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Executives

Robert Lynch - President and Chief Executive Officer

Daniel Terrell - Chief Financial Officer

Analysts

Matt Fassler - Goldman Sachs

Lumber Liquidators, Inc. (LL) Goldman Sachs 2012 Global Retailing Conference Call September 6, 2012 10:45 AM ET

Matt Fassler - Goldman Sachs

Good morning, everyone. I am Matt Fassler from Goldman Sachs and I have the pleasure this morning of introducing the senior management team of Lumber Liquidators and also moderating our conversation today. As I introduce Rob, I am thinking about the past year for this company. I am not sure if this should be an introduction or a coronation. Obviously, this has been a terrific year for this company. Lumber Liquidators has from its outset as a public company and were privileged to be involved in the IPO five years ago. Been one of the more interesting growth stories in retailing. It was the only company really in my career, one of the few with the audacity to become public in home improvement sector. Competing against Home Depot and Lowe’s in a fairly established oligopoly. It did so in 2007 as we are about to make our way into housing collapse if you will, and we didn’t know that at that time other than certainly as what transpired. And the stock from that moment has been, I think roughly tripled, or a little bit better than that which I think speaks to the power of the operating model and I think more recently the way this business has been run, and the way the opportunity has been monetized.

Rob, since you joined the company, we will speak quite a bit about this. I think he has made substantial changes in management structure and management personal, in sourcing. Starting to make some changes on the revenue generation side too. And the potential has always been there for many years, it worked quite well. There was a bit of a break in the action as you know but the recovery has been very very powerful. And this has been a terrific stock as you know over the period of time.

Dan Terrell has been with Lumber Liquidators since 2004, he has been the CFO for almost six years. Rob joined the company only in January of 2011, so nearly two years ago. He has been the CEO since January of this year. He came to this role from Orchard Supply Hardware where he was President and Chief Executive Officer, and prior to that among other places he worked at Home Depot and Wal-Mart. So with that I will turn it over to Rob.

Robert Lynch

Thanks, Matt. I hate to admit the Home Depot experience. Thank you very much and good morning everyone. We are excited and honored to be here with you this morning. And in terms of a little background, Lumber Liquidators is the largest specialty retailer of hardwood flooring in the United States. And our industry best value proposition of best price, best selection, best quality, best availability of product and best people is the key driver of our business and really differentiates us from all of our competitors.

Additionally, recently our strong store model and our recent investments in infrastructure have allowed us to increase net sales and profitability as Matt mentioned, by increasing market share in a very highly fragmented, still highly fragmented wood flooring market. In 2012 we have focused on five key initiatives that the team is driving on growing revenue, continuing to improve our sourcing, optimizing our supply chain, driving traffic through increased advertising reach frequency and urgency, and developing the best people to serve our customers.

We also are relentlessly committed to driving continuous improvement in all that we do and are working together as a team with a unified vision and strategy, and initiatives. And this goes from all of our store managers and every associate in our stores, all the way up to the senior team. So really with that, Matt, I would like to just turn it back to you for any questions.

Question-and-Answer Session

Matt Fassler - Goldman Sachs

Great. We have a nice full room, I am sure we will have many from the audience. I am going to start with a question about your assortments. So you have historically been a hard wood flooring business, very focused mandate. You recently introduced some tools into the assortment. You are called Lumber Liquidators, you could sell many things presumably, if you chose to. How the tools look so far and how do you think about potential product extensions for the business?

Robert Lynch

Yeah, I think it’s very exciting. You mentioned some of the changes we made to the team. We brought a new chief merchant into the company last year, a couple of months after I joined Lumber, by the name of Bill Schlegel. And he has, in the last 12 months has significantly upgraded and turned over our merchant staff. We currently have -- you know I have been in retail a while. I started at Wal-Mart, I was at Home Depot. For a company of our size, we have probably one of the best high class merchant teams I have ever seen in my career. And they are really doing a phenomenal job. I am very proud of them.

So, yeah, I think Matt that we have significant opportunity across all of our categories. In fact I have got a catalog in front of me. If I don’t mind sharing, we have some for everybody out there. We are introducing a new catalog right now with 51 new items. 51 new floors. So to your point about tools, Matt, now we are bringing in all the items that you need to complete your project tools, but we are also looking at -- and as we do our line reviews, we are looking strategically in terms of revenue generation. Is our assortment optimized? What can we expand within our core flooring categories? We have expanded to other flooring categories. We have added vinyl. In here we have added some new vinyl floors. We are expanding our laminate category. And then across accessories and moldings we are definitely looking there as well on [new mason] tools which, that’s been a very good test. It’s something that we started with 30 or 40 sale items a few months ago. Based on that performance it’s doing well and we are actually increasing it and we are going to up that probably 2x or 3x in terms of the tool assortment as we go forward.

Matt Fassler - Goldman Sachs

If you think about the two or three year plan understanding that things are moving very quickly for you day to day. Do you see kind of type of flooring governing the assortment that you carry?

Robert Lynch

Let me -- in floorings who we are. I mean flooring is the major discretionary purchase that we have out there. And I talked about our value proposition. I think that -- I think that’s a really good key question. One of the things we are doing is sticking through the who we are. This company was founded on a powerful value proposition and a powerful store model that resonates well out there. When I talked about that value proposition, it’s important we work on and we feel that we have the best price, the best selection, the best quality availability and people.

But to that point, Matt, we definitely have a revenue strategy and a comp driving strategy attaching on that floor. So the way I would look at it is, yes, the floor is the driver but we want to make sure we are definitely attaching and giving the customer everything they need on that. And that definitely will increase [ticking] and help us with the comps too.

Matt Fassler - Goldman Sachs

Great. As I think about the numbers and where they have moved. Gross margin has been the biggest store for you. And within that, sourcing has probably been the biggest driver. Can you talk about where your sourcing efforts stand today? Maybe sum up briefly what you have done and try to dimensionlize the impact quantitatively of the different moves that you have made and what they can do going forward?

Robert Lynch

Yeah, I will start and then maybe I will take it to Dan for some of the specifics numbers. But from a high level, surely after I got here I saw sourcing initiatives and gross margin enhancement as probably one of the most significant opportunities we had to drive value for the company. So we have been focusing on that. I would tell you that I am excited about that opportunity now as I have in the last three or four quarters. And so margin enhancement is something that we think will help us going forward for the next few years. And the way we are attacking it is, these three kind of key areas. It’s the sourcing initiatives, it’s supply chain optimization. And then it’s also longer term operational control and efficiencies there as well.

To your point, sourcing is the big one and most important. That is really about getting back to basics. Living up to kind of founding principles of this company of only buying direct from factory, no middleman, no distributors. Working directly with those factories, expanding our factory base. So where are we on that? You know we have started conducting line reviews last year, they have been very effective. We feel that we are about 50% of the way through conducting the line reviews in terms of the categories and the cost of goods, in terms of that. So we have 50% of the way to go over time.

And then I would tell you that we have -- of the 50% that we have done, we have probably only realized 30% or so of those benefits into the cogs right now. So more benefits to come from what we done and obviously more line reviews to do as we go forward. I have mentioned supply chain optimization. So we have got a new head of supply chain as well, Carl Daniels, who is just as strong in his area as Bill is in merchandizing. And he is really attacking with the same mindset in continuous improvement, really digging in and optimizing every [rate] thing we do in the supply chain. And we see that there will be good benefits there as well. And obviously some of that will flow through into margin. Dan, anything I missed, if you want to...?

Daniel Terrell

No, I think you covered it pretty well. I would say that we took out our largest middleman in Asia in September of last year. So we are just coming up on the anniversary of taking out one of our last middleman so that we are direct to the factory with our other supply. And those benefits began rolling through probably in the fourth quarter last year, maybe some in the first quarter. So other sourcing initiatives, I guess we have really started to see some momentum from what Rob’s talked about, layering on top of each other and we should see that for the next two three years.

Matt Fassler - Goldman Sachs

And if you think about -- saying that you are only 30% of the way through to gross margin benefits or your sourcing work, when I think about the fact that your gross margin this year, by my estimates, is going to be up another 200 basis points. I mean, is that to say that there is that kind of opportunity left if you do everything right?

Robert Lynch

I think there is multiyear opportunity here on the margin side and it’s exciting. And I think you hit it right on and what I would tell you is we have got the strategy in place. We see the opportunity over multiple years. We have got the team in place where we are conducting and we are executing. So really that where it comes come down to, Matt. As long as we continue to execute as we have, I am highly confident we will be able to -- we should see those benefits.

Now the exciting about this too is, is that, this is generating a lot of benefit for the company and is giving us flexibility to do a couple of things. It’s allowing us to take some of this benefit and reinvest it ostensibly into our value proposition, into price, into marketing and promotion to drive traffic, to drive comps. As we look at the market, Matt, we feel we have 10% or 11% market share in our categories. If you look at all the flooring, it’s about 1% when you add tile and carpet into there as well. In terms of conversion from that to flooring which is happening.

So we are excited about our growth opportunity and so I think it’s absolutely the right strategy for us. As we go forward we are going to -- and this is what I want you to know is that we are going to drive these benefits but we are going to use some of it strategically to grow the business, to grow top line, to grow comp sales, drive traffic. But then we are also going to obviously flow some through and drive operating income over time. So our goal is to grow but also become more profitable and efficient over time.

Matt Fassler - Goldman Sachs

Let's talk about store growth. What you have done on the margin side, on the sourcing side is indisputably hats off, it has worked well. And it sounds like there is legs to it. At the time you joined the company, the productivity of new stores relative to your existing stores would start to fade a little bit, the new stores. Sales of lumber was fading a bit. You took, for you to down by more than half this year, which by judgment was the right thing to do and I think you are benefitting from that. As you take a fresh look at your real estate program, how you are going to change the way you think about sites? And what kind of store growth rate do you think you can ultimately land at?

Robert Lynch

Great question. I will give you some history around that. You know when I got here the company was six month into post implementation of a new ERP system, SAP. And there were some issues that. And so the absolutely right and prudent thing to do I think was, given how fast we were growing and some of the productivity issues with the company it was through, it was a good thing to slow down. What that allows us -- I mean the reason why we did that was about continuous improvement. It had nothing to do with the opportunity for growth, the number of potential units out there, potential market share grab. It was really all about slowing down, re-tooling the real estate strategy. And what we have been doing and that we are going to continue to do is, when I joined the real estate executive time, my first month, January 2011. Dan wasn’t on the committee, the chief merchant and the Chief Marketing Officer were not the committee.

So we enhanced the team. We started digging in, asking a lot of questions. And we have been doing a comprehensive strategic review of every process under real estate. And so Matt’s point, from site selection to our model around demographics, to our store layout and design. Which is why you hear us talking about the new store of the future, to taking a more strategic market optimization approach to a site. When we go into an existing market, cannibalization. How do you balance and optimize your real estate when you add new stores? What's your remodel strategy, what's your relocation strategy.

So we have been having -- let me just put it this way, I am a numbers guys, we have been having a lot of fun in our real estate committee and Dan can testify to that. And we have seen some good results. The site, we have improved the site selection. We have enhanced, we have improved the quality of the sites we are going into. You are seeing that in new store productivity numbers. We are starting to test and we are developing and we will roll out into a test, this store of the future.

So I am optimistic that we are going to have some good results with them and over time as part of this process, Matt, to answer your question, we are doing kind of a global top down but then bottoms up assessment of what we think the total potential is for sites out there for us. I mean by zip code, all the way up. And I would see us sometime in the future, in the next three to six months kind of coming out and either reconfirming or adjusting what we think is the full potential for us.

Matt Fassler - Goldman Sachs

And to be clear, I believe that 300 was the number that the company had out there in the past?

Robert Lynch

It was 400 in U.S. and in 50 Canada, for a total of 450. And I would tell you that the exciting -- again, I have been around retail for a while and many of you have as well, this store model is awesome. The limited cost to get in, the availability of the sites, the speed to get in. The limited CapEx, the limited inventory to payback is really really neat. And when you think about 10% or 11% market share, less than 300 stores, you think about the flexibility of the model, how quick it is to get in. Really, what we have done here, and Matt again I want to reiterate is, we didn’t slow down because of a lack of potential or seeing that there is some wall out there, we really slowed down because I wanted to make sure we were optimizing and we were getting the maximum return on that real estate strategy. And I think we are going to be pleased with what we do long term.

Matt Fassler - Goldman Sachs

Just to dig a tad deep around that front. Back late last year before the turn on the business was evident, the most analyzed number associated with Lumber Liquidators related to the different metrics you gave on cannibalization. You know comps in cannibalized markets, productivity of new stores and markets with existing stores and new stores etcetera. If you think about the network that you have today, the way it was constructed and how you could do things differently in a way that might be different, what made those opportunities big?

Robert Lynch

Great point. Which is why we are kind of testing this store of the future and this marketing approach. Because, what attracted me to this company was the store model and was the opportunity for growth when you look at the market share. But then when I got in here and I saw this wonderful, really maturing company that’s really only been around 15 years. And the ability for us to bring in some kind of retail basics, retail best practices and even within real estate just basic retail 101 stuff. I am really, really excited because the team in the past, if you go back to when Dan started, I mean that’s their story, there was really no modeling. There was no demographics on the site selection. You had operators. Really, your field operator is just going and just picking sites. Just based on instinct.

So my hypothesis, Matt, is right in line where I think where you know the discretion is that our existing store base is doing as well as it is. And I think there is going to be a significant opportunity to even improve those sites as we go forward, as we test refine those new store prototype, and as we take that approach and we apply it to old stores. The exciting this is, our stores have flexible leases. They are five years. Over the next five years, if we are doing the math, I mean we are going to have a significant proportion of the chain come up for a lease renewal. And that’s going to allow us the flexibility and opportunity to, to your point Matt, if it’s in a bad site, relocate to an existing -- to a new better site and give it this new (inaudible) in the process and/or renegotiate with the existing landlord.

And we are going to be opportunistic, right. We have, in the last year or so we have looked at -- there were some sites that we actually ended you staying in because the landlord made us not -- we can refuse in terms of the kind of the rent reduction. So what that really is, what excites me about that is is just we know how leases -- I have been in companies where you have got 15 years. And 15 year out where you can't even think about this stuff in those stores for five, six, seven, ten years maybe. So we are going to be looking at every site as they come up, Matt, and making the right decision for the company long term.

Matt Fassler - Goldman Sachs

I want to talk for a moment about advertising. Pound for pound, you spent more on advertising than anyone I have ever seen. $0.07, $0.08 on the dollar of sales I believe is the number. Your real estate advertising relationship for most retailers is inverted for Lumber Liquidators. So this is a very important expenditure for you. My sense is that you are evolving that ad strategy and that marketing strategy, in what direction are you taking it today?

Robert Lynch

Yes, the question -- one thing I would try to think about is, and this is true for most retailers, especially this one. The company which Tom Sullivan found this company on, really, really cheap real estate and really high ad spend. So what he did was for a non-recurring, infrequent discretionary purchase, he kept the occupancy cost down. He spend a lot of money getting it to a store for that deal of a lifetime on your floor. So I often look at our occupancy cost and our marketing cost together. And to your point in terms of where we are going, as I took over the CEO, prior to that the company had been leveraging national advertising as a way to drop operating income. And what we did is, we as a team we had decided to shift that focus. And what we are doing now is holding that rate and as we grow, planning to reinvest.

And the reason why we are doing that is, number one, because of the opportunity for growth as a company. We have 10% or 11% market share. There is no reason why I think as long it’s effective and the ROI is there, that we are not on offence in advertising to drive traffic and take market share. So that’s kind of the shift we made this year, Matt. The other important thing to think about too is we are investing those incremental dollars by not leveraging but we’re also, we have gone back through under this continuous improvement mindset and we assessed everything we do and all of our prior spending and or prior advertising. And we have reallocated a significant amount of dollars from non-productive advertising to the new things we have been doing and that they are working.

And to Dan’s point here, the reason why we are doing that is, again, it goes back to the market share. The company has been so successful in targeting a very narrow slice of the pie in terms of the homeowners. There are 75 million owner occupied homes in the U.S. If you think about our market share, and the company has been very very focused on the profile of (inaudible). So I mean that’s, always we’re kind of their home, always remodeling. What we are doing now is we are looking at the whole rest of that pie and we are kind of stepping up that curve and we are expanding our -- and we are taking these dollars that we are not leveraging, we are reinvesting them to go after more customers.

So it’s a very simple, just widening of the radar. And we are increasing our reach, so we are reaching more people, our frequency. So we are talking to them more. And our urgency, getting more urgent in terms of, here’s our value prop, here’s our price, here’s our selection, that there is no better out there. Come in any buy flooring from us.

Matt Fassler - Goldman Sachs

We are asking all companies at the conference about your outlook for the backdrop in the second half of the year relative to the second quarter of the year. You had a bit of a different second quarter from real estate, a great second quarter. Second quarter slowed for lots of people. What's your thinking on the backdrop for the second half and then for 2013?

Robert Lynch

Relative to us or the macro environment?

Matt Fassler - Goldman Sachs

Focus more on the backdrop that you are thinking about, as it drives your thinking about you?

Robert Lynch

Yeah, I mean, obviously we have a high ticket discretionary category that we sell. So we are always, want to be aware of what's going on in terms of the backdrop. But we feel that the housing market and the consumer, our customer, is really probably on a pretty good firm foundation. We don’t see things getting worse. I mean I would tell you we see thing probably maintaining and/or slightly improving.

Matt Fassler - Goldman Sachs

Okay. And capital allocation is actually a much more germane issue for you than we would have thought a year ago. Again, if you just buyback and pretty thoughtfully, and it has worked out quite well so far. As you prioritize capital allocation, reinvestment of the business, buyback or the return of capital to shareholders, acquisitions, how do you prioritize or rank order some of those uses of money?

Daniel Terrell

As Rob has described, we have got a lot of significant initiatives to drive the business forward and they are always going to take top priority as operating the business. Fortunate thing for us, we have got a store model that’s cash flow positive. Even our new stores are generally cash flow positive inside the first 12 months. Low CapEx, 2,3 FTs and small occupancy cost. So the payback is quick there. So we have the operations that can fund our existing business and our significant initiatives to continue drive the business. We are debt free. We want to remain that way. We keep a conservative balance sheet. But we were thrilled this year where we are far enough past the SAP implementation. We had the people in place, the infrastructure investment where we could start returning capital to the shareholders via share repurchase plan.

And as we look at the alternatives on how we will reward long-term shareholders in the future we think continuing the share repurchase plan is the way. And that the capital is there to fund the operations, the growth, and maintain that conservative balance sheet.

Matt Fassler - Goldman Sachs

Great. I have a lot more questions but we also have a lot of people here. We have roaming mics. If you have questions please feel free to raise your hands. Do we have any takers yet? Okay. There will be more time. I want to ask you kind of a macro question about your business. Thinking about its linkage to repair and remodeling versus new home construction, what matters most in that regard for you?

Daniel Terrell

I will start and then kick it over to Rob. We are not tied to the new homes market. So as new housing comes back don’t think of us selling into that new housing market. We are a residential remodeling, to the degree new housing creates single family turn, that’s a key metric for us. Also keep in mind that we are a large ticket, absolutely discretionary. As long as the customer feels confident and secure in their financial situation, this is a purchase that they can move forward with. But this is a purchase that can be delayed if there is uncertainty or if the customer feels unsure about their own job. So single family in the housing world is probably the most important driver, and consumer confidence and unemployment on the discretionary purchase.

Matt Fassler - Goldman Sachs

I also want to talk about your core customer. That do you sell for, versus the decorator and the income level that you see, who you are really selling to right now and how does that compare to who you want that core customer to be?

Daniel Terrell

Let me start. Our demographic is in the home for a period of time. Homeowner that’s been in the home for a period of time, little bit older, little bit more affluent. Those are the demographics that tend to work best for us. Our customer is passionate about the purchase. They can tell you why they picked the width they did, why they picked the species they did, why they picked the hardness. That’s the DIY customer. Not necessarily DIY in the fact that they put the floor down, but they control the transaction and understand the comparison.

We are looking to broaden that base a little bit through the advertising in what we are calling a casual customer but it’s a customer who might consider shopping at Home Depot and Lowe’s a comparison. Or once they are starting to shade a floor but isn’t really concerned about the construction or the durability. We are trying to appeal to that customer because we believe once that customer comes into our store, takes a sample pack, we can win that customer’s support. So right now, core DIY dominates and we think we can expand that via the advertising program.

Robert Lynch

But we don’t want to exclude anyone of those 75 million existing homeowners out there, so we won't discriminate.

Daniel Terrell

Anybody that has a carpet is a potential customer. I’ve got to say my sinus has been acting up today and I think it’s because of all carpet in this building.

Matt Fassler - Goldman Sachs

We have a question here?

Unidentified Speaker

[Question Inaudible]

Matt Fassler - Goldman Sachs

I will just repeat the question. The question was, lot of home improvement retailers stated the year strong, softened up a bit, why has Lumber Liquidators remained pretty robust in the midst of that?

Robert Lynch

I think I would knock on wood and say that it really it goes back to some of my initial comments. When we kicked off you know we have got a new team in here focused on some key strategic initiatives, that I got to tell you, in terms of my career, I have never worked with a better team that’s executing at a higher [building] average than this team. And it’s really, I think it’s because of our size, our opportunity to grow. This company has demonstrated the ability to take market share as the last six, seven or eight years in a significant rate as the housing sector collapse. As the industry, the flooring had shrunk even at a greater rate. 40% something from peak to trough.

So I think it’s really about the value proposition. The limited amount of market share that we have, and the five or six key initiatives that we are working on. That they are bearing fruit and that we are appropriately reinvesting some of those benefits into driving traffic, spending more on advertising and marketing, lowering our costs, and improving our value proposition out there and differentiating. So I think it’s the team’s execution.

Matt Fassler - Goldman Sachs

We have a question right over here.

Unidentified Speaker

Could you just comment on your inventory returns? Looking over the last five years we had see inventory turns sort of steadily decline? Is that a concern for you? Do you have a target to get those back up?

Daniel Terrell

I would say, none. Inventory is important part of our value proposition. Availability to the customer. We can get our full assortment to the customer faster than any of our competitors. I would say we don’t know the inventory levels by region that maximize the top line yet. So there is still some revenue driving opportunities to make sure you have got the right mix between what you are carrying in stock and what you are shipping against open orders.

We have gone through some pretty significant transition in the last 12 months. Both in our people and in our products as we gone through the line reviews. And given that we have had revenue momentum that we have had, we thought as we transition suppliers, it was more important to protect the top line then to maintain lower inventory levels.

Robert Lynch

And that was a very conscious decision. As we have done these line reviews and where we have taken out, you know transitioned old vendors to new vendors. I have seen in my career where when you don’t do that in the right way and you turn off field inventory, absolutely the customer suffers and often times you see some serious negative comps. So we made a conscious decision to overinvest in the inventory and the transitioning categories to make sure we maximize our sales.

Now I also want to point to what Dan said, our five key value points. One of them is availability of product. So as we are assessing these categories, expanding on some of the assortment availability, something that we have been investing in in the inventory. And we think that that actually has been a contributor to some of our positive sales trends as a result. And the good news is, our product we warranty -- I mean our (inaudible) product, we warranty for a hundred years. This is a product that doesn’t go bad, it doesn’t spoil, the trends don’t change dramatically. So the risk of obsolescence and what have you is not as great.

And I would tell you, from a quality of inventory perspective, the quality of inventory has actually been improving when you look at the productive versus non-productive inventory.

Matt Fassler - Goldman Sachs

One topic we haven’t discussed a whole lot is process in store. There are moments in time over the past several years when you had a lot of kind of product on hold. And my sense is that people in the store were working on systems implementation. It sounds like one reason you are comping is that you are doing more with the traffic that comes to you. I know that this gets into the nitty-gritty but I think it matters a lot. What have you done for your associates? What is happening in the stores in the process perspective that might help explain what's going on for you?

Robert Lynch

That’s a great question. And I would tell you now that the ERP system is in, we just anniversaried this. It’s two years since it has been implemented. We are actually leveraging that system. And then the change to the senior team and then teams underneath, I would tell you that I think that the organization cross-functionally is working better together than it ever has before, in executing and supporting the stores, Matt. So to your point, those three, four or five people that we have in each of our stores are begin handed the ball, they are being passed the ball in a more efficient manner than it has ever been. So they absolutely have more time to take care of the customer. More time to attach, to add to that ticket, to that transaction.

The products -- our supply chain teams, our merchandizing teams, everybody, are working very well. And our in stock is better than ever. The accuracy of our trucks, the frequency of our deliveries, the timing those deliveries are really -- I mean if you ask one of our store managers, our regional manages, they are very pleased with how they are being supported right now. I think that’s absolutely showing through in the store execution and the sales.

Matt Fassler - Goldman Sachs

Great. What do see on the competitive front? I mentioned at the outset that you plan to market with two of the biggest retailers in the country. They talk about flooring. They are in flooring. I am sure they would like to do well in flooring. Has there been anything competitively from the big guys or from your regional competition? I know you also have some -- there are other growth companies in this sector. What are seeing in the marketplace?

Robert Lynch

Well, I would say one thing is, we absolutely track and monitor our competition relentlessly, as a team, as a senior team and as a field organization. So we are watching them. Over the last couple of years, more over a year or so ago, both the big boxes did make some changes in these categories. Did change their assortments to more of a value oriented product line. But really in the more recent -- I mean this year we haven’t seen a lot of things change differently. You know we hear what they say. I mean they seem to be doing well, we seem to be doing well. So nothing out of the ordinary that I have seen recently. Dan, if you want to...?

Daniel Terrell

No, I would add, I think Matt said at the beginning, it’s important to understand Home Depot, Lowe’s and Lumber Liquidators are only 40% of the market. So there is still a lot of market share opportunity out there to win over that’s held by the local store. That’s the unique situation. And I think Home Depot and Lowe’s have talked about the success in hard surface flooring which I think is another indication of hard surface flooring taking share from carpet. We think that’s been a long term trend and we think that trend is going to continue.

Matt Fassler - Goldman Sachs

The last question I really want to ask you relates to cost structure. You have one of the more variable cost models of any company I cover given your commission sale structure. How do you -- as you think about the business long run, how do you want this cost model to evolve?

Daniel Terrell

Yeah, Matt it’s right. Our stores heavily commission [lFT], sales professionals that are there to work with the customer. So the store might have a $30,000 base and earn $85,000 to $90,000. Gives you an idea of what's base versus what's commission. That model has worked for us. We have attracted some top notch talent in the field. Over the last few years, on the payroll line we have invested in our infrastructure, our management team, our store support operations and our warehousing supply chain. We think that that those, the majority of those investments are behind us and we will begin to start to leverage or payroll from our support standpoint in the years to come.

The occupancy costs generally run low. As Rob said, we have made some modifications to our real estate strategy but we don’t see a lot of change coming there. We intend to continue to reinvest our advertising spend into driving top line traffic just because our share is so low. But as you have seen in the first six months of this year, even with that intention to drive additional traffic and maintain the advertising spend it’s resulted in leverage. So that may continue going forward.

Matt Fassler - Goldman Sachs

Great. Do we have any last questions from the audience? Okay. Those who are interested can continue this conversation in the break-out in the (inaudible) suite. Next up in here we have O'Reilly. Tiffany will be on the second floor (inaudible) upstairs. Please join me in thanking Rob and Dan for their remarks. Thank you.

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Source: Lumber Liquidators' CEO Presents at Goldman Sachs 2012 Global Retailing Conference (Transcript)
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