Floor & Decor Holdings, Inc.

Good afternoon and welcome to the Floor and Decor Holdings third quarter 2022 conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Wayne Hood, VP, Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Joining me on our third quarter earnings conference call today are Tom Taylor, Chief Executive Officer, 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 measure can be found in the earnings press release, which is available on our investor relations website at ir.floranddecor.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 everyone for joining us on our fiscal 2022 third quarter earnings conference call. During today's call, I will discuss some of the highlights of our fiscal 2022 third quarter earnings. Trevor will then review our financial performance in more detail and discuss how we are thinking about the remainder of 2022. We are pleased with our fiscal 2022 third quarter and year-to-date financial results and excited about approaching 14 consecutive years of comparable store sales growth, a significant accomplishment considering the current macroeconomic challenges. Additionally, we are pleased with the execution of our growth strategies and gross margin rate recapture, which enabled us to deliver better than expected third quarter 2022 adjusted diluted earnings per share of $0.70 per share, an increase of 16.7% from last year's $0.60 per share. These solid financial results reflect the strength of our business model and the outstanding work that all of our associates do to serve our pros and homeowner customers better every day, as demonstrated in our recent customer satisfaction scores. Our three-month customer satisfaction service score was one of the highest in our history, further validating that the investments we are making in associate wages and training are working. I want to take a moment to particularly express my sincere gratitude to our associates in Florida for their hard work and deep dedication to their communities and each other. Because of their efforts, we quickly reopened our stores to serve our customers impacted by Hurricane Ian as they began recovery and rebuilding efforts. Turning to our new store growth, we opened four new warehouse format stores in the third quarter of fiscal 2022, including one store in fiscal August and three in fiscal September. Compared with our planned eight warehouse store openings in the third quarter, the lower than expected openings is primarily due to industry construction delays and Hurricane Ian, which pushed our Fern Park, Florida opening into the fourth quarter. As a result of these factors, we now intend to open 13 warehouse format stores in the fourth quarter of fiscal 2022, achieving our 32 warehouse store annual opening plan and ending the year with 191 warehouse stores. Fourth quarter to date, we have opened seven of our planned 13 warehouse store openings. We are excited to open a design studio in Atlanta, Georgia in October. We now operate six design studios, including studios in Dallas, Houston, Miami, Washington, D.C. suburb, Tyson's Corner, New Orleans, and Atlanta. As we think about our new warehouse store openings in fiscal 2023, we believe it is prudent to plan a range of 32 to 35 stores and for the openings to be weighted in the second half of the year. By doing so, we can take into account potential ongoing construction delays and be patient about finding the best real estate opportunities for our long-term goal of 500 U.S. warehouse stores. Third quarter total sales increased 25.2% from last year to approximately $1.1 billion. Our third quarter comparable store sales increased 11.6% compared to the third quarter of 2021. including 12% in July, 13.7% in August, and 9.6% in September. As expected, laminate and vinyl remain our strongest merchandise category. As we look forward, we expect a weak housing market and a slowing economy will continue to weigh in our transactions into the fourth quarter of fiscal 2022 and throughout fiscal 2023. As a reminder, our fiscal 2021 fourth quarter comparable store sales increased by 14%, making for a moderately more difficult sequential comparison versus 10.9% growth in the third quarter of fiscal 2021. Our fourth quarter to date comparable store sales are up about 5% as compared to the same period last year. Let me comment on the impact Hurricane Ian has had on us since it made landfall on September 28, 2022. We were fortunate that none of our stores were materially damaged. In the third quarter, we had 26 closed store days and 19 partially closed days. It was gratifying to see our associates take immediate operational and merchandising action to quickly reopen our stores to serve our customers as they begin recovery and rebuilding. For example, we quickly positioned 1,400 pallets of vinyl in South Florida to help those needing to replace their flooring from flooding. Our quick actions are remarkable for a company of our size. We estimate the storm was a drag on our comparable store sales growth by 130 basis points in September and 50 basis points for the third quarter. At this juncture, it is difficult to estimate with any degree of precision the potential benefit over the coming months and years from the billions of dollars in residential and commercial flood loss damage from Hurricane Ian. We are, however, well positioned for the rebuilding demand due to our substantial market share and value position in Florida, not to mention being able to deliver sufficient job lock quantities at the lowest price. Our third quarter comparable store sales were driven by a 19.5% growth in our average ticket compared with 17.9% growth in the second quarter of fiscal 2022. Our average ticket growth continues to benefit from an increase in retail prices to mitigate cost pressures, an increase in the sales penetration of laminate and vinyl, and an increase in sales penetration from our high ticket pro e-commerce and designer-led initiatives. We continue to see ongoing customer preferences towards our better and best price points where we offer industry-leading innovation trends and styles at the lowest price. The third quarter comparable store transactions declined 6.7% from last year, slightly improving from a 7.3% decline in the second quarter of fiscal 2022. As a reminder, our transactions turned negative in late November of fiscal 2021 and we're down 0.7% for the fourth quarter of fiscal 2021. We will start cycling past mid to high singles transaction declines in the second quarter of fiscal 2023. Turning to our pro business, we are successfully executing a holistic strategy to grow our wallet share among pros. In the third quarter, total and comparable store sales to pros exceeded the company's total sales growth of 25.2%. Consequently, pros accounted for 40.7% of our third quarter sales, up from 39% in the second quarter of fiscal 2022. Notably, pro-comparable transactions continue to be strong, increasing by 7.4% from the third quarter of 2021. Moreover, we are pleased that the pros that make up the top 10% of sales spent 24% on average more than last year. So we're excited about our growing engagement with pros and the opportunity to continue growing our pro contacts. In the third quarter, we created 29,000 new pro contacts supported by events like our third annual pro appreciation event. This year, this yearly event celebrates pros everywhere with giveaways and free weekly virtual installation classes. This year, the event generated a 67% increase in net new opted-in pro contacts from last year. The growth was significantly above our expectations and reflected our growing brand awareness. As we look to the fourth quarter of fiscal 2022 and beyond, we are focused on further strengthening our teams at the pro desk to build on the execution of our key priorities and objectives. To that end, We are investing resources in pro leadership training and development, including an initial framework of pro career path. We are fortunate that the growth ahead of us gives our pro team members a unique career opportunity. Additionally, we are refreshing our pro certification programs and expect all team members to be certified by the end of fiscal 2022. We are excited about launching our new ProConnect account management tool, enabling deeper tracking and account management of pros by our associates. These, among other strategies and tools, are aimed at building relationships and lifetime value with pros. Turning to our e-commerce business. As discussed during prior calls, our e-commerce team continues executing strategies that will further optimize our customers' digital experience, including focusing on product, inspirational content, and conversion. Our third quarter e-commerce sales increased 31% from last year and accounted for 17.3% of sales compared with 16.4% in the same period last year. We are pleased that the e-commerce average ticket comp grew at a faster rate year over year in the third quarter than the company average ticket comp. Turning to the growth opportunities in design services. We believe there is significant opportunity with design services to strengthen our competitive moat and are continuing to commit resources to this free service. We now have over 900 designers in our warehouse stores or about five designers per store. Additionally, we believe there is an opportunity to become involved with whole home or multi-room renovations by offering in-home design services. As such, we now provide in-home design services in Washington, D.C., Houston, Dallas, Miami, and Atlanta. As we have discussed in prior calls, when designers are involved in projects, we see higher customer service scores, average tickets, installation material sales, adjacent category sales, and gross margins. For these reasons, we are focused on designer staffing requirements to ensure we have the right designers in the right place, at the right time, and are executing follow-up and elevated service behaviors that maximize conversion. We believe our strategies are working. Both third quarter total and comparable store design sales growth were significantly above the company's growth rate. We are pleased to see strong growth in both transactions and average tickets. Let me turn my comments to growth in our commercial flooring business, which includes Spartan Services and our Regional Account Managers, or RAMS, which work with our stores. We are very pleased that the sales and earnings growth at Spartan Services, where third quarter sales and earning results once again exceeded our expectations. Spartan's third quarter sales increased by 45.3% compared to the third quarter of 2021, and EBIT increased by 63.3% from the same period last year. Our non-Spartan commercial sales also remain strong. As we have discussed in prior earnings calls, we remain excited about the commercial market opportunities and our commercial strategies. In closing, we believe that we have demonstrated that we have the right teams, strategies, and agile business model to navigate the challenging macroeconomic environment successfully. As we approach the end of this year, we're focused on setting ourselves up for continued success into fiscal 2023 and beyond. I will now turn the call over to Trevor to discuss in more detail our fiscal 2022 third quarter financial results and our outlook for the remainder of the year.