Q3 2020 Floor & Decor Holdings Inc Earnings Call
And then.
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Greetings and welcome to score into core Holdings Inc. third quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. A question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn this conference over to Mr. Wayne Hood, Vice President of Investor Relations. Thank you you may begin. Thank you operator and good afternoon, everyone. Joining me on our earnings call today are Tom Taylor, Chief Executive Officer, Lisa lobby, President and Troy.
Overlaying 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 and are subject to risks and uncertainties.
These statements that refers to expectations projections or other characterizations of future events, including financial projections or future market conditions. The forward looking statements. The companys actual future results could differ materially from those expressed in such forward looking statements for any reason, including those listed in it.
Our SEC filings for the core assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call. The company will discuss non-GAAP financial measures as defined by the SEC regulation G., we believe non-GAAP.
Disclosures enable investors to better understand our core operating performance on a comparable basis between period, a reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in our in the earnings press release, which is available on our Investor Relations website at IR.
For the core Dot com the recorded replay of this call together with related materials will be available on our Investor Relations website, Let me now turn the call over to Tom.
Thank you Wayne and thanks to everyone for joining us on our fiscal third quarter 2020 earnings conference call on today's call I will discuss the highlights of our strong third quarter as well as the progress we're making on some of our strategic growth initiatives that we believe will enable us to continue to grow our market share in 2020 and beyond.
Trevor will then review our third quarter financial performance and discuss how we are thinking about the remainder of 2020 and then we will open the call for your questions. We.
We are very pleased with our fiscal 2023rd quarter earnings results, which reflected broad based accelerating sales momentum strong earnings flow through as well as strong cash generation, our fiscal 2023rd quarter total sales increased 31.4% to $684.8 million.
Dollars from $521.1 million in fiscal 2019, our third quarter fiscal 2020 comparable store sales increased 18.4% exceeding our expectations. We are very pleased with our third quarter comparable store sales growth exit rate and the start to our fourth quarter.
Our year to date comparable store sales through the third quarter fiscal 2020 are flat with last year, which is a remarkable accomplishment considering coated nineteens.
Impact to our store operations, which began in late March our third quarter adjusted EBITDA meaningfully improved to a quarterly record $106.7 million, an increase of 86.8% from $57.1 million in the third quarter fiscal 2009.
18, and almost one and a half times higher than our annual adjusted EBITDA in fiscal 2015.
Our fiscal 2020, adjusted third quarter earnings per share increased 107.4% to 56 cents from 27 cents in the third quarter of fiscal 2019, we ended the third quarter of fiscal 2020 with no net debt on our balance sheet and remained strongest liquidity position and our.
Companys history.
Matt Let me now provide an update on each of our five strategic pillars of growth beginning with new store growth.
We successfully opened three new warehouse stores in the third quarter of fiscal 2020, including new warehouse store openings in Salt Lake City, Utah in Toms River, New Jersey in fiscal August and San Diego, California in September.
And the small design studio in Dallas, Texas in August the fiscal third quarter 2020 store openings brought the total number of warehouse stores that we operate to 128 stores up 13.3% from 113 warehouse stores at the end of the third quarter fiscal 2019.
As we look forward to the fourth quarter of fiscal 2020, we plan to open five new warehouse stores with most of the openings in November this will bring the total number of warehouse stores that we operate at the end of fiscal 2020.
133, an increase of 10.8% from fiscal 2019, we are very pleased with the performance of our new stores, including those new stores opened in the third quarter as we successfully opened them an atypical ways due to COVID-19 pandemic.
We are also pleased with the sales waterfall, among our store vintages, particularly our most mature stores.
We look forward to resuming 20% new warehouse format store growth in fiscal 2021, after having to temporary slow our new store growth in fiscal 2020 due to the cold and 19 pandemic.
We have long wanted to open our new stores and more balanced cadence throughout the fiscal year and we believe we'll accomplish this in fiscal 2021.
Also believed the class of 2021 will be a strong class of new stores.
Moving onto our second pillar of growth growing our comparable store sales. We are very pleased with the broad based sequential acceleration in our sales that emerged throughout our third quarter.
On a monthly basis, our comparable store sales increased 15.7% in July 8% to 18% in August and to 20.8% in September which led to an 18.4% comp growth in the third quarter of fiscal 2020, adjusting for the impact of Hurricane Dorian in the third quarter.
For fiscal 2019, we estimate our fiscal 2023rd quarter comparable store sales would have increased approximately 17.8%.
On a two year stack basis, our comparable store sales increased 23% this.
Fiscal 2023rd quarter comparable store transactions increased 18.9% and comparable store average ticket declined 2.5% from the third quarter of fiscal 2019, we believe the decline in our comparable store ticket reflects a higher growth from our homeowner versus pro and designer influence.
Business as well as being aggressive in the clearance of discontinued inventory and our highest ticket category, which is our natural wood category. We are making room for what we believe will be an improved natural wood assortment among our six key merchandising categories. Our top performing categories were decorative accessories laminate luxury vinyl plank.
Natural stone.
That said there was strong growth across all of our merchandising categories in the third quarter of fiscal 2020, which is the direct result of our ability to lead the market with differentiated and innovative trend right products. It everyday low prices and having instart job lot quantities that homeowners are looking for today.
Our third strategic pillar of growth is expanding our connected customer experience our fiscal 2023rd quarter E. Commerce sales remained strong increasing 111.5% from the third quarter of fiscal 2019 and accounted for 16.6% of our sales versus 10.2% last year.
We continued to see strong double digit growth from paid and organic search.
As well as direct traffic to our website as homeowners contemplate flooring projects in the third quarter traffic to our website increased 50% year over year, the combination of changing consumer behavior due to COVID-19 as well as the investments we have made to further optimize our web site experience and build out our content.
Leads us to believe our E commerce performance metrics will continue to be strong.
That said our stores remain a critical part of our connected customer experience in the third quarter of fiscal 2020, 87% of website orders were picked up in our stores.
Our fourth pillar of growth rest on the successful investments, we're making in our pro and commercial customers in September we need further created excitement in our stores by successfully launching our first digitally executed pro appreciation month, where there was no purchase necessary to enter or to win prizes relevant to the professional costs.
In summary, we are pleased that over 36000 pro signed up for the sweepstakes event and the feedback about the event and our virtual Webinars training forms was overwhelmingly positive. We believe recognition events like this which are very important to building long term relationships and engagement with our pros.
We also drive engagement through our pro Premier rewards PPR program, where almost 75% of our pro sales are from PPR members.
Market share.
Let me now discuss the progress we're making on our free design services, the fifth pillar of our growth.
We are pleased that the number of design appointments increased 44.5% in the third quarter of fiscal 2020 from the third quarter of fiscal 2019 and that is well above the fiscal 2021st quarter pre COVID-19 growth rate of 34.3%. This was particularly gratifying considering we were not able to quickly return.
And to pre KOVA 19 designer staffing levels as many were furloughed in the second quarter of fiscal 2020.
It's important to note that our design services are not only important to homeowners, but the pros. We believe we have significant runway ahead of us with design services and are focused on building awareness of our services to homeowners enpros internally driving the value of using our system to increase our already high conversion rate and growing our pipeline of designers to support.
Our growth objectives.
Let me now turn my comments to how we are thinking about the macroeconomic environment. We are operating in unprecedented times with homeowners net senior home more due to COVID-19, and having additional discretionary income due to not spending as much on leisure activities like travel hotels eating out in sporting events.
This has caused a substantial increase in the savings rate and Fortunately people are investing those dollars in the home.
We're also seeing some of the strongest growth in both new and existing home sales in September existing home sales grew for the fourth consecutive month to a seasonally adjusted annual rate of $6.5 million up 9.4% from the prior month and nearly 21% from last year.
The housing market is clearly benefiting from what looks to be a sustained period of low mortgage interest rates that are hovering at or below 3%.
We expect to continue to benefit from this lower longer interest rate environment and the secular demand for housing cars.
Carpet continues to see market share to hard surface flooring.
79% of the $123 million occupied housing units in the United States were built before 1999, which is a lot of homes that need to be invested in and maintain and flooring is a great way to improve the look of a home and increase the value millennials the nation's largest pop adult population at 72.
Point $1 million now outnumber baby boomers and they're entering their prime household formation years. This demographic trend is contributing to the demand for housing exceeding supply and is partly responsible for the home price appreciation we continue to experience.
The COVID-19 pandemic has also impacted consumer behavior home.
Homeowners are undertaking projects to re purpose and personalize their homes to work learn exercise and play the combination of homeowners nesting a high savings rate low interest rates rising housing demand rising housing values have.
Homes that are aging and the preference for hard surface flooring is a great backdrop for our industry and our company collectively these factors among others leave us optimistic about the remainder of 2020 and the long term opportunity ahead of us.
We are also pleased to announce today that Ryan Marshall CEO of Pultegroup Canyon, Scarlett Chief Human Resources Officer at Best buy and Charles Young Executive Vice President and Chief operating officer of invitation homes have been appointed to Florida cores Board of directors effective January one.
First 2021.
We are thrilled to welcome Brian can meet and Charles to our board.
They are outstanding executives with broad operational commercial and strategic expertise that we believe will assist us in our growth plans there.
They will also add diverse perspectives and skills to our board discussions.
We also announced that John Roth, Chief Executive Officer of Freeman Spogli, Rachel lead partner at the private equity group of areas Management Corporation, and Brad Bricco partner of Freeman Spogli have resigned from our board effectively the same time, we want to thank John Rachel Brad for the extra extra ordinary contribution.
The Florida core over the last 10 years now.
Let me close by saying that our strong fiscal 2023rd quarter earnings are the direct result of our associates responding tirelessly to the surging demand and cross functional collaboration of our teams.
Our entire executive leadership team I would like to thank them for their hard work and dedication to serving our customers I will now turn the call over to Trevor to discuss in more detail our third quarter financial results.
Thanks, Tom the unique operating environment, we find ourselves in combined with a distinctive business model with a great associates has allowed us to swing from a 50% decline in comparable store sales just a few months ago due to COVID-19 to strong 18.4% growth in third quarter fiscal 2020.
Tom already discussed how pleased we are with our solid third quarter fiscal 2020 sales momentum and a great start to the fourth quarter bundling concentrate my comments on some of the changes among the major line items in our third quarter 2014 income statement.
Balance sheet and statement of cash flows and then discuss our thinking about the remainder of 2020.
Let me begin with our gross margin. We are very pleased that our fiscal 2023rd quarter third quarter gross profit increased 37.8% to 294.600 million driven by a 31.4% increase in total sales and a 200 basis point increase in our gross margin rate to 43% or 41% in the same period last year.
The 200 basis point increase in gross margin rate from the same period last year was primarily due to higher product margin driven by continued enhancements to our merchandising strategies and improved leverage of our distribution center and supply chain infrastructure on higher sales, partially offset by higher clearance markdowns, our natural with apartment.
Turning to our fiscal third quarter 2020 expenses, our third quarter, selling and store operating expenses increased 25.2% to 171.500 million from $137 million in the same period last year and leveraged 130 basis points, our comparable store selling and store operating expenses leveraged 220 basis points from the.
Same period last year.
The improvement in our expense leverage was primarily the result of better than expected, 31.4% growth in total sales that enabled us to experienced outsized leverage and our store fixed and variable payroll expenses.
As well as store operating and occupancy costs.
More specifically the outsize near term expense leverage that is the direct result of our sales exceeding our planned store labor hours as customer demand accelerated.
As we move through the third quarter, we took actions to further accelerate the hiring of more associates to meet the surging demand.
As a result, our payroll hours with better aligned with our sales trend as we exited the third quarter, but they were still below where we think they should be to serve our customers well.
As we continue to add labor hours to meet the demand open more new warehouse stores, our fourth quarter 2020 expense leverage will not look similar to the third quarter fiscal 2020.
Our fiscal 2023rd quarter General and administrative expenses increased 5.5% to 39.300 million from 37.300 million. During the same period last year due to higher depreciation associated with associated with investments as well as our new store support center that we moved into the fourth quarter of 2019 and higher incentive compensation.
Charles.
As a percentage of sales our gene expense rate leveraged 140 basis points to 5.7% to 7.1% during the same period last year.
Excluding the impact of COVID-19, and secondary offering expenses in 2020 and costs associated with our distribution center closure and store support center relocation in 2019, our Genie expense rate leveraged approximately 20 basis points from last year due to our strong sales and lower year over year expenses for travel millimeters.
More details about these adjustments are provided in our third quarter 10-Q, and a reconciliation of GAAP net income to adjusted net income and our third quarter earnings release.
Our fiscal third quarter 2020, pre opening expenses declined 38.6% to $5 million from 8 million to 200000 last year and leverage 90 basis points year over year.
The decline in expenses is primarily the result of the decline in the number of stores that we either open or are preparing to open when combined when compared with the third quarter fiscal 2019.
We opened three new warehouse stores and one small design center in the third quarter of 2012, compared with seven new warehouse stores in the third quarter fiscal 2019.
Our fiscal 2023rd quarter effective income tax rate was 10.4% compared with a negative 39.3% benefit during the same period last year.
Our effective income tax rate is lower than the statutory federal income tax rate of 21% due to recognition of income tax benefits from tax deductions in excess of book expense related to stock option exercises and other discrete items.
Moving to our fiscal 2023rd quarter EBITDA profitability, the 31.4% increase in total third quarter sales, coupled with a 200 basis point increase in our gross margin rate at broad expense leverage drove a record fiscal 2008 third quarter EBITDA profitability.
Third quarter fiscal 2020, adjusted EBITDA increased 86.8% to a record 106.700 million from 57.100 million during the same period last year.
Our adjusted EBITDA margin rate increased 460 basis points to 15.6% from 11% last year.
Our fiscal 2023rd quarter GAAP net income increased 67.8% to $68 million 800000 to $41 million during the same period last year.
Our fiscal 2023rd quarter GAAP diluted earnings per share increased 66.7% to 65 cents to 39 cents per share last year R&D.
Our adjusted third quarter net income increased 111.8% to $59.400 million from 28.100 million last year.
Our adjusted diluted earnings per share increased 107.4% to 56 cents from 27 cents last year.
We ended the third quarter of fiscal 2020, with a 106.400 million diluted weighted average shares outstanding compared with 105.200 million during the same period last year.
Moving to our fiscal 2023rd quarter balance sheet and cash flow statements. We're very pleased that during these unprecedented times, we have been able to maintain a strong balance sheet and have the strongest liquidity position in our company's history to support our growth plans.
As of September 24, 2020, our unrestricted liquidity was 628.500 million.
Consisting of 271 million in cash and cash equivalents and 357.400 million immediately available for borrowing under our ABL facility without violating any covenants.
For the 39 weeks ended September 24, 2020, we generated 269.700 million in operating cash flow of 28.7% increase from the $209 million 600000 in the same period last year.
The increase reflects growth in our fiscal 2020 earnings improvement in our working capital and cash paid for income taxes, the improving our working capital is largely due to the improvement in our inventory productivity from accelerations in ourselves through this year.
Year to date, our fiscal 2020 net inventory grew by 2.9% to $598.500 million from 581.900 million at the end of fiscal 2019, which is below our 12.1% growth in total sales over the same period.
In the third quarter fiscal 2020, our net inventory increased 23.7% to 598.500 million and 484 million during the same period last year.
Which is below our 31.4% growth in third quarter sales.
Our fiscal 2020 capital expenditures for the 39 weeks ended September 24, 2020 declined 22.2% to 109.700 million.
From a 141 million during the same period last year.
The decline is primarily related to the decrease in new stores open or under construction as a result of COVID-19, when compared with the same period last year.
Our strong fiscal 2020 operating cash flow, coupled with lower year over year capital expenditures enabled us to generate 160 million free cash flow for the 39 weeks ended September 24, 2020 or more than double fiscal 2019 free cash flow of 68.600 million during that same period.
Let me now turn to our revised expectations for fiscal 2020 capital expenditures. We now expect fiscal 2012 annual capital expenditures to be approximately 200 million to 208 million, which is slightly more than the 6% increase from our prior expectations of 188 million to $196 million.
Our fiscal 2020 capital spending plans reflect the following growth divestments and will be funded from cash flow from operations and borrowings under our ABL facility.
We plan to open 13 warehouse stores and one small design center in fiscal 2020, we start construction on several stores in the fourth quarter fiscal 2020 that are expected to open in early 2021.
Capital spending associated with these plans is expected to be 132 million to $136 million.
We are investing in existing store remodeling projects and our distribution centers and expected capital spending associated with these projects is expected to be approximately $27 million at $28 million.
We are planning to in large and relocate our Houston distribution center in the second half of 2021, and our expected capital expenditures in 2020 associated with this project to be approximately 19 million to 20 million.
We continue to make investments in our new store support center information technology infrastructure ecommerce and other store support center initiatives to support our growth look for capital spending of approximately 22 million to $24 million to support our growth in new functional areas.
Let me now discuss how we're thinking about the remainder of fiscal 2020 from.
From a macroeconomic perspective, we are cautiously optimistic that the federal reserve's action to inject liquidity into the market and lower interest rates will continue to support the economy and provide a positive housing backdrop as well as consumers nesting and spending less on leisure activities will serve to support growth for the remainder of 2020 and into early 2021.
That said there are still significant uncertainty related to COVID-19, including a rising infections in many markets, which raises concerns of another wave heading into the fall in the winter.
While we are optimistic about the economic recovery and the momentum of our business. We recognize that these business risks remain elevated when we could have the closed stores in certain markets if necessary.
For that reason, we are continuing the practice of not providing specific sales and earnings guidance for fiscal 2020, but we would like to provide some direction as we approach the into fiscal 2020.
Our better than expected third quarter sales growth created outsized selling in store expense leverage as we benefited from the aggressive actions, we took to reduce our cost structure in the second quarter fiscal 2020 due to decode 19 pandemic.
As we exited the third quarter and into the into the fourth quarter. Our expense growth is becoming more balanced with our sales growth and is likely to lead to less expense leverage in the fourth quarter fiscal 2020 that we experienced in the third quarter fiscal 2020.
Consequently, we are planning on strong profit growth in the fourth quarter of fiscal 2020 relative to last year, but we do not anticipate the same rate of outsized profitability, we experienced in the third quarter fiscal 2020.
As a reminder, fiscal 2020 includes a 50 threerd week, which for US means a fourth quarter will include 14 weeks versus a normal 13 weeks, we have in each quarter.
We estimate this additional week will continue to contribute between three to four cents in diluted earnings per share.
The remaining comments about the fourth quarter of 2020 on a comparable 13 to 13 week basis.
Our reported fourth quarter 2019 gross margin benefited from a onetime section 301 tariff refund primarily related to rigid core vinyl of $14 million.
Adjusting last years fourth quarter for this benefit our gross margin rate, we would've been approximately 41%.
Our current expectation is for our fourth quarter fiscal 2012 gross margin rate to increase meaningfully from last year, but less than the 200 basis point increase in the gross margin rate, we experienced in the third quarter fiscal 2020.
In dollars were planning on mid single digit sequential growth and are selling in store operating expenses from third quarter fiscal 2020 for the fourth quarter fiscal 2020, due to a more normalized cost structure and more new stores.
We are planning on meaningful increase in our fiscal 2024th quarter pre opening expenses when compared to the third quarter as we plan to open five new stores in the fourth quarter versus three in the third quarter. Additionally in 2021, we are planning to open the highest number of new stores in any first quarter in our history. As a result, we will incur some of the pre opening expenses for these new too.
In 21 stores in the fourth quarter of 2020.
We expect our general and administrative and interest expense to be about flat with the third quarter fiscal 2020.
We would expect our fourth quarter tax rate to be approximately 23% to 23.7% higher than previously contemplated due to higher net income. This of course does not contemplate any stock option exercises that may benefit our provision for taxes.
We expect our annual depreciation and amortization to be approximately $90 million.
The executive team is incredibly proud of how we performed in 2020, we are a better company than before the pandemic occurred and I would like to thank all of our associates for their great work was that we'd like to turn the call over the operator for questions.
At this time well be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, well confirmations and will indicate your line of questioning queue. You May press star two if you would like to your questions from the queue for participants using speaker equipment enable necessary for you to pick up your handset before pressing the star team.
While we poll for questions.
Our first question comes from the line of.
Credit Suisse. Please proceed with your question.
Hi, Thanks for taking the question congrats on the quarter great results.
I want to talk about the improvement that you spoke to each month of the quarter can you just elaborate on the trends that youre seeing throughout the quarter and how consistent was that improvement across geographies.
And then I guess just related you mentioned the mix shift to the homeowner I think in some of your prepared remarks.
What's going on there if you can elaborate on DIY versus pro that'd be helpful too. Thanks.
Sure. Thank you set this is Tom.
As we as we said in the prepared remarks, each month, we got better.
And we exited at an incredibly strong rate with September being at 20.8%. So.
It really was across all geographies, we've seen the same type of performance.
Across the country.
Very pleased with that and to see that consistency.
Our homeowners strength is definitely good.
That we've talked about in the script and you guys know everyone with all the nesting at home and people re purpose in the space in their homes and people not spending on travel due to COVID-19.
In entertainment and sports and things of that nature that money being put back into the home and we're seeing the homeowners is evidenced in our weekend business.
It's been terrific and consistent consistent across regions. It's just been a lot better than it has historically been getting I'd say just on the homeowner side as we mentioned that.
Our web traffic was up 48% during the quarter. There is a lot of people research our purchase cycle is long in our category and there is a lot of people research and to do projects in the future. So we're really pleased with the tone business.
Okay. So sounds like the leading indicators in the business remains very strong as well.
I wanted to follow up also on the gross margin for the fourth quarter as Trevor I think you just talked about it being up year over year I want to clarify back against that 41% the adjusted.
And then I think you're seeing less it will be up less than the third quarter is any differences to call out there that would be helpful. Thanks.
Yes, I think you got that right. The last year's was abnormally high because of that $14 million benefit we got from the section three or one tariff refund and so the adjusted gross margin last year backing that out is this 41% and so yes that comment was relative to the 41% were assuming a nice gross margin last quarter, we had a 200 basis.
At this point increase in gross margin. So we don't think it's going be that high but as I said in the prepared comments, we think it's going to be up nicely and it's coming from continued product margin, but we're also starting to get fairly significant leverage out of that Baltimore distribution Center you guys will recall in November of last year, we opened that big Baltimore DC and.
And we will get in two benefits one the lapping it on much higher sales and to the domestic transportation costs to about just under a third of our stores is lower because we're now shipping to the mid Atlantic and northeast and the Midwest out of Baltimore versus Savannah, and so that will also give a benefit there so it's pretty balanced between supply chain and product margin.
This is what we're expecting.
Okay, great. Thanks, guys best of luck.
Our next question comes from the line.
Michael Lasser with CBS you May proceed with your question.
Good evening, Thanks, a lot for taking my question Tom.
He mentioned that assisted in focus compare flooring category.
Some other categories. It has been growing a bit slower than seasonally what what other categories within home improvement and the growing.
Can you offer your perspective on on why that might be the case do you think it's related to consumer is helping apprehension about letting installers into their home or the potential need to dislocate during a flooring project and does that bode well into next year, meaning this will have.
Legs to recovery Worldcolor categories might change within the home.
Brought our home business.
Michael the beginning part of your question came on a little blurry.
Larry but I couldn't hear it as well can you just I think I got the gist of it which is.
The the perception of exploring.
The all of home improvement is performing nicely as flooring performing consistent is that the nature of the question.
Yeah, I mean home.
The home depot, and Lowe's, you're Comping up mid to high Twentys.
At home Comped up 40% today, so clearly home to refocus the flooring seems to be doing.
Maybe a little bit below average within the broader housing ecosystem is that because this requires pros to be in a consumers.
It continues to be good.
Sure, Yes, I don't think that has anything to do with it we have not heard.
We talked about the surveys in the last quarterly call.
Consumers are letting professionals into their homes.
Our pros whether it's the pros.
That our ASD and our affiliate program or whether it's the pros that are shopping in our stores and our normalized basis.
They're they're booked they're backed up their backlog is strong.
They're out far before they can get into homes.
Consumers are showing no evidence of of that worry I think that we've tried to do a good job of educating our post early on on how to protect themselves and how to ensure the consumer feels good about letting them into their homes.
And and.
And they are so.
As bad that is the least of our concerns.
Okay.
And.
It seemed like you.
On the gross margin recognize.
Recognizing that your product margins that are you.
You are seeing higher product margins.
Your debt.
So presumably pricing is going up in excess of of costs through this is this a sustainable trend in and should we be modeling.
Stealing gross margins for the next several quarters, given some of what's happening right now.
Michael This is Trevor it's a it's a mix ride the team has done a great job of the assortment.
We called out our decorative accessories is comping above the company average as a higher product margin for us and then with the end each of the categories with the exception of would we called out we're seeing people gravitate towards better best.
And then and then also as I mentioned, we have that Baltimore DC. We opened last year that were getting leverage from this year. So it's the biggest drivers the product margin within the product margin is the better and best driving it and.
And then again the.
In the mix for that is the decorative accessories, which is a higher margin category for us as one of our better performing product product.
Product margins.
Okay. Thank you very much.
Thanks, Matt.
Our next question comes from the line of Steve for digital than High Securities. Please proceed with your question.
Good evening everyone.
Tom you spoke about.
Oh in great detail in your prepared remarks.
But I was hoping you could maybe expand on the commercial initiative right as we think about the regional account managers and how that scaling.
Are you are you leaning into the channel just given the strength in the end market hearing.
Any color on how we should be thinking about the maturation profile. The on that initiative looking out over the next couple of years.
Yeah, we feel good Easter.
We started adding a position called a regional account manager.
Well over a year ago, we now have 21 of them going around the country and we're adding them.
As aggressively currently and we will in the next year. These are managers that are they work with commercial customers that there are unlikely to come into our store or that the orders could be too big for our stores to handle appropriately.
When we started the process we start with just a couple of them to see how will the go again very pleased with what they've been able to bring to the table.
With that done a good job of recruiting some excellent talent to help lead the effort and its a strategy we feel good and we'll continue to work towards we're also excited as I said in my prepared remarks, we're adding two board members that have really good commercial experience and we're looking forward to their insight on how we can penetrate the commercial market and even a more meaningful way in the future.
Thanks, and then just a quick follow up right.
If you think about just the underlying demand in the end market here curious about whether youre seeing anything from a competitive dynamic.
Our people chasing or sort of trying to catch up TSR that late that driving innovation or how.
How do you how would you speak to sort of a separation.
Between App, Andy and and the competitive and the competitive landscape as it relates to sort of driving that product innovation cycle.
Lisa will go ahead and answer that in and out of China.
Yep got it differently.
Yes, if anything apart from vinyl and laminate category, where we've seen a lot of innovation over the last two or three years with wider isn't that any new.
You know Adam the FCC and heavy PC product there has not been at kind of innovation that we have seen out there from a competitive perspective, we think it is a real differentiator for asking it is something that we focus on a lot. We just brought in our new core performance line in the last month or two which is our highest than vinyl which offer is really great.
Features after the customer so that's been something that's been very good for us and we've got more things coming down the Pike. So I would say that from a competitive perspective in our our goal is always to be outfront meeting on the innovation side, especially where it pertains to your ability in those things that the customers are looking for like I said I'll chime in.
The other thing that makes us unique.
When it comes to the competitive landscape and Copa did not slow us down as is our approach to newness within each category that we participate in with our merchants have continued to do product line reviews across the board and bring new products offer opco that we were able to do that virtually and we've got great new stuff hitting the store every day and in this category.
The latest and greatest product innovation from the standpoint of durability is really important and we've done a lot of good work there and I think we are ahead, there, but at a newness is where I think we really continue to widen our gap.
Thank you best of luck.
Thanks.
Although smaller Linda Hello.
Two questions one question Keith will come from Shanghai.
Our last question comes from the line.
All right, let's go to the line security. Thank you for your question.
Our next question comes from the line of Cross Horvers with JP Morgan You May proceed with your question.
Okay.
Thank you good evening, good evening, everyone great quarter.
Can you think.
Seasonally is seasonally it looks looking back to gross margin rate tends to be better in the fourth quarter than the third quarter Im guessing thats mix driven so can you share your thoughts there and related to that with with tariffs I think back on what have you seen in the pricing environment and are you expecting some incremental cross parch pressure gross margin pressure there.
In the fourth quarter relative to Threeq.
Yes, Chris this is Trevor Hello.
Has more to do with the clearance event in Q3 than it does with really mix between Q3 Q4, we have our biggest clearance events of the year in the third quarter.
Thats historically been a lower margin categories as we recover clears the as far as regards to the tariffs. Most of you guys may recall on August 7th the government reinstituted, 25% tariffs on rigid core vinyl water resistant laminates and a few other categories and so we're now again paying 25% tariffs, we didnt know how that was going to happen. So we sort of.
Got ahead.
So we're not really doing a lot of that impact today.
And we're using the same playbook that we used for the two years have been dealing with this we're working with our vendors to see where cost we can take out we're working with our vendors to see where we can move sourcing.
Not a lot in this category currently.
And then there's probably going to be some retail increases and our goal is to monitor and see what's going on in the marketplace and Lisa keeps the surprise them, we're not seeing a lot today, but we would expect as people are starting to fill some of those cost increases that youd like there would be some retail increased because in those two categories today still the vast majority of that product is manual.
Factored out of China.
Got it and then as a follow up understanding you've been chasing labor to catch up with demand, but on the other side, there's probably some sort of onetime ish type expenses, you talked about incentive comp maybe quantify that in any other cove and related expenses or special bonuses, our PCL that that you paid.
Yes, when we when we came into the year. We were obviously accruing we got to Q1, we were incurring much.
Just not knowing how bad coated was so so that actually is a bit of a bit as you may recall, we had a really strong operating margin component in Q1 part of it was because of that and then as the year has progressed on we're actually getting closer to accrual so our incentive comp as a percentage of our total sales is pretty small so it's in the single best small bits.
A range that is impacting us.
No one call I understood investment would have thought I would've thought any big there's no big things, we have investments in consulting and some other things.
Just trying to grow and invest in future strategies, but nothing is very significant relative to our overall sales that we've incurred.
Understood Best of luck. Thank you.
Our next question comes from the line of Seth Basham with Wedbush You May proceed with your question.
Thank you and good afternoon. My question around transportation cost you guys talked that add distribution supply chain leverage in the quarter as those higher transportation Black 13, now again that baked into your product pass on work right now what kind of impact you expect members.
You can argue that if you could help us better understand competitive contract you had and mitigation and skagen He had as it relates to transportation Guy.
Yes, the treasury and we're very fortunate in our supply chain team is done a really good job and locking in long term contracts, both domestically and internationally and that helps us into is one that allows us to get capacity. When when there are certain places is very difficult to get capacity out of just because there's so much demand facing out of Asia. For example, in the nursing capacity can transfer in the states.
So so thats one thing that we can get capacity is an important part other than than too because we do have longer term contracts and the majority of our transportation is going to these contracts. We're not we're not meeting those spot increases today.
Now those contracts come up over the next 12 to 18 months and if the rates stay high we're going to have to deal with that more next year.
But currently because we've got these longer term contracts were not doing those cost increases.
Our next question comes from the line.
Jonathan is key with Jefferies. You May proceed with your question.
Hey, guys next quarter. Thanks for taking my question.
You mentioned in the release, you're pleased with the start to two for Q.
Care to share how October is trending versus september's exit rate.
And said, we're very pleased with the start to the fourth quarter. It's very it's very consistent to the way we exited September.
Our next question comes the line of Simeon Gutman with Morgan Stanley You May proceed with your question.
Thanks, Hi, everyone I wanted to ask I'll make it one question, but with two parts.
First I don't know Trevor I know you were answering chriss question on gross margin.
Is it are you ruling out the possibility that the Q4 gross can't be higher sequentially. This year than Q3 because of those factors or is there still a possibility of an outcome and the second question is.
Even with the tougher start to this year.
It looks like you're still going to do a roughly mid single digit comp. This year and you told us the biggest driver or one of the biggest drivers is housing turnover and I don't know if youve lined up the existing home sales estimates for next year, but they look pretty robust. So I'm curious if next year look normal in your algo I realize it's early for this but.
Just high level or if it can look outsized.
Yeah on the first on the gross margin.
We are planning on growing nicely versus the 41% we had last year.
It'd be very hard to imagine it would get to the through third quarter level that 43%. This is just a very large wait for so.
And then on as we're thinking about next year, where we're in the planning stages now Weve done a lot of work around this were preliminarily thinking about it kind of on a two year basis, because there's so much noise going on right now I do think from a macro perspective, we have a lot of.
Wind at our tails with with all the things that are going with existing home sales and and.
And the second home values are going up and the aging demographics I mean, all those things are going to really beneficial to us.
I think from a longer term perspective, most of you guys probably have read by now in our proxy statement. We have a goal for 2022 to get to $329 million in operating income, which would be a doubling.
Other operating income over three year period from from 2019 to 2022.
I mean, we're still focused on that it's a little harder because we didnt opened 24 stores. This year right. We opened 13.
But thats something thats in our sites and in our goals and we're focused on achieving so we know this year and next year will be a little bit choppy, but as we get to 2022, we still have our eyes set on those goals.
Our next question comes from the line of John Realm, with Gordon Haskett. You May proceed with your question.
Hey, Thanks, good afternoon, taking a step back despite all the volatility on gross margin it looks like you're going to finish the year at or above all time high levels. I think when you look ahead. How are you guys thinking about that trajectory here, particularly as you continue to compound growth at 20% a year and then just as a quick follow Trevor can you just clarify your guidance for us.
For the fourth quarter selling expenses I think you said up mid single digits sequentially.
I just wanted to clarify that.
Yes, I think as we think about the next three years.
Because we have to get back to 20% unit growth next year.
Theres going to be some headwinds on store level SDMA and pre opening expenses right. Just if we're going to open roughly 27 stores next year versus 13 stores, we incur anywhere from 1 million to 2 million five for pre opening so that expense is going to grow at a much faster rate our new stores as we've said for the three years that we've been public.
SDMA as a percentage of sales is roughly 50% higher mid the mid to low thirtys versus low twentys for our more mature stores. So we're we're going to have some deleveraging on the store level SGN a component because we're getting back to 20% unit growth, but we do think we have some some continued margin opportunities as we continue to execute better best as we can.
Can you get leverage out of the supply chain and distribution centers.
Sri damage all those kind of things. We think we can continue to grow scale gross margin and then the corporate side, we have the ability to we think we can leverage the corporate.
Get back to that comment of if you look at our 2019 results to what is the goal for 2022, we don't plan on doubling our sales during that period of time. So we are planning on getting operating margin and EBITDA.
EBITDA margin leverage.
There was another part of that question those okay. It's just a just a clarification on the fourth quarter selling expense.
Yes, I did say sequentially and the reason I you sequentially versus last year is just you know that was.
Pre colder versus post over this analysis postcode environment.
I thought it was more relevant to talk about how we're operating and you've heard me correct. Its sequential from Q3 to Q4 of this year, we didn't hit the mid single digit increase.
Our next question comes from the line of Matt Mcclintock with Raymond James You May proceed with your question.
Hi, good afternoon, everyone and clearly great results, but I have to say that but that's the only one that Tom those are some pretty could board announcement, you made today math effect I never said that.
Before.
The the question I have is one question clearly, but it's if you actually brought up the home demographic and segmentation analysis that you're doing right now and that you're going to get the results I guess and next year early next year and I don't think you talk too much about that on.
I already talked at your stores are pretty segmented the central so can you at least without knowing your hunger give a kind of a sense of.
What that talks about thank you.
Almost yes, so we've been talking for a year or two about our new CRM system sales.
Salesforce and we have been in the pro gasket used parts of it for the last couple of years and what we've been able to get over the last year in all of our data and their connect all of the customer information that we have from all the various touch points that they havent the company and we've climbed all that data and are now starting to be able to use that to understand.
And homeowner versus trying to weigh the demographics in each.
And now we are starting to add just initially.
Okay, personalized messaging and starting to go after where we see opportunity.
It's a little early to reveal guess yet add that we definitely are learning some interesting things about our customers anything that we think will really help us to drive the business forward in the future. So we look forward to sharing that maybe at first quarter meant their discharge I. Just had one thing is having a data is just incredibly useful to us because we missed out.
We have so much more information and then we're using some of that with data scientists didn't correlate what stores were over or underperforming relative to what they should be doing and that gives us a roadmap for the regional team even down to the store level core them to focus on design or poor old pass them on the back because they are exceeding our expectations in those levels and so.
Just we're going to have a whole we are finishing up having this sort of level of information and data that weve never had in our past and information is power. We are going to lead us make better decisions corporately of course, but even down to the region in the store level. So so we're pretty excited about having us and it's just a powerful tool that we have not really had access to in the past.
Our next question comes from the line of David Bellinger with Wolfe Research you May proceed with your question.
Hey, guys, great quarter, and thanks for taking the question.
On average ticket down 50 basis points, a quarter that broker trend of two to three percentage points over the last year or so.
What are you seeing there any type of trade down on lifetime and also maybe just some commentary on the in store design services for customers still engaging that service as much as they were pre co created.
Seen any consumer.
Consumer apprehension, there that ran on potentially higher ticket trend.
So two parts to that question I'll take them both the first part.
About our average ticket and as we said in our prepared comments.
Really a few reasons.
We're a little bit of that.
One is.
You mentioned design services and our design services.
Just getting back up to speed and we were slow we had a lot when we did our flow of our part time associates you have a lot of our designers that are part time and it took a while to get them back into the fold, they're getting here now and our design apartments, or where we want them to be and our designers are engaged in the seven during the during the third quarter that was it took time to get them. There. So we didnt have those big tick.
It's that we always have second.
Secondarily, you've been really aggressive and clearing out some old a sum all of our wood products at our average down a little deployment has gone down that's that's purposeful you've done that to get our new stuff, we get great New wood looks come that they're in now and more on the way and they had to get that clear and then the last part is.
With with the homeowner increase that we're seeing we're seeing the homeowners are attacking a lot of small jobs there when they're naturally at home and they are looking around in there. So they're looking at their backs flash is evidenced and if you look at our Deco Department. It was the best Comping departments during the third quarter and Thats evidenced we think people are nesting they're looking to see there.
Kitchen, or they're working out of their kitchen on conference calls and look up and they see an ugly backslash make changes.
Well backs plus thats a lot less than average tickets in the Bath and so I think the combination of those things are are whats challenge the average ticket but.
But overall I feel good about where we're going in design I feel good about our staffing levels and design that feel good about what we're doing in design as we enter into this quarter.
Our next question comes from the line of Alex Yao with Bank of <unk> Capital markets. You May proceed with your question.
Good evening guys. Thanks for taking my question with the net cash position in mind. In addition of the dry powder you have from the Emile would you be willing to accelerate in the store opening cadence or remodel older stores more rapidly in the coming quarters.
Yeah. This is Trevor I think Tom may have some to add to this.
We are going to be spending on Capex next year as we get this year. We opened 13 stores versus 27 stores. We're also investing more in our stores, we see a nice return wasn't that long ago that our first your new stores were doing $800000 in first year EBITDA now, they're getting close to two and a half million dollars EBITDA and we are getting some of that because the stores just a bigger there.
Better locations, we spend a lot more on inside the outside of the aesthetics of the store.
I mean, we're going to own a few locations.
We've got some areas, where we've got a number of stores very high volume very profitable stores that we think we've got a really good.
Investment in individual locations in the northeast in DC that I talked about we're going to spend some capital that DCDC every single one of those as very detailed ROI associated with it that we think will be well above our cost of capital and.
So we are going to be more aggressive in deploying that capital next year as we get back to 20% unit growth. Yes, you hit most everything I'd add one thing that.
We've been asked FERC for a while we'll be accelerate the growth of our new stores and that that is that's never been a cash decision as much as it's been a cultural decision.
We keep our growth to 20% units, which is a lot of growth that more than most reach most of retail does but that's purposeful culture is very important to us we have a unique culture, it's difficult to run a flaw in the core store, we want to make sure that people are trained to do that in there. Yes, there's a lot of autonomy at the store level to make decisions for their own and that takes time to get them ready to do that so we.
The pace our openings purposely.
Our next question comes from the line of Elizabeth Suzuki with Bank of America. You May proceed with your question.
Great. Thanks, guys.
Koeppen Capex start to rise again in some markets in the top of that the kind of lock down again, how do you think about how that business can perform so I did have to close the gap thinking or learn from your lap around that were bringing in sales.
Around the potential class.
Well I think it depends when we close the stores and the first time.
We really didnt have to close all the stores and taken the curbside delivery, we were classified as a central retail and a lot of the markets that we elected to shut our doors and we we shuttered our doors purpose, we because we wanted to make sure that we can protect our associates, we needed to get the stores ready we needed to get the right protect the product in so that everyone can build it and they needed to learn and.
And as we learned as we got our stores prepared.
He began to reopen so it depends on on.
On the severity of the closure and if its all of retail or essential retails allowed to open.
But if it's a sensor retail about to open we would stay open and and operates where we could effectively serve our professional customers.
And final question comes from the line of Jeff fiber with Baird. You May proceed with your question.
Hey, guys. Thanks for sneaking me in here I just had a follow up on tariffs based on your inventory position and turns.
When do you think you will see the peak pressure point on margin rate.
And it Doesnt sound like Theres would prevent you from expanding gross margins next year, but just wanted to kind of confirm how you're thinking about that thanks.
Yes, I mean it sometime early next year is when were going to start to have to see how that plays itself out.
So I think thats right and I do think that the merchants are.
Great and then they've got ideas on how we where we raise retails.
To deal with that so that the plan is in place we have fantastic systems to get the new base every single day in our inventory position and our margin position us hours eliminate so we watch it very closely.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn the call back over to Mr., Tom Taylor for closing remarks.
Yes, well first side.
I'd like to again, thank all of our associates for all their hard work our associates on the frontline and our associates behind the scenes that are in our store support center.
That are in our distribution centers.
Just excellent execution across the board. It was just an amazing quarter I'd like to thank all of you for your interest in our company and your excellent questions.
We appreciate that and we look forward to talking to you on our next quarterly update thank you.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation have a great rest of your evening.
Okay.
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Yes.
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