Greetings, and Welcome to Floor & Decor Holdings, Inc.'s Q3 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A Q&A 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 Laube, President; and Trevor Lang, Executive Vice President and Chief Financial Officer. Before we get started, I would like to remind everyone of the company's safe harbor language. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risk and uncertainties. Any statement that refers to expectations, projections, or other characterizations of future events, including financial projections or future market conditions, is a forward-looking statement. The company's actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Floor & Decor assumes no obligation to update any such forward-looking statements.
Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company will discuss non-GAAP financial measures as defined by 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.flooranddecor.com. A recorded replay of this call, together with related materials, will be available on our investor relations website. Let me now turn the call over to Tom.
Thank you, Wayne Hood, and thanks to everyone for joining us on our FY Q3 2020 Earnings Conference Call. On today's call, I will discuss the highlights of our strong Q3 , as well as the progress we are 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 Lang will then review our Q3 financial performance and discuss how we are thinking about the remainder of 2020. Then we will open the call for your questions. We are very pleased with our FY 2020 Q3 earnings results, which reflected broad-based accelerating sales momentum, strong earnings flow-through, as well as strong cash generation.
Our FY 2020 Q3 total sales increased 31.4% to $684.8 million from $521.1 million in FY 2019. Our Q3 FY 2020 comparable store sales increased 18.4%, exceeding our expectations. We are very pleased with our Q3 comparable store sales growth exit rate and the start to our Q4. Our year-to-date comparable store sales through the Q3 of FY 2020 are flat with last year, which is a remarkable accomplishment considering COVID-19's impact to our store operations, which began in late March.
Our Q3 adjusted EBITDA meaningfully improved to a quarterly record, $106.7 million, an increase of 86.8% from $57.1 million in the Q3 of FY 2019, and almost one and a half times higher than our annual adjusted EBITDA in FY 2015. Our FY 2020 adjusted Q3 earnings per share increased 107.4% to $0.56 from $0.27 in the Q3 of FY 2019. We ended the Q3 of FY 2020 with no net debt on our balance sheet and remain in the strongest liquidity position in our company's history. 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 Q3 of FY 2020, including new warehouse store openings in Salt Lake City, Utah, and Toms River, New Jersey in FY August, and San Diego, California in September, a small design studio in Dallas, Texas in August. The FY Q3 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 Q3 of FY 2019. As we look forward to the Q4 of FY 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 FY 2020 to 133, an increase of 10.8% from FY 2019. We are very pleased with the performance of our new stores, including those new stores opened in the Q3, as we successfully opened them in 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 FY 2021 after having to temporarily slow our new store growth in FY 2020 due to the COVID-19 pandemic.
We have long wanted to open our new stores in a more balanced cadence throughout the FY, and we believe we'll accomplish this in FY 2021. We also believe the class of 2021 will be a strong class of new stores. Moving on to 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 Q3. On a monthly basis, our comparable store sales increased 15.7% in July, 8%-18% in August, and to 20.8% in September, which led to an 18.4% comp growth in the Q3 of FY 2020.
Adjusting for the impact of Hurricane Dorian in the Q3 of FY 2019, we estimate our FY 2020 Q3 comparable store sales would have increased approximately 17.8%. On a two-year stack basis, our comparable store sales increased 23%. FY 2020 Q3 comparable store transactions increased 18.9%, and comparable store average ticket declined 0.5% from the Q3 of FY 2019. We believe the decline in our comparable store ticket reflects a higher growth from our homeowner versus pro and designer-influenced business, as well as being aggressive in the clearance of discontinued inventory in 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 6 key merchandising categories, our top-performing categories were decorative accessories, laminate/luxury vinyl plank, and natural stone.
That said, there was strong growth across all of our merchandising categories in the Q3 of FY 2020, which is the direct result of our ability to lead the market with differentiated and innovative trend-right products at everyday low prices and having in-stock job lo quantities that homeowners are looking for today. Our 3rd strategic pillar of growth is expanding our connected customer experience. Our FY 2020 Q3 e-commerce sales remained strong, increasing 111.5% from the Q3 of FY 2019 and accounted for 16.6% of our sales versus 10.2% last year. We continue 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 Q3, traffic to our website increased 50% year-over-year.
The combination of changing consumer behavior due to COVID-19, as well as investments we have made to further optimize our website experience and build out our content, leads us to believe our e-commerce performance metrics will continue to be strong. Our stores remain a critical part of our connected customer experience. In the Q3 of FY 2020, 87% of website orders were picked up in our stores. Our fourth pillar of growth rests on the successful investments we are making in our pro and commercial customers. In September, we 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 customer.
We are pleased that over 36,000 pros signed up for the sweepstakes event. The feedback about the event and our virtual webinar training forums was overwhelmingly positive. We believe recognition events like this one 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. PPR pros spend nearly three times more and shop 2.5 x more frequently than non-PPR members. We were pleased that enrollment in our PPR program in the Q3 of FY 2020 increased 30% year-over-year despite the impact of COVID-19. The value of our PPR program is not only measured by growth in PPR members, but also by points earned and redeemed.
In the Q3 of FY 2020, points redeemed increased 70% from last year, validating the value of our PPR program and engagement with our pros. To continue to drive engagement and points earned in the Q4 of FY 2020, we are incentivizing our most loyal pros from the Q3 of FY 2020 with an opportunity to earn Q4 incremental bonus points for growing their sales events relative to their Q3 spend. Our research is clear that the more engaged we get our pros with Floor & Decor, the more wallet share we can obtain, and PPR is just one avenue to do this. As we move into 2021, we will further enhance our PPR program and build on our segmentation and personalization efforts to drive engagement and lifetime loyalty.
We are nearing the completion of updating our homeowner and pro demographic and segmentation information and look forward to sharing the results early next year. Our CRM investment has resulted in a very successful tool as we are learning a lot about not only our pros, but homeowners, which better informs us of who customers are and the strategies we need to implement to obtain more wallet and 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 Q3 of FY 2020 from the Q3 of FY 2019. That is well above the FY 2020 Q1 pre-COVID-19 growth rate of 34.3%.
This was particularly gratifying considering we were not able to quickly return to pre-COVID-19 designer staffing levels, as many were furloughed in the Q2 of FY 2020. It's important to note that our design services are not only important to homeowners but to pros. We believe we have significant runway ahead of us with design services and are focused on building awareness of our services to homeowners and pros, 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 nesting at 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, and sporting events.
This has caused a substantial increase in the savings rate. Fortunately, people are investing those dollars in the home. We are 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. Carpet continues to cede market share to hard surface flooring.
79% of the 123 million occupied housing units in the U.S. were built before 1999, which is a lot of homes that need to be invested in and maintained. Flooring is a great way to improve the look of a home and increase the value. Millennials, the nation's largest adult population at 72.1 million, now outnumber baby boomers, and they are 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. Homeowners are undertaking projects to repurpose 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, homes that are aging, and a 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, Kamy 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 Floor & Decor's Board of Directors, effective January 1st, 2021. We are thrilled to welcome Ryan, Kamy, 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.
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 Lee, partner at the private equity group of Ares Management Corporation, and Brad Brutocao, partner of Freeman Spogli, have resigned from our board effectively at the same time. We wanna thank John, Rachel, Brad for their extraordinary contributions to Floor & Decor over the last 10 years. Let me close by saying that our strong FY 2020 Q3 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 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 Q3 financial results.
Thanks, Tom. The unique operating environment we find ourselves in, combined with a distinctive business model and 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 Q3 FY 2020. Tom already discussed how pleased we are with our solid Q3 FY 2020 sales momentum and our great start to the Q4. I'm gonna concentrate my comments on some of the changes among the major line items in our Q3 2020 income statement, balance sheet, and statement of cash flows, and then discuss how we're thinking about the remainder of 2020. Let me begin with our gross margin.
We are very pleased that our FY 2020 Q3, Q3 gross profit increased to 37.8% to $294.6 million, driven by a 31.4% increase in total sales and a 200 basis point increase in our gross margin rate to 43% from 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 margins 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 to our natural wood department.
Turning to our FY Q3 2020 expenses, our Q3 selling and store operating expenses increased 25.2% to $171.5 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 experience outsized leverage in our store fixed and variable payroll expenses, as well as store operating and occupancy costs. More specifically, the outsized near term expense leverage that is the direct result of our sales exceeding our planned store labor hours as customer demand accelerated.
As we moved through the Q3, we took actions to further accelerate the hiring of more associates to meet the surging demand. As a result, our payroll hours were better aligned with our sales trends as we exited the Q3, 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 and open more new warehouse stores, our Q4 2020 expense leverage will not look similar to the Q3 of FY 2020.
Our FY 2020 Q3 general and administrative expenses increased 5.5% to $39.3 million from $37.2 million during the same period last year due to higher depreciation associated with IT investments as well as our new store support center that we moved into the Q4 of 2019 and higher incentive compensation accruals. As a percentage of sales, our G&A expense rate leveraged 140 basis points to 5.7% from 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 G&A expense rate leveraged approximately 20 basis points from last year due to our strong sales and lower year-over-year expenses for travel, meals, and meetings. More detail about these adjustments are provided in our Q3 10-Q and the reconciliation of GAAP net income to adjusted net income in our Q3 earnings release. Our FY Q3 2020 pre-opening expenses declined 38.6% to $5 million from $8.2 million last year and leveraged 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 opened or are preparing to open when compared with the Q3 of FY 2019. We opened three new warehouse stores and 1 small design center in the Q3 of 2020, compared with seven new warehouse stores in the Q3 of FY 2019. Our FY 2020 Q3 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 book expense related to stock option exercises and other discrete items.
Moving to our FY 2020 Q3 EBITDA profitability, the 31.4% increase in total Q3 sales, coupled with a 200 basis point increase in our gross margin rate and broad expense leverage, drove a record FY 2020 Q3 EBITDA profitability. Q3 FY 2020 adjusted EBITDA increased 86.8% to a record $106.7 million from $57.1 million during the same period last year. Our adjusted EBITDA margin rate increased 460 basis points to 15.6% from 11% last year. Our FY 2020 Q3 GAAP net income increased 67.8% to $68.8 million from $41 million during the same period last year.
Our FY 2020 Q3 GAAP diluted earnings per share increased 66.7% to $0.65 from $0.39 per share last year. Our adjusted Q3 net income increased 111.8% to $59.4 million from $28.1 million last year. Our adjusted diluted earnings per share increased 107.4% to $0.56 from $0.27 last year. We ended the Q3 of FY 2020 with $106.4 million diluted weighted average shares outstanding compared with $105.2 million during the same period last year. Moving to our FY 2020 Q3 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 $628.5 million, consisting of $271 million in cash and cash equivalents and $357.4 million immediately available for borrowing under our ABL facility without violating any covenants. For the 39 weeks ended September 24, 2020, we generated $269.7 million in operating cash flow, a 28.7% increase from the $209.6 million in the same period last year.
The increase reflects growth in our FY 2020 earnings, improvement in our working capital, and cash paid for income taxes. The improvement in our working capital is largely due to the improvement in our inventory productivity from accelerations in our sales trends. Year to date, our FY 2020 net inventory grew by 2.9% to $598.5 million from $581.9 million at the end of FY 2019, which is below our 12.1% growth in total sales over the same period. In the Q3 of FY 2020, our net inventory increased 23.7% to $598.5 million from $484 million during the same period last year, which is below our 31.4% growth in Q3 sales.
Our FY 2020 CapEx for the 39 weeks ending September 24, 2020, declined 22.2% to $109.7 million from $141 million during the same period last year. The decline is primarily related to the decrease in new stores opened or were under construction as a result of COVID-19 when compared with the same period last year. Our strong FY 2020 operating cash flow, coupled with lower year-over-year CapEx, enabled us to generate $160 million in free cash flow for the 39 weeks ended September 24, 2020, or more than double FY 2019's free cash flow of $68.6 million during that same period. Let me now turn to our revised expectations for FY 2020 CapEx.
We now expect FY 2020 annual capital expenditures to be approximately $200 million-$208 million, which is slightly more than the 6% increase from our prior expectations of $188 million-$196 million. Our FY 2020 capital spending plans reflect the following growth investments 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 FY 2020 and start construction on several stores in the Q4 of FY 2020 that are expected to open in early 2021. Capital spending associated with these plans is expected to be $132 million-$136 million.
We are investing in existing store remodeling projects and our distribution centers. Expected capital spending associated with these projects is expected to be approximately $27 million-$28 million. We are planning to enlarge and relocate our Houston distribution center in the second half of 2021. We are expecting capital expenditures in 2020 associated with this project to be approximately $19 million-$20 million. We continue to make investments in our new store support center, information technology infrastructure, e-commerce, and other store support center initiatives to support our growth. We look for capital spending of approximately $22 million-$24 million to support our growth in these functional areas. Let me now discuss how we're thinking about the remainder of FY 2020.
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 is still significant uncertainty related to COVID-19, including a rise in infections in many markets, which raises concerns of another wave heading into the fall and the winter. While we are optimistic about the economic recovery and the momentum of our business, we recognize that these business risks remain elevated, and we could have to close stores in certain markets if necessary.
For that reason, we are continuing the practice of not providing specific sales and earnings guidance for FY 2020, but we would like to provide some direction as we approach the end of FY 2020. Our better than expected Q3 sales growth created outsized selling and store expense leverage as we benefited from the aggressive actions we took to reduce our cost structure in the Q2 of FY 2020 due to the COVID-19 pandemic. As we exit the Q3 and enter the Q4, our expense growth is becoming more balanced with our sales growth and is likely to lead to less expense leverage in the Q4 of FY 2020 than we experienced in the Q3 of FY 2020.
Consequently, we are planning on strong profit growth in the Q4 of FY 2020 relative to last year, but we do not anticipate the same rate of outsized profit growth that we experienced in the Q3 of FY 2020. As a reminder, FY 2020 includes a 53rd week, which for us means the Q4 will include 14 weeks versus the normal 13 weeks we have in each quarter. We estimate this additional week will continue, contribute between $0.03-$0.04 in diluted earnings per share. The remaining comments about the Q4 of 2020 are on a comparable 13 to 13-week basis. Our reported Q4 2019 gross margin benefited from a one-time Section 301 tariff refund, primarily related to rigid core vinyl of $14 million.
Adjusting last year's Q4 for this benefit, our gross margin rate would have been approximately 41%. Our current expectation is for our Q4 FY 2020 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 Q3 of FY 2020. In dollars, we are planning on mid-single-digit sequential growth in our selling and store operating expenses from the Q3 of FY 2020 to the Q4 of FY 2020 due to a more normalized cost structure and more new stores. We are planning on meaningful increase in our FY 2020 Q4 pre-opening expenses when compared to the Q3 as we plan to open five new stores in the Q4 versus three in the Q3.
Additionally, in 2021, we are planning to open the highest number of new stores in any Q1 in our history. As a result, we will incur some of the pre-opening expenses for these new 2021 stores in the Q4 of 2020. We expect our general and administrative and interest expense to be about flat with the Q3 of FY 2020. We would expect our Q4 tax rate to be approximately 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. With that, we'd like to turn the call over to operator for questions.
At this time, we will be conducting a Q&A session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation will indicate your line in the question queue. You may press star two if you would like to remove your question from the queue. If you are using speaker equipment, it may be necessary for you to pick up for hand before pressing the star key. One moment for first question. Our first question comes from the line of Seth Sigman with Credit Suisse. You may proceed with your question.
Guys, thanks for taking the question and congrats on the quarter. Great results. I wanted to talk about the improvement that you spoke to each month of the quarter. Can you just elaborate on the trends that you were seeing throughout the quarter and how consistent was that improvement across geographies? 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 could elaborate on DIY versus pro, that'd be helpful too. Thanks.
Sure. Thank you, Seth. This is Tom. As we said in the prepared remarks, each month we got better. We exited at an incredibly. People repurposing the space in their homes and people not spending on travel due to COVID-19 and entertainment and sports and things of that nature, that money's being put back into the home. We're seeing the homeowners, as evidenced in our weekend business. It's been terrific, and, you know, consistent across regions. It's just been a lot better than it has historically been. The other thing I'd say, just on the homeowner side is we mentioned that, you know, our web traffic was up 48% during the quarter. There is a lot of people researching.
You know, our purchase cycle is long in our category, and there is a lot of people researching to do projects in the future. We're really pleased with the tone of business.
It sounds like the leading indicators in the business remain very strong as well. I wanted to follow up also on the gross margin for the Q4. Trevor, I think you just talked about it being up year-over-year. I wanna clarify that's against that 41%, the adjusted. I think you're saying less it would be up less than the Q3. Just any differences to call out there, that would be helpful. Thanks.
I think you got that right. The last year's was abnormally high because of that $14 million benefit we got from the Section 301 tariff refund. The adjusted gross margin last year backing that out is 41%. Yes, that comment was relative to the 41%. We're assuming a nice gross margin. Last quarter, we had a 200 basis point increase in gross margin. We don't think it's going to be that high, but we, as I said in the prepared comments, you know, we think it's going to be up nicely. 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, D.C., and we're getting two benefits. One, we're lapping it on much higher sales. Two, the domestic transportation costs to about just under a third of our stores is lower because we're now shipping, you know, to the Mid-Atlantic, the Northeast and the Midwest out of Baltimore versus Savannah. That, we're also getting a benefit there. It's pretty balanced between supply chain and product margins is what we're expecting.
Okay, great. Thanks, guys. Best of luck.
Our next question comes from the line of Michael Lasser with UBS. You may proceed with your question.
Good evening. Thanks a lot for taking my question. Tom, you mentioned that the home has just been in focus. If you compare the flooring category to some other categories, it has been growing a bit slower than seemingly what other categories within home improvement have been growing. Can you offer your perspective on why that might be the case? Do you think it's related to consumers having apprehension about letting installers into their home or the potential need to dislocate during a flooring project? Does that bode well into next year, meaning this will have legs to a recovery, whereas other categories might fade within the home broader home business?
Michael, the beginning part of your question came out a little blurry. Not blurry, but I couldn't hear it as well. Can you just I think I got the gist of it, which is the, you know, the perception of is flooring, you know, the all of home improvement is performing nicely. Is flooring performing consistent? Is that the nature of the question?
Yeah. I mean, you know, Home Depot and Lowe's are comping up mid to high twenties. The at home could comp to 40% today. Clearly, home's in focus, flooring seems to be doing, you know, maybe a little bit below average within the broader housing ecosystem. Is that because this requires pros to be in a consumer's home?
You know.
for them to be this-
Sure. I don't think that has anything to do with it. We have not heard. You know, 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 are in our affiliate program or whether it's the pros that are shopping in our stores on a normalized basis, 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 that worry. I think that, you know, we try to do a good job of educating our pros early on how to protect themselves and how to ensure the consumer feels good about letting them into their homes.
They are. You know, that is the least of our concern.
Right. It seems like, you know, on the, on the gross margin, you know, recognizing that you're seeing higher product margins. Is that presumably pricing is just going up in excess of cost. Is this a sustainable trend, and should we be modeling expanding gross margins for the next several quarters given some of what's happening right now?
Yeah, Michael, this is Trevor. It's a mix, right? The team has done a great job on the assortment. You know, we called out our decorative accessories as, you know, comping above the company average. That's a higher product margin for us. With the in each of the categories, with the exception of wood we called out, you know, we're seeing people gravitate towards better, best. Also as I mentioned, you know, we have that Baltimore, D.C. we opened last year that we're getting leverage from this year. The biggest driver is the product margin. Within the product margin, it's the better and best driving it.
The within the mix to that is the decorative accessories, which is a higher margin category for us, is one of our better performing, product margins.
Okay. Thank you very much.
Thanks, Michael.
Our next question comes from the line of Steven Forbes with Guggenheim Securities. You may proceed with your question.
Good evening, everyone. Tom, you spoke about Pro in great detail in your prepared remarks. I was hoping you could maybe expand on the commercial initiative, right? As we think about the regional account managers and how that's been scaling, you know, are you leaning into the channel just given the strength in the end market here? Any color around how we should be thinking about the maturation profile behind that initiative looking out over the next couple years?
Yeah, we feel good. We started adding a position called a regional account manager a little over a year ago. We now have 21 of them going around the country, and we're adding them aggressively currently, and we will in the next year. These are managers that are they work with commercial customers that are unlikely to come into our store or that the orders could be too big for our stores to handle appropriately. You know, when we started the process, we started with just a couple of them to see how it would go. Again, very pleased with what they've been able to bring to the table.
We've done a good job of recruiting some excellent talent to help lead the effort, and it's a strategy we feel good and will 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 in an even more meaningful way in the future.
Thanks. Just a quick follow-up, right? You think about just the underlying demand in the end market here. You know, curious about whether you're seeing anything from a competitive dynamic. I mean, are people chasing or sort of trying to catch up to you as far as it relates to driving innovation? You know, how would you speak to sort of a separation between F&D and the competitive landscape as it relates to sort of driving that product innovation cycle?
Sure. Lisa will go ahead and answer that, and then I'll chime in.
Okay.
Go ahead.
Yeah. This is Lisa. The, you know, it's interesting, apart from the vinyl and laminate categories where we've seen a lot of innovation over the last two or three years, with water resistant and the new, you know, the SPC and WPC product. There has not been a ton of innovation that we have seen out there from a competitive perspective. We think it is a real differentiator for us, and it is something that we focus on a lot. We just brought in our new NuCore Performance line in the last month or two, which is our highest end vinyl, which offers really great features for the customer. That's been something that's been very good for us, and we've got more things coming down the pike.
I would say that from a competitive perspective, you know, our goal is always to be out front and leading on the innovation side, especially, where it pertains to durability and those things that the customers are really looking for.
Like I said, I'll chime in. The other thing that makes us unique when it comes to the competitive landscape and COVID did not slow us down, is our approach to newness within each category that we participate in.
Yes.
Our merchants have continued to do product line reviews across the board and bring new products all throughout COVID. We were able to do that virtually, and we've got great new stuff hitting the store every day. In this category, the latest and greatest, you know, 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. In newness is where I think we really continue to widen our gap.
Thank you. Best of luck. Stay safe.
Thanks.
As a small reminder, please remind to constrain to one question due to some time constraints. Our next question comes from the line of Steven Forbes with Guggenheim Securities. Thank you for your question. Our next question comes from the line of Christopher Horvers with JP Morgan. You may proceed with your question.
Thank you. Good evening, everyone. Great quarter. You know, seasonally is, seasonally looking back, gross margin rate tends to be better in the Q4 than the Q3. I'm guessing that's mix driven. Can you share your thought there? Related to that, with tariffs, I think back on, what have you seen in the pricing environment? Are you expecting some incremental gross margin pressure there in the Q4 relative to 3Q?
Yeah, Chris, this is Trevor. It has more to do with the clearance event in Q3 than it does with really mix between Q3 and Q4. We have our biggest clearance event of the year in the Q3. That's historically been a lower margin category, as you know, we have our clearance event. 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 laminate, and a few other categories. We're now again paying 25% tariffs. We didn't know how that was gonna happen, so we sort of bought ahead. We're not really feeling a lot of that impact today.
We're using the same playbook that we've used for the two years we've been dealing with this. We're working with our vendors to see what costs we can take out. We're working with our vendors to see where we can move sourcing. Not a lot in this category currently. Then there's probably gonna be some retail increases. Our goal is to monitor it and see what's going on in the marketplace. You know, Lisa keeps us apprised, and we're not seeing a lot today, but we would expect as people are starting to feel some of those cost increases, that you likely would see some retail increases because in those two categories today, still, the vast majority of that product is manufactured out of China.
Got it. 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 one-timish type expenses. You talked about incentive comp, maybe quantify that and any other COVID related expenses or special bonuses or PTO that you paid.
Yeah. You know, when we came into the year, we were obviously accruing. We got to Q1, we weren't incurring much, just not knowing how bad COVID was. That actually was a bit of a benefit. You may recall we had a really strong operating margin component in Q1. Part of it was because of that. As the year has progressed on, you know, we're actually getting closer to accrual. Our incentive comp as a percentage of our total sales is pretty small, so it's in the single bips, small bips range that it's impacting us.
I wouldn't call it.
I'm sorry. That's cool.
I wouldn't call it any big. There's no big things. We have invested in some consulting and some other things, as we, you know, just trying to, you know, grow and invest in future strategies, but nothing with very significant relative to our overall sales that we've incurred.
Understood. That's cool. Thank you.
Our next question comes from the line of Seth Basham with Wedbush Securities. You may proceed with your question.
Thank you, and good afternoon. My question's around transportation costs. You guys talked about distribution supply chain leverage in the quarter. As those higher transportation costs that we're seeing now get baked into your product costs and work their way through the P&L, what kind of impact are you expecting on gross margin? Related to that, if you could help us better understand the types of contracts you have and mitigation strategies you have as it relates to transportation costs.
This is Trevor again. We're very fortunate. Our supply chain team has done a really good job of locking in long-term contracts both domestically and internationally. That helps us in two ways. One, it allows us to get capacity when there are certain places it's very difficult to get capacity out of just because there's so much demand. You know, things coming out of Asia, for example, there's some capacity constraints here in the States. That's one thing is, A, we can get capacity, is an important part of it. Two, because we do have longer-term contracts and the majority of our transportation is going through those contracts, we're not feeling those spot increases today.
Now those contracts come up over the next 12 to 18 months, and if the rates stay high, we're gonna have to deal with that more next year. Currently, because we've got these longer-term contracts, we're not feeling those cost increases.
Our next question comes from the line of Jonathan Matuszewski 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 Q4 . Care to share how October is trending versus September's exit rate?
I said we're very pleased with the start to the Q4. It's very, very consistent to the way we exited September.
Our next question comes from the line of Simeon Gutman with Morgan Stanley. You may proceed with your question.
Thanks. Hey, everyone. I wanted to ask I'll make it one question, but with two parts. First, I don't know, Trevor Lang, I know you were answering Chris Horvers's question on gross margin. 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? The 2nd question is, even with the tougher start to this year, it looks like you're still gonna do a roughly mid-single digit comp this year. You told us, you know, the biggest driver or one of the biggest drivers is housing turnover. I don't know if, you know, you've lined up the existing home sales estimates for next year, but they look pretty robust.
I'm curious if next year could look normal in your algo. I realize, you know, it's early for this, but just high level or if it can look outsized.
Yeah. On the first one on the gross margin, we are planning on it growing nicely versus the 41% we had last year. It'd be very hard to imagine it would get to the Q3 level. That 43% is a, you know, just a very large rate for us. Then as we're thinking about next year, you know, we're in the planning stages now. We've done a lot of work around this. We're 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 all the things that are going with existing home sales and the fact that home values are going up and, you know, the aging demographics. I mean, all those things are gonna be beneficial to us. I think from a longer term perspective, most of you guys probably have read by now in our proxy statement, we had a goal for 2022 to get to $329 million in operating income, which would be a doubling of our operating income over a three-year period from 2019 to 2022. We're still focused on that. It's a little harder because we didn't open 24 stores this year.
We opened 13. That's something that's in our sights and in our goals, and we're focused on achieving. We know this year and next year will be a little bit choppy, but as we get to 2022, you know, we still have our eyes set on those goals.
Our next question comes from the line of Charles Grom with Gordon Haskett. You may proceed with your question.
Hey. Thanks. Good afternoon. You know, taking a step back, despite all the volatility, gross margins look like they're gonna finish the year, you know, at or above all-time high levels. I think when you look ahead, how are you guys thinking about the trajectory here, particularly as you continue to compound growth at 20% a year? Just as a quick follow-up, Trevor, can you just clarify your guidance for the Q4, selling expenses? I think you said up mid-single digits sequentially. I just wanted to clarify that.
I think as we think about the next three years, because we're gonna get back to 20% unit growth next year, you know, there's going to be some headwinds on store-level SG&A and pre-opening expenses, right? Just if we're gonna open roughly 27 stores next year versus 13 stores, you know, we incur anywhere from $1.2 million to $1.5 million for pre-opening. That expense is gonna grow at a much faster rate. Our new stores, as we've said, for the three years that we've been public, their SG&A as a percentage of sales is roughly 50% higher, you know, mid- to low 30s versus low 20s for our more mature stores.
We're going to have some deleveraging on the store level SG&A component because we're getting back to 20% unit growth. We do think we have some continued margin opportunities as we continue to execute Better Best, as we continue to get leverage out of the supply chain and the distribution centers, shrink damage, all those kind of things, we think we can continue to grow gross margin. The corporate side. You know, we have the ability that we think we can leverage some corporate. Again, 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.
You know, we are planning on getting operating margin and EBITDA margin leverage. There was another part of that question.
I think that was it.
Okay.
Just a clarification on the Q4 selling expense.
Yeah, I did say sequentially. The reason I used sequentially versus last year is just, you know, that was, you know, pre-COVID versus post-COVID. Now that we're in this post-COVID environment, I thought it was more relevant to talk about how we're operating. You heard me correct, it's sequential from Q3 to Q4 this year, we think it's a mid-single digit increase.
Cool. I have to say this, I guess I'm the only one, but Tom, those are some pretty good board announcements you made today, I have to say.
Thank you.
I've never said that before. The question I have is I know it's one question, clearly, but it's just you actually brought up the home demographic and segmentation analysis that you're doing right now, and that you're going to give the results of, I guess, in next year, early next year. I don't think you talked too much about that. I already thought that your stores were pretty segmented, decentralized. Could you at least, without stealing your thunder, give us kind of a sense of what that topic's about? Thank you.
Tom, over to you.
Yeah. We've been talking for a year or two about our new CRM system, it's Salesforce. We have been You know, the pro desk have used parts of it for the last couple of years. What we've been able to do over the last year is put all of our data in there, connect all of the customer information that we have from all the various touch points that they have with the company, and we've cleansed all that data and are now starting to be able to use that to understand homeowner versus pro, what are the demographics of each. Now we're starting to just initially to personalize messaging and starting to go after where we see opportunities.
It's a little early to reveal just yet, but we definitely are learning some interesting things about our customers and things that we think will really help us to drive the business forward in the future. We look forward to sharing that, maybe Q1.
Matt, this is Trevor, I'd just add one thing is, having that data is just incredibly useful to us because now we have so much more information. We're using some of that with data scientists to then correlate what stores are over or underperforming relative to what they should be doing. That then gives us a roadmap for the regional team and even down to the store level for them to focus on design or pro or pat them on the back because they're exceeding our expectations in those levels.
Just we're gonna have a whole We are finishing up having just a level of information and data that we've never had in our past, and information is power, and we're gonna be able to use that to make better decisions corporately, of course, but even down to the region and the store level. We are pretty excited about having this, and it's just a powerful tool that we've 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. Just on average ticket down 50 basis points this quarter, that broke a trend of, you know, up 2% to 3% points over the last year or so. What are you seeing there? Any type of trade down on the DIY side? Also maybe just some commentary on the in-store design services. Are customers still engaging that service as much as they were pre-COVID? Or have you seen any, you know, consumer apprehension there that's weighing on potentially higher ticket trends?
Yeah. There's two parts to that question. I'll take them both. The first part, about our average ticket, as we said in our prepared comments, really a few reasons for a little bit of that. You know, one is, you mentioned design services, and our design services are just getting back up to speed. We were slow. We had a lot, when we did a furlough of our part-time associates, we 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 appointments are where we want them to be, and our designers are engaged in the sale.
During the Q3, it took time to get them there, so we didn't have those big tickets that we always have. Secondarily, we've been really aggressive in clearing out some old of our wood products, so our average sale on our wood department has gone down. That's purposely. We've done that, you know, to get our new stuff. We've got great new wood, looks come They're in now and more on the way, and we had to get that clear. The last part is, you know, with the homeowner increase that we're seeing, you know, we're seeing the homeowners are attacking a lot of small jobs.
You know, when they're nesting at home and they're looking around and they're, you know, they're looking at their backsplash, as evidence in. If you look at our deco department, it was the best-comping department during the Q3. That's evidence that, you know, we think people are nesting. They're looking, they're sitting in their kitchen, they're working out of their kitchen, they're on conference calls, they look up and they see an ugly backsplash and they change it. When you sell a backsplash, that's a lot less than average ticket than a bathroom. I think combination of those things are what's challenged the average ticket. You know, but overall, I feel good about where we're going in design. I feel good about our staffing levels in design.
I feel good about what we're doing in design as we enter into this quarter.
Our next question comes from the line of Alex Maroccia with Berenberg Capital Markets. You may proceed with your question.
Evening, guys. Thanks for taking my question. With the net cash position in mind, in addition to the dry powder you have from the ABL, would you be willing to accelerate the store opening cadence or remodel older stores more rapidly in the coming quarters?
Yeah, this is Trevor. I think Tom may have something to add to this. We are gonna be spending a lot more on CapEx next year as we get, you know, this year we opened 13 stores versus 27 stores. We're also investing more in our stores. We've seen a nice return. You know, it wasn't that long ago that our first year new stores were doing $800,000 in first year EBITDA. Now they're getting close to $2.5 million in EBITDA, and we're getting some of that because the stores just are bigger. They're in better locations. We spend a lot more on the inside and the outside of the aesthetics of the store. We're gonna 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. Our Houston DC that I talked about, we're gonna spend some capital on that Houston DC. Every single one of those has a very detailed ROI associated with it that we think is gonna be well above our cost of capital. We are gonna be more aggressive in deploying that capital next year as we get back to 20% unit growth.
Yeah. You hit mostly everything. I'd add one thing that, you know, we've been asked for a while, would we accelerate the growth of our new stores? That is, that's never been a cash decision as much as it's been a cultural decision. You know, we keep our growth to 20% units, which is a lot of growth that more than 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 Floor & Decor store. We wanna make sure that people are trained to do that, and they're, you know, they have 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.
We pace our openings purposefully.
Our next question comes from the line of Elizabeth Suzuki with Bank of America. You may proceed with your question.
Great. Thanks, guys. I guess as COVID cases start to rise again in some markets and there's talk about potential lockdown again, how do you think about how the business could perform if stores did have to close again? What do you think you learned from the last go around that you would bring into, you know, a second round of potential closures?
Well, I think it depends. You know, when we closed the stores in the first time, we really didn't have to close all the stores and take them to curbside delivery. We were classified as essential retail in a lot of the markets that we elected to shutter our doors, and we shuttered our doors purposefully because we wanted to make sure that we could protect our associates. We needed to get the stores ready. We needed to get the right protective product in, so that everyone could feel good, and we needed to learn. As we learned and as we got our stores prepared, we began to reopen. You know, it depends on the severity of the closure and if it's all of retail or essential retail's allowed to open.
If it's essential retail, allowed to open, we would stay open and operate so that we could effectively serve our professional customers.
The final question comes from the line of Justin Kleber with Baird. You may proceed with your question.
Yeah. Hey, guys. Thanks for sneaking me in here. Just had a follow-up on tariffs. And based on your inventory position and turns, when do you think you will see the peak pressure point on margin rate? It doesn't sound like tariffs would prevent you from expanding gross margins next year, but just wanted to kind of confirm how you're thinking about that. Thanks.
Yeah. I mean, sometime early next year is when we're going to start to have to see, you know, how that plays itself out. I think that's right. I do think that the merchants are great, and they've got ideas on how and where we raise retails to deal with it. The plan is in place. We have fantastic systems to get the new base, you know, every single day from our inventory position and our margin position as to how we're doing, 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 this call back over to Mr. Tom Taylor for closing remarks.
Well, first I'd like to again thank all of our associates for all the hard work, our associates on the front line and our associates behind the scenes that are in our store support center and that are in our distribution centers. It's 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.