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

Greetings, and welcome to the Floor & Decor Holdings, Inc. Third Quarter 2026 Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Wayne Hood, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's Fiscal 2026 Third Quarter Earnings Conference Call. Joining me today are Brad Paulsen, Chief Executive Officer; and Bryan Langley, Executive Vice President and Chief Financial Officer. Before we begin, I want to remind everyone of the company's safe harbor language. Comments made during this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions is a forward-looking statement. These statements are subject to risks and uncertainties that could cause actual future results to differ materially from those expressed in these forward-looking statements for any reason, including those listed at the end of the earnings release and in the company's SEC filings. Floor & Decor assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company will discuss certain non-GAAP financial measures. We believe these measures enable investors to understand better our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our Investor Relations website at ir.flooranddecor.com. A recorded replay of this call and related materials will be available on our Investor Relations website. Let me now turn the call over to Brad.

Thank you, Wayne, and good afternoon to everyone joining us for our fiscal 2026 third quarter earnings call. This afternoon, I will provide an overview of our third quarter financial performance and the key factors that drove our results. Following my remarks, Bryan will share our outlook for the remainder of fiscal 2026, including how we are navigating the current operating environment while continuing to invest in initiatives that strengthen our competitive position. Turning to our third quarter results. We delivered diluted earnings per share of $0.61, up 15% from $0.53 last year. These results include a benefit of approximately $0.02 per share due to a lower year-over-year tax rate. Excluding this benefit, earnings per share grew 11%, reflecting disciplined expense management and solid operational execution. The earnings growth we delivered this quarter underscores the resilience of our business model and our ability to drive profitability in a challenging demand environment. Importantly, maintaining strong profitability and cash flow generation position us to continue investing in the business through the cycle. We believe our ability to continue investing in initiatives that enhance the customer experience, strengthen our PRO offering, expand our store base and advance our technology capabilities is a meaningful competitive advantage. The profitability and cash flow generation we have delivered this year provide us with the flexibility to both invest in our strategic growth initiatives and return capital to shareholders through our ongoing share repurchase program. Since announcing the $400 million authorization in April 2026 we have repurchased approximately $157 million in common stock through the end of the third quarter, demonstrating our commitment to balanced and prudent capital allocation while continuing to invest in the future growth of the business. Now let's take a deeper look at our third quarter results. Total sales increased 3% to $1,214.6 billion compared with $1,179.5 billion last year. Comparable store sales declined 1.4% in the quarter, representing an improvement from declines of 2.1% in the second quarter and 3.7% in the first quarter. Looking at the quarter by month, comparable store sales declined 2.3% in July and 2.6% in August before increasing 0.4% in September, marking our first month of positive comparable sales growth since January 2026. On a 3-year stack basis, comparable store sales improved sequentially throughout the quarter. While we are pleased with the progress made during the quarter, demand for big ticket discretionary home improvement projects remains challenged into the fourth quarter. 30-year mortgage rates are now solidly above 7% and approximately 115 basis points higher than a year ago, continuing to pressure housing affordability, pending home and existing home sales. In addition, consumers remain selective with larger discretionary purchases while higher energy costs continue to win household sentiment and budgets. Against this macroeconomic backdrop, fourth quarter to-date comparable store sales have declined approximately 3.8%. And -- despite these near-term challenges, we remain encouraged by the progress we are making across the business, including our continued momentum with PROs, ongoing market share gains in key categories and the actions we are taking to further strengthen our competitive position. Turning to some of the underlying third quarter sales drivers. Pro sales growth accelerated throughout the quarter with September growth of 9%, representing our strongest pro sales growth month of the year. PRO penetration increased to 55% for the quarter from approximately 50% in the prior year period reflecting our belief that we are continuing to gain share within the professional flooring market. Growing our business with PROs remains a key strategic priority and our teams continue to execute well against that strategy during the quarter. We remain focused on expanding our share of wallet with existing customers, particularly our highest volume and most loyal PROS. To support these efforts, our stores are operating with a supply house mentality, focusing time and resources on the activities that create the greatest value for our customers. This includes strengthening selling capabilities increasing quote generation and improving close rates on project opportunities. We are also making it easier and more convenient for customers to do business with us. Through our store expansion strategy, enhanced inventory positions in key product categories and a continued focus on in-stock execution across our most important SKUs, we are improving product availability and service levels. In addition, we recently launched a pilot of our new Pro loyalty program in select markets, marking another important milestone and keeping us on track for a broader launch in the first quarter of 2027 and consistent with the time line we outlined earlier this year. Taken together, we believe these initiatives are helping us deepen relationships with existing customers, attract new customers to the brand, and further strengthen our position within the professional flooring market. Beyond our continued progress with PROs, several key sales metrics also improved during the quarter. comparable average ticket increased 1.6%, accelerating from 0.8% growth in the second quarter. The increase in comparable average ticket reflects a sequential improvement of over 100 basis points and square footage sold. Comparable transactions declined 2.9%, consistent with the second quarter and significantly improved from the 5.5% decline in the first quarter. Collectively, we believe these results reflect the progress we are making in strengthening our value proposition and driving demand across our key customer segments. Geographically, the improvement in our comparable store sales became more broad-based during the third quarter. Both our East and West regions outperformed the company and delivered positive comparable store sales, excluding cannibalization. 12 of our 16 districts also reported positive comparable store sales, excluding cannibalization, up from 8 districts in the second quarter. From a merchandise category perspective, total sales in wood insulation materials and tile continued to outperform the company during the quarter. Tile, which represented approximately 23% of our sales, remained an area of strength, growing 5% year-over-year. Based on tile industry square footage sold data, we believe we are continuing to gain market share in the category, averaging approximately 100 basis points of annual share gains over the past several years with that pace accelerating to roughly 150 basis points in 2026. By combining premium design, strong performance and a compelling value proposition, we continue to expand our appeal across customer segments. Installation materials, which represented 22% of sales, delivered strong 10% sales growth year-over-year as we expanded our share of wallet with PROs and continue to strengthen our market position. Through disciplined execution of our supply house strategies, broad and deep job lot inventory availability, and an expanding store footprint, we are making it easier for PROs to source the products they need when and where they need them. These efforts are reinforcing our value proposition, deepening customer relationships, and further establishing Floor & Decor as a preferred destination for installation materials. We were encouraged by the improvement in laminate and vinyl flooring, which represented 23% of our sales. Comparable store sales and comparable square footage sales improved sequentially from the first and second quarters, becoming less negative with notable sequential improvement in square footage. The improvement reflects the actions we have taken to strengthen our value proposition in the category, including the introduction of new specified SKUs and other value-focused merchandising and marketing initiatives. Finally, sales penetration of our better and best offerings increased both sequentially and year-over-year, providing further evidence that customers continue to respond to the value, quality and differentiation in our assortments. Let me turn to our new warehouse store expansion. Through the first 3 quarters of fiscal 2026, we opened 12 new warehouse format stores including Fredericksburg, Virginia, which opened on the final day of the third quarter. Looking ahead, we continue to plan to open 8 new warehouse format stores in the fourth quarter with those openings expected to be evenly split between October and November. This would bring our total new warehouse format store openings to 20 for fiscal 2026, in line with our plan for the year. As we finalize our plans for new store openings in 2027, we are doing so with the expectation that existing home sales will remain subdued and foreign demand will continue to face a challenging backdrop. In light of these conditions, we believe it is prudent to moderate the pace of our warehouse store expansion and currently plan for 10 to 15 openings in 2027. While our confidence in the long-term opportunity in the United States remains unchanged at 500 warehouse stores, the current macroeconomic environment warrants a measured approach to near-term growth. Importantly, our approach is guided by returns rather than a specific unit growth target. That discipline allows us to moderate our overall pace of expansion, while continuing to invest in locations where we see attractive long-term returns. Periods of softer demand can create unique real estate opportunities, including access to high-quality sites that may not be available to us when market conditions improve. Our planned 2027 openings in Fairfax, Virginia and Cherry Creek, Colorado are a couple of examples of markets where we continue to see compelling opportunities and attractive expected returns. We continue to view this as a question of pacing as we remain focused on optimizing returns. Importantly, we do not face a significant fast follower competitor seeking to replicate our national footprint which provides us with considerable flexibility in managing our store opening cadence. As a result, we can remain disciplined in the near term and invest through the cycle where returns are compelling and preserve our ability to accelerate growth as the market conditions and expected returns improve. Turning to our omnichannel and digital transformation initiatives we continue to make meaningful progress during the third quarter. We further enhanced the customer experience by improving search capabilities, expanding the quality and depth of our product content and modernizing our underlying technology platform. These investments drove measurable results. In the third quarter, online penetration reached 20.3%, up about 150 basis points from the third quarter of last year. Park conversion improved 380 basis points year-over-year, reflecting stronger site performance and our ongoing efforts to reduce friction throughout the customer journey. Taken together, these results provide encouraging evidence that our digital investments are improving customer engagement, enhancing the shopping experience and driving increased conversion across our omnichannel platform. Turning to our commercial regional account managers or RAMs, we are encouraged by the positive momentum that developed throughout the quarter. The investments we have made in expanding our commercial sales organization, developing our reps and increasing account penetration are beginning to gain traction. Managed account comparable sales improved sequentially throughout the quarter and the gains were broad based. We saw a stronger performance across our existing territories continued contribution from new and added accounts and increased productivity across our sales team. Sales per rep increased each month of the quarter and reached its highest level in September with productivity improving across every 10-year group. While we still have work ahead of us, we are encouraged by the trajectory of the business and remain focused on building deeper customer relationships, and improving sales productivity across the organization. Turning to Spartan Surfaces. We continue to see progress during the third quarter as the business built on the momentum established in the first half of the year. Sales increased approximately 6% from last year, reflecting continued momentum in key verticals. While commercial end market conditions remain mixed, particularly in multifamily, we believe Spartan is well positioned to continue benefiting from the actions taken over the past year and remain encouraged by the opportunities ahead. I would also like to thank our approximately 14,000 associates for their hard work and dedication, their commitment to supporting our customers throughout their purchase journey, providing compelling value to our pros and homeowners and executing our growth initiatives was instrumental in delivering our third quarter results. Before I turn the call over to Bryan, I'd like to briefly touch on several board updates that we announced this afternoon. As part of our ongoing board succession and refreshment process, Norman Axelrod has informed the Board that he does not intend to stand for reelection at our 2027 Annual Meeting. Norman has served on our Board for 17 years, including as Chairman and his leadership, judgment and counsel have been invaluable. On behalf of the Board and management team, I want to thank Norman for his many contributions and dedicated service to Floor & Decor. As part of that succession planning process, we are also announcing a Board leadership transition, effective January 1, 2027, and Tom Taylor will transition from Executive Chair to Chair of the Board. This transition reflects the successful leadership handoff that has taken place between Tom and me and ensures we continue to benefit from Tom's experience strategic insight and guidance as our management team remains focused on executing our long-term growth strategy. We are also pleased to welcome Lauren Taylor Wolfe as a new independent director, effective February 1, 2027. Lauren was invited to join our Board because of her extensive capital markets experience, strategic perspective and proven track record of helping companies create long-term shareholder value. We believe her expertise and perspective will be valuable additions to the Board as we continue to execute our growth strategy and create value for our shareholders. Let me now turn the call over to Bryan.

Thank you, Brad. I would like to also thank our approximately 14,000 associates across the organization for their continued commitment to serving our customers and executing at a high level during the third quarter. Despite a demand environment that remains challenged, our teams remain focused on the areas within our control, delivering a differentiated customer experience, maintaining operational discipline and advancing initiatives that strengthen our competitive position. These efforts helped drive strong Net Promoter Scores during the quarter, deepen engagement with our PRO customers and deliver market share gains. That execution contributed to our gross margin performance, effective expense management and continued investment and capabilities that enhance the customer experience and support long-term growth. Now let me walk through the details of our third quarter financial performance. Our gross profit increased $19.4 million or [ 40.8% ] compared to the same period last year, our gross margin for the quarter was 43.7%, an increase of 30 basis points year-over-year, which was within our range of expected outcomes. The increase was primarily driven by the recognition of IEEPA tariff refunds as the related inventory sold through. That benefit was partially offset by higher supply chain costs as diesel fuel prices reached record highs during the third quarter and were up approximately 70% versus last year. Higher supply chain costs represented an approximate 100 basis point headwind to gross margin compared to the prior year. As a reminder, we had approximately $22 million of IEEPA tariff refunds still in inventory at the end of the second quarter. We recognized approximately $14 million of that benefit during the third quarter as the inventory was sold through with the remaining approximately $8 million expected to flow through in the fourth quarter. SG&A expenses increased $13.4 million or 3.0% in the third quarter compared with the prior year period. The increase was primarily driven by the 20 new stores opened since the third quarter of fiscal 2025. SG&A for noncomparable stores increased $25.0 million, while SG&A for comparable stores declined $7.9 million and store start-up expenses declined $4.1 million. As a percentage of sales, SG&A was 37.3% or flat versus the prior year period and within our range of expected outcomes, reflecting our team's continued ability to manage expenses amid a persistently challenged demand environment. Our third quarter net interest income was $0.4 million compared to net interest expense of $0.6 million in the same period last year. The year-over-year change was primarily attributable to increased interest income earned on larger cash balances partially offset by a decrease in capitalized interest. Our third quarter income tax expense was $13.5 million compared to $14.2 million during the same period last year. Our effective tax rate decreased to 17.3% from 19.8% in the same period last year, primarily due to a favorable return to provision adjustment driven by tax credits that were higher than anticipated. This lowered our effective tax rate and provided a $0.04 benefit to earnings per share in the third quarter relative to our expectations. Our balance sheet and free cash flow generation remains sources of strength, providing us with significant financial flexibility. During the 39 weeks ended September 24, 2026, we generated $485.3 million of cash provided by operating activities compared with $257.8 million in the prior year period. We ended the quarter with $1.0 billion of unrestricted liquidity, consisting of $392.5 million in cash and cash equivalents and $641.3 million of available capacity under our ABL facility. This strong liquidity position provides us with the flexibility to navigate the current environment, support working capital requirements and continue investing in the business for long-term growth. Our capital allocation priorities remain consistent and focused on creating long-term shareholder value. We continue to invest in strategic initiatives that enhance the customer experience, strengthen our competitive position and support sustainable growth over time. These investments span key areas of the business, including our stores, PRO loyalty, digital capabilities and supply chain, all of which are designed to deepen customer engagement, enhance our Pro capabilities, drive productivity and expand our long-term growth opportunity. At the same time, we remain disciplined in how we deploy capital, maintaining the flexibility to align new store growth with market conditions while continuing to invest where our highest return opportunities exist. This balanced approach positions us to continue funding the initiatives that will drive future growth while preserving financial flexibility. Our disciplined capital allocation strategy remains unchanged First, we will continue to invest in new stores and reinvest in our existing stores. Second, we will continue to invest in commercial flooring platforms and new growth concepts. And lastly, we will continue to utilize excess free cash flows to repurchase common shares while maintaining sufficient liquidity and a healthy balance sheet. Through the first 3 quarters of fiscal 2026, we invested $187.9 million in the business through capital expenditures while also continuing to execute against our $400 million share repurchase authorization announced in April 2026. In the third quarter, we repurchased 1.8 million shares of common stock, returning $91.4 million to shareholders, bringing our year-to-date total to 3.1 million shares of common stock or $157.1 million. We ended the third quarter with $242.9 million remaining under our authorization. Now turning to our outlook for the remainder of fiscal 2026. As Brad described, market conditions remain challenged and continued to negatively impact demand for big ticket discretionary purchases. Higher interest rates, which continue to pressure housing affordability along with inflationary pressures and ongoing uncertainty are pressuring existing home sales and household spending decisions. These dynamics are included in our updated guidance as we assume existing home sales will remain subdued and demand for big ticket discretionary purchases will remain pressured throughout the remainder of the year. We are narrowing our full year guidance ranges, which I will walk you through now. As a reminder, fiscal 2026 includes a 53rd week, which will be reported in the fourth quarter. I will highlight the expected contribution from the 53rd week as part of our guidance. Sales are expected to be in the range of $4.765 billion to [ $4.835 billion ] or increased by 2% to 3% from fiscal 2025. The 53rd week is expected to contribute approximately $65 million to sales. Comparable store sales are estimated to be down 3.5% to down 2.0%. Comp average ticket is estimated to be up low single digits and comp transactions are estimated to be down mid-single digits. Adjusted gross margin is expected to be approximately 43.6%. SG&A as a percentage of sales is estimated to be approximately 38.5%. From a quarterly perspective, we expect the first and fourth quarters will be the most pressure from new stores if you exclude the onetime costs associated with the IEEPA tariff refunds in the second quarter. Interest income expense net is expected to be approximately 0. This includes approximately $2.8 million of statutory interest benefit from tariff refunds, which was recognized in the second quarter. Tax rate is expected to be approximately 21.5% to 22.0%, down from our previous guidance of approximately 23%, largely reflecting the third quarter return to provision benefit. Depreciation and amortization expense expected to be approximately $250 million. Adjusted EBITDA is expected to be approximately $535 million to $550 million. The 53rd week is expected to contribute approximately $11 million to adjusted EBITDA. Diluted earnings per share is estimated to be approximately $2.19 to $2.29. Adjusted diluted earnings per share is estimated to be approximately $1.88 to $1.98. The 53rd week is expected to contribute approximately $0.08 to adjusted diluted EPS and which implies our 52-week adjusted diluted EPS to be $1.80 to $1.90. Diluted weighted average shares outstanding are estimated to be approximately 107 million shares is estimated to be approximately $235 million to $250 million. Operator, we would like to now take questions.

[Operator Instructions]. Our first question will hear from Chuck Grom with Gordon Haskett.

I wanted to talk about what you're seeing on the front in the LVT category. And your outlook for pricing in the category and if there's any expectation for you guys to start to lower prices a little bit to try to increase unit velocity in LVT?

Thanks for the question, Chuck. I know I've spent, I think, our last 2 earnings calls, walking this team or this group through kind of the key drivers of the pressure that we're seeing in that category. I would say at this point, we're really pleased with the actions that we've taken. I think as a reminder, it's a combination of special buys that we immediately send into our stores. We introduced new everyday SKUs into our assortment. And then we've been really thoughtful and surgical about where we've invested price into that category. And it is 1 of 2 categories where we see price elasticity. And I'm pleased, like I said, I think we continue to make progress. And unfortunately, it's we're becoming less and less negative. The unfortunate part is we're still negative, and that's consistent with the direction that we provided to all of you and the fact that we thought that category would be negative for the remainder of -- with that, we continue to see supply in the market. We've said that pressure is going to bleed over into 2027, and we still feel like that's the case. And I think the big unlock when it comes to the supply question is going to be improvement in EHS when you see housing pick back up, I think you're going to see some easing pressure on supply with that category.

Chuck, just to contextualize it, Q1 was down 10.4% in total sales. Q2 was down 4.6% in -- final Q3 was down -- or 3% flat. So for us, I mean, we're seeing progress. We're making progress. It's getting less bad as we progress throughout the year. So the actions we're taking, we're seeing those effects come through.

Okay. That's great to hear. And then, Bryan, my follow-up is on the gross margin line. It looks like you're projecting 4Q closer to 43% than 44%. So is that the right way to think about the margin structure, as you know, now for 2027 given some of the transportation headwinds that you're going to see?

Look, I'll stay focused on '26 more so. Obviously, we're still pretty early in the planning stages. So we'll give a gross margin outlook for 2027 when we give that guidance with Q4 results as we move through. But you're right, so I'll talk about Q3 and then Q4 and then kind of frame up some of the things we can do. So Q3 was impacted 100 basis points from supply chain costs. We anticipate Q4 that could be anywhere from 120 to 140 basis points of pressure. Majority of that is tied to the diesel fuel cost increases that we're seeing, which just keep in mind, those are not unique to us, and they're not structural either. So they'll ebb and flow as the market kind of moves. As Brad just talked about a little bit, the other part of the tariff refunds that we were repurposing putting back in were to absorb those pressures from supply chain costs as well as to invest in the pricing that we saw within laminate, vinyl and a couple of other strategic places. So those refunds really did give us the flexibility in 2026 to kind of play offense. But we know that there are other levers that must replace that as we exit the year. So we'll continue to take actions around strategic pricing, but we'll maintain our price gaps and really that value proposition as we continue to do that. We'll lean in on assortment with better and best, which run at higher margins. That's where all of our innovation, newness really, that's where our competitive moat really widens when you think about the competition. We have supply chain efficiencies, we'll continue to attack. And then we don't talk about a lot, but we've had a lot of great success with operational efficiencies as well. This year, we've seen really good progress with shrink and damage, and we'll continue to evolve that as we move into 2027. So there's a lot of different ways that we can attack it as we exit. So we're not going to commit to 2027 yet. I just wanted you guys to know it's what we said last time. Even without tariff refunds, we felt really good about our ability to land the plane this year at [ 43.6% to 43.8% ]. We're still doing that, even though we knew Q4 was going to be the lowest point of the year, even in the prior guidance that we gave. So we feel good about how we're stepping into 2027. We feel good about our ability to react going into '27.

And next, we'll hear from Simeon Gutman with Morgan Stanley.

Bryan, if you take that question one step further and you talk about the total margin just more conceptually, do you try to protect profit if the backdrop still doesn't get better in existing home sales?

So I'll go ahead and take that because I think that's a really important message that we want to deliver. When we think about managing through this environment, obviously, there's a number of levers that we can pull, which Bryan just outlined most of them. But I'm going to describe our approach as being really balanced. We're going to protect the profitability of the business and then continue to be surgical and where we invest in price in particular. And that's going to be where we see elasticity and sensitivity where we get the right level of return. Credit to Erson and our merchandising team, they've been testing pricing for years. Obviously, the environment is a little bit different right now, but we do have, I think, really, really strong intelligence about our categories and how customers, both customers being homeowner and PROs respond to our moves. So we'll continue to execute that play. But again, the message to this group is we're going to be really balanced and thoughtful as we navigate through this environment.

And I think from a cost perspective, what I would say is we've been very, very good about being able to flex with the environment that we're in. In Q3, we're able to take out $7.9 million in sales protecting that profit bottom line, we think about from an operating profit perspective. I know margins come down a little bit, but again, we were able to take out $7.9 million from comp stores in Q3. Our journey really started back in 2023. So since Q4 of 2023, we've taken out almost $100 million in our comparable stores. So we are doing what we need to do in this environment. But there's still some left to your point, as we move into 2027, we can continue to flex labor hours as we always talk about. 70% of our fleet, we can flex naturally with transactions. The other 30%, we can flex at a lower rate because they're lower volume stores. But the most important thing with that is we're not going to sacrifice our customer service experience. our customer service scores, our NPS scores are still at all-time highs. That's what we look at constantly just to make sure we're not pushing too much on the business. So we feel good about our ability to flex there. We'll continue to push on discretionary spend within the 4 walls and then we'll continue to align G&A expenses to the current environment. As Brad mentioned in his script, while still investing in growth initiatives for the future. We've got a lot of good days happening. So we continue to invest for the future, but making sure that we can protect that profitability as you mentioned.

And is your gauge of demand for big ticket, is it getting worse? Or we're a natural replacement red a bottom and it's stable.

It's an interesting question. Obviously, we felt really good, and this is probably a good moment for me just to kind of give my perspective on the transition from third quarter into the fourth quarter. we're generally really pleased with the progress we made in the third quarter. When we talk about progress in specific initiatives around our customer experience, we called that out of My Script probe digital loyalty feel really good about where we're at and know that's going to have a nice impact on our customer experience and our competitive position. But certainly, as we transition from September to October, our business felt the impact of I'm just going to call them changing macro conditions which I know this group is very well versed in. But for us, the list of those macro conditions are the driver of those macro conditions. First one is elevated 30-year mortgage rates, hovering up to nearly 7.5% at one point in time. EHS continues to be pressured. Obviously, the cost of fuel has an impact on households across America. And then you're seeing just generally lower consumer sentiment. So all of these are headwinds for our business. All of these are headwinds for big-ticket discretionary. So from our perspective on -- have we bottomed? I think that's, as I said, at the top of a tough question to answer. And our focus really is we're just going to control what we can control. We've got a really differentiated model. We think we're well positioned to take share in this type of market. We've got the right growth plan. We've got a great management team, great associates across the U.S. So we're going to stay the course. We're going to execute our play and that is really taking care of our team, being really passionate about customer service. As Bryan said a couple of times, we're going to invest in our customer experience, and we're going to continue to take market share.

Seth Sigman with Barclays, we'll have our next question. Please go ahead.

I wanted to follow up on the margins. So you discussed that balanced approach, and that's clearly been the approach for some time. There's a lot to balance into next year, to your point earlier, can you speak specifically to the Pro loyalty program? How do you think about the investment required there? Because that seems like a big undertaking. Help us think about that in the time line into '27?

Maybe I steal this question from Bryan as well. But we came out early and shared the news around our PRO loyalty program, and we shared that earlier because we really are excited about it. as I said in my prepared remarks, we -- finally, I'm going to say finally because we actually the team worked really hard to get to this point, but it's finally in the fact that we're excited to get to the point where we're beta testing this in 3 markets across the U.S. as of about 2 weeks ago, unlike any test. We're learning a lot. We're getting really, really helpful feedback from both our associates and our customers. And the initial response has been on the associate perspective, I would say, overwhelmingly positive from a customer perspective, also positive. When I think about customer feedback, the 2 boxes that I was looking to get checked was, number one, do they understand the program. And the second would be, do they see value in the program, and again, a couple of weeks in, really positive and encouraging signs that we're seeing from the beta test. But it is still early. And our expectation is we're going to continue to learn. But as we said in my prepared remarks, we are on track to launch that in the first quarter nationally. It will be just to kind of manage expectations from a financial perspective. We have modeled this. We do have, as you would expect, a really strong view on what it's going to mean from a sales perspective and a profitability standpoint. Maybe 2 or 3 things that I would share, and Bryan, feel free to add anything that you think I missed. One is this is a program like any other loyalty program. takes time to ramp up. It's not a flip of the switch in overnight, all of a sudden you see the full impact. So it will be a ramp-up over months in not days. One of the things that we've communicated to this group is our expectation is that it will be a slight headwind to gross margin rate. But we do expect and the whole reason we're doing this program is going to drive share of wallet with our PRO customers. So it will drive incremental volume into our stores and then ultimately be accretive from an operating income standpoint.

Okay. Great. Very helpful. I guess back on the demand side, throughout this year, you've had a couple of these periods of better comps, even positive comps, like you talked about in September. Despite pretty weak housing trends throughout. So what else can you tell us about what you've seen during these periods of improvement? And what ultimately it's going to take for comps to get back to positive more consistently?

Yes. So when I think about what we're seeing in October, it's not all that dissimilar to the discussion that we had around our early July performance. The only difference is that's been a little bit more prolonged and certainly worse from a performance perspective. I really point to the demand drivers that I talked about with mortgage rates being well over 7%. EHS continue to be pressure, inflationary pressure really weighing down on the consumer. That is what's changed the story a little bit and certainly inform some of our thinking as far as investments into 2027. So I think the short answer is we've got to see improvement there. One of the things that I would add to that, though, because of the focus on really key initiatives that we've been consistent talking about around digital, and PRO, I would say, evolutionary investments into supply chain. We feel like we've got a stack of initiatives that will allow us to deliver outperformance certainly. But as we've shared consistently, if we get any level of stability in this market, we think we've got a real line of sight to positive growth, positive comp growth.

And we'll move on to Steven Forbes with Guggenheim Securities.

Good evening, everyone. Brad, Bryan. Brad, given the planned moderation in new store growth for 2027 and some of the initiatives you talked about earlier this year around reduced DC to store lead times I was curious if you can maybe give us a first look or early look on any merchandising initiatives you have planned for '27 to drive mature store volumes in mature store productivity, anything to highlight?