Floor & Decor Holdings, Inc. Q1 FY2020 Earnings Call

Greetings, and welcome to Floor & Decor Holdings Inc. First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Wayne Hood, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and good afternoon, everyone. Joining me on our earnings conference 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’d 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 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 earnings press release, which is available on our Investor Relations website. 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.

Thank you, Wayne, and thanks to everyone for taking the time to join us on our first quarter 2020 earnings conference call. Before we get started, I just want to thank our entire Floor & Decor team particularly our store associates. They have enthusiastically come together in a way to protect the health and safety of all of our associates and customers. Their efforts have truly been inspirational and are a real testament to the culture of the organization, which continues to rise to the occasion to face new challenges that have been placed in front of them. The global spread of the novel coronavirus pandemic and the subsequent economic impacts we're facing is truly unprecedented. On today's call, I will discuss some of the highlights of our first quarter 2020 earnings results and then spend more time discussing some of the operational changes that we are making in our stores and store support center to enable us to continue to serve our Pro and do-it-yourself customers and retain sales during this challenging and uncertain time. I will discuss in more detail how we're building on our successful and convenient curbside model that we pivoted to in March by adding Pro appointments and are now rolling it out across the country. Additionally, I will touch on our limited customer entry approach that is happening in two of our Utah stores today. We do see a path forward to restoring growth against the challenging headwinds that we and others are facing. We're encouraged by the impact all of our strategies are now having on our sales trends and to the response from our Pro appointment strategy and white glove service it offers that sets us apart. All of our actions have been and will continue to be taken with an eye towards first protecting the health and safety of our associates and customers. Later Trevor will review our first quarter financial performance in more detail and then discuss how we are managing our liquidity, cash flow and profitability in a way that not only bridges us through the COVID-19 pandemic but ensures we are well positioned on the other side. The strength of our balance sheet and access to liquidity enables us to continue to provide our customers quality, trend-right assortment at the lowest possible price. This will directly contribute to further market share growth in 2020 and beyond as consolidation in the hard surface flooring industry likely accelerates as many independent foreign retailers may struggle to maintain liquidity in this unprecedented time. Let me start with our first quarter earnings. As you saw in our press release, our fiscal 2020 first quarter sales increased 16.3% to $554.9 million and our comparable store sales grew 2.4%. Our first quarter comparable store transactions declined 1% and our comparable store average ticket increased 3.4%. Prior to the last six days of fiscal March, which is our largest sales month of the quarter, we were pleased that our quarter-to-date comparable store sales grew 6.1% in line with our expectations. The growth during that period reflected a 3.4% increase in comparable store transactions and a 2.7% growth in comparable store average ticket. We are pleased with our first quarter 2020 sales results considering we experienced a sharp unexpected 46% decline in comparable store sales in the last six days of fiscal March as the impact from COVID-19 pandemic to more of our markets. In response to the pandemic, we proactively began limiting our store operations to convenient curbside pickup on March 21 and in some cases, we were forced to completely close stores. Despite the unexpected sales declines in late March, we are pleased that our first quarter fiscal 2020 GAAP diluted earnings per share increased 20.7% to $0.35 from $0.29 in the first quarter of 2019, primarily due to a favorable gross margin and lower than planned corporate expense. Our first quarter adjusted diluted earnings per share increased 17.2% to $0.34 from $0.29 in the first quarter of 2019 at the high end of our expectations. Now let me discuss in more detail some of the near-term operational changes that we have made during this period of uncertainty. In late March, we assembled cross-functional leaders to develop strategies and procedures designed to quickly adjust our operating model while implementing safety protocols for our associates and customers. The collaboration within this group and the creativity of the entire organization has enabled us to retain a significant amount of sales even as our stores have limited operations or in some cases are completely closed. As a point of reference, we had as many as 33 warehouse stores or 26.8% of the company completely closed at some point in late March. Today, there are only four warehouse stores that are completely closed. The remaining stores are open with shortened operating hours for convenient curbside product pickup which can be ordered online via phone or through our Pro app. We are slowly allowing our stores across the country to conduct Pro appointments in our showrooms. Additionally, in our two stores in Utah, we are testing allowing both DIY and professional customers to enter our showrooms with appropriate occupancy limits. As local conditions change, we intend to do this across the US. At this juncture, it is difficult for us to know when our stores will return to full operations. We do expect our reopening will be staggered and dictated by local, state, and government authorities and health official mandates. Because we do expect our stores to eventually open to full operations, we have chosen to protect our full-time associates from furlough albeit they're working reduced hours. All four of our distribution centers are open and fully supporting our stores today including shipping personal protective equipment to our stores. Nearly all of our stores support center associates are supporting our stores remotely which speaks to the strength of our business continuity plans. The curbside model that we pivoted to in March focuses on our strengths, as customers enter our parking lot, they will be met by a greeter outside who will qualify the needs of that customer. Once the needs are determined, the customer is sent to a designated area to be served or loaded. Additionally, we moved a small selection of bulk installation materials outside and added designated runners that can quickly grab samples in the store, thereby making it more convenient and safer for our customers. In fact, many pros would like us to maintain this level of concierge service post the impact of the pandemic. We strongly believe that our pros will remember how we are helping them to continue to operate their business during this challenging period. It is during these challenging periods that we believe we can build on our brand awareness and our long-term relationships to further grow our market share. From a merchandising perspective, we have moved most of our best-selling SKUs outside. Our large rolling inspirational merchandising fixtures give us a unique competitive advantage as they allowed us to easily move our great displays outside. This is particularly important when we are displaying luxury vinyl plank, large-format tile, designer picks, and other hard surface flooring products. Finally, we added the capability for customers to pay curbside with the mobile point-of-sale register. Now turning to our new stores, we have opened three new warehouse stores in the first quarter of 2020 including new warehouse stores in La Quinta and Sacramento, California, and Algonquin, Illinois. The first quarter openings brought the total number of warehouse stores that we operate to 123 stores, up 19.4% from the 103 stores at the end of the first quarter 2019. We had originally planned to open two more stores in late March, but due to the pandemic we have delayed those openings. The pandemic which has caused state and local restrictions on new construction has forced us to push some of our new store openings to later in the year or into 2021. For the fiscal 2020 full year, we now believe it is financially prudent to temporarily slow our new store growth and we consider all of the near-term headwinds caused by the COVID-19 pandemic. To that end, we now anticipate opening 11 warehouse stores and have designed a store piloting in Dallas in 2020 compared with our prior plan of 24 new warehouse stores in the design store pilot. We are taking a partnership approach with our landlords and we are engaged with them to discuss near-term rent deferments. We can't be specific about these fluid negotiations, but we are encouraged that our landlord partners are sympathetic to the challenges we and others are facing with reduced store operations and closed stores. That said, we are leveraging our legal options under our lease agreements and renegotiated locations with unexecuted leases. I think most of our landlords recognize that we are one of the few retailers that have plans to open stores over the long run and want to work with us as a tentative choice. Trevor will cover in his remarks the capital spending and cost savings that we expect from the temporary reduction in new store openings. Moving on to our comparable store sales, as concern about the COVID-19 pandemic mounted in March, we were still seeing pros continuing to shop with us despite other parts of the economy that were beginning to shut down. Though we were pleased that our first quarter comparable store sales grew 6.1% through Friday, March 20, that changed during the last six days of the quarter where we experienced a 46% decline in comparable store sales as we were forced to close stores, reducing our operating hours and shift to curbside pickup. While it is not our normal practice to provide inter-quarter sales information, we do want to share that our second quarter to date comparable store sales have declined 50%. While none of us are satisfied with this rate of decline, recent trends are slightly improving, and we have seen a surge in our sample sales, which tell us customers are interested in flooring projects. This coupled with our strategies to recapture sales and more phased full store openings in the coming months leaves us optimistic about the further improvements going forward. Turning to our first quarter sales performance within some of our merchandising categories. Consistent with previous quarters, our best-performing category was our laminate luxury vinyl plank category, which increased 28.2% and represented 22% of our total sales compared to 20% in the first quarter of last year. This category continues to resonate with our customers as it has superior technical features, is durable, and easy to install. We were also pleased with our sales in installation materials, which increased 18.7% and represented 17% of our sales. The changes we have made and how our installation materials are presented and improving operating processes is driving sustainable growth in this very important category for our professional customers. Our adjacent category business, which includes vanities, shower doors, countertops, and bath accessories continues to grow, and we'll be adding product throughout the year in many of our store locations. While the sales dollar volume in this category is not material today, the growth is strong, and we believe it offers incremental growth opportunities. As I mentioned, it has been inspiring to see how our store and store support center associates have enthusiastically rallied together in creative ways to meet the unique combination of challenges caused by the COVID-19 pandemic to continue to serve our customers. Let me discuss another example. Due to the high demand from our customers to still engage with our product offering, we introduced a virtual design appointment experience in April that is now operating in all of our stores. This is an example of how we're building on our connected customer strategies and our stores and designers are excited about this service offering. By providing this free live virtual video and chat experience, we expand our ability to connect and collaborate with customers that are contemplating a flooring project but might be under shelter-in-place restrictions or just prefer the ease of starting their project at home first with a cloud-based video conference. This strategy leverages our website resources including a room visualizer, my order quote builder and allows our designers to connect with customers while maintaining social distancing guidelines. Designers can virtually walk customers through a store and share inspirational ideas and collaborate with customers on their desktop browsers and on mobile devices in high definition. Meetings are easy to schedule through our website and additional participants can be invited. Also, as we've previously discussed, when a designer is involved in a project, our average ticket and margin rate is significantly higher than the company average. We have modified our advertising spend and messaging. We did this with an eye towards letting our pros and do-it-yourself customers know that our stores are open with banners and yard signs and how they can continue to shop with us for hard surface flooring products online or via the telephone. We choose to protect our spending on search, social, YouTube, and Pinterest as we see customers are still using this media looking for ideas and inspiration. We have also extended our 18-month no interest credit offering through May 31, which will give our pros and do-it-yourselfers an additional line of liquidity for projects. Additionally, in May, we will launch our Pro premier rewards incentive program where they can earn double and triple points based on their spend. We have decided to pause the second quarter 2020 launch of our Pro premier credit card until the operating environment improves. Our website and our call center have been critical to staying engaged with our professional and do-it-yourself customers. The multi-year investments we have made in our connected customer strategy are paying off to help customers find us, educate themselves, and be inspired virtually. As customers gain comfort and ultimately buy online and pick up in stores or have shipped to their job site, our technology allows for simple and safe social distancing access to our full product assortment. As we move to the curbside operating model, our e-commerce site has made it very easy for our customers to place an order online and then just pick it up at the store. Since the model change, our e-commerce business is sequentially up 270% and now represents approximately 60% of our company sales. We have also invested in the talented call center team and when combined with advanced technology, it has allowed us to flex up and handle the significant increase in call volume we're experiencing. To help manage the overflow, we added store support center associates to assist on the phone who are working with customers to help them complete their projects in this new business environment. Beyond providing critical support during these challenging times, our call center also has emerged as a functional business that drives revenues through its follow-up programs, which we began testing late last year. We continue to make great progress in investing in and growing the all-important professional and commercial customer base. We continue to find pros, cultivate relationships, and serve them well. Our value message is clear and easy for the professional customer to understand. We are open and we are your hard surface flooring supply house. It all starts with substantial quantities of trend-right, in-stock inventory at consistently low prices, combined with services such as a dedicated Pro team, free design services, free storage, a great loyalty program, and credit. Once pros are identified and input into our proprietary CRM solution, we have many ways to serve and communicate value to them, including through our Pro premier rewards loyalty program, email marketing, direct communication from our in-store Pro team, and through our Pro app, which continues to be used at higher rates. We are confident these strategies continue to work. Two simple examples, in the first quarter our top 500 pros spent over double what they have spent a year before with us, and our commercial big job sales which are generally sold to commercial clients and are much larger than our normal sales were up 67% in the first quarter. During this difficult time, we know these investments and unique solutions are important to our professional customers. We have heard loud and clear from our pros that they appreciate how we are proactively working with them to safely support them during this challenging time and they, like us, look forward to us reopening our doors again. The economic outlook and associated sales and liquidity challenges facing many retailers cause us to believe that we will see further store closures and industry consolidation, and we plan to remain the hard surface flooring retailer of choice on the other side. After the COVID-19 pandemic starts to phase, this will be the time for us to take more market share. Moving on to some of our near-term cost-saving measures. We have taken steps to judiciously resize our cost structure to protect our liquidity, profitability, and cash flow during this uncertain period. While most of these decisions were difficult for us to make, we made them with an eye towards not placing at risk our longer-term growth priorities and our competitive position. In late March, we made the difficult decision to resize our store and store support center payroll costs in anticipation that sales could continue to decline for some period of time from the COVID-19 pandemic and that a recovery could be slow once the economy begins to reopen. We were forced to furlough about 2,000 of our part-time associates. Part-time associates account for about 30% of our in-store associate hours, and our full-time associates account for the remaining 70%. While we have currently not furloughed our full-time store associates, we did reduce their hours to 32 hours from approximately 40 hours per week and our department head hours from 240 hours per week from approximately 45 hours per week. As business conditions improve, we are prepared to play offense by flexing up the hours of our full-time associates. The base salaries of our senior management team as well as other teammates in our store support center were temporarily reduced by graduated amounts. I will not receive a base salary other than the amount that will cover the benefits provided by the company. The base salaries for Lisa Laube, our President, and Trevor were both reduced by 50%. Our Board of Directors also agreed to temporarily suspend their cash retainers. Let me close by saying again how inspiring it has been to see how our store and store support associates have rallied together to meet the unique combination of challenges caused by the COVID-19 pandemic. Their tireless and creative efforts have enabled us to continue to serve our customers, particularly our pros that operate small businesses. We have ended fiscal 2019 and the quarter of 2020 in a strong financial position with our sales, EBITDA, and liquidity at the highest levels in our 20-year history. We believe we have correctly resized our cost structure and capital spending plans and have adequate access to liquidity to bridge us through this challenging time. Our confidence in the power of our business model and our ability to navigate this crisis is unwavering and we will remain committed to long-term profitable growth. I will now turn the call over to Trevor to discuss in more detail our first quarter financial results and how we are thinking about managing our liquidity, profitability, and cash flow during these unprecedented times.

Thank you, Tom. I want to start by expressing how proud our executive leadership team is of our swift operational adjustments to address the challenges posed by the COVID-19 pandemic. This reflects the remarkable talent of our associates and the investments we've made in our business model and technology, which have allowed us to rapidly shift to a curbside model and capitalize on our e-commerce investments. As Tom noted, since we introduced curbside pickup, our e-commerce sales have surged by 270% sequentially and now account for 60% of our total sales. The steps we've taken in e-commerce and store operations have helped us retain a substantial portion of sales during store closures. I'm proud of the immediate actions and resilience our organization has shown, which has strengthened our bonds during this crisis. We are confident that we will emerge stronger and continue to grow moving forward. As mentioned in our press release, we have decided to withdraw our previous sales and earnings guidance for fiscal 2020 due to the numerous unknown factors that could impact our results. Our team is working harder and more closely than ever to manage the business effectively. We feel it is important to have a seasoned board and management team during this quarter. We believe the decisions we've made, both in the short and long term, will distinguish us as we navigate this pandemic, and we will remain robust as we move past COVID-19. I will start by discussing how we are managing our liquidity, cash flow, and profitability in these challenging times, before giving a brief overview of our first quarter results. We are fortunate to have refinanced both our term loan facility and revolving credit facility on February 14, 2020. Our performance and conservative approach to leverage have positioned us well, providing us with the highest level of liquidity in our history. Refinancing enables us to access significant cash at lower costs with long maturity dates. By the end of the first quarter of 2020, we had $144.6 million outstanding under our term loan facility, maturing on February 14, 2027. Our term loan facility has an accordion feature that enables us to increase its size under specific conditions up to $270 million or 100% of consolidated EBITDA. We could also add to the facility under certain conditions, highlighting our financial flexibility. The ability to increase the facility, of course, depends on the functioning of debt markets, which are currently operating albeit at higher levels than when we renegotiated in February. Alongside our term loan amendment, we also adjusted our ABL facility to $400 million, maturing on February 14, 2025. The ABL facility features an accordion option that allows us to expand its size to $500 million or more if our lenders agree. To secure cash flow, we drew $275 million, or about 80% of what was available under our ABL facility, as uncertainty in the credit markets increased in late March. At the end of the first quarter of 2020, our net debt to adjusted EBITDA, excluding pre-opening expenses, stood at 0.5, with a lease-adjusted leverage ratio of 2.7. For our leverage to reach three times, which is not aggressive, our debt could increase by around $715 million, showing the liquidity we have at this point. We have no significant debt maturities or financial maintenance covenants on our senior secured term loan, other than a fixed charge coverage ratio increase if borrowing exceeds 90% of availability. We had $375.6 million in unrestricted liquidity available at the end of March, which included $289.9 million in cash and cash equivalents, alongside $85.7 million reachable under our ABL facility. We believe this liquidity, combined with our credit facilities and cost-reduction measures, provides the necessary resources to navigate the impact of COVID-19 on our business. We are continuously exploring all financing options to enhance our financial flexibility when needed. We've also evaluated the CARES Act and its potential effects on our liquidity and financials. We expect to benefit from multiple aspects of the act: first, we're adjusting our tax returns to utilize the five-year net operating loss payback option; second, we foresee advantages from deferring full-year Social Security tax payments; and third, we anticipate benefits from employee retention credits and other provisions in the act. We're finalizing our expected positive cash flows from the CARES Act, which should amount to tens of millions in the coming months to further boost liquidity. Next, I want to discuss how we are making spending decisions that will right-size our cost structure and safeguard our cash flow until we return to full store operations. We made cost-cutting decisions collaboratively with our leaders, focusing on significant short-term reductions while maintaining our long-term full-time employees and partnerships to remain a valued employer and partner. Our largest cash expenditure remains inventory and related supply chain costs. We have a strong team and technology to assess on-hand inventory, in-transit orders, and replenishment purchases, allowing us to quickly adjust our inventory strategies. We are actively managing our inventory purchases in line with demand projections. Additionally, we have partnered with vendors to temporarily extend payment terms to improve cash flow. For capital expenditures, as Tom mentioned, we've scaled back our 2020 new store openings and reduced expenditure in other areas in response to the pandemic. Total capital expenditures are now expected to range from $147 million to $157 million, down from an initial estimate of approximately $255 million to $265 million. As a consequence, we estimate our depreciation and amortization will be approximately $91 million to $93 million in 2020. These projections could vary significantly, as we are operating in a unique environment. We have carefully scrutinized each line in our profit and loss statement and implemented extensive cost cuts, including freezing most new hires and reducing expenses in advertising, non-essential store operations, incentive compensation, travel and entertainment, professional fees, and onboarding in new locations. We have proactively negotiated with our landlords to lower our store occupancy costs. Our strong relationships with partners built over the years have facilitated a collaborative approach that benefits us both. As a retailer that has experienced an average of 20% unit growth for the past seven years, we understand the value we bring to our landlords and our commitment to future expansion. We've successfully reduced our cash expenditures for fiscal 2020 by about $4 million by consistently cutting operating expenses by around $100 million, capital expenditures by $110 million, and inventory costs by approximately $190 million. While we are not providing specific sales or earnings guidance, we currently model a flow-through on decreased sales in the 25% to 30% range, based on prior guidance. Although this level is modeled, predicting our flow-through in the current environment is challenging and could vary. We have incurred some additional COVID-19 related expenses separate from our standard operations, and we will disclose these in our earnings release as they arise. One more point on liquidity before I outline our first-quarter performance: we have enhanced our robust financial models for 2020 to incorporate downside scenarios and liquidity stress tests. Our current outlook is that our liquidity will remain solid throughout this year. We project using about $130 million to $150 million in cash from the end of the first quarter through early June, as our sales decline due to COVID-19 and as we settle bills from before the pandemic. However, we expect to increase cash balances as we move past early June, assuming our stores reopen and expenses decrease due to previous cost structure changes. Although forecasting in this environment poses challenges, we are encouraged by our performance in April, surpassing our sales and liquidity model. We are positioning ourselves to have sufficient cash to completely pay off our ABL if we decide to do so. Now, moving to our fiscal 2020 first-quarter earnings objectives. Our gross margin rate for the first quarter increased by 30 basis points to 42.5%, slightly higher than our expectations. This year-over-year margin improvement can be attributed mainly to higher product margins, modestly offset by increased distribution costs associated with our new Baltimore distribution center that opened in late 2019. The enhancement in product margins results from lower costs due to tariff eliminations and merchandising strategies that improve gross margins. Looking at our first-quarter expenses, selling and store operating expenses rose 20.2% to $153.1 million from $127.4 million in the previous year. The 88 basis-point expense rate de-leverage to 27.6% from 26.7% last year stemmed from opening 20 new stores since March 28, 2019, lower-than-expected sales during the final days of March, and $1.3 million in unique COVID-19 related expenses. Our comparable store selling and operating expenses as a percentage of those stores decreased by around 70 basis points, due to leveraging occupancy, advertising, and incentive compensation costs. General and administrative expenses, typically not incurred in stores, rose by $700,000 or 2.2% during the 13-week period ending March 26, 2020, compared to the same time last year, due to continued investments in personnel and increased depreciation from technology investments to support our store growth. As a percentage of net sales, our general and administrative expenses dropped by around 80 basis points to 5.6% from 6.4% in the previous year due to lower accruals for employee incentive compensation in the recent quarter as a result of COVID-19. Pre-opening expenses in the first quarter increased by $1.4 million, or about 35%, from the same period last year, primarily due to higher occupancy costs during the extended possession period before store openings, alongside more new stores set to open compared to the previous year. We opened three stores during each of the 13-week periods ending March 26, 2020, and March 28, 2019. First-quarter net interest expenses decreased by $1.1 million, or 38.1%, compared to the same period last year, largely due to lower interest rates and higher interest income compared to last year. Our effective tax rate for the first quarter was 17.4%, up from 16.6% in the previous year due to increased discrete expenses for uncertain tax positions being partially offset by recognizing a larger income tax benefit from stock option exercises compared to last year. Regarding profitability, our first-quarter adjusted EBITDA rose by 21.7% to $73.1 million from $60.1 million in the previous year, raising our adjusted EBITDA margin to 13.2% from 12.6%. Our fiscal 2020 first-quarter GAAP net income grew by 20.6% to $37.1 million from $30.7 million last year. Our first-quarter adjusted net income was up 21.3% to $36.3 million, or $0.34 per diluted share, compared to $30 million, or $0.29 per diluted share last year. We concluded the first quarter with 105.5 million diluted weighted average shares outstanding, compared to 104.3 million shares last year. In closing, I want to extend my heartfelt thanks to all our associates for their relentless work and dedication in serving our customers during these challenging times. With that, we can now open the call to questions.

Our first question comes from Simeon Gutman with Morgan Stanley.

My first question, I wanted to get your view on housing and home improvement demand. And realizing there's no guidance here, some have a view that the downturn could look a little different for this segment for a bunch of different reasons. Curious what your take on it is. Do you think home improvement ends up being more insulated than a normal downturn?

Simeon, this is Trevor. I think we're all expecting things to be tougher. The consumer is going to be in a tough spot. They're going to build back their personal balance sheets. And so I do think the sector will be impacted just like a lot of sectors will. I will say, though, if you go back and look in history, back to that 2006-2008 time frame, peak to trough over a 2.5-year period, flooring sales declined 35%, and that's a lot obviously. And during that time, Floor & Decor did pretty well. We had adequate products, so we could sell to people who needed it. We have incredibly low prices, a very inspirational design center. And our prices were low. And so when you look at the overall value that exists, we think our attributes are accentuated during this environment. So yes, we think the environment will be tougher as we look forward. But I think value matters. And we have value in the sense of lots of products, low prices, really good-looking product, great salespeople, integrated website, Pro team to serve the professional customer. And so all those things give us a conviction that, yes, it's going to be a tough environment. But all the things we have will allow us to outperform the market like we have for a long period of time.

Okay. And then my follow-up is on the competitive environment and then something that Tom had mentioned. Can you share what you're seeing competitively? You do operate against a lot of smaller businesses. And I wonder if others have stayed open through an essential classification, any anecdotes you're getting about hardship against competitors? When you open up, do you think you're going to open up to a full slate of them? And then related to what Tom said about leaning in following this period, does this mean that if things are back to normal in 2021, do you open up the stores that didn't get open this year and you add them to the expected 2021 class?

That is a lengthy follow-up question. I'll address as much of it as I can. We prioritize the safety of our customers and associates, and we decided early on to adopt a curbside-only model, which has now evolved into three different models. We have a curbside model, a Pro appointment model, and two stores in Utah with limited entry models. Competitors are taking various approaches; in some areas, they are following our lead, while in others, they remain fully open, and this varies by market. As I've told my team, which is eager to resume normal operations, safety remains our top priority. We will continue to open our stores as permitted by the government. Regarding the other aspect, it’s difficult to predict who will remain operational. Smaller independent flooring stores may struggle to maintain liquidity in this environment, and we expect some consolidation to occur as a result. Lastly, our goal is to achieve 20% unit growth next year. Everything has been somewhat stalled, making it challenging to build new stores. Assuming the economy reopens well, we intend to resume our original plans.

Our next question comes from the line of Steven Forbes with Guggenheim Securities.

I wanted to focus really on the trends in the business post the transition to the curbside model. I mean, is there a particular category or region that differs greatly from the chain since that transition from a performance standpoint? And anything you can call out that's driving that difference, whether it's just geographical presence, urban versus suburban county exposure, etc.

The curbside model has been quite steady since we implemented it, and it has actually improved over time. However, it's challenging to determine whether the performance will be better in urban or rural areas until we fully reopen the stores and allow customers to visit regularly. From a product perspective, there hasn't been much change; consumers are purchasing the same items but in smaller quantities.

I'll just add two things. We ended last year with a comparable sales increase of 5.2% in the fourth quarter. Before COVID-19 impacted us, we had a 6.1% increase in the prior six days, so we anticipated some acceleration in our business, and it indeed occurred. We're pleased with that. The trends across the business showed that our rigid core volume remains the strongest category, while the natural wood category continues to face challenges. Our newer markets are still outperforming our existing ones, making everything slightly better. Additionally, regarding real estate, it's interesting that during this time, we are now seeing opportunities in locations we've wanted to enter for a long time. The strength of our business and how we've negotiated with our landlords have opened doors for us in dense markets that would have previously been hard to access. Thus, one positive aspect of this challenging environment is the improvement in real estate opportunities for us.

And then a follow-up on the design services, right? You spent some time in the prepared remarks on the virtual services and just the engagement with the Pro. But maybe just expand on whether, right, your recent experience here and the engagement with both the DIY and the Pro consumer has changed your investment plans as it relates to design services. Whether that's just the number of design associates in the stores or any sort of marketing plans around that, etc.

Yes. Most of our full-time associates, many of whom are designers, are still engaged in their work. We have accelerated our virtual design services for customers, and the response has been outstanding. Customers remain eager to interact with our products. The number of appointments we are handling has been growing each week since we launched this initiative. The feedback has been excellent. I visited a store last week and observed a virtual appointment where a designer walked around the store showcasing products and providing inspiration to the customer. It was quite impressive. Overall, it's been a fantastic experience, and we are excited about it. We are promoting this service on our website so people are aware and can participate. Lisa, do you have anything to add about the appointments?

No. The only other thing that I would add is that it has done extremely well, I think probably better than we expected. And I would say that going forward for the foreseeable future, we don't know how comfortable people are going to be out and about. So we think this virtual design appointment is going to be a great way for our customers to engage with the store and with the product before ever coming in. So we think it's a unique competitive advantage. And even when the stores are opened, we plan to continue to give the customer the option to have a virtual design appointment or come in and see one of our designers in person.

Our next question comes from Chris Horvers with JPMorgan.

If it's one really long question, does that count? So a question. So first, your quarterly comp is pretty consistent with the last week of the quarter. And it seems like you have a lot more stores 'open.' Is that right? And why not better? Is it less DIY? Is it less Pro, where the consumer doesn't want that professional coming in and making the installation? Is there some sort of lag impact that's going on or maybe the Pro becoming nonessential in more states? Can you talk about that trend overall?

I'll start, and Trevor can join in as well. Chris, since we implemented curbside, things have been pretty steady. Initially, I was uncertain about how it would turn out; I thought it might be just a temporary boost as people finished projects. However, that hasn't happened. It's remained steady, and recently, it has actually improved. Over time, people continue to engage with the product, as seen in the high number of virtual appointments and samples sold on our website. People still want to interact with the product and are motivated to do so. We are also trying to assist our professionals in ensuring safety when entering customers’ homes. It's important that they practice social distancing and take precautions so that customers feel safe. It's hard to gauge how the consumers feel, but based on my conversations and observations, we have reopened some stores where there are no shelter-in-place rules, and their performance has shifted from significantly negative to positive. There is still interest in our category. It's difficult to categorize whether the demand is more from professionals or DIYers since everything has kind of slowed down. When you visit our stores and observe the curbside setup, many professionals are still choosing our products.

Our next question comes from the line of Seth Sigman with Crédit Suisse.

I wanted to ask about the investments that you had initially planned for this year. I think it was expected to be somewhat of an elevated year of investments in-store growth and some other areas. Does that just shift into next year? Or conversely, is this a situation that serves as maybe a catalyst for longer-term efficiency? Should we actually be thinking about perhaps better operating leverage coming out of this as sales start to normalize?

This is Trevor. When everything first happened, we reviewed every single line item, and as we stated in our prepared comments, we decided to delay or cut anything that wasn't mission-critical. As a result, we reduced our capital expenditures by around 40%. We focused on activities that were essential for our customers. Consequently, we made significant cuts to our CapEx, reducing it to 11 new stores plus the design center, which also had an impact. We even slightly increased our budget for the class of 2021 due to anticipated openings early next year. Hopefully, one positive outcome from this situation is that we will have a consistent pace of openings in fiscal 2021. On the operating side, we still have more analysis to conduct. We are gaining insights that we probably wouldn't have learned otherwise. While it may be too early to draw conclusions, I'm unsure if Tom or Lisa has anything to add, but that summarizes my perspective.

No. I think that's right, Trevor. I do think it is that we are learning about different ways that we can operate, which could take some costs out of the business, and we'll be thoughtful in that approach and take the right steps to try to be.

Our next question comes from the line of Mike Lasser with UBS.

You've provided a variety of data points and perspectives on this call. Trevor indicated that during past recessions, flooring sales declined by 35%. This time, unemployment will be the most significant factor. Tom, you noted that when a few stores open, they have positive comparable sales. There may or may not be pent-up demand since professionals have been allowed into consumers' homes. Putting this all together, the key question we are trying to answer is regarding the new normal when it takes effect, likely in the third and fourth quarters. Relative to the benchmark of flooring being down 35%, should we anticipate flooring to decline by perhaps half that amount this time? Given the competitive position of Floor & Decor, you might perform twice as well as that. If the category is down 15% to 20%, it seems reasonable to expect your comparable sales might decline in the mid- to high single digits.

Yes, this is Trevor. I find it interesting that we are now a much larger company. During the last downturn, we were around $200 million, but this time, during COVID-19, we estimate we could be around $2.5 billion. As a larger company, we have access to a lot more information and data. Lisa's team has done an excellent job helping us understand our customers better. Upon analysis, we found that our average customer income is estimated to be between $100,000 and $125,000, compared to the U.S. median of about $60,000. Our typical customer is likely between 35 and 64 years old and has lived in their home for 11 to 15 years. This means they have a significant amount of discretionary income. Unfortunately, those severely impacted by this situation tend to be lower-income individuals. Considering our industry's success over the last decade, it's notable that 65% of the current market still consists of smaller independent companies, which may struggle in these times. We believe that by focusing on value—defined as competitive pricing, the right product assortment, and adequate inventory—we will capture a larger share of the market during this period. While it's challenging to predict exact outcomes, we're confident that by retaining our full-time staff and supporting our professional customers and vendor partners, we are well-positioned to serve our customers effectively when we reopen. As Tom mentioned, this is just a two-store test, and we've seen a shift from negative to positive performance. We have much to learn in the coming months, but we are in an excellent position to take advantage of available business as we open our doors.

Our next question comes from the line of Matt McClintock with Raymond James.

It seems you've been busy. There's a lot of detail in this call, and I really appreciate it. My first quick question is about the Pro perspective. Tom, when you conduct surveys of the Pro or speak with them in the store, what is their feedback regarding job cancellations compared to jobs being postponed? I'm trying to understand how much demand has been completely lost versus how much demand is just waiting for people to feel comfortable again to allow contractors into their homes.

I have mostly gathered information anecdotally by speaking with our stores, operators, and some professionals while visiting locations. There has been more pushback rather than outright cancellations. We have an installation partner with whom we maintain a somewhat distant relationship that we can recommend to customers, and they report similar trends: it's not cancellations, but rather delays. As restrictions ease and professionals learn to effectively communicate their protocols to customers—such as entering homes, using masks and gloves, disinfecting during the job, and maintaining social distancing—consumers are likely to become more comfortable with them entering their homes. Overall, I don't believe there has been a significant number of job cancellations; it's primarily a matter of job delays.

Our next question comes from the line of John Baugh with Stifel.

I was curious if you think there might be some longer-term reaction to sourced product coming from China, whether you factored that into your longer-range sourcing strategy?

It's a really interesting question. On the immediate term, thankfully, most of the countries have reopened, and we're starting to get product. So we've not, at this point, seen any customer preference change. As the tariffs and the ADD and CBD changes have happened over the last year and a half or so, we've dramatically reduced our reliance on China for sourced products. Pretty much the only thing left in China right now are those things that can only come from China. And so if we have another country option, we've moved product to those countries, and we will continue to do that. So whether it's working with some of our manufacturers to open up manufacturing in other countries or finding resources that we didn't know about in other countries, that landscape continues to change. But yes. So I think for us, we will continue to make sure that we're diversified and that we have the products that the customers want and expect from us.

Our next question comes from the line of Peter Keith with Piper Sandler.

Congrats guys, it's a tough environment. You guys seem to be doing a great job. Funny to say, good job at being down at 50%. I guess we thought it'd probably be worse than that. So that feels not so bad given everything that's going on. There's a thesis going around that people are spending a lot more time at home, that they're probably getting a little more fed up on their flooring and other aspects of the home. And I was wondering if you could give us some commentary on maybe what you're seeing with your web traffic. It might be a little hard to disaggregate with stores closed, but does it feel like there's a little bit more browsing, more shopping going on that could suggest potentially some pent-up demand in the back half of the year?

It's difficult to provide a definitive answer because, with the curbside model, around 60% of our sales are currently coming through the website. This makes it challenging to analyze the situation differently. However, we do monitor website traffic, which has increased. Most of our sales are coming from customers who used to browse in-store but are now purchasing online for pickup. We have definitely seen a rise in traffic, more time spent on our site, and increased use of our visualizer tool. Therefore, I believe that in this new landscape, more customers will shop online and either pick up their orders or opt for delivery. We are preparing and working on enhancing our website to create an even better and easier shopping experience for our customers moving forward.

I think, Peter, there's something worth mentioning that is more anecdotal, but we are hearing that as people have been sheltering in their homes, many are noticing aspects of their living spaces they may want to change, like old floors, backsplashes, or bathrooms. If people are going to travel less while the economy and the country reopen, they might decide to channel some of their discretionary income, which they would have spent on vacations, into home improvements. We're definitely picking up on that sentiment, but it's hard to predict anything with certainty. We'll have to wait and see.

Our next question comes from the line of Chuck Grom with Gordon Haskett.

You stated in certain markets, I think the two in Utah that you've opened up those stores and comps have turned positive, which is obviously a great sign. When you look ahead, it seems like you're being a little bit conservative on when you guys could open the majority of the chain. There's a number of companies even Macy's today articulated the plans to open up all their stores by the middle of June. So I guess just what are you guys looking for to open up those stores? And as a follow-up to that, just curious, in the April quarter-to-date number down 50%, if there's any geographical differences between the coast to the middle of the country, down south, what you guys are seeing would be helpful.

I'll address the first part regarding store openings. Currently, we aren't observing significant geographical differences. It's challenging to evaluate that precisely, but overall, the situation appears consistent across locations. I can confirm that we will be opening a number of stores tomorrow as certain states have lifted some restrictions. These stores will allow a controlled number of customers, which will vary depending on local regulations. By the end of May, we expect that about 70% of our stores will be operational, although this is subject to change. As mentioned in my prepared remarks, the reopening will be staggered and will follow the guidelines set by local and state authorities as well as health officials. We will proceed cautiously in this process. As of now, I must admit I'm a bit surprised that we are able to open more stores tomorrow, but based on the information available, we are still aiming for 70% by the end of May.

Our next question comes from the line of Kate McShane with Goldman Sachs.

Just following up on the question earlier about the supply chain. It doesn't sound like you're having any major supply constraints right now. But just wondering too in the current state of the world and the environment, if suppliers are willing to negotiate any more on price?

It's an interesting question. So far, we have had some luck on that. I mean, currency has helped us. Fuel and pricing has helped us some. So yes, I do think there is some opportunity on that front going forward.

Our next question comes from the line of Greg Melich with Evercore ISI.

One quick follow-up. Did you guys say that DIY was stronger than Pro since you closed the stores? I thought I heard that, but it cut out for a second.

No. We didn't say that.

Our next question comes from the line of Jonathan Matuszewski with Jefferies.

You guys alluded to the Pro appreciating some of the concierge-like services you're offering at curbside and mentioned that many of them are asking for those to continue on the other side of this. So are there other changes that you've made in the business beyond the virtual design appointment that you would anticipate to carry over on the other side of this?

We are examining that. Before COVID-19, when a customer wanted to pick up something in a store, they would pull up to the back, check in at a command center, then go back outside and wait. Now, when you pull up to the store, someone is outside to greet you and communicate your needs to the store so the product can be brought out more quickly. Every Pro I've spoken to thinks this is fantastic. They appreciate not having to get out of their truck, and I believe we need to pay attention to this and respond accordingly. Additionally, the virtual design aspect is evolving. While it's performing well because customers can't come into the store, it won't replace their desire to see and touch the products for inspiration. I expect that customers will still want to visit our stores.

Our final question comes from the line of Seth Basham with Wedbush Securities.

My question is pretty simple. Could you give us any color on what you're seeing from a mix perspective as it relates to good, better, best? Are you seeing customers trade down at all or trade from one category to another?

At the end of the first quarter, our top category remained our strongest performer. The comparisons for our leading SKUs outshine those for our good and better products. So far, we haven't observed any customers downgrading their choices. Even with the shift to a curbside model, customers have not opted for lower-priced items. We will monitor this as time progresses. However, the value and appeal of our best products are substantial, and we believe that when customers embark on such projects, they will still prefer the higher-quality options.

Our final question comes from the line of Greg Melich with Evercore ISI.

I'd love to hear if there's anything in the CARES Act that you guys are able to take advantage of and/or that you could help some of your Pro customer's particularly use as they try to manage their business through this tough time.

So there are three main components of the CARES Act that will significantly benefit us, amounting to tens of millions of dollars. The most substantial change allows us to take an immediate deduction on most of the capital expenditures for our stores instead of depreciating them over 39.5 years, which will account for a large portion of that amount. Additionally, the government has permitted companies to defer the employer’s portion of the 6.2% social security taxes, which will also bring us about $10 million that we will repay in 2021 and 2022. There are also provisions in the CARES Act for employee credits related to COVID-19, which we anticipate will yield several million dollars for us due to situations where employees have had to stay home or were ill. We've been looking into various borrowing opportunities from banks, although we believe we do not require additional borrowing and likely won’t make use of government funds, as we have access to capital markets and banks that are eager to lend to us. Our analysis indicates that we wouldn’t pursue those routes. On another note, we've noticed a significant surge in our sample sales, indicating strong customer interest in our products. Our CRM tools will help us follow up with potential customers. As Tom mentioned, we're planning to open many of our stores this Friday, aiming for 70% of them to be operational in May and all stores to be open by June in a changed environment. Regarding our Pro customers, I've spoken to several of them who indicated that while they still have backlogs, it's not as heavy as it used to be. Therefore, our Pro customers are still active but need better access to our stores. Once consumers feel more comfortable, we expect to see increased backlogs for our Pros.

This concludes our Q&A session. I'd like to hand the call back to Tom Taylor for closing remarks.

Well, thanks. First, I'd like to thank everyone for their interest in our company, and we appreciate everyone joining our call. I also know there's a lot of associates in the store support center and in our stores that are listening to the call, and I'd like to thank them for all of their hard work and for our associates in our stores for putting safety first and adhering to our safety protocols. It's a tough time to talk about business with all of the human tragedy that's come about because of COVID-19 pandemic. And the priorities of the country in the world have to be to stop the spread and to find a cure. That's the most important priority. But when it comes to Floor & Decor, we ended 2019, as we said in our script, with record sales, record profit, highest liquidity levels ever, highest service scores ever, and an incredible culture intact within our store support center and within our stores. And we've tried to be thoughtful in the way that we think about this, and we do see a path forward to restoring growth again. Like I said earlier, we believe that 70% of our stores will be opened during the month of May. We do believe that in 2021, we will get back to 20% unit growth. And we're fortunate because of the cuts that we made. We were thoughtful, and our store support center associates are still there, and our full-time associates are still there, and we're able to ramp them back quickly. So we're poised to come out on the other side of this pandemic in a really strong position and should have a great ability to take share. So again, thanks, everyone, for joining the call, and we look forward to updating you in the next quarter. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.