Brad Cohen - IR Bob Rucker - CEO Chris Homeister - COO Tim Clayton - CFO.

Seth Sigman - Credit Suisse Jon Berg – Piper Jaffray Peter Benedict - Robert W. Baird & Co. Daniel Moore – CJS Securities Kate McShane – Citigroup Anthony Rusedski - Sidoti & Company Joe Feldman – Telsey.

Greetings, welcome to The Tile Shop’s First Quarter 2014 Earnings 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, Brad Cohen. Thank you, Mr. Cohen. You may begin..

Thank you, operator. Good afternoon, everyone. Thank you for joining us today for Tile Shop’s first quarter 2014 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 to identify forward-looking statements 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 earnings press release issued today and in the Tile Shop’s latest filings with the Securities and Exchange Commission.

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 release issued for a reconciliation of these non-GAAP financial measures to net income, 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 will turn the call over to Tile Shop’s Chief Executive Officer, Mr. Bob Rucker.

Bob?.

Good afternoon. Today, I am joined by Chris Homeister, our COO and Tim Clayton, our CFO. As we discussed in February the first quarter of 2014 presented a unique challenge from much harsher than normal weather across much of the country.

As is evident from numerous reports in company results has certainly had an impact throughout much of the retail industry. For the Tile Shop this impact was amplified further because the majority of our stores are located in the Mid-West, Mid Atlantic and East Coast markets.

Looking forward what we are very encouraged by is the month-to-month improvement we are seeing in customer traffic and sales, as winter concludes and spring began. The quarter finished with positive comparable store sales growth in March, helping to bring the total revenue for the quarter to 64.4 million an increase of 13.3% from last year.

During the first quarter we took further steps in our drive to become the only national chain in the Tile industry, opening five stores with four stores in new markets and one store in the current market, our smaller format, urban store that opened in the Lincoln Park Neighborhood in Chicago.

Since the end of March we have added two additional locations, bringing our total current store count to 95. And we are now located in 30 states. Additionally an important milestone on our faster growth was restraining the quarter, as we signed the lease for our 100 store location.

This milestone has special meaning to me, as when I started the business in 1985, one of the goals I set for the company was to be able to create a chain with a 100 plus locations. Our new store investments have historically proven to generate high returns and we will continually focus on driving long term profitability.

We are always looking for additional ways to increase the availability in assortment of our product offerings and during this quarter we made significant strides in this area. Initial product shipments from two new quarries began in the quarter providing additional operational flexibility and diversity.

There were numerous other accomplishments in the first quarter regarding gross margin, inventory and organizational talent, the Tile Shop is making progress and it 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 as we progress through 2014 and beyond. I would now like to turn the call over to Chris Homeister for further discussion of results and key initiatives. .

Thanks Bob. Let me provide some additional perspective on our sales in a quarter. The negative 2.3% comparable store sale decline was a result of slower customer traffic, which we believe was almost entirely result of extreme weather that Bob just discussed.

While we do not typically share monthly or geographical comp sales data which shows is perfectly share a bit more color this quarter that highlights the severity of weather conditions that we saw throughout most of the country.

Our mid-west stores where the winter was most severe and frankly historic in many respects and a mid-single digit decline in the quarter. The Mid-Atlantic in East Coast markets had also experienced historically cold winters our comps were approximately flat.

Our stores located in more moderate southern geographies and then very encouraging results including the Atlanta, Charlotte, Raleigh, Lexington and Jacksonville markets delivering high single digit comparable store sales growth.

These more southern stores currently account for less than 15% of our comparable stores sales, meaning more than 85% of our comparable store sales were within markets meaningfully impacted by weather in the quarter. We have previously discussed the fact that weather has a multifaceted effect on our business.

But given the impact we firmly believe it had in the quarter, I’ll quickly summarize it again. Weather impacts customer traffic to browse and order and stall 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 than perhaps felt at more traditional cash and carry retailers.

Moving on to some of our key operating metrics, we are pleased to report that gross margin, a key focus area for the operating teams and store leadership in 2014 improved sequentially 100 basis points from the fourth quarter reaching approximately 70% in Q1.

Our inventory position improved more than anticipated as well as we finished the quarter with a sequential decline of nearly $6 million, increasing year to year at a much slower rate than our growth in store count.

Despite the normal course of inventory bills expected in the latter stages of the year, we now expect our ending inventory in 2014 to be slightly lower than 2013 ending inventory.

I would now like to briefly discuss a handful of notable operational changes that were implemented during the quarter that should continue to positively contribute to our results as we move forward.

First, in February we implemented a new sales commission pay structure that compensates our associates for not only gross profit balance they deliver but also creates upside opportunity based upon their gross margin performance.

This further encourages them taking advantage of our full range of product assortment, [indiscernible] and finishing materials that we can offer to our customers. It also has driven a more disciplined promotional discounting activity on our stores.

At new stores we are continuing with a newly recommended compensation structure to reduce unwanted turnover during the early stages of its stores [indiscernible]. This allows us to move effectively and efficiently develop sales talent and create staff stability at the store level to drive the success for our model going forward.

Additionally we took multiple actions on pricing. First we made further refinements to our pricing within competitive markets to attempt to proactively defend our market share. Second we made adjustments to all of our [indiscernible] pricing to be more competitive on an product category that we manufacture ourselves.

We plan to open additional 13 stores throughout the remainder of 2014, opening 20 store locations this year, ending this year with approximately 108 stores. We also increased the depth of our leadership team with few key acquisitions of talent during the quarter that I wanted to highlight here today.

We have hired a director of global product sourcing and merchandizing who'll be focused on creating product category strategies, developing and sourcing new products, zonal planning, pricing and deployment of merchandize and strategies.

This leader joins us after having extensive international sourcing and merchandizing experience, with leading retailers. We’re also bringing on board a leader for our new export trading office in China who joins us from an internationally recognized accounting firm.

This leader will play a vital role in overseeing the transactional activity with our Chinese vendors, driving potential sourcing efficiencies and managing vendor relationships on a localized basis.

Although we are encouraged by the positive shift in sales momentum as the quarter progressed we do feel it’s prudent to slightly modify our full year expectations on sales and EPS.

Although historically sales are prudent be deferred rather than lost when affected by circumstances such as weather, the magnitude of what occurred in the first quarter this year is too meaningful to assume a full recapture during 2014.

Weather aside we are very pleased with the operational and organizational improvements made during Q1 that further establishes a foundation for continuous success in the future. And with that I will now pass the call over to Tim. .

Thanks Chris, today we reported net sales of $64.4 million for the first quarter of 2014, which represents an increase of 13.3% over sales of $56.8 million in the same quarter of last year.

As Chris mentioned the unusually adverse weather in our key markets during much of the first quarter, was a primary cause for the drop in same store sales of 2.3% or about $1.3 million.

[Indiscernible] stores that had been open for less than one year generated 8.8 million of sales in the quarter even though these stores were also impacted by weather to a meaningful degree. We began the quarter with 24 non-comp stores, six stores entered the comp store group in the first quarter and we opened five new stores in the quarter.

The six stores that entered the comp store group in the first quarter were all in the upper Midwest or North East. We ended the quarter with 23 non comp stores which represents nearly 25% of our total store count.

With respect to the comp store performance in the quarter it is important to reiterate that the comp store performance improved each month throughout the quarter with March achieving low single-digit comp store gains, despite the fact that the first week of March saw severe winter weather across much of the Midwest and North East that provides us with additional confidence that weather was the caused for the revenue shortfall is that our southern store continued to show strong comp store gains during the quarter, boasting high single digits increases over prior year levels.

Finally I think it’s noteworthy to point out that our same-store sales growth in the first quarter of 2013 was a strong 10.4%. Gross profit increased $4.6 million or 11.3% in the first quarter compared to the prior year.

Our gross profit margin in the quarter was nearly 70% which represents a 100 basis points improvement over the gross profit margin in the fourth quarter of 2013.

We have started to see the results from the actions that we put in place during the quarter related to more disciplined surrounding discount activity and the changes in the commission structure which Chris discussed earlier.

The difference from the gross margin in the first quarter of 2013 are due primarily to product cost increases and the inclusion of the Durant, Oklahoma distribution center that opened in the middle of 2013. Our selling, general and administrative costs for the quarter were $38 million as compared to $28.4 million in the first quarter of last year.

The SG&A cost in 2014 included approximately $1.1 million related to nonrecurring items primarily special investigation cost. On an adjusted basis, our SG&A costs in the first quarter were $36.9 million or 57% of sales compared with 62% on an adjusted basis in the fourth quarter of last year.

This sequential improvement is a nice indication of the leverage that is achievable as our stores mature. Couple of other things are worth noting with respect to our SG&A costs in the first quarter of 2014 as compared to the first quarter of 2013.

First and most significantly at the end of the quarter, we had 22 more stores than we did at the end of the first quarter of last year and 23 stores that had been opened less than a year. This represents 25% of our store count at quarter end.

As we open new stores, the store related SG&A cost are disproportionally higher as a percentage of sales than for our more mature stores. This will continue to distort our SG&A to revenue percentages until our newer stores mature and until the number of new stores decreases in relation to our total store count.

One indication of the impact of our store growth on our SG&A is that while SG&A increased 31% on a year-over-year basis, our store count also increased 31% over the prior year.

In addition to store-related growth, our SG&A increased over 2013 as we have also strengthened our leadership team at the end of the first quarter of last year to continue to support growth initiatives. Depreciation and amortization expense in the quarter was $1.4 million higher than D&A in the first quarter of 2013.

Further our Durant distribution center opened in the middle of 2013 and our SG&A cost related to that operation in the first quarter of 2014 were approximately $850,000.

Stock based compensation costs were $300,000 higher in the first quarter of this year than last year and our pre-opening costs in the quarter were $425,000 as compared to $300,000 in the first quarter of last year. All of these items represent necessary investments in the future of the company.

Adjusted EBITDA was $13.8 million in the first quarter or 21.5% of sales. As of March 31, we had 23 stores that were opened less than one year and a total of 30 stores that had been opened within the past 18 months.

This represents 32% of our stores which while operating fully as expected produced results that are below the historical EBITDA four-wall margin levels of our matured stores. At the end of the first quarter of last year 26% of our stores had been opened less than 18 months.

As we discussed on many occasions there will be an EBITDA margin drag 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 lesser rate than in the prior year.

We expect this effect will begin to reverse late in 2014 as the number of new stores becomes a smaller percentage of the total. One more item with respect to store performance is specifically our new stores.

Absent the effect of abnormal weather situations, we continue to see our new stores generating on average $1.8 million of revenue in the first year of operation. The growth percentages after the first year generally continue to be in line with our expectations.

The non-GAAP net income presentation in the press release adjusts GAAP quarterly results by eliminating non-cash expenses related to the warrant liability as well as other unusual and non-recurring costs and that applies a normal tax rate of 40%.

This presentation results in a pro forma net income for the quarter of approximately $4.4 million which translates into basic and fully diluted earnings per share of $0.09. These amounts were computed using 51 million shares and 51.5 million shares for the basic and fully diluted calculation respectively.

Turning to our balance sheet as of March 31, we ended the quarter with $4.3 million of cash and $93 million of debt which is an improvement of approximately $2 million from the end of last year. At quarter end we had approximately $20 million of borrowings available under our long term credit facility.

Shifting to inventory, I am also pleased that the focus on more effective management of inventory coupled with the normal seasonal inventory delivery patterns results in a $5.8 million decrease in inventory at March 31.

This will continue to be a focus area for the company in 2014 and we expect our year-end inventory levels to be slightly lower than at the beginning of the year even with 20 additional stores.

Capital expenditures were $12 million in the quarter primarily related to new store build-outs and store remodeling but also included improvements at our existing distribution centers and corporate IC investments. With respect to cash flow, the company generated $15.2 million of cash from operations in the quarter.

Working capital changes generated about $4 million of cash in the quarter as reductions in inventory and the utilization of our income tax receivable were offset by reductions in accounts payable. It is important to note however that this level of cash flow was sufficient to fund our capital expenditures in the quarter and pay down some debt.

So let me provide an update on our thoughts for the remainder of 2014. Since the initial guidance we provided in February the weather effects on our business were much more pronounced than originally anticipated.

Consequently because of the adverse weather situation we have modified our guidance for 2014 to basically incorporate the first quarter shortfall into our full year expectations. That in another way we expect the remainder of 2014 to be generally in line with our original expectations for the final nine months of the year.

However as a result the company now expects the following for the full year of 2014; revenues to range from $280 million to $290 million; comparable store sales growth in the range of 4% to 6%; earnings per share to range from $0.41 to $0.45 per share assuming approximately 70% gross profit margin and effective tax rate of 40% and 51.7 million fully diluted shares outstanding.

We will open 20 new stores of which seven are already open. Of the 20 new stores we expect 14 to be in new markets, six to be in existing markets. CapEx is still expected to range from $36 million to $40 million and our expectation for depreciation and amortization and stock based compensation are not changed.

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

Thank you. We will now be conducting the question and answer session. (Operator Instructions) Our first question comes from the line of Seth Sigman of Credit Suisse. Please proceed with your question..

And thanks for all the color on the different sales drivers to the quarter maybe just to focus on some of the operational drivers so I think Chris mentioned the change in the comp structure obviously a tough quarter but any early reads on how that’s changing the behavior in the company and maybe how the consumers responding to some of those behaviors? Thanks..

Seth, its Chris, thanks for the question. We can’t plan change that we have noted to give you a good word we would view as being a positive influence for the company across the board.

We feel that we are able to drive a consistent pricing pressure with consumers across the country with over 90 stores now we feel that that was an important change that we need to make to our composition structure to give a consistent pricing pressure across the country and across the chain so the consumer can have relative reads of insurance that what they see in Minneapolis is the same that they’ll see in New York that they are seeing Atlanta.

I would also say that from a comp standpoint it has also going to be an important driver for behavior within our sales associates where they have an additional incentive to improve not only gross margin dollars but also gross margin rate and we think the coupled those two changes together is a positive outcome for the company at this point in time..

And as we think about the margin improvement that you saw in the quarter, could you maybe just elaborate on some of the promotional tactics that may have changed from the fourth quarter, some of the umbrella positions that maybe you’re running before or any specific categories that I think you eluded to before? Thanks..

So, the commercial levers that we’ve really begun at this point in time have just begun. So we -- as I mentioned before in Q4 we made pretty dramatic changes away from moving away from broad based umbrella promotions across the wide spectrum of parts that we had in Q4.

Within Q1 -- we really began at the beginning stages of implementing our targeted marketing approach and being targeted to consumers of when they’re actually active in the marketplace. So we’ve begun building the model, we’ve targeted consumers have actually won their shopping in the marketplace.

We’re serving them an ad when they are actually out to the site or to sites that we feel are good corollaries to their purchase behavior and actually when they will purchase.

Specific example was I would target around what we’re doing in Lincoln Park was one of the thing that we mentioned, that Bob mentioned on the call is not only talking about the store opening but also looking at how we actually can identify those customers in a geo-targeted manner around those particular stores not a store in particular in Chicago.

And servicing them an ad and providing -- not only a dynamic ad but also looking at more of a conservative video ad for them as well.

And actually get to a point where we can actually target them on a specific promotion around a specific product category based upon their research that they are doing online as well as what they might be doing in stores as well..

Okay. Thanks. I appreciate, it’s very helpful. Then one more and I’ll jump off.

The comps, it sounds like you are up low single digits in March, care to share what they were doing January and February before they inflected positively?.

Well, Seth, I think the comment was that the trend improved throughout the quarter and so I think you can kind of judge from that, you know the winter weather was the harshest in January and kind of you know continued on but from that standpoint, the trend wasn’t an improving trend throughout the quarter..

Our next question is from the line of Jon Berg with Piper Jaffray. Please proceed with your question. .

Sorry about the background noise here. But thanks a lot for taking our questions. Given that you comp negative in Q1 is there any way you could give us maybe a little additional color on April just to get us a little more comfortable with that four to six comp guide for the full year.

And at this point are you seeing the gap between geographies closed?.

Well, let me -- I’ll touch on that, we -- I think April is kind of as expected at this point, we don’t really want to go into a whole lot of detail from that, obviously you can understand and appreciate that but, we feel it’s kind of on track.

The other question in terms of closing of the geographies I have to take a look at more detail on that Jon, I don’t -- I haven't rolled it up in, from a standpoint of the individual weeks in the months to kind of show that closing of the gap if you will.

I can tell you that we are very pleased with how the Southern geography stores performed in the first quarter with a high single digit comp, which you know obviously also gives us comfort that when customers can get to the stores on a consistent basis, we can deliver that kind of comp improvement..

Okay. Great. Thank you.

And then I guess how should we really think about, the weather impact on business for the remainder of 2014, we knew obviously traffic was hurt in Q1 from what happen in the mid-west and north east, but how long do you feel that, is the demand really pushed out or lost or what if you guys seen in prior years with the company?.

Well, I mean I think historically as I think Chris mentioned that is that, the sales on a -- a normally seasonally impact are the weather impacted period of time would be deferred from a month-to-month standpoint or maybe a couple months as opposed to being lost in total.

We’ve seen a lot of information kind of in the press related to how this significant weather in the quarter, they have changed some of consumer buying patterns and that’s why we’re just being a little cautious in terms of the revisions in our year-end guidance, full year guidance and basically taking what we were short in Q1 and basically adjusting our full year guidance just to incorporate that shortfall, with the expectation that the rest of the year will continue to perform as we originally had expected the year to perform.

If there is more revenue that’s deferred if you will as opposed to being lost than we should see some favorable opportunities there..

Okay. And then just one last quick one from me and then I’ll hand it over.

Congratulations on signing your 100 store lease, that’s a great accomplishment, but just been thinking about your store openings for the rest of the year, five in the first quarter, it sounds like you’ve got two down in the second quarter already, how should we think about that pace, you know the openings throughout the rest of the year?.

Hi this is Chris. The store openings will be fairly balance throughout the course of the year.

So as we mentioned in the release we will combine in quarter we opened two, in this quarter, I think [indiscernible] to say that we will certainly be in the five to six range for Q2 and then when we look at feedback half the years is fairly equal between the two quarter as well..

Our next question comes from the line of Peter Benedict of Robert W. Baird. Please proceed with your question..

Thanks guys. Thanks for taking the question. First Chris just on the pricing changes that you were talking about earlier, it sounds like those are initial price points that I guess you’re trying to get more consistent across the country.

I don’t want to put words in your mouth but let me know if that’s correct? And then I mean how that does that jive? I know in the past you guys have talked about different markets having different competitive situations and customers maybe in Mid-West being more focused on getting a discount whereas maybe in the North East you don’t need to do that.

Does that just continue to be a factor you just want to start from the same place in terms of pricing just help me understand that. Thank you..

Well there is certainly -- we certainly want consistency across the board there is no question about that I think there is a lot of benefit from that and especially being an omni-channel retailer like the top [indiscernible] Internet can chose to be an important element and we certainly don’t want to broadcast to consumer that there is different prices within the store within and also within the Internet pricing from that standpoint.

With that said we continue to have market pricing within areas of the country that have other or maybe more pronounced competitive threats from each local marketplace so that has continued and the number of markets that we have from Q4 to Q1 has been relatively consistent from that standpoint.

And then I would just look at on a marketing standpoint of actually communicating price, we felt that we could be sharper on price on certain categories in order to signal a pricing pressure to consumer to test some of the contextual display ads and video ads that we’re rolling to the marketplace of actually having a pricing pressure and a hoping price point really ring true to a consumer and get them excited where price might be a barrier.

It’s certainly only one part of our value proposition but certainly we felt in some areas where we could [indiscernible] and have an opportunity to move through inventory or to have an opportunity where we’re actually maybe going into a new market such as Chicago I mentioned or as we went to Arizona or in Mexico those are important marketing tactics that we want to take advantage of.

And we felt moving price on a few select skews within certain categories within our broad product [indiscernible] skews was appropriate..

Okay, that’s helpful. And then Tim you talked about the story with the headwind reversing later this year.

Do you expect that the flow through fully to the consolidated EBITDA numbers so that we would see on the consolidated numbers maybe an improvement year over year in EBITDA margins in the fourth quarter? And then related to that as you think about longer term opportunities you said in the press release you continue to believe the business will get back to those prior margins.

Can you give us a sense of maybe how many stores you think you need to have operating in order to get the business back to that level? Thank you..

Yes, that’s a mouthful.

I would first expect given the dynamics of the cost associated with new stores as they open and how those stores mature that I would expect to see improvement in the EBITDA margins in the fourth quarter year over year as those percentage trends start to reverse I think the real leverage comes in probably Q1 of ’15 as we’ve said for quite a bit as that’s been a seasonally stronger quarter and I think we have some very strong leverage opportunities there as well.

Clearly our goal is to get back to that 28% EBITDA margin type of number, we’re several years away from that I think but we’re clearly going to be making strives -- meaningful strives towards that as we get into 2015 and I think I don’t have a specific number of stores Peter we have to take a look at where we think that might play out.

But I think within the next two-three years we should be approaching -- maybe sooner than that approaching that 28% number..

Our next question is from the line of Daniel Moore with CJS Securities. Please proceed with your question..

Good afternoon. Thank you.

You mentioned Lincoln Park new store being smaller urban, talk about whether that’s the model you expect to replicate in other areas and is there any difference in the economics given potentially higher rent and other expense relative to your sort of bigger box model?.

Chris Homeister:.

We’re certainly excited about Lincoln Park it’s -- we opened it on March 24th we’ve had a great initial reaction from the local community in the Chicago land area and Chicago as you all know is an important market for us in general. The economics of the store are not materially different from other stores.

We certainly have other stores within the chain that have rent structures that are similar to Lincoln Park given the fact they’re on the East Coast in a fairly material way.

But what I would say is that we feel that the square footage of that particular store which is around 40,000 square feet is a model that can certainly work for us in many geographies not just in urban setting.

We think the opportunity for us of what we’ve seen thus far and also I’d add as well that looking apart there are other stores that are similar size within the chain as well they’re about that same size.

So it’s not the smallest store in the chain from a square footage standpoint, but it's certainly the first store that’s really in a true urban setting.

So the things that we’re testing from an operational standpoint are certainly one in economics, but number two and number three are some of the operational elements of how do we view it large heavy shipments into urban setting market, do we need to change our delivery cycle that we need to have localized delivery at not just to your doorstep but to your apartment or to your condo.

How many flights of stairs do we want to go up? I mean I think those are things that for the first time that we really had to go through from an operational standpoint.

And again going back to my opening statement, I feel that the early read on the store from both a foot traffic standpoint sales and overall receptivity to our concept and to the presentation that we have within the Tile Shop brings to the community has been very-very positive thus far..

Very good and you mentioned the change in commission structure, the shift that went in February, do you think that had any adverse impact on revenue on comp store sales in the quarter?.

Chris Homeister:.

We don’t. As Tim and I both stated that we had sequential improvement throughout the quarter. The comps have improved every quarter from a month standpoint since the program has been in place. So we don’t actually feel it’s been a negating factor at all.

As we’ve mentioned time and time again through the release as well on the call that we feel that we are missing a plan from a comp standpoint was largely due to the weather and also hold that we had from very severe to relatively severe to better conditions throughout the quarter and given the store locations is not having a national footprint on the west coast or the deep south and even in the southeast where they had weather as well [indiscernible] to offset the large percentage of stores that we have from our comp base in weather impacted markets..

Excellent and finally maybe just update us on the transition over the past few months in terms of the procurement supply chain in the new export trading company, where if you think you’re sort of put that all behind at this point and just kind of where we stand in terms of that transition?.

Chris Homeister:.

I think we’re almost there. I think as I mentioned in our release, we’re very excited about having an individual that would be based in Beijing to lead our China’s export trading office. We feel that she will be a great addition to the team and once that is up and running and we feel that will be up and running within the second quarter.

We feel that will be the last step in the process of putting that chat through the river here. .

(Operator Instructions) The next question comes from the line of Kate McShane with Citigroup. Please proceed with your question..

Just going back to the supply chain, I wondered if you could update us on any changes in the supply chain or where you [indiscernible] from and what level of inflation are you seeing and expecting for 2014?.

Chris Homeister:.

The supply chain continues to be relatively consistent certainly China and Turkey remain very important countries for us from a country origin standpoint with Southeast Asia and South America, Central America all the important elements for the company as well.

We’re very excited about how Mexico can be an important country that will be adding to our supply chain across the board. We received our initial shipments from quarries within Mexico during the quarter that Bob spoke about which are every encouraging and we think that could be a tremendous outlet for that we haven’t used after this point in time.

Pertaining to inflation, there is inflation that I think we have spoken to within the comments here today. We feel that it’s been well managed by the teams here and we feel that in many cases we’re able to pass it along to consumer where appropriate.

Certainly there is certainly in some areas where what I would classify as a commoditize product that that may not necessarily be the case, but in general given the fact that we will have a broad assortment across many different countries I feel that we are somewhat more insulated than maybe some other players out there..

Okay thanks and my last question is not to beat a dead horse because I know you’ve given a lot of detail around your pricing actions and refining some of your price, but can you talk a little bit about the competitive environment and what you’re seeing from some of your closest competitors especially now as you get to be 90 stores and opening in new markets what kind of the more recent reaction has been?.

Chris Homeister:.

Well, I think I’ve talked about this last year and certainly have to talk about here again today that with 90 stores and certainly growing to over 100 by the of the year, we are a noticeable presence when we go into any market and given the fact that we compete against a live variety of contenders in the market place, including local stores that might have one or two in the market but have been in business for 30 or for years, regional players that have a loyal following and [national] players of both big box stores as well as other players in the marketplace as well, we felt -- we continue to feel that our pricing is in line and very competitive across the board and as was mentioned before, we felt we had an opportunity to become sharper on price in certain skews within product families, where we could promote a pricing pressure in the marketplace that allows people to picking up the Tile Shop and also get to know, what we represent so they could come to the store to or about or come to our website and I think we’re very pleased with just how that has driven traffic and I think also get an introduction to the Tile Shop for areas that were brand new too, which is a fairly large percentage of our stores..

Our next question comes from the line from Anthony Rusedski with Sidoti & Company, please state your question..

Good afternoon just had a quick question about the previous comment that the expectation is that eventually the company will get back to the EBITDA margins of around 20% so, looking back historically you did that type of a margin in 2010, 2011, the gross margins were over 73% so, with that in mind, is the eventual goal of getting back to those types of margins is it because the gross margin will get back to 73 plus versus 70 now or will this come only because of leveraging the SG&A expenses..

Chris Homeister:.

Well, I think as we mentioned our target range for the gross margin is the 70 to 72 % range, you know we’ve seen stabilization and we think there’s opportunity for improvement in the gross margins from where we are, I think the majority of the return to that type of EBITDA margin level is going to come through leverage off of our SG&A as we continue to mature the stores and add more stores to the company across the country and that’s really where the opportunity comes in on a longer term basis..

Thank you. We have time for one final question for today’s Q&A session, that question is coming from the line of Joe Feldman of Telsey Advisor Group; please proceed with your question..

Hi guys, good afternoon thanks for taking the question, it’s really just a follow up to something that was commented on earlier, I guess I wanted to go back to the pent up demand issue, and I guess I was under the impression that this space has pent up demand that would put kind of unwind and I guess what you’re saying today is a little different and I’m curious just to why that wouldn’t be still the case where there would be this pent up demand, and there would be maybe a little bit of a boost in the second and third quarter sales to kind of get you back on to the sort of trend lines so to speak..

Chris Homeister:.

Well you know Joe, I think what we’re saying is that you know while we believe in many markets, that there is this pent up demand, you know we’ve also seen some things which we think could offset that somewhat as you know are people going to be spending money on improvements or repairs are they going to be doing home improvements.

And we’re just a little cautious until we see that pent up demand kind of flow through in a more consistent manner perhaps, I think all we’re doing here Joe is try to be maybe a little cautious or conservative and just reflecting the first quarter into the full year results and really saying that we think the rest of the year will be as we originally expected the year to play out when we first looked at the plan in early 2014..

Thank you. At this time I’ll turn the floor back to Mr. Rucker for closing comments..

Thank you folks for joining us tonight, good night..

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