Earnings Call: Q2 2020

Jul 30, 2020

Welcome to Fluor and Decor Holdings, Inc. 2nd Quarter 2020 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. It is now my pleasure to introduce your host, Wayne Hood, Vice President of Investor Relations. Thank you. You may begin. Thank you, operator, and good afternoon, everyone. Joining me on our earnings conference call today are Tom Taylor, Chief Executive Officer Lisa Laube, President and Trevor Lang, Executive Vice President and Chief Financial Officer. Before we get started, I would like to remind everyone of the company's Safe Harbor language. Comments made during this conference call and webcast contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions, is a forward looking statement. The company's actual future results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its SEC filings. Floor and 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, and thanks to everyone for joining us on our Q2 2020 earnings conference call. On today's call, I will discuss some of the highlights of our Q2 2020 earnings results and then discuss how we are positioned to further grow our market share of the estimated $22,000,000,000 hard surface flooring industry in 2020 beyond. Trevor will then discuss our 2nd quarter results in more detail and how we are thinking about the second half of twenty twenty. Looking back over the past several months, I am glad we made the voluntary decision to close our stores to the public in late March and pivot to curbside pickup only as the COVID-nineteen pandemic was escalating. This time allowed us to make numerous changes in safety protocols and to implement public healthcare guidelines that are essential to making our stores safer in the current environment. We believe our large 76,000 square foot stores with 9 to 15 foot wide aisles uniquely position us in the market. Add to that the millions we have spent on personal protective equipment, plexiglass separation, training and taking care of our affected associates with COVID-nineteen pay, and we believe our teams have done an excellent job creating a safer environment for our pro and do it yourself customers. It is obvious COVID-nineteen is not going away anytime soon, but all the changes we have implemented gives me confidence we can operate in a much safer store environment as long as COVID-nineteen is with us. Because of the pandemic, people are spending a lot more time in their homes and not spending as much on travel, eating out and other entertainment. The combination of these two phenomenas has people investing in their homes. Floor and Decor is in a great position to serve them with visually inspiring stores and website, innovative assortments, everyday low prices and in stock job lock quantities as consumers search for the best value and current trends. Also, our aggressive efforts to lower cost in the short term along with adding $75,000,000 of additional Term B loan, the majority which is not due until 2027 has fortified an already strong balance sheet and we now have the best liquidity in our company's history. This positions us to withstand this period of uncertainty, while at the same time continuing to make important investments to support our long term growth goals. I believe our future is bright. Looking more specifically at our Q2 results, we opened 2 new warehouse stores in the Q2 of 2020, 1 in Novi, Michigan and 1 in Elizabeth, New Jersey. The 2nd quarter openings brought the total number of warehouse stores that we operate to 125 stores, up 18% from 106 warehouse stores at the end of the Q2 2019. Looking at the Q3 of 2020, we have already opened our 3rd store in Salt Lake City area and our 1st small store design studio in Dallas, Texas. We also have plans to open a new store in Poms River, New Jersey in August and San Diego, California in September as we further build out and scale our stores nationwide. Despite the new store development headwinds caused by COVID-nineteen, we are pleased with our planned 2020 new store openings, which now include 13 new warehouse stores, up from our most recent estimate of 11 stores. As we look to 2021, we are committed to returning to 20% new store growth and excited about the new store pipeline. In addition, we expect to achieve more balanced cadence of openings throughout 2021. As we have discussed, we are taking partnership approach with our landlords and are encouraged that our landlords recognize that we are one of the few retailers that have plans to open stores over the long run. We are already seeing real estate opportunities that we believe are better than before the pandemic started. Moving on to our comparable store sales. Our 2nd quarter comparable store sales declined 20.8% due to COVID-nineteen and the associated declining transactions caused by our store closures, not allowing customers into our stores throughout much of the quarter and reducing operating hours. Comparable store transactions declined 22.3 percent and our comparable store average ticket increased 2%. Consistent with previous quarters, our best performing category continues to be laminate luxury vinyl plank. On a monthly basis, our comparable store sales were down 50.8% in April, but improved to a 26.1% decline in May and a positive 7.7% in June. We are pleased with the positive June comparable store sales increase, but since we started opening our stores to the public on different dates throughout the Q2, this number doesn't fully explain the strength of our comparable store sales. When we measure our comparable store sales from the day each store opened to the public until the end of the second quarter against the same time period for those stores in 2019, that comparable store sales increase would be 8.6%. And for fiscal June, using the same metric, those stores opened to the public had a comparable stores increase sales increase of 10.2%. Our 3rd quarter comparable store sales to date have accelerated to 16%. The sequential improvement is the direct result of our flexible business model where we were able to quickly convert from our curbside pickup model to fully reopening all of our stores by early June. Our e commerce and connected customer strategies allowed us to remain engaged with our customers, particularly on their mobile devices when our stores were closed to the public. As a result, we were able to retain a significant amount of sales as our stores were closed or operating with reduced operating hours. Our 2nd quarter e commerce sales increased 192% and accounted for 33% of our sales compared to 10% during the same period last year. At its peak, e commerce accounted for 64% of its sales. During this peak period, we saw over 90% of orders picked up at the stores as we were able to offer curbside pickup. As our stores have reopened, we have seen our e commerce sales penetration rate moderate to 17% to 18%. It remains well above the 12% penetration rate experienced prior to the impact of COVID-nineteen. We experienced strong traffic growth in organic and paid search as well as direct traffic, which drove our strong overall traffic. We believe the strong growth in traffic reflects consumers' interest in flooring projects as home values continue to rise, population densification emerges in certain markets and spending dollars shift from travel and entertainment to affordable home improvement projects. As we have discussed, the average household income among our customer demographic group is between $100,000 $125,000 giving them more discretionary income to explore foreign projects. Our internal survey in late April showed very few customers canceling projects or even postponing projects. As we continue to make website optimization upgrades and further build out content, we expect all of our e commerce growth and performance metrics will continue to improve, leading to a sustained higher level of e commerce sales penetration than prior to the impact of COVID-nineteen. We also have made several successful tactical decisions to grow our market share and build our brand loyalty with our pros that we believe will have long lasting benefits. 1st, our pro teams reached out to our top pros via wellness phone calls, emails and text messages to make them aware that we were there for them and could arrange select pickup appointments to serve their needs to complete ongoing and new projects. The teams made them aware of the benefits of using our Pro app, which includes the ability to build a quote, search in stock inventory and quickly check out. The feedback from our pros was overwhelmingly positive and we were very pleased with how we drove engagement. 2nd, we temporarily increased our Pro Premier Rewards points incentives in May to a maximum of 4 times based on spending levels. The increase in incentives not only provided needed support to our pros during these challenging times, it led to an increase in average spend. The average spend for a Pro Premier Rewards Pro is almost 3.5 times more than a non Pro Premier Rewards Pro. We continue to see constant quarter over quarter growth in points earned, points redeemed and engagement. It is clear to us that our top pros that are enrolled in Pro Premier Rewards are engaged with us and we have the ability to influence their behavior and spend through targeted initiatives that we will build on in 2021. We extended our 18 month no interest credit card offering through May 31, which gave our pros and do it yourselfers an additional line of liquidity for projects. In late June, we launched our pro business credit card in partnership with Alliance Data Services, which should be fully rolled out to all of our stores by the end of Q3 of 2020, further building on our value proposition. We are excited about the features that this card will offer our Pros, including but not limited to 180 day no interest payment plan that is more compelling than the industry standard terms of 30 to 60 days. Over time, we expect to tie the usage of this card with our Pro Premier Rewards program. As many of you know, free design services is a pillar of growth at Floor and Decor. As part of this service, we accelerated the launch of virtual design appointments into the Q2 of 2020 and are excited about the role virtual design appointments are playing during the COVID-nineteen pandemic. We have had over 8,000 appointments since its launch. By providing this free live virtual video and chat experience, we expand our ability to connect and collaborate with customers that are contemplating a flooring project, but maybe social distancing in response to the COVID-nineteen pandemic or just for the ease of starting the project at their homes first with a cloud based video conference. This strategy leverages our website resources, including our room visualizer and our My Order Quote Builder and allows our designers to connect with customers while maintaining social distancing guidelines. Importantly, over 70% of appointments are still going into our stores, which reinforces the importance that our stores play in the purchase decision. While the COVID-nineteen pandemic has created significant challenges, there are important lessons that we will carry forward that are leading us to adopt the new processes. Notably, we have learned how we can engage with our customers in different ways that are faster and easier that we believe will further build our brand loyalty. Specifically, we know our top pros embrace our concierge curbside and pickup service that is fast and efficient. Virtual design appointments have proven to be an important engagement tool that will continue to grow for years to come. Internally, we are doing more remote training and using virtual product line reviews. We will be using virtual technology to do more management store locks, a process that we believe will be long lasting. We are seeing more benefits of teleworking for certain store support function groups that we can carry into next year and beyond, potentially leading to less required office space. From a macro perspective, we are cautiously optimistic that the Federal Reserve's actions to inject liquidity into the market and lower interest rates to support the economy and housing will serve to support growth in the second half of twenty twenty and into twenty twenty one. That said, there is still significant uncertainty that most recently comes from an increase in COVID-nineteen infections in certain markets, which raises 2nd wave risks into the fall. For that reason, we are cautiously optimistic, but recognize business risks remain elevated and that we could have to close stores in certain markets if necessary. Nonetheless, we remain focused on maintaining the flexible business model and we'll continue to look for ways to engage with our customers in different ways. Before closing, I would just like to take a moment to discuss how we are thinking about diversity and inclusion and being part of the solution in our local communities. We remain a company that is committed to fostering a culture that not only supports diversity and inclusion, but embraces and encourages it. To that end, we have recently created an officer position reporting to our President, Lisa Labbe, refreshed and reenergized our diversity and inclusion steering committee and are excited to launch our diversity and inclusion task force. This task force will comprise associates from departments and regions across our company that are passionate about our culture. They will be responsible for developing and executing ideas to further promote diversity and inclusion across the company through various initiatives as well as building awareness of our initiatives and programs. These actions will further strengthen our company and its commitment to our core diversity and inclusion values. Let me close by saying again how inspiring it has been to see our store and store support associates along with our supply chain teams rally together in a unique combination of challenges caused by the COVID-nineteen pandemic. Their tireless and creative efforts have enabled us to continue to serve our customers, particularly our pros that operate small businesses. My confidence in the power of our business model and our ability to navigate this crisis is unwavering and we remain committed to long term profitable growth. I will now turn the call over to Trevor to discuss in more detail our Q2 financial results. Thanks, Tom. We are incredibly proud of how 4 under Core team has managed through the crisis. Our values, culture, fantastic leaders and unique business model allowed us to work through this difficult time and we are a stronger company now than when this all started in the Q1. Looking at our Q2 results, our sales were $462,400,000 down 11.1%. We believe the decline was entirely due to COVID-nineteen as we took measures to protect the health and safety of our customers and associates by limiting most of our stores to curbside service beginning in late March. Approximately half of the available selling days for our stores were under this curbside model during the Q2 of fiscal 2020, during which our comparable store sales were down approximately 50% compared to the prior year period. Beginning in May and concluding in June, we implemented a phased approach to reopening for in store shopping with enhanced safety and sanitation measures such as requiring associates to wear face masks, installing social distancing markers on the floors, protective shields at cash registers and regularly sanitizing shopping carts, pin pads, design desks and other high traffic areas. Tom already walked you through how our comparable store sales improved materially as we opened our stores to the public. Turning to our Q2 gross margin and expenses. While our 2nd quarter total sales have declined 11.1% from last year, our gross profit only declined 9.7% as our gross margin rates increased 60 basis points to 42.5% from 41.9% in the same period last year. The year over year increase in gross margin rate was largely driven by higher year over year product margins, including $3,600,000 from certain tariff refunds and improved merchandising strategies, partially offset by higher distribution center costs related to our new Baltimore rail and distribution center that opened in the Q4 of fiscal 2019. Our new Baltimore distribution center impact on gross margin is expected to moderate as we move through 2020 from the growing benefit of the reduction in stem mile costs that will have long lasting benefits. Moving on to our Q2 2020 expenses. Our decisive and early access to reduce expenses while at the same time retaining our full time associates enabled us to slow growth in our 2nd quarter selling and store operating expenses to 2.8% from $134,600,000 last year to $138,500,000 this year. Nonetheless, our 2nd quarter selling and store operating expenses deleveraged 400 basis points to 29.9 percent of sales from the deleverage of payroll, operating expenses and occupancy costs related to the decline in sales as well as operating additional 19 stores. We incurred $1,100,000 in store expenses during the Q2 related to measures we took to protect our associates and customers while in our stores from the COVID-nineteen virus, primarily for personal protective equipment. Our quick actions to curtail broadcast media in the quarter enable us to leverage our advertising expense. Our comparable store selling and store operating expenses rate deleverage as a percentage of sales by 300 basis points. 2nd quarter general and administrative expenses, which are typically expenses incurred outside of our stores, increased $2,800,000 or 9%. As a percentage of sales, they deleveraged 140 basis points to 7.3% from 5.9% due to the decline in sales as a result of the COVID-nineteen pandemic, increased depreciation related to our store support center and technology investments to support long term growth and a higher expense from employee incentive compensation. We incurred $500,000 in general and administrative expenses in the Q2 related to COVID-nineteen virus, primarily for personal protective equipment. Preopening expenses during the Q2 decreased $2,900,000 or 46.1 percent from the same period last year. The decrease is primarily the result of operating fewer new stores in the Q2 of 2020 and planned fewer new stores in the Q3 of 2020 relative to the same time last year. Our 2nd quarter net interest expense increased $100,000 or 3.6 percent from the same period last year. The slight increase is due to higher interest costs from new borrowings offset by increased interest income earned related to the tariff refund receivables. In the 2nd quarter, we incurred a $12,200,000 benefit from income tax provision compared with $100,000 of expense last year. As a result, our effective tax rate was a negative 61.6 percent versus a positive 0.2% last year. The decrease in the effective tax rate was primarily due to the recognition of income tax benefits in connection with the CARES Act. More details about the tax provision is provided in our Q2 10 Q and the reconciliation of GAAP net income to adjusted net income in our press release. Moving on to profitability, our fiscal Q2 2020 adjusted EBITDA decreased 31.6 percent to $45,600,000 from $66,600,000 last year as a result of the decline in 2nd quarter sales and deleverage in our expenses. As a result, our adjusted EBITDA margin rate decreased approximately 2 90 basis points to 9.9% from 12.8% last year. Our 2nd quarter GAAP net income decreased 26.6 percent to $32,000,000 or $0.30 per diluted share from $43,600,000 or $0.42 per diluted share last year. Our 2nd quarter adjusted net income decreased 62.2 percent to $13,400,000 or $0.13 per adjusted diluted share to $35,300,000 or $0.34 per adjusted diluted share last year. We ended the 2nd quarter with 105,500,000 diluted weighted average shares outstanding compared with 104,800,000 shares last year. A reconciliation between GAAP 2nd quarter net income and adjusted net income is provided in the press release. Let me now turn that comment to some of the changes in our 2nd quarter balance sheet. We have a large income tax receivable of $28,000,000 due to taking advantage of the CARES Act provision that I will touch on in a moment. We also have a large increase in our receivables due primarily to tariff refunds we expect to collect in the second half of twenty twenty and we have discussed in more detail in our SEC filings. Our inventory balance was $594,300,000 up $147,000 or 33.1 percent versus the Q2 of 2019. There are two reasons for the increase over the same period last year. 1, lower than planned cost of goods in the Q2 due to COVID-nineteen. 2, 19 new stores and 18% in store count versus the Q2 of 2019. And finally, our new Baltimore distribution center was not opened in the Q2 of 2019. As we get closer to the end of this year, we are planning on our inventory balances versus the same time last year growing at a rate below our expected future sales growth. On May 18, 2020, we entered into a $75,000,000 incremental term loan V1 facility with a maturity date of February 14, 2027 to provide additional liquidity due to the business uncertainty caused by COVID-nineteen pandemic. The Term Loan B1 facility is a separate tranche from our existing Term B facility. At the end of Q2 of 2020, we had $219,300,000 an outstanding term loan facility with maturity date of February 14, 2027. We have no meaningful debt maturities over the next 5 years. At the end of the Q2, our last 12 months net debt to adjusted EBITDA excluding preopening expenses was 0.3 $2.8 on a lease adjusted basis. We had $496,500,000 of unrestricted liquidity immediately available to us, including $134,400,000 in cash and cash equivalents and $362,100,000 for borrowings under our ABL facility. This is the highest liquidity in Florida Decor's history. I'm glad to have repaid down all of the $275,000,000 precautionary asset based revolving line of credit we drew at the end of the Q1 and finished with one of the highest cash balances in our history. We believe the immediate liquidity that is available to us coupled with our credit facilities and actions we have taken to reduce costs provides us with the liquidity we need to manage through the COVID-nineteen pandemic. We have an initial assessment of the CARES Act, which we expect will provide a substantial cash benefits for the second half of twenty twenty. We anticipate benefiting from 3 main sections of the Act. First, we are amending our tax returns to take advantage of the temporary 5 year net operating loss carryback allowance and technical correction for the qualified leasehold improvements, which changes 39 year property to 15 year property eligible for 100% bonus tax depreciation and we estimate this will generate an IRS refund of approximately $28,500,000 2nd, we expect to benefit from the temporary deferral of employer payments for Social Security taxes, which has saved us $3,100,000 in deferments through the Q2 and we expect to defer another $9,000,000 in the second half of twenty twenty. And third, we expect to benefit from employee retention credits, which we estimate total at least $1,100,000 potentially more if we qualify additional credits during the second half of twenty twenty. Collectively, we expect these to increase our cash flow by approximately $42,000,000 Moving on to capital expenditures. Our fiscal 2020 capital expenditures are currently planned to be between approximately 188,000,000 dollars to $196,000,000 compared to approximately $255,000,000 to $265,000,000 when we originally planned and will be funded primarily by cash generated from operations. The growth in capital spending reflects our planned opening of 13 new warehouse stores in fiscal 2020 compared to 11 new store openings when we planned at the end of the Q1 of 2020. Additionally, we plan 1 small format standalone design center and to start construction on stores we plan to open in the early part of fiscal 2021. Capital expenditures associated with these projects is expected to be $121,000,000 to $125,000,000 in fiscal 2020. We also will invest more in existing store remodeling projects and distribution centers in fiscal 2020 using approximately $47,000,000 to 49,000,000 of cash. We plan to invest in information technology infrastructure, e commerce and other store support center initiatives using approximately $20,000,000 to $22,000,000 of cash. Based on these changes, we expect our depreciation and amortization to be approximately $91,000,000 to $93,000,000 in 2020. Our planned capital expenditures and related depreciation could vary materially from our estimates as we are operating in a very unique environment, but this is our current best estimate. While we're excited about bringing our stores back to full operations and the resulting strong growth in our comparable store sales, there remains significant business and economic risk that still creates a wide range of potential outcomes in the second half of twenty twenty. For this reason, we have elected at this time not to change our policy of not providing annual sales and earnings until economic and business risks have improved and the range of outcome narrows. In closing, I would like to say that our entire executive leadership team is extremely proud of how quickly floor to core adapted to meet the challenges of the COVID-nineteen pandemic. It is a testament to the resilience of our business model, our talented associates and the investments we have made in our business that have been critical to managing through such a challenging time. I want to personally thank all of our associates for their tireless work and dedication to serving our customers under such challenging circumstances. With that, I'll now turn the call back over to the operator for questions. Thank you. We will now be conducting a question and answer Our first questions come from the line of Christopher Horvers of JPMorgan. Please proceed with your questions. Thanks. Good evening, guys. Good morning, Chris. I know it's hard to tease it out, but have you tried to think about the benefit from stimulus in the economy? And more importantly, you called out customers in April saying they're not canceling projects. What are your thoughts on how much of the surge in demand that you've seen in June July of stores have become open could simply be a deferral demand that you would have already you just it's just moving in time, so to speak? Hey, Chris, this is Tom. I'll take a stab at a few parts and maybe Trevor can jump at the end if need be. So I think from the first part about is this result catch up from finishing projects. We really never closed and we were able to retain a good portion of our sales in a curbside model. So I feel like in the curbside model, there wasn't a lot of new projects being started early on and that was a lot of finishing up of jobs. There may have some I mean there were some starting of projects, but generally during our curbside operations, that consumer was fit or that pro is finishing their job. As I look forward now, I mean the business has continued to strengthen and I don't feel like it's catch up. I feel like it's a lot of new projects that are coming underway. I think as people have been not almost forced to stay home, they're not spending on movies, they're not spending in restaurants, they're not traveling, they're being forced to work out of their homes. And I think the more time they spend in their home, the more projects that they identify. And that has continued. The consumers are coming in and continue at a pretty fast pace. So, a lot of new stuff is getting started. I do think that the stimulus has helped. I mean, the stimulus has supported the consumer and it's supported small business. And I think those things are beneficial and I believe the consumer spend is going into home improvement. The only thing I would add, Chris, this is Trevor, is when we exited last year, we exited a 5.2 comp. When we before COVID really clamped down, we were comping at a 6.1% and when we had given guidance at the beginning of the year, we said that we thought we'd have a comp of around 6% all year. And again, we were right at that at the time we gave comp. So hard to say for sure, but I do think we felt confident in that conviction. The 3 years we've been public, we've really never had a miss in the range of comps we've given. So I do feel like this year was going to be that mid to upper single digit comp. I think the difference we're seeing right now as we all know, the thing Pamm just mentioned, the unprecedented level of liquidity that the Fed has put into the government, plus people aren't spending 1,000 of dollars a month on discretionary items of going out to eat and travel and things like that. And the combination of those three things has helped us perform. The other benefit I would say that we're hearing loud and clear from our customers and our pros, certainly we get great assortment, our employees are doing good, but it's another advantage of having that in stock inventory, right? People can get it today as opposed to have to waiting and pros want to get it today because they don't know when another shutdown is coming. And so I think just our business is structurally advantaged in this environment as well. That's great. And then my follow-up question is, I know you're not providing guidance, but can you maybe talk about how you're thinking about gross margin going forward? I mean, I think 2Q is going to be the quarter where the majority of retailers beat gross margin, promotional environment is down, demand is good. So how are you thinking about the gross margin dynamics as you think about the back half of the year? Thanks very much. Yes. This is Trevor again, positive. We're expecting our gross margins to be better than last year. Just as a reminder though, we had a very big benefit with that tariff refund about a $14,000,000 benefit in the Q4 of last year. If you back out that benefit, our gross margins would have been about 41 percent versus the 43.6% we reported last year in the Q4. So if you back out that one time benefit, our expectation is that our gross margins will be higher as we round out the rest of this year. That's great. Best of luck. Thank you. Thank you. Our next question has come from the line of Zach Fadem of Wells Fargo. Please proceed with your question. Hey, guys. Curious if you could walk us through whether the acceleration from your 8% comp in June to the 16% comp in July is more so a function of having more stores open or if the underlying business has accelerated from June to July and what those drivers from month to month could particularly be? So first, if you our I think that from the standpoint, well, I'm still going wrong here. The acceleration in June and the acceleration from June to July has come a lot on the heels of homeowners just taking on more projects. As you look at our business and you kind of watch what's going on, our weekend business is better than I've seen it in multiple years. We've just had just an increase. I mean, when you're comping in the 16% rate in the month of July, both the pros doing a little bit better. But for us, I think the biggest difference we've seen is a lot of do it yourselfers are entering the marketplace. So I think that's been part of it. The other thing I think that's what's helped our business and Trevor mentioned it a little bit as an advantage with the Pro is during COVID, our in stock position that we talked about prior, it wasn't as good as it is today. And we've done a we've got our Chinese transition SKUs have been completed. Our tile in stock is the best it's been in 3 years. And because of that inventory levels in the store and the amount of new products that hit, I think they just all of those things together have helped us benefit. So if the consumers come back into the marketplace and come back in our stores, it's been very beneficial to what's happened to the month of July. And just if you look at the May when our stores were open, June when our stores were open, July and the way our calendar falls were actually in fiscal August, our comps have accelerated every single month. So we're getting better every fiscal month as we proceeded through this very unique time. Got it. And then on the exposure to some of the recent COVID hotspots like Texas, Arizona and Florida, you've got a lot of stores in these states. Curious if you've seen any dispersions or fluctuations in these states in particular relative to the overall fleet? We've watched the hotspots and we're living in one of the hotspots and we certainly have watched it across the country and our strength is across the country. So we're seeing the same pace of improvement in the states where COVID is where the trend is worse. We're seeing the same trends in our business where COVID is getting better. So it's hard to explain and hard to rationalize, but clearly I think consumers want to engage with our product and they're coming into the stores. Got it. Appreciate the time. Thank you. Our next question has come from the line of Chuck Grom of Gordon Haskett. Please proceed with your question. Hey, good afternoon. Thank you. I realize it may be anecdotal from your perspective, but when you talk to the pro and more specifically the backlog today versus say 90 to 120 days ago And then maybe also a year ago, I guess what have you learned? And I'm also curious if the pros giving you any color on whether consumers aversion to having contractors come into their home has alleviated at all over the past few months? Yes, I can go maybe Trevor since he's in charge of Pro may want to jump in. But from my perspective, the Pro is busy. And Pro is that I have engaged with. I've been in many of our stores. Spoke to many of our team, and everything that I'm hearing, our pros are really busy. Certainly, when COVID started, it was one of the things that we were concerned about was the consumer going to allow people into their home. And I think as by evidence of what's happened with our business, as you watch the acceleration in our sales trend from June to July, clearly, I think the consumer is feeling okay, living a contractor in their house. We've done our part. We've tried to educate our professionals and say, hey, make sure you understand social distance and make sure you wear masks. But I think when someone lets a contractor into their home, in general, contractors are playing by the rules and making consumers feel comfortable. So I believe that that comfort level is good and people are allowed in the homes. The only thing I was going to add, this is Trevor speaking, is we've talked to our biggest pros in all of our stores. We have the ability to do that now. And what they told us is, as you would expect, when we shut our doors, they were finishing business. But the minute we opened our stores, their business is incredibly strong. We've been told their leads are at the highest level they've had. It looks like July is going to be the best month they've had. And so it does appear that just like you're seeing in our business, people are not currently averse to having pros. And I think our pros are smart. As Saum said, they're social distancing, they're wearing masks, they're taking off their shoes, they're staying away from their clients in the house. And so our pros business is incredibly strong right now. That's great to hear. And then just from a category perspective, I was wondering, you talked about the overall monthly comp improving from May to June and into July here. Just wondering from a category perspective if you're seeing anything out of the ordinary. And I guess from a 2Q perspective, you called out LVT being the best. Just wondering if you could shed some light on some of the other parts of the business. Sure. Lisa, do you want to comment? Sure. This is Lisa. So yes, we have we haven't seen a huge shift. During the curbside piece of the business, we did see some shift. We saw higher penetration in LVT, higher penetration in tile. We talked a lot about our good, better, best assortment and how better and best has been driving our assortment or excuse me, driving our sales. And we did see a slight shift down during the curbside model. But as soon as the stores opened back up, everything kind of went back to the way it was. So while decorative accessories, which is a category that is heavily sold by our designers, people want to see that product, that was hard when we were in curbside. And so those that penetration did go down a little. But as I said, as the stores have opened back up and we look at July, the mix is very similar to what we saw before and our better and best strength is back to where it was before. Helpful. Thank you. Thank you. Our next questions come from the line of Stephen Forbes of Guggenheim Securities. Please proceed with your questions. Good evening. Trevor, maybe to start with you. I think back to the flow through commentary in the math we were all doing 3 months ago, right, on any comp reduction relative to the original forecast. Obviously, we're moving the other way here. So maybe can you give us some color on what we should expect the incremental margin to be, right, with the comp revisions being positive now? Is it the 25% to 30% we were talking about on the downside? Or is it closer to that 35%, 40% in the normal state of the business? Yes. Steve, this is Trevor. I think if you're talking about relative to our original guidance, so when I gave that comment about the 25% to 30% flow through on a negative revision to sales on the original guidance, that's what we expected. We obviously still believe that even though we're having a great performance now, our current expectation is that we're not going to achieve that original guidance. But because of the aggressive moves we've done with the cost maneuvers and lowering our cost plus the positive results we're seeing now and we do expect that to maybe not at this level, but we do expect that to commute for the rest of the year. I would expect that flow through to be probably closer to 20%. And so since we're talking about a negative sales versus the plan, a lower percent is a higher profit number. I think you guys get that, but just to be clear. So our profit outlook has improved materially from what we were thinking back in COVID when our comps were down 50% is how we're thinking about the rest of the year. Thank you. And then either for Tom or Cover, can you just update us on how commercial performed during the quarter? And then also, right, as we think about this July month, you think about the potential windfall here and I think the goal was to add 18 regional account members. Do you sort of view today's end demand strength as an opportunity to push that initiative forward here or just updated thoughts on commercial? Absolutely push it forward. We haven't stopped hiring our RANs across the country. It's a we like the activity that we're seeing. We're seeing we have seen some where some bigger jobs come through as hotels have shut down and small businesses shut down. Those end users that happen to have the liquidity to do it have taken on some larger projects during when they're not as busy. So that strategy is working for us and we're seeing great activity in it. Thank you. Thank you. Our next question has come from the line of Michael Lasser of UBS. Please proceed with your question. Good evening. Thanks a lot for taking my question. So Tom, you mentioned that you didn't think the 16% that you're seeing in July was a function of pent up demand. However, you thought a run rate of the business, a reasonable run rate of the business is comping up 6%. So how do you reconcile that? How do you bridge what a realistic expectation is over the next few quarters, if it's not mid teens and it's not low mid single digits? I guess one point of clarity, Michael. The way I was trying to explain it is the difference between what I would have thought we would have run, which was 6%, we said we thought we would comp 6% all year. I think the difference of that is really 3 main things. 1, the unprecedented liquidity that the government has put into not only businesses, but in consumers pockets. I mean, that's probably the biggest driver. But as Tom mentioned in his prepared comments as well is people are just spending a substantial amount of time in their homes looking at things or spending things on home offices, on developments they know they need to do. And then you add to that the liquidity that they're not spending 100, probably 1,000 of dollars a month on travel and entertainment. I think the combination of those three things is what is driving our comps from what would have been a mid to upper single digit comp to a mid teen comp. And so do you think those are temporary factors, Trevor? In one sense, yes, because I don't think the government is going to keep injecting the same level of liquidity that they have, but that's obviously under advisement and the government is working on that right now. On the positive side though, I don't think people are going to be traveling and I don't think people are going to be leaving their homes anytime soon. Actually, I mean, those are all sort of positives. Yes. I think, look, COVID doesn't feel like it's going away anytime soon. And I think that the consumer is going to continue to not have the spend that they spend. If you remember, we slant to towards a bit of a higher end customer. I also think that what Trevor is mentioning that people when they're having to work out of home and they're not being able to go out as much, they're not just looking at the space, they're having to repurpose space in their homes. I mean, if you got to see your kids being going to school in the dining room and you've got to you and your staff are both working, you need to create 2 offices and that's spurring people working within their homes and recreating space. So those things, I believe that COVID is not going away, people staying home, that is going to last for a little while. So without providing guidance, are you buying inventory to the mid teens run rate comp for the back half of the year? 80 plus percent of our business is replenishment. And so we have a very sophisticated system and a substantial amount of people that manage that. We're buying inventory based on the trends of the business. Yes. And I think I mentioned it earlier, Michael, too, that our in stock condition is as good as it's been in a long time. Our transition excuse me, we didn't we were thoughtful with our inventory as we went through the pandemic. But as we're coming out, we're kind of on the offensive and the stores are in good condition. And I guess just one thing, I'll end with, as I mentioned prepared in my comments, the inventory growth we'd had at the end of Q2 was the highest we've ever had. Now a big part of that was because our cost of sales fell off pretty quickly because of COVID. But we're sort of fortunate now on the other side of that. As Tom mentioned, we've got a substantial amount of inventory sitting in our distribution centers and the supply chain team is doing an excellent job of fulfilling that demand. And so we feel good about our inventory position to support the sales. Good luck and thank you very much. Thanks, Michael. Thank you. Our next question is coming from the line of Matt McClintock of Raymond James. Please proceed with your questions. Hi, yes. Good afternoon, everyone. Great execution, I have to say. My first question is this, Tom, like you actually mentioned DIY in the press release and I don't think you guys have ever done that before. So you may be talking you actually also said on this call that there's a lot of DIYers that helps with the quarter. So can you talk about what's going on in this industry because it does seem like this has historically been an industry that wasn't DIY meaningfully and that's changing? Yes. I think so we call a lot of times we call the end user we call the end user the DIYer. And that doesn't necessarily mean that they're actually buying it and putting them themselves. But the activity of the end user has been substantial. I mentioned our weekend business is about as good as I've seen it in a very long time. The activity on our website, the amount of people that are on searching the category and engaging the website is at an incredible pace. The viewing like we've added a ton of how to clinics on our website, the viewership of that is incredibly high or incredibly higher. And YouTube views of our product, we started an Instagram Live clinic for our associates because not for associates, for our customers because we couldn't do clinics in the store because of social distancing. And the activity in that has been good. Our virtual appointments, we did 8,000 virtual appointments. That's also the end user in the store. So when I combine all of those things, I don't think that everyone that necessarily that my neighbors coming in and buying a pallet of tile and installing it this weekend because I still think they're engaging the pro to do that. When I look at our department comp sales, that makes me feel like they're engaged in the project, but they're hiring a pro to do it in most cases. I don't think they're tackling the project like that. But maybe they're on a backslash more than they have historically. But they definitely want to engage in our product. Thanks for that. Really helpful. And then my second question is the Pro business credit card 180 days of free working capital. It seems like a game changer. Could you actually maybe elaborate more on that and how you think about it? It? Yes, it's just about that simple. We do think it's a game changer. There's also all kind of other benefits that you can see on the website or we can get you a pamphlet. It's more than even just that, but we do think it's going to be very beneficial. So we'll see. We're just now starting to roll it out. These pros generally don't necessarily are looking for this big credit solution. But that being said, it's one more arsenal in our tool to serve the pros. The other thing we can do with that pro credit card that we're thinking about more longer term is the costs are fairly materially below what we pay the credit cards and there's ways we can tie that into the Pro Premier Rewards program to maybe offer incremental points and make it a win win for the pro as well. So just getting started, I'm super proud of our IT team and our pro team and our credit team that worked hard on this for over a year and more to come as we get to the end of this year and into next year. Really appreciate the color. Best of luck. Thanks, Matt. Thank you. Our next question has come from the line of Kate McShane of Goldman Sachs. Please proceed with your questions. Hi, good afternoon. Thanks for taking my question. My question focuses on real estate. You mentioned in your prepared comments that you were having conversations with your landlords. And I wondered if it resulted in any kind of deferred rent and how it impacts cash flow this year and next. And then just with regards to you stating that there might be better real estate opportunities, would this change the timing at all of entering into new regions that you've been thinking about entering in? Would it accelerate it, move it up into 2021 perhaps? Yes. So I will take the this is Tom. I will take the second part of your question. Trevor can talk about rent deferrals and things of that nature when I'm done. I think what we've seen is we had a good real estate pipeline for 2021 in place, but we had a good real estate pipeline in 2020 also. And we had to due to delay due to the pandemic and being able to get our stores physically constructed, get them to be able to open the right way. So the pushing back of those stores along with our 2021 pipeline, along with there's been opportunities that have presented themselves in different parts of the country that we didn't anticipate, it's collectively we've been able to put together just a great pipeline of stores for 2021 2022. All of the changes have been given us the ability to have good cadence in the opening. So the stores for the first time since we've been opening 20%, we're going to open them at the right time. We're going to have a good amount across the quarters of the company. So it's not so much though it's given us the opportunity in any markets anytime sooner. It's given us the ability to fill in some important markets a little bit quicker. We've seen some good opportunities arise in the Northeast as a result of this. And so that we'll be able to go a little bit faster than we had been planning to. And the first part of your question, our real estate team did a great job. We deferred $5,900,000 in payments in Q2 that we will be paying back most of it over the next year. And then the other thing that I think is exciting for us and again our real estate team gets credit for doing a great job is the rents we're getting this year and next year are the lowest I've seen in my 9 year history and the quality of the real estate is better. Part of that's because we're taking on more of the construction costs, but part of that is just the environment we're in and we've got some really good deal makers. And so our rent costs are getting close to the high single digits versus the mid double digits on a rent per square feet basis. So we're getting better locations and we're entering better markets, but our rent per square foot is coming down. Thank you. Thank you. Our next question has come from the line of Simeon Gutman of Morgan Stanley. Please proceed with your questions. Hey, thanks. Good afternoon. I want to hit on the 16% quarter to date once more. I realize it's sort of an average or weighted average and in there you probably have some 20s 30s and maybe some flats. Given that you're still sort of reopening and markets are ramping, would you say there's a bias as these markets normalize to higher than that number or bias a little bit lower? Just a couple of things. So we've had all of our stores open since early June. So for the 16% in July, all of our stores have been open. And it's been pretty consistent. It hasn't it's been steadily getting better, I guess is how I would say it. I don't know that it's going to keep ratcheting up per se, but as I mentioned a second ago, our fiscal August, which started last Friday, has actually been a little bit better than that. Okay. And then the second question is, it like you'll do about 13 stores and then to get to the 20 percent about 27 I think next year. Anything changing post COVID, because I think you've told us new stores cost or the operating cost about 1.5 times what an existing store is in year 1. So any offsets to that and thinking of really about earnings power for 2021? No, I don't our total SG and A as a percentage of sales for new stores, I don't see coming down any time soon. Even though we're having better real estate cost, we've got higher depreciation as we're spending more CapEx. And so our stores over 3 years old are kind of in the low 20% SG and A as a percentage of sales. Our new stores are kind of in the mid to low 30% as a percent of SG and A. And I currently don't expect that to change much. The only big driver of that is that these stores do higher volumes, we'll obviously get more leverage out of that. But currently, I'm not sure we've seen any big changes there. Okay. Thanks. Good luck. Thank you. Our next question comes from the line of Jonathan Matuszewski of Jefferies. Please proceed with your question. Hey, guys. Nice quarter. Thanks for squeezing me in. First question just on adjacent categories. You guys have had success in introducing a few of them over the years. Just given the schematic of what we're seeing with trip consolidation in a post COVID world, how do you think about your propensity to introduce new related product categories? I know you guys have done the frameless shower doors and the countertops and whatnot. How do you think about new product introductions going forward? Hi, this is Lisa. So we're very bullish on it. We have been all along and even when the stores were at curbside, we were selling some of our adjacent categories and as the stores have opened back up, we have definitely seen the customer very interesting completing that project with us. So we had plans in place this year to get all of the adjacent categories that we're addressing right now into about 40, 45 stores this year and we are on track. We got delayed by a month or so, but we still believe by the end of the year those stores will be set. And from what we've seen so far and the very few stores that we started with, we're excited about the possibilities. It's something that we hear a lot from our customers and our designers as they work through projects with our customers is that they want to be able to complete the whole project and that's how we view this business. So we're excited. That's great. Really helpful. And then just a quick follow-up on real estate. You mentioned the 20% unit growth for 2021. Do you have any sense of the breakdown in terms of new markets versus existing markets and how that will compare relative to 2020? Yes, this is Trevor. I think it's pretty balanced, new versus existing. Tom mentioned this in his prepared comments. And one thing we're very excited about is the fact that the cadence of openings is going to be the best in our history, meaning most of the last our history 70% of our stores have opened in the back two quarters. It's going to be much closer to 25% new stores per quarter. It won't be exact, but we're going to get those new stores opened earlier, which just makes a lot of sense for our business and makes it easier for the operators easier for the operators. Great. Thank you. Thank you. Our next question has come from the line of Seth Basham of Wedbush. Please proceed with your question. Thanks a lot and good afternoon. I may have missed this, but if you could help us think through the flow through aspects of your comps when they're as strong as mid teens, that would be helpful. Is there anything different in this environment when we think about flow through profit from that comp strength than we could be thinking about relative to historical strength? Yes. Again, we're not giving guidance just as there's too many ranges of outcomes. But what we would say is relative to the original guidance we gave back in our year end earnings release, whatever sales are below that because I don't think we're going to make that all up between the end of the year, we would expect that flow through relative to sales being lower than that original guidance in that kind of 20% -ish range, maybe 25%. On a year over year basis, now that our business is performing well, there's nothing structurally that's changed in our business that would impact that flow through on a year over year basis. Got it. Thank you. And one unrelated follow-up. Are you thinking about the Chinese tariff exclusions and whether or not they might expire in August? Yes. This is Trevor again. So the government keeps that under very close wraps. We are saying as close to we can. We have very well paid advisors that give us as much counsel as they can. And they're telling us they have no idea. I think if the government does the same assessment that they did last year when they decided to remove the 25% tariffs, logically to us based on the detailed research we and our advisors have done, that we believe they should come to that same conclusion and not reinstitute the 25% tariffs. But as we all know, the trade policies between us and China are getting more difficult, not less difficult. So even if they were delayed, which again, we don't know the answer to that, but even if they were not reinstituted, the government has said they're not going to hold it out for a year. They may only hold it out for 6 months or till the end of the year. And so while I think they should come to the same conclusion and not reinstitute those 25% tariffs, I don't think we're going to get a year's exclusion like we did last year. Got it. Thank you very much. Thank you. Our next question has come from the line of Greg Melich of Evercore ISI. Please proceed with your question. Hi, thanks. I had a couple. You mentioned that in SG and A that obviously payroll deleveraged a lot, but leveraged advertising, which means the dollars are down a lot. I'd love to know that now that sales are back, what's the thought on advertising strategy? Does it just ramp right back up or shifting a lot because you're not trying to actually drive traffic to the stores? Just take us through that ramp. Hi, this is Lisa. No, we did pause mostly our TV advertising in April and the beginning of May as the stores were incurred side, although we did continue with all of our digital marketing because our web business was so strong and wanted to make sure that we were there when the customers were searching our category. But as the stores opened back up, we ramped back up with our TV advertising in the middle of June. And we actually have the exact same cadence that we had planned before. And in fact, we took a week that we had planned for April and had moved now moved those dollars into August. So we believe that we have got a customer base that is very excited. And so we want to make sure that we are in front of them from a TV perspective as well as a digital perspective. Great. Can you just quantify how much it was leveraged in the quarter? I have to defer to Trevor on that one. Hey, Trevor. Yes. Yes. I'm just looking here. Our overall advertising is less than 3% of sales. And it was even less than that obviously here. So it was a minor component of it helped the deleveraging it. We just don't spend a lot on advertising. Great. And then the second question is more about the labor side of the equation. Can you just remind us what you did in terms of furloughs or not during the peak of the crisis? And as you reopen the stores, you've been able to get back the people you need in the right spot and what do you expect that going forward labor costs and that sort of recruitment retention? There's a whole lot of questions in that. So I'll do the best I can on some of what you said. So I we as a when we went into the pandemic, we decided to ensure that we could come out strong on the other side. So we made the conscious decision to protect our full time associates. We did furlough our part timers, but we kept our full timers the whole time. And I think it's part of our strength now that we came on the other side with an intact team. We started calling our part timers back as we reopened our stores and we've gotten a very high percentage of those part timers have come back, 80% have come back. We are hiring where we need to hire. In retail, when sales are like this, it seems like you're always chasing to get talent in stores, but we've got excellent recruiting efforts. We feel like we provide associates a terrific opportunity. They can get promoted here. We open a lot of stores and majority of our promotions come from inside. So we're a good place to work. So we feel solid about our workforce. There was a lot of us in that question. What else did I miss in question? And are you comfortable now that getting 80% back was enough given that sales are now running up 16% or would you like to get 100%? Sure. Well, it's not just that, you'd like to hire new full timers. And in retail you're going to have pockets of the country where it's a time harder to get help. That's not something that's new. It's happened before. But we've got good hiring events going on in the markets where we need people. We're seeing good amount of attendance at those hiring events and making progress getting staffed where we want to get staffed. That's great. And you don't think the unemployment insurance pop up has been a challenge to getting people to come back. You haven't seen that? I do think it's a challenge, but our full timers never left. And so part timers have come back on a pretty good basis. That may make it a challenge to hire people. And we're seeing some of that, but it's an obstacle we believe we can overcome. That's great. Good luck to everyone. Thank you. Our final question comes from the line of Liz Suzuki of Bank of America. Please proceed with your questions. Great. Thanks, guys. Have you heard any about any difficulties getting lumber? We've heard that from some of the home improvement stores. Is that translating into hardwood flooring as well? And just if there are broadly any categories where you're now experiencing some product shortage that may have contributed to the sales declines in the quarter or anything from an inventory standpoint that stands out to you? This is Lisa. So no, we have not seen product shortages. As we've talked about on the I think it was the Q1 call, as different parts of the world shut down, we did have different times where there were various countries not shipping. But all of that has resolved itself and our in stocks, as Tom and Trevor mentioned, are as good as they've ever been. The lumber shortages don't generally relate to flooring lumber. It's more building lumber, which is slightly different. And so we have not really seen that as an issue. So we feel very good about our in stock position today. We feel very good about the inventory that we have coming. And so we've all of our vendors are back up in shipping and kind of a silver lining, I think, as Tom or Trevor mentioned, silver lining is being shut down for that time. It allowed us to catch up on some of our China transitions that we had. And so we feel very good our position today. Great. That's all I have. Thank you. There are no sorry. Go ahead. You're going to say there's no further questions. And I was going to say thank you for everyone joining the call. We certainly again, I'd like to thank all of our associates who happen to be a lot of them listen to the call and we certainly appreciate all of their hard work and all of their hard effort. I thank you all for your interest in the company and we look forward to talking in the next quarter. Thank you. That does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great evening.