Welcome to Floor & Decor Holdings, Inc.'s Second Quarter 2020 Earnings Call. [Operator Instructions] Please note this call is being recorded. It is now my pleasure to introduce your host, Wayne Hood, Vice President of Investor Relations. Thank you. 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 would like to remind everyone of the company's safe harbor language. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Any statement that refers to expectations, projections or other characterizations of future events including financial projections or future market conditions is a forward-looking statement. The company's actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Floor & Decor assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company will discuss non-GAAP financial measures as defined by the SEC Regulation G. We believe non-GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our Investor Relations website at ir.flooranddecor.com. A recorded replay of this call, together with related materials will be available on our Investor Relations website. Let me now turn the call over to Tom.

Thank you, Wayne, and thanks to everyone for joining us on our second quarter 2020 earnings conference call. On today's call, I will discuss some of the highlights of our second quarter 2020 earnings results and then discuss how we are positioned to further grow our market share of the estimated $22 billion hard surface flooring industry in 2020 and beyond. Trevor will then discuss our second quarter results in more detail in how we are thinking about the second half of 2020. Looking back over the past several months, I am glad we made the voluntary decision to close our stores to the public in late March and pivot to curbside pickup only as the COVID-19 pandemic was escalating. This time allowed us to make numerous changes in safety protocols and to implement public health care guidelines that are essential to making our stores safer in the current environment. We believe our large 76,000 square foot stores with 9- to 15-foot wide aisles uniquely position us in the market. Add to that, the millions we have spent on personal protective equipment, plexiglass separation, training and taking care of our affected associates with COVID-19 pay, and we believe our teams have done an excellent job creating a safer environment for our Pro and do-it-yourself customers. It is obvious the COVID-19 is not going away anytime soon, but all the changes we have implemented gives me confidence we can operate in a much safer store environment as long as COVID-19 is with us. Because of the pandemic, people are spending a lot more time in their homes and not spending as much on travel, eating out and other entertainment. The combination of these two phenomenas has people investing in their homes. Floor & Decor is in a great position to serve…

Thanks, Tom. We are incredibly proud of how Floor & Decor team has managed through the crisis, our values, culture, fantastic leaders and unique business model allowed us to work through this difficult time, and we are a stronger company now than when this all started in the first quarter. Looking at our second quarter results, our sales were $462.4 million down 11.1%. We believe the decline was entirely due to COVID-19 as we took measures to protect the health and safety of our customers and associates by limiting most of our stores to curbside service beginning in late March. Approximately half of the available selling days for our stores were under this curbside model during the second quarter of fiscal 2020, during which our comparable store sales were down approximately 50% compared to the prior year period. Beginning in May, and concluding in June, we implemented a phased approach to reopening for in-store shopping with enhanced safety and sanitation measures such as requiring associates to wear facemasks, installing social distancing markers on the floors, protective shield at cash registers and regularly sanitizing shopping carts, PIN pads, design desks and other high-traffic areas. Tom already walked you through how our comparable store sales improved materially as we opened our stores to the public. Turning to our second quarter gross margin and expenses. While our second quarter total sales have declined 11.1% from last year, our gross profit only declined 9.7% as our gross margin rate increased 60 basis points to 42.5% from 41.9% in the same period last year. The year-over-year increase in gross margin rate was largely driven by higher year-over-year product margins, including $3.6 million from certain tariff refunds and improved merchandising strategies, partially offset by higher distribution center costs related to our new Baltimore, Maryland distribution center…

[Operator Instructions] Our first questions come from the line of Christopher Horvers of JPMorgan. Please proceed with your questions.

Thanks. Good evening, guys. So I know it's hard to tease it out, but have you tried to think about the benefit from stimulus in the economy? And more importantly, you called out customers in April saying they're not canceling projects. What are your thoughts on how much of the surge in demand that you've seen in June and July, stores have become open, could simply be a deferral demand that you would have already – it's just moving in time, so to speak?

Chris, this is Tom. I will take a stab at a few parts, and maybe Trevor can jump at the end if need be. So I think from the first part about is this resolves catch up from finishing projects. We've really never closed, and we were able to retain a good portion of our sales in a curbside model. So I feel like in the curbside model, there wasn't a lot of new projects being started early on and that was a lot of finishing up of jobs. There may have some – I mean there were some starting of projects, but generally during our curbside operations, that consumer was fit – or that Pro was finishing your job. As I look forward now, I mean, the business has continued to strengthen. And I don't feel like it's catch up. I feel like it's a lot of new projects that are coming underway. I think as people have been not almost forced to stay home, they're not spending on movies. They're not spending in restaurants. They're not traveling. They're being forced to work out of their homes. And I think the more time they spend in their home, the more projects that they identify. And that has continued. The consumers are coming in and continuing at a pretty fast pace. So a lot of new stuff is getting started. I do think that the stimulus has helped. I mean the stimulus has supported the consumer and it supported small business. And I think those things are – they're beneficial, I believe the consumer spend is going into home improvement.

The only thing I would add, Chris, this is Trevor, is when we exited last year, we exited at a 5.2% comp when we – before COVID really clamp down, we were comping at a 6.1%. And when we had given guidance at the beginning of the year, we said that we thought we'd have a comp of around 6% all year. And again, we were right at that at the time we gave come. So hard to say for sure, but I do think we feel confident in that conviction that three years we've been public, we really never had a miss in the range of comps we've given. So I do feel like this year was going to be that mid- to upper single-digit comp. I think the difference we're seeing right now, as we all know, good thing Tom just mentioned, the unprecedented level of liquidity that the Fed has put in to the government. Plus people aren't spending thousands of dollars a month on discretionary items and going out to eat and travel and things like that. And the combination of those three things has helped us perform. The other benefit I would say that we're hearing loud and clear from our customers and our Pros. Certainly, we got a great assortment. Our employees are doing good, but it's another advantage of having that in-stock inventory, right? People can get it today as opposed to have to waiting. And Pros want to get it today because they don't know when another shutdown is coming. And so I think just our business is structurally advantaged in this environment as well.

That's great. And then my follow-up question is, I know you're not providing guidance, but can you maybe talk about how you're thinking about gross margin going forward? I mean, I think 2Q is going to be the quarter where the majority of retailers beat gross margin, promotional environment down, demand is good. So how are you thinking about the gross margin dynamics as you think about the back half of the year?

Yes. This is Trevor again, positive. We're expecting our gross margins to be better than last year. Just as a reminder, though, we had a very big benefit with that tariff refund, about a $14 million benefit in the fourth quarter of last year. If you back out that benefit, our gross margins would have been about 41% versus the 43.6% we reported last year in the fourth quarter. So if you back out that onetime benefit, our expectation is that our gross margins will be higher as we round out the rest of this year.

That’s great. Best of luck.

Thank you.

Thank you. Our next question is coming from the line of Zach Fadem with Wells Fargo. Please proceed with your question.

Hey guys. Curious if you could walk us through whether the acceleration from your 8% comp in June to the 16% comp in July is more so a function of having more stores open? Or if the underlying business has accelerated from June to July and what those drivers from month-to-month could particularly be?

Yes. So first, if you – our – I think that from a standpoint – why I'm stumbling along here? The acceleration in June – the acceleration from June to July has come a lot on the heels of homeowners just taking out more projects. As you look at our business and you kind of watch what's going on, our weekend business is better than I've seen it in multiple years. We've just had a – just an increase. I mean when you're comping in the 16% rate in the months of July, both the Pros doing a little bit better. But for us, I think the biggest difference we've seen is a lot of do-it-yourselfers are entering the marketplace. So I think that's been part of it. The other thing, I think, that's helped our business, and Trevor mentioned it a little bit as an advantage with the Pro is during COVID, our in-stock position that we talked about prior, it wasn't as good as it is today. And we've done a – we've got our Chinese transition SKUs have been completed. Our Taiwan stock is the best it's been in three years. And because of that inventory levels in the store and the amount of new products that hit, I think they've just – all of those things together have helped us benefit. So if the consumers come back into the marketplace and come back in our stores has been very beneficial to what's happened to the month of July.

And just if you look at the May when our stores were open, June when our stores were open, July and the way our calendar falls, we're actually in fiscal August. Our comps have accelerated every single month. So we're getting better every fiscal month as we proceeded through this very unique time.

Got it. And then on the exposure to some of the recent COVID hotspots like Texas, Arizona and Florida. You've got a lot of stores in these states. Curious if you've seen any dispersions or fluctuations in these states, in particular, relative to the overall fleet?

We live – we watch the hotspots, and we're living in one of the hotspots. And we certainly have watched it across the country, and our strength is across the country. So we're seeing the same pace of improvement in the states where COVID is – where the trend is worse. We're seeing the same trends in our business where COVID is getting better. So it's hard to explain and hard to rationalize. But clearly, I think consumers want to engage with our products, and they're coming into the stores.

Got it. Appreciate the time.

Thank you. Our next questions come from the line of Chuck Grom of Gordon Haskett. Please proceed with your questions.

Hey, good afternoon. Thank you. I realize just maybe anecdotal from your perspective. But when you talk to the Pro and more specifically, the backlog today versus, say, 90 to 120 days ago. And then maybe also a year ago, I guess, what have you learned? And I'm also curious if the Pro is giving you any color on whether consumers aversion to having contractors come into their home has alleviated at all in the past few months?

Yes, I can go. Maybe Trevor, since he's in charge of Pro, may want to jump in. But from my perspective, the Pro is busy. And Pros that I have engaged with, I've been in many of our stores, spoke to many of our team and everything that I'm hearing, our Pros are really busy. Certainly, when COVID started, it was one of the things that we were concerned about where was the consumer going to allow people into their home. And I think as by evidenced of what's happened with our business is you watch the trend – the acceleration in our sales trend from June to July. Clearly, I think the consumer is feeling okay letting the contractor in their house. We've done our part, we tried to educate our professionals and say, "Hey, make sure you understand social distancing and make sure you wear mask." But I think when someone lets a contractor into their home, in general, contractors are playing by the rules and making consumers feel comfortable. So I believe that, that comfort level is good and people have allowed them in their homes.

The only thing I was going to add, this is Trevor speaking, is we've talked to our biggest Pros in all of our stores. We have the ability to do that now. And what they told us is, as you would expect, when we shut our doors, they were finishing business but the minute we opened our stores, their business is incredibly strong. Their – we've been told their leads are at the highest level they've had. It looks like July is going to be the best month they've had. And so it does appear that just like you're seeing in our business, people are not currently averse to having Pros. And I think our Pros are smart. As Tom said, they're social distancing. They wear mask, they're taking off their shoes. They're staying away from their clients in the house. And so our Pros business is incredibly strong right now.

That's great to hear. And then just from a category perspective, I was wondering, you talked about the overall monthly comp improving from May to June and into July here. Just wondering from a category perspective, if you're seeing anything out of the ordinary. And I guess from a 2Q perspective, you called out LVT being the best. Just wondering if you could shed some light on some of the other parts of the business.

Sure. Lisa, do you want to comment?

Sure. This is Lisa. So yes, we haven't seen a huge shift. During the curbside piece of the business, we did see some shift. You saw a higher penetration in LVT, higher penetration in tile, we talk a lot about our good, better, best assortment and how better and best has been driving our assortment – or excuse me, driving our sales. And we did see a slight shift down during the curbside model. But as soon as the stores open back up, everything kind of went back to the way it was. So while decorative accessories, which is a category that is heavily sold by our designers, people want to see that product. That was hard when we were in curbside. And so those – that penetration did go down a little. But as I said, as the stores have opened back up and we look at July, the mix is very similar to what we saw before, and our better and best strength is back to where it was before.

Okay. Thank you.

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

Good evening. Trevor, maybe to start with you. I think back to the flow-through commentary and the math we were all doing three months ago, right, on any comp reduction relative to the original forecast. Obviously, we're moving the other way here. So maybe can you give us some color on what we should expect the incremental margin to be, right, with the comp revisions being positive now? Is it the 25% to 30% we were talking about on the downside? Or is it closer to that 35%, 40% in the normal state of the business?

Yes. Steve, this is Trevor. I think if you're talking about relative to our original guidance. So when I gave that comment about the 25% to 30% flow-through on a negative revision to sales on the original guidance. That's what we expected. We, obviously, still believe that even though we're having a great performance now, my current expectation is that we're not going to achieve that original guidance. But because of the aggressive moves we've done with the cost maneuvers, and lowering our cost, plus the positive results we're seeing now, and we do expect that to – maybe not at this level, but we do expect that to continue through the rest of the year. I would expect that flow-through to be probably closer to 20%. And so since we're talking about a negative sales versus the plan, a lower percent is a higher profit number. I think you guys get that. But just to be clear, so our profit outlook has improved materially from what we were thinking back in COVID when our comps were down 50% is how we're thinking about the rest of the year.

And then either for Tom or Trevor, can you just update us on how commercial performed during the quarter? And then also, right, as we think about this July month, you think about the potential windfall here and I think the goal was to add 18 regional account members. Do you sort of view today's end demand strength as an opportunity to push that initiative forward here? Just updated thoughts on commercial.

Absolutely push it forward. We haven't stopped hiring our rents across the country. It's a – we like the activity that we're seeing. We're seeing – we have seen some where some bigger jobs come through as hotels have shut down and small businesses shut down. Those end users that happened to have the liquidity to do it have has taken on some larger projects during the – they're not as busy. So that strategy is working for us, and we're seeing great activity in it.

Thank you.

Thank you. Our next question has come from the line of Michael Lasser of UBS. Please proceed with your question.

Good evening. Thanks a lot for taking my question. So Tom, you mentioned that you didn't think the 16% that you're seeing in July was a function of pent-up demand. Trevor, you thought a run rate of the business, a reasonable run rate of the business is comping up 6%. So how do you reconcile that? How do you bridge what realistic expectation is over the next few quarters, if it's not mid-teens, and it's not low mid-single digits?

Just – I guess one point of clarity, Michael, the way I was trying to explain it is the difference between what I would have thought we would have run, which was 6%, we said we thought we would comp percent all year. I think the difference of that is really three main things: one, the unprecedented liquidity that the government has put into not only businesses, but in consumers' pockets. I mean that's probably the biggest driver. But as Tom mentioned in his prepared comments as well, is people are just spending a substantial amount of time in their homes, looking at things, they're spending things on home offices, on developments. They know they need to do. And then you add that to the liquidity that they're not spending hundreds, probably thousands of dollars a month on travel and entertainment. I think the combination of those three things is what is driving our comps from what would have been a mid- to upper single-digit comp to a mid-teen comp.

And so do you think those are temporary factors, Trevor?

In one sense, yes, because I don't think the government is going to keep injecting the same level of liquidity that they have, but that's obviously under advisement, and the government is working on that right now. On the positive side, though, I don't think people are going to be traveling, and I don't think people are going to be leaving their homes anytime soon. So I mean those are all sort of positive.

Yes. I think, look, COVID doesn't feel like it's going away anytime soon. And I think that the consumer is going to continue to not have the spend that they spend. If you remember, we planned through towards a bit of a higher end customer. I also think that what Trevor is mentioning that the people – when they're having to work out of home and they're not being able to go out as much, they're not just looking at the space, they're having to repurpose space in their homes. I mean, if you've got your kids being going to school in the dining room and you've got to – you and your spouse are both working, you need to create two offices. And that's spurring people working within their homes and recreating space. So those things, I believe that COVID is not going away, people staying home. That is going to last for a little while.

So without providing guidance, are you buying inventory to the mid-teens run rate comp for the back half of the year?

Our – 80-plus percent of our business is replenishment. And so we have a very sophisticated system and a substantial amount of people that manage that. We're buying inventory based on the trends of the business. Yes. And I think as I mentioned it earlier, Michael, too, that our in-stock condition is as good as it's been in a long time. Our transition – excuse me, we didn't – we were thoughtful with our inventory as we went through the pandemic, but as we're coming out, we're kind of on the offenses and the stores are in good condition.

And I guess just one – I'll end with – as I mentioned prepared – in my comments, the inventory growth we had at the end of Q2 was the highest we've ever had. Now a big part of that was because our cost of sales fell off pretty quickly because of COVID, but we're sort of fortunate now on the other side of that, as Tom mentioned, we've got a substantial amount of inventory sitting in our distribution centers. And the supply chain team is doing an excellent job of fulfilling that demand. And so we feel good about our inventory position to support the sales.

Good luck and thank you very much.

Thank you. Our next questions come from the line of Matt McClintock of Raymond James.

Hi, yes. Good afternoon everyone. Great execution, I have to say. My first question is this, Tom, like you actually mentioned DIY in the press release, and I don't think you guys have ever done that before. So could you maybe talk – and you actually also said on this call that there's a lot of DIYers that helps with the quarter. So can you talk about what's going on in this industry? Because it does seem like this has historically been an industry that wasn't DIY, meaningfully. And that's changing.

Yes. I think – so we call a lot of times we call the end user – we call the end user, the DIY. And that doesn't necessarily mean that they're actually buying it and putting it themselves. But the activity of the end user has been substantial. I mentioned our weekend business is about as good as I've seen it in a very long time. The activity on our website, the amount of people that are on searching the category and engage in the website is an incredible phase. The viewing, like we've added a ton of how-to clinics on our website. The viewership of that is incredible, incredibly high or incredibly higher. And YouTube views of our product. We do a – we started an Instagram live clinic for our associates because – not for our associates, for our customers, because we couldn't do clinics in the store because of social distancing. And the activity in that has been good. Our virtual appointments, we did 8,000 virtual appointments. That's also the end user in the store. So when I combine all of those things, I don't think that everyone that necessarily my neighbors coming in and buying a pile of tile and installing it this weekend, because I still think they're engaging a Pro to do that. When I look at our department comp sales, that makes me feel like they're engaged in the project, but they're hiring a Pro to do it. In most cases, I don't think they're tackling a project like that, but maybe they're on a backsplash more than they have historically. But they definitely want to engage in our product.

Really helpful. And then my second question is the Pro business credit card, 180 days of free working capital, seems like a game changer. Could you actually maybe elaborate more on that and how you think about it?

Yes. It's just about that simple. We do think it's a game changer. There's also all kind of other benefits that you can see on the website or we can get you a pamphlet, just to get more – it's more than even just that, but we do think it's going to be very beneficial. So we'll see. We're just now starting to roll it out. These Pros generally don't necessarily are looking for this big credit solution. But that being said, it's one arsenal in our tool to serve the Pros. The other thing we can do with that Pro credit card that we're thinking about more longer-term is the costs are fairly materially below what we pay to credit cards, and there's ways we could tie that into the PRO Premier Rewards program to maybe offer incremental points and make it a win-win for the Pro as well. So just getting started, I'm super proud of our IT team and our Pro team and our credit team that have worked hard on this for over a year and more to come as we get to the end of this year and into next year.

Really appreciate the color. Best of luck.

Thank you. Our next question is coming from the line of Kate McShane of Goldman Sachs. Please proceed with your question.

Hi, good afternoon thanks for taking my question. My question focuses on real estate. You mentioned in your prepared comments that you were having conversations with your landlords, and I wondered if it resulted in any kind of deferred rent and how it impacts cash flow this year and next? And then just with regards to you stating that there might be better real estate opportunities. Would this change the timing at all of entering into new regions that you've been thinking about entering in? Would that – would it accelerate it, move it up into 2021, perhaps?

Yes. So I'll take the – this is Tom. I will take the second part of your question, Trevor can talk about rent deferrals and things of that nature when I'm done. I think what we've seen is we had a good real estate pipeline for 2021 in place, but we had a good real estate pipeline in 2020 also. And we had a delay due to pandemic and being able to get our stores physically constructed to get them to be able to open the right way. So the pushing back of those stores, along with our 2021 pipeline, along with there's been opportunities that have presented themselves in different parts of the country that we didn't anticipate it's collectively, we've been able to put together just a great pipeline of stores for 2021 and 2022. All of the changes have been given us the ability to have good cadence in the opening. So the stores for the first half, since we've been opening 20%, we're going to open them at the right time. We're going to have a good amount in the – across the quarters of the company. So it's not so much, though, it's given us the opportunity to – any markets anytime sooner is giving us the ability to fill in some important markets a little bit quicker. We've seen some good opportunities arise in the Northeast as a result of this. And so that – we'll be able to go a little bit faster than we had been planning to.

In the first part of your question, our real estate team did a great job. We deferred $5.9 million in payments in Q2 that we will be paying back most of it over the next year. And then the other thing that I think is exciting for us. And again, our real estate team gets credit for doing a great job as the rents we're getting this year and next year are the lowest I've seen in my nine-year history, and the quality of the real estate is better. Part of that's because we're taking on more of the construction cost, but part of that is just the environment we're in, and we've got some really good dealmakers. And so our rent costs are getting close to the high single digits versus the mid-double digits on a rent per square foot – square feet basis. So we're getting better locations, and we're entering better markets, but our rent per square foot is coming down.

Thank you.

Thank you. Our next questions come from the line of Simeon Gutman of Morgan Stanley.

Hey, thanks good afternoon. I want to hit on the 16% quarter-to-date once more. Realize it's sort of an average or weighted average. And in there, you probably have some 20s and 30s and maybe some flats. Given that you're still sort of reopening and markets are ramping, would you say there's a bias as these markets normalize to higher than that number or bias a little bit lower?

Just a couple of things. So we've had all of our stores opened since early June. So the 16% in July, all of our stores have been opened. And it's been pretty consistent. It hasn't – it's been steadily getting better, I guess, is how I would say. I don't know that it's going to keep ratcheting up per se. But as I mentioned a second ago, our fiscal August, which started last Friday, has actually been a little bit better than that.

Okay. And then the second question is, it looks like you'll do about 13 stores and then to get to the 20%, about 27%, I think, next year. Anything changing post-COVID? Because I think you've told us new stores cost or the operating cost, about 1.5 times what an existing store is in year 1. So any offsets to that and thinking of really about earnings power for 2021?

No. I don't – our total SG&A as a percentage of sales for new stores, I don't see coming down anytime soon. Even though we're having better real estate costs, and we've got higher depreciation as we're spending more CapEx. And so our stores over three years old are kind of in the low 20% SG&A as a percentage of sales. Our new stores are kind of in the mid- to low 30% as a percent of SG&A. And I currently don't expect that to change much. The only big driver of that is that these stores do higher volumes, we'll obviously get more leverage out of that. But currently, I'm not sure we see any big changes there.

Okay. Thanks good luck.

Thank you. Our next questions come from the line of Jonathan Matuszewski of Jefferies.

Hi guys. Nice quarter. Thanks for squeezing me in. First question just on adjacent categories. You guys have had success in introducing a few of them over the years. Just given this thematic of what we're seeing with trip consolidation in a post-COVID world, how do you think about your propensity to introduce new related product categories? I know you guys have done the frameless shower doors and the countertops and whatnot. How do you think about new product introductions going forward?

This is Lisa. So we're very bullish on it. We have been all along. And even when the stores were at curbside, we were selling some of our adjacent categories. And as the stores have opened back up, we have definitely seen the customer very interest in completing that project with us. So we had plans in place this year to get all of the adjacent categories that we're addressing right now into about 40, 45 stores this year, and we are on track. We got delayed by a month or so, but we still believe by the end of the year, those stores will be set. And from what we've seen so far in the very few stores that we started with, we're excited about the possibility. Something that we hear a lot from our customers and our designers as they work through projects with our customers is that they want to be able to complete the whole project, and that's how we view this business. So we're excited.

That's great, really helpful. And then just a quick follow-up on real estate. You mentioned the 20% unit growth for 2021. Do you have any sense of the breakdown in terms of new markets versus existing markets and how that will compare relative to 2020?

This is Trevor. I think it's pretty balanced, new versus existing. Tom mentioned this in his prepared comments, and one thing we're very excited about is the fact that the cadence of openings is going to be the best in our history, meaning most of the last – our history, 70% of our stores have opened in the back two quarters, it's going to be much closer to 25% new stores preferred. Won't be exact, but we're going to get those new stores opened earlier, which just makes a lot of sense for our business and makes it easy for the operators – easier for the operators.

Great. Thank you.

Thank you. Our next questions come from the line of Seth Basham of Wedbush. Please proceed with your questions.

Thanks a lot and good afternoon. I may have missed this, but if you could help us think through the flow-through aspects of your comps when they're as strong as mid-teens, that would be helpful. Is there anything different in this environment when we think about flow-through to profit from that comps trends than we could be thinking about relative to historical trends?

Yes. Again, we're not giving guidance just because there's too many ranges of outcomes. But what we would say is relative to the original guidance we gave back in – on our year-end earnings release, whatever sales are below that because I don't think we're going to make that all up between the end of the year, we would expect that flow-through relative to sales being lower than that original guidance in that kind of 20-ish percent range, maybe 25%. On a year-over-year basis, now that our business is performing well, there's nothing structural that's changed in our business that would impact that flow-through on a year-over-year basis.

Got it. And one unrelated follow-up, are you thinking about the Chinese tariff exclusions and whether or not they might expire in August?

Yes. This is Trevor again. So the government keeps that under very close wraps. We are saying as close to we can. We have very well paid advisers that give us as much counsel as they can, and they're telling us they have no idea. I think if the government does the same assessment that they did last year when they decided to remove the 25% tariffs logically to us based on the details research we and our advisers have done. That we believe they should come to that same conclusion and not reinstitute the 25% tariffs. But as we all know, the trade policies between us and China are getting more difficult, not less difficult. So even if they were delayed, which, again, we don't know the answer to that. But even if they were not reinstituted, the government has said they're not going to hold it out for a year, they may only hold it out for six months or until the end of the year. And so while I think they should come to the same conclusion and not reinstitute those 25% tariffs, I don't think we're going to get a year's exclusion like we did last year.

Got it. Thank you very much.

Thank you. Our next questions come from the line of Greg Melich of Evercore ISI. Please proceed with your questions.

Hi, thanks. I have a couple. You mentioned that in SG&A that obviously, payroll deleverage a lot, but leveraged to advertising, which means the dollars are down a lot. I'd love to know that now that sales are back, what's the thought on advertising strategy? Does it just ramp right back up or shifting a lot because you're not trying to actually drive traffic to the stores, just take us through that ramp.

This is Lisa. No, we did pause mostly our TV advertising in April and the beginning of May as the stores were in curbside, although we did continue with all of our digital marketing because our web business was so strong, and I wanted to make sure that we were there when the customers were searching our category. But as the stores opened back up, we ramped back up with our TV advertising in the middle of June. And we actually have the exact same cadence that we had planned before. And in fact, we took a week that we had planned for April and we've now moved those dollars into August. So we believe that we have got a customer base that is very excited. And so we want to make sure that we are in front of them from a TV perspective as well as a digital perspective.

Can you just quantify how much it was leveraged in the quarter?

I have to refer to Trevor on that one.

Yes. Yes, I'm just looking here. Our overall advertising is less than 3% of sales, and it was even less than that obviously here. So it was a minor component of – it helped the deleveraging. We just don't spend a lot on advertising.

Great. And then the second question is more about the labor side of the equation. Can you just remind us what you did in terms of furloughs or not during the peak of the crisis? And as you reopen the stores, you've been able to get back the people you need in the right spot. And what do you expect that going forward, labor cost and that sort of recruitment – retrenchment – retention?

There's a whole lot of questions in that. So I'll answer the best I can on some of what you said. So I – we, as a – when we went into the pandemic, we decided to ensure that we could come out strong on the other side. So we made the conscious decision to protect our full-time associates. We did furlough our part-timers, but we kept our full-timers the whole time. And I think it's part of our strength now that we came on the other side with an intact team. We started calling our part-timers back as we have reopened our stores, and we've gotten a very high percentage of those part-timers have come back, 80% have come back. We're hiring where we need to hire in retail when sales are like this. It seems like you're always chasing to get talent in the stores, but we've got excellent recruiting efforts. We feel like we provide associates a terrific opportunity. They can get promoted here. We open a lot of stores, and majority of our promotions come from inside. So we're a good place to work. So we feel solid about our workforce. There was lot else in my question, what else did I miss in the questions?

Yes. And are you comfortable now that getting 80% back was enough given that sales are now running up 16%? Or would you like to get 100%?

Sure. Well, it's not just that. You'd like to hire new full-timers. And in retail, you're going to have pockets of the country where it's at time harder to get help. That's not something that's new. It's happened before. But we've got good hiring events going on in the markets where we need people. We're seeing a good amount of attendance at those hiring events and making progress, getting staff where we want to get staff.

That's great. And you don't think the unemployment insurance top-up has been a challenge to getting people to come back. You haven't seen that?

I do think it's a challenge, but our full – timers never left. And so the part-timers have come back on a pretty good basis, but that may make it a challenge to hire people and we're seeing some of that. But it's an obstacle we believe we can overcome.

That’s great. Good luck everyone.

Our final question comes from the line of Liz Suzuki of Bank of America. Please proceed with your questions.

Great. Thanks guys. Have you heard any – about any difficulties getting lumber? We've heard that from some of the home improvement stores. Is that translating into hardwood flooring as well? And just if there are broadly any categories where you're now experiencing some product shortage that may have contributed to the sales declines in the quarter or anything from an inventory standpoint that stands out to you?

This is Lisa. So no, we have not seen product shortages. As we talked about on the – I think it was the first quarter call, as different parts of the world shut down, we did have different times where there were various countries not shipping, but all of that has resolved itself. And our in-stocks, as Tom and Trevor mentioned, are as good as they've ever been. The lumber shortages don't generally relate to a flooring lumber. It's more building lumber, which is slightly different and so we have not really seen that as an issue. So we feel very good about our in-stock position today. We feel very good about the inventory that we have coming. And so we've – all of our vendors are back up and shipping and kind of a silver lining, I think as Tom and Trevor mentioned, silver lining is being shut down for that time it allowed us to catch up on some of our China transitions that we had. And so we feel very good about our position today.

Great. That’s all I have. Thank you.

There are no...

Sorry. Go ahead. You're going to say there's no further questions. And I was going to say thank you for everyone joining the call. We certainly – again, I'd like to thank all of our associates who happen to be a lot of them listen to the call, and we certainly appreciate all of their hard work and all of their hard effort. I thank you all for your interest in the company, and we look forward to talking to you next quarter. Thank you.

That does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great evening.