Earnings Call: Q3 2019

Nov 1, 2019

Greetings, and welcome to Floor and Decor's Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Wayne Hood, Vice President, Investor Relations. Thank you. You may begin. Thank you, and good morning, everyone. Joining me on our call today are Tom Taylor, Chief Executive Officer Trevor Lang, Executive Vice President and Chief Financial Officer. Also in the room is Lisa Laube, Executive Vice President and Chief Merchandising Officer, who will join us for the Q and A session. Before we get started, I'd like to remind you that 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 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 statement for any reason, including those listed in its SEC filings. Corning 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 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. Florentdecor.com. A recorded replay of this call, together with related materials will be available on our Investor Relations website. Now let me turn the call over to Tom. Thank you, Wayne, and thanks to everyone for joining us on our Q3 2019 earnings conference call. On today's call, I will discuss the highlights of our Q3 results as well as the progress we are making on each of our strategic growth initiatives. Trevor will then review our Q3 financial performance and updated outlook in more detail, and then we will open the call for your questions. We are pleased with our Q3 2019 results as total sales increased 19.5% to a record $521,100,000 from $435,900,000 last year despite an estimated 70 basis point headwind to our comparable store sales caused by Hurricane Dorian. As we anticipated, our 3rd quarter comparable store sales growth accelerated from the first half of twenty nineteen to 4.6 percent from 3.1 percent and was in line with our expectations of 4% to 5.5% growth. Excluding Houston, our comparable store sales increased 6% from last year. We are pleased with our Q3 sales growth of 19.5 percent considering Q3 U. S. Hard surface flooring square foot sales could have increased only 1.3% from last year according to Catalina Research. Moving on to earnings. We reported Q3 2019 GAAP diluted earnings per share of $0.39 a 56% increase from 0 point 0 point 2 $5 in the Q3 of 2018. Our adjusted Q3 2019 diluted earnings per share increased 12.5 percent to $0.27 from $0.24 in the Q3 of 2018 and was above the high end of our expectations of $0.25 to $0.26 Let me now discuss some of the drivers of our Q3 2019 sales and earnings growth and how we see the remainder of the year. As a reminder, the core pillars that we focus on to achieve our long term sales and earnings growth targets are 1, opening large warehouse stores in new and existing markets at a 20% annual rate 2, growing our comparable store sales mid to high single digit 3, investing in our Pro customer and 4, expanding our connected customer experience. I will now touch on the progress we are making on each of these growth initiatives. 1st, opening new large warehouse stores. We opened 7 new warehouse stores in the Q3 of 2019 bringing the year to date total of warehouse stores that we operate to 113 stores, up 18.9% from 95 warehouse stores last year. In the Q3, we opened 3 new warehouse stores in July including new stores in St. Louis, Missouri, Thornton, Colorado and El Paso, Texas. In August, we opened a new store in Pineville, North Carolina and in September, we opened 3 new warehouse stores in Moreno Valley, California, Wichita, Kansas and Irving Park, Illinois. As we look to the Q4 of 2019, we expect to open 7 new stores, of which 4 new stores opened in October, Columbus, Ohio North Charleston, South Carolina Shelby Township, Michigan and Humble, Texas. We expect to finish the year by opening 3 new stores in November, including 2 new stores in California and a new store in Tolleson, Arizona. Through September, we have successfully opened 13 new warehouse stores and are on plan to open 20 new stores in 2019. This will be our 7th consecutive year of 20% average annual unit growth. We remain particularly pleased with our 2019 class of new stores. This class of stores is on track to be our best class of new stores from a 1st year sales perspective. This is a direct result of our continuing efforts to open more inspirational and engaging stores, our unique localized assortment strategies, our growing brand awareness and the benefits of scale from opening stores in existing markets. Among our 2019 class of new stores, 60% will be opened in existing markets in 2019 compared to 35% in 2018. Beyond 2019, we remain excited about the strong pipeline of new stores that we have lined up, which will allow us to sustain 20% unit growth for the foreseeable future. We expect as we grow our store grades that our brand awareness will continue to grow. To that end, we have seen significant increase in our consumer brand awareness in 2019, increasing 7 points to 64% from 57% last year, including a 3 point increase in unaided brand awareness to 13% according to a 3rd party study. Our research tells us that if we can get customers to shop our brand in store or online before making a purchase decision, they buy from us 77% of the time. Building brand awareness is an important part of growing our market share as we have strategies that will convert those aware of floor and decor into shoppers and in turn into purchasers. After we convert them into purchasers, we want them to become loyal and be brand advocates. Moving on to our 2nd pillar of growth, comparable store sales. Our 3rd quarter comparable store sales growth of 4.6% was at the midpoint of our guidance of 4% to 5.5% growth as Hurricane Dorian slowed traffic into our Florida stores late in the quarter, which as we mentioned was an estimate an estimated drag of about 70 basis points to our comparable store sales. The increase in our Q3 comparable store sales was largely driven by 2.8% growth in our comparable store average ticket and a 1.8% growth in our comparable customer transactions. On a 2 year stack basis, our 3rd quarter comparable store average ticket grew 1.4 percent, which was equal to the 2nd quarter's 2 year stack growth. We were pleased to see the sequential acceleration in our 3rd quarter 2 year stack growth rate in transactions to 14.5% from 13.1% in the Q2 of 2019. Turning to our sales performance within our merchandising categories. Consistent with prior quarters, our strongest sales growth continues to come from our laminate and rigid core luxury vinyl plank category where we have an industry leading assortment. 3rd quarter sales in the category increased 38.7 percent to $116,000,000 and accounted for 22% of our sales, up 300 basis points from 19% last year. Our strategies to accelerate growth in Installation Materials continue to deliver strong results. 3rd quarter sales increased 27.1% and are up 27.5% year to date. The sales penetration in the category is up about 100 basis points to 17% from 16% last year. As I look at our tile business, we're making progress as our sales in the Q3 grew at a faster rate than the Q2, but we're still working through some product transitions as a result of moving sourcing away from China, which we'll cover shortly. We believe our strategies to bring trends and innovation like our Maximo Thin Tile is a contributing factor to the improvement. Across all merchandising categories, we continue to see the strongest growth at the better and best price points. We continue to build on the successful strategies to drive incremental growth by adding adjacent merchandising categories. For example, we now have bathroom vanities in 32 stores and expect them to be in all new stores in 2020. We are pleased with the early results and we'll continue to build out our assortments and delivery options. While we will always be a hard surface flooring retailer, our adjacent merchandise programs are currently small in isolation. They represent incremental, scalable, adjacent growth opportunities and help us meet the demand we see from our professional and do it yourself customers. We are also continuing to build on our design services and are seeing significant traction. It's exciting to see the number of appointments exceeded 100,000 through the Q3 of 2019, which is almost double over the same period last year. To further build on this growth, customers now can set up design appointments on their mobile devices. We expect to build on our conversion as our CRM systems will take us from mostly a manual follow-up process to one that is driven by task prompts to ensure there is timely follow-up. As we have discussed in prior quarters, when the designer is involved with a customer, our average transaction size can be 3 to 4 times greater than our company average. Expanding to the connected customer experience is our 3rd pillar of growth. We continue to see robust growth from our connected customer strategies. Our 3rd quarter e commerce sales increased 54% and accounted for 10.2% of our tendered sales, up about 2 25 basis points from last year on the back of double digit growth in traffic. Part of our strategy to drive growth comes from adding new online tools that make the customer journey less intimidating. In the Q3, we added measurement calculators for square footage, mortar, sealant and moldings making it easier to determine the materials needed for the 4th flooring project. Our main product landing page was also modified to reflect these additions. To build on this, we expect to add a room visualizer in the Q4 of 2019, which will be personalized by room experience and integrated with our shopping cart to tender on a project online. Our 4th pillar of growth comes from investing holistically in our professional customers. As we have discussed in the past, investing in our Pro customers to drive loyalty and brand advocacy is a strategic priority of ours as we look to increase our share of wallet with our existing Pros as well as engage with Pros that do not currently shop with us. Important enablers to grow our market share include our Pro Premier points based rewards program, our Pro Partner Services and our Pro App. Let me speak to how each of these are contributing to growth. First, our Pro Premier rewards program which launched in the Q3 of last year continued to grow enrollment. On average, we see a meaningfully higher rate of comparable store sales growth in stores that have strong enrollment and are excited about further driving awareness and enroll. Moving to our Pro Partner Services program where we have an umbrella of service offerings, which give our Pro significant cost savings. In the Q3, we added Lenovo to our stable partners, bringing the total number of partners to 17. We now believe we have a critical mass of partners which will enable us to drive further engagement through our programs umbrella of cost savings offered to our pros by our partners. We continue to be pleased with the growth and the number of pros that are using our Pro app which was launched last year. Over 35,000 pros have now downloaded this application. As we have discussed in prior quarters, pros can use the app for receipt tracking, order details, SKU search, inventory lookup, quote build, order function and UPC scan and tender purchase. We expect usage to grow as we continue to build out our awareness, features and functionality including scheduled pickup and pro check-in. Through our Pro Premier Rewards program, our Pro App and our Pro Partners, we are gathering critical information that is being integrated into our CRM database to deliver better personalization. Collectively, these are examples of how we continue to add capabilities that enable us to drive engagement, customer satisfaction and wallet market share among certain segments of the pro market. Separately, we continue to build out our outside commercial sales infrastructure in the Q3. As we discussed in the Q2 earnings call, these regional account managers are outside our stores and focus on larger job sizes and like commercial projects that our store teams are not adequately able to serve. While our commercial sales remain small in isolation relative to our total sales, the segment sales growth continues to far exceed our total sales growth. Now let me turn my comments to how we are thinking about the macroeconomic and geopolitical factors that affect our industry and the company. Let me start by saying that we remain very pleased with our merchandising and supply chain team's efforts to mitigate the impact of tariffs on our product costs. As a reminder, about half of the products we sell were imported from China in 2018. We are fortunate that we have a very flexible global supply chain and an experienced merchandising and supply chain organizations that have allowed us to quickly diversify our countries of origin. We continue to expect the percentage of products that we sell that are outsourced from China to decline to the mid-30s by the end of 19 and to be less than 20% over time. Moving on to the potential impact of countervailing and antidumping duties imposed on ceramic tiles, tile, wall and tile deco that are sourced from China. As explained by our 10 Q in September 2019, the Department of Commerce reached a preliminary determination that imports from China were subsidized and imposed preliminary duty rate of 103.8%. The Department of Commerce is expected to reach its preliminary determination as to the level of antidumping, if any, in early November 2019. Once the Department of Commerce has reached its preliminary determinations, it will instruct the U. S. Customs and Border Protection to require cash deposits based on these preliminary rates. These determinations are preliminary only and are subject to revision or rescission either by the Department of Commerce's final determinations expected in March of 2020 or in the U. S. International Trade Commission's final determination with respect to injury shortly thereafter. If orders are issued, the final rates will be determined during an administrative review in approximately 2 years. While it's too early to determine what the outcome of this investigation will be and what impact, if any, it will have on the company, we have aggressively moved the affected SKUs that are subject to countervailing and antidumping from China to avoid the increased duty costs. Among the macroeconomic metrics that impact our industry and company, namely existing home sales and home price appreciation, we like many others remain cautiously optimistic that the decline in mortgage interest rates will serve as a catalyst to moderate the persistent year over year decline in existing home sales that occurred in 2018 and early 2019. We have been encouraged that existing home sales began to turn the corner in the Q2 of 2019 and are now growing year over year albeit modestly. On the other hand, home prices as measured by Case Shiller have moderated to low single digit growth from mid single digit growth. We watch many other housing metrics, but we rely more on our company specific drivers, which we believe will lead to mid single to high single digit comparable store sales growth over the long term. As we think about the remainder of 2019 and beyond, we continue to believe that we will grow our market share in hard surface flooring through our ongoing innovation strategies and by offering consumers easy, affordable and updated stylish flooring solutions. Before I turn the call over to Trevor, I would just like to close by saying that we believe our Q3 year to date 2019 results continue to validate the strength of our value proposition in the hard surface flooring industry. I would like to thank all of our associates for their hard work and exceptional service to our customers. I will now turn the call over to Trevor to discuss more of the details of our Q3 results and our updated 2019 outlook. Thanks, Tom. I'm going to concentrate my comments on some of the changes among the major line items in our 3rd quarter 2019 income statement, balance sheet and cash flow statements and then discuss our outlook for the Q4 of 2019. Tom already discussed our 2019 Q3 sales results, so I will start with our Q3 gross margin. On a dollar basis, our gross profit increased 20% which was slightly higher than our 19.5% sales growth as our gross margin expanded 10 basis points to 41% from 40.9% last year. This increase in gross margin was primarily attributable to higher product gross margin. Turning to our 3rd quarter expenses, selling and store operating expenses increased 25.4 percent to $137,000,000 from $109,200,000 last year and deleveraged 130 basis points primarily from our new store. As we have discussed in prior quarters, our new store selling and operating expenses as a percentage of sales are approximately 50% higher than our stores opened greater than 1 year, which results in near term operating expense deleverage. Our comparable store selling and store operating expense ratio increased by approximately 20 basis points from last year as we incurred higher operating expense related to store merchandising initiatives and advertising expense when compared to last year. These expenses are timing related. For the 9 months ended September 26, we continue to obtain nice expense and operating margin leverage for our comparable stores. Our Q3 general and administrative expenses increased 40.7 percent to 37,200 dollars from $26,500,000 last year inclusive of unique items which are reconciled in our earnings release. In the Q3, we took an impairment charge of $4,100,000 related to our related to exiting our former store support center. As discussed in previous earnings calls, we have now completed the relocation to our new store support center and this impairment relates to exiting our former store support center. In October, we executed an agreement with our former landlord to terminate this lease. We will take a $2,100,000 charge in the Q4 for the lease termination as well as approximately $400,000 in accelerated depreciation and rent costs associated with the former store support center which is included in our guidance. Excluding unique items which are mostly related to our store support center relocation costs, our Q3 general and administrative expenses increased 19.4%. Our Q3 2019 preopening expenses declined 1.8 percent to 8,200,000 dollars from $8,300,000 last year and leveraged 30 basis points year over year. The favorable preopening expense leverage is primarily due to an enhanced store opening process which shortens the period it takes to open new stores thereby lessening pre occupancy cost as well as opening fewer stores and higher cost metropolitan markets in the Q3 of 2019 when compared to the Q3 of 2018. Our Q3 interest expense declined 8.9 percent to $2,000,000 from $2,200,000 last year. The decrease in interest expense was primarily due to lowering our average 3rd quarter debt balance to $146,600,000 from $160,600,000 last year as well as ending the quarter with $84,100,000 in cash. Turning to our Q3 profitability. Our 3rd quarter adjusted EBITDA increased 16.8 percent to $57,100,000 from $48,900,000 last year and was in line with our guidance of 57,000,000 dollars to $58,500,000 Our adjusted EBITDA margin rate declined to 20 basis points to 11% from 11.2% last year and was in line with our expectations of 11% to 11.1%. Adjusted third quarter net income increased 9.9 percent to $28,100,000 from $25,500,000 last year. Our adjusted earnings per share increased 12.5 percent to $0.27 from $0.24 last year, which was 0 point 0 $1 above the high end of our guidance $0.25 to $0.26 We ended the quarter with 105,200,000 diluted weighted average shares outstanding compared with 104,600,000 last year and our guidance of 104,900,000 dollars Moving on to Q3 balance sheet and cash flow. Total 3rd quarter inventory increased 19.9% from last year's Q3 and is up 2.7% year to date. The rate of growth is in line with our expectations. The improvements we are making in our 2019 working capital have contributed to a 45.9 percent increase in our operating cash flow to $209,600,000 As a result, our free cash flow doubled to $68,700,000 from $34,300,000 last year and was a contributing factor to the $83,500,000 positive swing in our cash and cash equivalents. As of September 26, 2019, we had $369,600,000 in unrestricted liquidity consisting of $84,100,000 in cash and cash equivalents and $285,500,000 immediately available under our ABL facility. Now turning to our earnings guidance. While we are pleased with our Q3 year to date results, the Q4 has started off slower than we anticipated. As a result, we are trimming the top end of our adjusted 2019 guidance and now look for fiscal 2019 adjusted diluted earnings per share of 1.09 dollars to $1.10 versus our prior expectations of $1.09 to $1.12 Let me now discuss some of the more important building blocks to our recast of fiscal 2019 earnings outlook. We are still planning on our quarterly sales growth to sequentially accelerate in the Q4 2019 albeit at a slower rate than previously forecasted. The acceleration is still expected to come from strategic price increases to offset the impact of 25% Chinese tariffs, more new stores ending in the comparable store sales base and the drag from Houston abating as we have now reached the 2nd anniversary of Hurricane Harvey. That said, we are now planning on a lower comparable store sales growth rate in the 4th quarter versus our prior guidance based on current quarter to date trends. There are four reasons behind our lower 4th quarter comparable store sales growth. 1st, traffic has not accelerated at the rate at which we thought it would curve. 2nd, we are seeing higher new store sales cannibalization as some of our new stores are doing very well and pulling more sales from existing stores than we had contemplated. 3rd, we have seen an increase in our out of stock in tile and wood as we transition away from China sourced product. And 4th, we currently have not had to increase retails as much as we had originally contemplated as our costs have not increased at the same rate as modeled this summer. We believe the majority of these are transitory issues that should abate as we move into fiscal 2020. We believe the class of 2020 will not be as cannibalistic next year. We are actively working to improve our in stocks and it currently does not appear that there will be any higher tariffs in the near future. I also like to mention, I think it's worth mentioning that if you exclude our stores in Houston that are negative comping due to abnormally high volumes due to Hurricane Harvey and our stores that have been strategically cannibalized, our comparable store sales are currently in the low double digit range. We continue to have a healthy business. We expect our Q4 2019 sales to be in the range of $523,000,000 to $529,000,000 an increase of 20% to 21% versus the Q4 of 2018. This growth outlook is based on a comparable store sales growth of 4% to 5%. Excluding the Houston market, we expect our comparable store sales to be in the range of 5% to 6%. We expect our 4th quarter gross margin rate to decline by about 100 basis points due primarily to opening our new distribution center in Baltimore, Maryland where we will incur about $4,000,000 in cost worth approximately 70 basis points. We are excited to open this brand new state of the art 1,500,000 square foot distribution center, one of the largest buildings in the state. Our New Baltimore distribution center increases our distribution capacity by 50% and will serve about a quarter of our current stores. The distribution center will start to leverage these upfront costs in 2020 as it begins shipping to stores and our supply chain gets the benefit of lower stem miles. Excluding approximately $2,500,000 of previously mentioned termination and other costs associated with the relocation to our new store support center, we expect our Q4 operating margin to be approximately 6%. This is down from the Q4 of 20 eighteen's adjusted operating margin due primarily to the cost tied to our new Baltimore distribution center and $1,100,000 in incremental costs related to our new larger store support center. Diluted earnings per share for the Q4 is expected to be $0.18 to 0 point 19 dollars and our adjusted diluted earnings per share is expected to be $0.20 to $0.21 We are assuming 105,400,000 weighted average fully diluted shares outstanding for the Q4 of 2019. We are planning on our adjusted EBITDA for the Q4 of 2019 to be $52,100,000 to $54,000,000 an increase of approximately 17% to 21% over the Q4 of 2018. Turning to our full year outlook, we expect net sales for fiscal 2019 to be in the range of $2,041,000,000 to $2,047,000,000 an increase of approximately 20% to 21% versus fiscal 2018. This net sales growth outlook is based on 20 new warehouse store openings and a comparable store sales increase of approximately 4%. Excluding the impacts of Houston, we are planning on fiscal 2019 comparable store sales to increase approximately 6.1%. Assuming we achieve our full year comparable store sales growth expectations, we are proud to be able to accomplish this above industry growth rates yet again. We have had substantial success in improving our gross margin rate through the 1st 9 months of 2019 with 25% tariffs on Chinese imported products. Even with tariffs now increasing from 10% to 25 percent on Chinese flooring imports and taking on an incremental $4,000,000 in cost to open our new Baltimore distribution center in the Q4 of 2019, we plan to have a modest increase in gross margins of approximately 20 to 30 basis points for the full year. This speaks to the strength of our model and our talented merchandising and supply chain teams. Moving on to full year SG and A expense, we continue to expect total SG and A to deleverage as a percentage of sales through the new stores. Fiscal 2019 diluted earnings per share is expected to be $1.28 to $1.29 and adjusted diluted earnings per share is expected to be $1.09 to $1.10 Diluted weighted average shares outstanding is expected to be $104,900,000 and our fiscal 2019 tax rate is still estimated to be 23.3 percent for the remainder of fiscal 2019. As a reminder, this guidance does not consider the tax benefit due to the impact of stock option exercises that may occur in fiscal 2019. We expect fiscal 2019 adjusted EBITDA to be in the range of $236,000,000 to $238,000,000 an increase of approximately 23% to 24% over fiscal 2018. Total capital expenditures in fiscal 2019 are now planned to be between $203,000,000 to $213,000,000 versus our prior $205,000,000 to $215,000,000 guidance and will remain funded primarily by cash flow generated from operations. Our fiscal 2019 capital spending plans reflect the following growth investments: opening 20 stores and start construction on stores opening in early 2020 using approximately $131,000,000 to $137,000,000 of cash investing in existing store remodeling projects in our distribution centers using approximately $35,000,000 to $37,000,000 of cash invested in our new store support center, information technology, infrastructure, e commerce and other store support center initiatives of approximately $37,000,000 to $39,000,000 in cash. Tom and I are proud of how we performed in 2019 and we look forward to fiscal 2020. I like to thank all of our employees for the great work they are doing to democratize hard surface flooring while also serving our customers. Our first question comes from Seth Sigman with Credit Suisse. Please proceed with your question. Hey guys, good morning. Thanks for taking the question. I wanted to follow-up on the product transitions that you talked about on the back of tariffs. Can you just discuss where you are in that transition today? When do you think that gets resolved? And if you could give us any sort of color on how much that may have impacted Q3? And does that impact actually increase in Q4? Is there a bigger impact in Q4? That would be helpful. Yes. This is Tom. Hey, Seth. I will take the first step of that. So look, due to tariffs, antidumping and countervailing, we've been very active with transitioning SKUs out of China. As you know, in 2018, 50 percent of our sales came from SKUs out of China. That number will be down to the mid-30s by the end of this year and going even lower in the future. With that, there's a lot of moving parts and our in stock hasn't been as good as we'd like it to be within a couple of our categories that are affected. It's hard to put an exact number on it because when you have 300 options in tile and you're out of a few skews of tile, you try to get another tile into the customer's hands, but sometimes that isn't possible. So we are continuing to work on it. We think that our out of stock situation will be much better by the time we get to the Q1. So we're I think that's the answer. Okay. That's helpful. And then I guess related on the pricing topic, you mentioned that you didn't need to raise pricing as much. Is that because of your ability to change sourcing or just any more color on that? And then I guess related, what is the implication when you look at your pricing versus competitors? Should we be assuming that your price advantage is actually widening here? Just any more color on that would be helpful. Yes. So for sure, our merchants did a better job than we had anticipated. We're fortunate to have an excellent team in place on both the supply chain side and on the merchandising side. And they did a really good job of negotiating with our suppliers and moving product quicker than we thought. So we haven't had to take a lot of the price increases that we had anticipated. So that we're pleased with that performance. That was the other part of the question. Seth, what was the last question? And I guess the implication on that, I mean, just the price gap versus your direct competitors and how you look at that? Yes. So I'd say during the independence that it's probably wide that we've gotten better. And I think during the with the big box competition, it stayed consistent. Great. All right. Thanks guys. Our next question comes from Zack Fadem with Wells Fargo. Please proceed with your question. Hey, good morning guys. So first question on the slower start to October and as we recalibrate our comp buildup for Q4, could you walk us through your new expectations here for the impact of price? I think it was previously 250 basis points and as well as new stores entering the comp base and cannibalization. And how have these factors changed relative to how you were thinking about them last quarter to get to that 4% to 5%? I'll let Trevor start and take you through kind of how what drove the change. Hey, Zach, this is Trevor. The estimates I'm about to give you are directional. As Tom mentioned, it's very hard to measure some of these things because when we have close to 3 positions of tile just because they're out of a few, you don't know if maybe they picked another suite that you had. But you're right, we listed 4 items. We would estimate that the cannibalization we just opened a handful of stores, more than a handful of stores, really most of our new stores that are exceeding our volume expectations. And we're obviously very proud of that fact. They get the profitability a lot faster. They're just doing incredibly well. And because of that, we would estimate that maybe 100 basis points to 125 basis points of the comp that we've adjusted for the Q4 is just due to these new stores and exceptionally well and taking more volume out of our existing stores. 2nd, we talked about out of stocks. We would estimate maybe that's costing us 50 basis points to 200 basis points really in our tile and our wood businesses is where we've got the bigger out of stocks. And then finally on the price, as Tom mentioned, our merchandising and supply chain teams have just done a great job of getting cost out of both the product and the supply chain, and maybe that's 20 to 50 basis points. So if you add those 2 up, you'd get probably 170 to 375 basis points of that change. And I think the remainder of it is exogenous factors that are leading to traffic that is we're just not seeing the traffic expectations that we had. So that's as best we can do directionally to reconcile the change in the guidance that we had when we talked to you in July versus today. Got it. Really helpful. So that was the change there. And then so I know you won't provide 2020 guidance for a little while, but just given all the moving parts around tariffs, countervailing duties and then also the new DC, I'm hoping you could add some clarity into what the first half of next year should look like, at least to the gross margin line from a modeling perspective? Yes, I'll take a crack at that. We're not done with our budgeting process, but we are confident at this point based on everything we see, we would expect total sales, comp store sales and profitability to grow at a faster rate as we get into 2020 versus 2019. Again, we've got to finish some of those analyses up. Couple of things, we're not going to have the Houston headwind Hopefully, it's never talked about again after this quarter. We do believe we're going to be in a better macro environment from a housing perspective. You guys will remember Q4 starting in 2018 was one of the worst existing housing turnovers and that really persisted through the first half of this year. We've now had 3 months in a row of existing home sales turning positive. Mortgage rates are now down 100 basis points from where they were last year. That's historically led to an increase in existing home sales. And so and the fact that there will be some tariff increase prices in at least the first half of next year because we didn't really start doing that until July or August. And so those things all lead us to a better sales, comp sales and profit perspective. And the final thing, as we see the world today and again we'll update you guys in March, we're going to open the most amount of new stores in the Q1 of next year that we've ever opened and we're proud of that. The 8 years I've been here, we really wanted to get to that. And so we're excited to have a lot more new stores open in the first half of the year, which again, that's part of the reason our total sales we believe will be higher than they are the growth will be higher than it is this year. From a profit perspective though, because we have this new Baltimore distribution center that we're opening late in kind of November this year, because the new corporate office will be a little bit more expense, While opening new stores is an incredibly good thing for us for the year, there will be some pressure because we have preopening expenses and things like that. And so I do think it's going to be kind of a smile type format where your the first half of next year will not be as profitable growth as the second half of next year. And but we do believe we're going to have, as I mentioned, better top line growth and bottom line growth as we look to 2020. Got it. Appreciate the color, Trevor. Thanks for the time. Our next question comes from Christopher Horvers with JPMorgan. Please proceed with your question. Thanks. Good morning, guys. So I had a question, just a clarification. You said you still expect comps to accelerate in 4Q and you're guiding 4% to 5% and you did have 4% to 6% in the Q3. And then I had a question about sort of what you're basing that guide on and is that assuming sort of October's trend stays? Are you assuming any acceleration in November December because presumably the push from Dorian, if it was 70 bps to 3Q and we recapture that, that should be a couple of 100 basis point benefit to October. So just trying to reconcile all that. Yes. So I'll hey, Chris, this is Tom. I'll start and then Trevor will jump in. So yes, our guidance for the quarter, while October started off less than we had, it still was an acceleration from the Q3. And it was by any other measurement, it was a good month, just wasn't as good as we thought. And we do anticipate that things will continue to accelerate as we get to November December. And I just this is Trevor. I'm just looking here. October, I think, was the 2nd best month we've had in the year so far. So it is a bit better. But we do believe that our comps will continue to accelerate as we get into November, December. Again, we're getting further away from Hurricane Harvey. We've got more new stores coming into the comp base and especially in December and last year. And there's usually a bit of a lag. I think you guys all know that. But last year, really November December is when you had the incredible fall off in existing home sales. And so for those reasons, we do believe that November December will be slightly better than October. But again, October was better than Q3 and I think it was the 3rd best month we've seen all year. And do you think that the recapture of doreen was all in October or is that something that bleeds out over the entirety of 4Q? What's interesting about hurricanes for us is, if they're heavy rain hurricanes like we saw in Harvey, that obviously helps our business a lot. But when you have a hurricane like Dorian that scares everybody and they spend a lot of their discretionary income to try and make their home safer, that's just lost discretionary income. So you don't know if you get as much of that back. And so because Dorian, thank goodness, just kind of skirted the East Coast of Florida, people went out and spent a lot of their discretionary income on fortifying their house to avoid what could have been a big catastrophe. So we don't see as much of that come back like we would historically in a big rain type hurricane. So maybe we'll get some of that back, but importantly, this is good, but we're not planning on it. Okay. So just to clarify, you're guiding in 4Q with what you did in 3Q. So what's the acceleration comment? Well, I think we comped 4.6% in Q3. And I guess if you see the high end of that comp, the guidance we gave would be higher. All right. Got it. Thanks so much. Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question. Thanks. Good morning. So it sounds like October was a decent month, just not as much traffic as you thought. Can you talk about how broad based that not as much traffic comment reflects? Or did you make your plan? Or did you think you'd get into your plan in some places? And then just any explanation why traffic wasn't as good as you thought and this is going to is this far off? But how do you rule out that it's not competitive whereas some competitors doing something different? This is Trevor. I would say we lowered our guidance in Q4. So obviously, October wasn't as strong as we had originally thought. We do have fairly detailed reforecast in October. And so as we were seeing that performance, we were down. We've seen the slowdown. It's not one category. It's not one region of the country. It has been fairly broad based. I would say on the competition front, as we mentioned versus the independents, we feel as good as we've ever felt. I think they're feeling the pinch of the complexity of all this macroeconomic, geopolitical more so than we are just because it's even hard for some in some cases for them to get inventory versus we carry a lot of inventory. So I think we've gotten better versus the independents. And the home centers, we watch them very closely. We have big regional teams that live and breathe in the 8 regions that we quantify our regions by. They're sending an analysis every single week on what they're seeing and what the competitive set is doing. And I think what we've said for the 3 years of the Republic and the only 8 years I've been here, they get better. They're obviously focused on this category, but we're also getting better too. And so I do believe they're getting better. And I think if we'll see what they report when they come out with their numbers. But this year, we meaningfully outperformed, and I think they've not called out parts of this board and is comping above the company average. So I think that's how I'd answer that. Yes. I think, look, our competitive moat really hasn't changed. There's always been resets that go on within the home improvement centers. They're always resetting, upgrading and trying to improve not just the flooring department, but departments across their stores. We certainly we pay attention to that, but it doesn't we have 78,000 square foot stores that are just different than we have the broadest in stock assortment by a lot. So I think our competitive mode is well intact. Okay. And my follow-up, I guess part of the traffic improvement or that you missed your plan a little, did you assume that at this point you'd see a bigger benefit from existing home sales inflecting? And then can you talk about the typical lag? We've had only a couple of months now of improvement. It's been modest as you said, but when should we see a response to that? Yes. I think our modeling shows somewhere between 3 to 6 months, and we were expecting traffic to get better when we gave guidance this summer, not so much that we because we thought the environment would get a ton better, but we knew we were coming up against big negative numbers. Mean really when you look at the when you break apart by month, it was really November and especially December where that existing home sales fell off. So but we as you said, as we said, we just haven't quite seen that quite yet. Great. Thanks. Good luck in the Q4. Thanks. Our next question comes from Michael Lasser with UBS. Please proceed with your question. Good morning. This is Atul Maheshwari on for Michael Lasser. Thanks a lot for taking our question. So on the tariff related price increases, just on the SKUs where you have actually raised prices, how have consumers reacted to it? And what are you seeing from the rest of the competition in terms of their price increases? Hi, this is Lisa. So we actually did earlier in the year as we were getting a glimpse that tariffs were coming, we did quite an exhaustive test across our chain and did not see a dramatic impact to the SKU unit velocity as we raised prices. So as we rolled those price increases out through the rest of the chain, it has been saying we have not seen any material impact in the amount of units or square foot that we're selling. So I think that from that perspective, we're very happy that from a competitive perspective, we are in line with everyone else and the customer understands what's going on in this business. Thank you. And as a follow-up on the traffic being slower than expected in October, do you think it could also be more macro related due to the decline in existing home sales from earlier in the year? Or do you don't think that macro is a bad guy here? Very hard to say. I mean, we've looked at it as Trevor mentioned in his comments, we've looked at it in lots of different ways and it's really hard to pinpoint, but it's really hard to say. Okay, fair enough. Thank you. Our next question comes from Kate McShane with Goldman Sachs. Please proceed with your question. Hi, good morning. Thanks for taking my question. I had a question specifically around the cannibalization. I think you've mentioned it won't be as much in 2020, but wondered if the why that would be the case if the new classes of stores are getting better, why there would be less cannibalization and your list of the mix of new markets versus existing markets for 2020 versus 2019? Yes. I think in 2020, we'll open in less existing markets than we did this year. This year, we were at 60 this year, we were at sixty-forty in our new markets, which was more than the year before. So we're cannibalizing more this year. Next year should get a little bit less cannibalization, but not we're still going to cannibalize. And look, we cannibalize strategically, right? Our goal is to grow total market share and we're going to provide the customer with the best experience. So in a lot of cases, we're opening stores on top of higher buying stores, older stores and they it's we're pretty good at predicting the new store sales where sometimes we struggle with predicting the cannibalization, but we're learning every store that we open. Okay. And just as a follow-up, have you seen a difference in the start to Q4 across most is it happening across most of the chain or is there a regional difference? And can you talk about comp trends at your more mature stores versus the newer stores? Yes. So we have looked at it across we only have 100 stores in 8 regions. So we obviously analyze that closely. And we have seen been a bit consistent. There's a couple of regions that are a little bit better than they were in the Q3, but for the most part, we've seen it very consistent. And again, from a product category perspective, haven't seen it all come in one category. As we mentioned, tile and wood have got some in stocks as we transition away from China. But there's not one category and there's not one region of the country that we can specifically tie to. Thank you. Our next question comes from Jonathan Matuszewski with Jefferies. Please proceed with your question. Yes, good morning, guys. Thanks for taking my questions. You alluded to some out of stocks in wood and tile. Is there any way to help us understand like the magnitude, whether it be kind of percentage of total SKUs for those categories? Thanks. We broke up I want to break apart those numbers again, but Yes. I think we normally kind of run-in the mid to low 90s in stocks. And in those cases, we've seen those numbers go in somewhere in the 80s. But as we said, we think we'll actively pursuing with opportunity buys as well as getting in stock with some of the new vendors as we get into the 1st part of next year. And from a comp perspective, and again, this is very directional because it's hard to know exactly what if a customer bought something else, we estimated for the Q4 that the out of stocks cost us maybe somewhere between 50 to 200 basis points. And I think that what we tried to mention earlier too, this is a little bit difficult to say exactly what an out of stock cost you at Floor and Decor because it's one thing if you're out of a certain water heater, you can tell specifically what that water heater sells. And with us, when you have 300 options in tile within a given store, if you're out of a certain, you hope you can get another one in your customers' hand, but you always can't. So it's just it's a little bit hard to pick. We don't know exactly how many customers walked out with something else, but we know that we didn't have everything we wanted in the building. Makes sense. And then just a follow-up, you have a few stores in the Northeast now. They seem to be meeting some high internal expectations. How should we think about this region in the context of your longer term store plans? And does it change your view as it relates to kind of that 400 target longer term? Thanks. Yes. We're certainly excited with what's going on in the Northeast, and we are working hard to access more real estate there. We will that's a very important home improvement market and a very important market that we will grow in. We're not ready to talk about our store count yet. That will come in time, but we feel good about our 400. Thank you. Our next question comes from Matt McClintock with Raymond James. Please proceed with your question. Yes, we can hear. Matt, is your line muted? I will go to the next question. Operator, we still can't hear you. Rob, are you there? I'm here, yes. Let me go to the Yes, why don't we go to the next question? Our next question comes from Chuck Grom with Gordon Haskett. Please proceed with your question. Hey, good morning guys. Can you just dissect for us the degree of price increases in the Q3? And then I guess what you've changed in the Q4 so far? I think you said last period that you expected about 80 to 90 basis points of a benefit to the comp from tariff price increases. And I think the Q4 was expected to be 200 to 250, if those numbers are right. And I guess do you think you're seeing some inelasticity on the demand side and maybe that could be potentially contributing to some of the softness here in the month? Yes, we did go back and look at Q3 and we do estimate it was about actually 80 basis points in our Q3 comp that came from the limited SKUs where we raised retails. I think you're right on the last call, we said 200 basis points to 2 50 basis points. We thought it might be towards the higher end of that number when we talked to you guys in July. Our current expectation is that as we've talked about the merchants and the supply chain team have gotten some cost out that have allowed us not to have to raise increases. That number is probably closer to 200 basis points. On the elasticity, Lisa touched on this, I'll just kind of reiterate. We did a fairly exhaustive study with maybe a dozen stores looking at test versus control over a 6 month period of time, where we raised retails to see what would happen. And we really didn't see a lot of elasticity. And just as a reminder, I'll point out to you guys, the vast majority of what we sell is private label esque, meaning it's very difficult to compare what we sell to other people. And we have 76,000 square foot stores versus maybe 3000 to 5000 square foot in the home centers and maybe 3000 to 10000 square foot in an independent. And so we have a massive assortment benefit that helps us as well. And so I think because our merchants have done an incredibly good job with better and best and how you bring the assortment together that if there are minor tweaks to pricing, the consumer still wants that total project along with all the other benefits that we have in Florida and the core. So to date, we have not seen a meaningful elasticity change for the modest price increases we passed along. Okay. That's helpful. And just as a quick follow-up to Horvath's question earlier about October being greater than what you did in the Q3. Obviously, it means it's greater than 4.6%. So it looks like you guys are being a little bit conservative here. And I'm just wondering if you think that's the case. And along with that, can you just remind us how the Q4 of 2018's comp progressed throughout the period, did November December, were those easier periods for you? Just wondering how we should think about the complexion of the comps? Yes. I think I don't have 2018 right in front of me, but we don't have really a seasonal business. It's a fairly consistent business. And so we put a lot of time and effort into reforecasting these numbers. The entire executive team along with all of our staff helps us do that. And we've called it as how we see it today. Yes. And then there's lots of moving parts with products going to new suppliers, products going to new countries. There's just a lot of moving parts, so we just want to be prudent. Makes sense. Thank you. Our next question comes from Steve Forbes with Guggenheim Securities. Please proceed with your question. Good morning. I wanted to focus back on the Baltimore D. C, right? You mentioned the $4,000,000 of cost hitting the P and L in the Q4, right, associated with the opening. But can you help us conceptualize the run rate operating cost as we look out to 2020 and then discuss, right, the potential cadence and benefit of the future reduction in stem miles as productivity ramps? Thank you. Yes, Steve, this is Trevor. So that new DC, we're really only taking possession in November December. And if you do the math, I think it's going to cost us some portion of $20,000,000 for a full year run rate as we look to 2020. Again, we've only got $4,000,000 of that in this year's P and L. So obviously, it will be higher cost next year. With that said, again, we plan on growing sales and profits at a faster rate in 2020 as we currently see it well relative to 2019. We are on a weighted average cost method. And so what that means for our systems is that as we start to ship from that Baltimore distribution center, for example, when it goes to our 3 Washington D. C. Stores, you can imagine the transportation cost to get from Baltimore to Washington C. Or the Midwest to the Northeast is a lot lower. And so we're still working through that math. But by the time you get to a full year run rate, which will happen in late Q2 as we sort of work through all that lower cost inventory coming into the base because of the lower stem miles, we'll maybe get as much of a third of that back through the lower stem miles. And again, we're still finalizing those calculations, but we will definitely offset some of those costs. Thank you. Our final question comes from Greg Melich with Evercore. Please proceed with your question. Hi, thanks guys. I want to follow-up a bit on margins and what we saw in the Q3 and what should we expect into the base points of next year. You talked a little bit about profitability. So specifically, if we back out the Baltimore and the store support center, what would SG and A have deleveraged in the quarter? Let me break it into its component parts. We break out on our SEC filings, our store operating expenses, our preopening expenses and what we'll call G and A, which is our corporate expenses. We are planning on having slightly higher store operating expenses based on the models here. You're kind of in the mid-twenty 7 percent range. I think we were 27.3% last year. So we're going to have modestly higher store operating expenses. And that's really tied to the number of new stores that are in some of these more expensive markets as well as we are spending more on our new stores. We're getting a good return on spending more in those new stores, but we're spending more in CapEx and some advertising in some of these markets. So that's the modest deleveraging we're having at the store leverage. Pre opening expenses actually will be down relative to the same time last year. As we've mentioned in a couple of calls before, our real estate team and our digital merchandising team have done a great job of taking months out of the process. And so we actually believe our preopening expenses in Q4 will be modestly down. And then finally, when you get down to corporate, last year, we were at, I think, 6.9% was our corporate expenses. If you back out the $2,500,000 that we talked about for terminating the lease with our former store support center, I think we'll kind of be in just above 5.5%. So when you blend all those together and you go all the way down to kind of adjusted operating margin, as I kind of said in my prepared comments, the only reason we're flattish if you back out the Baltimore D. C. And you back out the costs associated with exiting our former store support center. Got it. And that difference that we saw in the Q3 that we should expect to anniversary Q3 next year effectively? Yes. I think my view today is and we're not done with the budget, so we'll give you guys an update and more granularity in March is that because of the incremental costs associated with the new store support center, we're opening a lot more stores in the first quarter of next year as well as our new corporate office. Our profits will not grow at the rate in the first half of the year as they will for the back half of the year. And so you're going to definitely have the tail of 2 halves. But that being said, for the full fiscal year, and I'm start to repeat it for the 3rd time, for the full fiscal year, if you see the world today, assuming there's no major change in macro environment, either positive or negative, we would expect sales and comp sales and total profits to grow at a faster rate in 2020 than they are in 2019. That's helpful. And then this is another question, just a clarification, if I could sneak it in. October, is that the biggest month of the Q4, just given the nature of your business? On a weekly volume basis, yes. But on a total volume basis, no, because we have a 4.4.5 and so we have 5 weeks in the month of December. So we've got an extra week in there. Okay. So it's pretty balanced. Those are good selling weeks as you've seen? Correct. Got it. All right. Thanks guys. Good luck. Thank you. At this time, I'd like to turn the call back to management for closing comments. Look, I appreciate everyone joining the call and for your interest in the business. I also know that a lot of our associates listening to the call and I'd like to thank all of them. It's a we really have something special here. As Trevor said in his prepared comments, if you think about it, we're still if you took out Houston and you took out our cannibalized stores, we're still comp 10% or better. So we feel really good about what's going on. The new stores are being received extremely well. Our service scores are off the charts. So we appreciate your guys' interest and we appreciate all the associates and all their hard work and we'll talk to you at the next quarter. This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.