Floor & Decor Holdings, Inc.

Greetings and welcome to Floor & Decor Holdings, Inc. First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Wayne Hood, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Joining me on our earnings conference call today are Tom Taylor, Chief Executive Officer, Lisa Lobby, President, and Trevor Lang, Executive Vice President and Chief Financial Officer. Before we get started, I would like to remind everyone of the company's safe harbor language. Comments made during this conference call and webcast contain forward-looking statements within the meeting of the Private Securities Litigation Reform Act, of 1995 and are subject to risk and uncertainties. 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. The company's actual future results could differ materially from those expressed in such forward-looking statement for any reason, including those listed in its FCC's filings. Warrant, of course, 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 non-GAAP financial measures as defined by SEC Regulation G. We believe non-GAAP disclosures enable investors to better understand 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 our earnings press release, which is available on our investor relations website at ir.flooranddecor.com. A recorded replay of this call together with related materials will be available on our investor relations website. Let me now turn the call over to Tom.

Thank you, Wayne, and thanks to everyone for taking the time to join us on our first quarter 2020 earnings conference call. Before we get started, I just want to thank our entire Floor & Decor team, particularly our store associates. They have enthusiastically come together in a way that protects the health and safety of all of our associates and customers. Their efforts have truly been inspirational and are a real testament to the culture of our organization, which continues to rise to the occasion to face new challenges that have been placed in front of them. The global spread of the novel coronavirus pandemic and the subsequent economic impacts we are facing is truly unprecedented. On today's call, I will discuss some of the highlights of our first quarter 2020 earnings results and then spend more time discussing some of the operational changes that we are making in our stores and store support center to enable us to continue to serve our pro and do-it-yourself customers and retain sales during this challenging and uncertain time. I will discuss in more detail how we are building on our successful and convenient curbside pickup model that we pivoted to in March by adding pro appointments and are now rolling it out across the country. Additionally, I will touch on our limited customer entry approach that is happening in two of our Utah stores today. We do see a path forward to restoring growth against the challenging headwinds that we and others are facing. We are encouraged by the impact all of our strategies are now having on our sales trends and to the response from our pro appointment strategy and white glove service it offers that sets us apart. All of our actions have been and will continue to be taken with an eye towards first protecting the health and safety of our associates and customers. Later, Trevor will review our first quarter financial performance in more detail and then discuss how we are managing our liquidity, cash flow, and profitability in a way that not only bridges us through the COVID-19 pandemic, but ensures we are well positioned on the other side. Strength of our balance sheet. and access to liquidity enables us to continue to provide our customers quality trend right assortments at the lowest possible price. This will directly contribute to further market share growth in 2020 and beyond as consolidation in the hard surface flooring industry likely accelerates as many independent flooring retailers may struggle to maintain liquidity in this unprecedented time. Let me start with our first quarter earnings. As you saw in our press release, our fiscal 2020 first quarter sales increased 16.3% to $554.9 million and our comparable store sales grew 2.4%. Our first quarter comparable store transactions declined 1% and our comparable store average ticket increased 3.4%. Prior to the last six days of fiscal March, which is our largest sales month of the quarter, we were pleased that our quarter-to-date comparable store sales grew 6.1% in line with our expectations. The growth during that period reflected a 3.4% increase in comparable store transactions and a 2.7% growth in comparable store average ticket. We are pleased with our first quarter 2020 sales results considering we experienced a sharp unexpected 46% decline in comparable store sales in the last six days of fiscal March as the impact from COVID-19 pandemic broadened to more of our markets. In response to the pandemic, we proactively began limiting our store operations to convenient curbside pickup on March 21st. And in some cases, we were forced to completely close stores. Despite the unexpected sales declines in late March, we are pleased that our first quarter fiscal 2020 gap diluted earnings per share increased 20.7%, 35 cents, from 29 cents in the first quarter of 2019. primarily due to a favorable gross margin and lower than planned corporate expense. Our first quarter adjusted diluted earnings per share increased 17.2% to $0.34 from $0.29 in the first quarter of 2019 at the high end of our expectations. Now let me discuss in more detail some of the near-term operational changes that we have made during this period of uncertainty. In late March, we assembled cross-functional leaders to develop strategies and procedures designed to quickly adjust our operating model while implementing safety protocols for our associates and customers. The collaboration within this group and the creativity of the entire organization has enabled us to retain a significant amount of sales, even as our stores have limited operations or in some cases are completely closed. As a point of reference, we had as many as 33 warehouse stores or 26.8% of the company completely closed at some point in late March. Today, there are only four warehouse stores that are completely closed. The remaining stores are open with shortened operating hours for convenient curbside pickup of product, which can be ordered online, via phone, or through our Pro app. We are slowly allowing our stores across the country to conduct Pro appointments in our showrooms. Additionally, in our two stores in Utah, we are testing allowing both DIY and professional customers to enter our showrooms online with appropriate occupancy limits. As local conditions change, we intend to do this across the U.S. At this juncture, it is difficult for us to know when our stores will return to full operations. We do expect our reopenings will be staggered and dictated by local, state, and government authorities and health official mandates. Because we do expect our stores to eventually open to full operations, we have chosen to protect our full-time associates from furlough, albeit they are working reduced hours. All four of our distribution centers are open and fully supporting our stores today, including shipping personal protective equipment to our stores. Nearly all of our store support center associates are supporting our stores remotely, which speaks to the strength of our business continuity plans. The curbside model that we pivoted to in March focuses on our strengths. As customers enter our parking lot, they will be met by a greeter outside who will qualify the needs of that customer. Once the needs are determined, the customer is sent to a designated area to be served or loaded. Additionally, we moved a small selection of bulk out installation materials outside and added designated runners that can quickly grab samples in the store, thereby making it more convenient and safer for our customers. In fact, many pros would like us to maintain this level of concierge service post the impact of the pandemic. We strongly believe that our pros will remember how we are helping them to continue to operate their business during this challenging period. It is exactly during these challenging periods that we believe we can build on our brand awareness and our long-term relationships to further grow our market share. From a merchandising perspective, we have moved most of our best-selling SKUs outside and believe our large, rolling, inspirational merchandising fixtures give us a unique competitive advantage as they allowed us to easily move our great displays outside. This is particularly important when we are displaying luxury vinyl plank, large format tile, designer picks, and other hard surface flooring products. Finally, we added the capability for customers to pay curbside with a mobile point of sale register. Now, turning to our new stores. We have opened three new warehouse stores in the first quarter of 2020, including new warehouse stores in La Quinta and Sacramento, California, and Algonquin, Illinois. The first quarter openings brought the total number of warehouse stores that we operate to 123 stores, up 19.4% from 103 stores at the end of the first quarter 2019. We had originally planned to open two more stores in late March, but due to the pandemic, we have delayed those openings. The pandemic, which has caused state and local restrictions on new construction, which has forced us to push some of our new store openings to later in the year or into 2021. For the fiscal 2020 full year, we now believe it is financially prudent to temporarily slow our new store growth when we consider all of the near-term headwinds caused by the COVID-19 pandemic. To that end, we now anticipate an open 11 warehouse stores and a design store pilot in Dallas in 2020 compared with our prior plan of 24 new warehouse stores and a design store pilot. We are taking a partnership approach with our landlords and we are engaged with them to discuss near-term rent deferments. We can't be specific about these fluid negotiations, but we are encouraged that our landlord partners are sympathetic to the challenges we and others are facing with reduced store operations and closed stores. That said, we are leveraging our legal options under our lease agreements and renegotiating locations with unexecuted leases. I think most of our landlords recognize that we are one of the few retailers that have plans to open stores over the long run and want to work with us as a tentative choice. Trevor will cover in his remarks the capital spending and cost-out savings that we expect from the temporary reduction in new store openings. Moving on to our comparable store sales. As concern about the COVID-19 pandemic mounted in March, we were still seeing pros continuing to shop with us despite other parts of the economy that were beginning to shut down. So we were pleased that our first quarter of comparable store sales grew 6.1% through Friday, March 20th. That changed during the last six days of the quarter, where we experienced a 46% decline in comparable store sales as we were forced to close stores, reducing our operating hours and shift to curbside pickup. While it is not our normal practice to provide inter-quarter sales information, we do want to share that our second quarter to date comparable store sales have declined 50%. While none of us are satisfied with this rate of decline, recent trends are slightly improving and we have seen a surge in our sample sales, which tells us customers are interested in flooring projects. This, coupled with our strategies to recapture sales and more phased full store openings in the coming months, leaves us optimistic about the further improvements going forward. Turning to our first quarter sales performance within some of our merchandising categories. Consistent with previous quarters, our best performing category was our laminate luxury vinyl plank category, which increased 28.2% and represented 23% of our total sales compared to 20% in the first quarter of last year. This category continues to resonate with our customers today, as it has superior technical features, is very durable and easy to install. We were also pleased with our sales in installation materials, which increased 18.7% and represented 17% of our sales. The changes we have made in how our installation materials are presented and are improving operating processes is driving sustainable growth in this very important category for our professional customer. Our adjacent category business, which includes vanities, shower doors, countertops, and bath accessories, continues to grow. And we'll be adding product throughout the year in many of our store locations. While the sales dollar volume in this category is not material today, the growth is strong, and we believe it offers incremental growth opportunities. As I mentioned, it has been inspiring to see how our store and store support center associates have enthusiastically rallied together in creative ways to meet the unique combination of challenges caused by the COVID-19 pandemic to continue to serve our customers. Let me discuss another example. Due to the high demand from our customers to still engage with our product offering, we introduced a virtual design appointment experience in April that is now operating in all of our stores. This is an example of how we are building on our connected customer strategies, and our stores and designers are excited about this service offering. By providing this free, live, virtual video and chat experience, we expand our ability to connect and collaborate with customers that are contemplating a flooring project but might be under shelter-in-place restrictions or just prefer the ease of starting their project at home first with a cloud-based video conference. This strategy leverages our website resources, including our room visualizer. My Order Quote Builder and allows our designers to connect with customers while maintaining social distancing guidelines. Designers can virtually walk customers through a store and share inspirational ideas and collaborate with customers on their desktop browsers and on mobile devices in high definition. Meetings are easy to schedule through our website and additional participants can be invited. As we have previously discussed, when a designer is involved in a project, our average ticket and margin rate is significantly higher than the company average. We have modified our advertising spend and messaging. We did this with an eye towards letting our pros and do-it-yourself customers know that our stores are open with banners and yard signs, and how they can continue to shop with us for hard surface flooring products online or via the telephone. We choose to protect our spending on search, social, YouTube, and Pinterest as we see customers are still using this media looking for ideas and inspiration. We have also extended our 18-month no-interest credit offering through May 31st, which will give our pros and do-it-yourselfers an additional line of liquidity for projects. Additionally, in May, we will launch a pro premier rewards incentive program where they can earn double and triple points based on their spend. We have decided to pause the second quarter of 2020 launch of our Pro Premier credit card until the operating environment improves. FloorAndDecor.com and our call center have been critical to staying engaged with our professional and do-it-yourself customers. The multi-year investments we have made in our connected customer strategy is paying off to help customers find us, educate themselves, and be inspired virtually. As customers gain comfort and ultimately buy online and pick up in stores, or have shipped to their job site, our technology allows for simple and safe social distancing access to our full product assortment. As we move to the curbside operating model, our e-commerce site has made it very easy for a customer to place an order online and then just pick it up at the store. Since the model change, our e-commerce business is sequentially up 270% and now represents approximately 60% of our company sales. We have also invested in the talented call center team, and when combined with advanced technology, it has allowed us to flex up and to handle the significant increase in call volume we are experiencing. To help manage the overflow, we added store support center associates to assist on the phone who are working with customers to help them complete their projects in this new business environment. Beyond providing critical support during these challenging times, our call center also provides has emerged as a functional business that drives revenues through its follow-up programs, which we began testing late last year. We continue to make great progress in investing and growing the all-important professional and commercial customer base. We continue to find pros, cultivate relationships, and serve them well. Our value message is clear and easy for the professional customer to understand. We are open, and we are your hard-surface flooring supply house. It all starts with substantial quantities of trend right in-stock inventory at consistently low prices, combined with services such as a dedicated pro team, free design services, free storage, a great loyalty program, and credit. Once pros are identified and input into our proprietary CRM solution, we have many ways to serve and communicate value to them, including through our Pro Premier Rewards loyalty program, email marketing, direct communication from our in-store pro teams, and through our pro app, which continues to be used at higher and higher rates. We are confident these strategies continue to work. Two simple examples. In the first quarter, our top 500 pros spent over double what they have spent a year before with us. And our commercial big job sales, which are generally sold to commercial clients and are much larger than our normal sales, were up 67% in the first quarter. During this difficult time, we know these investments and unique solutions are important to our professional customers. We have heard loud and clear from our pros that they appreciate how we are proactively working with them to safely support them during this challenging time, and they, like us, look forward to us reopening our doors again. The Economic Outlook and Associated Sales and Liquidity Challenge challenges facing many retailers cause us to believe that we will see further store closures and industry consolidation, and we plan to remain the hard surface flooring retailer of choice on the other side. After the COVID-19 pandemic starts to fade, this will be time for us to take more market share. Moving on to some of our near-term cost saving measures, we have taken steps to judiciously resize our cost structure to protect our liquidity, profitability, and cash flow during this uncertain period. While most of these decisions were difficult for us to make, we made them with an eye towards not placing at risk our longer-term growth priorities and our competitive position. In late March, we made the difficult decision to resize our store and store support center payroll costs in anticipation that sales could continue to decline for some period of time from the COVID-19 pandemic and that a recovery could be slow once the economy begins to reopen. We were forced to furlough about 2,000 of our part-time associates. Part-time associates account for about 30% of our in-store associate hours, and our full-time associates account for the remaining 70%. While we have currently not furloughed our full-time store associates, we did reduce their hours to 32 hours from approximately 40 hours per week and our department head hours to 40 hours per week from approximately 45 hours per week. As business conditions improve, we are prepared to play offense by flexing up the hours of our full-time associates. The base salaries of our senior management team, as well as other teammates in our store support center, were temporarily reduced by graduated amounts. I will not receive a base salary other than the amount that will cover the benefits provided by the company. The base salaries for Lisa Lobby, our president, and Trevor were both reduced by 50%. Our board of directors also agreed to temporarily suspend their cash retainers. Let me close by saying again how inspiring it has been to see how our store and store support associates have rallied together to the unique combination of challenges caused by the COVID-19 pandemic. Their tireless and creative efforts have enabled us to continue to serve our customers, particularly our pros that operate small businesses. We have ended fiscal 2019 and the first quarter of 2020 in a strong financial position, with our sales, EBITDA, and liquidity at the highest levels in our 20-year history. We believe we have correctly resized our cost structure and capital spending plans to have adequate access to liquidity to bridge us through this challenging time. Our confidence in the power of our business model and our ability to navigate this crisis is unwavering, and we will remain committed to long-term profitable growth. I will now turn the call over to Trevor to discuss in more details our first quarter financial results and how we are thinking about managing our liquidity, profitability, and cash flow during these unprecedented times.