Floor & Decor Holdings, Inc. (FND) Q4 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to Floor & Decor Holdings Q4 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.I would now like to turn the conference over to your host, Mr. Wayne Hood, Vice President of Investor Relations. Thank you, sir. You may begin.

Thank you, operator, and good afternoon, everyone. Joining me on our earnings conference call today are Tom Taylor, Chief Executive Officer; Lisa Laube, President; and Trevor Lang, Executive Vice President and Chief Financial Officer.Before we get started, I’d like to remind you everyone of the company’s Safe Harbor language. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to 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 each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our Investor Relations website at ir.flooranddecor.com. A recorded replay of this call, together with related materials, will be available on our Investor Relations website.Let me now turn the call over to Tom.

Thank you, Wayne, and thanks to everyone for joining us on our fourth quarter 2019 earnings conference call. On today’s call, I will discuss some of the highlights of our fourth quarter and full-year 2019 results, as well as the progress we are making on each of our strategic growth initiatives. Trevor will then review our fourth quarter and full-year 2019 financial performance and provide our 2020 sales and earnings outlook and then we’ll open up the call for questions.We are pleased with our fourth quarter fiscal 2019 results, as we delivered comparable store sales growth, adjusted EBITDA and adjusted earnings per share that all exceeded our expectations. Total fourth quarter sales increased 20.7% to a record $527 million from $436.7 million last year. For the full-year, our total sales increased 19.6% from last year to a record $2 billion, which is almost triple our 2015 sales of $784 million.Moving on to earnings. We reported fourth quarter fiscal 2019 GAAP diluted earnings per share of $0.34, a 100% increase from $0.17 in the fourth quarter of 2018. Our fourth quarter adjusted diluted earnings per share increased 30% to $0.26 from $0.20 in the fourth quarter of 2018, exceeding our expectations of $0.20 to $0.21 per share.For the full-year, we reported GAAP diluted earnings per share of $1.44, up 29.7% from $1.11 per share in 2018. Our full-year fiscal 2019 adjusted diluted earnings per share increased 18.6% to $1.15 from $0.97 per share in 2018.We are pleased to be able to report that our full-year adjusted fiscal 2019 earnings per share exceeded our initial 2019 guidance of $1.07 to $1.12, which we think is a great result considering the long-term scalable growth investments that we continue to make over the fiscal year, as well as difficulty presented as we were forced to navigate a challenging trade environment and macroeconomic headwinds in the first-half of 2019.Let me now discuss some of the drivers of our fourth quarter and full-year 2019 sales and earnings growth and how we’re thinking about 2020. As a reminder, the pillars to achieving our long-term sales and earnings growth targets are: one, opening large warehouse stores in new and existing markets; two, growing our comparable store sales; three, expanding our connected customer experience; and four, investing in our Pro and commercial customers. Additionally, we are introducing a fifth pillar investing in free design services.Let me now discuss some of the progress we’re making on each of these strategic growth initiatives. First, opening new large warehouse stores. We opened seven new stores in the fourth quarter of 2019, bringing the total number of warehouse stores that we operate to 120 stores, up 20% from 100 warehouse stores in 2018.We continue to believe that we have a unique store model in the retail industry, as we have been able to successfully grow our store base at a 20% compounded annual growth rate over the last seven years at a time of significantly – significant industry consolidation.As we look to the first quarter of 2020, we expect to open five new warehouse stores, one of which opened January 13 in La Quinta, California: later this month, we’ll open a store in Sacramento, California. The remaining planned store openings are expect to be in the mid to late March.For the full-year, we expect to open 24 new warehouse stores, with 40% of those openings in new markets and 60% in existing markets, which is the same percentage mix that we opened in 2019.Additionally, we expect to open a small 12,000 square foot design studio in Dallas, Texas. The design studio represents a test for us, where we will see an opportunity to increase our market share in densely populated, higher-income areas, where we’re not able to fit a large format store. Our research tells us that these are mostly new untapped customers.Beyond 2020, we remain excited about the strong pipeline of new stores that we have lined up, which we believe will allow us to sustain 20% unit growth over the next several years. With that in mind, I want to thank our real estate, construction, visual merchandising and operating teams for their excellent execution in 2019.Moving on to our second pillar, growing comparable store sales. Our fourth quarter fiscal 2019 comparable store sales grew 5.2%, which was slightly above the top-end of our guidance of 4% to 5% growth.When we exclude the impact of new store cannibalization, we are pleased that our fourth quarter comparable store sales increased in the low double-digit range from last year. This increase in our fourth quarter comparable store sales reflected a good balance between 2.8% growth in comparable store transactions and 2.3% growth in our comparable stores average ticket.We were also pleased to see our comparable stores transaction growth accelerate to 2.8% from 1.8% growth in the third quarter of 2019. For the full-year, our 2019 comparable store sales increased 4% and increased 6.2% when we exclude the Houston markets.Excluding new store cannibalization and the Houston market, our comparable store sales grew in the low double-digit range for fiscal 2019, a very healthy rate and these stores comparable store sales accelerated in the second-half of 2019. The increase in our comparable store sales in fiscal 2019 was driven by 1.9% growth in comparable store transactions and 2.1% growth in comparable stores average tickets.We are pleased with our comparable store sales exit growth rate in the fourth quarter of fiscal 2019 and with the start of fiscal 2020. As Trevor will discuss, we are forecasting stronger annual comparable store sales and total sales growth in 2020, when compared to 2019.Turning to our sales performance within some of our merchandising categories for the fourth quarter. Among our six merchandising categories, four experienced comparable store sales growth in the fourth quarter of 2019. Consistent with prior quarters, our strongest total and comparable store sales growth continues to come from our laminate and rigid core luxury vinyl plank category, where we have an industry-leading assortment.Fourth quarter total sales in the category increased 36.7% to $120.4 million and accounted for 22.8% of our sales, up 260 basis points from 20.2% last year. To build on this growth, in January, we launched our new exclusive new core performance flooring, which we believe is the most durable scratch, dent and pet-proof resistant rigid core vinyl flooring in the market.New core performance is at our best price point is another example of how we are driving value and sustained growth through our innovation strategies. We are so confident in the product that it comes with a lifetime residential and 15-year commercial warranty.As we discussed throughout 2019, we put a lot of emphasis around growing our installation accessory sales. We implemented a new incremental bonus program for our store associates, laid out the department in a more logical fashion, brought a new compelling products and focused on training, all of which paid off in 2019.The category was our second best comping category for the year and fourth quarter. We estimate this is an area where we are underpenetrated relative to the market and believe that as a one-stop destination for hard-surface flooring, we can make further enhancements to increase our market share.Moving on to decorative accessories, where we experienced a marked acceleration in our fourth quarter sales from the third quarter of 2019. Total sales grew 25.5% to $101.5 million and accounted for 19.3% of sales, up 80 basis points from last year. The category is benefiting from the successful execution of our 2019 merchandise reset, which included new trend forward stock keeping unit that customers expect from us. We expect to build on this growth in 2020, as we add additional trend forward stock keeping unit.Fourth quarter comparable store sales in our wood and tile categories were below last year. As we discussed in our third quarter 2019 earnings conference call, we are working through some near-term product transition challenges in tile, our largest category, as we diversify our countries of origin.This transition has led to some near-term merchandising out of stocks in this important category, which we are correcting. We expect our merchandise in-stock rates to return to normal over the next several months. In wood, we will be updating our assortments to be more trend forward and will further improve our job lot in-stock positions, which we believe will improve our performance.We are continuing to build on our successful strategies to drive incremental growth by adding adjacent merchandising categories in store and online. This includes vanities and vanity tops, bath accessories, custom countertops, sinks and shower doors. For example, we now have bathroom vanities in 32 stores, or 27% of the store base at year-end. We expect them to be in all stores in 2020.We are pleased with the early results and will continue to build out our trend forward assortments with exclusive styles and delivery options. While we will always be a hard-surface flooring retailer and our adjacent merchandise programs are currently small and isolation, they represent incremental, scalable adjacent growth opportunities and help us meet the demand we see from our Pro and DIY customers. Across all merchandising categories, we continue to see the strongest growth at the better and best price points and are pleased with our merchandise margin.Expanding the connected customer experience is our third pillar of growth. We continue to see robust growth in both traffic and conversion from our successful connected customer strategies. In the fourth quarter, our e-commerce sales accelerated to 66% growth from 54% growth in the third quarter of 2019. As a result, our e-commerce sales accounted for 11.4% of our fourth quarter sales, up 310 basis points from 8.3% last year.For the full-year, our e-commerce sales increased 61.2% and accounted for 10.1% of our sales, up 250 basis points from 7.6% in 2018. We believe that our growth in e-commerce sales is the direct result of strategies we have implemented to inspire and educate through our website.We have also aligned the sales process with our stores, so that we can make the consumer purchase journey simpler, more streamlined and more engaging, while removing friction from the purchase process.A few recent enhancements include, adding measurement calculators for square footage, mortar, sealant and moldings, making it easier to determine the materials needed for a flooring project; a room visualizer, which is personalized by room experience and integrated with our shopping cart to a tender project online. While it’s too early to measure the visualizers’ potential impact, we’re excited about how it will enable us to customize content and product and we believe it’s best in the end.In 2020, we intend to build on these strategies to make further performance improvements to our website and further harness data to determine where the customer is in the purchase decision. That said, our stores remain key to executing our e-commerce strategy as we continue to see approximately 85% of our web orders picked up in the store.When combined with our brick and mortar attributes, like unique in-stock products and everyday low prices, large visually appealing stores, free design services and knowledgeable sales associates to help, we believe our overall brand experience is hard to match. This is validated by our 2019 market research, which shows 77% of consumers who shop Floor & Decor ultimately purchase from us.Our fourth pillar of growth comes from investing holistically in our Pro and commercial customers. As we have discussed in the past, investing in our Pro customers to drive loyalty and brand advocacy, the strategic priority of ours as we look to increase our share of wallet with our existing Pros, as well as engage with Pros that do not currently shop with us.It all starts with the local store that serves our Pros and is enhanced with important enablers, which include our PRO Premier point-based rewards program, our Pro partner services and our PRO App. We build on these offerings with the launch of our PRO private label credit card in 2020. Collectively, all of our programs are important touch points with our Pros that will enable us to drive personalized engagement through our CRM platform in 2020 and beyond.We are also making important investments in our commercial team, where our market share is still very minor, but growing nicely. Let me speak to how each of these are contributing to growth. First, our PRO Premier Rewards program, which launched company-wide in the third quarter of 2018, continue to experience robust growth. We had exceptional enrollment growth in 2019 and saw strong year-over-year growth in average earned and redeem points. Our PRO Premier members say, they spend an average of 10% more after signing up with the program.To add further context, the average Pro Premier Rewards member spent three times more than a non-member. So we will continue to build on the program’s growth by increasing awareness of its benefits and driving engagement in 2020. We continue to be pleased with the growth and the number of Pros that are using our PRO App, which was launched in 2018.We recently launched a schedule, pickup, check-in feature on the app that could be one of the most utilized features of the app. We had over 40,000 Pros download the PRO App in 2019 and we expect app usage to continue to grow, as we continue to build out our awareness, features and functionality.We are leveraging our CRM investments in Pro across all customers and have obtained a wealth of data about our customers, such as average spend, length of time between shopping visits, when and how customers buy installation accessories and much more for both DIY and Pro customers.We can now place, both Pro and DIY customers in decile, we better understand their spend, identify opportunities, as well as focus on our best customers and find lost customers to see if we can get them back. While we are in our infancy with CRM, in the fourth quarter, we ran our first campaign to drive higher Pro engagement sales, using incremental points and the results were compelling at a higher ROI.We are just getting started, but are very confident in the intelligence we are gathering, so that we can improve our knowledge of our customers and how to serve them better. Separately, we continue to build out our commercial sales infrastructure with regional account managers, or RAMs. These are professional sales associates that reside outside our stores with the sole focus to sell to commercial clients by leveraging our incredible assortment, supply chain and large stores.We ended 2019 with 13 RAMs and have plans to add about eight more in 2020 in strategic locations. These investments are very accretive, as there is no CapEx or working capital investments and builds off of the store and DC infrastructure already in place. While our commercial sales remain small and isolation relative to our total sales, we were pleased that the segment’s 50% sales growth exceeded our internal plan and continues to far exceed our total sales growth.Lastly, we’re calling out separately a new fifth pillar of growth, which is our free design service offering. We are seeing significant traction in several important engagement metrics, including growth in the number of design appointments, growth in average ticket and conversion rates.We are delighted to see that we had almost 150,000 appointments in 2019 and experienced a significant increase in conversion in 2019 when compared with 2018. The improvement is the direct result of growing the number of designers in our stores, while at the same time providing them with the tools, measurement goals and processes they need to be successful.As we have discussed in the past, when our designers involved, our conversion rate is much higher, our average ticket is three to four times greater than the company average, our gross margin rate is higher, and our customer satisfaction scores are higher. We intend to build on this growth by testing in-home design consultation in 2020.I will now turn my comments to how we’re thinking about the macro environment and geopolitical factors that affect our industry and the company. Let me first discuss how we are taking precautionary measures for our associates in China, as they and the country managed through the coronavirus outbreak.First, we asked our associates and our Asia sourcing office to minimize any travel by working from home after they return from the Chinese Lunar New Year. Second, we suspended those who travel to and from China and Southeast Asia in February and March. Finally, we do anticipate that the travel restrictions imposed by the Chinese government and overall concerns about the spread of the virus will likely lead to some production delays.As a result, our Asia sourcing office is regularly following up with all of our suppliers to better understand their production schedules and any potential delays. We believe our inventory receipt flow leaves us in a good position to manage in a near-term slot supply chain disruption. That said, this is a fluid event that we, like many others, are monitoring closely.Moving on to the impacts of tariffs. As many of you know, on November 7, 2019, the U.S. Trade Representative, USTR made a ruling to retroactively exclude certain flooring products imported from China from Section – from the Section 301 Tariffs that were implemented at 10% beginning in September 2018 and increased to 25% in June 2019.In addition, on November 20, 2019, U.S. Customs issued Chapter 99 exclusions for each unique article number identified under the November 7, 2019 USTR ruling. The granted exclusions apply to certain click vinyl and engineered products that we have sold and continue to sell. All these exclusions were granted retroactively, we are entitled to a refund from the U.S. Customs and Border Protection for the applicable Section 301 tariffs previously paid on these goods.While tariff refunds claims are subject to the approval of the U.S. Customs, we currently expect to recover approximately $19.3 million related to the Section 301 tariff payments in 2020. We, like many others, are pleased that the decline in mortgage rate interest rates and continued economic growth has served to reverse the slide and year-over-year existing homes, though, one of the macroeconomic metrics, along with home price appreciation and age of housing stock, that impact our industry.As many of you know, existing home sales began to reverse their year-over-year decline in July of 2019 and were up 10.8% in December of 2019, albeit against a 10.1% decline in December 2018. We have also been encouraged that home prices have continued to show modest appreciation.Finally, the median age of owner-occupied homes is currently 40 years, which supports home improvement spending to repair and improve the aesthetics of homes. So we believe we are entering 2020 with a more favorable economic backdrop when compared to the beginning of 2019.That said, we watch many housing metrics, but rely mostly on our company’s specific growth drivers, which we believe will lead to mid single to high single-digit comparable store sales growth over the long-term.As we think about 2020 and beyond, we continue to believe that we will grow our market share in hard-surface flooring through our ongoing innovation strategies and by offering consumers easy, affordable and updated stylish flooring solutions and services.Before I turn the call over to Trevor, I would like to say how excited we were to announce the promotion of Lisa Laube, President of Floor & Decor. As many of you know, Lisa is a terrific leader, who has been instrumental in the company’s success joining – since joining in early 2012, and her influence can be seen throughout our company.As part of the change, we also announced new multi-year employment agreements with me and our executive leadership team, which further demonstrates our commitment to the company.To support the next chapter of the company’s aggressive long-term growth strategy, we are also further aligning our executive compensation philosophy with our long-term vision and intend to tie more of our executives’ compensation to the achievement of our long-term corporate financial performance objectives, which we expect to discuss in greater detail in our annual proxy statement.Let me close by saying that we believe our fiscal 2019 results continue to validate the strength of our value proposition in the hard-surface flooring industry. I would like to thank all of our associates for their hard work and their exceptional service to our customers.I’ll now turn the call over to Trevor to discuss more of the details of our fourth quarter and full-year fiscal 2019 results and our 2020 sales and earnings growth outlook.

Thanks, Tom. I’m going to concentrate my comments on some of the changes among the major line items in our fiscal 2019 fourth quarter income statement, balance sheet and statement of cash flows, and then discuss our outlook for 2020. Tom already discussed our fourth quarter and full-year fiscal 2019 sales result, so I will start with our fourth quarter and full-year gross margin results.Our fiscal 2019 fourth quarter gross margin rate expanded 220 basis points to 43.6% from 41.4% in the fourth quarter of 2018, due to a $14 million, or 270 basis points and we expected Section 301 Tariff Refunds, primarily related to rigid core vinyl tariffs that we have paid since September of 2018.As this goes in more detail on our 10-K, $3 million, or $0.02 per share of the $14 million benefited our gross margin starting on November 20, the date, which U.S. Customs lowered the tariff rate from 25% to 0%. This was obviously not contemplated when we gave our guidance in early November.The remaining $11 million was for periods from September 2018 through November 20, 2019, and we have backed this out of our adjusted EBITDA, adjusted net income and adjusted diluted earnings per share in the earnings release as its unique material and the majority of this benefit does not relate to our fourth quarter results.The favorable tariff refunds benefit was partially offset by higher distribution costs of approximately $4 million, worth approximately 30 basis points due to the opening of our new Baltimore Distribution Center. Our supply chain does an incredible job, again, opening this new 1.5 million square foot distribution center and is operating fantastically in the short-term than it has been opened.This is just one more example of the significant investments that we’re making to support our long-term sales and earnings growth. This new facility expanded our distribution center capacity by 50% and will serve about one-third of our store base. Importantly, it should allow us to replenish one-third of our stores faster and in a low domestic transportation costs for a longer period of time.Before I move on to expenses, let me provide some more detail about how the Section 301 Tariff recoveries and refund payments are impacting our balance sheet and income statement.From a balance sheet perspective and subject to the approval of the U.S. Customs, we expect to recover 19,300,000 related to Section 301 Tariff Refund payments within the next 12 months. As of December 26, 2019, our balance sheet receivables include this expected recovery from U.S. Customs and Border Protection.From an income statement perspective, in the fourth quarter of 2019, we recognized the benefit of $14,300, $14 million as a reduction of cost of sales, as previously discussed, as well as $300,000 as a reduction of interest expense. Additionally, we reduced our year-end inventory on hand by $5 million, which is reflected as a reduction in our balance sheet inventory.As we look to 2020, we plan to reinvest the remaining $5 million in cost on hand inventory towards driving market share.Turning to our fourth quarter 2019 expenses. Our fourth quarter selling and store operating expenses increased 24.1% to $147,900,000 from $119,100,000 last year and deleveraged 80 basis points. The deleverage is entirely from our new store growth, as our comping stores obtain nice leverage in the fourth quarter.As we have discussed in prior quarters, our new store selling and operating expenses as a percentage of sales are approximately 50% higher than our stores opening greater than a year, which results in near-term operating expense deleverage. That said, we are pleased that our comparable store selling and administrative expenses leverage approximately 50 basis points in the fourth quarter, as we leverage all major expense items on increasing sales.Our fiscal 2019 fourth quarter general and administrative expenses increased 12.2% to $34 million from $30,300,000 last year and leveraged 40 basis points to 6.5% from 6.9% last year.The improved leverage came mostly from comparing against the $5,800,000 lease impairment charge we took in 2018 related to the exit of our Miami distribution center, including our 2019 fourth quarter general and administrative expenses are the final costs related to relocation to our new Store Support Center, including lease termination costs and minor costs related to the closure of our former Miami distribution center.In total, these Store Support Center and Miami distribution center exit costs were $2,400,000, compared with $5,800,000 last year. Excluding these costs, our fourth quarter general and administrative expense ratio deleveraged 40 basis points to 6% from 5.6% in the fourth quarter of last year, primarily from higher depreciation and occupancy costs related to our new Store Support Center, which we will leverage over time as we grow.Our fourth quarter preopening expenses declined 27.1% to $6 million from $8,300,000 last year and leveraged 80 basis points on a year-over-year basis. Favorable preopening expense leverage is primarily due to the enhanced store opening process, which shortens the period of time it takes to open new stores, thereby lessening preoccupancy costs.We opened seven stores in the fourth quarter of 2019, compared to five stores opened and one relocation in 2018. Among the new store openings, three were in new markets and four were in existing markets in the fourth quarter of 2019, as compared to three in new markets and two in existing markets in 2018.Fourth quarter net interest expense declined 40.4% to $1,700,000 from $2,800,000 last year on lower average debt compared with last year and interest income earned during the quarter related to tariff recoveries and excess cash on hand.Our fourth quarter tax provision was $5,100,000, compared to $2,600,000 last year, and flat on a year-over-year on a rate basis. Our lower tax rate continues to be primarily due to the recognition of higher excess tax benefits related to stock options.Turning to our growth and profitability. Our fourth quarter fiscal 2019 adjusted EBITDA margin rate increased 100 basis points to 11.2% from 10.2% last year, primarily due to the improvement in our gross margin rate. The 220 basis point increase in gross margin rate, coupled with a 20.7% total sales growth, led to our adjusted EBITDA growing 32.1% to $58,800,000 from $44,500,000 last year and exceeded our guidance of $52,100,000 to $54 million.Our fiscal 2019 fourth quarter GAAP net income increased 97.4% to $35,300,000 and 17,900,000 in the fourth quarter of fiscal 2018. Our GAAP diluted earnings per share increased 100% to $0.34 from $0.17 per share in the fourth quarter of 2018.Our non-GAAP fourth quarter adjusted net income increased 29.5% to $27 million from $20,800,000 in the fourth quarter of fiscal 2018. Adjusted diluted earnings per share increased 30% to $0.26 and $0.20 in fiscal 2018, exceeding our guidance of $0.20 to $0.21 per share.We ended the fourth quarter with 105,400,000. diluted weighted average shares outstanding, compared with 103,800,000 last year.Moving on to our fiscal 2019 balance sheet and cash flow. In fiscal 2019, our total net inventory grew $110,900,000, or 24% to $581,900,000 from $471 million last year. Excluding the inventory required to support our new distribution center in Baltimore, our total inventory would have increased only 14%, comparing favorably with our total sales growth of 19.6%. Our comparable store inventory increased only 3.4% from last year.As discussed on the last call, we have some opportunities in the wood and tile business to improve in stocks. Our in-stock positions has improved since the end of last year and assuming no significant shipping issues due to the coronavirus, we believe our in-stock will improve in the second quarter.We are pleased that we generated $204,700,000 in operating cash flow in fiscal 2019, which exceeded our required growth capital of $196 million. We remain in a very strong financial position. As of December 26, 2019, we had $306,500,000 in unrestricted liquidity, consisting of $27 million in cash and cash equivalents and $279,500,000 immediately available under borrowing under ABL facilities.Moving on to capital expenditure allocation. Our fiscal 2019 capital expenditures increased 29.5% to $196 million from $151,400,000 in 2018, slightly below our recent guidance of $203 million to $213 million. The growth is primarily related to the increase in new stores opened all under construction during fiscal 2019, compared to the same period in fiscal 2018. We also opened our new Baltimore DC and invested in our new Store Support Center.For fiscal 2019, approximately 62% of our capital expenditures were for new stores, 20% were for information technology, e-commerce investments and our new Store Support Center relocation. The remaining of our existing CapEx was for store remodels and distribution center investments.As we look to fiscal 2020, our total capital expenditures are planned to be between $255 million to $265 million and are expected to be funded primarily by cash flow generated from operations under our borrowings, under our ABL facility. More specifically, we intend to make the following capital expenditures in fiscal 2020.The growth in our capital spending reflects the planned opening of 24 new warehouse stores in fiscal 2020, which represents another 20% unit growth year for us. Additionally, we plan to start construction on 12 warehouse stores that are expected to open in the early part of fiscal 2021, compared with nine warehouse stores in fiscal 2020.We did make the strategic decision to take on more of the new construction costs in 2020 to improve the timing of our store openings and lower our rent costs. Capital expenditures associated with these projects are expected to be approximately $188 million to $194 million in fiscal 2020.We also will invest more in existing store remodeling projects and distribution centers in fiscal 2020, using approximately $50 million to $52 million of cash. We plan to invest in our information technology, infrastructure, e-commerce and other Store Support Center initiatives using approximately $17 million to $19 million of cash.Now turning to our fiscal 2020 annual sales and earnings guidance. As a reminder, 2020 will be a 53rd week, but my discussion will be on a comparable 52 to 52-week basis. As you saw on our earnings release, we’re moving to annual sales and earnings guidance, which is more closely aligned with industry practices. Like many other companies, we believe this change will give us more flexibility and managerial business throughout the year towards our long-term goals.Let me now discuss some of the details of our fiscal 2020 outlook. We expect net sales for fiscal 2020 to be in the range of $2.450 billion to $2.475 billion, or increased 20% to 21% in fiscal 2019. This will be greater than 19.6% growth we reported in fiscal 2019.Our outlook is based on various assumptions, including opening 24 new warehouse stores, comparable store sales growth of 5.5%, 6.5 versus 4% growth in 2019. Our plan assumes fiscal 2020 comparable store sales are fairly consistent throughout 2020.Moving on to how we’re thinking about fiscal 2020 gross margins, expenses and adjusted EBITDA. Even with taking on the cost to increase our distribution center capacity by 50% with our new our Baltimore distribution center opened in November 2019, we’re planning on gross margin to be flat to up 10 basis points. If you remove the $14 million benefit from our fourth quarter 2019 due to expected tariff refunds previously discussed, we’re planning on improving gross margins by 70 to 80 basis points for fiscal 2020.On a quarterly and GAAP basis, gross margin is planned to improve sequentially relative to the same quarter last year throughout the first three quarters of 2020 due to improved product gross margins, anniversarying tariffs for 2019 and as we begin to leverage our new Baltimore distribution center.The first quarter gross margin will start out with minimal improvement due to our – primarily to the new Baltimore DC being opened this year and not being opened last year. The fourth quarter of 2020 gross margin is planned down entirely due to the $14 million tariff refunds received in the fourth quarter of 2019.On the expense side, we plan to modestly deleverage due entirely to new stores as it relates to selling and store operating expenses. We’ve also made the decision to invest more into store employees, including investments in our commercial sales teams and we’ve decided on to take on more of the rising cost of healthcare. We believe these are good long-term investments in our people.Preopening expenses are planned to deleverage 20 basis points to almost entirely due to opening more new stores earlier in 2021. Thereby, we expect to take more of the preopening expenses for those stores in 2020 versus 2021. Most of the deleverage will come in the fourth quarter of 2020.The first quarter of 2020 preopening expenses are planned to increase about 50% due to the planned opening of five new stores in Q1 2020 versus three new stores in the first quarter of 2019. Opening new stores more equally throughout the year has been a long-term goal for us and this should benefit us in fiscal 2021.We are planning on general and administrative expenses staying around 6% throughout 2020. 2020 interest expense is planned to decline about 30% from 2019, due to capitalizing interest on capital expenditures, as well as the lower cost of debt on our lease and debt amendments announced on Wednesday.We expect our adjusted EBITDA to grow 23% to 27% in 2020 to approximately $300 million to $308 million. We look forward to continued expansion in our adjusted EBITDA margin rate to 12.2% to 12.4% in 2020 from 11.9% in 2019 and 1.2% in 2018. Importantly, we continue to see a path towards increasing our EBITDA margin rate to the low-teen range over the immediate term and growing at 15 to 30 basis points thereafter towards our long-term target of mid-teens.Fiscal 2020 diluted earnings per share expected to be at $1.31 to $1.37, excluding the 53rd week. Diluted weighted average shares is estimated to be approximately 106 million and our fiscal 2020 tax rate is estimated to be 23.3%.As outlined in our earnings press release today, fiscal 2020 53 is a 53-week for us. We estimate the incremental sales associated with additional week to be about $34 million to $35 million and the incremental diluted earnings per share to be approximately $0.03 to $0.04. We are planning on strong sale and profit growth again in 2020.Looking beyond 2020, if we assume today’s favorable macroeconomic backdrop, as modest growth remains intact and there are no exogenous events like unfavorable trade policies, we believe our fiscal 2021 sales and profit should grow at a faster rate than 2020, as we leverage important vessels like our new Baltimore DC in Store Support Center.In closing, I would just like to say that our entire leadership team is proud of how we performed in 2019. And we look forward to fiscal 2020, we believe our best days lie ahead of us. I would like to personally thank all of our associates for their great work they’re doing everyday to democratize hard-surface flooring, while serving their colleagues and all of our customers.I would now like to turn the call over to questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.

Thanks. Good evening, everybody. So I wanted to ask about how do you think about the controversy in 2020? There’s a bunch of factors to consider on the insight there. So, market growth cannibalization relative to last year, how are you thinking about the lagged acceleration of the accelerated existing home sales? And then just the overall sort of impact of pricing now that there’s this tariff relief? And then ultimately, as a follow-up to that, how are you thinking about the cadence of combo for the year?

Okay. I’m going to try and tackle those, Chris. If I don’t catch them all, please just reiterate it. I think, as we said, we are expecting a better macro backdrop here. We had six months of existing home sales. Improving interest rates are at a very low rate. Housing stock, as Tom mentioned, is a lot of housing stock over four years old.We’re now beyond two years away from Houston, a number of initiatives that Tom laid out, give us a lot of comfort around what’s going on in the business. And we feel really good about the products. We’ve got a few headwinds for some of our in-stocks, where we’re working through that, feel good about where we’re going to be as we in this quarter and come into Q2. So, with that, as we mentioned in the prepared comments, reflected comps will be fairly consistent throughout this year.

And so I guess, as you just – if you think about that, so maybe focusing on the lag impact of the existing home sales. One would think that, as you get into second and third quarter, especially in line with the improvement in the tile and stock that, one would think that perhaps comp should accelerate in those quarters. But on the other hand, you have the relief on the tariff. So are you essentially assuming that they offset themselves, or what – how are you thinking about that?

Yes. I think, we do a very bottoms-up approach. We also have to look at new stores that are coming on, stores that are getting cannibalized, stores that are getting – coming off being cannibalized. We think about what is landing from an assortment perspective, initiatives we’ve got in the Pro and the designer and the omni-channel experience that we’re executing.I mean, there’s a lot of all those detail factors go into the plan. I think, your instincts are right on the refund of the tariffs. We generally lower prices when we can and Lisa and team have done a very thoughtful analysis of what’s going on in the market and we want to keep that price leadership position. So I think your thoughts are right there that we’re going to keep our everyday low price strategy and stay below the competition.And I think, as we anniversary the second-half of next year, the other issue is, we had some increase in comps. We talked about 80 basis points in Q3 of this last year, a bigger number than that in Q4 that we just finished, because we had to raise some prices because of tariffs. And so, we’re up against those as we come to the second-half of next year as well.

Gotcha. And then my follow-up is on the gross margin, what was the adjusted x the non-operating charges, gross margin, because it – you mentioned, you had the $4 million for the supply DC, but then you had the $3 million, that sort of roughly offsets that and it looks like the adjusted gross margin was up $1.30 million. So could you help us reconcile that?

Sure. The way I think about it, Chris, is the $14 million really that benefited the P&L in the fourth quarter relates to that tariff refund. And as we said on the – I mentioned earlier, as way we looked at it was on November 20th is the date that U.S. Customs lowered the rate from 25% to 0%.So from that period to the end of the year, our margin was higher just because we didn’t – we and nobody else really changed our retails that quick. So that was rough about – that was roughly $0.02 a share, or in the quarter were 270 basis points of benefit to gross margin.If you think about the distribution center expenses, that in and of itself was probably about 50 basis points. But we’re going to have that for the rest of our lives. So we’ll start to get leverage out of it. But the way I like to think about is the benefit of the $14 million, the $3 million was November 20th on, plus the $11 million before that was worth 270 basis points that was kind of unnatural and drove our gross margin rate up.

Understood. Thanks very much.

Thanks, Chris.

Thanks, Chris.

Our next question comes from the line of Steven Forbes with Guggenheim Securities. Please proceed with your question.

Good afternoon. Maybe just a quick – starting with a quick follow-up on the gross margin question for the fourth quarter, right? Because I think if you back out that 270 basis point tailwind, it would imply that gross margin was down again, makes sense, given the Baltimore distribution center.But can you comment about the product margins during the quarter? Because I thought you said you were satisfied with them. But where were our product margins? And are you still getting that good, better, best trade up tailwind?

I’ll take it quick, Lisa and Tom may want to weigh in. The thing you have to remember mostly about the fourth quarter based on our inventory turn is those tariffs went from 10% to 25% in June of last year. And based on our inventory turning just over two times a year, we had the full brunt of those tariffs going from 10% to 25%.So we had plan for that in our margins. Our margin actually came in better than we had guided based on the guidance we gave and really there was two pieces that are – drove our margins to be better about equal. The first one was our overall product margins and rebates ended up coming in stronger at the end of the year. And then on the supply chain team did a good job in the overall distribution center, expenses were probably some portion of $1.04 better than we had planned for.So relative to the guidance we gave, we had a beat. If you think about the overall beat for the quarter, $0.02, as I mentioned, was the tariffs that none – nobody was expecting. And then we had another $0.02 associated with better product margins, as I said, the product margins and supply chain and then the rest of that beat is tied up with just spinning and rounding.And I would just say add a couple of things that we are continuing to see our best product to be our best performing product. They continue to grow at a faster pace and are doing very well. So the consumer is trading up often in our stores. And I think the energy around – two of our big initiatives, the energy around our design initiatives, we know when a designer engages with our customer that we get a higher average ticket and we get a better gross margin and better customer satisfaction.And that department and those associates that are designers continue to perform better and better each quarter, the longer that we get into it. And then all of the energy that we’ve had around our installation materials department, where we changed our kind of the bonus program within the department and we changed the way the department’s merchandise and they pay good dividends. And we’re selling more add-on product, service associates are doing a good job and all that’s helping margin.

Thank you. And then just a follow-up regarding, I guess, the fifth pillar, right, the plan to invest in free design services. Maybe just expand on that, right? You think about the space in the front of the store that is designated to the vignettes? Is there – do you see an expansion of that, especially as we think about, right, incorporating maybe some of the new product categories, vanity top, vanities, et cetera? I mean, is there training right for the design representatives in those other categories, maybe just expand on the initiatives as a whole?

Yes. So I think we’ve had from a merchandising standpoint, we’ve been really good for many, many years on kind of the design center and the vignettes within the store and how we’re executing. I mean, they every time, every store a little bit better. We’re doing a really good job designing them and the departments look good. I don’t see the department getting much bigger. I think we’re adding. We have about – we’re committing the right amount of square footage to it.But what we started to do a little over now it’s going on two years ago, as we hired a Head of Design. We instituted some training, not some, lots of training. We gave the designers tools, technology. We put guidelines in and we’re in the early to middle innings of seeing the payoff of that.I mean, I’m really pleased with what’s going on. I still think, as we mentioned in our prepared comments earlier, I mean, we’re going to pilot in-home design services this year. That’s going to be something that’s new for us. We will show – we’ve got work to do and showing our adjacent categories within our design centers. And as you know, we redo half of our design center every year. So we’ll be adding some of those adjacent categories and to show them better. But still in the early innings, but really excited about what we’re doing there.

Thank you.

Thanks.

Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Good evening. Thanks a lot for taking my question. So what have you assumed in your guidance for this year for any disruptions or associated with the China supply chain?

I mean, as we mentioned in our calls, it’s a fluid situation. But we – we’ve done a good job in getting our Chinese New Year orders in early 97% of them came and were shipped before the holiday. We’ve got safety stock within the store and in our distribution centers, and we feel like it – while it’s a fluid situation, and we’re certainly paying attention to it, and we feel like we’re in a pretty good position to weather it.

And Tom, as of the end of 2019, what percentage of your goods came from China?

Mid-30s.

Mid-30. And so if this situation were to extend on for a couple of months, should we think about the potential downside risk as maybe 10% of – 10% hit to 30% of your sales, or is that too draconian to downside of the scenario that would play out?

Nearly.

Hi, Michael, this is Lisa. So…

Hey, Lisa, congratulations.

Thank you very much. So the good news is, our Asia sourcing office is all over this. And so we’ve got 12 people that are in China and they have been in very close contact with all of our factories. And so we’re very excited that 50% of our factories are back up and running this week. And we think within the next week, we’ll be up to about 75% up and running.So, as Tom mentioned, our Chinese New Year orders got here on time. So that bought us sometime. We carry safety stock in the stores and in the DCs. And so, we feel like we’ve got many weeks to before we get concerned about what this could mean to the business. So by all intents, everything that we’re hearing coming out of our factories in China is that, they expect that they’ll be delivering and we won’t have much in the way of delays.

In – is your sense of those 50% better up and running? Are those at full capacity? And what about from a transportation and just movement of goods perspective? Is your sense that there will be not any no bottlenecks from that perspective, either?

They’re not up to full capacity. I mean, that’s something they’re building up to full capacity. However, to be fair, when the factories come back from Chinese New Year every year, they never start the first week or two at full capacity. So I can’t really answer are they further ahead or behind than they normally are, because it always – there’s always a bit of a ramp-up when they come back.But right now, like I said, we’re not really concerned. There is some concern over the domestic transportation in China. The supply chain team is working closely with our vendors there and making sure that we get or able to get the translation that we need. But that is possible that we could see some bottlenecks there. That is, as Tom mentioned before, it’s very fluid. Our team is talking to our factories and our vendors everyday. And we just keep saying where we are on that, but at the moment we feel optimistic…

Okay.

Cautiously optimistic on that.

Even if this goes on for several more weeks, you’re still in a decent spot?

Yes.

I think, yes, several more weeks. We’re okay. Yes.

Okay. My follow-up question is unrelated is, so these rebates and reduced tariffs to flow through, what has been the response to that from the independent community, from the competitors? And do you expect to be able to widening your price gaps as a result of this?

Yes. I don’t know. I mean, our – we certainly pay attention to price across the independence and across really all of our competitors. And we make – we – we’re changing prices up and down all the time in reaction to our competitors, and we feel we’ll be able to maintain the spread that we’ve – that would – that’s existed over the last several years.

Could I ask a question just, maybe another way? It – could you guys give us an aggregate sense of what your prices increased net of all the decreases in 2019? And what that might have contributed to the comp? And how are you expecting that in 2020? And then I’m done.

We have – we’ve quoted, I think, our overall retail is, I think, in the $2.60, maybe to $2.65 on a per SKU basis, and I think that’s probably close to $2.50 a year performs somewhat at the end of fiscal 2019 versus the end of fiscal 2018. So that, we had a modest increase driven by the 10% tariffs and then 25% tariffs…

And better investment.

…and better investment mix – mixture of that as well. So we had some – we feel like very modest increases because of the tariffs. As we mentioned earlier, we’ll be more aggressive now that that cost is down. And I think we’re seeing some of the industry taking out some of their retailers as well.So we feel like it’s managed well. What – you – if you know us well, what you know is, we’re very disciplined about keeping our price discrepancy on opening price points, mid price points against the competition and we’re continuing to follow that strategy and service wall for many years.

Thanks a lot, and good luck.

Thanks, Michael.

[Operator Instructions] Our next question comes from the line of Zack Fadem with Wells Fargo. Please proceed with your question.

Hey, guys, first question on cannibalization. I’m curious whether that’s still tracking above plan? And with some of the bigger stores entering the comp base, how do you think about the how the impact play out as we move through 2020?

Hey, Zack, this is Trevor. You’re right. We call that cannibalization. We expected it to be the highest event in our history in the fourth quarter of this last year. And then that did come to fruition, it was a high number for us. Part of that is, if you go back to 2018, 35% of our stores were in existing markets. This last year fiscal 2019, we just finished up 60% of our stores were in new markets. So we knew we would be higher.This year, as we look to the future, as Tom mentioned, we think about 60% of our stores will be in existing markets, again. So it will be high this year. I think, as we exit this year, our current modeling suggested it gets a little bit better every quarter. The year will still be a fairly high number, but it’ll get better every quarter is how we’re currently modeling it.And I’d say, we’re not sitting idly by, too. We’ve got a lot of thoughtful people here with some strategies on things we can do and Pro and commercial and design and product, great operators at the field level. So it is high. It’s the highest it’s been, but we expect it to come down and we’re focused on continuing to do things to help those older stores.And I guess, the last thing I just want to reiterate that we said in the last call, is we intentionally opened really big stores close to these very high volume old stores that were small and didn’t give the customer the experience. We don’t have that many stores that left to do. We’ve got a handful of those stores left that are kind of small and old and really don’t show the business the way it should be presented. So I do think that, that is a bit of a unique piece that will be – we won’t have to redo that again as we think about 2020 and 2021.

Got it. And with the LBT exclusion, how do you expect the pricing reinvestments to trend through 2020s and more front-end loaded? And then how do you expect that to impact the gross margin line in terms of cadence in – throughout the year?

Yes. I think the market and leasing from way, too. I mean the market reacted pretty quickly and rationally and we all kind of know that we used to pay $0.25 on $1 product and now we’re not paying that $0.25. So the math was fairly simple and people kind of came down reasonably over time is what we’ve seen. We’ve ever seen about getting too aggressive. We factor all that in when we give our guidance and I think, kind of contemplated to be fairly consistent throughout the year.

Got it. I appreciate the time.

Thanks, Zack.

Our next question comes from the line of Matt McClintock with Barclays. Please proceed with your question.

Sorry, that’s Raymond James. Hi, good afternoon, everyone. So I guess, my first question is, first off, congratulations, Lisa. Hi, that’s great news. It really is good to hear that. My first question really is, Tom, you talked about lost customers and the – that you actually do have lost customers. And I was wondering if you actually dig into what you’ve learned in terms of what you’re doing that actually loses those customers and how you can turn that around that much. That’s my first question. Thanks.

Yes. I mean, we – we’ve got some really great reporting now that our proteins can use and we’re able to identify someone that was purchasing lot from us at one time and slowdown and doesn’t purchase as much this time or currently. And we’re able to reach out to that customer and find out what happened. Is it a change in their business? Have they been decided to go elsewhere? Are they working in a different part of the market?And, look, we’re not immune. We’re like every other retailer, we try to execute at a high level. But there is times that we can do better if it’s – because of the amount of activity at the back of our store picking up in order, if we don’t get it done quick enough. Time is money to a Pro and we’ve got to react to that.We average a 15-minute pickup time now behind our stores, which we’re pretty proud of. But you can have one or two outliers to that and you can really aggravate a professional customer. So that’s an example of a service thing that I think that we can always do better to get our customer out quicker. A lot of the times those things that we really can’t control. It’s – they’ve moved too far away. We still only have 121 stores.We’re not in every part of the market. And their jobs may take them to a different part of the market that were just simply too far for. So we think store openings will help that. But I’m just glad that we’ve got our fingertips on that type of reporting now, and that our stores can react to it.

Yes. The only thing I would add is, we are really excited about the CRM tool. We put a really high-quality tool in there. And Lisa’s teams has got a few people that are really helping us understand and know things about our customers that we’ve never known before. And we’re – we really just have stood that thing up.And so like, I think all companies as we have this data that we’ve not had in the past, and we can really deep dive into our customers to see who they are, see why they’re shopping with us, why they – in the few cases, they stop shopping with us. We can learn how we market and get that consumer and find more consumers. So we’re very excited about having the CRM full suite of.

Thanks for that. Then, as my secondary question, just on the design studios, I think, you had one in New Orleans. You might have one somewhere else, or historically you have. And I was trying to think about how those those studios play into your overall strategy.? How do you think about expanding those? What do they actually do for your business in terms of uplift and the region? et cetera, as you have decided to roll that out to I believe Dallas, right?

Yes. Not roll our, we’re piloting in another one, I would say. We, yes, we do have a small store that’s – it’s in a magazine street outside of New York retina store in New Orleans. And it’s something that we’ve had, that the Founder had opened since before I joined the company. We always thought it was an interesting store and an opportunity for us.And it’s just as we look through kind of, how are we going to take more market share and how are we going to penetrate areas that we can’t today, this story gives us the opportunity to put offer our supply chain advantages of having really great prices in a different environment that, that will be kept at a big box store.So it gets us into markets and gets us into areas, where it would be really difficult to put a big box store. But a customer will have the ability to see everything that we carry under one roof staff, full of designers and a little bit better of an atmosphere. And it just gives us the opportunity to get into more, like I said in the script, kind of a highly populated dense markets, where we can’t get a big store. So I think it’s a unique opportunity. We’ll talk more about it as we get it open, as we learn more. It’s a bit of a laboratory and we’ll share more as we learn more.

So Manhattan is opening up next year, I guess [Multiple Speakers]?

It’s a good example of kind of how we’re thinking about it. So yes, Manhattan, maybe not next year, but certainly it’s a good example of how we plan to use a store like that.

Well, I appreciate the color. I can’t wait to see the rest of it. Thanks, guys. Best of luck.

Yes. Take care.

[Operator Instructions] Our next question comes from the line of Jonathan Matuszewski with Jefferies. Please proceed with your question.

Yes. Thanks for taking my questions. First one, just on the Pro private label card, you mentioned the launch this year. Just maybe tell us a little bit more about kind of how this solution will differ from your current offerings and anything embedded in guidance related to this new offering?

This is Trevor. So, we’ve had a consumer private label credit card for a long period of time. And I believe it’s just sub-10% of our sales is after that consumer card. And then we have through an external large bank that manages our big customer, what we do commercial sales, they’ll manage the vast majority of our big customer commercial sales.And what we really never had a great solution for is that Pro that’s in the middle, which is the meat of our customer. It’s a small business person that maybe has a handful of employees that the private label credit card is too small, but yet they don’t qualify for $10,000, $20,000, $50,000, $100,000 line of credit like some of our large commercial clients were looking for.So that’s really what it’s designed at. We’ve been designing it now for a year. It’s not easy to do, because a lot of these customers don’t have extensive credit. There may be new in business. And so we’ve got a great partner, we’re working with their.A couple of things that will be unique. We’ll offer extended payment terms, extended interest terms. We will offer the ability for a business owner to, let’s say, they have four employees. They can give the card to the four or five different employees. They can give different employees different credit limits. They can text to improve over time.And so we do think it’s going to be something unique and different. We’ve been working on it for a long period of time. I don’t think I can specifically call out an exact percent it’s in our comps, but it is a net new additive solution that we think our Pros are going to appreciate.

Helpful. Thank you. And then just a quick follow-up on in-home design consultations. That’s interesting. Have you guys done any customer insights work? And kind of what has that revealed about, maybe geographically where you’re seeing outsize demand, or any other kind of insights that are – that’s informing kind of the move there? Thanks.

Yes. We’re not doing a lot of customer insight work on that beyond. We’ve got 121 stores that have staff with designers, who tell us all the time in every store. Our customers would love us to go to their house. So we do think there’s a bit of an opportunity. It’s like, we know when we engage with a customer within our own store, within our own vignettes, with their own pictures and their own samples, we know that we can sell him more.And we know if we go out to the house and see what they’re working on, it helps build even a better relationship and gives us the opportunity to not only make the current project better, but make the next one even better. So we’ve known – we’ve talked about it since we put designers on staff in the store. This has been a common request. It was something that we thought.My goal was first, let’s get the stores operating consistently. Let’s get a good program within the stores. And once we get that going and going in the right direction, then we’ll improve our service even more by starting to get outside of the store. So I think it’s a – it’s another good initiative and another good idea and another thing that should help drive same-store sales growth.

Great. Thanks so much.

Thanks.

Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hi, guys, this is Josh on for Simeon. Thanks for taking my questions. The business is performing pretty well in all the external factors, except for – maybe for coronavirus seem to be swinging in your favor at the moment. Is there anything you can talk about within your business that’s not up to your expectations? You kind of touched on a couple of things earlier, and then what risks you most focused on?

This is Trevor, I guess, I’m glass half empty guy. That’s true. I’d take that one. I think the cannibalization is a little bit higher. We’re working through that, as we’ve said. I think one thing that when you guys get to do in your detail modeling, I think, you’ll notice that our new store productivity is planning to be slightly lower for the class of 2019 just to give a little context around that.The class of 2020 stores, we do very detailed performance. We spend a lot of time going through that. Brian’s team does a good job managing up for us. We feel really good about the class of 2020 on a full-year basis, both sales and profitability when you compare it to the class of 2019.But even though we opened a few of those stores earlier in the quarter, in the year, I should say, we’re currently not planning on opening those stores at the midpoint of the quarter or earlier in the quarter, number of those new stores can open late in the quarter. And so that’s going to have the appearance of having lower new store productivity, but it really is just a timing issue and that we’re going to open some of those doors a little bit later in the quarter in 2020 relative to the same quarter in 2019.So we really finished with the timing issue. And if you look at our overall new store productivity for 2019, while it might be slightly below 2018. It’s still at a very high rate relative to our recent past. For GAAP, it will be well above what we did in 2018.So – and then, we worry about new stores all the time, but we’ve got a good job of opening new stores for a long period of time. But those are probably the two, I guess, I’d call out.

Thanks. And then just on the kind of relation, again, if you could remind us the rationale for sticking to 60% in new markets – sorry, in existing markets this year, just that you want to complete the program of the smallest doors that you have to cannibalize, as you want to kind of stay within range your DC footprint? Is it harder to find the right real estate, which Tom touched on briefly, or is it something else going on?

I mean, it’s – it gets harder to get to new markets the bigger we get. So – but we like the – we’re about getting total market share. And as we’re building that awareness and we think we can – we try to have a balance. We would like new stores and going into new markets within the same time. There’s – Trevor can talk about the profitability components of doing that.But from the standpoint, we – what we hear from our Pro customers is the markets we’re participating, “Hey, your stores are really far apart. We need – we’ll use you even more if convenience becomes more replaced. So we want to get those markets filled out and we’ll keep going down that path.

Yes, the only thing I just add from a modeling perspective, the way we’ve tried to think about it is, we try to as close as we can about half of our new stores and new markets and half in existing markets. And that’s – you can’t ever do that perfect, because it’s – sometimes it’s harder to get stores in certain markets.And the reason we – one of the reasons we do that is, we shoot for an overall level of sales and profitability. So that when we’re done, you’ll have some higher volume stores that are more profitable, and you have some other stores that are lower volume and harness profit.But on average, we can get to a sales number and a profit number that makes sense for us. And we call that out as being, I think, $12 million to $14 million and trying to shoot for close to $2 million, or slightly above $2 million in first through EBITDA. And so that factors into it as well. We’ve got to have a good balance.And, as Tom mentioned, as you would imagine, where we have a lot of stores and really good brand recognition and a really strong protein generally in our existing markets, our new stores are higher volume and more profitable. When you go to a new market, it takes time to build that up, takes time maybe get the assortment exactly perfect. And so generally speaking, our new stores and our new markets just take a little bit time from a sales and profitability perspective. So that’s what we shoot to the 50-50. And every year, we get close, but some years, it’s more new and some years, it’s more existing.

Thank you. And then just to clarify quickly, so there’s nothing you’re seeing it all that would cause you to pause on or question of 400 store target at this moment. Is that fair?

No, nothing.

Great, thank you.

Our final question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Thanks. Great quarter and good year. My question just as with regards to the potential upside and flow through, if you guys were to outperform your comp guidance, which I think some people expect could happen, but I understand why you’re guiding to where you are. So I guess, is there a way to capture what the margin flow through would be, maybe for every 1% of comp upside in 2020? Thanks.

Yes. This is Trevor. I mean, every comp we’re going to purchase over $20 million next year, you would like to keep that in kind of the maybe 25% range, maybe slightly above that, margins a bit better. But that’s how we’re thinking about it.I think the other thing that if we are beating on comps, there’s things we’re going to want to invest into. And we do a lot of investment as it is, but there’s lots of ideas that we’d like to try and think so. But I guess, the answer to that simply, we would plan on the mid-20s, maybe slightly above the mid-20s flow through, so how we’d expect incremental sales above our outlook.

Okay. And then just one more, just with regards to your 2021 commentary. I just wonder if you guys could just amplify on that for us? And I guess, just to make sure our math was correct. Does that exclude the benefit that you’re going to see here in the 53rd week in terms of that potential upside? Thanks.

Yes. This is Trevor. It does. It’s all on a 52 to 52-week basis. We’ve tried to make it as comparable as possible and exclude that 53rd week. So yes, as we think about 2021, we we think that as long as, again, as I said, the outset of my prepared comments, as long as the macro environments at or where we are now and doesn’t take a step down or being trade policy goes the wrong way, we feel really good about it.I think just from where we are, where we’re going to end, the year, the type of comp stores, we’re going to open. As we said in my prepared comments, we think we’re going to hopefully open a few more stores earlier in the year. We’re taking some of those expenses into this year that would normally reside in 2021.And then, this year specifically, we’ve got 12 months of our new Store Support Center versus only had two months in fiscal 2019. Same thing with the Baltimore distribution center, we only had two months of that Baltimore distribution center in fiscal 2019 versus a full 12 months in fiscal 2020. And so we’ll get the benefit of leveraging those fairly big investments we made. We won’t have to make that level of investment as we think about 2021. And so all of those things, just give us confidence that we’re going to do better.And the final thing I said in my prepared comments is that, we’re expecting gross margins to continue to grow each of the quarters. If you back out that $14 million benefit we talked about, so that makes us feel good, assuming we execute that, that makes us feel good about where the product margins are exiting the year out. So we’ll see long-term away from now, but that’s how we’re modeling a business today.

Great. Thanks.

We have reached the end of our question-and-answer session. And I would like to turn the call back over to Mr. Tom Taylor for any closing remarks.

Yes. Well, first, I’d like to thank. I know we, as I said in the last call, we have associates who are listening on the call that are – and I’d like to thank them for all their hard work. It was – we had a terrific year. Good, strong finished work.We’re proud of everyone’s hard work and appreciate everyone’s accomplishments. We appreciate all of you for taking interest in our company and joining the call today and asking us the thoughtful questions. We look forward to talking to you in the next quarter.

This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.