Earnings Call: Q2 2021

Aug 5, 2021

Good afternoon, and welcome to the Floor and Decor Holdings Second Quarter 2021 Earnings Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I will now turn the conference over to Wayne Hood, Vice President of Investor Relations. Please go ahead. Thank you, operator, and good afternoon, everyone. Joining me on our earnings call today are Tom Taylor, Chief Executive Officer Lisa Laube, President and Trevor Lang, Executive Vice President and Chief Financial Officer. Before we get started, I would like to remind everyone of the company's Safe Harbor language. Comments made during this conference call and webcast contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions, is a forward looking statement. The company's actual future results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its SEC filings. Floor and Decor assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company will discuss non GAAP financial measures As defined by 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 irflooranddecor.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 fiscal 2021 Q2 earnings conference call. On today's call, I will discuss some of the highlights of our strong fiscal 2021 second quarter earnings results and how we are positioned to further grow our market share of the residential and commercial segments of the hard surface flooring market in 2021 and beyond. Trevor will then review our financial performance and discuss how we are thinking about the remainder of fiscal 2021, and then we will open the call for your questions. Let me begin by thanking all of our associates for the fantastic job they continue to do. I am proud of our 2021 financial results, but I am even prouder of how our associates have stepped up during these challenging times to serve our customers and each other in the communities where they work. I am very grateful for the culture we embrace at Floor and Decor. I would also like to say thank you to our vendor community and our supply chain partners. Our enduring Shifts with them have allowed us to continue to grow during these challenging times. Turning to our record fiscal 2021 second quarter earnings results. We believe our strong execution coupled with the favorable economic environment is enabling us to achieve record sales and profitability in fiscal 2021. We are excited about being on a path towards delivering our 13th consecutive year of positive comparable store sales growth in fiscal 2021, equally driven by new and returning customers. Our fiscal 2021 second quarter total sales increased 86% to $860,100,000 from $462,400,000 in the same period last year and grew 28.6 percent on a 2 year compounded annual growth rate basis when compared to the Q2 of fiscal 2019. You will recall last year, we voluntarily limited access to our stores to public for anything other than curbside delivery for the majority of the 2nd quarter. It is noteworthy that these 2nd quarter sales results exceeded our annual fiscal 2015 sales, leaving us thrilled to have achieved another milestone in our company's history. Our fiscal 2021 second quarter comparable store sales increased 68.4 percent driven by an impressive 62.1% growth in comparable store transactions and a 3.9% growth in comparable store ticket. We are pleased that our strong fiscal 2021 results enable us to reinvest back into our hourly associates with a broad market wage increase in the 2nd and third quarters of fiscal 2021 and a special one time 401 match. Our average hourly store wage is now over $16 an hour. Additionally, 92% of our stores qualified for an Achieve payout in the 2nd quarter. Achieve is our incentive compensation for our hourly associates. We continue to believe that sharing our success with our associates and providing them with Clear passive growth is essential to the success of our company. Let me now provide an update on each of our 5 strategic pillars of growth, Beginning with new store growth. We opened 7 new warehouse stores in the Q2 of fiscal 2021 compared with only 2 stores that opened during the Q2 of fiscal 2020, when we slowed our new store development and openings due to the COVID-nineteen pandemic. By month for the Q2 of fiscal 2021, we opened 2 new stores in May, 5 new warehouse stores in June. Year to date, we have successfully opened 14 new warehouse stores and are pleased that 52% of our planned fiscal 2021 warehouse store openings were opened in the first half of the year, a first for Floor and Decor. We remain on track to achieve our long term objective of more balanced quarterly new store openings in fiscal 2021, which in turn leads to improved new store productivity from more operating weeks. We intend to open 6 new warehouse stores in the Q3 of fiscal 2021 towards our planned 27 new warehouse stores opening in fiscal 2021, representing 20.3% growth from fiscal 2020. We remain pleased with the sales performance among all our warehouse store vintages, but we are particularly happy with the sales and earnings flow through of some of our most mature warehouse in fiscal 2021. Additionally, our strong results in fiscal 2021 reinforce our belief The new store classes of 2020 2021 will likely represent the strongest 1st year sales and profit classes in our history. This is a direct result of our real estate team increasingly bringing to us preferred site options and excellent execution among our visual merchandising, Training, marketing and store teams. For example, we are excited to have opened our 2nd warehouse store on Long Island in Comac in July and will open our 3rd Long Island location in Bohemia later this year. We have a strong pipeline of 13 additional warehouse store openings and 2 design studio store openings planned for the remainder of the year. Moving on to our 2nd pillar of growth, Growing our comparable store sales. We continue to be very pleased with our comparable store sales growth momentum and the broad based strength we see across all of our merchandising categories and 11 geographic regions. All of our merchandising categories experienced double digit comparable store sales growth in the Q2 of fiscal 2021 With 6 of 7 departments, comp store sales growing over 50%. Comparable store sales growth in our laminate and luxury vinyl plank, Decorative accessories, installation materials and adjacent categories were above the company average. We are particularly excited about the emerging growth we are experiencing in our adjacent categories as they collectively represent large incremental growth opportunities. In the second quarter, we also continued to see our was moving up to the better and best price points within our merchandising assortments, which positively impacted our gross margin rate. This is where our customers will often find new formats, sizes, innovations and performance, higher end and stunning on trend visuals that won the spectrum of style and visual preferences. We believe the shift upward along the merchandising assortment is further validation that our merchandising strategies are working. Our seasoned and talented merchandising teams continue to widen our competitive moat by working with our suppliers and designers to stay ahead of trends and drive exciting new product innovation. The successful introduction of new SKUs continues to drive a material amount of our sales and we are excited about building on the success in the second half of twenty twenty one and beyond. Despite the global Travel challenges of having in person meetings with our suppliers over the past 18 months, our merchants have not taken a step back from product line reviews, Adding new factories and diversifying our countries of origin. We have made significant progress towards diversifying our countries of origin by moving a large portion of our sourcing out of China. We estimate that China could account for less than 30% of our sales at the end of 2021, down from approximately 50% in 2018. We are pleased that we have shifted a significant portion of our sourcing to the United States, which lowers our merchandising lead times. On a monthly basis, our comparable store sales increased 174.1% in April, 83.2% in May and 21.3% in June. As expected, these strong monthly results sequentially moderated as we began to cycle past improving monthly sales results last year from our stores beginning to reopen from curbside delivery only in early May with all stores opened in early June. Recall, our fiscal 20 22nd quarter comparable store sales declined 50.8% in April and 26.1% in May before increasing 7.7% in June. We are pleased with the start to the Q3 of fiscal 2021 where our comparable store sales are up about 11% quarter to date. Let me now turn my comments to our supply chain and inventory. We, like many companies, are having to navigate through the constraints in the global supply chain. To address this challenge, we added significantly more capacity this year to our Ocean and North American logistics to align with our strong growth, particularly from Asia, Europe and Brazil. As we have discussed, we are a large importer and are fortunate to have agreements with our dedicated fleet, One way asset based carriers and ocean carriers to secure additional capacity and minimize costs where we can. We have been creative with our inbound freight by adding non containerized options, taking advantage of additional Capacity such as new services of extra loader vessels, onboarding multiple new providers to carry our freight, Expanding our ports of entry and increasing our transload activities in various ports. We believe our ability to pivot to multiple alternative is a clear competitive advantage in these challenging times, particularly when compared with independent hard surface loin retailers. We believe that these strategies and our broad assortments have enabled us to offer our homeowners and pros alternative products where some out of stocks have occurred without materially impacting our sales and gross margin. However, consistent with what we have said during our last two calls, We expect these costs to be a headwind to our gross margin rate in the second half of twenty twenty one and into 2022. Our 3rd strategic pillar of growth is expanding our connected customer experience. As expected, our fiscal 2021 2nd quarter e commerce sales declined about 1% from last year as we were comparing against unusual 192% growth last year from customers shifting to online purchases as the internal portion of our stores were closed to the public for the majority of the quarter. Relatedly, our fiscal 2021 second quarter e commerce sales penetration rate declined to 16% from an unusually high rate of 33% in the Q2 of last year. We are pleased that when measured on a 2 year compound annual growth rate basis, Our Q2 e commerce sales remained strong growing 70% from 2019 to 2021. Let me turn my comments to some of the enhancements we made to our website in the Q2 of fiscal 2021 towards delivering an unmatched personalized customer experience. Probably the most important was the launch of pickup scheduling capability, which allows online customers to select a pickup time online after orders are picked in our stores. Additionally, we upgraded our website with search suggestions that we believe will increase items being added toward the checkout cart. Finally, we redesigned and better organized the Help Center section of our website to more quickly find answers to common questions. As we look forward, we are working on other initiatives that include reducing the number of checkout pages to accelerate the checkout process for our customers. We believe these investments among others will lead to further strong e commerce performance metrics and growth for years to come. Our 4th pillar of growth rests on the successful investments we are making in our pro and commercial customers to grow our market share. We continue to see strong double digit comparable store sales growth from our Pro customers in the Q2 of fiscal 2021. These strong sales reflect our growing brand awareness and our efforts to drive engagement with an eye towards developing strong and long lasting relationships with Pro customers. We are very pleased that the new Pro contacts increased double digit in the Q2 of fiscal 2021 from the same period last year. This is a testament to our in store teams as well as continually improving service offerings like our PPR loyalty and credit offerings. Additionally, we are launching pro education events in partnership with National Tile Contractors Association that will include 24 workshops and 5 certification courses. Finally, we look forward to our upcoming annual Pro Appreciation Month where all stores will celebrate our Pro customers through sweepstakes prizes and virtual training. We believe these promotional events drive meaningful new pro engagement, relationships and contacts. Turning to our growth and our award winning Pro Premier Rewards PPR program. We are thrilled that the 2nd quarter enrollment in the PPR program jumped 120% from the same period last year. We now have over 230,000 PPR members and have significant New member growth potential ahead of us. These members account for about 81% of our pro sales and shop with us 2 times more frequently and spend 2.5 times more than non PPR pros. As we look to the remainder of Fiscal 2021 2022, we're exploring opportunities that will further drive pro engagement and increase awareness of our value proposition. We see opportunities to grow our market share by introducing PPR tiers, SKU based bonus point promotions and pro credit card incentives that will further drive engagement. We continue to be pleased with the strong growth in commercial sales, particularly those sales that are originated from our regional account managers or RAMs, which are now in most of our major markets. While sales from our regional account managers are small relative to the size of our retail business, we are excited about the growth opportunity and plan to add approximately 15 regional account managers in fiscal 2021. Over time, we expect commercial sales to become a material part of our growth as we leverage Floor and Decor's core strength in merchandising and direct sourcing as well as the vast industry experience and value proposition Spartan Surfaces now brings to our portfolio. Let me now discuss our progress with our free design services, the 5th pillar of growth. We continue to be pleased with the momentum in design services and are building on our strategies to sustain strong growth for years to come. For example, we recently added 3 new divisional design service directors across the U. S. To maximize our design opportunity across all of our warehouse stores. In the Q3 of 2021, we will be conducting a multi store market test that will inform us how we can further refine our strategies to attract and retain high caliber designers. This will include career path growth opportunities and programs that will recognize our most tenured designers. In the Q2, we launched in home design Services out of our design studio location in Dallas and are excited about extending in home design appointments to our warehouse stores in Dallas and Houston in August. To enhance the customer experience, homeowners and pros will book in home designer appointments online and choose among 3 different design fees based on project needs. As we have discussed in the past, we are focused on building a consistent, high touch, best in class and seamless design service experience for our Homeowner and Pro customers and are pleased that our strategies are working. Our fiscal 2021 second quarter design penetration sequentially increased 66 basis points. Importantly, we achieved an 85% satisfaction score in our design appointment experience in the 1st and second quarters of fiscal 2021. We believe we are in the early stages of developing long term competitive advantage through our free design services. Before I close, I'd like to give you a brief update on our acquisition of Spartan Surfaces, which we completed on June 4, 2021. We remain very excited about the prospects for Spartan Surfaces to incrementally accelerate our growth in the fragmented commercial market flooring market and create value through revenue and product cost synergies. Over the last 60 days, we have focused our attention on integrating certain functional areas, including human resources, information technology, legal and regulatory and finance. We have been pleased with the integration progress of these functional areas and were elated with Spartan's June operating performance. Post closing, we have collaborated in more detail about the synergistic growth opportunities. While Spartan will not be material to our fiscal 2021 results, we are excited about its value creation potential. I will now turn the call over to Trevor to discuss in more detail our fiscal 2021 Q1 results. Thanks, Tom. I would also like to express my appreciation to all our associates for their enduring hard work and dedication towards serving our customers. Our record fiscal 2021 Q2 and year to date financial results are a testament to the excellent execution of our strategies by our associates and the strength of our business model. Let me now discuss some of the changes among the major line items in our fiscal 2021 Q2 income statement, balance sheet and statement of cash flow. I will then discuss how we're thinking about the remainder of fiscal 2021. As a reminder, these results include our acquisition of Spartan Services, which was completed on June 4. Spartan's results were not material to our fiscal 2021 Q2 earnings, but they were modestly accretive to the Q2. As Tom mentioned, our fiscal 2021 Q2 total sales increased 86% and our comparable store sales grew 68.4% from the same period last year. While 68.4% growth in comparable store sales is an impressive rebound from last year's 20.8% decline in comparable store sales When access to our stores was limited to curbside pickup, we are exceptionally pleased on a 2 year compounded annual growth rate basis. Our fiscal 2021 2nd quarter comparable store sales increased 14.8% from 2019. On that same basis, our year to date Comparable store sales have grown at a 15.1% compounded annual rate, which is well above our long term target of mid to high single digit comparable store sales growth. We are particularly pleased with the sales performance of our older vintage stores and their contribution to our 2nd quarter comparable store sales growth as well as the consistency across all of the regions of our country. Our fiscal 2021 second quarter gross profit increased 85.8 percent to a record $165,400,000 from $196,700,000 in the same period last year. The increase in gross profit was driven by the 86 percent increase in our fiscal 2021 Q2 total sales as our gross margin rate was flat at 42.5% versus the same period last year. We are pleased with our 2021 second quarter gross margin rate performance considering we are cycling past 60 basis points increase in the Q2 of fiscal 2020 compared to 2019. Additionally, our 2021 second quarter gross profit included a $2,500,000 decrease to the estimated tariff refund receivables that impacted our gross margin rate by about 30 basis points. Turning to our fiscal Q2 2021 expenses, Selling and store operating expenses increased $66,600,000 or 48.1 percent from the same period last year. The increase was primarily attributable to the 22 new warehouse stores opened since June 25, 2020, as well as additional staffing required to align with the strong sales Nevertheless, our strong sales enabled us to leverage our 2nd quarter selling and store operating expenses 610 basis points to 23.8% from 29.9% in the same period last year. Furthermore, we are pleased that our fiscal 2021 second quarter expense rate was 210 basis points below fiscal 20 nineteen's 2nd quarter rate of 25.9%. Our Q2 general and administrative expenses increased $19,100,000 or 56.7 percent from the same period last year, primarily due to the higher incentive compensation and cost to support store growth, including store support staff and higher depreciation related to technology and other store support center investments. Additionally, we incurred $3,200,000 in acquisition related costs in the quarter. On a rate basis, our general and administrative expenses leveraged approximately 120 basis points to 6.1% from 7.3% last year on higher sales. Preopening expenses during the Q2 increased $5,600,000 or 161.9 percent from the same period last year. This increase is primarily the result of an increase in the number of stores that we either opened or preparing to open compared to the same prior year period. We opened 7 warehouse stores during the 13 weeks ended July 1, 2021 as compared to opening 2 warehouse stores during the 13 weeks ended June 25, 2020. 2nd quarter net interest expense decreased $1,000,000 or 43.9 percent from the same period last year. The decrease in interest expense was primarily due to a decrease in interest related to lower revolver line of credit borrowings and a decrease in the term loan interest rates compared to the corresponding prior year period. Our fiscal 2021 second quarter provision for income taxes was $14,300,000 compared to a $12,200,000 benefit in the same period last year. As a result, our effective tax rate was 14.8% compared to a negative 61.6 percent in the same period last year. The increase in the effective tax rate was primarily due to the recognition of income tax benefits in connection with CARES Act in 2020 and higher earnings during the current quarter without a proportional increase in available tax credits. Moving on to our profitability. Our Q2 2021 adjusted EBITDA margin rate increased to 15.9 percent from 9.9 percent in the same period last year. As a result, our fiscal 2021 Q2 adjusted EBITDA increased 200.8 percent to a record $137,000,000 from $45,600,000 in the same period last year. Consequently, we delivered stronger than expected fiscal 2021 second quarter earnings per share. Our 2nd quarter GAAP Net income increased 159.1 percent to $82,900,000 or $0.77 per diluted share from $32,000,000 or $0.30 per diluted share last year. Our 2nd quarter adjusted net income increased 485 percent to $78,300,000 or $0.73 per adjusted diluted share from $13,400,000 or $0.13 per adjusted diluted share last year. We ended the 2nd quarter with 107,300 diluted weighted average shares outstanding compared with 105,500,000 shares last year. Moving on to our fiscal 2021 balance sheet and cash flow. Our strong fiscal 2021 financial results, favorable trade payables and higher inventory turnover drove significant increase in our operating cash flow. For the 26 weeks ended July 1, 2021, our operating cash flow more than doubled $256,600,000 from $96,700,000 in the same period last year. We ended the 2nd quarter with 360 $6,100,000 in cash on our balance sheet and anticipate using a significant portion of that cash to fund our capital spending and inventory requirements in the second half of fiscal twenty twenty one. Our fiscal 2021 Q2 inventory increased 15% from the same period last year and 5% year to date, which is well below our sales growth due to the constraints in the global supply chain. Despite these supply chain constraints, we are pleased that we have been able to deliver strong sales results by successfully offering our homeowner and pro customers a broad range of alternative products where there are specific product availability challenges. As we look forward, we have intentionally added international container and North American logistics capacity and pulled forward some of our Chinese New Year purchase orders further improve our merchandise in stock position. In doing so, we will be facing higher freight costs in the second half of twenty twenty one that will pressure our gross margin rate. Moving on to our capital expenditures. Our capital expenditures through the 26 weeks ended July 1, 2021 totaled $213,800,000 including capital expenditures accrued at the end of the period And we also acquired Spartan for $63,400,000 in cash. As we look forward, we now expect The annual fiscal 2021 capital expenditures to be approximately $455,000,000 to $475,000,000 compared to our prior capital spending for our new stores that we intend to open in early 2022 as we now have better visibility into the class of 2022 store opening dates and costs. We expect our fiscal 2021 capital spending to be funded with $366,000,000 in cash on our balance sheet and by cash flow generated from our operations. We still intend to open 27 warehouse format stores, 2 small format design studios and start construction on stores opening in fiscal 2022. We also intend to relocate 2 existing stores in early 2022 and will have construction costs incurred in fiscal 2021. Collectively, these investments are expected to require $305,000,000 to $315,000,000 compared to $285,000,000 to $295,000,000 that we originally planned. The relocation of our Houston, Texas distribution center is expected to be completed by the end of 2021. This new distribution center will double our capacity into 1,500,000 square feet and increased our total DC capacity by 19% to 5,500,000 square feet. Additionally, we are opening a new transload distribution facility in Los Angeles that will allow us to maximize cargo weight leading to fewer containers, which will drive ocean freight and drayage savings beginning in fiscal 2022. Collectively, these plans are expected to require $70,000,000 to $74,000,000 We continue making investments in existing store remodeling and expansion projects and existing distribution centers using approximately $52,000,000 to $56,000,000 Finally, we plan to continue to invest in information technology infrastructure, e commerce Other store support center initiatives using approximately $28,000,000 to $30,000,000 Let me now turn my comments as to how we're thinking about the second half of fiscal twenty twenty one. From a macroeconomic perspective, fiscal and monetary policies look to remain very accommodative over the intermediate term. June existing home sales seem to have steadied at an annualized rate of $5,900,000 a healthy rate. Home prices are at all time highs, which allows for the reinvestment back into the home, while mortgage rates are up from the end of last year, they are still at historic lows. The secular demand for homes continues to exceed available supply, which we believe will continue to lead to growth in home price appreciation and support home reinvestment projects. Our sales growth has remained robust across geographies and merchandise categories and the Pro backlog remains strong. While we are optimistic about the prospects of a Same economic recovery in the second half of fiscal twenty twenty one and into 2022 and the momentum in our business, we recognize that business risks remain elevated. For that reason, we are continuing our practice of not providing specific annual sales and earnings per share guidance. That said, let me provide you some context and items to consider for the remainder of the fiscal year. As many of you know, we like many companies will be cycling past increasingly difficult comparable store sales and margin comparisons in the second half of fiscal twenty 21. As a reminder, our fiscal 20 23rd and 4th quarter comparable store sales increased 18.4% to 21.6%, respectively. Moreover, our fiscal 20 2Q3 and 4th quarter gross margin rate increased 200 basis points and 90 basis points versus 2019 on an adjusted basis taking out unique items called out in our previous non GAAP reconciliations and the impact of the 53rd week in 2020. As we look forward, we are facing rising product and freight costs from capacity challenges in the global supply chain. While we have plans to effectively manage these higher costs, they are likely to change the complexion of our P and L in the short term. As we have discussed in prior calls, we are likely to see a year over year line in our gross margin rate in the second half of twenty twenty one due to the outsized increases in gross margin rate last year and the rising costs this year. That said, on an adjusted basis, our gross margin rate for the second half of twenty twenty one is expected to be slightly higher than the same period of fiscal 2019, but below our highs of the second half of twenty twenty. To mitigate these rising products and freight costs and related gross margin rate pressures, we have plans to selectively raise price uncertain products were necessary. Our current expectation is these price increases will be modest in 2021. It's important to keep in mind that any price adjustments that we may make will be rolling and will be with an eye towards maintaining our price leadership and protecting our value proposition. We are fortunate to have a broad assortment where we can make select strategic price adjustments without materially impacting unit elasticity. We believe these Coupled with our underlying organic growth could lead to a rate of comparable store sales growth in the short term that could be at the upper end or above the long term As Tom mentioned, our quarter to date comparable store sales were up about 11% on top of the very healthy comparable store sales of 16% quarter to date last year. Turning to our selling and store operating expenses. We expect our Fiscal 2021 Q3 selling and store operating expenses to deleverage compared to our Q3 of fiscal 2020 when we leveraged these expenses by 130 basis points. In the same period, our comparable store selling and store operating expenses leveraged 2 20 basis points. Recall, the outsized expense leverage in the Q3 of 2020 a direct result of our sales exceeding our planned store labor hours as customer demand accelerated. While we are expecting our selling and store Operating expenses to deleverage in the Q3 of fiscal 2021, they are expected to leverage when compared to fiscal 2019. As we look forward to the Q4, we expect modest leverage over the same period last year. Our preopening expenses as a percentage of sales expected to be higher in fiscal 2020 through the opening 27 new stores this year versus only 13 last year And for the year, we are modeling our pre opening expenses as a percentage of sales for the fiscal year to be close to 2019 when we also grew our store count by 20%. Our general and administrative expenses as a percentage of sales are not expected to change significantly in the second half of twenty twenty one. We are expecting the rate to be approximately 6%. We are planning on our depreciation and amortization to be approximately $115,000,000 to $117,000,000 we are planning on our interest expense to be approximately $5,000,000 unchanged from our prior guidance. Diluted weighted average shares outstanding is estimated to be $107,000,000 and our 2021 tax rate is estimated to be slightly above 24%. As a reminder, this guidance does not take into consideration the tax benefits due to the impact of stock exercises that may occur in fiscal 2021. We also expect our year end inventory balance to be approximately $1,000,000,000 an increase from the $654,000,000 at the end of fiscal 2020. The expected increase is being driven primarily by 2 investments. First, intend to bring in a portion of the Chinese New Year inventory a couple of months early landing in November December to try to mitigate the current international capacity issues that exist and second, we are making investments to improve our in stock inventories of key SKUs. Even with these investments, our inventory turns will approach 3x this year, the highest in our company's history. While there are some manageable challenges in the global supply chain that will change the complexion of our P and L in the short term, our longer term growth algorithm is unchanged. We continue to see 20% unit growth, Mid to high single digit comparable store sales growth and a modest gross margin improvement over the long term that leads us to net income growth of at least 25% on a compounded annual growth rate basis. The entire executive team is incredibly proud of how we have performed. Let me now turn the call back over to Tom. Thanks, Trevor. We also announced today that Lisa Labbe has informed us on August 3, 2021 that she intends to retire on on April 30, 2022. Lisa joined the company as an Executive Vice President and Chief Merchandising Officer in 2012 and was promoted President in February of 2020. She has been a critical part of Floor and Decor's success and growth over the last decade and I can't thank her enough for her leadership, Vision and friendship. Her influence can be seen in each of our stores. Let me now turn the call over to Lisa to briefly talk about her decision and how she came to it. Thanks, Tom. The events over the past year have really caused me to reflect on what's important to me and to my family. I can't tell you how many times I've said the words someday. So my husband and I finally decided rather than talking about it, we would define it. There's never a great time to leave and I will certainly miss the company and all of our associates, But I've never felt better about leaving than now. We have an incredible strategy and long term plan, an amazing team who doesn't depend on me to continue this journey. All of my direct reports have been with us for more than 8 years. They know what they're doing. They got us to where we are today and they are excited about carrying Floor and Decor into the future. We have a deep and experienced bench of leaders. Our EVP of Store Operations, Steve Denny and our 3 DBPs have a combined 85 years of experience in retailing and 35 at Floor and Decor. Our Senior Vice President of Merchandising, Erfon Sainman, has 25 years of experience in the hard surface flooring industry and has been with Floor and Decor for 17 years. And collectively, senior merchandising leaders have almost 100 years of experience at F and D. These leaders have a deep understanding of the hard surface flooring industry and unmatched relationships with our over 200 suppliers around the world. It's also important to note that Tom, Trevor and I have been involved in all of the strategy and day to day operations of the business for almost 10 years together and they will continue to make sure that we are focusing on merchandising as a foundation of our company. I could never leave if I wasn't 100% confident in the legacy I leave behind. I'll be here until next April and will ensure that we have a smooth and seamless transition. Let me turn the call back over to Tom. Thanks, Lisa. Well, Trevor and I and our leadership team will miss Lisa, we're excited as ever about being part of the growth that lies ahead of us. With that, I will turn the question I'll turn the call over to questions. Thank you. You now begin the question and answer session. Our first question comes from Karen Short from Barclays. Please go ahead. Hi, thanks very much and congratulations Lisa on your retirement. I wanted to ask This is a near term question and then a bigger picture question. Maybe could you maybe Okay. We lost you. Operator, we'll come back to Karen. Yeah, we'll come back to Karen. Okay. Our next question comes from Chris Rovers from JPMorgan. Thanks. Good afternoon and congratulations on a great quarter. And you don't leave a lot of room for questions because you just give so much great detail. But let me try and first congratulations Lisa on retirement obviously a great career. So my first question is, I mean There was a modest deceleration on a 2 year basis over the months of 2Q and into Quarter to date, do you think that was just fading stimulus? Was it anything to do with sort of a share of wallet as people sort of head out on vacation? How are you thinking about that? Yes, I think of it. I mean, look, if you'd have asked me 6 months ago when we got to July, if we'd be able to post 11 in July on top of the 16 from last year. I probably wouldn't have guessed that. I mean business is Still pretty strong, but the deceleration is to be expected. And I think it's a little bit of both, Chris. But I think certainly Consumers are getting back out. They're out of their homes. They're back into restaurants. They're back traveling. And some of that share, while certainly it's going to shift. But overall, the demand in the business is still pretty good. Trevor, has your Has the gross margin outlook, I mean directionally it's similar to what you said prior. Has it has sort of the freight Pressures and supply chain pressures, are they worse than you thought 3 months ago? And then as you think about next year, Do you expect to recapture some of these pressures as you pass through pricing? So thanks, Chris. The answer to the first question is, yes, the supply chain and what's happened over the last 3 months has definitely gotten more complex and the Costs have gone up more than we had anticipated. But I think the benefit for us and again, we have a benefit of having a big broad field team that This information every single week when you look at the pricing we have versus the market out there, whether it's our larger competitors or our smaller competitors, we feel as good as we've ever felt. And when we look at the assortment and the uniqueness of what we're doing, we feel great. That then leads us to the answer that you've heard really for over 3 years from us, Which is our we have very good teams and good systems that allow us to model this that we still think we can get to a similar gross profit dollar amount. As you guys have heard me say again for 3 years, the math of that is if you have a SKU for a cost for $1 and you're selling it for $2 if the cost goes up to $1.05 or $1.10 We still think we can raise retails by that same $0.05 to $0.10 and get to the same gross profit dollar number, which mathematically will bring down your rate. So hopefully that answers both of those questions. Our next question comes from Simon Gutman from Morgan Stanley. Hey, everyone. It's Simeon. Congratulations, Lisa. Nice quarter. Hey, can I start on the top line? Can you talk about, I may have missed it, average order value in the second quarter versus The Q1 versus a year ago and then in relation to volume. And then looking at the sales environment, How are you looking at it, I guess, Trevor and Tom, regarding sales per store? Are you looking at 2 year stacks, 3 year stacks? I kind of got the guidance, so it's helpful, but curious what the best way you think to look at your business is? Yes. Our comps were mostly led by transactions. Again, I think our transactions, 3% or maybe closer to 4%. And that's a similar trend over both a 1 and a 2 year basis. Last quarter when we gave you guys an update, we said at the Time for the quarter, our total sales were up on a 28 about 28.5% on a 2 year CAGR basis, I'm excluding Spartan from any of these numbers. That number accelerated a little bit to almost 29% As the Q2. And we also came up with a metric that I mentioned in my prepared remarks When you look at our comparable store sales on a 2 year basis, again, taking the 2019 base year and looking at what that is in 2021, and our 2 year CAGR Sales were 15.3% in Q1, 14.8% in Q2 and they're running about 12.8%. So as Tom mentioned, we have seen a bit of a deceleration, but still well above our long term expectations. And I think where we when we sit And look relative to what we see in the marketplace, we're in a fantastic position. So it's hard to say what the rest of the year is going to hold, whether that deceleration Obviously, we're going up against even increasingly large compares towards the end of the year. But I think we laid out how we're thinking about the rest of the year. Our next question comes from Michael Lasser with UBS. Good evening. Thanks a lot for taking my question. Congratulations, Lisa. On the gross margin, Can you unpack or dimensionalize the magnitude of the pressure that you're going to experience in the transportation costs versus The input costs on the product side, Trevor, I think you mentioned that Gross margin in the back half is going to be slightly above 2019 implying well over 100 basis points of pressure in the next couple of quarters. And if a good portion of it is the product cost inflation You're not able to pass along in the form of price increases. Why should we expect that to abate anytime soon? I think you're reading the team leads right. We do expect gross margin rate to come down based on the cost increases we are seeing today when you look at portion of what's driving up our cost, it's more on the supply chain side than it is on the vendor side. And I think based On how our inventory turns, you're right. We are going to be dealing with this in 2022. I'll just I'll reiterate, we have an incredibly strong merchandising team. We know exactly where we need to look to retail increases when if and when they come. And we've got a strong plan to execute it. And so we're I think the math you're right is pretty straightforward when based on the goalpost I gave you of being above 20 nineteen's gross margin rate, but being below last year's historic highs That's how we should think about the rest of this year and kind of leading on into next year. It's hard to say what's going to happen. We're maybe all a little optimistic that once The holiday shipping happens for doesn't really affect our business, but really the shipping industry that maybe there'll be some better capacity rates Capacity and rates as we get into 2022, and hopefully that will bring down some of these very, very unique cost pressures that we're all facing today. Our next question comes from Stephen Forbes with Guggenheim Securities. Good evening and also extending my congrats to you, Lisa. Thank you. Tom, I want to focus on The mature store trends, right, you seem to sort of highlight it in the prepared remarks here. So curious if you provide some additional context around the underlying strength in the mature store footprint as you would define it. I don't know if you could sort of talk to your growth CAGRs the mature store base, is there any sort of insight as we think about what's happening there? Yes, go ahead. As we said in the prepared comments, I'll let Trevor Give some of the detail and numbers. As you said in the prepared comments that our mature fleet, it's been a really pleasant surprise, the amount of growth rates we've seen across the country that have been doing terrific all year. Yes. I mean, I'll just reflect that. I just look into the details across all of our 11 regions and they're all performing exceptionally well. There's not one pocket or area of the country That's really driving this. If you go back pre COVID, so kind of talking about the end of 2019, early 2020, Our store is over 5 years old. We're probably doing about $22,000,000 in sales and maybe making about $5,000,000 in 4 wall EBITDA. Those numbers now are closer to $26,000,000 And getting close to 25 percent full wall profit, which is about $6,500,000 and our sales per square foot are Up to $3.57 per square foot. So we have seen incredible strength. Certainly, the economy and the macro is doing a lot of that. But as we look at what our competitors are publishing their numbers as well, they're not anywhere near us. I think it speaks to the culture, Speech to what the merchandising team has done, the new real estate that we're seeing out there, how the supply chain has continued to do a great job. So It is quite incredible what we've seen over the last few years as we've continued to evolve and improve our model. Our next question comes from Karen Short from Barclays. Hi, thanks very much. Sorry about that before. I never would have thought a landline would be less reliable than a cell phone. But anyway, so Lisa, as I was saying, congratulations on your retirement. And I just had a couple of questions. So the first is Just following up, I think on Chris' question. So looking at the puts and takes on the gross margin for the second half, obviously, you maintain the Dollar gross profit dollar if you're raising prices, which pressures margin. And then freight sounds like it is going to be a little bit more of a pressure, but can you just Kind of dimensionalize those 2 and then I had a bigger picture question. You can take the step dimensionalizing. Yes. I'll just say that the back and go to our product cost is the product itself. 80% plus of the product is the product cost. And we're Today, the volatility we're seeing in the supply chain, it wasn't that long ago, you would get a container out of Asia for less than $2,000 or $3,000 and now on the You could be seeing things at $20,000 I mean it's just really, really unique interesting times. But again, it's a testament to what Brian and the supply chain team have done. They All this coming earlier, they locked up capacity. They're bringing in alternative ways of bringing product that we never would have thought, alternative ports, alternative ships. That's why when you look at our in stocks versus I think the competitors you see us in a better shape, especially versus the smaller competitors out there, which is 60% of the industry today. So I can't on the margin, I can't say anything other than that said. There'll be I think we're modeling them to be below last year's historic highs, above 2019, that gives you a pretty narrow range. And when you do that math, depending on what you're the sales, you're going to see where we're very nice Good growth based on current expectations in gross profit dollars over last year. But before Karen, you asked a bigger picture question, I would just say just a couple of things On the margin side of it. 1, we mentioned a couple of times the amount of experience we have in our merchandising teams. They have lived through An unbelievable balance of having to deal with tariffs over the last few years and have been having to how do we keep our margin rates consistent as we're dealing with the They've done an outstanding job and it's just a testament to the amount of years of experience that we have within our merchants in the job that they do. The second thing I'd say is we have a lot of initiatives that have been helping gross margin that aren't going away, that will continue. We're continuing to see our consumers Stepping up to better and best products where we tend to make a better margin rate. And if you go into the stores and you see kind of the assortment that we're leaning towards, we've got We've never stopped doing product line reviews. So the product assortment that's coming in to the stores is just terrific and consumers are stepping up to better invest that helps margin. And If you compound that with what we've done within our installation accessories department where we've really created a nice supply house in there and then you can That was what we're doing in design services, which we tend to have a higher margin rate when we should have a designer involved in the sales. All of those things help to improve margin over the long haul. So while We're going to have some headwinds and some challenges that we have to deal with. The overall strategy is good. The overall strategy is working. And in the long term, we will be fine. Okay. That's helpful. Thanks. And then I just wanted to see, I mean, I think last quarter you commented that web traffic was kind of a leading indicator of sales. So I'm wondering if you could talk a little bit about what you're seeing in terms of the pipeline and then specifically on DIY versus the Pro, whether it's just in your store or based on web traffic more specifically? Sure. And since Lisa is not retiring until April, we'll let her answer that Yes, they're stuck with me for quite a long time still. Anyway, it's a hard thing to look at web traffic versus last year because last year for Quarter is when we were closed, so it was really a different animal. What we are seeing is if you go way back pre COVID, our web Traffic or not traffic, but our web sales were about 12% of our sales. And for last quarter, they were 16%. So we continue to see really nice growth. And even as we've come out and now we're kind of comping stores open to stores open, our traffic is up on the website, which is great. So we're continuing to see a lot of There and a lot of interest in the product category. To your question on pro versus homeowner, still I think as we talked about last time, homeowner growth is a little bit Stronger than pro growth, but both growing nicely. So we're very, very excited about that too. And it remains to be seen as Tom and both Trevor have both said, as people start going out more and doing things more, how that may shift over time. But for today, we're very happy with both segments. Our next question comes from Chuck Grom from Gordon Haskett. All right. Good afternoon and congrats Lisa as well. I was wondering if you guys could just speak to new category growth opportunities both on On the commercial front and also adjacent categories, which it sounds like you're more excited about recently, I guess where penetration is today on both fronts, where you think they can go to? And then also as a follow-up, Just remind us what the margin profile of both of those segments look like. So did we give in the script What our penetration is in inflation? Yes. We're at 2% today and that 1 point Yes, we're at 1.6% today. Sorry about that. And we I couldn't be more pleased with each adjacent category that we have entered into. Each one of them has been a pleasant surprise. It's all incremental. Our stores are excited about it. And that number will continue to grow. I don't think we publicly said that it's going to be a bigger piece of our business in the future for sure. We just are finishing reflows in our stores. We're not even By the end of this year, we'll have gone through and reset all the stores to show them the way we want to set. That's not complete today and we're having the success we're having without that. So And then I'd also say that there's more categories to come. So I wouldn't put a number out there, but it's going to be bigger than 1.6%. And it's something that we're hard surface flooring retailer first. We're not going to get distracted with that, but there are some things our customers want to complete the project And we've proved these big stores give us the ability to flex space and to add them in as we go over time. From a margin standpoint, Our goal is to get them to the margin rates that we run-in the rest of the store. They're a little bit less than that today. But as we learn more about them and we buy them better, we can continue to improve those rates. And then the only thing I'd say on the commercial side is, as we mentioned, we're hiring 15 new regional account managers. I think we ended last year with maybe 22 23, we're very excited about what we're seeing there and it's getting validated by what Spartan is teaching us. We hire those It takes them a little while to get up to speed. Hopefully, they do $500,000 maybe a little bit more than that in sales their 1st year. And by the time they get up to maturity, we think they're doing 2, 2.5 Probably closer to $3,000,000 in sales and we're currently exceeding those numbers today, but they're performing well. And just one other number because it comes right off The 10 Q, just to give you a sense on adjacent categories. Last year for the 6 months ended, we did $5,900,000 in sales. And this year for the 6 months ended, we've done $25,800,000 So the team is doing great. There's new things they're thinking about. The space looks great with the way we refloat it. And More to come there. And the last thing I'd say, Elyse and I are absolutely confident that even though if the margin rate currently is a little bit lower, it's absolutely an incremental sell, right? It's not like you're thinking, I'll pick this floor versus this vanity. When you pick the flooring and the insulation, you decide to pick the vanity, it's an incremental sale. Yes. And if you think about it too, it's not labor We're adding very easy categories to sell where customers can just grab and go. So it's working well. Our next question comes from Lisa Suzuki with Bank of America. Great. Thank you, guys. Just given that there's still a fair amount of uncertainty such that you're Still not providing guidance for the year. How are you thinking about allocation of capital and whether you continue to maintain elevated levels of cash as you have for the last 6 quarters or so? Great question. We do want to keep a little conservative, right? We're a growth company. We're one of the few guys growing at 20%. What we're We're confident as Tom mentioned. The biggest as you guys because I get a lot of detail on CapEx where we're spending our stores is we're investing that capital back into that's the vast majority. We're getting well over 20% IRRs when we look at both the 10 year and the 20 year basis. The next Area that we're investing in is our distribution centers, especially now when you read what's happening where there is no distribution center capacity and costs are going up, like What we're doing in Houston, for example, where we own in that distribution center, we know there's a very, very high return on invested capital there. The next two really are investing back into our stores. As we mentioned, things like making room for the adjacent categories and investing in some of our older stores. We see a nice Turn when we take an older store and we remerchandise it and we figured out how to lower that cost over time. And then technology in the e commerce Platform. So even though there may be some uncertainty in the short term, these are long term investments that we've got a 10 year record of improving and Not to get too excited, but when you look at our return on invested capital over the last 3 years, it's gone up substantially. And so we got a very strong conviction that we're going to get a very good On the cash piece of it, we do have a lot of cash. Last year, we cut our stores and our business took off. So we ended having a lot of cash, But we're going to use a lot of that this year. When you look at our CapEx, we're going to more than double our CapEx this year versus last year. That's going to be a use of cash. And then as I mentioned, we're going to end with $1,000,000,000 in inventory versus the $654,000,000 we had last year. And so that cash balance is going to come down. It's not going to go to 0, but that cash number is going to come down as we get to the end of the year, as we make the investment in the CapEx as well as in the inventory. Our next question comes from Justin Kleber from Baird. Yes. Hey, guys. Thanks for taking the question and congrats, Lisa. Just wanted to ask about new stores And the new store waterfall. It seems like every year your stores are delivering higher and higher AUVs. So just given that base, I mean, how are you thinking about the maturation curve of new stores maybe relative to what you've historically seen in the business? Yes. This is Trevor. We've historically said the new store is at about 400 basis points to our overall comp. It's hard to measure in this environment where we're we comped down 21 last year and we comped up 68. Unfortunately, I've been wrong every year I've been here on this, but every year To your point, as when I got here, new stores were maybe do 8 or 9. When that long ago, they were doing 10 to 12. Now we quote in our 10 ks 13 to 15 and it looks like of stores are certainly going to be at the higher end, maybe above the higher end of that for the class of 2020 2021, as Tom mentioned. But mathematically, I still think that 400 basis points is going to shrink because if you have a new store ultimately is going to get to $22,000,000 or $24,000,000 if it's now opening at $15,000,000 versus it used to open at $12,000,000 or $13,000,000 then mathematically the comps have got to come down. So hope I'm wrong. I hope that the 5 year number average I talked about keeps going up. But I do think as we think about the future because these new stores are opening up so much better and so much Profitable, but mathematically that 400 basis points is going to come down as we look to the future. But it's a good thing because the beginning number is a much, Our final question comes from Jonathan Matuszewski Kezewski from Jefferies. Please go ahead. Great. Thanks for squeezing me in and nice quarter guys. Two questions. First one, lots of room to go domestically with new stores. Can you give us your latest thoughts on potential market entry into Canada? And how do you think about the hard surface flooring buying preferences of pros and DIY customers Up there versus the U. S? Thanks. So I believe that Canada is a terrific market. I have been fortunate to be in home improvement for I can't believe how old I'm getting, but I've been in home improvement for a very long time and Home improvement around the world and there's nothing like floor and decor anywhere in the world. And flooring really, particularly in Canada, It's really bought the same way that it's bought here in the U. S. The competitive landscape looks the same way it does here in the U. S. We know we'll be successful when the time is right to go there. We're ready to talk about going there. We're certainly going to let the world know. I think when we get to our analyst meeting and as we get to Then we'll talk a little bit more about that. But I know it's an opportunity in Canada and beyond. So it's just a question of it's not a question of if, it's just a question of So look, I want to thank everyone for participation in the call today. I know Our comments were longer than usual and we heard we're long sometimes in general, but certainly we are we had a lot to a lot of information that we want provides you today, including Lisa's announcement. Lisa will be here until April of next year and she's committed to stay on every investor call, every Call that we do. So, certainly she'll be here and we'll have plenty of time to say goodbye to her. So, thanks for joining. Thanks for your interest and we'll talk to you soon.