Q2 2020 Floor & Decor Holdings Inc Earnings Call
In 2020 earnings call.
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A brief question and answer session will follow the formal presentation.
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Recorded.
It is now Mike Wayne Hood, Vice President of Investor Relations. Thank you you may.
Again.
Thank you operator, and good afternoon, everyone. Joining me on our earnings conference call today, or Tom Taylor, Chief Executive Officer, Lisa lobby.
President and Trevor lining executive Vice President and Chief Financial Officer, before we get sorted it would like to remind everyone at the company Safe Harbor language comments made during this conference call and webcast contain forward looking statements within the meeting of the private Securities Litigation Reform Act of 1995.
Five 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 for.
Eight minutes for any reason, including those listed in the SEC filings for into core assumes no obligation to update any such forward looking statements. Please also note that past performance where market information is not a guarantee of future results. During this conference call. The company will discuss non-GAAP financial measures as.
Defined by the SEC regulation G. We believe non-GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which.
Is available on our Investor Relations website at IR dock flooring to core dotcom and recorded replay of this call together with related materials will be available on our Investor Relations website, Let me now turn the call over to Tom.
Thank you Wayne and thanks to everyone for joining us on our second quarter 2020 earnings conference call on todays call I will discuss some of the highlights of our second quarter 2020 earnings results and then discuss how we are positioned to further grow market share of the estimated 22 billion dollar hard surface flooring industry in 2020.
Beyond that Trevor will then discuss our second quarter results in more detail and how we're thinking about the second half of 2020.
Looking back over the past several months I am glad we made the voluntary decision to close our stores to the public in late March and pivot to curbside pickup only as the coven 19 pandemic was escalating.
This time allowed us to make numerous changes in safety protocols and to implement public health care guidelines that are essential to making our store safer and the current environment.
We believe our large 76000 square foot stores with nine to 15 foot wide aisles uniquely position us in the market.
Add to that the millions we have spent on personal protective equipment plexiglas separation training and taking care of our affected associated with coven 19 pay and we believe our teams have done an excellent job, creating a safer environment for our pro and do it yourself customers. It is obvious coven 19.
It is not going away anytime soon but all the changes we have implemented gives me confidence we can operate in a much safer store environment as long as coven 19 as with us.
Because of the pandemic people are spending a lot more time in their homes and not spending as much on travel eating out and other entertainment. The combination of these two phenomena as.
As people investing in their homes, Florida core isn't a great position to serve them with additionally, inspiring stores and website innovative assortments everyday low prices and stock job locked quantities as consumers are for the best value and current trends also our aggressive aggressive efforts to lower cost in the short term.
Hum along with adding 75 million of additional term b loan.
The majority, which is not due until 2027 as fortified an already strong balance sheet and we now have the best liquidity and our company's history. This positions us to withstand this period of uncertainty while at the same time continuing to make important investments to support our long term growth goals I believe our fuel.
Sure as bright.
Looking more specifically at our second quarter results, we opened two new warehouse stores in the second quarter of 2020.
One in Novi, Michigan, and one and Elizabeth New Jersey.
Second quarter openings brought the total number of warehouse stores that we operate to 125 stores up 18% from 106 warehouse stores at the end of the second quarter 2019.
Looking at the third quarter of 2020, we have already opened our third store in Salt Lake City area and our first small store design studio in Dallas, Texas.
We also have plans to open a new store and Tom Germany Jersey in August and San Diego, California in September as we further build out and scale our stores nationwide.
Despite the new store development headwinds caused by Coven 19, we're pleased with our planned 2020, new store openings, which now include 13, new warehouse stores up from our most recent estimates of 11 stores.
As we look to 2021, we're committed to returning to 20% new store growth and excited about the new store pipeline. In addition, we expect to achieve more balance canes of openings throughout 2021.
As we have discussed we are taking partnership approach with our landlords and there are encouraged that our landlords recognize that we are one of the few retailers that have plans to open stores over the long run we are already seeing real estate opportunities that we believe are better than before the pandemic started.
Moving onto our comparable store sales.
Our second quarter comparable store sales declined 20.8% due to covert 19, and the associated declining transactions caused by our store closures not allowing customers into our stores throughout much of the quarter and reducing operating hours comparable store transactions declined 22.3% and our comparable store average ticket increase.
These 2% consistent with previous quarters, our best performing category continues to be laminate luxury vinyl playing on a monthly basis, our comparable store sales were down 50.8% in April but improved to 22 at 26.1% decline in May and a positive 7.7 in June.
We are pleased with the positive June comparable store sales increased but since we started opening our stores to the public on different date throughout the second quarter. This number doesn't fully explained the strength of our comparable store sales when we measure our comparable store sales from the day each store opened to the public until the end of the second quarter.
Against the same time period for those stores in 2019 that comparable store sales increase would be 8.6% and for fiscal June using the same metric those stores open to the public had a comparable stores increased sales increase of 10.2%.
Our third quarter comparable store sales to date have accelerated to 16%.
The sequential improvement is the direct result of our flexible business model, where we were able to quickly convert from our curbside pickup model to fully reopening all of our stores by early June.
Our E commerce and connected customer strategies allowed us to remain engaged with our customers, particularly on the mobile devices, when our stores or close to the public as a result, we were able to retain a significant amount of sales as our stores were closed or operating with reduced operating hours, our second quarter E Commerce sales increased 192.
Percent and accounted for 33% of ourselves compared to 10% during the same period last year.
At its peak E commerce accounted for 64% of itself.
During this peak period, we saw over 90% of orders picked up at the stores as we were able to offer curbside pickup.
As our stores that we open we have seen our ecommerce sales penetration rate moderate to 17% to 18% it remains well above the 12% penetration rate experienced prior to the impact of cobot 19.
We experienced strong traffic growth and organic and paid search as well as direct traffic, which drove our strong overall traffic.
We believe the strong growth in traffic reflects consumers interest in flooring projects as home values continue to rise.
Population densification emerges in certain markets and spending dollars shift from travel and entertainment to affordable home improvement projects.
As we have discussed the average household income among our customer demographic group is between 100, and 125000, giving them more discretionary income to explore flying projects.
Our internal survey in late April showed very few customers canceling projects are eating postponing projects.
As we continue to make website optimization upgrades and further build out content. We expect all of our E commerce growth and performance metrics will continue to improve leading to a sustained higher level of ecommerce sales penetration than prior to the impact of cobot 19.
We also have made several successful tactical decisions to grow our market share and build our brand lower loyalty with our pros that we believe we'll have long lasting benefits first our proteins reached out to our top pros via wellness phone calls emails and text messages to make them aware that we were there for them.
And could arrange select pickup appointments to serve their needs to complete ongoing and new projects.
The teams made them aware of the benefits of using our pro App, which includes the ability to build a quote search in stock inventory and quickly checkout. The feedback from our pros was overwhelmingly positive and we were very pleased with how we drove engagement.
Second we temporarily increased our pro premier rewards points incentives in May two a maximum of four times based on spending levels, the increasing incentives not only provided needed support to our pros. During these challenging times it led to an increase in average stent.
Average spend for a pro Premier rewards pro is almost 3.5 times more than a non pro Premier War rewards pro.
We continue to see constant quarter over quarter growth and points earn points redeemed and engagement.
It is clear to us that our top pros that are enrolling pro premier rewards are engaged with us and we have the ability to influence their behavior and spend through targeted initiatives that we will build on in 2021.
We extended our 18 month no interest credit card offerings through May 30, Onest, which gave our pros and do it yourself versus an additional line of liquidity for projects in late June we launched our pro business credit card in partnership with Alliance data services, which should be fully rolled out to all of our stores by the end of the third quarter of 2020.
Further building on our value proposition.
Proposition.
We are excited about the features of this car will offer our approach, including but not limited to 180 day no interest payment plan that is more compelling than industry standard terms of 30 60 days overtime, we expect to tie the usage of this card with our pro Premier rewards program.
As many of you know redesign services is a pillar of growth at Florida core as part of the service we accelerated the launch of virtual design appointments into the second quarter of 2020 and are excited about the role virtual design appointments are playing during the coven 19 pandemic.
We have had over 8000 appointments since its launch by providing this free live virtual video and chat experience, we expand our ability to connect and collaborate with customers that are contemplating the flooring project, but may be social distancing in response to the coven 19 pandemic or just prefer the ease of starting the project after her.
Comes first with a cloud based video conference. This strategy Leverages, our website resources, including our room Visualizer and our my order quote Miller and allows our designers to connect with customers, while maintaining social distancing guidelines.
Importantly over 70% of appointments are still going into our stores, which reinforces the importance that our stores play in the purchase decision.
While the Cobot 19 pandemic has created significant challenges there are important lessons that we will carry forward that are leading us to adopt the new processes, notably we have learned how we can engage with our customers in different ways that are faster and easier that we believe will further build our brand loyalty.
Typically we know our top pros embrace our concierge curbside and pickup service that is fast and efficient.
Virtual design appointments have proven to be an important engagement tool that will continue to grow for years to come.
Internally, we're doing more remote training and using virtual product line reviews, we will be using virtual technology to be more management strokes a process that we believe will be long lasting.
We are seeing more benefits of teleworking for certain store support function groups that we can carry into next year and beyond potentially leading to less required office space.
From a macro perspective, we're cautiously optimistic that the federal reserves actions to inject liquidity into that market and lower interest rates to support the economy and housing will serve to support growth in the second half of 2020 and into 2021.
That said there is still significant uncertainty that most recently he comes from an increasing cobot 19 infections in certain markets, which raises second wave risks into the fall for that reason, we're cautiously optimistic but recognize business risks remain elevated and that we could have to close stores in certain markets if necessary.
Nonetheless, we remain focused on maintaining a flexible business model and we'll continue to look for ways to engage with our customers in different ways.
Before closing I.
I would just like to take a moment to discuss how we're thinking about diversity and inclusion and being part of the solution and our local communities. We remain a company that is committed to fostering a culture that not only supports diversity and inclusion, but embraces and encourage us to that and we have recently created an officer position reporting to our press.
Lisa lobby refresh in Reenergized, our diversity and inclusion steering committee and are excited to launch our diversity and inclusion task force.
This task force will comprise associates from departments in regions across our company that are passionate about our culture.
They will be responsible for developing and executing ideas to further promote diversity and inclusion across the company through various initiatives as well as building awareness of our initiatives and programs. These actions will further strengthen our company and its commitment to our core diversity and inclusion values.
Let me close by saying again, how inspiring and has been to see our store and store support associates, along with our supply chain teens rallied together and unique combination of challenges caused by the Coca 19 pandemic their tireless and creative efforts have enabled us to continue to serve our customers, particularly our pros that operates small businesses.
My confidence in the power of our business model and our ability to navigate this crisis is unwavering and we remain committed to long term profitable growth I will now turn the call over to Trevor to discuss in more detail our second quarter financial results.
Thanks, Tom we're incredibly proud about 414 has managed through the crisis, our values culture fantastic leaders and unique business model allows to work through this difficult time, and we are stronger company now than when this all started in the first quarter.
Looking at our second quarter results, our sales were 462.400 million down 11.1%.
We believe the decline was entirely due to covert 19, as we took measures to protect the health and safety of our customers and associates by limiting most of our stores to curbside service beginning in late March.
Approximately half of the available selling days for our stores were under these curves hub model during the second quarter fiscal 2020 during which our comparable store sales were down approximately 50% compared to the prior year period, beginning in May and concluding in June we implemented a phased approach to reopening for in store shopping with enhanced safety and temptation measures such as requiring us.
Mr where face masks consulting social distancing markers on the floors protective shield, the cash registers and regularly sanitizing shopping carts pin pads design desks and other high traffic areas Walmart to walk you through our comparable store sales improved materially as we opened our source to the public.
Turning to our second quarter gross margin and expenses, while our second quarter total sales have declined 11.1% from last year. Our gross profit only declined 9.7% as our gross margin rates increased 60 basis points to 42.5% from 41.9% and the same period last year to year over year increase in gross margin rate was largely driven by higher.
Year over year product margins, including 3.600 million from certain carefree funds and improved merchandising strategies, partially offset by higher distribution center costs related to our new Baltimore railing distribution center that opened in the fourth quarter fiscal 2019, our new Baltimore distribution center impact on gross margin is expected to moderate as we move through 20.
20 from the growing benefit of the reduction in stem mile costs that will have long lasting benefits.
Moving onto our second quarter 220 expenses.
Our decisive in early access to reduce expenses, while at the same time, retaining our fulltime associates enable us to slow growth in our second quarter selling in store operating expenses, the 2.8% from 134.600 million last year to 138 point 500000. This year, Nonetheless, our second quarter, selling and store operating expenses Deleveraged 400 basis.
29.9% ourselves from the deleverage of payroll operating expenses and occupancy costs related to the decline in sales as well as operating additional 19 stores.
We incurred 1.100 million store expenses during the second quarter related to measures, we took to protect our associates and customers while in our stores from the co impacting virus primarily for personal protective equipment.
A quick action to curtail broadcast media mcwhorter enable us to leverage our advertising expense.
Our comparable store selling and store operating expenses rate deleverage as a percentage of sales by 300 basis points.
Our second quarter general and administrative expenses, which are typically expenses incurred outside of our stores increased 2.800 million or 9% as a percentage sales the leveraged 140 basis points to 7.3% from 5.9% due to the decline in sales as the result of the cobot Nitin pandemic increased depreciation related to our store support center and technique.
College investments to support long term growth and a higher expense from employee incentive compensation.
We incurred a half million dollars in general and administrative expenses in the second quarter weighted to covert 19 virus, primarily for personal protective equipment.
Pre opening expenses during the second quarter decreased 2.900 million for 46.1% from the same period last year.
Decrease is primarily the result of operating fewer new stores in the second quarter 2020, and planned fewer new stores in the third quarter 2020 relative to the same time last year.
Our second quarter net interest expense increased $100000 or 3.6% from the same period last year, the slight increases due to higher interest costs from new borrowings offset by increased interest income earned relating to the tariff refund receivables.
In the second quarter, we incurred a 12.200 million benefit from income tax provision compared with $100000 of expense last year.
As a result, our effective tax rate was a negative 61.6% versus a positive 0.2% last year.
The decrease in the effective tax rate was primarily due to the recognition of income tax benefits in connection with the cares Act.
More details about the tax provision is provided in our second quarter, two and a reconciliation of GAAP net income to adjusted net income in our press release.
Moving on to profitability, our fiscal second quarter 2020, adjusted EBITDA decreased to 31.6% to 45.600 million from 66.600 million last year as a result of the decline in second quarter sales and de leveraging our expenses as a result, our adjusted EBITDA margin rate decreased approximately 290 basis points to 9.9.
10% from 12.8% last year, our second quarter GAAP net income decreased 26.6% to 32 million or 30 cents per diluted share from 43.600 million or 42 cents per diluted share last year.
Our second quarter adjusted net income decreased 62.2% to 39, 400000 or 13 cents per adjusted diluted share to 35.300 million or 34 cents per adjusted diluted share last year.
We ended the second quarter with 105.500 million diluted weighted average shares outstanding compared with 104.800 million shares last year, a reconciliation between GAAP second quarter net income and adjusted net income is provided in a press release.
Let me now turn that comment to some of the changes in our second quarter balance sheet.
We have a large income tax receivable of $28 million due to taking advantage of the cares act provision that I will touch on in a moment. We also have a large increase in our receivables due primarily to tariff refunds, we expect to collect in the second half to 2020, and we have discussed in more detail and our SEC filings.
Our inventory balance was 594.300 million up 147 million hundred thousand or 33.1% versus the second quarter 2019. There are three reasons for the increase over the same period last year, one northern bank cost of goods in the second quarter due to covert 19 to 19, new stores and 18% in store.
Account versus the second quarter of 2019, and finally, our new Baltimore distribution Center. There was not opened in the second quarter 2019, as we get closer to the end of this year, we're planning on our inventory balances versus the same time last year growing at a rate below our expected future sales growth.
On May 18, 2020, we entered into a $75 million incremental term loan B one facility with the maturity date of February 14, 2027 to provide additional liquidity due to the business uncertainty caused by code 95 impending.
The terminal B one facility is a separate charge from our existing term b facility.
We ended the second quarter 2021 at 219.300 million an outstanding term loan facility with maturity date of February 14, 2027, we have no meaningful debt maturities over the next five years at the end of second quarter. Our last 12 months net debt to adjusted EBITDA, excluding pre opening expenses 1.3, and 2.8 on a lease adjusted basis.
We had 496 and a half million of unrestricted liquidity immediately available to us, including 134.400 million, a cash and cash equivalents and 362.100 million for borrowings under our ABL facility. This is the highest liquidity important course history.
Glad to repay down all of the 275 million per cautionary asset base revolving line of credit. We drew the ended the first quarter and finish with one of the highest cash balances in our history.
We believe the immediate liquidity that is available to us coupled with our credit facilities and actions we've taken to reduce cost provides us with liquidity needs managed to the koby. Thank you can mimic.
We have an initial assessment of the cares Act, which we expect will provide a substantial cash benefits from the second half was 20 point, we anticipate anything from three main sections of the act.
First we are meeting our tax returns and take advantage of the temporary five year net operating loss carry back allowance and technical correct correction for the qualified leasehold improvements, which changes 39 year properties to 15 year property eligible for 100% bonus tax depreciation and we estimate this will generate an IRS refund of approximately $28.5 million.
Second we expect to benefit from the temporary deferral of employee or payments for social security taxes, which has saved US 3.100 million deferred the performance through the second quarter and we expect to defer another 9 million in the second half of 2020 and third we expect the benefit from employee retention.
Credits, which we estimate total at least $1.1 million for instance in more if we qualify additional credit during the second half of 2020.
Collectively we expect these to increase our cash flow by approximately $42 million.
Moving on to capital expenditures, our fiscal 2020 capital expenditures are currently planned to be between approximately 188 million to 196 million compared to approximately 255 million to 265 million when we originally plan.
And we'll be funded primarily by cash generated from operations.
The growth in capital spending reflects our planned opening of 13, new warehouse stores in fiscal 2020 compared to 11, new store openings when we plan to into the first quarter 2020.
Additionally, we plan one small format Standalone design center and to start construction on storage we plan to open in the early part of fiscal 2021.
Capital expenditures associated with these projects is expected to be a 121 million to 125 million in fiscal 2020.
We also will invest more in existing store remodeling projects and distribution centers in fiscal 2020, using approximately $47 million to $49 million of cash we plan to invest in information technology infrastructure E Commerce and other stores reports and our initial using approximately $20 million to $22 million and cash.
Based on these changes, we expect our depreciation and amortization to be approximately 91 to 93 million points where.
Our planned capital expenditures and related depreciation could vary materially from our estimates as we are operating in very unique environment, but this is our current best estimate.
While we're excited about bringing our shores back to full operations and the resulting strong growth in our comparable store sales there remains significant business and economic risk is still creates a wide range of potential outcomes in the second half of 20 point.
For this reason we have elected at this time not the change our policy of not providing annual sales and earnings until economic and business rules have improved and the range of outcome narrows.
In closing I would like to say that our entire executive leadership shoot leadership team is extremely proud of how quickly Florida core adapted to meet the challenges of the Golden Med dependent is a testament to the resilience in our business model, our talented associates and investments we've made in our business that have been critical and managers such a challenging pound our one to personally thank all of our associates for their tireless.
This work and dedication to serving our customers and such under such challenging circumstances with that I'll now turn the call back over to the operator for questions.
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One moment, please while we call for your questions.
Thank you our first questions come from the line of Christopher Horvers of JP Morgan. Please proceed with your question.
Thanks, Good evening guys.
So I know it.
I know it's hard to.
Tease it out but have you tried to think about the benefit from stimulus.
In the economy and pay no more importantly, you called out customers in April saying, they're not canceling projects what are your thoughts on how much of the the surge in demand that you've seen in June and July of stores and become open could simply be deferrals demand that you wouldn't have already can you just it's just moving and time so to speak.
Hey, Chris This is Tom I'll take a stab at a few parts and maybe Trevor can jump in if need be so I think from the first part about.
Is is this result catch up from finishing projects, we've really never closed and we were able to retain a good portion of our sales and a curbside model. So I feel like in the curbside model. There wasn't a lot of new projects being started early on and that was a lot of finishing up of jobs or may have some.
There were some starting the projects, but generally during our curbside operations.
That consumer was that are that pro is finishing your job.
As I look forward now in the business has continued to strengthen.
And I don't feel like it's catch up I feel like it's a lot of new projects that are coming.
In underway.
I think as people have.
Been not almost forced to stay home.
They're not spending on movies that spending in restaurants done are traveling.
They're being forced to work out of their homes and I think the more time they spend their home the more projects that they identify and and that has continued to consumers are coming in and continue to pretty fast pace. So.
A lot of new stuff is is getting started.
I do think that the stimulus has helped I mean, the stimulus to supported the consumer and it's supported small business.
And I think those things are.
The beneficial night I believe the consumer spend is going into home improvement.
The only thing I would add Chris. This is Trevor is when we exited last year, we we exited the 5.2 comp.
When we look for coal would really plant down we were comping in the six one and where we had given guidance at the beginning of year. We said that we thought we'd have accomplished around 6% all year and again, we were right at that at the time, we gave comp so hard to say for sure but I do think we feel confident in that condition. The three years, we've been publicly really never had a miss in the range of comps should give.
And so I do feel at this year was going to be that mid to upper single digit comp I think the difference were seeing right now as we all know as in Palm just mentioned the unprecedented levels of liquidity to date with the fed is put in to the credited to the government plus people aren't spending thousands of dollars a month on discretionary items of going out the meeting and travel and things like that.
In the combination of those three things has helped us perform the other benefit I would say that we're hearing loud and clear from our customers in our pros certainly we've got great assortment. Our employees are doing good but it's another advantage you have not been stock inventory people can get it today as opposed to have to waiting in the pros want to get it today, because I don't know one another shutdowns coming and so I think just our business is structurally.
Managed in this environment as well.
That's great and then my follow up question as I know, you're not providing guidance, but can you maybe talk about how you're thinking about gross margin going forward I mean, I think to Q is going to meet a quarter, where the majority of free Taylor's beat gross margin promotional environment down demand is good. So heres how are you thinking about.
The gross margin dynamics as you're thinking about the back half of the year. Thanks very much.
Yet this Trevor again positive we're expecting our gross margins due to be better than last year, just as well as a reminder, though we had a very big benefit what that tariff refund about a 40 million dollar benefit in the fourth quarter of last year.
If you back out that benefit our gross margins was about 41% versus the 43 six we reported last year in the fourth quarter. So if you back out that onetime benefit in our expectation is that our gross margins will be higher as we round out the rest of this year.
Thats great best of luck.
Thank you.
Thank you. Our next question is how can a line of Jack Sator of Wells Fargo. Please proceed with your question.
Hey, guys at curious if you could walk us through whether the acceleration from your 8% Comping June to 16% comp in July is more so a function of having more stores opened or if the underlying business has has accelerated from June to July and what those drivers.
From month to month could particularly beta.
So first if you if you.
Our.
I think that from the standpoint.
Someone on here.
The acceleration in June.
Acceleration from June to July has come a lot on the heels of homeowners just taking on more projects as you look at our business and you kind of watching what's going on our our weekend business is better than I've seen it in multiple years, we just had a.
Just the just the increase I mean, when you're Comping in the 16% ran a bunch of July both the pros doing a little bit better but for US I think the biggest difference we've seen use a lot a lot of do it yourself those are entering the marketplace. So I.
I think thats been part of it the other thing I think this what's what's helped our business and Trevor mentioned is a little bit as an advantage with the pro is during coded.
Our in stock position that we talked about prior it wasn't as good as it is today and we've done a.
We've got our Chinese transition skews have been completed our Thailin stock is the best it's been in three years and because of that inventory levels in the store and the amount of new products that hit I think they just all of those things together has helped us benefits with the consumers come back into the marketplace model.
What's happened to them into July.
Just if you look at the May one our stores were opened June one our stores Groping July and the way our calendar falls, we're actually in fiscal August our comps of accelerated every single month. So we're getting better every fiscal month as we proceeded through this very unique time.
Got it and then on the exposure to some of the recent co get hot spots like Texas, Arizona, and Florida, you've got a lot of stores in the states curious if you've seen any dispersions or fluctuations in India.
In particular relative to the overall sleep.
We look you know we watch the hot spots and we were living in one of the hot spots and we certainly have have watched it across the country on our strength is across the country. So we're seeing the same pace with improvement.
In the states where coded is.
Is there.
For the trend is worse, we're seeing the same trend the same trends in our business, we're focused getting hard to rationalize that no clearly I think consumers want to engage with our product.
Got it appreciate.
The time.
Thank you. Our next question is coming from the line of Chuck Grom Gordon Haskett. Please proceed with your question.
Hey, good.
It's been in thank you.
I was just that maybe anecdotal for coming from your perspective, but when you talk to the pro and more specifically that the backlog today.
So say 90 to 120 days ago, and then maybe also a year ago I guess, what have you learned and I'm also curious if that was giving any color on whether consumers are version to having.
Contract contractors come into there.
Yes.
Yes, I committed to Trevor since he's in charge per may want to new and jump in but from my perspective, the pros busy in pros that I have engaged with I've been in many of our stores I spoke to many of our team.
In everything that I am hearing our pros are really busy certainly been cobot started it was one of the things that we were concerned about where was the consumer going to allow people into their home and I think is as by evidence of what's happened with our business as you watch the trending the acceleration in our sales trend from June to July.
Clearly I think the consumers is feeling okay them into contractor in the house, we've done our part we tried to educate our professionalism.
So hey, make sure you understand social distance and make sure you wear masks, but.
I think when someone let's have contractor into their home in general contractors or airplane by the rules and making consumers feel comfortable so I believe that that comfort level is good and people are little allowed in the homes is the only thing I was going ahead and this is Trevor speaking is we talk to our biggest pros and all of our stores, we have the ability to.
Do that now.
And what they told US is as you would expect when we shut their doors they were finishing business, but the minute we opened our stores their businesses incredibly strong there we've been told their lead our at the highest level they've had it looks like july's can be the best month, they've had in so it does appear that you'll just like you're seeing.
In our business people are not currently averse to having pros and I think our pros are smarter assumptions their social distancing there were a nasty taken off their shoes are staying away from the clients in the house.
So our pros business is incredibly strong right now.
That's great to hear next from a category perspective, I was wondering you talked about the overall monthly costs improving from May to June and into July here, just wondering from a category perspective, if you're seeing anything.
Out of the ordinary and I guess from a Twoq perspective, you called out obviously being asked to just wanted to get shut some light. So many other parts Jake.
The business.
[music].
Sure I want to come.
Sure. This is Lisa so yeah huge shift during the card side pieces of business, we didn't see saumen shack any thoughts on higher penetration and I'll be key higher penetration on trial.
We talk a lot about our good better best assortment and how better Ambac has been driving our assortment excuse me driving our sales and we did see a slight shift down during the current Soc model, but he said this doors open back up everything kind of went back to the way. It was so while decorative accessories, which is a category that is heavily felt by our designers people watch.
The that product that was hard when we were encouraged siding. So those that penetration didn't go down a little but as I said is historically health and backup and we look at July. The next is very similar to what we saw before and are better and better strength in that back to where it was a floor.
Helpful. Thank you.
Mhm.
Thank you. Our next question is talking a line of Steven Forbes of Guggenheim Securities. Please proceed with your questions.
Good evening.
Cover maybe to start with you I think back to the flow through commentary in the mass we are all doing.
Three months ago right on.
Yes.
You know any comp reduction relative to the original forecast obviously, we're moving the other way here. So maybe can you give us some color on what we should expect the incremental margin to be right with the comp revisions being positive now is it. The 25 to 30, we were talking about on the downside or is it a closer to that 35 40.
Okay.
In a normal state of the business.
Yes, Steve this and Trevor I think if you're talking about relative to our original guidance, so and when I gave that comment about the 25% to 30%.
Flow through on a negative revisions to sales on the original guidance.
Thats, where we expected we obviously still believe that even where even though we're having a great performance now our current expectation is that we're not going to achieve that original guidance, but because of the the aggressive moves we've done with the cost maneuvers.
And.
We will bring our business our cost plus the positive results, we're seeing now and we do expect that to maybe not at this level, but we do expect that the new for the rest of year I would expect that flow through to be probably closer to 20% and so since we're talking about a negative sales versus the plan and lower percent is a higher profit number I think you guys get that but just to be clear so.
Our profit outlook has improved materially from what we were thinking.
Back in October one our comps were down 50 is how we're thinking about the rest of the year.
Thank you and then either for Tom recover.
Can you just update us on how commercial performed during the quarter.
And then also right as we think about this July month, you think about the potential windfall here and I think the goal was to add 18 regional account members d. It sort of view of today's end demand strength as an opportunity to push that initiative for here or just updated thoughts on commercial.
Absolutely push it forward, we haven't stopped hiring iran's across the country.
You know its a.
We like the activity that we're seeing.
They are seat we have we have seen some where.
Some bigger jobs come through.
As hotels have shut down and small businesses shutdown that bodes.
Those end user that happened to have liquidity to do it have taken on some larger projects during the mid they're not as busy so.
That strategy is working for us and we're seeing great activity in it.
Thank you.
Thank you. Our next question has come from the line of Michael Lasser view vs. Please proceed with your question.
Good evening. Thanks for taking my question. So Tom you mentioned that you Didnt think that pull percent that you're seeing July was the function of pent up demand covering you thought a run rate on the business a reasonable run rate of the business, it's topping up 6% how do you.
Reconcile that having bridge what a realistic expectation is over the next few quarters is it's not mid teens and if not a low mid single digits.
I, just what I guess, one point of clarity Michael away. We I was trying to explain it is the difference between what I would have thought we would have run which was 6%. We said we thought we would comp 6% all year I think the difference of that is really three main things one the unprecedented liquidity that the government is put into not only businesses that have consumers pockets I mean, thats, probably the biggest driver.
But as Tom mentioned in his prepared comments as well is people are just being a substantial amount of time in their homes looking at things are spending things on home offices on on developments I know they need to do.
And then you add to that the liquidity that they're not spending hundreds probably thousands of dollars a month on travel and entertainment and the combination of those those three things is what is driving our comps from what would've been a mid to upper single digit comp to a.
Mid teen comp.
Oh and and so do you think those are temporary factors colder.
In one sense, yet because I don't think the government is going to keep injecting the same level of liquidity that they have but I think you know that's obviously under advisement and the government's working on that right now.
On the positive side, though I don't think people are going to be traveling and I don't think people are going to be leaving your homes anytime soon so I mean, if things all sort of positives yeah, I think I think low coke called it doesn't feel like it's going away anytime soon and I think did the consumer is going to continue to not have the spend that based upon if you remember we slant.
Two towards a a bit of a higher end customer.
I also think that would tremors mentioning the people when they're having to work out of home and they're not being able to go out as much then not just look into the space, they're having to re purpose space in their homes. Many of you got to Cuba, Your kids being going to school in the dining room and you've got to Youre viewing your spot. The both working you need to create two offices and that spring people working within their home.
Homes in recreating space, so those things.
I believe that cold is not going away people staying home that is going to last for a little.
Mid teens run rate.
For the back after the year.
Our.
80, plus percent of our business is the punishment and so we have a very sophisticated system.
A substantial amount of people that.
Manage that we're buying inventory based on the trends of the business.
Yes, I think as I mentioned earlier, Michael too is as good as it's been in a long time.
Transition excuse me, we didnt, we recover we're thoughtful with our inventory as we went to the pandemic, but as we've come out we're kind of on the offensive and the stores are in good condition and but it's just one that you all ended as I mentioned prepared my in my comments the inventory growth. We had at the end of Q2 was was the highest we've ever have now been part of that was because our cost of sales.
The off pretty quickly because cobot, but we're sort of fortunate now on the other side of that as Tom mentioned, we've got a substantial amount of inventory sitting in our distribution centers and will and that the supply chain teams did an excellent job of fulfilling that demand.
So we feel good about our inventory position to support the sales.
Good luck in thank you very much.
Thanks, Michael.
Thank you. Our next question is coming from the line of Matt Mcclintock of Raymond James. Please proceed with your questions.
Hi, Yes, good afternoon, everyone, great execution that say.
Mike.
First question is this.
Tom.
Mike you actually mentioned DIY why in the press release and I don't think you guys have ever done that before so could you maybe talk and you actually also set of the call. That's off the there's a lot of FCI wires that helps with the quarter. So can you talk about what's going on in this industry because it does seem like this historically, but an industry that wasn't DIY meaningfully app.
Changing.
Yes, I think so we call a lot of times, we call the end user.
We call the end user the BDI wire net.
Doesn't necessarily mean that they're actually buying it and putting themselves, but the activity of.
Of the end user has been substantial I mentioned, a weekend business is about as good as I've seen it in a very long ton.
The activity on our web site the amount of people that are on searching the category and engage in a web site is that any isn't an incredible pace.
The viewing like Weve added a ton of how to clinics on our website the viewership of that is incredible.
Incredibly high.
Are incredibly higher and you know you two views of our product. We do it is we started the Instagram live clinic for our associates because now for our such as for our customers because we couldn't do clinics in the store to the social distancing and the activity and that has been Ben good our virtual appointments. We did 8000 virtual appointments. That's also the end user in the in the store.
So when I combine all of those things that I don't think that everyone you know that necessarily that.
My neighbors coming in in spine Apollo tile installing that this weekend. So I still think they're engaging approach to do that when I look at our department comp sales.
That makes me feel like.
They are engaged in the project, but they're hiring approach to do it in most cases I don't think their tackling the project like that but maybe there on a backstop more than they have historically.
But there definitely a one engaging our product.
Thanks for that really helpful. And then my second question is the pro business credit card 180 days, a free working capital seems like a game changer could you actually maybe elaborate on that and how you think about it.
Yes, it's just about that simple we do think it's a game changer. There's also all kind of other benefits that you just on the website or we can get Japan for just some more does is more than even just add but what do you think it's going to be very beneficial. So we'll see we're just now starting to roll it out it these pose generally.
Don't necessarily are looking for this big credit solution, but that being said, it's one more arsenal in our tool to serve the pros is there anything we can do with that program to car that we're thinking about more longer term is the cost are fairly materially below what we pay the credit cards and those in ways. We can tie that into the pro Premier rewards program, but maybe offer an incremental piece.
Joints and make it a win win for the pro as well. So just getting started I'm super proud of our team and our pro team and our credit team that has worked hard on this for over a year more to come as we get to the end of this year and into next year appreciate the color a split.
Thanks, Matt.
Thank you. Our next question to start in the line as Kate Mcshane of Goldman Sachs. Please proceed with your questions.
Hi, Good afternoon. Thanks for taking my question on my question focuses on real estate. Yeah, you mentioned in your prepared comments that.
You are having conversations with your landlords and I wondered if it resulted in any kind of deferred rent and how it impacts cash. This year next and then just with regards to ease stating that there might be better real estate opportunities with the change the tiny at all and entering into new regions that you can thinking about entering in with that but it accelerate.
It move it up into 2021, perhaps.
Yes, so I will I'll take that this is Tom I will take the second part of your question Travis and talked about.
Rent deferrals and things of that nature.
When I'm done and I I think what we've seen is we had a good real estate pipeline for 2021.
In place, but you had a good real estate pipeline in Htwo 2020, also and we had to do a delayed due to the pandemic in being able to get our stores physically constructed given to begin to be able to open the right way. So the pushing back of those stores along with our 2021 pipeline along with there's been opportunities that have present.
The themselves in different parts of the country that we didn't anticipate it's collectively we've been able to put together just a great a great pipeline to store for 2021 in 2022.
All of the changes have been.
Given us the ability to had good came to the opening so the stores for the for the first.
Since youve been opening 20%, we're going to open them at the right times are going to have a good amount in the and across the quarters of the company. So it's not so much though it's given us the opportunity any any markets anytime sooner, it's given us the ability to fill in some important markets a little bit quicker we've seen some some good opportunities arise in the northeast as.
Result of this and so that will be able to go a little bit faster than we've had been playing into it and the first part of your question our real estate seem to the great job, we deferred 5.9 million in payments in Q2 that we will be paying back most of it over over the next year.
And then the other thing I think is exciting for us and again, our real estate team gets credit for doing a great job is the rents were getting this year next year are the lowest I've seen in my mind your history and the quality of the real estate is better part of that because we're taking on more of a construction cost that part of that is just the environment and we've got some really good dealmakers in so nor rent costs are.
Our getting close to the high single digits versus the mid double digits on a rent per square foot square feet basis. So, we're we're getting better locations and we're entering better markets, but our rent per square foot is coming down.
Thank you.
Thank you. Our next question has come from the line of Simeon Gutman of Morgan Stanley. Please proceed with your questions.
Hey, Thanks, good afternoon, I want to hit on the 16% quarter to date once more realize it's further than average our weighted average and in there you probably have some twentys and thirtys and maybe some flat given that you're still sort of reopening and end markets are ramping would you say, there's a bias as these markets normalize tore high to higher than that number or biased a little bit lower.
Yeah.
I'm just a couple things so although not all of our stores opened since early June sofas with a 16% in July all of our stores have been open.
And it's been pretty consistent it hasn't it's been steadily getting better I guess as Howard said I don't know that it's going to keep ratcheting up per se, but but as I mentioned, a second ago, nor our fiscal August which started last Friday.
It's actually been a little bit better than that.
Okay and then the second question is it looks like you'll do what 13 stores and then to get to the 20% about 27, I think next year anything changing post coded because I think you've told us new stores cost core operating cost about one and a half times, what an existing stores in year, one so any offsets to that didn't think.
King a really about earnings power for 20.
For 21.
No I don't are our total SDMA as a percentage of sales for new stores I don't see coming down anytime so even though we're having better real estate call should we got higher depreciation as we're spending more.
Our stores over three years older kind of in the low 20% SGN age.
Or is there kind of in the mid to low 30% as a percent of SGN and I currently got expect that to the change much. The only big driver that is that these stores do higher volumes will obviously get more leverage out of that but currently.
I'm not sure we seem to be changes there.
Okay. Thanks, good luck.
Thank you. Our next question is comes in a lot of Jonathan Master Suky of Jefferies. Please proceed with your question.
Hey, guys nice quarter. Thanks for squeezing me in first question just on.
Adjacent categories, you guys have had success in introducing a few of them over the years.
Just given that the manic of what we're seeing with trip consolidation.
In a post Kobin world, how do you think about your propensity to introduce new related product categories.
I know you guys have done the frame a shower door is and then the countertops and whatnot. How do you think about at new product introductions going forward.
Hi differently, if that though we're very bullish on it we have been all along and even when that doors were incurred side, we were selling some of our adjacent categories stores open back up we have definitely seeing the customer very interesting completing that project went up so we had plans in place this year can get all the.
Adjacent categories that were addressing right now I am talking about 40 45 stores. This year and we're on track we got delayed by a month or so that we still believe by the ended a year ago dorsal will be sat and from what we've seen so far in a very few stores that we started wed where we're excited about the possibility that they are something that we hear a lot from our customers in our designers.
As they work through a projects with our customers that they want to be able to complete the whole project and that's how we have you decided that so Brett fighting.
That's great really helpful. And then just a quick follow up on a real estate you mentioned that 20% unit growth for 2021.
Do you have any sense of the breakdown in terms of new markets versus existing market, then and how that will compare relative to ER in 2020.
It is Trevor I think it's pretty balanced the new versus existing.
Tom mentioned this in his prepared comments and one thing we're very excited about.
The fact that the cadence of openings is going to be the best in our history, meaning most of the last our history, 70% of our stores opened in the back two quarters, it's going to be much closer to 25% Newsource preferred won't be exact.
We're going to get those those new stores opened earlier, which just makes a lot of since for our business and makes it easier for the operators easier for the operators.
Great. Thank you.
Thank you. Our next question is coming from the line that Seth Basham of Wedbush. Please proceed with your questions.
Thanks, a lot and good afternoon.
I may have missed this but if you could help us think through that flow through aspects of your comps. When there is strong as mid teen that'd be helpful is there anything different in this environment. If you could that gross profit.
Tom strengthen weve.
Can you backed out the historical trend.
Yes, I again, we're not giving guidance just because there seems to me ranges of outcomes, but what we what we would say is relative to the original guidance. We gave back in our key on our yearend earnings release.
Whatever sales are below that because I don't think we're going to make that all up back button, but between the end of year.
I would expect that flow through relative to sales being lower than that original guidance in that kind of 20 ish percent range maybe 25%.
On a on a year over year basis, now that our business is performing well, there's nothing structurally that's changed in our business that would.
Impact that flow through on a year over year basis.
Hi, Thank you and one unrelated follow up are you thinking about the Chinese tariff exclusions, and whether or not they might expire in August.
Yeah. This Trevor again so.
The government keys that under very close wraps. We are seeing is close to we can we have very well paid advisors that give us as much council as they can and they're telling that they have no idea I.
I think if the government does the same assessment that they did last year when they decided to remove the 25% tariffs logically to us based on the detail should research we in our visors have done that we believe they should come to that same conclusion and not reinstitute the 25% tariffs.
But as we all know the the trade policies between us in China are getting more difficult not less difficult. So even if it were delayed which again, we don't know the answer that but even if they were not reinstituted.
The government has said, they're not going to hold it out for a year they mailing holding out for six months or till the end of the.
Some of the same conclusion and not reinstitute, just 25% terrace.
I don't think we're going to get a year's exclusion like we did last year.
Got it thank you very much.
Thank you. Our next question has come from the line of Greg Melich of Evercore ISI. Please proceed with your question.
Hi, Thanks.
And then a couple of you mentioned that and asked Shannay that obviously payroll de leveraged a lot, but leverage the advertising, which means the dollar down a lot I'd love to to know the now that sales are back.
What's the thought on advertising strategy is it just ramp right back up for.
Shifting a lot because you're not trying to actually drives traffic in stores. So just take us through that that ramp.
Hi, This is lease ups no we identified let's say our TV advertising in April and the beginning of May at the stores were incurred side. Although we did continue with all of our digital marketing because our web business with us.
Strong and I wasn't sure if it were there and the customers were searching our category, but ADVATE stores open back up we ramped back up with our TV advertising in the middle idea and we actually have the exact same cadence that we had planned before and in fact, we took a week that we had planned for April and I hadn't let's now move.
Those dollars into into August so we I believe that we have got a our customer base that is very excited and so we want to make sure that we are in France out of drama TV perspective, It was intentional perspective.
Thank you I guess quantify.
How much it was leveraged in the corner.
I have to harness Trevor on that line area.
Yeah I'm just looking here, it's all advertising is less than 3% of sales.
And it was even less than that obviously here. So it was a it was a minor component of it's helped the deleveraging is we just don't spend a lot on advertising.
Great and then the second question is more about.
The labor seismic that equation.
Do you just remind us what you did in terms of furloughs are not during the peak of the crisis and as you reopened the stores.
Unable to get back the people you need and the right spot and what do you expect that going forward labor cost and that's sort of recruitment retention retrenchment.
Were essential services.
There's a whole lot of question then that [laughter] site, the best I can on us than what you said so I.
We as a week when we went into the pandemic, we decided to.
To ensure that we could come out strong on the other side. So we made a conscious decision to protect our fulltime associates, we did furlough.
I think it's part of our strength now that we came on the other side within tech team.
We started.
Following our part time.
And we've got in a very high percentage of best part timers have come back 80% have come back.
We are we're hiring where we need to higher retail when sales are make this it seems like you're always chasing a chasing to get town in the stores that we got excellent recruiting efforts.
We feel that can provide associated with a terrific opportunity. They can get promoted here, we opened a lot of stores and majority of our promotions come from inside so where a good place to work. So we feel solid about our workforce.
There's a lot Olson my question what else did I Miss in the question and are you comfortable now the getting 80% back was enough given the sales are now running up 16 or would you like I get a 100%.
Sure. It's it's not just that you'd like to higher meaningful.
Well, you're going to have pockets of the country, where it's a time harder to get help that's not something this new it's happened it's happened before but we've got good high and events going on in the markets, where we need people were seeing good a good amount of attendance at those aren't events and and making progress getting stuff, where they want to get the stuff.
That's great and you don't think the unemployment insurance top up has been a a challenge to getting people to come back you have in saying that.
I do think it's a challenge, but our first our full time was never left and right in terms of come back on on a pretty good base is that that may make it a challenge to hire people will.
I've seen some of that but.
It's an obstacle we believe we can overcome.
That's great good luck Gaborone.
Thank you.
Our final question comes from the line of list as Yoki Bank of America. Please proceed with your questions.
Great. Thanks, guys have have you heard any of any difficulties getting lumber on the only heard that from some of the home improvement stores is that translating into hardwood flooring is well and just if there are broadly any categories for years now experiencing some.
May have contributed to the sales declines in the corner or anything from an inventory Stan standpoint that stands out to you.
No we have not seen product shortages as weve talked about on that I think it was our first park.
Shutdown, we did have different times, where there were various countries not ship. Thanks, but all of that has resolved itself and our in stock does that Tommy Trevor mentioned our.
They've ever bench, the lumber shortages Dow generally relate kept flooring lumber if more building lumber, which is slightly to fracs and so we have not really theme that.
So we feel very good about our in stock position today, we felt very good at about the inventory that we have coming I'm Intel we buy all of our vendors are backup in shipping and that kind of silver lining I think it how much Kevin mentioned, a silver lining of being shut down for that time with it allowed us to catch up on some of our China transition that we had.
So we feel very good our position today.
Great. That's all I have thank you.
Hey, when there are no sorry.
Well go ahead as you're going to say, there's no further questions and I was going to say thank you for everyone. Joining the call we certainly.
Again, I'd like to thank all of our associates, who.
Happening a lot of listen to the ball. We certainly appreciate all their hard work and all of their hard effort I. Thank you all for your interest in the company and we look forward to talking the next quarter. Thank you.
That does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great evening.