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

Hey, good morning, everyone. Welcome to Jefferies 2021 Virtual Home Retail Summit. My name is Jon Matuszewski. I cover the broader home industry at Jefferies, including flooring, retail. Very pleased to be hosting this fireside chat with the Executive Vice President and Chief Financial Officer for Floor & Decor, Trevor Lang. As many of you know, FND is a disruptive force in the hard surface flooring industry with 147 stores today and a path to 400 long term. So we'll start off with some prepared discussion topics and then open it up later for Q&A, if there's time. [Operator Instructions] But before we get to that, I want to turn it over to Wayne Hood, who heads up IR for F&D, and he's going to read some legal disclaimers.

Yes. Thanks, Jon, and thanks, everyone, for joining us this morning. I just need to make the safe harbor language comment. So 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 the Private Litigation Securities Act of 1995 throughout the course of our presentation this morning. So I'll turn it back to you, Jon.

Thanks so much, Wayne. So Trevor, thanks so much for taking the time this morning. Really appreciate you spending some time with us and glad that we're making this an annual get together for you and I.

Thank you for having me. And we -- it's a great franchise. You do a great job. Look forward to being a part.

Great. So I want to start off kind of high level and just talk about drivers of residential flooring demand ahead. So you think about the past 18 months, consumers have had some extra time to tackle projects on their to-do list. They've also had some extra money in their pockets from foregone spending on travel and entertainment. So some may say the projects that needed to get done have already been done. And so I just wanted to get your thoughts on what you would say to that and how you're thinking about that overall topic?

Yes. I mean, I think our view is we're still in a fairly good macro position. There's 126 million housing units in the United States. And the value of those housing units is up 18% as of last month to a record high of $306,000. I think it's 80% of those homes are over 20 years old. So there's a natural replacement cycle and a trend cycle that changes over a 10- or 20-year period of time. Mortgage rates are fairly low, right around 3%. They were a little below, a little above, but they're hovering around historic lows. Last month, we had a bit of an increase in inventory up 7%, so 1.32 million. And so while the affordability is down because home prices are up, there's still -- home prices are up for those 126 million housing units that exist up there. And again, they're aging. The other thing I would say about our customer we said this probably 2 years ago, and we still study this and believe it to be true. But we serve a sort of a higher income customer. We estimate the income levels to $100,000 to $125,000. And those people have record levels of cash, record levels of home values as we spoke about. And the stock values that they have are at record levels. So they have the ability to invest. And so we think that as they've enjoyed a new bathroom or kitchen maybe they'll do another bathroom or maybe they want to work on their basement or outdoor on a patio. And so because we think they've seen the value of that investment, the value go up in their home, they enjoy it with their friends and family, that maybe they will take on another project. That being said, as you know, and probably everybody knows who's following this industry, we and everybody else start to go up against rough -- much tougher compares. And what we said on the call, I think looking at our business on a 2-year basis because last year was so complex with COVID being shut down and then opened back up. But on a 2-year basis, our first quarter comps were up 15.3%. Our second quarter comps had a slight deceleration to 14.8%. And as of our call in early August, our 2-year comps were in the mid-13%, and we're up -- starting to go up against pretty big comparables. And so that natural deceleration that we talked about is occurring. And so to sort of finalize that answer is I think the business is good. We're performing well. But we should assume some deceleration as our -- we're up against the 18% comp in Q3 and up over 20% comp in Q4.

No. That makes a lot of sense. So yes, it seems like kind of overarching macro variables still supportive, and we are distancing ourselves from peak COVID. So deceleration is reasonable to expect. Yes, obviously, a lot of those folks who have been doing projects recently, they have a need, but it's also kind of what's going on in terms of innovation that's been kind of really sparking interest, I'd say for folks who are going to Floor & Decor and learning about what's out there. LVT has been your fastest-growing category for the past couple of years. It's obviously supporting the growth for the overall hard surface flooring industry. So how are you thinking about the innovation quotient ahead for LVT? What should we be thinking about in terms of catalysts to keep kind of demand in that area strong?

Yes. It has been strong. But I would say, again, our decorative area has been strong. Our installation area has been strong. Our tile area has been strong, our stone area has been strong. Certainly, you're calling out the one that's probably been the strongest over the last 5 or 6 years. But we've had pretty broad strength with the exception of our wood business, which is because of the LVT business, right? It's a very wood-looking product. It's just generally a little bit less expensive, easier to install and waterproof. So that's the only reason we think our wood business is down. But I think it's a reflection of the merchant-led culture that this company has. We have merchants that average probably over 10 years of experience in their category. And because of that, that leads to innovation in visuals, in product size, in thickness, length, construction, warranty, waterproof warranties, wear layers and more. Our stores have stunning displays. We ensure our product is presented well. Nobody really has the ability to show the products like we do. Our in-stock levels are generally above all of our competition even in this difficult supply chain. We feel -- we believe we have fantastic salespeople, a great website and our prices are low. And I think when you combine all those things together, it allows us to continue to have strength in that category. We've got a couple of new products and brands that have rolled out in the last 6 to 9 months that we think will hopefully continue to allow that business to perform well. But I think all of those things are the reason that we're having the success we are.

Right. Right. And in terms of that innovation going forward, would you say with LVT, is it more kind of slated towards like durability and versatility? Or would you say like just more options with aesthetics whereas it just tends to be both?

I think it's all of the above. I mean, there are definitely -- you're starting to see longer planks, wider planks, random width planks. There's great new looks that exist out there, whether it's a distressed look or a gray look or all kind of different looks that exist out there. So it's probably all those things. I think most people have a waterproof -- most of the competition has some sort of a waterproof type technology. So we're probably not leaving there just because most people have one. But it's the differentiation and not just kind of a basic product that really allows us to stand out because of, again, the size of our stores are just so big that we can really show that presentation and then dupe it on our stores. They have 8-foot by 4-foot sections where we show every single product. So you're not just looking at a little 4x4 sample, you're actually seeing a massive display as well as the design vignettes in the front of the store. So all those things are leading to the continued strength that we're having.

Right. That's fair. So over the next couple of months, we should start to see pricing for hard surface flooring increase, given efforts to neutralize the impact of tariffs. So I want to ask about kind of your customer insights work and maybe any studies you've done around elasticity that's kind of informed where you'll be passing along that price in your assortment? And just kind of any commentary in general that investors should understand.

Yes. The tariffs for us went in the -- for this LVT product we're talking about, which I think is roughly 14% of our sales, those price increases, they snapped back to 25% in August of last year. So we're almost a year into those tariffs working their way into our cost system. And we have not -- you guys have seen our results for the last 3 quarters since subsequent to those going in and they've been fantastic. Now we have sale has been up and margin has been up. Once -- what you're really seeing now is not so much tariff increases, but it's supply chain cost increases. We talked about on our last call, we're seeing fairly substantial increases. As is the industry, this isn't endemic to Floor & Decor. But you're seeing fairly substantial increases in international container costs as well as domestic trucking costs and, to some extent, drayage and demerge cost to get it out of the ports. Our view at the time, and I think it really still is, is that those will drive a modest increase. The vast majority of our product costs are the product itself, not necessarily the supply chain cost. But those are real costs. And so those costs goes up. The words we used on our call is we would expect to have a modest increase in prices. We had had -- not had any of those price increases as of the call. We're now starting to see some of those higher costs come into our weighted average costs and starting to modestly increase our retails because of that. But so is the rest of the industry. What we see in the independents, what we see in the home centers is these costs are going up. Their retails are going up, and we still think we're going to -- we don't think we will continue to lead with price. And so I think just because it's so modest, it's not a meaningful number. Generally speaking, over half the cost is the install. So it's hard to actually see that and then the total cost of the project, also the -- there's a lot of -- we see a lot of backlog. So that tells us that the pros are still busy. So to date, we've not seen any elasticity issues. And we'll see how the rest of the year and next year plays out.

And just -- we're starting to see kind of other players in the industry take greater control over their supply chain to kind of get product to the U.S. Are you guys kind of contemplating any larger strategy shifts in terms of your supply chain? Or is it kind of really just working with your vendors. You've obviously worked with them over the years. Their business is growing with you, a lot of opportunity ahead. But just any thoughts there in terms of kind of big tweaks you're making to your supply chain?

The answer is yes and yes. Yes, the vast majority of our freight that we're bringing in is with our existing big partners that we've dealt with for many, many years. But because our volumes have been so strong and above our own expectations, as has been most people in the industry, we are having to be very creative in finding ways to get products. We're using extra loader vessels. We're onboarding new freight partners. We're actually expanding our ports of entry to ports that we wouldn't normally use just so we can get capacity in the United States. We're increasing our transload activity. And so all of those things in concert have allowed us to receive for the last 4 months, with the exception of maybe 1 or 2 weeks, we've been receiving more than we've been selling, which is great because we, like everybody else, have said that our in-stock levels were below where we wanted them. So our supply chain team did a good job coming to us kind of late in Q1 and saying, "Hey, we're seeing this on the horizon. Let's get aggressive and make sure we get additional capacity outside of what we have contracted." And we said, "agreed. Let's go." We know that our sales have continued to be strong. And so they've done a good job of finding very unique ways to get product into the United States. And as I mentioned for the last 4 months, we've been receiving more than we've been selling.

And I want to move on to adjacent categories for a bit. It sounds like there's 2 or 3 others that you may be looking into. The contribution to sales, I believe, is still in the low single-digit range. So I want to get an understanding just from your viewpoint, maybe why some of your Pro customers don't currently engage in those categories. And I'm trying to understand that just to get a sense of as you're adding more adjacent categories, the opportunity. Is it -- does it really come down to awareness and they're not simply aware that you guys have some of these other categories aside, hard surface flooring. And how do you look to build a bigger brand awareness?

Yes. I mean the way we think about adjacent categories is we're a hard surface flooring retailer, and that's what we're always going to be focused on. But it makes sense to have a vanity or frameless shower door, soap dishes, sill bars, towel bars, all those kind of things make sense, fabricated custom kitchen countertops, when you're working on a kitchen, for example. And so we've done a pretty good job of showing that product. And we're actually reflowing our stores this year as we speak, and we've seen a nice lift in sales when we sort of flow through categories the way a shopper would logically shop for it. And so it's still a fairly small percentage of our sales. But if you just look at where we are year-to-date last year, we did $5.9 million in sales. This year, we've done $25.8 million for the first 6 months of the year. So a massive increase. Our teams have done a great job of getting all that in stock and getting it ready. And the reason we did it was when we do a lot of external surveys about our customers, we were hearing consistently I want a one-stop shop destination for my projects. And we're like, there's no way. We're not a one-stop shop. We have every flooring you could ever imagine. But what they meant by that was I have to go somewhere else to get vanities. I have to go somewhere else to get sinks and hardware and mirrors and lighting and all those kind of things. And so it was just a natural flow from people wanting to do a hard surface flooring project. So the team has done a fantastic job. So as I said, we're reflowing the projects, I think most of our customers understand that we have these categories now. It's hard to walk a store and not say that we have all these things. And just like we've seen our better and best components of our flooring categories be stronger, that's where we're really seeing the strength there as well. And we're excited about the category. It's truly an increase in sales. It's not like you say, "Hey, I want to pick this flooring or this vanity, you're going to have to pick both almost always speaking." And so it's a truly incremental additive item to our ticket, and it's something that really just helps us be that one-stop shop. So more to come. We've got some more categories we're going to be adding. Our goal is, ultimately, I think it's just over 1.5% of our sales today. We think, hopefully, in 5 to 7 years, we could make that be 5% of our sales, which is over $1 million per store in sales, times 400 stores. We think that's a big idea. So the team has done a great job. We've got lots of new ideas coming out. And again, I think it's going to continue to be a big grower for us.

Right. And so you obviously have the product, but I think where you guys are differentiated is the design services, too. You help your customers kind of put together their projects. You added a new VP of Design Services not too long ago. So just want to understand any contemplated changes in terms of that offering ahead? What should we be watching out for in stores? And obviously, this is -- it has an impact on the P&L, just given those folks are really good in terms of building UPT and upselling for higher AURs. So just thoughts there.

Yes. I mean, you summarized it right. We took our longest tenured regional operator out of the Midwest and promoted him into an officer level position, asked him to move here and help our team. We already had a good team that was small -- very small team. We had a good team here in Atlanta helping us think about that, but having someone with field experience that's managed stores for a long part of their career. He's done a fantastic job. Just like we've done with all the other strategies, we aligned him around all the other officer corps and said, here's how we build Pro. Here's how we built adjacent categories. Here's how we built regional account managers. So he sort of absorbed how do I think about the strategy to build this out. He's presented that to us. One of the first things we did is we added 3 regional design directors across the United States because he's just 1 person trying to get to over 150 stores. It's not possible, but having a regional team out there helping execute those strategies has been a huge win. And we promoted, as you would expect, some of our best design leaders in those regions to take that on. So that's been a very good impact for us. He's focused a lot right now on how do we attract and retain the great designers. We know our ticket -- I forget the last time we quoted this plan, but our ticket is 3 or 4 times the size when a designer is involved. Our gross margin rate is higher because they're usually picking all the installation categories and back splashes and things like that, that are higher-margin categories that drives ticket up. So he's really focused on how do we get those designers in the building. And then once they're here, how do we career track them such that they stay with us for a long period of time. And we've done a good job on our full-timers, done a good job on our management teams. But we've got some opportunity in that turnover ranks of the design. So that's been a big focus of this team. We're also testing in-home design services. I think you know, Jonathan, we have a small design studio in Dallas, along with the other 7 existing stores. So we'll have designers actually go into a house. You pay a fee for that. It's relatively inexpensive but much less than you pay an external designer, but still a bit of a fee. We've been encouraged by the -- we just launched this probably within a few months ago, and we've been encouraged by that. We're going to open another design studio in Houston and do the same thing. We know our design penetration in our stores. I think quota being up 66 basis points. And we know when a designer is involved, our social media rankings go way up, which is very important as people learn about Floor & Decor. And the customer satisfaction rate is in the mid-80s, which is some of the highest we have. So those are just a few things that he's working on. We're still in the early innings. I think Tom quoted, we're maybe in the seventh or eighth inning in Pro. To use a baseball analogy, we're probably in the second inning, maybe even in the first or second inning as far as design. So those are a handful of the things that he's working on, that we're working on. And we do think it's something that really differentiates us and allows us to get a higher end customer and take them all the way through.

Yes. And I want to drill down on one of those that you mentioned. It's obviously in home. It's something that's unique. There are some industry players that engage with the consumer this way today. Just curious, your thoughts, maybe what are they doing right? What are they doing wrong? Where are you trying to kind of differentiate the experience? Obviously, you get a wealth of data when you're able to kind of step in a potential customer's home. So just how are you looking to harness that data and kind of retarget them? Just more thoughts there.

I think it's very prevalent in the high-end furniture industry is where we see it the most. That's where we've gotten some of our team to help us think about this industry. We don't see a lot in the flooring. I mean, the home centers really don't do it there, maybe 30% of the market. We're probably approaching 10% of the market. There's probably some of that that goes on in the smaller competitors, the independent business. But I think for us, again, it's really just being close to the client, understanding what it is that they're trying to do for their home. Again, the fee is fairly nominal relative to the total project. It endears a lot of loyalty. We can actually sketch out. We have tools where we can actually put it on a piece of paper so you can see what the product looks like, give them samples, all of those things. So I think it's just something very unique in the industry that you have to be a big player like us to really do at scale. And we'll see. We just -- again, we just started testing it, but we think it is something that's going to be unique and different for us that's going to allow us to win. And it also allows the designer to win, right? That's what they love. That's the part of their career that they're passionate about is getting in their customers' homes and helping them build a beautiful project. And so there's lots of job satisfaction that goes along with that as well.

Absolutely. And so I want to jump to commercial. That's an area where I get a lot of questions from investors. Obviously, you guys are very early days with your acquisition of Spartan Surfaces. What surprised you as you've learned about some of the business development and selling tactics of those brands relative to F&D commercial brands? Would love to hear just how you're kind of applying your learnings on that side of the business.

Yes. We, as you would expect, for a company who's really done its first M&A, we spent a lot of time and money with some of the big firms to help us think about this the right way. And when we started that process, we really identified, hey, the specifier, which is what Spartan is, is a wholesale specifier is probably what's going to make the most sense for us. And then we really narrowed down, okay, who are the best players that are someone that's close to us. And it really just focused in that there was -- that Spartan was really the best one. When we did some other further research and we -- as we look through Spartan's businesses and doing due diligence, we found that the majority of their business, of the $13 billion commercial industry, we estimate about $7 billion is in what they call the A&D business. This is a specifier working with the large architecture or a small architectural and design firm who is ultimately working with the client. But really who we're serving is that architectural and design firm or who Spartan is serving is that architectural design firm. And they've just got incredibly strong tenured, well thought of salespeople that can go in and help that A&D firm figure out what's the right flooring for this hospital or this hotel or this condo. These are big jobs, expensive jobs. The total project is expensive, and the salespeople are just fantastic. And so as we thought about our own business, where we were having lots of success on the commercial side was kind of downstream for that. We really weren't getting a lot of that architectural and design, kind of the $6 billion of that $13 billion. We were having success with working with the local general contractor or commercial flooring inspector or commercial flooring installer to flip a spec from 1 of our competitors or a small business owner that owns a few hotels or someone who owns a power center or grocery stores, things like that. That's where we were having all of our success. And so as we were thinking about, okay, if we want to get to the $7 billion, we could try and do it ourselves. But maybe what would be more logical and make more sense is if we can find a good partner, that will get us there faster. And that's exactly what's happened. Kevin and the team are doing a fantastic job. They're starting to get exposure to some of the products we sell, which is exciting for them. Our -- we believe, and I think they believe our products are incredibly good, great products at a much lower cost. And so they're going to -- we're starting to expose them to those products and hopefully, next year, they'll start to be able to sell some of those products. And so that, at its core, is really what it was about is. It would just would have taken us longer and probably been more difficult. And there's not a lot retailers who've had success moving up in that A&D community, and that's where helping a company like Spartan with the resources, financial resources to grow, recruiting resources to hire more talent, allowing them to get our products and expose them to the customers was what was very exciting to Spartan about us. So we're -- only owned them for a handful of months, but they're doing fantastic. As we said on the call last couple of months ago or 1.5 months ago, they're off to a fantastic start, and they're completely, for the most part, integrated and working on their long-term plan, which is what we're doing this time of year, kind of 4-year plan and very pleased with how things have started.

Yes. All that color is helpful. And we've taken a stab at kind of what that business could be long term. And it seems like there's a lot of potential. How are you thinking about just the mix between organically hiring new RAMs versus maybe other tuck-in acquisitions. Obviously, the latter part is going to be opportunistic based on what's available in terms of businesses for sale and whatnot. But is it just kind of balance -- a balanced approach between the 2? Or how should we think about that?

Our initial goals are going to be organic. We've only done 1 M&A in our 20 years of existence. And Tom, Lisa and myself don't have a lot of experience with M&A. Brian, who actually leads that group on our team, does have a lot of experience in M&A and has done a fantastic job on this. But the goal of Spartan was let's let you grow outside of your home [roots]. Most of their business today is in the Mid-Atlantic. They've started some operations in the Northeast and in Texas and in Chicago, and they've had good success there. And so our original goal is let's try to do this organically as best we can for a while. We had seen ourselves. We're almost in every major market with our regional account managers by the end of the year. We're almost in every major market, and we feel like we can help them with those recruiting and hiring processes. Again, it's a bit of a different sales team, but we think we can help them do that. Over time, my guess is we're going to run into companies that are good in local markets that we don't have a presence in. And if we feel like we did with Spartan, where 1 plus 1 could be more than 2, that M&A is possible. Today, again, we're very focused on organically. We think we can do it organically. But my guess is, over time, we will find someone. And we don't think there's anybody big out there. Even Spartan at the sub-$100 million was one of the bigger ones. But as I said, where we think it makes sense and we can tuck one in and help them grow their business and help them be more successful, expose them to our product, all those things that are going to make Spartan successful, we'll talk about that when it comes. But for now, it's all going to be organic.

Okay. And getting back to the stores, you recently remarked on the last earnings call that the class of 2020 and 2021 stores were shaping up to be some of the strongest in history on the measure of average unit volume. So maybe just spend some time and talk about kind of what you're doing different these days maybe to reduce the impact of cannibalization? Obviously, part of this is just a function of better awareness of Floor & Decor, right? But anything you're doing operationally to really kind of get a great start in terms of local marketing or anything like that from the gate?

Yes. I think our team has -- our real estate team has done a really good job of bringing us better deals. Our stores are a little bit larger. We're averaging 80,000 square feet, when not long ago, we were closer to 70,000 square feet. The visual inspiration and the outside aesthetics of the store have improved. We're building more vignettes in the stores, which makes them inspirational. We're taking more of the heavy tasking responsibilities out of the store. So the store employee could really focus on training and selling and merchandising. We've done a better job with our advertising, much better job with social media, as we open stores. This year, for example, we're going to have a higher mix of stores. I think maybe 65% of our stores are in existing markets that naturally leads to a better performance because you've got more brand awareness and knowledge. And when you add that fourth, fifth, sixth store, it just makes everybody's life a lot better. So there's not one thing. I mean it's across assortment. It's across staffing. It's across the website, better locations, bigger stores, a better visual inspiration, just the product benefits that we're getting that's driving our comp store sales, where that same incredible product just going into our new stores. So it's a combination of all of those things that we're doing right. I think on the cannibalization front, our cannibalization rate has come down, but it's going to go back up. I mean we opened 11% new stores last year because of the pandemic, right? We only opened 13 new stores last year. This year, we're opening, like, what 24, 27 stores this year. And so as we open more stores, as I mentioned earlier, we're going to open more stores in existing markets, we're going to see that cannibalization rate come back up. I don't think it will ever be enough to offset the incremental comps we get for new stores, at least not for the short term. But we should expect our cannibalization rate as we get back to 20% growth from 11% growth last year.

Got you. All right. And so we have a few questions in the queue. [Operator Instructions]. First one I'm seeing is an investor asking, what will be the effect of Hurricane Ida in the South and Northeast? So any perspective in terms of impact to stores and thoughts there?

It's early. We have one store in New Orleans. We had maybe 4 stores that it appears -- well, they were impacted a little bit for a few days just where they were closed or -- because of the flooding, mostly in New Jersey. So I think we have 3 or 4 stores affected in the Northeast, mostly in New Jersey. We do think there's going to be some incremental business in our 1 store in New Orleans. Thank God New Orleans was saved, but there's a lot of damage around New Orleans. As we all know, they're still trying to get electricity. And so it seems like there'll be some incremental business for a year or so would be our experience in our New Orleans store. It's much -- we're a much bigger company than we were when Hurricane Harvey hit Texas in 2007. I think it was like almost 20% of our sales are impacted now versus this is a pretty small impact. And then I read in the Northeast, I think they think the damage is going to be about half as bad as the storm that hit Sandy. I think that hit almost maybe 8, 9 years ago. So there will be some incremental business that will likely come our way due to the flooding. It seemed to be much more of a windstorm in parts of the country, but there definitely is going to be some water damage as well. And so maybe there'll be 5 stores that will get a benefit out of our, I guess, win this year with 160 or so stores. There may be 5 or so stores to get a benefit for a period of time.

Understood. And another one I'm seeing, you alluded to this earlier, just in terms of freight and transportation and supply chain costs. But client asking about just the puts and takes to major expense line items next year, obviously, not giving guidance or anything like that. But just given kind of it's been an unusual year, just how we should think about directionally some of the main line items with SG&A and COGS and all that.

Yes. I think for us, as we said the previous 2 quarters as well as our most recent earnings call, we would expect our gross margin rate to come down as we take on some of these inflationary pressures. I give a very simple example because we've been dealing this with tariffs. We've been dealing with this going on 4 years now with an inflationary cost. Originally, it was tariffs, now it's supply chain. If we buy a widget for $1 and sell it for $2, if our costs are rising, $0.03, $0.05, $0.07, somewhere along those range, we think we have the ability to -- let's just pick $0.05 to make it easy. If our costs went from $1 to $1.05 and we're selling that to $2, we think we can raise that retail to $2.05 because we're the low-cost leader. We feel like we have low prices relative to our competition. By the way, their costs are growing up faster because they don't turn their inventory -- they turn their inventory faster. So in that case, you'll see the gross profit dollars or really your EBITDA dollars still get to the same number to $1 in the example I gave, but your gross margin rate will come down. The other area that we and every retailer are talking openly about is labor costs are going up. As we all know, it's difficult to get labor at the lower end of the pay scale. We've made some pretty big increases, I think, of our 8,000 or so store associates. We raised 2,500 of those associates in the second quarter to a nice rate. We're now on average above $16 per an hour, so we're fairly well paid. It's a difficult job. We have to pay well to get people to do what we do. So you're going to see some -- I think some cost right there. And I think we will think about that on the same thing. We'll either find costs elsewhere in the deal to offset that. If not, because we know it's going up across the United States, there might be some modest retail increases to offset that. So the -- summarizing that, labor, which is an SG&A for us and then cost of sales for the cost of the higher transportation cost to get the product to our stores is probably going to be the 2 areas that manifest itself.

Understood. So that's what I'm seeing in the queue for questions. So Trevor, I want to just thank you again so much for taking the time. Really appreciate updated views on the business and hope you have a great day.

Yes. It's a great franchise. I've enjoyed working with you, Jonathan. Always thoughtful questions, and hope you have a great conference.

All right. Thank you so much.

See you.