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

Hi. Good afternoon, everyone. I'm Greg Melich. I cover the retail broadlines and hardlines here at Evercore ISI. It's my privilege and honor to have with us the Floor & Decor team to -- on the screen. Next to me, I have Trevor Lang, who's the Chief Financial Officer; and Wayne Hood, who runs Investor Relations. With that, I'm going to hand it off to Wayne for a few comments.

Yes. Thanks, Greg. I just need to make a brief comment -- safe harbor comment before we begin the conference today. So let me do that. Before we get started, I'd like to refer you to the standard safe harbor language included in our press release 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 Greg, I'll turn it back over to you and Trevor.

Thanks, Wayne. That's perfect. So Trevor, certainly active market, exciting times in the business. A lot of change over just 12 months ago. So I'd love you to level set where you think the total addressable market is for your business. And maybe walk through commercial as an opportunity and how that led to the logic of the recent Spartan acquisition.

Yes. First off, Greg, just thank you so much for having us. We've had a great day, and we've got a number of meetings coming up after this. And you guys always do a very thorough research and have great quality items that I'd like to read and learn from. So thanks for having us. So we estimate the market size that we participate in today at $22 billion to $23 billion. And that has a fair amount of the commercial industry that we think is addressable to us. And just to give a little bit of context before I give the answer on what we think the addressable market grows to is, we did a lot of homework with one of the big consulting firms that most people might know on the call to help us really understand that commercial space. We were having good success, but before we really want to grow that to be a lot bigger, we wanted to do a very deep dive, who are the participants, why do they win, why are we winning? How big is the market? What part of the markets could we win in? What part of the markets will we not likely win in? And what we've done in that was where our regional account managers, which is our non-store Pro sales force that is out there selling in the commercial industry today, where they were having a lot of success is in the -- what we call, the downstream mainstream market. So this is where a general contractor has either a new hotel or refurbing a hotel. We can come in, give a very good-looking product at possibly a lower cost or maybe just a better looking product and that general contractor can then, what they call, flip the spec and go from what was there to ours. Same thing with flooring contractors, meaning that general contractors will then delegate that down to a commercial flooring installer. We can come in, show him a great product at a low cost and get that spec. We're also having lots of success with small business owner operators, people who own apartment complexes or own a few business buildings, own a few hotels, condos, things like that. That's what's, again, they call the downstream mainstream market. What we thought was going to be more difficult for us to get and what was attractive to us about Spartan was what they call the upstream market, the A&D community, companies like Gensler who is a big architectural and design firm, that will help their large corporate clients when they're building a large condominium, high-rise or an apartment complex or a hospital or any kind of business building, any kind of commercial application. And that's where Spartan's sweet spot is. That's where they really were having a lot of success and where they're focused the majority of their time. It's a different sales cycle. It's, in many cases, a different salesperson. It's a different way to get that market. And we just felt like, for us, we maybe could have basically figured out and got there, but why not partner with someone who's done it for a long time and can be really good at that. So with that backdrop, to answer your question, so we think adding Spartan takes that $22 billion to $23 billion market, probably up somewhere in the $5 billion to $7 billion range because that piece of the commercial market we had taken out of our addressable market because we just didn't think we were -- we would be able to address that ourselves.

Got it. So that's the upstream addition. So I guess maybe talk a little bit about how do you bring them on board? How do you see the sales progression going as you add those reps and maybe even tie it into how you -- as you open new stores, I think you're probably going to do 25, 30 a year now as a plan, does that affect the type of stores or locations that you pick going forward?

Yes. On the commercial side, there are really going to be almost completely 2 independent businesses. One of the reasons Spartan was so attractive to us is they have a great management team. Strong CFO, strong operating team, obviously, really good on the sales cycle, on the marketing and merchandising and the winning over of clients. And that was important to us because we obviously have a big retail business that we're trying to win. So we've put incentives in place for all of the management team. They are going to be very well rewarded financially if they get the financial goals that we put out there for them. They absolutely think they can achieve them. And the business model for them and for us, what we put together, together is really 3 simple things. One, we -- when we did our research with this big consulting firm, what we found was that there are certain cases where they wouldn't get a job because people would maybe just assume that they would not be able to execute at the level that some of the big domestic manufacturers like a Shaw or a Mohawk, for example, might be able to execute. So because their supply chain was so small and to some extent nonexistent because they don't really have distribution centers, they wouldn't win that job. So they -- we heard very clearly from their clients and from them, if they had this massive supply chain infrastructure of Floor & Decor behind them, their win rate is going to go up. And so that was the easiest piece of that. So simple math is, if a mature sales person is doing $2.5 million to $3 million, they felt like they can do 10%, 20% more than that because they've got now access to our 7,000 SKUs, really good-looking product at a lower cost. Two is we think we can add reps faster. You know, Greg, for us, we'll probably add 14 or so RAMs this year. Historically, we've added anywhere from like 3 to 5 commercial sales reps. We think we can ratchet that up hopefully over time, maybe we get that up to the 10 or more as we work together to figure out how we're going to grow that. And then the big unlock for a company like Spartan is, as we mentioned earlier, they're getting the access to 7,000-plus SKUs at a lower cost, in the same way we have competed. When I got here 10 years ago, we were just doing over $200 million in sales. And last year, we did $2.4 billion in sales, and our Q1 sales were up 41%. Even this last quarter, the way we've competed against those big domestic manufacturers in the retail side is just we go into the market very differently. We source from 240 vendors in 24 countries. Our merchants have been in role for very long periods of time. They're great at anticipating trends and getting in low cost. That same big successful sourcing, merchandising strategy, we think, is also going to be very effective in the commercial world because just like you're seeing in the residential market, rigid core vinyl is very strong in the commercial market. Tile is very strong in the commercial market. And those are areas where we can give, again, companies like Spartan a much better -- or a very good product at a low cost.

Interesting. So that might -- I guess it wouldn't change the real estate strategy, but it could shift some of the sourcing strategy in terms of those 7,000 SKUs could either increase or go a bit to have the right type of product?

Yes. I think you're right. I wouldn't -- there are almost -- there's no real overlay between the retail business and what Spartan does today. Those -- the commercial clients that they're selling to, generally, these architectural designers or these large businesses, they may know who Floor & Decor is just because they've redone a home, but many of them may not know. They won't shop in the stores. I mean maybe there would be 1 or 2, but for the most part, they won't even know or come into our stores. What they will care about, again, is I've got a $5 per square foot budget. It needs to be this kind of a product, I'm looking at this kind of color with this kind of durability, it matches these specs. We and maybe 2 other folks will bid on an RFP for that. And hopefully, we'll ultimately get the job. But it will be not divorced completely, but the retail business will have very little influence over the -- today's Floor & Decor business model, very little input or influence on the Spartan specifying business other than the fact, again, these incredible SKUs at low cost, that -- we now have that in their portfolio of products for them to sell.

Got it. And so it sounds -- I mean, there could be a few product additions as well. So I see this, the channel is different. But in terms of the products, there could be a little addition but nothing proportional to the increase in TAM that you're talking about.

I think that's right. And I will say, for example, we said in the presentation a few weeks back about 55%, 60% of what they sell today, we think we can help source. And that obviously tells us there's a lot of things they're selling today that we don't source. So for example, the biggest example is rubber flooring in like gym applications or in commercial hospital applications. Those are areas today we don't source and we don't necessarily believe we will be doing anytime over time, maybe. But a lot of what they sell today, we won't be able to help them with. One of the big things that we'll be able to help them with today is for the most part, they don't sell much tile. They're more focused on rigid core vinyl and rubber flooring and things like that. Now they can -- actually, we can help them source tile, which is arguably one of our strongest businesses we're in, they now don't have to cede that business to someone else because we can, again, offer them really good products. So over time, I would imagine that kind of 60-ish percent of products that are being -- that we can help them source with will grow because now they've got this massive assortment in tile and stone, which is a bigger component of our business than our wood and our laminate business, they now have this incredible product at low cost that they can sell in addition just to the -- versus the engineered or the rigid core vinyl or the rubber flooring that they're offering.

Awesome. That's great. I want to transition now on the top line to the actual demand that we're seeing now, a lot of rising input costs. You talked about with some of the tariffs coming back into place, how some price increases are going to be coming. Could you just help frame for us the current inflationary environment or growth in AUR that you're seeing?

Yes. So when we had the call, I guess, going on a month ago now, we -- at the time, we had already seen some, what we are likely to see, cost increases for the transportation components of our business, international transportation, get the products to the U.S. and then domestic trucking to get it from the ports ultimately to our distribution centers, ultimately to our stores. We had a fairly good view as to what that cost was looking like. It has now gone up more since that time, you can just read the trade press publications, just based on the demand and supply chain issues that are out there. So those costs are continuing to rise. And then we also, at the time of the call, were starting to get cost increases from our vendors, not all that significant, but some modest cost increases from our vendors. So that's all kind of happening in real lifetime. It's not like a beginning and an end time, right? These things are live, dynamic. I -- what we have said in the past, and I think we've managed through a tariff regime where we used to -- half of what we came -- bought was coming through China, and those tariffs went from 10% to 25%, and we had to deal through that. We're going to use the same playbook. We have the huge benefit of being the low-cost leader. So the starting point for our retailers versus our competitors is lower. That pricing differential has been as good as it's ever been. We said that on each of the last 2 calls. And because we like being that low-priced leader, we just think we get a lot more volume and profitability by keeping that pricing difference there and that pricing difference is there. The way we think about those cost increases, we have great systems to be able to see it at a SKU store level. As we start to see some of those costs work their way into our weighted average cost, we think we can pass that up through the retail. And so the simple example I've given for a few years now is if we were buying a product for $1 and selling it for $2, if we're now buying it for $1.05, we will sell it for $2.05 in that simple example. Now that 5% increase, when you work through the math of that, your gross margin rate will come down, but you still get to the same gross profit dollars and the operating profit dollars and EBITDA growth. But mathematically, your gross margin rate will come down. And that's why we said on each of the last 2 calls, we would expect our gross margin rate in the back half of the year to be down, not going to impact our ability to grow our profits, but the margin rate will come down as we have to pass along some of those cost increases.

Got it. And so if we were to look at your comps as they've been running like just the last quarter or however you want to frame it, really it's been transaction growth that's really driving it as opposed to average ticket, whether that's AUR or inflation. Is it going to be all traffic going forward? Or now do you start to see some of AUR up 200, 300, 400 basis points? Is that a reasonable?

Yes. I do think that's very reasonable. And you're right. In almost my 10 years here, we had 15 years -- 10 years of 15 -- comps averaging 15% during that period of time. It vacillated a little bit year-by-year, but 80% to 90% of that comp growth was almost always through transaction. The other thing about the reason for the ticket not being as much of the growth for us, which is a bit unique versus some of our competitors that have a lot more inflation in their business, is when our business took off when we opened back up in basically June of last year, what we saw was it was really driven a lot more by the consumer versus the Pro business. The Pro business kind of stayed kind of flattish to up a little bit, and now it's gotten a lot better as of Q1. But when the consumer came in, they were doing smaller square footages. So it wasn't like the retail per square foot was going down. It was because it was driven more by a DIY business, and that DIY customer was just doing less square footage than the professional customer. So while we did have a few negative ticket, it had to do with just the mix of having more Pro business -- or sorry, more consumer business versus Pro business, and they just who had -- they had less square footage on the ticket. Our actual price per square foot had stayed -- or just it's actually a little bit.

Just to be clear, Greg, I mean, your question about will our -- will we raise prices by 200 to 300 basis points. We haven't identified the magnitude of the price increase or how it might impact our comp, but -- because we don't know yet, right? But just to be clear, don't build in anything based on what you just said.

Okay. We'll work with that. Thank you there for the clarification, Wayne. The -- I guess the other thing is how does if we think about that impacting margins? I mean -- because we've had such weird comparisons. And I guess one way I would frame it is, if you just look at sort of where consensus is right now, if you assume that that's right for this year, your EBIT margin is going to be 10%, give or take. And in the past, you talked about that once you're a mature business, 10% would be -- or double digits could be a mature EBIT margin, but I don't think you guys have described yourselves as mature yet. So help us square that as to whether the sort of EBIT margin results you're getting this year are sustainable given that you're not mature versus the potential to keep some of this sustained demand environment and share capture.

Yes. I'll maybe work backwards and then ultimately answer your question, I think, is I do think you're right. We -- the level of profitability that we have achieved on this side of COVID has been well above what we've expected. And part of that is obviously because when your sales are growing at that level of rate, and historically, we've said 60% of our costs are more fixed in nature, you just get a substantial amount of leverage on that increase in sales when you got that much of a fixed cost in your business. But I do think longer term, and we sort of see this right today, like last quarter, our same -- our adjusted EBITDA margins were 17% if you back out preopening expenses. Obviously, we're fully built, don't open new stores, won't be having preopening expenses. Our operating margins last quarter were almost 13% when you back up preopening expenses. I think we are of the mindset now longer term, when we get to that -- closer to that 400-store goal that we will have upper teen EBITDA margins and then somewhere probably 250 to 350 basis points of depreciation brings you down to mid-teen to maybe slightly below mid-teen operating margins. And so yes, I do think the overall profitability of the business is going to be higher. The other component of that, now obviously, the commercial piece of our business is very small today. But with Spartan's acquisition, the way we built our models there, that's an accretive business to our retail business today. Now that's not completely fair because it's building off the infrastructure that we built for retail business. But we see the commercial business -- even today, Spartan, as small as they were, they have a slightly higher operating margin than we did last year. And so we see that business being accretive to operating margins as well. And so yes, I think now we have a long way to go to get to 400 stores. But the answer is yes, I would see us as an upper teen EBITDA margin business and a mid-teen, maybe slightly below mid-teen, operating margin business depending on how -- where depreciation shakes out.

And maybe help us a little more near term in the back half as to how those things play out. I mean, obviously, last year was so unusual. I think you talked about how the gross margin could see some pressures in the back half. Could you maybe help us sort of frame that a little bit and also how we should think about SG&A given what you're cycling and not? I mean is it better just to look at gross margin dollars per quarter and how they move sequentially? Or any help on that front?

I -- obviously -- the reason we didn't give guidance is it's just so hard to project the top line, but I'll -- and I'll eventually answer your question, but I think you got to figure out the top line before you can figure out any of those percent equations. But if you take an assumption that the environment is continuing to be very strong like it has been for us, we said on the last call, our 2-year sales growth had been 28% for the first quarter. Our 2-year CAGR sales growth, that we said that trend had continued into the first 5 weeks of the quarter which, when we had the earnings release of Q2, was trending consistent. If you take that same 28% based off 2019 actions, you can actually play that out and see what the back half of the year looks like and come up with -- you're going to come up with a very robust number, I think probably even above where consensus is today. I think one would think though that as herd immunity takes over, as people start spending more on leisure and services and not so much on goods, maybe that moderates a little bit. Don't know for sure. We'll see what happens. That's why we didn't give guidance. But either way, you're going to come up with a very good growth rate from a sales perspective and a profitability perspective. And to answer your question specifically, as you're thinking about EBITDA margins or operating margins, you also need to remember like we and many other people, when our business took off and shot up, we had trouble staffing. So especially in Q3, our labor percent was very low. Some of our advertising costs were very low because we didn't need to advertise as much to get the sales. We had pulled back on some of our corporate investments and we didn't start those back up quite that fast. So now that we've got our stores much more fully staffed, we have made some investments in corporate, you're just not going to see the same kind of leverage that you saw last year. So said another way, if you're looking at your sales on a 2-year basis, you might also want to look at your 2-year profit growth as you think about Q1 and Q2. And that would be another way to maybe think about how -- what your profit growth would look like on a 2-year basis if you use '19 as kind of a base year and you kind of have a view of Q1 and you'll know Q2 pretty soon.

Okay. That's super helpful. So basically, think about the 2-year and it's true for sales, but it's also true for how a lot of the profit metrics would hit the P&L. There was nothing bizarro in 2019 seasonality. I mean there's always something, but there was nothing extraordinary, certainly compared to what we had last year.

I think that's right. The other way to think about like our business is, we don't have a seasonal business. We don't have a promotional business for the most part. And so our store level SG&A in Q1, if I'm reading this right, was like 189 -- basically $190 million. That will kind of grow as we move throughout the year, as we get staffed up and as we add new stores. So normally, I would say, yes, look at last year as a comparison to how you think about growth, you're growing 20% unit growth in comps, you can grow off last year. Maybe this year might be a better way as to look at what you think is going to happen -- we know what happened in Q1, we'll be publishing Q2 pretty soon. That number is just going to grow a little bit because of inflation and because of new stores. So it might be, that's a better way to think about modeling your cost structure. And then on corporate as well, we spent, I think, probably this's right, $43 million in corporate. That will be a little bit higher to move throughout the year just as we get projects and staff hired up for initiatives and opening more stores and more regional staff. But the quarter-over-quarter growth will not be all that meaningfully different, especially on the store side.

That's a great way to frame it. And so maybe I think it's linked with margins, it's linked with sales, it's linked with competition, basically. So could you frame the competitive environment right now in terms of how you compete with the big boxes, the independents. If the promotional environment, I imagine, is about as favorable as we've seen, how long can we expect that to maintain itself?

Yes. I think -- when I simplify that, we've got our bigger competitors, which we estimate are maybe 28% of the market. And we think we're maybe 9% of the market. And then you've got distributors and independents and companies like Lumber Liquidators and Tile Shop that are smaller competitors that make up the other kind of 60% of the industry. I think if you talk about the bigger competitors, their business is obviously incredibly strong. They are executing -- both of them are executing at a very high level. But neither of them have called out flooring as comping above the company average in, I think, years now. And that is probably not completely a fair statement just because garden and there's a lot of inflation in lumber and other things that are driving that. But that being said, our total sales were up 41% last quarter. And our comp store sales were up 31%, 26.5% if you take out some of the noise in our comps. And so we -- from what we can tell, we are meaningfully outperforming that component of the industry. Look, downstream, I think Lumber Liquidators, or LL Flooring, had a kind of modest, low single-digit comparable store sales growth, and I think Tile Shop actually comped negative. And they're in the same environment we're in, right? They've got the same level of heightened expectations. And so I think they're probably a pretty decent proxy for the independents that are the 60% of the industry below us. So that tells us that we are doing a good job. Our business model is different. People are liking what we're doing online, they're liking what we're doing with the assortment. The pros understand and appreciate this high level of in-stock inventory is super helpful in an environment where inventory is hard to come by. And so I don't believe that we're going to see a lot of changes. In my 10 years here, we have not seen kind of step changes happen that fast. So they're there. They're doing what they think works for their business. They're probably doing fine in this environment, but it doesn't seem like they're doing quite as well as we are.

And do you feel good about your price competitiveness? And sort of remind us of where that's most important to keep that sort of level.

We do. We said at each of the last 2 calls, we thought it's good, if not as best we've ever felt on our price competitive today. We also have the benefit of -- one of the strengths of our business is, we micro merchandise not only each of our markets, but each of our stores. And one of the ways we do that is we have merchants that live in the 11 regions throughout the United States, right, one that lives in New Jersey, one that lives in Austin, one that lives in Miami and Phoenix and so on. And so we are consistently talking with them every week. They're giving us analysis of what they're seeing in the market. So we get fairly thoughtful comprehensive decks from those regional merchandising teams telling us what they're seeing in the market. Obviously, we've got a lot of corporate merchants that are also out there traveling and seeing what's going on in the world. And so we feel great about where we are and the uniqueness of our assortment. You guys can see this online. But if you look at some of the things we're doing with brands like OptiMax, with NuCore, and AquaGuard, we're just doing incredibly well on the rigid core vinyl front. Some of the bigger tiles that you're seeing out there in ceramic and porcelain, more so on the ceramic side, is just a really advantage for us. You need a lot of space to show that product. There are new innovations in decorative, which is probably the part of our business that's the most unique. We have -- an average store has 900 SKUs of decorative. And they have it in stock versus our competitors won't. And so yes, we feel really good about what the team has done, the merchandising team has done, on focusing here on that better and best component of our business, which has been the better performing part of our business now for probably 3 or 4 years.

Yes, that's great. So I guess the last 2 areas I want to address is, one, multichannel and e-commerce. And how important that's been, but also I imagine now with the pros coming back and maybe they don't use it as much, but maybe they do, so I'd love to hear how you can use that to really help accelerate the business even on the pro side, not just DIY. And then last really on the capital allocation. So over to e-commerce.

Yes. I think for us e-commerce is about education, it's about inspiration and it's about ease of transaction. Those were the kind of the 3 primary goals that we're doing there. And it truly is an omnichannel experience at Floor & Decor, and it kind of always has been. A simple example, some people like to start on the web and do a lot of homework, maybe even create a quote for Trevor's Kitchen. And then I want to go into the store and talk to people because my floor is not level or it's below grade, it's below -- it's above grade, how big I want my grout lines to be, what does my condo association allow versus not allow? I mean, there's just all those complexities that people almost always end up going to a store or it could be the other way around. You go into a store, you want to get educated, you got the product. We create a shopping list for Trevor's Kitchen, but then I want to go home and talk to my Pro and my spouse and figure out how I'm going to pay for it and all those kind of things. And so that's what our website does. It really allows people to do a lot of that homework that they need to do, but they're ultimately going to want to talk to someone in the store because of all those complexities of putting a hard surface flooring project in your home. And I think our team has done a great job of educating, inspiring. Once you ultimately decide to buy it, you can just tender it out on the website on Monday when you show up at work. And that shows up as a web sell, which is currently 17% of our sales but you likely visited in the store. I think 80% to 90% of people that we talk about this, they visit a store even though they transacted online. So we don't get too caught up about where the sale is tendered. If it's tendered in the store, great. If it's tendered on the website great. We know it's a very integrated experience, and that's really what the strategy has been for a long period of time, and this has worked well for us. I think we are still seeing that elevated level where our website sales of pre-COVID, I think they were maybe 11.5% of sales; right now, we're running closer to 17% of sales. That has not fallen off. And I think just we as consumers can just kind of fast track this to there faster. And now really people really appreciate retailers who have that integrated experience.

Is Pro less than the 17%. I assume that that's higher with DIY, but maybe not.

I don't think we have that data. I don't know that we have a cut like that. We can probably find that out. I don't know. I mean I do think anecdotally, a lot of our really good pros are kind of shopping with us all the time, so there's not -- and they know what they want. They have -- they know. We have a great app. We give really good credit if you go to the app store and check out our app from a Pro's perspective. We do get -- we have a really good app. But I don't know that if our -- I don't know of our Pro penetration side. I would guess it is lower only because, again, I'm coming into store usually every few weeks anyway, but I don't think I know that.

Okay. So maybe another way to assess. Did you just mention that 80-something percent of people have used the website before they buy, whether it's online or in a store?

That's right. It's -- the last time I think I saw that number was over 80% of people who have ultimately transacted with us, visited either both -- or no, they visited both the store and the website. It's the -- by far the vast majority are doing work on both.

Got it. Makes sense. And maybe in the last few minutes, capital allocation, our most strong part with a bunch of investors and financial analysts. So I guess what makes this model really work with the fixed costs and the flow-through is some quite strong cash generation. Obviously, you maybe wish you had a little more inventory than you had more recently. But I guess help us level set what the right number of inventory is and what a more normalized free cash flow you see the business having once we -- once inventories normalize? I mean our -- I know our numbers, which I imagine, aren't too far off the consensus, there's a free cash flow number here that's $150 million, $200 million pretty easily.

The only thing I'd say, this year is a little bit unique in the sense that we are doubling our CapEx. We -- last year, we only opened 11% new stores, 13 new stores. This year, we're going to 27 new stores, 20% unit growth. We bought a distribution center in Houston, which we can talk about why we think that's going to be a very high return on invested capital. We spent $60-something million on Spartan. And so if you include the Spartan acquisition, we're going to be free cash flow negative this year. Even though our inventories are going to be a little bit lower and our cash flow from operations is going to be massive, I would expect that we're going to probably be modestly free cash flow negative this year just because, again, we're doubling our CapEx and we bought a small business. But your thesis is correct. As you get beyond 20 this current fiscal year, we're not going to be buying DCs every year. I don't think we're going to be buying commercial businesses every year, we are going to start to get into those kind of numbers that you're talking about. We are likely to have an Analyst Day or have some conversation late this year. If we don't, we'll do it as part of next year's guidance. We'll come out with a more formal policy. But the first priority is to invest back in the business. We know we're getting today for our new stores, we're getting above a 25% IRR. Our weighted average cost of capital, depending on how much you allocate for risk value, is 9% to 11%. So we're going to invest in new stores all day long, or you have some investment back into some of our older stores to make them look like new stores. We're investing in things like supply chain with this Houston distribution center, adjacent categories where we had a lot of success with, the commercial M&A. But even with all those, right, Greg, as we get beyond this year, we're still going to have free cash -- we should still have free cash flow left over unless there's some kind of unique investment. I think we will be like most companies when we get to that point, and we're evaluating dividends versus stock buybacks. But I think we will lean more towards -- because we think the ultimate value of the company is worth a lot more, we're probably going to end up leaning towards stock buybacks at some point. But more to come on that later in the year as we fully vet that and finish our long-term forecasts.

Fair enough. Just to make sure I got those numbers right. I think this year, you set around $450 million of CapEx. Did that include Spartan or...

No. Spartan is on top of that, yes. Yes. I think we did, so 97-point -- yes, I think our -- yes, I think we're in the high 60s is what we paid for Spartan.

And how much do you spend on the Houston DC?

I think between the 2 years, I think it's close to $90 million. Some of that was spent last year, we bought the land, and most of the CapEx is occurring this year.

So the answer is, we're running heavy, but we shouldn't go back to where we were like $200 million. We're probably going to go back to, say, $400 million or something like that, if we sort of normalize for the DC?

I -- the way I would -- I would break into 3 chunks, which is kind of how we do it in our 10-Qs. As I would say, the new stores, right, we say today, we spend $7 million to $9 million in CapEx, but we're going to be a 20% unit grower. So that number is going to continue to grow as we add new stores. We're going to spend anywhere from $200,000 to $500,000 per store for existing stores for CapEx to remodel some of those stores so that they have the best look and feel. We will spend anywhere from $20 million to $30 million, probably, a year on technology for things on the website, lots of technology tools at the stores to make them run more efficiently. Those are the 3 main buckets that I would have people think about. Then probably every 2 years-ish, we're either going to open a new DC, I don't know if we're going to be able to buy them. We just got very fortunate with Houston. So that is a bit of a unique CapEx item. So I wish I could be simple, but it will be a little bit chunky with the biggest driver, again, just driven by the $7 million to $9 million in CapEx that we're spending for new stores.

Got it. And would you -- so with that, even with all that, we have those sort of numbers that are hundreds of millions. So to get to the fun part of the equation, do you just build up cash? Would you ever pay dividend? Do you buy back stock? What's the thought process?

We'll have to get a little bit -- We'll have to get sign off on the Board on that. But I do think it's a reasonable assumption that even with that, we're still going to have free cash flow. We currently have no net debt. That will change -- that won't change a lot over time just because we are generating a bout of free cash flow. And most of what you see when you do your research on this is companies like ours that see a lot more value in the future, we would probably lean more towards stock buybacks. But again, we've got to get that vetted towards -- for the Board and other things. So my guess is at the end of this year or certainly by no later than the year-end earnings release that we do in February, we'll have kind of a more formal policy on leverage and priorities of investments and what we're going to do with that free cash flow that we expect to start having in 2022.

Well, Trevor, you answered those so quickly and effectively. I think I may have time for one more question.

Sure.

So I guess I'm going to go back to something we talked about earlier, which is spreading the assortment, and you mentioned adjacencies. So I guess, given the size of the story you have and the unique changes going on in the market, what categories or product adjacencies do -- are you testing or thinking about are most juicy to think about?

So today, we're having good success with vanities as an area. When you walk our stores, you'll see some very good looking vanities or online, you'll see them on our website. We are having good success with frameless shower doors. If you're doing a bathroom, you're almost always going to put in a frameless shower door. That's another area we're having a lot of good success with. Bathroom accessories, so towel bars, towel hooks, soap dishes, to some extent, faucets and sinks and things like that. Those are the areas we are having a lot of success with. It's quickly grown. We disclosed this in our 10-Qs. We're close to 2% of sales versus almost nothing a few years ago. Fabricated custom kitchen countertops, right? If you're working on a kitchen, you're probably going to put a big island in a nice centerpiece of some kind of natural stone or some natural -- man-made looking natural stone. Those are the areas we're having success with today. And we think as we -- not that far in the distant future, that could be maybe 5% of sales. On average store over 5 years today, there's $22 million in sales. So that's an extra $1 million in sales. There's a couple of other categories we haven't publicly announced that we're looking at. We really have 2 simple rules, is how we think about adjacent categories. First is, it has to be something you're doing with a hard surface flooring project, right? We're not going to get into things that are outside of hard surface flooring. We're a specialty retailer of hard surface flooring. And then two, we have to think it's not -- it would likely -- it needs to be a category that we don't think has done exceptionally well elsewhere. So for example, paint is something that is almost always done when you do a remodeling, but there's lots of good options for paint companies, as you well know. And so paint is probably something we wouldn't get into. But vanities isn't always a great experience, you're going to get a product that there is a good cost for. Again, bath accessories or frameless shower doors does make a lot of sense. And so that's how we think about it. So there's a couple more, 2 to 3 categories that we're actively looking at today and more to come in the future as we start to have some success there. But the longer term, again, we think that it could be at least 5% of sales and aspirationally maybe a little bit more than that as we continue to have success there.

Great. Well, look, that's a great summary and a way to end it. So Trevor and Wayne, really appreciate your time. Keep up the great work and have a good summer. Hopefully, this will keep on going.

Yes. Thanks again for having us, Greg. It's been a great day so far, and look forward to the rest of the afternoon.

Appreciate it.

See you guys.