Hello, and welcome to the Floor & Decor Third Quarter 2021 Earnings Call and Webcast. 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. It's now my pleasure to turn the call over to Wayne Hood, Vice President, Investor Relations. Please go ahead, sir.

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 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 measures can be found in the earnings press release, which is available on our Investor Relations website. A recorded replay of this call together with related materials will be available on our Investor Relations website. Let me now turn the call over to Tom.

Thank you, Wayne, and thanks to everyone for joining us on our fiscal 2021 third quarter earnings conference call. On today's call, I will discuss some of the highlights of our fiscal 2021 third quarter earnings results. Trevor will then review our financial performance in more detail and discuss how we are thinking about the remainder of fiscal 2021, and then we will open the call for your questions. Let me start by saying how pleased we are with our fiscal 2021 third quarter results, which build on our record third quarter financial results last year. Our fiscal 2021 third quarter total sales increased 28% to $876.6 million from $684.8 million last year. Our comparable store sales increased 10.9% in the third quarter of fiscal 2021 and 14.1% on a two-year compound annual growth rate basis from 2019. In addition, we achieved fiscal 2021 third quarter adjusted earnings per share of $0.60 per share, up 49.1% on a two-year compound annual growth basis from 2019, ahead of our expectations. Our continuing strong financial performance is the direct result of the outstanding work all of our associates are doing to serve our Pros and homeowners every day, which enables us to continue to grow our market share. We believe we are winning with our large warehouse stores that offer broad innovative trend-forward assortments in job lot quantities, which enable our Pro and homeowner customers to choose from multiple options to complete their projects on time. These benefits have been significant during the turmoil in the global supply chain, particularly for Pros, where there is uncertainty in product lead times and rising costs. While the global supply chain disruption remains challenging, we are successfully managing our inventory flow and merchandise in-stocks by being flexible with our supply chain, leveraging our diverse countries of origin and the support of our vendor and supply chain partners. Our inventory receipts outpaced our cost of goods sold in the third quarter, and we saw improved in-stock levels. We remain excited about being on a path towards delivering our 13th consecutive year of positive comparable store sales growth in fiscal 2021. I will now discuss some of our strategic pillars of growth beginning with new store growth. We had a busy third quarter opening six new warehouse stores compared with three in 2020. We opened one warehouse store in July, two stores in August, and three stores in September. We remain excited about growing our brand awareness and market share in suburban locations within larger MSAs as we look to the future. To that end, some of our third quarter warehouse store openings included successful new stores in the towns of Commack and Bohemia Long Island. These openings bring the total to three warehouse stores that we now operate on Long Island. We also opened a new warehouse store in the suburban market of Waltham Massachusetts, bringing the total to three stores that we operate in the Boston market at the end of the third quarter. Year-to-date through the third quarter of fiscal 2021, we have successfully opened 20 new warehouse stores bringing our total warehouse store count to 153 warehouse stores operating in 33 states. We intend to open seven new warehouse stores in the fourth quarter of fiscal 2021 compared with five in fiscal 2020. As a result, we will have opened 27 new warehouse stores in fiscal 2021 representing 20.3% growth from fiscal 2020. We intended on opening two design studios—our small-format stores located in densely populated higher-income metropolitan markets—late in the fourth quarter of fiscal 2021 in Miami, Florida, and Houston, Texas. However, delays in the supply chain where we source unique fixtures for the design studios will likely push these openings into January of 2022. Our strong third quarter and year-to-date results served to reinforce our belief that the new store classes of 2020 and 2021 will likely represent the most robust first year sales and profit classes in our history. The improvement is from our real estate team increasingly bringing preferred site options with lower occupancy costs compared with prior years. Additionally, we have improved our grand opening cadence in 2021 resulting in more operating weeks. Furthermore, the improving performance results reflect the excellent execution among our merchandising, construction, new store visual merchandising, training, marketing, and store teams. Moving on to our second pillar of growth: growing our comparable store sales. Fiscal 2021 third quarter comparable store sales increased 10.9% from the same period last year and 14.1% on a two-year compound annual growth basis from the third quarter of fiscal 2019. Both comparable store sales growth measures are above our long-term target of mid to high single-digit comparable store sales growth. Monthly, our comparable store sales increased 11.5% in July, 10.5% in August, and 10.8% in September. We are happy with our third quarter sales exit rate and the start to the fourth quarter of fiscal 2021 where our comparable store sales are up 16% quarter-to-date. A better way to look at our comparable store sales increase is on a two-year compounded annual growth rate basis due to COVID-19. And on that basis, our quarter-to-date comparable store sales are up 18%, the highest of the year. Our fiscal 2021 third quarter comparable ticket increased 8.3% from the same period last year and 4% on a two-year compound annual growth rate basis from 2019. The increase in fiscal 2021 third quarter comp ticket is due primarily to a mix benefit of selling more better and best products and, to a lesser extent, certain retail price increases we took in the second half of the quarter to mitigate higher costs. Additionally, comparable store sales in our Pro business exceeded our homeowner business, which had a favorable impact on our ticket. Our fiscal 2021 third quarter comp transactions grew 2.4% year-over-year and a robust 9.8% on a two-year compound annual growth rate basis from fiscal 2019. The two-year solid growth rate in our transactions reinforces our belief that we are gaining market share. We continue to see customers moving up to the better and best price points within our merchandising assortments. They will often find new formats, sizes, innovations in performance, and higher-end materials on-trend visuals that run the spectrum of style and visual preferences. Let me now turn my comments on how we are navigating the constraints in the global supply chain. As we discussed during our fiscal 2021 second quarter earnings call, we added significantly more capacity this year to our ocean and North American logistics to align with our strong growth particularly from Asia, Europe, and Brazil. We have increased our agreements with dedicated fleet carriers, one-way asset-based carriers, and ocean carriers to secure additional capacity and minimize costs where we can. That said, we continue to selectively use the spot market to work down the backlog on specific SKUs which drives an increase in our supply chain cost for those shipments. We have also been creative with our inbound freight by adding non-containerized options and taking advantage of additional capacity such as new services or extra loader vessels. We believe that these supply chain strategies combined with our broad assortments have enabled us to offer our homeowners and Pros alternative products where some out-of-stocks have occurred elsewhere. Additionally, we have onboarded multiple new providers to carry our freight, expanded our ports of entry, and increased our transload activities in various ports. We believe these actions and our ability to pivot to multiple alternatives is a clear competitive advantage in these challenging times, particularly when compared with independent hard-surface foreign retailers. Moving on to the elevated cost headwinds that have emerged from the disruption in the global supply chain. We, like many companies, continue to face higher supply chain costs and select product cost increases from higher raw material, labor, and energy costs that will be a headwind to our gross margin rate in the fourth quarter of fiscal 2021 and into fiscal 2022. As Trevor will discuss in more detail over the immediate term, we believe these cost headwinds will change the complexion of our P&L as supply and demand remain unbalanced. That said, we are uniquely well-positioned to grow our market share during the demand and supply chain turmoil from flooring retailers that cannot effectively manage the growing complexity and rising costs as evidenced by our transaction growth and overall sales momentum. As a reminder, we estimate that 60% of the industry sales are sold through hard-surface specialty retailers, small independent hard-surface retailers, and distributors. Our third strategic pillar of growth is expanding our connected customer experience. We continue to invest in our connected customer capabilities to deliver what we feel is an unmatched and seamless personalized customer experience across our desktop, mobile, and store selling channels. As a reminder, 79% of our customers who purchased in the stores said they had been to our website, and 71% of customers who bought online said they have been in the store. Our warehouse stores are integral to our website revenues as approximately 80% of online revenues are picked up in stores. The investments we have made in e-commerce over the last several years resonate with our homeowners and Pros leading to improving conversion and a significant increase in our e-commerce sales penetration rate. Our year-to-date fiscal 2021 e-commerce sales penetration rate is 15.9%, up significantly from 9.7% in 2019. Our fiscal 2021, third quarter e-commerce sales increased 34% year-over-year. When measured on a two-year compound annual growth rate basis, our third quarter e-commerce sales grew 67% from 2019. Our fourth pillar of growth rests in the investments we are making in our Pro and commercial customers to grow our market share. Our strategy is to expand our Pro wallet share particularly among returning top Pros. This has resulted in total and comparable store sales growth that exceeded the company average in the third quarter of fiscal 2021. We are thrilled that our top Pros are shopping more often and spending more with us to build lifetime value. Our third quarter Pro sales penetration rate increased year-over-year and exceeded the prior two fiscal 2021 quarters and the year-to-date rate. We believe our Pro sales could exceed $1 billion in fiscal 2021, another company milestone. We attribute the improvement to Pros increasingly seeking retailers with trend-right, low-cost products, high on-hand job lot quantities, and better lead times to complete their projects, as well as great relationships from our Pro desk. As we have said many times, we believe our Pro Premier Rewards or PPR loyalty program credit offerings and Pro education events enable us to grow our market share and build lifetime value with Pros. As we look to the future, we see opportunities to further accelerate membership growth and our market share by introducing PPR enhancements including loyalty tiers, SKU-based bonus point promotions, and Pro credit card incentives that will further drive engagement. Fiscal 2021 third quarter commercial sales growth from our regional account managers or RAMs exceeded the company average. While commercial sales from our regional account managers are small relative to the size of our retail business, we are excited about the growth potential and added five new RAMs in the third quarter of fiscal 2021 towards our plan of adding 16 in fiscal 2021. Over time, we expect commercial sales to become a material part of our growth. We will leverage Floor & Decor's core strengths in merchandising and direct sourcing, as well as the vast industry experience and value proposition Spartan Surfaces now brings to our portfolio. Let me now discuss our progress with our design services, the fifth pillar of our growth. As we have discussed in the past, we are focused on building a consistent high-touch best-in-class and seamless designer service experience for our homeowner and Pro customers. We have refined our strategies to attract and retain high-caliber designers and recently added three new divisional design services directors across the US. We continue to enhance our design opportunity under this new leadership structure and use the unified metrics across all of our warehouse stores and now in the home. In the third quarter, we introduced an in-home design services pilot in Dallas and Houston, Texas. Homeowners and Pros can make appointments with our in-home designers, in our warehouse stores or online with our design scheduler and choose among three different compelling design fees based on project needs. Before I close, I want to give a special thanks to our associates in Louisiana and the Northeast who responded to Hurricane Ida. Their extraordinary efforts allowed our stores to get back up and running quickly to serve our communities. I'm also proud of all our associates who contribute to the West Fund, our associate assistance fund named after our founder Vincent West, which helped associates personally impacted by Hurricane Ida. The West Fund is one of our important ESG initiatives. And I'm also pleased that we hired a new Director of Sustainability during the third quarter of fiscal 2021. In 2022, we look forward to sharing more with you about these important initiatives and how they will strengthen our company. I will now turn the call over to Trevor to discuss our fiscal 2021 third quarter results in more detail.

Thanks, Tom. I also want to say how happy I am with our operating and financial performance in the third quarter of fiscal 2021. We have been successfully maneuvering through growing complexity in our supply chain and sequentially improved our merchandise in-stock levels, which is impressive considering our year-to-date total sales increased 28.8% on a compounded annual growth rate basis from 2019. Today product availability is even more critical to grow market share. Additionally, like many companies, we face higher supply chain costs, rising product costs from higher raw material input costs, including energy, and pressure on labor rates. We have effectively managed our costs and been strategic about increasing prices to offset these broad cost pressures. As a reminder, any price adjustments that we may make will be rolling, and we intend to keep our price leadership and protect our value proposition. We are fortunate to have broad assortments to make select strategic price adjustments without materially impacting our unit elasticity to date. As we have said in prior earnings calls, we drive profitability towards managing gross profit dollars rather than gross margin rate. We believe our strong fiscal 2021 third quarter financial results where adjusted net income increased 129% from 2019 demonstrates our ability to grow our market share and successfully manage our profitability during these industry-wide challenging periods. Let me now turn my comments to some of the line items in our fiscal 2021 third quarter income statement, balance sheet, and statement of cash flows, and then discuss how we are thinking about the remainder of fiscal 2021. Let me begin with our gross profit. We are pleased that our fiscal 2021 third quarter gross profit increased 24% to $365 million. The increase in gross profit was driven by a 28% growth in total sales, partially offset by a lower gross margin rate. Our third quarter gross margin rate decreased a better-than-expected 130 basis points to 41.7% from 43% last year. The decrease in gross margin was primarily due to higher supply chain costs. As a reminder, our fiscal 2020 third quarter and fourth quarter gross margin rate increased 200 basis points and 90 basis points respectively from 2019, adjusting for unique items called out in our previous non-GAAP reconciliation and the impact of the 53rd week in 2020. For that reason, we said in our second quarter earnings call that we expected our fiscal 2021 third quarter gross margin rate to be lower on a year-over-year basis but above our fiscal 2019 third quarter rate of 41%. Turning to our fiscal 2021 third quarter expenses. Our third quarter selling and store operating expenses increased 27.5% to $218 million. The increase was primarily from the opening of 25 new stores since September 24, 2020, and additional staffing to support our sales growth. As a percentage of sales, our selling and store operating expenses rate decreased better-than-expected 10 basis points to 24.9% from 25% in the same period last year. We are pleased with our selling and store operating expenses rate leverage, considering last year we grew our store units by 13% compared to 20% new store unit growth this year. Additionally, last year we achieved extraordinary expense leverage in the third quarter of fiscal 2020 when our store staffing was not yet fully aligned with our accelerating sales momentum. On a comparable store basis, our fiscal 2021 third quarter selling and store operating expense rate leveraged approximately 80 basis points from the same period the previous year, as we leveraged advertising and occupancy costs on higher sales. The 80 basis points decline in fiscal 2021 third quarter comparable store selling and store operating expense rate is on top of leveraging approximately 220 basis points in the third quarter of fiscal 2020. Our third quarter general and administrative expenses increased 33.6% to $52.5 million. The increase is primarily due to costs to support our store growth including increased store support staff and higher depreciation related to technology and other store support center investments. As a percentage of sales, G&A expense was in line with our expectations increasing approximately 30 basis points to 6% from 5.7% from the same period last year, primarily due to the amortization of intangible assets acquired from Spartan Surfaces and other non-payroll-related general and administrative costs. Our fiscal third quarter 2021 preopening expenses increased 113.5% to $10.7 million. The increase is primarily the result of an increase in the number of stores we either opened or were planning to open compared to the prior year period. We opened six warehouse stores during the 13 weeks ended September 30, 2021 compared to opening three warehouse stores and one design studio during the 13 weeks ended September 24, 2020. Our fiscal 2021 third quarter EBIT increased 5.8% to $83.4 million. Adjusted EBITDA increased 12.7% to $120.2 million. Our adjusted EBITDA margin decreased 190 basis points to 13.7% from last year's record 15.6% primarily due to higher freight costs that impacted our gross margin rate as well as higher preopening expenses as we ramped up our new store growth from 13% last year to 20% this year. Our fiscal 2021 third quarter effective tax rate was 9.3% compared to 10.4% during the same period the previous year. The decrease in the effective tax rate was primarily due to higher excess tax benefits related to stock option exercise during the current quarter compared to the same period in the prior year. As a result, our fiscal 2021 third quarter provision for income taxes was $7.6 million compared to $8 million in the same period last year. Our fiscal 2021 third quarter GAAP net income increased 8.5% to $74.6 million. Fiscal 2021 third quarter GAAP diluted earnings per share increased 6.2% to $0.69. Our adjusted third quarter net income increased 8% to $64.2 million. Adjusted diluted earnings per share increased 7.1% to $0.60. Our third quarter weighted average diluted share count was 107.5 million compared to 106.4 million during the same period last year. A complete reconciliation of our GAAP to non-GAAP earnings can be found on today's earnings press release. Moving on to specific items in our fiscal 2021 third quarter balance sheet and cash flow statement. As Tom mentioned in his prepared remarks, we have taken multiple actions to build our inventory to support our strong sales growth. To that end, our third quarter net inventory increased 39% from the same period last year and 27% year-to-date. The growth compares favorably to the second quarter when our inventory was up 15% from the same period last year and up 5% year-to-date. We expect our fiscal 2021 year-end inventory to increase to approximately $900 million to $1 billion, up about 40% to 50% from fiscal 2020. The expected increase in our inventory is being driven primarily by two investments. First, we are investing in improving our in-stock inventory in key SKUs. And second, we intend to bring in a portion of the Chinese New Year inventory a couple of months early landing in November and December to try to mitigate the current international container capacity issues that exist. Notwithstanding this inventory growth, we are experiencing an all-time high in our inventory turnover. Moving on to our capital expenditures. Through the 39 weeks ended September 30, 2021, our capital expenditures totaled $346.1 million including capital expenditures accrued at the end of the period. As we look forward, we expect our annual fiscal 2021 capital expenditures to be approximately $455 million to $475 million unchanged from our prior guidance. We expect our fiscal 2021 capital spending to be funded by cash flow generated from operations and existing cash on hand. As of September 30, 2021, we had $708.9 million in unrestricted liquidity to support our growth including $330.1 million in cash on our balance sheet. Let me now turn to how we're thinking about the fourth quarter of fiscal 2021. We are still operating in a solid macroeconomic and housing market. Existing home sales remain elevated at 6.3 million annualized units in September and the 30-year mortgage rates are hovering around 3%. Home prices continue to be well above last year and 80% of the homes people live in are 20 years old or older and there is a natural replacement cycle that occurs due to trend and maintenance. The secular demand for homes continues to exceed available supply which we believe will continue to lead to continued growth in home prices to support home reinvestment projects. Our in-stock inventory positions have improved, which we think are better than many of our competitors. Our merchandising teams have also done a great job with on-trend and innovation. With our Pro business growing at a faster rate than our homeowner business, along with a modest increase in retail due to higher cost, we see an elevated ticket. As Tom mentioned in our fourth quarter, comparable store sales have accelerated both on a one and two-year basis driven by ticket. We are optimistic about the prospects of a sustained economic recovery in the final quarter of fiscal 2021 and into 2022, but we recognize that business risks remain elevated. That said, let me provide some comments about the fourth quarter and fiscal 2021. As we look forward, we face rising product and freight costs from the capacity challenges in the global supply chain. While we have plans to manage these higher costs effectively, they are likely to change the complexion of our income statement over the intermediate term. To mitigate these rising product and freight costs and related gross margin rate pressure, we have plans to raise prices on certain products. We believe these actions coupled with our underlying organic growth could lead to a rate of comparable store sales growth in the short term that could be above our longer-term comparable store sales growth targets of mid- to high single-digit growth. As Tom mentioned, our quarter-to-date comparable store sales were up about 16% on top of the very healthy comparable store sales growth of 20.4% quarter-to-date last year. As discussed on prior calls, we are likely to see a year-over-year decline in our gross margin rate in the second half of 2021 due to the outsized gross margin rate increases last year as well as rising costs this year. Our fiscal 2021 fourth quarter gross margin rate is expected to be approximately 39% to 40%. I should also note that the acquisition of Spartan Surfaces is expected to modestly lower our gross margin rate as commercial gross margin rates are below retail. Turning to our selling and store operating expenses. We expect our fiscal 2021 fourth quarter selling and store operating expenses to leverage compared to the fourth quarter of fiscal 2020, at approximately 26% or slightly lower. As a percentage of sales, our fiscal 2021 fourth quarter pre-opening expenses are expected to be about 1% of sales in line with the fourth quarter of fiscal 2020. In the fourth quarter, our general and administrative expenses are expected to be similar to the amount we spent in the third quarter of fiscal 2021. We plan on depreciation and amortization to be about $32 million and interest expense to be approximately $1.5 million. Diluted weighted average shares outstanding are estimated to be 107.7 million and our tax rate is estimated to be slightly above 24%. As a reminder, this guidance does not consider the tax benefit due to the impact of stock option exercises that may incur in the fourth quarter of fiscal 2021. Let me close by saying our entire executive team is incredibly proud of our performance in 2021.

Thank you. We’ll now be conducting your question-and-answer session. Our first question today is coming from Kate McShane from Goldman Sachs. Your line is now live.

Hi, good afternoon. Thanks for taking our question. Trevor, I wondered if you could talk a little bit more about the actions you're taking with your inventory, specifically what you mentioned with regards to the Chinese New Year and bringing that in early. Could you maybe explain a little bit how that will work and what that will do for your inventory standpoint by the end of the year?

Yes, Kate. We do plan on bringing our inventory in. I think you heard me say, we're going to expect it to be between $900 million and $1 billion, which will be up 40% to 50% over last year. And just as you guys are all reading in the paper, you're probably seeing with the other companies you cover, it's difficult sitting out there. And so the supply chain team came to us early on and said, hey, capacity is getting tough. We're going to bring in some inventory earlier than normal. And we said, good, let's do it. We're pleased that we did make that decision. So it was really just a timing thing. That inventory normally would have landed probably early next year. We're just planning to bring it in earlier this year.

Okay. And of the comp the quarter-to-date comp that you highlighted, can you talk about ticket versus transaction? And once we do start to see maybe an easing of the supply chain, what do you think happens to pricing when that supply chain starts to loosen up a little bit more?

Yeah. I think when – the ticket this quarter is actually much more driven by better and best. Our merchants have done a great job selecting great products. Our stores and the website have done a great job showing those products. So the biggest driver of our ticket is again just driven by the better best. And you guys also probably noticed, or you will when you get a chance to read our 10-Q. Our laminate and LVT category continues to be our best-performing department. It's now our largest department. And we're winning all over there better and best. People are buying more square footage. They're picking the better products. The price increases that we had that we instituted in the second half of the quarter were fairly modest and a very small piece of that 8% lift in ticket.

Thank you. Next question today is coming from Michael Lasser from UBS. Your line is now live.

Good evening. Thanks a lot for taking my question. Of the 350 basis points of gross margin degradation that you're guiding to for the fourth quarter, is all of this coming from the increased supply chain cost that you're not able to pass along in the form of higher price increases? How long does this persist into next year? And does this structurally change Floor & Decor's gross margin?

Great question, Michael. These are very unique times, and we're in a dynamic environment. To start, all of our supply chain costs are increasing. Our international container costs are now the largest part of our cost structure, and those costs are about double what they were before. We believe that 80% of what we sell is manufactured outside the United States, and that needs to be transported to the U.S. Duties and import fees have also gone up. You might recall that last August, the USTR reintroduced the 25% tariffs, which increased our expenses. Our domestic costs have risen about 25% compared to last year. There are also demurrage costs, which are fees that the port charges when containers are not picked up and returned to the port promptly. L.A. as you guys have read is the biggest issue we're having. We have a big distribution center out on the West Coast. And those costs are still rising even at this point, right? We're seeing cost increase there. So that's the bad news. The good news is that, our supply chain team and our merchandising team have done a fantastic job in managing that. So not only have we increased our inventory in this environment, where our costs are going up, we've been able to pass along those cost increases with really no effect on units yet. And as you guys have heard us say for many years, we try to manage to gross profit dollars. And so that entire weight that you're seeing that we see as a decline, we do believe is completely driven almost entirely at this point by supply – for supply chain costs. As we look into 2022, it's possible that we're also likely that we're also going to see some possible cost increases from the vendors at some point. Right? Input costs are going up there as well. And our goal is to manage it the same way we have in the past, which we think we can pass along those costs. When we do our price comparative shopping, we feel great about our price differential versus the competition. And so probably, again, the other side of that equation, on the positive side is the fact that our sales have increased as well, right? Tom mentioned that our comps accelerated from a 10.9% in Q3 to I think we're 16% quarter-to-date. And so what we've said over the years is what's happening. And then just the final piece of your question I want to answer is, it looks like some of these costs are going to be with us for a while, maybe into 2022.

Yeah. And Michael, I'd add just a couple of thoughts to it too. The supply chain complexity is partly cost, it's partly accessing product in our category. And the priority for us is to get the product within the stores. We do feel like this is an opportunity to take share. Our model is unique. We've got broad in-stock assortments. Pros expect to be able to get product and access product, and our model allows them to do that. So this is not a structural change to our business. This is a moment in time. We have to manage through it. And over time things will normalize, but it's going to take a little bit of time.

And Tom, how are you thinking about passing along these costs to the consumer? Because if we just roll through a 39% gross margin throughout 2022, it would suggest that maybe you don't see any earnings growth next year?

We will continue to pass along costs as they arise, as Trevor mentioned. As a value retailer offering hard-to-access products, we believe this is an opportunity to gain market share. We will be careful with price increases and manage our costs. We are confident that our top line will improve and that we can manage our gross margin dollars effectively.

I want to follow up on that. I understand that the rate is a bit lower than we've shown recently, but our top line revenue is significantly higher as well. The strategy I've mentioned consistently over the past three years is that if a product costs us $1 and we sell it for $2, but now that product costs us $1.05 or $1.10 and we sell it for $2.05 or $2.10, we still achieve the same gross profit dollars. In fact, you gain more leverage throughout the rest of the profit and loss statement because we're not dealing with a significantly larger volume of products. And so we still think we can get to a good profit growth. So we'll talk more about what our goals are for next year. But there's no intention on our part that we won't be able to achieve a good gross profit dollar increase and a good operating profit growth next year.

Thanks. Our next question today is coming from Steven Forbes from Guggenheim Securities. Your line is now live.

Good evening. Tom, I wanted to expand on your last comment there around share. So curious if you could speak to the in-stock levels that you're seeing in market among the independent operators you compete with? And then, from a customer behavior standpoint, both Pro and DIY, are you seeing customers migrate to the F&D brand in market because of the state of in-stocks in the independent channel, or do you think you're still experiencing a comp headwind from your in-stock levels?

There's a lot to that question. I'll do my best to address all those points, and Lisa can add if I miss anything. Yes, as Trevor mentioned earlier, we are noticing that most of our competitors are independent hard-surface flooring stores, and they are facing challenges with supply chain complexities. First, accessing products has made their in-stock levels lower than what they have been historically. Second, managing pricing has become difficult because supply chain costs are fluctuating daily, making it hard for them to guarantee prices on special orders for customers. When that happens, both of that turns some of their customers who may have been loyal to them to us. And as evidence, our Pro sales are outpacing our DIY sales or our homeowner sales in the third quarter. We anticipate that to continue. As long as there is complexity and difficulty in the supply chain, people – Pros have to access product and our model has done a good job of providing that product for them. So I feel good about that. So I don't know Lisa, if there's anything you want to add on the competitive side?

No, I think that's right. I mean certainly with 13,000 independents out there everyone has a different story. Some are in better shape than others. But anecdotally what we do see as Tom said across the board is that it is harder to get products and the products that they are able to get are going to be more expensive. So we feel very good about — although, we're taking some price as well that our competitive gap will remain. And we think that as we talked about the moat around our castle has never been stronger. And so we feel really good that in these challenging times that we're able to continue to take share.

I'd add two things that I left out that I think are relatively important. One, we know from our customer research, historically that when we get a flooring Pro into our stores that we keep them. We're pretty sticky. Once they see the model and they see what we do, it's important. And we're getting some of those new Pros now because they've been loyal to an independent flooring store and they've been having a harder time getting product than they have historically done. And then, two is our existing Pros, because of a small store base and convenience sometimes their jobs are too far away from the store and we don't get all the wallet share that we'd like to get. And we're seeing that we're getting the larger wallet share from some of our existing Pros too. Both of those are positive for us.

That's great. And then just a quick follow-up. I thought there was plans to expand into a new adjacent product category at some point here but maybe just update us on timing and if the supply chain challenges have delayed sort of the plans around the launch of a new category.

We're doing very well with all of the categories that we have. We do have two new ones that we're going to be testing. So that means 15, 20, 25 stores something like that. You are right. We were hoping to get those tested by November, December, but it's going to be more like January, February now. But we feel great about both of those and are on track to first quarter be able to test those. And then assuming that they will do well as all of our others have, we'll continue to roll that out. But it was 1.6% of our sales in the third quarter and was the highest growth category albeit on a small base. But we feel very good about the customers' response to all the categories we've introduced so far.

Total sales up 28%. That adjacent category is up 140%. Again albeit from a small base but that category is performing very nicely.

Your next question is coming from Steven Zaccone from Citi. Your line is now live.

Great. Thanks very much. I wanted to follow up on the gross margin. So if we think about the fourth quarter how much of the pressure in the fourth quarter is an acceleration in inventory you referenced? I guess said another way should we think the fourth quarter is the peak of gross margin pressure and then it eases as we go through 2022, or is this level of pressure with the business well into 2022?

I think it will depend on what happens with cost increases in the future. Currently, we are in a situation where costs have not stopped rising. Most of the cost increases we've experienced so far have been related to the supply chain. However, with rising energy, commodity prices, and other cost inputs, we may face some vendor cost increases as well. We aim to effectively incorporate these costs into our inventory for individual products. As we encounter higher costs, we collaborate with our merchandising and supply chain teams to adjust retail prices. Simply put, we cannot predict far into the future, but we have no reason to believe that our gross margin rates for next year will be significantly different from what we are projecting for the fourth quarter of this year. Okay. That's very helpful. Thank you. And then a question on new store openings for next year since you referenced that there were some supply chain delays that caused the push out of some design stores. Is there any reason to think you couldn't do 20% unit growth next year? Not at this point.

Not at this point. Yes. The problem we have with the design stores is just some unique fixtures that come from a certain part of the world that we can't access product. But for our regular stores we're in good shape.

Our next question is coming from Chris Horvers from JPMorgan. Your line is now live.

Thanks, evening everyone. So I guess my first question is on the acceleration in October from like a 10-ish kind of 11% to the 16%. To what degree is that price that you've taken versus mix benefit of Pro in the ticket? And was there any benefit from Hurricane Ida in there?

Great questions. Most of what we're observing in the fourth quarter is still ticket, and it's actually accelerated with the majority of it, if not almost all, being ticket in Q4. The impact from pricing for this acceleration remains quite modest, representing a very small percentage of the 16% comp that Tom mentioned. We estimate about 100 basis points in comp, primarily from one store in New Orleans, along with stores in our Mid-Atlantic and Northeast regions, specifically Pennsylvania, New Jersey, and New York, which we're seeing some benefit from, amounting to approximately 100 basis points. Overall, this is largely due to an acceleration of our better and best offerings, with the impact from Hurricane Ida also contributing 100 basis points. The pricing increases we implemented in the early part of the quarter are the smallest factor, but we anticipate those price increases will have a more significant impact as we move out of the quarter.

We're also seeing a slight mix benefit from laminate and LVP is out-comping the average at a higher ticket.

That's right. And the Pro ticket to your point runs about 25% higher than our non-Pro ticket. And so as the Pros are doing more business with us, that also drives a higher ticket.

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Well, thank you. I appreciate everyone's interest in our company and interest in our call and we look forward to talking to you in the next quarter. Thanks everybody.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.