Floor & Decor Holdings, Inc. (FND) Earnings Call Transcript & Summary

Good afternoon. My name is Angie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Crédit Suisse Conference Call with Floor & Decor. [Operator Instructions] I would now like to turn the conference over to Mr. Sigman. Please go ahead, sir.

Everybody, good afternoon. This is Seth Sigman, the Hardline/Broadline Analyst at Crédit Suisse. Thanks, everyone, for joining today. It's my pleasure to host this call with Floor & Decor senior management. With me is Tom Taylor, CEO; Lisa Laube, President; Trevor Lang, EVP, CFO; Wayne Hood, VP, Investor Relations; Matt McConnell, Senior Manager of Investor Relations. We appreciate you guys joining us today on such a busy day and a busy time for your business. Most investors on the call should be pretty familiar with the stock and then the company. But Floor & Decor is a leading hard surface flooring retailer, 123 locations as of the first quarter in the U.S., last year generated $2 billion of revenue. $243 million of adjusted EBITDA. We view this as one of the best long-term growth stories in retail, and the company would seem to be in a very good position to grow market share through this environment. In terms of the format today, I'll guide the conversation, I'll make it as efficient as possible. If you do have questions, feel free to e-mail me directly. I'm going to first turn it over to Wayne Hood, VP of IR, for the safe-harbor statement.

Thanks. Just before we get started, I'd just like to refer you to the standard safe harbor language included in our press releases as we may make forward-looking statements within the meaning of Private Litigation Securities Act of 1995 throughout the course of our presentation today. So I'll turn it back to you, Seth, so we can get started.

Okay, great. So Tom, to start with you, to set the stage here, so much has changed in the last couple of months. I think it would be helpful for a quick recap of Q1 and maybe some of the trends that you started to see from a demand perspective late March and into April, we'll start there.

Yes. I think, as we look at the -- the first quarter until we got to March 21, things were going well. We were above the mid-range of our sales guidance. We were at 6.1% comp going into the end of the quarter. And then at March 21, we had to turn to a -- we had to close a bunch of stores, and we had to switch to a curbside operating model, and our comps went down 45% during that time frame or 46% during that time frame. So it drives the quarter down. But as we went into that event, and we'll talk about April, what's going on as we get through today when you're ready to, but the first quarter was going like we had hoped it would go. Things were good, demand was good, health of the consumer was good. There was some positive in the -- in housing turnover was continuing to improve. We felt pretty good about the way things went in the first quarter.

Okay. That's helpful. And then just as it relates to that trend in April, you did talk about comps being down 50% last week, but it sounded like there were some improvements -- modest improvements through that time period. Can you maybe talk a little bit more about that? And if there was an improvement, what do you attribute that to?

So yes, I'll go through -- I'll talk to a few things. So first, just in case everyone on the call doesn't know, we really got 3 different operating models going on, right? So actually 4, if you consider closed stores. So we've got a handful of stores that are still closed. We've got a segment of stores that are still on curbside-only and then we have a segment of stores that are on appointment-only shopping, where one professional at a time can go in the store, and then we started to open up in a limited-capacity model. And we view the reopenings as they're going to be staggered. They're going to be dictated by local and state government authorities and health official mandates, and we'll get the stores open. But since as we look at the sales performance, as I said on the call, quarter-to-date, and we don't usually give quarter-to-date performance, but we did then, and we were at negative 50% then. The appointment stores and the curbside-only stores had stayed pretty consistent for most of the month. They started to show a little bit of improvement as we got to the end of April. And now we started to reopen some of our stores with limited capacity. It's a very short period of time. We've had 2 stores that have been open for 11 days in limited capacity. 29 stores that have been opened for 4 days in limited capacity and 15 stores that we opened yesterday in limited capacity. The company's comp has improved, and again, we're not going to do this all the time, but since we just gave it Friday, we'll give it -- now the company's comp has improved from 50 to 48 negative. I would say that the reopened stores, they've materially improved from -- as we've reopened them. It's better than I thought it would be. And I'm still pretty confident that we'll do a minimum 7 -- we'll at least get to 70% or greater by the end of May, operating this limited capacity.

Okay. That's helpful. So initially, you had talked about these first 2 stores reopening in Utah and returning to positive comps over a 6-day period. Should we be thinking about a similar return to positive trends across the rest of the stores that you've opened here?

We're pleased with the performance that we've seen at the stores. We're not going to give -- it's too short a time frame to kind of give the numbers, but we're pleased. We've seen a material improvement across these fleet of stores. The 2 stores that have been opened the longest continue to be really strong. And I mean the good news is too with this improvement in performance that we're seeing, we're doing with very little marketing. We really haven't told people. It's been word of mouth. It's been e-mail marketing campaign, letting -- putting notifications on our website. So we're quietly reopening, and we're pleased with what we're seeing out of the consumer so far.

Okay. That's helpful. How broad-based is the improvement that you're seeing maybe across customer cohorts or by region? Is it pretty consistent?

Surprisingly, very consistent. These -- the level of it now -- again, 4 days, 1 day. So it's -- I don't want to get -- it's hard to say. But yes, it's been surprisingly -- the rate of improvement has been surprisingly consistent by region and by type of stores. So it's -- like I said, I'm pleased with what I'm seeing, it's better than what I thought it would be.

Okay. Now from an operational perspective, how is the process going, when you open up the stores and bringing employees back? Just maybe talk through that process? And then the second part of the question is around capacity in the store and, if there are limitations, and how you're thinking through that?

Yes. The operating side, we've been at -- it's one of the things that I am the proudest of, now this is such a difficult time for our country and for people in general and for our company, and the collaboration that I've seen and the enthusiasm to work for a solution to satisfy our associates and our professional customers while maintaining a safe environment, it's been the bright spot for me. It's -- so we've been ready to reopen. We've had -- we've done -- we did a good job on getting our stores trained. We've done a good job on getting the stores signed with the appropriate signage. We've outfitted the stores with sneeze guards and things of those nature. So we've been ready to reopen as time goes on and because we were fortunate that we were able to maintain those full-timers, we've had staff that are ready to go. And as we've reopened the stores, we've ramped our full-timers' hours up. We've actually started calling part timers back. And we're -- as I said before, we were -- we're going to try to play a little bit of offense. And we started that process, and I'm pleased with our ability to get the people that want to come back, I'm pleased to see that. And I'm pleased that we've been able to execute at a pretty high level so far in a limited time frame. And the limited capacity, we're controlling the capacity in the store. I mean the way that -- because our stores are big, a lot of the wording around the regulation of how many people can be in a store at one time, and when you're operating in close to 80,000 square foot stores, that's a lot of people that would be allowed. But we want to make sure that our associates feel comfortable and that we can execute with limited capacity to 50 customers at a time in the stores. That number is subject to change. As I said, we have the ability to go up if we want to, we'll -- but we're putting our customers' and our associates' safety first. And as we get more comfortable and we get staffing better in the stores, then we might inch that number up.

Okay. And then with those capacity limitations today, I mean, do you think that limits sales? Or should conversion be higher? Obviously, you're utilizing other tools as well to drive higher quality traffic to the store. And how do you think about those puts and takes around how that can limit sales?

Yes. I'll start, and then I'll let Lisa weigh in too. Yes, you'd think that if someone because -- and we do have -- in fact, we do have stores that the people are waiting in line to get in our stores. We're not a high-traffic store. So to think that we have 50 people inside and there's people waiting in line is -- makes you scratch your head at times. But we're having some of that. And you'd think if someone's going to wait in line that you might be able to convert them at a higher level, but it's just -- it's too early to tell. I don't think that we know enough today. I've been pleased that the mix of customers is what we normally see. It's a mixture of pros and do-it-yourselfers that are coming into the stores. And we've known all along, we've watched our sample sales, as we said on the earnings call, the sales have gone through the roof and so we know that there continues to be consumers that want to engage with our products. So Lisa, I don't know if you want to pile on or add to that?

Yes. The only other thing I would add is that another reason we don't feel like the limited capacity is going to be a limitation on sales at all. One is people seem to be very content if they have to wait a few minutes to get into the store. And I think that's going to be a bit of the new normal. And so we have not seen anybody be impatient about that or leave. Everybody has been very, very nice about that. The other thing I would say is that our e-commerce sales, before this was running, I think, 11% or 12% during the curbside model, obviously, went up to 60%. So it's not going to stay at 60%, but we also don't think it's going back down to the 11% or 12%. So e-commerce also gives us the ability to do more sales to the store, without having as many people in the store. So that's just another factor as you think about that. I think people are going to choose to shop in different ways maybe than they've shopped in the past.

Right. Right. Okay. That's helpful. And then just a couple of follow-up questions here on the demand environment. So it seems like there are some positive demand signals, including the stores opening and the bounce that you're seeing as well as online samples and other things that you've highlighted. At the same time, you've talked a little bit more cautiously about the outlook from here. How do you reconcile those 2?

That we're in an unprecedented -- it's kind of -- this is an unprecedented time. It's hard to predict. We -- with what we see today, we feel good. But this is an unprecedented time, and I think people across the country are just -- we haven't dealt with this before. So it's hard to -- certainly hard to forecast what demand will be. As I've said, as we reopened stores, I've been pleased with how they performed. I've been surprised that the customers have come back so quickly and wanted to engage with the product in the stores. So I don't know, Trevor, or Lisa if there's anything that you want to add?

No. I don't think so, no.

So we've received a few questions about the significant increase in online samples that are being sold right now. That's come up a lot in conversations. What's the relationship that you typically see with sales and to what extent does that indicate just a lot of pent-up demand, and that's part of what you're seeing here?

Well, I think the thing that you have to realize too is that in our stores, we sell a lot of samples. I mean most times customers will come in and buy samples, they'll go home, they'll think about them before they make a purchase. This is a relatively long-lead-time category. So I think that what we have seen is that people instead of coming in and buying samples are now buying samples online. So I don't know that we are seeing more sample sales. I think we're seeing similar sample sales just procured in a different way. And so we haven't actually looked at the number. We can't always track all the sample sales through the store. But what we do know is that once we have that customer's information through sample sales in the store or online, it gives us the ability then to follow-up with that customer, follow-up on a credit offering or a free design service appointment or whatever we can offer them to go ahead and close those sales. But there's been the big -- or excuse me, the big increase in sample sales online, I think, has come from people not being able to access the store.

Yes. I think the only thing that's, too, that I'd add just about the consumer is that we -- in the stores that have reopened with limited capacity across the country, and again, I keep [ capping ] on that's, it's a small group of stores, and it's a limited amount of time, we're seeing the same blend of new customers, new projects starting and finishing projects as we just have historically seen. So people are -- that was one of the things that you wonder if you're going to see as many people ready to start engaging on the next project. And so far, what we're seeing is very consistent to what we have historically seen.

Okay. All right. That's a great point. And just a follow-up on the Pro. What are you hearing from the pro right now? Pro is about 60% of your business. I think the comment on the conference call was that your sense is that projects were getting delayed but not canceled. What gives you confidence in that?

It's a very good question. From it's -- what we have heard from our Pros, and we have lots of Pro sales associates. We've got lots of Pro regional managers. Lisa and I spend a lot of time, and Trevor, speaking to them to get their feedback on what their Pros are telling them, and we've heard very consistently, what I said on the earnings call, that it's not cancellations, it's postponements. And that -- so historically, our people, what they've said, they're the closest to the customer, they're pretty accurate. So that gives me confidence on that side. And then we have an arm's length relationship with an installation company that we can give to customers when they're in our stores. And in our conversations with them, it's been the same thing. They haven't seen a rash of cancellations. They've seen postponements, but not cancellations. So those 2 data points are which gives me confidence that the Pro is going to be okay.

Okay. Now obviously, there's been an acceleration in omnichannel -- your business in this environment. What are you learning about how your business model could potentially evolve over time?

So it's interesting. There's a few things I think that we've learned through this whole thing. And I think that part of it is that we've always said and, as Tom has always said, that we've all been surprised about the level of e-commerce sales that we're able to do in a category that is pretty permanent, that people are going to spend a lot of money on, that they pretty much want to touch and see before they decide to go ahead and make the purchase. So we've been very excited about the amount of e-commerce business that we've been able to do. I think there's a few things that we've learned, a few things that we'll work on over the future on -- from an e-commerce perspective, and it really has to do with convenience and giving the customer the option to shop, however they choose to shop. So whether that's adding functionality to our mobile site that makes it easier for our customer to place an order to the time they come and pick it up, or I'm on my way, that type of functionality, or whether it's adding more information or more inspiration on our website to help customers be able to see and understand their project a little bit better. The virtual design appointments that we've had, I think, we've all been surprised how many virtual design appointment that we've done. And so that's something that we would also continue with going forward. And I think customers would much prefer to come into the store, but some just aren't comfortable with that right now. And so now we'll have options for customers to shop, however they choose to shop.

Yes. I think the only thing I'd add, too, is that 2 things. One, Lisa mentioned most of them, but we've had a lot of feedback from our professional customers who've been shopping with us for a long time that they like this white glove concierge service. So we're going to have to execute better at the back of the store, make sure that we can get people to get their product quickly out. And we're pretty good at it, but we think we'll continue to work to get better on it. And then the other thing now, which is interesting, because we weren't sure as we started reopening stores, how much of demand the customers want that curbside model, where they really never get out of their car. And so far, it's early, limited number of stores, limited amount. The customers have -- and they've wanted to shop the store like they have historically shopped it versus engaging in a curbside pickup program. So that early indication is probably good news for us as we won't have to change the operating model all that much.

Okay. How does the transaction differ online versus the store? And maybe throw a curbside in there, too, in terms of the dollar size, the number of attachments, things like that.

Well, I think that what we're seeing in the last few weeks may or may not be the normal going forward. Historically, we have seen an e-commerce less installation materials, for instance, because it tends to be a little bit more of a homeowner type of a purchase. But I think that this could change. Through this curbside model, we've learned that the Pros are getting very comfortable shopping online. So I think that the mix of insulation materials could change and the mix of Pro versus homeowner could change going forward. And they shop in different ways, right? I mean, the homeowner and our website has to serve both. The homeowner really wants to come on to see the inspiration, room galleries, videos, information about what they could choose. The Pro is much more about fast and easy. So how do I quickly add things to my basket, how do I quickly check out and then come and pick up. So the -- so I think it's actually really going to be much more, as I said earlier, about how that customer chooses to shop, and we'll continue to work on our e-commerce platform to serve both our professional customers as well as our homeowners.

Okay. So at this point, from a category perspective, is it hard to assess whether there's going to be a significant shift or change in the sort of profitability mix, depending on categories, based on whether you're picking it up or not? Yes.

Yes. We've not seen any significant shift in categories at all. I mean we saw a little bit of shift when we were in curbside only, just because the stores got 3,000 SKUs, and you can't pull them all out to the parking lot to show them off. And so you saw a little bit of a shift just to the store's bestsellers and the things that they chose to put outside. But I think that had nothing to do -- it had only to do with the fact that the customers were just seeing those things that were in front of them. So we've seen no real shift in the business at all, I believe that as soon as all the stores reopen, we'll be right kind of back to where we were.

Okay. And Lisa, for you, is there anything else you're doing from a marketing perspective? Any other color on trends you may be seeing? For example, it seems like there are some lower advertising costs right now in this environment, in this category. Is that an opportunity to lean in? What else are you seeing?

Yes. We have actually paused our broadcast marketing in April and in May and we may bring some of that back. We're debating that now and then we'll pick back up in June. We don't do a ton of broadcast, but I think that from a messaging perspective, what has changed is that our messaging is going to be much more around not just the brand equity points that we always promote, but also around, it's a safe place to shop. I mean it's a huge store. So it's going to be -- it's a safe environment from a social-distancing perspective. All of the steps that we're taking to ensure that our associates are wearing masks and wearing gloves and that we're sanitizing carts and all the things that most retailers are doing. So I think that one of the things that will be important going forward to message to the customer is to make them comfortable to come back into the store. I mean they know why Floor & Decor is the best place to shop for flooring. But we need to make sure they're comfortable coming into the store as well. So I think you'll see us switch some of our messaging to that as well. I also think we'll continue to promote, shop the way you want to shop. So shop online, pick it up in the store, curbside, virtual design, free design service in the store. I think this new world is going to be much more around the retailer, even more than ever, figuring out how to be wherever the customer wants us to be.

Yes. I think I'd add 2 things too, Lisa, that one is we've got to be thoughtful and think of how we market. There is the ability to disinfect hard surface flooring versus soft flooring. Soft flooring is an opportunity to help educate consumers on that and perhaps have them -- that trend has been good for us for as long as I've been here, the shift from hard service -- I mean to hard surface from soft flooring, so we'll probably help try to encourage that. And then the other thing is that we're really working on, two, so how we can educate our Pros and then let our consumers know that a Pro can work safely in their home because we're working on -- we've got some of our larger Pros who already are doing good with educating their end user that, hey, we wear masks; hey, we clean up after the job; hey, we practice social distancing when we're in your home, et cetera. So we're going to -- we're also going to work on our messaging around that as well.

Okay. So I think one of the most important messages today and from the conference call last week is that the company's not just sitting back, cutting costs in this environment, you're really evolving the model for the consumer, and that's through online and curbside pick up and a lot of the other things that you've talked about. Can you help us better understand how Floor & Decor may be ahead of the curve versus some of the smaller competitors today? Because that's clearly one of the big opportunities with the story, right? Market share in a very fragmented space. So -- and it's hard to see it from our side sometimes what some of these small players may be doing from a digital perspective. But how do we think about how Floor & Decor may be ahead of the curve?

Yes. I'll let Lisa talk a little bit about our advantages versus the independents from our -- whether it's our website or our stores, some of the things that have always been the competitive edge. I think in this current environment, where we have a lot of advantages, as I would say, buckets into 3 things. So one, you mentioned, we've been very thoughtful on the cost side of our business. We did not want to cut to the bone. We always believe there'd be another side to this. And because of our balance sheet, we felt like we didn't need to be so draconian with our cuts. We were able to protect all of our full-time associates, albeit they work -- we cut their hours back, but we maintain them. And that gives us the ability to -- versus an independent who may have had to shutter their doors, they might not have had the ability to keep paying their associates, so they may lose them -- or they may have a harder time getting them back. And we've been able to maintain that and get them ramped up rather quickly. So I think that's an advantage. I think they'd also because of our balance sheet -- we had -- our inventory position is really terrific. Our in-stock is probably better than it has been in a long time. This transition -- or this time frame that we've had to wait gave us the ability to get those transition SKUs that we've been struggling on in-stock. We're in a much better position today as we exit. So we think our -- I think our -- the ability to get inventory is going to be better than the independents. And the last thing I would say is just that -- the consumer is going to be challenged, right? There's a lot of unemployed people. This is -- people are going to be looking for value. And if there's a time that people -- price is going to be the most important thing, and we're really confident how we'd be able to participate versus the independents. So I may have said everything. I might not have let Lisa, lot of -- not a lot of things to say, but I don't know Lisa. I guess you could talk, Lisa, a little bit about our advantages in the way the customer shops, the -- our web advantages and maybe a little bit about store?

Yes, no. I think, Tom, you covered them all. Just we believe we have the best-in-class website out there, and we continue to work on that. I think there are some good competitors out there. It's a huge mixed bag. I mean when you're talking about over 10,000 independents, you've got folks who have really good websites and people with barely any websites. And so -- and depending on where they are and what their personal situation was, some have been opened through this time and some have been completely closed down, some by appointment only. So I think that we would maintain exactly, as Tom said, we will -- the all the reasons that the customer chooses to shop us, and we have the best model and we have the best website, will just get amplified through this situation.

Is it reasonable to assume that the market share gains from independents would accelerate through 2020?

We think so -- yes.

Yes, if I'm answering the question, yes, I would say, it would be reasonable. So we should be able to take share at a faster rate. We do believe, based on the call, that it's likely that some of the independents will not have been able to survive the closing of their stores for this amount of time. So -- and then -- and Trevor has talked about it before, if you want to weigh in, just through the Great Recession, we took share at a much quicker rate coming out of that. And our founder would just say because of the value proposition that we create, we're able to take share at a faster rate. Trevor, I don't know if you want to mention anything about historically how we've performed in a recessionary environment.

Yes, the only thing I was going to add is, as much success as we've had as much success as the Home Centers have had, still the industry is dominated by independent distributors, companies like [ welcome liquidators ] and tile shops that have smaller stores. We estimate 65% of the industry is those smaller players, we think we maybe have 8% of the market today. And so we do think that this provides us a huge opportunity. And if you go back -- and the business was very different back then, we didn't have -- we didn't share -- sell much in the way of in-stock inventories. We competed with our Pros. There was a lot of things that our founder would say the business wasn't running right. When the founder came back in and started running the business in 2008, as we were getting sort of out of the Great Recession, and we really instituted the core principles that we built upon today, we ran off 10 years of double-digit comps. Now the business is a lot bigger. It was only $170 million back then versus last year, we did $2 billion in sales and the store volumes, I think were $7 million or $8 million versus our average store volume over 3 years today does over $20 million. So it's a very different business. But I do think, as both Lisa and Tom said, when you think about the value propositions we have, they get accentuated in this environment. The in-stock inventories always matter, but they matter a lot more to a Pro if their backlog is shorter. The price compression or the price differential will become more important in this environment and having a store with roughly 50 associates in there who can help you pick what's right for your budget is hugely helpful versus a lot of our -- the Home Center competition just doesn't have some of that ability to service like we do as well. So we're biased, we work here, but I do think as we look to the next 2 to 3 years, we're going to invest in those strengths to continue to differentiate ourselves. And we'll see how long and pronounced this recession is, the longer and the more pronounced, the more market share we obviously will gain. If it's a quick snapback, then probably not quite as much.

Yes. What are you seeing from a promotional perspective in the industry right now? Are you seeing anything? Or do you expect to see anything as stores reopen?

It's been very quiet. Right now, I said that on the earnings call as well, it's what we're seeing -- maybe less because everyone's kind of batten down the hatches. You're not seeing a lot of marketing at all. We're not hearing much about price. I don't know how that's going to change. This is a bit of an unprecedented time. But no matter how it changes, I just -- I think that our competitive advantages versus that independent environment is pretty significant across many aspects of our -- of whether it's our stores, the way we service our customers, our assortments, et cetera, the stuff we've been through. So so far, we haven't seen much out of the independents.

Okay. Just shifting a little bit to flow through. And I just wanted to clarify the 25% to 30%, Trevor, that you discussed on the conference call. We got a few questions on that. Can you describe exactly what you mean from that 25% to 30% decremental margin?

Sure. So we, as you would expect and expect us to do, Seth, have spent a substantial amount of time of modeling not just the P&L on the balance sheet, but the liquidity as we've gone through this process and have done multiple, multiple iterations. We have a process that existed before this, and we've been very focused on making sure we get collaborative buy-in from the rest of the senior team and, really, the entire organization. And so as we went through those multiple, multiple, multiple sets of scenarios, we felt like a 25% to 30% flow through, based on the current expectation, was the right way to think about that. And so just as a simple example, if sales were to go down $100 below the guidance that we had given in February, that consumers -- or sorry, investors should expect probably 25% to 30% of that to flow to the bottom line, which, in our model is a very low percentage because historically, we would say about 65% of our stores at an existing store, about 65% of those costs are more fixed in nature, with 35% variable. And when you look at our gross margin profile, what that would intimate to you is a normal negative flow through would be kind of be in the high 30s. In this environment, what are normally fixed costs, everything goes to variable, and we've cut costs across the board. And so as we cut costs, we had to make some difficult labor decisions at the stores. We've lowered the salaries at the corporate office. We've lowered our distribution center expenses. We've lowered our advertising. Incentive comp has gone materially down, as you would expect in this environment. So as we've been able to be aggressive in reducing those costs, what would normally be possibly on the downside of mid- to upper 30% flow through, we've been able to get down to a 25% to 30% flow through.

Okay. And is that number, that 25% to 30%, is that consistent on a quarterly basis? And also, is it the same if stores are open or closed?

That was an annual number. Our view is business will be the toughest in Q2, as Tom already gave you, we were running down 50. Even though we're very impressed with the comps now that we're starting to open some stores, we expect the number to get a lot better in May and get a lot better in June just based on the stores actually being open. But that being said, the Q2 sales, we think, relative to expectations and what we would have performed last year, Q2 is going to be the toughest. So even though we've cut a lot of cost, you're not going to be able to cut costs as quick for Q2. I think as you get to Q3 and Q4 and the sales get better because the stores are assumed to be open, then that flow through will get better as you move out. But to be clear, that flow through was on an annual basis, not -- it will be different on a quarterly basis. And I think there's just too many range of outcomes in the short term to give that level of guidance, which is why we didn't feel comfortable giving guidance.

Right. Right. Okay. And we should think about most of the impact flowing through SG&A because of the deleverage? Or is there also some gross margin impact as well?

Yes. That's right. Most of the cost reductions, when I talked about on the call, there was probably $100 million of operating expense reductions in the current environment. The vast majority of those were in operating expenses. We did lower our distribution center expenses a little bit. That is in our gross margin, but that's a fairly immaterial amount relative to our total cost of sales. . And so there will be a little bit of deleveraging on gross margin because we're not going to be able to reduce our distribution center costs at the same rate as we're going to be able -- as we're expecting our sales to be down. But the vast majority, probably over 95% of that $100 million, is going to come through store operating expenses, preopening expenses and G&A, which is our corporate expenses.

Got it. Okay. This question has come up quite a bit as well, just around the cost savings you just discussed. Help us think about like what is temporary versus what could stick beyond the short term?

I'll break it into 2. And certainly, Tom, if you can weigh in. I think there are going to be some temporary savings for us. Incentive comp, for example, we're going to hopefully reinstitute that at some point. So that's really temporary in nature. I think advertising costs may go down a little bit just because there's not as many people advertising, that will be a market-based approach as we get beyond the next 6 months. So there might be some cost savings there. I think the -- if you look at the last 2 or 3 years, not just for Floor & Decor, but across the United States, there's been quite a bit of labor inflation. I think with the unemployment rate going down, there can be some possible lower inflation in the wage rate. Those things all kind of feel like they're temporary, tied to COVID-19. On a longer-term basis, we haven't seen anything today, and again, we've got to open up our stores to learn more. We haven't seen anything today that says we are going to materially change our cost structure on a go-forward basis. The one thing that, hopefully, will help and in the grand scheme of our total P&L, it won't be all that significant, but what we would expect, and what I've seen in my 25 years in retail and what we're starting to see a little bit of today, is as the market opens up for real estate, and there are less people competing for the same real estate, we would expect our rent per square foot on a like-for-like basis to go down and we are hopeful, at least for the next few years, at least, that our construction costs will come down as commodity prices come down, general contractors get aggressive. And so we could see some modest improvements in our new store occupancy costs, which would, obviously, lead to hopefully a better ROI on those new stores. But today, I think it's too early to call to say there's any meaningful changes to our overall cost structure.

I'd add, Trevor, just a couple that -- I think that 2 of them that we're learning and one of them is a question mark out there on what we'll see, but I agree, first off, I'd reinforce Trevor's point about rent. I do think that we're going to get better real estate opportunities. We're already seeing it. We're already -- people are reaching out, and we think that in this new environment, with so many closures, that we'll have the opportunity to have nice savings there. So I just would reinforce that one. Then I'd add 2, one is travel. I do think that we're learning that we don't -- our company doesn't have to travel as much. It's a big expense for us. We have lots of travelers, and I think we're finding that we can be more efficient in the use -- through the use of technology. There's not as much travel that we've historically done. So I think that's -- we'll change the way that we do business from that perspective. I think the amount of telecommuting, we've been -- we've had some telecommuting going on in our company for a while, but we're -- we've been a -- we've probably been a bit old fashioned. I think if one thing we've learned is there's a good amount of our associates that can work remotely, which would, in turn, turn to less occupancy expense in the long run that we wouldn't have to take space as the company continue to grow. So I think that's probably could be a benefit in the long run. And then there's a bit of a question mark on what happens to hourly wage. As we went into this, we had the lowest -- as we went into this pandemic, we had the lowest unemployment rates in forever, maybe -- and it was -- it caused us to -- it was really aggressive on the retail side of the market to get associates and had to pay more. So you don't know with this unemployment rate, how that changes and the availability of people that work in our stores should be broader. And so we may not have the pressure on wage that we had anticipated.

Okay. Okay. That's helpful. A question on tariffs. So there were some concerns over the weekend about relationships with China escalating again. Can you just remind us the steps that F&D has taken and how you're positioned right now in terms of your exposure to China?

Sure. So through the whole tariff situation and then the ADD and CVD, we have spent to last, I guess, 18 months now, aggressively getting out of China. And while it went faster than we probably would have preferred, it's good because now the vast majority of it is done. So our penetration of sales was about 50% -- a little over 50% to China, and we're now down into the mid-30s. Most everything that can be moved out of China at this point has been moved out of China. So we'll continue to watch that, and we'll continue to work with our manufacturers to open up factories in other places and continue to find other ways to source product. But as of now, we are down to mid-30s. We think it will go a little bit lower. But we're very happy with the diversification that we've been able to accomplish. Having said that, it's always something that we watch closely. And even through this recent scare by country, we have been very fortunate that while China was closed for a month and then Europe was closed for a month, that we had enough manufacturing sourcing capability across the country that it did not really impact our stock, in-stock or sales at all.

So at this point, are you seeing any supply chain disruption from what's going on globally? Or do you feel like your inventory position is where you want it to be? And I guess, line of sight into the next couple of quarters and the flow of inventory. Any more color there?

Yes. I think that we're in very good start shape. In fact, the last year or so, we've really struggled through some of the transition that was called out on different calls, whether that be tile or wood, just as we've transitioned out of China so quickly, as I mentioned a few minutes ago, so I actually -- a lot -- the kind of the silver lining of everything is some of the vendors that were a little behind have been able to catch up. So we actually feel very good about the impact position as we open the stores back up. As far as sourcing goes, I guess, that China was -- the manufacturing was shut down for about a month, but it didn't really impact us. They've all opened back up now. We've got Europe -- some of Europe is still closed, some is open. It's kind of gradually opening back in Italy and Spain, Brazil had closed down for a little while. But based on securing the in-stock that we carry and the fact it's going to -- we're diversified around the world, we've not seen a big impact, and we don't expect to see an impact in our sales or in our in-stock.

Okay. Now there was a pretty significant exclusion, I believe it was in November. What is your sense on what competitors have done with pricing on the back of that exclusion? What has F&D done? And then my understanding is that it expires in August. I mean, how are you thinking about that?

Yes. We were -- have actually been talking about that. It does expire in August, so it remains to be seen where -- kind of which way the wind is blowing by then and what will happen to the extension of that exclusion or not. I think from a pricing perspective, we've seen some movement, but I would not say that anyone in the industry has gone back to pre-tariff retail. So I think people kind of settled down in the middle somewhere.

The only thing I would add is, and it's difficult -- just the only thing I would add, it's difficult to know in this -- what's going on with the governments and with other countries. But the circumstances that existed at the time when the government, we believe, came to the correct conclusion that they shouldn't be charging that 25%, that hasn't been all remedied, meaning, it's not like there's all of a sudden, enough domestic manufacturing capacity to support the demand. So we certainly believe the right answer is to continue to not charge that 25% tariff, but it's hard to know until the government comes out with a ruling. And I think the petitioners, including us, who petition for that, we'll obviously be making that same case, and we have lots of facts to prove that there's just not the domestic manufacturing capability that exists to sort of adding that 25% tariff back. But again, it's a difficult environment to guess what's going to happen from a tariff policy.

Great point.

Okay. Okay. Yes. So then on real estate and store growth, you did trim your target this year to 11%. You did reaffirm the 20% for next year. A couple of follow-up questions. One, if this is a prolonged downturn, how does that change your view of store growth? Would you actually accelerate it? Or would it be slower?

I'll take my first slice of that and then Trevor, you could jump in. I think if it's -- if we're operating -- if the economy generally reopens, if we're operating our stores, even if there's capacity restraint, as long as consumers are allowed with inside of our stores, that I don't think we get much more aggressive than the 20%. That's a -- maybe, but probably not. That's been a cultural thing. It's very important to us. It's very difficult. There's a lot of autonomy at the store level in our company, having people ready to run the stores, keeping our culture intact is important. So no matter what happens, it would be difficult to say that we would go much higher, I guess, possibly tweak it a little, but only time will tell. And like I said, if the economy opens and we're doing -- and we're seeing our stores rebounding to a good level, then we would maintain the 20% growth. We think even in a down market, that we can take share at an accelerated rate, we know that our concept is accepted around the country and performance around the country. We performed fairly well during the great housing recession. So I would -- I'd see us continuing at that rate.

Okay. And then what are you finding as it relates to availability as you look out over the next 12, 18 months?

Good opportunities. We've got a lot of nervous landlords who aren't getting rent checks from other places and we're getting shown sites in parts of the country that we're really excited to grow fast in. So we're able to add some of that into our lineup next year. We're -- for the -- because we have the delay in this year, we're able to have a better menu between what's been brought to us and what we push from this year. We've got a good menu for next year. We'll have a good cadence for next year as far as the timing of when the store is open for the first time, we'll finally get the right amount of stores open in the first half of the year. So so far, it's good. And I do think that it's -- that we will probably see more real estate opportunities as we get into the next 60 days, because my guess is, if people didn't pay in April, they're certainly not going to pay in May. And that will continue to get landlords more nervous, and we'll probably continue to get more calls.

Okay. And through this experience, are you thinking about new ways to tweak the format at all, including a smaller format?

Well, as you know, we've got the design store that we're opening this year that we're excited about. We'll continue to open that store. We won't have enough time to learn enough to say how we aggressively would grow that. But as of today, the only things that would change in the way the stores are certainly taking -- what we're doing to make our stores safe today, it would apply to the new stores, which is something new that we haven't historically done. As Lisa mentioned in her answer earlier, thinking about the way the customers come in to pick up product, there could be some changes in the way we format the store and the way we operate the store. So we're not far enough along to really share much of that. But we're certainly talking about it, but it could change the way we have the command center in the back and things of those nature. But in general, the -- we still see -- and as a result of -- or as evidenced by what's happened since we've gradually reopened stores, people still want to engage with our product inside the store. This is the time where a big store is at an advantage because people want to practice social distancing and you'll have -- it's a lot easier to do it in an 80,000 square foot store than it is to do it in a 10,000 square foot store. So not much change to the format beyond what I mentioned.

Okay. Okay. And then just a couple of follow-up questions here on the demand backdrop. So I think one of the messages has been that your core customer hasn't been as impacted to date. As a result, it seems like there's pent-up demand. And as you're opening up the stores, as you've clearly talked about, and the business has started to bounce back, can you, one, elaborate a little bit more on some of the demographic work that you've done? It sounds like you have some good information, good data from some of the CRM tools. And then the second, what are some of the things that you're watching for that you'd be more concerned about? Obviously, existing home sales slowing, that's a key driver of the business. I guess, how are you thinking about some of those factors?

Yes -- go ahead.

Yes. I'll take Point 1, and I'll pass Point 2 on to Trevor. The -- as far as the CRM data, it's still pretty new. I mean we've spent the last year standing that system up, and are just really starting to be able to understand much more about the customer demographics than we ever have. What we're excited about, especially with what's going on right now, is that our core customer, the average household income is actually between $100,000 and $125,000, which is higher than what we thought it was. And I think that, as we look at the unemployment that is going on now and the struggles that the American consumer will have, I don't think that will be as pronounced in that kind of an income level. And so I think that we have hope that we would be less effected than maybe some other businesses would be by the unemployment and what goes on after this. I think they're a little bit older than we thought, kind of 35 to 64. They've been in their homes a while. And so I think that the information that we have been getting and we'll continue to get more and more data as we are able to continue to gather more information from our customers. But I think that what we've been able to learn so far gives us positive thoughts about where we -- how we come out of this. Trevor, I'll let you answer the second part of that question.

Yes. Historically, as we've analyzed our business, we think the highest correlation of our business is existing home sales. We think a lot of -- the vast majority of our sales are going into a residential remodel. We're certainly diversifying that with our efforts in the commercial business. We've -- you've heard Tom call out on the call, we continue to have a lot of success, even though it's a small piece of our pie, but we're very focused on continuing to grow our commercial business. I think the next most important thing is household values. You guys might have even seen the article in the Wall Street Journal today that the household values are holding up nicely in this environment. And as people feel like they're in a house that's adding value, they're much more likely to invest in it. So I think those are probably the most 2 important metrics that we watch closely. Interest rates because it has a high correlation to existing home sales and new home sales is another one we watch. Obviously, interest rates are incredibly low. You can get a mortgage for -- depending on what you're doing for 3%-ish right now. I think as we look forward, I think existing home sales, everything we're reading, and it just probably makes sense is that existing home sales are going to be declining for a while. We saw that at the end of March. Even though COVID-19 really hadn't completely taken hold for the entire month. And so I do think -- we think the demand side of this could get tougher. We already went through all those reasons why we think we'll do better in a down scenario with the value proposition. But we are assuming that it's going to be a difficult macro environment out there, a difficult flooring environment because of the difficult macro environment. So that's how we're planning for the future.

Okay. Thank you for that. I think we're just about out of time. I don't know if the team there, if you have any final thoughts, anything else that you wanted to get across after the call last week?

No. I mean, I think I certainly made my points at the end, we ended 2019 with record sales, record earnings, strongest liquidity position, great -- the best customer service scores we ever had. And the pandemic is -- it's a human tragedy and something that we're all facing, that we're all dealing with. But we think we've been thoughtful in our approach to how to operate our stores, thoughtful in our approach on how to manage the cost side of our business so that we can play offense on the other side. And we've got a good experienced management team that's been together for a long time, and we've been able to prove, we've weathered lots of storms, and we feel pretty confident we will be able to do that for this one, too. So I appreciate everyone's interest in our company and participating in the call.

Okay, all right. Thank you to the Floor & Decor management team and, of course, everyone else for joining, and have a great day. Appreciate it.

Thanks Seth.

Thank you.

Bye.

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