Good afternoon, and welcome to the Floor & Decor Holdings Second Quarter 2021 Earnings Call. All participants will be in a listen-only mode [Operator Instructions] After today's presentation, there will an opportunity to ask questions [Operator Instructions] 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 meeting 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 & Decor assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company will discuss non-GAAP financial measures as defined by SEC Regulation G. We believe non-GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our Investor Relations website at ir.flooranddecor.com. A recorded replay of this call together with related materials will be available on our Investor Relations website. Let me now turn the call over to Tom.

Thank you, Wayne, thanks to everyone for joining us on our fiscal 2021 second quarter 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're continuing 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 & Decor. I would also like to say thank you to our vendor community and our supply chain partners. Our enduring partnerships 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 $860.1 million from $462.4 million in the same period last year and grew 28.6% on a two-year compounded annual growth rate basis when compared to the second quarter of fiscal 2019. You'll recall, last…

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 second quarter 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 second quarter 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 Surfaces, which was completed on June 4. Spartan's results were not material to our fiscal 2021 second quarter earnings, but they were modestly accretive to the second quarter. As Tom mentioned, our fiscal 2021 second quarter 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 that on a 2-year compounded annual growth rate basis, our fiscal 2021 second 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 second 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% to a record of $365.4 million from…

Thanks, Trevor. We also announced today that Lisa Laube has informed us on August 3, 2021, that she intends to retire on April 30, 2022. Lisa joined the company as an Executive Vice President and Chief Merchandising Officer in 2012 and was promoted to President in February of 2020. She has been a critical part of Floor & 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 word someday. So my husband and I finally decided, rather than talking about it, we would define it. There is 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 them 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've got us to where we are today. And they are excited about carrying Floor & Decor into the future. We have a deep and experienced bench of leaders. Our EVP of Store Operations, Steve Denny, and our three EVPs have a combined 85 years of experience in retailing and 35 at Floor & Decor. Our Senior Vice President of Merchandising, Ersan Sayman, has 25 years of experience in the hard surface flooring industry and has been with Floor & Decor for 17 years. And collectively, our senior merchandising leaders have almost 100 years of experience at F&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 aspects 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 we'll ensure that we have a smooth and seamless transition. Let me turn the call back over to Tom.

Thanks, Lisa. While 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'll turn the call over to questions.

Thank you [Operator Instructions] 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 just a near-term question and a bigger picture question. Maybe - could you maybe...

Karen, we lost you. Operator, come back to Karen. Yes, we'll come back to Karen.

Okay. Our next question comes from Chris Horvers from JPMorgan.

Thanks good afternoon and congratulations on a great quarter. And you don't leave a lot of room for questions because you - give so much great detail. But let me try and first, congratulations, Lisa, on your retirement, obviously a great career?

Thank you.

So my first question is - I mean there was a modest deceleration on a two-year basis over the months of 2Q and then to sort of 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 would have asked me six months ago when we got to July, if we'd be - being able to post and 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 of wallet, 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've said prior. Has it - has sort of the freight pressures and supply chain pressures, are they worse than you thought three 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 three 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 the benefit of having a big broad field team that feeds us 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 three 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. But as you guys have heard me say again for three 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 Simeon Gutman from Morgan Stanley.

Hi 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 first quarter 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 two-year stacks, three-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, Tom mentioned, were up 3% or maybe closer to 4%. And that's a similar trend over both a one and a two-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 - about 28.5% on a two-year CAGR basis. I'm excluding Spartan from any of these numbers. That number accelerated a little bit it's almost 29% as the second quarter. And we also came up with a metric that I mentioned in my prepared remarks that when you look at our comparable store sales on a two-year basis again, taking the 2019 base year and looking at what that is in 2021, and our two-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 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 continues or not. 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 and congratulations, Lisa. On the gross margin, can you unpack or dimensionalize the magnitude of the pressure that you're going to experience on the transportation cost versus the input cost on the product side? Trevor, I think you mentioned that the 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 that 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 tea leaves right. We do expect gross margin rate to come down based on the cost increases we are seeing. Today, when you look at the proportion 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, 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, it's pretty straightforward. Based on the goalpost I gave you of being above 2019's gross margin rate to being below last year's historic highs is how we should think about the rest of this year and kind of leaning on into next year. It's hard to say what's going to happen. We're maybe a little optimistic that once the holiday shipping happens for - doesn't only 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 Steven Forbes with Guggenheim Securities.

Good evening and also extending my, congrats to you, Lisa.

Thank you.

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 in the mature store base. Just any sort of insight as we think about what's happening there?

You can go ahead.

As we said in the prepared comments - I'll let Trevor give some of the detail in numbers. As we said in the prepared comments that our mature fleet has been a really pleasant surprise, the amount of growth rates we've seen across the country, they've been doing - they have done 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 is 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 stores over five years old were probably doing about $22 million in sales and maybe making about $5 million in four-wall EBITDA. Those numbers now are closer to $26 million and getting close to 25% four-wall profit, which is about $6.5 million. And our sales per square foot are up to $357 per square foot. So we have seen an 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. So I think it speaks to the culture, speaks 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 my 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 is going to be a little bit more of a pressure. But can you just kind of dimensionalize those two and then I had a bigger picture question.

Fixed up dimensionalize.

Yes, I'll just say the vast majority of our product cost is the product itself, 80% plus of the product is the product cost. And we're not seeing today the volatility we're seeing in the supply chain. Wasn't that long ago, you would get a container out of Asia for less than $2,000 or $3,000. And now in the spot market, 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 saw 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 and 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 else other than I said is there'll be - I think we're modeling them to be below last year's historic highs, but above 2019. That gives you a pretty narrow range. And when you do that math, depending on what you have in the cells, you're going to see we - have a very nice good growth based on current expectations in gross profit dollars over last year.

Before, Karen, you ask - a bigger picture question, I would just say just a couple of things just on the margin side of it. One, 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 handling how do, we keep our margin rates consistent as we're dealing with the complexity of that. And 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 and 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. 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 and best. That helps margin. And then 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 combine that with what we're doing in design services, which we tend to have a higher margin rate which will 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, that 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 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 question.

Yes, they're stuck with me for quite a long time. So anyway, it's a hard thing to look at web traffic versus last year because last year for the quarter 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 - 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 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 strength 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 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.

Good afternoon and congrats, Lisa, as well. Just wondering if you guys could just speak to new category growth opportunities, both on the commercial front and, also adjacent categories which sounds, like you're more excited about recently. I guess, where our 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 - we gave in the script what our penetration is in inflation?

Tom, thank you it's 2%.

We're at 2% today and that...

1.6%.

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 - 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 don't - 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 and 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 think 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 or 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 people, takes them a little while to get up to speed. Hopefully, do $0.5 million maybe a little bit more than that in sales their first year. And by the time they get up to maturity, we think they're doing $2 million, $2.5 million, probably closer to $3 million 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 face of the 10-Q just to give you a sense on adjacent categories, last year for the six months ended, we did $5.9 million in sales. And this year for the six months ended, we've done $25.8 million in sales. So the team is doing great. There is new things they're thinking about. The space looks great where - the way we refloat it and so more to come there. And the last thing I'd say, Lisa and I are absolutely confident, even if the margin rate currently is a little bit lower. It's absolutely an incremental sell, right so 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 to, it's not labor-intensive. 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 Liz 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 six quarters or so?

Good 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 absolutely confident of, as Tom mentioned, the biggest as you guys - Lisa gave a lot of detail on CapEx, where we're spending our stores, is we're investing that capital back into the store. That's the vast majority. We're getting well over 20% IRRs when we look at both the 10 and 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 that distribution center. We know there is 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 return when we take an older store and we remerchandise it, and we figure 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 three years, it's gone up substantially. And so, we've got a very strong conviction that we're going to get a very good return on that invested capital. 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 up 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 getting $1 billion in inventory versus the $654 million 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 that new stores added about 400 basis points to our overall comp. It's hard to measure in this environment where we comped down 21 last year and we comped up 68. Unfortunately, the long every year I've been here on this. But every year, to your point - when I got here, new stores they would maybe do doing eight or nine, but not longer, they were doing 10 to 12. Now we quote in our 10-K 13 to 15, and it looks like the class of stores are certainly going to be at the higher end, maybe above the higher end of that for the class of 2020 and 2021, as Tom mentioned. But mathematically, I still think that 400 basis points is going to shrink because if you have a new store that ultimately is going to get to $22 million or $24 million. And if it's now opening at $15 million versus it used to open at $12 million or $13 million, then mathematically, the comps have got to come down. So I hope I'm wrong. I hope that the five-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 more 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 numbers are much, much higher number and much profitable number.

We'll take that offline?

Yes.

Our final question comes from Jonathan Matuszewski from Jefferies. Please go ahead.

Great, thank you 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 seen home improvement around the world. And there's nothing like Flow & Decor anywhere in the world. And flooring really, particularly in Canada, is 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. When 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 as we get to next year 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 when. So look, I want to thank everyone for participation in the call today. I know our comments were longer than usual and were long sometimes in general. But certainly, we are - we have a lot of information that we wanted to provide to you today, including Lisa's announcement. Lisa will be here until April of next year, and she's committed to stand every investor call, every earnings call that we do. So certainly she will be here, and we'll have plenty of time to take a bite at her. So thanks for joining, thanks for your interest, and we'll talk to you soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.