Floor & Decor Holdings, Inc.

Greetings and welcome to the Florida Core Holdings, Inc. second 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.

Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's Fiscal 2024 Second 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 Corps 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 understand better 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.florindecor.com. A 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.

Thank you, Wayne, and everyone for joining us on our fiscal 2024 second quarter earnings conference call. During today's call, Trevor and I will discuss some of our fiscal 2024 second quarter earnings highlights. Then Brian will provide a more in-depth review of our second quarter financial performance and share our thoughts about some of our updated outlook for fiscal 2024. Our fiscal 2024 second quarter total and comparable store sales were modestly below our expectations. However, our gross margin rate exceeded our expectations, which coupled with prudent expense management helped mitigate most of the impact of weak sales. As a result, we were able to report fiscal 2024 second quarter diluted earnings per share of 52 cents compared with 66 cents in the same period last year. We and our industry continue to contend with monetary policy affecting the housing market and repair and remodeling spending, including ongoing soft demand for large project discretionary hard surface flooring. Existing home sales have now declined year over year for almost three years. In the month of June, existing home sales declined 5.4% to a seasonally adjusted annual rate of 3.89 million. the lowest level since December 2023 and one of the lowest readings in 40 years. Housing affordability remains a hurdle for most buyers given elevated mortgage rates and record high home prices. Therefore, we are not seeing the resurgence in hard surface flowing demand that we had expected and believe some sustained mortgage interest rate relief is needed to improve existing home sales and flowing demand. Our revised physical 2024 sales and earnings outlook provided in today's press release reflects this muted market environment. We understand the short-term challenges current market conditions pose and are adapting our strategies accordingly. We remain committed to executing strategies that we expect to help us continue to grow our market share while diligently working to manage our profitability and maintaining a strong balance sheet. We opened five new warehouse format stores in the second quarter of fiscal 2024, ending with 230 warehouse stores and five design studios compared with 203 warehouse stores and five design studios in the same period last year. For the full fiscal 2024 year, we now plan to open 30 new warehouse stores compared with our prior expectation of 30 to 35 stores. Looking forward to fiscal 2025 and considering current market conditions, We believe it is prudent to slow our new store opening pace to approximately 25 new warehouse stores. We are pivoting most of the new store openings to larger existing markets where our brand awareness is higher. We believe this increases the likelihood of successful store openings and a challenging housing backdrop. In fiscal 2025, we intend to focus on opening warehouse stores with the highest potential for success in this weak environment, thus maximizing our return on capital. As Brian will discuss in more detail, we are using this period as an opportunity to better align sales projections and capital spending growth within the current environment. These actions have enabled us to reduce our fiscal 2025 capital investment per new store and increase the expected return for this class of stores by more than 200 basis points. As a reminder, Most of the growth in capital spending per new store over the past few years reflects significant industry-wide increases in new store construction costs, a strategic decision to increase the number of self-development projects, which raised capital spending per store but lowered rent, and our entry into the Northeast where all costs are higher. Our long-term goal of operating 500 stores is supported by our ability to open stores in large, medium, and smaller single-store markets across the United States to maximize our market share and profitability. We believe the slope and timeline of reaching 500 stores will be influenced by when we return to a historical normal level of existing home sales. We are fortunate to have a portfolio of store sizes that we can open to fit market needs ranging from 55,000 square feet to 80,000 square feet warehouse stores. Our ability to successfully operate this range of store sizes is underpinned by executing a local merchandising strategy at scale. Once we determine the market potential and store size, we micro-merchandise a targeted assortment for each store with input from our regional merchants, chief executive merchants or store managers, and market analogs to optimize sales, and inventory productivity. We are not peanut butter spreading our assortments across the country. In fact, we see further opportunities for customer segmentation to drive assortment decisions to widen our competitive moat. In smaller single-store markets where our annualized sales per store could be less than larger markets, we are able to implement less costly labor and new store construction models. We can reduce our store footprint and skews without compromising our merchandising assortments or the customer experience. Because these markets are generally less expensive than larger markets, it's easier to operate. We believe we can generate internal rates of return that exceed our weighted average cost of capital, making them attractive markets. We are pleased that the market demographics for these potential stores we plan to open in fiscal 2024 and 2025 have higher average household incomes and higher ownership rates than our 2023 store class. Collectively, we expect our planned openings to further solidify our market share and position us for strong growth when industry fundamentals improve. Before turning the call over to Trevor, I want to express our pride in our teams. Their hard work enables us to sustain customer service scores and engagement that are near all-time highs. and to successfully manage our profitability, liquidity, inventory, and capital spending during this challenging period. By doing so, we can position ourselves to continue growing our market share and make significant strategic growth investments towards our long-term goal of operating 500 warehouse stores in the United States. We currently intend to re-accelerate our new store opening cadence as well as generate healthy operating margin expansion and earnings growth