Floor & Decor Holdings, Inc.

Greetings and welcome to the Florence Decor Holdings fourth 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 you require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Wayne Hood, Senior Vice President of IR. Thank you, Wayne. You may begin.

Thank you, Operator, and good afternoon, everyone. Welcome to Florida Corps' Fiscal 2024 Fourth Quarter Earnings Conference Call. Joining me on our call today are Tom Taylor, Chief Executive Officer, 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 that 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 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 irflowindecor.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 fourth quarter and full year earnings conference call. During today's call, Brian and I will discuss some of our fiscal 2024 fourth quarter and full year earnings highlights. Then Brian will share our thoughts about fiscal 2025. Let me start by saying how excited we were to announce in January the appointment of Brad Paulson as our new president, reporting directly to me. As many of you know, he will succeed Trevor, who is retiring in March after a remarkable 14-year career with us. We wish him well. Brad brings nearly two decades of relevant experience and will be a valuable addition to our executive team, helping to lead the next chapter of Florinda Corps' growth. Most recently, he served as the CEO of North America for Rent-A-Kill Initial PLC, a global leader in pest control, hygiene, and wellness services. Prior to Rent-A-Kill, Brad was CEO of Rexel USA, a leading electrical parts distributor. He has held the position of Chief Operating Officer at HD Supply and has had various leadership and merchandising roles at the Home Depot. Brad is an accomplished leader with experience in retail, commercial, and service-based organizations. His deep understandings of home improvement, merchandising, retail, and commercial sales and supply chain operations will be particularly valuable to our company. Moreover, his customer service and associate support principles align perfectly with our core values. Let me now comment about our fiscal 2024 fourth quarter and full year earnings results. Our leadership team is proud of our store and store support teams. Despite the challenges we face within hard surface flooring category in fiscal 2024, They successfully executed our sales and customer service initiatives to grow our market share while diligently managing costs. Thanks to their collective efforts, we reported better than expected comparable store sales, earnings flow through, operating cash flow, and earnings per share for the fourth quarter of fiscal 2024. We delivered fiscal 2024 fourth quarter diluted earnings of 44 cents per share, which includes a favorable $6.8 million, or 5 cents per share, net benefit from a derivative litigation settlement in December of 2024. This net settlement benefit was not contemplated in our prior earnings guidance. For the fiscal 2024 year, we reported diluted earnings of $1.90 per share, which includes the 5 cent net benefit from the settlement proceeds. As Brian will discuss in more detail, we are in a strong financial position that allows us to navigate through the short term and at the same time make long-term growth investments during this cyclical downturn in flooring. Specifically, we continue to invest in opening new stores of various sizes in new and existing markets and innovative and trend-forward merchandise, technology, and our associates. This has allowed us to grow our market share despite the industry contracting and prepared us to maximize sales and profitability once the industry's cyclical growth accelerates to historical rates. We take a long-term view when making these investments, as we are optimistic about the secular spending opportunities in hard surface flooring and our adjacent categories. The demand for housing continues to outpace supply, and the 40-year median age of owner-occupied housing is continuing to increase. We believe the supply and demand imbalance in housing and aging housing stock remains a significant secular growth opportunity as older homes will need updates after the past several years of postponed remodeling. Turning to our new warehouse store format growth. December 2024 marked a historic milestone in our company's growth journey. We opened our 250th store in North Seattle, Washington, reaching the halfway point towards our vision of operating 500 warehouse format stores in various size markets across the United States. Over the past three years, we have opened 93 warehouse format stores, including locations in five new states, underscoring our commitment to strategic growth despite the cyclical pressures in our industry. We remain excited about our future sales and earnings growth prospects as approximately 55% of our stores have opened in the last five years, leaving what we believe is plenty of room for growth along the maturity curve. Our commitment to opening new warehouse stores has contributed to our market share growth and positions us well for when industry fundamentals improve. In the fourth quarter of fiscal 2024, we opened 10 new warehouse format stores, culminating in 30 new warehouse format stores opened in fiscal 2024. At the end of fiscal 2024, we operated 251 warehouse format stores and five design studios in 38 states. In the first quarter of fiscal 2025, we have already opened new warehouse format stores in Venice, Florida, and Covington, Louisiana. We plan to open seven new warehouse format stores in the first half of 2025, including Tollerton, Oregon, Kissimmee, Florida, San Antonio, Texas, and two stores in California, Gilroy and Chula Vista. Currently, we plan to open 25 new warehouse format stores in fiscal 2025 and close one store at the end of the first quarter of fiscal 2025. Most of our new stores will be located in existing markets. If macroeconomic conditions are less favorable than we anticipate, we have flexibility to adjust this number downward, as most of these openings are slated for the second half of the fiscal year. We recognize we cannot control the short-term cyclical pressures affecting the hard surface flooring industry and their impact on the first-year sales of our new stores we open. However, we have identified specific strategic actions we can take to maximize their chances for success during this challenging period. In fiscal 2025, we plan to be more intentional about reaching new customers. we intend to emphasize impression-driving media and messaging updates to grow local brand awareness. By taking these actions, we believe we can expand our brand awareness, attract more new homeowners and pros, and create a strong foundation for long-term growth. Moving to our total and comparable store sales, our fiscal 2024 fourth quarter total sales increased by 5.7% from the same period last year, and comparable store sales decreased by a better than expected 0.8%. For the 2024 year, our total sales increased by 0.9% to $4,456,000,000, driven by the opening of 30 new warehouse format stores and growth at Spartan Surfaces. While our fiscal 2024 comparable store sales declined by 7.1%, we saw improvement each quarter, with the fourth quarter being the strongest of the year. Fourth quarter comparable store sales decreased by 0.8%, a notable improvement from a 6.4% decline in the third quarter, a 9% decline in the second quarter, and an 11.6% decline in the first quarter. The improvement sequential sales trend partially reflects long-awaited modest growth in existing home sales. Despite elevated mortgage interest rates, existing home sales rose significantly. for the third straight month in December, the longest growth streak since early to mid-2021. Our fourth quarter average ticket comp increased by 1.3%, the only quarterly increase in fiscal 2024. Our average ticket comp benefited from a favorable product mix and the positive impacts of hurricanes Helene and Milton. Additionally, the enhancements we have made in associate training, including micro-learning sessions, are yielding positive results. The training boosts their confidence in articulating the features and benefits along our merchandising continuum. Fourth quarter, comparable transactions continued to sequentially improve, declining by 2.1% from the same period last year. Breaking down our comparable store sales by month, October declined by 4.8%, which followed an increase of 8.1% in November and a 4.8% decline in December. Adjusting for the Thanksgiving holiday shift from fiscal November to December, comparable store sales for November and December combined grew by 1.2% from the same period last year. We estimate the fiscal 2024 fourth quarter benefit to our comparable store sales from Hurricanes Helene and Milton was approximately 110 basis points. In the first quarter of fiscal 2025, our quarter-to-date comparable store sales have decreased 1.7%. From a regional perspective, we continue to see encouraging comparable store sales trends emerging from our west division, where fourth quarter comparable store sales grew modestly year over year. Our hearts go out to all of those impacted by the California wildfires, which only impacted our San Gabriel and Woodland Hills stores for a few days. Among our merchandising categories, the fourth quarter total sales growth in wood, installation materials, stone, decorative accessories, and adjacent categories increased above the company average compared to the same period last year. The sales growth in these categories reflects successful merchandising initiatives to grow these categories. We expect these initiatives to benefit us in 2025 and beyond. The sales growth in laminate and vinyl and tile were below the company average but showed sequential improvement. In fiscal 2025, we are excited to continue delivering new, innovative products and programs to our homeowners and pros. We will expand our merchandise offerings in adjacent categories, including testing a high-quality, stylish, semi-custom cabinet program at approximately 40 warehouse stores and online in the first quarter. We can now offer online semi-custom cabinets express ship plywood cabinets, cabinet accessories, decorative hardware, and cabinet samples that we can ship to the job site. This initiative helps our homeowners and pro customers complete kitchens and other cabinet projects and is expected to drive incremental sales growth to our stores. Furthermore, we will reset decorative accessories to improve the customer experience and product productivity further. We'll also continue expanding our outdoor and pool offerings and XL slab program. I will now discuss our supply chain and how we expect to manage anticipated tariffs in 2025. First, we are pleased that the International Longshoremen's Association and the U.S. Maritime Alliance reached an agreement in January. As a result, we did not experience any material supply chain disruptions. As we enter fiscal 2025, our merchandise installs are strong. We continue to closely monitor the fluid developments regarding tariffs on products we sell, particularly trade disputes between the US and China. These trade disputes will lead to additional tariffs beyond the previous 25% imposed on most products that we sell that are produced in China. For example, on February 1st, an additional 10% tariff was announced for all products from China. As previously discussed, we have been actively working to mitigate tariff cost pressures over the past five years by successfully diversifying our countries of origin. In fiscal 2024, China accounted for approximately 18% of the products we sold, down from approximately 25% in fiscal 2023 and approximately 50% in fiscal 2018. In the fourth quarter of fiscal 2024, China accounted for approximately 16% of the products we sold. We expect our diversification strategies to continue to meaningfully reduce our reliance on China in 2025 and beyond. We source products made in Canada and Mexico, and the portion of our products sold in these countries for fiscal 2024 was not material. We are proud to report that the United States is now our largest country of manufacture, accounting for approximately 27% of the products we sold in fiscal 2024 up from approximately 20% in fiscal 2018. Regardless of any new tariffs timings and potential impacts, our strategy remains the same. First, we expect to continue negotiating costs with our vendor partners to mitigate the incremental costs. And second, we will continue sourcing from alternative countries where it makes sense. Third, we will increase retail pricing as we deem appropriate while maintaining our price gaps. We believe our scale and worldwide direct sourcing model for more than 240 vendors in 26 countries is a competitive advantage, particularly amongst independent flooring retailers and distributors. Shifting to our connected customer pillar of growth, our fiscal 2024 fourth quarter connected customer sales increased by 6% compared to the same period last year, accounting for approximately 18% of sales. For the full year, Connected customer sales rose by 3%, accounting for approximately 19% of sales. In fiscal 2025 and beyond, we plan to continue integrating our processes and technology solutions to provide an inspirational, robust, and seamless personalized experience across all of our engagement channels. To that end, we are continuing to work towards ensuring continuity between our website and stores. Moreover, We plan to continue improving our website and mobile download speed and visual navigation. We believe we have an edge with visual shoppable content in our online image sets and galleries. These image sets and galleries promote inspiration and infuse project selling throughout the customer journey. We are excited to add more inspiring designer and user generated content in 2025, which will benefit our free design services. In support, we plan to expand our long-form content library by including care guides, refinishing guides, and more in-depth articles. Overall, we expect these strategies, among others, to further improve our brand affinity. In fiscal 2024, we adopted a more convenient confirm-to-pay payment option, which allows customers to provide payment information more conveniently and allows individuals they authorize to finalize the purchase and pick up those products on their behalf. Confirm to Pay is replacing an outdated paper-based process. It has proven to be a successful payment option with high adoption, particularly among pros, making it easier to transact with us. We believe this could slightly pressure our connected customer sales penetration metric as sales shift from point of sale from online and other payment options. However, we better serve our pros and homeowners with multiple seamless payment options. This is just a change in the geography of where and how customers will transact with us. Let me comment on design services. We are pleased to report that design service sales growth significantly accelerated throughout fiscal 2024, with the fourth quarter being the strongest. These results reflect strong transaction growth and our commitment to design services staffing at a time when labor hours were diligently managed. Additionally, our designers are focused on closing high-value design opportunities and building brand awareness and project credibility with homeowners and pros. Consequently, we achieved the highest net promoter score for design services since we began measuring it. In summary, we are successfully executing our strategy of offering homeowners and pros an elevated and personalized design experience across in-store, online, and in-home channels. These combined efforts led to a remarkable year for our design services, highlighting our commitment to excellence and customer satisfaction. Turning my comments to pros, we're pleased to report that the total sales to pros continue to grow in the fourth quarter of fiscal 2024. accounting for approximately 50% of our total sales. Pro-comparable store sales improved sequentially throughout through 2024. These results demonstrate that our grassroots supply house approach is effective, focusing on engagement and nurturing strong relationships with pros. We continue to benefit from partnering with native advertising platforms that provide a practical and cost efficient way to attract and retain new pros. Additionally, we benefit from our pro service managers spending more time outside of our stores and in new zip codes where they directly engage with pros to build brand awareness, understand their needs, and provide tailored solutions. Finally, we successfully held 144 educational events in our stores in 2024 and plan to have 155 events in 2025. We believe these events are industry leading in hard surface flooring, In physical 2025, we'll focus on driving growth among new pros and reengaging inactive pros. Finally, I'll discuss our commercial business. Physical 2024 fourth quarter sales at Spartan Services declined 17.9% from the same period last year. The sales decline is primarily due to weakness in the multifamily residential market, pricing pressures in the commercial LVT market, and difficult comparisons against record dissembled sales at Spartan last year. Collectively, these factors pressured Spartan's fiscal 2024 fourth quarter and full year gross margin in EBIT. In fiscal 2024, Spartan services sales grew by 10.1% to $215.2 million compared to last year, but EBIT declined 25.4% to $14.3 million from $19.1 million last year. in fiscal 2023, primarily due to pressure on the gross margin rate. In fiscal 2025, Spartan will continue to focus on the healthcare, education, senior living, and hospitality sectors. As previously discussed, these are high specification sectors of the commercial flooring market where the opportunity for long-term growth and profitability is greatest. These sectors generally have high quote to conversion rates, recurring revenue, and more attractive profitability. We plan to continue making investments in sales representative growth, particularly in those sectors that are most important to us. Additionally, we plan to continue building out Spartan's infrastructure to support growth at scale and achieve our long-term market share and profitability objectives. The necessary long-term investments we are making will impact Spartan's near-term EBIT with fiscal 2025 EBIT rate expected to be about flat with fiscal 2024. However, they are critical to driving significant market share growth in the coming years. It's important to note that the investment cycle and return timeline in our commercial business differs from what many of you are familiar with within our retail operations, reflecting the distinct nature and opportunities of the commercial sector. Over the long term, Spartan Services aims to become a disruptive leader in the specified commercial flooring industry by establishing a comprehensive nationwide sales network. This network would prioritize high specification products and leverage strong relationships to provide superior availability, delivery, and service nationwide. Let me now turn the call over to Brian. Thank you, Tom.