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spk10: Greetings, ladies and gentlemen, and welcome to Floor and Decor's first quarter of 2022 conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Mr. Wayne Hood, Vice President of Investor Relations.
spk03: Thank you, operator, and good afternoon, everyone. Joining me on our first quarter earnings conference call today are Tom Taylor, Chief Executive Officer, Trevor Lang, Executive Vice President and Chief Financial Officer, and Ersan Sehman, Executive Vice President of Merchandising. 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 statements for any reason, including those listed in its SEC filings. Florida, of course, has 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 release, which is available on our investor relations website at irflorentecor.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.
spk02: Thank you, Wayne, and everyone for joining us on our fiscal 2022 first quarter earnings conference call. During today's call, I will discuss some of the highlights of our 2022 first quarter earnings. Trevor will then review our financial performance in more detail and discuss how we are thinking about the remainder of 2022. We will then open the call for your questions. We enter fiscal 2022 with good momentum in our business and are pleased to deliver first quarter sales and earnings that exceeded expectations, especially considering lapping record sales and earnings last year. We are proud that our store, commercial, and support teams continue to successfully execute our growth strategies in a dynamic and challenging industry-wide operating environment. We believe our competitive moat from a product, price, and access to inventory standpoint has never been stronger, giving us added confidence and our ability to continue to grow our market share in a wide range of macroeconomic challenges. Moreover, we are happy that our investments and associate wages and training resulted in better staffing, lower turnover, and 100 basis and point sequential increase in our composite customer service score. Investing in our associates is core to our culture and success. Collectively, these efforts contributed to record fiscal 2022 first quarter sales. Total sales increased 31.5% to $1 billion. And comparable store sales grew 14.3% from last year, exceeding expectations. Fiscal 2022 adjusted first quarter earnings per share declined 1.5%, to 67 cents from the previous year's record earnings of 68 cents per share, also exceeding our expectations. Let me turn my comments to our new store openings. During the first quarter of fiscal 2022, we opened six new warehouse format stores compared with seven stores during the same period last year. We opened one store in January, two stores in February, and three stores in March. ending the first quarter of 2022 with 166 warehouse format stores in 34 states. We are excited to have opened our first store in Portland, Oregon, market in the first quarter of 2022, and are pleased with its early performance. Additionally, we are delighted with the strong acceptance of our newest store on Long Island in Garden City, New York. We remain on plan to open nine stores in the second quarter of and 32 total warehouse format stores in fiscal 2022. We evaluate each lease as they come up for renewal, and as such, we plan to close our Southlake store in Atlanta in the second quarter of fiscal 2022. This store was the second store opened by Floor & Decor, and we intend to reposition the store to an expected better location in 2023. The net store openings would bring our total warehouse format store count to 191 stores at the end of fiscal 2022. As discussed at our March investor day meeting, we forecast the path towards operating at least 500 warehouse format stores over time, implying we would only be 38% built out by the end of fiscal 2022. Moreover, 58% of our warehouse stores have been opened after 2016, with an average storage of just 2.3 years for this group of stores. Collectively, we believe these stores will continue to move up their sales maturity curve and support our longer-term comparable store sales growth target of mid to high single-digit growth. In the first quarter of fiscal 2022, we opened three design studios, including February openings in Miami, Florida, and Houston, Texas. In March, we opened at Tyson's Corner, Virginia. We now operate five design studios and have plans to open one additional design studio in Atlanta during the second half of fiscal 2022. Let me now discuss in more detail our comparable store sales. First quarter demand for hard surface flooring remains strong, particularly among pros, with broad-based strength across most merchandise categories and all store classes. We are particularly pleased with the sales performance of some of our most mature stores where many had their strongest sales weeks ever in the quarter. We experienced double-digit comparable store sales growth in all divisions led by the South. Our comparable store sales increased 11.5% in January, 23.5% in February, and 10.1% in March, bringing the first quarter growth to 14.3%. As a reminder, last year's comparable store sales increased 30.1% in January, 19.2% in February, and 41.3% in March. As we look to the second quarter of fiscal 2022, our April comparable store sales increased 9.9% and are up 9.7% month-to-date in May, in line with our expectations as we lap our most difficult comparisons. The first quarter comparable store sales increase of 14.3% was driven by a 16.7% increase in our average ticket. As expected, the increase in the average ticket is mainly due to retail price increases to mitigate cost increases, continuing strong sales in laminate and vinyl, and ongoing customer preferences towards our better and best price points across all departments. Our first quarter average ticket also benefited from an increase in the sales penetration rate from our designer-led initiatives and e-commerce, both of which have an average ticket above the company average. First quarter 2022, comparable store transactions declined 2.1% from last year, which was sequentially lower than the 0.7% decline in the fourth quarter of fiscal 2021. First quarter, comparable store sales among pros continue to grow faster than our homeowner sales as we successfully executed a holistic pro strategy that leans into relationship building and growing our wallet share. Pros accounted for 33.1% of our sales in the first quarter of 2022. We are pleased that the top 10% of our pros shop with us an average of 11 times in the first quarter, and their average spend was up 25% over last year, validating the strength of our growing brand equity. We continue to believe our in-stock job lock quantities are a clear competitive advantage during the current disruptions in the global supply chain. Let me turn to growth from our e-commerce business. The investments we are making towards improving our web experience by focusing on product content and conversion are working. First quarter e-commerce sales increased 46% from last year and accounted for 17.7% of sales compared with 15.4% in the same period the previous year and 16.4% in the fourth quarter of 2021. We are pleased with traffic to our website and double-digit conversion growth on both desktop and mobile devices. As we look ahead, we'll continue to optimize our customers' digital experience and focus on product and inspirational content. Let me now discuss the progress we are making with design services. We are focused on building a consistent, high-touch, best-in-class, and seamless design service experience for our homeowners and pro customers in our stores. We find that not only is our average ticket and gross margin higher when a designer is involved, but our customer experience score is materially higher. So we have been doubling down in design by investing in designers, and we have begun testing an enhanced organizational structure that we believe will improve our ability to attract and retain high caliber designers by providing them with clear career path opportunities. We are pleased that the focused attention and investments we are making in design contributed to a marked improvement in designer turnover in the first quarter of 2022. and the company's highest quarterly appointment penetration rate. We are in the early stages of benefiting from these initiatives and are excited about building awareness and familiarity with our design services. Let me turn my comments to our progress in commercial, which includes Spartan Services and our regional account managers, or RAMs, that work with our stores. As a reminder, Spartan Services targets 60% of our commercial addressable market by focusing on A&D firms that have large projects with hard product specifications and long lead times. By comparison, our regional account managers focus on 40% of the commercial market, where projects generally have soft product specifications or no product specifications. We are successfully integrating critical functional areas with Spartan Services and implementing strategies to accelerate growth in 2022 and beyond. To that end, we acquired Wisconsin-based distributor KRS Incorporated in February of 2022. While KRS is small and not material to our results, they are a leader in commercial hard surface flooring in Wisconsin and are an example of how we can expand nationally when we find the right opportunity and partners. We remain excited about Spartan's growth prospects and are pleased that their first quarter 2022 sales and earnings results exceeded our expectations following a strong 2021. As we look ahead, we are encouraged to see that AIA's Architecture Billings Index for March increased to 58 from a score of 51.3 in February, implying continued growth in billings and commercial flooring demand. We are pleased that first quarter sales from our RAMs increased 88% year over year. We are continuing to build out our regional account manager's with the addition of seven rams in the first quarter of fiscal 2022 towards our plan to onboard 16 rams in 2022. Let me update you about how we are navigating constraints in the global supply chain. As we assess US port congestion and its impact on our supply chain costs and distribution capability to our stores, we continue to see that the ports of Los Angeles and Long Beach remain our most significant challenge. However, We continue to divert to other ports and increase our dray capacity to minimize this impact. Congestion in the ports of Los Angeles and Long Beach have taken a step backwards in recent weeks as more ships leave Asia following the Lunar New Year. We are closely monitoring this trend and the impact of COVID-19 lockdowns in Shanghai, China, but at this point, it is not having a greater than expected net effect on our business. We are also monitoring labor contract negotiations between West Coast ports and the International Longshoremen and Warehouse Union that expires July 1st. We believe it's likely there could be a work slowdown or go slow measures put in place during contract negotiations. As we discussed at our March Investor Day meeting, we are planning on higher ocean freight costs throughout 2022. At this juncture, we have no major port concerns from our Houston, Savannah, or Baltimore distribution centers. Before turning the call over to Trevor, I want to thank all of our floor and decor associates for their collective hard work in our stores, distribution centers, and store support center to serve our customers. Together, we continue to prove to be an agile, resilient, and resourceful company. I'll now turn the call over to Trevor to discuss in more detail our fiscal 2022 first quarter earnings results.
spk04: Thank you, Tom. We are pleased to deliver fiscal 2022 first quarter total sales of $1 billion, comparable store sales growth of 14.3%, and earnings that exceeded our expectations. In dollars, our first quarter sales of $1 billion was approximately equal to our full year sales in fiscal 2016, the year before we went public. We are excited to be on track to deliver our 14th consecutive year of comparable store sales growth in 2022. This growth is a fantastic accomplishment considering last year's very strong results. Let me now discuss some of the changes among the significant line items in our fiscal 2022 first quarter income statement, balance sheet, and statement of cash flow. Then I will discuss how we're thinking about the remainder of fiscal 2022. Our first quarter gross profit increased 21.1% from last year, driven by a 31.5% increase in total sales. The first quarter gross margin rate decreased 340 basis points to 39.7% from 43.1% last year, primarily due to higher supply chain and freight costs and lapping last year's strong 60 basis point increase. The gross margin rate was better than our mid-39% expectations shared on our last call, and above the 38.8% we reported in the fourth quarter of 2021. I want to acknowledge the thoughtful, hard work by all of our teams to manage our gross margin during this inflationary time with substantial supply chain complexity and cost increases. Our teams did a remarkable job through pricing actions and other margin-driving initiatives. First quarter selling and store operating expenses increased 31.4% from the same period last year and was flat as a percentage of sales at 24.3% year-over-year, modestly better than expected. The increase in cost was primarily attributable to 26 new warehouse format stores, and three new design studios open since April 1, 2021, and additional staffing and operating expenses to align with our strong sales growth. Comparable store selling and store operating expenses as a percentage of comparable store sales decreased approximately 60 basis points. The decrease primarily reflects leveraging our advertising and occupancy costs from the 14.3% growth in comparable store sales. First quarter general and administrative expenses increased 24.1% and leveraged 30 basis points to 5.3% from 5.6% last year due to lower year-over-year incentive compensation. Reopening expenses during the 13 weeks ended March 31st, 2022 increased 2.9 million or 42.1% compared to the prior year quarter. The increase is primarily the result of an increase in the number of stores that we either opened or plan to open compared to the prior year period. Moving on to our profitability, First quarter adjusted EBITDA grew 6.8%, trailing our 31.5% growth in total sales due to a 300 basis points decline in EBITDA margin rate to 13.2% from last year's record 16.2%. We are lapping a 300 basis point increase in last year's EBITDA margin rate from significant improvement in gross margin rate and expense leverage in 2021. First quarter gap net income decreased 6.4% to $71 million from $75,800,000 in the same period last year. Gap diluted earnings per share decreased 7% to $0.66 from $0.71 in the same period last year. First quarter non-gap adjusted net income decreased 1.5% to $71,600,000 from $72,700,000 in the same period last year. First quarter adjusted earnings per share declined 1.5% to 67 cents from previous year's record earnings of 68 cents per share, exceeding our expectations. We ended the first quarter with 107,500,000 diluted weighted average shares outstanding compared with 107,100,000 last year. A complete reconciliation of our gap to non-gap earnings can be found in today's earnings press release. Turning to our balance sheet and cash flow, our inventory was 1,100,000,000 up 542 million or 89% from last year. The increase is driven by making investments to improve our in-stock inventory, inflation, the opening of 26 new stores since the first quarter of last year. Our first quarter of 2021 ending inventory was only up 3% over the first quarter of 2020. Comparing our ending inventory at the end of the first quarter of 2020 to the first quarter of 2022, the two-year compounded annual growth rate was in line with our sales growth over the same period. Net cash used in operating activities was a negative 3.3 million for the 13 weeks ended March 31st, 2022, compared with net cash provided by operating activities of 101 million for the 13 weeks ended April 1st, 2021. The decrease in net cash provided by operating activities was primarily the result of the net increase in inventory and other working capital line items to support our growth. Let me now turn my comments to how we're thinking about the macroeconomic environment. We continue to believe important long-term secular trends that support growth and home improvement spending. These trends are well documented and include the inventory of new and existing home sales is at the lowest level in recent recorded history, an aging housing stock where 80% of the homes are 20 plus years old and need investment and repair, substantial home equity, remote work from home trends, and the growing ranks of millennials entering their prime home buying years. That said, in the short run, the Federal Reserve is now on a path to expeditiously raise interest rates, shrinking its balance sheet, and tightening financial conditions to bring inflation under control to fulfill its price stability goal. The effect of these policy changes is that as interest rates rise, this likely means a cooling of existing home sales, home price appreciation, home equity values, and potentially slower spending rates that we must consider. Partially offsetting these headwinds is tremendous home equity. Wages continue to be high and unemployment low. as well as consumers' and businesses' balance sheets are strong, which will allow them to make investments as they deem necessary. Considering these factors and the potential impact on our business, we continue to expect our 2022 comparable source sales growth will be within the range of 10.5% to 13%. But coming in at the high end of the sales and earnings range could be more challenging than previously contemplated due to the recent changes in the macroeconomic and geopolitical environment, such as rising interest rates and mortgage rates, continued declines in existing home sales, record high inflation, and still a difficult supply chain. It's still early in the year, but we want to be prudent in assessing potential outcomes. Our sales guidance contemplates continued declines in comparable store transactions throughout the rest of fiscal 2022. Our fourth quarter 2021 comparable store transactions declined 0.7%. Our first quarter 2022 comparable store sales transactions declined 2.1%. March 2022 was down 4.4%, and second quarter to date transactions have decreased 6.7%, in line with our expectations as we are currently lapping some of our strongest results from last year. While transactions are expected to decrease for the remainder of 2022, our comparable store sales range is unchanged as it reflects the ongoing preference for our better and best products, floor-to-core initiatives, price increases to mitigate product and supply chain cost pressures, We believe our prior fiscal 2022 earnings per share guidance range is still achievable, largely driven by our sales growth and increasing our gross margin rate to approach 41% as we exit 2022. Our differentiated business model and value proposition are as strong as ever, giving us confidence that we will continue to grow our market share in any macroeconomic environment. We are reaffirming our fiscal 2022 sales and earnings outlook range we provided at the beginning of the year and included in today's press release. In closing, our entire leadership team is encouraged by the strong start to fiscal 2022, and we are very excited about the growth that still lies in front of us. We would like to personally thank all of our associates and vendor partners for their great work they're doing every day to serve our customers. Operator, we would now like to take questions.
spk10: Thank you very much, sir. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and then 1. on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to leave the question queue. For participants using speak equipment, it may be necessary to pick up the handset before pressing the star keys. The first question comes from Steve Forbes of Guggenheim.
spk15: Good evening. Tom, Trevor, maybe... Just take a step back and just focus on the unit growth sort of plans longer term. Curious how the change in the macro is impacting how you guys are approaching the real estate pipeline. Should we still expect you sort of to plan for that 20% growth in 2023, or are you taking a more cautious approach to building the pipeline here?
spk02: No change in our plans on unit growth. Our pipeline is robust. New stores are performing well. You know, this is an opportunity to take market share. And so no, the short answer is there's not a change in our strategy and 20% unit. Yeah.
spk04: And the only thing I'd add to it is, you know, we're getting our cash back in two and a half to three years. You know, it's early in the year, but the class of 22 is going to appears to be a really strong class of stores. We're making money. you know, close to probably over $3 million in four-wall levy out of the first year. That number gets close to $6 million by year five. So even if things were to decelerate some, we're not seeing that today. We're not sure that's going to happen. But even if they were to decelerate from where we're today, we're going to get a return on capital that's double our cost of capital. And so we still think that's going to be a very prudent continued investment for us.
spk15: And a follow-up on the store model and really the predictability of year one sales, I'm curious if you could provide some color on how the sales build within sort of a new market, where those sales are coming from today versus maybe three or five years ago. Are you still sort of creating local market share demand, or are you pulling more from independents? How do you sort of think about the predictability of that year one sales build?
spk02: I'll start. Trevor can jump in. I would say a couple things. As we've opened more stores, our ability to predict has gotten better. The more stores we get on our base, the better our analytics are in predicting what the first-year sales are going to be. I don't think there's too much change from the standpoint historically. We feel like we take a third out of the home improvement center market. We take a little over a third out of the independents, and then We tend to grow the market because people will take on larger jobs when they come into our stores. There'll be more rooms when they come into our stores. So we see some increased demand. I don't think that's changed a whole lot. I don't have any data that says different. Stores these last few years have been terrific. I think the better, I think a couple of things, our real estate team has done a better job over the last three years of getting better locations. Our sites are more visible than they've historically been. And that's helped. And I think as we've grown the base over the last 10 years, our awareness is better. So when we open a store, particularly in a new market, it does a lot of times better than we anticipated it would do. Pros end up coming to the stores more often because they become more convenient.
spk04: Yeah, and the only thing I would add is that there's really two main drivers that allow us to see what a store is or predict what a store is going to do. First off, if we want to do an existing market, we've got really good stores around there. So we're opening stores in Atlanta and Texas and Florida and Arizona and California. As we said at the analyst day, stores start at kind of $15 to $17 million and make at least $2.5 million in full all EBITDA. When we open to those existing markets, the stores are materially higher than that. And so we have super good confidence and knowledge of what the store is going to do in existing markets. When we go to new markets, it really is determined by three things. It's density of population, it's household value, and household income. And since we have fairly good knowledge of what that is, we've got a good real estate team, a good finance team, a good consulting partners that help us make those decisions, we're fairly good at predicting those things as well. But it's really those three demographic factors that will dictate what new stores perform at. And as a class, we've been really good at forecasting and coming in at those numbers. Thank you.
spk10: Thank you. The next question comes from Zach Fidham of Wells Fargo.
spk00: Hey, good afternoon. Could you talk a bit more about your pricing actions in Q1 versus Q4, where you sit today versus the full year plan? And is there any way to quantify the level of share gains you typically see as your price gaps widen versus peers?
spk02: A lot to that question. I'll do my best to start. And I guess Trevor can weigh in and maybe Ursan if needed. So, you know, we've continued, as we said, we took modest price increases as we were exiting 2021. In the first quarter, we continue to take price increases to offset increased supply chain costs. And, you know, so we're finding our ability to pass on price is good. Um, the way we look at the market, we pay really close attention to our competition, both independence and big box and our spread, uh, we feel is in a really good place while taking price. Um, so, uh, we've been able to, uh, to do that and it's working. It's not the sole piece of what's driving our ticket. We've got lots of initiatives that are driving tickets. We see customers stepping into better and best. We see our design penetration in e-commerce, uh, which, which drive its tickets. are helping that as well. And we're seeing more square footage per transaction. And so all of those things are benefiting the ticket at the same time.
spk04: Got it. Sorry, I just want to, Zach, when you get a chance, you'll see our margin came in a little bit better than we were planning for. We said kind of a mid-39s. I think we came in at maybe 20 basis points ahead of that. And the retail increases we took in Q1 relative to Q4 We're actually lower. So the modest increase was less modest or lower, I should maybe a better way to say that, than the increases we took. So we feel really good about our pricing relative to what we see in the industry. You guys see what Mohawk and Shaw and a lot of big domestic manufacturers are talking about retail increases. So the team's done a fantastic job in managing it. It's still a very difficult supply chain environment with lots of moving parts, very volatile, but so far so good.
spk00: Got it. That's helpful. And then, Trevor, as you think about the plan for the rest of the year, you outline clear positives today around high project demand, healthy consumer balance sheets. But as you square that with the looming headwinds around rising mortgage rates and potentially slowing housing turnover, I'm curious to what extent you believe these potential headwinds need to materialize in order to impact the second half outlook.
spk04: We spent more time analyzing the forecast this year than I think any time in my 11 years. And I specifically called that out in my commentary about what we're seeing in decelerated transaction trends. We were down 2% in the second quarter, and then we were down almost 7% quarter to date. Those trends have gotten a little bit better in May. And so we're planning on those decelerating trends to continue every quarter for the rest of the year. So we're not putting our heads in the sand. We are absolutely assuming that it's going to be a bit of a more difficult environment. We're not economists. We don't know, but we certainly pay attention to things that affect our business. But our modeling tells us, based on what we're seeing today with pro, with design, with other centric initiatives, with our commercial sales, along with the retail increases that we feel like we're going to have to pass along because of the higher costs we're incurring, will more than offset that. And we see our comps for this quarter probably close to what we're doing now. We think this is probably the trough. And then as we get back into Q3 and Q4, we see our comps going up a little bit, again, primarily because a lot of the higher costs we'll incur will be in the back half of the year. So that's a long answer. But so far as that issue goes, we were pleased to have exceeded our expectations in January, February, March and, you know, April came in line with our plan. So we've been doing pretty good so far thinking about the forecast that either coming in at or above the forecast.
spk02: I think the only thing I'd add to the back half conversation is what, you know, what was in the, in my prepared comments, you know, 58% of our stores are less than five years old. So they're still maturing and that, that, that, you know, historically has benefited our comp line. And then I, you know, we mentioned our mode often, but, I do think the moat is pretty significant. I think our ability to take share at a faster rate, I think we've been taking share at a faster rate since this global supply chain crisis started happening. I do think our in-stocks are in a terrific position and continue to improve. And I just think our merchants have done a fabulous job and trend right product. We're really far ahead of the trends. And I think that that's helping us gain share at a quicker rate, which should help in the back half as well.
spk00: Very helpful. Appreciate the time.
spk10: Thank you. The next question comes from Michael Lasser of UBS.
spk13: Good evening. Thanks a lot for taking my question, Trevor, and your prepared remarks. You mentioned that it might be more difficult to hit the high end of your comp range for this year. What is motivating you to say that? Is it the 67% traffic decline? that you've experienced thus far this quarter? Is it five consecutive months of declines in total housing turnover? Is it the 30-year fixed rate mortgage that's now at 5.5%? I assume you're going to say all of the above, but is there one that's motivating you to say more than the others?
spk04: I think that's a good summary, Michael. You know, we, we had our, uh, we had our last call on the day that, uh, Russia invades Ukraine. Uh, you know, so energy costs are gone up. You know, the, the fed has been even clear about interest rates, rising in mortgage rates. You know, we're assault today. The mortgage rates are what 5.3%. You know, if you just take a simple mortgage, you know, that takes your, uh, $350,000 mortgage. It takes your payments to 2000 versus 1500 bucks. That's, you know, that's $6,000 a year that's coming out of middle income America's, um, costs. All those macroeconomic factors and geopolitical factors have just sort of gotten tougher since we had the last call. We're performing great to date. Again, we're not economists, but we just think there's been enough macro commentary around things that could affect our business that's giving us that commentary.
spk13: Okay. My follow-up question is, in that case, how low can your comps be this year in and you still hit the low end of your EPS guidance?
spk04: I think if you look, I mean, we said 10 and a half is what we had in the guidance. I think if we see things start to trend below that, we re-looked at this recently. Historically, we'd say 60% of our costs are more fixed in nature, more 40%. We've been over the years, been able to lower that to kind of 55%, 45%. Um, but if, you know, if you got in a really difficult environment, um, you know, we could even go after some, what are traditionally fixed costs. So we would obviously very quickly start looking at costs. Um, there's a fairly large incentive compensation payment that, you know, is mathematical that goes to our, um, our SG&A, both store and corporate. Um, and so if we, if we saw a trend that were a lot off that off of what we're seeing, we would obviously be much more aggressive in lowering our costs. So, Said simply, I think that 10 and a half is what would tell us that we would be able to hit the low end of the EPS. We're not seeing that today. And if we got below that number, we would start to get more aggressive on the cost side of our business.
spk13: Understood. Thank you very much, and good luck.
spk10: Thank you. The next question comes from Chuck Crum of Gordon Huskies.
spk12: Hey, thanks a lot, guys. Good afternoon. Great results. there's been some evidence across retail over the past month of some demand destruction on price increases. So I was curious, and I think the answer is no, but I want to see if you can elaborate if you've seen any of that in your business over the past couple of months.
spk04: One thing I'd say, I mean, our business has decelerated, but it was planned for. We're up against really big numbers last year. When you look at March and April, there was a pretty big benefit we got because of the Texas freeze that hit Texas and some of the surrounding stores. So our hardest dollar comparisons are right now. And as we said in the call and you guys saw in the results, we actually exceeded our sales and earnings expectations in April was essentially at plan. So we're not seeing it today, I guess. We're coming in at or above our plans through the first four months and one week of the year.
spk02: Yeah, and I'd say that I go back to what I said earlier, just on my pricing. One thing I didn't mention, which I'll get to, but just from the way we look at price and the way we compare ourselves across the people that we compete with, the spread is consistent to what it's historically been. So you feel... you feel good about that. And then secondarily, I pay attention to competitive markdowns. Um, and we're actually running less competitive dollar markdowns than we did a year ago, um, in a rising price environment. So, um, you know, I feel good about our price and then, you know, I don't, but I'm in the stores all the time and we don't hear anecdotally. I think consumers have expected prices to increase and they're accepting of that. That's not the turn.
spk04: So at this point, I think it's probably worth mentioning one more thing. We called out our inventory, um, Our supply chain team came to us well over a year ago now and said, hey, we need to be aggressive in getting inventory in earlier. We mentioned on each of the last three calls that we were bringing in Chinese New Year orders early. And so we find ourselves in a position where our in-stock levels, even though they're not maybe where we'd like them, they're much better than the competition. And so I think that's another thing that's helping our business grow. is the fact that we've got more inventory than our inventory team, our merchandising team, our supply chain team. It's come at a cost, but they've done a good job of keeping us in stock relative to what we're seeing in the competition. So I think that's another thing that's helping our businesses, the fact that we've got inventory and a lot of others do not. That's right.
spk12: Okay, great. And then my follow-up, a little bit unrelated, given that the commercial business is growing and becoming a bigger piece of the business, I was wondering how cyclical it's been during past rising rate cycles.
spk04: I think for us, we're fairly new into it. There was such a trough when COVID hit in a lot of those commercial areas that there's just a lot of deferred maintenance that needs to be done. You guys probably heard Tom talk about the architectural index is fairly gross. When we look at our backlog, both on our commercial business as well as Spartan's commercial business, it looks very good. So hard to think about 2023 at this point, but everything we can see this year because it's longer lead times. It's not like a consumer business where the consumer may or may not show up. These are contracts and POs. Everything we're seeing today is great. I think Tom mentioned Spartan had just a fantastic Q1 as well as the Rams did. So it feels like 2022 is going to be a strong year for commercial for us. Okay, great. Thanks.
spk10: Thank you. The next question comes from Chris Herbers of JP Morgan.
spk09: Thanks and good evening guys. Um, so I guess, um, as we think about just, you know, in the very near term, if, if, if it's, it sounds like there's really nothing that's happening in the business that's outside of, you know, your expectations from, you know, trade down or trade up or, or transaction growth or declines in pricing. So, you know, if we, if we held the three year CAGR from April, that would suggest an 11% comp in the second quarter. You know, so following up on an earlier question, is that how we should think about the business? And then, you know, how do we think about when those price increases actually come through? Because, I mean, theoretically, if nothing else changes, that would lead to CAGR acceleration.
spk04: I think you're close on current quarter. I mean, our modeling suggests that – if the current trends continue we actually be really close to what we called out you know roughly 10 today so i'm not sure we'd be at 11 but maybe uh and then as we get to the back part of the year because we don't we don't look at comps as much as we look at the raw volume and the trends we're running at today um we think that that we're at the trough in q2 and comps uh would be closer to what we did in q1 as you think about q3 and q4 and you know it's hard to look at three-year trends but But because COVID made it so unique, if you go back and look at three years and look at our Q1 three-year stack, and then you look at our Q3 and our Q4 three-year stack, they're going to be fairly commensurate. And that's been consistent with our business. We don't have a seasonal business. We don't have a promotional business. And so that might be another way to think about it is look at the three-year stack. And our modeling would suggest that it should be around where we are in Q1.
spk09: Got it. Yeah, it's probably just stack versus CAGR. And then on the gross margin, what what drove the upside? I know you had some the fees, the demurrage that had impact you in early in the fourth quarter and probably earlier in the year. Is that is that all gone? And so how does that change the calculus of how the, you know, the gross margin looks and in terms of where you can actually get to? I think on the last call you talked about, you know, up to or maybe slightly better than that, you know, that that. 41% on exit.
spk04: I think the 20 basis points we beat in Q1, there was a lot of demurrage and detention. Good guys that were better than we were playing. It's definitely not gone. We are still taking on lots of costs and not so much in detention, but in demurrage, we're taking on lots of costs. I think as we think about the rest of the year, they're currently And again, it's very volatile. You know, we said this six months ago and we ended up not being true, but the current view of the world is that costs are coming down a bit. Um, the spot markets have come down again, we're managing the, uh, the demerge and the detention pieces better. So that's probably where the upside could be, um, as well as, you know, the retail increases to date. Again, we feel really good about our competitive position. So yeah, I would say, um, demerge detention, current spot markets, uh, mix continues, you know, could be an opportunity for us. And, um, So if we were to have upside, that's where it would come from.
spk02: Yeah, the only thing I'd add, Trevor, is that our better and best categories are still our best comping categories. And that's a benefit to margin, and that's been helping. And then our designer penetration is increasing. That's also a benefit to margin. So those are things that are within our control and that the consumer is gravitating towards.
spk09: That's great. Thank you very much.
spk10: Thank you. The next question comes from Simeon Goodman of Morgan Stanley.
spk01: Hi, this is Jackie Sussman on for Simeon. Just back on the price elasticity question, are you guys seeing anything on the high or low end consumer with price elasticity?
spk02: I mean, our best performing categories are our better and best categories. So customers are still coming in and stepping up to the highest prices that we have. I think in our, you know, In hard surface learning, I do believe the trend is critically important. People don't do these jobs all the time. So when they come in, I think they're going to buy what they like, and it tends to be with us. It's our better and best. So we're seeing consumers continue to spend a lot. Gotcha.
spk01: Thank you. And just a quick follow-up question. Can you talk a little bit about the backlog or pipeline of projects?
spk04: It's mostly a retail business, so we don't have a ton of backlog in our business. The vast majority of what we sell is a residential remodel. The commercial business is expected to be fairly large from a small base. It's still not overly significant for us today. So we feel good about the backlog in the commercial business, but again, that's relatively small versus the over $4 billion in sales we'll do this year. And from the consumer perspective and the pro perspective, It's still strong.
spk02: Yeah, I mean, the only thing we can go, we don't have data from the pros that shop in our stores every day beyond what they tell us. And then their backlog is still robust. They're out in markets. They're weeks away from getting jobs done, and they've got a good pipeline from what they tell us. And we ask that question across the country. So we feel like the backlog is pretty good.
spk10: Thank you. The next question comes from Karin Short of Barclays.
spk06: Hi, this is actually Zane Burak on 4K. Thanks for taking our questions. Are you able to parse out how much of your business comes from replacement within the context of repair and remodeling versus what you would characterize as more discretionary purchases? And maybe somewhat related to that, Talk about the resiliency of the model in a softer macro in light of the more discretionary of the business, nature of the business, presumably relative to the broader home improvement space and housing potentially continuing to slow down from here.
spk04: If I understood the first part of the question, the vast majority of what we sell is a residential remodel. How much of that is replacement versus trend versus maintenance? I don't think we have a good, I don't think we know that. And I will tell you, as far as cycles, we have a low price leader. And my experience here and my experience in other retailers, the better operator and the low price leader takes a lot more market share and down times, especially when you have the inventory like we do. And, you know, we double digit comped in 2009 when the overall housing was pretty tough. And then, you know, we saw a bit of a cycle where mortgage rates went up very fast in late 2017, early 2018. We did see a deceleration in our business between Q1 and Q2 of 2018. I think it's a lot different now because the home equity and the wealth that people have. But even then, we meaningfully outperformed the market. And so those are the only two cycles that I can speak to when I've been here. But I do believe that we're a much stronger, better company. And if price becomes more important, the low price leader usually does a lot better.
spk10: Thank you. The next question comes from Greg Mullick of Evercall.
spk11: Thanks. I wanted to follow up on the mix and pricing impact. It sounds like mix, design center, et cetera, was probably a majority of the ticket growth year on year. Would that be fair?
spk04: I think, yeah, the... The biggest part of our growth is definitely with, well, it's a combination of all. It's better and best. It's price. It's, you know, e-com tickets a lot higher. Designer tickets higher. The pro tickets higher. All those things are working in concert.
spk11: So I guess what I'm trying to get at is if all those are tailwinds right now, I think you started to layer in pricing in the back half of last year if let's just pick a number let's say pricing was five percent should we expect that to accelerate on a year-over-year basis uh in the comp the next couple quarters or is that something that you expect to sort of roll in and roll off on a year-over-year i think as we think about the back half of the year we're expecting more retail because our we're expecting higher supply chain costs um
spk04: Our international container costs, as you guys know, even though the spot market's down in order to lock up capacity, us and others are adding more capacity. It wasn't that long ago we were paying $1,500 for a container. Now we're paying a lot more than that now. So because those costs were coming in the back part of the year, that's when we see probably some more of the retail increases being higher in the back half of 2022 relative to what we've seen to date.
spk11: Could you update us on what percentage of your sales are imported either from China or from Europe, given the supply chain challenges in the world?
spk04: Yeah, I think Asia's 25. Well, that's China, but overall Asia is a higher percentage than that. It's probably close to 40. I think Europe's less than 30.
spk11: Got it. Thanks, and good luck, guys.
spk10: Thank you. The next question comes from Seth Bashan of Whitbush.
spk05: Hey, thanks a lot, and good evening. Just to clarify, relative to when you last spoke to us in February, how much have changed in your comp store transactions and average ticket for 2022 and your comp guidance now?
spk04: You know, to date, we've been better. You know, our sales came in better than we had thought. Our comps were a little bit better. The trends we're on right now are essentially where we were. I think as we think about the rest of the year, though, what's changed is we are expecting a continued deceleration in transactions. I'm not so sure we knew that when we originally gave the guidance. So we are assuming slightly higher deceleration in transactions, but we're also planning on a slightly higher increase in retails to more than offset that. So the overall comp ends up at the same place.
spk05: Is it a couple hundred basis points in each direction offsetting each other from those parts?
spk04: I think it changes a little bit by quarter. We think Q2 is probably the biggest deceleration we see in transactions. And then it becomes a lot more modest at the back part of the year. And again, we're not economists. I think the big driver on that, what happens and how quick the Fed reacts and does that really impact consumer confidence and spending? But Our current view is that the deceleration will be the highest in Q2, and then you'll see a much more modest deceleration as you get to the back half of the year is how we're currently thinking about it.
spk05: Got it. Thank you very much.
spk10: Thank you. The next question comes from Justin Clever of BARD.
spk07: Hey, guys. Justin Clever from BARD. Can you hear me? Yep. Yeah. So I wanted to ask about operating leverage. You had mentioned, you know, the 60 basis points of leverage on comp store sales or on comp stores. And I guess I would have thought on a 14 comp, you'd have got more leverage. Is that just the fact of stores last year were running lean from a staffing perspective and you've recently obviously made wage investments or is there anything else, you know, we should be aware of from a timing standpoint?
spk04: Two things I guess I'd call out, you know, last year, um, We started the year with only 11% new stores, right? Because we really ratcheted down our store growth in the year of COVID. We only ended with 11% new stores. And, you know, we're now up to 20%. Now that's the total, not just the comping stores. So we've got a lot more newer stores and our SG&A and our newer stores runs at 50% higher costs than our more mature stores. Just so, you know, we took a pause that one year of COVID. And as you started Q1 of 2021, You're going up versus 2022. You've just got a lot more younger stores in the base. They have much higher SG&A. And then the second piece of that is, yeah, we're in an inflationary environment. And certainly, you know, we're labor wise. We and a lot of other retailers have talked about the investments we made. We made a fairly significant increase in raises in July of last year. We became a $15 minimum retailer in January of this year. And so it'll take us a while to anniversary those two increases as well. Those are the big things. He's also right that the stores weren't staffed last year.
spk02: We were chasing staffing last year, and we're in a pretty good place now in staffing that we weren't for the last couple of years. That's right. Okay.
spk07: No, that's helpful. And then just unrelated, I wanted to ask about tariffs, because I believe the USTR reinstated certain exclusion on Chinese imports. I don't know, a month or so ago. It wasn't clear to me which categories were being excluded. Are you guys seeing any relief from that recent decision? And if so, are you flowing that to the bottom line, or do you give that back to the consumer in the form of lower prices, similar to how you operated a few years ago? Thank you.
spk04: I'm looking at Ersan now. We're not aware of any changes that are impacting Chinese tariffs. Brian Robbins is on. I don't know if he knows about anything.
spk16: Hey, Tommy, that's Brian. There has been no change. We just keep on waiting for the – we hope that towards the end of the second quarter there may be some relief, but right now we're not looking for anything to change.
spk02: Thank you.
spk10: Okay. Thanks. Thank you. The next question comes from Chris Vodlagiri of BNP Paribus.
spk08: Hey, guys, thanks for taking the questions. I'm just trying to understand how much visibility you have into the DIYs of the business. Like, typically, how long is the purchase cycle in this category from when you begin to track a customer versus when they ultimately purchase? And I guess my question would be, as you look at leads, are those trending similar to transactions, or are you seeing any kind of different level of activity relative to negative transactions you've seen? Thank you.
spk04: Yeah, I'd say we're not really seeing any major trend shifts in samples or, you know, Anything that would lead us to believe things are changing materially.
spk08: Gotcha. Okay. That's helpful. And then I just want to ask about inventory, unrelatedly. It sounds like you were maybe just catching up on some pent-up level of in-stocks from where you wanted to be. That grew 10% quarter-on-quarter on a per-store basis. Just kind of get perspective on how you think about inventory per store over the course of 2022, if you're kind of just planning to get the shutdowns in China, or how would you look at the turn of that metric looking forward?
spk04: We're definitely planning on increasing our inventory this year. Part of its inflation, too, is we're taking on these costs. That's driving it up. And as we exit the year, as good as our business has been, it would have been better had we had better in-stocks. So, yes, we've got a really good system and a fairly large team of people that think about where we need to improve our in-stocks. And so we've continued to make progress each quarter over the last four quarters. But there's still more work to do to improve our in-stock. So we would expect our – assuming we don't have any major issues with what's going on in Shanghai right now and China, we would expect our inventories to continue to increase at a slightly faster rate than sales for the rest of the year. But that's going to be good because we're going to get in-stocks in categories we know that we're leaning in today.
spk08: Makes sense. Thank you.
spk10: Thank you. And our final question comes from the line of Joe Feldman of TAG.
spk14: Hey, good afternoon, guys. Thanks for taking the question. On the new stores, thanks for sharing the update of the numbers, but are you seeing any delays related to the materials? If I recall, a lot of the stores were going to be back half-weighted this year, but I'm just wondering if you're seeing any that might even flip to 2023 just because I keep hearing about more material delays and permitting issues related to real estate out there. Thanks.
spk02: Certainly there's challenges, but we don't anticipate having any problem getting our 20% unit growth. We had some problems at the end of last year with some fixturing coming out of China that was for our design studios. We had to delay our design studios, but that doesn't count on our 20% unit growth. So short answer is it's a more challenging environment than it's historically been, but we think we can navigate it.
spk14: Got it. That's great to hear. Thanks. And then just one other kind of unrelated question. You mentioned the training and the improved training you guys have done that's helping, you know, retain associates and drive better productivity. I probably should know this, but can you remind us some of the things that you have changed with regard to the training that is helping to improve that?
spk02: So we make changes every year and enhancements every year to the way that we train our associates and the way that we train our managers. We've spent a lot of time. I would say we've over-indexed in training our managers on how to onboard associates. Our fastest turnover comes in the early part of an associate's tenure at Florida Corps. It's a tough environment to work in. We sell heavy stuff. So we've done a pretty good job of spending time with our managers to make sure that they're really holding the associates' hands through the first three to six months of their onboarding. That seems to be, in combination with lots of other things, helping reduce our turnover. We're seeing improvement in our turnover rates. We think that, in combination with wage, has been beneficial. As far as product training, we've been good. We are good. We continue to change it and evolve it and make it better and better. We're never satisfied with how good it is, but there's just too many changes to list for a call like this.
spk12: Got it.
spk02: Well, look, I – Thank you, man. I appreciate it. Well, I appreciate everyone's interest in the, in our results and appreciate the questions for our associates that are listening. We certainly appreciate everything that you're doing in these challenging times, but thank you for your interest. And we look forward to talking to you in the next quarter.
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