Floor & Decor Holdings, Inc. Q1 FY2021 Earnings Call

Welcome to the Floor & Decor Holdings, Inc. First Quarter 2021 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct the question-and-answer session. As a reminder, this conference is being recorded. I would now turn the call over to your host, Wayne Hood, Vice President of Investor Relations. Please go ahead.

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 today, 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 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 2021 first quarter earnings conference call. On today's call, I will discuss some of the highlights of our strong fiscal 2021 first quarter earnings results. Trevor will then review our financial performance and discuss how we are thinking about the remainder of fiscal 2021. Then, we will open the call for your questions. We could not be more pleased with our fiscal 2021 first quarter earnings results, which are supported by the favorable macroeconomic environment and our excellent execution amidst strong comparable store sales growth. Our first quarter 2021 total sales exceeded our expectations, increasing 41% or $227.6 million to $782.5 million from $554.9 million in the first quarter of 2020. We are particularly proud that our fiscal 2021 first quarter total sales are equivalent to our full year 2015 annual sales, which is a testament to the execution of our business plan and our resulting growth. Our first quarter 2021 comparable store sales increased 31.1% and represented the strongest quarterly comparable store sales growth in our company's history. It is also notable that our customer service scores improved during this period of strong growth as we continue to focus on serving our customers with on-trend products. Our fiscal 2021 first quarter adjusted EBITDA also exceeded our expectations, increasing 74% to $127.1 million from $73.1 million in the first quarter of fiscal 2020, as our adjusted EBITDA margin increased 300 basis points to 16.2%. Our fiscal 2021 adjusted first quarter diluted earnings per share increased 100% to $0.68 from $0.34 in the first quarter of fiscal 2020. Let me now provide an update on each of our five strategic pillars of growth, beginning with new store growth. We successfully opened a first quarter record seven new warehouse stores in the first quarter of fiscal 2021, more than double the three new warehouse stores we opened in the first quarter of fiscal 2020. Recall that last year, we delayed two of our store openings in late March due to state and local construction restrictions caused by the COVID-19 pandemic. In fiscal 2021, we opened two new warehouse stores in each of January and February, and three new warehouse stores in March, including new market openings in Pleasant Hill, California, and Danbury, Connecticut. As we look to the second quarter of fiscal 2021, we expect to open eight new warehouse stores with most of the openings occurring in late June. We continue to believe that the timing of our 2021 store openings will allow us to achieve our long-desired objective of balanced quarterly store openings. For the full year, we still expect to open 27 new warehouse stores, an increase of 20.3% from 2020. We are also continuing to move forward with opening two more design studios in the fourth quarter of fiscal 2021, with openings in Miami and Houston. Finally, we remain very pleased with the sales performance among all of our store vintages. We were particularly pleased with some of our most mature stores. Based on the early strong results, we continue to believe that the new store classes of 2020 and 2021 will represent the strongest classes in our history from both a top-line and profit perspective. Moving on to the second pillar of growth, growing our comparable store sales, we are very pleased with our comparable store sales growth momentum and the broad-based strength we continue to see across all of our merchandising categories and nine geographic regions. The 31.1% growth in our first quarter comparable store sales was driven by strong 29.2% growth in comparable store customer transactions and 1.5% growth in our comparable store average ticket. There was a favorable shift towards our better and best price points in the first quarter when compared with last year. This shift is the direct result of being able to offer our homeowners and pros clear and compelling trade-up options. The recent launch of our Optimax Eco Resilient Flooring and our large-format tile offerings are just a couple of examples where we believe we have widened the gap with our competition with better and best products. On a monthly basis, our comparable store sales increased 30.1% in January, 19.2% in February, and 41.3% in March. There are a couple of events that influence our monthly sales that we want to highlight. First, the shift in timing caused by the 53rd week in fiscal 2020, historically a low-volume week, benefited our January comparable store sales by an estimated 560 basis points and 170 basis points for the first quarter of 2021. Adjusting for this timing, we estimate our comparable store sales would have increased approximately 24.5% in January. Second, in February 2021, about 20% of our stores were impacted by severe weather over multiple days and multiple states that slowed our sales in weeks seven and eight. We estimate this adversely impacted our February comparable store sales by 500 basis points but benefited our March comparable store sales by 300 basis points. That said, the net impact from the severe weather on our 2021 first quarter comparable store sales was not material. Third, the final six days of the first quarter of fiscal 2020, we limited our stores to curbside pickup, which resulted in a 46% decline in our comparable store sales during that period. This created an easy sales comparison and was a significant contributing factor to the strong sales increase in fiscal March 2021. We estimate our first quarter comparable store sales would have increased approximately 26.5% after adjusting for the benefit of the 53rd week shift and adjusting for the decline in March 2020 sales when we were limited to curbside pickup. As we look at our second quarter sales results to date, our comparable store sales increased 170%, but that is comparing against the negative 50% last year due to our stores being closed to the public due to COVID-19. We believe using one and two-year comparable store sales growth rates are less meaningful right now due to the store closures. We believe a better way to evaluate our sales trends is to compare our total sales growth to 2019, as 2019 was more of a normal year. By doing so, our first quarter 2021 net sales grew at a 28% compounded annual growth rate, and our second quarter 2021 date net sales have grown at a similar compound annual growth rate so far. We expect our comparable store sales growth to be elevated in the second quarter, but moderated through the quarter as our stores began to reopen in early May last year and most stores opened by early June. Recall, last year our comparable store sales declined 26.1% in May and increased 7.7% in June. We are excited about our sales momentum and the prospects of achieving our 13th consecutive year of comparable store sales growth in fiscal 2021. From a merchandising perspective, all of our product categories experienced double-digit first quarter 2021 comparable store sales growth. Comparable store sales in laminate and luxury vinyl plank, decorative accessories, and adjacent categories were above the company average. The broad-based strength in our merchandising categories is a continuation of trends from the second half of 2020 and further validates our position as the one-stop solution for all our customers' hard surface flooring needs. We are continuing to consistently deliver on our strategy of offering our homeowners and pros the broadest, most differentiated, and trend-forward assortment in every category. Our large stores enable us to provide unmatched visual inspiration of all our categories using larger displays, side caps, end caps, and vignettes compared with our competition. We complement this with in-stock job lot quantities at the widest range of everyday low price points. Let me turn my comments to our supply chain. We, like many companies, have been challenged by the constraints in the global supply and transportation chain that were brought on by the COVID-19 pandemic and unexpectedly strong demand. We are navigating these challenges amidst our exceptionally strong growth by focusing on securing international container capacity, as well as North American logistics capacity. Between the first and second quarters of fiscal 2021, we have added significantly more capacity to our ocean and North American logistics to align with our strong growth. We are fortunate to have agreements with our dedicated fleet, one-way asset-based carriers, and ocean carriers to secure additional capacity and minimize costs. That said, we can pay premiums on surge capacity when necessary to maintain product flow. These strategies and our broad assortments have enabled us to offer our homeowners and pros alternative products where there are specific product availability challenges. Our third strategic pillar of growth is expanding our connected customer experience. Our first quarter 2021 e-commerce sales remained strong, increasing 66.3% from the first quarter of fiscal 2020 and accounting for a meaningful 16.6% of our sales compared with 14.2% during the same period last year. We continue to see strong double-digit growth from paid inorganic searches, as well as direct traffic to our website, as our customers are choosing to engage with our brand as they begin their flooring purchase journey. We are continuing to make investments towards delivering an unmatched personalized customer experience. For example, in the first quarter of 2021, we enabled customers to upload their room photos into our Visualizer, rather than using one of our stock room photos. This now permits them to view our products in their home setting. We are also taking additional actions to further optimize the speed of our website and the mobile experience, which in turn we believe will lead to further improvement in conversion and the customer experience. In the first quarter of 2021, we completed another large site upgrade and redesign, which further enhances search in our site pages. We believe these continuing investments will lead to further strong e-commerce performance metrics and growth for years to come. Our fourth pillar of growth rests on the successful investments we are making in our Pro and commercial customers to grow our market share. We continue to be pleased with the accelerating growth trends in our award-winning PRO Premier Rewards, PPR program, which drives engagement and loyalty with new and existing pros. Today, about 80% of our pro sales come from our PPR members. Year-to-date, enrollment in the PPR program has increased 50% from last year and was up 76% in March. Year-to-date points earned and redeemed increased 50% and 77% respectively, validating the value of the program. As we look to the remainder of fiscal 2021 and 2022, we are exploring opportunities that will further drive pro engagement and increase awareness of our value proposition. We see opportunities to grow our market share through the introduction of PPR tiers, SKU-based bonus points programs, and pro credit card incentives that will further drive engagement. From a product standpoint, we are continuing to make investments to grow our pro brand equity as a supply house and are excited about adding Laticrete, a leading installation material brand, to our assortment in 2021. We are now able to offer pros multiple leading brands and complete assortments, which will allow us to more easily cross over into their wholesale distribution channel. We continue to be very pleased with the strong growth in commercial sales, particularly those sales that are originated by our regional account managers, or RAMs, which are now in most of our major markets. While sales from our regional account managers are small relative to the size of our retail business, we are excited about the growth opportunity and plan to add approximately 14 regional account managers in fiscal 2021. Over time we expect commercial sales to become a material part of our growth as we leverage Floor & Decor's core strengths in merchandising and direct sourcing. Let me now discuss the progress we are making with our free design services, the fifth pillar of our growth. We continue to be pleased with the momentum in design services and have strategies in place that we believe will sustain strong growth for years to come. First quarter 2021 design appointments increased 100% from the first quarter of 2020 and design service sales penetration increased 290 basis points year-over-year. Importantly, our customer experience and social reputation scores are strong. We are continuing to build on our success by further elevating the talent in design services and exploring ways to create career paths to attract and retain high-caliber designers. As we have discussed in the past, we are focused on building a consistent, high-touch, best-in-class, and seamless design service experience for our homeowner and pro customers. To do so, we are further building out and updating key performance metrics and management dashboards to enhance productivity. We believe we are in the early stages of developing a long-term competitive advantage through our free design services. Let me close by saying that our strong fiscal 2021 first quarter earnings reflect the unwavering efforts by our associates to serve our customers. Our entire executive leadership team would like to thank them for all of their hard work and dedication. I will now turn the call over to Trevor to discuss in more detail our fiscal 2021 first quarter results.

Thank you, Tom. We are extremely pleased with our fiscal 2021 first quarter sales and earnings results, which are supported by the favorable macroeconomic environment and excellent execution of our store strategies by our associates. Their execution led to exceptionally strong sales and earnings flow-through in the first quarter of fiscal 2021. Let me discuss some of the changes among the major line items in our first quarter income statement, balance sheet, and statement of cash flow, and then I will discuss how we're thinking about the remainder of fiscal 2021. Our first quarter 2021 gross profit increased $100.9 million or 42.7% compared to the corresponding prior year period. The increase in gross profit was driven by a 41% increase in total sales and an increase in gross margins of 43.1%, up approximately 60 basis points from 42.5% in the same period a year ago. The increase in our gross margin was primarily due to improved leverage of our distribution center and supply chain infrastructure on higher sales. Turning to our fiscal 2021 expenses. Selling and store operating expenses increased $36.9 million or 24.1% from the same period last year. The increase was primarily attributable to 17 new warehouse stores opened since March 26, 2020, as well as additional staffing and operating expenses to align with our strong sales growth. As a percentage of our net sales, selling and store operating expenses decreased approximately 330 basis points to 24.3% from 27.6% in the corresponding prior year period. This decrease was primarily driven by leveraging our cost across increasing comparable store sales. Comparable for selling and store operating expenses as a percentage of comparable store sales decreased approximately 390 basis points, as we leveraged payroll and occupancy costs from strong sales. First quarter general and administrative expenses increased $13.2 million or 42.7% from the same period last year, primarily due to higher incentive compensation expense and costs to support our store growth, including increased store support staff and higher depreciation related to technology and other store support center investments. On a rate basis, our general and administrative expenses as a percentage of net sales remained flat at approximately 5.6% during the 13 weeks ended April 1, 2021, and March 26, 2020. Our first quarter preopening expenses increased $1.6 million or 28.8% from the same period last year. This increase is primarily the result of an increase in the number of stores that we either opened or are preparing to open compared to the prior year period. First quarter net interest expense decreased $400,000 or 23.2% from the same period last year. The decrease in interest expense was primarily due to an increase in interest capitalized during the construction period of certain capital assets during the first quarter of 2021 compared to the corresponding prior year period. Our first quarter effective tax rate was 19.8% compared to 17.4% in the same period last year. The increase in our effective tax rate was primarily due to higher earnings without a proportional increase in available tax credits and the recognition of lower excess tax benefits related to stock option exercises during the current quarter compared to the same period last year. Moving on to our profitability. While our first quarter total sales increased 41%, our adjusted EBITDA increased 73.8% to $127.1 million from $73.1 million during the same period last year. The improvement in our gross margin rate and expense leverage led to a 300 basis point increase in our EBITDA margin to 16.2% from 13.2% last year. We are proud that our first quarter 2021 adjusted EBITDA in isolation now exceeds our annual 2016 adjusted EBITDA of $108.4 million. Our first quarter GAAP net income increased 104.5% to $75.8 million from $37.1 million last year. Our first quarter adjusted net income increased 100% to $72.7 million or $0.68 per diluted share from $36.3 million or $0.34 per diluted share last year. We ended the first quarter with 107.1 million diluted weighted average shares outstanding compared with 105.5 million last year. Moving on to our first quarter fiscal 2021 balance sheet and cash flow. As of April 1, 2021, there was $207.7 million term loan debt outstanding on our balance sheet compared with $419.6 million of term and ABL debt outstanding during the same period last year. Last year, as a precautionary and proactive measure as uncertainty in the credit markets escalated, we drew down $275 million or approximately 80% of what was available on our ABL facility. We subsequently paid down $275 million in the ABL in the second quarter of 2020, as we had better visibility into the business and our liquidity needs. When considering our first quarter 2021 cash on hand of $354.1 million, we had no net debt outstanding at the end of the first quarter of 2021 due to our strong earnings growth and favorable working capital. This led to our first quarter operating cash flow increasing fourfold to $101 million from $24.7 million during the same period last year. Our strong earnings growth, cash flow, and balance sheet enable us to consider taking on more ownership of stores rather than leasing them and accelerating store and customer-facing technology investments to further enhance the shopping experience across all of our channels. We believe these investments will place us in an even stronger position competitively and lead to longer-term EBITDA margin expansion while also helping us in the event of another cyclical decline in the economic activity. Let me now turn my comments as to how we're thinking about fiscal 2021. From a macroeconomic perspective, we have seen fiscal and monetary policies to be very accommodative, which we believe will continue to provide tailwinds to the existing and new home sales. Additionally, the secular demand for homes continues to exceed available supply, which we believe will continue to lead growth in home price appreciation and growth in home equity. While the personal savings rate has declined from its peak, it remains historically elevated, giving homeowners dollars to reinvest into their home. We believe the reinvestment is being driven by views such as my home no longer meets my needs of me and my family. I want to take advantage of the current market. I want a house that is less work, and I want to live closer to friends and family. Collectively, we see these factors as continuing to support reinvestment projects and our business. While we are optimistic about the prospects of sustained economic recovery in 2021 and the momentum in our business, we recognize that business risks remain elevated, albeit lessening from the COVID-19 pandemic. For that reason in the interim, we are continuing our practice of not providing specific annual sales and earnings guidance that was established in the second quarter of fiscal 2020. As business risk improves, we expect to return to annual sales and earnings guidance. As we discussed on our fourth quarter fiscal 2020 earnings conference call as we look beyond 2021, our goal is still to achieve $329 million in adjusted EBIT in 2022 as described in our 2020 annual proxy statement. Doubling our EBIT over three years in the throes of the worst pandemic in the century would be quite an accomplishment. As we look to the next three years, we believe our long-term growth algorithm of 20% unit growth, mid to high single-digit comparable store sales growth, along with modest gross margin improvement, should lead to net income growth of at least 25% on a compounded annual growth rate basis. Due to the COVID-19 pandemic, the growth path will not be a straight line. But over the long term we believe these goals are achievable. In closing, I would like to say that our entire leadership team is encouraged by the continuing momentum in our business and we are very excited about the growth that still lies in front of us. We would like to personally thank all of our associates for their great work that they are doing every day to serve our customers. Operator, we will now turn it over to questions.

And our first question comes from Zach Fadem with Wells Fargo. Please proceed. Your line is open.

Hey, good afternoon, guys. Can you talk a little more about the step-up from January to March? And if there were any particular drivers across DIY versus Pro or just broader changes in consumer behavior? And then as we look to Q2, it looks like extending the Q1 growth rate versus 2019 would suggest a comp of at least 60%, so just given the moving parts around new stores and just the wonky year-over-year compares is this the right way to think about the business as we think about sequentially into Q2?

So Trevor, this is Tom. Trevor will discuss the monthly cadence first, and then I will share some insights about the consumer and our observations.

Hey Zach, you’re correct. We experienced some unusual happenings this quarter that may make the comparisons seem a bit strange. If we exclude the benefit of that extra week, everything shifted out by a week. The week around New Year’s and Christmas tends to be low-volume, which explains why the comp was quite high in January. Removing that influence, we’re around 24.5%. February’s numbers are fairly close as well, considering the impact of the storms. We observed a slight acceleration in March, even accounting for the fact that we were closed for the last six days last year. So, we ended the quarter at 26.5% on a pro-forma basis, excluding that extra week and those six days of closure last year. However, we did notice a modest improvement in March compared to the first two months, possibly a couple of hundred basis points. Tom mentioned earlier something worth reiterating: due to the significant negative comps from last year, where we had a 170% increase, we believe it’s more appropriate to view the business on a two-year basis. We concluded Q1 with a compound annual growth rate of 28% compared to 2019, and we’re maintaining a similar rate in Q2. While we’re not providing guidance, I’d note that our business has remained fairly steady this year, aside from the holiday and certain shifts. We don’t operate seasonally; we have a promotional business. Q2 typically sees slightly higher volumes, while Q1 and Q3 are around average for us, with Q4 usually lower due to holiday-related activities. The reason we’re not offering guidance is that it’s challenging to predict what will transpire. Depending on your outlook regarding the macro environment, you could project various numbers. If you believe the economy is going to be strong again, the weekly patterns have remained quite consistent. Conversely, if the macro environment is expected to slow, you might lower those projections. Whatever the case may be, it seems we’re poised for a strong year ahead.

Yes. And the other thing I'd add just from a consumer standpoint when you're seeing strength like this you see strength in both homeowners and professionals. So we're seeing nice increases in both. Our pros continue to tell us that their backlog is long and the amount of time to get the jobs is a while. And the company that we work with on installations they had their best March ever. So both consumers are strong for us.

And then a longer-term question, maybe talk about your expectations for multiyear EBIT margin progression. And with your store level margins at a high-teens rate do you think a mid-teens EBIT margin is a fair long-term landing spot for the business over time?

This is Trevor. I mean, I would have said no historically. But this last quarter if you back out pre-opening expenses, because we won't have that and we're done opening stores a long time from now we've been 17.5% EBITDA margins, right? Back off call it 300-ish basis points for depreciation and you're getting pretty close to that mid-teen operating margin. And obviously when we're multiple billions of dollars bigger than we are today we're going to run the business more efficiently. So we just had a lot of things go our way. Obviously, we're in a very good macro environment. And so that's possible. That feels rich to me. But again we're close to that today, but we're obviously in a heightened sales environment. So, positive, very positive.

Thank you for your question. Our next question comes from the line of Michael Lasser with UBS. Your line is open. Please proceed.

Good evening, thanks for taking my question. You mentioned that your pro customers and 85% of your sales are in some way, shape, or form levered to a pro customer have long backlog. Presumably, when a customer gets a windfall of additional money they can't just go that same day and spend it on something like a flooring project, the considered purchase. So between those two factors, how long are you expecting the robust sales that you're experiencing now to last? Is it reasonable to expect that this could extend well into the fall and winter?

I mean that's a good question, Michael. I think that's what Trevor said earlier, it's hard to predict. We're seeing strong strength now. Our strength has been consistent. The backlog has remained pretty consistent too. While the pros are backlogged, that's not a new event that's been going on as we started to come out of COVID. So I think the reason we're not giving guidance is it's kind of hard to predict exactly what's going to happen. As I look at the macro existing home sales still are strong. Last month, we were up 12.3% over last year. Household values continue to go up. You've got an aging household stock, millennials entering the housing market. And there's a lot of good things in the macro. And then lastly, aging houses, I mean there's just a lot of good things in the macro that support the category. So it's hard to predict because of the moving parts due to COVID, but we'll see.

And my follow-up question is there's a lot of well-documented pressures on many of the key imports for the products you're selling like lumber. And how is that impacting both your cost and your ability to secure product at this point?

I'll let Lisa discuss the cost. When running this type of competitive environment with net sales growth, you'll always be managing inventory. In my time here, we've experienced some significant competition, and this situation is somewhat unprecedented. There will be times when we need to chase inventory. What's impressive to me is our capability to maintain a broad in-stock assortment. When we pursue inventory for a specific tile or wood SKU, we still have hundreds of other options in those categories that we can offer to customers. So, even while managing inventory in this environment, it doesn't seem to be impacting our sales. I'll let Lisa address the costs and how we're handling that.

Hi, Michael. So on the cost perspective, yes, we have started to see some increases. Now we're not going to be affected like lumber is. The wood that we use is a little different so we don't see those kinds of increases. But we have started to see some. The great news is we have really terrific partners out there that we've worked with for years and in some cases decades. And they keep our costs as low as possible. We have really extensive sourcing options. We have a lot of purchasing power. So where we've had to take increases, we're able to take strategic retail increases. They're not a lot of them, but we have had to do that in some cases. But we do remain really confident with our price gap. I mean in the price shops that we do our gap with the competition is as big if not bigger than we've ever been. So yes, we're facing some of the same cost pressures everyone else is but we feel very good about our ability to navigate through those.

Thank you for your question. Our next question comes from the line of Steven Forbes with Guggenheim Securities. Please proceed. Your line is open.

Good morning, Tom, Trevor. I wanted to focus on the adjacent category performance since you're disclosing it in the Qs now. 1.6% of revenue it seems for the quarter. Just curious, sort of, your takeaways on what that means for the opportunity there. I know you've talked about getting to $1 million per store but the strength here seems especially strong. So what does it mean? Any updated thoughts in also about your ability to sort of continue to expand into new categories?

I have been quite pleased with the performance of our adjacent categories. We have explored several of them and have been deliberate about adding products that help complete a project, as we've heard from customers that they want to purchase everything needed for a project in one place. For example, in a bathroom remodel, we consider what items complement the flooring that a customer may be using. I'm satisfied with how this approach has worked out, but I believe there's still room for improvement. We have faced challenges with inventory, but as we enhance our inventory management, I expect continued growth in these categories. Our store sizes are intentionally large, allowing us the flexibility to respond to shifts in sales. When one category experiences a slowdown, we can shift our space allocation to support another growing category. We've historically done this within the hard surface flooring sector, and we are now applying this strategy to adjacent categories as well. Over the past few years, our average store size has increased, which provides us with more opportunities. We are not content with where we are and are always looking to do more. We are committed to exploring new expectations from our customers, and we will continue piloting new concepts. If they prove successful, we will roll them out to more stores.

And then just a quick follow-up on the commercial RAMs. You talked about adding 14, I think, this year. Any update on how the legacy cohorts, I guess, or the classes of RAMs are performing relative to those stated goals, the sales goals that you had in the past?

Yes, this is Trevor. They are off to a great start this year. The commercial sector was expected to decline, and while it may overall, our presence in that industry is quite small. They are performing well. Some of the RAMs who have been with us for a couple of years are likely to exceed the $2.5 million to $3 million target. Some are getting close to that figure just four months into the year. As you mentioned, we've brought in a lot of new talent; we hired 12 last year and plan to hire 14 this year. With many new people onboard, the core principles that have contributed to our residential business success are working effectively with the RAMs. We are focusing on high-quality products at a low cost and ensuring a fast supply chain. We are very pleased with our progress. That's why we initially aimed to hire 12, but due to our success, we increased it to 14. In short, we feel very confident about achieving our commercial goals.

I think the only thing I would add to that is I've also been surprised at the amount of talent that we've been able to attract. I think people are starting to understand the benefits of working with Floor & Decor on commercial projects and people in the industry are seeing that so we'll be able to attract good talent and a lot tends to bring a book of business with them.

Thank you for your question. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed. Your line is open.

Hi, everyone. Good afternoon. I have two questions. First on sales. My sales question I guess has two parts. First, Trevor back to the comment around the CAGR for the last, I guess, the weeks you're saying week-to-week it's pretty stable and it's a good way to think about your business on I guess a two-year basis from 2019 or on a CAGR. Did you also say though that underlying momentum seems to have accelerated in the first quarter sort of I don't know if it was week-to-week or month-to-month? That's my first question.

Yes, it does. But just to be fair about that it should because March is a bigger selling season and April is one of our biggest volume months relative to January and February. But so yes the answer is our week-to-week volumes when you look at every week week-to-week we have seen our volumes increase, but they should because March and April are higher volume months for us. So the answer is, yes, but they should.

Got it. Okay. And then within that still on sales do you have a sense of the composition of new transactions or customers you haven't seen versus existing?

I don't have that information from our CRM data at the moment. However, I'm proud to be celebrating my tenth year at Floor & Decor. As Tom mentioned, the vast majority of our comparable sales come from transactions, and we can likely retrieve that detail from our CRM database for our next update.

I believe we are seeing a significant influx of new customers in the marketplace. With the growth in transactions and our increasing brand awareness, we still have more work to do. As we continue to open numerous stores and expand into various markets, those markets are evolving, which often attracts new customers for us. Overall, when I assess our performance, I see new customers, and I believe we are capturing market share at a quicker pace than in the past.

And just the last follow-up. On market share you mentioned Tom mature markets. Do you have a sense or just remind us what you've told us in terms of market share in most mature markets? I don't know if there's any updated 2020 data out there.

I think we consider our operational focus more in terms of a catchment area, which allows us to evaluate some of that work. The last time I checked, we noticed that some of our higher-volume stores can achieve market shares of 35% or 40% within a 45-minute drive radius, and some are even higher. Therefore, in our larger volume stores located in more mature markets, we've established a very high market share. Overall, we estimate our total market share at about 9% given that we only have 140 stores, but in more developed markets with our higher-volume locations, that share is significantly greater.

Thank you for your question. Our next questions come from the line of Karen Short with Barclays. Please proceed. Your line is open.

Hi. Thanks very much. Just a couple of questions. Wondering if you could talk a little bit more about inventory. Obviously, you had exceptionally strong sales, but the inventory increase was pretty lean this quarter relative to 4Q and much more so relative to 3Q. So wondering how you're thinking about that going forward? Then I did have one or two other questions.

Yes. As Tom mentioned, we weren't really prepared for this level of sales, but we have excellent systems in place. Our strong team of merchants and supply chain professionals is helping us analyze these trends, and we are definitely selling more than we anticipated. Also, as Tom said, a key advantage of our business is the wide variety of SKUs we offer. We were in stores today discussing with our teams, and consumers seem very enthusiastic. For example, we may have 15 or 18 shades of gray tile, each slightly different. If we don’t have the exact SKU you initially considered, we likely have something similar to sell. Our merchants excel at presenting options from good to better to best, and our store teams are effective at highlighting the differences among those SKUs. Additionally, we are collaborating closely with our supply chain partners and vendors to improve our inventory levels. Currently, our in-stock rates are not significantly below historical levels. However, as we continue to sell at a high pace, those in-stock levels might decline. Nevertheless, as of now, our in-stock situation remains strong.

Okay. And then my second question is just related to, obviously, you talked about the percent of sales Pro sales from the PPR members. Wondering if you could just give an update on tie-in rewards programs for pros using the Pro credit card or just a general update on how you're thinking about tying the credit card into the reward program in general.

We are collaborating with a professional firm that works with many large companies to help us prioritize our efforts. We expect to complete that analysis in about a month. As we’ve mentioned, we are focused on three key goals for the PPR program, which is performing exceptionally well, as Tom noted. One of the next steps we are considering is implementing a tiered program that recognizes and rewards our best customers more, which we are very enthusiastic about. We are currently defining how the credit card feature will integrate, but we know that the costs associated with our private label credit cards are significantly lower than those from external brands. We plan to incentivize customers for using our card, which also offers the best terms available, including six months with no interest. Additionally, as we launch new innovative technology or products, particularly in the installation category, we can provide points for trying these new items and collaborating with our vendors on this. Our objective is to deploy these initiatives later this year, contingent on the technology and resources we need to invest in. We aim to have everything ready for rollout to enhance our performance into 2022.

And thank you for your question. Our next question comes from the line of Greg Melich with Evercore ISI. Please proceed. Your line is open.

Thanks. I had a follow-up on inventory and then on CapEx. So if inventory was up 3% year-over-year and given that costs are going up, is there any inflation in that? And is volume actually down on inventory?

There is currently a bit of inflation. We expect most of our inflation to arise later in the year. Our return on inventory is just over two times annually, and the cost increases we're experiencing now were not present with the receipts we have at the moment. Therefore, there will be some inflation included. Lisa and I often joke that last year's inventory isn't always the best indicator because we don't always have it available. We just achieved a 41% increase in sales, so we would love to have more of our best sellers, and we are actively collaborating with our partners to achieve that, which is advantageous given our large store with ample inventory.

Is there a number like 50 million that you'd like to have ideally?

Well, I feel that number is a bit high for me.

Okay. You mentioned in your prepared remarks about shifting towards more ownership instead of leasing. I see that you've maintained the CapEx plan at around $440 million, while the first quarter only accounted for $46 million. Should we expect CapEx to increase to about $130 million per quarter? Is the strategy now leaning more towards ownership than leasing?

We currently own two stores, one in Connecticut and one in Texas, and we're quite satisfied with that. To put it simply, we are investing between $7 million to $9 million for each new store. When it comes to land acquisition, the real estate varies across the U.S., but we typically spend around $3.5 million to $4 million for the land on the lower end, potentially exceeding $5 million on the higher end. We assess two independent returns on investment: one for the store itself and another for the real estate. Our expectation is to achieve a return on capital above 10% on these investments. We are looking to expand our ownership of real estate, following specific guidelines such as identifying strong demographic regions and the potential resale value of the real estate. We're currently reviewing these investments and exploring opportunities for more ownership. There are additional advantages to owning real estate, such as improved tax negotiations and better management of cost increases. While it might be possible for us to own between 10% to 20% of our new stores, we are not fully committed to that figure just yet. For example, in places like Dallas, Texas, where we are familiar and see a strong potential, we intend to increase our ownership of stores. Looking ahead to 2022 and 2023, as we work on those stores, we would like to own some of that real estate, which will cost around $3.5 million to $4 million on the low end and $5 million to $6 million on the high end for the land. Although this response is lengthy, I believe our ownership of real estate will not significantly impact our overall capital expenditures, but we will pursue additional ownership where it makes sense.

Thank you for your question. Our next question comes from the line of Chris Horvers with JPMorgan. Please proceed. Your line is open.

Thanks. Good evening, everyone. A couple of margin questions. Top line has been pretty fully covered here. Can you talk about product margins? You didn't call it out as a positive in this quarter and you had prior. It does sound like you had – you did have trade up to better and best. And then you also talked about transportation costs and input costs rising and inventory turns. So any color commentary about how to think about gross margin over the balance of the year? And could we flatten out and maybe see some pressure as we get to the fourth quarter?

Yeah, I'll hit it at a high level, and then Lisa and Tom can weigh in. We saw some pretty meaningful gross margin improvements last year across all of our product categories. This quarter, when you look at the totality of it, the majority, as I mentioned in my prepared comments, was driven by the leverage of the supply chain was a bigger driver of our gross margin this quarter. The way we think about our gross margins for the rest of the year and obviously a little bit of this is predicated on sales, but assuming reasonable sales growth that we're planning on we would expect to have higher gross margins again in Q2. As we get to the back half of the year, our current expectations are that they'll be flat to down maybe just a little bit driven by the fact that, we are going to see some of these cost increases. And Chris you followed us for a long time. When we think about these cost increases we try to keep our retails as low as possible. We're going to likely pass on those cost increases to some extent. But it's a market-based approach, it's a portfolio-based approach. But I do think as we see some of those inflationary pressures come in, the gross margin will not be growing in the back half of the year. But as we did when tariffs came in we don't think that will affect our ability to get to our gross profit goals and our profit goals.

Got it. And then can you just talk about – maybe quantify how much incentive comp pressured from a dollar perspective? And help us out in terms of sort of how you accrue for that? Do you typically say, we beat the first quarter versus our internal plan and we raise only for that, or do you typically recast the year and then sort of adjust your accrual rate at that point in time?

It's the latter. Fortunately, our overall incentive compensation is relatively small as a percentage of our sales, so it doesn't have a massive impact. As expected, we're accruing at the high end of the range right now based on the business's performance. Some of that is included in our general and administrative expenses, and some is related to store performance. As you observed, our comparable store sales were good, and we achieved over 300 basis points, nearly 400 basis points in leverage for our comp stores, despite last year's bonuses being essentially zero as we were heading into COVID. This year, we're accruing at the maximum rate and still see significant leverage in the stores. The leverage at the corporate level was less pronounced, and the lack of leverage in the first quarter was primarily due to bonuses since we accrued almost nothing last year. This year, we're accruing at the high end of the range.

So said another way, it was the comparison year-over-year. It's not like you sort of recast your plan and said okay now internally we're expecting even better outcome than what we had predicated for the year?

I would say so we have a plan that the compensation committee approves at the beginning of the year and then we will accrue based on what you're – what do we think we're going to hit throughout the year. So as we're re-forecasting the businesses we'll take that incentive comp up throughout the year. So hopefully that answers your question. But basically, we do reforecast the year, and then we accrue based on how we're performing throughout that – throughout the year. And then obviously, as we get closer to the end of the year that true-up becomes pretty immaterial because you're getting close to the end of the year.

Thank you for your question. Our next question comes from Kate McShane with Goldman Sachs. Your line is open. Please proceed.

Hi. Thanks. Good afternoon. A lot of our questions have been answered. So this is a little bit more of a detailed one on the cadence of comps that you talked about today. I know you mentioned that February was impacted by about 500 basis points by the storms, but you think 300 basis points of that got pushed into March. Do you think those 200 basis points difference can still come back? And just with regards to the commentary around what you achieved in March I know, it's small but is there a way to know if that was from needing to replace floors, because of the storms, or is it from delayed projects?

Part of this is just a bit of a math equation. March is a five-week month. February is a four-week month. And then also the March volumes were higher and the February volumes were lower. So the combination of those two things is they basically dollar-wise wash each other out. But because March is such a higher volume month, both because of the volumes and it's a five-week month, that's why it's only a $300,000 benefit in March. On the storm itself you guys know Hurricane Harvey hit us in late 2017, and it felt like the rain stopped and the sales went through the roof. And we're obviously a smaller company and more concentrated in Houston there. We don't think that happened here. Maybe that will come maybe there's some to come throughout the year. It felt like we kind of lost some of what we would have gotten otherwise. And maybe there's some upside to come as frozen pipes burst and things like that. But it doesn't feel like we're going to see anything close to what we saw in Houston back when Hurricane Harvey hit.

Thank you for your question. Our next question comes from the line of Steven Zaccone with Citi. Please proceed. Your line is open.

Great. Thanks for taking my question. Congrats on the strong results. One quick one, just why don't you expand a bit more on what's driving the growth of the 2020 and 2021 cohort of stores to be so strong relative to prior cohorts? Do you think the brand awareness is growing? Is it better execution? It seems like you're being more vocal with the grand opening celebration. So just what's the key drivers of the outperformance when you look at these versus prior cohorts? Thanks.

I don't think it's one thing. It's a little bit of everything you said. Certainly, our execution I feel is at a high level. What's encouraging is the stores, particularly in 2021 we're not opening the same – with the same fanfare that we have historically opened our stores over the last few years and we're seeing really strong results. And so that our teams are executing they're out they're finding new pros they're getting them into the stores, just not in one big mass party, because you can't do that in a COVID world. So I'm pleased with that part of it. I think that the 20 and 21 stores I do think our awareness is improving. I think people are knowing, where we are. Even in new markets people are starting to hear of the brand. So I think that that helps. I think our real estate team has done a phenomenal job in our locations. I keep pulling up to our new stores and I'm like this is one of the best locations that we have. And it's – and I'm getting tired of saying it, but I do think that, they've done a good job a better job than we've historically done in getting the right locations with the right visibility which is important to us. So – and we're also opening in markets where you'd expect some higher volumes. So we're getting some more stores up in the Northeast. We're getting some more stores in Texas and markets that we perform good at and those stores performed strong historically. So yeah, it's a little bit of everything. There's no one magic bullet. But certainly, we're pleased with the 20 and 21 stores.

I think one other thing, Steven, that we're learning is that 60% of our stores are in existing markets this year, which helps improve brand recognition among professionals. We're also noticing that our real estate team is securing better locations for us as we grow as a company with a stronger balance sheet. When you open a second or third location, you're really starting to see the leverage you hoped for because of the increased brand recognition. It becomes more convenient for professionals to shop at multiple stores, which is very encouraging. With at least 400 stores planned to open, we're currently at 140, so we still have many markets to expand into with additional stores. This is something we've learned a lot about over the last few years.

Thank you for your question. Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed your line is open.

Hi. Thank you. Great quarter. Just a question on geographic performance. Just curious if you're seeing any diversion in performance in some of the markets that are further along in the reopening process? And then also just curious from a consumer perspective, if you're seeing shoppers start to engage in larger purchases at this point in time?

Geographically, we're pleased across the country. All markets are performing very well. As I said in my prepared remarks that there's not one place that's really driving it. We're fortunate to see strength across all territories. Whether customers are taking on larger projects, it's hard to tell. I mean, I don't think so. I think they're taking on the same. Flooring project is a flooring project and that doesn't change so much. So the one thing, we are seeing you can see our average ticket is a little bit better. Customers continue to step up through our better and best products, which tend to be a little bit more expensive. I think our merchants have done a terrific job of being trend-right and I think customers are gravitating that. So that takes the project up a little bit and it's reflective in our average ticket. So we feel good about both.

Thank you for your question. Our next question comes from the line of Alex Maroccia with Berenberg. Please proceed your line is open.

Good afternoon. Thanks for taking my question, guys. I might have missed this in the prepared remarks, but can you give us an update on the new California transload facility? And if your thoughts around benefits from it have changed given the current freight environment?

Yes. Again, our supply chain team has just been very thoughtful about this, so we pulled the trigger to do it. We don't plan on operating it until the fourth quarter. And then it will take time to work its benefit in because we're on a weighted average cost of inventory method. So we'll start to get some modest benefits for that at the end of Q4 and into Q1. But with the congestion out there and the cost of dealing with the congestion out there, it's going to help us now. We think some of that's going to hopefully abate over time as they get caught up. But we're on track. We plan to open it like I said, I think in the fourth quarter and we'll start to see some of those benefits really more realistically into 2022.

Thank you for your question. Our final question is coming from the line of Justin Kleber with Baird. Please proceed, your line is open.

Hi, guys. Thanks for taking the question. I wanted to ask just about web traffic. I assume you've seen an acceleration in growth during 1Q. I don't know if you had that specific number you can share. But maybe as a part of the question what's the typical lag time from when you see a homeowner start to engage with your website and then when they actually make a purchase?

Hi. This is Lisa. So yes, we did see pretty consistent web traffic through the first quarter. There's some ups and downs by week as we usually see. I believe that our total for the first quarter was up 81% web traffic. So that was great. April did come down some, but it's getting very fuzzy now because we are now going up against stores being closed. So if you remember last year, the web represented like 65% of our business in the second quarter last year. So there was a lot of noise now as we start to compare year-over-year. But first quarter, we felt very good still running close to 17% of sales, so that's great. I don't know if I know the exact lead or lag time. I think kind of anecdotally, we've always said some are in the 30- to 90-day range from the time somebody kind of starts the thought process to do it until the time it actually gets done. And I don't think we have any reason to believe that timeline has changed.

So I think that concludes our question-and-answer session. We appreciate everyone joining our call today and appreciate your interest in our company and our performance, and we look forward to talking to you on our next quarterly update.

That does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines.