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Tile Shop Holdings (NASDAQ:TTS)
Q2 2018 Earnings Conference Call
Jul. 19, 2018 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Tile Shop's second-quarter 2018 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator instructions] And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to Ken Cooper. Please go ahead.

Ken Cooper -- Investor Relations

Thank you, Candice. Good morning to everyone on the call, and welcome to the Tile Shop's second-quarter earnings call. Joining me on today's call are Bob Rucker, our interim CEO; Cabby Lolmaugh, our chief operating officer; and Kirk Geadelmann, our chief financial officer. Following our prepared remarks, the call will be opened for analysts' questions.

Certain statements made during the call today 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. 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 our earnings press release issued earlier in our filings -- and our filings with the SEC. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update these forward-looking statements.

Today's call will also include certain non-GAAP measurements. Please see our earnings release for a reconciliation of those non-GAAP financial measures. With that, let me turn the call over to our founder and interim CEO, Bob Rucker. Bob?

Bob Rucker -- Interim Chief Executive Officer

Thanks, Ken. Good morning and thank you for joining us today to discuss our second-quarter results. Our financial performance in the quarter improved relative to last quarter. Our same-store sales were better in this quarter as we improved from being down 6.8% in the first quarter to being down 1.8% in the second quarter.

This 500-basis-point improvement gives us confidence that we're on the right path. With good progress on our product assortment strategy and easier compares, we feel we're positioned well for the second half of the year. We also had a nice quarter from a gross profit perspective. We increased gross profit dollars and once again achieved a 70% gross margin rate.

We are making progress in each of the key areas that we outlined for you on our last call. This includes the investment made to increase our service levels, strengthen relationships with our Pro customers, and increase traffic to our stores. We expect these increased costs to translate into higher revenue and profits in the future. 2018 has been and will continue to be a transition year for us.

We are working hard on reenergizing our product assortment, making our stores more appealing and easier to shop, improving our sales and field management organization and focusing our marketing efforts on upscale customers, who are serviced through our professional channel partners. We are pleased with what we've accomplished so far. Finally I would like to provide a brief update on our CEO selection process. At the present time we continue to develop the future leadership of the Tile Shop and continue to focus on our in-house leaders.

We're making good progress on our strategy and that is a good sign that our management team is fully embracing the challenge in the opportunity in front of them. I would now like to turn the call over to Cabby who will go into greater detail on each of our initiatives. Cabby?

Cabby Lolmaugh -- Chief Operating Officer

Thanks, Bob. Good morning, everyone. The first priority that we discussed on our last call was the expansion of our product assortment. Not only does this involve increasing the total number of tile that we carry, but also aggressively replacing the older-style tiles with products we believe our upscale consumers demand.

We're making steady progress with this initiative and expect to have our assortment well-positioned by the end of the third quarter, but of course, this work will be ongoing. It will never be complete. Our most significant learning over the past years that we need to be on top of our product assortment every day. Our merchandising, demand planning and supply chain leaders are hard at work to ensure we have the best assortment in the industry.

As a matter of fact, we are on pace to have an even broader product assortment than we did our recent peak in 2015. And we have decided to continue the elevated pace of new product introductions through the year-end, which will bring the total number of new tiles well above what we originally anticipated. This is having some short-term balance sheet implication on inventory, which Kirk will discuss in his section. Our second priority is related to store presentation.

We have two primary work streams underway here. First, during the quarter, we completed three digital remodels, which gives us seven completed in the first half of the year. These included remodels of the larger, more mature stores that have not had the benefit of a significant store remodel in the last five or more years. Certain of these stores have some of the highest four-wall EBITDA margins in the chain.

The second work stream is focused on enhancing our in-store merchandising to showcase all of our products. Over the past six months, we have been piloting new end caps, fixtures, and merchandising systems. Some of these fixtures enable us to present our tile assortment in more efficient and effective ways. Make it easier for customers to shop and help our customers explore all the various options.

To ensure sound capital and cash management, we're looking to balance our investment and remodels in older stores in the second half of the year with our investment in fixtures and merchandising across the entire chain of stores. While we do plan to complete a few more remodels of larger and mature stores during the second half of the year, it's also important that we make this merchandising investment to best display our newest tiles entering the assortment. We will further evaluate the timing and amount of additional capital investment, we believe will be required for the remaining stores and even vignette refresh as we head into 2019. Our third priority is the investment we made to expand our regional sales leadership and to improve the sales associate, compensation system to allow us to attract and retain high-quality talent in a competitive labor environment.

As a reminder, we did this to reduce the number of stores' each regional sales leader overseas. This increases the time regional leaders can spend at each store and work with each store manager. The feedback has been very positive from the field. Our stores are staffed at the desired levels, they are managed by well-trained store managers who in turn have the benefit of a close working relationship with their regional sales manager who has deep experience in the Tile Shop way of doing business.

Our fourth priority is the win back and grow our professional sales channel. Like product assortment, this is ongoing and will be a part of our core going forward. We've taken several recent actions, which have been well-received by our Pro customers.

No.1, we have continued to avoid all price promotions directed at retail customers. This is the lever last used on December 1, 2017. No. 2, in early June we launched our new Pro loyalty program.

The new program formalize some of the benefits we've offered over the years and also include certain new benefits, we believe will be meaningful to our Pros as we continue to build long-term relationships with them. Our goal is to understand our Pros' needs and provide a consistently high level of service regardless of the Tile Shop store where they choose to shop or the sales person who is providing the service. No. 3, we're hosting more events at our stores.

This tactic is designed to communicate all of our exciting improvements we've been making to our product assortment, our in-store merchandising in our customer service in person. Over the last six months, we hosted over 100 Pro events in our stores. Many of these have involved local branches of National Trade Association. The initial feedback from our Pro customers as well as attendance at certain of these events has helped us validate that we're on the right path.

No. 4, we have now rolled out Pro market managers in roughly 90% of the markets we serve. These managers all have tenure with us, either former stores managers or top sales associates with strong Pro books of business. They identify Pro prospects, calling these prospects in the field, organize Pro event in our stores focused on product and installation and train our sales associates in each market to better serve our professional channel partners and their upscale consumers.

No. 5, finally in early June, we reverted back to our traditional model and the model used by the vast majority of our local and regional competitors and we move pricing from our website for consumers. All of our research and feedback from our customers suggest pricing has a low [Inaudible] importance in our upscale customers' decision making. Historically, if we make our website easy to navigate to see our broad assortment, the customer will come into the store.

Once this happens, we feel good about our ability to convert. We're moving fast, and the team is energized by the results we have generated so far. I'd now like to turn the call over to Kirk, who will take you through the financial results. Kirk?

Kirk Geadelmann -- Chief Financial Officer

Thanks, Cabby. Good morning, everyone. As Bob mentioned, we had a solid quarter improved financial performance from the first quarter. I'd like to highlight a couple of key items.

First, we were encouraged by the sequential improvement in comparable store sales during the quarter compared to the first quarter of 2018. We also continued to be encouraged by the continuation of certain trends that emerged in the first quarter, including a strong gross margin of 70%, strong sales orders for many of the new tiles we've recently introduced, and improved profitability despite increased expenses from new stores opened over the last 12 months and approximately $2 million of strategic investments made during the second quarter. Certain of our key initiatives are designed to improve customer traffic to our stores and others are intended to improve customer service. While all of these strategies are designed with the long term in mind, we also expect that these initiatives will help gradually continued to improve financial performance in the near term.

The continued investments in our product assortment, our Pro marketing and event strategy, as well as our new Pro loyalty program, are all key initiatives designed to improve customer traffic. We have received roughly 75% of the new products that were originally planned at the beginning of the year. However, many of these products are not yet displayed in stores as the product was just received at the DCs or is still on the water. We anticipate all of these new products will be merchandised in stores by the end of the third quarter.

In addition, we now plan to add several additional important new product lines to our assortment through year-end. This will result in our inventory being somewhat higher for the next several months as we continue to refine our product assortment strategy. I'd now like to provide a brief update on our second-quarter financial performance and highlight the expense and capital investments we've made to support our strategic initiatives during the quarter. Net sales of $92.9 million were up 3.9% year over year. Comparable-store sales declined 1.8% in the quarter.

This was the result of continued weaker traffic relative to last year, as we continue to transition our business strategy back to a product and service focus as compared to one on price. We expect that retail traffic will continue to be relatively choppy near term as we lap last year's aggressive price promotions, continue to complete the work on our product assortment, work to remerchandize our stores and focus on our new Pro marketing and loyalty strategies. While we are not yet where we want to be from a sales perspective, we believe we are positioned well for the second half of 2018. Gross profit was $65.3 million for the second quarter of 2018, an increase of $3 million or 4.8% over gross profit in the same quarter of last year.

Gross margin of 70.3% was equal to our gross margin rate for Q1. The year-over-year improvement of approximately 60 basis points from the second quarter of last year was the result of eliminating all advertised price promotions, online and in stores, as well as improved sales mix. Based upon our last two quarters' results, as well as our plan to focus on unique, exclusive and higher-end product offerings, we continue to expect to maintain a higher gross margin rate that is closer to our historical 69% to 70% range. Our selling, general and administrative cost for the quarter were $57.9 million as compared to $50.7 million in the second quarter of last year.

The $7.2 million increase was driven by approximately $3 million of costs associated with a full quarter of expense for 10 new stores opened over the last 12 months. In addition, the second quarter of 2018 included approximately $2 million of largely planned strategic investments in store compensation, store leadership, redesigning our website and building out our customer relationship management capabilities. Finally, we also experienced an increase in shipping and transportation cost, mostly related to outbound freight between our distribution centers and our stores. The addition of Pro market managers this year, which was not fully contemplated in our financial plans at the beginning of the year, will mean that our total strategic expense investment for the year will likely be closer to the higher end of our original projected $5 million to $7 million range.

To date this year, we've incurred approximately $4 million in expense for these initiatives. However, we expect the run rate for store compensation will naturally slow in the back half of the year, due to our effort to increase sales productivity. Income tax expense for the second quarter of 2018 was $1.9 million compared with $2.5 million for the second quarter of 2017. The decrease in the company's overall tax rate was primarily due to the Tax Cuts and Jobs Act of 2017.

The company anticipates an annual effective tax rate of approximately 26% to 28% in 2018. We concluded the quarter with 140 stores. Our third planned store opening, which was slated for third quarter of 2018 is now expected to open in 2019, due to delays from the landlord. We do not anticipate any more store openings during the balance of 2018.

Adjusted EBITDA was $50 million in the second quarter. Adjusted EBITDA margin was 16.2%, a 110 basis point improvement from the first quarter. Net income for the second quarter was $5 million and earnings per share was $0.10.Turning to our balance sheet. We ended the quarter with $9.9 million of cash and $29.5 million of long-term debt.

Our debt increased slightly from the first quarter by approximately $4.3 million. We continue to make additional investments in inventory to support our best product assortment strategy. Inventory of approximately $100 million was higher than originally anticipated for the second quarter as the company was able to work with suppliers, to accelerate the shipment of certain new products. While a significant amount of work remains to get this new product properly merchandised in our stores, we believe we are in a solid position to support our sales goals in the back half of the year.

As I mentioned earlier, inventory levels will likely remain higher for the next several months as we continue to make certain additional refinements to our assortment strategy. We now anticipate our year-end inventory level will be approximately 10% to 20% higher than last year, reflecting a much stronger overall product assortment. Capital expenditures were approximately $8 million in the quarter, primarily related to three store remodels, store merchandising and technology investments that include work during the quarter on a new enterprise resource planning system that will be primarily focused on improving our POS capability in stores, and our supply chain planning processes. As we've discussed on previous earnings calls, the historical payback for our store remodel is roughly three years or better.

While the historical return on these projects is good, we have decided to slow some of this work in the second half of 2018 to enable our merchandising investments. And as Cabby mentioned, we designed and tested several fixtures and store merchandising systems over the last six months. The focus of this work has been twofold: first, we want to convey a clear and consistent brand message to our customers; second, we need to effectively showcase all of the new tiles that will be entering our assortment this year. Based upon the testing results, we have made the decision to roll out certain of these investments to all 140 stores.

As a result, we are now planning only a handful of additional remodels in the second half of this year. At the same time, we now expect to be at the high end of our $27 million to $32 million capital spending assessment of the year. We believe many of the investments we're making now should create return from many years to come. Our longer-term goal is to generate a return on capital employed of greater than 20% as well as eventually increasing adjusted EBITDA margins to greater than 20%. Finally, I'd like to offer a few comments on China tariffs.

As you know, approximately 50% of our purchases come from Asia, and China is well-represented. If the 10% tariffs are implemented, we have three options: first, we can look to other suppliers outside of China for similar products. If we can get similar quality, we are open to changing suppliers. Second, we can pass it through to the customer.

We do feel this is possible. Third, we can absorb the extra cost and hope increased sales can offset the price or look for cost saving elsewhere in our cost structure. With that operator, Bob, Cabby, and I are happy to take your questions.

Questions and Answers:

Operator

Thank you. [Operator instructions] And our first question comes from Daniel Moore of CJS Securities. Your line is now open.

Daniel Moore -- CJS Securities -- Analyst

Good morning. Thanks for taking the questions and congrats on the progress. Want to dive a little deeper into same-store sales, any improvement there? Are there particular regions that stood out in terms of improvement? And were there certain stores where refurbishments, refreshments are already in place kind of ahead of the quarter or early in the quarter? I'm trying to get an early indication on any tangible progress that those are having and one quick follow-up. Thank you.

Kirk Geadelmann -- Chief Financial Officer

Good morning, Dan. It's Kirk. Thanks for the question. We're still -- as I said in my remarks, it's still a little bit choppy in terms of our comps in our organic growth metrics.

But we are seeing a lot of good things happening across the country as we look at some of the metrics and some of the sales growth. But just like the total company metrics, it's sort of choppy and inconsistent across our markets as well. So, we're hopeful that as we go out here over the next couple of quarters, we can get a little bit more consistency across our metrics in terms of the total company as well as the individual markets that we serve as well.

Daniel Moore -- CJS Securities -- Analyst

Helpful. Appreciate it, Kirk. And I have one quick follow-up, I'll make it a two-parter, sneak it in. One, how many of the 140 stores by year-end will either have been refurbished or new enough that probably don't need to touch in a meaningful way? Just trying to get a sense for ongoing CAPEX.

And then two, with the elevated inventory plans beyond 2018, do you see tangible or meaningful impact on inventory turns going forward relative to kind of historic averages? Thanks.

Kirk Geadelmann -- Chief Financial Officer

Yes. That was a two-parter there, Dan, but I'll take both of them. In terms of the stores, as we've talked about a little bit, every-- by the end of this year, even with not doing quite as many remodels as we originally anticipated. As Cabby talked about in his remarks and I alluded to as well.

By the end of this year, we'll have the vast majority of the chain, either open to new in the last five years or those stores would receive a pretty major remodel. We'll only have maybe 20-ish stores that we think we still need to freshen up. But for the most part as we look at those 20 stores, they're pretty good looking stores. I mean, I think the average person won't know that they need a little bit of a freshen up.

So, we feel good about that. We'll step back and as we head into 2019 at the end of the year here and the beginning of next year and try to figure out what our remodel investment will be for next year. But overall, we feel like the work we're doing, both with store remodel this year as well as merchandising this year as well, we're going to make a very positive and very material impact on our store presentation. And we're just trying to maximize the overall result this year.

In terms of inventory, I think it's fair to say, we're really sort of just resetting our inventory. I think we know now that we probably we cut a few-- too many SKUs out of our assortment or inventory, last year was lower than it should have been. We didn't quite have the breadth we needed, particularly in certain subcategories. So, this is a reset year this year.

Going forward, as Cabby said, we're going to be working on our assortment every single day. I think that was a hard lesson we learned last year. So, we'll still be doing some work. But I don't think it'll have-- it won't be as material or as impactful as we saw this year.

Cabby Lolmaugh -- Chief Operating Officer

And, Dan, this is Cabby. I'd like to comment a little bit more on the remodel. Of those 20-ish stores that Kirk mentioned, I want to reinforce that they still look great. These stores look really good when you walk in and operationally very sound.

And as we bring in a lot of our new assortment, we're very pleased with the run rate of these new SKUs and the impact they're having on our overall sales. So I'd like to watch as these new SKUs sell and make a better-educated decision on what we're going to put in these vignettes going forward. So it's kind of a wait-and-see on some of those stores before we make that investment.

Daniel Moore -- CJS Securities -- Analyst

Understood. Thank you and thanks for the color.

Operator

Thank you. And the next question comes from Peter Benedict of Baird. Your line is now open.

Peter Benedict -- Robert W. Baird -- Analyst

Hi, guys. Thanks for taking the question. First one just around comps. I mean to the degree that you can talk a little bit more about maybe the cadence you saw across 2Q.

I mean, a lot of changes occurred in June, Pro loyalty, pulling some of the pricing, I think, from the website. So, just curious how should we think about kind of the sequential trend in the approved comp and how you're thinking about the back half of the year? Certainly it seems to be a lot of opportunity in the fourth quarter, given the compares and when all the assortments can be in place, but just curious how we should be thinking about kind of 3Q, 4Q?

Bob Rucker -- Interim Chief Executive Officer

Good morning, Peter. Well, I think I'd just anchor back to it's choppy. As you've said, we have a lot of different moving pieces right now. While we feel really good and I'm very confident about all of our operational strategies.

It makes it a little tougher to assess, specifically the impact of each one because, obviously, none of them have been in isolation. So, we try to measure them as best as we can. We've high conviction that all the things are the right things. Many of these things, all the critical ones we've tested.

So, we feel-- we have confidence from that perspective. But overall, we still have a lot of choppiness as we look across our chain. And again, I mean, our goal is to hopefully start to see some stabilization and some consistency and we'll look for that over the next several quarters.

Peter Benedict -- Robert W. Baird -- Analyst

OK. That's fair enough. Just turning to SG&A, you mentioned in your prepared remarks, store compensation increases starting to slow in the back half. Just curious if you can maybe expand upon that so we understand that? And just as we think about the overall level of SG&A was around $58 million, each of the first two quarters of the year. Is there any reason why that steps down materially over the back half or does that kind of remain stable? Just kind of curious of your thoughts there. Thanks.

Kirk Geadelmann -- Chief Financial Officer

Sure, Peter. As you guys know, our business is a little bit seasonal. So part of the natural slight slowdown in some of the SG&A increases are just due to the fact that we typically have seasonally a bit lower sales in the back half of the year than we do in the first half of the year, so some of it is just that. The other piece of it as we've talked about a little bit over the last couple of quarters, we feel good about our staffing.

We're really at a point where we are recruiting well. Now we're in a really kind of an area where we're trying to coach the new folks that we've added to the team, and get their sales up. And of course, we're a commission sales environment. So, the more productivity we can get from our sales folks, it's better for them obviously, because their compensation is higher.

It's also better for our customers because they're getting a higher level of service, but it also reduces the unproductive impact and some of the compensation changes we've made. And we essentially are-- we're offering a stipend, a subsidy for folks if their commission sales aren't to the levels that we'd expect. And that gives them comfort that they can get their feet, learn how to sell, learn our products. So, I think it's really a good program that we have, but we need to work.

Our new regional sales managers need to work with our store managers and work with the sales associates to make sure that we have the type of productivity that we expect. And we do think that we're going to make some progress on that in the back half of this year.

Peter Benedict -- Robert W. Baird -- Analyst

OK. Thanks. And if I could sneak one more and just around the store growth outlook. I mean, you're not guiding beyond this year.

But just, I mean, should we think about store growth. The next few years, I mean do you have a desire to get back to growing double digits? Or is it mid-single digit growth rate something that you want to get back to? Or does '19 likely look like another year where you're going to do maybe only one or two?

Cabby Lolmaugh -- Chief Operating Officer

Hey, Peter, this is Cabby. We're going to continue to work on a real estate and unit growth strategy going into 2019. We're still going to hold some longer-term 8% to 12% unit growth and targeting up to 400 stores, nationally is still our goal. We're really going to focus the back half of 2018 on optimizing our current portfolio of stores with the merchandising systems and the-- getting the best assortment our stores with all of our new product.

Peter Benedict -- Robert W. Baird -- Analyst

OK.

Kirk Geadelmann -- Chief Financial Officer

And then I think the only thing I'd add to that, Peter, is that it's a function largely on top line. Once we see the top line stabilize and we get back to the kind of comp growth that we've been used to seeing, then that's the point then we would certainly evaluate and expect to restart unit growth based on some of the ranges that Cabby just provided.

Peter Benedict -- Robert W. Baird -- Analyst

OK. Thanks a lot, guys.

Operator

Thank you. And our next question comes from John Baugh, Stifel. Your line is now open.

John Baugh -- Stifel Financial Corp. -- Analyst

Thank you. Good morning and congrats on the progress you are making here. I wanted to dive into the inventory increase into the dollars. Are we having higher in-stock positions in the DCs? I know you don't carry a ton of inventory in stores, but maybe are you carrying more there? Is it sample investments on the floor? Or is the price per unit of everything much higher? Just trying to get a sense for precisely where the dollar increases are coming?

Kirk Geadelmann -- Chief Financial Officer

Good morning, John. Sure, absolutely. It's just really a function of units. Our number of SKUs is going up.

We're adding SKUs to the assortment. And any SKUs we add to the assortment would be-- we'd have-- as you know, we'd have most of our stock at the DCs. But we'd certainly have that same SKU displayed in the store as well and have samples. So as we add well over a 1,000 SKUs compared to last year, it's certainly increasing the inventory.

And at the end of Q2, we also believe as we've said for the last couple of quarters that the main thing we can do to help reaccelerate our comps is get our inventory assortment optimized. And so we believe that the SKUs we're putting in is going to give us the best chance to get our top line where we want it to be. And so we try very hard working with many of our various partners around the world to bring in some of this inventory as fast as we could and we're pretty successful actually bringing in a little bit sooner, some of the SKUs than we originally anticipated, which is why we see saw inventory a little bit higher at quarter end than we originally expected. But that's a good thing, in our view, because it sets us up for the back half of the year.

So, our goal now is to, for all those new SKUs, is to make sure that we get them on, present them on boards and out to the stores, so that our sales folks can start to learn about them and tell customers about them.

John Baugh -- Stifel Financial Corp. -- Analyst

So, Kirk, I understand that the inventory went down and they were bare shelves in the stores and things whether the past year. But I guess I'm curious is, if I went and compared prior to that where this 1,000 SKUs increase year over year. Are we getting back to a fairly similar SKU presentation to what happened before changes were made? Or is it still going to be higher, and therefore, maybe the inventory investment overall will still be slightly higher, not just year over year, a lot higher but compared to say the prior before the downturn?

Kirk Geadelmann -- Chief Financial Officer

Yes. We dipped at-- last year at this time, right about this time, we dipped to as low as about 3,500 SKUs in our assortment. That's pretty low for the Tile Shop. Yes, as you said, we're going to get it back a lot closer to where we were at our recent peak in 2015, which is really the last time as we look back now, we feel that our assortment was pretty well-optimized.

And we're getting good productivity from all of our various subcategories within our assortment. Honestly, I think we're probably going to go a little past to where we were in 2015, but that's a pretty good comparison overall.

John Baugh -- Stifel Financial Corp. -- Analyst

OK. And any sense or help, what is the average price per unit doing in terms of your current sales? And then you're obviously transitioning and bringing in new SKUs. Are these generally speaking higher price points? And then, specifically, what are you bringing in later this year that you hadn't planned to bring in in terms of product type, and again, sort of the price point?

Kirk Geadelmann -- Chief Financial Officer

Generally, absolutely. As we talked about a little bit in Q1 as well, our ASPs are going up. And I think that's a trend that we expect to see continue. We are very focused.

I'm not going to get into specifics on product categories for several reasons. But we're going to be focused on exclusive products. Some of those will be brand-- branded exclusives that only we have. We're going to be generally focused on the higher end, even though it's not exclusively focused on the higher end stuff.

We also have some very nice product coming in and what we characterize as the good tranche of products. So it really varies. But generally, yes, higher ASPs is something that we certainly expect and a little bit skewed more to the higher end stuff, very unique and exclusive product.

John Baugh -- Stifel Financial Corp. -- Analyst

OK. And my last question is quickly is, how do we think about the vignettes. My recollection was when you built a store and maybe when we remodeled, I don't know, if you did all the vignettes, when you remodel. But these were significant investments and they were targeted to last, I don't know, seven years was my memory of sort of a duration or turnover. Is that changing? How do we think about the merchandise displays, end caps.

These things you're talking about. How do you think about the capital and the speed of which this turns over in the stores?

Cabby Lolmaugh -- Chief Operating Officer

Hey, John, that's a great question. This is Cabby. Being a salesperson for 13 years, the manager for 13 years in our company, utilizing vignettes has definitely been a core strength of ours. And when we think about changing out vignettes, you want to look at your new assortment, you want to look at what's hot in the marketplace today, but you also want to stay away from getting too hot.

You want to just look at stuff that's timeless and is going to last a long time because we want these vignettes to last. And I've utilized some vignettes in certain stores, where they wanted to remodel and I said no, because the layout was good and I could utilize it with so many customers. Even though I couldn't maybe use that tile anymore, the layout was exceptional. So, when we look at a remodel or swapping out a vignette, we take a lot of things into consideration.

A, what tile has proven itself to last a long time? What is the fixturing? What is the overall cost? And then we're going to make decision as a team going forward. So, right now, with such a influx in new products, we want to make sure we're making the right decision there. And then looking at the fashion and the industry right now, what are people sticking with for the long haul? And I think we're on the right track there, as we remodel our vignettes in our stores. It's nice to know our product doesn't spoil.

So when you have something on the wall, we can still utilize it even though it's not in stock, we'll still utilize a lot of different aspects of these vignettes.

John Baugh -- Stifel Financial Corp. -- Analyst

OK. Thanks for that Cabby and Kirk and team. Good luck.

Operator

Thank you. And our next question comes from Peter Keith of Piper Jaffray. Your line is now open.

Peter Keith -- Piper Jaffray -- Analyst

Hi, thanks. Good morning, everyone. So I wanted to dig into the decision to remove pricing from the website in two regards. No. 1, I'm assuming there is really no more e-comm fulfillment. So I'm wondering, what type of comps-sales headwind that might be for the next 12 months as you would remove about probably, I don't know, maybe 1% of sales? And then, I'm also just curious, big picture, in the world of omni-channel, taking pricing off the site is kind of going backwards. Maybe for your business model, this makes sense. But how can you get me and the market confidence that this is the right move and that we won't see a deterioration in traffic trends over the coming months and quarters?

Cabby Lolmaugh -- Chief Operating Officer

Peter, this is Cabby. Yes, it was a decision we made as a team after a lot of research and knowing that we are a specialty retailer. And when you're online advertising a price, that's exactly you're advertising, a price. And The Tile Shop is much more special than the price on the tile.

We want people to get into our stores. And so we decided as a team to make the -- our website traffic lead generator to our stores, knowing our ability to convert at a much higher ASP and much larger tickets, when the customers in the stores a better process for us in the future. I don't think it's going to have-- it's only a greater impact for our stores to drive more and more customers. If you look at our website, it's materially very different than it was six months ago.

So it's not just pricing was removed, you have to look at the overall feel of it. It is higher-end look and it is a great place to get inspiration. So, if anyone out there is deciding to do a renovation in their home and they go to our website, they're going to be inspired to want to come into one of our stores, no doubt. So I believe, those are very good decisions on our part and as we position ourselves as a specialty retailer in the market, with a little more of a higher end selection, we don't need to battle price online.

That's not our game.

Peter Keith -- Piper Jaffray -- Analyst

And would there be some type of, I mean, sales headwinds, because you did have e-comp fulfillment before? So assuming you don't now, maybe you just drive that to the stores? Or should we think about that is a modest sales headwind going forward?

Kirk Geadelmann -- Chief Financial Officer

Peter, good morning. This is Kirk. I think it's relatively modest. I think your assumption is fair.

Our fulfillment online, as you make some of the adjustments that we've talked about is going to be impacted. However, there still will be online fulfillment for our pro customers. We have not removed prices for our pro customers. Our Pros can now see the price for all of the products and our assortments, both the regular price as well as the price that they get as part of our loyalty program.

So we're not shifting completely away from e-commerce. But I think Cabby's comments are right on. Our strength is -- as you know, it's about service, it's about uniqueness and product and it's about collaborating both with our channel partners and the homeowner to create something that's very unique, and it's timeless. And price is certainly a factor, but it's fourth or fifth on the list for our core customers.

So we want to lead with strength and that's the broad product assortment, service uniqueness and a variety of other things that we offer that we believe no one else does.

Peter Keith -- Piper Jaffray -- Analyst

OK. Fair enough. And then I wanted to circle up on the remodels. I know there has been a few questions.

So, if you've done seven to-date versus the beginning of the year with the planned 30. So we're interpreting it appropriately that maybe the 20 to 23 that you had circled to remodel this year, you're just pushing back in order to get a better sense of which new products you want to display in the vignettes, is that the basic explanation?

Kirk Geadelmann -- Chief Financial Officer

Yes. That's exactly what's happening. We're pushing them back. But the other thing that I think it's important for everyone to understand is the ones we did first and the ones that will get through this year, we believe are going to be the most impactful.

They skew larger. They skew a little bit older. Most of them are very, very successful stores and we believe, we're going to get a real good return on the remodel investment that we've done in the first six months of the year. The ones that we had planned, that second tranche, which is roughly 20 stores, they did not--their new stores, they did not need as much of a refresh.

So we feel pretty good about delaying those a little bit and getting into those next year or even the following year.

Peter Keith -- Piper Jaffray -- Analyst

OK. And one concern out there, I guess I have that we hear from investors as well is that some of the stores still have a fairly large vignette display of travertine, which generally seem to fall little bit out of favor, just there's more robust colors and tile designs. Do you guys view some stores with that heavy travertine assortment has an issue? Or does the taste and preferences tend to be regional such that some of those stores still work?

Kirk Geadelmann -- Chief Financial Officer

Well, we are still selling travertine, but you're right. That category is-- it's fallen out of favor a little bit the last couple of years. I've learnt in my several years here that we see that shift back and forth with things like travertine, or marble, or certain man-made products as well. So, while we plan to still sell that, it's fair to say that if we're going to refresh a store, that's the type of vignette that we'd probably look at first to freshen up a little bit and maybe do something a little bit different.

Cabby Lolmaugh -- Chief Operating Officer

And when you look at some of these travertine vignettes, we're very good at mixing up design styles. So it's not usually-almost never. You just see straight travertine vignettes. What you're going to find as transitional designs, you're going to find fusion, you're going to find a lot of accessories, different mosaics, things that we use with the travertine that help keep it relevant.

So the customers, I don't want travertine, but I love the style of that vignette. Well, let's throw some faux wood or use marble or introduce some slate, something like that, that appeals to that customer. So I'm personally not worried about travertine displays. I like having natural stone, have higher ASPs, and something we can transition the customer into maybe just a different color stone.

Peter Keith -- Piper Jaffray -- Analyst

OK. Great. One last question for you guys. So, Kirk, I'm joking a little bit but you mentioned the three letters that strike fear into the analyst community, which is ERP investment.

Can you give us a sense on the timing of that? How extensive it's going to be? Is it something that you think about as hopefully not causing any type of disruption?

Kirk Geadelmann -- Chief Financial Officer

Yes. Well, that's why I try to spell out the words rather than use the acronym, Peter. It's something that we just felt we needed to do. And it's-- we feel like we have a really, really good team in place, it's the right time for the company.

We've slowed down our unit growth here this year. So we have some extra capacity internally. So it's just the right time. We're -- obviously, there's always -- there's things you got to be mindful of as you're going through that.

But our main focus is really on our stores' persons and POS capability, as well as our supply chain systems. We know we have some opportunities to make things better for customers. And part of it is, hey, we're going through somewhat of a transitional year here. We're making some changes.

We have the team that we need in place to make sure all of these changes are well-executed, including some of the system upgrades and so we're doing that. And we're confident that we'll manage it well and we'll get outcome.

Peter Keith -- Piper Jaffray -- Analyst

And one last. Sorry for all the questions. Kirk, when exactly do you flip the switch, so that the new ERP system goes live?

Kirk Geadelmann -- Chief Financial Officer

Peter, that will be next year. It should be early in 2019, so not this year.

Peter Keith -- Piper Jaffray -- Analyst

OK. Very good, guys. Thanks so much for answering all my questions.

Kirk Geadelmann -- Chief Financial Officer

OK, Peter. Thanks.

Operator

Thank you. [Operator instructions] And our next question comes from Joe Feldman of Telsey Advisory Group. Your line is now open.

Joe Feldman -- Telsey Advisory Group -- Analyst

Hey, guys. Thanks and good morning. With regard to the remodels and the fixtures you were just talking about earlier in the call, what exactly are the new fixtures, like can you share little more color just because as I personally haven't seen them yet. But I'm curious how that will change the displays and how you're thinking about that?

Cabby Lolmaugh -- Chief Operating Officer

Joe, this is Cabby. Good question. Yes, we're utilizing a different fixture to display our boards. As you know, when you walk into a store, a typical 4-foot section could display anywhere from four larger boards to maybe eight or nine smaller boards.

With the increased SKU count going into our stores and we want to make sure we have our full assortment on display in all stores and that is the square footage of the store. We have to figure out a way where we could get all the board because we still want to keep our grouted boards. That's something that we're very proud of and it's been successful for us. So these new drop-in fixtures will go into the same rose.

We'll just take out some gray board and drop these in, and be able to utilize the space more effectively, where we can double the display of the board. So every board, you will be able to see it. It'll still have a price tag on every board. It'll still all be grouted but we're just going to get more into that 4-foot section.

We're also looking at utilizing different fixtures on end caps as well to display specialty tiles such as encaustic or cement-made tiles and some of the merchandising with new photography, upscale photography, different things like that, that we're utilizing on our end caps. That's going into all stores as well. So, you're going to get a little different feel when you walk in, more of an upscale, higher-end look and feel with better photography and more boards to look at. The assortment is, how do I put it, quite impactful to the consumer when they walk in.

So we're excited about that investment.

Joe Feldman -- Telsey Advisory Group -- Analyst

That's helpful. Thank you. And then to follow on to that, the new product that you guys are bringing in, how-- I guess, is it more stylistic? Is there a shift in sort of what consumer demand is? Because I recall you guys have always talked about that it tends to be longer fashion cycles, and it just feels like are we at that point where we're embarking on a new cycle and that's part of the-- what's going on behind this transition in the inventory?

Cabby Lolmaugh -- Chief Operating Officer

This is Cabby again. As we work with a lot of our Pros and getting a lot of surveys, a lot of focus groups, talking to a lot of designers, what we found in the marketplace today, there isn't really good source for unique styles to differentiate yourself from your competitors. So what you're going to see when you come in our stores is everything from 3D tiles to newer patterns to newer sizes from all over the world, a lot more color as well. You're going to see bright bold colors.

You're going to see things that have a story to them. Where do they come from? The Albert Museum collection. Things that no one else is going to have up and down the road. You come to the Tile Shop, we're going to be the source for everything, stone, ceramic, porcelain, man-made and we're going to be unique.

And that's -- every week, I go out on the sales floor, I get pretty excited watching these new tiles arrive, and watching them sell makes me even happier. So it's -- yes, we're going to set ourself apart from everyone on the block.

Joe Feldman -- Telsey Advisory Group -- Analyst

That's great. Thanks. If I could sneak one more in. I just want to ask about the stores.

Given the-- I understand slowing down the store growth at the moment focusing on enhancing what you have, are those 140 stores you have today though, are they in the right spots to kind of support this more -- your strategy to go more upscale again? I know a lot of them are original stores, but like -- I guess, I'm trying to say, are you in the right markets, the right locations to support it?

Cabby Lolmaugh -- Chief Operating Officer

Undoubtedly, yes. There is-- we have no concern there. If you look at our stores and where they're at, you're going to notice the Tile Shop is a destination location. Some of our top-performing stores are nowhere near any other retail.

They historically have been the top of the chain. And it baffles a lot of people sometimes when we go through this and sit down and talk about it that yes, that's something that Bob had created years and years ago with his strategy and it's successful today. So, we continue to look at new sites, potential new sites and markets that set us apart. So, when a high-end or more affluent customer wants to do a project, they're going to call a Pro in to see how much it's going to cost.

And our Pro is going to say, "This is where you need to go." So we're pretty happy.

Kirk Geadelmann -- Chief Financial Officer

The only thing I'd just like to add to what Cabby said there, Joe, is that it's-- we have-- as you know, we have a variety of different locations. We have some Grade A real estate, we've high-traffic retail areas. And then as Cabby said, many of our most successful stores are a little bit more off the beaten path. But as you think about the Pro customer, which is going to continue to be a real focus of ours, often our Pro customers don't want to fight through a bunch of retail traffic and stoplights and things like that.

It's just not very convenient for them. I think that's one reason that explains why some of the locations that are a little bit more off the beaten path, often by a bunch of our competitors, are a better location for us. So we feel very good about our real estate right now and our real estate strategy moving forward.

Joe Feldman -- Telsey Advisory Group -- Analyst

That's great. Thanks, guys. Good luck with this quarter.

Kirk Geadelmann -- Chief Financial Officer

Thanks, Joe.

Operator

Thank you. And our next question comes from Anthony Chukumba of Loop Capital Markets. Your line is now open.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Thank you and thanks for taking my questions. I believe, Kirk, you mentioned that you're going to be bringing in, over the course of the year, 1,000 -- over a 1,000 new SKUs and it sounds like a lot of those are still kind of in the warehouse or on the water but on their way. And you specifically mentioned that they -- you'd have to be pretty much all set with the new SKUs by the end of third quarter. I guess, my question was, where were we at the end of the first quarter in terms of the new SKUs? I think, let's call that 1,000 that's actually in the store.

And then where were we at the end of the second quarter? I mean, do we have 300 at the end of first quarter? Maybe 500 at the end of second quarter? Or was it more than that? Was it less than that? I'm just -- I guess, I'm just trying to sort of triangulate comps and these new SKUs that are coming to the assortment? Thanks.

Kirk Geadelmann -- Chief Financial Officer

Yes, fair question, Anthony. Thanks for the question. So as I said in my prepared remarks, for -- if you look at the SKUs that we originally planned at the beginning of the year to bring in to our assortment this year, for that group of SKUs, we're about 75% of the way there. In terms of we have the SKU, it's in our possession.

In our possession could mean it's in the store, it could mean it's in our DC and it hasn't quite got to the store yet on the board. As Cabby talked about, the way we present the product on the board is very important to our sales process. In some cases, that's still on the water. So we own it.

It's in our $100 million of inventory and we're about 75% of the way there. By the end of the third quarter, all of that product will be in the stores. Our salespeople and our customers will be looking at it, interacting it, hopefully selling and buying it. And the vast majority of the rest of the SKUs that we originally planned to bring in this year will also be in our inventory.

In addition to that, we're also continuing to look at our assortment strategy, and we made the decision to bring in some additional SKUs. And so we're going to be a little higher than we originally anticipated. And we're going to try to get that product in by the end of the year. But as we talked about a little bit, we feel like in the third quarter, we're going to be in a pretty solid position from an assortment perspective.

We'll still have some improvement after that, but we should have some really good stuff to sell and pretty unique. In our view, we'll be back to where we want to be and able to serve our customers at a very high level and pretty much have everything that they want to buy.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Got it. And then just one quick follow-up. So you mentioned one of your major initiatives was adding the Pro market managers. I mean, as you look at your comps right now, and I know, say, about high 30% of your products are direct -- sales directly to Pros, they'll obviously influence the rest of sales as well.

But I mean, have you seen any significant divergence in comps Pros versus kind of your non-Pros? I mean, in other words, are you seeing any signs that the Pro marketing manager initiative is working?

Cabby Lolmaugh -- Chief Operating Officer

Hi, Anthony, it's a great question. This is Cabby. We've been looking at this program for quite some time and we've tested it in some markets for a little while and we decided now is the right time to go chainwide with it. We know the Pros are very, very important segment to our customer base, and it's growing.

So, as I've said before, with my tenure as store manager, with the Pro, it's more based on communication and having a relationship than based on price. So if we can accelerate that and have a point of contact for all Pros around all of our stores to strengthen that relationship, we know we're on the right track. So we're happy. We eliminated the Pro market manager and kind of used some of those funds to fund this new Pro market manager title in the field.

So we're watching it closely. Well, these are Tile Shop employees that have been with us for quite some time. So they know exactly how we operate and how we do business and it makes us comfortable.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Got it. Good luck with the remainder of the year.

Cabby Lolmaugh -- Chief Operating Officer

Thank you.

Operator

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Ken Cooper for any closing remarks.

Ken Cooper -- Investor Relations

Thanks for participating this morning. We look forward to another strong quarter of investor outreach. We then look forward to our third-quarter earnings report in October. Thank you for your interest in Tile Shop.

Have a great rest of the day.

Operator

[Operator signoff]

Duration: 60 minutes

Call Participants:

Operator

Ken Cooper -- Investor Relations

Bob Rucker -- Interim Chief Executive Officer

Cabby Lolmaugh -- Chief Operating Officer

Kirk Geadelmann -- Chief Financial Officer

Daniel Moore -- CJS Securities -- Analyst

Peter Benedict -- Robert W. Baird -- Analyst

John Baugh -- Stifel Financial Corp. -- Analyst

Peter Keith -- Piper Jaffray -- Analyst

Joe Feldman -- Telsey Advisory Group -- Analyst

Anthony Chukumba -- Loop Capital Markets -- Analyst

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