give really individual quarters, Dan. We haven’t gotten into that specifically but I think we are not far away from it in the context of Q4 and we think the number of things that have been outlined here are going to have an impact – positive impact on the gross margin rather quickly.

Daniel Moore – CJS Securities

And then maybe talk about – it’s early days obviously but the performance of some of your newest stores in your newest markets like Texas and Oklahoma relative to your expectation?

Bob Rucker

It’s obviously very early on both of those markets. But the early days that we see in Texas are, that continued to perform as planned. We have a little bit more history in the Greater Dallas area with the stores that we opened last year and that continues to perform toward our expectation as well. We expect as a whole will be a significant for us as we go throughout 2014 and beyond.

Daniel Moore – CJS Securities

And lastly, maybe just elaborate on some of the changes that you’ve made in terms of personnel and controls particularly around sourcing and procurement as a result of the outcome of the internal investigation?

Bob Rucker

So we have made [ph] different changes from that standpoint. We are going through – we’ve actually hired one specific person that handles our Chinese purchases directly. We are also actively searching for a few other individuals that would be part of our merchandising team as well, that would be responsible for the broader purchasing across all geographies. So those would be significant changes from that standpoint and then we are also making changes from a control standpoint around how we actually go through the sourcing and review and bringing that into the CFO’s office as well.

Daniel Moore – CJS Securities

Thank you very much.

Bob Rucker

Thanks Dan.

Operator

Our next question comes from the line of Justin Kleber from Robert W. Baird.

Justin Kleber – Robert W. Baird

Hey guys, it’s Justin Kleber here. Thanks for taking the question. Just wanted to start with the comp guidance for the full year of 5% to 7%. If you run the comp waterfall based on the historical store maturation model that you guys have laid out, it seems the contribution from new stores alone should probably get you about six points of comp here in ’14. So are you assuming that matured stores are comping roughly flattish this year?

Tim Clayton

Well, I think that reflects a conservative outlook on where our expectations are for this year especially given when we issue that guidance, what are – what we're seeing in stores, weather patterns, things like that, that could have an impact on some of those numbers. It’s a lot of those stores come into the company later in the year this year and we do expect some lift of that but I think we are being cautious and really kind of seeing how the year transpires given some of the things we saw at the end of the fourth quarter.

Justin Kleber – Robert W. Baird

Thanks, Tim and just to confirm your response to Dan’s question earlier. Did I hear you correctly in saying that you are currently running not too far from your annual comp guidance here in the first quarter?

Tim Clayton

No. I am not sure. I don’t know where you’ve heard that.

Justin Kleber – Robert W. Baird

Okay. I am just trying to get a sense of a cadence – as you think about the cadence of sales, in 1Q relative to the annual guidance, you had one of your competitors in the marketplace yesterday talked about running flattish comps quarter to date here in 1Q. So I am just trying to make sure we understand the cadence that you guys are expecting for the business in 1Q relative to your full year guidance 5% to 7%.

Tim Clayton

Justin, it gets into this whole thing. We have not historically given quarterly guidance. We provide kind of the annual guidance. And that’s really I think where we want to stay at this point. I mean I think Chris mentioned, or I mentioned it in the remarks that there are weather impacted sales so far in the first quarter. We’ve always indicated and historically the company has seen that those sales typically will come back when – they are not lost, they are just deferred. They come back when the weather [indiscernible] there. So from that standpoint, we think we spec this just to look at the year as a whole and provide that kind of overview.

Justin Kleber – Robert W. Baird

Alright. Thanks for the color Tim. Best of luck guys.

Operator

Our next question comes from the line of Kate McShane from Citi. Please proceed with your question.

Kate McShane – Citigroup

Thanks. Good afternoon. I was wondering if there was any color that you could give of the existing markets where you did add stores, if you saw any cannibalization. And are there any new features – or any features of the newer stores that your more matured stores do not have and with the remodels are there opportunities to add those new features?

Chris Homeister

Hi Kate, this is Chris. We don't – we are not seeing any material cannibalization in the existing markets. We certainly added stores within the Chicago and Detroit markets, in 2013 in particular, those stores continue to perform at higher than expected rates and continue to perform just as we expect and quite frankly better than we’re expecting in many areas. We haven’t seen any associated decline in those existing stores. So which leads us to really believe that we have further specification opportunities within some of our best markets, which I think is exciting opportunity for us as we look to – we will look to continue to increase our market share within each of those markets. So I would say definitely [indiscernible] the first part of the question.

The second is on new features and certainly the stores in which we right now in 2012 see [ph] materially this year we will the best of the best from that standpoint. That’s obviously an opportunity element when we actually look at placing our stores out there and place the related to various tiles and fashion trends and colors and a mixture of certain stone and tile, porcelain and plastic and black stone [ph] out there. That would be the biggest thing that I would say, obviously we want to give all the customers a great inspiration and a great presentation when we go in there and then certainly the thing I talked about it in my opening remarks that we will continue to remodel 15 to 20 stores during the course of 2014 as well, where we bring a lot of those – that are big sellers and certainly the venerates [ph] are an incredibly important cornerstone of our presentation where we inspire customers and they are significant sellers in the sales floor as well.

Kate McShane – Citigroup

Okay, great. And if I can just follow up with a one more question about the discounting that occurred in Q4. Could you just give us a little bit more color around that, how much more year over year was the discounting, was it more a result of trying to drive more traffic in the store in a very challenged traffic environment because of weather or is there something more secular with the level of discounting?

Bob Rucker

Well, I would look at it from a standpoint that the company is bringing with many different elements on marketing efforts and what promotional vehicles are things that we can deploy on a go forward basis. I think you have to still recognize the company is still on a growing phase on advertising and marketing especially as we look at new stores and new markets. And certainly we want to give every opportunity possible to our store employees of bringing awareness of the Tile Shop and awareness of what we are, and awareness of what the store is, and we promote it [indiscernible] points of store and every Friday the company airs from TV to radio to digital billboards to digital to radio to newspaper. And I would look at those things we will offer going towards as we went through the fourth quarter. I think differences, the promotional vehicles, good performance as we expected and certainly Tim talked about it in detail. But others that could maybe over perform about how well they can do in the marketplace and people look at that as – went up and down as we go forward about and what really works for our business and what works for our business, I think customers versus maybe what we maybe work for cash and carry retailer and price discounting can be a little bit traffic driver for us, I think we can be much more – I feel that we can be much more tailored into precise development when we used promotional vehicles in the fourth quarter of 2013.

Kate McShane – Citigroup

Okay. Thank you.

Operator

Our final question comes from the line of Joe Feldman from Telsey. Please proceed with your question.

Joe Feldman – Telsey

Wanted to ask about what people are buying. So like have you noticed any change in what people are buying when they come in? Meaning the size of the basket or the ticket so to speak or are they opting from less expensive stone these days or, not even stone just going to ceramic or porcelain, any kind of changes that you’ve noticed like a shift in consumer spending pattern?

Chris Homeister

No, this is Chris. We haven’t seen any subtle changes to the mix of the business or the price point in which customers are walking out of the door with – I feel that we are not seeing any changing customer behaviour or price sensitivity around the project that they might want to do. I think if anything they are looking at a multitude of different opportunities, as they look at tile, porcelain and look at all the opportunities that they have with that stone or the opportunities that they have to access their bathroom or kitchen or other room in the house with, where they go at in stone mosaic which is on average more expensive than ceramic or stone given the detailed intricacies of that type of products.

So we are not seeing any broad macro consumer behaviour patterns from that standpoint, or what I would call or from my standpoint, or the company’s standpoint, any changes in the customer acceptance around what they want to buy and how they want to buy it or what type of dollars they want to spend.

Joe Feldman – Telsey

Got it and then have you noticed anything from a competitive standpoint, from again whether it’s Home Depot or Lowe’s or local guys – as you entered markets, have you seen a defensive response from people or regional players?

Chris Homeister

Well, I think I would answer that question. Certainly we receive attention, there is no question about it in where I think Bob has spoken about in the past that it’s difficult to for a small retailer – regional retailer to really go out of its regional – regional comfort zone from a geography standpoint given the infrastructure that we have in place in order to transport its goods from store – distribution center to store or directly to the customers. So we are certainly going into areas that are entrenched with many regional customers and certainly use that as well that we compete on a day in, day out basis with the Home Depot and Lowe’s and the other regional players, they compete in the industry, we feel as we said before, we feel very good about our competitive pricing and really don’t see anything changing from that standpoint, where we feel the value that we have, the value that we provide to consumer is best in the market and certainly we see reactions in the marketplace but nothing has really concerned us from the standpoint of a competitive pricing standpoint or availability of goods.

Joe Feldman – Telsey

And then if I can just sneak in one more. I wanted to ask a follow up on the inventory. I know you guys feel like you’re kind of garnering good spot right now. But it is still up a decent amount when you just look at the growth in inventory relative to the growth of sales. And I guess I just wanted to ask a little more follow up on that, could you give little more color maybe that the quality of the inventory is in good shape or is it the type of stuff that you just naturally sell through because you don’t need to buy more like your control in the open and buy better these days, or any color you can give there would be great.

Chris Homeister

This is Chris. We’ve always felt the quality of inventory has been outstanding. We certainly operate in a business that the inventory is a bit evergreen from the standpoint that it doesn’t spoil when new models come in, and it’s timeless from the things that we purchase. So we’ve never felt that the quality of the inventory that we had at any point in time and certainly not in the 2013 and Q4 in particular has changed at all. I would say on the – we have been more prudent about managing to open to buy and looking at what the appropriate base of stock that we need to have in forecasting revenue per buy against purposes and getting back to few level basis as well that that perhaps – that we can tighten a bit in Q4 and certainly we feel that we can do that as you go forward as well.

So we feel good about where we are at on the inventory, our inventory levels right now and we feel that as I said in my commentary that the yearend number, we feel, is a very realistic target for us to get as we go into 2014 and certainly for our store base on another 22% and certainly recurring our sales as we did them as well, we think that’s a prudent number and I think a number that will serve us well throughout the course of the year.

Joe Feldman – Telsey

That’s great. Thanks for the update and good luck for this quarter guys.

Chris Homeister

Thank you.

Bob Rucker

Well good night and thanks for joining us.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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