Good morning, ladies and gentlemen. This is Floor & Decor's First Quarter 2018 Earnings Call. [Operator Instructions]. As a reminder, this conference call is being recorded today, Thursday, May 3, 2018. I'll now turn the call over to Matt McConnell, Manager of Investor Relations, at Floor & Decor. Thank you, you may begin.

Thank you, Danielle. Good morning, everyone. I'm Matt McConnell, Manager of Investor Relations. Joining me on our call today are Tom Taylor, Cheif 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 during the Q&A session. Before we get started, I'd 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 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 may discuss non-GAAP financial measures as defined by SEC Regulation G. A reconciliation 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 for joining our call. Our first quarter results demonstrated the strength of our business model as we continue to gain market share and disrupt the residential hard surface flooring industry with our innovative, fashion-forward and trend-right products. We have a tremendous opportunity this year as we'll opening new stores in new densely populated markets in Boston, Long Island and Seattle. I'm confident in our strategy and the team we have in place to execute our initiatives. Our success is a credit to all of our associates, and we would like to thank them for all of their hard work and dedication to our customers. Now turning to our first quarter results. Total sales increased 31% to $403 million. Our comparable store sales increase of 15.6% was driven primarily by transaction growth of 13.4%. Our adjusted diluted earnings per share doubled to $0.26. All categories had positive comps with laminate, luxury model plank and installation accessories comping above the company average. As expected, we saw an estimated 400 basis points comp benefit due to the demand from Hurricane Harvey which moderated from last quarter's estimated 800 basis points tailwind. Excluding the comparable store sales impacted by Hurricane Harvey, our first quarter comps increased just over 11%. Our consistent comparable store sales growth over the last nine years has not come from one just initiative or strategy. There are many talented people and initiatives responsible for our growth. And we're constantly challenging ourselves to change to evolve and better serve our customers. The strength of our business reflects the fact that our differentiated concept is resonating as we continue to build brand awareness and gain market share. Now let me briefly outline our key strategic priorities and progress for 2018. As reminders, our priorities…

Thank you, Tom, and good morning, everyone. I will review our first quarter 2018 results, and then discuss our outlook for the second quarter and the remainder of fiscal 2018. We delivered another strong quarter, continue to see positive momentum across all product categories and regions, and we continue to make key strategic investments. First quarter again demonstrates that our business model provides a distinct competitive advantage that creates a positive customer experience whether in-store or through our website. Net sales in the first quarter of 2018 increased 31.1% to $402,900,000 compared to $307,300,000 in the first quarter of 2017. We ended the quarter with 84 total warehouse-format stores, an increase of 12 stores or 17% versus the end of the prior year period. Our first quarter comparable store sales increased 15.6% and was driven by a combination of post-hurricane demand in Houston market, estimated to be approximately 400 basis points as well as the continued positive momentum in our other markets outside of Houston. Our first quarter comp increase was driven largely by transaction growth, though both transactions and average tickets increased year-over-year. Now on to profitability. Gross profit increased 31.8% to $165,400,000 in the first quarter from $125,500,000 in the first quarter of fiscal 2017. Gross margin increased by approximately 20 basis points to 41% from 41.8% in the first quarter of 2017. The increase in gross margin rate was primarily due to deleveraging our distribution center costs or cost increased sales worth approximately 10 basis points and another approximately 10 basis points to lower -- due to lower shrink and damage. As a percentage of sales, total SG&A leveraged approximately 150 basis points to 31.9% compared to the first quarter of 2017, primarily due to leveraging our store and preopening expenses. As I mentioned previously, we opened…

[Operator Instructions]. Our first question comes from the line of Seth Sigman with Credit Suisse.

A couple of clarifications. I guess, just first on the hurricane benefit. It seems to be tracking pretty much as expected, but just curious is there anything that leads you to believe that the impact for the year is going to be different than you expected previously, either better or worse at this point?

Yes, it is. From the top line, it is absolutely tracking like we predicted, which is hard to believe, considering its a historic flood. We haven't dealt with something like that as a company before. It's kind of a onetime event and -- but our teams did a really good job predicting what's happening with the top line. As Trevor mentioned, we've got some mix issues that were hard to predict. And as people rebuild exactly what they're going to buy, when they were going to buy and this puts some margin pressure in the market. But overall, we're pleased with what's gone on there. We will -- it hasn't changed our yearly outlook. But again, it's kind of a onetime event. It's a -- we'll see how it plays out. But as of today, what we thought was going to happen is happening.

Okay. That's helpful. And then, just as we think about the margin bridge for the second quarter. Trevor, you zipped through a lot of the different drivers there. I guess I'm trying to figure out on a comparable store basis, what is really implied here? So if we look at the first quarter, your store-level operating expenses looked like they leveraged 80 bps on a consolidated basis, but actually 160 basis points on a comparable store basis. And as we look at the guidance for the second quarter, it seems to imply a lot less leverage on a comparable store basis. Is that just conservative? Is that math right? I'm just trying to figure out what some of the moving pieces would be within that. If you could walk us through that, it would be helpful.

Yes, good question, and I'll apologize in advance for the confusion of our P&L. But it's all due to the new store timing. If you just looked at our stores that are pre-2017, we're getting nice operating leverage out of that, fairly consistent with the operating leverage we got in Q1 because the comps are pretty close. So what appears to be the deleveraging of it, a 100% of that has to do with the new stores that we're opening in '18, and the timing of some of those new stores when we're coming in there. Now for example, as I mentioned, and this is a different line item on our P&L, we break it out for -- to be clear, our store start-up costs are going from $3 million to $8.2 million. So that's 173% increase. And again, that has to do with opening the most number of new stores we've ever opened in a six-month period of time. Associated with that is, we'll be taking on occupancy costs and labor costs and marketing costs. And as I mentioned in my prepared comments, for the year, that's some portion of $10 million step-up just because we're in those expensive markets. So to simply say that, to back out the pre-2017 stores, the operating leverage that you saw in Q1 will be fairly consistent in Q2. All of the deleveraging you're seeing comes from the newer stores that we're opening in these more expensive, densely populated markets.

And our next question comes from Elizabeth Suzuki with Bank of America Merrill Lynch.

Can you just quantify the year-over-year increase in freight costs as well as raw materials, if any? And your ability to pass through those cost increases to your customers? Anything -- I know your product category is obviously quite heavy and expensive to move around. So I'd imagine these costs are going up quite a lot. So just wanted to get some clarification on how you manage that?

Sure. This is Tom. I will tackle some of that question, and let Trevor talk about domestic freight. But we're seeing -- we're seeing headwinds in domestic freight. From a price -- from a commodity increase standpoint, really haven't been all that effective. We've seen a little bit in the solid wood side of our business, but it's nothing that we can't deal with or that we're unable to pass along if we have to. The activity has been a little bit more than historic, but nothing that's out of the realm. On supply chain, on domestic freight, we do have some headwinds. Trevor, do you want to just touch on that?

Yes, I would call out two things as we think about the rest of the year. The Miami store -- or distribution center relocation is a fair amount of this. And the overall gross margin we expect to be higher when we get all of that inventory, which we've now done out of that Miami DC into our Savannah DC. But the landed margins will be slightly lower because of the domestic trucking cost to get that product down to Florida. But because our new Savannah distribution center is so large and so efficient and so much less costly, the overall gross margin impact is better. But there are going to be some headwinds as we move throughout the rest of the year to move through that higher Miami distribution center landed-cost inventory. So I know that's a bit confusing, but we do see that as kind of a five to six-month issue as we move through that Savannah distribution to move that Miami inventory that's moving up to our Savannah distribution center. And on the domestic transportation cost, I think you're right. If you look at our international costs, our drayage costs, our duties, all those things, they're not changing materially. We were fortunate that we were very aggressive in leasing and taking ownership of over 70% of our domestic transportation cost through a dedicated fleet. We aggressively leased into or kind of procured those assets. And we didn't quite -- we didn't need quite as many as we had. So that's got some excess capacity in those. So our sales continue to grow, we're maybe going to give back some of those assets. We also see that mitigating as we get towards the end of the year. And as we think about our gross margins, and I said this in the prepared comments but just to mention it, call it 80 -- 70 to 80 basis points in Q2 coming down from that as we get into Q3. And by the end of the year, we think gross margins will be closer to flat. So these are issues that are -- we think kind of effective in Q2 and Q3. And as we get to the end of the year, we think we've worked through those.

Great. That's really helpful. And can you just talk about the growth rate of sales to Pros versus DIY in the quarter? And whether there was an appreciable difference between the two? And then, any big essential MRO opportunities you could talk about?

Yes, this is Tom. I will talk about this, the DIY versus the Pro. We don't break that apart yet. We're getting to the point, we're working aggressively on CRM where we'll have better visibility to what goes on with each segment of customer. But when you're comping at the double-digit rate, both consumers appear to be doing very well. As we look at -- the Pro activity in the backside of our store has remained consistent, if not increased. But again, we don't have specific measures. But again, I said it on the last call as well, when we're comping at this kind of rate, all customers have good demand for the product. And we're getting -- awareness continues to get better. If you think about our awareness levels, it's still unaided awareness is about 10% for our company. So people are just getting to know who we are as we open more stores. I think we get more Do-It-Yourselfers in the store. And more people learn more about the brand, the Do-It-Yourselfers will drag more pros in the stores because a lot of them use pros who don't know about us. Both segments are doing well. And we anticipate that will continue to happen.

And just one thing I would add to that is, we had done two fairly large studies in the last six months that do through surveys and exit interviews and talking to our customers, and we think that mix has not changed meaningfully over the last five years. You guys probably recall, but about 40% of our customers we see as DIY purchasers, about 40% where the Pro pays for the product, and 20% Buy-It-Yourself customers, which are customers we define as the consumer paid for it, but they were influenced by some professional customer. And that hasn't changed a lot. We don't think that's changed either. On the MRO space, we are also growing that business. It has a much smaller base. But we do see our larger sales to our bigger corporate customers growing at a faster rate. But again, albeit from a much lower base.

So that's within the commercial division that we started. We asked that, that is ramping nicely. We're getting a lot of bigger sales from that. But in the stores, we've always sold to hotels, motels. That customer has always been, of course, staple to our professional business that runs through the registers in our stores. And that business, I think our Pro teams in the stores do a better job of going to networking within their own areas to sell to more of that maintenance repair personally.

And our next question comes from Michael Lasser with UBS.

This is Atul Maheshwari filling in for Michael Lasser. So your SG&A per store and the SG&A per square feet growth was meaningfully below the last several quarters. So what really changed in the first quarter compared to what you were seeing in the past several quarters that drove this outperformance?

It's pretty simple. We only opened one store versus opening a lot of stores. Those new stores -- because they do less volume than our mature stores, and they have higher costs than our new stores. When you open fewer stores relative to previous periods, that will give the -- factually an appearance that our SG&A is more efficient. But again, it really just had to do with -- we opened a lot stores in the back half of last year. And we only opened one store in the first quarter of this year.

Okay. And as a follow-up, can you provide some thoughts on how rising rate specifically impacts your category? What you're seeing in the marketplace now that rates have risen a bit? And how much would rates really have to rise before it begins to act as an impediment for category growth?

No, it's a good question. There's a number of macro factors we watch. Certainly, interest rates are one element. Interest rates rising is a bit of headwind. But when you look at overall household depreciation, household formation, GDP, lower and format rising consumer discretionary income, and the fact that 2/3 of Americans homes are over 30 years old. When you balance all of those headwinds and tailwinds out, we still think it's going to be a good market, and we'll continue to grow for the foreseeable future.

And as I said earlier, our unaided awareness is 10%. People don't -- still don't know who our brand is. So as we open stores and we grow that awareness, we'll take share no matter what happens with rates.

Your next question comes from Matt McClintock with Barclays.

Tom, I was wondering if we could focus on your efforts to improve the time to service the pros when they get to your store. Can you talk a little bit about what you've done there? I mean, how does that correlate with sales in the Pro business? Does that have an immediate impact on sales in the Pro business? Or is it something that just builds over time as pros get used to you being very speedy with helping them out?

So, yes. I will give you some thoughts on that. So we have spent a lot of energy on getting professional customers in and out of our stores quickly. Time is money for a professional. So we have to invest to make it easier for them to get their product out. So we've done a few things: one, and I'm going to through it, because it's been over several years we've made lots of investments. So we created a Pro zone within the back of the store that has a desk. It has an area for them to be able to command center and all the stores where people can check-in when they come to get the product out of the store. About two years ago, we invested in technology in the back of our stores so that our teams could know when a Pro is entering. We could get them in and out quicker. Today, we average getting a Pro out of the back of the store less than 15 minutes. So when someone checks-in, our are average pickup rate has dropped down to 15 minutes of getting a Pro out. If you think about that, a Pro is buying a couple of pallets at a time. So being able to get a forklift, get it out of a rack, get it out to their trucks in that timeframe, we're pretty pleased with the results. The second part is we're not done. The Pro app that we are in pilot on, it really focuses on better communication for the professional to get a hold of the Pro desk and get in and out of the store quickly. So they can go have announces, I'm on my way. I'm in the parking lot. I'm here, and we can have the…

A lot going on here. I guess my other question would be just high level. One of the interesting aspects of your story upon the IPO was that it really seems like you haven't found the mature store yet to date. And I was wondering, conceptually, are we still at that point where your order stores are growing? I'm not trying to get to a point where you break growth by vintage out every year or anything like that. But just -- what are -- how have your thoughts on maturity, store maturity evolved over the past 1.5 years relative to when you came out to the original markets?

Yes. I mean, when you have nine -- because you know we're in our 10th year of double-digit same-store sales growth, when our unaided awareness is still at a very anemic level, all stores are still maturing. When you are comping at this rate, we're getting growth out of our oldest stores. We're getting growth out of all of our stores that we're not cannibalizing. So whether or not you can define it as do we understand maturity? I think until we get to more of a -- we're investing a lot. We've taken a lot of the tax -- not a lot, but a portion of the tax reform benefit that we've got. And we're investing in better marketing campaigns and trying to spread the word of our brands. As we open more stores, that helps our awareness. And so I think the more awareness we can get, there's still a lot of share to be taken. There's still a ton of independent flooring stores that we compete against. And then the publicly traded people that sell our product where we compete against them. There's still more share to be had. So a long way around of -- we've been comping at this rate in our 10th year. When you're comping like that, all stores continue to do well.

Our next question comes from Chris Horvers with JPMorgan.

You swung the gross margin outlook by about a 100 basis points relative to the prior guide, but you also raised the outlook for earnings for the year. So my question is, what are the offsets? Are you dialing back previously planned investments to a little bit of incentive comp swing? Or is it a change in posture to the extent that the earnings outlook is less conservative than perhaps where you started the year?

This is Trevor. So sales are a little bit higher in the current forecast. We're obviously a little further through the year. We've now completed our first quarter. You're right. We did take our gross margin expectations down. And we went through. And as we saw what we really felt like we needed to spend this year, we tightened that up a little bit. So you're right. Margin is down. Sales are up. And we've taken SG&A costs out of the business. This is kind of how we got there.

And I guess where you saw those pools of SG&A opportunities to offset?

Really across most of the business. Little bit out of the stores, not a lot. Some here -- probably more over here in the corporate office. We've been investing at a very high cliff for -- we're going on a nice seven years here. And there's areas where we felt like we didn't have to invest quite as heavily this year. And as we get throughout the year, we've just pulled back things. Incentive comp is a very immaterial impact. So far we're fairly close on what we thought when we built the original forecast.

Understood. And just sort of a general cadence, not only within the quarter but relative to last year. There's been some modest moderation in the underlying growth rate in the market. So can you talk about was that -- is that sort of like broadly felt across the categories? Or is it any particular category standout? You did see some nice ticket improvement in this quarter. Was there any sort of stand out on the cadence within the first quarter as well?

No. Not, not really. The trends have been relatively consistent, so the businesses that have grown at a faster rate continue to be the same businesses as we've seen in the previous quarters. So we haven't seen anything from a category perspective. I think that still the durability components that have been added to a lot of our wood categories continue to drive people into the stores. And I still think that innovation is relatively new. And I think the innovation around inkjet technology and the batch components of the product we carry continue to resonate as well. So we're not seeing any difference in department performance than we've seen over the last few quarters.

And then my last question is, on the luxury vinyl plank category, I mean, how do you think your value props stands out there in the market? Have you seen competition step up from an assortment and the promotion perspective?

Yes, I'll let Lisa.

Yes, certainly it's one of the fastest-growing categories for the industry and for us as well. We think that our value proposition is one of the best out there. We were first to market on water-resistant laminate. We followed that up with NuCore. We've now got a new program DuraLux that is in that waterproof space and the customers really like that product. So yes, we see it all over from a competitive perspective, but we're very confident in what we're doing and the new programs that we're introducing.

Our next question is from Matt Fassler with Goldman Sachs.

My first question relates to the Pro loyalty program. You spoke about the Pro app and Pro loyalty starting to get traction up. Can you talk about the pace at which you would expect this program to start to move the needle on the top line? Like do you feel there was some benefit to the business here in Q1? And if not, at what point would you start to see it really impact the numbers?

Yes, we're not fully rolled out on the Pro loyalty program. It's in progress. We have, in our pilot markets, seen a benefit versus controlled markets. We're thoughtfully rolling that out. We got -- we should have it within all markets by the end of the year. It takes time to get benefit from it. While we saw improvements versus the control market, there's an enrollment period where we get people involved in it. There's education period where once we get enrolled, we are going to really teach them benefits of it. And we think the real benefit comes in the out years. Our goal is to get more of the share of our pros while creating this loyalty program making them -- trying to do more of their spend with us. So a long way around, we're getting some benefit now. When we get it rolled out in the rest of the country. And it's going to provide benefit over the years to come.

And only thing I would add to that, Matt, 100% agreed with what Tom said. But we're also integrating with the holistic CRM strategy. CRM not just for our professional customers but also for our Do-It-Yourself customers. And we're putting in some world-class technology and talent to help us manage that process. And as Tom mentioned, those processes are all about the next 3 to 5 years. You don't just see a quick lift on those. So we are very encouraged with the technology. We're very encouraged with the team that's putting it in. We are very encouraged, as Tom mentioned, on the test versus control market where we've been testing loyalty program. We'll be giving you guys a fairly detailed update on that probably in Q3 and Q4 as we get more traction there. But it looks very encouraging at this point.

Great. And then I have a couple of follow-ups on expenses. The first is, thinking about the leverage point. I'm looking out to next year when presumably Houston will be out of the -- no longer be aiding the comps, you'll be comping against it to some degree. What do you think the leverage point is for the business? Or what do you think it will look like next year in terms of what kind of same-store sales you'll need to hold the SG&A ratio flat? Now I'm asking that question considering what you said about the cost of market entries along with the fact that clearly you have some expense leverage as you said in answer to a question a couple of minutes ago.

I'll break it in two. So I think when you look at our stores, let's call the pre-2017 stores, just with inflation and things of that nature, we probably need a three-ish plus percent just to make sure we're getting flat operating margins. So to the extent we do better than 3%, we'll reach the operating margins out of the pre-2017 stores. As you think about the stores that we're opening in '18 and '19, those 18 stores are going to need to perform well. Historically, as you guys know, our new stores are comped at 2x to 3x the rate, and therefore, we've got the substantial amount of leverage in that next year. And so I do think that will continue to happen. As we think about those stores. So from a blended perspective, when you roll that all together, you're going to need, in order to get operating leverage, in the mid to maybe just above mid-single-digit comp on a consolidated basis to "pay" for the class of 19 stores, because those new stores are very negative impact on our overall operating margins. So I would say you're going to need that kind of mid- to upper single-digit comps to get leveraged. We're not ready to sign up for the 2019 budget yet, but that's all I would say today.

That's super helpful. And then finally and briefly, just as I look at what you told us about Q2 and trying to solve for the rest of the year, you gave us color on gross margin. If we look at the sales facts, it seems like to solve for the low-end to the midpoint of the '18 guidance. In Q4, the expense performance just year-on-year would need to be pretty tight. But I just wanted to make sure that, that's reasonable, given that last year your expenses really ripped in Q4 along with gross profits. So is the right way to directionally get there -- I know you didn't break out the last two quarters of the year, to really think about that expense compare as being one that you can cycle pretty easily year-on-year?

You're exactly right, Matt. With our current expectations are that we'll have actually have a modest improvement in operating margins when we get to the fourth quarter, because we did ramp up with all the DC expenses and everything we did in Houston and the timing of new store openings. Some big corporate investments there at the end of the year as well. So yes, our expectation is even with the flattish gross margin that I said. In Q4, we're going to get leverage out of our SG&A expenses and have a modest increase in operating margins as we get to Q4.

Our next question comes from Peter Keith with Piper Jaffray.

Just digging into it a little bit more on the gross margin puts and takes. Certainly, transportation cost inflation seems to be pretty widespread for a lot of companies. Could you maybe frame up how big of an impact that is? Looking at Q2, Q3, when you think about like the 70 to 80 basis points of pressure in Q2.

This is Trevor again. Yes, I would -- I'm just going to harken back to what we said. It's really those three things, the Miami costs, that higher landed cost inventory in Miami that we have got to push through for the remainder of this year, then that will subside. Our domestic trucking costs are one of the overall lowest of our supply chain costs, but they are increasing. Again, that didn't have to do so much -- had hardly anything to do with the spot markets are increasing. It's just that we wanted to go out there and procure that capacity to make sure we could support ourselves, because it's hard to get trucks in this day and age. And we probably procured more capacity than we needed at the time. And so it's mostly those two. And the third of those and the smaller of those, as we mentioned, is the Houston market is kind of shakes itself out and people come back to buying the different products from what they bought during the storm. That's the minor of those three.

Okay. And then also just want to talk about the class of stores. So, good to hear that 2017 running above 2016. And you guys seem like you're showing stronger and stronger improvement each year. So when you look back maybe at '16 now and how '17 is cycling, are you still seeing the same maturity curve dynamic where like in that year two when it enters the comp base, it comps about 20 and then year three, it comps 10. Is that the general trajectory that's still in place?

Yes, that is the general trajectory that's still in place. It's going to get harder. I mean, the new stores are doing better and better. But as of today, that is still happening.

Okay. Very good. One last quick one for me. So your publicly traded peers, one called out weather as a headwind, one said it wasn't a headwind. How did you guys shake out with Q1 -- granted some of your northern stores are newer, but how does that look for you?

Weather doesn't really affect our category, it shifts sales in our minds. So for us, it was definitely a colder winter and it was definitely more impactful maybe in the Northeast, but it doesn't have an impact for us or it doesn't have a meaningful impact in this -- in the first quarter.

We saw more closed days. But to Tom's point, our view is that the pros come in the week before or the week after.

And our next question comes from Seth Basham with Wedbush Securities.

My question is on gross margin. As you think about the outlook for 2019, obviously, not providing guide stand, but given the headwinds you're facing this year, would you expect to recover a lot of those pressures in 2019?

Yes, do we sign up for that, but yes, I mean, we'll also give leverage out of our distribution center expenses next year, right. So yes, there's a number of things that would give us optimism as we look to 2019.

Got it. So we should be thinking about gross margins growing in 2019. And as it relates to this year in gross margin, how are you considering mix into the equation? Is mix a benefit or a headwind to you guys from a product standpoint?

Right now, it's a little bit of a headwind. But yes, mostly because of Houston, but not meaningful. The bigger issues, as I mentioned, is that the Miami inventory is on the higher cost Miami inventory. And the overlay of the domestic trucking costs are the bigger ones but...

We're doing a lot to benefit our mix going forward. I mean, if you think about two initiatives, we have the designer initiative going on within the stores. And we hired a head of design services about almost one year ago now. She's doing a terrific job of kind of evolving how we serve on the designer side and inside of our design centers within our store windows. Designers are involved in the sales. We tend to have a higher margin rate. We're also -- Lisa and her team have done a really good job of bringing better and best products. We'd like the trajectory of our better and best. Customers are coming in and buying that. And we can help our margin rates with that as well. So we've some in-stores initiatives that we're doing that should help our overall mix also.

All right. And last question for me. I mean, thinking about the payback period on the new stores you're opening in the larger markets, would you plan those about to be the same as typical store that you open?

Yes. I mean, they should do -- they should be really the densely populated markets. Some of the biggest markets that we'll be in and some of the best housing markets that we'll enter. They'll do a good buying. And we anticipate the payback will be good.

Our next question comes from John Baugh with Stifel.

I wanted to follow up on the mix question, and let's leave Houston out of it. We're seeing waterproof laminates grow nicely and LVP grow nicely. How do we think about how that trend impacts both the top line and the gross margin?

I'd say, on the top line, we called out the laminate category as our best comping probably for almost two years now. And so that's been a nice benefit to our comps is what that -- Lisa's team has done in that category and helped the stores that have sold it as well. That category of itself, margin is improving a bit as well, so that helps.

Yes, as I mentioned earlier too that the water-resistant innovation is still relatively new. It's getting, certainly, marketed a lot more across the country, and that brings awareness to that -- into the consumer, and we think that'll drive more traffic into the stores. So we should get some good benefit of that for the foreseeable future.

Just the question was I assume what we're hearing ceramic and wood are being impacted a little bit in terms of share. How are the margin dynamics? Whether you're indifferent to that? Or it's a slight headwind or a benefit?

Yes, I mean, I do -- no, I don't think it's a headwind. I think it would be a benefit. I don't know that it's impacting tile as much as it's impacting solid wood and engineered wood. There's -- certainly, that's probably the case. But for us, it's not a headwind.

Yes, as Tom mentioned, if you look at the last five years, our comps have averaged 17.5%, and all of our departments have been comping positive. So there's always winners and losers, but for the most part, when you're comping 17.5% year over year over year, you're seeing all of your departments do better.

And then my second question is just on China, specifically in imports. All the saber rattling going on. Is there anything you're seeing and/or concerned about from a sourcing perspective with all this trade war talk?

No, not yet.

Our next question comes from Dan Binder with Jefferies.

I was just wondering if you could comment on what your expectation is for the Houston market in terms of the comp -- the added comp in Q2 coming up within that guidance you provided?

Dan, this is Trevor. So just as a quick reminder for everybody, so we called about 800 basis points in Q4, we called out a 400 basis points in Q1. And we've guessed some -- estimate would be somewhere between 200 or 300 basis points benefit in Q2. About flat for Q3. And as we get to Q4, as we called out in last quarter earnings release, we had over 100% increase in that market. We think we'll have maybe as much as a 800 basis points headwind just because they had such a huge lift in Q4 of last year. And so for the year, actually, Houston is not really -- it's a little bit of a detriment, not -- because that Q4 is so large for us. So it's a very specific answer.

And then I may have missed it, but what specifically was the product mix issue in Houston that caused some -- I know it wasn't the major part of your margin pressure, but what's going on there?

I wouldn't call it an issue. I just think that a lot of uniqueness happens when your sales go up like they did in Q4. Customers come in, they buy whatever they can get their hands on. We had a lot of great product, and so our margins were higher in the fourth quarter and the early part of this year. Now that, that's going back to probably a more normalized pace, people are buying not as much as maybe of the better and best product and more of the good product.

They were buying anything they could get their hands on in the fourth quarter. And so the margin blend was better in the fourth quarter than it is now because we're back in stock on everything. So they're buying more of the good product than they had been in the fourth quarter.

Understood. And then just two more items. Just broader pricing and promotion in the industry, have you seen any changes at status quo? Are you doing anything unique there? And then, Trevor, you did mention that there were some lower expenses than expected in Q1 that would shift to Qs two through four. I was wondering if you could just clarify a little bit more on what those were?

I'll talk about the competitive environment, and Trevor can talk about the shift in expense. So promotional cadence, I'd say, is similar to what we've seen. It hasn't changed. I can tell you, we're not doing anything different. You asked that question. All of our marketing is geared towards brand awareness, and we are investing more in marketing as part of that tax reform benefit. We're putting more into marketing to help build our awareness, so we'll continue to do that. But the competitive environment from a promotional standpoint feels the same to me. Pricing is always a challenge in different markets by different players at different times. We pay attention to that. We react to that when we need to react to that. I don't believe it's any different than it's been in the five years that I've been here, five past years that I've been here. All of the competitors do good things. We watch what they do. We try to learn from what they do. And if it's something that we can do better, we try to do that. So we still believe that our total value proposition having the broadest in-stock assortment, not competing with the pros, not installing and just having the real catering to that professional customers, we think our total value proposition is just a lot better. And there's evidence as all of our surveys say if we get the consumer into the store, we convert them 80% of the time. So we think we've got a better mousetrap. And as our awareness builds, we can do pretty well.

And Dan, this is Trevor. The second answer to your question, the expenses that were lower, pretty mundane-type things, remodeling expenses, maintenance expenses, marketing and distribution center. Those came in earlier, but we're still -- we're going to finish our remodels. We're going to get the maintenance done. We're going to spend the marketing to get the customers into our stores. So really mundane stuff that just didn't spend as much in March, and we'll end up spending that in Q2 and Q3.

Our final question comes from Zach Fadem with Wells Fargo.

So within the context of your good, better, best strategy. How would you say the higher-end products are performing relative to your other offerings? And as you add newer laminated, decorative products, is it your intent to take the higher-end product mix further upward in terms of overall sales?

So I will start with the first part, and then Lisa can jump in if there's -- if I miss something. I am pleasantly surprised with how the higher-end product we brought in across each category has performed. In fact, a little bit surprising. I mean, when I joined the company, we were an outlet center. We've invested a lot in the presentation of our storage, trying to really create inspiration. And as we've done that, and as we've invested in inspiration, put design centers in, showed the products differently, we've been able to show better product. And it shows well. It shows and it's had a tremendous value. So when we bringing higher-end, the value equation of what we do, it holds true in the higher-end products. And we're finding consumers in [indiscernible]. I think that's probably one of the bigger surprises that we're able to sell high-end in every store, no matter where the store is. So long way around, I'm very pleased with what we're doing. We are going to continue to bring higher-end stuff in. It's not our major focus. We're going to -- we want to appeal to everyone. It's not going to be like -- we're not going to turn into a high-end shop by any stretch of imagination. But we'll -- as we find good higher-end products that are good values for our customers, we'll bring them in. Our goal is to democratize the category. We want people to be able to come in and be inspired in our stores and be able to get things they didn't think were possible. And we -- if Lisa and her team can buy them right, we can price them right, and then we'll sell them well.

Great. And could also talk a little bit about the importance of brands in your category? When your customer considers all the variables, things like price, what's on trend, what's in stock, where would you say the brand falls in the pecking order?

Depends on what they're buying. I think brands are really important. In the back corner of our store where we have our accessories department, which is what you use to install the product, the tools that you use, the grouts that you use, we think brand is really relevant there. And we think our merchants have done a really good job of acquiring the right brands that our customers are asking for. As you venture out into the different departments, it becomes a little less relevant in my opinion. It's not -- we don't have a lot of customers come in asking for a specific brand, say, I'm looking for X brand or Y. It's more, "Hey, I'm looking for water-resistant laminate. I'm looking for wood plank-look tile." And there's just not as much brand relevance if you spend -- that's why we spend a lot of time working on our private brand strategy because to the consumers, that approach has worked for us. And we don't have a lot of people coming in saying they want a specific brand. It's more they want a specific product.

All right. Thanks, everybody. We appreciate you joining our call today. Thank you for your interest in Floor & Decor.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.