Greetings and welcome to Floor & Decor Holdings, Inc.'s Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. 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 fiscal third quarter 2020 earnings conference call. On today's call, I will discuss the highlights of our strong third quarter as well as the progress we are making on some of our strategic growth initiatives that we believe will enable us to continue to grow our market share in 2020 and beyond. Trevor will then review our third quarter financial performance and discuss how we are thinking about the remainder of 2020 and then we will open the call for your questions. We are very pleased with our fiscal 2020 third quarter earnings results, which reflected broad-based accelerating sales momentum, strong earnings flow-through as well as strong cash generation. Our fiscal 2020 third quarter total sales increased 31.4% to $684.8 million from $521.1 million in fiscal 2019. Our third quarter fiscal 2020 comparable store sales increased 18.4% exceeding our expectations. We are very pleased with our third quarter comparable store sales growth exit rate and the start to our fourth quarter. Our year-to-date comparable store sales through the third quarter of fiscal 2020 are flat with last year, which is a remarkable accomplishment considering COVID-19 impact to our store operations, which began in late March. Our third quarter adjusted EBITDA meaningfully improved to a quarterly record $106.7 million, an increase of 86.8% from $57.1 million in the third quarter of fiscal 2019 and almost one and a half times higher than our annual adjusted EBITDA in fiscal 2015. Our fiscal 2020 adjusted third quarter earnings per share increased 107.4% to $0.56 from $0.27 in the third quarter of fiscal 2019. We ended the third quarter of fiscal 2020 with no net debt on our balance sheet and the remained strongest liquidity position in our company's history. Let me…

Thanks, Tom. The unique operating environment we find ourselves in combined with a distinctive business model and great associates has allowed us to swing from a 50% decline in comparable store sales just a few months ago due to COVID-19 to strong 18.4% growth in third quarter fiscal 2020. Tom already discussed how pleased we are with our solid third quarter fiscal 2020 sales momentum and a great start to the fourth quarter, so I'm going to concentrate my comments on some of the changes among the major line items in our third quarter 2020 income statement, balance sheet and statement of cash flows, and then discuss how we're thinking about the remainder of 2020. Let me begin with our gross margin. We're very pleased that our fiscal 2020 third quarter third quarter gross profits increased 37.8% to $294,600,000 driven by a 31.4% increase in total sales and a 200 basis point increase in our gross margin rates of 43% from 41% in the same period last year. The 200 basis point increase in gross margin rate from the same period last year was primarily due to the higher product margin driven by continued enhancements to our merchandising strategies and improved leverage of our distribution center and supply chain infrastructure on higher sales, partially offset by higher clearance markdowns for our natural wood department. Turning to our fiscal third quarter 2020 expenses. Our third quarter selling and store operating expenses increased 25.2% to $171,500,000 from $137 million in the same period last year and leveraged 130 basis points. Our comparable store selling and store operating expenses leveraged 220 basis points from the same period last year. The improvement in our expense leverage is primarily the result of better than expected 31.4% growth in total sales that enabled us to experience…

At this time, we will be conducting a question-and-answer session. The first question comes from the line of Seth Sigman of Credit Suisse. You may proceed with your question.

Thanks for taking the question and congrats on the quarter, great results. I wanted to talk about the improvement that you spoke to each month of the quarter. Can you just elaborate on the trends that you were seeing throughout the quarter, and how consistent was that improvement across geographies? And then I guess just related, you mentioned the mix shift to the homeowner, I think in some of your prepared remarks, what's going on there. If you can elaborate on DIY versus pro, that'd be helpful. Thanks.

Sure. Thank you, Seth. This is Tom. As we said in the prepared remarks, each month we got better and we exited at an incredibly strong rate with September being at 20.8%. So, it really was across all geographies. We've seen the same type of performance across the country. Very pleased with that to see that consistency. Our homeowner strength is definitely good. That we we've talked about in the script and you guys know -- with everyone, with all the nesting at home and people repurposing the space in their homes and people not spending on travel due to COVID-19 and entertainment and sports and things of that nature that, that money is being put back into the home. And we're seeing the homeowners is evidence in our weekend business. It's been terrific and consistent across regions. It's just been a lot better than it has historically been. The other thing I'd say just on the homeowner side is we mentioned that our web traffic was up 48% during the quarter. There is a lot of people researching -- our purchase cycle is long in our category and there is a lot of people researching to do projects in the future. So, we're really pleased with the tone of business.

Okay. So, it sounds like the leading indicators in the business remain very strong, as well. I wanted to follow-up also on the gross margin. For the fourth quarter, Trevor, I think you just talked about it being up year-over-year. I want to clarify that's against that 41% the adjusted. And then I think you're saying less -- it would be up less than the third quarter. Just any differences to call out there. That would be helpful. Thanks.

Yeah. Seth, I think you got that right. The last year was abnormally high because of that $14 million benefit we got from the Section 301 tariff refund. And so the adjusted gross margin last year, backing that out is this 41%. And so, yes, that comment was relative to the 41% we're assuming a nice gross margin. Last quarter, we had a 200 basis point increase in gross margin. So, we don't think it's going to be that high, but as I said in the prepared comments, we think it's going to be up nicely. And it's coming from a continued product margin, but we're also starting to get purely significant leverage out of that Baltimore distribution center. You guys will recall in November of last year, we opened that big Baltimore DC. And we were getting two benefits, one the lapping on much higher sales and two, the domestic transportation costs to about -- just under a third of our stores is lower, because we're now shipping to the mid Atlantic and Northeast and the Midwest out of Baltimore versus Savannah. And so, that we're also getting a benefit there. So, it's pretty balanced between supply chain and product oranges as what we're expecting.

Great. Thanks guys. Best of luck.

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

Good evening. Thanks a lot for taking my question. Tom, you mentioned that the whole business has been in focus, compare the flooring category to some other categories, anything growing a bit slower than seemingly what other categories within home improvement have been growing? Can you offer your perspective on why that might be the case? Do you think it's related to consumer is having apprehension about letting installers into their home, or the potential need to dislocate during a flooring project? And does that bode well into next year? Meaning this will have legs to a recovery whereas other categories, like stay within the home -- broader home business.

Michael, the beginning part of your question came on a little blurry, not blurry, but I couldn't hear it as well. Could you just -- I think I got the gist of it, which is, the perception of is flooring. The all of home improvement is performing nicely as is flooring performing consistent. Is that the nature of the question?

Yeah. I mean, Home Depot and Lowe's are comping up mid to high 20s. At-home comped up 40% today. So, clearly home can focus. The flooring seems to be doing -- maybe a little bit below average within the broader housing ecosystem. Is that because this requires pro to be in a consumers home .

Sure. Yeah. I don't think that has anything to do with it. We have not heard -- we talked about the surveys in the last quarterly call. Consumers are letting professionals into their homes. Our pros whether it's the pros that are -- in our affiliate program or whether it's the pros that are shopping in our stores on a normalized basis, they're backed up. Their backlog is strong. They're out far before they can get into homes. Consumers are showing no evidence of that worry. I think that we try to do a good job of educating our pros early on, on how to protect themselves and how to ensure the consumer feels good about letting them into their homes. And they are. So, that is the least of our concern.

Okay. And it seems like -- on the gross margin, recognizing that your product margins that are -- you're seeing higher product margins, is that -- so presumably the pricing as is going up in excess of cost. So, is this a sustainable trend? And should we be modeling expanding gross margins for the next several quarters, given some of what's happening right now?

Yeah. Michael, this is Trevor. It's a mix, right? The team has done a great job on the assortment. We called out our decorative accessories as -- comping above the company average, that's a higher product margin for us. And then with the -- in each of the categories with the exception of wood we called out, we're seeing people gravitate towards better and best. And then also, as I mentioned, we have that Baltimore DC reopened last year that we're getting leverage from this year. So, it's -- the biggest drivers, the product margin within the product margins, it's the better and best driving it. And then again within the mix to that is the decorative accessories, which is a higher margin category for us is one of our better performing product margins.

Okay. Thank you very much.

Thanks, Michael.

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

Good evening, everyone. So, Tom, you spoke about pro in great detail in your prepared remarks. But I was hoping you could maybe expand on the commercial initiative, right, as we think about the regional account managers and how that's been scaling? Are you leaning into the channel just given this trend in the end market here? And any color on how we should be thinking about the maturation profile behind that initiative looking out over the next couple of year?

Yeah. We feel good. We started adding a position called a regional account manager a little over a year ago. We now have 21 of them going around the country and we're adding them aggressively currently and we will in the next year. These are managers that are -- they work with commercial customers that are unlikely to come into our store or that the orders could be too big for our stores to handle appropriately. When we started the process, we started with just a couple of them to see how it would go, again very pleased what they've been able to bring to the table. We've done a good job of recruiting some excellent talent to help lead the effort. And it's a strategy we feel good, and we'll continue to work towards. We're also excited -- as I said, in my prepared remarks, we're adding two board members that have really good commercial experience, and we're looking forward to their insight on how we can penetrate the commercial market and even a more meaningful way in the future.

Thanks. And then just a quick follow-up, right. You think about just the underlying demand in the end market here, curious about whether you're seeing anything from a competitive dynamic. I mean, are people chasing or sort of trying to catch up to you as far as relates to driving innovation? Or how do you -- how would you speak to sort of the separation between FND and the competitive landscape as it relates to sort of driving that product innovation cycle?

Sure. Lisa will go ahead and answer that. And then I'll chime in.

Okay. Yeah. So this is Lisa. It's interesting apart from the vinyl and laminate category where we've seen a lot of innovation over the last two or three years with water resistant and the new the SPC and WPC product. There has not been a ton of innovation that we have seen out there from a competitive perspective. We think it is a real differentiator for us, and it is something that we focused on a lot. We just brought in our new core performance line in the last month or two, which is our highest end vinyl, which offers really great features for the customer. So that's been something that's been very good for us. And we've got more things coming down the pipe. So, I would say that from a competitive perspective, our goal is always to be out front and leading on the innovation side, especially where it pertains to durability and those things that the customers are really looking for.

Like I said, I'll chime in. The other thing that makes us unique when it comes to the competitive landscape and COVID did that slow us down is, is our approach to newness within each category that we participate in. Our merchants have continued to do product line reviews across the board and bring new products all throughout COVID. We were able to do that virtually. And we've got great new stuff hitting the store every day. And in this category, the latest and greatest -- product innovation from the standpoint of durability is really important. And we've done a lot of good work there, and I think we are ahead there, but at a newness is where I think we really continue to widen our gap.

Thank you. Best of luck. Stay safe.

Our next question comes from the line of Steven Forbes with Guggenheim Securities. Thank you for your question. Our next question comes from a line of Chris Horvers with JPMorgan. You may proceed with your question.

Thank you. Good evening, everyone. Great quarter. Can you -- seasonally, it looks -- looking back the gross margin rate tends to be better in the fourth quarter than the third quarter. I'm guessing that's mixed driven. So, can you share your thoughts there? And related to that with tariffs, I think back on, what have you seen in the pricing environment and are expecting some incremental gross pressure -- gross margin pressure there in the fourth quarter relative to 3Q?

Yeah. Chris, this is Trevor. It has more to do with the clearance event in Q3 than it does with really mix between Q3 and Q4. We have our biggest clearance event of the year in the third quarter. So that's historically been a lower margin category. As you know, we got our clearance event. As it regards to the tariffs, most of you guys may recall on August 7, the government reinstituted 25% tariffs on rigid core vinyl, water resistant laminate, and a few other categories. And so, we're now, again, paying 25% tariffs. We didn't know how that was going to happen. So, we sort of bought ahead. So we're not really feeling a lot of that impact today. And we're using the same playbook that we've used for the two years. We've been dealing with this. We're working with our vendors to see what costs we can take out. We're working with our vendors to see where we can move sourcing, not a lot in this category currently. And then there's probably going to be some retail increases, and our goal is to monitor it and see what's going on in the marketplace. Lisa, it keeps us apprised and we're not seeing a lot today, but we would expect as people are starting to feel some of those cost increases that you'd likely would see some retail increases because in those two categories today, still the vast majority of that product is manufactured out of China.

Got it. And then as a follow-up. Understanding, you've been chasing labor to catch up with demand, but on another side, there's probably some sort of one-time-ish type expenses. You talked about incentive comp, maybe quantify that, and any other COVID related expenses or special bonuses or PTO that you paid.

Yeah. When we -- tail end of the year, we were obviously accruing. We got to Q1 and we weren't incurring much just not knowing how bad COVID was. So, that actually was a bit of a benefit. You may recall, we had a really strong operating margin component in Q1. Part of it was because of that. And then as the year has progressed on, we're actually getting closer to accrual. So our incentive comp is a percentage of our total sales is pretty small, so it's in the single bips, small bips range that it's impacting us.

Understood.

I wouldn't call it any big. There's no big things. We have invested in some consulting and some other things -- just trying to grow and invest in future strategies, but nothing very significant relatives to our overall sales that we've incurred.

Understood. Best of luck. Thank you.

Our next question comes from the line of Seth Basham with Wedbush. You may proceed with your question.

Thank you and good afternoon. My question is on transportation costs. You guys talked about distribution, supply chain leverage in the quarter. As those higher transportation costs seeing now that baked into your product costs and what's the rate through see now. What kind of impact do you expect on gross margin? And relate to that if you could help us better understand the types of contracts you had and mitigation strategies you had as it relates to transportation costs.

Yeah. This is Trevor. We're very fortunate. Our supply chain teams has done a really good job of locking in long-term contracts, both domestically and internationally. That helps us in two ways. One, it allows us to get capacity when there are certain places it's very difficult for capacity out, just because there's so much demand. Things seem out of Asia, for example, and then there's some capacity constraints here in the States. So, that's one thing is, Hey, we can get capacity is an important part of it. Then two, because we do have longer term contracts and the majority of our transportation is going through this contracts. We're not getting those spot increases today. Those contracts come up over the next 12 to 18 months. And if the rates stay high, we're going to have to deal with that more next year. But currently, because we've got these longer term contracts, we're not feeling those cost increases.

Our next question comes from the line of Jonathan Matuszewski with Jefferies. You may proceed with your question.

Hey, guys. Nice quarter. Thanks for taking my question. You mentioned in the release, you're pleased with the start to 4Q, can you share how October is trending versus September's exit rate?

As I said, we're very pleased with the start to the fourth quarter. It's very consistent to the way we exited September.

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

Thanks. Hi, everyone. I wanted to ask -- I'll make it one question with two parts. First, I don't know, Trevor, I know you were answering Chris's question on gross margin. Is it -- are you ruling out the possibility that the Q4 gross can't be higher sequentially this year than Q3, because of those factors? Or is there still a possibility of an outcome? And then the second question is even with the tougher start to this year, it looks like you're still going to do roughly mid single digit comp this year. And you've told us, the biggest driver or one of the biggest drivers is housing turnover. And I don't know if -- you've lined up the existing home sales estimates for nest year, but they look pretty robust. So, I'm curious if next year could look normal in your outlook. I realized, it's early for this, but just high level, or if it can fit with outside?

Yeah. On the first one the gross margin, we are planning on it growing nicely versus the 41% we had last year. It'd be very hard to imagine it would get to the third quarter level that 43%, just a very large -- late for us so. And then on -- as we're thinking about next year, we're in the planning stages now. We've done a lot of work around this. We're preliminarily thinking about it kind of on a two-year basis, because there's so much noise going on right now. I do think from a macro perspective, we have a lot of wind at our tails with all the things that are going with existing home sales and the fact that home values are going up and the aging demographics and all those things are going to be beneficial to us. And I think from a longer term perspective, most of you guys probably have read by now in our proxy statement, we had a goal for 2022 to get to $329 million in operating income, which would be a doubling of our operating income over a three-year period from 2019 to 2022. And we're still focused on that. It's a little harder, because we didn't open 24 stores this year, right? We opened 13. But that's something that's in our sites and in our goals, and we're focused on achieving. So, we know this year and next year we'll be a little bit choppy, but as we get to 2022, we still have our eyes set on those goals.

Our next question comes from the line of Chuck Grom with Gordon Haskett. You may proceed with your question.

Hey, thanks. Good afternoon. Taking a step back, despite all the volatility, gross margins look like they're going to finish the year at or above all time high levels. I think when you look ahead, how are you guys thinking about the trajectory here, particularly as you continue to compound growth at 20% a year? And then just as a quick follow-up. Trevor, can you just clarify your guidance for the fourth quarter selling expenses? I think you said up mid single digit sequentially. I just wanted to clarify that.

Yeah. I think as we think about the next three years, because we're going to get back to 20% unit growth next year. There's going to be some headwinds on store level SG&A and pre-opening expenses, right? Just if we're going to open roughly 27 stores next year versus 13 stores. We incur anywhere from 1.2 million to 1.5 for pre-opening. So that expense is going to grow at a much faster rate. Our new stores, as we've said for the three years that we've been public, their SG&A as a percentage of sales is roughly 50% higher, mid to low 30s versus low 20s for our more mature store. So, we'll want to have some be leveraging on the store level SG&A component, because we're getting back at 20% unit growth. But we do think we have some continue margin opportunities. We continue to execute better/best, as we continue to get leverage out of the supply chain and the distribution centers, shrink damage, all those kinds of things. We think we can continue to grow gross margin. And then the corporate side, we have the ability to -- we think we can leverage some corporate. And again, back to that comment of, if you look at our 2019 results to what is the goal for 2022, we don't plan on doubling our sales during that period of time. So, we are planning on getting operating margin and EBITDA margin leverage. And there was another part of that question. Okay.

Just a clarification on the fourth quarter selling expense.

Yeah. I did say sequentially. And the reason I've used sequentially versus last year is just -- that was -- pre-COVID versus post-COVID. So now we're in this post-COVID environment, I thought it was more relevant to talk about how we're operating. And you've heard me correct. It's sequential from Q3 to Q4 this year. We did get the mid single digit increase.

Our next question comes from the line of Matt McClintock with Raymond James. You may proceed with your question.

Hi. Good afternoon, everyone. And clearly great results. But I have to say this, but I am not the only one that -- Tom, those are some pretty good awards announcements you made today. I have to say you never said that before. The question I have is -- I've got one question clearly. But it's just -- you actually brought up the home demographic and segmentation analysis that you're doing right now, and that you're going to get the results I guess in next year, early next year. And I don't think you've talked too much about that. And I already thought that your stores are pretty segmented decentralized. So, can you, at least, without stealing your thunder, give us kind of a sense of what that topic's about? Thank you.

Yeah. So, I -- we'd been talking for a year or two about our new CRM system. It's salesforce. And we have been -- the pro desk has used parts of it for the last couple of years. And what we've been able to do over the last year is put all of our data in there, connects all of the customer information that we have from all the various touch points that they have with the company. And we've cleansed all that data and are now starting to be able to use that to understand homeowner versus pro, what are the demographics of each. And then now we're starting to just initially to personalize messaging and starting to go after where we see opportunity. So, it's a little early to reveal just yet. But we definitely are learning some interesting things about our customers and things that we think will really help us to drive the business forward in the future. So, we look forward to sharing that maybe first quarter.

And Matt, just trying to -- I just had one thing is, is having a data is just incredibly useful to us because we've -- now we have so much more information and then we're using some of that with data scientists to then correlate what stores are over or under performing relative to what they should be doing. And that then gives us a roadmap for the regional team and even down to the store level core them to focus on design or pro or pat them on the back because they're exceeding our expectations in those levels. And so just -- we're going to have a whole -- we are finishing up having just a level of information and data that we've never had in our past and information is power. And we're going to be able to use that to make better decisions corporately, of course, but even down to the region and the store level. So, we're pretty excited about having this and it's just a powerful tool that we've not really had access to in the past.

Our next question comes from the line of David Bellinger with Wolfe Research. You may proceed with your question.

Hey guys. Great quarter and thanks for taking the question. So, just on an average ticket down 50 basis points this quarter, that broke a trend of up two to three percentage points over the last year or so. What are you seeing there? Any type of trade down on the DIY side, and also maybe just some commentary on the in store design services? The customer is still engaging that service as much as they were pre-COVID or have you seen any consumer apprehension there that's weighing on potentially higher ticket trends?

Yeah. So, there's two parts to that question. I'll take them both. The first part about our average ticket, as we said in our prepared comments, really a few reasons for a little bit of that. One is you mentioned design services, and our design services are just getting back up to speed. We were slow. We had a lot -- when we did our furlough of our part-time associates, we have a lot of our designers that are part-time and it took a while to get them back into the full. They're getting here now. And our design appointments are where we want them to be. And our designers are engaged in the -- during the third quarter, it took time to get them there. So, we didn't have those big tickets that we always have. Secondarily, we've been really aggressive and clearing out some old wood products so that our average stay on a wood department has gone down. That's purposely. We've done that to get our new stuff. We got great new wood looks come -- they're in now and more on the way. And we had to get that clear. And then the last part is, with the homeowner increase that we're seeing, we're seeing the homeowners are attacking a lot of small jobs. They're -- when they're nesting at home and they're looking around and they're sitting -- they're looking at their backsplash is evidence. And if you look at our deco department, it was the best comping department during the third quarter. And that's an evidence that -- we think people are nesting. They're looking at -- they're sitting in their kitchen, they're working out of their kitchen. They're on conference calls, they'd look up and they see an ugly backsplash and they change it. So the backsplash, that's a lot less than average tickets in the bathroom. So, I think combination of those things are what's challenged the average ticket. But overall, I feel good about where we're going in design. I feel good about our stacking levels in design. I feel good about what we're doing in design, as we enter into this quarter.

Our next question comes from the line of Alex Mahylis with Baron Group Capital Markets. You may proceed with your questions.

Good evening, guys. Thanks for taking my question. With the net cash position in mind, in addition to the dry powder you have from the ABL, would you be willing to accelerate the store up in cadence or remodel older stores more rapidly in the coming quarters?

This is Trevor. I think Tom may have something to add to this. We are going to be spending a lot more on CapEx next year. This year we opened 13 stores versus 27 stores. We're also investing more in our stores. We've seen a nice return. It wasn't that long ago that our first year new stores were doing $800,000 in first year EBITDA. Now they're getting close to $2.5 million in EBITDA, and we were getting some of that because the stores just are bigger. They're in better locations. We spend a lot more on the inside and the outside of the aesthetics of the store. We're only -- we're going to own a few locations. We've got some areas where we've got a number of stores, very high volume, very profitable stores that we think we've got a really good investment in individual locations in the Northeastern DC that I talked about. We're going to spend some capital in that case in DC. Every single one of those has a very detailed ROI associated with it that we think is going to be well above our cost of capital. And so we are going to be more aggressive in deploying that capital next year, as we get back to 20% unit growth.

Yeah. You hit mostly. I mean, I'd add one thing that we've been asked for a while will be accelerated the growth of our new stores. And that is -- that's never been a cash decision as much as it's been a cultural decision. We keep our growth to 20% units, which is a lot of growth that more than -- most retail -- most of retail does, but that's purposeful. Culture is very important to us. We have a unique culture. It's difficult to run a floor and decor store. We want to make sure that people are trained to do that. And they're -- they have a lot of autonomy at the store level to make decisions for their own, and that takes time to get them ready to do that. So, we pace our openings purposely.

Our next question comes from the line of Elizabeth Suzuki with Bank of America. You may proceed with your question.

Great. Thanks, guys. So, I guess, as COVID cases start to rise again in some markets and there is talk about potential lockdown again. How do you think about how the business could perform if stores did have to close again? And what do you think you learned from the last go around that you would bring into -- second round of potential closes?

Well, I think it depends. When we close the stores in the first time, we really didn't have to close all the stores and taken the curbside delivery. We were classified as a central retail and a lot of the markets that we elected to shut our doors. And we shuttered our doors purposely because we wanted to make sure that we could protect our associates. We needed to get the stores ready. We needed to get the right protective product in, so that everyone could feel good and we needed to learn. And as we learned and as we got our stores prepared, we began to reopen. So, it depends on the severity of the closure. And if it's all of retail or essential retail's about to open, but if it's a essential retail allowed to open, we would stay open and operate so that we could effectively serve our professional customers.

And final question comes from the line of Justin Kleber with Baird. You may proceed with your question.

Yeah. Hey, guys. Thanks for sneaking me in here. Just had a follow-up on tariffs. Based on your inventory position and turns, when do you think you will see the peak pressure point on margin rate? And it doesn't sound like tariffs would prevent you from expanding gross margins next year, but just wanted to kind of confirm how you're thinking about that. Thanks.

Yeah. I mean, sometime early next year is when we're going to start to have to see how that plays itself out. So, I think that's right. And I do think that the merchants are great and they got ideas on how -- where we raise retails to deal with it. So, the plan is in place. We have fantastic systems to get there. Move based -- every single day in our inventory position and our margin position as to how we're doing. And so, we'll watch it very closely.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Tom Taylor for closing remarks.

Yeah. Well, first, I'd like to, again, thank all of our associates for all the hard work. Our associates on the frontline and our associates behind the scenes that are in our store support center and that are in our distribution centers. It's just excellent execution across the board. It was just an amazing quarter. I'd like to thank all of you for your interest in our company and your excellent questions. And we appreciate that. And we look forward to talking to you on our next quarterly update. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great rest of your evening.