Stephen Calk - Alpha IR Group Dennis R. Knowles - Lumber Liquidators Holdings, Inc.

Martin D. Agard - Lumber Liquidators Holdings, Inc.

Jill Witter - Lumber Liquidators Holdings, Inc.

John Baugh - Stifel, Nicolaus & Co., Inc. Daniel Thomas Binder - Jefferies LLC Laura Allyson Champine - Roe Equity Research, LLC Jon N.

Berg - Piper Jaffray & Co. Keith Hughes - SunTrust Robinson Humphrey, Inc.

Katie Price - Goldman Sachs & Co. Beryl Bugatch - Raymond James & Associates, Inc.

Oliver Wintermantel - Evercore Group LLC

Thank you, operator. Good morning, everyone, and thank you for joining us.

Let me reference the safe harbor provisions of the U.S. securities 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 and financial performance of Lumber Liquidators. Although Lumber Liquidators believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct.

Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in Lumber Liquidators' filings with the SEC. The information contained in this call is accurate only as of the date discussed.

Investors should not assume that the statements will remain operative at a later time. And Lumber Liquidators undertakes no obligation to update any information discussed in this call.

Now, I'm pleased to introduce Mr. Dennis Knowles, CEO of Lumber Liquidators.

Dennis?

Thank you, Steve, and good morning, everyone. Thank you for joining us for our fourth quarter 2016 earnings call.

I am joined by our Chief Financial Officer, Marty Agard. I'll give you a quick overview of our performance and then Marty will take you through some of the details on the numbers.

And I'll come back to talk about our key initiatives for 2017. In the fourth quarter, we reported revenues of $244.9 million, an increase of 4.3% compared to the prior year period.

Net sales from comparable stores increased 2.8% in the fourth quarter, making this our second consecutive quarter with positive top line comparisons. We're very encouraged about this on several fronts.

First, we're seeing evidence that our customers are responding to our new product assortment, our enhanced marketing strategy and our improved availability. In 2016, our market share improved across all categories, in wood, laminates and vinyl product, and Q4 was particularly strong in laminates and vinyl where we made significant investments in recent quarters.

The second reason we're encouraged is that our customers are encountering better staffing in our stores and our associates are better trained, more engaged and excited about what Lumber Liquidators has to offer. And third, I'm particularly encouraged that our Q4 sales were heavily based in our core merchandise offering.

Remember that in the year-ago quarter, we were still clearing out end of life flooring, tile and tools. By the end of Q4 of 2016, we were back to normal assortment health in our entire core merchandise offering.

This means that we not only grew the top line but also did it without any major noise or distractions. This tells me there has been fundamental improvement in the health of our business and we are all gratified that our strategy and hard work are beginning to pay off.

I must say, however, that we're not satisfied yet with our overall results and remain focused on a continued improvement in our sales trends. Marty is going to unpack the rest of the financials for you but let me give you a few more highlights upfront.

As the health of our top line continued to improve, we also drove improvements in gross margin which came in at 32.9% of sales and SG&A came in at 36.6% of sales. This netted an operating loss of $9.2 million compared to a loss of $31.5 million in Q4 of 2015.

While we're not happy with our overall results, we are seeing progress in the model and continue to balance and prioritize our SG&A spend. During Q4, we continued to make steady improvements in strengthening our foundation for the long term.

We sharpened our efforts in marketing and pricing to enhance our brand and attractiveness to customers. We have continued our expansion, integration and refinement of installation services and now offer that service in about two-thirds of our stores.

We made strategic investments in inventory that helped us expand our assortment and ensure that our stores had good availability for our customers. And I'm happy to report that our staffing levels are right where we believe they should be.

Last quarter we noted that we introduced GREENGUARD and FloorScore certifications, which provide assurance to our customers that our products meet comprehensive emission standards. And we opened three new stores in Q4, continuing our prudent and opportunistic strategy of focusing on locations with a high ROI and rapid payback.

On the legal front, our team continues to work through the remaining issues, including the DOJ and SEC investigations and the MDL. Finally, we're continuing to strengthen our team.

Marty and I have settled into our new roles and we are supported by a solid team that has a great knowledge of our products, markets and customers. And we have fresh support from new senior leadership in information technology, store operations, Installation sales, ProSales and strategic initiatives.

All of us are focused on improving the Lumber Liquidators business model and see that it has the potential to touch more customers than ever before. We're now squarely focused on engaging our customers and improving the business.

We know that we have much work to do in the coming quarters. I'll come back in a few minutes to talk about 2017 but now let me hand it over to Marty to give you more details on the financials.

Thank you, Dennis, and good morning, everyone. Let me start with a rundown of sales performance.

As Dennis stated, for the fourth quarter, net sales was $244.9 million, an increase of 4.3% over last year, with comparable stores net sales up 2.8%. While still a modest increase, this is our second consecutive quarter of positive comparisons and only had the benefit of our full assortment for the second half of the quarter.

Our average ticket increased by 3% while traffic was down slightly, which may partially reflect the two holidays falling squarely on weekends. To break down the sales performance just a bit, the overall comp store increase of 2.8% versus Q4 of 2015 consisted of merchandise being down 0.4% and installations being up 74%.

On the merchandise side, I'd mentioned while comp store sales were essentially flat, units were up 2%. Strong growth in vinyl products offset modest declines in solid and engineered wood.

And during the quarter, we introduced several new vinyl products along with engineered bamboo and laminate lines, and are pleased with the sales lift and margin expansion these products bring to our assortment. We continue to be pleased with the Installation program expansion.

As of year-end, the service is offered in about two-thirds of our stores and total sales for Q4 were up 76% versus last year. In stores where the program that's been in place a full year or more, which is a different population of stores than our overall comparable store group, installation sales were up 22%.

Now let's take a look at gross margin. For the quarter, this came in at 32.9%.

Last year's gross margin was 23% on a GAAP basis, but severely impacted by the write-off of laminate we took last December. If you exclude that and the test kit costs as shown in the supplemental table of our 10-K and press release, Q4 of last year's gross margin would have been 32.2%.

So this quarter was better by 70 basis points. This gross margin was favorably impacted by the growth and improved margins of new products in the manufactured lines, improved attachment of non-flooring products with strong margins, and lower transportation costs, but this was somewhat offset by the higher mix of installation sales.

As a reminder, installation sales are slightly dilutive to the margin percentage but bring incremental dollars to revenues and cash flow while expanding our potential customer market. If you look at our gross margin sequentially, you'll notice it improved by approximately 150 basis points relative to Q3 of 2016, with improvement across all our merchandise categories.

Lastly, I'd mentioned our margin was stronger in the back half of the quarter in large part due to the new assortment taking hold. Now let's look at SG&A.

SG&A expense for Q4 was $89.7 million or 36.6% of sales compared to $85.5 million or 36.4% of sales in Q4 2015. SG&A included incremental legal and professional fees of $3.4 million and a credit related to the stock issued in our securities settlement of $2.9 million, for a net impact of $0.5 million.

This compared to incremental legal and professional fees, retention bonuses, and other items last year totaling $8.9 million. These items are tabled out in the 10-K and press release.

Excluding these items, SG&A expense for the quarter were up $12.6 million from a year ago. This is very similar to the year-over-year comparison we discussed in the third quarter, reflecting increased payroll-based costs related to core store staffing improvements, investments in our ProSales and Installation teams, as well as compliance and other corporate capabilities.

An increase in advertising drove $1.5 million of that increase. If I compare sequentially, SG&A came down from $100.7 million in Q3 of 2016 to the $89.7 million in Q4 largely due to the swing in the stock value used in the securities settlement, which went from a charge of $4.6 million in Q3 to a credit of $2.9 million in Q4 that I previously mentioned.

Excluding that and the other unusual items we summarized in the 10-K, SG&A was flat with increases in people-based costs offset by lower advertising and base legal expenses. I'll offer a few more comments on our approach to SG&A cost management.

We continue to carefully assess all areas of our cost structure and have initiated a series of steps to improve our efficiency. Some examples include integrating merchandising, sourcing and compliance teams; sharing of resources that support our ProSales and Installation programs; and consolidating or eliminating various professional services expenses.

We're executing against these and reinvesting the savings in growth drivers, like ProSales and Installation teams, and enhancing key corporate capabilities like compliance, IT and finance. We continue to believe we can keep SG&A in the dollar range of the past few quarters while balancing the three objectives of driving growth, building sustainable corporate processes and, importantly, bringing SG&A down as a percent of sales to the mid to low 30%s over time.

We are encouraged by the top line progress seen this past quarter and are optimistic about 2017. That said, managing SG&A is an active process in our commitment to returning to profitability.

So moving down the P&L to operating profit. For the quarter, we incurred an operating loss of $9.2 million compared to a loss of $31.5 million in Q4 of 2015, and a loss of $24 million in Q3 of 2016.

Both prior periods, Q4 of 2015 and Q3 of 2016, had considerable unusual items that impacted those results, again, as scheduled in our 10-K. Now let's look at cash flow and liquidity.

As of December 31, we had cash and availability under our asset-based revolver totaling $101 million, which compares to $104.5 million at the beginning of the quarter, and $93.9 million at December 31 of 2015. Borrowings under our ABL facility were $40 million compared to $20 million drawn at the beginning of the quarter.

The net use of cash reflected by the increased ABL usage reflects both our operating loss and, to a greater degree, our investment in inventory, partially offset by related increase in accounts payable. Our inventory increased $49 million during the quarter to $302 million.

This inventory investment was made to support both our wider assortment of laminate, vinyl, and engineered bamboo products being introduced in the spring and to ensure full product availability during and after Chinese New Year. We also used $2.5 million in cash as part of the final securities and derivative shareholder litigation funded and closed in November 2016.

This series of transactions was outlined in our 8-K on November 17. To offer a little guidance on inventory.

Through January, it continued to expand modestly heading into the start of Chinese New Year and we expect it will remain at or slightly above December levels through the first quarter, before steady declines in Q2 and Q3 when we expect it to reach our seasonal low point in the $250 million to $275 million range. I will mention that as accounts payable related to the inventory buildup come due in January, we have increased our drawn amount under the ABL to $65 million and we could use modest additional liquidity in the near term if payables maturities outpace inventory declines in the next few months, at which point we expect the drawn amounts to decline on a lagging basis with inventory.

This inventory build in support of our assortment was a major reason for our expanded ABL facility, and considering we are at our seasonal high in terms of inventory, we remain comfortable with our liquidity. One more item to note on the balance sheet, as I referenced a minute ago, in November, we fully funded and closed the securities and derivatives shareholder litigations.

In this series of transactions, we issued 1 million shares of common stock, deployed $28.5 million in insurance proceeds and paid $2.5 million in cash to fully satisfy our settlement obligation. Pursuant to this, we cleared from our balance sheet the insurance receivable and the combined $48 million settlement liability.

On the investing side of things, we opened three stores during the quarter, bringing us to 383. We expect to continue this modest pace of store openings through 2017.

I would now like to turn the call back over to Dennis for his closing remarks.

Thank you, Marty. I'm encouraged by our progress in Q4.

I'm excited about the expansion of our team and I'm confident in our strategy. Now it comes down to execution in four areas.

These are the areas that we've been talking about for a year now, and we're starting to see results: first, improving store performance; secondly, enhancing our value to customers; third, ensuring best-in-class sourcing; and fourth, expanding the business. We have to execute on these while keeping a keen eye on costs and returning ourselves to profitability.

First, an update on store performance. As I mentioned earlier, we believe that our staffing is positioned where we want it to be.

We have modified the compensation structure for our store associates to ensure they align with corporate profitability goals. We have enhanced our approach regarding selling and product knowledge training to our field associates.

In fact, we now have a weekly forum to communicate to our stores that they stay current on the latest products, as well as sales techniques and customer service role plays. This is incremental to our existing training and employee development programs.

And for those stores that aren't meeting expectations, we have developed a gap (15:35) store program. We developed this program to provide a coordinated approach for our regional leaders to increase the amount of time and focus they spend on these stores.

It's a program we started in the middle of last year and were successfully able to move stores off the program for 2017 as they gained momentum. Our second initiative is about enhancing our value to the customers.

During Q4 we introduced two new flooring assortments to round out our product offering. With the addition of our expanded bamboo and engineered hardwood assortments, we feel we are in a position to deliver optimal price and value across the entire customer spectrum.

In the coming months, we'll launch new styles and technologies that are exclusive to Lumber Liquidators. These will support our efforts to house the best and most relevant assortments in the marketplace.

We are already seeing positive impact of our strategy in terms of customer feedback and interest. All of this is helping us capitalize on our pricing strategy, inventory health and new marketing initiatives.

We are optimistic that as more customers see our total offering, we will see continued improvement on the top line and in margin. Our third initiative is to continue to build a structure that ensures our customers always get safe, high-quality, compliant products.

We have strengthened our partnership and processes with key vendors to improve consistency and reliability. And as we mentioned last quarter, we have introduced certifications on the majority of our in-program foreign products, including our proprietary Bellawood brand.

Finally, we're continuing to expand our business. This starts with installation sales since the service improves customer satisfaction and also expands our reach to the do-it-for-me customer.

I mentioned earlier that we are now offering this service in two-thirds of our store and we're continuing to expand. As those do-it-for-me customers have great experience with Lumber Liquidators, we continue to see increases in penetration of that market.

We are also making significant progress on our ProSales offering where we specialize in servicing the pro customer at the local level. As we have increased our attention on these important customers over the past year, we have seen excellent receptivity and solid growth.

As a result, we have and will continue to drive staffing levels both at the customer support center and in dedicated sales support. We remain committed to evaluating opportunities to grow the business in additional areas where we can leverage our business model and competitive advantages.

One final area that we are turning our attention to more strategically is the communications front. In addition to our customer-facing messages and communication, we are increasing our energies to communicate more often and more effectively with our associates, our suppliers, our vendors and our shareholders.

We believe that Lumber Liquidators has a great story to tell and we will look forward to expanding our audience so that everyone knows the good work we're doing. So to wrap it up, we made progress in the quarter, solid execution in our key initiatives and the teams, both here at the customer support center and in the field.

It's all in place and motivated to grow our businesses across the country. We still have legal hurdles to clear and, make no mistake, those are not insignificant.

But the core business model is in significantly better shape than it was 12 months ago, and we're building the right team and tools to serve our customers, source efficiently and responsibly, and return to profitability. Operator, we can now open the call to questions.

Thank you for taking my questions this morning and I appreciate the color on the SG&A. I was wondering on the gross margin, I think you commented that the first half of Q4 didn't have full assortment.

I'm looking for color on, do we see an improvement in gross margin from that being in place for a full quarter, number one. Number two, what's sort of the plan for the spring sale as it relates to gross margin?

And then if you could also, number three, clarify again how much the comp was driven by the install services versus merchandise. I didn't get that.

Thank you.

Yeah. This is Marty here.

Good morning, John. First on the margin, the back half of the quarter was slightly stronger, as I indicated, and we are seeing that continue into the early part of 2017 and are hopeful that it'll sustain itself for the full quarter.

So that would suggest a little bit better margin in the first quarter than the fourth. In terms of the spring sale and its impact on margin, I don't really have any specific comments to make around its impact other than what I just said, that we're sort of looking for the second half momentum to continue.

And then what was your third question there?

The influence of (21:27) the comps from install services.

Yes. Yeah.

In my comments earlier, I'd said that the merchandise business, the merchandise itself was down 0.4%, so basically flat. Units were up 2%, but again, that's a mix effect comparison there.

And then the installs were up 74%. So a lot of it – all of the growth actually was installs but again, we're seeing merchandise comparisons improve as well.

John, kind of one thing I'd add. I'd add a little color on the spring sale.

As Marty mentioned, we filled the assortment up in Q4, and particularly in some engineered vinyl product and filled up our vinyl, both carrying somewhat higher margins. And so we plan to emphasize those in the first quarter and the beginning of the second quarter.

We'll have events that you'll see out there. As a matter of fact, today on our sites, we're starting to introduce those categories.

Good. And then as a follow-up, you mentioned staffing levels are where you want them.

I know you had a lot of issues with employee turnover. Dennis, is there anything you can give us in terms of numbers or commentary that supports the comment that you're where you want to be in the staffing level?

Right. Right.

So we measure staffing on a store-level basis every week. Mark, our head of store operations and the divisional VPs have really focused on two things this year – or for the latter part of last year, and that's ensuring that we had open head count filled.

And we always are going to experience a certain amount of turnover. We certainly saw that slow somewhat last year to a point where we were feeling good about the investments that we were making in training.

And we continue to do that. Like I said, when I say we're comfortable where our staffing is, that means that we feel like we've kind of stopped the slide, and now we're really focusing on upgrading our talent through training, we're really focused on that in each and every store, every day.

But we have – as I mentioned, we have a Saturday morning training program every week, and all that's just aimed at having a better customer experience and retaining our employees.

Thank you.

Thank you. My question this morning was about product innovation and availability.

You cited some new product you're introducing as well as better availability, I was wondering if you could put some color around that. In other words, can you just give us an update on how many SKUs you have in the store today, how many are available for take with, and how many and what percentage of that SKU base is available in, let's say, less than a week.

Well, we currently have – everything's available to our store in less than a week. We really focused this year, as you know, from the prior quarters, making sure that we had the product in our stores that the customers wanted the most.

And those that you characterize as take with. I can tell you that we really got in the best position towards the end of the quarter because a lot of that product was the laminate, the vinyl and the engineered vinyl plank.

And as we filled out those assortments, our logistics and merchandising team really focused on making sure that we had the right product in the store. So as a percent of what total, it really varied because we also started to think about the assortment in our stores based on geography.

When you think about slab markets versus conventional foundations, we wanted to make sure that we were thoughtful in how we think about where that inventory goes. And really, as that continues to evolve, most of that product is new for us, so we're still experiencing some of the sales – learning from the sales trends to determine where we need that product and what product we need in the stores.

But we have an allocation team that focuses on making sure, and we really had a real concentrated effort here, particularly over the last four weeks, in making sure that we're putting more of that product in our stores that customers choose to take with. And that's what I would call kind of a do-it-yourself project, something that's a laminate, a vinyl, or even an engineered vinyl plank.

Kind of something somebody might do over the weekend or a couple of days. So I would say that as our assortment filled out, we were really able to start thinking about that differently.

And in fact, we are just launching our real first campaign with our new assortment aimed at some of those products and the waterproof products as well.

So how many SKUs do you have today roughly?

Total?

Yeah, on the floor.

Yeah, about just under 400.

Okay. And what would you estimate the take with is of that?

Oh, I'd say – I'd hate to say, but it's – I would say it's...

A third.

...probably a third of our assortment.

Okay. My follow-up question was around just the competitive environment, what you're seeing from a promotional standpoint.

Is the environment more intense, less intense than where it was a year ago? A quarter ago?

However, you want to measure it.

I would say that it's been somewhat similar. We've seen a lot of focus on waterproof, as you can imagine.

There seems to be, from a flooring perspective, a lot of focus on tile and wood-look tiles. I've seen a lot of our competition has been out there more with ceramics and some waterproof.

That obviously is the hottest thing going right now in flooring. But I don't know that I would say that I've seen the intensity pick up in the home improvement channel anyway.

It seems like the focus has been kind of on spring categories and categories outside of our bailiwick, if you will.

Great. Thank you very much.

Thank you.

Good morning. Could you comment on what you're doing strategically to deal with any potential border tax adjustment or any potential tariffs on imports, and how you think about how that might impact your competitive standing?

Yes, this is Jill Witter. And we have been looking at this very carefully.

As you probably know, it's unclear just exactly what kind of support there will be relative to the border tax, but we have certainly been having discussions with our representatives regarding that and we're watching it very carefully.

Got it. Thank you.

Great. Thank you.

This is actually Jon on for Peter this morning. With your quarterly results beginning to stabilize, at what point to you think you may be able to provide an outlook, either on a full-year basis or, potentially, even one quarter out?

Yeah, this is Marty. And Dennis and I think about that a lot, and I guess I'd say we are getting more comfortable with some of the things we control better.

You see guidance in there around inventory and SG&A, and those areas we think we have sort of more control over. And not that they were not actively managing them, it feels more like we can set some expectations and manage accordingly.

The top line continues to be where we feel good about our momentum and so forth. It's just hard to look out very far based on all the different economic environments and shocks that can come up and stuff.

So we are hesitant there and I think we'll all kind of start to form a view of our business sort of structurally based on a revenue assumption. But I don't know, it's going to be a while before we really get comfortable setting a very long forward view of the top line.

Yeah. I would add also that we discussed so much of our assortment is new, and as we kind of determine how that's going to perform over the next couple of quarters will also give us a better feel for that as well.

Okay. Great.

And then on your advertising plan for the year, I know you probably don't want to get into too many specifics, but with your assortment kind of getting up to where you expected it to be now, do you expect to really accelerate the advertising dollars this year? And how might your message change around some of the new products?

Yeah, without tipping my hand too much, I would tell you that what we're most excited about is that we can advertise across the entire assortment. And we plan to – as I said, we're going to introduce some new product this year and we'll focus a lot on areas that we really couldn't go very deep into last year.

Marco and the marketing team have spent a lot of time really thinking about what's our most productive channel and how we're going to advertise our new and full assortment. So I would tell you that you will see more of that in terms of advertising across the entire assortment and really launching some of these product categories for us that we haven't been able to in the past several quarters.

Thanks. Good luck in 2017.

Thank you.

Thank you. You had mentioned in the prepared comments about getting the SG&A down to the low 30%s, from taking out a lot of charges kind of mid-30%s you're at right now.

Is that just going to be by growing sales over time, or is there a program to just lower overall SG&A spending?

Yeah. So first thing you've got to do is carve out and form expectations around those, what we call, unusual items we tabled out there.

We will continue to incur some of those above the average sort of legal spend that we identified related to specific litigation cases. And then ultimately, there is going to be some impacts around those litigation cases that, again, we've not been able to estimate a reliable range or timing.

So setting that stuff aside, kind of the indications and guidance I offered was that it would be flattish in dollars, and in fact, growing into that from a revenue standpoint. Now again, we are looking at ways and have initiated some of these steps to be more efficient.

At the same time, we don't want to take sort of the pedal off the metal as it relates to core staffing and the pro and installation investments and so forth. So for now, that is kind of the plan, yeah.

Okay. And then, so switching – I mean to get you to profitability here, that is going to rely on the sales line, you talked about changing about a third of your assortment, I think, you said earlier.

But is there any other plans in 2017 to see a new branding strategy, a new advertising – just things around that nature that's different than what we've seen the last couple years?

Yeah. I would add a couple of things.

First, we're focused on top line sales, of course, we're also focused, as Marty mentioned, on margin improvement. And then we have our eye on cost and making sure we got the right capabilities to support the growth drivers.

As it relates to our marketing plan, I hope – if you've had an opportunity to see our spring catalog, you'll see a much different look than you've seen in the past: a focus on innovation, trends and styles, as well as our new assortment. Really, it's not as much about screening price as much about screening breadth and depth of our assortment.

And we're continuing to kind of evolve that. We're listening to the consumer.

We're at a point now where we're starting to receive feedback from our customers that we can use constructively to make sure that we're talking to them in the right way. And advertising spend is a big expense for us, and so we're making sure that we have every effort in place to make sure that's an efficient spend that's really driving traffic into our stores, so that we can debut that new assortment we've got.

Okay. Thank you.

Thank you.

Good morning. Thank you.

This is Katie on for Matt. Wanted to switch gears and talk about the new stores you guys opened this quarter, it was a couple more than you've done in 3Q, and your outlook for stores next year related to the pipeline that you guys have set up so far.

We did open three stores in the quarter and they were stores that we had planned for a year (35:15). Quite honestly, one of them actually got pushed back from Q3.

We're planning about the same number of stores and, as I said, we're focused on stores that will clear a hurdle and that put us in a position in markets where we're currently not servicing. We have – one of those stores did bolster an existing market, but we're thinking that we'll probably have about the same cadence this year, two to three stores per year – or per quarter, and we'll probably end up somewhere between 10 to 14 stores this year.

Got it. Thank you.

And then it looks like the productivity has come down a little bit over time. Are you seeing any differentiation in these newer stores that you're opening, or are they pretty consistent with overall performance?

Yeah, we've been much happier with the stores that have opened as of late, but we believe that's impacted by the things that Marty talked about as it relates to the assortment. We've been able to – we've really taken a different look at how we open our stores as well.

Typically in the past, we wouldn't do a grand opening. We're starting to make sure that we really advertise in the market that we're opening stores.

We're also ensuring that we assort the store properly, as I talked earlier about making sure that our assortments aren't the same across the United States, and making sure that we put the right assortment in there. So we really had a chance to do that for the first time in the fourth quarter, and we're pleased with how our new stores in the last quarter performed.

So we'll continue to take that approach.

Great. Thanks very much.

Yeah. Good morning.

Thank you for taking my questions. So just want to be sure on installation we understand.

I think for the year, installation was about $53.7 million, can you give us a feel for what it was in the quarter?

In terms of volume, Budd?

Yes, sir.

Yeah, absolutely. Installation for the quarter was about $17 million – just over $17 million.

It was about 11.3% of our business.

And that was in 250 stores or so? What's the plan for the year?

Will you get to all of the stores for the end of the (37:59)?

Yeah, our plan is to be fully deployed at the end of 2016. And I just want to say that when you look at the penetration, it can be somewhat misleading.

We were at 10% -- I think just over 10% in Q3, and at 11% in Q4. But as we bring stores online, the adoption is slow, right?

We're training new employees. We're getting our installers up to speed.

And so you may have one store that penetrates at 15%, 16%, you may have another store that penetrates at 5%. So while we're seeing a steady growth in the overall Installation business, I really will not feel comfortable kind of understanding penetration targets till we get fully deployed.

Because the states that we have left, from my past experience, have been pretty heavy installation markets. So I think we're going to – it'll probably be first quarter of 2018 before we really know what the baseline is for penetration, but we plan to be fully deployed by the end of 2017.

And, Dennis, what do you think is the right number? What's the penetration per transactions?

What percentage of transactions do you think get installed? Is it 15% of transactions?

And what's the primary installation? Is it wood or is it laminate or vinyl?

Thank you.

Yeah. As you can imagine, it's the solids, it's the engineered.

It's the more complex assortments that we have. But, however, we're seeing a little more migration into the manufactured goods, not everybody wants to take that project on.

But I would hate to say – I would like to see our installation continue to grow somewhere in the mid-teens. But I think until we get a comfort level – because we also – one of the markets that we haven't – we don't install in Florida.

As you know, that's a slab market and probably is going to lend itself to things like vinyl and laminate, which is less – is not installed as much. However, it is a pretty strong engineered market which is – drives a lot of installations.

So it'd really be hard for me to say. We have some internal targets, but until we get more experience, we're just not sure where that's going to land.

Okay. Just a couple other questions.

Payables. They ballooned, but is that because of the inventory going up?

And where do you think payables then moderate to? And I think you may have addressed that, but I didn't quite catch it on the prepared remarks.

Yeah. No, they did expand at the end of the year.

Part of that's just the timing of the inventory. We were in the, really, the ramp of the inventory going through December and into January, kind of crested here in January, literally right about now, and the payables were just dragged in there.

And then additionally, we've been working with our vendors around extended terms and kind of bridging the seasonal build, so that's the kind of (41:06) comparison. And it'll come back down over the course of the second, third quarters.

I don't know an exact number. It'll sort of depend on where inventory settles, although I did give that range on inventory itself and a little bit of just the overall size of the business and the level of the top line and so forth.

But it should be coming down over the next couple quarters.

Okay. Just a couple more.

Jill – if Jill could give us maybe an update on the MDL. I think, if I read quickly in the K, the request for summary judgment is still pending.

Is that correct?

Yes, it is. It is still pending.

But it continues to work its way through.

But has all the discovery been done? Wasn't that what the combinations were for?

Yes, it is. There are still a few items pending.

As you know, these things do take a long time to work through the courts.

And so are the cases going to then be referred back to the original jurisdiction? How does that work?

What's the mechanism from here?

Yes, at some point they do get referred back to the original jurisdictions.

And have any of them been scheduled for trial?

Oh, no. We don't anticipate that for quite some time yet.

And any idea of when the summary judgment? I know that's probably a wish.

I truly – we don't have any idea. We're somewhat surprised it hasn't happened so far, but we just don't have any idea.

Got you. And my last question is maybe if we could get a read on how the stores are performing on a four-wall basis, or the profitability.

I realize there's a lot of underlying costs in SG&A that prevent the overall profitability. But how are the stores performing on a four wall basis?

Yeah, I mean they're coming along, with the top line and the margin improvement, that shows up through the four walls. I mean that doesn't say every store is profitable on a four-wall basis, but certainly the set of outlier stores that we're addressing and Dennis commented on earlier are, I want to say it's a shorter list, but I don't have the specific numbers of what it was six months ago.

And now, we have relatively focused, the stores that are underperforming for various reasons, but the vast majority are much better.

But I would also add that one of the things that Marty and his team focused on this year was giving Mark and the divisional vice presidents visibility into each individual store's performance. And so, as I mentioned in my comments, Mark implemented a gap (43:47) store program.

And just to expound on that a little bit, that's where Mark took basically every region in the company and identified underperforming stores. Now, it may be underperforming from a four-wall perspective, it may be the comp sales performance margin, and really started teaching and training our store operators how to be good stewards of the business, understanding our mix and then that helps them understand the importance of upselling, selling into the assortment.

And then because Marco and Jay and the merchandising team really spent a lot of time last year implementing our Good, Better, Best strategy. And so now Mark's focused on helping the store understand how they can improve the profitability and he's really made a lot of progress there, especially as we've seen margin improve.

The store teams are focused on selling attachments which have a much higher margin. So we're making good progress, but we've got a long way to go.

Just to be clear, they did not have that visibility before?

They did, just it was more on a high level. As I came on board last year, the stores pretty much had top line category visibility, but we really worked on giving them the line item visibility in their store so they understand the overall impact.

Okay. Thank you, Dennis.

Good luck on the balance of the quarter and the year.

Thanks, Budd.

Yeah. Good morning, guys.

I had a question regarding sourcing.

Good morning.

Maybe you can walk us through what percent of your inventory is now sourced from Asia, from China versus Europe and domestic? And how do you think that will progress over the next few years?

Well, I would tell you that we are focused on sourcing. Jill and Marco and their teams really focused last year on making sure that we had a compliance and sourcing program in place that gave us the ability to source wherever we wanted to.

We currently source a fair amount of product from Europe and Asia. Most of our laminates currently come out of Europe, and our engineered product is coming out of Asia, and a lot of our solid product is coming out of southern part of...

States.

...South America. So I would say that if you looked at it, it's probably about a third, a third and a third.

And we continue that. So one of the things that we're focused on this year, myself, Marty, Marco, the sourcing and merchandising team, is making sure that we're getting out this year.

As I mentioned in my comments, we want to get out, see our vendors, focus on innovation, focus on partnerships, and ensure that our vendors have that visibility and that we're out there looking. We really haven't been able to do that in the last couple of years.

We've really just been focused on filling the holes that we had and then starting to improve the assortment. But now we've got the time and we want to start focusing on making sure that we're getting out.

So hope that answered your question.

It does. Thank you.

And just one more on market share. Dennis, you mentioned you gained market share in about all segments.

Maybe you could give us a little bit more color on where you think you're gaining market share from.

Well, I could tell you that we saw really strong improvement in our market share in wood categories. This was a category that we had a lot of disruption over the course of the last year.

But when you look at the number of stores we have against those we compete against, we're really happy with the progress we're making. Like I said, we're nowhere near where we want to be.

And then the engineered – or the vinyl categories, both the vinyl plank and the engineered vinyl plank, have been categories that we really didn't participate in. So anything was going to be share that we picked up, but it has grown much faster than we anticipated, and we're really pleased with how we're positioned for 2017.

And like I said, we're really excited about the end of Q2 – or Q1 and Q2, as it relates to what opportunity we have with the new assortment. And, like I said, we've still got a lot of work to do, but we've got some things that we feel really good about in terms of our assortment in our stores.

And I think we'll have a better read on how those categories perform in Q1 as our assortments normalized into Q4.

Great. Thanks very much.

Good luck.

Thank you.

Well, as we close, I wanted to reiterate that we're confident in the potential of Lumber Liquidators. We have solid business model and a comprehensive plan.

We are not yet where we need to be, but I believe we're building the right team and I'm confident in our momentum. To all of our associates who have been so dedicated and have served our customers with excellence and integrity, thank you.

Your hard work has been critical to positioning Lumber Liquidators for success and growth. Thank you all again for joining us and we look forward to updating you on our progress next quarter.