Greetings and welcome to Floor & Decor Holdings, Inc.'s Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. 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 fiscal third quarter 2020 earnings conference call. On today's call, I will discuss the highlights of our strong third quarter as well as the progress we are making on some of our strategic growth initiatives that we believe will enable us to continue to grow our market share in 2020 and beyond. Trevor will then review our third quarter financial performance and discuss how we are thinking about the remainder of 2020 and then we will open the call for your questions. We are very pleased with our fiscal 2020 third quarter earnings results, which reflected broad-based accelerating sales momentum, strong earnings flow-through as well as strong cash generation. Our fiscal 2020 third quarter total sales increased 31.4% to $684.8 million from $521.1 million in fiscal 2019. Our third quarter fiscal 2020 comparable store sales increased 18.4%, exceeding our expectations. We are very pleased with our third quarter comparable store sales growth exit rate and the start to our fourth quarter. Our year-to-date comparable store sales through the third quarter of fiscal 2020 are flat with last year, which is a remarkable accomplishment considering the COVID-19 impact on our store operations, which began in late March. Our third quarter adjusted EBITDA meaningfully improved to a quarterly record $106.7 million, an increase of 86.8% from $57.1 million in the third quarter of fiscal 2019 and almost one and a half times higher than our annual adjusted EBITDA in fiscal 2015. Our fiscal 2020 adjusted third quarter earnings per share increased 107.4% to $0.56 from $0.27 in the third quarter of fiscal 2019. We ended the third quarter of fiscal 2020 with no net debt on our balance sheet and the strongest liquidity position in our company's history. Let me now provide an update on each of our five strategic pillars of growth, beginning with new store growth. We successfully opened three new warehouse stores in the third quarter of fiscal 2020, including new warehouse store openings in Salt Lake City, Utah, and Toms River, New Jersey in August and San Diego, California in September and a small design studio in Dallas, Texas in August. The fiscal third quarter 2020 store openings brought the total number of warehouse stores that we operate to 128 stores, up 13.3% from 113 warehouse stores at the end of the third quarter of fiscal 2019. As we look forward to the fourth quarter of fiscal 2020, we plan to open five new warehouse stores, with most of the openings in November. This will bring the total number of warehouse stores that we operate at the end of fiscal 2020 to 133, an increase of 10.8% from fiscal 2019. We are very pleased with the performance of our new stores, including those new stores opened in the third quarter as we successfully opened them in atypical ways due to the COVID-19 pandemic. We are also pleased with the sales waterfall among our store vintages, particularly our most mature stores. We look forward to resuming 20% new warehouse format store growth in fiscal 2021 after having to temporarily slow our new store growth in fiscal 2020 due to the COVID-19 pandemic. We have long wanted to open our new stores in a more balanced cadence throughout the fiscal year, and we believe we'll accomplish this in fiscal 2021. We also believe the class of 2021 will be a strong class of these stores. Moving onto our second pillar of growth, growing our comparable store sales. We are very pleased with the broad-based sequential acceleration in our sales that emerged throughout our third quarter. On a monthly basis, our comparable store sales increased 15.7% in July to 18% in August and to 20.8% in September, which led to an 18.4% comp growth in the third quarter of fiscal 2020. Adjusting for the impact of Hurricane Dorian in the third quarter of fiscal 2019, we estimate our fiscal 2020 third quarter comparable store sales would have increased approximately 17.8%. On a two-year stack basis, our comparable store sales increased 23%. Fiscal 2020 third quarter comparable store transactions increased 18.9% and comparable store average ticket declined 0.5% from the third quarter of fiscal 2019. We believe the decline in our comparable store ticket reflects a higher growth from our homeowner versus pro and designer influenced business as well as being aggressive in clearing discontinued inventory in our highest ticket category, which is our natural wood category. We are making room for what we believe will be an improved natural wood assortment. Among our six key merchandising categories, our top performing categories were decorative accessories, laminate luxury vinyl plank, and natural stone. That said, there was strong growth across all of our merchandising categories in the third quarter of fiscal 2020, which is a direct result of our ability to lead the market with differentiated and innovative trend-right products at everyday low prices and having in-stock job lot quantities that homeowners are looking for today. Our third strategic pillar of growth is expanding our connected customer experience. Our fiscal 2020 third quarter e-commerce sales remained strong, increasing 111.5% from the third quarter of fiscal 2019 and accounted for 16.6% of our sales versus 10.2% last year. We continue to see strong double-digit growth from paid and organic search, as well as direct traffic to our website as homeowners contemplate flooring projects. In the third quarter, traffic to our website increased 50% year-over-year. The combination of changing consumer behavior due to COVID-19, as well as the investments we have made to further optimize our website experience and build out our content, leads us to believe our e-commerce performance metrics will continue to be strong. That said, our stores remain a critical part of our connected customer experience. In the third quarter of fiscal 2020, 87% of website orders were picked up in our stores. Our fourth pillar of growth rests on the successful investments we are making in our pro and commercial customers. In September, we created excitement in our stores by successfully launching our first digitally executed pro appreciation month, where there was no purchase necessary to enter or to win prizes relevant to the professional customer. We are pleased that over 36,000 pros signed up for the sweepstakes event and the feedback about the event and our virtual webinar training forums was overwhelmingly positive. We believe recognition events like this are very important to building long-term relationships and engagement with our pros. We also drive engagement through our Pro Premier Rewards, PPR, program where almost 75% of our pro sales are from PPR members. PPR pros spend nearly three times more and shop 2.5 times more frequently than non-PPR members. We were pleased that enrollment in our PPR program in the third quarter of fiscal 2020 increased 30% year-over-year despite the impact of COVID-19. The value of our PPR program is not only measured by growth in PPR members, but also by points earned and redeemed. In the third quarter of fiscal 2020, points redeemed increased 70% from last year, validating the value of our PPR program and engaging with our pros. To continue to drive engagement and points earned in the fourth quarter of fiscal 2020, we are incentivizing our most loyal pros from the third quarter of fiscal 2020 with an opportunity to earn fourth quarter incremental bonus points for growing their sales in relation to their third quarter spend. Our research is clear that the more engaged we get our pros with Floor & Decor, the more wallet share we can obtain. And PPR is just one avenue to do this. As we move into 2021, we will further enhance our PPR program and build on our segmentation and personalization efforts to drive engagement and lifetime loyalty. We are nearing the completion of updating our homeowner and pro demographics and segmentation information, and look forward to sharing the results early next year. Our CRM investment has resulted in a very successful tool, as we are learning a lot about not only our pros, but homeowners, which better informs us of who our customers are and the strategies we need to implement to capture more wallet and market share. Let me now discuss the progress we're making on our free design services, the fifth pillar of our growth. We are pleased that the number of design appointments increased 44.5% in the third quarter of fiscal 2020 from the third quarter of fiscal 2019, and that is well above the fiscal 2020 first quarter pre-COVID-19 growth rate of 34.3%. This was particularly gratifying considering we were not able to quickly return to pre-COVID-19 designer staffing levels, as many were furloughed in the second quarter of fiscal 2020. It's important to note that our design services are not only important to homeowners, but to pros. We believe we have significant runway ahead of us with design services and are focused on building awareness of our services to homeowners and pros, internally driving the value of using our system to increase our already high conversion rate and growing our pipeline of designers to support our growth objectives. Let me now turn my comments to how we are thinking about the macroeconomic environment. We are operating in unprecedented times with homeowners spending more time at home due to COVID-19 and having additional discretionary income from not spending as much on leisure activities like travel, hotels, eating out, and sporting events. This has caused a substantial increase in the savings rate. Unfortunately, people are investing those dollars in their homes. We are also seeing some of the strongest growth in both new and existing home sales. In September, existing home sales grew for the fourth consecutive month to a seasonally adjusted annual rate of $6.5 million, up 9.4% from the prior month and nearly 21% from last year. The housing market is clearly benefiting from what looks to be a sustained period of low mortgage interest rates that are hovering at or below 3%. We expect to continue to benefit from this lower, longer interest rate environment and the secular demand for housing. Carpet continues to lose market share to hard surface flooring. 79% of the 123 million occupied housing units in the United States were built before 1999, which indicates a lot of homes that need to be invested in and maintained. Flooring is a great way to improve the look of a home and increase its value. Millennials, the nation's largest adult population at 72.1 million, now outnumber baby boomers, and they are entering their prime household formation years. This demographic trend is contributing to the demand for housing exceeding supply and is partly responsible for the home price appreciation we continue to experience. The COVID-19 pandemic has also impacted consumer behavior. Homeowners are undertaking projects to repurpose and personalize their homes to work, learn, exercise, and play. The combination of homeowners nesting, a high savings rate, low interest rates, rising housing demand, rising housing values, aging homes, and a preference for hard surface flooring is a great backdrop for our industry and our company. Collectively, these factors, among others, leave us optimistic about the remainder of 2020 and the long-term opportunities ahead of us. We are also pleased to announce today that Ryan Marshall, CEO of PulteGroup; Kamy Scarlett, Chief Human Resources Officer at Best Buy; and Charles Young, Executive Vice President and Chief Operating Officer of Invitation Homes have been appointed to Floor & Decor’s Board of Directors, effective January 1, 2021. We are thrilled to welcome Ryan, Kamy, and Charles to our Board. They are outstanding executives with broad operational, commercial, and strategic expertise that we believe will assist us in our growth plans. They will also add diverse perspectives and skills to our board discussions. We also announced that John Roth, Chief Executive Officer of Freeman Spogli; Rachel Lee, Partner at the Private Equity Group of Ares Management Corporation; and Brad Brutocao, Partner of Freeman Spogli have resigned from our Board effective the same time. We want to thank John, Rachel, and Brad for their extraordinary contributions to Floor & Decor over the last 10 years. Let me close by saying that our strong fiscal 2020 third quarter earnings are the direct result of our associates responding tirelessly to the surge in demand and cross-functional collaboration of our teams. Our entire executive leadership team would like to thank them for their hard work and dedication to serving our customers. I will now turn the call over to Trevor to discuss in more detail our third quarter financial results.

Thanks, Tom. The unique operating environment we find ourselves in, combined with a distinctive business model and great associates, has allowed us to swing from a 50% decline in comparable store sales just a few months ago due to COVID-19 to strong 18.4% growth in third quarter fiscal 2020. Tom already discussed how pleased we are with our solid third quarter fiscal 2020 sales momentum and a great start to the fourth quarter, so I'm going to concentrate my comments on some of the changes among the major line items in our third quarter 2020 income statement, balance sheet, and statement of cash flows, and then discuss how we're thinking about the remainder of 2020. Let me begin with our gross margin. We're very pleased that our fiscal 2020 third quarter gross profits increased 37.8% to $294,600,000, driven by a 31.4% increase in total sales and a 200 basis point increase in our gross margin rates of 43% from 41% in the same period last year. The 200 basis point increase in gross margin rate from the same period last year was primarily due to the higher product margin driven by continued enhancements to our merchandising strategies and improved leverage of our distribution center and supply chain infrastructure on higher sales, partially offset by higher clearance markdowns for our natural wood department. Turning to our fiscal third quarter 2020 expenses. Our third quarter selling and store operating expenses increased 25.2% to $171,500,000 from $137 million in the same period last year and leveraged 130 basis points. Our comparable store selling and store operating expenses leveraged 220 basis points from the same period last year. The improvement in our expense leverage is primarily the result of better-than-expected 31.4% growth in total sales that enabled us to experience outsized leverage in our store fixed and variable expenses, as well as store operating and occupancy costs. More specifically, the outsized near-term expense leverage is the direct result of our selling exceeding our plans for labor hours as customer demand accelerated. As we move through the third quarter, we took actions to further accelerate the hiring of more associates to meet the surge in demand. As a result, our payroll hours were better aligned with our sales trends as we exited the third quarter, but they were still below where we think they should be to serve our customers well. As we continue to add labor hours to meet the demand and open more new warehouse stores, our fourth quarter 2020 expense leverage will not look similar to the third quarter of fiscal 2020. Our fiscal 2020 third quarter general and administrative expenses increased 5.5% to $39,300,000 from $37,300,000 during the same period last year due to higher depreciation associated with IT investments, as well as our new store support center that we moved into the fourth quarter of 2019, and higher incentive compensation accruals. As a percentage of sales, our G&A expense rate leveraged 140 basis points to 5.7% from 7.1% during the same period last year. Excluding the impact of COVID-19 and secondary offering expenses in 2020 and costs associated with our distribution center closure and store support center relocation in 2019, our G&A expense rate leveraged approximately 20 basis points from last year due to our strong sales and lower year-over-year expenses for travel meals and meetings. More details about these adjustments are provided in our third quarter 10-Q and a reconciliation of GAAP net income to adjusted net income in our third quarter earnings release. Our fiscal third quarter 2020 preopening expenses declined 38.6% to $5 million from $8,200,000 last year and leveraged 90 basis points year-over-year. The decline in expenses primarily results from the decline in the number of stores that we either opened or were preparing to open when compared with the third quarter of fiscal 2019. We opened three new warehouse stores and one small design center in the third quarter of 2020 compared with seven new warehouse stores in the third quarter of fiscal 2019. Our fiscal 2020 third quarter effective income tax rate was 10.4% compared with a negative 39.3% benefit during the same period last year. Our effective income tax rate is lower than the statutory federal income tax rate of 21% due to the recognition of income tax benefits from tax deductions in excess of book expense related to stock option exercises and other discrete items. Moving to our fiscal 2020 third quarter EBITDA profitability. The 31.4% increase in total third quarter sales coupled with a 200 basis point increase in our gross margin rate and broad expense leverage drove a record fiscal third quarter EBITDA profitability. Third quarter fiscal 2020 adjusted EBITDA increased 86.8% to our record $106,700,000 from $57,100,000 during the same period last year. Our adjusted EBITDA margin rate increased 460 basis points to 15.6% from 11% last year. Our fiscal 2020 third quarter GAAP net income increased 67.8% to $68,800,000 from $41 million during the same period last year. Our fiscal 2020 third quarter GAAP diluted earnings per share increased 66.7% to $0.65 from $0.39 per share last year. Our adjusted third quarter net income increased 111.8% to $59,400,000 from $28,100,000 last year. Our adjusted diluted earnings per share increased 107.4% to $0.56 from $0.27 last year. We ended the third quarter of fiscal 2020 with 106,400,000 diluted weighted average shares outstanding compared with 105,200,000 during the same period last year. Moving to our fiscal 2020 third quarter balance sheet and cash flow statements. We were very pleased that during these unprecedented times we have been able to maintain a strong balance sheet and have the strongest liquidity position in the company's history to support our growth plans. As of September 24, 2020, our unrestricted liquidity was $628,500,000 consisting of $271 million in cash and cash equivalents and $357,400,000 immediately available for borrowing under our ABL facility without violating any covenants. For the 39 weeks ended September 24, 2020, we generated $269,007,000 in operating cash flow, a 28.7% increase from the $209,600,000 in the same year last year. The increase reflects growth in our fiscal 2020 earnings, improvement in our working capital, and cash paid for income taxes. The improvement in our working capital is largely due to the improvement in our inventory productivity from accelerations in our sales trends. Year-to-date, our fiscal 2020 net inventory grew by 2.9% to $598,500,000 from $581,900,000 at the end of fiscal 2019, which is below our 12.1% growth in total sales over the same period. In the third quarter of fiscal 2020, our net inventory increased 23.7% to $598,500,484 during the same period last year, which is below our 31.4% growth in the third quarter sales. Our fiscal 2020 capital expenditures for the 39 weeks ended September 24, 2020 declined 22.2% to $109,700,000 from $141 million during the same period last year. The decline is primarily related to the decrease in new stores opened or under construction as a result of COVID-19 when compared with the same period last year. Our strong fiscal 2020 operating cash flow coupled with lower year-over-year capital expenditures enabled us to generate $160 million in free cash flow for the 39 weeks ended September 24, 2020, or more than double fiscal 2019 free cash flow of $68,600,000 during that same period. Let me now turn to our revised expectations for fiscal 2020 capital expenditures. We now expect fiscal 2020 annual capital expenditures to be approximately $200 million to $208 million, which is slightly more than the 6% increase from our prior expectations of $188 million to $196 million. Our fiscal 2020 capital spending plans reflect the following growth investments and will be funded from cash flow from operations and borrowings under our ABL facility. We plan to open 13 warehouse stores and one small design center in fiscal 2020 and start construction on several stores in the fourth quarter of fiscal 2020 that are expected to open early 2021. Capital spending associated with these plans is expected to be $132 million to $136 million. We are investing in existing store remodeling projects and our distribution centers, and expected capital spending associated with these projects is approximately $27 million to $28 million. We are planning to enlarge and relocate our Houston distribution center in the second half of 2021, and we expect second capital expenditures in 2020 associated with this project to be approximately $19 million to $20 million. We continue to make investments in our new store support center, information technology infrastructure, e-commerce, and other store support center initiatives to support our growth, and we look for capital spending of approximately $22 million to $24 million to support our growth in these functional areas. Let me now discuss how we're thinking about the remainder of fiscal 2020. From a macro perspective, we are cautiously optimistic that the Federal Reserve's actions to inject liquidity into the market and lower interest rates will continue to support the economy and provide a positive housing backdrop, as well as consumers nesting and spending less on leisure activities will serve to support growth for the remainder of 2020 and early 2021. That said, there is still significant uncertainty related to COVID-19, including a rise in infections in many markets, which raises concerns of another wave heading into the fall and the winter. While we are optimistic about the economic recovery and the momentum of our business, we recognize that these business risks remain elevated and we could have to close doors in certain markets if necessary. For that reason, we are continuing our practice of not providing specific sales and earnings guidance for fiscal 2020, but we would like to provide some direction as we approach the end of fiscal 2020. Our better-than-expected third quarter sales growth created outsized selling and store expense leverage as we've benefited from the aggressive actions we took to reduce our cost structure in the second quarter of fiscal 2020 due to the COVID-19 pandemic. As we exited the third quarter and entered into the fourth quarter, our expense growth is becoming more balanced with our sales growth and is likely to lead to less expense leverage in the fourth quarter of fiscal 2020 than we experienced in the third quarter of fiscal 2020. Consequently, we are planning on strong profit growth in the fourth quarter of fiscal 2020 relative to last year, but we do not anticipate the same rate of outsized profitability we experienced in the third quarter of fiscal 2020. As a reminder, fiscal 2020 is a 53-week year for us, meaning the fourth quarter will comprise 14 weeks versus a normal 13 weeks each quarter. We estimate this additional week will contribute between $0.03 to $0.04 in diluted earnings per share. The main comments about the fourth quarter of 2020 should note that our reported fourth quarter 2019 gross margin benefited from a one-time Section 301 tariff refund, primarily related to rigid core vinyl of $14 million. Adjusting last year's fourth quarter for this benefit, our gross margin rate would have been approximately 41%. Our current expectation is for our fourth quarter fiscal 2020 gross margin rate to increase meaningfully from last year, but less than the 200 basis point increase in the gross margin rate we experienced in the third quarter of fiscal 2020. In dollars, we're planning on mid-single-digit sequential growth in our selling and store operating expenses from the third quarter of fiscal 2020 to the fourth quarter of fiscal 2020 due to a more normalized cost structure and more new stores. We're planning on meaningful increases in our fiscal 2020 fourth quarter pre-opening expenses compared to the third quarter, as we plan to open five new stores in the fourth quarter versus three in the third quarter. Additionally, in 2021, we are planning to open the highest number of new stores in any first quarter in our history. As a result, we will incur some of the pre-opening expenses for these new 2021 stores in the fourth quarter of 2020. We expect our general and administrative and interest expense to be about flat compared to the third quarter of fiscal 2020. We would expect our fourth quarter tax rate to be approximately 23.7%, higher than previously contemplated due to higher net income. This, of course, does not contemplate any stock option exercises that may benefit our provision for taxes. We expect our annual depreciation and amortization to be approximately $90 million. The executive team is incredibly proud of how we performed in 2020. We are a better company than before the pandemic occurred. And I would like to thank all of our associates for their brave work.

At this time, we will be conducting a question-and-answer session. The first question comes from the line of Seth Sigman of Credit Suisse. You may proceed with your question.

Thanks for taking the question and congrats on the quarter, great results. I wanted to talk about the improvement that you spoke to each month of the quarter. Can you just elaborate on the trends that you were seeing throughout the quarter, and how consistent was that improvement across geographies? And then I guess just related, you mentioned the mix shift to the homeowner, I think in some of your prepared remarks, what's going on there? If you can elaborate on DIY versus pro, that'd be helpful. Thanks.

Thank you, Seth. This is Tom. As mentioned in the prepared remarks, we improved each month and ended on a strong note in September with a rate of 20.8%. This positive trend was observed across all regions of the country, showing consistent performance that we're very pleased with. The strength among homeowners is evident, particularly as people are investing more in their homes due to spending less on travel, entertainment, and sports during COVID-19. This shift has positively impacted our weekend business, which has outperformed historical levels. Additionally, we saw a 48% increase in web traffic during the quarter, indicating a significant number of people researching home projects, as our purchase cycle tends to be lengthy. Overall, we're encouraged by the business climate.

Okay. So, it sounds like the leading indicators in the business remain very strong, as well. I wanted to follow up also on the gross margin. For the fourth quarter, Trevor, I think you just talked about it being up year-over-year. I want to clarify that's against that 41%, the adjusted. And then I think you're saying it would be up less than the third quarter. Just any differences to call out there. That would be helpful. Thanks.

Yeah. Seth, I think you got that right. Last year was abnormally high because of that $14 million benefit we got from the Section 301 tariff refund. Therefore, the adjusted gross margin last year, backing that out is this 41%. And so, yes, that comment was relative to the 41% we're assuming a nice gross margin. Last quarter, we had a 200 basis point increase in gross margin. So, we don't think it's going to be that high, but as I said in the prepared comments, we think it's going to be up nicely. And it's coming from continued product margin, but we're also starting to get significant leverage out of that Baltimore distribution center. You guys will recall in November of last year, we opened that big Baltimore DC. And we were getting two benefits; one, the lapping on much higher sales and two, domestic transportation costs for about just under a third of our stores is lower, because we're now shipping to the mid-Atlantic and Northeast and the Midwest out of Baltimore instead of Savannah. So, that we're also getting a benefit there. So, it's pretty balanced between supply chain and product margins as to what we're expecting.

Great. Thanks guys. Best of luck.

Our next question comes from the line of Michael Lasser with UBS. You may proceed with your question.

Good evening. Thank you for taking my question. Tom, you mentioned that the entire business has been focused on assessing the flooring category compared to others. Is there any category growing at a slower pace than the broader home improvement sectors? Could you share your thoughts on why that might be? Do you think consumer hesitance about allowing installers into their homes or the possibility of needing to relocate during a flooring project could be factors? And does this suggest a potential for recovery next year, indicating that the flooring category has room to improve while other areas of the home sector may remain stable?

Michael, I couldn't hear the beginning part of your question clearly. Could you clarify if the main point was about the performance of flooring in relation to the overall home improvement sector? Is that what you were asking?

Yeah. I mean, Home Depot and Lowe's are comping up mid to high 20s. At-home comped up 40% today. So, clearly home can focus. The flooring seems to be doing maybe a little bit below average within the broader housing ecosystem. Is that because this requires pro to be in a consumers home?

Sure. I don't believe that plays a role. We discussed the surveys in our last quarterly call. Consumers are allowing professionals into their homes. Our professionals, whether they are part of our affiliate program or shopping in our stores regularly, are quite busy. Their backlog is substantial, and they are scheduled out well in advance before they can enter homes. Consumers are not showing any signs of concern. We aim to educate our professionals on how to protect themselves and reassure consumers about letting them into their homes. And they are successfully doing that. So, that's not a major concern for us.

Okay. It seems that with the gross margin, and considering the higher product margins you are experiencing, it suggests that pricing is increasing more than costs. Is this trend sustainable? Should we expect expanding gross margins in the upcoming quarters, based on current developments?

Yes, Michael, this is Trevor. It's a combination of factors. The team has excelled in curating the assortment. We've noted that our decorative accessories are performing better than the company average, contributing to a higher product margin for us. In most categories, except for wood, we're seeing a trend where customers are opting for better quality products. Additionally, we reopened our Baltimore DC location last year, which is providing us with leverage this year. Overall, the main contributors to our product margins are the higher quality products and the strong performance of decorative accessories, which is one of our most profitable categories.

Okay. Thank you very much.

Thanks, Michael.

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

Good evening, everyone. So, Tom, you spoke about pro in great detail in your prepared remarks. But I was hoping you could maybe expand on the commercial initiative, right, as we think about the regional account managers and how that's been scaling? Are you leaning into the channel just given this trend in the end market here? And any color on how we should be thinking about the maturation profile behind that initiative looking out over the next couple of years?

We are pleased with our progress. Over a year ago, we began hiring regional account managers, and we now have 21 across the country, with plans to add more aggressively in the coming year. These managers cater to commercial customers who may not visit our stores or have large orders that exceed our store capacities. Initially, we started with just a few to test the waters, and we are very happy with their contributions. We've successfully recruited great talent to drive this initiative, and we are confident in this strategy, which we will continue to pursue. Additionally, we are enthusiastic about bringing on two new board members with significant commercial experience, and we look forward to their insights on enhancing our penetration into the commercial market in a more impactful way moving forward.

Thanks for the follow-up. Regarding the underlying demand in the end market, I'm interested in whether you've noticed any competitive dynamics. Are competitors trying to catch up with you when it comes to driving innovation? How do you view the distinction between FND and the competitive landscape in terms of fostering product innovation?

Sure. Lisa will go ahead and answer that. And then I'll chime in.

Okay. Yeah. So, this is Lisa. It's interesting apart from the vinyl and laminate category where we've seen a lot of innovation over the last two or three years with water-resistant and the new SPC and WPC products. There has not been a ton of innovation that we have seen out there from a competitive perspective. We think it is a real differentiator for us, and it is something that we focused on a lot. We just brought in our new core performance line in the last month or two, which is our highest end vinyl, which offers really great features for the customer. So that's been something that's been very good for us. And we've got more things coming down the pipe. So, I would say that from a competitive perspective, our goal is always to be out front and leading on the innovation side, especially where it pertains to durability and those things that the customers are really looking for.

As I mentioned, I'll add my thoughts. What sets us apart in the competitive landscape, especially considering that COVID caused some delays, is our focus on introducing new products in each category we operate in. Our team has consistently conducted product line reviews and introduced new items throughout the pandemic, and we managed to do this virtually. We have exciting new products hitting the stores daily. In this area, product innovation, particularly related to durability, is crucial. We've made significant progress here, and I believe we're leading in this aspect, but it's really the introduction of new products that continues to strengthen our advantage.

Thank you. Best of luck. Stay safe.

Our next question comes from the line of Chris Horvers with JPMorgan. You may proceed with your question.

Thank you. Good evening, everyone. It's been a great quarter. Looking back, the gross margin rate tends to improve in the fourth quarter compared to the third quarter. I believe this is driven by the mix. Can you share your thoughts on this? Additionally, regarding tariffs, what have you observed in the pricing environment, and do you anticipate some added pressure on gross margins in the fourth quarter compared to the third quarter?

Yeah. Chris, this is Trevor. It has more to do with the clearance event in Q3 than it does with really the mix between Q3 and Q4. We have our biggest clearance event of the year in the third quarter. So, that's historically been a lower margin category. As you know, we got our clearance event. As it regards to the tariffs, most of you guys may recall on August 7, the government reinstituted 25% tariffs on rigid core vinyl, water-resistant laminate, and a few other categories. So, we're now, again, paying 25% tariffs. We didn't know how that was going to happen. So, we sort of bought ahead. So we're not really feeling a lot of that impact today. We're using the same playbook that we've used for the two years we've been dealing with this. We're working with our vendors to see what costs we can take out. We're working with our vendors to see where we can move sourcing, not a lot in this category currently. And then there's probably going to be some retail increases, and our goal is to monitor it and see what's going on in the marketplace. Lisa keeps us apprised and we're not seeing a lot today, but we would expect as people are starting to feel those cost increases that you'd likely see some retail increases because the majority of that product is manufactured out of China.

Got it. And then as a follow-up. Understanding you've been chasing labor to catch up with demand, but on another side, there's probably some sort of one-time-ish type expenses. You talked about incentive comp, maybe quantify that, and any other COVID-related expenses or special bonuses or PTO that you paid.

Yeah. At the tail end of the year, we were obviously accruing. We got to Q1 and we weren't incurring much just not knowing how bad COVID was. So, that actually was a bit of a benefit. You may recall, we had a really strong operating margin component in Q1. Part of it was because of that. And then as the year has progressed on, we're actually getting closer to accrual. So our incentive comp is a percentage of our total sales is pretty small, so it's in the single bips, small bips range that it's impacting us.

Understood.

I wouldn't describe it as anything major. There's nothing significant. We've invested in some consulting and other initiatives aimed at growth and future strategies, but nothing very substantial compared to our overall sales.

Our next question comes from the line of Seth Basham with Wedbush. You may proceed with your question.

Thank you and good afternoon. My question is on transportation costs. You guys talked about distribution and supply chain leverage in the quarter. As those higher transportation costs seeing now that baked into your product costs and what's the rate through? What kind of impact do you expect on gross margin? And relate to that if you could help us better understand the types of contracts you had and mitigation strategies you had as it relates to transportation costs.

Yeah. This is Trevor. We're very fortunate. Our supply chain team has done a really good job of locking in long-term contracts, both domestically and internationally. That helps us in two ways. One, it allows us to get capacity when there are certain places it's very difficult for capacity out, just because there's so much demand. Things seem out of Asia, for example, and then there's some capacity constraints here in the States. So, that's one thing is, hey, we can get capacity is an important part of it. Then two, because we do have longer-term contracts and the majority of our transportation goes through these contracts, we're not getting those spot increases today. Those contracts come up over the next 12 to 18 months. And if the rates stay high, we're going to have to deal with that more next year. But currently, because we've got these longer-term contracts, we're not feeling those cost increases.

Our next question comes from the line of Jonathan Matuszewski with Jefferies. You may proceed with your question.

Hey, guys. Nice quarter. Thanks for taking my question. You mentioned in the release, you're pleased with the start to 4Q, can you share how October is trending versus September's exit rate?

As I said, we're very pleased with the start of the fourth quarter. It's very consistent with the way we exited September.

Our next question comes from the line of Simeon Gutman with Morgan Stanley. You may proceed with your question.

Thanks. Hi, everyone. I wanted to ask a question that has two parts. First, Trevor, regarding your response to Chris's question on gross margin, are you discounting the possibility that the Q4 gross could exceed Q3 sequentially due to certain factors? Or is there still a chance for that outcome? Secondly, despite a challenging start to this year, it appears you're still on track for roughly mid-single digit comparable sales this year. You mentioned that housing turnover is one of the biggest drivers. The existing home sales estimates for next year seem quite strong, so I'm interested in your outlook for next year. I know it's early for this, but can you provide a high-level perspective on whether next year might appear normal or if it aligns with external factors?

On the first point regarding gross margin, we expect it to increase from the 41% we achieved last year. It would be ambitious to reach the third quarter level of 43%, as that's a significant achievement for us. As we think about next year, we are in the planning phases and have done substantial groundwork around this. We are tentatively considering a two-year outlook due to the current volatility. From a macro perspective, we have favorable conditions with existing home sales, rising home values, and aging demographics, all of which should positively impact us. Looking at our long-term goals, our proxy statement indicates we aimed for $329 million in operating income for 2022, which would represent a doubling of our operating income from 2019 to 2022. We remain committed to that goal, though it is more challenging this year since we opened only 13 stores instead of the planned 24. Nevertheless, these objectives are still within our focus, and while we anticipate some ups and downs this year and next, we are determined to achieve those goals by 2022.

Our next question comes from the line of Chuck Grom with Gordon Haskett. You may proceed with your question.

Hey, thanks. Good afternoon. Taking a step back, despite all the volatility, gross margins look like they're going to finish the year at or above all-time-high levels. I think when you look ahead, how are you guys thinking about the trajectory here, particularly as you continue to compound growth at 20% a year? And then just as a quick follow-up. Trevor, can you just clarify your guidance for the fourth quarter selling expenses? I think you said up mid-single-digit sequentially. I just wanted to clarify that.

I believe that as we look at the next three years, we anticipate returning to 20% unit growth next year. However, we will face some challenges with store-level selling, general, and administrative expenses, as well as pre-opening expenses. We plan to open approximately 27 stores compared to 13 stores in the previous year, which will increase our pre-opening expenses to between $1.2 million and $1.5 million. Consequently, these expenses will rise significantly. Our new stores typically have SG&A as a percentage of sales that is about 50% higher, in the mid to low 30s, compared to low 20s for our more established stores. Therefore, we will need to gain some leverage on store-level SG&A as we achieve 20% unit growth. Nonetheless, we believe there are still opportunities to improve margins. We are focused on executing better and more efficiently, taking advantage of efficiencies in our supply chain and distribution centers, and managing shrink and damage. We expect to see growth in gross margin. On the corporate side, we also believe we can leverage some costs. Referring back to our 2019 results and our goals for 2022, we do not intend to double our sales during this timeframe. Thus, we are planning for improvements in operating margin and EBITDA margin. There was another aspect of your question that I’ll need to address.

Just a clarification on the fourth quarter selling expense.

I mentioned sequentially because I believe it's more relevant to discuss our operations in this post-COVID environment compared to pre-COVID. So yes, it's sequential from Q3 to Q4 this year, and we did experience a mid-single-digit increase.

Our next question comes from the line of Matt McClintock with Raymond James. You may proceed with your question.

Hi. Good afternoon, everyone. There are clearly great results. I want to acknowledge the impressive awards announcements you made today, Tom; you haven’t mentioned those before. I have a question regarding the home demographic and segmentation analysis you're currently conducting and the results expected early next year. I don't think this has been discussed in detail. I already viewed your stores as pretty well-segmented and decentralized. Can you give us an idea of what this topic involves without revealing too much? Thank you.

We have been discussing our new CRM system, Salesforce, for the past year or two. The pro desk has utilized parts of it for the last few years. Over the past year, we have successfully integrated all of our data, connecting customer information from various interactions with the company. We have cleansed the data and are now beginning to use it to analyze the differences between homeowners and professionals, including their demographics. We are starting to personalize our messaging and focus on areas where we see opportunities. Although it’s still early to share specific details, we are uncovering some interesting insights about our customers that we believe will help propel the business forward. We anticipate sharing more information, possibly in the first quarter.

Having access to data is incredibly beneficial for us because we now possess much more information. We're collaborating with data scientists to determine which stores are over or underperforming compared to their expected outcomes. This insight provides a clear direction for the regional teams and even down to the store level, allowing them to focus on design initiatives or recognize those who are exceeding expectations. We are on track to collect a level of information and data that we have never had before, and we believe that information will empower us. This will enable us to make improved decisions at both the corporate level and at regional and store levels. We are excited about this development as it serves as a powerful tool that we haven't had access to previously.

Our next question comes from the line of David Bellinger with Wolfe Research. You may proceed with your question.

Hey guys. Great quarter and thanks for taking the question. So, just on an average ticket down 50 basis points this quarter, that broke a trend of up two to three percentage points over the last year or so. What are you seeing there? Any type of trade down on the DIY side, and also maybe just some commentary on the in-store design services? The customer is still engaging that service as much as they were pre-COVID or have you seen any consumer apprehension there that's weighing on potentially higher ticket trends?

There are two parts to your question, and I'll address both. First, regarding our average ticket, there are a few reasons for the slight decline. One reason is our design services, which are just now getting back on track. We had many part-time associates furloughed, including a significant number of our designers, and it took time to bring them back. Now, our design appointments are at the desired level, and our designers are engaged, although it took some time during the third quarter to reach that point, which affected our larger transactions. Additionally, we've been proactive in clearing out some older wood products, which has resulted in a lower average for that department. We did this purposefully to make way for exciting new wood designs that are currently available, with more on the way. Lastly, with the increase in homeowners, many are taking on smaller projects. While at home, they notice things that need attention, such as their backsplashes. For instance, our decor department performed exceptionally well during the third quarter, which indicates that people are focusing on making their spaces more appealing. However, replacing a backsplash typically comes with a lower price tag compared to a bathroom renovation. Overall, these factors have impacted our average ticket, but I am optimistic about our progress in design, our staffing levels, and our initiatives as we move into this quarter.

Our next question comes from the line of Alex Mahylis with Baron Group Capital Markets. You may proceed with your questions.

Good evening, guys. Thanks for taking my question. With the net cash position in mind, in addition to the dry powder you have from the ABL, would you be willing to accelerate the store up in cadence or remodel older stores more rapidly in the coming quarters?

This is Trevor. I believe Tom has additional insights on this. Next year, we plan to significantly increase our capital expenditures. This year, we opened 13 stores compared to 27 last year. We're also investing more in each store, and we've seen positive results from that investment. Not too long ago, our new stores generated $800,000 in first-year EBITDA, but now they are approaching $2.5 million. This improvement is partly because our stores are larger and located in better areas. We are enhancing both the interior and exterior aesthetics of the stores. We're focusing on owning a select few locations where we have multiple high-volume, profitable stores, particularly in the Northeastern DC region I mentioned earlier. We are planning to invest capital in DC. Each of these locations has a detailed return on investment that we anticipate will exceed our cost of capital. Therefore, we intend to be more proactive in utilizing that capital next year as we aim for 20% growth in our units.

You are mostly correct. I would add that we've been asked for some time to speed up the growth of our new stores. This has never really been a cash decision but more a cultural one. We limit our growth to 20% in units, which is quite significant and more than most retail companies, but this is intentional. Culture is very important to us and we have a unique culture. Running a Floor and Decor store is challenging, and we want to ensure that our staff is properly trained and has the autonomy to make decisions at the store level. This preparation takes time, which is why we carefully plan our store openings.

Our next question comes from the line of Elizabeth Suzuki with Bank of America. You may proceed with your question.

Great, thanks guys. So, I guess, as COVID cases start to rise again in some markets and there is talk about potential lockdowns again. How do you think about how the business could perform if stores did have to close again? And what do you think you learned from the last go-around that you would bring into the second round of potential closes?

Well, I think it depends. When we closed the stores the first time, we really didn't have to close all the stores and taken the curbside delivery. We were classified as essential retail in a lot of the markets that we elected to shut our doors. And we shuttered our doors purposely because we wanted to make sure that we could protect our associates. We needed to get the stores ready. We needed to get the right protective product in so that everyone could feel good, and we needed to learn. As we learned and as we got our stores prepared, we began to reopen. So, it depends on the severity of the closure. If it's essential retail allowed to open, we would stay open and operate so that we could effectively serve our professional customers.

And final question comes from the line of Justin Kleber with Baird. You may proceed with your question.

Yeah. Hey, guys. Thanks for sneaking me in here. Just had a follow-up on tariffs. Based on your inventory position and turns, when do you think you will see the peak pressure point on margin rate? And it doesn't sound like tariffs would prevent you from expanding gross margins next year, but just wanted to confirm how you're thinking about that. Thanks.

We expect to start seeing how this develops early next year. I agree with your assessment. The merchants have valuable ideas on how to adjust retail prices accordingly. We have a solid plan in place and excellent systems to achieve our goals. We're continuously monitoring our inventory and margin positions every day, so we will keep a close eye on it.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Tom Taylor for closing remarks.

Yeah. Well, first, I'd like to, again, thank all of our associates for all the hard work. Our associates on the frontline and our associates behind the scenes that are in our store support center and that are in our distribution centers have shown just excellent execution across the board. It was just an amazing quarter. I'd like to thank all of you for your interest in our company and your excellent questions. We appreciate that and look forward to talking to you at our next quarterly update. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great rest of your evening.