Hello, and welcome to the Floor & Decor Third Quarter 2021 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Wayne Hood, Vice President, Investor Relations. Please go ahead sir.

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 Act -- 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 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 measures 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 2021 third quarter earnings conference call. On today's call, I will discuss some of the highlights of our fiscal 2021 third quarter earnings results. Trevor will then review our financial performance in more detail and discuss how we are thinking about the remainder of fiscal 2021 and then we will open the call for your questions. Let me start by saying, how pleased we are with our fiscal 2021 third quarter results, which build on our record third quarter financial results last year. Our fiscal 2021 third quarter total sales increased 28% to $876.6 million from $684.8 million last year. Our comparable store sales increased 10.9% in the third quarter of fiscal 2021 and 14.1% on a two-year compound annual growth rate basis from 2019. In addition, we achieved fiscal 2021 third quarter adjusted earnings per share of $0.60 per share, up 49.1% on a two-year compound annual growth basis from 2019, ahead of our expectations. Our continuing strong financial performance is the direct result of the outstanding work all of our associates are doing to serve our Pros and homeowners every day, which enable us to continue to grow our market share. We believe we are winning with our large warehouse stores that offer broad innovative trend-forward assortments in job lot quantities, which enable our Pro and homeowner customers to choose from multiple options to complete their projects on time. These benefits have been significant during the turmoil in the global supply chain, particularly for Pros, where there is uncertainty in product lead times and rising costs. While the global supply chain disruption remains challenging, we are successfully managing our inventory flow and merchandise in-stocks by being flexible with our supply chain, leveraging our diverse countries…

Thanks, Tom. I also want to say how happy I am with our operating and financial performance in the third quarter of fiscal 2021. We have been successfully maneuvering through growing complexity in our supply chain and sequentially improved our merchandise in-stock levels, which is impressive considering our year-to-date total sales increased 28.8% on a compounded annual growth rate basis from 2019. Today product availability is even more critical to grow market share. Additionally, like many companies we face higher supply chain costs, rising product costs from higher raw material input costs, including, energy and pressure on labor rates. We have effectively managed our costs and been strategic about increasing prices to offset these broad cost pressures. As a reminder, any price adjustments that we may make will be rolling and we intend to keep our price leadership and protect our value proposition. We are fortunate to have broad assortments to make select strategic price adjustments without materially impacting our unit elasticity to date. As we have said in prior earnings calls, we drive profitability towards managing gross profit dollars rather than gross margin rate. We believe our strong fiscal 2021 third quarter financial results where adjusted net income increased 129% from 2019 demonstrates our ability to grow our market share and successfully manage our profitability during these industry-wide challenging period. Let me now turn my comments to some of the line items in our fiscal 2021, third quarter income statement, balance sheet and statement of cash flows, and then discuss how we are thinking about the remainder of fiscal 2021. Let me begin with our gross profit. We are pleased that our fiscal 2021, third quarter gross profit increased 24% to $365 million $300,000. The increase in gross profit was driven by a 28% growth in total sales partially…

Thank you. We’ll now be conducting your question-and-answer session. [Operator Instructions] Our first question today is coming from Kate McShane from Goldman Sachs. Your line is now live.

Hi, good afternoon. Thanks for taking our question. Trevor, I wondered if you could talk a little bit more about the actions you're taking with your inventory, specifically what you mentioned with regards to the Chinese New Year and bringing that in early. Could you maybe explain a little bit how that will work and what that will do for your inventory standpoint by the end of the year?

Yes, Kate. We do plan on bringing our inventory in. I think you heard me say, we're going to expect it to be between $900 million to $1 billion, which will be up 40% to 50% over last year. And just as you guys are all reading in the paper, you're probably seeing with the other companies you cover, it's difficult sitting out there. And so the supply chain team came to us early on and said, hey, capacity is getting tough. We're going to bring in some inventory earlier than normal. And we said, good, let's do it. We're pleased that, we did make that decision. So it was really just a timing thing. That inventory normally would have landed probably early next year. We're just planning to bring it in earlier this year.

Okay. And of the comp the quarter-to-date comp that you highlighted, can you talk about ticket versus transaction? And once we do start to see maybe an easing of the supply chain, what do you think happens to pricing when that supply chain starts to loosen up a little bit more?

Yeah. I think when – the ticket this quarter is actually much more driven by better and best. Our merchants have done a great job selecting great products. Our stores and the website have done a great job showing those products. So the biggest driver of our ticket is again just driven by the better best. And you guys also probably noticed, or you will when you get a chance to read our 10-Q. Our laminate and LVT category continues to be our best-performing department. It's now our largest department. And we're winning all over there better and best. People are buying more square footage. They're picking the better products. The price increases that we had that, we instituted in the second half of the quarter were fairly modest and a very small piece of that 8% lift in ticket.

Thank you. Next question today is coming from Michael Lasser from UBS. Your line is now live.

Good evening. Thanks a lot for taking my question. Of the 350 basis points of gross margin degradation that you're guiding to for the fourth quarter is all of this coming from the increased supply chain cost that you're not able to pass along in the form of higher price increases? How long does this persist into next year? And does this structurally change Floor & Decor's gross margin?

Great question, Michael. These are very unique times and we're living in a very dynamic environment. So let me just start-off. All of our supply chain costs are increasing. So our international container costs are the largest component of our cost structure. Those costs are about double what they were. 80% of what we sell we believe is manufactured outside the United Sates. That stuff's obviously got to get to the United States. Duties and import fees have also increased. You guys will recall in August of last year, the USTR removed the 25% -- or added back the 25% tariffs. So we were paying more there. Our domestic costs are up about 25% over last year. Demurrage maybe a term you've never even heard before, but those are costs that the port charges when containers don't get in and back into the port quickly. L.A. as you guys have read is the biggest issue we're having. We have a big distribution center out on the West Coast. And those costs are still rising even at this point, right? We're seeing cost increase there. So that's the bad news. The good news is that, our supply chain team and our merchandising team, have done a fantastic job in managing that. So not only have we increased our inventory in this environment, where our costs are going up, we've been able to pass along those cost increases with really no effect on units yet. And as you guys have heard us say for many years, we try to manage to gross profit dollars. And so that, entire weight that you're seeing that we see as a decline we do believe is completely driven almost entirely at this point by supply – for supply chain costs. As we look into 2022, it's…

Yeah. And Michael, I'd add, just a couple of thoughts to it too. The supply chain complexity is – it's partly cost, it's partly accessing product in our category. And the priority for us is to get the product within the stores. We do feel like this is an opportunity to take share. Our model is unique. We've got broad in-stock assortments. Pros expect to be able to get product and access product and our model allows them to do that. So this is not a structural change to our business. This is a moment in time. We have to manage through it. And over time things will normalize, but it's going to take -- it will take a little bit of time.

And Tom, how are you thinking about passing along these costs to the consumer? Because if we just roll through a 39% gross margin throughout 2022, it would suggest that maybe you don't see any earnings growth next year?

Well, we are going to -- as Trevor said, we'll continue to pass along cost as costs come in. But as the value retailer and hard to access product, we believe this is the time to take shares. So we'll be thoughtful in those price increases and manage the cost. And we believe that our top line will be better and we believe we're trying to manage to gross margin dollars.

Yeah. Just I do want to follow-up on that. I want to be clear. I understand the rate is a little bit lower than you've seen from us in a while but the top line is a lot higher too. So the strategy again -- you guys have heard me say a lot over the last three years is if the product cost us $1 and we were selling it for $2 if now that product is costing us $1.05 or $1.10 and we're selling it for $2.05 $2.10, we still get to the same gross profit dollars. You actually get more leverage through the rest of the P&L, because you're not having to handle that many more widgets. And so we still think we can get to a good profit growth. So we'll talk more about what our goals are for next year. But there's no intention on our part that we won't be able to achieve a good gross profit dollar increase and a good operating profit growth next year.

Thanks. Our next question today is coming from Steven Forbes from Guggenheim Securities. Your line is now live.

Good evening. Tom, I wanted to expand on your last comment there around share. So curious if you could speak to the in-stock levels that you're seeing in market among the independent operators you compete with? And then, from a customer behavior standpoint, both Pro and DIY, are you seeing customers migrate to the F&D brand in market because of the state of in-stocks in the independent channel, or do you think you're still experiencing a comp headwind from your in-stock levels?

There's a lot to that question. I'll do the best to hit all of those points and Lisa can chime in if I don't. Yes we are hearing and seeing as Trevor said in his comments earlier the majority of -- who we compete with are independent hard-surface flooring stores and the supply chain complexity is a bit of a headache for them. One on accessing products so their in-stocks aren't what they've historically been. And two it's hard for them to manage the price component. The supply chain costs are moving every day, so for them to if they have to special order a product for a customer it's hard for them to guarantee the price. When that happens both of that turns some of their customers who may have been loyal to them to us. And as evidence our Pro sales are outpacing, our DIY sales or our homeowner sales in the third quarter. We anticipate that to continue. As long as there is complexity and difficulty in the supply chain, people Pros have to access product and our model, has done a good job of providing that product for them. So I feel good about that. So I don't know Lisa, if there's anything you want to add on the competitive side?

No, I think that's right. I mean certainly with 13,000 independents out there everyone has a different story. Some are in better shape than others. But anecdotally what we do see as Tom said across the board is that it is harder to get products and the products that they are able to get is going to be more expensive. So we feel very good about -- although, we're taking some price as well that our competitive gap will remain. And we think that as we talked about the moat around our castle has never been stronger. And so we feel really good that in these type of challenging times that we're able to continue to take share.

I'd add two things that I left out that I think are relatively important. One we know from our customer research, historically that when we get a flooring Pro into our stores that we keep them. We're pretty sticky. Once they see the model and they see what we do, it's important. And we're getting some of those new Pros now because they've been loyal to an independent flooring store and they've been are having a harder time getting product than they have historically done. And then, two is our existing Pros, because of a small store base and convenience sometimes their jobs are too far away from the store and we don't get all the wallet share that we'd like to get. And we're seeing that we're getting the larger wallet share from some of our existing Pros too. Both of those are positive for us.

That's great. And then just a quick follow-up. I thought there was plans to expand into a new adjacent product category at some point here but maybe just update us on timing and if the supply chain challenges have delayed sort of the plans around the launch of a new category.

We're doing very well with all of the categories that we have. We do have two new ones that we're going to be testing. So that means 15, 20, 25 stores something like that. You are right. We were hoping to get those tested by November December but it's going to be more like January, February now. But we feel great about both of those and are on track to first quarter be able to test those. And then assuming that they will do well as all of our others have we'll continue to roll that out. But it was 1.6% of our sales in the third quarter and was the highest growth category albeit on a small base. But we feel very good about the customers' response to all the categories we've introduced so far.

Total sales up 28%. That adjacent category is up 140%. Again albeit from a small base but that category is performing very nicely.

Your next question is coming from Steven Zaccone from Citi. Your line is now live.

Great. Thanks very much. I wanted to follow up on the gross margin. So if we think about the fourth quarter how much of the pressure in the fourth quarter is an acceleration in inventory you referenced? I guess said another way should we think the fourth quarter is the peak of gross margin pressure and then it eases as we go through 2022, or is this level of pressure with the business well into 2022?

I think it's going to depend on what happens with the cost increases as we look forward because again I think what we're -- the environment we're in right now is that we're not in an environment where the cost have stopped going up. Most of the cost increases we've seen to date have been on the supply chain side. But with energy and commodity and other cost inputs going on it's possible that we're going to see some vendor cost increases as well. So -- and I think the way we account for our inventory we try to capitalize those costs effectively into the individual products. And so as we see these higher costs come in that's when we work with the merchandising team and the supply chain team then to push through retail. So maybe said simply we don't have our crystal ball that far out yet, but there's nothing for us to believe as we think about next year that we're going to be materially off the gross margin rates that we're projecting for the fourth quarter of this year.

Okay. That's very helpful. Thank you. And then a question on new store openings for next year since you referenced that there were some supply chain delays that caused the push out of some design stores. Is there any reason to think you couldn't do 20% unit growth next year?

Not at this point

Not at this point. Yes. The problem we have with the design stores is just some unique fixtures that come from a certain part of the world that we can't access product. But for our regular stores we're in good shape.

Our next question is coming from Chris Horvers from JPMorgan. Christopher

Thanks, evening everyone. So I guess my first question is on the acceleration in October from like a 10-ish kind of 11% to the 16%. To what degree is that price that you've taken versus mix benefit of Pro in the ticket? And was there any benefit from Hurricane Ida in there?

Great questions. Most of what we're seeing in the fourth quarter is still ticket. It's actually accelerated where it's -- the majority of it if not almost all of it is ticket in Q4. The pricing component for the acceleration still is very modest. It's a very small percentage of that 16% comp that Tom mentioned. And we are getting -- we estimate about 100 basis points in comp. Really we have one store in New Orleans. And then the stores in our Mid-Atlantic and Northeast primarily Pennsylvania New Jersey and New York we're seeing some benefit. And again we think that's about 100 basis points. So most of it is just an acceleration of better and best 100 basis points for Hurricane Ida. And the smallest of those is the pricing increases that we put in in the early part of the quarter. Now we think those price increases will be more material as we exit the quarter. But in the early part of the quarter they're pretty modest.

We're also seeing a slight mix benefit from laminate and LVP is out-comping the average at a higher ticket.

That's right. And the Pro ticket to your point the Pro ticket runs about 25% higher than our non-Pro ticket. And so as the Pros are doing more business with us that also drives a higher ticket.

Got it. And then you're seeing -- there's a fair amount of wage inflation and I know you've made investments in wages and labor both from a rate as well as an hours perspective. But it also seems like some of the I guess jobs that are less desirable than working in a store such as yours are seeing more wage inflation. So it seems like there's compression between let's say fast food and working at Floor & Decor as a starting hourly associate. How are you thinking about wage investments as we look forward into 2022, do you think there's a sort of next level of investment that you have to make to keep some of that gap wider?

Yes. I mean, look we -- Chris as you said, we've been thoughtful about that through the course of this year. We gave lots of increases across our associate base at the end of the second quarter. We have an achieved bonus that we pay to the associates when the stores perform and we have very good high, high percentage of our stores are achieving that bonus and a good percentage of those are ordered in a max bonus, which also helps our wage. We continue to look at it. We feel good about where our wage is today. Our starting wage is good. We feel like we're within market. We're able -- staffing challenges all year long they've been there. They haven't gotten any worse. It's almost a little bit of one market gets better, then another market gets worse, but that's our job. We have to react to that. But we'll monitor it, but we feel pretty good where we're at in the wage today.

Thank you. Our next question today is coming from Simeon Gutman from Morgan Stanley. Your line is now live.

Good evening. This is Soham Bhonsle on for Simeon. Just wanted to dig in on the DIY versus Pro dynamic here. It seems like the market is shifting to more Pro just as people get more comfortable with Pros coming in. But just wanted to get your thoughts on sort of the sustainability of this, right? It seems like backlogs are still there, but just thinking through the next couple of quarters on how that could help ticket and just the comp overall.

Yes. I think I'll take a stab at that. I would say that from a Pro perspective, we continue to hear that the backlog is very strong from our Pros. And so they've got plenty of work. I think people have been general been comfortable in letting professionals into their homes for a while and I think that continues and the backlog is strong. I think from a homeowner perspective, we're seeing -- last year was artificially inflated with the homeowner. They weren't able to go to restaurants. They weren't able to go to ball games. They weren't able to travel and that has definitely eased as we go forward. So it's a natural that Pros are going to continue to be busy, and it's expected that the homeowner is going to have other places to spend their time and spend their money. And I think that's what we're seeing. But we feel terrific about the backlog. And as evidence just look at our top line, I mean, the Pros are in they're buying. So we feel good about that.

In-stock matters. In-stock matters.

Right. And then I know much of the focus today is on gross margin, but just thinking about the SG&A line and OpEx. I mean, it feels like you guys are sort of have a better control on that line, right? How should we think about the levers as we go into next year? Is there an opportunity to maybe pull back some of the expenses as you sort of maneuver this volatility on gross margin, right? Can you just walk us through some of the puts and takes?

Yes. I think about it in halves. The first half of last year, we were still trying to get ramped up on staffing. So we were running a little bit light. Our sales were really strong throughout really all this year, but certainly the first half of the year. And so I think the first half of the year, we've got to make some investments back in the store. We ran a little light on labor in the first half of the year. Now that we've gotten our staffing up to levels that we're more comfortable with, we'll now roll in and go against last year where we were a little bit under staff, but that's not going to be a big driver. I think on the pre-opening expenses they really shouldn't change much. If anything we'll get a bit of a benefit, because we're actually going to own more of our stores next year. So we'll have a little bit less pre-opening expenses for those stores. And then as we get to the back half of next year when we're kind of going up against more comparable investments back into the store, I would expect to see a lot more leverage in the back half of the year. And then just back to the comment around gross margin, because it matters to sales if our sales are going to be elevated and driven more by ticket that generally leads to getting normal expenses a better leverage, because you're not really selling more units you're just driving a higher ticket, which allows you to get a little bit of leverage out of SG&A.

Thank you. [Operator Instructions] Our next question is coming from Lavesh Hemnani from Credit Suisse. Your line is now live.

Hey, thank you for taking my questions. This one is for you Tom. In your prepared remarks you were talking about uncertainty related to the Pros from the rising lead times. I was just trying to figure out if that was even a concern this quarter did it impact sales growth?

Can you say that one more time?

Can you ask that question again to just slow the question down? It's hard to hear your concern.

Sure. No problem. So my question is about the comment in the prepared remarks regarding the uncertainty for the Pros, because of the rising lead times for the products. I'm trying to understand if that was a factor this quarter and did you leave any sales on the table?

Yes. I think -- well, no I think it's benefited us. I think in the prepared comments it was, Pros can't have uncertainty about accessing product and the Floor & Decor model gives them the ability to have a reliable source of product. And I think in the competitive landscape that we're working in today with the difficulties in supply chain, a lot of folks are having a hard time accessing inventory. And when -- I'll use one category as an example, when we have 250 options of tile in a given Floor & Décor, if we're out of 10 SKUs, while that's problematic, there's 240 to choose from and a lot of people that we compete with don't have that benefit. So I think that's benefiting us. I think it benefited us in the third quarter. I think it's benefiting us even more in the fourth quarter, so far.

Thank you. Our next question is coming from Chuck Grom from Gordon Haskett. Your line is now live.

Hey. Thank you. Another great quarter. Just to circle back here on price. Just curious, how we should think about the degree or amount of price actions that you guys have taken so far in the month of October and I guess how much more could be established in November and December and into 2022? I guess what I'm trying to get a sense for is, if everything else holding equal, including transactions, I guess, what do you think the comp could be in the fourth quarter to get to that 26% SG&A as a percentage of sales?

One thing I would call out about Q4 comps. Last year, our comps got better every single month throughout the quarter. For example, October we comped 20.8% last year. And for the quarter we comped 21.6%. So our compares do get higher. The other thing, that's a bit of a technical item that we mentioned last year, but it's worth mentioning again this year. Christmas, the day of Christmas fell in the 53rd week. So that was a freebie where we benefited last year, we estimated maybe 130 basis points by not having Christmas in the 13 weeks of the fiscal year. This year Christmas moves back into it, because we don't have a 53rd week. So that's going to be a headwind of about 130 basis points for the quarter. And then, to specifically answer your question, the way the costs roll into our inventory we're on a weighted average cost basis, so as these costs come in, they sort of -- they take up our inventory up over time, because we turn our inventory three to four times a year, that cost just takes a little bit of time to weigh in. So that's why when we talked about having our price increases it's on a rolling basis. So as those costs roll up higher we then roll out those retails. And so, we do expect to continue to raise retails as we exit this year. And to date, we don't believe we've seen a lot of elasticity impact and we'll see obviously what the future holds, because obviously inflation is in things beyond just flooring and how the consumer is going to react when everything costs more, we'll have to see how that plays out.

Yes. And just on the pricing front, as Trevor said and we've said a couple of times, we're going to continue to pass price along as we have to. We're sensitive to our price spread. We think that we think we're getting a lot of new professionals in our stores. We think that this is not a structural change to the business. This is the moment of time and we want to be sure that when Pros -- Pros are going to give us a first chance if they've been loyal to a place where they now can't get product, now they're going to come into a Floor & Decor. And we think when they come into the store, they'll be sticky and they'll like what they see. So we're going to be sensitive to our price versus the rest of the market. And because of our inventory position, combined with our low price value, this is an opportunity for us to take more share.

Thank you. Our next question is coming from Karen Short from Barclays. Your line is now live.

This is [Indiscernible] on for Karen. Thanks for taking our question. Can you just talk a little bit about your new store waterfall? What is the average payback period per store now versus pre-COVID? And how has that maturity curve changed?

Yes. Our new stores are performing exceptionally well. As Tom mentioned, we've been saying for over a year now, it looks like the top line of the stores we're going to probably be above $15 million now. And the bottom line could be close to $3 million in four-wall EBITDA. And it wasn't that long ago that our stores were $12 million in sales and making $600,000. So we're doing fantastic new store payback. Those stores, even though the volumes have elevated nicely from where we were just a handful of years ago, when those stores go into the comp base, the first year the comps are materially higher than the mature stores. The second year they're still substantially higher than the more mature stores. The third year they get a little bit closer. And in the fourth year, between years four and seven, they'll sort of come into maturity based on whether it's a new market or an existing market. So, that's a lot of backdrop to say the waterfall is still very good for our newer stores until they get to again years four to seven depending on whether it's an existing market or a new market.

Thank you. Our next question is coming from Peter Keith from Piper Sandler. Your line is now live.

Hey thanks guys. Nice job navigating a tough environment. Big picture just on the supply chain, it's obviously volatile but since you guys are kind of involved in this every single day, I'm just curious to get your perspective on the supply chain status. Do you feel like is it getting worse as you sit here today? Is it getting any better? What's kind of your real-time view?

I see it as -- and I'm looking at my partner who runs supply chain over there is that we're climbing the hill, but we're sort of seeing the top of it is what our hope is. And as we're sort of looking over and saying okay we see hopefully where it is now. And as we look into 2022 we hope it gets better. We think it's going to get better.

I agree.

I'm getting nods from my head of supply chain.

We have his microphone off, but he agrees.

Thank you. Our next question today is coming from Greg Melich from Evercore ISI. Your line is now live.

Hi thanks. I'd love to go a little deeper on the geography of the P&L and the margin degradation. You mentioned a few times the extra sales the share gain. But did I hear you mention like a 26% or 28% or a leverage point either for the fourth quarter if we think about sales growth? And if we end up having 35% growth, is all of that leverage, or how much SG&A would you need to add back to get those sales with the higher ASPs?

I'm not sure I'm quite -- Greg maybe ask it one more time or a different way. I want to make sure I understand the question. So, I answer it correctly.

Well, it's just gross margin is down 300-plus bps. So -- but you're passing through dollars not rate. So, if we think about SG&A leverage, you talked about some of the puts and takes first half versus second half. But I guess more specifically is how should we think about total net sales growth? Like if that ends up being 20%, could we expect to leverage that year-over-year in the fourth quarter?

I think again we'll talk about 2022 next quarter. I mean I think if things continue like they are preliminarily into the fourth quarter, you would see a higher level of elevated sales. You would likely get some hopefully leverage out of your SG&A and would lead to a good profit growth. The other thing I would mention this year, we've obviously, seen very outsized profit growth. If you look at our net income on a two-year basis our CAGR for Q1 was up 56% on net income, it was up 50% in Q2 and 51% in Q3. So, we're coming up against very high compares. So, that's something else we're going to take into consideration that our profits will grow next year, but not at the elevated rate that they grew this year.

Thank you. Our next question today is coming from Justin Kleber from Baird. Your line is now live.

Yes, thanks for taking the question. Just wanted to go back to the supply chain cost pressures and the impact on margin. Is the change from what you were saying 90 days ago a function of just the actual cost escalating, or is it more about the decisions you're making to secure and bring in as much inventory as possible including using more I guess spot rates?

They're a little intertwined, but more so that the cost structure has grown relative to where we were back in July.

Thank you. Our final question today is coming from Joe Feldman from Telsey Advisory Group. Your line is now live.

Hey guys. Thanks for taking my question. I wanted to go back to the out of stocks that you do have. Again I know you've said it's the transfer to another product has been pretty strong. But it does sound like that's an those are the areas where you are trying to accelerate or at least get some of those goods here more rapidly. I was just curious what are those in particular? Is it just like the basic subway tiles that people want or is it something more precious than that?

That is a difficult question to answer with 3,500 SKUs. I would say it would vary by department and it would be a little bit different answer by department. In general though, we've got the basics in stock. I mean our in-stock rate improved from last quarter to this quarter. And while it's not what our -- our in-stocks not historically what it's been, it's much better. I'd say that the category that is the most challenging is wood and there's lots of reasons for that. But the rest of the store we're getting in pretty good shape.

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Well thank you. I appreciate everyone's interest in our company and interest in our call and we look forward to talking to you in the next quarter. Thanks everybody.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.