Floor & Decor Holdings, Inc.

Q1 2024 Earnings Conference Call

5/2/2024

spk21: Greetings and welcome to the Floor & Decor Holdings, Inc. First Quarter 2024 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Wayne Hood, Senior Vice President of Investor Relations. Please go ahead.
spk04: Thank you, Operator, and good afternoon, everyone. Welcome to Floor & Decor's fiscal 2024 first quarter earnings conference call. Joining me on our call today are Tom Taylor, Chief Executive Officer, Trevor Lang, President, and Brian Langley, Executive Vice President and Chief Financial Officer. Before we start, I want 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. Florida Core 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 ir.florendecor.com. The recorded replay of this call and related materials will be available on our investor relations website. Let me now turn the call over to Tom.
spk18: Thank you, Wayne, and everyone for joining us on our fiscal 2024 first quarter earnings conference call. During today's call, Trevor and I will discuss some of our fiscal 2024 first quarter earnings highlights. Then Brian will provide a more in-depth review of our first quarter financial performance and share our thoughts about some of our financial projections for the remainder of fiscal 2024. We are pleased to report fiscal 2024 first quarter earnings diluted earnings per share of 46 cents, which surpassed our expectations. We take pride in these results as they demonstrate how our teams can manage our profitability by continuing to strategically grow our gross margin rate and prudently manage expenses without sacrificing customer service amid ongoing weak demand for hard surface flooring. These results are a testament to our store associates' hard work and dedication. reflecting their tireless work to drive sales and engagement with our homeowner and pro customers daily. We are happy to report that their efforts continue to result in high customer service scores across all our touchpoints, which helps set us apart from our competition. During this uncertain demand period for hard surface flooring, it's important for us to focus on what we can control. Therefore, we've taken steps to reinforce our price and value messaging at the front of our stores. We do this by offering bulk-out displays of opportunity buys, deals of the week, and compelling adjacent category offerings. Our strategy also includes having well-equipped salespeople and designers on the floor at the right time. We proactively greet and assist customers who enter our stores by asking them, what project are you working on? This approach helps us drive conversions and customer satisfaction. We are also diligent about following up on open quotes and are focused on closing high-value opportunities in design and pro using our CRM solutions. We use our CRM data and business intelligence tools to drive sales and engagement with inactive, active, and new pros. Additionally, we continue to drive sales with innovative new products like Excel Slabs that were added to 17 additional locations in the first quarter. bringing the offering to 130 warehouse stores. While demand for hard surface flooring is likely to remain challenged in the near term, we remain committed to offering our customers innovative and stylish hard surface products of superior quality at everyday low prices, in job lock quantities, and providing them with a high level of service across all touchpoints. These values are fundamental to our growth strategy and we believe they will help us increase our market share and create lifetime value among homeowners and pros. Let me briefly turn my comments to the tragedy in Baltimore caused by the Francis Scott Key Bridge collapse on March 26th. We know many agencies are working very hard to reopen the channel as quickly as possible, and we thank them for their efforts. We have a 1.5 million square foot state-of-the-art distribution center near the Port of Baltimore, one of our four distribution centers in the United States. This facility is open and operating normally, except it now receives products from other ports. As many of you know, we have a strong, experienced distribution and supply chain leadership team with a long history of successfully overcoming unexpected global distribution and supply chain challenges. We have proudly called on them, again, and as expected, They quickly implemented strategies to ensure the timely flow of inventory to our stores with only a modest impact on profitability. We are working closely with our ocean carrier partners to divert containers to the nearby ports of New York, New Jersey, Norfolk, and other East Coast ports. We are leveraging our existing dedicated trucking fleets to help mitigate the cost impacts of transporting products to our distribution center. Recently, a channel that can accommodate smaller commercial vessels opened. we will shortly begin moving products on barge vessels utilizing this channel to replenish our distribution center as well. We are hopeful the Baltimore port will start operating normally by the end of May. That's the estimate of the Army Corps of Engineers. Before turning the call over to Trevor, I would like to take a moment to express how proud our leadership is of our team's ability to manage our profitability, inventory, and capital spending despite the challenges posed by weak flooring demand. By doing so, we can continue to make significant strategic growth investments with the long-term goal of operating 500 warehouse stores in the United States. Trevor will share more details about our busy fiscal 2024 second quarter new warehouse store opening plan, which includes the opening of a new 129,000 square foot warehouse format store in Brooklyn, New York. We welcome the people of New York to visit this store and embark on their next inspirational flooring project. Let me now turn the call over to Trevor.
spk03: Thanks, Tom. We take pride in the execution of our sales driving initiatives by all of our associates to grow our market share and manage our profitability, despite the near-term challenges and the demand for hard surface flooring. In the first quarter of fiscal 2024, our sales declined by 2.2% to $1,097,300,000, with comparable store sales falling by 11.6% from the same period last year. As expected, comparable store sales sequentially improved as we cycled past easier sales comparisons and successfully executed our sales driving initiatives. Monthly comparable store sales declined 14.7% in January, 10.7% in February, and 10% in March. Our fiscal 2024 second quarter to date, comparable store sales declined 9.3% from the same period last year. As discussed in our fiscal 2023 fourth quarter prior earnings conference call, We expect the first half of 2024 to represent our most challenging comparable sales period. From a regional standpoint, we are seeing some, albeit early, positive sales trends emerging from our West division. Comparable store sales are improving sequentially and are better than the company average. The West division was the first to experience softening sales in 2022 and has been less impacted by cannibalization compared to other divisions due to fewer new store openings. Comparable store sales were similar in our east and south divisions, excluding the impact of opening new stores. Turning to our sales trends by merchandise categories, like the fourth quarter of fiscal 2023, our fiscal 2024 first quarter comparable store sales in tile, wood, insulation materials, and adjacent categories were better than the overall decline of 11.6% in comparable store sales. Laminate and vinyl remains our weakest merchandise category. We are pleased that our merchandise strategies continue to resonate with our customers as they remain consistently drawn towards our better and best price point products, which offer industry-leading innovation, trends, and styles at everyday low prices. We are happy that the successful execution of our merchandising strategies continues to lead to a sales mix shift to higher margin products. Let me comment about our comparable store sales average ticket and transaction trends. Recall that our fiscal 2023 first quarter comparable source average ticket increased by 7.3% and by 1.1% in the second quarter, before declining by 2.8% in the third quarter and by 4.7% in the fourth quarter. In the first quarter of fiscal 2024, our average ticket sequentially improved slightly, declining 4.2% from the last year as we began to lapse strategic price reductions we took in 2023. In terms of transactions, our 2024 first quarter comparable store transactions fell 7.7% compared to a 4.9% decline in the fourth quarter of fiscal 2023, a 6.8% decline in the third quarter, a 7.1% decline in the second quarter, and a 9.9% decline in the first quarter. The trends largely reflect the macroeconomic headwinds as well as customers are purchasing less square footage and undertaking smaller projects. Turning my comments to our connected customer pillar of growth, We're happy to see that our connected customer strategies continue to resonate with our homeowner and pro customers. It's worth noting that our customers can engage with us through 10 different touch points during their purchase journey. Achieving a unified execution among these touch points is crucial to the customer experience and a competitive advantage over the independents, particularly for high consideration purchases like flooring. We've observed that customers who visit our stores and engage with our website spend substantially more than single channel customers. On our most recent earnings call, we discussed how we are integrating our processes and technology solutions to further develop a seamless in-store and online experience. To continue enhancing these strategies, we focused on driving organic traffic growth to our website and further optimizing the customer search experience. We plan to achieve this by improving our website speed and the quality of our website search, adding inspiring content for customers, and refining our online merchandise processes to increase efficiency. In the first quarter of fiscal 2024, we saw sequential improvement in organic traffic and connected customer sales increased by 1.1% from last year, which resulted in 100 basis points increase in the sales penetration to 19%. We continue to be pleased with our design services. Our design teams are focused on delivering an elevated design experience through engagement with designers who are passionate about our customer service and our products. The teams are focused on driving engagement, selling the entire project, and following up on high value sales opportunities by leveraging the power of our CRM solution. Furthermore, our designers are collaborating with the ProDesk to build relationships with contractors. We are happy to report that our first quarter design sales growth was better than the company's overall sales performance. As a result, the design sales penetration increased sequentially and year over year. Moreover, we are pleased that our net promoter score improved sequentially and that efforts to grow our basket selling are working. Moving to our new warehouse store format pillar of growth, in the first quarter of fiscal 2024, we opened four new warehouse format stores, ending the quarter with 225 stores, an increase of 16% from the same period last year. These openings include new warehouse format stores in Mansfield, Texas, Somerville, Florida, Glen Burnie, Maryland, and Augusta, Georgia. We have a busy fiscal 2024 second quarter opening plan, and have already opened four new warehouse stores including Lone Tree, Colorado, Bremerton, Washington, Brooklyn, New York, and Hendersonville, Tennessee. In June, we expect to open new warehouse stores in West Palm Beach, Florida, and Columbus, Georgia. We plan to open 30 to 35 new warehouse format stores in fiscal 2024 across various large, medium, and small market sizes unchanged from our previous guidance. Most of the 2024 warehouse format store openings are expected to be in large existing markets in the east and the south, where we continue to grow our market share. In fiscal 2024, we anticipate about 30% of our new warehouse store openings will be in the first half of the year. We expect the remaining 70% of our fiscal 2024 new warehouse store openings will be in the second half, with the majority of the openings in the fourth quarter. Turning my comments to pros. In the first quarter of fiscal 2024, pros accounted for approximately 45% of sales. Top 20% of our pros are busy increasing their average order frequency moderately from last year. We are pleased that our market share with our pros continues to grow, particularly among our top pros due to our engagement and supply house mindset. Notably, this mindset led comparable store sales in the first quarter for installation materials exceeding the company average. Consequently, the first quarter sales penetration rate for insulation materials increased 200 basis points from last year and 220 basis points among the top 20% of our pros. We are excited about the opportunity to grow our market share further in this underpenetrated pro-heavy merchandise category. We intend to grow our market share further with pros by leveraging our pro dashboards and CRM tools to drive engagement with new and active and active pros. In the first quarter, we launched new tools that will better measure the effectiveness of our store pro sales manager's contact journey. We now provide enhanced reporting to help our field leadership better understand the effectiveness of their contact and close journey. Furthermore, we have begun to partner with native advertising platforms within banks' digital channels that should provide us with a practical and cost-efficient avenue to drive new pro acquisitions. We also see an opportunity to drive engagement by increasing the number of pro customer roundtables we host quarterly. These successful networking events allows us to further understand pros needs better and update them on new initiatives and investments we are making that will benefit their business. Finally, we continue to deepen our relationship with pros by partnering with trade associations to host educational events. Increasingly, education events are important to our pros as installation in certain categories is complex. Importantly, we see a significant lift in sales from pros attending these events. In the first quarter of fiscal 2024, we hosted 25 National Tile Contractor Association and five National Wood Flooring Association educational events, training approximately 580 pros. We are excited to host about 145 educational events in 2024. We are pleased that the first quarter sales from our regional account managers exceeded our expectations and then were significantly above last year. We ended the first quarter of fiscal 2024 with 65 regional account managers compared with 60 at the end of fiscal 2023. Let's now discuss our commercial business. Spartan Services' first quarter sales exceeded our expectations, increasing significantly from last year due to the acquisition of SalesMaster in June 2023. With the acquisition of SalesMaster, we ended the first quarter of fiscal 2024 with 81 reps compared to 65 at the end of March 2023. Spartan continues to progress in its diversification strategies, re-indexing to healthcare, education, hospitality, and home builders. Healthcare is an excellent example of an attractive commercial segment that is less sensitive to economic cycles, price, and specification flipping due to its installed location. In 2024, we plan to continue to drive sales and market share growth through opportunistic acquisitions, organic rep growth, and boosting rep productivity. In closing, we remain confident that we have the right people, strategies, and business models to navigate this challenging macroeconomic environment successfully. Let me now turn the call over to Brian.
spk10: Thank you, Tom and Trevor. I want to express my gratitude to all of our associates who contributed to our fiscal 2024 first quarter results. Your hard work, dedication, and commitment enabled us to remain flexible, strong, and resilient which allowed us to exceed our expectations at a time when customer spending on discretionary hard surface flooring is uncertain. Although first quarter sales fell at the low end of our expectations, we delivered diluted earnings per share of 46 cents, surpassing our expectations. This achievement is due to the diligent efforts of our teams in delivering on our gross margin expansion plan and prudently managing expenses and capital spending. Now let me discuss some of the changes among the significant line items in our fiscal 2024 first quarter income statement, balance sheet, and statement of cash flows, as well as our outlook for the remainder of the year. Our fiscal 2024 first quarter gross margin rate was better than expected, increasing 100 basis points to 42.8%. This was mainly due to favorable supply chain costs and to a lesser extent product costs. The increase in our gross margin rate enabled us to grow our gross profit by 0.2% from the same period last year despite a 2.2% decline in sales. Our fiscal 2024 first quarter selling and store operating expenses increased by 30.7 million or 10.1% to 334.3 million from the same period last year. This growth was primarily driven by an increase of 39.6 million from operating 31 additional stores versus the same period last year and 3.5 million at Spartan, partially offset by a decrease of 12.4 million at our comparable stores. As a percentage of sales, fiscal 2024 first quarter selling and store operating expenses delevered by 340 basis points to 30.5% from the same period last year. This expense deleverage is due to the decrease in comparable store sales and the addition of new stores. Our fiscal 2024 first quarter general and administrative expenses of $66.8 million increased by 7.9% from the same period last year. The growth is attributed to the investments we continue to make to support our store growth, including growth of $4.9 million for personnel expenses related to additional staff and to a lesser extent, incentive compensation. Due to the decline in our first quarter sales, general and administrative expenses deleveraged 60 basis points to 6.1% as a percentage of sales. Our fiscal 2024 first quarter pre-opening expenses of $9.6 million increased 19.6% from the same period last year. The year-over-year increase primarily resulted from the timing of spend for new stores. Our fiscal 2024 first quarter net interest expense decreased $2.9 million or 59.8% from the same period last year. The reduction in interest expense is due to lower average borrowings under our ABL facility, higher interest income from our interest rate cap derivative contracts, and an increase in capitalized interest, partially offset by interest rate increases on outstanding debt. Our fiscal 2024 first quarter adjusted EBITDA of $123.0 million decreased by 17.8% from the same period last year. primarily due to expense deleverage from the decline in our comparable store sales. Depreciation and amortization increased 21.7%, contributing to net income declining by 30% to $50.0 million and diluted earnings per share of $0.46, falling by 30.3% from the same period last year. Our fiscal 2024 first quarter effective tax rate of 12.8% decreased from 21.1% in the same period last year, primarily due to increased tax benefits related to stock-based compensation awards. Moving on to our balance sheet and cash flow. We continue to maintain a strong balance sheet, which allows us to prudently grow within our existing capital structure, even during a period of industry contraction. We are pleased that our fiscal 2024 first quarter inventory decreased 6.7% to $1.0 billion from the end of fiscal 2023 and declined 12.6% from the first quarter of fiscal 2023. As discussed in our prior earnings call, we anticipate inventory to grow slightly faster than sales as we exit 2024 due to most of our 2024 new store openings being late in the year and planned 2025 store openings. We ended the fiscal 2024 first quarter with $698.2 million of unrestricted liquidity consisting of $57.4 million in cash and cash equivalents and $640.8 million available for borrowing under the AVL facility. Let me now discuss how we were thinking about the macroeconomic environment and our financial performance for the remainder of 2024. There remains considerable uncertainty about the timing and slope of potential improvement in existing home sales and hard surface flooring spending in 2024. The absolute sales of existing home sales may have bottomed at 3.85 million units in October of last year, but they are choppy, improving sequentially to 4.38 million units in February 2024, before falling to 4.19 million units in March. Unfortunately, the direction and absolute level of 30-year mortgage interest rates are rising again, and housing affordability and spending on large-ticket discretionary durable goods remain headwinds. For these reasons, we believe fiscal 2024 full year sales could be at the low end of our guidance of $4,600,000,000 to $4,770,000,000 as the timing and slope of improvement could be more elongated. We expect to gain a better line of sight about the timing and slope of sales over the next several months, which will better inform us about the second half of 2024. That is not to say we don't expect sequential, quarterly improvement in comparable store sales. We expect our fiscal 2024 first quarter comparable store sales decline of 11.6% to represent the trough for the year and comparable store sales to improve sequentially throughout the year from easier sales comparisons and improving transactions. In the meantime, we believe we can manage our profitability. The successful execution of our gross margin expansion plan gives us more confidence in the top end of our annual 2024 gross margin guidance of 42.6% to 42.8%. As we look to the remainder of fiscal 2024, we expect to prudently manage selling and store operating expenses. We anticipate modest sequential growth in selling and store operating expense dollars from the first quarter of fiscal 2024. As a reminder, every 100 basis points change in annual comparable store sales compared with our plan impacts earnings by approximately 10 cents per share. Our ability to manage our gross margin, prudently manage expenses, and lower interest and tax expense enables us to manage our profitability in this uncertain period. Based on our fiscal 2024 first quarter results, we now expect our fiscal 2024 four-year interest expense to approximate $9 million to $11 million and our tax rate to approximate 20%. Over the long run, we remain excited about the well-documented structural opportunities and repair, remodel, and flooring spend, including housing demand that exceeds supply in an aging housing stock. We still see a path to achieving our long-term goal of mid to high teens adjusted even to margin. Operator, we would now like to take questions.
spk21: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two 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 the star keys. And our first question comes from the line of Chris Horvers with JP Morgan. Please proceed.
spk12: Thanks. Good morning, guys. So my first question is, can you talk about how the quarter played out relative to your expectations? I think January had some weather impact. How did it proceed from there and through April? And related to that, how reflexive is demand to mortgage rates or above or below 7%?
spk18: Hey, Chris, this is Tom. I'll start and Brian can jump in. The comp in the quarter each month got a little bit better. We did start off January, I think January was a negative 14% What was it? It was negative 14 to negative 10.7, and then negative 10, and now we're negative 9.3. So the comps moderating, we're going to be up against easier comparisons the further along we get into the year. So we'll see how that plays out. You know, we are affected. Interest rates are continuing to go up. You know, at the last report, 7.5%. Back to that approaching 8, it's the highest it's been in the year. You know, we don't know how that's going to affect. We've only got existing home sales reported through the month of March. They step back in the month of March. So, you know, it's hard to tell what that will have. But I think interest rates will have an effect on existing home sales and make it a challenge.
spk12: I guess maybe that's another way is I guess relative to how you thought about the cadence of the year, I guess how much more are you sort of implicitly back half weighting the sales relative to what you thought a few months ago?
spk10: Yeah, I mean, I think that's what you heard in the pre-prepared remarks is that we're turning towards the lower end. So, I mean, I think it's – we're not putting more to the back half. We do expect things perhaps to get slightly better from where we are today, but that's reflected in that guide, and that's why we kind of alluded in the call that we're turning more towards the lower end.
spk18: And, Chris, the only thing else that I would say is that the further we get into the year, I mean, you started in – June of last year, we started bumping along below 4.1 million annualized. Only one month went above that 4.1 million. That was in the month of February that just occurred, which is 4.38. As we start lapping those numbers, the spread year over year between existing home sales gets a little bit better. And as soon as they turn positive, we do think there'll be a lag, but then it gives us a better opportunity to count positive.
spk10: Exactly. I mean, just to reiterate what we said on the last quarter, we do expect sequential improvement in both transactions and ticket with the biggest movement coming in transactions. So if you think about it, we just did a Q1 at negative 7.7%. we'll get towards the end of the year and be flat to slightly positive. And the same thing on ticket is down 4-2 in Q1. That'll stay kind of where it is and then move towards, you know, hopefully getting flat towards the end of the year. So both of those movements are based on easier compare and then slightly improvement through the year.
spk12: Got it. So if I were just going to reword it, it's like essentially you're leaving the back half. Your back half view is largely unchanged, and it's really just what's happening in the first half, and that's why you expect a low end of the range. Yeah, that's right. Got it. Thanks very much.
spk21: Our next question comes from the line of Simon Gutman with Morgan Stanley. Please proceed.
spk20: Hey, good afternoon, everyone. It's Simeon. The comments that were made on the West, I don't know if it was normalizing or improving. Can I ask if that's happening against easy compares or you're seeing some reacceleration? And then is that DIY or are you able to decipher that?
spk03: This is Trevor. The West started off having issues a good six to eight months before the rest of the business in 2022. So they've had this now for a longer, they've been dealing with this for a longer period of time because they had some of the more strenuous negative existing home sales to start off with. We think they're going up against easier comparisons. I think some of the housing malaise that ended up affecting everybody has come across the United States and now we're seeing some of that more difficult in some of our bigger markets. Places like North Texas and Florida and Georgia and even to a lesser extent up in the Midwest and the Northeast. I think just to call it the housing recession, for lack of a better term, started out West and worked its way East. that's why they're doing better. And conversely, that's why, you know, some of our stores in Texas and Florida and Georgia and markets like that, the mid Atlantic are having a harder time because it just didn't hit them at the same time as it hit out West.
spk20: Got it. Okay. Um, and my followup is you also said in the West, you know, maybe some stores not as cannibalized from growth, the cannibalization rate of the business. And I don't know if you've mentioned it recently, is that that's more controlled by the percentage opening, you know, how much you're opening stores in the region versus the industry's health. I mean, the industry's health is controlling the growth, but obviously in tougher environments, it would feel like that cannibalization would pick up as well, or is it more dictated by the pace at which you're opening stores?
spk03: Yeah, I think it's more of the latter. Our cannibalization this last quarter was actually a little bit better than we'd seen in the previous four quarters. That's obviously a little bit nice to see, and that could be timing. Generally speaking, our cannibalization is dictated by where we're opening stores and what kind of store we're opening against. If you're opening a brand new, beautiful, bigger store against an older, smaller store, and it's closed within call it 30 minutes or less, you're going to have higher cannibalization. If it's a big store going up against another new big store, that's, you know, call it 45-minute drive time, you're not going to see as much cannibalization. And I think we said this year, I think maybe 70% of our stores are in existing markets, which is probably similar to last year as well. So I think we own that cannibalization more than the market factors.
spk20: Got it. Okay. Thanks. Good luck.
spk21: And the next question comes from the line of Michael Lasser with UBS. Please proceed.
spk06: Good evening. Thank you so much for taking my question. How do you think your relative market share trended in the first quarter versus where it had been, especially in more mature markets? And what's happened quarter to date, especially in light of your comments that you think you'll hit the low end of the full year top line range? Thank you.
spk18: Yeah, Michael, this is Tom. I'll take a shot at that first. It's hard to know in the first quarter kind of what happened from a market share perspective. Not everyone's reported yet, so you have to take a minute to digest everyone's numbers to see. When you look at last year, Floor & Decor grew our revenue by 3.5%, and Catalina predicted the market went down 5.2%. The big boxes count negative, and Floor & was worse than them. And across, you know, the publicly traded competitors, tile shop, lumber liquor, they're all negative. Mohawk reported North American sales negative. So we were positive. In the first quarter, only Mohawks reported out. They reported negative. And we were, you know, while we're negative, we're slightly better than they were. So, you know, and I don't think much changed, you know, when you look at the competition and the competitive landscape. I think the way we were competing last year versus the way we were competing in the first quarter, I haven't seen much of a change. So I would anticipate that we're continuing to take market share in a really tough market.
spk06: Okay. My follow-up is, Eddie, anything you could say about what's been happening quarter to date, especially in light of the comments on getting to the low end of the full year guidance range?
spk18: I mean, you know, quarter to date, again, the comp's modestly getting better month over month. So it's, you know, we would have hoped it would get better quicker. March is existing home sales taking a step backwards. There's a lag to what we see there. But, you know, when you look at it, I mean, we've been in this since June of last year, this really low 4.1 million-ish existing home sales, and with only one month being up at 4.3, which is February. So... It just gives us a pause as we think about the rest of the year. We'll know more. Spring is a very important for existing home sales, and we'll know more when we get the data of what happened during the month of April, what's going to happen during the month of May, and what happens in June with the lag of our benefit from existing home sales. If they're good, then we should be good. If they're not, then it'll be tougher, but we'll talk about that when we get to the second quarter.
spk06: Can I just dig into that, Tom? Is there a case or what would be the case where your trends become disconnected from existing home sales, either on the positive or on the negative? Would it be if there was some product category change that Florida Core was not well positioned for? Would it be that your prices became uncompetitive or maybe more competitive What would be that scenario? Hey, Chris, this is Trevor.
spk03: I think just reading a lot of the other large consumer products companies that have reported here recently, they have a common theme, and it's just that the consumer is under pressure. Inflation is still a little bit high. Savings rates have been drawn down. They don't have the same level of discretionary spending power that they had. And so that's probably the only thing that, one of the things that we're watching closely is just does that consumer, you know, stay under pressure. Historically for us, as you've well noted in your reporting and others have as well, we have had a very high correlation to existing home sales. I think the only question I have now is just, you know, is that consumer in a more stretched position than they've been because of inflation and just what we're hearing from other retailers that the consumer feel is a little stretched.
spk18: Yeah, and, Michael, I would just say that from the way we compete across every category, that hasn't changed. I mean, our stores, we still have a competitive advantage across every department that we participate in. So I don't think there's anything fundamental in the model that would affect that. It's much more the health of the consumer that would give it a challenge. Got you.
spk06: All right, thank you very much, and good luck.
spk18: Thank you, Michael.
spk21: Ladies and gentlemen, due to the interest of time, we ask that you please limit yourselves to one question only. Thank you. And our next question comes from the line of Chuck Grom with Gordon Heskett Research. Please proceed.
spk02: Hey, thanks very much for your afternoon. I'll just maybe try a two-part here. Can you just remind us on the store openings, just to switch gears, you know, how many are in the smaller format locations and bigger picture within your 500-store long-term target? Can you remind us the mix of small versus large locations? And then I guess as a follow-up, you know, if comps were to continue to trend down in the high single-digit range, say, through the second or third quarter, I guess how do you think about store growth in 2025 and 2026? Because I'm sure you've already begun that planning process. Thanks.
spk03: You want me to take the first part and I'll take the second part, Trevor? Yeah, I was looking to see. I don't have it off the top of my head how many of the smaller formats. I think it's less than 20% of our stores, maybe less than 30% of our stores are going to be in the smaller format this year relative to the larger format. And sometimes that's mostly in the smaller market, but that could also be if we're opening a store in a more tertiary market that's further out in existing markets.
spk18: Yes. And then 25 is a long ways away, so we're not prepared to – talk about what our new store growth will be in 2025. We have slowed our new store growth down since existing home sales became under pressure. We went from opening 20% new units per year to now this year, we gave guidance of 30 to 35 stores, so I believe we'll be within that range. We'll watch as the year progresses and make a determination on next year and let you know as we get to that determination. So as of now, we're not going to We're not going to grow at all costs. We're going to make sure that we're thoughtful about the way we're investing in business. We already have been thoughtful about the way we're investing in the business. If we think that this is – if the slope or the range of recovery is continuing to slow, then we'll make the best decision we can on how we deploy our capital. We still believe – It doesn't affect our long-term plans of opening 500 stores. The pace of opening, it's already slowed a little bit, and that may continue. It will depend on how the back half goes.
spk03: I'll just look real quick while Tom was giving that elegant response. I think we have seven of our stores roughly are going to be the small format stores this year.
spk02: Okay, great. Thank you, guys.
spk21: And the next question comes from the line of Zach Fadum with Wells Fargo. Please proceed.
spk01: hey good afternoon um so as we look back over the years we've seen a lot of tailwinds uh you know both internally and externally from you know aging housing stock you've had shift to hard surface house slippers etc and then some company specific tailwinds like designers pro loyalty etc so just as we think about the next category upswing could you walk us through what you think the next round of tailwinds could be both internal and external. And is it fair to say that your comps on the next upswing could be as strong as they've been over the last upswing?
spk03: Uh, I think this is Trevor. I think there's a stab at that. I mean, I think, you know, we're making investments in key categories today that we think there's, you know, unique to us. When you look at our stores, you know, XL slabs and Tom talked about that. That's one area. Larger type products are trending better. Our stores are big. That's a nice category. It's small today, but if you look at our adjacent categories, that category is growing. We've got ideas there where we could continue to add the adjacent categories. I think on the macro front, so those are things that, yeah, I mean, we've got great merchants. We've been thinking about ways to drive merchandising strategies that are unique to us, and we'll continue to do that. I think on the long term, as you guys have heard us say many times over the last seven or eight years, we've got 130 million housing units in the United States. 80% of them are over 20 years old. On average, they're 40 years old. There's just a replacement cycle that has to happen. I do think everybody in this space, including us, should do well over the medium to long term. We're not adding, as you know, we're not adding nearly as many new homes relative to the household formation that we're having as a country. That's part of the reason house values continue to go up and up. I think for us over the medium and the long term, we're feeling good. One last thing I was just going to mention, Brian, is that we're in the stores all the time and we're seeing our competition all the time. I feel like even though our business isn't great, as Tom mentioned, our performance relative to all our peers is much better. But I think when you look at the stores, the aesthetics of the stores, the in-stock levels are better, our customer service scores are higher, our turnover is down, our supply chain is resilient. We're ready when it comes.
spk10: Zach, I was going to say, even outside the four walls too, we're super excited about the opportunity to commercial as well. So when the early innings there, so when you think about your total sales growth, that's something that the next couple of years should accelerate as well.
spk18: And the last thing I think Trevor kind of mentioned, I would just say that We haven't changed anything with our product line view strategy. We're continuing to bring in newness across every department that we have, newness in fashion, newness in durability across every department. So as the market turns, I mean, I feel better about our product sermon today than I did when we were comping 20%. So, you know, we're just in a tough macro. This too shall pass. It's just a question of when.
spk01: Thanks for the time.
spk21: And the next question comes from the line of Stephen Zaccone with Citi. Please proceed.
spk13: All right. Good afternoon, guys. Thanks for taking my question. I wanted to follow up on two points that have already been asked. The first on the West. So what are you actually seeing that's driving the improvement? Is it more traffic? Are you actually starting to see some larger project sizes? And then on the second aspect, cannibalization, can you just remind us What is that right now as a drag to the comp, and what is the long-term goal for cannibalization?
spk10: Yeah, so I'll do my best to answer those. So it's more transaction-based. I would say our size has increased slightly, but it's not the main driver. It's really around activity, so it's traffic and transactions on the West Coast that we're starting to see that get healthier out there. And the cannibalization, we've never actually given the number, so I can't quote exactly what it is. I'm going to say exactly what Trevor just said. It was slightly favorable compared to historical trends, more recent trends in Q1, but it's relatively in line, and we expect it to stay there probably the next couple of years as we're still opening stores. It's just a matter of where the stores are and how many stores they impact. To Trevor's point, it's more planned cannibalization on our side. Yep.
spk03: Long, long term, assuming we're still opening this level of store count, it'll come down just because they won't have as many new store openings because we're not adding 20% new stores, somewhat offset by the fact that at some point we'll run out of new markets. Right now I think we're 70, 30, 70 in existing stores and 30 in new markets. At some point it'll be 100% in all markets because we just want to have a lot of new stores. But I think the other side of that is our new store productivity will get better because I've seen it here and as well as other companies I've worked at, when you open the second half of stores. So in Houston, for example, the first five stores did good, but the second five stores did incredibly good. Same thing in Dallas, Atlanta, Phoenix. So I do think our new store productivity over time will hopefully improve as we open more stores in these existing markets where they've got better brand recognition, more convenient for the pros, more people know where you are.
spk21: And the next question comes from the line of Stephen Forbes with Guggenheim Securities. Please proceed. Good evening.
spk16: Trevor, I think you mentioned installation materials. I was curious, maybe we could just focus on that with my question on how you're sort of thinking about what the right penetration in terms of the opportunity is and how penetration sort of varies across the store fleet today. And if there's anything in particular, right, that you sort of seen as a driver of success, right? And maybe those stores that have the highest penetration today.
spk03: Yeah, I mean, I think it's a lot of heavy lifting by the merchandising team and the store operations teams. We made some very dedicated strategies going on two years ago now, Ersan, where we brought in some of the best brands. That's the one part of our business where brands matter. So we brought in two of the best brands that are out there for installation and setting type products that really matter to the pros. We increased our in-stocks so that they could have confidence that we were in there. that we have the in-stock jobs when they need it. We got our pro teams some really good reporting on where we were under-penetrated with pros, and so we have exceptional CRM data that is at our hands of our pro devs, so they can see this pro is at 17% of installation. Our best pros are at 25% to 30% installation. So I think it's a lot of work that our store operations and our merchandising teams have done I don't know that it will ever get there, but we understand the industry, it's roughly almost 25% of the total sales are installation materials. When you put our two installation materials categories together, I think we're closer to 20%. So our goal is to continue to grow. It was our best performing category last year. I think it's other than adjacent categories, it's still our best performing category again this year. And so, yeah, we've done a good job there, and we've got more opportunity to continue to focus on that. Thank you.
spk18: Perfect answer. The only thing I would add to your answer is I think A lot of times the purchase of the product and the purchase of the insulation materials occurs at two different times because the end user may make one purchase and the pro makes the other purchase. And I think when we didn't have markets filled out, you had to drive past a lot of home improvement centers to get to a floor and decor. And I think the more floor and decors we have in a market where we take that drive time out of the equation, the more convenient we are for the pros not to drive by five or six other stores to get to our store and we'll sell more. So that penetration should continue to go up.
spk21: And the next question comes from the line of Seth Sigman with Barclays. Please proceed.
spk05: Hey, everyone. My question is on average ticket down 4.2, a little bit better than it's been. You know, over the last few quarters, you've talked a lot about the decline in project sizes. Can you just remind us, where are we in that correction? Are we close to cycling that? And then, you know, I guess the other side of it could be, do you think this could be one of the factors that perhaps is just different for a while in the context of some of the consumer pressures you mentioned earlier, meaning that you just don't go back to where project sizes were in the last couple of years. How do you guys think about that? Thanks so much.
spk18: I'll take the second part of the question. This is Tom. I'll take the second part of the question, and Brian can take the first part of the question. On the second part of the question, I think job sizes will come back to what they were historically. I think our job size today just has to do with As long as existing home sales, the amount of flippers that are out of the market right now, again, there's a good correlation when someone's buying or selling a house. They tend to redo the whole house and flooring versus doing a small project when houses aren't turning over. They'll upgrade a powder bath. They'll upgrade a backsplash. I believe that when existing home sales come back up to that 5 million annualized, that our job sizes will go back to what they've historically been, but it's going to be dependent on that improvement. I don't think there's anything fundamentally changed with the way people buy the category. I think the square-footed drop is just a product of what's going on with existing home sales. So I'll let you answer the other part.
spk10: Yeah, I'll take the first part of this, Brian. So, yeah, I mean, we've kind of bottomed out. Whenever we talked about it all through last year, it was sequentially declining. I think from Q4 to Q1, it was kind of moderated. So I think we've kind of hit the bottom to Tom's point. I think it has to do with the compilation of stay-in-place activity, which is more your small powder bathrooms and things like that, which is why we actually saw a pickup in tile as well, if you look at our categories. Some of the bigger projects is more your laminate and vinyl and other things that we've alluded to, and so I put stress on that category. So I agree with Tom. As we see a pickup in size, you also should start to see that in our laminate vinyl categories and wood categories that go in some of these bigger rooms as well.
spk21: And the next question comes from the line of Justin Kleber with Robert W. Baird. Please proceed.
spk15: Hey, good afternoon, guys. Thanks for taking the question. Just wanted to ask more of a hypothetical one as it relates to pricing and gross margin. If some of the mom and pops or even your regional competitors start to get more aggressive with price, would you feel the need to maintain a similar price spread or are your gaps so wide today that you would be comfortable not necessarily responding if pricing in the industry does get irrational.
spk18: Thanks. Look, I think the independents, I think they're aggressive. I think they've been aggressive, and I think our spreads are good against them. If they start getting more aggressive, we'll be able to deal with that. Our local managers, they're responsible for price. So if they've got an independent that's aggressive, they have the ability to change their price and bring their prices down to react to that competition. So our gross margin improvements have been coming from better supply chain costs, the merchants are doing a better job on getting costs from the suppliers. Our mix is benefiting our gross margin, so there's a lot of other ancillary pieces that are helping that gross margin improvement. So I feel good about the spread versus the competition. If we have an independent that gets even more aggressive or irrational than our store managers, they have the authority and autonomy to deal with it, and they do.
spk21: And the next question comes from the line of David Bellinger with Mizuho Securities. Please proceed.
spk09: Hey, great. Thanks for the question. As a follow-up on gross margins and just the cadence, should we still expect a sequential improvement through the year? And second, if total revenues and comps were to trend towards that low end of the guidance range, can gross margins continue to move higher? Are those metrics decoupled in some way, just given some of the underlying initiatives and positives you just mentioned a minute ago?
spk10: Yeah, this is Brian. I'll take a stab at it, and then Trevor and Tom can jump in if they need to. From where we sit today, we still feel good about the high end, which is 42.8. Obviously, we just came off of Q1 of 42.8. You could see slight improvement from there. The one caveat to that is we still need to sit back and think about what the impacts could be to the Baltimore distribution center that we have, and so that's one of the things that we're looking at that could be a headwind to those. But we still feel good about the high end, and so you could see it step slightly higher than what we alluded to in the 42.6, 42.8, but I wouldn't expect meaningful improvement from there.
spk21: And the next question comes from the line of Greg Melich with Evercore ISI. Please proceed.
spk19: Hi. Thanks, guys. I'd love to follow up on what gets comps better through the year. I think you said that you thought both traffic and ticket would get better. So I'd love to know what, if transaction counts are going to go from negative seven to flat, what existing home sales do you think would need to be there to get that? And then on the ticket side, how much of the expansion from negative four to flat is that project size or is it a mixed shift or deflation turning to a little bit of inflation? Just help us give a little more guideposts on those two factors.
spk10: Yep. This is Brian. I'll take a stab at it and then, again, Tom and Trevor can jump in if they need to. Majority of it is actually just your compare. So the majority of the expectation of the improvement quarter over quarter is on an easier compare. When it comes to transactions, there is a slight improvement needed from existing on sales. So if you're asking that without pinning down an exact number, you need it to at least maintain where it is today coming off of Q4 and then slightly improvement. If you remember, the original guide was around 4 million units to 4.3 million. And so I would say to be flat to slight improvement in transactions, you'd have to see things get slightly better from where they are today as we exit the year. And again, we'd have to have that tight correlation as well. We alluded to it earlier, but one of the disconnects that could happen is if spending is harder on discretionary spending for consumers, if they're pressured, you could see that lag actually, you know, kind of fan out a little bit more and take more than that three months. And so that's one of the things is we need the lag to stay compressed to that kind of two to three months, and we need slight improvement from there. Average ticket is really just the strategic retail reductions we took last year, we're lapping those. And so that is the biggest thing that that's going to happen for us as we get throughout the year, that should help us get back to that flat. It's not going to take a lot in the project size, maybe just a little bit of improvement there, but not a lot for us to get back to kind of flatten Q4 average ticket.
spk08: Yeah.
spk03: Like Q1, we were down nine, nine or call it 10% in transactions last year. By the time we get to Q4, we go down to 4.9. So as Brian mentioned, we do get easier comparisons. And our thesis when we originally gave guidance that we didn't really change in this one is that existing home sales would continue to improve throughout the year. So we are expecting the macro to help us some and then going up gives us easier comparisons.
spk21: And the next question comes from the line of Seth Basham with Red Bush Securities. Please proceed.
spk00: Thanks a lot and good afternoon. My first question is if you guys have any updated thoughts on price elasticity related to those retail price reductions. Any changes in your viewpoint there?
spk18: We're always testing. We'll drop prices on a product or a product category and across the flooring categories themselves. We don't see much of an improvement when we do it or a consistent enough improvement to where we'd say, all right, that's automatically going to be beneficial. We do see benefits in the installation materials category. When we take prices down, we have taken prices down in installation material. Penetration's gone up. That's a product that is brand recognition. It's easier for the pro to compare, and they buy it on a weekly basis. So we know that that one's a benefit, and we'll continue to drive that category meaningful throughout the year. And we won't stop testing. We're always testing and adjusting prices and kind of seeing if we can get benefits in one direction or the other. But we just haven't seen enough benefit. Our spreads versus the competition are significant enough that lowering the price usually just transfers a customer from one SKU to another in our store versus changing the volume of the store.
spk21: And the next question comes from the line of Robbie Ohms with Bank of America. Please proceed.
spk17: Oh, hey, guys. Maybe a follow-up on that question. I think last quarter, well, this quarter you kind of talked about, you know, the opportunity buys and deals of the week and value at the front of the stores and things. You know, last quarter I think you guys said you were still seeing the consumer leaning towards better and best. Is that still the case?
spk18: Yes. Same trends, customers, when they're buying, they're still leaning towards the better and best products across all of our departments. So it's when they're opting to do the project, they're getting what they want. Now, look, we're a company that's positive its whole life, so we're trying everything, and that's why you go in the front of the stores. We're staying aggressive at the front of the stores that are opening price points. We're doing everything. trying to make deals, trying to get customers to engage and close on sales. And we'll continue to do that. We'll continue to stay aggressive and try to drive that message. But the fact is, when someone is doing a flooring job, they're still stepping up to the better and best.
spk21: And the next question comes from the line of Chris Bottiglieri with BNP Paribas. Please proceed.
spk08: Hey, guys. Thanks for taking the question. This is a cost question. So if your whole existence, you've been a growth company, So imagine this downturn, you know, has been filled up the stomach internally. Can you talk about the ways you've taken costs out of the business or slowed investment as sales have declined? How do we think about incremental SG&A when existing home sales does return to normal and comps go up? Like, is there a rule of thumb we could think about when, say, comps go up 10? What does SG&A do in that scenario? Yeah.
spk18: If comps go up by 10, we're going to float through incredibly well because if we've learned anything, we have taken costs out. We have been much more aggressive across every line of our P&L trying to execute upon a plan when sales aren't working in our favor. And we don't plan on adding back. You'll add back some costs as sales go up, but in general, we should flow through incremental sales pretty well.
spk10: And just as a reminder, we're in a typical time period where 55% fixed costs, 45% variable within the stores, that's going to drive a lot of that flow through as well.
spk03: call structure's gone down, our gross margin rate's gone up, so our flow-through should be better than start positive comping.
spk21: And the next question comes from the line of Jonathan Matuszewski with Jefferies. Please proceed.
spk11: Good evening, and thanks for squeezing me in. Just a question on your most valuable pros. I think you mentioned the top 20% of pros were increasing their order frequency year over year. So maybe just if you could elaborate on that. Presumably they're more integrated into your ecosystem with, you know, pro premier and training classes and designer services, but maybe beyond that, you know, what are you hearing from those pros? Do they skew to a certain region? Any more color you can give us on, on what's driving them to actually increase transactions with you year over year. Thanks.
spk03: Sure. There's a significant component of that successful pro strategy that's frankly just relationship and making sure that pro is taken care of in a way that they're not being taken care of somewhere else. All of the other ancillary services that we have are good and sort of the flywheel approach is they add features and benefits to why they would shop with us. I just think it has a lot to do with the relationship and making sure we take care of that pro in a way that nobody else does is probably the most important aspect that we call out for those pros. Because we have good technology and just good business practices, we know who those pros are and we do an exceptional job of taking care of them.
spk21: And our last question will come from the line of Joe Feldman with Telsey Advisory Group. Please proceed.
spk07: Hey, guys. Thanks for taking the question. It was actually somewhat similar to what Jonathan had just asked, but I wanted to take a different approach in terms of the other 80% of the pros where You know, I feel like that's a little bit of a change from the last call or two where pros had been holding up pretty well as a broad category. Now you're kind of isolating it to the best pros that are holding up. I'm just curious what you're seeing and hearing from those other guys. Presumably it's just more of the same, like it's just, you know, people aren't doing projects. But anything you can share on that?
spk03: We do hear that a lot. I mean, there's just not as much business out there. Again, we're the best performing of all the businesses. We'll see what everybody reports, but historically we've been the best performing by a long shot. We went from having sales up in the mid to low single digits for most of last year to actually having total sales be lower. Our pros tell us they're just not having as many jobs. Steve and I, our head of store operations, we were in a store and They were talking about how they were doing plumbing work and doing fences and other things just to stay busy during this period of time. There's just less flooring work to be done in this environment where existing home sales are down 40% from the peak.
spk18: Look, I appreciate the good amount of time for question and answer today. We appreciate that. We appreciate all of your interest. We look forward to giving you a more thorough update as we get to the end of this quarter. Thanks, everybody.
spk21: Thank you. This concludes today's conference. You may now disconnect your lines. Enjoy the rest of your day.
Disclaimer

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