Welcome to Floor & Decor Holdings, Inc.'s Second Quarter 2020 Earnings Call. Please note this call 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 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 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.

Thank you, Wayne, and thanks to everyone for joining us on our second quarter 2020 earnings conference call. On today's call, I will discuss some of the highlights of our second quarter 2020 earnings results and then discuss how we are positioned to further grow our market share of the estimated $22 billion hard surface flooring industry in 2020 and beyond. Trevor will then discuss our second quarter results in more detail and how we are thinking about the second half of 2020. Looking back over the past several months, I am glad we made the voluntary decision to close our stores to the public in late March and pivot to curbside pickup only as the COVID-19 pandemic was escalating. This time allowed us to make numerous changes in safety protocols and to implement public health care guidelines that are essential to making our stores safer in the current environment. We believe our large 76,000-square-foot stores with 9- to 15-foot wide aisles uniquely position us in the market. Add to that, the millions we have spent on personal protective equipment, plexiglass separation, training, and taking care of our affected associates with COVID-19 pay, and we believe our teams have done an excellent job creating a safer environment for our Pro and do-it-yourself customers. It is obvious COVID-19 is not going away anytime soon, but all the changes we have implemented give me confidence we can operate in a much safer store environment as long as COVID-19 is with us. Because of the pandemic, people are spending a lot more time in their homes and not spending as much on travel, eating out, and other entertainment. The combination of these two phenomena has people investing in their homes. Floor & Decor is in a great position to serve them with visually inspiring stores and website, innovative assortments, everyday low prices, and in-stock job lock quantities as consumers search for the best value and current trends. Also, our aggressive efforts to lower costs in the short term, along with adding $75 million of additional Term B loan, the majority of which is not due until 2027, has fortified an already strong balance sheet, and we now have the best liquidity in our company's history. This positions us to withstand this period of uncertainty while at the same time continuing to make important investments to support our long-term growth goals. I believe our future is bright. Looking more specifically at our second quarter results, we opened two new warehouse stores in the second quarter of 2020, one in Novi, Michigan, and one in Elizabeth, New Jersey. The second quarter openings brought the total number of warehouse stores that we operate to 125 stores, up 18% from 106 warehouse stores at the end of the second quarter of 2019. Looking at the third quarter of 2020, we have already opened our third store in the Salt Lake City area and our first small store design studio in Dallas, Texas. We also have plans to open a new store in Toms River, New Jersey in August and San Diego, California in September as we further build out and scale our stores nationwide. Despite the new store development headwinds caused by COVID-19, we are pleased with our planned 2020 new store openings, which now include 13 new warehouse stores, up from our most recent estimate of 11 stores. As we look to 2021, we are committed to returning to 20% new store growth and excited about the new store pipeline. In addition, we expect to achieve a more balanced cadence of openings throughout 2021. As we have discussed, we are taking a partnership approach with our landlords and are encouraged that our landlords recognize that we are one of the few retailers that have plans to open stores over the long run. We are already seeing real estate opportunities that we believe are better than before the pandemic started. Moving on to our comparable store sales. Our second quarter comparable store sales declined 20.8% due to COVID-19 and the associated declining transactions caused by our store closures, not allowing customers into our stores throughout much of the quarter and reducing operating hours. Comparable store transactions declined 22.3%, and our comparable store average ticket increased 2%. Consistent with previous quarters, our best-performing category continues to be laminate luxury vinyl plank. On a monthly basis, our comparable store sales were down 50.8% in April, but improved to a 26.1% decline in May and a positive 7.7% in June. We are pleased with the positive June comparable store sales increase, but since we started opening our stores to the public on different dates throughout the second quarter, this number doesn't fully explain the strength of our comparable store sales. When we measure our comparable store sales from the day each store opened to the public until the end of the second quarter against the same time period for those stores in 2019, that comparable store sales increase would be 8.6%. And for fiscal June, using the same metric, those stores opened to the public had a comparable store sales increase of 10.2%. Our third quarter comparable store sales to date have accelerated to 16%. The sequential improvement is the direct result of our flexible business model, where we were able to quickly convert from our curbside pickup model to fully reopening all of our stores by early June. Our e-commerce and connected customer strategies allowed us to remain engaged with our customers, particularly on their mobile devices when our stores were closed to the public. As a result, we were able to retain a significant amount of sales as our stores were closed or operating with reduced operating hours. Our second quarter e-commerce sales increased 192% and accounted for 33% of our sales compared to 10% during the same period last year. At its peak, e-commerce accounted for 64% of our sales. During this peak period, we saw over 90% of orders picked up at the stores as we were able to offer curbside pickup. As our stores have reopened, we have seen our e-commerce sales penetration rate moderate to 17% to 18%, which remains well above the 12% penetration rate experienced prior to the impact of COVID-19. We experienced strong traffic growth in organic and paid search as well as direct traffic, which drove our strong overall traffic. We believe the strong growth in traffic reflects consumers' interest in flooring projects as home values continue to rise, population de-densification emerges in certain markets, and spending dollars shift from travel and entertainment to affordable home improvement projects. As we have discussed, the average household income among our customer demographic group is between $100,000 and $125,000, giving them more discretionary income to explore flooring projects. Our internal survey in late April showed very few customers canceling projects or even postponing projects as we continue to make website optimization upgrades, and further build out content, we expect all of our e-commerce growth and performance metrics will continue to improve, leading to a sustained, higher level of e-commerce sales penetration than prior to the impact of COVID-19. We also have made several successful tactical decisions to grow our market share and build our brand loyalty with our Pros that we believe will have long-lasting benefits. First, our Pro teams reached out to our top Pros via wellness phone calls, emails, and text messages to make them aware that we were there for them and could arrange select pickup appointments to serve their needs to complete ongoing and new projects. The teams made them aware of the benefits of using our PRO App, which includes the ability to build a quote, search in-stock inventory, and quickly check out. The feedback from our Pros was overwhelmingly positive, and we were very pleased with how we drove engagement. Second, we temporarily increased our PRO Premier Rewards points incentives in May to a maximum of four times based on spending levels. The increase in incentives not only provided needed support to our Pros during these challenging times, but it led to an increase in average spend. The average spend for our PRO Premier Rewards Pro is almost 3.5 times more than a non-PRO Premier Rewards Pro. We continue to see constant quarter-over-quarter growth in points earned, points redeemed, and engagement. It is clear to us that our top Pros that are enrolled in PRO Premier Rewards are engaged with us, and we have the ability to influence their behavior and spend through targeted initiatives that we will build on in 2021. We extended our 18-month no-interest credit card offering through May 31, which gave our Pros and do-it-yourselfers an additional line of liquidity for projects. In late June, we launched our Pro business credit card in partnership with Alliance Data Services, which should be fully rolled out to all of our stores by the end of the third quarter of 2020, further building on our value proposition. We are excited about the features that this card will offer our Pros, including, but not limited to, a 180-day no-interest payment plan that is more compelling than the industry standard terms of 30 to 60 days. Over time, we expect to tie the usage of this card with our PRO Premier Rewards program. As many of you know, free design services is a pillar of growth at Floor & Decor. As part of this service, we accelerated the launch of virtual design appointments into the second quarter of 2020 and are excited about the role virtual design appointments are playing during the COVID-19 pandemic. We have had over 8,000 appointments since its launch, 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 may be social distancing in response to the COVID-19 pandemic or just before the ease of starting the project at their homes first with a cloud-based video conference. This strategy leverages our website resources, including our room visualizer and our My Order quote builder and allows our designers to connect with customers while maintaining social distancing guidelines. Importantly, over 70% of appointments are still going into our stores, which reinforces the importance that our stores play in the purchase decision. While the COVID-19 pandemic has created significant challenges, there are important lessons that we will carry forward that are leading us to adopt new processes. Notably, we have learned how we can engage with our customers in different ways that are faster and easier that we believe will further build our brand loyalty. Specifically, we know our top Pros embrace our concierge curbside pickup service that is fast and efficient. Virtual design appointments have proven to be an important engagement tool that will continue to grow for years to come. Internally, we are doing more remote training and using virtual product line reviews. We will be using virtual technology to do more management store walks, a process that we believe will be long-lasting. We are seeing more benefits of teleworking for certain store support function groups that we can carry into next year and beyond, potentially leading to less required office space. From a macro perspective, we are cautiously optimistic that the Federal Reserve's actions to inject liquidity into the market and lower interest rates to support the economy and housing will serve to support growth in the second half of 2020 and into 2021. That said, there is still significant uncertainty that most recently comes from an increase in COVID-19 infections in certain markets, which raises second wave risks into the fall. For that reason, we are cautiously optimistic but recognize business risks remain elevated and that we could have to close stores in certain markets if necessary. Nonetheless, we remain focused on maintaining a flexible business model, and we'll continue to look for ways to engage with our customers in different ways. Before closing, I would just like to take a moment to discuss how we are thinking about diversity and inclusion and being part of the solution in our local communities. We remain a company that is committed to fostering a culture that not only supports diversity and inclusion, but embraces and encourages it. To that end, we have recently created an officer position reporting to our President, Lisa Laube, refreshed and reenergized our diversity and inclusion steering committee, and we are excited to launch our diversity and inclusion task force. This task force will comprise associates from departments and regions across our company that are passionate about our culture. They will be responsible for developing and executing ideas to further promote diversity and inclusion across the company through various initiatives as well as building awareness of our initiatives and programs. These actions will further strengthen our company and its commitment to our core diversity and inclusion values. Let me close by saying again how inspiring it has been to see our store and store support associates, along with our supply chain teams rallied together in a 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. My confidence in the power of our business model and our ability to navigate this crisis is unwavering. And we remain committed to long-term profitable growth. I will now turn the call over to Trevor to discuss in more detail our second quarter financial results.

Thanks, Tom. We are incredibly proud of how the Floor & Decor team has managed through the crisis, our values, culture, fantastic leaders, and unique business model allowed us to work through this difficult time, and we are a stronger company now than when this all started in the first quarter. Looking at our second quarter results, our sales were $462.4 million, down 11.1%. We believe the decline was entirely due to COVID-19 as we took measures to protect the health and safety of our customers and associates by limiting most of our stores to curbside service beginning in late March. Approximately half of the available selling days for our stores were under this curbside model during the second quarter of fiscal 2020, during which our comparable store sales were down approximately 50% compared to the prior year period. Beginning in May, and concluding in June, we implemented a phased approach to reopening for in-store shopping with enhanced safety and sanitation measures such as requiring associates to wear facemasks, installing social distancing markers on the floors, installing protective shields at cash registers, and regularly sanitizing shopping carts, PIN pads, design desks, and other high-traffic areas. Tom already walked you through how our comparable store sales improved materially as we opened our stores to the public. Turning to our second quarter gross margin and expenses. While our second quarter total sales have declined 11.1% from last year, our gross profit only declined 9.7% as our gross margin rate increased 60 basis points to 42.5% from 41.9% in the same period last year. The year-over-year increase in gross margin rate was largely driven by higher year-over-year product margins, including $3.6 million from certain tariff refunds and improved merchandising strategies, partially offset by higher distribution center costs related to our new Baltimore, Maryland distribution center that opened in the fourth quarter of fiscal 2019. Our new Baltimore distribution center's impact on gross margin is expected to moderate as we move through 2020 from the growing benefit of the reduction in shipping costs that will have long-lasting benefits. Moving on to our second quarter 2020 expenses. Our decisive and early actions to reduce expenses, while at the same time, retaining our full-time associates, enabled us to slow growth in our second quarter selling and store operating expenses to 2.8% from $134.6 million last year to $138.5 million this year. Nonetheless, our second-quarter selling and store operating expenses deleveraged 400 basis points to 29.9% of sales from the deleverage of payroll, operating expenses, and occupancy costs related to the decline in sales as well as operating an additional 19 stores. We incurred $1.1 million in-store expenses during the second quarter related to the measures we took to protect our associates and customers while in our stores from the COVID-19 virus, primarily for personal protective equipment. Our quick actions to curtail and broadcast media in the quarter enable us to leverage our advertising expense. Our comparable store selling and store operating expenses rate deleveraged as a percentage of sales by 300 basis points. Our second-quarter general and administrative expenses, which are typically expenses incurred outside of our stores, increased $2.8 million or 9%. As a percentage of sales, they deleveraged 140 basis points to 7.3% from 5.9% due to the decline in sales as a result of the COVID-19 pandemic, increased depreciation related to our store support center and technology investments to support long-term growth, and a higher expense from employee incentive compensation. We incurred $0.5 million in general and administrative expenses in the second quarter related to COVID-19 virus, primarily for personal protective equipment. Preopening expenses during the second quarter decreased $2.9 million or 46.1% from the same period last year. The decrease is primarily the result of operating fewer new stores in the second quarter of 2020 and planned fewer new stores in the third quarter of 2020 relative to the same time last year. Our second quarter net interest expense increased $100,000 or 3.6% from the same period last year. The slight increase is due to higher interest costs from new borrowings, offset by increased interest income earned related to the tariff refund receivables. In the second quarter, we incurred a $12.2 million benefit from income tax provision compared with $100,000 of expense last year. As a result, our effective tax rate was a negative 61.6% versus a positive 0.2% last year. The decrease in the effective tax rate was primarily due to the recognition of income tax benefits in connection with the CARES Act. More details about the tax provision are provided in our second quarter 10-Q and a reconciliation of GAAP net income to adjusted net income in our press release. Moving on to profitability. Our fiscal second quarter 2020 adjusted EBITDA decreased 31.6% to $45.6 million from $66.6 million last year as a result of the decline in second-quarter sales and deleveraging our expenses. As a result, our adjusted EBITDA margin rate decreased approximately 290 basis points to 9.9% from 12.8% last year. Our second quarter GAAP net income decreased 26.6% to $32 million or $0.30 per diluted share from $43.6 million or $0.42 per diluted share last year. Our second quarter adjusted net income decreased 62.2% to $13.4 million or $0.13 per adjusted diluted share from $35.3 million or $0.34 per adjusted diluted share last year. We ended the second quarter with 105.5 million diluted weighted average shares outstanding compared with 104.8 million shares last year. A reconciliation between GAAP second quarter net income and adjusted net income is provided in our press release. Let me now turn to some of the changes in our second quarter balance sheet. We have a large income tax receivable of $28 million due to taking advantage of the CARES Act provision that I will touch on in a moment. We also have a large increase in our receivables due primarily to tariff refunds we expect to collect in the second half of 2020, which we have discussed in more detail in our SEC filings. Our inventory balance was $594.3 million, up $147.1 or 33.1% versus the second quarter of 2019. There are three reasons for the increase over the same period last year: One, lower-than-planned cost of goods in the second quarter due to COVID-19; two, 19 new stores and an 18% increase in store count versus the second quarter of 2019. And finally, our new Baltimore distribution center was not opened in the second quarter of 2019. As we get closer to the end of this year, we are planning on our inventory balances versus the same time last year, growing at a rate below our expected future sales growth. On May 18, 2020, we entered into a $75 million incremental term loan B1 facility with a maturity date of February 14, 2027, to provide additional liquidity due to the business uncertainty caused by the COVID-19 pandemic. The term loan B1 facility is a separate tranche from our existing Term B facility. At the end of the second quarter of 2020, we had $219.3 million in outstanding term loan facilities with a maturity date of February 14, 2027. We have no meaningful debt maturities over the next five years. At the end of the second quarter, our last 12 months net debt to adjusted EBITDA, excluding preopening expenses, were 0.3 and 2.8 on a lease-adjusted basis. We had $496.5 million of unrestricted liquidity immediately available to us, including $134.4 million in cash and cash equivalents and $362.1 million for borrowings under our ABL facility. This is the highest liquidity in Floor & Decor's history. I'm glad to have repaid all of the $275 million cautionary asset-based revolving line of credit we drew at the end of the first quarter and finished with one of the highest cash balances in our history. We believe the immediate liquidity that is available to us, coupled with our credit facilities and actions we have taken to reduce costs, provides us with the liquidity we need to manage through the COVID-19 pandemic. We have an initial assessment of the CARES Act, which we expect will provide us substantial cash benefits for the second half of 2020. We anticipate benefiting from three main sections of the act. First, we are amending our tax returns to take advantage of the temporary five-year net operating loss carryback allowance and technical correction for the qualified leased improvements, which changes 39-year property to 15-year property eligible for 100% bonus tax depreciation, and we estimate this will generate an IRS refund of approximately $28.5 million. Second, we expect to benefit from the temporary deferral of employee payments for social security, which has saved us $3.1 million in deferments through the second quarter, and we expect to defer another $9 million in the second half of 2020. Finally, we expect to benefit from employee retention credits, which we estimate total at least $1.1 million, potentially more, if we qualify for additional credits during the second half of 2020. Collectively, we expect these will increase our cash flow by approximately $42 million. Moving on to capital expenditures. Our fiscal 2020 capital expenditures are currently planned to be between approximately $188 million to $196 million compared to approximately $255 million to $265 million when we originally planned and will be funded primarily by cash generated from operations. The growth in capital spending reflects our planned opening of 13 new warehouse stores in fiscal 2020 compared to 11 new store openings when we planned at the end of the first quarter of 2020. Additionally, we plan for one small format stand-alone design center and to start construction on stores we plan to open in the early part of fiscal 2021. Capital expenditures associated with these projects are expected to be $121 million to $125 million in fiscal 2020. We also will invest more in existing store remodeling projects and distribution centers in fiscal 2020, using approximately $47 million to $49 million of cash. We plan to invest in information technology, infrastructure, e-commerce, and other store support centers and should be using approximately $20 million to $22 million of cash. Based on these changes, we expect our depreciation and amortization to be approximately $91 million to $93 million in 2020. Our planned capital expenditures and related depreciation could vary materially from our estimates as we are operating in a very unique environment, but this is our current best estimate. While we're excited about bringing our stores back to full operations and the result in strong growth in our comparable store sales, the remaining significant business and economic risk could still create a wide range of potential outcomes in the second half of 2020. For this reason, we have elected at this time not to change our policy of not providing annual sales and earnings until economic and business risks have improved and the range of outcomes narrows. In closing, I would like to say that our entire executive leadership team is extremely proud of how quickly Floor & Decor adapted to meet the challenges of the COVID-19 pandemic. It is a testament to the resiliency of our business model, our talented associates, and the investments we've made in our business that have been critical in managing through such a challenging time. I want to personally thank all of our associates for their tireless work and dedication to serving our customers under such challenging circumstances.

Thank you Tom and Trevor for taking my question. I just wanted to ask the team on the gross margin picture. The expectation going forward, what is that? And is there anything that has changed in terms of your outlook due to rising raw material costs, things like lumber? What are your thoughts there?

I think that dirt in the background there, you just need to bounce off of that. I think one of the things we see in this environment that is good is people are not cut off. I think as we're seeing those material costs fluctuate, and you've got the home renovation overall are strong. People are willing to pay to get those products, and we've held steady on our pricing. So there is competition out there for that gross margin. When we look at going forward, I think we're expecting to be stronger, given that we'll see the performance continue.

As I mentioned before, we are expecting our gross margins to be better than last year. Just as a reminder, though, we had a very big benefit with that tariff refund, about a $14 million benefit in the fourth quarter of last year. If you back out that benefit, our gross margins would have been about 41% versus the 43.6% we reported last year in the fourth quarter. So if you back out that one-time benefit, our expectation is that our gross margins will be higher as we round out the rest of this year.

Thanks. Good evening, guys. So I know it's hard to tease it out, but have you tried to think about the benefit from stimulus in the economy? And more importantly, you called out customers in April saying they're not canceling projects. What are your thoughts on how much of the surge in demand that you've seen in June and July, as stores have become open, could simply be a deferral demand that you would have already – it's just moving in time, so to speak?

Chris, this is Tom. I will take a stab at a few parts, and maybe Trevor can jump in at the end if need be. So I think from the first part about is this catch up from finishing projects. We've really never closed, and we were able to retain a good portion of our sales in a curbside model. So I feel like in the curbside model, there wasn't a lot of new projects being started early on, and that was a lot of finishing up of jobs. There may have been some – I mean there were some starting of projects, but generally during our curbside operations, the consumer was finishing their job. As I look forward now, I mean, the business has continued to strengthen. And I don't feel like it's just catch up. I feel like it's a lot of new projects that are coming underway. I think as people have been almost forced to stay home, they're not spending on movies, they're not spending in restaurants, they're not traveling. They're being forced to work out of their homes. And I think the more time they spend in their home, the more projects that they identify. And that has continued. The consumers are coming in and continuing at a pretty fast pace. So a lot of new stuff is getting started. I do think that the stimulus has helped. I mean, the stimulus has supported the consumer and it supported small businesses. And I think those things are definitely beneficial. I believe consumer spend is going into home improvement.

The only thing I would add, Chris, this is Trevor, is when we exited last year, we exited at a 5.2% comp when we – before COVID really clamped down we were comping at a 6.1%. And when we had given guidance at the beginning of the year, we said that we thought we'd have a comp of around 6% all year. And again, we were right at that at the time we gave comp. So hard to say for sure, but I do think we feel confident in that conviction that three years we've been public, we really never had a miss in the range of comps we've given. So I do feel like this year was going to be that mid- to upper single-digit comp. I think the difference we're seeing right now, as we all know, good thing Tom just mentioned, is the unprecedented level of liquidity that the Fed has put in into the government. Plus, people aren't spending thousands of dollars a month on discretionary items and going out to eat and travel and things like that. And the combination of those three things has helped us perform. The other benefit I would say that we're hearing loud and clear from our customers and our Pros. Certainly, we got a great assortment, our employees are doing a good, but it's another advantage of having that in-stock inventory right? People can get it today as opposed to have to waiting. And Pros want to get it today because they don't know when another shutdown is coming. And so I think just our business is structurally advantaged in this environment as well.

Hey guys. Curious if you could walk us through whether the acceleration from your 8% comp in June to the 16% comp in July is more so a function of having more stores open? Or if the underlying business has accelerated from June to July and what those drivers from month-to-month could particularly be?

Yes. So first, if you – our – I think that from a standpoint – while I'm stumbling along here? The acceleration in June – the acceleration from June to July has come a lot on the heels of homeowners just taking out more projects. As you look at our business and you kind of watch what's going on, our weekend business is better than I've seen it in multiple years. We've just had a – just an increase. I mean, when you're comping at the 16% rate in the months of July, both the Pros doing a little bit better. But for us, I think the biggest difference we've seen is a lot of do-it-yourselfers are entering the marketplace. So I think that's been part of it. The other thing, I think, that's helped our business, and Trevor mentioned it a little bit as an advantage with the Pro is during COVID, our in-stock position that we talked about before wasn't as good as it is today. And we've done a – we've got our Chinese transition SKUs have been completed. Our Taiwan stock is the best it's been in three years. And because of that, inventory levels in the store and the amount of new products that hit, I think they just – all of those things together have helped us benefit. So if the consumers come back into the marketplace and come back in our stores has been very beneficial to what's happened in the month of July.

And just if you look at the May when our stores were open, June when our stores were open, July, and the way our calendar falls, we're actually in fiscal August. Our comps have accelerated every single month. So we're getting better every fiscal month as we proceed through this very unique time.

Hey, good afternoon. Thank you. I realize just maybe anecdotal from your perspective. But when you talk to the Pro and more specifically, the backlog today versus, say, 90 to 120 days ago. And then maybe also a year ago, I guess, what have you learned? And I'm also curious if the Pro is giving you any color on whether consumers' aversion to having contractors come into their home has alleviated at all in the past few months?

Yes, I can go. Maybe Trevor, since he's in charge of Pro, may want to jump in. But from my perspective, the Pro is busy. And Pros that I have engaged with, I've been in many of our stores, spoke to many of our team and everything that I'm hearing, our Pros are really busy. Certainly, when COVID started, it was one of the things that we were concerned about, where was the consumer going to allow people into their home? And I think as evidenced by what's happened with our business is you watch the trend – the acceleration in our sales trend from June to July. Clearly, I think the consumer is feeling okay letting the contractor in their house. We've done our part, we tried to educate our professionals and say, 'Hey, make sure you understand social distancing and make sure you wear masks.' But I think when someone lets a contractor into their home, in general, contractors are playing by the rules and making consumers feel comfortable. So I believe that comfort level is good and people have allowed them in their homes.

The only thing I was going to add, this is Trevor speaking, is we've talked to our biggest Pros in all of our stores. We have the ability to do that now. And what they told us is, as you would expect, when we shut our doors, they were finishing business, but the minute we opened our stores, their business was incredibly strong. We've been told their leads are at the highest level they've had. It looks like July is going to be the best month they've had. And so it does appear that just like you're seeing in our business, people are not currently averse to having Pros. And I think our Pros are smart. As Tom said, they're social distancing, they wear masks, they're taking off their shoes. They're staying away from their clients in the house. And so our Pros' business is incredibly strong right now.

That's great to hear. And then just from a category perspective, I was wondering, you talked about the overall monthly comp improving from May to June and into July here. Just wondering from a category perspective, if you're seeing anything out of the ordinary. And I guess from a 2Q perspective, you called out LVT being the best. Just wondering if you could shed some light on some of the other parts of the business.

Sure. This is Lisa. So yes, we haven't seen a huge shift. During the curbside piece of the business, we did see some shift. You saw a higher penetration in LVT, higher penetration in tile. We talk a lot about our good, better, best assortment and how better and best has been driving our assortment – or excuse me, driving our sales. And we did see a slight shift down during the curbside model. But as soon as the stores opened back up, everything kind of went back to the way it was. So while decorative accessories, which is a category that is heavily sold by our designers, people want to see that product. That was hard when we were in curbside. And so that penetration did go down a little. But as I said, as the stores have opened back up and we look at July, the mix is very similar to what we saw before, and our better and best strength is back to where it was before.

Good evening. Trevor, maybe to start with you. I think back to the flow-through commentary and the math we were all doing three months ago, right, on any comp reduction relative to the original forecast. Obviously, we're moving the other way here. So maybe can you give us some color on what we should expect the incremental margin to be, right, with the comp revisions being positive now? Is it the 25% to 30% we were talking about on the downside? Or is it closer to that 35%, 40% in the normal state of the business?

Yes. Steve, this is Trevor. I think if you're talking about relative to our original guidance. So when I gave that comment about the 25% to 30% flow-through on a negative revision to sales on the original guidance. That's what we expected. We, obviously, still believe that even though we're having a great performance now, my current expectation is that we're not going to achieve that original guidance. But because of the aggressive moves we've done with the cost maneuvers, and lowering our cost, plus the positive results we're seeing now, and we do expect that to – maybe not at this level, but we do expect that to continue through the rest of the year. I would expect that flow-through to be probably closer to 20%. And so since we're talking about a negative sales versus the plan, a lower percent is a higher profit number. I think you guys get that. But just to be clear, so our profit outlook has improved materially from what we were thinking back in COVID when our comps were down 50% is how we're thinking about the rest of the year.

Good evening. Thanks a lot for taking my question. So Tom, you mentioned that you didn't think the 16% that you're seeing in July was a function of pent-up demand. Trevor, you thought a run rate of the business, a reasonable run rate of the business is comping up 6%. So how do you reconcile that? How do you bridge what realistic expectation is over the next few quarters, if it's not mid-teens, and it's not low mid-single digits?

Just – I guess one point of clarity, Michael, the way I was trying to explain it is the difference between what I would have thought we would have run, which was 6%, we said we thought we would comp at percent all year. I think the difference of that is really three main things: one, the unprecedented liquidity that the government has put into not only businesses but in consumers' pockets. I mean that's probably the biggest driver. But as Tom mentioned in his prepared comments as well, is people are just spending a substantial amount of time in their homes, looking at things, they're spending things on home offices, on developments. They know they need to do. And then you add that to the liquidity that they're not spending hundreds, probably thousands of dollars a month on travel and entertainment. I think the combination of those three things is what is driving our comps from what would have been a mid- to upper single-digit comp to a mid-teen comp.

Yes. I think, look, COVID doesn't feel like it's going away anytime soon. And I think that the consumer is going to continue to not have the spend that they spent. If you remember, we planned through towards a bit of a higher-end customer. I also think that what Trevor is mentioning, that the people – when they're having to work out of home and they're not being able to go out as much, they're not just looking at the space, they're having to repurpose space in their homes. I mean, if you've got your kids going to school in the dining room and you've got to – you and your spouse are both working, you need to create two offices. And that's spurring people working within their homes and recreating space. So those things, I believe that COVID is not going away, people staying home. That is going to last for a little while.

Hi, yes. Good afternoon everyone. Great execution, I have to say. My first question is this, Tom, like you actually mentioned DIY in the press release, and I don't think you guys have ever done that before. So could you maybe talk – and you actually also said on this call that there's a lot of DIYers that help with the quarter. So can you talk about what's going on in this industry? Because it does seem like this has historically been an industry that wasn't DIY, meaningfully. And that's changing.

Yes. I think – so we call a lot of times we call the end user – we call the end user, the DIY. And that doesn't necessarily mean that they're actually buying it and putting it themselves. But the activity of the end user has been substantial. I mentioned our weekend business is about as good as I've seen it in a very long time. The activity on our website, the amount of people that are on searching the category and engaging on the website is an incredible pace. The viewing, like we've added a ton of how-to clinics on our website. The viewership of that is incredibly high or incredibly higher. And YouTube views of our product. We did a – we started an Instagram live clinic for our associates because we couldn't do clinics in the store because of social distancing. And the activity in that has been good. Our virtual appointments, we did 8,000 virtual appointments. That's also the end user in the store. So when I combine all of those things, I don't think that everyone that necessarily my neighbors are coming in and buying a pile of tile and installing it this weekend, because I still think they're engaging a Pro to do that. When I look at our department comp sales, that makes me feel like they're engaged in the project, but they're hiring a Pro to do it. In most cases, I don't think they're tackling a project like that, but maybe they're doing a backsplash more than they have historically. But they're definitely wanting to engage in our product.

Yes. It's just about that simple. We do think it's a game changer. There's also all kinds of other benefits that you can see on the website, or we can get you a pamphlet, just to get more – it's more than even just that, but we do think it's going to be very beneficial. So we'll see. We're just now starting to roll it out. These Pros generally don't necessarily are looking for this big credit solution. But that being said, it's one arsenal in our tool to serve the Pros. The other thing we can do with that Pro credit card that we're thinking about more longer-term is the costs are fairly materially below what we pay to credit cards, and there's ways we could tie that into the PRO Premier Rewards program to maybe offer incremental points and make it a win-win for the Pro as well. So just getting started, I'm super proud of our IT team and our Pro team and our credit team that have worked hard on this for over a year or more to come as we get to the end of this year and into next year.

Hi, good afternoon, thanks for taking my question. My question focuses on real estate. You mentioned in your prepared comments that you were having conversations with your landlords, and I wondered if it resulted in any kind of deferred rent and how it impacts cash flow this year and next? And then just with regards to you stating that there might be better real estate opportunities. Would this change the timing at all of entering into new regions that you've been thinking about entering in? Would that – would it accelerate it, move it up into 2021, perhaps?

Yes. So I will take the second part of your question. Trevor can talk about rent deferrals and things of that nature when I'm done. I think what we've seen is we had a good real estate pipeline for 2021 in place, but we had a good real estate pipeline in 2020 also. And we had a delay due to the pandemic and being able to get our stores physically constructed to get them to be able to open the right way. So the pushing back of those stores, along with our 2021 pipeline, along with there's been opportunities that have presented themselves in different parts of the country that we didn't anticipate. It's collectively, we've been able to put together just a great pipeline of stores for 2021 and 2022. All of the changes have been giving us the ability to have good cadence in the opening. So the stores for the first half, since we've been opening 20%, we're going to open them at the right time. We're going to have a good amount in the – across the quarters of the company. So it's not so much, though, it's giving us the opportunity to – any markets anytime sooner, but it is giving us the ability to fill in some important markets a little bit quicker. We've seen some good opportunities arise in the Northeast as a result of this. And so that – we'll be able to go a little bit faster than we had been planning to.

In the first part of your question, our real estate team did a great job. We deferred $5.9 million in payments in Q2 that we will be paying back most of it over the next year. And then the other thing that I think is exciting for us. And again, our real estate team gets credit for doing a great job as the rents we're getting this year and next year are the lowest I've seen in my nine-year history, and the quality of the real estate is better. Part of that is because we're taking on more of the construction cost, but part of that is just the environment we're in, and we've got some really good dealmakers. And so our rent costs are getting close to the high single digits versus the mid-double digits on a rent per square foot basis. So we're getting better locations, and we're entering better markets, but our rent per square foot is coming down.

Hey, thanks. Good afternoon. I want to hit on the 16% quarter-to-date once more. Realize it's sort of an average or weighted average. And in there, you probably have some 20s and 30s and maybe some flats. Given that you're still sort of reopening and markets are ramping, would you say there's a bias as these markets normalize to higher than that number or bias a little bit lower?

Just a couple of things. So we've had all of our stores opened since early June. So the 16% in July, all of our stores have been opened. And it's been pretty consistent. It hasn't – it's been steadily getting better, I guess is how I would say it. I don't know that it's going to keep ratcheting up per se. But as I mentioned a second ago, our fiscal August, which started last Friday, has actually been a little bit better than that.

Hi, thanks. I have a couple. You mentioned that in SG&A that obviously, payroll deleverage a lot, but you leveraged advertising, which means the dollars are down a lot. I'd love to know that now that sales are back, what's the thought on the advertising strategy? Does it just ramp right back up or shift a lot because you're not trying to actually drive traffic to the stores, just take us through that ramp.

This is Lisa. No, we did pause mostly our TV advertising in April and the beginning of May as the stores were in curbside, although we did continue with all of our digital marketing because our web business was so strong, and I wanted to make sure that we were there when the customers were searching our category. But as the stores opened back up, we ramped back up with our TV advertising in the middle of June. And we actually have the exact same cadence that we had planned before. And in fact, we took a week that we had planned for April, and we've now moved those dollars into August. So we believe that we have got a customer base that is very excited. And so we want to make sure that we are in front of them from a TV perspective as well as a digital perspective.

Sorry. I'm trying to jump between analysts' comments. If we look at advertising this quarter, it represented about 2.4% of our sales during the quarter, that's kind of a healthy number for us. As we get back to a normalized rate, I think that number will click back up. I don't expect it to be significantly higher than it was prior to COVID.

Our overall advertising is less than 3% of sales, and it was even less than that obviously. So it was a minor component of – it helped the deleveraging. We just don't spend a lot on advertising.

Got it. And then on the exposure to some of the recent COVID hotspots like Texas, Arizona, and Florida. You've got a lot of stores in these states. Curious if you've seen any dispersions or fluctuations in these states, in particular, relative to the overall fleet?

We live – we watch the hotspots, and we're living in one of the hotspots. And we certainly have watched it across the country, and our strength is across the country. So we're seeing the same pace of improvement in the states where COVID is – where the trend is worse. We're seeing the same trends in our business where COVID is getting better. So it's hard to explain and hard to rationalize. But clearly, I think consumers want to engage with our products, and they're coming into the stores.

Good evening. Thanks a lot for taking my question. So Tom, you mentioned that you didn't think the 16% that you're seeing in July was a function of pent-up demand. Trevor, you thought a run rate of the business, a reasonable run rate of the business is comping up 6%. So how do you reconcile that? How do you bridge what realistic expectation is over the next few quarters, if it's not mid-teens, and it's not low mid-single digits?

Just – I guess one point of clarity, Michael, the way I was trying to explain it is the difference between what I would have thought we would have run, which was 6%, we said we thought we would comp at percent all year. I think the difference of that is really three main things: one, the unprecedented liquidity that the government has put into not only businesses but in consumers' pockets. I mean that's probably the biggest driver. But as Tom mentioned in his prepared comments as well, is people are just spending a substantial amount of time in their homes, looking at things, they're spending things on home offices, on developments. They know they need to do. And then you add that to the liquidity that they're not spending hundreds, probably thousands of dollars a month on travel and entertainment. I think the combination of those three things is what is driving our comps from what would have been a mid- to upper single-digit comp to a mid-teen comp.

Yes. I think, look, COVID doesn't feel like it's going away anytime soon. And I think that the consumer is going to continue to not have the spend that they spent. If you remember, we planned through towards a bit of a higher-end customer. I also think that what Trevor is mentioning, that the people – when they're having to work out of home and they're not being able to go out as much, they're not just looking at the space, they're having to repurpose space in their homes. I mean, if you've got your kids going to school in the dining room and you've got to – you and your spouse are both working, you need to create two offices. And that's spurring people working within their homes and recreating space. So those things, I believe that COVID is not going away, people staying home. That is going to last for a little while.

Our first questions come from Christopher Horvers of JPMorgan. Please proceed with your questions.

Thanks. Good evening, guys. So I know it's hard to tease it out, but have you tried to think about the benefit from stimulus in the economy? And more importantly, you called out customers in April saying they're not canceling projects. What are your thoughts on how much of the surge in demand that you've seen in June and July, stores have become open, could simply be a deferral demand that you would have already – it's just moving in time, so to speak?

Chris, this is Tom. I will take a stab at a few parts, and maybe Trevor can jump at the end if need be. So I think from the first part about is this resolves catch up from finishing projects. We've really never closed, and we were able to retain a good portion of our sales in a curbside model. So I feel like in the curbside model, there wasn't a lot of new projects being started early on and that was a lot of finishing up of jobs. There may have some – I mean there were some starting of projects, but generally during our curbside operations, that consumer was fit – or that Pro was finishing your job. As I look forward now, I mean, the business has continued to strengthen. And I don't feel like it's catch up. I feel like it's a lot of new projects that are coming underway. I think as people have been not almost forced to stay home, they're not spending on movies. They're not spending in restaurants. They're not traveling. They're being forced to work out of their homes. And I think the more time they spend in their home, the more projects that they identify. And that has continued. The consumers are coming in and continuing at a pretty fast pace. So a lot of new stuff is getting started. I do think that the stimulus has helped. I mean the stimulus has supported the consumer and it supported small businesses. And I think those things are – they're beneficial, I believe the consumer spend is going into home improvement.

Hi, thanks. I have a couple. You mentioned that in SG&A that obviously, payroll deleverage a lot, but leveraged to advertising, which means the dollars are down a lot. I'd love to know that now that sales are back, what's the thought on advertising strategy? Does it just ramp right back up or shifting a lot because you're not trying to actually drive traffic to the stores, just take us through that ramp.

This is Lisa. No, we did pause mostly our TV advertising in April and the beginning of May as the stores were in curbside, although we did continue with all of our digital marketing because our web business was so strong, and I wanted to make sure that we were there when the customers were searching our category. But as the stores opened back up, we ramped back up with our TV advertising in the middle of June. And we actually have the exact same cadence that we had planned before. And in fact, we took a week that we had planned for April, and we've now moved those dollars into August. So we believe that we have got a customer base that is very excited. And so we want to make sure that we are in front of them from a TV perspective as well as a digital perspective.

Sorry. I'm trying to jump between analysts' comments. If we look at advertising this quarter, it represented about 2.4% of our sales during the quarter, that's kind of a healthy number for us. As we get back to a normalized rate, I think that number will click back up. I don't expect it to be significantly higher than it was prior to COVID.

Our overall advertising is less than 3% of sales, and it was even less than that obviously. So it was a minor component of – it helped the deleveraging. We just don't spend a lot on advertising.

Got it. And then on the exposure to some of the recent COVID hotspots like Texas, Arizona, and Florida. You've got a lot of stores in these states. Curious if you've seen any dispersions or fluctuations in these states, in particular, relative to the overall fleet?

We live – we watch the hotspots, and we're living in one of the hotspots. And we certainly have watched it across the country, and our strength is across the country. So we're seeing the same pace of improvement in the states where COVID is – where the trend is worse. We're seeing the same trends in our business where COVID is getting better. So it's hard to explain and hard to rationalize. But clearly, I think consumers want to engage with our products, and they're coming into the stores.

Good evening. Thanks a lot for taking my question. So Tom, you mentioned that you didn't think the 16% that you're seeing in July was a function of pent-up demand. Trevor, you thought a run rate of the business, a reasonable run rate of the business is comping up 6%. So how do you reconcile that? How do you bridge what realistic expectation is over the next few quarters, if it's not mid-teens, and it's not low mid-single digits?

Just – I guess one point of clarity, Michael, the way I was trying to explain it is the difference between what I would have thought we would have run, which was 6%, we said we thought we would comp at percent all year. I think the difference of that is really three main things: one, the unprecedented liquidity that the government has put into not only businesses but in consumers' pockets. I mean that's probably the biggest driver. But as Tom mentioned in his prepared comments as well, is people are just spending a substantial amount of time in their homes, looking at things, they're spending things on home offices, on developments. They know they need to do. And then you add that to the liquidity that they're not spending hundreds, probably thousands of dollars a month on travel and entertainment. I think the combination of those three things is what is driving our comps from what would have been a mid- to upper single-digit comp to a mid-teen comp.

Yes. I think, look, COVID doesn't feel like it's going away anytime soon. And I think that the consumer is going to continue to not have the spend that they spent. If you remember, we planned through towards a bit of a higher-end customer. I also think that what Trevor is mentioning, that the people – when they're having to work out of home and they're not being able to go out as much, they're not just looking at the space, they're having to repurpose space in their homes. I mean, if you've got your kids going to school in the dining room and you've got to – you and your spouse are both working, you need to create two offices. And that's spurring people working within their homes and recreating space. So those things, I believe that COVID is not going away, people staying home. That is going to last for a little while.

That concludes our conference call. Thank you for your participation. We will now open the floor for any further questions.