U.S. Markets open in 6 hrs 22 mins
  • S&P Futures

    3,597.50
    +21.50 (+0.60%)
     
  • Dow Futures

    29,765.00
    +219.00 (+0.74%)
     
  • Nasdaq Futures

    11,958.50
    +53.25 (+0.45%)
     
  • Russell 2000 Futures

    1,835.80
    +18.70 (+1.03%)
     
  • Crude Oil

    43.42
    +0.36 (+0.84%)
     
  • Gold

    1,825.10
    -12.70 (-0.69%)
     
  • Silver

    23.39
    -0.25 (-1.05%)
     
  • EUR/USD

    1.1868
    +0.0022 (+0.1899%)
     
  • 10-Yr Bond

    0.8570
    0.0000 (0.00%)
     
  • Vix

    22.66
    -1.04 (-4.39%)
     
  • GBP/USD

    1.3356
    +0.0033 (+0.2511%)
     
  • USD/JPY

    104.3680
    -0.1200 (-0.1148%)
     
  • BTC-USD

    18,407.70
    +75.20 (+0.41%)
     
  • CMC Crypto 200

    368.34
    +6.92 (+1.91%)
     
  • FTSE 100

    6,333.84
    0.00 (0.00%)
     
  • Nikkei 225

    26,165.59
    +638.22 (+2.50%)
     

Edited Transcript of FND.N earnings conference call or presentation 29-Oct-20 9:00pm GMT

·55 min read

Q3 2020 Floor & Decor Holdings Inc Earnings Call SMYRNA Oct 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Floor & Decor Holdings Inc earnings conference call or presentation Thursday, October 29, 2020 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Lisa G. Laube Floor & Decor Holdings, Inc. - President * 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 ================================================================================ Conference Call Participants ================================================================================ * Alexander Rocco Maroccia Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst * Charles P. Grom Gordon Haskett Research Advisors - MD & Senior Analyst of Retail * Christopher Michael Horvers JPMorgan Chase & Co, Research Division - Senior Analyst * David Leonard Bellinger Wolfe Research, LLC - Research Analyst * Elizabeth Lane Suzuki BofA Merrill Lynch, Research Division - VP * Jonathan Richard Matuszewski Jefferies LLC, Research Division - Equity Analyst * Justin E. Kleber Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst * Michael Lasser UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines * 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 ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to Floor & Decor Holdings, Inc. Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn this conference over to Mr. Wayne Hood, Vice President of Investor Relations. Thank you. You may begin. -------------------------------------------------------------------------------- Wayne Hood, Floor & Decor Holdings, Inc. - VP of IR [2] -------------------------------------------------------------------------------- Thank you, operator, and good afternoon, everyone. Joining me on our earnings call today are Tom Taylor, Chief Executive Officer; Lisa Laube, President; and Trevor Lang, Executive Vice President and Chief Financial Officer. Before we get started, I would like to remind everyone of the company's safe harbor language. 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 other 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 conference 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 our -- 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. Let me now turn the call over to Tom. -------------------------------------------------------------------------------- Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Wayne, and thanks to everyone for joining us on our fiscal third quarter 2020 Earnings Conference Call. On today's call, I will discuss the highlights of our strong third quarter as well as the progress we are making on some of our strategic growth initiatives that we believe will enable us to continue to grow our market share in 2020 and beyond. Trevor will then review our third quarter financial performance and discuss how we are thinking about the remainder of 2020, and then we will open the call for your questions. We are very pleased with our fiscal 2020 third quarter earnings results, which reflected broad-based accelerating sales momentum, strong earnings flow through as well as strong cash generation. Our fiscal 2020 third quarter total sales increased 31.4% to $684.8 million from $521.1 million in fiscal 2019. Our third quarter fiscal 2020 comparable store sales increased 18.4%, exceeding our expectations. We are very pleased with our third quarter comparable store sales growth exit rate and the start to our fourth quarter. Our year-to-date comparable store sales through the third quarter of fiscal 2020 are flat with last year, which is a remarkable accomplishment considering COVID-19's impact to our store operations, which began in late March. Our third quarter adjusted EBITDA meaningfully improved to a quarterly record $106.7 million, an increase of 86.8% from $57.1 million in the third quarter of fiscal 2019 and almost 1.5x higher than our annual adjusted EBITDA in fiscal 2015. Our fiscal 2020 adjusted third quarter earnings per share increased 107.4% to $0.56 from $0.27 in the third quarter of fiscal 2019. We ended the third quarter of fiscal 2020 with no net debt on our balance sheet and remain in the strongest liquidity position in our company's history. Let me now provide an update on each of our 5 strategic pillars of growth beginning with new store growth. We successfully opened 3 new warehouse stores in the third quarter of fiscal 2020, including new warehouse store openings in Salt Lake City, Utah and Toms River, New Jersey in fiscal August and San Diego, California in September and a small design studio in Dallas, Texas in August. The fiscal third quarter 2020 store openings brought the total number of warehouse stores that we operate to 128 stores up 13.3% from 113 warehouse stores at the end of the third quarter of fiscal 2019. As we look forward to the fourth quarter of fiscal 2020, we plan to open 5 new warehouse stores with most of the openings in November. This will bring the total number of warehouse stores that we operate at the end of fiscal 2020 to 133, an increase of 10.8% from fiscal 2019. We are very pleased with the performance of our new stores, including those new stores opened in the third quarter as we successfully opened them in atypical ways due to COVID-19 pandemic. We are also pleased with the sales waterfall among our store vintages, particularly our most mature stores. We look forward to resuming 20% new warehouse format store growth in fiscal 2021 after having to temporarily slow our new store growth in fiscal 2020 due to the COVID-19 pandemic. We have long wanted to open our new stores in a more balanced cadence throughout the fiscal year, and we believe we'll accomplish this in fiscal 2021. We also believe the class of 2021 will be a strong class of new stores. Moving on to our second pillar of growth, growing our comparable store sales. We are very pleased with the broad-based sequential acceleration in our sales that emerged throughout our third quarter. On a monthly basis, our comparable store sales increased 15.7% in July, to 18% in August and to 20.8% in September, which led to an 18.4% comp growth in the third quarter of fiscal 2020. Adjusting for the impact of Hurricane Dorian in the third quarter of fiscal 2019, we estimate our fiscal 2020 third quarter comparable store sales would have increased approximately 17.8%. On a 2-year stack basis, our comparable store sales increased 23%. Fiscal 2020 third quarter comparable store transactions increased 18.9% and comparable store average ticket declined 0.5% from the third quarter of fiscal 2019. We believe the decline in our comparable store ticket reflects a higher growth from our homeowner versus Pro and designer influence business as well as being aggressive in the clearance of discontinued inventory in our highest ticket category, which is our natural wood category. We are making room for what we believe will be an improved natural wood assortment. Among our 6 key merchandising categories, our top-performing categories were decorative accessories, laminate luxury vinyl plank and natural stone. That said, there was strong growth across all of our merchandising categories in the third quarter of fiscal 2020, which is the direct result of our ability to lead the market with differentiated and innovative trend-right products at everyday low prices. And having in stock job lock quantities that homeowners are looking for today. Our third strategic pillar of growth is expanding our connected customer experience. Our fiscal 2020 third quarter e-commerce sales remained strong, increasing 111.5% from the third quarter of fiscal 2019 and accounted for 16.6% of our sales versus 10.2% last year. We continue to see strong double-digit growth from paid and organic search as well as direct traffic to our website as homeowners contemplate flooring projects. In the third quarter, traffic to our website increased 50% year-over-year. The combination of changing consumer behavior due to COVID-19 as well as investments we have made to further optimize our website experience and build out our content, leads us to believe our e-commerce performance metrics will continue to be strong. That said, our stores remain a critical part of our connected customer experience. In the third quarter of fiscal 2020, 87% of website orders were picked up in our stores. Our fourth pillar of growth rests on the successful investments we are making in our Pro and commercial customers. In September, we further created excitement in our stores by successfully launching our first digitally executed Pro appreciation month, where there was no purchase necessary to enter or to win prizes relevant to the professional customer. We are pleased that over 36,000 Pros signed up for the sweepstakes event and the feedback about the event and our virtual webinar training forms was overwhelmingly positive. We believe recognition events like this one are very important to building long-term relationships and engagement with our Pros. We also drive engagement through our PRO Premier Rewards, PPR program, where almost 75% of our Pro sales are from PPR members. PPR Pros spend nearly 3x more and shop 2.5x more frequently than non-PPR members. We were pleased that enrollment in our PPR program in the third quarter of fiscal 2020 increased 30% year-over-year despite the impact of COVID-19. The value of our PPR program is not only measured by growth in PPR members, but also by points earned and redeemed. In the third quarter of fiscal 2020, points redeemed increased 70% from last year, validating the value of our PPR program and engagement with our Pros. To continue to drive engagement and points earned in the fourth quarter of fiscal 2020, we are incentivizing our most loyal Pros from the third quarter of fiscal 2020 with an opportunity to earn fourth quarter incremental bonus points for growing their sales with us relative to their third quarter spend. Our research is clear that the more engaged we get our Pros with Floor & Decor, the more wallet share we can obtain and PPR is just one avenue to do this. As we move into 2021, we will further enhance our PPR program and build on our segmentation and personalization efforts to drive engagement and lifetime loyalty. We are nearing the completion of updating our homeowner and Pro demographic and segmentation information and look forward to sharing the results early next year. Our CRM investment has resulted in a very successful tool as we are learning a lot about not only our Pros, but homeowners, which better informs us of who customers are and the strategies we need to implement to obtain more wallet and market share. Let me now discuss the progress we're making on our free design services, the fifth pillar of our growth. We are pleased that the number of design appointments increased 44.5% in the third quarter of fiscal 2020 from the third quarter of fiscal 2019, and that is well above the fiscal 2020 first quarter pre-COVID-19 growth rate of 34.3%. This was particularly gratifying considering we were not able to quickly return to pre-COVID-19 designer staffing levels as many were furloughed in the second quarter of fiscal 2020. It's important to note that our design services are not only important to homeowners, but to Pros. We believe we have significant runway ahead of us with design services and are focused on building awareness of our services to homeowners and Pros, internally driving the value of using our system to increase our already high conversion rate and growing our pipeline of designers to support our growth objectives. Let me now turn my comments to how we are thinking about the macroeconomic environment. We are operating in unprecedented times with homeowners nesting at home more due to COVID-19 and having additional discretionary income due to not spending as much on leisure activities like travel, hotels, eating out and sporting events. This has caused a substantial increase in the savings rate. And fortunately, people are investing those dollars in the home. We are also seeing some of the strongest growth in both new and existing home sales. In September, existing home sales grew for the fourth consecutive month to a seasonally adjusted annual rate of $6.5 million, up 9.4% from the prior month and nearly 21% from last year. The housing market is clearly benefiting from what looks to be a sustained period of low mortgage interest rates that are hovering at or below 3%. We expect to continue to benefit from this lower longer interest rate environment and the secular demand for housing. Carpet continues to seed market share to hard surface flooring. 79% of the 123 million occupied housing units in the United States were built before 1999, which is a lot of homes that need to be invested in and maintained, and flooring is a great way to improve the look of a home and increase the value. Millennials, the nation's largest adult population at 72.1 million, now outnumber baby boomers, and they are entering their prime household formation years. This demographic trend is contributing to the demand for housing exceeding supply and is partly responsible for the home price appreciation we continue to experience. The COVID-19 pandemic has also impacted consumer behavior. Homeowners are undertaking projects to repurpose and personalize their homes to work, learn, exercise and play. The combination of homeowners nesting, a high savings rate, low interest rates, rising housing demand, rising housing values, homes that are aging and the preference for hard surface flooring is a great backdrop for our industry and our company. Collectively, these factors, among others, leave us optimistic about the remainder of 2020 and the long-term opportunity ahead of us. We are also pleased to announce today that Ryan Marshall, CEO of PulteGroup; Kamy Scarlett, Chief Human Resources Officer at Best Buy; and Charles Young, Executive Vice President and Chief Operating Officer of Invitation Homes have been appointed to Floor & Decor's Board of Directors effective January 1, 2021. We are thrilled to welcome Ryan, Kamy and Charles to our Board. They are outstanding executives with broad operational, commercial and strategic expertise that we believe will assist us in our growth plans. They will also add diverse perspectives and skills to our Board discussions. We also announced that John Roth, Chief Executive Officer of Freeman Spogli; Rachel Lee, Partner at the Private Equity Group of Ares Management Corporation; and Brad Brutocao, Partner of Freeman Spogli have resigned from our Board effectively at the same time. We want to thank John, Rachel, Brad for their extraordinary contributions to Floor & Decor over the last 10 years. Let me close by saying that our strong fiscal 2020 third quarter earnings are the direct result of our associates responding tirelessly to the surging demand and cross-functional collaboration of our teams. Our entire executive leadership team would like to thank them for their hard work and dedication to serving our customers. I will now turn the call over to Trevor to discuss in more detail our third quarter financial results. -------------------------------------------------------------------------------- Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [4] -------------------------------------------------------------------------------- Thanks, Tom. The unique operating environment we find ourselves in, combined with a distinctive business model and great associates, has allowed us to swing from a 50% decline in comparable store sales just a few months ago due to COVID-19 to strong 18.4% growth in third quarter fiscal 2020. Tom already discussed how pleased we are with our solid third quarter fiscal 2020 sales momentum and our great start to the fourth quarter. I'm going to concentrate my comments on some of the changes among the major line items in our third quarter 2020 income statement, balance sheet and statement of cash flows and then discuss how we're thinking about the remainder of 2020. Let me begin with our gross margin. We are very pleased that our fiscal 2020 third quarter gross profit increased to 37.8% to $294.6 million, driven by a 31.4% increase in total sales and a 200 basis point increase in our gross margin rate to 43% from 41% in the same period last year. The 200 basis point increase in gross margin rate from the same period last year was primarily due to higher product margins driven by continued enhancements to our merchandising strategies and improved leverage of our distribution center and supply chain infrastructure on higher sales, partially offset by higher clearance markdowns on our natural wood department. Turning to our fiscal third quarter 2020 expenses. Our third quarter selling and store operating expenses increased 25.2% to $171.5 million from $137 million in the same period last year and leveraged 130 basis points. Our comparable store selling and store operating expenses leveraged 220 basis points from the same period last year. The improvement in our expense leverage is primarily the result of better-than-expected 31.4% growth in total sales that enabled us to experience outsized leverage in our store fixed and variable payroll expenses as well as store operating and occupancy costs. More specifically, the outsized near-term expense leverage that is the direct result of our sales exceeding our planned store labor hours as customer demand accelerated. As we move through the third quarter, we took actions to further accelerate the hiring of more associates to meet the surging demand. As a result, our payroll hours were better aligned with our sales trends as we exited the third quarter, but they were still below where we think they should be to serve our customers well. As we continue to add labor hours to meet the demand and open more new warehouse stores, our fourth quarter 2020 expense leverage will not look similar to the third quarter of fiscal 2020. Our fiscal 2020 third quarter general and administrative expenses increased 5.5% to $39.3 million from $37.2 million during the same period last year due to higher depreciation associated with IT investments as well as our new store support center that we moved into the fourth quarter of 2019 and higher incentive compensation accruals. As a percentage of sales, our G&A expense rate leveraged 140 basis points to 5.7% and 7.1% during the same period last year. Excluding the impact of COVID-19 and secondary offering expenses in 2020 and costs associated with our distribution center closure and store support center relocation in 2019, our G&A expense rate leveraged approximately 20 basis points from last year due to our strong sales and lower year-over-year expenses for travel, mills and meetings. More detail about these adjustments are provided in our third quarter 10-Q and the reconciliation of GAAP net income to adjusted net income in our third quarter earnings release. Our fiscal third quarter 2020 preopening expenses declined 38.6% to $5 million from $8.2 million last year and leveraged 90 basis points year-over-year. The decline in expenses is primarily the result of the decline in the number of stores that we either opened or are preparing to open when combined -- when compared with the third quarter of fiscal 2019. We opened 3 new warehouse stores and one small design center in the third quarter of 2020 compared with 7 new warehouse stores in the third quarter of fiscal 2019. Our fiscal 2020 third quarter effective income tax rate was 10.4% compared with a negative 39.3% benefit during the same period last year. Our effective income tax rate is lower than the statutory federal income tax rate of 21% due to recognition of income tax benefits from tax reductions, an excess book expense related to stock option exercises and other discrete items. Moving to our fiscal 2020 third quarter EBITDA profitability. The 31.4% increase in total third quarter sales, coupled with a 200 basis point increase in our gross margin rate and broad expense leverage, drove a record fiscal '20 third quarter EBITDA profitability. Third quarter fiscal 2020 adjusted EBITDA increased 86.8% to a record $106.7 million from $57.1 million during the same period last year. Our adjusted EBITDA margin rate increased 460 basis points to 15.6% from 11% last year. Our fiscal 2020 third quarter GAAP net income increased 67.8% to $68.8 million from $41 million during the same period last year. Our fiscal 2020 third quarter GAAP diluted earnings per share increased 66.7% to $0.65 from $0.39 per share last year. Our adjusted third quarter net income increased 111.8% to $59.4 million from $28.1 million last year. Our adjusted diluted earnings per share increased 107.4% to $0.56 from $0.27 last year. We ended of the third quarter of fiscal 2020 with 106,4 million diluted weighted average shares outstanding compared with 105.2 million during the same period last year. Moving to our fiscal 2020 third quarter balance sheet and cash flow statements. We're very pleased that during these unprecedented times, we have been able to maintain a strong balance sheet and have the strongest liquidity position in our company's history to support our growth plans. As of September 24, 2020, our unrestricted liquidity was $628.5 million, consisting of $271 million in cash and cash equivalents and $357.4 million immediately available for borrowing under our ABL facility without violating new covenants. For the 39 weeks ended September 24, 2020, we generated $269.7 million in operating cash flow, a 28.7% increase from the $209.6 million in the same period last year. The increase reflects growth in our fiscal 2020 earnings, improvement in our working capital and cash paid for income taxes. The improvement in our working capital is largely due to the improvement in our inventory productivity from accelerations in our sales trends. Year-to-date, our fiscal 2020 net inventory grew by 2.9% to $598.5 million from $581.9 million at the end of fiscal 2019, which is below our 12.1% growth in total sales over the same period. In the third quarter of fiscal 2020, our net inventory increased 23.7% to $598.5 million from $484 million during the same period last year, which is below our 31.4% growth in third quarter sales. Our fiscal 2020 capital expenditures for the 39 weeks ended September 24, 2020, declined 22.2% to $109.7 million from $141 million during the same period last year. The decline is primarily related to the decrease in new stores opened or were under construction as a result of COVID-19 when compared with the same period last year. Our strong fiscal 2020 operating cash flow, coupled with lower year-over-year capital expenditures enabled us to generate $160 million in free cash flow for the 39 weeks ended September 24, 2020, or more than double fiscal 2019's free cash flow of $68.6 million during that same period. Let me now turn to our revised expectations for fiscal 2020 capital expenditures. We now expect fiscal 2020 annual capital expenditures to be approximately $200 million to $208 million which is slightly more than the 6% increase from our prior expectations of $188 million to $196 million. Our fiscal 2020 capital spending plans reflect the following growth investments and will be funded from cash flow from operations and borrowings under our ABL facility. We plan to open 13 warehouse stores and 1 small design center in fiscal 2020, and start construction of several stores in the fourth quarter of fiscal 2020 that are expected to open in early 2021. The capital spending associated with these plans is expected to be $132 million to $136 million. We are investing in existing store remodeling projects and our distribution centers, and expected capital spending associated with these projects is expected to be approximately $27 million to $28 million. We are planning to enlarge and relocate our Houston distribution center in the second half of 2021 and are expecting capital expenditures in 2020 associated with this project to be approximately $19 million to $20 million. We continue to make investments in our new store support center, information technology infrastructure, e-commerce and other store support center initiatives to support our growth and look for capital spending of approximately $22 million to $24 million to support our growth in these functional areas. Let me now discuss how we're thinking about the remainder of fiscal 2020. From a macroeconomic perspective, we are cautiously optimistic that the Federal Reserve's action to inject liquidity into the market and lower interest rates will continue to support the economy and provide a positive housing backdrop as well as consumers nesting and spending less on leisure activities will serve to support growth for the remainder of 2020 and into early 2021. That said, there is still significant uncertainty related to COVID-19, including a rise in infections in many markets, which raises concerns of another wave heading into the fall in the winter. While we are optimistic about the economic recovery and the momentum of our business, we recognize that these business risks remain elevated, and we could have to close stores in certain markets if necessary. For that reason, we are continuing the practice of not providing specific sales and earnings guidance for fiscal 2020, but we would like to provide some direction as we approach the end of fiscal 2020. Our better-than-expected third quarter sales growth created outsized selling and store expense leverage as we benefited from the aggressive actions we took to reduce our cost structure in the second quarter of fiscal 2020 due to the COVID-19 pandemic. As we exited the third quarter and entered the fourth quarter, our expense growth is becoming more balanced with our sales growth and is likely to leave less expense leverage in the fourth quarter of fiscal 2020 than we experienced in the third quarter of fiscal 2020. Consequently, we are planning on strong profit growth in the fourth quarter of fiscal 2020 relative to last year, but we do not anticipate the same rate of outsized profitability that we experienced in the third quarter of fiscal 2020. As a reminder, fiscal 2020 includes a 53rd week, which for us means the fourth quarter will include 14 weeks versus the normal 13 weeks we have in each quarter. We estimate this additional week will continue to contribute between $0.03 to $0.04 in diluted earnings per share. The remaining comments about the fourth quarter of 2020 on a comparable 13 to 13-week basis. Our reported fourth quarter 2019 gross margin benefited from a onetime Section 301 tariff refund, primarily related to rigid core vinyl of $14 million. Adjusting last year's fourth quarter for this benefit, our gross margin rate would have been approximately 41%. Our current expectation is for our fourth quarter fiscal 2020 gross margin rate to increase meaningfully from last year, but less than the 200 basis point increase in the gross margin rate we experienced in the third quarter of fiscal 2020. In dollars, we are planning on mid single-digit sequential growth in our selling and store operating expenses from the third quarter of fiscal 2020 to the fourth quarter of fiscal 2020 due to a more normalized cost structure and more new stores. We are planning on meaningful increase in our fiscal 2020 fourth quarter preopening expenses when compared to the third quarter as we plan to open 5 new stores in the fourth quarter versus 3 in the third quarter. Additionally, in 2021, we are planning to open the highest number of new stores in any first quarter in our history. As a result, we will incur some of the preopening expenses for these new 2021 stores in the fourth quarter of 2020. We expect our general and administrative and interest expense to be about flat with the third quarter of fiscal 2020. We would expect our fourth quarter tax rate to be approximately 23.7% higher than previously contemplated due to higher net income. This, of course, does not contemplate any stock option exercises that may benefit our provision for taxes. We expect our annual depreciation and amortization to be approximately $90 million. The executive team is incredibly proud of how we performed in 2020. We are a better company than before the pandemic occurred and I would like to thank all of our associates for their great work. With that, we'd like to turn the call over to operator for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Seth Sigman with Crédit Suisse. -------------------------------------------------------------------------------- Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [2] -------------------------------------------------------------------------------- Congrats on the quarter, great results. I wanted to talk about the improvement that you spoke to each month of the quarter. Can you just elaborate on the trends that you were seeing throughout the quarter? And how consistent was that improvement across geographies? And then I guess just related, you mentioned the mix shift to the homeowner, I think, in some of your prepared remarks. What's going on there, if you could elaborate on DIY versus PRO, that would be helpful, too? -------------------------------------------------------------------------------- Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [3] -------------------------------------------------------------------------------- Sure. Thank you, Seth. This is Tom. As we said in the prepared remarks, each month, we got better. And we exited at an incredible and people repurposing the space in their homes and people not spending on travel due to COVID-19, entertainment and sports and things of that nature, that money is being put back into the home. And we're seeing the homeowners as evidenced in our weekend business. It's been terrific and consistent across regions. It's just been a lot better than it has historically been. The other thing I'd say just on the homeowner side is we mentioned that our web traffic was up 48% during the quarter. There's a lot of people researching. Our purchase cycle is long in our category, and there is a lot of people researching to do projects in the future. So we're really pleased with the tone of business. -------------------------------------------------------------------------------- Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [4] -------------------------------------------------------------------------------- Okay. It sounds like the leading indicators of the business remains very strong as well. I wanted to follow-up also on the gross margin. For the fourth quarter, Trevor, I think you just talked about it being up year-over-year. I want to clarify that against that 41% the adjusted and then I think you're saying less -- it would be up less than the third quarter. Just any differences to call out there that would be helpful. -------------------------------------------------------------------------------- Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [5] -------------------------------------------------------------------------------- Yes. I think you got that right. The last year's was abnormally high because of that $14 million benefit we got from the Section 301 tariff refund. And so the adjusted gross margin last year, backing that out, is 41%. And so yes, that comment was relative to the 41% we're assuming a nice gross margin. Last quarter, we had a 200 basis point increase in gross margin. So we don't think it's going to be that high, but we -- as I said in the prepared comments, we think it's going to be up nicely. It's coming from continued product margin, but we're also starting to get fairly significant leverage out of that Baltimore distribution center. And you guys will recall, in November of last year, we opened that big Baltimore DC and we are getting 2 benefits. One, we're lapping on much higher sales; and two, the domestic transportation cost to about just under 1/3 of our stores is lower because we're now shipping to the Mid-Atlantic and Northeast and the Midwest, the Baltimore versus Savannah. And so that, we're also getting the benefit there. So it's pretty balanced between supply chain and product margins is what we're expecting. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question comes from the line of Michael Lasser with UBS. -------------------------------------------------------------------------------- Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [7] -------------------------------------------------------------------------------- Tom, you mentioned that the home (inaudible) been in focus, compare the flooring category to some other categories, it has been growing a bit slower than seemingly what other categories within home improvement and they're growing. Can you offer your perspective on why that might be the case? Do you think it's related to consumers having apprehension about letting installers into their home or the potential need to dislocate during a flooring project? And does that bode well into next year, meaning this will have legs to a recovery, whereas other categories might say this in the broader home business? -------------------------------------------------------------------------------- Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [8] -------------------------------------------------------------------------------- Michael, the beginning part of your question came out a little blurry, not blurry but I couldn't hear it as well. Can you just -- I think I got the gist of it, which is the perception of is flooring -- all of home improvement is performing nicely, is flooring performing consistent, is that the nature of the question? -------------------------------------------------------------------------------- Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [9] -------------------------------------------------------------------------------- Yes. I mean, Home Depot and Lowe's are comping up mid- to high 20s. The at-home comps of 40% today. So clearly, home's been focused, but flooring seems to be doing maybe a little bit below average within the broader housing ecosystem. Is that because this requires Pro to be in consumer's home, a consumer to be just... -------------------------------------------------------------------------------- Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [10] -------------------------------------------------------------------------------- Sure. Yes. I don't think that has anything to do with it. We have not heard -- we talked about the surveys in the last quarterly call. Consumers are letting professionals into their homes. Our Pros, whether it's the Pros that are in our affiliate program or whether it's the pros that are shopping in our stores on a normalized basis, they are booked. They are backed up. Their backlog is strong. They are out far before they can get into homes. Consumers are showing no evidence of that worry. I think that we try to do a good job of educating our pros early on, on how to protect themselves and how to ensure the consumer feels good about letting them into their homes and they are. So that is the least of our concern. -------------------------------------------------------------------------------- Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [11] -------------------------------------------------------------------------------- Okay. And it seems like on the gross margin, I recognize that it's just product margins that are -- you're seeing higher product margins. Is that -- so presumably pricing as is going up in excess of cost. So is this a sustainable trend? And should we be modeling expanding gross margins for the next several quarters given some of what's happening right now? -------------------------------------------------------------------------------- Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [12] -------------------------------------------------------------------------------- Yes. Michael, this is Trevor. It's a mix, right? The team has done a great job on the assortment. We called out our decorative accessories as comping above the company average. That's a higher product margin for us. And then with -- in each of the categories, with the exception of wood we called out, we're seeing people gravitate towards better best. And then also, as I mentioned, we have that Baltimore DC we opened last year that we're getting leverage from this year. So it's -- the biggest drivers of the product margin within the product margin is the better and best driving it. And then again, within the mix to that, is the decor of accessories, which is a higher-margin category for us. It's one of our better performing product margins. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Our next question comes from the line of Steve Forbes with Guggenheim Securities. -------------------------------------------------------------------------------- Steven Paul Forbes, Guggenheim Securities, LLC, Research Division - Analyst [14] -------------------------------------------------------------------------------- Tom, you spoke about Pro in great detail in your prepared remarks, but I was hoping you could maybe expand on the commercial initiative, right? As we think about the regional account managers and how that's been scaling, are you leaning into the channel just given the strength in the end market here? And any color on how we should be thinking about the maturation profile behind that initiative looking out over the next couple of years? -------------------------------------------------------------------------------- Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [15] -------------------------------------------------------------------------------- Yes. We feel good. We started adding a position called a regional account manager a little over a year ago. We now have 21 of them going around the country, and we're adding them aggressively currently and we will in the next year. These are managers that are -- they work with commercial customers that are unlikely to come into our store or that the orders could be too big for our stores to handle appropriately. When we started the process, we started with just a couple of them to see how it would go. Again, very pleased with what they've been able to bring to the table. We've done a good job of recruiting some excellent talent to help lead the effort, and it's a strategy we feel good and will continue to work towards. We're also excited, as I said in my prepared remarks, we're adding 2 Board members that have really good commercial experience and we're looking forward to their insight on how we can penetrate the commercial market in even a more meaningful way in the future. -------------------------------------------------------------------------------- Steven Paul Forbes, Guggenheim Securities, LLC, Research Division - Analyst [16] -------------------------------------------------------------------------------- And then just a quick follow-up, right. You think about just the underlying demand in the end market here. Curious about whether you're seeing anything from a competitive dynamic. I mean are people chasing or sort of trying to catch up to you as far as it relates to driving innovation? Or how would you speak to sort of the separation between F&D and the competitive landscape as it relates to sort of driving that product innovation cycle? -------------------------------------------------------------------------------- Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [17] -------------------------------------------------------------------------------- Sure. Lisa will go ahead and answer that and then I'll chime in. -------------------------------------------------------------------------------- Lisa G. Laube, Floor & Decor Holdings, Inc. - President [18] -------------------------------------------------------------------------------- Okay. Yes. So this is Lisa. It's interesting apart from the vinyl and laminate categories where we've seen a lot of innovation over the last 2 or 3 years with water resistant and the new -- the FCC and WCC product. There has not been a ton of innovation that we have seen out there from a competitive perspective. We think it is a real differentiator for us, and it is something that we focus on a lot. We just brought in our new core performance line in the last month or 2, which is our highest in vinyl, which offers really great features for the customers. So that's been something that's been very good for us, and we've got more things coming down the pipe. So I would say that from a competitive perspective, our goal is always to be out front and leading on the innovation side, especially where it pertains to durability and those things that the customers are really looking for. -------------------------------------------------------------------------------- Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [19] -------------------------------------------------------------------------------- Like I said, I'll chime in. The other thing that makes us unique when it comes to the competitive landscape and COVID did not slow us down is our approach to newness within each category that we participate in. Our merchants have continued to do product line reviews across the board and bring new products all throughout COVID. We were able to do that virtually, and we've got great new stuff hitting the store every day. And in this category, the latest and great -- product innovation from the standpoint of durability is really important, and we've done a lot of good work there, and we think we are ahead there. But in newness is where I think we really continue to widen our gap. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- (Operator Instructions) The next question comes from the line of Steve Forbes with Guggenheim Securities. Our next question comes from the line of Chris Horvers with JPMorgan. -------------------------------------------------------------------------------- Christopher Michael Horvers, JPMorgan Chase & Co, Research Division - Senior Analyst [21] -------------------------------------------------------------------------------- Great quarter. Can you -- seasonally, looking back, the gross margin rate tends to be better in the fourth quarter than the third quarter. I'm guessing that's mix driven. So can you share your thoughts there? And related to that, with tariffs, I think back on, what have you seen in the pricing environment? And are you expecting some incremental gross margin pressure there in the fourth quarter relative to 3Q? -------------------------------------------------------------------------------- Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [22] -------------------------------------------------------------------------------- Yes. Chris, this is Trevor. It has more to do with the clearance event in Q3 than it does with really mix between Q3 and Q4. We have our biggest clearance events of the year in the third quarter. So that's historically been a lower margin category as we drive our clearance event. As regards to the tariffs, mostly you guys may recall on August 7, the government reinstituted 25% tariffs on rigid core vinyl, water-resistant laminate and a few other categories. And so we're now, again, paying 25% tariffs. We didn't know how that was going to happen, so we sort of bought ahead. So we're not really feeling a lot of that impact today. And we're using the same playbook that we've used for the 2 years we've been dealing with this. We're working with our vendors to see what costs we can take out. We're working with our vendors to see where we can do sourcing, not a lot in this category currently. And then there's probably going to be some retail increases. And our goal is to monitor it and see what's going on in the marketplace. Lisa keeps us surprised, and we're not seeing a lot today. But we would expect, as people are starting to fill some of those cost increases that you likely would see some retail increases, because in those 2 categories, today, still, the vast majority of that product is manufactured out of China. -------------------------------------------------------------------------------- Christopher Michael Horvers, JPMorgan Chase & Co, Research Division - Senior Analyst [23] -------------------------------------------------------------------------------- Got it. And then as a follow-up, understanding you've been chasing labor to catch up with demand. But on other side, there's probably some sort of onetime-ish type expenses. You talked about incentive comp, maybe quantify that. And any other COVID-related expenses or special bonuses or PTO that you paid? -------------------------------------------------------------------------------- Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [24] -------------------------------------------------------------------------------- Yes. When we came into the year, we were obviously accruing. We got to Q1, and we weren't incurring much, just not knowing how bad COVID was. So that actually was a bit of a benefit. You may recall, we had a really strong operating margin component in Q1, part of it was because of that. And then as the year has progressed on, we're actually getting closer to accrual. So our incentive comp as a percentage of our total sales is pretty small. So it's in the single bps, small bps range that it's impacting us. And I wouldn't call it any big -- there's no big things. We have invested in some consulting and some other things, just trying to grow and invest in future strategies, but I have nothing very significant relative to our overall sales that we've incurred. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Our next question comes from the line of Seth Basham with Wedbush. -------------------------------------------------------------------------------- Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [26] -------------------------------------------------------------------------------- My question is around transportation costs. You guys talked about distribution and supply chain leverage in the quarter. As those higher transportation costs are seeing now that baked into your product costs and worked the way through the P&L, what kind of impact do you expect on gross margins? And related to that, if you could help us better understand the types of contracts you have and mitigation strategies you have as it relates to transportation costs? -------------------------------------------------------------------------------- Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [27] -------------------------------------------------------------------------------- Yes. This is Trevor again. We're very fortunate. Our supply chain team has done a really good job in locking in long-term contracts, both domestically and internationally. That helps us in two ways: One, it allows us to get capacity when there are certain places that's very difficult to get capacity out of just because there's so much demand, things coming out of Asia, for example, and then there's some capacity constraints here in the states. So that's one thing is, a, we can get capacity, it is an important part of it. And then two, because we do have longer-term contracts and the majority of our transportation is going through these contracts, we're not feeling those spot increases today. Now those contracts come up over the next 12 to 18 months. And if the rates stay high, we're going to have to deal with that more next year. But currently, because we've got these longer-term contracts, we're not feeling those cost increases. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Our next question comes from the line of Jonathan Matuszewski with Jefferies. -------------------------------------------------------------------------------- Jonathan Richard Matuszewski, Jefferies LLC, Research Division - Equity Analyst [29] -------------------------------------------------------------------------------- You mentioned in the release, you're pleased with the start to 4Q. Care to share how October is trending versus September's exit rate? -------------------------------------------------------------------------------- Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [30] -------------------------------------------------------------------------------- As said, we're very pleased with the start to the fourth quarter, it's very consistent to the way we exited September. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Our next question comes from the line of Simeon Gutman with Morgan Stanley. -------------------------------------------------------------------------------- Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [32] -------------------------------------------------------------------------------- I wanted to ask -- I'll make it one question but with two parts. First, I don't know, Trevor, I know you were answering Chris' question on gross margin. Is it -- are you ruling out the possibility that the Q4 gross can't be higher sequentially this year than Q3 because of those factors? Or is there still a possibility of an outcome? And then the second question is, even with the tougher start to this year, it looks like you're still going to do a roughly mid single-digit comp this year. And you've told us the biggest driver or one of the biggest drivers is housing turnover. And I don't know if you've lined up the existing home sales estimates for next year, but they look pretty robust. So I'm curious if next year could look normal in your algo? I realize it's early for this, but just high level or if it can look outsized? -------------------------------------------------------------------------------- Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [33] -------------------------------------------------------------------------------- Yes. On the first one, the gross margin, we are planning on it growing nicely versus the 41% we had last year. It would be very hard to imagine it would get to the third quarter level. That 43% is just a very large rate for us. So -- and then on -- as we're thinking about next year, we're in the planning stages now. We've done a lot of work around this. We're preliminarily thinking about it kind of on a 2-year basis because there's so much noise going on right now. I do think from a macro perspective, we have a lot of wind at our tails with all the things that are going with existing home sales and the fact that home values are going up and the aging demographics and all those things are going to be beneficial to us. And I think from a longer-term perspective, most of you guys probably have read by now in our proxy statement, we had a goal for 2022 to get to $329 million in operating income, which would be a doubling of our operating income over a 3-year period from 2019 to 2022. And we're still focused on that. It's a little harder because we didn't open 24 stores this year, right? We opened 13, but that's something that's in our sights and in our goals, and we're focused on achieving. So we know this year and next year will be a little bit choppy, but as we get to 2022, we still have our eyes set on those goals. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Our next question comes from the line of Chuck Grom with Gordon Haskett. -------------------------------------------------------------------------------- Charles P. Grom, Gordon Haskett Research Advisors - MD & Senior Analyst of Retail [35] -------------------------------------------------------------------------------- Taking a step back, despite all the volatility on gross margins, looks like they're going to finish the year at or above all-time high levels. So I think when you look ahead, how are you guys thinking about the trajectory here, particularly as you continue to compound growth at 20% a year? And then just as a quick follow-up, Trevor, can you just clarify your guidance for the fourth quarter selling expenses. I think you said up mid-single digits sequentially. I just wanted to clarify that. -------------------------------------------------------------------------------- Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [36] -------------------------------------------------------------------------------- Yes. I think as we think about the next 3 years, because we're going to get back to 20% unit growth next year, there's going to be some headwinds on store-level SG&A and preopening expenses, right? Just -- if we're going to open roughly 27 stores next year versus 13 stores, we incur anywhere from $1.2 million to $1.5 million for preopening. So that expense is going to grow at a much faster rates. Our new stores, as we've said for the 3 years that we've been public, their SG&A as a percentage of sales is roughly 50% higher, mid- to low 30s versus low 20s for our more mature stores. So we're going to have some deleveraging on the store level SG&A component because we're getting back to 20% unit growth. But we do think we have some continued margin opportunities as we continue to execute better best, as we continue to get leverage out of the supply chain and the distribution centers, shrink damage, all those kind of things, we think we can continue to grow gross margin. And then the corporate side. We have the ability that we can leverage some corporate. And again, back to that comment, if you look at our 2019 results to what is the goal for 2022, we don't plan on doubling ourselves during that period of time. So we are planning on getting operating margin and EBITDA margin leverage. And there was another part of that question, I think that was it, okay. -------------------------------------------------------------------------------- Charles P. Grom, Gordon Haskett Research Advisors - MD & Senior Analyst of Retail [37] -------------------------------------------------------------------------------- Just a clarification on the fourth quarter selling expense? -------------------------------------------------------------------------------- Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [38] -------------------------------------------------------------------------------- Yes, I did say sequentially. And the reason I used sequentially versus last year is just that was pre-COVID versus post-COVID. And so now within this post-COVID environment, I thought it was more relevant to talk about how we're operating. And you heard me correct, it's sequential from Q3 to Q4 of this year, we think it's a mid-single-digit increase. -------------------------------------------------------------------------------- Charles P. Grom, Gordon Haskett Research Advisors - MD & Senior Analyst of Retail [39] -------------------------------------------------------------------------------- But I have to say this, I guess, I'm the only one, but Tom, those are some pretty good Board announcements that you made today I have to say, I never said that before. The question I have is -- one question clearly, but it's just -- you actually brought up the home demographic and segmentation analysis that you're doing right now and that you're going to give the results, I guess, in next year, early next year. And I don't think you talked too much about that. And I already thought that your stores are pretty segmented, decentralized. So can you at least without stealing your thunder, give us kind of a sense of what that thought is about? -------------------------------------------------------------------------------- Lisa G. Laube, Floor & Decor Holdings, Inc. - President [40] -------------------------------------------------------------------------------- Yes. So we've been talking for a year or 2 about our new CRM system, sales force and we have been -- the Pro desk have used parts of it for the last couple of years. And what we've been able to do over the last year is put all of our data in there, connect all of the customer information that we have from all the various touch points that they have with the company. And we've cleansed all that data and are now starting to be able to use that to understand homeowner versus Pro. What are the demographics of each. And then now we're starting to just initially to personalize messaging and starting to go after where we see opportunities. So it's a little early to reveal just yet, but we definitely are learning some interesting things about our customers and things that we think will really help us to drive the business forward in the future. So we look forward to sharing that maybe first quarter. -------------------------------------------------------------------------------- Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [41] -------------------------------------------------------------------------------- And Matt -- this is Trevor. I'll just add one thing is having that data is just incredibly useful to us because we've just -- now we have so much more information. And then we're using some of that with data scientists to then correlate what stores are over or underperforming relative to what they should be doing. And that then gives us a road map for the regional team and even down to the store level for them to focus on design or pat them on the back because they're exceeding our expectations in those levels. And so just we're going to have a whole -- we are finishing up, having just a level of information and data that we've never had in our past, and information is power. We're going to be able to use that to make better decisions corporately, of course, but even down to the region and the store level. So we are pretty excited about having this, and it's just a powerful tool that we've not really had access to in the past. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Our next question comes from the line of David Bellinger with Wolfe Research. -------------------------------------------------------------------------------- David Leonard Bellinger, Wolfe Research, LLC - Research Analyst [43] -------------------------------------------------------------------------------- Great quarter. Just on average ticket down 50 basis points this quarter, just look at the trend of up 2 to 3 percentage points over the last year or so, what are you seeing there? Any type of trade down on the DIY side? And also maybe just some commentary on the in-store design services. Are customers still engaging that service as much as they were pre-COVID? Have you seen any consumer apprehension there that's weighing on potentially higher ticket trends? -------------------------------------------------------------------------------- Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [44] -------------------------------------------------------------------------------- Yes. So the two parts of that question, I'll take them both. The first part about our average ticket. As we said in our prepared comments, really a few reasons for a little bit of that. One is, you mentioned design services and our design services are just getting back up to speed. We were slow. We had a lot -- when we did a furlough of our part-time associates, we have a lot of our designers that are part timers. It took a while to get them back into the fold. They're getting here now, and our design appointments are where we want them to be, and our designers are engaged in the cell. But during the third quarter, it took time to get them there. So we didn't have those big tickets that we always have. Secondarily, we've been really aggressive in clearing out some old of our wood products. So the average sale in our wood department has gone down. That's purposely. We've done that to get our new stuff. We've got great new wood looks come -- they're in now and more on the way, and we had to get that clear. And then the last part is with the homeowner increase that we're seeing, we're seeing the homeowners are attacking a lot of small jobs. When they're nesting at home and they're looking around and they're looking at their backsplash as evidenced, and if you look at our decor department, it was the best comping department during the third quarter and that's an evidence that we think people are nesting. They're looking, they're seeing their kitchen. They're working out of their kitchen. They're on conference calls. They look up and they see an ugly backsplash and they change it. So the backsplash that's about less than average tickets in the bathroom. So I think a combination of those things are what's challenged the average ticket. But overall, I feel good about where we're going in design. I feel good about our staffing levels in design, I feel good about what we're doing in design as we enter into this quarter. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Our next question comes from the line of Alan Maroccia with Berenberg Capital Markets. -------------------------------------------------------------------------------- Alexander Rocco Maroccia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [46] -------------------------------------------------------------------------------- With the net cash position in mind, in addition to the dry powder you have for the ABL, would you be willing to accelerate the store opening cadence or remodel older stores more rapidly in the coming quarters? -------------------------------------------------------------------------------- Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [47] -------------------------------------------------------------------------------- Yes. This is Trevor. I think Tom may have something to add to this. We are going to be spending a lot more on CapEx next year. As we get -- this year, we opened 13 stores versus 27 stores. We're also investing more in our stores. We've seen a nice return. It wasn't that long ago that our first year new stores were to an $800,000 in first year EBITDA. Now they're getting close to $2.5 million of EBITDA, and we are getting some of that because the stores are just bigger, they're in better locations. We spend a lot more on the inside and the outside of the aesthetics of the store. We're owning -- we're going to own a few locations. We've got some areas where we've got a number of stores, very high volume, very profitable stores that we think we've got a really good investment in individual locations and then our Houston DC that I talked about. We're going to spend some capital on Houston DC. Every single one of those has a very detailed ROI associated with it that we think is going to be well above our cost of capital. And so we are going to be more aggressive in deploying that capital next year as we get back to 20% unit growth. -------------------------------------------------------------------------------- Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [48] -------------------------------------------------------------------------------- Yes. You hit mostly everything. I'd add one thing that we've been asked for a while would we accelerate the growth of our new stores. And that is, that's never been a cash decision as much as it's been a cultural decision. We keep our growth of 20% units, which is a lot of growth, more than most of retail does. But that's purposeful. Culture is very important to us. We have a unique culture. It's difficult to run a floor in the core store. We want to make sure that people are trained to do that and there's a lot of autonomy at the store level to make decisions for their own, and that takes time to get them ready to do that. So we pace our openings purposely. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- Our next question comes from the line of Elizabeth Suzuki with Bank of America. -------------------------------------------------------------------------------- Elizabeth Lane Suzuki, BofA Merrill Lynch, Research Division - VP [50] -------------------------------------------------------------------------------- So I guess as COVID cases start to rise again in some markets and there's talk about potential lockdown again, how do you think about how the business could perform if stores did have to close again? And what you think you learned from the last go around that you would bring in to a second round of potential closes? -------------------------------------------------------------------------------- Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [51] -------------------------------------------------------------------------------- Well, I think it depends. When we closed the stores in the first time, we really didn't have to close all the stores and take them to curbside delivery. We were classified as essential retail in a lot of the markets that we elected to shutter our doors. And we shuttered our doors purposely because we wanted to make sure that we could protect our associates. We needed to get the stores ready. We needed to get the right protective product in, so that everyone could feel good and we needed to learn. And as we learned and as we got our stores prepared, we began to reopen. So it depends on the severity of the closure. And if it's all of retail or essential retails allowed to open, but if it's essential retail allowed to open, we would stay open and operate so that we could effectively serve our professional customers. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- The final question comes from the line of Justin Kleber with Baird. -------------------------------------------------------------------------------- Justin E. Kleber, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [53] -------------------------------------------------------------------------------- I just got a follow-up on tariffs. Based on your inventory position and turns, when do you think you will see the peak pressure point on margin rate? And it doesn't sound like tariffs would prevent you from expanding gross margins next year, but just wanted to kind of confirm how you're thinking about that. -------------------------------------------------------------------------------- Trevor S. Lang, Floor & Decor Holdings, Inc. - Executive VP & CFO [54] -------------------------------------------------------------------------------- Yes. I mean sometime early next year is when we're going to start to have to see how that plays itself out. So I think that's right. And I do think that the merchants are great and they've got ideas on how and where we [raise] retails to deal with it. So the plan is in place. We have fantastic systems to get the new base every single day from our inventory position and our margin position is how we're doing. So we watch it very closely. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Tom Taylor for closing remarks. -------------------------------------------------------------------------------- Thomas V. Taylor, Floor & Decor Holdings, Inc. - CEO & Director [56] -------------------------------------------------------------------------------- Yes. Well, first, I'd like to, again, thank all of our associates for all the hard work, our associates on the front line and our associates behind the teams that are in our store support center and that are in our distribution centers. It's just excellent execution across the board. It was just an amazing quarter. I'd like to thank all of you for your interest in our company and your excellent questions, and we appreciate that. And we look forward to talking to you on our next quarterly update. Thank you. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great rest of your evening.