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

Good day, everyone. This is Simeon Gutman, Morgan Stanley's Hardline/Broadline and Food Retail analyst. It is my distinct pleasure to welcome everyone to this fireside chat -- this virtual fireside chat with the management team of Floor & Decor, represented by Trevor Lang, EVP and CFO; and Wayne Hood, VP of Investor Relations. And Trevor, hope I didn't add an extra title to your name. I'm going to read a quick disclaimer, and then I'm going to hand it over to Wayne Hood to read a quick disclaimer from his side before we jump into the discussion. Keep in mind, we do have a parallel webcast for investors to ask questions, which I can see on my other screen, and I'm happy to bring them into the discussion. First, for our disclaimer. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/research disclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Over to you, Wayne.

Yes. In the spirit of disclosures, we have ours, which -- before we get started, I'd 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 our Private Litigation Securities Act of 1995 throughout the course of our presentation today. So I'll turn it back over to you, Simeon, to begin the conference.

Thanks, Wayne. So Trevor, maybe to ease into our discussion around lumber and wood flooring and housing. Maybe start with, can you give us, I guess, a synopsis or chronology of your experience or Floor & Decor's experience or the progression thus far through the pandemic, or I guess, the 2020 overview.

Yes. First of all, just thank you very much, Simeon, for having us. It's a great franchise that you work with, and you've done a great job covering our company. And so thank you very much for having us. We're pleased to be a part of this again this year. So if you go back to Q1, our business had progressed. We've gotten a little bit better than the previous quarter -- the previous year we comped at 4, and -- but that had gotten better throughout the year. We were comping 6 through the first 12 weeks of the fiscal year. As we got to the end of March, we and many other companies made a proactive decision to shut down our stores when COVID was really ramping up and a bit out of control. Because we didn't know, right? We were all kind of learning. When we shut down our stores to customers, both professional and consumers, during that period of time, starting in late March through -- we started opening some of our stores in April, our same-store sales were down about 50%, which in one case is quite amazing that you have 50% of your sales still coming in when you're not letting customers into your stores, but that business was down. Starting in April, we opened a couple of stores in Salt Lake City. We liked what we saw. We felt like we had done all the safety precaution, things that we needed to do from the CDC and all the other governmental regulatory agencies. We felt like we had processes to keep our customers and employees safe. Same-store sales started double-digit comping shortly thereafter. As we said in Q3, every month got better from a comp perspective. We ended in September, I think, with almost a 21% comp. And we said that our business continued to be strong into October. And so then quite an interesting period of time. And I know all of the investors know this, but I'll just say to be clear, the combination of us all spending a lot more time in our homes, having to make room for work, having to make room for working out, for kids, for parents, people are making investments in their home. You combine that with all the stimulus that came from the government and probably more so the fact that people are not spending on leisure activities, we're not spending as a country some portion of $2 trillion on flights and hotels and ball games and concerts and things like that. People are spending and investing a lot in their homes, and we're -- certainly it's like we're getting our fair share of that. So up 6 pre-COVID, down 50 during COVID. And last quarter, we comped up 18.4 as we opened our stores, and every month has gotten better throughout that period of time.

Thanks for that. As you think about planning the business, when -- if we're standing, you mentioned the extreme swing that occurred in your business, it was almost the worst of times, the best of times, and we were talking about decremental margins. Now we're talking about incremental margins. As we look forward today, do you still plan with a wide range of outcomes? Or do you don't feel like we need to anymore? And the outcome set probably, it can't be as obviously as dire as it was back then. Just curious, just broad picture, not guidance, but when you think about scenarios.

Yes. So we're fortunate. I come from the background of a very detailed financial planning process. I worked for private equity firms before here. And then when I was here, as you might expect, they certainly had requirements and then very thoughtful about long-term financial plans as well as short-term financial plan. We've been doing that for 10 years I have been in Floor & Decor. We have continued that. Obviously, it's been very difficult, and the plans have widened in their scope. But we have a 2020 budget -- 2021 budget, I should say. We have a 2024 long-term plan that we just published to the Board of Directors. So we are continuing to do those things. The range of variability, you're right, is short-term, is a lot broader, but ultimately, the way we think about it long-term is we think it's going to be a fairly good place to be. There's 129 million housing units in the United States today. Tom quoted, I think, on our last call, 80% of them -- of those 129 million are over 20 years old, right? You've got to start investing back into a home at some point, the stuff wears out, trends change. And so you add to that, we've got the lowest interest rates and mortgage rates that I think we've seen ever. That is spurring existing home turnover, that is spurring new home builds, that is spurring people refinancing their mortgages, which gives them a lower payment or allows them to cash out to invest back in their home. And so it feels like, obviously, none of us -- all of us wish COVID had never happened, but it has created a very strong short-term and really long-term backdrop for anything having to do with housing. And so as we think about that long-term plan, we think that the hard surface flooring market was going to grow anywhere in the 3% to 5% range, maybe it will do a bit better than that over the short-term, just because of all the factors we've already talked about. And so we kind of think about it on a CAGR basis. Simply said, we think even our most mature stores, our stores that have very high volumes. As long as you're not being cannibalized, those stores should be able to grow 3%, 4%, 5%, 6% a year. You then add to that the new stores, we're going to get back to 20% unit growth. We have a lot of stores and half of our storerooms were not even close to maturity yet, and you start adding 20% more stores again next year. That gets you an upper-single digit, mid- to upper-single-digit comp. And again, that could be a little bit higher with a better backdrop. And that then leads to kind of mid-20% sales growth and earnings growth at a faster rate than that. So I think on a long-term basis, we still think the hard surface flooring industry is going to do well. And because of our uniqueness, all investments we're making in assortment and e-commerce and product and supply chain, distribution, all those things we think will allow us to grow at or above the industry. And then again, when you add on the new stores, that's when you get to that mid- to upper-single-digit comp.

Is there anything that's changed about the way you're running the business? Or you're thinking about the outlook or growth that you learned through the pandemic?

Yes. Probably the thing that -- not a lot, I should say. I mean we think the core tenets of what has made us successful, everyday low price, in-stock inventories, great website that's integrated into the store, fantastic associates that know how to sell this product. I mean all the heavy levels of inventory. Those things are an important component of what we're really able to continue. Probably the thing that we have learned a little bit more that we're going to lead into as we think about the next 2 to 3 years is the importance of the website and integrating that experience into the website and then the back end of the store. We've really learned a lot in the last 6 months of the importance of getting our customers in and out the store effectively. And so a lot of retailers have done a really good job on buy online. And when you show up at the store, we'll have your product ready, we put in your car and you're off down the way. You can buy online. I'm going to show up on Wednesday at 3:00. You can put the inventory in my car, and I'm out the door. It could take you 15, 30 minutes. Maybe you've got a bit of a bad day, 45 minutes, to get the product out of our warehouses, right? With big bulky product, you have to use a forklift. You have to drive the forklift slow for safety reasons. And so that's probably one area, I'd say, the website and the importance of the connected customer strategy as well as the fulfillment piece of our business and how we are going to invest in making our stores more efficient on the back end when the customer actually picks up the product because if we do that we know we're going to get more positive feedback on social media. The pros are going to want to do more business with us. The consumers are going to have a great ending experience with us. And so those are the 2 that I would call out that we're going to be able to focus on investing in as we think about the next year or 2. But those are just improvements on what we do today. The core tenets that have made us successful were enhanced during this period of time. And so there's no massive new changes that we're going to be making.

Got it. I'll ask -- I'll call it, the $16 billion question because that's double your market cap, which I'm sure wouldn't be a bad outcome. Regarding the length that this backdrop will persist and then some of the lapping of it. Someone in this conference earlier today said everyone is going to be taking epic vacations. I don't know if that's true or not. But right, this idea that dollars will flow back to services. You operate in a space though, that is tied to the greatest appreciable asset that any household owns or rents. And so the dynamic could be a little different. Curious how you think about it. Obviously, it's broad-based around comping the comp and the, I guess, consistency that housing could have next year even as we lap some of this unprecedented level of spend.

Yes. It's -- you're right, it's the billion, trillion-dollar question for everybody thinking about their business. And the way we're thinking about it, and I've heard a few other big company CFOs, companies much larger than us, think about it as well is, again, kind of on that CAGR basis. Meaning, that 2019 is the base year, which was a decent -- pretty good years, especially as we exited that year, the macro backdrop for housing in Florida was pretty good. So that's a good base year to start with. Again, I think my existing stores, my stores that are higher volume, that have been around for a long time, I think for all the initiatives that I talked about briefly, we should be able to grow those at 3% to 5%, right? So I give you a simple example, if you had a store doing 100, it would have probably done 105. To pick a nice round number this year, it would have been 110 or 110.5 or whatever that math is than 105. Next year we would have been 117 on that same 5% growth rate. And so that's how we're building our longer-term plan is on that kind of CAGR business under the theory that the overall backdrop is going to be fine. What could make that better, as you know, and we talked about is the fact that these interest rates are going to be low for a long period of time, right? The Fed has been very clear that even if we get above 2% for a period of time, they're not going to go -- the current indication from the Fed is we're not going to raise interest rates. Low-interest rates drive a number of good things. They drive existing home sales turnover, they drive people refinancing and taking cash out to invest back in their home, they provide people to refinance and just have a lower monthly payment. It drives incremental household value, right? We saw that, that was up 15%. I think last report out, when your house used to be worth $300,000 now is worth, whatever, $340,000. You're much more likely to invest in it. And so I think the combination of the macro environment being strong for a period of time, it will definitely be bumping. We're up against very big numbers in the back half of next year. But I think as we get to 2022 is probably when we'll try to focus people on. Most people know that. If you read our proxy, we had a goal of doubling our EBIT over a 3-year period of time, which would be $329 million in 2022. And we still think that's an achievable goal. It's a little bit harder now because we're only opening 13 stores this year, not 24, but that's still a goal we can hit. And again, in its core, we've got a big housing stock that's aging and we've got a very unique business that's hard to replicate, and we're making it better every year.

Do you think it's instructive if we look at the Pro versus DIY spend during the pandemic a gauge to assess if we can lap, meaning, hey, they would do-it-yourself versus doing small projects themselves, a lot of them, and that's how the home centers seem to have evolved and those may be difficult, but you're -- now as we're progressing through the pandemic, you're seeing the larger jobs come back, and that could be a bigger composition of the business now going forward.

Yes, it could be. I think our Pro business has been fairly strong for a period of time. And as we know, there's only a finite number of professional tradesmen or tradeswomen that do this job. And if anything, they probably shrank a little bit during COVID because they got laid off like other people did. And then when the business came roaring back, again, you still have that finite level of tradespeople who can actually install these products. And so I think our Pro business has been sort of flattish, strong, but not growing. And exactly what you said, I think the consumers are the ones that have really driven our business up. You did see our ticket go down, which was really driving to less square footage. But our gross margins went way up because the consumer was picking the product themselves. And so I do think that's right. They were doing smaller jobs that either they and their family could tackle, maybe they've got a handy person in the family or they're using a Pro that they've got a relationship somewhere else that we don't know as well. But I do think the consumer -- or we know the consumer has been the stronger piece of our business with some of our new CRM information we now have.

And in the mix of product would it be telling? Would it -- I don't know if there's anything to glean based on what type of flooring people are buying.

Yes. I think what was also interesting about the most recent quarters, we had a much more balanced growth across most of the categories with the exception of our wood business, which is still getting very heavily cannibalized by rigid core vinyl, water-resistant laminate. All of our categories were growing nicely. Our -- for the first time in, I don't know, 4, maybe 5 years, we had a category other than rigid core vinyl we are fastest-growing category. Our stone business was our fastest-growing category. Our tile business, which is still our largest category, was very strong in the quarter. Our decorate accessory, which is 20% of ourselves, is also very strong. And so it was pleasing as those consumers kind of came into the store and saw what we had with the exception of the wood business, again, because that rigid core vinyl was such a great product, all of the categories had nice growth. So yes, it was pleasing to see the growth across almost all categories in the third quarter.

I'm going to jump to the webcast. We have 2 questions. They're not in the sequence that I've gone to. So hopefully, it's okay to jump around a little. First is the rollout of the DFW design boutique ramp and how that's going? How is the rollout going? Any further thoughts on buy or build decision for further expansion of this format. I'll pause on that one, and we'll go to the next one after.

Yes. So we've had that store in Dallas open maybe 3 -- if I remember we get on our fourth month now. We're pleased with it. We get very detailed pro formas on that like we do for all of our stores. And really, if I go back, I don't know if everybody knows, but just to be clear, when we looked at Dallas, it's a market we've operated in for a long period of time. We have 7 very high volume, very profitable stores in Dallas. We're fortunate most of our customers will store their product with us. So we have their name, e-mail and phone number, and so we can get some pretty good data about where that customer lives and shops. And what we saw in that information, even though we have very successful stores in Dallas, we weren't getting a lot of that downtown, dense, high income, high household value, high net wealth individual. They just stay in town, downtown Dallas and pay more for their form. And we would love to have an 80,000-square-foot store in Downtown Dallas, but you just can't really make that work. It's not the site or the cost. And so we felt like we could open this design center. It is a beautiful store. It's this -- in this case, I think, it's 10,000 square feet. It's as good as any of our smaller competitors that are boutique. That's as good as any -- as much as the aesthetics and the look of the store. It's got all of our great product. The assortment is actually bigger than our big box stores because we carry -- because we don't carry in-stock in the store. We certainly can put more SKUs in there. And it's very aspirational. And it's working just like we wanted it to work. We got customers coming in. We've got our professional customers bringing their clients in. And people are astounded at the prices relative to what they see in the design district. We're in the heart of the design district there in Dallas. And when they go Walker Zanger or they go to Porcelanosa or Tile Shop, which are all close competitors, they're amazed at our prices. And so yes, we're pleased with the performance. Again, it's only been open. I think we're in our fourth month now, so we've got more time to go there. We're probably -- we're going to try and open probably 1 or 2 more next year. We've got some ideas on where we're going to open those stores. We're working on deals right now. So yes, it's a great idea. Maybe we could have 50, 75, maybe 100 of those stores eventually if it works out the way we would like it to work out. But I wouldn't say we're going to open 5 or 10, but we're going to open a couple more next year, hopefully, 2 or 3 the year after that. But we do think it's a new, great concept that is net new, that allows us to get to a customer today, just to have lived in Dallas for a long time. Those customers, they won't drive to Plano or McKinney or The Colony or Arlington or Hulen where we have stores. It's just -- for them, it's just too much of a commute. And so it's really a hopeful way for us to get new customers that weren't exposing themselves to driving out to the suburbs to get our product.

And Trevor, I may have missed it, but is the -- are the tickets that are being generated or originated from this location, are they -- how do they compare to like a non-design center-driven sale?

That's a good question. I don't think I've looked at specifically that store's ticket, but the gross margins are meaningfully higher. That customer is definitely buying the best product we have, which is in better margins. So we are very pleased with the gross margin profile of how that store is performing. It's fairly significantly above our big box stores.

Got it. Okay. And then it's just going to be shifting very far in topics. Can you talk about pricing by flooring segment and the impact of tariffs on LVT and ceramics to your business?

Yes. I'd like to sort of think about our industry in simple terms. We've got the big home centers that are, I think, 28% of the competition today that we compete within the hard surface flooring. And they're kind of lump everybody else in the independent category, people who -- their pricing, you have to negotiate or you have to get your Pro to give you a price. They don't carry in-stock inventory. They're small stores. LL Flooring, Tile shop, the independent sale kind of operates somewhat similar. So you got much bigger companies as the home centers or maybe 30% of the industry. Everybody else is maybe 6% and we're probably 8% to 10% of the industry. So the people who are obviously very focused on costs are the home centers. And our pricing philosophy has been consistent for really the 10 years I've been here. We've probably got better out of it. But we want to be at or slightly below. I shouldn't say at, we should be slightly below the opening price points. It could be 2%, 4%, 5% below on opening price point products. And then as you move up on the features and the attributes, we want to be hopefully 10% to 20% below our larger competitors. As you add more features and benefits, warranty, thickness of the product, rectified versus pressed-edge, thin grout lines, the price difference will grow as you move up those features and attributes. Then -- and that's again, 28% of the industry. We compete, obviously, a lot with home centers. The rest of the industry, our pricing, we think, has actually gotten better. I think with the complexities of having to deal with tariffs, a lot of distributors and agents that we're sourcing for domestic companies or distributors. We're buying a lot from China as that business has gotten more difficult with tariffs and on top of that antidumping and countervailing. I think the cost structure has gone up more. You add to that, we've gotten more efficient with our supply chain as we negotiated long-term contracts with international container companies and domestic transportation companies. We've seen our supply chain costs bring down our cost. And so our pricing disparity against the independents, we think, has actually gotten better and bigger. And so price is really not an issue if you were to shop with us versus independent, and you're going to be paying 15, 20, 30, in some cases double what you're going to pay at Floor & Decor. So the answer is pricing has gotten at or better, we believe. And we're fortunate we have regional merchants that live and breathe in all of our 8 regions, and they're shopping the competition all the time. And so we keep pretty good marks and control of what we're seeing out there from a competitive perspective.

So tying in the -- because you started mentioning some of the market share and the composition. Do you think about Floor & Decor's market opportunity in terms of store count and a sales per box, which in theory backs into a market share level or an ultimate market share level that is comparable to other scaled, let's say, big box, I would say, category killers. How do you think about the market share, ultimate potential?

Yes. Today, we look at it. So we use -- we've actually used 3 different data scientists, real estate firms that help all retailers think about where to add their boxes. They come in to do a fairly detailed assessment. And we're fortunate because I think I'm going to mention this, but our customers will give their name and address because they'll store their product with us before they come, pick it up. So we feed all of that information into our external data scientist firms. And then they come back to us and tell us, statistically speaking, based on this demographic and psychographic profile, here's how many stores you can have. And basically -- even though we pay a lot of money for this, it's pretty basic. The most important demographic profile is density of population. The more households we can deal with, obviously, the higher volume the store can be. Household income and household value are number 2 and 3. Obviously, if you have a higher income or you have a higher household value, you're more likely to be able to spend on things like flooring. And then we historically do better with owners versus ventures. And so since we know that for all -- we know that information for all 330 million Americans, we have a detailed list of where those 400 stores that we talked about will be. And so that's how we come up with that 400 -- at least 400 stores. As we open more stores closer to each other, we have stores in Texas and Florida that are within a 10- to 15-minute drive, a handful of them. We're learning more about how close our stores can be and what level of density in population we need to be. As we get into adjacent categories that expands the total addressable market. And we're now selling vanities, fabricated custom kitchen countertops, frameless shower doors, that increases the addressable market. And so we feel very confident it's at least 400 stores. The small stores we talked about previously, Simeon, that will be on top of those 400 stores. And as time will tell, as we continue to grow in those adjacent categories, we have success in commercial. We firmly believe it's at least 400 stores, is where our head is today.

Got it. Do you think -- and just reflecting back, a little bit of a market share question, a little bit of comping the comp question. Were there any outsized gains that you think you benefited from because competitors were not open, call it, in the first 6 months of 2020.

I think the in-stock inventories that we carry in our stores and in our distribution centers was absolutely an advantage that really helped us versus our competitors. And we have to be humble with this answer because we were a little bit lucky. We opened that big distribution center in Baltimore, Maryland in November of last year. Obviously, nobody had any idea at that time that COVID was going to be an issue. But we filled that distribution center up with inventory. And so we had a lot more inventory than maybe we would have otherwise had because we increased our distribution center capacity by 50% from 3 million square feet to 4.5 million square feet. And so I definitely think, when we started opening up our stores in late April and by the beginning of June, we had all of our stores opened, we had inventory, and we had in-stock inventory. And I think a lot of our smaller competitors may have not had inventory because they were really watching their business closely. And the big boxes, we all know they didn't close because they were essential retailers. Their inventory levels were probably a little bit lower. So I think the answer is yes. I think that in-stock inventory, and we can replenish back into our storage generally within a week. That was a very big advantage for us that others did not have.

Store openings, Trevor, and the cadence of them. You're making up some lost stores or stores that didn't get opened in 2021. Can you talk about the store openings in general, the cadence? And then how we should think about the impact it may have on margins as we get through, I guess, this little-pig-in-the-python period.

Yes. The great way to think about it. I mean you're right. So 13 stores -- new stores this year will end at 133. We'll add 27 stores next year, which I think gets us to 160. We will open those stores in a more equal cadence, which is roughly 7 stores a quarter. That's very attractive to us. We've never been in that position. We're much -- we're very pleased that we're going to be opening up. But to your point, you're going to see some incremental costs in the first half of 2021 relative to 2020 because just again around math, if you're going to open 14 stores in the first half of 2021 versus we opened 5 stores in the first 6 months of this year, you're going to have higher cost, right? We'll be averaging anywhere from $1.3 million to $1.5 million in reopening expenses, right? We have 14-ish new stores versus the 5 next year. We've also talked very frequently in the 3.5 years we've been public. Our new store SG&A runs in kind of the mid-30s. The first-year-of-store operates versus our more mature stores are in the low 20s. And so you're definitely going to have some pressure on preopening expenses, and we call it out separately in our SEC filings and on store operating expenses because we're going to have a number of new stores. Now as we get to the end of 2021, the back half of 2021 and certainly into 2022, you shouldn't have that same issue. But there's no question there's going to be some cost pressures in the first half of next year. Now the other benefit we probably will have, and listen, my crystal ball is no better than anybody else's because if we're in this environment where comps stay that will hopefully help some. I'm not suggesting we're going to comp in the upper teens for the first half of next year. But I do think we're going to be in a pretty good environment. And so maybe that's going to offset or help some just because the more mature stores are going to benefit from this environment we are operating in.

You mentioned a crystal ball, and this is something I meant to ask earlier when we were discussing housing and comping the comp. You probably pay attention to all the existing home forecast, and I don't know how many you've seen for 2021. But they all seem pretty good, pretty healthy. I don't know how you center around your forecast or your level of, I guess, excitement around it. But how do you kind of size them up at this point? Would you describe them as either pretty bullish, pretty typical? And then when do you sort of finalize your forecast based on them?

Yes. I think we look at a number of different resources as we think about planning it. And in this year, we actually brought in one of the big consulting firms to help us think about it too, because we just want an independent perspective. And we've been pretty good at forecasting the business, not perfect, but we've never missed the guidance -- the range of guidance. The 3.5 years we've been public, obviously, we pulled guidance here recently. But I think we are expecting the environment because of low-interest rates because people are likely to spend more time in their homes in the first half of the year because I don't believe the vaccine is going to be widely distributed until the late summer or fall. But that low-interest rate, I think, is going to be very important because that drives existing home sales, drives refinancing, drives up value of households. I think we're going to be in a pretty good environment. Obviously, we're up against fairly -- we're up against modest -- very modest comps in Q1, negative comps in Q2. So the first half of next year feels like it's going to be a lot better than the second half. They were up against 18% comps in Q3, and we'll see how Q4 turns out. But again, if I kind of go back to that -- the way we think the right way to think about it is that the overall market was going to grow on a CAGR basis, 3% to 5% a year. We still think that's the right way to think about 2021, '22, '23, probably going to be a little bit higher in the short-term. But ultimately, I guess we're just getting to some of those sales a little bit sooner than we would have gotten otherwise.

Great. Can I ask about the Pro. Can you talk -- I apologize if you said this earlier, what percentage of your business is Pro today? And then regarding the Pro loyalty program and the enhancements, can you talk about the level of sales outside attached to them?

Yes. In our last year's 10-K, we would have said 40% is the Pro spending on the product; 40% is what we would, in that case, call the DIY or the homeowner spending on a project; and 20% is the buy-it-yourself customer, which is a consumer's credit card or cash, but they were heavily influenced to purchase from us because the Pro suggested they maybe go look at our products. So 60-ish percent would be Pro influenced and 40% would be the consumer. We briefly mentioned this on the last call. Now that we've got our CRM data, we've learned a lot. We've invested this in smart consulting firms, we've hired some really smart people and promoted some people internally. We now have much better data because we're fortunate. You will know -- most customers will give us their information because we're storing their product with us. And so we have the name, phone number and e-mail. And we know when you're a Pro or a consumer for most of our people to check out through the POS system. So we're going to update that in February. I don't think it's going to be by some huge difference. But we do have better, newer information about what -- how much of our customer is Pro, how much of is consumer, age and income demographics. And so we are definitely learning more about that, and we'll give slightly updated disclosures in February. But at the end of the day, most of our products today are going into a residential remodel. And most of our products have some form of professional installation. That piece is not changing. But we do have better information that we're going to talk about in February as to how much of our business is homeowner, DIY, DIY and Pro.

On the topic of 4-wall margins, can you update us on where they sit? Is it the right way to think about the ultimate margin potential of the business, 4-wall less whatever corporate costs may be over time? And has anything changed? And I think -- and this framework applies to, I assume, 400 stores, but talk about where the long-term margin of the business can get to.

Yes. I just want to give the answer first, and then I'll give some of the details. So we do think it's a mid-teen, maybe slightly above mid-teen EBITDA margin business. And if you backed up all of our stores over 3 years, we're basically there today. But it's hard for investors to see that because we're opening so many new stores, and we're investing in infrastructure to support 20% unit growth. And then you back off probably 300 or 400 basis points of depreciation to get operating margins in 11, 12, 13, possibly from an operating margin perspective. The 4-wall EBITDA margins is somewhere above 20%, is where we're operating at today. If you then back off our distribution center expenses, we don't push those down to the store, the four-wall distribution center expenses. We're probably right -- and I'm talking about stores over 3 years old, right? Stores that are closer to maturity or over 5 years old. We're probably right around that 20% if you fully burden the stores with all of the distribution center costs. Last year, our corporate costs, let me get this right, 6.5%. Yes, last year, our corporate costs were 6.5% of sales, that number is going to come down over time. And so that's how you kind of -- that's the math of how you can get to a mid-teen EBITDA margin business. And again, somewhere between, hopefully, 12% to 14% operating margins, as we get closer to maturity. So yes, I think we absolutely believe that. I do think there's probably one thing that has benefited from in this environment is now I think that mid-teen EBITDA margin is -- can be achieved even when we're growing 20%, and I would not have said that 2 or 3 years ago. I think just the incredible job Lisa and the merchants have done on the product margins have been above what we would have thought. And so we're a bit ahead of -- as again, if I look at my 3-year plan from 3 years ago, we're a bit ahead on that product margin aspect. And therefore, we will get to that mid-teen EBITDA margin probably a little sooner than we thought.

And I guess online shouldn't really play a big or have a big impact in that outcome, right? It's not like you're putting a pallet of lumber in the mail at your own cost to send over to somebody, right? I mean, is there any -- are there any potential impediments to that vis-à-vis having a bigger digital platform?

I think yes and no. I mean, for us, when you read our initiatives, new stores is number #1, growing comps is #2, but the e-commerce and what we call connected customer omnichannel is #3. We have invested heavily in that platform for a long period of time. It's still a top -- it's our #3 initiative. It's kind of like a high tide that rises all the boats, the storage being the boats. And so we've got some very thoughtful strategies that we're going to invest in on how do we merchandise the website, how do we make it easier to transact us with this mobile-lead, right? We're obviously seeing a lot more transactions and insights and research going mobile. We have some good ideas on how we can improve that. Expand the assortment through the website. So you get comfortable buying with us, maybe you've done a project. "Oh, my gosh, now with all these new advantages that they have online that they don't have in the store, right?" So that's -- kind of grow endless hour, I think, is the terminology some people use for that. And so I would say the web is in a very incredibly integrated and successful part of our business. And the enhancements that we're making from a technology perspective and a talent perspective, we think will help us to run an even better business. And even things on the back end of the store, as I sort of talked about when we first started the conversation, is there's retailers out there today, where, again, you can -- on a website or on the app for the store, we have a great app for our pros, I can manage all of when I come to pick up the product and you have the product ready for me. So I think all of those things tell us that it's -- again, it's a top 3 priority for us. We've got a very thoughtful roadmap as to how we're going to invest in the web. Based on what we hear from our stores and our customers, to continue to enhance that experience. We do a really good job of it today, but we've got some really good ideas as we think about the next 2, 3 years that could -- maybe our web business could be a bigger piece of ourselves. But I think at its core, you're right, people need a curated assortment, right? They don't want a marketplace for flooring. They need someone to help them pick what is right for their project. There's water issues you have to think about, are floors level, what kind of product can I use in the environment based on the humidity, what's the look in San Antonio versus Miami is very different. And so a curated assortment versus the marketplace is what you need to do on a website, and we obviously think we do a really good job with that. So I don't think there's a pure-play player that can come steal a lot of market share from us because it's the most micro merchandise piece of retail I have ever been associated with. In that case, you need a store and a website to work together because of that.

Great. I'm going to ask about product. I have one, and I'm going to take one from webcast and put it into a 2-parter. Update on the latest product trends was asking a little tongue in cheek. What's the next LVT? I don't know if we're going to really identify that during the pandemic. And then the webcast question, Trevor, is given the strength in composite decking, have you considered stocking the category? If so, why or why not? Would it be a good opportunity for you?

Yes. So I think one -- last quarter was probably one of the more balanced quarters we've had in a long time. Our decorative business was very strong. Our tile business interestingly enough. That had been a business because of having to get out of China so fast last year, and that was a business that struggled, but our tile business was very strong. Rigid core and water-resistant laminate continued to be very strong. Our stone business was interesting. It's only 6% of our sales, but our stone business was our best-performing category last quarter. And so we were very pleased to, frankly, see a more balanced growth when our sales were up 31%. It's probably been the most balanced quarter we've had since we've been public, maybe. And so that was appealing to us because that shows the consumers -- and as we already talked about, the consumers are making a lot of those choices. The consumers are coming in and buying what's right for their projects in their home. As to what's the next rigid core vinyl? I don't have a good view for that. I do think there are lots of unique things in each of the categories we sell, tile. You're starting to see things that look like natural stone and bigger format tile be strong. that's an area we can be successful in with our big stores. In decorative, you're continuing to see price points and uniqueness go up. And consumers are resonating with that. I worked 2/3 of the day in our Roswell store the other day and spent half that time in the decorative area. And well that's an area where we really shine. In my view that's probably the most unique part of our business that our merchants and store [ chiefs ] have done a really good job. And just great new products that you -- if you find it somewhere, you're only finding it at the boutique store and you're paying $100 a square foot, you were selling it for $30, $40, $50 a square foot. So we're having lots of success there. And then natural -- again, the stone business and the natural stone business, lots of very new products that you can't get at the home centers that are successful for us. And I missed -- what was the last part of that sentence?

Composite decking. Yes.

Yes. We have not done that. We have added a number of adjacent categories, we've added vanities. That's been a really good success story for us. We've added bathroom installation accessories; towel hooks, towel bars, soap dishes, things like that. That's been a nice growth area for us. We've done frameless shower doors. We do a lot of bathrooms. If you're doing a bathroom, you're very likely putting a frameless shower door, that's also been a nice new category for us. Fabricated custom kitchen countertops hasn't been quite as strong for us, but that's another area. Those addressable markets as we size are actually better than the flooring markets. So those categories that we're already in today are big. We have not tried decking. We've done some pavers for outdoors, like if you're from Florida or someone from Arizona where you've got a lot of pools and things, we've done some decking and had okay results with that. We have had conversations about that product. That may be something we just got to make sure we have had to do it in a way that it's not so bulky that it takes up too much space because that is a bit more of a commodity product. But the margin profile is not as high as our flooring projects. So I'll make sure Lisa and the team hear that. But I know we've talked to a couple of vendors about it, but if it hasn't just like the other adjacent categories that we've already invested in or having success with, there's a bigger opportunity than that today.

Great. One more from the webcast, and then I'll ask one after to bring us home. Of the 3% to 5% long-term growth, how much of that is price and how much of that is volume?

I think the majority of that is in square footage. I don't know that a lot of retailers are going up now that it gets a little complex with tariffs. And tariffs coming back in on rigid core vinyl, there might be a little bit of price as we think about the next year. But once we anniversary that, I do think historically, more of that has come from square footage than it has been on retails.

Got it. Okay. And then maybe this is the last question. You added 2 new Board members. One comes from a new home background -- new home sales background. One, I think -- I don't know if you call it property management or home services area. Broader discussion about which -- what channels out there you can service, who you can sell to, is the TAM a lot bigger maybe than what we're thinking through. I know you have some commercial endeavors. So if we could talk about that and then tie it into some of these Board members and their background and how it could help Floor & Decor?

Yes. It's very perceptive. So we actually added 3 Board members. We had Kamy Scarlett. She is the Head of HR for Best Buy. It's a company we got a substantial amount of respect for her. They've really done a good job, and they have a culture that is passionate about their business. And so much bigger company than us. And so we were very fortunate to get her on our Board. And so she is more focused on the people and the HR, just -- she has got a lot of experience in operating too. But the other 2 board members, you're right, both Charles and Ryan, Charles with Invitation Homes. You're right, it's -- they rent -- they're the largest renting -- house renting company in America. He's the COO. And so you're right, it's a lot about how do we understand the MRO and that property management business, how they buy for and how they think about replacement. And then, obviously, Ryan, with Pulte Homes, big national homebuilder that's had a lot of successful long period of time. And we are planning to learn with them. We're having good success with our commercial business. It's growing albeit from a small base, but it's growing at a faster rate than our total sales. And adding those Board members was, as you would expect us to say, strategic to help us think about how we can grow in that commercial space and really what is it that those property managers and those new home construction people think about, as they're thinking about sourcing partners. And so yes, we are pleased to have them. They started on January 1, so -- but they're getting up to speed quickly, and we're just super pleased. For a company of our size to get a Board talent at that level and that caliber is a big coup for us.

Great. Well, look, we have a minute. I think we can end around now. By the way, I hope that's not the Roswell Store you worked in because it looks like you scared everyone out of there.

This was taken at night or something, I don't know.

Yes. All right. Well, we appreciate your time, your insight. Wayne, thank you. Trevor, appreciate it, as always. Wish you best of luck in the remainder of this year and success in '21 and beyond.

Thanks again for having us. We really appreciate it. And great questions. Talk soon.

We will. Take care. Thank you.