Tile Shop Holdings (TTS) Q4 2018 Earnings Conference Call Transcript

Tile Shop Holdings (TTSH 4.23%)
Q4 2018 Earnings Conference Call
Feb. 19, 2019 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to The Tile Shop fourth-quarter 2018 earnings conference call. [Operator instructions] As a reminder, this conference call may be recorded for replay purposes. It is now my pleasure to handle the conference over to Ken Cooper with IR. Sir, you may begin.

Ken Cooper -- Investor Relations

Thank you, Brian. Good morning to everyone on the call, and welcome to The Tile Shop's fourth-quarter earnings call. Joining me on today's call are Bob Rucker, our founder; Cabby Lolmaugh, our chief executive officer; and Kirk Geadelmann, our chief financial officer. Following our prepared remarks, the call will be opened for analyst 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 and in 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 Bob.

Bob Rucker -- Founder

Thanks, Ken. Good morning, and thank you for joining us today to discuss our fourth-quarter results. I am very pleased to formally introduce Cabby as our new chief executive officer. I've known Cabby for a long time and enjoyed watching him grow into the leader that he is today.

Over the last year, he has been instrumental in getting our company back to The Tile Shop way of doing business. He clearly showed me and the rest of the board that he understands our business and, more importantly, he knows what our customers need. This includes helping homeowners romance their home through our vast tile options and Pro customers maximize their business through us. It was clear early on that Cabby had the knowledge, and his actions this year give us confidence that we are on track and that he can lead us as we transition to a profitable growth in 2019.

Moving forward, the company will be in good hands with Cabby. 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 Executive Officer

Thanks, Bob, and good morning, everyone. I'm very excited to have been given this opportunity to lead The Tile Shop. We continued to make good progress during the fourth quarter. Our team has now completed a pretty impressive list of accomplishments over the last 12 months, in what was truly a transition year for us.

Working together, we successfully added over 2,000 new products to our assortment; remerchandised all of our stores with brand-consistent signage and endcaps; implemented a new Pro rewards program; executed a new compensation structure for sales and distribution center associates, enabling us to compete for high-quality talent; developed and implemented a new outbound trucking strategy using company-owned trucks; developed and implemented a new CRM capability; designed and converted to a new website platform, including a new website pricing strategy; hired and trained over 20 new Pro market managers; and successfully converted to a new enterprise resource planning system on January 1st that will enable our businesses to scale nationwide over the next 10 years. We believe we have built a solid foundation for the long term. I could not be more proud of our store teams, our distribution center teams and our team here in the Plymouth, Minnesota office. As we head into 2019, our focus will continue to be on delivering the best assortment, the best presentation and the best service in the industry.

Our top priority continues to be offering the best product assortment in our industry. During the fourth quarter, we introduced a number of beautiful new natural stone collections. Many of these new collections include a full assortment of floor, wall and trim pieces. In addition, we've continued to add hundreds of new SKUs to our manmade porcelain and ceramic assortment.

All of these new products are unique and fashion focused; you can't find them anywhere else. These additions include our exclusive new Annie Selke product line, representing a full collection over 230 new products. These products are very unique, with several closely mimicking the appearance of fabric. The technology is pretty cool.

But most important is that it can really help soften the appearance of our retail consumers' bath, kitchen or laundry room projects. As you walk on some of these tiles, it's as if you have a rug under your feet. Finally, we're very excited about the man-made ceramic and glass color collections we've introduced. While many of these SKUs are already in stores, some others are still in the water and will be in stores during the first quarter.

These collections represent a total of over 1,000 products. With all these additions, we're confident that no other competitor can come close to offering the choices that we don't have available to offer our retail customer per designer and our other key Pro partners who often serve as key influencers for retail customers. We're very comfortable that we've now checked the box under 2018 product initiative. We also believe we now have all the right products in all of our stores that will differentiate us from all competitors and appeal to the upscale consumers that both we and our Pro channel partners serve.

Some of the retail customers we served over a year ago are already back to remodel their bathroom again because they now want to incorporate some of these new product features and design trends into their home. These new products are that good. Another key initiative in 2019 will be to complete the product source work we discussed briefly on our Q3 earnings call. As we discussed, our merchandising, demand planning and supply chain leaders have been hard at work on planning and ordering for the back half of 2019.

This work includes shifting some of our products sourced from China to suppliers in other parts of the world, including Turkey, India, South America and Southeast Asia. We are confident this work should drive many benefits, including ensuring a steady and good supply of unique and high-quality product, maintaining good margins that are above the industry average and diversifying our supplier base. In addition, we've added other new resources and tools to help our supply chain team stay well ahead of the new products trends. Our goal is to stay on our toes, anticipate new product trends as they're emerging and use our enablements to quickly adjust to emerging trends.

Our No. 1 goal overall will always be to ensure we have the best assortment in the industry. The key to our model is having the best product, and we want to stay well ahead of the curve. Our second top priority continues to be ensuring we have the best product presentation in our stores and on our website.

The majority of our attention in the fourth quarter was focused on continuing to enhance our in-store merchandising to showcase all of these new products across our entire store base. We're still in the midst of executing a comprehensive plan that will touch each and every store in the chain. As of today, approximately half of our stores have received new product display fixtures. The remainder of our stores will receive the new fixtures over the course of the next several months.

We now anticipate this work being fully completed by April 30. The new fixtures will enable us to present our tile assortment in more efficient and effective ways, make it easier for our customers to shop and help our customers explore all the various options for their home projects. In addition, several of these new merchandising systems will enable us to better highlight and feature certain of our new product lines. Finally, we converted to a new website platform in January that we believe does a great job of presenting our product in a more effective and efficient manner.

One of our goals for this new platform was to enhance our customers' ability to access our website with their mobile devices. We believe we've achieved that goal. Our second goal was to enhance our product content, organize this content in a more logical and intuitive manner and enhance the usability and speed of our website. A third goal of ours was to ensure the images and content on our website were powerful and very consistent with our in-store signage and our brand marketing messaging developed and refined over the last six months.

We have invested in our content capability over the last year and now have a full in-house creative team that includes photographers, visual designers and content specialists. Our objective is to offer a seamless experience for our customers, whether they are opening one of our new product catalogs, researching their project on our website or shopping in one of our stores. But our ultimate objective is to provide inspiration. And we believe our website, our product catalog and our stores now really do a great job of achieving that objective.

Our third top priority is service. During 2018, we made substantial investments in store and distribution center compensation, adding regional sales leaders, adding new Pro market managers, launching a new Pro rewards program, launching a new CRM and making other key investments designed to build long-term Pro relationships, increase their frequency of their visits to our stores, enhance our retail customer satisfaction and increase our overall customer conversion. Our primary goal in 2019 will be to fully leverage all these investments, and we expect to see a return. I continue to work closely with our two divisional vice presidents, our regional sales leaders, our director of Pro services and our Pro market managers to focus on sales excellence, increase traffic and improve conversion.

As we head into 2019, we are optimistic we have all the necessary pieces in place to sustain better top-line performance. Our goal will be to continue the improvement in comp sales growth, Pro sales growth, retail customer satisfaction and conversion that we've seen over the last several quarters. Our fourth priority is to resume store unit growth. Given the sequential improvement in our business over the last four quarters, we feel we are now well-positioned to begin opening new stores in 2019.

We are not in a hurry to open stores. Instead, we'll take a careful and methodical approach. The majority of our new store openings over the next two to three years will continue to be in existing markets. Many of the 17 new stores opened over the last two years were negatively impacted by some of the challenges with our product assortment and promotional strategy.

We still have some improvements to make to get some of these newest stores generating the type of returns we've historically enjoyed. That will also be a primary focus for our regional sales leaders in 2019. In addition, we will continue our focus on our store leader pipeline, talent development and training. Historically, the key success factor for a new store opening is the strength of the store manager.

As we resume our new store growth, we will be tapping into our new store manager bench strength. Last year, we promoted several of our strongest store managers to be new regional sales managers and Pro market managers. At the same time, we have continued to invest in store manager training and talent development. Today, not only is a new store manager better trained, but each store manager has a strong network of regional sales managers and Pro market managers to help them grow their local business and also a full suite of additional resources from our centralized training, recruiting and sales support teams.

It's faith in the strength of our people and also this new support system that gives us confidence we are ready to resume store unit growth. Finally, we've continued to work on our real estate and distribution strategy over the last 12 months. We have a list of target locations for the next three years. We've been actively working with brokers in each of these markets.

We feel we are ready to go. I would 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 Cabby mentioned, we believe we have indeed made progress during the fourth quarter. Our same-store sales have now improved sequentially for four straight quarters, including 5% same-store sales growth during Q4.

We also had another nice quarter from a gross profit perspective. We increased gross profit dollars by 12.4% over last year and once again achieved a 70% gross margin rate. I'd like to call out three additional key points. First, during the fourth quarter, we began to see a nice contribution from the new products that recently entered our assortment, particularly in our stone category.

Our overall sales mix from new products, which include both stone and manmade, is up significantly. Second, we continue to be encouraged by our sustained gross margin of 70% over the last four quarters. As a result of our gross margin performance, lapping easier comparisons and sequential increases in same-store sales results, we are also continuing to see improved year-over-year gross profit, earnings per share and adjusted EBITDA despite absorbing increased levels of SG&A expense to support our 2018 strategic initiatives. Third, while the continued investments in our product assortment and Pro customer strategies, designed to improve customer traffic, are continuing to show measurable signs of progress, our traffic remains somewhat softer than we'd like.

As we mentioned on our Q3 call, during the fourth quarter, we lapped fairly aggressive price promotions that were in place until December 1, 2017. As expected, without these price promotions in place, we did experience lower traffic, particularly over the Black Friday holiday weekend. We continue to believe that the key for us to improve traffic will be threefold. First, we will be continuing to focus on marketing communications to our Pro and retail customers that highlight our new product assortment.

Second, we will be continuing to work with our new Pro market managers to fully leverage our new Pro rewards program and CRM capability. Third, we have a variety of new brand marketing initiatives that are specifically designed to increase our brand awareness, traffic to our website and traffic to our stores. Some of these initiatives take time to fully take hold, and a certain degree of patience is required. At the same time, we are encouraged by our progress over the last 12 months, and our objective is to continue that progress.

I'd now like to provide a brief overview of our fourth-quarter financial performance and discuss our current outlook for 2019. Net sales of $83.9 million were up 6.8% year over year. Comparable store sales increased 5% in the quarter, driven by a strong increase in average ticket. We continue to see good signs of progress across many of our markets and across store vintages, and that is certainly encouraging.

In fact, each and every store vintage delivered positive comparable store sales growth during the quarter, and nearly every one of our 30-plus store markets generated positive comparable store sales growth. We were particularly excited to see a significant improvement in sales growth for our stone category. Several of the new stone product collections Cabby mentioned have made an immediate impact with our designers and retail customers. From a financial perspective, it's important to note that the average stone SKU has a price per square foot that is roughly twice the average price per square foot of the average manmade SKU.

And while the gross margins are typically slightly lower, the gross profit dollars per square foot and the average ticket tend to be much higher for stone products. Gross profit was $59 million for the fourth quarter of 2018, an increase of $6.5 million or 12.4% over gross profit in the same quarter of last year. Gross margin of 70.3% was consistent with the last three quarters. The year-over-year improvement of approximately 350 basis points from the fourth quarter of last year was primarily the result of eliminating all advertised price promotions, online and in stores.

We continue to expect to deliver a gross margin rate in the 69% to 70% range going forward. At the present time, our strong inventory position and in-stock levels provide us with plenty of flexibility to continue to methodically pursue our sourcing strategy, as Cabby discussed. In addition, we continue to believe we have price elasticity, particularly with noncomparable products. Finally, many of the new products that have recently entered the assortment not only have higher average selling prices but also higher-than-average gross margin profiles.

These factors all provide us with confidence in our gross margins going forward. Our selling, general and administrative costs for the quarter were $58.3 million. The $2.2 million increase from Q4 of last year was primarily due to $1.7 million of planned strategic investments in store compensation, new regional sales leaders, new Pro market managers, increased distribution center wages, the redesign of our website and buildout of our customer relationship management capabilities. For the year, we invested approximately $8 million in expense for these initiatives.

Income tax expense for the fourth quarter of 2018 was $1 million and included a $0.9 million write-off of a deferred tax asset associated with employee stock options that expired during the quarter. We concluded the quarter with 140 stores. In January, we closed one store in Kansas City that was at the end of its lease. Looking ahead to 2019, we plan to open five to seven stores.

The majority of these stores will be opened in the second half of 2019, and we will continue to focus on existing markets. Adjusted EBITDA was $8.7 million in the fourth quarter. Adjusted EBITDA margin was 10.3%, a 570 basis point improvement compared to last year during the fourth quarter. Net loss for the fourth quarter was $1.1 million, and earnings per share was a loss of $0.02.

Turning to our balance sheet, we ended the quarter with $5.6 million of cash and $53 million of long-term debt. Our debt increased approximately $7 million from the third quarter due to our expanded product assortment. Inventory of $110 million increased by approximately $4 million from the third quarter or 3.6%. Our product assortment work is now substantially complete, and we expect inventory levels will begin to normalize as we move through 2019.

We have a nice opportunity to leverage some of the new tools available with our new enterprise resource planning system. These tools will enable us to better optimize our inventory levels and receipts flow, communicate more effectively with key suppliers and reduce our inventory investment while maintaining an industry-leading assortment and good in-stock levels. Capital expenditures were approximately $12 million during the fourth quarter, primarily related to store merchandising, store remodel and technology investments, including the final phase of our work on our new enterprise resource planning system, which went live January 1. We expect our level of store remodel and merchandise investment to also normalize in 2019.

In 2018, of the $35 million in total CAPEX, we invested approximately $20 million to specifically support various 2018 strategies, including merchandising fixtures to accommodate our expanded product assortment, a new enterprise resource planning system, a new CRM capability and a new website platform. Looking ahead to 2019, we're planning approximately $25 million of capital investment that is comprised primarily of new store openings and a more normal level of store remodel and maintenance CAPEX. Included in this estimate is approximately $3 million of investment to complete our merchandising work that was begun in 2018. In addition to a normalization of inventory and capital spending levels, we also expect our SG&A to continue at the current run rate with only nominal increases that are primarily inflationary.

Other than new store openings, we do not expect any material new strategic investments during 2019. Our goal will be to generate a return on the SG&A we have added to the baseline, and we will be focused on growing revenue faster than we grow expenses. It is not our standard practice to comment on intra-quarter activity or provide quarterly guidance, but I'd like to provide a bit of color on a few unique factors that impacted our business in January. First, we experienced an unusually high number of weather-related store closures in the Upper Midwest and the Northeast.

Second, we converted to a new website platform in mid-January. Third, after converting to our new ERP system on January 1st, we experienced several issues that impacted our normal POS processing and product shipments to stores, particularly in the first several days after the conversion. These three factors all had a negative impact on January traffic conversion and sales. Accordingly, we expect low single-digit comp sales growth for the first quarter, with improvement in subsequent quarters throughout the year.

Our integral long-term target for comps continues to be mid-single-digit sales growth. If we are able to sustain sales growth at those levels, we believe we can achieve our ROCE and adjusted EBITDA margin goals within the next several years. Over the last 12 months, we believe we've made all of the necessary strategic expense, inventory and capital investments that we needed to be highly competitive and to serve our Pro and retail customers at a very high level. With that background, Brian, we are now happy to take questions. 

Questions and Answers:

Operator

[Operator instructions] And our first question will come from the line of Geoff Small with Citi.

Geoff Small -- Citi -- Analyst

I wanted to first ask on comparable sales trends. You just noted the three factors of that pressured result in January. I'm just curious if you saw a snapback in trends early in February toward that mid-single-digit growth level you called out as being your long-term target.

Cabby Lolmaugh -- Chief Executive Officer

This is Cabby. Thanks for the question. Yes, as we got through our hurdles in early January, we have seen a good bounce-back in February, and we're pretty happy with the results so far this month.

Geoff Small -- Citi -- Analyst

Understood. And I wanted to touch upon gross margins as well. You've obviously been able to maintain a strong rate as you've turned around the top-line trends but are guiding 2019 at that 69% to 70% level, suggesting possibly some giveback. I'm just curious if that's conservatism.

Or does it reflect possibly the impact of tariffs or the mix impact of stronger stone sales? Any color there would be appreciated.

Kirk Geadelmann -- Chief Financial Officer

The primary thing is it's really just been our historical range over the last five years. So that's the main thing. We feel very comfortable we should be in that range. We like what we've done with our product assortment.

One of the things going back a couple of years that we were very proud of is we've really accelerated the growth in some of our setting categories. So thin-sets and grouts and things like that that typically carry lower margins, that growth has continued over the last 18 or 24 months. And so you mix in the lower margin rates, but we'll take the profit dollars obviously. As you've called out and we talked a little bit in our opening remarks, we'd love to mix back in the stone because it carries an ASP that's two times what the average manmade SKU has.

It does carry slightly lower margin rates, not materially lower but slightly. But again, it's a great thing for our customers, and it's a great thing for our bottom line as well. So those are the key factors really.

Geoff Small -- Citi -- Analyst

Understood. Cabby, congratulations on the promotion and best of luck in this first quarter.

Cabby Lolmaugh -- Chief Executive Officer

Thank you, Geoff.

Operator

And our next question will come from the line of Daniel Moore with CJS Securities.

Daniel Moore -- CJS Securities -- Analyst

I want to start with, your conversion obviously has improved, and you already called this out in the prepared remarks in terms of traffic. Can you elaborate on perhaps some of those levers that you have talked about? And then are there any additional levers that maybe you haven't spoken as much as we look forward in terms of trying to drive some of those traffic numbers higher? And I have one quick follow-up.

Kirk Geadelmann -- Chief Financial Officer

I think the primary thing that we were on here over the last 12 months, and as you know, Pro has really heavily influenced our business. Our direct sales mix with Pros is around 40%. That's continued to decline over the last several years. But in addition to that, Pros influence a substantial amount of our retail traffic as well.

So the overall impact to our business from our Pro relationships is probably in the 70% to 80% range. And so the implementation of our Pro rewards program and the team of Pro market managers that we hired and, in addition, giving those folks our new CRM tools, that was a big part of trying to build back our Pro traffic, and we've been happy with that progress. The additional work that we're still working on here during the latter part of 2018 and into '19 is more focused on the retail customer. We've talked a little bit with stakeholders about our new product catalog.

That certainly isn't the only thing that we worked on, but that's a great example of something that is out of the website, and as retail customers are researching their projects, it's very prominently presented, they start looking through that, and it really gets them excited to come into one of our stores, and it inspires them. And so the types of things that we're working on to improve both Pro and retail traffic are along those lines.

Cabby Lolmaugh -- Chief Executive Officer

I'd like to jump on that as well. With all these things that Kirk just mentioned to help drive Pros and all of the things we offer them, along with our focus on retail customers, none of this could be possible without our increased assortment. And that is really what has opened the eyes over the past, say, six to nine months, is the new SKUs have trickled in quarter after quarter. It takes time for these people to see all this.

Now with our Annie Selke connection, with our new product catalog, with our new website, it has really opened the eyes across our industry of, wow, The Tile Shop has really come back with a new assortment, a forward-looking assortment that really touches all design styles. So we're excited to see that continue to ramp up and the awareness level rise on everything we're doing here. So we're pretty confident right now.

Daniel Moore -- CJS Securities -- Analyst

Helpful. And then changing gears to some of the probably typical glitches, my word, not yours, of the ERP implementation, just elaborate there, and confidence that we've kind of got those out of the way on a go-forward basis.

Cabby Lolmaugh -- Chief Executive Officer

Yes. It was interesting to launch an ERP for The Tile Shop. And we had our first few hurdles in the first few days of January. I believe that impacted our conversion in the first few weeks.

We're back at normal conversion levels right now. It was nice that we planned ahead. We told our Pros what was coming and just said, "Hey, we may have a few hiccups," but that's the nice thing about Pros: it's a relationship business. And I don't believe we lost any Pro customers due to this launch.

I think they're actually -- some are quite pleased with how it's reacting right now. So yes, we had some conversion impact for the first few weeks, but that's all been buttoned up, and we're moving forward.

Operator

Our next question will come from the line of Anthony Chukumba with Loop Capital Markets.

Anthony Chukumba -- Loop Capital Markets -- Analyst

I guess my first question, so you've sort of given -- you said with your new stores how many stores you're going to open and kind of cadence for opening those stores. And you gave some sort of direction in terms of comps and gross margin, a little bit on SG&A. I guess I'm just wondering, why didn't you just have EPS guidance as well? I mean, I guess we can sort of get there based on what you've given us, but I guess we're lazy, right? And so I was just wondering why you did not provide specific EPS guidance.

Kirk Geadelmann -- Chief Financial Officer

You certainly are not lazy, I know that. But the main reason is we're really just 100% focused on long-term targets: 20% EBITDA margin and 20% ROCE. And the key to making progress on those goals over the next several years, as you well know, is sustaining mid-single-digit comps. So that certainly is our internal target, and if we're able to do that over the next several years, we'll be able to hit those objectives.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Got it. OK, so because you used to provide guidance or specific EPS guidance. And then I thought the reason for stopping was more just because of the kerfuffle that you had in your business last year. So it sounds like just going forward, you do not intend to provide specific EPS guidance? I just want to confirm.

Kirk Geadelmann -- Chief Financial Officer

Yes. At this time, we're going to be focused on the long-term goals, that's correct, Anthony, yes.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Got it. Fair enough. And just real quickly on comps, so you talked about some of the disruptions that you had in the first quarter, and you're guiding to low single-digit comps in the first quarter and that getting sequentially better. I guess I was a little surprised with that just from the perspective of obviously, the compare is getting much more difficult in the back half.

So even with a more difficult comparison to the back half, you are expecting comps to sequentially improve throughout the year?

Kirk Geadelmann -- Chief Financial Officer

Yes. The short answer is that's correct. The -- with some of the things that we talked about in our prepared remarks and Cabby just alluded to as well, the key thing for Q1 is it just limits our upside in Q1, but we feel good with the strength of our product assortment and all these other key initiatives that we're working on that we should see improvement as we proceed through 2019.

Operator

And our next question will come from the line of Peter Keith with Piper Jaffray.

Peter Keith -- Piper Jaffray -- Analyst

I wanted to touch on the longer-term store growth. So you are reaccelerating here to 3.5% to 5% growth rate. But when you talk about getting to that long-term EBITDA margin target and mid-single-digit comp, how should we think about kind of your longer annual store growth? Because certainly, it seems like it should be higher than 5% given your whitespace opportunity.

Cabby Lolmaugh -- Chief Executive Officer

Yes. Thanks. This is Cabby. Yes, we definitely want to, first of all, show that all of our investments pay off this year.

We want to drive a lot of revenue to get our business back on track, so that way, we can give a higher guidance of store openings going forward. We've guaranteed three this year. We want to do five to seven. That's going to -- let's see how these next few quarters pan out.

We're going to continue to open stores the next few years and grow that percentage. So we feel comfortable right now in giving the low single or mid-single digits -- digit for store growth, but that should increase with our business.

Kirk Geadelmann -- Chief Financial Officer

Yes. And just one additional clarification there, Peter. We're still focused on 8% to 12% unit growth. So I think you can look at it -- in a way, you can look at we're opening stores largely in the back half, five to seven stores.

If you look at it as we're going to get back to that 8% to 12% in the half a year, beginning in the back half of the year and then hopefully carry that into next year and beyond, that's our expectation.

Peter Keith -- Piper Jaffray -- Analyst

OK. That's helpful. That's what I was looking for. And I was intrigued, Cabby, you talked about some brand initiatives and brand awareness and pivoting a bit more to the retail customer.

So you've got a lot of great product in the store, which I agree look nice. It's just a matter of getting the footprints -- footsteps in there. Could you talk about maybe with some specifics some of the things you're going to start experimenting or pushing forward with to drive that traffic?

Cabby Lolmaugh -- Chief Executive Officer

You bet, Peter. You'll notice if -- a lot of the higher-end magazines, nationally syndicated magazines, we've been experimenting with some editorials in those. We've done a lot of work on the social side of the business and seen tremendous response. So working in Pinterest, Facebook and more editorials, reaching out to those retail customers, targeting them has been a big focus for the last, I'd say, year, and we're getting better at it every quarter.

With our Pro market managers, they're having more and more events every quarter, every week. I mean, we've had five last week alone. So we're targeting the Pro and the high-end retail customer at the same time with our new higher-end assortment. So we're pretty happy with the response so far, but we're going to continue to test -- we're not doing our job if we're not testing different methods and different levers to drive traffic in our stores.

But we know once we get the Pro and if we get the retail customer to get a look at us, we're in for a good ride.

Operator

And our next question will come from the line of John Baugh with Stifel.

John Baugh -- Stifel Financial Corp -- Analyst

I had a few questions. First off, did you provide the average ticket in Q4 and/or the traffic in Q4? And I know the traffic was up against the promotional traffic last year, but can you quantify those?

Kirk Geadelmann -- Chief Financial Officer

No, not specifically. But yes, I will reinforce that average ticket continues to be a very strong growth driver for us and has been for the last 4 quarters. We also see that continuing with the trends that we provide a little color on, including the uptick in our natural stone business that coincides with some of the new product collections. We feel like that should continue to be a tailwind for us.

John Baugh -- Stifel Financial Corp -- Analyst

OK. And then number of initiatives we've talked about to drive traffic, including like Pro managers and loyalty programs and things with the Pro. Where are we? What inning of the ballgame are we in? I know you get a lot of SG&A spend in '18, and it doesn't sound like there's going to be much incremental, if any, in '19? So does that mean we're done with all of these initiatives? Where exactly are we?

Kirk Geadelmann -- Chief Financial Officer

Yes. These initiatives are substantially complete, but of course, they'll be ongoing. And I think we'll -- our expectation is we'll get more and more out of the investments that we've made throughout 2019. There's a lot of good additional examples we could provide.

One example I'll offer to just complement some of the examples that Cabby just gave is a big part of our being able to increase our brand awareness with both Pro and retail customers is inspiration. And it's our content on our website, in our product catalogs and the content that we're highlighting in some of our social media, as Cabby talked about, that's taken time to develop. And we spent a lot of time and resources on that, particularly in the back half of last year. We now feel like we're ready to really tier that and leverage that as we head into next year.

So we feel good about our strategies. We'll continue working on them. And I think the other key point related to traffic is we lap easier traffic comparisons as we move through 2019, so that also gives us a certain degree of confidence.

John Baugh -- Stifel Financial Corp -- Analyst

OK. And lastly, any impact expected from trying to source from other places than China in 2019? Is that in any way in the 69% to 70% gross margin, or you don't anticipate any impact at all?

Cabby Lolmaugh -- Chief Executive Officer

This is Cabby. I do not anticipate any impact sourcing from other countries, not at all.

Operator

[Operator instructions] And our next question will come from the line of Peter Benedict with Baird.

Peter Benedict -- Robert W. Baird and Company -- Analyst

First, just circling back to traffic and some of the traffic-driving initiatives, you spoke to a number of them. But help us understand, how are you messaging value to the consumers? I mean, does price play any role here? Or is value really around the assortment, unique product, etc.? That's my first question.

Cabby Lolmaugh -- Chief Executive Officer

It's Cabby. In my 18 years of being here selling on the floor, manager and regional, whenever -- we advertised on price or we just collected less dollars, so it's always been on inspiration, it's always been on the aspirational customer. And we've seen that once we put all content that inspires people, we're seeing the traffic. We're seeing the things we want.

When we push, pull that lever, we're seeing the people in our stores talking about us on social media, and it's never about price. Whenever we do our surveys, whenever we talk to Pros in all of our events and we push out emails or various things like that, price is always No. 3 or No. 4.

It's service. It's selection. Things like that is what drive our customers to spend with us. So when we focus on remodels, when we focus on assortment, when we focus on merchandising, these are all things to up our conversion, up our margin and continue to increase our revenue.

Peter Benedict -- Robert W. Baird and Company -- Analyst

OK. That's helpful. And then just on the Pro loyalty, remind us of like, how are you guys measuring that, I guess, internally? And how is that progressing kind of versus your expectations now that you've had these Pro market managers in place for a bit?

Kirk Geadelmann -- Chief Financial Officer

It's progressing well, and we have a variety of different metrics we're using. Obviously, one of them is one that we've talked about with you guys for at least the last four or five years as Pro growth -- Pro sales growth. And that's a, obviously, key measurement, and that certainly has improved over the last four quarters. We're pretty pleased with the progress.

In fact, when we look at markets where we put the Pro market leaders in first, there was a few that got a new leader as early as last March, I believe it was, and then the remainder didn't get Pro market managers until, in some cases, July or August. But those were the markets that really started to show progress the earliest. And so we think there's high correlation there. There's other things that we're looking at as well with our new CRM tools and the more structured Pro rewards program that we have in place.

And I won't go into all the detail, but it's things like retention and not just in total but also retention at various Pro rewards tiers. We're looking at our ability to grow our Pros business and convert them into a higher tier and similar types of metrics. So we're able to now measure these things at a more granular level with our new CRM tools. We have a lot better data that we're capturing to kind of connect the dots on these things, and we're encouraged by what we see.

Peter Benedict -- Robert W. Baird and Company -- Analyst

That's great, Kirk. And then just last, on the macro, I mean, you did mention that, I guess, all of the store vintages are coming positive in most of the regions. Just when you think about housing turnover, obviously, that's been on the minds of a lot of folks. As you think about the markets that you guys operate in, I mean, any dynamics to call out in terms of turnover, housing turnover trends and what that has meant to the business here of late?

Cabby Lolmaugh -- Chief Executive Officer

It's Cabby. Yes, it's clearly mixed, but it's still solid despite some trend lines for certain metrics. We've always been strong with the remodel. So whenever housing sometimes get down, people, our customers invest in their homes, and we thrive.

So the home price appreciation is strong, which gives our more affluent retail customers the confidence to remodel. Repair and remodel spending is expected to continue to grow in 2019. So we're confident we can weather any type of downturn in the new housing turnover.

Operator

And our next question will come from the line of Joe Feldman with Telsey Advisory.

Joe Feldman -- Telsey Advisory Group -- Analyst

One of the questions -- I know you guys alluded to that the 17 newest stores that you have and continuing to work to get those kind of where you would like to see them to close the gap with the targets. Can you talk a little more about how you're doing that and maybe some of the strategy around that?

Kirk Geadelmann -- Chief Financial Officer

Yes. The 17 was the last bunch of stores we opened. Obviously, they're impacted a little bit if you have challenges with your assortment and/or are doing some things with your promotional strategy that maybe aren't in the best interest of the business. So there's a chunk of those stores that, even despite some of those challenges, actually blew away our expectations.

And that's when you have a really seasoned store manager typically as that's one attribute when that happens despite some of the other headwinds. But the main thing we're doing is just saying, "Hey, listen, we can't just start opening new stores. We also have to make sure, if there's any stores that are still a little behind where we want them to be, we got to get them up to speed." And the nice thing about having a group of 10 regional sales managers, we've never had that kind of leadership before in our company and also over 20 Pro market managers, is we can now very easily tap those leaders and have them help these store managers and get up to -- get them up to our target levels where we want them to be. So we're fully leveraging that, and we're holding those leaders accountable for helping us.

We're providing some extra incentives as well. And we expect to see some good progress here in the next 12 months.

Joe Feldman -- Telsey Advisory Group -- Analyst

Got it. And then just as a follow-up, it's great to hear some of the new products really working and the different -- the new stone stuff. Do you think there's a change in trend? I know you guys have always talked about these kind of long-term trends as opposed to -- and I'm just wondering if we're at kind of an inflection point with the change in direction with what consumers are looking for.

Cabby Lolmaugh -- Chief Executive Officer

It's Cabby. Change in trends happen every week. It's amazing that when we pull out a new product that we're kind of on the fence, is this going to sell or not, and then boom, it takes off. Yes, we're always looking at different colors, different textures, different sizing.

Our consumer now is more demanding than they've ever been in the history of sourcing flooring for their home. Design and fashion is what it's all about. And when you think of everyone's different design or style, you have to appeal to everyone, and we've really kind of narrowed down the last few years what we had to offer. And now you walk into our stores, and it's different color, different texture, different finish, different size, different material.

And it's really got the designers excited. They're bringing their clients in more than they've ever had. So yes, we've always got our finger on the pulse of trends in fashion. And now that we have our in-house product designer, we're very nimble.

We can actually get tiles that only we want or can offer our customers. So we're very fashion-forward here at The Tile Shop. And I encourage anyone on this call to visit your local store and really get inspired today.

Kirk Geadelmann -- Chief Financial Officer

Just a quick add to that, I think that was excellent. The other thing I'd just remind people of, Joe, is that while porcelain and ceramic industry sales have been good over the last couple of years, they've been right around that 5% or 6% or 7% growth level, stone has also been good. It's been in the 4% to 5% range. And while we've enjoyed and taken part in the growth in manmade, unfortunately, the last couple of years, we haven't really taken part in the growth in stone.

And we're looking forward to doing that again.

Operator

And I'm showing no further questions at this time. So now it's my pleasure to hand the conference back over to Mr. Ken Cooper with IR for any closing comments or remarks.

Ken Cooper -- Investor Relations

Thanks for listening to our earnings conference call. We are looking forward to another strong year of investor outreach, and we look forward to providing our next update in April. Thank you for your interest in Tile Shop, and have a great day.

Operator

[Operator signoff]

Duration: 52 minutes

Call Participants:

Ken Cooper -- Investor Relations

Bob Rucker -- Founder

Cabby Lolmaugh -- Chief Executive Officer

Kirk Geadelmann -- Chief Financial Officer

Geoff Small -- Citi -- Analyst

Daniel Moore -- CJS Securities -- Analyst

Anthony Chukumba -- Loop Capital Markets -- Analyst

Peter Keith -- Piper Jaffray -- Analyst

John Baugh -- Stifel Financial Corp -- Analyst

Peter Benedict -- Robert W. Baird and Company -- Analyst

Joe Feldman -- Telsey Advisory Group -- Analyst

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