Floor & Decor Holdings, Inc.

Greetings and welcome to Floor and Decor Holdings Inc. Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to Mr. Wayne Hood, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Operator, and good afternoon, everyone. Joining me on our earnings call today are Tom Taylor, Chief Executive Officer, Lisa Lobby, President, and Trevor Lang, Executive Vice President and Chief Financial Officer. Before we get started, I would like to remind everyone of the company's safe harbor language. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risk and uncertainty. 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. Florida Corps assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company will discuss non-GAAP financial measures as defined by the SEC Regulation G. We believe non-GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release. which is available on our investor relations website at ir4deco.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 third quarter 2020 earnings conference call. On today's call, I will discuss the highlights of our strong third quarter as well as the progress we are making on some of our strategic growth initiatives that we believe will enable us to continue to grow our market share in 2020 and beyond. Trevor will then review our third quarter financial performance and discuss how we are thinking about the remainder of 2020, and then we will open the call for your questions. We are very pleased with our fiscal 2020 third quarter earnings results, which reflected broad-based accelerating sales momentum, strong earnings flow-through, as well as strong cash generation. Our fiscal 2020 third quarter total sales increased 31.4% to $684.8 million from $521.1 million in fiscal 2019. Our third quarter fiscal 2020 comparable store sales increased 18.4% exceeding our expectations. We are very pleased with our third quarter comparable store sales growth exit rate and the start to our fourth quarter. Our year-to-date comparable store sales through the third quarter of fiscal 2020 are flat with last year, which is a remarkable accomplishment considering COVID-19's impact to our store operations, which began in late March. Our third quarter adjusted EBITDA meaningfully improved to a quarterly record $106.7 million, an increase of 86.8% from $57.1 million in the third quarter of fiscal 2019, and almost one and a half times higher than our annual adjusted EBITDA in fiscal 2015. Our fiscal 2020 adjusted third quarter earnings per share increased 107.4% to 56 cents from 27 cents in the third quarter of fiscal 2019. We ended the third quarter of fiscal 2020 with no net debt on our balance sheet and remain in the strongest liquidity position in our company's history. Let me now provide an update on each of our five strategic pillars of growth, beginning with new store growth. We successfully opened three new warehouse stores in the third quarter of fiscal 2020, including new warehouse store openings in Salt Lake City, Utah, and Toms River, New Jersey, in fiscal August, and San Diego, California, in September. and a small design studio in Dallas, Texas in August. The fiscal third quarter 2020 store openings brought the total number of warehouse stores that we operate to 128 stores, up 13.3% from 113 warehouse stores at the end of the third quarter of fiscal 2019. As we look forward to the fourth quarter of fiscal 2020, we plan to open five new warehouse stores with most of the openings in November. This will bring the total number of warehouse stores that we operate at the end of fiscal 2020 to 133, an increase of 10.8% from fiscal 2019. We are very pleased with the performance of our new stores, including those new stores opened in the third quarter as we successfully opened them in atypical ways due to COVID-19 pandemic. We are also pleased with the sales waterfall among our store vintages, particularly our most mature stores. We look forward to resuming 20% new warehouse format store growth in fiscal 2021 after having to temporarily slow our new store growth in fiscal 2020 due to the COVID-19 pandemic. We have long wanted to open our new stores in a more balanced cadence throughout the fiscal year, and we believe we'll accomplish this in fiscal 2021. We also believe the class of 2021 will be a strong class of new stores. Moving on to our second pillar of growth, growing our comparable store sales. We are very pleased with the broad-based, sequential acceleration in our sales that emerged throughout our third quarter. On a monthly basis, our comparable store sales increased 15.7% in July, to 18% in August, and to 20.8% in September, which led to an 18.4% growth in the third quarter of fiscal 2020. Adjusting for the impact of Hurricane Dorian in the third quarter of fiscal 2019, we estimate our fiscal 2020 third quarter comparable store sales would have increased approximately 17.8%. On a two-year stack basis, our comparable store sales increased 23%. Fiscal 2020 third quarter comparable store transactions increased 18.9%. and comparable store average ticket declined 0.5% from the third quarter of fiscal 2019. We believe the decline in our comparable store ticket reflects a higher growth from our homeowner versus pro and designer-influenced business, as well as being aggressive in the clearance of discontinued inventory in our highest ticket category, which is our natural wood category. We are making room for what we believe will be an improved natural wood assortment. Among our six key merchandising categories, our top-performing categories were decorative accessories, laminate luxury vinyl plank, and natural stone. That said, there was strong growth across all of our merchandising categories in the third quarter of fiscal 2020, which is the direct result of our ability to lead the market with differentiated and innovated trend-right products at everyday low prices and having in-stock job-lock quantities that homeowners are looking for today. Our third strategic pillar of growth is expanding our connected customer experience. Our fiscal 2020 third quarter e-commerce sales remained strong, increasing 111.5% from the third quarter of fiscal 2019 and accounted for 16.6% of our sales versus 10.2% last year. We continue to see strong double-digit growth from paid and organic search to as well as direct traffic to our website as homeowners contemplate flooring projects. In the third quarter, traffic to our website increased 50% year-over-year. The combination of changing consumer behavior due to COVID-19, as well as investments we have made to further optimize our website experience and build out our content, leads us to believe our e-commerce performance metrics will continue to be strong. That said, our stores remain a critical part of our connected customer experience. In the third quarter of fiscal 2020, 87% of website orders were picked up in our stores. Our fourth pillar of growth rests on the successful investments we are making in our pro and commercial customers. In September, we further created excitement in our stores by successfully launching our first digitally executed Pro Appreciation Month. where there was no purchase necessary to enter or to win prizes relevant to the professional customer. We are pleased that over 36,000 pros signed up for the sweepstakes event, and the feedback about the event and our virtual webinar training forums was overwhelmingly positive. We believe recognition events like this one are very important to building long-term relationships and engagement with our pros. We also drive engagement through our Pro Premier Rewards PPR program, where almost 75% of our pro sales are from PPR members. PPR pros spend nearly three times more and shop 2.5 times more frequently than non-PPR members. We were pleased that enrollment in our PPR program in the third quarter of fiscal 2020 increased 30% year over year, despite the impact of COVID-19. The value of our PPR program is not only measured by growth in PPR members, but also by points earned and redeemed. In the third quarter of fiscal 2020, points redeemed increased 70% from last year, validating the value of our PPR program and engagement with our pros. To continue to drive engagement and points earned in the fourth quarter of fiscal 2020, we are incentivizing our most loyal pros from the third quarter of fiscal 2020 with an opportunity to earn fourth quarter incremental bonus points for growing their sales with us relative to their third quarter spend. Our research is clear that the more engaged we get our pros with floor and decor, the more wallet share we can obtain. And PPR is just one avenue to do this. As we move into 2021, we will further enhance our PPR program and build on our segmentation and personalization efforts to drive engagement and lifetime loyalty. We are nearing the completion of updating our homeowner and pro demographic and segmentation information and look forward to sharing the results early next year. Our CRM investment has resulted in a very successful tool as we are learning a lot about not only our pros but homeowners, which better informs us of who customers are and the strategies we need to implement to attain more wallet and market share. Let me now discuss the progress we're making on our free design services, the fifth pillar of our growth. We are pleased that the number of design appointments increased 44.5% in the third quarter of fiscal 2020 from the third quarter of fiscal 2019, and that is well above the fiscal 2020 first quarter pre-COVID-19 growth rate of 34.3%. This was particularly gratifying considering we were not able to quickly return to pre-COVID-19 designer staffing levels as many were furloughed in the second quarter of fiscal 2020. It's important to note that our design services are not only important to homeowners but to pros. We believe we have significant runway ahead of us with design services and are focused on building awareness of our services to homeowners and pros, internally driving the value of using our system to increase our already high conversion rate and growing our pipeline of designers to support our growth objectives. Let me now turn my comments to how we are thinking about the macroeconomic environment. We are operating in unprecedented times, with homeowners nesting at home more due to COVID-19 and having additional discretionary income due to not spending as much on leisure activities like travel, hotels, eating out, and sporting events. This has caused a substantial increase in the savings rate, and fortunately, people are investing those dollars in the home. We are also seeing some of the strongest growth in both new and existing home sales. In September, existing home sales grew for the fourth consecutive month to a seasonally adjusted annual rate of $6.5 million, up 9.4% from the prior month and nearly 21% from last year. The housing market is clearly benefiting from what looks to be a sustained period of low mortgage interest rates that are hovering at or below 3%. We expect to continue to benefit from this lower, longer interest rate environment and the secular demand for housing. Carpet continues to see market share to hard surface flooring. Seventy-nine percent of the 123 million occupied housing units in the United States were built before 1999, which is a lot of homes that need to be invested in and maintained. And flooring is a great way to improve the look of a home and increase the value. Millennials, the nation's largest adult population at 72.1 million, now outnumber baby boomers, and they are entering their prime household formation years. This demographic trend is contributing to the demand for housing exceeding supply, and it's partly responsible for the home price appreciation we continue to experience. The COVID-19 pandemic has also impacted consumer behaviors. Homeowners are undertaking projects to repurpose and personalize their homes to work, learn, exercise, and play. The combination of homeowners nesting, a high savings rate, low interest rates, rising housing demand, rising housing values, homes that are aging, and a preference for hard surface flooring is a great backdrop for our industry and our companies. Collectively, these factors, among others, leave us optimistic about the remainder of 2020 and the long-term opportunity ahead of us. We are also pleased to announce today that Ryan Marshall, CEO of Pulte Group, Kami Scarlett, Chief Human Resources Officer at Best Buy, and Charles Young, Executive Vice President and Chief Operating Officer of Invitation Homes, have been appointed to Florida Corps Board of Directors, effective January 1st, 2021. We are thrilled to welcome Ryan, Kami, and Charles to our board. They are outstanding executives with broad operational, commercial, and strategic expertise that we believe will assist us in our growth plans. They will also add diverse perspectives and skills to our board discussions. We also announced that John Roth, Chief Executive Officer of Freeman Spogli, Rachel Lee, partner at the private equity group of Aries Management Corporation, and Brad Brudico, partner of Freeman Spogli, have resigned from our board effectively at the same time. We want to thank John, Rachel, Brad for their extraordinary contributions to Floor & Decor over the last 10 years. Let me close by saying that our strong fiscal 2020 third quarter earnings are the direct result of our associates responding tirelessly to the surging demand and cross-functional collaboration of our teams. Our entire executive leadership team would like to thank them for their hard work and dedication to serving our customers. I will now turn the call over to Trevor to discuss in more detail our third quarter financial results.