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Edited Transcript of FND.N earnings conference call or presentation 1-Aug-19 8:30pm GMT

Q2 2019 Floor & Decor Holdings Inc Earnings Call

SMYRNA Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Floor & Decor Holdings Inc earnings conference call or presentation Thursday, August 1, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lisa G. Laube

Floor & Decor Holdings, Inc. - Executive VP & Chief Merchandising Officer

* Thomas V. Taylor

Floor & Decor Holdings, Inc. - CEO & Director

* Trevor S. Lang

Floor & Decor Holdings, Inc. - Executive VP & CFO

* Wayne Hood

Floor & Decor Holdings, Inc. - VP of IR

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Conference Call Participants

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* Charles P. Grom

Gordon Haskett Research Advisors - MD & Senior Analyst of Retail

* John Allen Baugh

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Michael Lasser

UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines

* Peter Jacob Keith

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

* Seth Ian Sigman

Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst

* Seth Mckain Basham

Wedbush Securities Inc., Research Division - MD Of Equity Research

* Simeon Ari Gutman

Morgan Stanley, Research Division - Executive Director

* Steven Paul Forbes

Guggenheim Securities, LLC, Research Division - Analyst

* Zachary Robert Fadem

Wells Fargo Securities, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the Floor & Decor Holdings second quarter call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce Wayne Hood.

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Wayne Hood, Floor & Decor Holdings, Inc. - VP of IR [2]

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Thank you, and good afternoon, everyone. Joining me on our call today are Tom Taylor, Chief Executive Officer; Trevor Lang, Executive Vice President and Chief Financial Officer; also in the room is Lisa Laube, Executive Vice President and Chief Merchandising Officer, who will join us for the Q&A session.

Before we get started, I would like to remind you that comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties.

Any statement that refers to expectations, projections or characterizations of future events, including financial projections or future market conditions, is a forward-looking statement. The company's actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Floor & Decor assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results.

During this call, the company will discuss non-GAAP financial measures as defined by the SEC Regulation G. We believe non-GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our Investor Relations website at ir.flooranddecor.com.

A recorded replay of this call, together with related materials, will be available on our Investor Relations website.

Now let me turn the call over to Tom.

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [3]

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Thank you, Wayne, and thanks to everyone for joining us on our second quarter 2019 earnings conference call. We are pleased with our second quarter 2019 earnings results as we delivered earnings per share that exceeded the high end of our guidance on robust sales growth from our new stores, solid comparable store sales growth of 3% and favorable expense timing. As we look to the remainder of the year, we believe we are in a strong competitive position to execute our strategies and navigate the unprecedented changes in the hard-surface flooring industry from tariffs and potential antidumping and countervailing duties.

Second quarter total sales increased 19.8% to a record $520.3 million from $434.3 million last year. Comparable store sales grew 3% and were up 14.4% on a 2-year stacked basis. Excluding sales in the Houston market, where we are still cycling past strong prior-period results from Hurricane Harvey, our comparable store sales increased 5.5% and a 14.1% on a 2-year stacked basis.

Moving on to earnings. We reported second quarter diluted earnings per share of $0.42, a 10.5% increase from $0.38 last year. Our adjusted second quarter diluted earnings per share were $0.34 per share, up 25.9% from last year's $0.27 and $0.03 above the high end of our guidance of $0.29 to $0.31 per share.

Let me now discuss some of the drivers of our second quarter 2019 sales and earnings growth, and how we see the balance of the year. The core pillars that we focus on to achieve our long-term sales and earnings growth targets and grow our estimated 8% market share are: one, opening new warehouse format stores in new and existing markets at a 20% annual rate; 2 growing our comparable store sales in the mid- to high single-digit range by offering in-stock good, better, best products at an everyday low price; 3, expanding and improving our connected customer experience; and 4, improving the Pro customer experience.

I will now touch on some of these and how they are contributing to our growth. First, opening new large warehouse stores. We successfully opened 3 new warehouse stores in the second quarter of 2019 compared with 4 stores last year, bringing the year-to-date total number of warehouse stores that we operate to 106 stores, up 20.5% from 88 warehouse stores at the end of the second quarter last year. Our second quarter openings were in Fort Worth, Texas and Tampa, Florida in May, and Saugus, Massachusetts in June, all successful markets for us. While still early in our new store life cycle, we are very pleased with the sales contribution from our new stores.

New stores contributed to our better-than-expected second quarter total sales growth and year-over-year improvement in our new store productivity. The performance of our new stores gives us added confidence that our comparable store sales will sequentially accelerate in the second half of 2019 as more newer stores fall into the comparable store sales base. As we look to the third quarter, we expect to open 7 stores, of which 3 stores already opened in July, St. Louis, Missouri, Golden, Colorado, and El Paso, Texas. The majority of the remaining third quarter openings are expected to be in September. We remain on plan to open 20 new stores in 2019, which would represent on average our seventh consecutive year of 20% unit growth.

We continue to expect 60% of our 2019 new store openings will be in existing markets compared to 35% in 2018. Beyond 2019, we remain excited about the strong pipeline of potential stores and strive for a more balanced store opening cadence in 2020 and beyond. As a reminder, the 109 stores that we currently operate represent only a fraction of our potential U.S. store base. For example, our successful opening in Saugus, Massachusetts, represents only our second store in the Boston area where we believe we have a significant runway for growth.

Moving on to our second pillar of growth, comparable store sales. Our second quarter comparable store sales growth of 3% was at the high end of our expectations of 1% to 3% growth. Our monthly comparable store sales momentum improved throughout the quarter, leaving us optimistic about further acceleration in our comparable store sales in the second half of 2019. We are also encouraged that our strongest growth continues to come from what we characterize as our best products, which are generally more unique to Floor & Decor. Our large stores and deep in-stock inventory gives us a unique ability to out-of-sort our competitors and be the one-stop shop for our customers.

Second quarter comparable store transactions, one measure of market share growth, increased 1.1%, but was up 3.2% and 12.7% on a 2-year stacked basis, excluding Houston. Our comparable store average ticket increased 1.9% in the second quarter with most of our categories increasing their average ticket.

Turning to our sales performance within our merchandising categories. Our strongest sales growth continues to come from our laminate and rigid core luxury vinyl plank category, where total sales increased 39.8% from last year and accounted for 20.8% of our second quarter sales, up about 300 basis points from last year. We continue to be very pleased with the sales growth and attachment rates that we are experiencing in our higher-margin installation accessories categories.

In the second quarter, total sales for the department increased 30% and accounted for 17% of our sales, up 130 basis points from last year. We expect this momentum to build in 2019 and beyond as we have added department leadership incentives, measurement metrics and made changes to our website to accelerate growth and improve the customer experience. As we think about the remainder of 2019 and beyond, we continue to believe that we will grow our market share in hard-surface flooring through our ongoing innovation initiatives and by offering consumers easy, affordable and updated stylish flooring solutions.

And among many of the products we're excited about in 2019 is an easy-to-install, thin-tiled branded under Floor & Decor's exclusive Maximo tile brand. This tile option has been successful in our Florida market and will be rolled out to all of our stores in 2019. This type of tile is thinner than traditional tile, comes in a variety of colors and finishes and can be installed over existing tile.

We also continued to build on our successful strategies to drive incremental growth by adding additional adjacent merchandise categories to our existing countertop and shower door programs. In the second quarter, we have begun testing vanities and vanity tops as well as bath accessories. As we have success, we will continue to add these programs to more stores.

Expanding the connected customer experience is our third pillar of growth. Our connected customer strategies continue to drive double-digit sales growth from increases in both traffic and conversion. Our second quarter e-commerce sales increased 60% from last year and accounted for 10% of our tendered sales compared with 8% at the end of 2018. As a reminder, we estimate 70% of our customers who ultimately buy from us will visit our website during their buying process. What is exciting to us is that about 85% of online sales are being picked up in our stores, which gives us another unique opportunity to engage with customers to make sure they have all the materials they need to complete their project and drive cross-selling opportunities. It also further demonstrate the importance of the synergy between our physical stores and our e-commerce platform in the purchase journey decision. We continue to see increased customers' e-commerce engagement with tools like My Order, which allows us to work with a customer to build their order in our aisle on a mobile device so that they can buy that day and get on their way quicker or e-mail them the details so that they can think about it or change products and ultimately tender when they are ready. In the third quarter, we plan to add an improved room visualizer to deliver more personalization.

And our fourth pillar of growth comes from investing holistically in our Pro customers. Investing in our Pro customers to drive loyalty is a strategic priority of ours as we look to increase our share of wallet with our existing Pros as well as engage with Pros that do not currently shop with us. A crucial tool that we launched in the third quarter of 2018 is our PRO Premier Loyalty Program, along with an umbrella of needed business service offerings. We are very pleased with our rewards program and have seen a 49% increase in enrollments since the end of 2018. Importantly, we are now seeing growing and above-average redemption rates, which is a measure of the strength of our program and shows engagement. Said another way, our PRO Premier Rewards program is valuable and engaging, which in turn encourages our Pros to return and shop more often. In stores where Pro Premier engagement and redemption is highest, we see higher comparable store sales growth compared with stores that are not as far along in the development of their program.

We are proud that our program placed second at the Loyalty360 Awards, beating out many established brands. In the second quarter, we also added 2 additional Pro partners, Sunbelt Rentals and [Pods]. Our Pro partners are third parties that provide unique discounts or advantages to our Pro Premier members. We currently have 17 partners, giving us critical mass, allowing us to shift our attention towards driving awareness and engagement with this important pillar of our loyalty program.

In the second quarter, we saw a 28% increase from the first quarter of 2019 in Pro partner activities, validating the demand for these services. We are also pleased with the growth in the number of Pros that are using our PRO App, which was launched last year. Pros can use the app for receipt tracking, order details, SKU search, inventory lookup, quote build, order function, UPC scan and tender purchases. Over the last 90 days, we've seen substantial increases from last year's, and we expect usage to continue to grow as we further build out awareness, features and functionality, including schedule and Pro check-in.

Collectively, these are examples of how we continue to add capabilities that enable us to drive engagement, customer satisfaction and wallet market share. We continue to make strides in growing our small but important commercial business. We have developed and have been piloting an outside regional account sales strategy, which leverages our stores and bridges us into the relationship in account management business that has been in place at independent flooring retailers and supply houses, which have historically supported this segment. We believe these are primarily new incremental sales from business customers that likely have not historically bought from retail, thereby opening a large segment of commercial flooring up to us. We are in the very early stages of addressing this commercial segment, but we see a large opportunity to disrupt the commercial flooring business, much like we have done in the residential flooring business. These sales provide a high return on capital as they leverage our existing supply chain and store infrastructure with no working capital or capital expenditures.

We also continue to be excited about our designer initiative, and how they are impacting our sales and customer experience. As we have enhanced our design centers and given our designers new tools like tablets to help their clients, we continue to see improved results. In the second quarter alone, we saw designer appointments double last year's volume, and our design consultation conversion rate is up substantially over last year. Most importantly, we know when the designer helps a customer, we see our customer satisfaction at its highest. Word-of-mouth is still one of the largest ways we keep customers satisfied and get new customers. Our free design services are integral to this free advertising.

Let me now turn my comments to how we are thinking about the macroeconomic and geopolitical factors that affect our industry and the company. Let me first speak to how we plan to continue to mitigate the cost impact of tariffs on merchandise that we source from China, which has historically been the source of about 50% of the merchandise we sell. I will then discuss the potential impact from the proposed antidumping duties, or ADD, and countervailing duties, or CVD, on ceramic tiles that are sourced from China following a review by the International Trade commission, or ITC, and the Department of Commerce, or DOC, that was initiated by petition filed by the Tile Council of North America.

First, on tariffs. We have a flexible global supply chain and experienced merchandise organization which has allowed us to accelerate plans that we began in 2018 to diversify our countries of origin to reduce our sourcing risk. As a result, there will be a meaningful shift in our countries of origin in 2019 and beyond. Specifically, by the end of 2019, we expect the percentage of our merchandise sourced from China to decline to the mid-30% range from 50% in 2018. We believe it will continue to decline in 2020 and beyond.

Moving on to the potential impact of ADD and CVD imposed on ceramic tiles sourced from China. We see and have planned for a significant reduction in ceramic tiles that is sourced from China by the end of 2019 from our accelerated actions to diversify our countries of origin. Tile, wall tile and tile deco are all subject to proposed new duties, and accounted for about 34% of our sales this year, of which approximately 39% was sourced from China. We believe we can lower our China-sourced tile exposure to the low single-digit range as a percentage of total sales by the end of 2019 due to the early actions we have taken in moving sourcing to other countries. We believe our growth, breadth of product line and flexible direct sourcing model from over 20 countries gives us a distinct competitive advantage.

We are operating under the extended preliminary determination time line, which, if correct, we would find out what the proposed CVD rate might be in early September and the industry believes we will find out about the ADD rate in early November. The Department of Commerce's final affirmative determination of ADD and CVD duties would not likely occur until the first quarter of 2020, followed by the ITC in the second quarter of 2020. We have positioned our inventory receipt flow around these timelines and believe our strategies will help mitigate these potential cost increases.

Among the macroeconomic metrics that impact our industry and company, namely existing home sales and home price appreciation, we, like many others, remain cautiously optimistic that the recent pullback in interest rates will serve as a catalyst to moderate the persistent year-over-year decline in existing home sales that began in early 2018 and has continued throughout 2019. Recent housing data points to a potential for an improving trend, particularly in the second half of 2019 when existing home sales comparisons ease. As many of you know, the year-over-year decline in existing home sales moderated in April and May from the first quarter of 2019 and late 2018, leaving us encouraged about the second half of 2019.

That said, we have company-specific drivers that we believe will sequentially accelerate our comparable store sales growth in the second half of 2019. Specifically, there will be more new stores entering our comparable store sales base and the difficult sales comparisons in the Houston market caused by Hurricane Harvey will further ease as we move through 2019. In addition, we plan to continue to drive sales growth by leveraging our merchandising, in-store and website strengths. As many of you know, one of our core strengths in -- is our merchandising organization, which is always working towards the next generation of products that are innovative and trend-right and in many cases, exclusive to the Floor & Decor. You will see more of this as we move through the remainder of 2019.

Before I turn the call over to Trevor, I would like to thank our associates for their hard work, service to our customers and execution. I'll now turn the call over to Trevor to discuss more of the details of our second quarter results and 2019 outlook.

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [4]

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Thanks, Tom. I'm going to concentrate my comments on some of the changes among the major line items in our second quarter of 2019 income statement, balance sheet and cash flow statements, and then discuss our outlook for the third quarter of 2019 and the remainder of the year. Tom already discussed our 2019 second quarter sales, so I will start with our second quarter gross margin rate, which increased 100 basis points to 41.9% from last year's 40.9%, and was modestly above the 70 to 80 basis points increase we had planned for.

The increase in gross margin versus last year was primarily due to higher product gross margin. The improved product margins were due to favorable negotiations with our suppliers, improved merchandising strategies, including higher sales from our higher-margin installation accessories and some strategic retail price increases.

Let me now discuss some of the various expenses and the variance to last year. Our second quarter selling and store operating expenses increased 24% to $134.6 million from $108.6 million last year and de-leveraged 90 basis points, primarily due to higher store occupancy expense, which was partially offset by leveraging our advertising expense. The 90 basis points of expense de-leverage came entirely from our new stores. Our new stores' selling and operating expenses as a percentage of sales are approximately 50% more than stores opened greater than 1 year, and this results in near-term operating expense de-leverage.

We continue to leverage our expenses in our existing stores and are gratified in this accomplishment in 2019 considering the headwinds we faced in our Houston market, where we are stuck in large sale increases in 2018 due to Hurricane Harvey. Moving on to our second quarter preopening expenses, which decreased 3.3% to $6.4 million from $6.6 million last year and leveraged 30 basis points. The decline is largely from opening in less expensive markets as well as enhancing our store opening process, which has allowed us to shorten the period it takes to open new stores, thereby lessening our preopening occupancy cost. We opened 3 new stores and relocated 1 store this year compared with 4 new store openings last year.

Our second quarter general and administrative expenses grew 22.8% to $30.9 million from $25.2 million last year, inclusive of unique items that are reconciled in our earnings release. This was better than expected due primarily to the timing of spending that we are now planning to incur in the second half of 2019.

Our second quarter interest expense increased 3.6% to $2.2 million, which was in line with our expectations. Our second quarter adjusted net income increased 24.5% to $35.3 million from $28.4 million last year. Adjusted earnings per share increased 25.9% to $0.34 and was $0.03 above the high end of our guidance. Approximately $0.02 of this better-than-expected results was due to the shift of certain expenses into the second half of 2019. The remaining $0.01 was due to better-than-expected sales and a gross margin rate.

We ended the second quarter with 104.8 million diluted weighted average shares outstanding compared with 104.9 million last year. Turning to our second quarter growth in adjusted EBITDA. Stronger-than-expected sales growth coupled with favorable gross margin and favorable expense management led to a 31.4% growth in our second quarter adjusted EBITDA to $66.6 million from $50.7 million last year, exceeding our guidance of $60.8 million to $63 million.

Our adjusted EBITDA margin rate expanded 110 basis points to 12.8% from 11.7% last year despite significant investments we are making to support our long-term growth. Moving on to our second quarter balance sheet. We continue to be in a strong financial position and ended the second quarter with $325.7 million in total available liquidity, including $51.5 million in cash and cash equivalents and $274.2 million from undrawn lines of credit to support our growth plans. Total second quarter inventory was well managed, increasing only 3.2% from the same period last year despite the impacts of 10% tariffs on Chinese imports. That said, we do expect our inventory will be higher year-over-year by the end of 2019. This will reflect the inventory build to support 20 new stores, more new store openings in early 2020, our new Baltimore DC that's planned to open in the fourth quarter, 25% tariffs on Chinese imports and further improving our merchandise in-stock positions. The improvement we are making in managing our inventory, our receivables and trade accounts payables contributed to a 45.6% year-over-year increase in our year-to-date operating cash flows to $122.2 million. This, in turn, led to free cash flow exceeding our required capital spending of $78.2 million and increasing our cash and cash equivalent on hand to $51.5 million.

Now turning to our earnings guidance. As you saw in our press release, we are updating our 2019 sales and earnings outlook to reflect the second quarter results and changes in our outlook from import tariffs imposed on products sourced from China. The later timing of the 25% tariff being put in place and was originally contemplated earlier this year, the success we are seeing with vendor negotiations to manage through the associated higher cost, our inventory position as well as our assumptions around potential antidumping and countervailing duties on Chinese tile imports are reflected in our outlook. As you recall, our previous 2019 earnings guidance provided on May 2 had assumed the implementation of 25% tariffs on our products was being postponed until further notice. However, in mid-May, shortly after our earnings release, the U.S. Trade Representative's Office took action to institute a 25% duty rate at the U.S. ports for Chinese hard-surface flooring imports. As such, we have revised our outlook to reflect the impact of the 25% duty rate. As we have discussed in the past, we expect the overall impact for the imposition of 25% tariffs on Chinese flooring to change the complexion of our income statement for-for -- but for to generally be net earnings dollar neutral. I think it's important to point out that our pricing philosophy and strategy has maintained -- to maintain our industry-leading-everyday low-price strategy has not changed.

I will now discuss some of the more important building blocks to our re-casted 2019 earnings outlook. As discussed on our last 2 earnings calls, we expect our comparable store sales to sequentially accelerate throughout the remainder of 2019 due to the comparable store sales drag from Houston abating as we get to the second anniversary of Hurricane Harvey as well as having a higher concentration of new stores entering the comp base in the second half of 2019. We saw a sequential acceleration in comparable store sales throughout the second quarter. In addition, now the 25% tariffs have gone into effect, we plan to strategically increase retails for remaining Chinese imports.

We obviously have more visibility now as to how much we will resource away from China versus earlier in the year. And as Tom has already discussed, with the great work our merchandising and supply chain teams have done with cost, we believe we will only have to make modest increases to our retails for items where we did not achieve lower cost or source from a different country. These modest changes in retail have been reflected in the slightly higher back of the half of 2019 sales in comparables to our store sales growth expectations. Also as discussed on the last 2 calls, the implementation of higher tariffs will modestly lower our gross margin expectations as we intend to only pass along the incremental cost we incur versus making a margin on the new tariffs.

With respect to our third quarter outlook, we expect our third quarter 2019 sales to be in the range of $520 million to $527 million, an increase of 19% to 21% versus the third quarter of 2018. This growth outlook is based on a comparable store sales growth of 4% to 5.5%. Excluding the Houston market, we expect our comparable store sales to be in the range of 5.5% to 7%.

Excluding the estimated costs associated with our relocation to our new store support center, we expect our operating margin to be approximately 7%. Diluted earnings per share for the third quarter is expected to be $0.22 to $0.24, and adjusted diluted earnings per share is expected to be $0.25 to $0.26. We are assuming 104.9 million weighted average diluted shares outstanding for the third quarter of 2019. We expect our adjusted EBITDA for the third quarter of 2019 to be $57 million to $58.5 million, an increase of approximately 16% to 20% over the third quarter of fiscal 2018.

Turning to our full year outlook. We expect net sales for fiscal 2019 to be in the range of $2.060 billion to $2.075 billion, an increase of 20% to 21% versus fiscal 2018. This net sales growth outlook is based on 20 new warehouse store openings and comparable store sales increase of 4.5% to 5.5%. Excluding the impacts of Houston, we are planning on fiscal 2019 comparable store sales to increase 7% to 8%.

Assuming we achieved our full year comparable store sales growth expectation, we are proud to be able to accomplish these above-industry growth rates yet again in the most challenging housing environment in a decade. We have made substantial success in improving our gross margin rates in the first half of 2019 with 10% tariffs on Chinese imported products. Even with these tariffs now increasing from 10% to 25% on Chinese flooring imports and taking on an additional $5 million in cost to open our new Baltimore DC in the fourth quarter of 2019, we plan to have a modest increase in gross margins of approximately 10 to 20 basis points for the full year. This speaks to the strength of our model and our talented merchandising and supply chain teams.

Moving to our full year SG&A expense. We continue to expect total SG&A to slightly de-leverage as a percentage of sales to the new stores. Fiscal 2019 diluted earnings per share is expected to be $1.14 to $1.18, and adjusted diluted earnings per share is expected to be $1.09 to $1.12. Diluted weighted average shares outstanding is expected to be 104.7 million, and our fiscal 2019 tax rate is still estimated to be 23.3% for the remainder of the year. As a reminder, this guidance does not consider the tax benefit due to impact of stock option exercises that may occur in fiscal 2019.

We expect our fiscal 2019 adjusted EBITDA to be in the range of $238 million to $243 million, an increase of approximately 24% to 27% over fiscal 2018. Regarding capital expenditures for fiscal 2019, we slightly lowered the range from $220 million to $230 million to $205 million to $215 million. This expected lower CapEx is primarily due to having more clarity around the timing and the cost of class 2020 stores planned to open in early 2020. On a separate note, as it relates to 2020, please keep in mind that 2020 will have a fiscal 53rd week.

With that, I think I'll turn the call back over to Tom for a few closing remarks.

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [5]

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I am proud of how we performed in early 2019, and we are planning for another successful year. We firmly believe our best days lie ahead of us and look forward to updating you after our third quarter results.

We'd now like to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Simeon Gutman with Morgan Stanley.

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Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [2]

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Sorry about the noise. First question is, you had taken the comp down by about 300 basis points at the midpoint in Q1 and now you are taking it up by about 100. Just to confirm that solely adjusting for tariffs' rates. And maybe can you speak to the underlying run rate of the business.

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [3]

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I'll start. This is Tom, and then Trevor can chime in a little bit. So yes, I mean we -- it does. We were fortunate that there was a shift in the timing of the tariffs that -- from March to mid-June. It gave us the ability to clear more inventory pre-tariffs, and our vendors did a better job at negotiating than we anticipated. So and then lastly, we have done a better job executing our countries of origins and diversifying that. So equal, that's not having to raise prices until -- or not having to raise as much price as we thought, and we won't to have to do it as early as we thought.

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [4]

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Yes. And Simon (sic) [Simeon], this is Trevor. Just following up on that a bit, that when you look at the full year, we think it's maybe an 80 to 90 basis points increase in comps we did for the fiscal year, and that elevates closer to 200 to 250 basis points of comps due to tariffs when we get to the fourth quarter. Tom outlined some of the reasons why it wouldn't be as much already. One other thing I wanted to point out, when you look at the total sales guidance we gave for the year, we took out the total sales guidance more than the comp piece of it because of the performance of our new stores. Our new stores book the timing of the stores are opening earlier and the performance of the new stores are doing better. So that more than offset maybe some of that higher comp that you might have expected to see.

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Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [5]

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Okay. And Tom, how did you ship supply away from China so quickly without compromising in the quality of this executing? And just a lot of your suppliers have unused capacity overseas?

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [6]

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So I think there was 2 questions there, Lisa, you can answer them. How did we move the supply so quickly?

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Lisa G. Laube, Floor & Decor Holdings, Inc. - Executive VP & Chief Merchandising Officer [7]

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Yes. Okay. I missed the second one.

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [8]

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And I think he sort of --

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [9]

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Did they have excess capacity in other -- in Europe?

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Lisa G. Laube, Floor & Decor Holdings, Inc. - Executive VP & Chief Merchandising Officer [10]

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Oh, sorry. Yes, this is Lisa. So we've known about this since back when we had the border tax days. That discussion, it has been over 2 years ago now. So we started that and really looking at trying to diversify outside of China. And as these different actions have taken place, we've just been able to accelerate that. Thankfully, we have a very experienced merchandising team. We have a relationship with vendors in 23 countries. And so it's not so hard for us to move some of our categories. And so as we found out the tariffs were going to, in fact, happen, we decided to go ahead and start making some quick moves. So we've already started in some of our categories getting in products from other countries. And as we have said earlier in the year, about 50% of our business will be from China and by the end of the year, we think we'll be into the mid-30s. So we just -- we've been working on it a long time.

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Operator [11]

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Our next question comes from John Baugh with Stifel.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [12]

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Congratulations on a good quarter. I was wondering if you could discuss the timing of when increased Chinese imports flows for you. Do you have to take a price increase? When that hits your inventory cost? And when we might see the retail adjustments on that?

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [13]

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John, this is Trevor. So the 25% tariffs were increased from 10% in mid-June. So that starts going into our costing at that point. We -- like everybody, we precleared as much of that inventory as we could. So kind of mid- to late June is when those costs started going in. We turn our inventory about over a 6-month period of time, and we use a weighted average costing method. So you'll start to slowly see that cost come in over the kind of now through the end of the third quarter and as our inventory turns, it becomes more material in the fourth quarter. And that's why I mentioned the increase in the retail, it was pretty small in the third quarter, but could be as much as 200 to 250 basis points of comps as we get into the fourth quarter. And one other point we made this early in the year, just to make it again. The reason our margin rate goes down during that time period is because we're not going to make a markup on those tariffs. We're just -- anything we can't resource, anything we can't get a better cost out, then we're just going to pass that bit of an increase on to the consumer.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [14]

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And then as a follow-up to that. The growth, I think you called it LVPs and laminates, was impressive at almost 40%. With this pricing that you expect to go through, say, in Q4, do you expect that to change, moderate, I guess, the growth rate of those categories at all, see how other categories performed like just less poorly? Or is that not enough change in price to impact it?

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [15]

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I don't believe it's enough change in price to impact it. I think that as we continue to evolve our luxury vinyl plank assortments and continue to bring in better features and benefits, better durabilities, I think the consumer is going to still buy it. And I think it's still -- it's been a terrific category for us, and I think, it'll continue to be a terrific category for us.

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Operator [16]

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Next question comes from Michael Lasser with UBS.

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Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [17]

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As you started out this year, you probably had to make an assumption about the overall market for flooring and your share within that. As you reflect midway through the year, is the market doing better or worse than you thought? And is your share doing better or worse than you thought?

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [18]

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I'll take a stab at that. I think the market's probably a little bit worse than we thought. And I think our taking share's probably better than we thought.

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Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [19]

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And so now looking forward, have you assumed that the market is going to improve from here? And Tom, I know this is very early in the year and unfair position, but how have you factored in the likelihood that prices of a lot of consumer goods are probably going to go up now in the latter part of the year? And what's your thought on the effect of flooring interior dollars being counted out?

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [20]

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Well, as I said in my comments at the end of my prepared remarks, we are cautiously optimistic that -- that rate cuts are going to help existing home sales and moderate them at best. So we have felt pretty good about -- we do feel pretty good about that, not that -- we still feel pretty good about that. I mean there's a bit of our unknown with the tweet that came out a little white ago about tariffs going onto the next batch of products. It doesn't affect us any differently, but it will affect the consumer differently. But we feel good about our ability to perform in the market.

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [21]

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Yes. And just the only thing I would add to that is if indeed -- we finally saw a sliver of hope with pending home sales actually showed an increase, and there's a high correlation to that turning into actual home sales increasing, that all feels better. Interest rates are over 100 basis points lower than where they were last year. And so if we do see a pickup in existing home sales turnover, we feel that's going to lead to some improvement from what we've seen for the last 18 months, where existing home sales have been declining.

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [22]

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Yes. I mean, if you look, this is a -- it hasn't been an easy environment. And if you look at the second quarter, we achieved the high end of everything that we thought we would achieve. So it feels pretty good.

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Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [23]

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And with that being said, what's implied for the fourth quarter? Is it pretty significant ramp in your same-store sales? Looks around a 9% comp. Is a lot of that coming from these larger -- stores in larger market falling into the comp base? Or is there something else going on there?

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [24]

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I'll start, Trevor; you can weigh in, too. But if you look at over the last 2 years, 70% of our openings have happened in the back half of the year. So our first year comp stores and our second year comp stores generally comp pretty well, historically comp very well. And those entering the comp base should give us a nice tailwind.

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [25]

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Yes. If look at the components of it, as we mentioned, 200 to 250 basis points of that is because of the tariffs. We are expecting that the new stores are going to continue to perform at a much higher rate. You guys may remember this from when we disclosed and went public, we see -- have historically seen that our new stores contribute about 400 basis points of our total comps, and since as Tom just mentioned, we have a much higher percentage of those come into the comp base later in the year. That's going to drive it. And then finally, for the noncomp stores -- sorry, the stores that are older, we are expecting those stores to get a bit better because we are in an incredibly difficult housing market. And as just Tom just mentioned, once we get to early September, which isn't not far from now, we'll be at the second year anniversary of Hurricane Harvey. And so we won't have much of the headwind from Hurricane Harvey. Those are the main contributors to that much higher comp in the fourth quarter.

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Operator [26]

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Next question comes from Chuck Grom with Gordon Haskett.

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Charles P. Grom, Gordon Haskett Research Advisors - MD & Senior Analyst of Retail [27]

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Just on the comp again here. If we look at the comp trend at Houston and stack it from2Q to 3Q, it's about a 250 basis point improvement. I was just wondering if you could just maybe unpack how much is company-specific, how much is new stores versus price? I know you've talked about the price impact in the fourth quarter. I was just wondering if you could just hold our hand in the third quarter.

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [28]

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Yes. I don't -- you're talking Q1 to Q2?

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [29]

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No, Q2 to Q3.

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Charles P. Grom, Gordon Haskett Research Advisors - MD & Senior Analyst of Retail [30]

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Q2 to Q3.

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [31]

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Yes. There was some noise in the comp 2 years ago because of Hurricane Irma in Florida. So we had 2 hurricanes that year. Hurricane Irma impacted our Florida business negatively in the third quarter, and there really wasn't a huge pickup because of that. So I think it has much more to do with that we had a bit of a pickup this last year, which was the other side of that because we didn't have the negative headwind in '18 has probably more to do with it than anything.

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Charles P. Grom, Gordon Haskett Research Advisors - MD & Senior Analyst of Retail [32]

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Okay. And I just -- with independents, just wondering if you could speak to what you're seeing from them, given the increase in prices you think you've been able to gain some market share over the past few months?

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [33]

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I think we have gained market share over the last few months, a bit longer than that. Independents are -- we're seeing prices drift up in independents earlier than we are having to do it. So yes, I think that this give us the ability to take share. So yes.

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Operator [34]

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Next question comes from Zach Fadem with Wells Fargo.

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Zachary Robert Fadem, Wells Fargo Securities, LLC, Research Division - Senior Analyst [35]

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On the gross margin side, 2 really strong quarter of expansion here, looks like you are expecting a bit of a step down here in the second half. Can you walk us just through the moving parts? Inventory pull-forward had a tariff's selling-through now at higher price points. Can you also talk about that in connection with as we move into Q4 with the DC costs in, and how we should expect that cadence to play out?

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [36]

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Yes, Zack. This is Trevor. You're right. We were up 120 basis points in Q1 and up 100 basis points, as we just said. It's a combination of things. Lisa and her team have done a great job of sourcing and getting cost out more so than we had expected. We've had some mix benefit earlier in the year with both deco and installation accessories. Those are our high-margin categories, more recently with our installation accessory categories. And then we have taken some retails up in certain cases. And that's what's been driven that. If you looked at the third and the fourth quarter, specifically, our current expectations in our third quarter gross margins would be kind of flattish. 2 things driving that. One is, last year, as soon as the tariffs came into place, again Lisa's team hustled up and got some vendor accommodations that benefited us. She might remember us talking about that on the last call. We are not going to get that again this year. That was sort of a one-time benefit we got from some of our vendors helping us with the 10% tariffs. And then on top of that, we are going to have a modest headwind in the third quarter because of tariffs. We are now taking a small piece of those 25% tariffs. So that's why you are not seeing that same 100 basis point increase when you look at Q3 relative to Q2. And then in the fourth quarter, we are expecting gross margins to be down some portion of 120 basis. That $5 million for the Baltimore DC, it's about 90 basis points. At that time, the tariffs are almost fully baked in. So that's about 100 basis points, offset by what has been running product margins. And that kind of gets you back down to that 120 basis points. So a lot of moving parts with DCs and tariffs and things like that coming in, but I think that reconciles it for each of the remaining 2 quarters.

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Zachary Robert Fadem, Wells Fargo Securities, LLC, Research Division - Senior Analyst [37]

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Got it. And then for Tom and Lisa maybe. Could you just talk about, on a bigger picture, the impact of some new initiatives like design services in adjacent categories? What the expectations are for the comp in the back half of the year? How you think that can trend what you have seen so far? And then also on the commercial sales team that you announced, curious if you could just talk a little bit more about that.

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [38]

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I think -- so I'll try to -- if I remember, you've mentioned a lot of them in there. So the first one on the design services, we feel incredibly good about what's going on with the design services. I think it is -- it shows up in our customer service. One is we are doing a lot more design appointments. We're -- the amount we're doing out of this amount of stores is pretty incredible. When those associates are doing design appointments with customers, they're doing 2 things. One, they're satisfying them incredibly well. Our customer service scores are higher than they have ever been. And so that's a big part of it too. They're selling the whole project. We are seeing great results in our installation accessories, and their -- the designers are good at attaching that. They'll let a customer know how important grout is to a tile job. So they do a good job of selling the whole project. And then 3 is they're selling better and best stuff. We look at -- when you peel apart our average unit retail, our better and best stuff are out-comping our good stuff. So the designers sell better stuff. So I couldn't be more pleased. I do think we're still in early innings of what that can be. So we're going to continue to work there. Adjacent categories, forever we've talked about that there be a point in time where we would get into some adjacent categories. The impact on comp is insignificant. We're only piloting, as we've mentioned in the script, we got, we're piloting vanities, we're piloting vanity tops, we're piloting bath hardware. We like the results so far. We are happy about that. And they'll roll out over time. And those are things that we'll continue. We've got big stores, and we have the ability to flex our space as we see fit. So we're still a hard-surface flooring retailer, but we're going to -- customers ask for something to go with that project, and we think we can do it well, we will. But so far so good; we're pleased with the result.

And then commercial. We have done well in the commercial space out of our stores. We have started this outside regional sales position which really tackle a lot bigger customers. We are in the very early stages of it. We have got a handful of those guys. We like what we are seeing so far. And because of the results we're seeing through them, we'll add more in the future. That just gives us the potential to get some customers that haven't historically shopped in retail stores or bigger than what we've got so with a target where we can visit them, go out in their job-site a bit more, we think that could be a beneficial program.

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Operator [39]

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Next person comes from Peter Keith with Piper Jaffray.

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Peter Jacob Keith, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [40]

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Good quarter, guys, in what seemed like a tough environment. I was wondering if you could talk about the potential price increases. There does seem to be a consumer land on whether these items are -- price increases are accepted by consumers, and particularly for maybe considered purchase where bigger ticket consumers looking at the price for maybe a couple of weeks. Have you done any testing on pricing at this point to see if there is any elasticity or maybe a pause dynamic where consumers hesitate once they see that price go up on an item that they're focused on?

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [41]

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Yes. I'll start, Peter, and then Lisa can convey a little bit in that. We've talked about it on few of these calls that when you look at the flooring purchase in total, the SKU that you're having to take price up on is only part of that total project cost. So as you look, the installation accessories are not affected by tariffs. Those prices haven't changed. And then the labor component's not affected by tariffs, and that's usually 50% of the total purchases. So it's a small portion of the total flooring jobs that's affected when you have to raise price. We have raised price before like every retailer we watch and when we've had opportunities, and we can maintain our pricing advantages, we have adjusted price in the consumers. It hasn't affected unit volume. So we now -- as the year goes on, and it depends on the consumer sentiment, and how they feel about the general economy. But so far, where we've done it, we felt pretty good about it.

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Peter Jacob Keith, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [42]

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Okay. That's helpful, Tom. And maybe to the other issue on antidumping that you had addressed earlier in the prepared remarks. So looks like the potential antidumping duties are the bigger deal that with a preliminary determination that could come in November. You guys, I'm sure, have researched this in great detail. In some cases, there's retroactive duties that look back sometimes 2 to 3 months. I think I heard you say that you wouldn't expect any duties to be applied until early 2020. So can you confirm that? And can you confirm that there's no look back that we need to be concerned about as we think about the back half of 2019?

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [43]

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Peter, this is Trevor. I think your thinking is right. Just to be clear. So the countervailing duties around we think we'll find out the answer on that. That's the lower of the 2. We think we'll find out that in early September. That rate doesn't affect them. And then what can happen and later is they can say, "Okay, we are going to change that rate." So let's -- I'm just picking a number. Let's say they put in 3% for that. They will finalize that early the next year and then that could be retroactive. And then on antidumping, which you're right. That one usually is a vendor-specific rate. It's usually -- is proposed to be a lot more than that. We'll find that out in early November, and then they'll finalize that early into the next year. And the final piece of your question is you are correct. It is possible that when they put those 2 rates in, the one in early September, the one in early November, countervailing and antidumping, they can retro it back 90 days. We don't know but our experts tell us that, that's generally unlikely, doesn't generally happen. But you're right, we don't know until it happens.

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Lisa G. Laube, Floor & Decor Holdings, Inc. - Executive VP & Chief Merchandising Officer [44]

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And we, for that reason exactly, have really accelerated our shift out of China on those products. The products that would be potentially affected is only 13% of our sales. And thankfully, because of tariffs, we were already moving on the vast majority of that. So this is changing a little faster. So we feel good that we are going to be able to get those items out of China in time.

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Peter Jacob Keith, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [45]

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Okay, that's great. Maybe just to clarify, so If there is that ruling in early November, assuming you have something factored into guidance. If we do find at that time there's some retroactive dynamic, that might be new to the overall guidance outlook. Is that correct?

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [46]

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That is correct. If there is something that goes back 90 days that nobody knows, we can't forecast that. That's right.

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Operator [47]

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Next question comes from Seth Sigman with Crédit Suisse.

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Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [48]

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Tom, early in the call, you mentioned that comps improved sequentially each month in the quarter. Can you just elaborate on that? It seems like some of the kickers that you have for the back half of the year, like pricing and the new stores entering the comp base, it would not have really helped the second quarter. So I'm just curious, what do you think is driving that improvement in the trend?

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [49]

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I think in the first -- this -- the comparisons in Houston have gotten easier. They're still tough to lap but they moderate each month. So that gives us the ability to have sequential improvement in the comps. I think you know our continued focus on what we're doing with installation accessories, and what we're doing in the design center, and what we're doing in Pro is kind of a combination of a lot of things that have helped accelerate those sales. So.

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [50]

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The only thing I would add to that is our comparisons got a little easier relative to the same time last year as well.

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [51]

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That's exactly right.

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Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [52]

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Got it. Okay. And just a couple of follow-ups on pricing, I may have missed it. But did you guys quantify if there was any impact this quarter from pricing? And then your expectations for Q3 versus Q4? It sounds like more price increases in Q4, but I mean how do we think about the impact in the third quarter?

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [53]

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So, yes. This is Trevor, again. We really didn't have any material or significant price increases to speak of, certainly not related to tariffs for the most part because those didn't go into -- 10% going to 25% tariffs didn't happen until mid-June. It's below 1% for the third quarter, and then as we said, probably 200 to 250 basis points of that is reflected in the fourth quarter.

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Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [54]

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Got it. Okay. Just one quick follow-up on inventory and the position there. Your inventory has been down on a per-store basis the last couple of quarters. I'm just curious in light of all the sourcing changes, how do you feel about your inventory position today? And I guess the ability to support your second half, pretty aggressive store growth in comp acceleration?

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [55]

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Yes. Thanks for asking. So you are right, we have done a good job of managing inventory. It's up some portion of 3%, but our stores are up 20% over plus comps on top of that. But we feel good about where we are in stocks. We always got opportunities to have slightly better in-stocks and we're getting better at that every year, but we feel good about our overall composition and the amount of inventory we have on hand. As we do get to the end of the year, as I laid out in my prepared comments, we're currently expecting our inventory to be as much up as 30% to 35% for all of those reasons. We're putting a lot of more inventory in our new Baltimore DC. We're going to open more stores earlier in 2020. We've never really done that. So we're excited about having a better cadence of store openings but we have to receive that inventory early to get it there. We will still be receiving inventory from China, and pay that extra 15% tariff. And we were always going to shoot for some better in-stocks so you will not see that level of inventory growth. It will be -- probably could be as much as 30% or even a little bit above 30% by the time we get to the end of the year.

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [56]

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I would say -- I'd a couple of more things on inventory. I do agree with Trevor. I think our in-stock position is terrific. And when we've had issues within in-stock. When you have such broad assortment of in-stock product across every category, typically you can give something in the customer's hand before they leave the building. So always feel really good about that. But the other thing that Lisa and her team has done a much better job. We have very little -- our clearance inventory situation is the best it's been. We are at a really low level which helps our total inventory productivity.

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Operator [57]

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Next question comes from Steve Forbes with Guggenheim Securities.

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Steven Paul Forbes, Guggenheim Securities, LLC, Research Division - Analyst [58]

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I wanted to start off with cannibalization, right. You mentioned the strength of the new stores this year. But how has cannibalization played out this year given the mix, right, of new versus existing markets this year versus last? And then can you just talk about what the typical cannibalization impact is for a new store based off its proximity?

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [59]

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Steve, this is Trevor. Our cannibalization is currently, for the first 6 months of actuals, is slightly above last year. It's actually slightly below where it was 2 years ago. We do plan on it becoming higher as we move throughout the year. As you probably heard Tom say, 70% of our stores are opening in the back quarter of this year. And 60% of our new stores are in existing markets. And so we do plan our cannibalization being probably the highest it's been as we move to the fourth quarter. That's all known and contemplated in the guidance we gave. And in most cases, you guys that have followed us well, when we cannibalize the store, 13 months later that store starts comping again. And so we get the best of both worlds where we got the new store that's comping at a much higher rate, that store that was cannibalized for a year then starts comping positive with whatever the region's comping and we have seen that over my 8 years here as well. So we feel really good that these new stores are opening at such higher volumes and doing a lot more profit. You guys have heard us say it's starting really with the class of '16 that more than doubled our first year profit. A lot of that is because of the overall sales and gross margins are higher. And the final thing was -- oh, on cannibalization rate. We studied this in pretty depth and what you normally see is the closer the store is, as you might expect this is going to be pretty common sense. But the closer the store is, we could have cannibalization north of 20% for a while. Once you get beyond 30 to 45 minutes away from a store, it steps down and could be a 10%, maybe 15%, and then once you get beyond probably a 45-minute drive time, it's negligible.

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Steven Paul Forbes, Guggenheim Securities, LLC, Research Division - Analyst [60]

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And I just follow up. Right, you've talked -- you gave us a lot of color on gross margin. And I guess as you guys are thinking right, considering the fourth quarter gross margin outlook due to both towers in the Baltimore DC. I don't know if you can just provide a comment on how we should be thinking about the pricing strategy as we start working our models for the first half of 2020 or just 2020 in general? There should be no reason to think that, that sort of dynamic between comping in gross margin will be comping left/right versus gross margin get more changed right, as we look out?

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [61]

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Yes. Let me hear it from a really high level, and then I'll get into a little bit more granularity. Assuming the environment is not materially different than it is today, which hopefully will be a little bit better, we are committed to our long-term growth goals, both from a top-line perspective and the mid- to low 20s and an earnings growth rate on a CAGR business being above that. So we feel really good about that. We just finished our 3-year planning process here and feel strongly about where we're going. And this is as good as we have ever felt about a plan. Specifically, though, if you're talking about early next year, your thinking is correct. We will have more gross margin challenge in the first half of the year because, obviously, Baltimore only exist in the fourth quarter of this year whereas it's going to be here for 4 quarters next year. To a lesser extent it doesn't have anything to do with gross margin but with our store support center, we're picking on a new store support center in the fourth quarter this year, and we'll have it for all 4 quarters next year. But as we think about the year, as I mentioned, we're not ready to give guidance yet. But we feel good about our ability to grow our -- both our sales and earnings next year, even though we are going to take on additional costs for that Baltimore DC.

And one last thing I will mention about the Baltimore DC that you will hear us reiterate again is there is incremental cost associated with that Baltimore DC because we have employees and lease expense and things like that. But there is also going to be a fairly good reduction in domestic transportation costs because that Baltimore DC is going to be substantially closer to our stores in the mid-Atlantic, in the Northeast, in the Midwest. And so we won't completely offset the cost of that DC. But we will be able to offset a good portion of that DC through lower domestic transportation cost.

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Operator [62]

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Our final question comes from Seth Basham with Wedbush Securities.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [63]

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My first question is just one on clarification. Thinking about the monthly comp trends in the second quarter. Maybe ex Houston on 2-year stack basis. Can you clarify or confirm whether or not you did see acceleration in the trend through the quarter?

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Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [64]

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Let's see. On a 2-year, yes. Just looking here. 2-year stack basis, I don't know if we have that. I think it's probably closer to flattish on a 2-year stack basis.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [65]

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Got it. Okay. And then secondly, just thinking about the pricing environment. And I've got a couple of questions around this. But when you look at your big-box competitors, how do you see them changing their prices over the last 2 months? How do you see them increase the retails? Have you seen those stick? And have you acted accordingly?

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [66]

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We certainly pay attention to the big box retailers. There's always movement in price, both up and down. And we watch that and react where we need to react. Our competitive approach hasn't changed when it comes to pricing. We want to be the value retailer. The fortunate thing for us is that we don't play just to be good at the good price point, we play at the better and best price point. And there is a lot stuff that we have that they don't have where we can continue to be aggressive with. So we've watch them. They are tough to deal with but we have a unique value proposition that is just different than what they compete with. Or they can compete with.

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Operator [67]

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This concludes today's teleconference. I'd like to turn the call over to Tom for closing comments.

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Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [68]

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I appreciate all the questions today. And we appreciate your interest. We look forward talking next quarter. I just would close with a couple of comments that we do have a lot to feel good about. It's a tough environment for flooring this year, and if you look for the second quarter, we're able to achieve all the high ends of our guidance, what we thought we could achieve to be able to still grow at 20% total top-line growth have ticket and transactions up within the quarter and have new stores performing really well. Something that I know we have a lot of our associates who listen to call, too. We're certainly proud of what we've accomplished during the quarter. Looking forward to talking to you in the third quarter.

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Operator [69]

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This concludes today's conference. Thank you for your participation.