Welcome to Floor & Decor Holdings Inc.'s Second 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 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, and thanks to everyone for joining us on our second quarter 2020 earnings conference call. On today's call, I will discuss some of the highlights of our second quarter 2020 earnings results and then discuss how we are positioned to further grow our market share of the estimated $22 billion hard surface flooring industry in 2020 and beyond. Trevor will then discuss our second quarter results in more detail and how we are thinking about the second half of 2020. Looking back over the past several months, I am glad we made the voluntary decision to close our stores to the public in late March and pivot to curbside pickup only as the COVID-19 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 sq ft stores with 9-15 ft 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-19 pay, and we believe our teams have done an excellent job creating a safer environment for our pro and do it yourself customers. It is obvious that COVID-19 is not going away anytime soon. All the changes we have implemented give me confidence we can operate in a much safer store environment as long as COVID-19 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 phenomena has people investing in their homes.
Floor & Decor is in a great position to serve them with visually inspiring stores and websites, innovative assortments, everyday low prices, and in-stock job lot 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 million of additional Term B loan, the majority of which is not due until 2025, have 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 second quarter results, we opened two new warehouse stores in the second quarter of 2020, one in Novi, Michigan, and one in Elizabeth, New Jersey.
The second quarter openings brought the total number of warehouse stores that we operate to 125 stores, up 18% from 106 warehouse stores at the end of the second quarter in 2019. Looking at the third quarter of 2020, we have already opened our third store in the Salt Lake City area and our 1st small store design studio in Dallas, Texas. We also have plans to open a new store in Toms 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-19, 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 a more balanced cadence of openings throughout 2021. As we have discussed, we are taking a 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 second quarter comparable store sales declined 20.8% due to COVID-19 and the associated declining transactions caused by our store closures, not allowing customers into our stores throughout much of the quarter and reducing operating hours.
Comparable store transactions declined 22.3%, and our comparable store average ticket 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 second quarter, 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%. For fiscal June, using the same metric, those stores open to the public had a comparable store sales increase of 10.2%. Our third quarter comparable store sales to date have accelerated to 16%. The sequential improvement is the direct result of our flexible business model, where we were able to quickly convert from our curbside pickup model to fully reopening all of our stores by early June. Our e-commerce and connected customer strategies allowed us to remain engaged with our customers, particularly on 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 second 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%-18%. It remains well above the 12% penetration rate experienced prior to the impact of COVID-19. 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 de-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 and $125,000, giving them more discretionary income to explore flooring 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-19.
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. First, 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 Premier 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. Second, we temporarily increased our Pro Premier Rewards points incentives in May to a maximum of four times based on spending levels.
The increase in incentives not only provided needed support to our pros during these challenging times, but it also led to an increase in average spend. The average spend for a Pro Premier Rewards pro is almost 3.5 times more than for 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 31st, 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 Systems, which should be fully rolled out to all of our stores by the end of the third quarter of 2020, further building on our value proposition. We are excited about the features that this card will offer our pros, including but not limited to a 180-day no-interest payment plan that is more compelling than the industry standard terms of 30-60 days. Over time, we expect to tie the usage of this card to our Pro Premier Rewards program. As many of you know, free design services are a pillar of growth at Floor & Decor. As part of this service, we accelerated the launch of virtual design appointments into the second quarter of 2020, and are excited about the role virtual design appointments are playing during the COVID-19 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 may be social distancing in response to the COVID-19 pandemic or just prefer 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-19 pandemic has created significant challenges, there are important lessons that we will carry forward that are leading us to adopt 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 strollabouts, 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 2020 and into 2021. There is still significant uncertainty that most recently comes from an increase in COVID-19 infections in certain markets, which raises second -wave risks into the fall. We are cautiously optimistic but recognize business risks remain elevated and that we could have to close stores in certain markets if necessary. We remain focused on maintaining a flexible business model and will 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 also embraces and encourages it. To that end, we have recently created an officer position reporting to our president, Lisa Laube; refreshed and re-energized 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-19 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 second quarter financial results.
Thanks, Tom. We are incredibly proud of how the Floor & Decor team has managed through the crisis. Our values, culture, fantastic leaders, and unique business model have allowed us to work through this difficult time, and we are a stronger company now than when this all started in the first quarter. Looking at our second quarter results, our sales were $462.4 million, down 11.1%. We believe the decline was entirely due to COVID-19, as we took measures to protect the health and safety of our customers and associates by limiting most of our stores to curbside service beginning in late March. Approximately half of the available selling days for our stores were under this curbside model during the second quarter 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 second quarter gross margin and expenses. While our second quarter total sales have declined 11.1% from last year, our gross profit only declined 9.7%, as our gross margin rates increased 60 basis points to 42.5% from 41.9% 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 $3.6 million from certain tariff refunds and improved merchandising strategies, partially offset by higher distribution center costs related to our new Baltimore-Maryland distribution center that opened in the fourth quarter of fiscal 2019. Our new Baltimore distribution center's 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 second quarter 2020 expenses.
Our decisive and early actions to reduce expenses while at the same time retaining our full-time associates enabled us to slow growth in our second quarter selling and store operating expenses to 2.8% from $134.6 million last year to $138.5 million this year. Nonetheless, our second quarter selling and store operating expenses deleveraged 400 basis points to 29.9% of sales from the deleveraging of payroll, operating expenses, and occupancy costs related to the decline in sales as well as operating an additional 19 stores. We incurred $1.1 million in store expenses during the second quarter related to measures we took to protect our associates and customers while in our stores from the COVID-19 virus, primarily for personal protective equipment.
Our quick actions to curtail broadcast media in the quarter enabled us to leverage our advertising expense. Our comparable store selling and store operating expense rates deleveraged as a percentage of sales by 300 basis points. Our second quarter general and administrative expenses, which are typically expenses incurred outside of our stores, increased $2.8 million 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-19 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 half a million dollars in general administrative expenses in the second quarter related to COVID-19, primarily for personal protective equipment.
Pre-opening expenses during the second quarter decreased $2.9 million or 46.1% from the same period last year. The decrease is primarily the result of operating fewer new stores in the second quarter of 2020 and planning fewer new stores in the third quarter of 2020 relative to the same time last year. Our second quarter net interest expense increased $100,000 or 3.6% 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 second quarter, we incurred a $12.2 million benefit from income tax provision compared with $100,000 in expenses last year.
As a result, our effective tax rate was a negative 61.6% versus a positive 0.2% last year. The decrease in the effective tax rate was primarily due to the recognition of income tax benefits in connection with the CARES Act. More details about the tax revision are provided in our second quarter 10-Q and the reconciliation of GAAP net income to adjusted net income in our press release. Moving on to profitability. Our fiscal second quarter 2020 adjusted EBITDA decreased 31.6% to $45.6 million from $66.6 million last year as a result of the decline in second quarter sales and deleverage in our expenses. As a result, our adjusted EBITDA margin rate decreased approximately 290 basis points to 9.9% from 12.8% last year.
Our second quarter GAAP net income decreased 26.6% to $32 million or $0.30 per diluted share from $43.6 million or $0.42 per diluted share last year. Our second quarter adjusted net income decreased 62.2% to $13.4 million, or $0.13 per adjusted diluted share , from $35.3 million, or $0.34 per adjusted diluted share, last year. We ended the second quarter with 105.5 million diluted weighted average shares outstanding compared with 104.8 million shares last year. A reconciliation between GAAP second quarter net income and adjusted net income is provided in our press release. Let me now turn my comments to some of the changes in our second quarter balance sheet.
We have a large income tax receivable of $28 million due to taking advantage of the CARES Act provision that I will touch on in a moment. We also have a large increase in our receivables due primarily to tariff refunds we expect to collect in the second half of 2020, which we have discussed in more detail in our SEC filings. Our inventory balance was $594.3 million, up $147.7 million or 33.1% versus the second quarter of 2019. There are three reasons for the increase over the same period last year. one. Lower -than-planned cost of goods in the second quarter due to COVID-19. 2. 19 new stores, an 18% increase in store count versus the second quarter of 2019.
Finally, our new Baltimore distribution center was not opened in the second quarter 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 million incremental Term Loan B-1 facility with a maturity date of February 14, 2027 to provide additional liquidity due to the business uncertainty caused by the COVID-19 pandemic. The Term Loan B-1 facility is a separate tranche from our existing Term B facility. At the end of the second quarter of 2020, we had $219.3 million in an outstanding term loan facility with a maturity date of February 14, 2027.
We have no meaningful debt maturities over the next five years. At the end of the second quarter, our last 12 month's net debt to adjusted EBITDA, excluding pre-opening expenses, was 0.3 and 2.8 on a lease-adjusted basis. We had $496.5 million of unrestricted liquidity immediately available to us, including $134.4 million in cash and cash equivalents and $362.1 million for borrowings under our ABL facility. This is the highest liquidity in Floor & Decor's history. I'm glad to have paid down all of the $275 million precautionary asset-based revolving line of credit we drew at the end of the first quarter 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-19 pandemic. We have an initial assessment of the CARES Act, which we expect will provide us substantial cash benefits for the second half of 2020. We anticipate benefiting from three main sections of the act. First, we are amending our tax returns to take advantage of the temporary five-year net operating loss carryback allowance and technical re-correction for the qualified base building permits, which changes a 39-year property to a 15-year property eligible for 100% bonus tax depreciation. We estimate this will generate an IRS refund of approximately $28.5 million.
Second, we expect to benefit from the temporary deferral of employer payments for Social Security taxes, which has saved us $3.1 million in deferments through the second quarter, and we expect to defer another $9 million in the second half of 2020. Third, we expect to benefit from employee retention credits, which we estimate total at least $1.1 million, potentially more if we qualify for additional credits during the second half of 2020. Collectively, we expect these to increase our cash flow by approximately $42 million. Moving on to capital expenditures.
Our fiscal 2020 capital expenditures are currently planned to be between approximately $188 million and $196 million, compared to approximately $255 million-$265 million 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 had planned at the end of the first quarter of 2020. Additionally, we plan one small -format standalone design studio and to start construction on stores we plan to open in the early part of fiscal 2021. Capital expenditures associated with these projects are expected to be $121 million-$125 million in fiscal 2020.
We also will invest more in existing store remodeling projects and distribution centers in fiscal 2020 using approximately $47 million-$49 million of cash. We plan to invest in information technology infrastructure, e-commerce, and other store support center initiatives using approximately $20 million-$22 million of cash. Based on these changes, we expect our depreciation and amortization to be approximately $91 million-$93 million 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 remain significant business and economic risks that still create a wide range of potential outcomes in the second half of 2020.
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 outcomes narrows. In closing, I would like to say that our entire executive leadership team is extremely proud of how quickly Floor & Decor adapted to meet the challenges of the COVID-19 pandemic. It is a testament to the resiliency of our business model, our talented associates, and the investments we have made in our business that have been critical in 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 session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment , please, while we poll for your questions. Thank you. Our first questions come from the line of Christopher Horvers of J.P. Morgan. Please proceed with your questions.
Thanks. Good evening, guys.
Good evening.
I know it's hard to tease it out, but have you tried to think about the benefit from stimulus in the economy? You know, 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 and July as stores have become open could simply be a deferral of demand that, you know, you would've already had; 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 in at the end if need be. I think from the first part about whether this result is catching up from finishing projects, you know, we really never closed, and we were able to retain, you know, a good portion of our sales in a curbside model. I feel like in the curbside model, there weren't a lot of new projects being started early on, and there was a lot of finishing up of jobs. There were some starting of projects, but generally during our curbside operations, that consumer or pro was finishing their jobs.
As I look forward now, I mean, the business has continued to strengthen; I don't feel like it's caught up. I feel like there are a lot of new projects that are coming underway. I think as people have not, you know, almost been forced to stay home, they're not spending on movies, they're not spending in restaurants, and they're not traveling. They're being forced to work out of their homes. I think the more time they spend in their home, the more projects that they identify. That has continued. The consumers are coming in and continuing at a pretty fast pace.
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 businesses. I think those things are, you know, beneficial, and, you know, 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. Before COVID really clamped down, we were comping it at 6.1%. 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. Again, we were right about that at the time we gave the comp. You know, it's hard to say for sure, but I do think, you know, we felt confident in that conviction. The three years we've been public, we've really never had a miss in the range of comps we've given.
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, is the thing Tom just mentioned, the unprecedented level of liquidity that the Fed has put into the government, plus people aren't spending thousands of dollars a month on discretionary items like going out to eat and traveling and things like that. 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 is that, certainly, we've got a great assortment and 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 having to wait, and, you know, pros want to get it today because they don't know when another shutdown's coming. I think just our business is structurally advantaged in this environment as well.
That's great. 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, the promotional environment's down, and demand is good. How are you thinking about the gross margin dynamics as you think about the back half of the year? Thanks very much.
This is Trevor again. Positive. You know, we're expecting our gross margins to be better than last year. Just as a reminder, though, you know, we had a very big benefit with that tariff refund, about a $14 million benefit in the fourth quarter of last year. If you back out that benefit, our gross margins would've been about 41%, versus the 43.6% we reported last year in the fourth quarter. If you back out that one-time benefit, you know, 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 Zachary 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.
Yeah. First, if you know, I think that, you know, from the standpoint Wow, I'm stumbling along 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 , you know, just an increase. I mean, when you're comparing in the 16% range in the month of July, both the pros are 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. I think that's been part of it.
The other thing I think that 's helped our business, which Trevor mentioned a little bit as an advantage with the pro, is that during COVID, our in-stock position that we talked about prior wasn't as good as it is today. We've done it; we've got our Chinese transition SKUs completed. Our tile in stock is the best it's been in three years. Because of that, inventory levels in the store and the amount of new products that hit, All of those things together have helped us benefit. As the consumers come back into the marketplace and come back into our stores, it's been very beneficial to what's happened to the month of July.
If you look at May when our stores were open, July, and the way our calendar falls, we're actually in fiscal August; our comps have accelerated every single month. We're getting better every fiscal month as we proceed through this very unique time.
Got it. Then, on the exposure to some of the recent, you know, 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 looked, you know, we've watched the hotspots and, you know, we're living in one of the hotspots, and we certainly have watched it across the country, and our strength is across the country. We're seeing the same pace of improvement in the states where COVID is and where the trend is worse. We're seeing the same trend, you know, the same trends in our business where COVID's getting better. It's hard to explain and hard to rationalize, but, you know, 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.
Good afternoon. Thank you. I realize this 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, what have you learned? I'm also curious if the pros are giving you any color on whether consumers' aversion to having, you know, contractors come into their home has alleviated at all for the past few months.
Yeah. I can go. Maybe you know, Trevor, since he's in charge of pro, may want to jump in. But from my perspective, the pro is busy. pros that I have engaged with, I've been in many of our stores, and I spoke to many of our teams.
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, where was the consumer going to allow people into their home? I think by evidence of what's happened with our business, as you watch the trend in the acceleration in our sales trend from June to July, clearly I think the consumer is feeling okay letting a contractor in their house. We've done our part. We've tried to educate our professionals and, you know, say, Hey, make sure you understand social distancing. Make sure you wear masks. I think when someone lets a contractor into their home, in general, contractors are playing by the rules and making consumers feel comfortable. I believe that comfort level is good, and people are allowed in the homes.
Yeah, 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. What they told us is, as you would expect, when we shut our doors, they were finishing business. The minute we opened our stores, their business was incredibly strong. You know, 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. It does appear that, you know, just like you're seeing in our business, people are not currently averse to having pros. I think our pros are smart. As Tom Taylor said, they're social distancing. They're wearing masks. They're taking off their shoes. They're staying away from the clients in the house. Our pros' business is incredibly strong right now.
That's great to hear. Just from a category perspective, I was wondering; you talked about the overall monthly comp improving, you know, from May to June and into July here. Just wondering from a category perspective if you're seeing anything out of the ordinary. I guess from a Q2 perspective, you called out LVT being the best. I just wondered if you could shed some light on some of the other parts of the business.
Sure. Lisa, do you want to comment?
Sure, hi. Sure. This is Lisa. Yeah, 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. You know, we talk a lot about our good, better, and best assortment and how better and best have been driving our assortment or, excuse me, driving our sales. We did see a slight shift down during the curbside model. As soon as the stores opened back up, everything kind of went back to the way it was. While decorative accessories are a category that is heavily sold by our designers, people want to see that product, that was hard when we were in curbside, penetration did go down a little.
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 strengths are back to where they were before.
helpful. Thank you.
Thank you. Our next question has come from the line of Steven 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 and the math we were all doing three months ago, right, on, you know, any comp reduction relative to the original forecast. Obviously, we're moving the other way here. 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%-30% we were talking about on the downside, or is it closer to that 35%-40% in the normal state of the business?
Yeah, Steve, this is Trevor. I think if you're talking about it relative to our original guidance, so when I gave that comment about the 25%-30% flow through on a negative revision to sales on the original guidance, you know, that's what we expected. We obviously still believe that, you know, even though we're having a great performance now, our current expectation is that we're not going to achieve that original guidance. Because of the aggressive moves we've done with the cost maneuvers and, you know, lowering our costs, plus the positive results we're seeing now, we do expect that to continue for the rest of the year, maybe not at this level, but we do expect that to continue .
You know, I would expect that flow through to be probably closer to 20%. Since we're talking about negative sales versus the plan, a lower percent is a higher profit number. I think you guys get that, but just to be clear. Our profit outlook has improved materially from what we were thinking, you know, back in COVID-19 when our comps were down 50%. That's how we're thinking about the rest of the year.
Thank you. Then, either for Tom Taylor or Trevor Lang, can you just update us on how the commercial performed during the quarter? 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 Managers. Do you sort of view today's end -demand strength as an opportunity to push that initiative forward here? Or just updated thoughts on the commercial.
Absolutely push it forward. We haven't stopped hiring our RAMs across the country. You know, it's a, we like the activity that we're seeing. We have seen some bigger jobs come through as hotels have shut down and small businesses have shut down. The those end users that happen to have the liquidity to do it have taken on some larger projects during times when they're not as busy. That strategy's 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, and thanks a lot for taking my question. Tom, you mentioned that you didn't think the 16% that you're seeing in July was a function of pent-up demand. Trevor, you thought a run rate in the business, a reasonable run rate of the business, was coming up 6%. 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 mid-single digits?
I just, I guess, need one point of clarity, Michael. The way I was trying to explain it is the difference between what I would've thought we would've run, which was 6%; we said we thought we would comp 6% all year. I think the difference of that is really three main things. First, the unprecedented liquidity that the government has put into not only businesses but also consumers' pockets. I mean, that's probably the biggest driver. As Tom mentioned in his prepared comments as well, people are just spending a substantial amount of time in their homes looking at things or spending things on home offices and developments they know they need to do.
That and when you add to that the liquidity that they're not spending, you know, hundreds, probably thousands 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've been a mid- to upper single-digit comp to a, you know, mid-teen comp.
Do you think those are temporary factors, Trevor?
In one sense, yes, because I don't think the government's going to keep injecting the same level of liquidity that they have. You know, that's obviously under advisement, and the government's working on that right now. On the positive side, though, I don't think people are going to be traveling, and I don't think people are going to be leaving their homes anytime soon.
Absolutely.
Those are all sort of positives.
Yeah. I think, you know, 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 spending that they spend. If you remember, we slant to a bit of a higher-end customer. I also think that what Trevor's mentioning, that people, when they're having to work out of home and they're not being able to go out as much, are not just looking at the space but are having to repurpose space in their homes. I mean, if you've got to do your kids going to school in the dining room and you've got to, and you and your spouse are both working, you need to create two offices, and that's spurring people, you know, working within their homes and recreating space.
You know, those things—I believe that, you know, COVID's not going away; people staying home—that is going to last for a little while.
Without providing guidance, are you buying inventory for the mid-teens run rate comp for the back half of the year?
Our, you know, +80% of business is replenishment. We have a very sophisticated system and, you know, a substantial number of people that manage that. We're buying inventory based on the trends of the business.
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, we didn't, you know; we were thoughtful with our inventories as we went through the pandemic. As we've come out, you know, we're kind of on the offensive and the stores are in good condition.
Like, it's just one last thing I'll end with. You know, as I mentioned in my comments, the inventory growth we'd had at the end of Q2 was the highest we've ever had. A big part of that was because our cost of sales fell off pretty quickly because of COVID. You know, 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, you know, the supply chain team's doing an excellent job of fulfilling that demand. 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; I don't think you guys have ever done that before. Could you maybe talk and you actually also said on this call that there are a lot of DIYers that help with the quarter. 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.
Yeah.
That's changing.
Yeah. I think, we call a lot of times, we call the end user the DIYer. That, you know, that doesn't necessarily mean that they're actually buying it and putting it in themselves. 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 with 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 incredible, incredibly high, incredibly higher than anything else.
YouTube views of our product? we started an Instagram Live clinic for our associates, for our customers—'cause we couldn't do clinics in the store because of social distancing. The activity there has been good. Our virtual appointments: we did 8,000 virtual appointments. That's also, you know, the end user in the store. When I combine all of those things, I don't think that everyone, you know, necessarily thinks that my neighbor's coming in and is buying a pallet of tile and installing it this weekend 'cause I still think they're engaging a pro to do that.
When I look at our department comp sales, you know, that makes me feel like they're engaging with 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. You know, maybe they're on a backsplash more than they have historically. You know, they definitely want to engage with our product.
Thanks for that. Really helpful. My second question is the PRO business credit card. 180 days of free working capital seems like a game changer. Could you actually maybe elaborate more on that and how you think about it?
Yeah, it's just about that simple. We do think it's a game changer. There are also all kinds of other benefits that, you know, you can see on the website, or we can get you a pamphlet. Just some more; it's more than even just that, but we do think it's going to be very beneficial. You know, we'll see. We're just now starting to roll it out. It, you know, these pros generally aren't necessarily looking for this big credit solution. You know, that being said, it's one more tool in our arsenal to serve the pros.
You know, the other thing we can do with that Pro credit card that we're thinking about longer term is, you know, the costs are fairly materially below what we pay the credit cards; there are, you know, 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. Just getting started. I'm super proud of our IT team and our Pro team and our credit team that have worked hard on this for over a year. 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. Just with regard 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 ? Would that accelerate it, move it up into 2021 perhaps?
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; we had a good real estate pipeline in 2020 also, and we had to do a delay due to the pandemic and being able to get our stores physically constructed and get them to be able to open the right way. The pushing back of those stores, along with our 2021 pipeline, along with opportunities that have presented themselves in different parts of the country that we didn't anticipate.
It's collectively that we've been able to put together just a great, a great pipeline of stores for 2021 and 2022. All of the changes have given us the ability to have good cadence in the opening. The stores, for the first time since they have been opening at 20%, are going to open them at the right time. We're going to have a good amount across the quarters of the company. 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.
So that's, you know, we'll be able to go a little bit faster than we had been planning to.
The first part of your question: our real estate team did a great job. We deferred $5.9 million in payments in Q2 that we will be paying back most of it over the next year. The other thing that I think is exciting for us, and again, our real estate team gets credit for doing a great job, is that the rents we're getting this year and next year are the lowest I've seen in my nine-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.
You know, we've got some really good deal makers. You know, our rent costs are getting close to the high single digits versus the mid -double digits on a rent per square foot, square feet basis. 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 the 16% quarter -to-date once more. Realize it's sort of an average or weighted average, and in there you probably have some 20s and 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 a high, to higher than that number, or bias a little bit lower?
Just a couple things. We've had all of our stores open since early June. For the 16% in July, all of our stores have been open. 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, as I mentioned a second ago, you know, our fiscal August, which started last Friday, has actually been a little bit better than that.
Okay. The second question is, it looks like you'll do what, 13 stores and then to get to the 20%, about 27, I think, next year? Anything changing post-COVID? Because I think you've told us new stores cost or the operating cost is about one and a half times what an existing store's is in year one. Any offsets to that in thinking really about earnings power for 20 21?
No. Our total SG&A as a percentage of sales for new stores, I don't see coming down anytime soon. Even though we're having better real estate costs, you know, we've got higher depreciation as we're spending more CapEx. You know, our stores over three years old are kind of in the low 20% SG&A as a percentage of sales. Our new stores are kind of in the mid- to low 30% as a percent of SG&A. I currently don't expect that to change much. The only, you know, big driver of that is if these stores do higher volumes; you know, we'll obviously get more leverage out of that. Currently, I'm not sure we've seen any big changes there.
Okay. Thanks. Good luck.
Thank you. Our next question has come 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 theme of what we're seeing with trip consolidation in a post-COVID world, how do you think about your propensity to introduce, you know, 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. 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. As the stores have opened back up, we have definitely seen the customer very interested in completing that project with us. 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. From what we've seen so far in the very few stores that we've 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: they want to be able to complete the whole project, and that's how we view this business. We're excited.
That's great and really helpful. 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'll compare relative to 2020?
Yeah, this is Trevor. I think it's pretty balanced, new versus existing. You know, 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, you know, most of the last our history, 70% of our stores have opened in the last 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 easy 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 to profit from that comp strength than we could when we're thinking about relative to historical strength?
Yeah, again, we're not giving guidance just because there are too many ranges of outcomes. 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, you know, I don't think we're going to make that all up back between the end of the year; you know, we would expect that flow through relative to sales being lower than that original guidance in that kind of, you know, 20% 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. One unrelated follow-up. Are you thinking about the Chinese tariff exclusions and whether or not they might expire in August?
Yeah, this is Trevor again. The government keeps that under very close wraps. We are staying as close as 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, they should come to that same conclusion and not reinstitute the 25% tariffs. As we all know, the trade policies between the U.S. and China are getting more difficult, not less difficult.
Even if they were delayed, which again, we don't know the answer to , 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 six months or till the end of the year. 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&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 shift 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 in curbside, although we did continue with all of our digital marketing because our web business was so strong and we wanted to make sure that we were there when the customers were searching our category.
As the stores opened back up, we ramped back up with our TV advertising in the middle of June. We actually have the exact same cadence that we had planned before. In fact, we took a week that we had planned for April, and we've now moved those dollars into August. 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.
To Trevor, yeah.
Yeah. I'm just looking here. You know, our overall advertising is less than 3% of sales. It was, you know, even less than that , obviously, here. It was a minor component of that.
Got it.
it helped the deleveraging. We just don't spend a lot on advertising.
Great. 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? As you reopen the stores, you know, you've been able to get back the people you need in the right spot. What do you expect going forward, labor cost and that sort of recruitment retrenchment and retention?
There are a whole lot of questions in that. I'll do the best I can on some of what you said. We, as a You know, when we went into the pandemic, we decided to ensure that we could come out strong on the other side. 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. It's, I think it's part of our strength now that we came out on the other side with an intact team. We have started calling our part-timers back as we reopen our stores, and we've gotten a very high percentage of those part-timers to come back. 80% have come back.
We are, you know, we're hiring where we need to hire. You know, in retail, when sales are like this, it seems like you're always chasing to get talent in the stores. 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 the majority of our promotions come from inside. We're a good place to work. We feel solid about our workforce. There was a lot else in that question. What else did I miss in the question?
Yeah. Are you comfortable now that getting 80% back was enough, given that sales are now running up by 16%? Or would you like to get 100%?
Sure. Well, it's not just that. You'd like to hire new full-timers. You know, in retail, you're gonna have pockets of the country where it's, at times, harder to get help. That's not something that's new. It's happened before. You know, we've got good hiring events going on in the markets where we need people. We're seeing good, a good amount of attendance at those hiring events and making progress getting staffed where we want to get staffed.
That's great. 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.
Right
Part-timers have come back on a pretty good basis. That may make it a challenge to hire people. We're, you know, seeing some of that, but it's an obstacle we believe we can overcome.
That's great. Good luck, everyone.
Thank you.
Our final question comes from the line of Elizabeth Suzuki of Bank of America. Please proceed with your questions.
Great. Thanks, guys. Have you heard anything about any difficulties getting lumber? you know, we've heard that from some of the home improvement stores. Is that translating into hardwood flooring as well? 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. No, we have not seen product shortages. As we talked about on the—I think it was the first quarter call, you know, as different parts of the world shut down, we did have different times where there were various countries not shipping. 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. We have not really seen that as an issue. We feel very good about our in-stock position today. We feel very good about the inventory that we have coming.
We've all of our vendors back up and shipping, and kind of the silver lining, I think as Tom or Trevor mentioned, the silver lining of being shut down for that time was it allowed us to catch up on some of our China transitions that we had. We feel very good about our position today.
Great. That's all I have. Thank you.
There are no-
Sorry.
No, go ahead. You were going to say there are 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, you know, 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 to you 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.