Floor & Decor Holdings Inc (FND) 2017 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. This is Floor & Decor's Third Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded today, Thursday, November 2, 2017.

I will now turn the call over to Matt McConnell, Manager of Investor Relations at Floor & Decor.

Thank you, Derrick, and good afternoon, everyone. I'm Matt McConnell, Manager of Investor Relations. Joining me on our call today are Tom Taylor, Chief Executive Officer; and Trevor Lang, Executive Vice President and Chief Financial Officer. Also in the room is Lisa Laube, Executive Vice President and Chief Merchandising Officer, who will join us for the Q&A session.

Before we get started, I would like to remind you of the company's safe harbor language. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties.

Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions is a forward-looking statement. The company's actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Floor & Decor assumes obligation to update 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 may discuss non-GAAP financial measures as defined by SEC Regulation G. 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, ir.flooranddecor.com. A recorded replay of this call, together with related materials, will be available on our Investor Relations website, ir.flooranddecor.com.

Now let me turn the call over to Tom.

Thank you, Matt, and thank you to everyone joining us on our third quarter earnings call. I'll begin today's call by discussing the highlights of our third quarter results, then discuss the impact from recent hurricanes and update you on the progress we're making against our key growth initiatives. Trevor will then review our financial results and outlook in more detail.

We are very pleased with our top and bottom line third quarter financial results, which exceeded our outlook, despite hurricane-related headwinds in the month of September. This performance once again demonstrates the strength and uniqueness of the Floor & Decor business model within the highly fragmented hard surface flooring industry.

Our better-than-expected results were driven by strong new store performance, our comp store sales increase of 13.5%, which when combined with gross margin expansion and expense leverage, resulted in adjusted diluted earnings per share growth of 42% or $0.17.

Before discussing our third quarter results in more detail, I want to take a minute to say our thoughts remain with everyone affected by the hurricanes that occurred over the past few months. We are grateful to first responders and everybody who helped affected communities prepare for these damaging storms and recover post storm.

As many of you know, we have 3 distribution centers and 24 stores that were in impacted areas. We are fortunate that all of our associates were safe. We can't thank them enough for all their hard work to support their communities and their dedication during the difficult time, getting our stores up and running so we were able to quickly meet the needs of our customers.

In terms of the business impact from the hurricanes, we were negatively impacted in the third quarter, but we've seen a lift in the business in the fourth quarter in all areas affected. The stronger growth in Houston -- due to severe flooding. Trevor will touch of this in his guidance discussion.

Now turning to our results. Net sales for the third quarter increased 26.8% to $344 million from $271 million in the third quarter of fiscal 2016, driven by a 19.4% increase in new units compared to the third quarter of 2016 as well as a 13.5% increase in comparable store sales.

Our top line results for the quarter were negatively impacted by over 150 total days of store closures, including both full and partial store closures across our 24 stores affected by the hurricanes. We estimate the hurricanes cost us approximately $6 million to $7 million in sales for the quarter and approximately 2.5 percentage points of comp, all of which was realized in the month of September, our third month of the third quarter.

In terms of store growth, we opened 7 stores during the third quarter, which is the most we have opened in any quarter in Floor & Decor's history, and we ended the quarter with a total of 80 stores. We continue to believe there is a nationwide potential for at least 400 stores, providing us with a long runway for growth and supporting our annual unit growth goals of approximately 20% for the foreseeable future.

We've now opened 11 of the planned 14 new stores for 2017, which will mark our 5th year of 20%-plus store growth, and we're seeing strong sales and profit performance from our class of 2017 openings. This comes on top of our record sales and profit performance for the 2016 new store openings, which were our strongest new store class ever, driven by several home run openings in very dense markets.

Looking at the composition of our comparable store sales for the quarter, our 13.5% comp was primarily driven by transaction growth with a small increase in average ticket, all 6 regions achieved positive comparable store sales growth, and we saw continued strong performance from our e-commerce business.

We remain encouraged by these metrics, which illustrates that our multi-channel business, with its unmatched breadth of hard surface flooring and accessories assortment, offer a tremendous value to the customer, continues to resonate, fueling our continued market share gains. Our unwavering focus on innovation as well as good, better and best product offerings are also keys to our success. We continue to upgrade and improve our visual merchandising and marketing in stores and online, which we believe is inspiring our Pro and Do-It-Yourself customers.

We're also enhancing our customer's experience by introducing several technology tools online and in-store. These tools will help facilitate the customer's experience by making it easier to understand their installation accessory needs, new CRM tools to help us understand and market better to our customers and new Pro tools and solutions that will help our customers be more efficient in running their businesses.

From a category perspective, we're pleased with the performance of all categories with laminate and decorative performing above the company average. All other categories, with the exception of stone, also comped positive. As we mentioned before innovation in trends change and vary by category. Our product and category diversity allows us to capitalize on these shifts as we're able to effectively flex our offerings in response to our customer's preferences.

Our differentiated shopping experience, combined with a positive secular shift to hard surface flooring and the supportive housing market, position us well for further share gains as we continue to [execute] against our key strategic priorities of new store growth, increasing comparable store sales growth, expanding the customer connected experience, continuing to invest in the Pro customer.

Let me touch on each of those goals. New store growth. As I mentioned, we opened 7 stores in the quarter, a record number of quarterly openings for Floor & Decor. These openings span both new and existing markets. I believe each year, our new stores get better than the last year and we continue improving the shopping experience, localize merchandising, back office and visual merchandising solutions.

We have a significant whitespace opportunity nationwide that supports a 5-fold increase in our store base, and the constant and consistently strong customer response to our new stores reinforces our confidence and the growth potential for our highly differentiated business. As we continue to open new stores in existing markets, it increases brand awareness, makes shopping and returning easier for all customers and helps grow the overall market. We're currently finalizing our 2018 new store lineup, and we believe our new stores will continue to perform very well.

Our second goal, increasing comparable store sales growth. The strength of our 13.5% comp in Q3 despite hurricane headwinds is a result of our consistent comp-driving efforts, including expanded marketing campaigns, product innovation, localized assortments, visual merchandising enhancements, both in-store and online, as well as our strategies to enhance our Pro business.

As we open more stores, it increases our brand awareness, which helps the -- all the stores in that market. Our years of investing -- investment in building our global supply chain infrastructure, combined with some of the most experienced merchants dedicated to our industry, enables us to deliver the best products and newest innovations from around the world at everyday low prices. This is one example of how we differentiate ourselves and what makes our value proposition to our hard surface flooring Pro and Do-It-Yourself customers different from any other competitor. Innovations and product durability and fashion have been an important factor in our success so far.

Lastly, we continue to hire seasoned designers to staff in our design centers. These professionals are not just sales people but real design talent, which is a great asset to our customers and helps expand this area of the business for us.

Our third goal, expanding the connected customer experience. This remains an important initiative for us, given we know that our customers and potential customers use our website for research, inspiration and education, often before ever visiting a store.

Therefore, we work -- therefore, just as we work to elevate the in-store experience, we're simultaneously improving the functionality and capability of our website to drive an even better, more seamless connected customer experience.

Soon, we'll begin piloting our project estimator. This online tool will help our associates and customers select installation accessories, explain why they would choose one product versus another and make the shopping experience easier.

As we continually add tools like this to our website, we believe this will drive traffic to our website and improve the omni-channel cycle. Our progress here is evidenced in the over 50% growth rate delivered by our e-commerce business in the third quarter to approximately 6% of total sales.

As a reminder, we believe our expanding store network facilitates our e-commerce sales growth as approximately 85% of purchases made on our website are picked up in the store through our buy online, pick up in store program.

Our next goal, continuing to invest in the Pro customer. The Pro customer remains an extremely important focus for us, given their high project frequency and spend. As a result, invest in our Pro capabilities at the store level to elevate their shopping experience, remains at the forefront of our initiatives. This includes capabilities, such as a separate in-store Pro desk and phone line with direct access to our Pro team, training on installation services, free design and storage services, enhanced credit offerings, amongst others.

In the third quarter, we made progress on our Pro app that we'll be piloting soon. This tool, when complete, is intended to give our Pro customers everything all-in-one place to help them manage their Floor & Decor purchases and includes time-saving features, such as alerting our stores ahead of time that the Pro is on the way so that we can have their product ready faster. A major service differentiator as Pros want speed and accuracy.

Our research indicates once a Pro customer visits a Floor & Decor, our assortment, price points and service level drive a 70% conversion rate. So we are focused on doing an even better job of getting Pros to visit our stores for the first time, and are pleased with the traction of our focused marketing. We're still in the early innings of maximizing our Pro business and we expect continued strong growth, particularly as we build awareness among Pros. We've always had a philosophy of reinvestment to sustain and grow our competitive advantage here at the Floor & Decor, and we continue to make investments across the business in marketing, merchandising, stores, websites, supply chain, technology and talent.

So in summary, we are very pleased with our third quarter performance and the progress we continue to make against each of our growth strategies. Our strong year-to-date results have continued into the fourth quarter, thus far, as we have benefit from post-hurricane demand, in addition to continued strength in our unimpacted markets. And as a result, we are raising our full year guidance.

I want to thank our teams across the country that execute day in and day out and provide the best-in-class service to our customers. They have been critical to our success, and together, we look forward to building on our market share gains going forward.

I'll now turn the call over to Trevor, our CFO and Head of Professional Services, to go over our financial results and guidance.

Thanks, Tom, and good afternoon, everyone. I will review our third quarter 2017 results, provide some color on the impact from the recent hurricanes on our business and then discuss our outlook for the remainder of fiscal year 2017.

As Tom touched on, our focus on innovative, high-quality hard surface flooring at everyday low prices, great customer service, offerings unique to Floor & Decor, along with continued investment in our supply chain, marketing, connected customer, Pro and storage strategies led to record results in the third quarter and fiscal year-to-date 2017.

Net sales in the third quarter of 2017 increased 26.8% to $343,900,000 from $271,300,000 in the third quarter of 2016. We ended the quarter with 80 total warehouse stores, an increase of 13 stores or 19.4% versus the 67 stores at the end of the prior year period.

During the quarter, we opened 7 stores, which as Tom mentioned, is the highest number of new stores we've opened in Floor & Decor's history. Our third quarter comparable store sales increased to 13.5%. It was above our outlook despite the hurricane headwinds and came on top of a 19.3% comp store sale increase in the prior year period.

September 2017 was our 103rd month of comparable store sales increases. We are in what should be our ninth consecutive year of double-digit comp store sales growth.

For the first 2 months of the quarter, our comparable store sales increased -- accelerated from the 14% comps we were running in the first 6 months of fiscal 2017 to 16%. Due to the 150 closed or partially closed store days, and the...

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of the storms of our -- 24 of our high-volume stores, which was roughly 1/3 of our comp base, our comps decelerated to just under 10% in September.

We believe our comparable store sales would have continued at the 16% rate in September if not for the hurricanes, and we estimate that this cost us approximately $6 million to $7 million in sales in the third quarter.

Our comp strength was driven primarily by transaction growth as customer awareness of Floor & Decor model continues to grow. We believe having high-quality hard surface flooring, consistently introducing new, trend-right products for every budget at low prices is why we've been able to drive sales increases through transactions for almost a decade now.

Now onto profitability. Gross profit increased 28.4% to $142,500,000 in the third quarter from $111 million in the third quarter of fiscal 2016. Gross margin increased by approximately 50 basis points to 41.4% in the third quarter. Approximately 35 basis points of this increase was driven primarily by a shift in product mix to products that carry a higher gross margin.

Gross margin also increased by approximately 20 basis points due to lower inventory shrinkage and damage, partially offset by 5 basis points of higher distribution center costs and supply chain costs due to investments to expand our distribution capacity and the increased volumes of inventory to support our sales growth.

As a percentage of sales, total operating expenses increased approximately 130 basis points to 33.1% compared to the third quarter of 2016. Excluding approximately $500,000 in disaster expenses related to the hurricane, $700,000 accrued in the third quarter of 2017 for our secondary offering that we completed in July 2017, and $3.5 million related to litigation settlement in the prior year period, our operating expense as a percentage of sales decreased 30 basis point to 32.8%.

Our expense leverage on higher sales was mostly offset by 7 new stores we've opened during the quarter. As a reminder, our new stores operating expenses generally run about 50% higher as a percentage of sales in the first year of operation than mature stores. And since we're adding about 20% new stores a year, this mitigates the significant operating expense leverage we are getting from our stores that are more mature.

Our strong sales growth, gross margin expansion, drove a 16.4% increase in operating income during the third quarter of $28,600,000 as compared to $24,600,000 in the third quarter of fiscal 2016.

Excluding the charges I just outlined, operating income for the quarter would have increased 41.3% to $29,800,000 as compared to $21,100,000 in the third quarter of fiscal 2016.

Our reported tax rate for the quarter was 10.5% compared to 35.9% in the third quarter of 2016. This decrease in effective tax rate was primarily due to a $6.8 million excess tax benefit related to the stock option exercises in the third quarter of 2017 in accordance with the new option accounting rules ASU 2016-09 and to a lesser extent, due to lower state income tax rate due to changes in our corporate structure.

We have adjusted the $6.8 million excess tax benefit related to stock option exercises out of our calculation of adjusted diluted earnings per share.

Before I discuss net income and guidance, please note that I will discuss both GAAP and non-GAAP measures. As described in our earnings release, we believe non-GAAP disclosures enable investors to better understand our core operating performance on a comparable, IPO-adjusted basis between periods. A reconciliation of these GAAP metrics to their most directly comparable GAAP financial measures can be found in our earnings release issued in connection with this call.

Adjusted net income and diluted earnings per share, which includes a statutory tax rate of approximately 37% was $17,300,000 or $0.17 per adjusted diluted share as compared to $12,200,000 or $0.12 for adjusted diluted share in the third quarter of 2016. This represents an increase in net income of $5,100,000 or 41.8%. Adjusted EBITDA for the third quarter increased 41% to $39,700,000 compared to adjusted EBITDA of $28,200,000 in the third quarter of 2016.

We ended the quarter with $150 million in cash and available liquidity under our revolving credit facility and $187,400,000 outstanding on our borrowings. At the end of the third quarter, our leverage ratio was 1.2x.

Our inventory turn balance -- our inventory balance at the end of the third quarter was $395,600,000, up $94 million or 31.2% from the third quarter fiscal of 2016. The increase was driven by our new store growth as well as planned strategic investments as we prepare for the large Savannah and Miami distribution center relocations later this year and into early 2018.

Now turning to our fourth quarter and full year 2017 guidance. We are seeing an increase in sales in the hurricane-affected markets. The stores in these markets now represent 35% to 40% of our comp base, and as such, we are raising our fourth quarter 2017 comparable store sales guidance.

As we have previously mentioned, our comparable store sales accelerated in the third quarter to 16% before the hurricane impact on our sales in September. Due to continued strength of the business as well as the faster growth in hurricane-affected markets, we have raised our fourth quarter comparable store sales expectations to 17% to 19%. Our expense with prior hurricane and flooding events as well as others in the industry suggest the lift in sales could last 3 to 4 quarters.

We do believe we will have an elevated comparable store sales into the first half of 2018 as home and business owners rebuild from the hurricanes and the associated flooding. Our expense also suggest this increase will be lower the further we get away from the hurricanes, and do not believe the fourth quarter comparable store sales increase is indicative of how to plan for 2018.

We are not yet done with our strategic 2018 planning and budgeting processes, and we plan to provide fiscal 2018 guidance in March. We do believe comparable store sales will be higher in the first half of fiscal 2018 due to the repair and rebuilding that will occur due to the hurricanes, and we are committed to our goal of growing our annual earnings 25% for the foreseeable future.

As Tom mentioned, we are also committed to reinvesting back into the business to support our growth. We are only a fraction of our ultimate size, and we believe continued investments in key strategic areas will further differentiate us and allow us to continue market share gains.

For the fourth quarter of fiscal 2007 (sic) [2017], we expect net sales to be in the range of $362 million to $370 million, an increase of 30% to 33% versus the fourth quarter of fiscal 2016. This growth outlook is based on a comparable store sales increase in the range of 17% to 19%.

Due to the strength of our business, we are making important investments for the future. In the fourth quarter, a few worth mentioning include, first, we had decided to incrementally invest an additional $2 million in the fourth quarter of 2017 in general and administrative, focused on new marketing creative to be used at the end of this year and into 2018 and beyond as well as a labor study and an in-depth customer consulting strategy to help us formulate continued long store growth -- long-term growth.

We are finalizing our customer purchasing path study and have learned some very valuable strategies. And we will kick off our labor study here shortly with the goal of more efficiently deploying our labor and consultative selling.

Second, our distribution center costs are increasing by an estimated $2 million above what we believe would be a normal growth rate due primarily to the planned distribution center expansions and relocations. As mentioned on previous calls, we more than doubling our distribution square footage to 2.9 million square feet by the end of fiscal 2017. We are relocating our current Savannah DC to a new 1,400,000 square feet Savannah DC in the fourth quarter of 2017 and in early 2018, we plan to relocate and consolidate our Miami DC to this new constructed 1,400,000 square feet DC in Savannah.

With the added distribution center capacity, we believe we will be able to support approximately 110 stores before having to open another distribution center. It's important to note that we are building inventory to support the hurricane-driven sales increases as well as the support of 2- to 3-week closure of our Miami, D.C. and early 2018, which we will see reflected in our year-end inventory balance. Even with these investments, we are planning a modest increase in operating margin and a strong growth in adjusted EBITDA earnings per share for the fourth quarter compared to the same period last year.

GAAP diluted earnings per share for the fourth quarter of 2017 are expected to be in the range of $0.15 to $0.16, and adjusted diluted earnings per share is planned to be in the range of $0.14 to $0.16. Adjusted earnings per share assumes a 37% statutory tax rate as well as 104,600,000 weighted average diluted shares outstanding.

We expect adjusted EBITDA for the fourth quarter of 2017 to be $36,800,000 to $39,500,000, an increase of 31% to 40.6% over the fourth quarter of fiscal 2016.

Turning to our full year outlook, given our strong third quarter results and improved fourth quarter outlook, we now expect sales for fiscal 2017 to be in the range of $1,357,000,000 to 1,365,000,000, an increase of 29.1% to 29.9% versus fiscal 2016. This net sales growth outlook is based on 14 new warehouse format stores, openings and assume comparable store increase of 14.5% to 15%.

Given our outperformance year-to-date and our fourth quarter outlook, we now expect a slight improvement in our gross margin despite absorbing the expenses associated with expanding our distribution centers by over 100%, with the large DC relocations in Los Angeles and Savannah that we expect to complete by the end of the year.

We expect to leverage our operating expenses and, therefore, an improvement in our operating margins as well as our EBITDA margin. Diluted earnings per share for fiscal 2017 is now expected to be $0.70 to $0.72, with adjusted diluted earnings per share of $0.64 to $0.65 based on an adjusted diluted weighted average shares outstanding of 103,100,000 and a statutory tax rate of an estimated 37%. We expect fiscal 2017 adjusted EBITDA to be in a range of $152 million to $150 million -- $154,700,000, an increase of 40.2% to 42.7% over fiscal 2016. We anticipate our GAAP tax rate will be approximately 34% for the fourth quarter. Our lower fourth quarter tax rate is due to planned research and development tax credits. As a reminder, this guidance does not consider the tax benefit impact of new stock-based compensation accounting standards that may occur after the third quarter of 2017.

With respect to capital expenditures in fiscal 2017, we expect to spend about $104 million to $107 million, with $53 million to $54 million under this capital budget being spent on the 14 new store openings in 2017 as well as towards constructions that will open in early 2018. $35 million to $36 million is earmarked for store remodels and the relocation of 2 of our core distribution centers. The remainder of the CapEx approximately $16 million to $17 million will be directed towards our IT, infrastructure, e-commerce and store support center initiatives.

As a reminder, our year-end inventory is planned to increase approximately 35% over last year. As we've discussed previously, we're making strategic investments to prepare for the large Savannah and Miami distribution center relocations and to improve key in-stock positions in anticipation of Chinese New Year shutdown.

For all the details related to the results in this guidance, please refer to our earnings release. And I think with that, operator, we'd like to turn it over to Q&A.

(Operator Instructions) And we'll take our first question from Matt McClintock with Barclays.

And exceptional quarter for you and the rest of the team at Floor & Decor.

Thank you.

Thanks, Matt.

Two questions, I guess the first one, Trevor, just on the guidance, 17% and 19% for 4Q, that's almost double what you guided originally for 3Q. Is that strength entirely hurricane related? Is anything else going there? I know you exited September even at a lower run rate there. And just can you kind of update us on your philosophy related to guidance? I believe, historically, you've tried to guide more in line with your expense plan. Is that kind of your expanse plan is going up so that's why you're guiding more aggressively? Just kind of walk us through that level of guidance.

Yes, Matt, I'll -- this is Tom. I will take the first stab of your question, then I'll let Trevor talk about guidance philosophy. As we mentioned, going into the storm, our business was continuing to do very well. I mean going into the storm, we were comping right around 16%. So that is stronger than we thought the business would be. We're seeing good strength all around the country. And then you're going to get some benefit of the affected areas going forward. So as we think about guidance for the fourth quarter, we looked at how the business is going within this quarter kind of the rebound, how it went and how it was going before the storms hit, and that's why we took the guidance up. Trevor, you want to talk philosophy?

Yes, you're right, Matt. We have historically guided more conservative. But as Tom mentioned, we have great systems. We're looking at the business every day, so we took that into consideration as we gave this guidance. And then I think the other large increase is because the storm-affected stores are performing higher. So that kind of pulled us up. As we mentioned in the prepared comments, we were comping about 16% before the storms hit, and then when you add the benefit of what the storms look like, they may participate in, they might get you to -- get you up to that 17% to 19% that we're guiding to.

Okay. That's helpful. And then, Tom, if I could just talk about the new store openings this quarter, 7 stores, pretty impressive. I think that's why almost 10% on the quarter itself. Any lessons from those stores that you've seen? Or anything that you'd do differently? Or anything that kind of stood out for you as maybe unique or challenged in terms of the store opening itself or the aftermath of the response from consumers?

I think that, look, we will get better. But we want better teams in our store openings. To open 7 in a quarter is a lot. We certainly -- we've opened -- this is our fifth year of 20%-plus unit growth. So we've opened lots of stores. We're very good. I mean, I feel like we're very good at it. We've got teams in place and resources in place to be able to execute on that plan. We like them a little bit more spread out, but I -- there's no learnings or missteps in performance of the stores. They came out great. We were fortunate that we had talent lined up way ahead of time, right, to be able to go and run these stores. They're not easy to run. We have a very unique culture. There's a lot of decision-making at the store level. So we spent a lot of time training ahead of time to make sure that our people are ready, and they were and they've done great. And we're pleased with the opening. So the learning is we're going to keep pushing our teams and our landlords and developers to work on better teams of our store openings. I think we'll get there. So is there a second part of the question that I missed?

No, that's it. Just like any -- the aftermath of those stores, is there anything that kind of stood out for you as maybe you could have done better, or maybe consumers, or there was just less of response or more of response to a particular store, location, et cetera.

Yes, we're pleased. I mean, we continue to learn as we open stores, and we've opened a lot of them now in the last 5 years. So I think we know kind of how we want the stores to be, how we want them to look, and I think we do well. So I -- yes, there's no -- look, we're never satisfied. We always want the stores to do better and we'll push them -- we'll push our teams to try to get better, but I -- look, I couldn't be more thrilled. This -- when you just but this quarter into perspective of what we had to deal with the hurricanes across a good portion of the company and having that prepared, affecting our distribution centers and still being able to get the stores open on time. Good and good openings, good attended Pro events. I couldn't be more pleased with the efforts of our teams.

Your next question comes from Matt Fassler with Goldman Sachs.

My first question relates to the sales that you're generating in storm-related or storm-impacted markets, what's the gross margin profile of that business? Does it differ at all from the business that you've been doing kind of that more broadly?

Matt, this is Trevor. Our gross margins closer to our ports are generally higher, and so the margins are a little bit higher in those markets, but it's not material and it's contemplated in the guidance we gave.

So that's really a function of kind of region rather than mix of the kind of product that you might be replacing?

Yes, that's pretty much. That's the biggest driver of it. There will be a little bit more tile in those markets, but for the most part, it has to do with just the lower domestic transportation.

But the mix within the stores that are affected has remained consistent pre- and poststorm.

That's right.

Understood. So it's not as if to replace floors destroyed through flooding, for example, there's a tilt one way or the other that would impact the margin rate?

No, it's not like -- Matt, it's not like you'd see, like, okay, well, customers have a lot of wood flooring ruined maybe from flooding, so they decided to go with tile. The mix within the stores kind of stays consistent after the storm as it was before the storm. So they're replacing whatever they had with whatever they had. I don't know if you...

And my second question, as you talk to customers, I know there's often an insurance cycle in terms of time-to-market for replacement. To the extent you can get a sense of how people are proceeding here, is this moving faster or slower than other storms, given the flooring probably is at the focal point? And how would you expect recovery from this storm? And I know you talked about the duration and the curve, et cetera, but if you think about this versus other storms in terms of the reimbursement dynamic and also the magnitude of damage and the kind of damage that was done, is this a typical storm in terms of recovery? Longer duration, slower duration? What's your -- what sort of duration that is? What's your read on that?

I mean I think -- my sense in -- I've been into the market a few times and between engaging the customers and driving neighborhoods and reading, as we mentioned, I think the business demand should be good through the third quarter of next year. I think as we get to the third quarter, now we have a lot to learn. It's really early in the recovery. We've got a -- we'll monitor, provide more information as we get more information on kind of how long we think the demand going to last. But my early indications are, I mean, if you -- there's an article out this week that Moody talked about the amount of damage that was done. It's a storm that's different than other storms that we've dealt with before. So it's still saying there's lots of people who aren't back in their homes. There's still lots of construction to be done. So I think it's going to sustain for a while and our job is to be there and be able to provide great flooring and great prices for customers that need to rebuild.

Next up, we have Chris Horvers with JPMorgan.

Also a question on the hurricanes. I wanted to ask another follow-up on the hurricane side. So this 35% to 40% of stores, is that Houston and South Florida? And broadly, is the rough math that you're seeing 15% increase in store volume post hurricane?

So it includes the Houston stores, our -- all of our Florida stores because Irma came up through all that and our Savanna store are the stores that were impacted by it. We're not going to get into all that detail quite yet. We just want to continue to watch and see how it plays out. This storm was unique to us. I think what we -- I'll just stick to what we said in the comments, is the business was performing at a 16% comp before the storms and after the storms, it elevated to, what we said, about 17% to 19%.

I mean, there's -- clearly, I think you can read the headlines, right? The severe flooding in Houston and Florida has some damage, so we'll see.

How do you think about the sort of lag impact in Houston versus in the Florida stores?

I mean Florida was different. I mean Florida really wasn't -- didn't have some flooding in some pockets but not a lot. It was much more damage in kind of -- the business kind of paused in Florida as people prepped for the storm and then people cleaned up after the storm. As I said, there are certain pockets of Florida, which have damage, which will have to rebuild, but that's more wind damage. And wind damage buy in our category, there's a lag to that, right? So you've got to rebuild before you come in. Flood damage, there's different degrees of flooding throughout Houston. So different areas of Houston are performing -- they're coming quicker because they're ready to put flooring in. And other areas were flooded up to the chest level and they've got to replace installation, drywall, other parts of the home before they're going to get to the floor. So that's why we think it's a sustained -- it should be sustainable for the next at least couple of quarters, maybe 3, and that's how we see it.

Understood. And then as a follow-on, you've seen Depot and Lowe's step up some marketing and promotions around luxury vinyl plank. How do you think about the competitive environment in that category?

I think flooring remains a very good home improvement category across the country, and I think all the competitors, to a certain extent, continue to market the category aggressively. But I don't see much of an effect.

Yes, I think our view, what we said historically too is people are bringing awareness to the category. That's a good thing for us. Because this is generally a fairly well-shopped category. So as long as people are bringing awareness to the category, we're okay with that.

Our next question comes from Michael Lasser with UBS.

With stone comping negative despite the whole store up in the low to mid-teens, you're seeing a pretty sizable change in the mix. So would you shift some space allocation or at least think about shifting space allocation within your store over time?

Sure. I'll let -- Lisa's here. We'll let her tackle that.

Yes, we are always looking at that. That's one of the beauties of our business model that we carry wood, stone, tile, laminate, LVP, so whatever the customers are most interested in, we can easily flex our space to that given the way that we wrack our stores. So yes, so stone, has, over the last few years, really kind of seeded some ground to tile just because inkjet technology has made that tile so much better looking and very affordable. So we have seen that over the last few years. And yes, we have started reducing some space in stone to give that space to other things.

And if you -- and Tom, Trevor or Lisa, if any of you could give a shot at this, that'd be great. But if you could kind of break down your comp between the innovation, the contribution from new stores and the brand awareness and the contribution from your growing brand awareness. How would you break down your comp according to those different areas along with just the grocery category?

That would be a neat trick. That's kind of tough to break down, I would tell you. I think it is a little bit of all of that, right? So if you look at -- I mentioned it before. I mean, if you just look at the innovation across hard surface flooring between fashion and durability, that certain drive -- that's certainly driving customers to step up and change when take carpet out to go in there. Certainly, as we've seen and we mentioned a couple of times in the script, we've seen, as we've opened stores in new -- I mean, in existing markets, particularly when we're opening up out in the West and -- on the West Coast and then the Northeast, where our awareness is -- as we open more stores, that awareness, I'm sure, is driving some of the performance as well. So -- and then you have new stores that are modeled just as the way that new stores tend to do well in the second and third year. So all those 3 factors are benefiting. I really can't break it apart.

One thing -- Michael, this is Trevor. One thing we did mention on the S-1 is our new stores are contributing probably 400 to 600 basis points to our comp, and I think you think that's probably still about the same. So if you go back and look at that S-1, you'll see some of that documentation there. So we can't say the new stores are getting sort of less than 3 years old are probably some portion of 400 to 600 basis points lift in our comps.

Yes. My last question is as you've enjoyed this great success, done so in a very public way or more public than it's been. Has there been any change in pricing from some of the mom and pops or even the regional players that are trying to emulate your strategy in any way?

Yes. I mean, look, this has been a competitive category as long as I've been here. I mean, I've seen the competitors react to us as we've opened stores in new markets. Independents, as we come into the markets, they've tried to react to what we do. We continue to see that. I wouldn't say it's all dramatically different since we've gone public. We certainly we pay attention to that. We have a lot of respect for what our competitors do. We pay attention. We try to learn where we can learn. But at the end of the day, we think our total value proposition is what wins the game. Our model's just different. We have big stores. Everything is in stock. We're priced aggressively, and we're -- we display the product differently than others can and have a good focus on training, making sure our associates are the content knowledge. So it's just we think the model's better overall, and that's why we do the way we do.

Our next question comes from Peter Keith with Piper Jaffray.

I was just going to add on one more question about competition. We're getting a lot of investor questions on this topic because 2 publicly traded competitors have mentioned a stepped up competitive environment, maybe a little bit change in consumer buying behavior, focus on lower price points. Clearly, results are being impacted. But have you noticed any change in overall consumer interest with categories or price points?

Not in the -- the second part of it is probably easier. No, not in price point. We have seen no difference in what our customers' demands are across the board. In categories, I think what's driving demand changes within our stores has much more to do about the innovation within the categories. So it's durability. Customers like the durability of water-resistant products and waterproof products, and that drives them into that side of the store. And they love the fashion components that we've done, and our merchants have done a good job on better, best. So between -- across everything we do, we think we're seeing the benefit of that. So long way roundabout, I don't think there's anything competitively that's shifting demand one way or the other.

Okay, very good. A follow-on and unrelated question just with the strong store growth profile and what seems to be a pretty tight labor environment. How is it going with attracting talent and hiring people? Are you still getting strong application pool to choose from? And maybe just give us a little bit of feedback on the type of people you're recruiting.

Yes. I think -- yes, I think we are -- I think we're able to -- we're certainly able to get our staff -- our store staffed, which -- what's inspiring to me, is that we're able to do it in new markets where no one knows who we are. I mean, as we're going into existing markets, people tend to know who we are, and we're able to attract and get people easier. But we've had no problems in staffing the new stores as well. I think we provide something very unique for associates to come to work at Floor & Decor. I mean, we're a growth retailer. There's just not a lot of those, so we're promoting -- we tried 75% of our -- the people that run our stores, we try to promote from the inside. We try to -- all the department heads get promoted from inside. All the ADMs get promoted from inside. So we're -- we really sell them a dream, that we can bring people in, and they can achieve things that they didn't think were possible in their life. So because of that, we're able to recruit good people. So we're not having problems staffing our store, and our turnover is actually down. When you look at the store turnover of -- associate turnover year-over-year, we're actually down this year. So all those things point to pretty good story for us.

And our next question comes from Dan Binder with Jefferies.

Couple of questions. First on just flow-through. I know historically you've thought about or given some indication that the flow-through should run at about 20%. If I just look at your reported sales and adjusted EBITDA versus the guidance, it looks like it's probably closer to 50%. Just wondering if there was any shift in expenses or if you've changed the way you think about that flow-through going forward.

No. This is Trevor. We were fortunate in the margin profile. Most of that flow-through came through at the margin level. And as the storms were hitting us, we kind of hit the brakes on spending, right, because we don't know how bad it was going to be at the time. And so traditionally, kind of like we mentioned in the fourth quarter, when business is strong, we'll pull in investments, and that's kind of how you get that flow-through to be in that low 20s. And so just because we didn't, again, know how big the storms were going to be, we slowed that down. Had we not had the storms, we probably would have had that flow-through be a little bit lower.

We were busy getting our stores closed and opened. (inaudible) doing that.

Got you. And then you talked a little bit about the category performance. I think hardwood flooring had been softer in some prior quarters. You didn't call it out as negative this quarter. Just curious how that performed and if there's any changes happening with the trends there.

Yes. We've brought in quite a lot of new products. It seems to be resonating well with the consumer. It's not comping at the same level as some of our other categories, but it is positive. So bamboo, we have a new water-resistant bamboo program that's doing well, some new wide woods engineered and several other programs that, like I said, have resonated with our consumer.

And next, we'll hear from Zach Fadem with Wells Fargo.

This is actually Quinn Burch on for Zach Fadem. I was hoping you guys could update us on some of the adjacent categories you've been testing and rolling out, so how things like shower doors, marble countertops have been performing versus your plan and then where we are in the rollout and if there's any other categories we should keep an eye out for in the inclusion in the stores?

So I'll tackle that first, and Lisa can add on. We're pleased with the progress in both. Frameless shower doors are doing well. They're in how many stores now?

We're in about 60, and we'll be in all the stores by the end of the year.

Yes. So by the end of this year, there'll in the stores. From a countertop perspective, we're pleased with our slab countertop program. I think it continues to do well. It's in less than 20 of our stores today. It will go into more stores next year. It's a -- to take some space, so we've got to be thoughtful on where that goes. But we're pleased with it. As for additional adjacent categories, we kind of take the approach and let our customers dictate that. If our customers have -- they're looking to get something -- It's like 2 ways. If they're looking to -- if it's part of the project, so like from the kind of things we've offered, we know that when people are doing bathrooms that, that's -- if they're tiling their bathroom, that they're going to need a frameless shower door. That's a natural category. And the same thing with countertops. A lot of times, when you're picking tiles for your kitchen, you're going to start with looking at what the countertop looks like. So those are natural extensions. And there's others that make the same sense. And at times we'll look at that. We're not going to lose our focus from hard surface flooring. That's who we are. That's what we do. But there'll be more categories to come, and as we get things up in pilot, we'll share them with you.

And we have no further questions in the queue at this time.

Okay. Well, listen, I appreciate everyone joining the call. Thank you for the questions. Thank you for your interest in our business, and we'll talk to you on the next call.

And once again, that does conclude today's conference call. We thank you for your participation. You may now disconnect.