Floor & Decor Holdings, Inc.

Greetings. Welcome to the Floor and Decor Holdings Incorporated fourth quarter and fiscal year 2020 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. Please note this conference is being recorded. I will now turn the call over to your host, Wayne Hood. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Joining me on our earnings conference 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 today, I would like to remind everyone of the company's safe harbor language. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, of 1995 and are subject to risk and uncertainties. Any statement that refers to expectations, projections or other characterizations of future events including financial projections or future market conditions is a forward-looking statement. The company's actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. One, of course, seems 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.flooranddecourt.com. A recorded replay of this call, together with the 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 2020 fourth quarter and full year 2020 earnings conference call. On today's call, I will discuss some of the highlights of our strong fourth quarter and full year fiscal 2020 results, as well as the progress we are making on some of our strategic growth initiatives. Trevor will then review our fiscal 2020 fourth quarter and full year financial performance and discuss how we are thinking about fiscal 2021, and then we will open the call for your questions. We delivered exceptional fiscal 2020 fourth quarter earnings results that represented an acceleration of trends we saw in the third quarter of fiscal 2020. Our fiscal 2020 fourth quarter total sales increased 37.3% or $196.7 million to $723.7 million from $527 million in the fourth quarter of fiscal 2019. exceeding our expectations. On a 52 to 52-week basis, our fiscal 2020 fourth quarter comparable store sales increased 21.6%, the strongest quarterly growth rate of the year. We experienced robust and consistently strong sales across all months and all nine geographic regions in the quarter. Our fiscal 2020 fourth quarter adjusted EBITDA also exceeded our expectations, increasing 65.9%, to $97.6 million from $58.8 million in the fourth quarter of fiscal 2019. Our fiscal 2020 adjusted fourth quarter diluted earnings per share increased 80.8% to 47 cents from 26 cents in the fourth quarter of fiscal 2019. We ended fiscal 2020 with no net debt on our balance sheet and remain in our strongest liquidity position in our company's history. Our financial performance and strong balance sheet enable us to continue to make significant investments towards further strengthening our competitive position and growing our market share in 2021 and beyond. Let me now provide an update on our five strategic pillars of growth, beginning with new store growth. We opened five new warehouse stores in the fourth quarter of fiscal 2020, bringing the total number of warehouse stores we operate to 133, plus two design studios in 31 states at the end of fiscal 2020. By month, we opened four new warehouse stores in fiscal November 2020 and one new warehouse store in fiscal December 2020. These openings were a remarkable accomplishment considering the impact COVID-19 had on many elements of new store construction. As we look to fiscal 2021, we intend to return to 20% unit growth and expect to achieve our long-desired objective of a more balanced quarterly new warehouse store opening cadence. To that end, we expect to open seven new warehouse stores in the first quarter of fiscal 2021, more than double the three new warehouse stores we opened in the first quarter of fiscal 2020. For the full year, we expect to open 27 new warehouse stores, an increase of 20.3% from 2020. We expect about 60% of our new warehouse store openings will be in new markets, particularly in the Northeast and the West Coast, and 40% in existing successful markets. We are continuing to move forward with our design studio pilot by opening two additional locations in the second half of fiscal 2021. We remain very pleased with the sales waterfall among all of our store vintages, particularly our most mature stores, and believe the classic 2020 and 2021 stores will represent some of our strongest classes of new stores. Moving on to our second pillar of growth, growing our comparable store sales. We are very pleased with the broad-based and consistent strength in our fiscal 2020 fourth quarter comparable store sales and the strong start to fiscal 2021. Our reported fourth quarter comparable store sales increased 21.6% from last year. But if we adjust for the impact of Christmas moving into the 53rd week, which benefited physical December 2020, we estimate our fourth quarter comparable store sales would have increased approximately 20.5%. Our comparable store sales were driven by strong 23.1% growth in comparable store customer transactions. This represents the strongest growth rate in customer transactions in fiscal 2020 and exceeded our expectations. On a monthly basis, our comparable store sales increased 20.4% in October, 19.4% in November, and 24.9% in December. As I mentioned, the 24.9% increase in December comparable store sales was closer to 21.7 when adjusting for Christmas shifting into the 53rd week. We are very pleased with our December comparable store sales growth exit rate and the strong start to fiscal 2021. Near debate, our fiscal 2021 first quarter comparable store sales increased approximately 24% despite severe weather that impacted approximately 20% of our store base over multiple days. From a merchandising perspective, all of our product categories experienced double-digit fourth quarter 2020 comparable store sales growth, excluding our wood category. That said, the changes we have made in our wood assortments are now leading to modestly higher growth in the category. The broad-based strength in our merchandising categories further validates our position as the one-stop solution for all of our customers' hard surface glory needs. The strength of our merchandising and supply chain teams has enabled us to continue to successfully deliver on our strategy of offering differentiated and innovative trend-right products in job-lock quantities at everyday low prices. Our third strategic pillar of growth is expanding our connected customer experience. our fiscal 2020 fourth quarter e-commerce sales remained strong, increasing 93.7% from the fourth quarter of fiscal 2019 and accounting for 15.9% of our sales compared with 11.4% last year. For the full fiscal year, our e-commerce sales increased 120.3% to $451 million and accounted for 18.9% of our sales compared with 10.1% in fiscal 2019. We believe we are now seeing our e-commerce sales penetration rate approaching a more normalized rate following its peak of over 60% in the second quarter of fiscal 2020. We are very pleased with the fiscal 2020 fourth quarter traffic to our website, which increased 53% year-over-year, an improvement in growth from the third quarter of fiscal 2020. We continue to see strong double-digit growth from paid and organic search as well as direct traffic to our website as our customers are choosing to engage with our brand. We are particularly pleased with 92% growth in direct traffic to the website in the fourth quarter, which is a direct result of our growing brand awareness and our team's ability to capitalize on these trends. We will continue to make investments towards delivering an unmatched personalized customer experience with efficient business processes across all our touchpoints, including our website, mobile app, and in-store. For example, in 2021, we're excited about rolling out a I'm Here notification, which offers customers the ability to check in contact lists and curbside from the personal devices, making for a better pickup experience. Additionally, later this year, we intend to enable customers to schedule delivery and pickup times. We are also taking additional actions to further optimize the speed of our website and mobile experience, which in turn we believe will lead to further improvement in conversion and customer experience. We believe these actions will continue to lead to strong e-commerce performance metrics and growth. That said, our stores remain a critical part of our connected customer experience. In the fourth quarter of fiscal 2020, about 88% of our website orders, excluding sample purchases, 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 to grow our market share. We are continuing to make investments in our pro mobile app and our award-winning Pro Premier Awards PPR program, which drives engagement and loyalty with new and existing pros. We grew enrollment in the PPR program 22% in fiscal 2020, despite the headwinds caused by the COVID-19 pandemic. We were encouraged to see our fiscal 2020 fourth quarter monthly PPR enrollment return to pre-COVID-19 levels and accelerate from the third quarter, leaving us optimistic about further strong growth in 2021. We had over 178,000 pros enrolled in PPR at the end of fiscal 2020, which represents a 73.7% increase from fiscal 2019 and a remarkable accomplishment since its launch in the third quarter of fiscal 2018. As a result, about 77% of our fiscal 2020 pro sales were from PPR members, up from 67% in fiscal 2019. The increased enrollment is the direct result of our proteins engaging the pros about the benefits and value the program that now includes over 100,000 reward items, including unique reward experiences and social good offerings. For example, our pros have redeemed over 1.8 million points to provide clean water to underdeveloped countries, amounting to over 34,000 liters of clean water. Home Advisors is one of our newest pro partner additions to PPR, offering members savings as well as the option to redeem points directly for credits for lead generation. the lifeblood of any contractor. In fiscal 2020, PPR points earned increased 37% versus 2019, and points redeemed rose 70%, further validating the value of our PPR program and engagement with our pros. Our PPR program is an important tool for us, and we have found that PPR members spend nearly three times more and shop 2.5 times more frequently than non-PPR members. As we move into 2021, we'll further enhance our PPR program and build on our segmentation and personalization efforts to drive engagement and lifetime loyalty, and we intend to reward our pro customers for using our pro credit card. We continue to be very pleased with the growth in commercial sales, particularly those sales that are generated by our regional account managers, the RANs, which are now in most of our major markets. While sales from our 22 regional account managers are small relative to the size of our retail business, We are excited about the opportunity to see sales triple in fiscal 2020. Prompting us to further build out this organization, we plan to add approximately 12 regional account managers in fiscal 2021. Over time, we expect commercial sales to become a material part of our growth as we leverage key floor decor strengths, merchandising, and our direct sourcing model. Let me now discuss the progress we are making with our free design services, the fifth pillar of growth. We are pleased with the momentum in our free design services where our fiscal 2020 fourth quarter sales increased uniquely from fourth quarter fiscal 2019. Key performance metrics, including appointment conversion rate, average ticket, and sales penetration were the highest of the year as consumers felt safe inside our large stores. Our fiscal 2020 design appointments of 193,000 were a record as we augmented in-person design appointments with virtual ones. Design appointments and product recommendations are very important to homeowners, pros, and our conversion rate. So we were pleased to learn through our design survey that among homeowners and pros who had design appointments at Florida Core, that over 90% were very or somewhat satisfied. We have seen sales tied to a designer more than double since 2018 and have strategies to drive continued strong growth in 2021 and beyond. We are focused on building a consistent, high-touch, best-in-class, and seamless design service for our homeowner and pro customers. To that end, we'll continue to elevate the talent in design services. As we have discussed, when the designer is involved with the project, the average ticket and margin are above the company average. Let me now turn my comments to what we have learned about our customers following our updated homeowner and pro demographic and customer market segmentation analysis. We now have information on over 2 million customers in our CRM database that we have combined with external research to create strategies for our different types of customers. Within our two homeowner segments, do-it-yourself and buy-it-yourself, we now have further defined them into nine distinct personas. We also have more clarity on the professional side of our business as to what percent of our business comes from a remodeler, flooring specialist, general contractor, property owner, architect, and designer. Based on our most recent research, we believe approximately 70% of our sales come from homeowners and 30% from professional customers. More importantly, when looking at who makes the determination of where to shop, we still believe the pro influences about 40% of our sales and homeowners 60%. Additionally, we now estimate that 85% of flow-under-curve purchasers involve a professional in their installation. Our strategy has always been to serve both homeowners and professional customers But this new information and granular level of detail in our CRM database allows us to enhance store, connected customers, and marketing strategies to find new customers, as well as obtain more wallet share from existing customers. We are now much better informed as to why customers buy from us and why sometimes we don't get the sale. We have begun to refine our targeting strategies through digital advertising and have created more personalized and relevant communications throughout the homeowner and pro-shopping journey. We are also building our collaborative strategies between our pro desk and pre-designed services. Finally, we are enhancing our pro premier rewards loyalty program by segmenting our pros by a dollar spend, which we expect will allow us to increase engagement and loyalty. Let me close by saying that our strong fiscal 2020 fourth quarter and full year earnings are the direct result of our associates tirelessly serving our customers and each other. In 2020, we learned that we can successfully operate our business under extreme circumstances and unexpected events due to the collaborative strength of our people and culture. Our entire executive leadership team would like to thank them for their hard work and dedication to serving our customers and each other. I'll now turn the call over to Trevor to discuss in more detail our fiscal 2020 fourth quarter and full year financial results. Thanks, Tom. Our strong fourth quarter In fiscal 2020, earnings results are an exceptional accomplishment considering the unique and challenging operating environment we faced in fiscal 2020. It is a testament to the resiliency of our business model and our associates' tireless effort to serve our customers and each other. We are pleased with two consecutive quarters of double-digit comparable store sales growth driven by transaction growth, which is encouraging as we enter 2021. We are particularly proud of our second half financial performance in fiscal 2020 as it represents the highest operating and EBITDA margin performance in our recent history. Let me now turn my comments to some of the changes among the major lines in our fiscal 2020 fourth quarter income statement, balance sheet, and statement of cash flow, and then I'll discuss how we are thinking about fiscal 2021. As a reminder, our fiscal 2020 year, which ended December 31, 2020, is a 53-week period compared with fiscal 2019's 52-week period ending December 26, 2019. This means we had 14 weeks of operations in the fourth quarter of 2020 versus 13 weeks in fiscal 2019's fourth quarter. We estimate the additional week added approximately $41,800,000 in sales, $8.5 million in operating income, $6,400,000 in net income, $0.06 to our diluted earnings per share and $8,800,000 to adjusted EBITDA. My comments from here will be on a 14-week to 13-week basis. A fiscal 2020 reported fourth quarter gross margin rate contracted to 42.5% and 43.6% in fiscal 2019 due entirely to the 270 basis points or $14 million in Section 301 tariff refunds discussed in fiscal 2019 related primarily to rigid core vinyl. Excluding the 270 basis points of benefit from last year, our growth margins improved 150 basis points, driven by higher product margins due to continued enhancements to our merchandising strategies and improved leverage of our distribution center and supply chain infrastructure on higher sales. Turning to our fiscal 2020 fourth quarter expenses, our fiscal 2020 fourth quarter selling and still operating expenses increased 29.2% to $191,100,000, from 147,900,000 in fiscal 2019, leveraging approximately 170 basis points. The year-over-year improvement is the direct result of the distinct leverage that comes from the strong 37.3% growth in our total sales. Our staffing levels sequentially improved in the fourth quarter of fiscal 2020 relative to the third quarter of fiscal 2020, but we ran lean in some stores due to COVID-19. Our fiscal 2020 fourth quarter general and administrative expenses increased 20.1% to $40,900,000 from $34 million in the fourth quarter of fiscal 2019, leveraging 90 basis points year over year. The leverage was due to the increase in sales as well as we incurred $2,400,000 in last year's fourth quarter related to the relocation to our new store support center and the exit of our Miami distribution center. Our 2020 fourth quarter pre-opening expenses increased 26.4% to $7,600,000 from $6 million in the same period in the prior year, primarily due to the opening of five new warehouse stores in Q4 2020 and spend for 10 stores expected to open throughout 2021 versus opening seven stores in Q4 2019 and spend for five stores that opened in 2020. We are pleased that our strong second half 2020 results enabled us to pay $2.5 million in spot bonuses to our store associates and reimbursed store support center associates for salary reductions they took in the second quarter of fiscal 2020 due to the COVID-19 pandemic. Fourth quarter net interest expense increased 34.3% to $2,300,000 from $1,700,000 at fiscal 2019. primarily due to higher average total debt outstanding with our term loan when compared to the same period in fiscal 2019. Fourth quarter fiscal 2019 included a benefit of approximately $335,000 related to the Section 301 tariff refunds. Without the benefit, the interest expense would have increased 15.9% in the fourth quarter of 2020. Our fiscal 2020 fourth quarter provision for income taxes was $8,600,000 or 13.1% of pre-tax income compared with $5,100,000 or 12.6% in fiscal 2019. The lower effective income tax rate when compared to our statutory rate is primarily due to income tax benefits for tax deductions in excess of book expense related stock option exercises. Turning to our profitability, our fiscal 2020 fourth quarter adjusted EBITDA margin rate increased 230 basis points to 13.5% from 11.2% in fiscal 2019, primarily due to the 150 basis point improvement in our gross margin rate, which when coupled with expense leverage led to our adjusted EBITDA growing 65.9% to $97,600,000 from $58,800,000 in the same period in fiscal 2019. Our fiscal 2020 fourth quarter gap net income increased 61.7% to $57,100,000 from $35,300,000 in the same period in fiscal 2019. Our GAAP deleted earnings per share increased 58.8% to $0.54 from $0.34 per share in the fourth quarter of 2019. Our fiscal 2020 fourth quarter non-GAAP adjusted net income increased 86% to $50,200,000 from $27 million in the fourth quarter of fiscal 2019. Our fiscal 2020 fourth quarter adjusted deleted earnings per share increased 80.8% to $0.47 from $0.26 in the same period in fiscal 2019. A reconciliation of our fiscal 2020 fourth quarter earnings to non-GAAP earnings is provided in today's earnings release. Moving on to our fiscal 2020 balance sheet and cash flow, we are pleased that during these unprecedented times that we have been able to maintain a strong balance sheet and have the strongest liquidity position in our company's history to support our growth plans. As of December 31st, 2020, there was $217,800,000 in gross debt outstanding related to our term loan facility. When considered the $307,800,000 in cash and cash equivalences on our balance sheet, we had no net debt outstanding as of December 31, 2020. Further, we can access approximately $378,700,000 of unused borrowings available under our $400 million ABL facility. Our fiscal 2020 operating cash flow almost doubled to $406,200,000 from $204,700,000 in fiscal 2019, primarily due to strong growth in our net income and a decrease in working capital. The decline in our working capital was primarily due to 11% growth in new stores in fiscal 2020 compared with our historical 20% growth in new units. Turning to capital expenditures for fiscal 2020, our total capital expenditures were $212,400,000 compared to $196 million for fiscal 2019. While we opened fewer stores in fiscal 2020 than 2019, we intend to open more stores in early 2021 than in 2020, so we had an increase in new store capital spending for future year opens. We also spent more on our distribution centers as we bought land and intend to own a new, larger distribution center near our current facility outside of Houston, Texas. For fiscal 2020, approximately 66% of our capital expenditures were for new stores, 23% for existing store and distribution center reinvestments, while the remaining spending was associated with information technology, e-commerce, and store support center investments to support our growth. Let me now turn my comments to how we're thinking about fiscal 2021. From a macroeconomic perspective, fiscal and monetary policies look to remain very accommodative over the intermediate term, which we believe will continue to provide tailwinds to existing and new home sales. secular demand for homes continues to exceed available supply which we believe will continue to lead to moderate growth in home price appreciation and support home reinvestment projects indeed our sales growth has accelerated and has remained robust across geographies and merchandise categories and the pro backlog remains strong into 2021. while we are optimistic about the prospects of the sustained economic recovery in 2021 and the momentum in our business we recognize that business risks remain elevated from the COVID-19 pandemic. For that reason, in the interim, we are continuing our practice of not providing specific annual sales and earnings guidance that was established in the second quarter of fiscal 2020. However, we are providing select annual guidance for new store openings and financial measures that we believe can reasonably be forecasted. As business risks improve, we expect to return to annual sales and earnings guidance. While we are not providing specific annual sales and earnings data for fiscal 2021, let me provide some context and items to consider. We will be cycling past increasingly difficult comparable store sales comparisons in the second half of fiscal 2021, and we believe measuring our growth on a two and three year stack basis in the second half of 2021 is a better analytical way to gauge our underlying trends. As a reminder, our fiscal 2020 third quarter and fourth quarter comparable store sales increased 18.4% and 21.6% respectively. We are planning on depreciation and amortization to be approximately $116 to $118 million. We are planning on interest expense to be approximately $5 million. The lower interest expense is due to the recently amended term loan where we paid down $10 million of the higher cost $75 million term loan B-1. as well as lowering our interest rate by about 300 basis points on the remaining balance. Deleted weighted average shares outstanding is estimated to be approximately $107 million and our fiscal 2021 tax rate is estimated to be approximately 24%. As a reminder, this guidance does not consider the tax benefit due to the impact of stock option exercises that may occur in fiscal 2021. Our 2021 capital expenditures are expected to accelerate from fiscal 2020 as we return to 20% growth in new warehouse store openings and make other strategic long-term investments. For fiscal 2021, total capital expenditures are planned to be approximately $440 million to $460 million, which will be funded primarily by cash from operations and cash on hand. We intend to open 27 warehouse format stores, two small format design studios, and start construction on store openings in fiscal 2022. We expect these warehouse store openings to be equally balanced throughout the quarters in fiscal 2021. We also intend to relocate two existing stores in early 2022 and will have construction costs incurred in fiscal 2021. Collectively, these investments are expected to require $285 million to $295 million in cash in fiscal 2021. Most of the year-over-year increase reflects an acceleration in store openings to 27 new warehouse stores, which is more than double the 13 new warehouse stores opened in fiscal 2020. We plan to relocate our Houston, Texas distribution center to a nearby location in fiscal 2021. We have purchased the land and already started construction on a new 1,500,000 square feet building that we intend to own for the long term. This new DC will double our capacity in Houston to 1,500,000 square feet and increase our total DC capacity by 17% to 5,500,000 square feet. Additionally, we intend to open 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 drainage savings in fiscal 2022. Collectively, these are expected to use approximately 72 to 76 million in cash. we will invest in existing store remodeling and expansion projects and existing distribution centers using approximately $56 million to $59 million of cash. Finally, we plan to continue to invest in information technology infrastructure, e-commerce, and other store support center issues using approximately $27 to $30 million of cash. As we move beyond 2021, our goal is still to achieve $329 million in adjusted EBITs in 2022 as described in our 2020 annual proxy statement. If achieved, this would be quite a feat to double our EBIT over a three-year period in the throes of the worst pandemic in a century. As we look to the next three years, we believe our long-term growth algorithm of 20% unit growth, mid to high single-digit comparable store sales growth, along with modest gross margin improvement should lead to net income growth of at least 25%. Due to the COVID-19 pandemic, this growth path will not be a straight line, but over the longer term, we believe these goals are achievable. In closing, I would like to say that our entire leadership team is proud of how we performed in 2020, and we remain encouraged by the momentum that has continued into fiscal 2021. We believe our best days and years lie ahead of us. Our entire executive team would like to personally thank all of our associates for the great work they are doing every day to serve our customers. Operator, we will now take your questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star keys. Please limit to one question and one follow-up. Our first question comes from Christopher Horvath with J.P. Morgan. Please go ahead.

Thanks. Good evening, guys. Can you talk a little bit about the puts and takes of gross margin in 2021? As you think about it, obviously, there's a lot of press about freight costs and there's tariffs out there. And can you also give some insight around the cadence, perhaps, of the year, given some of the investments that you make and the comparisons that you've faced?

Yeah, Chris, this is Trevor. You know, we have exited the year with a very strong gross margin, as we mentioned in the prepared comments, up nicely if you back up to Section 301, Ferris. A lot of reasons for that we've talked about over the years. Lisa and her team and the supply chain team have done a fantastic job in putting the assortment together, did better best. There's a mixed benefit with people buying more of our decorative accessories and some of the insulation accessories and just really overall product margins across the board. So we exited the year very strong. As you think about the first half of the year, you'll remember at the end of 2019, we put in that Baltimore Distribution Center, which was a pretty big expense for us at that time. It was a 50% expansion. So we've gotten leverage in the back half of the year. We would expect to continue to get leverage out of that in the first half of this year. So we would expect in the first half, you know, to have maybe moderately better gross margins. As you get to the second half of the year, that 25% tariff is going to start to lay into our gross margins. We really didn't feel much of that yet because, as we said in the last call, we bought a lot of inventory in anticipation of that. We are certainly seeing the same things that everybody else is seeing with higher international container costs, higher domestic transportation costs. And so we will probably see more cost pressure in the back half of the year. The probably most important point I want to make is as we look at our business, we look at the uniqueness of our assortment, we look at our pricing power relative to the competition, we feel great about the pricing power we have. And as you know, we believe we're the lowest price leader out there. To summarize that, I think we've probably got a little bit of margin upside in the first half of the year. The back half of the year, you know, could be, you know, flattened down just a little bit only because of some of those cost pressures. But as you have now worked with us for many years, we try to maintain that same gross profit dollar. So if we have to raise costs because we see costs going up, you know, we think we have the ability to raise retails to offset that.

That's super helpful. I really appreciate that. Typically, people don't stop putting in floors because they lost power for a period of time. You talked about heavy exposure, obviously, with taxes to the severe weather and that impacting your business quarter to date, but still putting up at 24. So, I guess, how much do you think that you left on the table that presumably would get back?

Go ahead. So, yeah, I think that's right. Our I think, as Tom said, we've got 20% of our sales that were impacted. There might be some, if pipes burst and floors got busted, you know, we read a little bit more about that in more businesses than in homes. You know, with that, it just happens. So we'll have to wait and see how that plays out. But there was definitely an impact on that 24 comp. Our comps definitely would have been higher had we not impacted that, had not been impacted by those storms. Yeah, 16% of our store base is in Texas, and, you know, we lost five, six, seven days out of that. Yeah, and it affected Tennessee and Alabama a little bit, too.

Okay, so we do like a per store per day. We can extrapolate that off that, and it probably comes back. Do you expect it to come back typically pretty quickly?

I hope so. It just depends. What we've seen in our history is two kinds of storms. We saw Hurricane Harvey hit us a few years back. We saw a massive increase in sales, obviously, in that market because people were so damaged. But we've also seen storms in Florida where there was a lot of wind damage and other damage, and people have to then take their discretionary income that they otherwise would have put into floors and put into roofs and fixing fences and things like that where it's actually hurt ourselves. So, on balance, we would expect to have a little bit of a benefit because I do think there's been some damage because of burst pipes and things like that. But just too early to say whether it will be a material upside yet.

Thanks, guys. Best of luck.

Thank you.

Next question, Michael Lasser with UBS. Please go ahead.

Good afternoon. Thanks a lot for taking my question.

It seems like these businesses are salary and nice to meet you. your belief that 85% of your sales are going to involve a pro in one way or another. What's your sense of the pipeline for these pro customers?

And why wouldn't the pros continue to accelerate here as we get to a reopening?

Customers are going to want to reshape their house in a way that makes it even more comfortable for them and they'll have more comfort allowing them to put it in their home. Michael, I had a really hard time understanding all of that question. You're a bit muffled. I think pipeline is part of the question. This is like the Tom Brady commercial of Grunt. The order to the question, Tom, was how big is your pipeline and why shouldn't business continue to accelerate from here? Yeah, I mean, the pipeline, from what we hear from our professional customers, is there's a four- to six-week backlog. They have just plenty of work. So the other point that I would make, too, is that, you know, people are still engaged. You know, if you look at People are still engaging within the category. I look at our website traffic, which is, you know, when people are starting the project, you look at websites, they're going to go there first. In the fourth quarter, our traffic was up 53%. Year-to-date, we're up 79%. So the traffic on our website continues to be pretty robust, and that leads to, you know, pretty good demand. So, you know, we feel good about the tone of business. We're strong as Trevor's. As you said in our prepared remarks, we're strong across all geographies and strong across all categories. Okay.

And you mentioned the long-term guidance that you had put out there. It seems like given what's happening with the state of the business, you're going to do much better than that long-term guidance.

What factors should we consider that would just allow you to meet that goal and not vastly outperform it at this point? That's a great question, Michael. Your crystal ball is better than mine. I just don't – there's just too many unknowns. I think one thing, you know, when that $329 million goal was put out there, you know, at that time we were executing 20% unit growth. And, you know, that would have meant 24 stores opened in the fiscal year we just opened versus the 13 stores. You know, in our 10K, we disclosed that we want new stores to be $2.5 million in first year. You can then assume they're doing a lot more than that in years two, three, and four. So, you know, we lost 11 stores that would have been contributing, you know, over $3 million in profit. You know, 11 times three, that's $30 million of new debt that we're not going to get. But we hope that we can overcome that and still get there. I hope you're right. I think we've got a long track record of making the most out of it. I think this last quarter was a great example of you. you know, kind of simplified and on a 13 week basis to a 13 week basis where our sales are up 29% and our net income is up 62%. If the environment continues to be robust, we absolutely intend to grow our profit at a much higher rate than sales, which we've done in many years in the past. And, you know, certainly in the second half of this year, you know, last quarter there was another example where our sales were up over 30% and our net income was up over 100%. So we will make the most of it if indeed sales continue to be robust. Thank you very much and good luck.

Next question, Kate McShane with Goldman Sachs. Please go ahead. Hi, good afternoon. Thanks so much for taking my question. Trevor, you mentioned last quarter about favorable rents that you were seeing and that the quality of real estate is still really high. I just wondered three or four months later here, just how you're viewing the opportunities beyond 2021 and Has the real estate pipeline evolved in any way since last week?

I'll take that. Yes, the real estate pipeline continues to be good. We're seeing opportunities that we didn't think we would see. The classes mentioned in our prepared comments, we feel extremely good about the class of 2021. And we have visibility out to the class of 22, and it looks good also. So we've had eight consecutive years of 20% unit growth. Deals have started to come our way over the last few years in a meaningful way, and so we feel good about it. Yeah, and I think Dylan just put some numbers to that. Kate, when you look at the class of 21 to 27 stores, we know what all those stores are going to be. Our rent per square foot is going to be about half what we've made in the past. We were probably close to 14 to 16 bucks per square foot. And, you know, I think we're going to be in the high single digits, or I know we're going to be in the high single digits. So the real estate team has just done a fantastic job. And we're putting stores, as Tom mentioned, more stores in the northeast than in California. As you can expect, those rents are generally a lot more than the rents in the south where we started. So the class we just finished is going to be a fantastic class. The class we're opening is going to be a fantastic class. So, you know, these four return metrics are just great.

That's helpful. Thank you. And then my follow-up question was just on inventory levels. I know you mentioned in your prepared comments that you may have been a little bit light in a few places. Just how should we expect the inventory build to look over the year, and are there any categories where these bills would like to, you know, have better inventory levels in the future?

Yeah, I'll start, Trevor, and you can talk about the build. Our in-stock continues to be a challenge. I mean, when you're chasing these types of comps, keeping up with the inventory is not easy. I would say that it is one of the benefits of our model of having when you have a store that has 250-plus options of tile, when you're out of five tiles, you can usually find something to put into a customer's hand. So while we're never happy and we're never satisfied and it feels like we're always – it's like whack-a-mole, we're always chasing something, you know, we're able to overcome that because of our broad assortments across every category that we sell. So I don't know, Trevor, if you want to talk about the gains of – Yeah, and I think Tom mentioned this. Our business has been accelerated ever since we opened back up in the summer. And so even though we have had certain stocks out of stocks in certain categories because of the breadth of the assortment and just the great selling theme of the website, we've been able to accelerate our shelves again ever since we opened back up. I think if you think about this year, our expectation is that we'll be growing our inventory at a slower rate than sales.

Thank you. Next question, Liz Suzuki, Bank of America. Please go ahead.

Great, thanks. Could you just talk about CapEx, which is going up pretty meaningfully, and understanding that some of the costs of the 2021 stores occurred in 2020, but are there some other factors besides just the larger number of stores going into the CapEx guidance for 2021? It seems like the per-store spend is going up just given the location thing in New York and the West Coast. So just want to think about how that $450 million at the midpoint is likely to be the base level spending off of which 2022 and beyond will grow or if you think it's going to be a little elevated for 2021.

Yeah, definitely 2021 is going to be a little bit elevated. So yeah, our CapEx is going from just over $200 million to, I think that midpoint you said is probably close to $450 million. A few things I'd call out. One, our CapEx per store is not going up all that much. It's going to be a little bit higher. And really the only reason for the higher CapEx is part of the reason that our rents are coming down is we're taking on more of the CapEx burden. We're actually going to own a few stores this year, one in Dallas and one in Connecticut. We are doing more what we call self-development, where we'll go get a piece of dirt and build the store. And so our capex is going to be a little bit higher. But on a personal basis, it's not all that high, but there's a mixed component where we're taking on more of a development ourselves. And again, the benefit of that is we can get particularly lower rents for that. A few other things I would like to call out on CapEx is we're going to do two relocations this year. That's probably $15 million that we otherwise wouldn't spend. We've done three relocations in the past, and in all three cases, it's been a home run where the sales go up a lot and the profits go up a lot. We've just got a few old stores that we're going to relocate, so that's a little bit unique. The distribution center, I'm As you might have heard, we're actually going to own that distribution center in Houston. We've bought the land. We started construction on that 1.5 million square foot. So we're spending 72 to 76 million in CapEx there. Normally our DC CapEx is very small, well less than a million dollars. So that's a bit unique. We won't have to do that for at least another 18 months, maybe two years. And then we're getting smarter as a company. Our adjacent categories, as you look at our 10K, you're going to see the sales are up massively in our adjacent categories. It's still small, but it's up a lot. We're reflowing the stores to a more logical fashion so that it works better with the consumer. And that's going to be some capex to spend some money on that. And then we've got a couple of our super high volume stores that we're expanding because their volumes are so high. And that's going to cost us a little bit of money. But, you know, I think as you think beyond this year, I think we put these numbers in our 10K. I think with $79 million in CapEx for sure, we still think that's probably about the right number. We probably won't have as many relos possibly, you know, per year. And then I think, you know, the big one is probably that VC and some of the adjacent category expansion. But that's the things I would call out.

Okay, great. Thank you. For the remainder of today's Q&A, please limit yourself to one question. Our next question comes from Greg Malich with Evercore. Please go ahead.

Hi, thanks.

I guess I'd love to focus on inflation and how that may have been influencing the growth and ticket, if there was one, because I know with all the tariffs and everything else, so maybe an estimate of what inflation was in the quarter last year? I don't think we saw a lot of inflation. You know, we just felt what we sell doesn't tend to be a lot of inflation. Some of them would. Yeah. Some of them would, but, you know, would is whatever, 6% or 7% of our sales, maybe 8% of our sales. So we haven't seen a lot. The 25% tariffs, that's going to happen right there. I think that's now maybe 13% of our sales. So there's going to be some higher costs that are going to come across there. We think, again, that's going to be more kind of back half of fiscal 2021 that's going to affect us. And then the bigger one that we and everybody else are talking about is the higher international container costs, the higher domestic trucking costs. We are expecting and planning for those to be higher. But I just want to reiterate, again, I think the benefit for us is – The difference between the retails and us and our competitors is as good as we've ever been. And when you think about the smaller competitors out there that we compete with, that's getting close to 60% of the industry. You know, the home centers are probably 28%, 29% of the industry. But with both of those, our prices are really good. So as their costs go up, they're going to raise retails. And, you know, we may have to raise ours a bit, too. But I think the pricing difference is going to be as strong as we've seen it.

Thank you. Our next question comes from Stephen Forbes with Guggenheim Securities. Please go ahead.

Good evening.

Yes, I wanted to focus on the CRM learnings. Maybe a two-part question here. The first one, Tom, you mentioned the gaining learnings, right, or understanding why you don't get the sale during your prepared remarks. So curious if you could expand on that. on those learnings. And then the second part is just on the pro, a lot of helpful detail there. But curious if you could sort of update us on wallet share capture, right? And we could obviously do the math behind the average spend here of a pro. But curious what the CRM is showing you or telling you in terms of wallet share trajectory and maybe where it can go.

Yeah, I'll let Lisa take the CRM questions. She's leading our CRM efforts, so Lisa.

Sure. Hi. So back to your first question. So some of the learnings that we have gotten as we've dived into our customers is we do start to understand that there's some things at play that are within our control, some longer term. For instance, convenience is a big one. We still only have 135 stores, so we may not be the closest store. store to someone. So it's possible that we could lose the sale just because we're not close enough. So we do hear that. There's also an essence of familiarity, which I think also comes with being a young brand. And as we continue to get bigger and as we continue to get our message out there, the people that shop us We have an extremely high conversion rate, so basically if we can get them in the store, we can sell them. So for us, the goal is really to make sure that people, that the customers understand the value proposition that we have and why, you know, we believe it's the best business model and the best place for them to shop. I'll let Trevor speak to the pro-wallet share pieces. He's probably a lot closer than that than I am.

Yeah, we... With the CRM data, as Lisa mentioned, we've had it in pro for a lot longer than we've had it as a total business. And with the PPR program, part of the reason for that was to get more data on those pros. And what we're learning is we have a small amount of pros where we have a massive amount of market share. And these are big pros, people that are spending $40,000 to $50,000 a year or more with us. Some of these people are spending six figures with us a year. But that's a small number of pros, but they obviously spend a lot. And we're learning why that is, and we're obviously going to pick those learnings and expand it. The next set of pros, we've got another kind of small set of pros that are spending kind of $15,000 to $40,000 a year. Again, those are big pros with big wallet share, small overall percentage of our number of pros, but a big part of our wallet. And then we have a substantial amount of pros where our share is very small with them, and With the loyalty program, what we're working on is figuring out how do we tier that structured loyalty program and add other benefits like credit, like Tom talked about home advisor, which is a great way to get them leads, making sure the desk is taking good care of them. And so now that we sort of have all these loans over the next year or so, we're going to roll out CRM and loyalty strategies to help move people through those tiers. And we think that, you know, if you look at a lot of, bigger companies than us that have executed CRM and loyalty strategies. That's the playbook they've executed. And we've got some really good advisors helping us think about that as well. So I would say in total, if you sort of boil that down, though, we still have a very small percentage of a catchment area or a trade area as pro-wallet shares. And it's a very big opportunity for us. And we've got a small team of people here at the corporate office as well as all of our stores very focused on continuing to grow that wallet share.

Next question, Karen Short, Barclays. Please go ahead.

Hi, thanks very much. Just a quick question on the newer markets. I'm wondering if you could talk a little bit about the expense structure as an SGA, as a percent of sales, and say the denser markets like Northeast and the West Coast. And then wondering if you could just give a little color on what you think the expected waterfall would be for the 2021 vintage stores?

Yeah, this is Trevor. So if you look in total, our stores kind of over five or six years, their SG&A is kind of in the low 20s. Our totals are on 27. Our total companies are on 27 for store-level SG&A. Our more mature stores are kind of in the low 20s. And our newer stores, the first year they open, they run about 50% higher, so they're kind of in the low to mid-30% SG&A. If you then, to your question, bifurcate that even further, as you would expect, our new stores in existing markets are generally lower because we do higher volumes in those. And then our new stores in brand-new markets is generally higher than that. But the simple way to think about it is, Our new stores SG&A is a percent, runs about 50% higher than the first year. And then over that five-year period, it goes from kind of the mid to low 30s down to the low 20s, is how we think about it. And the second question was? Waterfall. Waterfall, yeah. I've been pleasantly surprised. I've been here 10 years now, and we've been running this 300 to 400 basis points of incremental comp from new stores, including last year has been the case. We always model it to come down to the streets and go to the sky, but I've been pleasantly wrong on that, and our new stores continue to profit at a much higher rate, and our new store volumes. When I got here, our new stores might be $7 or $8 million. Now, as we've disclosed in our 10K, our new stores were raining from $13 to $15 million. So at some point, that waterfall will come down just because our new stores are opening up at such a higher rate, but to date, we've not really seen that waterfall slow.

Next question, Seth Sigmund with Credit Suisse. Please go ahead.

Hey, everybody. I wanted to talk a little bit about operating expenses.

Can you give us a sense how to think about SG&A headwinds or tailwinds in 21 based on what happened in 20?

So there was a period where you cut a lot and had limited operations, and then there were some bigger increases in expenses in the back half of the year. I'm not sure where that all netted out, but Is there a way to frame SG&A into 21 like you did for gross margin and help us think about your ability to leverage expenses this year? Thank you. Yeah, it's a very difficult question because obviously you've got to have the sales component to answer that question, which we're not comfortable in giving the sales number. I would say, though, based on the last comment we just gave, with new stores, operating at 50% higher SG&A than more mature stores, and more than doubling our new store count, going from 13 new stores to 27 new stores. We're not expecting a lot of leverage in store-level SG&A, only because of the new stores. We are absolutely, again, I've been here 10 years, we've gotten leverage, which is incredible, but we've gotten leverage, I think, every year in our company stores, and we intend to do that again. We'll get a little bit of leverage out of our corporate expense, we think, this year, but we're not really expecting to get much leverage in store-level SGA, again, only because we're going from 13 new stores to 27 new stores.

Next question, Chuck Groff with Ford and Haskett. Please go ahead.

Hey, good afternoon, guys. This is John Park. I'm for Chuck. You guys have your second design center now open. Can you guys frame that a little bit, how you think about the sales productivity from adding one of those to a market and how they should ramp over the next few years?

So we've got – we opened one design studio in Dallas so far. We're getting ready to open another one. We'll open two more this year. And it's just too early to tell. You know, we need to get a few of them open to understand kind of the dynamics of how they'll work. We like what we're seeing so far, but it's just way too early to really talk about it. But as we learn more and it becomes meaningful, we'll share more.

Next question comes from Seth Bashman with Wedbush Securities. Please go ahead.

Thanks a lot and good afternoon. My question is around gross margins. Just coming back to the quarter, excluding the tariff-refund comparison, how much of the increment you see in gross margins from leveraging supply chain versus other factors such as merchandising, pricing, and mix? And how do we set those factors to play out over the next two quarters before you start hitting the back half comparisons?

Yeah, you know, we exited the quarter 42.5%, which is where we started the year. And I think as we think about this last quarter, the majority of the better gross margin was pure product margins, both from a mixed perspective as our decorative business continues to do well, and then also as our consumers are choosing the better and best products, those generally carry a higher gross margin. As we get into next year, then we would expect that we're going to get a little bit of that. In the first half of the years, I said we'd probably expect to get a little bit of margin. A little bit of that would probably come from product margin, and some of that would come from the supply chain as well.

Next question, Simon Coopman with Morgan Stanley. Please go ahead.

Hi, this is actually Hannah. Thanks for taking the question. My question is on the top line. You know, obviously you've seen pretty strong trends so far. In the absence of a sales guide, could you give us some color on how you're thinking about broader home improvement industry trends during the year? And if you could specifically touch on what you're building into your internal planning around housing demand and interest rates and to what extent the top line outcomes are dependent on how COVID progresses and the timing of the vaccine in the year.

Yeah, I think, Mr. Trevor, I think the backdrop's as good as it's ever been. You know, if you think about people are spending more time in their home, they're having to repurpose their home, it's work, it's play, it's everything, exercise. You know, we're at 6.7 million existing home sales turnover, which I think is the highest on the record, or close to that. Interest rates are high. You know, they're going up a little bit now, but they're still at record lows. About 123 million housing units out there. I think 80% of them are over 20 years old. So all those things lead up to a very strong macro backdrop, and that has historically been good for our business. Was there a second part to that question, too?

Sorry. And the extent to which COVID is going to be a driver and the way you're looking at the timing of vaccines?

I think, again, that's hard to say. That's why we're not giving guidance. My sense is, based on recent information, things are getting a lot better out there, and if herd immunity really is taking on, we're going to be a lot better. People will start to travel again. They will start to go to ballgames, and some of that discretionary spending that's been directed towards us could possibly go back to other leisure activities. But as of, you know, as Tom mentioned, we're counting 24. That number would have been higher without those stands in Texas. So the backdrop remains very strong. I'd add, Trevor, too, that when you think about us, our unneeded brand awareness still hovers around 10%, so people still find out who we are. You know, 40% of our stores are less than three years old, so we get some tailwinds from those stores. um you know we're we're share taker uh we've been taking share we think our model is better so and we've got just a lot of initiatives in place to continue to drive top lines next question david belliger with wolf research please go ahead hey great thanks for taking the question maybe a follow-up on an earlier topic here but

As you look at your most mature stores at this point, where are sales for Square Foot trending now versus some of the younger stores in the fleet? And what does that inform you about the potential productivity level of some of these newer units over the next few years? Is there anything structural in the way of those stores reaching that same level of productivity?

Yeah, I'm just flipping to try and find some notes here. I mean, our sales productivity for our older stores, you know, 5 and 10 years old, I think they're north of $300. $328. You sent it today. Yeah, I mean, exactly. I think it's over $300 in sales per square foot. I think that does lead us to feel strong about those stores. As you look at our stores, the older they are, generally speaking, the higher volume and the much higher profit they are. I'm looking at our stores over 10 years old is well over $300 in sales per square foot. Our newer stores are obviously a lot lower than that. It is like a fine wine. The older these stores get, the higher the volume and the more profitable they get. And so that does bode well. If you, you know, really simplify business, I gave you the new store economics, right? We want new stores to be $13 to $15 million in sales in the first year and be $2.5 million in full-wall EBITDA. You know, those stores get to 5 and 10 years old, you know, they're going to get closer to $22, $23, $24 million in sales and getting close to 25% EBITDA margins. So it's a great business. And as Tom said, you know, I've been down here for almost 10 years. We've all been here. We've got a substantial amount of initiatives with, you know, commercial and design and pro. We still don't have the majority of the wall chair. Our mind chair is still at a low. So as we kind of ended with my comments, our best days are in the future.

Our last question comes from Chris Vodigleri with Exane BNP. Please go ahead.

Hey, guys. Steve McMahon. It's on for Chris. Thanks for squeezing us in here. I wanted to circle back to freight. I think last quarter you guys mentioned, you know, you weren't really seeing an uptick in spot rate increases at the time. But, you know, we've seen ocean freight rates really step up the last couple of months. So I'm just curious if there was, you know, a more meaningful impact that you guys saw in the fourth quarter.

No, not in the fall. We had almost all of our containers contracted out. Again, our spot chain team did a very thoughtful, and those contracts kind of come over time. I think our first one comes up in May. So we don't have to deal a lot with the spot. We have some just because our barns have been higher, so we are doing a little bit, but it's been pretty insignificant. Looking in the rearview mirror, we really didn't see much in the way of higher costs. As I mentioned, as we start to get to those new contracts and then our inventory turns just over a few times a year, so we won't see it probably much in the first half of the year. But as we get to the second half of the year, we will likely see higher costs just because of the overall markets going up.

Thank you. I would like to turn the floor over to Tom Taylor for closing comments.

Well, I want to thank everyone. I hope everyone's staying safe and healthy. And we thank you all for joining the call. I know a lot of our associates listening, we appreciate everything that they're doing in these trying times. But thank you for your interest, and we look forward to talking to you at the next quarter. Thanks, everyone.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.