Floor & Decor Holdings, Inc.

Greetings. Welcome to the Floor and Decor Holdings Incorporated fourth quarter and fiscal year 2020 conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the call over to your host, Wayne Hood. Please go ahead.

Thank you, Operator, and good afternoon, 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 today, 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 meaning 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 statements for any reason, including those listed in its SEC filings. One, of course, seems 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 the earnings press release, which is available on our investor relations website at ir.flooranddecourt.com. A recorded replay of this call, together with the 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 joining us on our fiscal 2020 fourth quarter and full year 2020 earnings conference call. On today's call, I will discuss some of the highlights of our strong fourth quarter and full year fiscal 2020 results, as well as the progress we are making on some of our strategic growth initiatives. Trevor will then review our fiscal 2020 fourth quarter and full year financial performance and discuss how we are thinking about fiscal 2021, and then we will open the call for your questions. We delivered exceptional fiscal 2020 fourth quarter earnings results that represented an acceleration of trends we saw in the third quarter of fiscal 2020. Our fiscal 2020 fourth quarter total sales increased 37.3% or $196.7 million to $723.7 million from $527 million in the fourth quarter of fiscal 2019. exceeding our expectations. On a 52 to 52-week basis, our fiscal 2020 fourth quarter comparable store sales increased 21.6%, the strongest quarterly growth rate of the year. We experienced robust and consistently strong sales across all months and all nine geographic regions in the quarter. Our fiscal 2020 fourth quarter adjusted EBITDA also exceeded our expectations, increasing 65.9%, to $97.6 million from $58.8 million in the fourth quarter of fiscal 2019. Our fiscal 2020 adjusted fourth quarter diluted earnings per share increased 80.8% to 47 cents from 26 cents in the fourth quarter of fiscal 2019. We ended fiscal 2020 with no net debt on our balance sheet and remain in our strongest liquidity position in our company's history. Our financial performance and strong balance sheet enable us to continue to make significant investments towards further strengthening our competitive position and growing our market share in 2021 and beyond. Let me now provide an update on our five strategic pillars of growth, beginning with new store growth. We opened five new warehouse stores in the fourth quarter of fiscal 2020, bringing the total number of warehouse stores we operate to 133, plus two design studios in 31 states at the end of fiscal 2020. By month, we opened four new warehouse stores in fiscal November 2020 and one new warehouse store in fiscal December 2020. These openings were a remarkable accomplishment considering the impact COVID-19 had on many elements of new store construction. As we look to fiscal 2021, we intend to return to 20% unit growth and expect to achieve our long-desired objective of a more balanced quarterly new warehouse store opening cadence. To that end, we expect to open seven new warehouse stores in the first quarter of fiscal 2021, more than double the three new warehouse stores we opened in the first quarter of fiscal 2020. For the full year, we expect to open 27 new warehouse stores, an increase of 20.3% from 2020. We expect about 60% of our new warehouse store openings will be in new markets, particularly in the Northeast and the West Coast, and 40% in existing successful markets. We are continuing to move forward with our design studio pilot by opening two additional locations in the second half of fiscal 2021. We remain very pleased with the sales waterfall among all of our store vintages, particularly our most mature stores, and believe the classic 2020 and 2021 stores will represent some of our strongest classes of new stores. Moving on to our second pillar of growth, growing our comparable store sales. We are very pleased with the broad-based and consistent strength in our fiscal 2020 fourth quarter comparable store sales and the strong start to fiscal 2021. Our reported fourth quarter comparable store sales increased 21.6% from last year. But if we adjust for the impact of Christmas moving into the 53rd week, which benefited physical December 2020, we estimate our fourth quarter comparable store sales would have increased approximately 20.5%. Our comparable store sales were driven by strong 23.1% growth in comparable store customer transactions. This represents the strongest growth rate in customer transactions in fiscal 2020 and exceeded our expectations. On a monthly basis, our comparable store sales increased 20.4% in October, 19.4% in November, and 24.9% in December. As I mentioned, the 24.9% increase in December comparable store sales was closer to 21.7 when adjusting for Christmas shifting into the 53rd week. We are very pleased with our December comparable store sales growth exit rate and the strong start to fiscal 2021. Near debate, our fiscal 2021 first quarter comparable store sales increased approximately 24% despite severe weather that impacted approximately 20% of our store base over multiple days. From a merchandising perspective, all of our product categories experienced double-digit fourth quarter 2020 comparable store sales growth, excluding our wood category. That said, the changes we have made in our wood assortments are now leading to modestly higher growth in the category. The broad-based strength in our merchandising categories further validates our position as the one-stop solution for all of our customers' hard surface glory needs. The strength of our merchandising and supply chain teams has enabled us to continue to successfully deliver on our strategy of offering differentiated and innovative trend-right products in job-lock quantities at everyday low prices. Our third strategic pillar of growth is expanding our connected customer experience. our fiscal 2020 fourth quarter e-commerce sales remained strong, increasing 93.7% from the fourth quarter of fiscal 2019 and accounting for 15.9% of our sales compared with 11.4% last year. For the full fiscal year, our e-commerce sales increased 120.3% to $451 million and accounted for 18.9% of our sales compared with 10.1% in fiscal 2019. We believe we are now seeing our e-commerce sales penetration rate approaching a more normalized rate following its peak of over 60% in the second quarter of fiscal 2020. We are very pleased with the fiscal 2020 fourth quarter traffic to our website, which increased 53% year-over-year, an improvement in growth from the third quarter of fiscal 2020. We continue to see strong double-digit growth from paid and organic search as well as direct traffic to our website as our customers are choosing to engage with our brand. We are particularly pleased with 92% growth in direct traffic to the website in the fourth quarter, which is a direct result of our growing brand awareness and our team's ability to capitalize on these trends. We will continue to make investments towards delivering an unmatched personalized customer experience with efficient business processes across all our touchpoints, including our website, mobile app, and in-store. For example, in 2021, we're excited about rolling out a I'm Here notification, which offers customers the ability to check in contact lists and curbside from the personal devices, making for a better pickup experience. Additionally, later this year, we intend to enable customers to schedule delivery and pickup times. We are also taking additional actions to further optimize the speed of our website and mobile experience, which in turn we believe will lead to further improvement in conversion and customer experience. We believe these actions will continue to lead to strong e-commerce performance metrics and growth. That said, our stores remain a critical part of our connected customer experience. In the fourth quarter of fiscal 2020, about 88% of our website orders, excluding sample purchases, were picked up in our stores. Our fourth pillar of growth rests on the successful investments we are making in our pro and commercial customers to grow our market share. We are continuing to make investments in our pro mobile app and our award-winning Pro Premier Awards PPR program, which drives engagement and loyalty with new and existing pros. We grew enrollment in the PPR program 22% in fiscal 2020, despite the headwinds caused by the COVID-19 pandemic. We were encouraged to see our fiscal 2020 fourth quarter monthly PPR enrollment return to pre-COVID-19 levels and accelerate from the third quarter, leaving us optimistic about further strong growth in 2021. We had over 178,000 pros enrolled in PPR at the end of fiscal 2020, which represents a 73.7% increase from fiscal 2019 and a remarkable accomplishment since its launch in the third quarter of fiscal 2018. As a result, about 77% of our fiscal 2020 pro sales were from PPR members, up from 67% in fiscal 2019. The increased enrollment is the direct result of our proteins engaging the pros about the benefits and value the program that now includes over 100,000 reward items, including unique reward experiences and social good offerings. For example, our pros have redeemed over 1.8 million points to provide clean water to underdeveloped countries, amounting to over 34,000 liters of clean water. Home Advisors is one of our newest pro partner additions to PPR, offering members savings as well as the option to redeem points directly for credits for lead generation. the lifeblood of any contractor. In fiscal 2020, PPR points earned increased 37% versus 2019, and points redeemed rose 70%, further validating the value of our PPR program and engagement with our pros. Our PPR program is an important tool for us, and we have found that PPR members spend nearly three times more and shop 2.5 times more frequently than non-PPR members. As we move into 2021, we'll further enhance our PPR program and build on our segmentation and personalization efforts to drive engagement and lifetime loyalty, and we intend to reward our pro customers for using our pro credit card. We continue to be very pleased with the growth in commercial sales, particularly those sales that are generated by our regional account managers, the RANs, which are now in most of our major markets. While sales from our 22 regional account managers are small relative to the size of our retail business, We are excited about the opportunity to see sales triple in fiscal 2020. Prompting us to further build out this organization, we plan to add approximately 12 regional account managers in fiscal 2021. Over time, we expect commercial sales to become a material part of our growth as we leverage key floor decor strengths, merchandising, and our direct sourcing model. Let me now discuss the progress we are making with our free design services, the fifth pillar of growth. We are pleased with the momentum in our free design services where our fiscal 2020 fourth quarter sales increased uniquely from fourth quarter fiscal 2019. Key performance metrics, including appointment conversion rate, average ticket, and sales penetration were the highest of the year as consumers felt safe inside our large stores. Our fiscal 2020 design appointments of 193,000 were a record as we augmented in-person design appointments with virtual ones. Design appointments and product recommendations are very important to homeowners, pros, and our conversion rate. So we were pleased to learn through our design survey that among homeowners and pros who had design appointments at Florida Core, that over 90% were very or somewhat satisfied. We have seen sales tied to a designer more than double since 2018 and have strategies to drive continued strong growth in 2021 and beyond. We are focused on building a consistent, high-touch, best-in-class, and seamless design service for our homeowner and pro customers. To that end, we'll continue to elevate the talent in design services. As we have discussed, when the designer is involved with the project, the average ticket and margin are above the company average. Let me now turn my comments to what we have learned about our customers following our updated homeowner and pro demographic and customer market segmentation analysis. We now have information on over 2 million customers in our CRM database that we have combined with external research to create strategies for our different types of customers. Within our two homeowner segments, do-it-yourself and buy-it-yourself, we now have further defined them into nine distinct personas. We also have more clarity on the professional side of our business as to what percent of our business comes from a remodeler, flooring specialist, general contractor, property owner, architect, and designer. Based on our most recent research, we believe approximately 70% of our sales come from homeowners and 30% from professional customers. More importantly, when looking at who makes the determination of where to shop, we still believe the pro influences about 40% of our sales and homeowners 60%. Additionally, we now estimate that 85% of flow-under-curve purchasers involve a professional in their installation. Our strategy has always been to serve both homeowners and professional customers But this new information and granular level of detail in our CRM database allows us to enhance store, connected customers, and marketing strategies to find new customers, as well as obtain more wallet share from existing customers. We are now much better informed as to why customers buy from us and why sometimes we don't get the sale. We have begun to refine our targeting strategies through digital advertising and have created more personalized and relevant communications throughout the homeowner and pro-shopping journey. We are also building our collaborative strategies between our pro desk and pre-designed services. Finally, we are enhancing our pro premier rewards loyalty program by segmenting our pros by a dollar spend, which we expect will allow us to increase engagement and loyalty. Let me close by saying that our strong fiscal 2020 fourth quarter and full year earnings are the direct result of our associates tirelessly serving our customers and each other. In 2020, we learned that we can successfully operate our business under extreme circumstances and unexpected events due to the collaborative strength of our people and culture. Our entire executive leadership team would like to thank them for their hard work and dedication to serving our customers and each other. I'll now turn the call over to Trevor to discuss in more detail our fiscal 2020 fourth quarter and full year financial results. Thanks, Tom. Our strong fourth quarter In fiscal 2020, earnings results are an exceptional accomplishment considering the unique and challenging operating environment we faced in fiscal 2020. It is a testament to the resiliency of our business model and our associates' tireless effort to serve our customers and each other. We are pleased with two consecutive quarters of double-digit comparable store sales growth driven by transaction growth, which is encouraging as we enter 2021. We are particularly proud of our second half financial performance in fiscal 2020 as it represents the highest operating and EBITDA margin performance in our recent history. Let me now turn my comments to some of the changes among the major lines in our fiscal 2020 fourth quarter income statement, balance sheet, and statement of cash flow, and then I'll discuss how we are thinking about fiscal 2021. As a reminder, our fiscal 2020 year, which ended December 31, 2020, is a 53-week period compared with fiscal 2019's 52-week period ending December 26, 2019. This means we had 14 weeks of operations in the fourth quarter of 2020 versus 13 weeks in fiscal 2019's fourth quarter. We estimate the additional week added approximately $41,800,000 in sales, $8.5 million in operating income, $6,400,000 in net income, $0.06 to our diluted earnings per share and $8,800,000 to adjusted EBITDA. My comments from here will be on a 14-week to 13-week basis. A fiscal 2020 reported fourth quarter gross margin rate contracted to 42.5% and 43.6% in fiscal 2019 due entirely to the 270 basis points or $14 million in Section 301 tariff refunds discussed in fiscal 2019 related primarily to rigid core vinyl. Excluding the 270 basis points of benefit from last year, our growth margins improved 150 basis points, driven by higher product margins due to continued enhancements to our merchandising strategies and improved leverage of our distribution center and supply chain infrastructure on higher sales. Turning to our fiscal 2020 fourth quarter expenses, our fiscal 2020 fourth quarter selling and still operating expenses increased 29.2% to $191,100,000, from 147,900,000 in fiscal 2019, leveraging approximately 170 basis points. The year-over-year improvement is the direct result of the distinct leverage that comes from the strong 37.3% growth in our total sales. Our staffing levels sequentially improved in the fourth quarter of fiscal 2020 relative to the third quarter of fiscal 2020, but we ran lean in some stores due to COVID-19. Our fiscal 2020 fourth quarter general and administrative expenses increased 20.1% to $40,900,000 from $34 million in the fourth quarter of fiscal 2019, leveraging 90 basis points year over year. The leverage was due to the increase in sales as well as we incurred $2,400,000 in last year's fourth quarter related to the relocation to our new store support center and the exit of our Miami distribution center. Our 2020 fourth quarter pre-opening expenses increased 26.4% to $7,600,000 from $6 million in the same period in the prior year, primarily due to the opening of five new warehouse stores in Q4 2020 and spend for 10 stores expected to open throughout 2021 versus opening seven stores in Q4 2019 and spend for five stores that opened in 2020. We are pleased that our strong second half 2020 results enabled us to pay $2.5 million in spot bonuses to our store associates and reimbursed store support center associates for salary reductions they took in the second quarter of fiscal 2020 due to the COVID-19 pandemic. Fourth quarter net interest expense increased 34.3% to $2,300,000 from $1,700,000 at fiscal 2019. primarily due to higher average total debt outstanding with our term loan when compared to the same period in fiscal 2019. Fourth quarter fiscal 2019 included a benefit of approximately $335,000 related to the Section 301 tariff refunds. Without the benefit, the interest expense would have increased 15.9% in the fourth quarter of 2020. Our fiscal 2020 fourth quarter provision for income taxes was $8,600,000 or 13.1% of pre-tax income compared with $5,100,000 or 12.6% in fiscal 2019. The lower effective income tax rate when compared to our statutory rate is primarily due to income tax benefits for tax deductions in excess of book expense related stock option exercises. Turning to our profitability, our fiscal 2020 fourth quarter adjusted EBITDA margin rate increased 230 basis points to 13.5% from 11.2% in fiscal 2019, primarily due to the 150 basis point improvement in our gross margin rate, which when coupled with expense leverage led to our adjusted EBITDA growing 65.9% to $97,600,000 from $58,800,000 in the same period in fiscal 2019. Our fiscal 2020 fourth quarter gap net income increased 61.7% to $57,100,000 from $35,300,000 in the same period in fiscal 2019. Our GAAP deleted earnings per share increased 58.8% to $0.54 from $0.34 per share in the fourth quarter of 2019. Our fiscal 2020 fourth quarter non-GAAP adjusted net income increased 86% to $50,200,000 from $27 million in the fourth quarter of fiscal 2019. Our fiscal 2020 fourth quarter adjusted deleted earnings per share increased 80.8% to $0.47 from $0.26 in the same period in fiscal 2019. A reconciliation of our fiscal 2020 fourth quarter earnings to non-GAAP earnings is provided in today's earnings release. Moving on to our fiscal 2020 balance sheet and cash flow, we are pleased that during these unprecedented times that we have been able to maintain a strong balance sheet and have the strongest liquidity position in our company's history to support our growth plans. As of December 31st, 2020, there was $217,800,000 in gross debt outstanding related to our term loan facility. When considered the $307,800,000 in cash and cash equivalences on our balance sheet, we had no net debt outstanding as of December 31, 2020. Further, we can access approximately $378,700,000 of unused borrowings available under our $400 million ABL facility. Our fiscal 2020 operating cash flow almost doubled to $406,200,000 from $204,700,000 in fiscal 2019, primarily due to strong growth in our net income and a decrease in working capital. The decline in our working capital was primarily due to 11% growth in new stores in fiscal 2020 compared with our historical 20% growth in new units. Turning to capital expenditures for fiscal 2020, our total capital expenditures were $212,400,000 compared to $196 million for fiscal 2019. While we opened fewer stores in fiscal 2020 than 2019, we intend to open more stores in early 2021 than in 2020, so we had an increase in new store capital spending for future year opens. We also spent more on our distribution centers as we bought land and intend to own a new, larger distribution center near our current facility outside of Houston, Texas. For fiscal 2020, approximately 66% of our capital expenditures were for new stores, 23% for existing store and distribution center reinvestments, while the remaining spending was associated with information technology, e-commerce, and store support center investments to support our growth. Let me now turn my comments to how we're thinking about fiscal 2021. From a macroeconomic perspective, fiscal and monetary policies look to remain very accommodative over the intermediate term, which we believe will continue to provide tailwinds to existing and new home sales. secular demand for homes continues to exceed available supply which we believe will continue to lead to moderate growth in home price appreciation and support home reinvestment projects indeed our sales growth has accelerated and has remained robust across geographies and merchandise categories and the pro backlog remains strong into 2021. while we are optimistic about the prospects of the sustained economic recovery in 2021 and the momentum in our business we recognize that business risks remain elevated from the COVID-19 pandemic. For that reason, in the interim, we are continuing our practice of not providing specific annual sales and earnings guidance that was established in the second quarter of fiscal 2020. However, we are providing select annual guidance for new store openings and financial measures that we believe can reasonably be forecasted. As business risks improve, we expect to return to annual sales and earnings guidance. While we are not providing specific annual sales and earnings data for fiscal 2021, let me provide some context and items to consider. We will be cycling past increasingly difficult comparable store sales comparisons in the second half of fiscal 2021, and we believe measuring our growth on a two and three year stack basis in the second half of 2021 is a better analytical way to gauge our underlying trends. As a reminder, our fiscal 2020 third quarter and fourth quarter comparable store sales increased 18.4% and 21.6% respectively. We are planning on depreciation and amortization to be approximately $116 to $118 million. We are planning on interest expense to be approximately $5 million. The lower interest expense is due to the recently amended term loan where we paid down $10 million of the higher cost $75 million term loan B-1. as well as lowering our interest rate by about 300 basis points on the remaining balance. Deleted weighted average shares outstanding is estimated to be approximately $107 million and our fiscal 2021 tax rate is estimated to be approximately 24%. As a reminder, this guidance does not consider the tax benefit due to the impact of stock option exercises that may occur in fiscal 2021. Our 2021 capital expenditures are expected to accelerate from fiscal 2020 as we return to 20% growth in new warehouse store openings and make other strategic long-term investments. For fiscal 2021, total capital expenditures are planned to be approximately $440 million to $460 million, which will be funded primarily by cash from operations and cash on hand. We intend to open 27 warehouse format stores, two small format design studios, and start construction on store openings in fiscal 2022. We expect these warehouse store openings to be equally balanced throughout the quarters in fiscal 2021. We also intend to relocate two existing stores in early 2022 and will have construction costs incurred in fiscal 2021. Collectively, these investments are expected to require $285 million to $295 million in cash in fiscal 2021. Most of the year-over-year increase reflects an acceleration in store openings to 27 new warehouse stores, which is more than double the 13 new warehouse stores opened in fiscal 2020. We plan to relocate our Houston, Texas distribution center to a nearby location in fiscal 2021. We have purchased the land and already started construction on a new 1,500,000 square feet building that we intend to own for the long term. This new DC will double our capacity in Houston to 1,500,000 square feet and increase our total DC capacity by 17% to 5,500,000 square feet. Additionally, we intend to open a new transload distribution facility in Los Angeles that will allow us to maximize cargo weight leading to fewer containers, which will drive ocean freight and drainage savings in fiscal 2022. Collectively, these are expected to use approximately 72 to 76 million in cash. we will invest in existing store remodeling and expansion projects and existing distribution centers using approximately $56 million to $59 million of cash. Finally, we plan to continue to invest in information technology infrastructure, e-commerce, and other store support center issues using approximately $27 to $30 million of cash. As we move beyond 2021, our goal is still to achieve $329 million in adjusted EBITs in 2022 as described in our 2020 annual proxy statement. If achieved, this would be quite a feat to double our EBIT over a three-year period in the throes of the worst pandemic in a century. As we look to the next three years, we believe our long-term growth algorithm of 20% unit growth, mid to high single-digit comparable store sales growth, along with modest gross margin improvement should lead to net income growth of at least 25%. Due to the COVID-19 pandemic, this growth path will not be a straight line, but over the longer term, we believe these goals are achievable. In closing, I would like to say that our entire leadership team is proud of how we performed in 2020, and we remain encouraged by the momentum that has continued into fiscal 2021. We believe our best days and years lie ahead of us. Our entire executive team would like to personally thank all of our associates for the great work they are doing every day to serve our customers. Operator, we will now take your questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star keys. Please limit to one question and one follow-up. Our first question comes from Christopher Horvath with J.P. Morgan. Please go ahead.