Q4 2019 Earnings Call

Greetings and welcome to Florida Core Holdings Q4 earnings Conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator systems. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now like turn the conference over to your host Mr. when Hood.

Vice President Investor Relations. Thank you Sir you may begin.

Thank you operator, and good afternoon, everyone. Joining me on our earnings conference call today, or Tom Taylor, Chief Executive Officer, Leaser lobby, President and Trevor laying 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 995 at are subject to risks and uncertainties any statement that refers to expectations projections or other characterizations of future events, including financial projection.

And our future market conditions is at 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 warranted core assumes no obligation to update any such forward looking statement.

Please also note that past performance.

Or market information is not a guarantee of future results. During this conference call. The company May discuss non-GAAP financial measures as defined by SEC regulation G. A record a reconciliation of each of these non-GAAP measures to to the most route excuse me to the most directly comparable GAAP financial measure.

To be found in the earnings press release, which is available on our Investor Relations website at IR floor in the core Dot 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 fourth quarter 2019 earnings conference call on today's call I will discuss some of the highlights of our fourth quarter and full year 2019 results as well as the progress we're making on each of our strategic growth initiatives. Trevor will then review our fourth quarter and full year 2019.

Formats and provide our 2020 sales and earnings outlook and then we'll open up the call for questions.

We are pleased with our fourth quarter fiscal 2019 results as we delivered comparable store sales growth adjusted EBITDA and adjusted earnings per share that all exceeded our expectations total fourth quarter sales increased 20.7% to a record $527 million from 436.7 million last year.

For the full year, our total sales increased 19.6% from last year to a record 2 billion.

Which is almost triple our 2015 sales of 784 million moving on to earnings we reported fourth quarter fiscal 2019, GAAP diluted earnings per share of 34 cents, a 100% increase from 17 cents in the fourth quarter of 2018, our fourth quarter adjusted diluted earnings per share increased.

30% to 26 cents from 20 cents in the fourth quarter of 2018.

Exceeding our expectations of 20 to 21 cents per share for the full year, we reported GAAP diluted earnings per share of $1.44 up 29.7% from $1.11 per share in 2018, our full year fiscal 2019, adjusted diluted earnings per share increased 18.6% to $1.50.

I mean from 97 cents per share in 2018, we are pleased to be able to report that our full year adjusted fiscal 2019 earnings per share exceeded our initial 2019 guidance of one dollar and seven cents to $1.12 cents, which we think is a great result, considering the long term scalable growth investments that we continue.

Due to make over the fiscal year as well as difficulty presented as we were forced to navigate a challenging trade environment and macroeconomic headwinds in the first half of 2019.

Let me now discuss some of the drivers of our fourth quarter and full year 2019 sales and earnings growth and how we're thinking about 2020 as a reminder of the pillars to achieving our long term sales and earnings growth targets are one opening large warehouse stores in new and existing markets to growing our comparable store sales three expanding our connected car.

Customer experience and for investing in our pro and commercial customers. Additionally, we are introducing a fifth pillar investing in free design services. Let me now discuss some of the progress we're making on each of these strategic growth initiatives first opening new large warehouse stores, we opened seven new stores in the fourth quarter of 2019, bringing the total non.

Our of warehouse stores that we operate to 120 stores up 20% from 100 warehouse stores. In 2018, we continue to believe that we have a unique store model in the retail industry as we have been able to successfully grow our store base at a 20% compounded annual growth rate over the last seven years at a time of significantly.

Significant industry consolidation.

As we look to the first quarter of 2020, we expect to opened five new warehouse stores, one of which opened January 13th and look into California. Later. This month will open a store in Sacramento, California, the remaining planned store openings or expect to beat and in the mid to late March for the full year, we expect to opened 24 new.

Warehouse stores with 40% of those openings in new markets and 60% in existing markets, which is the same percentage mix that we opened in 2019. Additionally, we expect to open a small 12000 square foot design studio in Dallas, Texas. The design studio represents a test for us where we will see an opportunity.

I need to increase our market share in densely populated higher income areas, where we're not able to fit a large format store. Our research tells us that these are mostly new untapped customers beyond 2020, we remain excited about the strong pipeline of new stores that we have lined up which we believe will allow us to sustain 20% unit growth over the next.

All of years with that in mine I want to thank our real estate construction visual merchandising and operating teams for their excellent execution in 2019.

Moving onto our second pillar.

Growing comparable store sales, our fourth quarter fiscal 2019 comparable store sales grew 5.2%, which was slightly above the top end of our guidance of 4% to 5% growth when we exclude the impact of new store cannibalization. We are pleased that our fourth quarter comparable store sales increased in the low double digit range from last year.

This increase in our fourth quarter comparable store sales reflected a good balance between 2.8% growth and comparable store transactions and 2.3% growth and our comparable stores average tickets.

We were also pleased to see our comparable stores transaction growth accelerate to 2.8% from 1.8% growth in the third quarter of 2019.

Well the for the full year, our 2019 comparable store sales increased 4% and increased 6.2%, we exclude the Houston market, excluding new store cannibalization and the Houston market, our comparable store sales grew and the low double digit rain for fiscal 2019, a very healthy rate and these stores comparable store sales access.

Rated in the second half of 2019, the increase in our comparable store sales in fiscal 2019 was driven by 1.9% growth and comparable store transactions and 2.1% growth and comparable stores average tickets. We are pleased with our comparable store sales exit growth rate in the fourth quarter of fiscal 2019 and with the start.

Fiscal 2020, as Trevor will discuss we are forecasting stronger annual comparable store sales and total sales growth in 2020, when compared to 2019.

Turning to our sales performance within some of our merchandising categories for the fourth quarter, among our six merchandising categories.

For experienced comparable store sales growth in the fourth quarter of 2019, consistent with prior quarters, our strongest total and comparable store sales growth continues to come from our laminate and Bridget core luxury vinyl plant category, where we have an industry leading assortment.

Fourth quarter total sales in the category increased 36.7% to $120.4 million and accounted for 22.8% of our sales up 260 basis points from 20.2%.

Last year.

The build on this growth in January we launched our new exclusive new core performance flooring, which we believe is the most durable scratch, Dan and pet proof resistant rigid core vinyl flooring and the market Nucor performance is out our best price point as another example of how we are driving value and sustained growth through our innovations.

Outages, we are so confident in the product that it comes with a lifetime residential and 15 year commercial warranty.

As we discussed throughout 2019, we put a lot of emphasis around growing our installation accessory sales, we implemented a new incremental bonus program for our store associates laid out the department in a more logical fashion brought a new compelling products and focused on training all of which paid off in 2019. The category was our second best comp.

And category for the year and fourth quarter. We estimate this is an area, where we are underpenetrated relative to the market and believe that as a one stop destination for hard surface flooring, we can make further enhancements to increase our market share.

Moving onto decorative accessories, where we experienced and marked acceleration in our fourth quarter sales from the third quarter of 2019 total sales grew 25.5% to 101.5 million and accounted for 19.3% of sales up 80 basis points from last year.

The category is benefiting from the successful execution of our 2019 merchandise reset which included new trend forward stock keeping units that customers expect from US we expect to build on this growth in 2020, as we add additional trend forward stock keeping units.

Fourth quarter comparable store sales in our wouldn't top categories were below last year.

As we discussed in our third quarter 2019 earnings conference call. We're working through some near term product transition challenges until our largest category as we diversify our country of origin.

This transition has led to some near term merchandise out of stocks in this important category, which we are correcting we expect our merchandise in stock rates to return to normal over the next several months in would we will be updating our assortments to be more trend forward and will further improve our job lot in stock positions, which we believe will improve our performance.

We are continued to build on our successful strategies to drive incremental growth by adding adjacent merchandising categories in store and online. This includes vanities and Vanity tops Bath accessories custom countertops sinks and shower doors. For example, we now have bath, and vanities, and 32 stores or 27% of the store base at year end.

We expect them to be in all stores in 2020, we are pleased with the early results and we'll continue to build out our trend forward assortments with exclusive styles and delivery options.

While we will always be a hard surface flooring retailer and our adjacent merchandise programs.

Our currently small in isolation that represent incremental scalable adjacent growth opportunities and help us meet the demand, we see from our pro and DIY customers.

Across all merchandising categories, we continue to see the strongest growth at the better and best price points and are pleased with our merchandise margin.

Expanding the connected customer experiences our third pillar of growth, we continue to see robust growth in both traffic and conversion from our successful connected customer strategies in the fourth quarter, our ecommerce sales accelerated to 66% growth from 54% growth in the third quarter of 2019 as a result, our E commerce sales accounted for 11 point.

4% of our fourth quarter sales up 310 basis points from 8.3% last year for the full year, our ecommerce sales increased 61.2% and accounted for 10.1% of our sales up 250 basis points from 7.6% in 2018, we believe that our growth in ecommerce sales is the direct result.

Of strategies, we have implemented to inspire and educate through our website. We have also aligned the sales process with our stores. So that we can make the cuts consumer purchase journey simpler more streamlined.

And more engaging while removing friction from the purchase process. A few recent enhancements include adding measurement calculated for square footage mortar sealant and moldings, making it easier to determine the materials needed for foreign project, a room, visualizer, which is personalized by room experience and integrated with our shopping cart to tender project online.

While it's too early to measure the visualizers potential impact we are excited about how it will enable us to customized content and product and we believe its best in the in.

In 2020, we intend to build on these strategies to make further performance improvements to our website and further harness data to determine where the customer is in the purchase decisions that said our stores remain key to executing our ecommerce strategy as we continue to see approximately 85% of our web orders picked up in the store.

When combined with our brick and mortar attributes like unique in stock products and everyday low prices large visually appealing stores redesign services and knowledgeable sales associates to help we believe our overall brand experience is hard to match. This is validated by our 2019 market research, which shows 77%.

Consumers, who shops flooring decor ultimately purchase from us.

Our fourth pillar of growth comes from investing Holistically and our pro and commercial customers as we have discussed in the past investing in our pro customers to drive loyalty and brand advocacy. This strategic priority of ours as we look to increase our share of wallet with our existing pros as well as engage with pros that do not currently shop with us it all.

I'll start with the local store that serves our pros and is enhanced with important enablers, which include include our pro Premier points based rewards program.

Our pro partner services, and our pro App, we build on these offerings with the launch of our pro level Pro private label credit card in 2020 collectively all of our programs are important touch points with our pros that will enable us to drive personalize engagement through our CRM platform in 2020 and beyond.

We're also making important important investments in our commercial team for our market share is still very minor, but growing nicely. Let me speak to how each of these are contributing to growth first our pro Premier rewards program, which launched company wide in the third quarter of 2018 continued to experience robust growth we had.

Exceptional enrollment growth in 2019 and saw strong year over year growth in average earned and redeem points. Our pro Premier members state of spend an average of 10% more after signing up with the program to add further context. The average pro Premier rewards members spent three times more than a non member.

So we will continue to build on the programs growth by increasing awareness of its benefits and driving engagement in 2020.

We continue to be pleased with the growth and the number of pros that are using our pro App, which was launched in 2018, we recently launched a schedule pickup check in feature on the App that could be one of the most utilized features of the App. We had over 40000 pros download the pro up in 2019, and we expect App usage to continue.

To grow as we continue to build out our awareness features and functionality.

We are leveraging our CRM investments in pro across all customers and have obtained a wealth of data about our customers such as average spend length of time between shopping visits when and how customers by installation accessories and much more for both DIY and pro customers. We can now plays both pro and DIY cut.

Summers in Deciles to better understand their spend identify opportunities as well as focus on our best customers and find lost customers to see if we can get them back.

While we are in our infancy with CRM in the fourth quarter. We ran our first campaign to drive higher pro engagements sales using incremental points and the results were compelling at a higher our ROI.

We are just.

Getting started but are very confident in the intelligence. We are gathering so that we can improve our knowledge of our customers and how to serve them better.

Separately, we continue to build out our commercial sales infrastructure with regional account managers programs. These are professional sales associates that reside.

Outside our stores with the sole focus to sell to commercial clients by leveraging our incredible assortments supply chain and large stores. We ended 2019 with 13 rands and have plans to add about eight more in 2020 in strategic locations. These investments are very accretive as there is no capex are working cap.

Total investments and builds off of the store and DC DC infrastructure already in place while our commercial sales remains small in isolation relative to our total sales. We were pleased that the segments, 50% sales growth exceeded our internal plan and continues to far exceed our total sales growth.

Lastly, we're calling out separately, a new fifth pillar of growth, which is our free design service offerings.

We are seeing significant traction in several important engagement metrics, including growth in the number of design employments growth an average ticket and conversion rates. We are delighted to see that we had almost 150000 appointments in 2019 and experienced a significant increase in conversion in 2019, when compared with 2018.

The improvement is the direct result of growing the number of designers in our stores while at the same time, providing them with the tools measurement goals and processes they need to be successful.

As we have discussed in the past when our designers involved our conversion rate is much higher our average ticket is three to four times greater than the company average our gross margin rate is higher and our customer satisfaction scores are higher we intend to build on this growth by testing in home design Conns consultation in 2020.

I will now turn my comments to how we're thinking about the macro environment and geopolitical factors that affect our industry and the company.

Let me first discuss how we are taking precautionary measures for our associates in China as day and the country managed through the Corona virus outbreak first we asked our associates and our Asian sourcing office to minimize any travel by working from home. After they return from the Chinese lunar new year second we suspended associate travel to and from China.

China and southeast Asia in February and March.

Finally, we do anticipate that to travel restrictions imposed by the Chinese government and overall concerns about the spread of the virus will likely lead to some production delays.

As a result.

Our Asia sourcing office is regularly following up with all of our suppliers to better understand their production schedules and any potential delays, we believe our inventory receipt flow leaves us and a good position to manage any near term. So a lot supply chain disruptions that said this is a fluid event that we like many others are monitoring closely.

Moving onto the impacts of tariffs as many of you know on November 7th 2019. The US trade representative U.S.T. are made a ruling to retroactively exclude certain flooring products imported from China from section from the section 301 tariffs that were implemented at 10% beginning in September 2000.

18, and increased to 25% in June 2019. In addition on November 22019, US Customs issued chapter 99 exclusions for each unique article number identified under the November 7th 2019, U.S tier ruling the granted exclusions applied a certain click.

Vinyl and engineered products that we have sold and continue to sell all these exclusions exclusions were granted retroactively we're entitled to a refund from the US customs and border protection for the applicable section 301 tears previously paid on these goods fault Harris refund claims are subject to the approval of the.

Yes, customs, we currently expect to recover approximately $19.3 million related to these section 301 tariff payments.

20.

We like many others are pleased that the decline mortgage rate interest rates.

And continued economic growth has served to reverse the slide in year over year existing Homesales one of the macroeconomic met metrics along with home price appreciation and age of age of housing stock that impact our industry. As many of you know existing home sales began to reverse there year over year decline in July of 2019 and were up 10 point.

8% in December of 2019.

Against a 10.1% decline in December 2018.

We have also been encouraged at home prices have continued to show modest appreciation.

Finally, the median age of owner occupied homes is currently 40 years, which supports home improvement spending to repair and improve the aesthetics of homes.

So we believe we are entering 2020 with a more favorable economic backdrop when compared to the beginning of 2019 that said, we watch many housing metrics, but rely mostly on our company specific growth drivers, which we believe will lead to mid single to high single digit comparable store sales growth over the long term.

As we think about 2020 unblock beyond we continue to believe that we will grow our market share and hard surface flooring through our ongoing innovation strategies and by offering consumers easy affordable and updated stylish flooring solutions and services before I turn the call over to Trevor I would like to say how excited we were to announce the promotion of Lisa lobby.

President of flow into core as many of you know leases a terrific leader who has been instrumental in the company success joining.

Since joining in early 2012 enter influence can be seen throughout our company as part of the change we also announced new multi year employment agreements with me and our executive leadership team, which further demonstrates our commitment to the company to support the next chapter of the company's aggressive long term growth strategy. We are also further aligning our executive.

Compensation philosophy, with our long term vision and intend to time more of our executive compensation to the achievement of our long term corporate financial performance objectives, which we expect to discuss in greater detail and our annual proxy statement, let me close by saying that we believe our fiscal 2019 results continue to validate the strength of our value proposition and the hard surface.

Flooring industry I would like to thank all of our associates for their hard work and their exceptional service to our customers I'll now turn the call over to Trevor to discuss more the details of our fourth quarter and full year fiscal 2019 results and our 2020 sales and earnings growth outlook.

Thanks, Tom I'm going to concentrate my comments on some of the changes among the major line items in our fiscal 2019 fourth quarter income statement balance sheet and statement of cash flows and then discuss our outlook for 220.

Some already discussed our fourth quarter and full year fiscal 2019 sales results. So I will start with our fourth quarter and full year gross margin results.

Our fiscal 2019 fourth quarter gross margin rate expanded 220 basis points to 43.6% from 41.4% in the fourth quarter 2018.

Due to a $14 million for 270 basis points and expected section 301 therapy group was primarily related to rigid core vinyl tariffs that we have paid since September 2018.

As disclosed in more detail in our 10-K.

3 million or two cents per share of the $14 million benefited our gross margin starting on November twentyth with date, which us customs lowered the tariff rate.

From 25% zero. This was obviously not contemplated when we gave our guidance in early November.

The remaining $11 million was for periods from September 2018 through November Twentyth 2019, and we have back this out of our adjusted EBITDA adjusted net income and adjusted diluted earnings per share in the earnings release as is unique material and the majority of this benefit does not relate to our fourth quarter results.

The favorable clear freephone benefit was partially offset by higher distribution costs of approximately $4 million worth approximately 30 basis points.

Due to the opening of our new Baltimore distribution Center.

Supply chain, because an incredible job again opening this new 1.5 million square foot distribution center and is operating fantastically in the short term that it has been opened this just one more example of the significant investments that we are making to support our long term sales and earnings growth. This newfield facility expands our distribution center capacity by 50% and will serve about why.

One third of our store base importantly, it should allow US to report is one third of our stores faster and at a lower domestic transportation cost for a long period of time.

Before I move onto expenses, let me provide some more detail about how the section 301 tariff recoveries refund payments are impacting our balance sheet and income statement.

The balance sheet perspective, and subject to the approval of US customs, we expect to recover 19.300 million related to section three or one tariff refund payments within the next 12 months as of December 26, 2019, our balance sheet receivables include this expected recovery from us customs and border protection.

From an income statement perspective in the fourth quarter 2019, we recognize the benefit of 14.300 million $14 million as a reduction of cost of sales as previously discussed as well as 300000 as a reduction of interest expense.

Additionally, we reduced our year end inventory on hand by $5 million, which is reflection reflected as a reduction in our balance sheet inventories.

As we look to 2020, we plan to reinvest the remaining $5 million in costs on hand inventory towards driving market share.

Turning to our fourth quarter 2019 expenses, our fourth quarter, selling and store operating expenses increased 24.1% 247.900 million from 119.100 million last year and deleverage 80 basis points.

The deleverage is entirely from our new store growth as our Comping stores obtain nice leverage in the fourth quarter as we've discussed in prior quarters, our new store selling in operating expenses as a percentage of sales are approximately 50% higher than our stores open greater than a year, which results in near term operating expense deleverage that said, we are pleased that our comparable store selling.

Net of expenses leveraged approximately 50 basis points in the fourth quarter as we leverage all major expense items on increasing sales.

Our fiscal 2019 fourth quarter general and administrative expenses increased 12.2% to 34 million from 30.300 million last year, the leveraged 40 basis points to 6.5% from 6.9% last year.

The improved leverage came mostly from comparing against that 5.800 million lease impairment charge. We took in 2018 related to the exit of our Miami distribution center, including our 2019 fourth quarter General and administrative expenses a final costs related to relocation through our new store support center, including lease termination cost and minor costs relate to the closure of our former mine.

Distribution center.

In total these store support center in Miami distribution Center exit costs were 2.400 million compared with 5.800 million last year. Excluding these costs, our fourth quarter general and administrative expense ratio Deleveraged 40 basis points to 6% from 5.6% in the fourth quarter of last year, primarily from higher depreciation and occupancy.

Costs related to our new store support center, which we will leverage overtime as we grow.

Our fourth quarter pre opening expenses declined 27.1% to $6 million from $8.300 million last year, and leverage 80 basis points on a year over year basis.

Favorable preopening expense leverage is primarily due to enhance the store opening process, which shortens the period of time. It takes the opening new stores, thereby lessening pre occupancy costs.

We opened seven stores in the fourth quarter 2019, compared to five stores opened in one relocation in 2018.

Among the new store openings, three where new markets and forward existing markets in the fourth quarter 2019, as compared to three and new markets into an existing markets in 2018.

Fourth quarter net interest expense declined 40.4% to 1.700 million from 2.800 million last year on lower average debt compared with last year and interest income earned during the quarter related to tariff recoveries that excess cash on hand.

Our fourth quarter tax provision was 5.100 million compared to 2.600 million last year and flat on a year over year on a rate basis are lower tax rate continues to be primarily due to the recognition of higher excess tax benefits related to stock options.

Turning to our growth and profitability, our fourth quarter fiscal 2019, adjusted EBITDA margin rate increased 100 basis points to 11.2% from 10.2% last year, primarily due to the improvement in our gross margin rate.

The 220 basis point increase in gross margin rate, coupled with a 20.7% total sales growth led to our adjusted EBITDA growing 32.1% to $58 million 800000 from $44.500 million last year and exceeded our guidance of 52.100 million to 54 million.

Our fiscal 2019 fourth quarter GAAP net income increased 97.4% to 35.300 million 70.900 million in the fourth quarter fiscal 2018, our GAAP diluted earnings per share increased a 100% to 34 cents to 17 cents per share in the fourth quarter of 2018.

Our non-GAAP fourth quarter adjusted net income income increased 29.5% to $27 million from 20.800 million the fourth quarter fiscal 2018.

Adjusted diluted earnings per share increased 30% to 26 cents from 20 cents in fiscal 2018 exceeding our guidance of 20% 21 cents per share.

We ended the fourth quarter with 105 billion 400000 diluted weighted average shares outstanding compared with 103.800 million last year.

Moving onto our fiscal 2019 balance sheet in cash flow in fiscal 2019, our total net inventory grew 110.900 million for 24% to 581.900 million from $471 million last year, excluding the inventory required to support our new distribution center in Baltimore, Our total inventory would have increased only 14.

Percent comparing favorably with our total sales growth of 19.6% our comparable store inventory increased only 3.4% from last year.

As discussed on last call, we have some opportunities in the wouldnt and tile business to improve and stocks are in fact physicians has improved since the end of last year and assuming no significant shipping issues due to the Corona virus, we believe our in stock will improve in the second quarter. We are pleased that we generated 204.700 million in operating cash flow in fiscal 2019.

Which exceeded our required growth capital of 196 million.

We remain a very strong financial position as of December 26, 2019, we had 306.500 million and unrestricted liquidity consisting of $27 million and cash and cash equivalents and 279.500 million immediately available under borrowing under our area ABL facilities.

Moving on to capital expenditure allocation.

Our fiscal 2019 capital expenditures increased 29.5% to $196 million from 151.400 million in 2018 slightly below our recent guidance of 203 million to $213 million.

The growth is primarily to the increase in new stores opened over under construction during fiscal 2019 compared to the same period in fiscal 2018.

We also opened our new Baltimore, DC and invested in our new store support center.

For fiscal 2019, approximately 62% of our capital expenditures were for new stores.

20% or for information technology ecommerce investments and our new store support center relocation the remainder of our just these capex was four store Remodels and distribution center investments.

As we look to fiscal two took 2020, our total capital expenditures are planned to be between 265 million to $265 million and are expected to be funded primarily by cash flow generated from operations under our borrowings under our ABL facility.

More specifically, we intend to make the following capital expenditures in fiscal 2020.

The growth in our capital spending reflects the planned opening of 24, new warehouse stores in fiscal 2020 were which represents another 20% unit growth year for us.

Additionally, we plan to start construction on 12 warehouse stores that are expected to open in the early part of fiscal 2021, compared with nine warehouse stores in fiscal 2020.

We did make the strategic decisions take on more of the new construction cost in 2020 to improve the timing of our store openings and lower our rent cost.

Capital expenditures associated with these projects are expected to be approximately 188 million to 194 million in fiscal 2020.

We also will invest more in existing store remodeling projects and distribution centers in fiscal 2020, using approximately $50 million to $52 million or cash.

We plan to invest in our information technology infrastructure E Commerce and other store support so the inner initiatives using approximately 17 million to $19 million of cash.

Now turning to our fiscal 2020 annual side sales and earnings guidance.

As a reminder, 2020 will be a 50 threerd week, but my discussion will be on a comparable 52 to 52 week basis.

As you saw on our earnings release, we're moving to annual sales and earnings guidance, which is more closely aligned with industry practices.

Any other companies. We believe this change will give us more flexibility manager business throughout the year towards our long term goals.

Ill now discuss some of the details of our fiscal 2020 outlook. We expect net sales for fiscal 2020 to be in the range of $2.450 billion 2.475 billion.

Or increased 20 point, 20% to 21% in fiscal 2019.

This would be greater than a 19.6% growth we reported in fiscal 2019.

Our outlook is based on various assumptions, including opening 24, new warehouse stores comparable store sales growth of 5.5%, 6.5% versus 4% growth in 2019, our plan assumes fiscal 2020 comparable store sales are fairly consistent throughout 2020.

Moving on to how we're thinking about fiscal 2020 gross margins fences and adjusted EBITDA.

Total with taking on the costs to increase our distribution center capacity by 50% with our new Baltimore distribution Center opened in November 2019, we're planning on gross margin to be flat to up 10 basis points.

If you remove the 14 million our benefit from our fourth quarter 2019, due to expected tariff refunds previously discussed we're planning on improving gross margins by 70 to 80 basis points for fiscal 2020.

On a quarterly and GAAP basis gross margin is planned to improve sequentially relative to the same quarter last year throughout the first three quarters of 2020 due to improved product gross margins anniversary tariffs will 2019, and as we begin to leverage our new Baltimore distribution Center.

The first quarter gross margin will start out with minimal improvement due to our primarily to the new Baltimore DC being opened this year and not being opened last year.

The fourth quarter 2020, gross margin as planned down entirely due to the $14 million tariff refund received in the fourth quarter 2019.

On the expense side, we plan to modestly deleverage due entirely to new stores as it relates to selling in store operating expenses.

We have also made the decision to move us more into store employees, including investments in our commercial sales teams and we have decided on to take on more of the rising cost of healthcare. We believe these are good long term investments in our people.

For opening expenses or plan to Deleveraged 20 basis points to almost entirely due to opening more new stores earlier in 2021, thereby we expect to take more of the pre opening expenses for those stores in 2020 versus 2021.

Most of the deleverage will come in the fourth quarter 2020, the first quarter 2020, preopening expenses or plan to increase about 50% due to the planned opening a five new stores in Q1 2020 versus three new stores in the first quarter 2019 opening new stores more equally throughout the year has been a long term goal for us and this should benefit us in fiscal 2021.

We're planning on general and administrative expenses staying around 6% throughout 2020.

2020 interest expense discipline to decline about 30% from 2019 due to capitalizing interest on capital expenditures as well as the lower cost of debt on our recent debt amendments announced on Wednesday.

We expect our adjusted EBITDA grew 23% to 27% in 2022, approximately 300 million to $308 million. We look forward to continued expansion in our adjusted EBITDA margin rate to 12.2, 12.4% in 2020 from 11.9% in 2019 and 11.2% in 2018 importantly, we.

We continue to see a path towards increasing our EBITDA margin rate to the low teen range over the immediate term and growing 15 to 30 basis points thereafter towards our long term target of mid teens.

Fiscal 2020 diluted earnings per share expected to be $1.31 to $1.37. Excluding the 50 Threerd week diluted weighted average shares is estimated to be approximately 106 million in our fiscal 2020 tax rate is estimated to be 23.3%.

As outlined in our earnings press release today fiscal 2000, 2053 is a 53 week for US we estimate the incremental sales associated with the additional week to be were 34 to 35 million and the incremental diluted earnings per share to be approximately three to four cents.

We are planning on strong sales and profit growth again in 2020 looking beyond 2020, if we assume today's at favorable macro economic backdrop as modest growth remains intact and there are no exhausting. This event like unfavorable trade policies. We believe our fiscal 2021 sales and profit should grow at a faster rate than 2020 as.

We leverage important vessels like our new Baltimore DC in store support center.

In closing I would just like to say that our entire leadership team is proud of how we performed in 2090 and we look forward to fiscal 2020, we believe our best days lie ahead of us.

I would like to personally thank all of our associates for their great work, they're doing every day to democratized hard surface flooring, while serving their colleagues and all of our customers.

We would now like to turn the call over to questions.

Thank you at this time, we will be conducted a question and answer session. If you'd like to ask questions. Please press star one on your telephone keypad a confirmation until indicate your line is in the question Q you may push start to fuel let your move your question from the Q4 participants using speaker equipment and maybe this soon to think of your handset before persons are keys.

Our first question comes on line of Christopher Horvers with Jpmorgan. Please proceed with your question.

Thanks, Good evening everybody.

So I wanted to ask about.

How do you think about contractors in 2020, there is there's a bunch of factors to consider on the on the inside there so market growth cannibalization Rolla and look relative to last year, how are you thinking them out to that lag acceleration.

Off the accelerated existing home sales and then just the overall sort of impact of pricing now that there's this tariff release and then ultimately.

Follow up to that how are you thinking about the cadence of harmful for the year.

Right, Okay, I'm going to try and tackle those Chris if I didn't catch a mall. Please just reiterated.

I think as we said.

We are expecting a better macro backdrop your overhead six months of existing home sales improving interest rates are at a very low rate.

Housing stock as Tom mentioned is.

The housing start over 40 years old.

We're now beyond two years away from Houston.

A number of initiatives the Tom laid out no give us a lot of comfort around what's going on in the business and that we feel really good about the products. We've got a few headwinds. So some of our in stocks were working through that feel good about where we're going to be as we end this quarter come into Q2, so with that as we mentioned the prepared comments would reflect the comps will be fairly consistent throughout this year.

So I guess as you.

Now do you think about that so maybe focusing on the.

Lagged impact of the existing home sales one one thing that you know as you get into second and third quarter, especially in line with the.

Improvement in and the tile in stock that one would think that perhaps comps should accelerate in those quarters, but on the other hand, you have the release on the tariff. So are you essentially assuming that they offset themselves or what how are you thinking about that yes, I think we do a very bottoms up approach. We also to look at new store.

Is that are coming on stores that are getting cannibalized stores that are getting coming off being cannibalized I would think about what is landing from an assortment perspective initiatives. We've got in the pro and the designer and Omnichannel experience that we're executing when there's a lot of all of those detailed factors go into the plan I think your instincts are right on the.

The refund of the tariffs we generally.

Lower prices when we can and leasing team has done a very thoughtful analysis was more on the market and we want to keep that price leadership position. So I think your thoughts are right. There that we're going to cut we're going to keep our everyday low price strategy and stay below the competition.

And I think as we anniversary the second half of next year. The other issue as you know we had some increase in comps we talked about 80 basis points in Q3 of this last year, a bigger number than that and Q4, because we just finished because we had a raise some prices because of tariffs and so we're we're up against those as we come to the second half of next year as well.

Gotcha and then my follow up is on the on the gross margin what was the was the adjusted acts the non operating charges gross margin because it you mentioned yet the 4 million dollar offered the supply do you see.

And the 3 million dollar that sort of roughly offsets it and it looks like that adjusted gross margin was up one of journey. So could you help us reconcile that sure but we are the way I think about a Chris is the $14 million. It really that benefited the PML in the fourth quarter relates to that tariff refunds and as we settlement.

As mentioned earlier as well we looked at it was on November 20-F is the data use customs lowered the rate from 25% to zero. So from that period to the end of year. Our margin was higher just because we didnt with Nick when nobody else or changed our retailers that quick so that was what rough about that was roughly two cents a share or in the quarter were 270 basis points have been.

If it's a gross margin.

If you think about the distribution center expenses.

That in of itself is probably about 50 basis points, but we're going to have that for the rest of our lives. So we'll start to leverage out of it but the way I like to think about is the the benefit of the $14 million.

The three nine of course November 20 of on close to 11 million before that was worth 270 basis points that we're kind of unnatural and drove our gross margin rate up.

Understood. Thanks, very much thanks, Chris Thanks, Chris.

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

Good afternoon, maybe just a quick starting with a quick follow up on the gross margin question for the fourth quarter.

Yes, I think if you back out that 270 basis point tailwind and we would imply that gross margin was down again makes sense given the Baltimore.

Distribution center, but can you comment about the product margins during the quarter because I thought you said you were satisfied with them, but where we're a product margins.

Are you still getting that good better best trade up tailwind.

I'll take a quick leasing Tom may well away and you get the thing you have to remember mostly about the fourth quarter based on our inventory turn as those tariffs went from 10% 25% in June of last year and based arms are returning just over two times a year, we had the full brands of those tariffs going from 10%, 25%. So we had planned for that.

Our margins our margins actually came in better than we had guided based on the guidance. We gave and really there was two pieces that are drove our margins to be better about equal. The person was our overall product margins and rebates ended up coming in stronger it ended the year.

On the supply chain team did a good job in the overall distribution center expenses were probably some portion of a million for better than we had planned for so relative to the guidance. We gave we have you had a beat if you think about the overall be product for the quarter a two cents as I mentioned most of the tariffs that none of nobody who is expecting and then we had another two cents associated with better product margins as I said.

Product margins and supply chain and then the rest of that'd be just tied up with just spending and rounding and then have to the I'd say at a couple of things that.

We are continuing to see that our best product to be our best performing product. They continue to grow faster pace and and are doing very well. So the consumer is a is trading up often than our stores and I think the energy around two of our big initiatives the energy around our design initiatives.

We know when a designer engages with our customer that we get a higher average ticket when we get a better gross margin and better customer satisfaction and that department and those associates, our designs continue to perform better and better each quarter the longer that we that we that we get into it and and then all of the energy than we've had around our installation.

Materials Department, where we changed our kind of the bonus program within the department, we changed where the departments merchandise and pay good dividends and we're selling more more add on products advance our associates is going to good job in all of Thats, helping margin.

Thank you and then just.

A follow up regarding I guess, the fifth pillar I plan to invest in free design services, maybe just expand on that right now.

You think about the space in the front of the store that is designated to the vignettes.

There is there is there do you see an expansion of that.

Especially as we think about writing incorporating maybe some of the new product categories that any tops and any et cetera. I mean, hi is there is a training right for the design.

Representatives in those other categories, maybe just expand on the initiatives as a whole yes, yes. So I think we've had from a merchandising standpoint, we've been really good.

For many many years on on kind of the design center it and have been yes within the store and how we're executing there I mean, they every time every store the little bit better we're doing a really good job designing them and.

And the Department look good I don't see the department getting much bigger I think we're adding we have about around about we're committing the right amount of square footage to it but but we started to do a little over now it's going on two years ago. As we hired ahead of design, we instituted some training that not some lots of training we gave the designers tools technology, we put.

Lines, and and where in the early to middle innings are seeing the pay off of that I mean, I'm really pleased with what's going on I still think as we mentioned in our prepared comments earlier I mean, we're going to pilot in home design services. This year, that's going to be something thats new for US We will show we've got work.

To do in showing our adjacent categories within our design centers and as you know we re do half of our design Center every year. So we'll be adding some of those adjacent categories into show them better but.

Still in the early innings, but really excited about what we're doing that.

Thank you.

Yes.

Our next question comes from the line of Michael Lasser would you be US. Please state your question.

Good evening. Thanks, a lot for taking my question. So what have you assumed in your guidance for this year for any disruptions.

Associated with the China supply chain.

I mean, as we mentioned in our calls it's a fluid situation.

But we we've done a good job in getting.

Our Chinese new year orders in early 97% of them came in were shipped for the holiday.

We've got safety stock within the store in our distribution centers and we feel like it.

That's a fluid situation and we're certainly pan attention to it and we feel like we're in a pretty good position to whether it.

And Tom as of the end of 2019, what percentage of your good came from China.

Mid Thirtys mid Thirtys instill STS situation were to extend on for a couple of months should we think about the potential downside risk as maybe 10% of 10% hit to 30% of your sales or is that too draconian to two downside.

If a scenario that would play out.

Hi, Mike rightly said, so at least the congratulations.

Thank you very much.

The good news is era Asian sourcing office is all over this and so we've got 12 people that are in China, and they have been very close contact with our factories and there were very excited that 50% of our factories are back up and running this week and we think within the next week, we'll be up to about 75% up and running it sounds as Tom mentioned our chief.

Good evening year orders guide here on time for that product sometime I was there any safety stock in the stores and it may be feed and now we feel like we've got.

Many weeks okay. It before we get concerned about what this means the business now.

Hi, all it has everything that we're hearing coming out as our factories in China is that they expect that there'll be delivering them limit we won't have much anyway.

In in your sense, if those the 50% better up and running our those at full capacity and what about from a transportation and just movement of goods perspective.

Is it your sense that there will be not any no bottlenecks from that perspective either.

They're not up to full capacity I mean that something they're building back to full capacity however to be fair when the factories come back from Chinese new year every year. They never start to first week or two at full capacity. So I can't really answer or are they further ahead or behind than they normally architect always there is always our state of a ramp up when they come back.

Right now like I said, we're not we're not really there is some concern over the domestic transportation in China. It's my thinking is working closely with our vendors there and making sure that we get are able to get to transportation that we need that you that it's possible that we could see some some bottleneck there.

Got it.

It's very clearly our our teammates talking to our factory and our vendors everyday and we get key theme, where we are on that that at the moment we feel.

That's right optimistic.

Okay. So it should be up again [laughter], even if even if it goes on for several more weeks you you are still in a decent spot I guess, yeah. Several more weeks were okay, yes, okay.

My follow up question that's unrelated is.

So these rebates and reduced here is to flow through what has been the response.

To that.

From the independent community from the competitors and do you expect to be able to widen your price gaps as a result of this.

Yeah, I don't know.

We certainly pay attention to price across the independence and across really all of our competitors and we make.

We.

We're changing prices up and down all the time in reaction to our competitors and we feel we'll be able to maintain the spread that we've been that that's existed over the last several years.

Can I ask the question just maybe another way.

He could you give to give give us an aggregate sense of what your prices increased net of all the decreases in 2019 and what that might have contributed to the comps in how you expecting that in 2020, and then I'm done we have we quoted I think you our overall retail is.

Yes, I think in the 260, maybe to 65 on a per SKU basis. I think there was probably close to 250 since the year formed our money into fiscal 2019 versus the end of fiscal 2018.

So that we had a modest increase driven by 10% tariffs in the 25% tariffs that are in that and Thats a mix mix drove that as well. So we had some we feel very modest increases because of the tariffs.

As we mentioned earlier will be more aggressive now does that cost us down and I think we're seeing some of the industry don't take now some of their retailers as well so we.

We feel like is managed well what you if you know as well what you know as we're very disciplined about keeping our price discrepancy on opening price points mid price points against the competition and we'll continue to follow that that strategy has served us well for many years.

Thanks, a lot and good luck thanks, Mike.

As a reminder, when asking a question. Please as one question and one follow up. Our next question comes on line of Zach Fadem with Wells Fargo proceed with your question.

Hey, guys first question on cannibalization curious, whether that's still tracking above plan and with some of the bigger stores entering the comp base. How do you think about the how the impact plays out as we move through 2020.

Is that this is Trevor you're right, we called out cannibalization, we expected to be the highest it's been in our history in the fourth quarter of this last year and that did come to fruition. There was it was a high number for us.

Part of that is if you go back to 2018, 35% of our stores were in existing markets. This this last year fiscal 2019, we just finished up 60% of our stores were in new markets. So we knew it would be higher.

This year as we look to the future as Tom mentioned, we think about 60% of our stores will be in existing markets again. So it will be high this year I think as we exit this year.

Our current modeling suggested it gets a little bit better every quarter.

The year will still be a fairly had number but it'll get better every quarters. Our currently modeling. It's I'd say, we're not sitting idly by two we've got a lot of thoughtful people here with some strategies on things, we can do and pro and commercial.

And design and product great operators at the field level. So.

It is high and size, it's Ben but we expected to come down and we're focused on continuing to do things to help those older stores and since I guess the last thing I just would reiterate that we sell in the last call is we intentionally opened really big stores.

Close to these very high volume old stores that were small and didnt give the customer the experience. We don't have that many stores that less to do we've got a handful of those stores left that are kind of small an old and really don't show that business. The way. It should be presented so I do think that that is a bit of a unique piece that will be we won't have to redo that again as we think about.

2020 2021.

Got it and with the Lv T. exclusion, how do you expect that pricing reinvestments to trend through 2020 is it more front end loaded and then how do you expect that to to impact the gross margin line in terms of cadence Cheney and throughout the year.

Yes, I think the market and leasing from way too I mean, the market erectus pretty quickly and rationally and we all kind of know that we used to pay 25 cents on a dollar product and now we're not paying that 25 cents of map was was fairly simple and people kind of came down reasonably over time as what we've seen we haven't seen about getting too aggressive.

But we factor all that and when we give our guidance and again, our comps are kind of contemplated to be fairly consistent throughout the year.

Got it appreciate the time thanks Zack.

Our next question comes from the line of Matt Mcclintock with Barclays. Please proceed your question.

Sorry, Thats Raymond James Hi, Good afternoon, everyone.

So I guess my first question his first off congratulations Lisa Hi, that's great news it really it's good to hear that.

My first question really is Tom.

You talked about lost customers and the that you actually do have lost customers and I was wondering if you actually dig into what you've learned in terms of what you're doing that actually looses those customers and how you can turn that around that much. That's my first question. Thanks, Yes, I mean, we've we've got some really great reporting now that our proteins can use and were able to identify someone that was purchasing purchasing lot.

From us at one time is slow down and doesn't Progen. This much. This time are currently and were able to reach out to the customer and find out what happened is it's a change in their business I would have been decided to go elsewhere or theyre working at a different part of the market and look no. We're not immune were like every other every other retailer we try to execute at a high low.

But there is times that we can do better if it's.

Because.

Of the amount of activity at the back of our store picking up an order if we don't get it done quick enough time as money to approach and we've got to react to that.

We averaged 15 minute pickup time now behind our stores, which are pretty proud of but you can have one or two outliers to that and you can really aggravated professional customer side and so thats. An example of a service thing that I think that we can always do better to get a customer quicker a lot of the time zones things that we really can't control its.

They've they've moved too far away, we still only have 121 stores.

We're not in every part of a market in their jobs may take into a different part of the market that we're just simply too far forward. So we think store openings will help that but.

Im just glad that we've got our finger tips on that type reporting now and that our stores can react to it yes, joining I would add is we're really excited about the CRM tool, we put a really high quality tool in there and leases team has got a few people that are really helping us understand a no things about our customers that weve never known before and we're we're really just have stood that thing up and so let me go.

All companies as we have this data that we've not had the past and we can really deep dive into our customers see who they are see whether shopping with us why the in a few cases, they stop shopping with US we can learn how we how we.

Market and get that consumer and find more consumers. So we're very excited but having the CRM tool set up now.

Thanks for that and then as my secondary question just on the design Studios I think you had one in New Orleans, you might have one somewhere else or historically, you have and I'm just trying to think about how those those studios play into your overall strategy how to think about expanding those what did what did they actually do for your business in terms of uplift in the region et.

Cetera, as you have decided to roll that out Sue I believe Dallas right, yes, not rollout were piling in another one I would say.

Yes, we do have a small store that it's in on magazine Street outside.

So at or near our Gretna store in New Orleans.

And it's something that we've had the founder had opened since before I joined the company. We always thought it was an interesting store and an opportunity for us and it's just as we look through kind of how are we going to take more market share on how are we going to penetrate areas that we can today. This story gives us the opportunity to.

Put offer our supply chain advantages of having really great prices.

Different environment.

That will be kept at a big box stores. So it gets us into markets and gets us into areas, where it would be really difficult to put a big box stores, but a customer will have the ability to see everything that we carry under one roof staff full of designers and a little bit better of an atmosphere.

And it just gives us the opportunity to get into more like I said in the script kind of a highly populated dense markets, where we where we can't go big stores. So I think it's a unique opportunity.

We will talk more about it as we get it open as we learn more.

It's a bit of a laboratory and we'll share more as we learn more.

So Manhattan's opening up next year, I guess [laughter] goodness.

That's a good example, kind of how we're thinking about it so yes, Manhattan, maybe not next year, but certainly it's a good example of how we plan to use a store like that.

Well I appreciate the color.

Can't wait to see the rest of it thanks, guys best of luck if they care.

As a reminder piece when asking the questions limit yourself to one question due to talk to shrink. Our next question comes on line of Johnston Macheski with Jefferies. Please proceed with your question.

Yes, thanks for taking my questions.

First one just on a pro private label card you mentioned the launch.

This year, just maybe tell us a little bit more about kind of how this solution will differ from your current offerings and anything embedded in guidance related to this.

New offering.

This is Trevor so we've had a consumer private label credit card for a long period of time and I believe it's just sub sub 10% of ourselves as it happens that consumer card and then we have through an external large bank.

That manages our big customer, where we do commercial sales domains. The vast majority of our big customer commercial sales and what we really never had a great solution for is that proved its in the middle which is the meat of our customer.

It's a small business person there may be has a handful of employees that the private label credit card.

Is too small, but yet they don't qualify for 10 2050 $100000 line of credit like like some of our large commercial clients were 44. So that's really what is designed that we've been designing and now for year, it's not easy to do because lot of these customers don't have extensive credit.

Theres, maybe new in business and so we've got a great partner, we're working with there.

Couple of things it will be unique will offer extended payment terms extended interest terms, we will offer the ability for a business owner to let's say they have for employees. They can you give a card to the four or five different employees that can give different employees different credit limits vacant text to approve overtime and so we do think it's going to be something unique and different we've been working on it for.

For a long period of time.

I don't think I can specifically call out exact percentages in our comps, but it is a net new additives solution that we think our pros are going to appreciate.

Helpful. Thank you and then just a quick follow up on.

In the home design consultations that's interesting.

Have you guys done any customer insights work and kind of what has that revealed about maybe.

Maybe geographically, where you're seeing outsized demand or any other kind of insights that our that's informing kind of the move there. Thanks.

We're not doing a lot of customer.

Insight work on that beyond you've got out we've got a 121 stores that have staffed with designers who tell us all the time and every store our customers would love us to go to their house. So we do think theres a bit of an opportunity. It's like we know when we engaged with the customer within our own store within our own and been yes with their own pictures and their own Sam.

As we know that we can sell them more and we know if we go out to the house and see what they're working on it if that helps build even a better relationship and gives us the opportunity to not only make the current project better but make the next one even better so.

We've known we've talked about it simply put designers on staff in the store. This has been are common request. It was something that we thought my goal is first let's let's get the stores operating consistently let's let's get a good program within the stores and once we get that going and going into right direction. Then the more improve our service even more but starting to get outside of the store. So I'd say.

Thank you to its another good initiative and another good idea and another thing that should help drive same store sales growth.

Great. Thanks, so much thanks.

Our next question comes along the Simon Gutman with Morgan Stanley. Please proceed with your question.

Hi, guys. This is Josh on semi and thanks for taking my questions that business is falling pretty well in all the external factors, except maybe the current virus seem to be swinging in your favor at the moment is there anything you can talk about within your business, that's not up to your expectations you kind of touched on a couple of things earlier and then what risks you most focused on upon it.

This is Trevor I guess I'm back glass half empty guide.

That's true and take that one.

I think.

Yes, the cannibalization is a little bit higher work, we're working through that as we've said.

I think one thing that when you guys get to do in your detailed modeling I think you'll notice that our new store productivity is planned to be slightly lower further classes 19, just to give a little context around that and the class 2020 stores. We do very detailed pro forma as we said a lot of time going through that Brian seem doesn't good job managing out for us we feel.

Really good about the class in 2020 on a full year basis, both sales and profitability. When you compare to the class of 19, but even though were opened a few of those stores earlier.

In the quarter in the year I should say, we're currently not planning on opening those stores and at the midpoint of the quarter earlier in the quarter number of those new stores and opened late in the quarter and so thats going to have the appearance of having lower new store productivity, but it really is just a timing issue and that we're going to open some of those stores a little bit later in the quarter to quarter in 2020 relative to the sale.

Third quarter in 2019, so really going to just the timing issue.

If you look at our overall new store productivity for 19, while it might be slightly below 18.

It's still a very high rate relative to our recent past.

Got it will be well above what we did in 2018 so.

And then we worry about Newsource all time as we've done a good job of opening new stores for a long criticism, but those probably too I guess I'd call up.

Thanks, and then just on the kind of relation again, if you could or am I missed the rationale for sticking to 60% in new markets sorry in existing markets. This year, just that you want to complete the program of the small stores that you have to cannibalize Isaac see you Onyx kind of stay within range you do see footprint is it out of it find the right real estate, which Tom touched on briefly or is it something else going on.

So I mean, it's since gets harder to get to new markets the bigger we get.

So, but we we like the.

We're about getting total market share and as we're building out awareness and we think we can we try to have a balance we would like new stores and going into new markets within the same time, there's Trevor can talk about the profitability components doing that.

But from the standpoint, we we vote will be here from our pro customers as the markets were participating hey, your stores. It really far apart we need we will use you even more convenience becomes more replacement we want to get those markets filled out and then we'll keep going down that path is only I'd just for modeling perspective. The way. We've tried to think about it is we tried to close this weekend about half of our.

These new stores in new markets and half in existing markets. In you know that you can ever do that perfect because it's sometimes it's harder to get stores in certain markets and the reason we one of the reasons. We do that is we shoot for an overall level of sales and profitability. So that when we're done you'll have some higher volume stores are more profitable and you have some other stores that are lower volume an artist profits, but on average we can get to a cell.

His number and a profit number that makes sense for us and we pulled that out there's been nothing $12 million to $14 million and try and as you've heard.

Close to $2 million or slightly above $2 million in first year EBITDA.

And so that factors into it as well we've got to have a good balance and as Tom mentioned.

As you would imagine where we have a lot of stores in really good brand recognition and they're really strong protein generally in our existing markets. Our new stores are higher volume to more profitable. When you go to a new markets. It takes time to build that picks on maybe the assortment exactly perfect. So generally speaking our new stores and our new markets just take a little bit time from a sales and profitability perspective. So that's why we shoot to the 50 50.

And every year, we get close but some years, it's more new in some years, it's more existing.

Thank you and then just to clarify quickly. So there's nothing you're seeing it all that would cause you to pause on the all question the 400 stores how.

Is that fair no nothing.

Great. Thank you.

Our final question comes the line of Chuck Grom with Gordon Haskett. Please state your question.

Thanks, Great quarter I'm good here.

My question, just with regards to the potential upside and flow through if you guys worded outperform your comp guidance, which I think some people expect could happen, but I understand why you're guiding to where you are so I guess is there way to capture what the margin flow through would be maybe for every 1% of comp upside.

In 2020 thanks.

Yeah. This is Trevor I mean every company purchased over $20 million next year.

I'd like to keep that in kind of the maybe 25% range, maybe slightly above that of margins a bit better.

But that's how we're thinking about it I think the other thing if we are beating on comps.

There's things were going to want to invest into and we do a lot of investment is is that there's lots of ideas that we thought we'd like to try and things so but I guess answer that simply we we would plan on the mid Twentys, maybe slightly above the mid twenties flow throughs, how we'd expect.

Incremental sales above our focus.

Okay, and then just one more just with regards to Euro 2021 commentary just wonder if you guys could just amplify on that for us and I guess just to make sure. Our math is correct does that exclude the the benefit that you're going to see here in the 50 Threerd week in terms of that potential upside. Thanks, Jeff. This is forever. It does it's all on a 52 to 52 week basis, we've tried to make it is.

Comparable as possible.

And exclude that 50 Threerd week, so yeah, as we think about 2021.

We think that as long as again as I said the outside of my prepared comments as long as a macro environments at her where we are now and doesn't take step down or or any trade policy go the wrong way.

It really good about it I think just from where we are where we're going to end the year the type of comp stores, we're going to open.

As we said in my prepared comments, we think we're going to hopefully opened a few more stores earlier in the year. We're taking some of those expenses into this year that would normally reside in 2021 and then this year specifically, we've got 12 months of our new store support center versus only had two months in fiscal 19 same thing with the Baltimore distribution Center willing.

Two months of that Baltimore distribution center in fiscal 19 versus a full 12 months.

In fiscal 2020, and so we'll get the benefit of leveraging those fairly big investments. We've made we won't have to make that level of investment as we think about 2021 and so all those things just give us confidence.

There were going to do better and the final thing I said in my prepared comments is that we're expecting gross margins to continue to grow each of the quarters. If you back out that 14 joined our benefit we talked about so that makes us feel good assuming we execute that that makes us feel good about where the.

Product margins are exiting the year. So we'll see one time away from now, but that's how we're modeling the business today.

Great. Thanks.

We have reached the end of our question and answer session and I would like to turn the call back over to Mr., Tom Tiller concluding remarks.

Well first I'd like to thank I know, we as I said in Alaska, We have associates listening on the call that are.

And I'd like to thank them for all their hard work. It was we had a terrific year. Good good strong finish where we're proud of everyone's hard working appreciate everyone's accomplishments. We appreciate all of you for taking interest in our company in joining the call today in asking this the thoughtful questions. We look forward to talking to you and the next quarter.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation have a wonderful day.

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