Floor & Decor Holdings, Inc.

Hello, and welcome to the Floor and Decor Fourth Quarter and Fiscal Year 2021 Conference Call and Webcast. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If you should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Wayne Hood, Vice President, Investor Relations. 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 Laube, 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 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. Foreign 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 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 measures can be found in the earnings press release. which is available on our investor relations website at irflorentaccord.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 joining us on our fiscal 2021 fourth quarter earnings conference call. Today's call will discuss some of the highlights of the strong fiscal 2021 fourth quarter earnings and 2021 full-year earnings results. Trevor will review our financial performance in more detail and discuss how we are thinking about fiscal 2022. We will then open the call for your questions. Let me start by saying that we are proud to have achieved several milestones in fiscal 2021, and most important, continue to grow our market share in a challenging environment. Despite the continued challenges presented by COVID-19, widespread disruption in the global supply chain, and related cost headwinds, we delivered record fiscal 2021 sales and earnings results. On a 13-week to 13-week basis, our fiscal 2021 adjusted fourth quarter earnings increased 7.3% to 44 cents from 41 cents last year. On a two-year compound annual growth rate basis, our adjusted earnings per share increased 30.1% from 2019. We are happy that our strong results enabled record incentive payouts through our Bonus and Achieve programs in 2021. Additionally, we raised our minimum starting wage to $15 per hour effective January 1st, 2022, placing us in the first quintile of retailers. Over the past six months, we have increased our average store wage by 5% to over $17 per hour from approximately $16 per hour in July 2021. We believe this will help improve retention and associate turnover. Our fiscal 2021 fourth quarter total sales increased 26.4% to $914.3 million from last year, exceeding expectations. Adjusting to remove the extra week last year, our fourth quarter, 13 week to 13 week total sales increased 34.1%. Our full year fiscal 2021 total sales increased 41.5% to a record 3.4 billion, which is more than double our fiscal 2018 sales, despite having to moderate our new store openings in 2020 due to COVID-19 pandemic. On a 52 week to 52 week basis, our full year 2021 total sales increased 44%. Our fiscal 2021 fourth quarter comparable store sales increased 14% on top of a strong 21.6% growth last year. Comparable store sales increased 17.2% on a two-year compound annual growth rate basis from 2019, the highest two-year quarterly growth rate in fiscal 2021. Our full year 2021 comparable store sales increased 27.6% and 15.4% on a two-year compound annual basis, culminating in 13 years of growth in our comparable store sales. Let me turn my comments to our new store opens. During the fourth quarter of fiscal 2021, we opened seven new warehouse format stores compared with five new stores during the same period last year. We opened four stores in October and three stores in November. For the 2021 fiscal year, we opened 27 new warehouse format stores, representing 20.3% growth from fiscal 2020. We ended 2021 operating 160 warehouse format stores and two design studios in 33 states, further extending our store footprint and brand awareness. We plan to open 32 new warehouse format stores in fiscal 2022 and expect about 56% of the store openings to be in existing markets and 44% in new markets. Among the 32 new warehouse store openings, we expect seven will be owned. We are taking advantage of our strong balance sheet and cash flow by intentionally shifting some of our new store development to owned locations from lease projects. We have seen a good return on this additional investment. The shift increases our control of new store projects, significantly increases our store level EBITDA by lowering rent and occupancy expense, and improves our store opening cadence. We intend to open six new warehouse stores in the first quarter of fiscal 2022, including a new warehouse store in Garden City, New York, expected in March. We are excited about continuing to build our store footprint in the Northeast. And this opening will bring us to four warehouse stores that we operate on Long Island, New York. We expect a balanced opening cadence of about 50% of our new warehouse stores opening in the first half and second half of fiscal 2022. We intend to open four design studios, including three in the first quarter of fiscal 2022, one in Miami, Florida, one in Vienna, Virginia at Tyson's Corner, and one in Houston, Texas. The design studios are small format stores strategically located in densely populated, higher income metropolitan markets that we would not be able to operate a large warehouse store economically. As we look beyond 2022, we are excited to announce that we have expanded our new store opportunity in the United States. We now believe we have a path to operating at least 500 warehouse format stores over the next eight to 10 years compared with our prior market expectations of operating at at least 400 warehouse format stores. The performance of our new stores opened over the past three years, coupled with the strong performance from our more seasoned stores and our market refresh information reinforce our conviction in our new store opportunity. We intend to get into more details at our upcoming analyst day on March 16th, the webcast details of which will be available on our investor relations page. Let me now discuss in more detail our comparable store sales. Monthly, our comparable store sales increased 16.2% in October, 10.9% in November, and 14.8% in December, culminating in a 14% growth in the fourth quarter of 2021. Thanksgiving week, a lower volume week for us, moved into November from December last year, which is the main difference in November and December comparable store sales. We are pleased with our fourth quarter sales exit rate and the start to the first quarter of fiscal 2022, where our January comparable store sales increased 11.5% and are up to 23.9% month to date in February. Our fourth quarter comparable store sales growth was driven by a 14.8% increase in average ticket, which is primarily being driven by higher average retail per square foot We also saw a slight increase in square foot comp per ticket. The increase in average ticket is mainly due to continued strong sales in laminate and vinyl, ongoing customer preferences towards our better and best price points across all departments, and to a lesser extent, retail price increase to mitigate cost increases. Additionally, our average ticket benefited from an increase in the sales contribution from our designer-led initiatives, a higher sales penetration in e-commerce, and a higher pro sales penetration rate, all of which have an average ticket above the company average. While fourth quarter transactions declined 0.7% from the same period last year, they increased 10% on a compounded annual basis from 2019, which is slightly above the 9.8% growth in the third quarter of 2021. The two-year compound annual growth rate in transactions of 10% and modest year-over-year growth in our square footage sold per comp store transaction reinforces our belief that we continue to gain market share. At this juncture, we are pleased that the modest price increases that we have taken to cover the rising costs are having an inelastic impact on demand. Let me now turn my comments to how we are navigating the constraints in the global supply chain. Our supply chain teams continue to work aggressively to secure international ocean carrier capacity to meet our strong demand. To do so, we have added significantly more capacity to our ocean and North American logistics, particularly from Asia, Europe, and Brazil. Consequently, our in-stocks continue to trend in the right direction, supporting our strong sales growth. We believe this strategy, combined with our broad assortments, enables us to offer our homeowners and pros alternative products where some out of stocks have occurred elsewhere. However, we face intermediate term cost headwinds in pursuing this strategy, particularly from elevated ocean container costs as well as the merge and detention costs, particularly in the Los Angeles port. In the fourth quarter of 2021, our ocean freight costs, which represent our highest supply chain costs, more than doubled from 2020. Given the ocean capacity constraints that are driving higher container rates and demurrage and detention costs, we are planning on higher ocean freight costs throughout 2022. As a reminder, we didn't see material increases in supply chain costs until the final four months of fiscal 2021. As we study the market and our competition, we believe our holistic value proposition is the best it has ever been. Simply said, We don't believe anyone offers the breadth of in-stock product, visual inspiration, compelling assortment, or services we offer, and certainly not at our prices. Because of this, we will continue to judiciously raise retails throughout 2022 in this heightened inflationary environment, and we plan to grow our gross margin rate throughout 2022 to relative to the 38.8% we achieved in the fourth quarter of fiscal 2021, with the goal of exiting the fourth quarter of 2022 with the gross margin rate approaching approximately 41%. While none of us knows the future, it seems reasonable that the global and U.S. supply chain issues will abate at some point in the future, And if this occurs in late 2022 or early 2023, we see a path for gross margin rate to continue to grow as we move into 2023 and 2024. Our third strategic pillar of growth is expanding our connected customer experience. On the 13 week to 13 week basis, our fourth quarter e-commerce sales increased 45.1% from last year and 61.7% when measured on a two year compound annual growth rate basis from fiscal 2019. As a result, our fourth quarter e-commerce sales penetration rate increased 190 basis points to 16.4% from 14.5% last year. For the year, our e-commerce sales increased 30.2% year over year and on a 52-week to 52-week basis and accounted for 16.1% of our sales compared with 17.4% in 2020 and and 9.4% in 2019. These results exceeded our expectations and validated that we are making the correct investments in our connected customer capabilities. We continue to enhance our web experience, focusing on content and conversions. That said, our stores remain integral to our connected customer strategy. For example, about 79% of web sales and 88% of web orders were picked up in the stores in the fourth quarter. Our fourth pillar of growth rests on the investments we are making in our pro and commercial customers to grow our market share. We are pleased that our strategies to grow our pro wallet share, particularly among our top pros, are working. For the full year, our pro sales increased 44.1% from last year, exceeding $1 billion, a milestone in the company's history. Our pro sales continue to grow at a faster pace than our homeowner sales. We are pleased that our top pros are shopping more often and spending more with us to build lifetime value. The average spend of our top 10% of pros was 24% higher compared to the top 10% of pros in 2020, validating the strength of our growing brand equity. Indeed, our brand tracker data shows that our brand equity with pros improved in 2021 from 2020. We see that pros increasingly shop with us as their spend increases due to our large in-stock selection of high-quality, low-cost, trend-right flooring products, website, and Pro Premier app, which increasingly resonates with pros. Importantly, we believe our in-stock job-lock quantities are a clear competitive advantage during the current disruptions in the global supply chain. We are pleased that enrollment in our Pro Premier Rewards Program, or PPR, increased 56% in 2021 from 2020. PPR sign-ups are positively correlated with store performance. In 2021, PPR pros spent three times as much as non-PPR pros and shopped with us 2.6 times as frequently. Points redeemed, a measure of the program's value increased 63% in 2021. Turning to sales growth from our commercial regional account managers, or RAMs, and Spartan Services. We are happy that the 2021 sales from Rams increased 61% in 2020. Let me turn my comments to Spartan Services. We are focused on successfully integrating critical functional areas and understanding Spartan's needs to prepare the company for accelerating growth in 2022 and beyond. We are pleased to say that the integration has been going exceptionally well, contributing to management's meeting 100% of their earn out performance metrics and related payout associated with 2021. As we look to 2022, Spartan is expected to begin to leverage opportunities with our supply chain manager, floor and decor products, and organic and inorganic sales reps and additions. Over time, We expect commercial sales to become a material part of our growth as we leverage our core strengths in merchandising, direct sourcing, and Spartans commercial sales rep. Let me now discuss our progress with our design services, the fifth pillar of our growth. As we have discussed in the past, we are focused on building a consistent, high touch, best in class, and seamless designer service experience for our homeowners and pro customers in our stores. To that end, we are enhancing key productivity metrics adding new technology to improve the customer experience and refining our design organizational reporting structure. We believe the new organizational structure enhances our ability to grow this business and attract and retain high caliber designers by providing them with clear career path opportunities. Collectively, we are pleased that our focus on design services led to a 78% increase in design appointments in 2021. Notably, our 2021 annual design sales penetration rate increased 440 basis points. As a reminder, the gross margin and average ticket is higher than the company average when a designer is involved. We are excited to build on these investments in 2022 and grow the awareness and familiarity with our design services. We are also pleased with our Dallas Design Studio, where the pro forma metrics are slightly ahead of expectations. We look forward to walking through our Miami design studio and Doral warehouse store with analysts attending our March 16th analyst meeting in Miami, Florida. Before turning the call over to Trevor, I want to thank all of our floor and decor associates for their collective hard work every day in our stores, distribution centers, and store support center to serve our customers. I want to particularly thank our merchandising and supply chain teams that continue to work tirelessly to ensure we have inventory sourcing flexibilities to meet the strong demand despite ongoing disruption in the global supply chain. Collectively, we have yet again proved to be a company that is agile, resilient, and resourceful. I'll now turn the call over to Trevor to discuss our fiscal 2021 fourth quarter and full year 2021 earning results in more detail. Thank you.