Floor & Decor Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 15 speakers on the call.

Operator

Hello, and welcome to the Floor and Decor Holdings, Inc. 4th Quarter 2023 Conference Call. It's now my pleasure to turn the conference over to Wayne Hood, Vice President, Investor Relations. Please go ahead, Wayne.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to Floor and Decor's fiscal 2023 4th 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 get started, 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 risks and uncertainties.

Speaker 1

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. We're under Coruscant's 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.

Speaker 1

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. Flooranddecor.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.

Speaker 2

Thank you, Wayne, and everyone for joining us on our fiscal 2023 Q4 earnings conference call. During today's call, Trevor and I will discuss some of our fiscal 2023 4th quarter and full year earnings highlights. Then Brian will provide a more in-depth review of our Q4 and full year financial performance and share our thoughts about some of our financial projections for fiscal 2024. We are pleased to deliver better than expected fiscal 20 23 Q4 diluted earnings per share of $0.34 primarily due to total and comparable store sales that exceeded our updated expectations we communicated on our Q3 earnings call. For the fiscal 2023 year, we delivered diluted earnings per share of $2.28 exceeding our updated guidance of $2.14 to $2.24 per share.

Speaker 2

Throughout the year, we are proud to have grown our market share and effectively managed our profitability, balance sheet, inventory and cash flow while continuing to make significant long term growth investments towards our goal of operating 500 warehouse stores in the United States over time. As Brian will discuss in more detail, we generated $238,600,000 in free cash flow in fiscal 2023. We achieved these fiscal 2023 results despite the headwinds caused by existing home sales declining to a seasonally adjusted annualized rate of 3,800,000 units in December, a decade low as 30 year mortgage rates spiked higher to 8% in October and personal consumer consumption expenditures continue to normalize to services and away from large ticket discretionary goods. Against this backdrop, we executed what we can control in 2023 by opening 31 new stores, successfully executing our sales driving initiatives, strategically growing our gross margin rate by 100 and 60 basis points year over year, maintaining our competitive price gaps, continuing to deliver exciting innovation and newness in our merchandising assortments, and further diversifying our countries of origin to reduce costs and mitigate risks. Importantly, we are prudently managing expenses without sacrificing the customer experience.

Speaker 2

We are thrilled that our customer service scores remain near record high levels and are building on our excellent service scores in early 2024. We are particularly pleased to receive high scores for service, selection and professional staff. These attributes are essential when consumer spending in the category slows, resulting in declining transactions. We find that typically an assisted customer's average ticket is significantly higher than unassisted customers. Achieving and building on these results over any housing related spending cycle requires us to make ongoing commitments to investing in our associates, finding ways to simplify store processes and deploying technology in store and online to provide a seamless customer experience.

Speaker 2

We proudly promoted approximately 15.50 associates and created 2,000 new jobs in 2023. Our commitment to our associates resulted in notably higher associate retention in 2023, which we believe will help us control costs and support our growth for years to come. We believe that by making these long term investments, we will further build our competitive moat and grow our market share. As we look to fiscal 2024 and beyond, we remain focused on executing our key growth strategies.

Speaker 3

We are fortunate that the strength of

Speaker 2

our business model, balance sheet and cash flow allows us to prudently invest in new and existing stores, merchandising growth initiatives, technology and our commercial business in the face of challenging industry fundamentals. As Brian will discuss in more detail,

Speaker 1

we are

Speaker 2

approaching 2024 with continued rigor in our expense and inventory management and prudent discipline in our growth investments in capital spending as we navigate industry headwinds. We have a long history of overcoming challenges with a strong and agile execution. And we believe this period just represents another challenge to overcome in our journey to 500 stores. We will continue to make prudent investments that we believe will well position us for accelerated sales, market share and strong earnings growth when industry fundamentals improve. Let me now turn the call over to Trevor.

Speaker 2

Thanks, Tom. I also want to

Speaker 1

express my appreciation to all of our associates for their unwavering dedication and collaboration towards serving our customers and executing our key growth initiatives. Our fiscal 2023 total 4th quarter sales of $1,048,100,000 were flat compared to the Q4 of fiscal 2022. Comparable store sales declined at better than expected 9.4%, primarily from the successful execution of our sales driving initiatives and cycling past easier sales comparisons. Monthly comparable store sales sequentially improved declining 11.6% in October, 10% in November and 6.7% in December. Regionally, our 4th quarter comparable store sales in the East were the strongest with a decline in the West division improving from the 3rd quarter.

Speaker 1

4th quarter comparable store sales in tile, wood, installation materials and adjacent categories were better than the 9.4% overall comp store sales decline. Within our merchandise assortments, we continue to see ongoing customer preferences towards our better and best price point products where we offer industry leading innovation, trends and styles at an everyday low price. On an annual basis, our fiscal 2023 total sales increased 3.5 percent to a record 4,413,900,000 dollars primarily from opening of 31 new warehouse format stores and growth in our commercial business. Our fiscal 2023 comparable store sales declined 7.1% from fiscal 2022, which is modestly better than our expectations of a 7.8% to an 8.5% comparable store sales decline. As a reminder, we are comparing against fiscal 2022 comparable store sales growth of 9.2% when monthly annualized existing home sales averaged 5,100,000 units and 30 year mortgage rates averaged 5.5%.

Speaker 1

I will now discuss our fiscal 2023 transactions and average ticket. Fiscal 2023 comparable store transactions declined 9.9% in the 1st quarter, 7.1% in the 2nd quarter, 6.8% in the 3rd quarter and a better than expected 4.9% in the 4th quarter. For the fiscal 2023 year, comparable store transactions declined 7.2% compared to a 6.6% decline in fiscal 2022. Our fiscal 2023 4th quarter comparable store average ticket remained under pressure. After growing 7.3% in the 1st quarter and 1.1% in the 2nd quarter, our average ticket declined by 2.8% in the 3rd and 4.7% in the 4th quarter.

Speaker 1

The deteriorating sequential trends reflect the macroeconomic housing headwinds, which created an ongoing drag from customers purchasing less square footage, cycling class retail price increases in fiscal 2022 and the impact of our strategic decision to selectively lower retail prices on specific SKUs. For the fiscal year 2023, our comparable store average ticket increased 0.2%. Turning to our early fiscal 2024 sales trends, our fiscal 2024 Q1 to date comparable store sales are down 12.8%, in line with the 2024 sales and earnings guidance we provided in today's press release. Our comparable store sales declined 14.7% in January, but have improved to a 10.9% decline in February month to date. As discussed in prior earnings conference calls, we expect the first half of twenty twenty four to represent our most challenging sales period as existing home sales could remain below 4,000,000 units and we faced our most difficult sales comparisons of the year.

Speaker 1

Additionally, inclement weather caused us to reduce store hours in many of our stores in January and high wind and rainstorms impacted our California stores in early February. Turning my comments to our Connected Customer pillar of growth, we are pleased that our connected customer strategies resonate with our customers when search interest in the flooring category is down from last year. Our 2023 4th quarter connected customer sales increased 7.6% from last year. As a result, 4th quarter sales penetration increased approximately 160 basis points to 18.7% from 17.1% last year. For the year, connected customer sales increased 9.7% from last year, accounting for 18.7% of our fiscal 20 23 sales compared with 17.4% in 2022.

Speaker 1

We are successfully integrating our processes and technology solutions towards seamless in store and online experience. We see customers who visit our stores and interact with our websites spend substantially more than single channel customers and we plan to continue to enhance these strategies. As we look to 2024 and beyond, we have initiatives intended to drive organic growth to our website and further optimize the customer search experience. These include further improving our website speed and the quality of our website search, adding content to drive inspiration and refining our online merchandising process to drive efficiency. Over time, we will enrich search results by infusing customer shopping behavior to inform personalized results.

Speaker 1

We continue to be pleased with our design services offering. This free service to our homeowners and pros exemplifies how we can drive exceptional customer service through engagement. Engagement leads to high customer satisfaction scores, positive social media comments, meaningfully higher average ticket and adjacent category sales, margin and market share with homeowner and pro customers. We ended fiscal 2023 with 904 designers, including in home designers in select markets. We have plans to continue to grow this team in 2024 and we believe there is a further opportunity for collaboration between our designers and Pro partners to drive sales.

Speaker 1

Furthermore, we are streamlining our processes and performance reporting toward team performance to drive additional sales, productivity and conversion. Our design teams are focused on leveraging the power of our CRM solution where they can prioritize high value sales opportunities from key My Project Quotes to ensure we have consistent, timely and thorough follow-up. Additionally, we are adding installation estimating tools with our partner, Installations Made Easy, Forum Wizard tool to deliver a complete project summary and are making enhancements to our design schedule. Finally, we are reducing friction in customer tender process by adding point of sale registers and a hotline to our design desks. Moving on to our warehouse store format pillar growth.

Speaker 1

Remain excited about the long term opportunity to operate 500 warehouse stores in the United States. We are fortunate that our strong balance sheet and cash flow enabled us to prudently invest in new store growth during an industry downturn. We opened 14 new warehouse format stores in the 4th quarter and 31 1 in fiscal 2023, operating 2 21 warehouse stores and 5 design studios across 36 states. On December 29, 2023, one day after the end of fiscal 2023, we opened our Mansfield, Texas warehouse store. Due to permitting delays, the Mansfield store opening slipped out of fiscal 2023 Q4 into the fiscal 2024's Q1.

Speaker 1

We expect to open 30 to 35 new warehouse stores in fiscal 2024, unchanged from our prior guidance. Most of our fiscal 2024 warehouse store openings will be in large existing markets in the East and the South, where we continue to solidify and 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 and most of those openings will be in April May. We expect the remaining 70% of our fiscal 2024 new warehouse store openings will be in the second half of the year as we continue to face ongoing industry wide construction delays. Because we are not fully booked out in the United States, we believe we can navigate these ongoing construction delays with a flexible range of market openings and store sizes from 55,000 to 80,000 square feet.

Speaker 1

We expect about 25% to 30% of our planned 2024 new warehouse store openings could be in smaller format stores. While these smaller format stores will naturally have lower 1st year pro form a sales than their larger store cohort in larger markets, we believe their operating margins can be as profitable as our existing stores due to their lower costs. Turning my comments to Pro, we probably continue growing our market share with our Pros by embracing a supply house mindset. We believe in buying this mindset with specific strategies contributed to comparable store sales and installation materials growing throughout 2023. In the Q4 of fiscal 2023, tendered sales accounted for approximately 45% of our sales compared with approximately 44% in fiscal 2022.

Speaker 1

For fiscal 2023, pro tendered sales accounted for approximately 45% of our sales compared with approximately 42% in fiscal 2022. Pro sales growth continued to outpace our homeowner sales in the Q4 and the full year of fiscal 2024.

Speaker 3

In fiscal 2024, we expect

Speaker 1

to continue growing our market share with flowing Pros by leveraging our Pro dashboards and CRM tools to drive engagement with new and active Pros. We are continuing to build long term relationships and to accomplish this, we are focused on having our Pro Services Managers or PSMs spend most of their time in the field with a comprehensive measurable plan to drive pro contacts and conversion. To better measure the effectiveness of our PSM's contact journey, we are now providing them with enhanced reporting that will enable them and field leadership to better understand the effectiveness of their contact and closed journey and adjust tactics where necessary. We are also excited about continuing to deepen our relationship with Pro customers by continuing to partner with trade associations to host educational events. We believe providing educational events is increasingly important to PROs as the flooring installation process in certain categories is new and more complex.

Speaker 1

We see a significant lift in sales from PROs attending these events and have plans to expand these events in 2020 4. In the Q4 of fiscal 2023, we hosted 33 educational events and trained approximately 530 PROs. We held 123 educational events in the entire year with compared with 71 in 2022. We look forward to hosting about 145 educational events in 2024. We are continuing to find new solutions to identify pros that may not have shopped with us and are focused on introducing them to our brand.

Speaker 1

We continue to be pleased with the strong sales growth from our regional account managers or RAMS. As a reminder, regional account managers serve customers who require specialized account and project management that can be supported by our stores. For that reason, their sales are included within our warehouse store sales. We ended fiscal 2023 with 60 ramps, almost double our fiscal 2021 ramp count of 32. Let me now discuss our commercial sales.

Speaker 1

We are incredibly pleased with Spartan Services fiscal 2023 4th quarter and full year sales and earnings results, which exceeded our expectations and were accretive to earnings. The leadership team continued to build its national presence by adding 23 incremental A and D and contractor reps, including those from the June 2023 Salesmaster acquisition, ending the year with 86 reps. In 2024, we plan to continue to drive sales and market share growth through opportunistic acquisitions, organic rep growth and boosting rep productivity. We are excited to see Spartan's awareness growing thereby enabling them to attract stronger talent. We also have plans to further integrate Salesmaster to drive synergies and penetrate top MSAs, particularly in New York City.

Speaker 1

Additionally, we are excited to enhance Spartan's core further with proprietary brands, including Community, Cobalt and Umare. We believe these proprietary brands will help grow their market share in healthcare, education, hospitality, homebuilders and the multifamily commercial segments. These proprietary brands exemplify how Spartan is leveraging floor to floor merchants and supply chain teams to design and curate exclusive flooring and wall tile products for commercial specifiers supported by a deep nationally available inventory. Our strategic road plans for Spartan will continue to index them to more economically attractive, less cyclical and price sensitive healthcare and education commercial segments. As discussed in prior earnings calls, we remain excited about the long term commercial market opportunity and our strategies.

Speaker 1

We remain confident that we have the right people, strategies and business model to continue successfully navigating this challenging macroeconomic environment. I will now turn the call over to Brian to discuss our fiscal 2023 Q4 financial results in more detail and share our outlook for fiscal 2024. Thank you, Tom and Trevor. As CFO,

Speaker 3

I take immense pride in how our teams continue navigating the macroeconomic challenges that pose headwinds to our business. Their focused efforts enabled us to sustain market share growth and effectively manage our profitability, balance sheet, inventory and cash flow throughout fiscal 2023 despite contraction in the flooring industry year over year. We achieved a 3.5% increase in sales and generated $803,600,000 of operating cash flow, while investing $565,000,000 in capital, generating $238,600,000 in free cash flow. As we embark on fiscal 2024, we do so from a position of strength and we believe we will continue to grow our market share by executing what we can control. Now let's discuss some of the changes among the significant line items in our fiscal 2023 Q4 and full year income statement, balance sheet and statement of cash flows, as well as our outlook for 2024.

Speaker 3

I'll begin my discussion with gross profit. As discussed in prior earnings calls, we are strategically managing our profitability by focusing on growing our gross margin rate. Fiscal 2023 4th quarter gross profit increased by 1.4% on flat sales from the same period last year, driven by a 60 basis points rise in our gross margin rate to 42.2%. The increase was primarily attributed to favorable product margins from lower supply chain costs. Fiscal 2023 full year gross profit grew 7.6% on sales growth of 3.5% from the same period last year, driven by a year over year increase of 160 basis points in our gross margin rate.

Speaker 3

The increase in gross margin rate can be largely attributed to lower supply chain costs that started in late 2022 and are expected to continue to benefit us into fiscal 2024. Turning to our selling and store operating expenses. Our selling and store operating expenses for fiscal 2023 Q4 of $315,600,000 increased by 12.7% from the same period last year. This growth is primarily attributed to higher occupancy and store expenses stemming from operating 30 additional warehouse stores versus the same period last year, offset by expense reduction in our comp stores of $4,600,000 as we continue to manage expenses. As a percentage of sales, selling and store operating expenses deleveraged by 3.40 basis points to 30.1% from the same period last year.

Speaker 3

This increase is primarily due to operating 30 additional warehouse stores and deleverage in occupancy and other fixed costs, as well as store labor resulting from a 9.4% decrease in our comparable store sales. For fiscal 2023 full year, selling and store operating expenses increased by $160,800,000 or 14.9 percent from the same period last year. The increase in selling and store expenses was driven by $154,900,000 for new stores and $8,900,000 at Spartan, partially offset by a decrease of $3,000,000 in our comparable store expenses. As a percentage of sales, selling and store operating expenses deleveraged by approximately 280 basis points to 28.1% from the same period last year. This increase was primarily attributable to deleverage from a decrease in comparable store sales and new stores.

Speaker 3

Turning to general and administrative expenses. Our fiscal 2023 4th quarter general and administrative expenses of $67,700,000 increased by 31.6 percent from the same period last year. This growth is attributed to investments to support our store growth, including increased store support center staff and investments, as well as additional administrative costs, including higher incentive and equity compensation compared to the same period last year. As a percentage of sales, general and administrative expenses deleveraged 160 basis points to 6.5%, primarily due to deleverage caused by the decline in our comparable store sales. Fiscal 2023 full year general and administrative expenses increased 18.2% from the same period last year.

Speaker 3

The increase was primarily comprised of cost to support store growth, including approximately $23,300,000 for additional staff and $11,800,000 in other administrative costs. Our general and administrative expenses as a percentage of sales delevered by approximately 70 basis primarily driven by the deleverage from a decrease in comparable store sales. Moving to pre opening expenses, our fiscal 2023 Q4 pre opening expenses of $12,800,000 increased 30.8% from the same period last year, resulting in a deleverage of 30 basis points year over year. This increase primarily stems from the increase in the number of new store openings, future stores we were preparing to open and rent and labor expenses incurred related to delays in getting our stores open compared to the same period last year. Moving to interest expense, our fiscal 2023 4th quarter net interest expense was $900,000 decreased $4,400,000 from $5,300,000 in the same period last year.

Speaker 3

The reduction in interest expense is primarily due to lower borrowings under our ABL facility and higher interest income from our interest rate cap derivative contracts. Turning to taxes, our fiscal 2023 4th quarter effective tax rate decreased by 450 basis points to 18.1% from 22.6% in the same period last year, primarily due to increased tax benefits related to stock based compensation awards. Moving to adjusted EBITDA. Our fiscal 2023 4th quarter adjusted EBITDA of $107,800,000 decreased by 24.7% from the same period last year, primarily due to expense deleverage from the decline in our comparable store sales. Consequently, 4th quarter net income declined by 46.4 percent to $37,100,000 and diluted earnings per share of $0.34 fell 46.9% from the same period last year.

Speaker 3

Moving on to our balance sheet and cash flow. We maintain a strong balance sheet that we believe allows us to prudently grow within our existing capital structure even during a period of industry contraction. We are particularly pleased with our working capital and inventory management. As of the end of fiscal 2023, inventory of $1,100,000,000 decreased by 14.4% from the same period last year, generating a positive year over year swing in operating cash flow of $478,300,000 In fiscal 2023, our capital expenditures, including capital expenditures accrued at the end of the period, totaled $566,300,000 compared with $486,000,000 during the same period last year. And within our most recent guidance range of $550,000,000 to $575,000,000 Consequently, we are pleased to have delivered $238,600,000 in free cash flow and had no borrowings under our ABL facility at the end of fiscal 2023.

Speaker 3

We believe this leaves us well positioned for 2024. We ended 2023 with $752,800,000 of unrestricted liquidity, consisting of $34,400,000 in cash and cash equivalents and $718,400,000 available for borrowing under the ABL facility. As Tom mentioned, we have continued diversifying our countries of origin to reduce our inventory costs and mitigate risk. In 2023, we successfully sourced products from 26 countries compared to 24 countries in 2022. Importantly, in fiscal 2023, approximately 25% of the products we sold were produced in China compared with approximately 50% in 2018.

Speaker 3

We now proudly source approximately 23% of our sales from products that are produced in the United States. We anticipate our continuing diversification strategies to provide a tailwind to our gross margin rate in 2024 and beyond. Relatedly, we don't believe the attacks on cargo ships moving through the Red Sea will have a material impact on the flow of our international shipments or ocean shipping cost in the United States. Fortunately, only a few of our international shipments are routed through the Red Sea. For shipments that can bypass the Red Sea, we increased the lead times from these origins to account for the added transit times around the Cape of Good Hope in Africa.

Speaker 3

Additionally, we have multi year contracts with some of the world's largest shippers, with staggered contract end dates to manage our cost and mitigate risk. We are not experiencing capacity issues or facing any material cost increases at this time. Global demand is weaker and ocean carrier capacity is larger than during the COVID-nineteen pandemic period, further reducing the risk of supply chain impacts. As a reminder, our business is not highly influenced by seasonality or subject to promotional sales and we are in a very good inventory and cost position. Let me now discuss some of the assumptions behind our fiscal 2024 sales and earnings outlook.

Speaker 3

There remains considerable uncertainty and debate about when existing home sales and hard surface flooring spending will return to year over year growth. The discussion largely hinges on the direction and absolute level of 30 year mortgage interest rates, housing affordability and spending on large ticket discretionary durable goods. While we are pleased that 30 year mortgage interest rates have moved lower from the most recent peak of around 8% in October of 2023, they remain elevated. Moreover, it now appears that the pace of potential interest rate cuts in 2024 could be slower and more second half weighted than forecasters previously expected following the recent CPI and PPI report. Therefore, we are prudently planning for continuing headwinds in existing home sales, repair and remodel spending and industry growth that is likely to put continued pressure on our business.

Speaker 3

Taking all of these considerations into account, we provided a slightly wider range of potential earnings outcomes in fiscal 2024. As a reminder, every 100 basis points change in comparable store sales compared with our plan impacts earnings by about $0.10 per share. Over the long run, we remain excited about the well documented structural opportunities in repair, remodel and flooring spend, including housing demand that exceeds supply and an aging housing side. We still see a path to achieving our long term goal of mid to high teens adjusted EBITDA margin. Turning to our fiscal 2024 outlook.

Speaker 3

Our fiscal 2024 sales are expected to be in the range of 4,600,000,000 dollars to $4,770,100,000 and increased by approximately 4% to 8% from fiscal 2023. For fiscal 2024, our comparable store sales are estimated to decline 2% to 5.5%. We expect our comparable store sales to be the most challenged in the first half of fiscal twenty twenty four with the Q1 comparable store sales likely declining low double digit. We expect to be flat or return to growth in our comparable store sales in the Q4 of 2024. We are using the assumption that existing home sales sequentially improved throughout the year and exit at approximately 4,300,000 units in Q4 of 2024 in our high end outlook and remaining around approximately 4,000,000 units in our low end outlook.

Speaker 3

For fiscal 2024, we estimate our comparable average ticket to decline low single digits and estimate our comparable transactions to decline mid to low single digits. We expect sequential improvement in both comparable average ticket and comparable transactions throughout the year. We expect our fiscal 2024 sales to continue to be impacted by lower new store productivity due to the trend environment and a back end loaded store opening cadence. We expect continued sequential year over year gross margin rate expansion throughout 2024 from the Q4 of fiscal 2023. We estimate the Q1 of fiscal 2024 to have the largest sequential and year over year gross margin rate increase.

Speaker 3

We anticipate our full year fiscal 2024 gross margin rate could approximate 42.6% to 42.8%. In fiscal 2024, we expect our selling and store operating expenses to approximate 30% of sales at the midpoint of our 2024 outlook. The year over year deleverage and expenses from 2023 is primarily attributed to the decline in our comparable store sales. We expect the Q1 to be pressured to be the new store openings late in 2023 as well as the decline in comparable store sales. Additionally, the Q4 will be pressured due to most of our new store openings on late in the Q3 and 4th quarters of 2024.

Speaker 3

We estimate fiscal 2024 general and administrative expenses to be approximately 6% of sales, slightly above 2023. The expense deleverage is caused by the decline in our comparable store sales and incentive and equity compensation recapture. Fiscal 2024 preopening expenses are estimated to be approximately 1% of sales and flat to 2023. Fiscal 2024 interest expense is expected to be approximately $12,000,000 to $14,000,000 The increase over 2023 is primarily due to an increase in borrowings under ABL facility and interest rate increases. We estimate our fiscal 2024 adjusted EBITDA approximately decline by 5% or grow by 2% to approximately $520,000,000 to 560,000,000 dollars Our adjusted EBITDA margin rate is expected to be approximately 11.3% to 11.7%.

Speaker 3

For fiscal 2024, diluted earnings per share are estimated to be in the range of $1.75 to $2.05 Diluted weighted average shares outstanding is estimated to be approximately 109,000,000 shares. Moving on to capital expenditures. Our fiscal 2024 capital expenditures are planned to be in the range of $400,000,000 to $475,000,000 compared with 566,300,000 dollars including capital expenditures accrued at the end of the period in fiscal 2023 and to be funded primarily by cash flow from operations and borrowings under our ABL facility. More specifically, we intend to make the following capital expenditures in fiscal 2024. We intend to open 30 to 35 warehouse format stores, relocate 2 stores and begin construction on stores opening in fiscal 2025.

Speaker 3

Collectively, these investments are expected to require 315,000,000 dollars to $365,000,000 We plan to invest in existing store modeling projects and distribution centers using approximately $60,000,000 to $75,000,000 And finally, we plan to continue to invest in information technology infrastructure, e commerce and other store sports center initiatives using approximately $25,000,000 to $35,000,000 In closing, the resiliency of our business model has demonstrated our ability to grow our market share in the face of uncertainty during a period of industry contraction. On behalf of the entire executive team, I want to express our gratitude and extend a personal thank you to our associates. Operator, we would now like to take questions.

Operator

Thank you. Our first question is coming from Michael Lasser from UBS. Your line is now live.

Speaker 4

Good evening. Thank you so much for taking my question. One of the pieces of feedback that we've been hearing is that Floor and Decor had been overly optimistic about the depth of the downturn that the flooring category was going experience heading into 2023. So what did you learn and why is it different that you're not being overly optimistic this time to expect that your comps are going to flatten out or turn positive by the Q4 of this year?

Speaker 1

Michael, this is Trevor. I would say, we certainly are not prescient. We take in all the data we can with our own internal resources and then we also look at the economists. And last year around the same time, people were expecting interest rates to go down and existing home sales to increase. And that is expected to happen again and it started to happen a little bit on the mortgage rate side.

Speaker 1

And I guess a slight bit of good news on existing home sales today coming in at $4,000,000 versus $3,700,000 but that didn't happen last year. Things just kept getting worse, the Fed was more aggressive and mortgage rates kept going up and existing home sales just kept getting worse. So that's the big difference from last year. This year we'll see if those macroeconomic factors are correct. But assuming mortgage rates do continue to come down a little bit, they were 8% not that long ago.

Speaker 1

I think they're just under 7% today. And again, it's only 1 month, but we had a slight improvement in existing home sales that got published today. If that continues to happen, we think that will give us a better backdrop. When we final thing I'll say is, when we compare our performance versus others in the flooring sector, even though our earnings were down about 18%, they appear to be materially better than anybody else who performed. So in a difficult environment, I think we performed well.

Speaker 2

Yes. I would say the only thing I'd add is that I think we're being a little bit more conservative than we were last year in our approach in existing home sales. So we're still expecting them to get a little bit better by the time we end the year as an evidence in Brian Langley's prepared comments. But I think last year we were more optimistic that the interest rates were coming and it would be better And we're not anticipating that as much this year.

Speaker 4

Got you. My follow-up question is on Floor and Decor's market share, especially in more mature markets or more mature locations. What evidence do you have to point to, Fluor and Coors market share trends? I think there's some debate about what's happening within those markets and how that is influencing the productivity of some of the more mature Floor in the locations? Thank you.

Speaker 5

Hey, Michael. This is Brian. I'll jump in first. So we believe that we're still taking accelerated market share,

Speaker 3

same way we were in 2022. Historically, we

Speaker 5

were taking about one point of market share across the industry. And so in the past 2 years, we think we've taken anywhere from 150 to 200 basis points of market share. I mean, we feel really confident and really good about our mature markets that we're in today and we're still gaining share with pros and still getting share of wallet there. So we're still getting traction in even our most mature markets versus our new ones. The only thing

Speaker 1

I would add, if you look at our larger competitors that are 30% of the industry, from what we can tell, we're meaningfully outperforming them. And when you look at the 3 or so public companies that are also selling flooring, we're meaningfully outperforming them. And so from everything we can tell, we're growing at a much faster rate on the residential side and then on the commercial side, which is small for us, but still on the commercial side, we're growing that business pretty fast right now. Thank you very much. I appreciate it.

Operator

Thank you. Next question is coming from Simeon Gutman from Morgan Stanley. Your line is now live.

Speaker 6

Hey, good afternoon guys. I wanted to ask an oldie but goodie, the decremental margin question. Brian, you said, I think you said $0.10 for every point of sale. We were getting a little bit less meaning we're getting like 25% on the way down. Curious if that's about right.

Speaker 6

And then and if that's right, maybe because you're getting good gross margin expansion. And does that mean the incrementals on the other way actually could be bigger within what they've been historically?

Speaker 3

I think within the guidance range, it's pretty close to that $0.10 think it just depends on

Speaker 5

how far you are outside the range, which would dictate that because then obviously your incentive compensation and other things tend to slope differently. So it really depends on how far you are from the plan that will drive that. So I think last year we were just so far from the original plan that the flow through was a little bit different. This year, as we look at as we set the plan, that's why I say it's versus kind of the way we plan it. We feel pretty good about that $0.10 on the up and downside.

Speaker 5

But once you get outside a normal range, then it does start to deviate a little bit from there. It can move anywhere from $0.10 to $0.12 to $0.13 but it's not like it moves to $0.20 So you're right, you can have margins up or down anywhere from 35 percent flow through to kind of 30%.

Speaker 6

Okay. And then a follow-up is on the CapEx. The number is a bit lower on roughly the same store number of stores was much higher, I think 4 to 4.75 versus the 560 last year. So my question is, first getting to the 500, did that always like have an asterisk for maybe smaller stores or does the smaller store get you to even a bigger number now?

Speaker 2

No, we always had I'll take that I'll take a stab at that. We always had in our plans that there would be 3 different store sizes. We've got and we already operate today. We have stores that operate under all of those sizes today. So it was always in our assumption that in some of the single markets that we single store markets we operate in, the stores could tend to be smaller.

Speaker 2

And then there's places where you can only fit a small store. So we prefer the bigger ones, but if we're going into inner city places, it's sometimes it's hard to get. So smaller stores have always been in that assumption of 500 stores.

Speaker 3

And then, Sumit, I'll just jump in and tell you

Speaker 5

a little bit on the CapEx guide. Majority of the reduction is actually spend for the future class. There is a little bit tied to the type of store we're opening as well. We have our ground up leases versus our second use facilities. This year, we've got a little bit more second use facility.

Speaker 5

I think it's about 60%, whereas last year we were 60% ground up. And so that's a little bit of the change

Speaker 3

as well. So it's a little bit

Speaker 5

of the class of 25 spend that will happen this year versus what we've done in the past as well as kind of the type of facility. Another thing that I want

Speaker 3

to talk about as well

Speaker 5

is we communicated previously that we would have a spend for our Northwest Seattle distribution center. We've been able to actually push that out without any sort of effect to our operations. So you'll see

Speaker 3

it just a little bit

Speaker 5

of spend this year where we had previously communicated you would see spend for a distribution center as well.

Speaker 6

Thanks everyone. Good luck.

Operator

Thank you. Next question is coming from Zach Fadem from Wells Fargo. Your line is now live.

Speaker 7

Hey, good afternoon. So first one for me on store OpEx. As I think you said a quarter ago that a small percent of your stores were on minimum hours. And I'm curious, first of all, where are you with that today? And then for 2024, is the game plan more about managing the stores to maintain a level of profitability or do you balance that with keeping the store staffed to drive growth when the category inflects?

Speaker 1

Yes, I think we're still in about a quarter of our stores today are at minimum hours in this environment. And we've obviously evaluated that and done some changes to what the minimum hours are this year. I think on the let me say it this way, I think at minimum hours for the store, the volumes of stores are doing, we think that's the appropriate amount of hours. And we don't we really try not to go below that minimum Just when you think about the number of hours we're open and the type of product we're receiving and getting it to the floor so we can sell it. So for those stores, if they were to go lower in volumes, we probably would not change their hours because there's just a minimum number of hours it takes to operate a store.

Speaker 7

Got it. And then with existing home sales hovering around this $4,000,000 level today, you mentioned the levels embedded in the 2024 outlook, but curious at what level you would need to see for the business to step back into positive comp territory and to sustain positive comps?

Speaker 2

So I'll take a stab, Brian, you can fill in after the end. I said on previous calls that I felt like existing home sales would have to turn positive year over year. And I think it's when they do that for a sustained amount of time, that that gives us a much better shot of posting positive same store sales growth. So when they turn positive, there's a bit of a lag. It doesn't come instantaneously customers, but there's within the 3 month window, we feel like that those comps could turn positive.

Speaker 5

Yes. If you look at NAR's data, we were below 4,000,000 units starting in September of 2023. So to Tom's point, there's a little bit of lag built in, but if 4,000,000 units or above start to happen around that September timeframe,

Speaker 3

you build in a little bit

Speaker 5

of lag for 2 to 3 months, that's when we should be able to start to see positive comps in the business, which is why you heard me in the pre the pre remarks is, we think we'll start from where we are today or from where we are today, you're probably going to be in the low double digits in Q1 and then turning flat to positive in Q4. That's kind of what's embedded, Zach.

Speaker 1

And I think just longer term, Zach, the high we get on existing home sales is $6,500,000 We're now at a 40 year low of $3,780,000 I think the median is probably $5,000,000 to $5,500,000 So I just think we've got aged houses, we've got a lot of millennials and Gen X that are going to or Gen Z that are going to come in and need homes. And so as we get past this time, assuming mortgage rates continue to come down, this is going to be a really good sector long term.

Speaker 3

Thanks for the time, guys.

Operator

Thank you. In the interest of time, we ask that going forward, you please limit yourselves to one question. Our next question is coming from Stephen Forbes from Guggenheim Securities. Your line is now live.

Speaker 8

Thanks, everyone. Trevor, maybe I'll just focus on a follow-up to your response right there. A lot of sort of just debate about what the sort of post recovery comp profile looks like inclusive of cannibalization and then also just your relative strength in the end market. So anyway to help frame like what you think the comp profile should or could return to if we get back to a more normalized macro with $5,500,000 existing home sales? Is this still based on your relative positioning in the business in the industry like a mid to high single digit comp story or has something changed?

Speaker 8

Would love to just hear how you guys are thinking about the next 3 to 5 years here?

Speaker 1

Yes. I think if we got back to 5.5 depending on how fast we got there, I mean that would be a pretty big lift to us. Obviously, that would be fantastic. We would love that. I think the things we've done throughout the last certainly 13 years that I've been here have positioned ourselves to be even better.

Speaker 1

And again, when we compare ourselves just financially comparing ourselves to our peers, our performance pretty meaningfully outperforms. What Arsan and team have done with the assortment and Steve on the operations team, marketing, the way we handle our website, I mean all of those things as you heard in my prepared comments, we continue to invest through the cycle. So I think our competitive position is as good as it's ever been as a category killer. And when it turns, we're in great shape. I think the other thing, short term, when it actually turns, we're in the best in stock levels we've ever been in.

Speaker 1

So we've seen that happen in my 13 years here when business gets strong and we have really good in stocks and a really good curated assortment at local at the store level, then we'll take off like a rocket. We just we need something to happen in the macro to help store those consumers to come in and buy from us.

Speaker 2

I would say the only thing I'd add, Mike, with everything you said. I think the only thing I'd add is we've also because we stayed on track with our strategy and continue to open stores during a really difficult market that we've got a batch of new stores that should give us a really nice lift that they as the market recovers because they started off slow, we should get an incremental lift from those stores.

Operator

Thank you. Next question is coming from Steven Zaccone from Citi. Your line is now live.

Speaker 9

Great. Good afternoon, everybody. Thanks for taking my question. I wanted to ask about unit opening plans for 2025. So I think last time you guys spoke to us, tough to make changes to 24% in a short timeframe.

Speaker 9

But as you think beyond the next 12 months, if we're in an environment where rates maybe stay a little bit elevated, is that a concern that maybe you should pull back on some unit openings?

Speaker 2

So I will take that question. 2025 is a long ways away. So we're not quite prepared to talk about our store opening plans then. But I would just say that it's going to depend on a lot of will depend on the macro environment and where existing home sales are falling. And if we're seeing an increase year over year in existing home sales, then we remain confident in opening our stores as long as the return on investment continues to look like it has historically.

Speaker 2

So we'll watch how this year goes. Today was an encouraging sign with existing home sales in their release. It was encouraging. We hope that that continues. And as we get to the middle part of the year, we will have plenty of time to look at our store count as we get to the middle part of this year and we'll know more of that.

Speaker 1

The only thing I'd add to Tom, this year I think close to 75% of our stores are in existing markets. And as we grow, we're going to have more of that because there just won't be as many new markets. And we have a much better understanding and conviction on what our return on invested capital and our returns are at our existing markets just because when you open your 7th store at a market or your 10th store at a market, there's much less guessing versus when you have to go to a new market. And so we would always take that into consideration. If indeed things aren't as good and it's more difficult, the places we would consider possibly pairing back, which again, that would be very unusual for the last 100 years of housing in America.

Speaker 1

But if that was true, that's probably where we'd pair back at probably more of the new market because we still get good returns in existing markets and that's where the majority of our stores are going.

Speaker 2

Amit, the final comment on new store openings is all of this nothing changes our view that there will be that we could have 500 stores. So it's just a question of timing.

Operator

Thank you. Next question is coming from Seth Sigman from Barclays. Your line is now live.

Speaker 10

Great. Hey, everybody. I wanted to focus on pricing. It does seem like there is a little bit more noise in the industry around discounts and maybe prices starting to come down. I'm curious what you're seeing, what your strategy is going to be here?

Speaker 10

And maybe just put it in the context of some of the price changes that you've been testing through the year, where does that stand today? Thank you.

Speaker 11

Hi, this is Arasan. The changes we see in the market are not irrational. In some cases, when there is a promotional activity, that's a lower quality or any clearance item could be there too. I mean, we see some price reductions and increase at home centers, but independents did not change much. I mean, as we tested we've been testing the retail changes since last February.

Speaker 11

And as we mentioned in the last quarter, certain products that are served mainly to pros had some return good return and some others, it was inconclusive. And we continue to look at our balanced portfolio and then try to adjust retails as needed. And we feel like our gap against the competition is still good and we intend to keep it that way.

Operator

Thank you. Next question is coming from Chuck Grom from Gordon Haskett. Your line is now live.

Speaker 12

Hi. This is Eric on for Chuck. I had a question on gross margin, but you're expecting a nice incremental improvement this year. So what are the additional drivers driving expansion? And then also just given that the top line has been soft, why not reinvest some of that in the price to drive incremental volume?

Speaker 12

I guess what have you seen on the price elasticity of those parks in which you have lowered prices?

Speaker 2

So I'll take some of that and maybe Ursan can jump in at the end. So yes, we as we've guided, we believe that we can continue to see benefits in gross margin. Some of that will come from continued decreased supply chain costs which burn in over time. Our merchants have also done an outstanding job of negotiating costs. It's a tough market right now.

Speaker 2

So the vendors want to sell product and our merchants are very good at asking for price and they're doing a good job of getting it. And as we've diversified outside of China and found new countries of origin, we've been able to do that at a better gross margin rate. So between that and then the last thing I would say is that the consumer is leaning towards better and best products in our store with blended a higher margin and our designers are impacting more and more of our sales, which end up impacting our margin. All of that turns into we think the margin rates can continue to go down without having to take price. So we feel good about that.

Speaker 2

We do invest back into price. As Ursan mentioned, we've piloted multiple areas of the store where we've taken price down to see what happens with the unit movement. And when we have conclusive results where it works, we continue to do that and we'll continue to focus on that.

Operator

Thank you. Next question is coming from Greg Melich from Evercore. Your line is now live.

Speaker 13

Hi, thanks. I want to follow-up on the ticket progression, maybe it ties in with the pricing and mix question. But if we think about that comp improvement you talked about through the year, it sounds like it's pretty much all transactions and traffic getting better. Would you expect the ticket to sort of be steady through the year? Or would that also have a similar progression as you go through your guidance?

Speaker 1

Let me just weigh in first, I think Brian's got something he wants to say too. When you look at what's going on with our ticket right now being down in the mid single digits, it's really driven by our laminate business, which last year was our largest category And then that's really laminate and vinyl, those are together. That's really driven by people are doing much smaller projects and you have a lot less house flipping, right? When you were 5,000,000 6,000,000 existing home sales, there was a lot of investment that would need to go into those homes and you would do full homes or full floors or things like that. Now what you see is our square footage has come down pretty meaningfully in the double digits because people are doing either their main bathroom or powder baths or things like that.

Speaker 1

That's part of the reason our tile business is doing well and our installation business is doing well relative. So that's probably the biggest driver. That is by far the biggest driver of our ticket is that laminate LVT. And so when existing home sales go back up, which we're optimistic they will and they have for the last 40 years, we would expect that ticket to go back up because hopefully people are flipping houses and they're working on bigger rooms as well.

Speaker 5

Yes. I mean, look, I would just add, you're right. So from the ticket perspective, that's going to drive, but you're right, the majority of the change in our comp is going to be led by transactions. So that's also on the back of existing home sales. So as those start to lap weaker numbers in the back half, it will be a transaction led story, but also ticket will improve throughout the year as well.

Operator

Thank you. Our next question is coming from Robbie Ohmes from Bank of America. Your line is now live.

Speaker 14

Hey, thanks for taking my question. I was curious how you're taking the inventory down so much, what the secret sauce is there. Are you guys reducing SKUs? Are you bringing in a lot less? Are you spreading inventory from existing stores into the new stores, so you can bring in a lot less?

Speaker 14

Is that helping the freight cost situation as well? Like how are you doing to bring the inventory down?

Speaker 1

We have year over year, I think we're high single digit, low double digits in SKUs, Urson, that were down versus last year. But probably more important than that is, again, we weren't prescient, but we saw late last year that the trends didn't look like they were going to improve and we felt like we could take some actions in late 2022 and then early into 2023. We were fortunately right on that and we're able to bring it down. I mentioned, our inventory replenishment team and our merchandising team have done a fantastic job. Even though our inventory is down 14%, our in stocks are probably the best I can remember in a long time.

Speaker 1

And so, yes, our team has jointly managed that this year and that we think when the customer is ready, they're going to be very pleased to come in when we get more traffic.

Operator

Thank you. Next question is coming from Justin Kleber from Robert W. Baird. Your line is now live.

Speaker 8

Thanks and good afternoon everyone. Just as it relates to the smaller format stores as we think about modeling new store contribution in 2024, Any color just how we should think about the year 1 sales of those smaller stores relative to that $14,000,000 to $16,000,000 benchmark you typically talk about, I guess, for an average store?

Speaker 3

They're lower? I mean, shouldn't I

Speaker 1

speak, not always, they're lower, but then we've got stores like we've said, we're going to open a store in Brooklyn, right? And that's obviously going to be we believe a lot higher. We work towards opening that balanced portfolio of stores to get those numbers around $14,000,000 to $16,000,000 is our goal. You guys will notice when you read our 10 ks, we'll just say it now and Brian and I said it both last quarter as well. We're slightly below that goal for the class of 'twenty two, pretty close

Speaker 2

to the low end of

Speaker 1

that goal for the class of 'twenty two. We opened almost half of our class of 'twenty three, so it's probably too early to say for the class of 'twenty three, but we would expect because of the macro environment to be below the low end of those goals at this point. And then again, when the macro comes back, we expect those numbers to get much better.

Speaker 2

Yes. The only thing I'd add is that in a single store market, the smaller stores will be less buying. But if the smaller store is in a normal size market, then the volume is very close to what a normal store would be.

Speaker 5

And as Trevor alluded to in the call, the operating margins can be just as good as the large stores. And so we the profitability is going to be there because a lot of those will have lower cost structures. So your op margin can be just as good.

Speaker 1

We were looking at a couple of stores in Knoxville and Sarasota and a couple of other markets that are pretty small square footed stores, but do 50% above average store volumes. And so we can operate a very productive profitable store small store that is again in this case, these stores are much smaller, but they do way better than the average store. So we're thoughtful and smart about it.

Operator

Thank you. Our final question today is coming from Jonathan Matuszewski from Jefferies. Your line is now live.

Speaker 7

Great. Thanks for squeezing me in and good evening. Just to follow-up on the store opening plan. I know it's early for 'twenty five, but just want to understand again that the smaller store penetration in 2024, is that specific to this kind of macro housing backdrop or do we expect 25% to 30% of new warehouse openings going forward being in that smaller format? Just wanted clarification there.

Speaker 7

Thanks.

Speaker 1

I guess I'd say 2 things. 1, I think we're Brian, maybe in the 10 ks, we say we're around 77,000 square feet to our average store. I think the class of this year, I think it's not that far off of that. So I don't want to make too much of that. We're just trying to be transparent that we are going to be opening more smaller stores than we have a very big store that we're opening in New York that's somewhat offsetting it.

Speaker 1

So I think as we look forward, I don't know that we're going to have a meaningful change because again we're trying to hit that blended average of those new store economics that I mentioned earlier.

Speaker 2

Okay. So, that brings us to the end of the call. I'd like to thank everyone for joining us today. I do have want to take a minute and it's a bittersweet day at Flora Nikkor. We have one of our long term executives, our Executive Vice President of Strategic Business Development and Supply Chain, Brian Robbins, has we announced this a while back that Brian is going to move on to the next chapter of his professional life and personal life.

Speaker 2

And Brian has been here for 13 years or almost it feels like 13 years, not quite, but Brian has been here. He joined right after I did. He has built up an incredible supply chain function at Floor and Decor, built an incredible team. He has led our real estate team in development over the last few years and he was behind our first acquisition that has turned out to be a huge success for us. So Brian is a friend and Brian is going to always be part of the Floor and Decor family, but we wanted to take a minute and wish him well.

Speaker 2

So Brian, we wish you well. I know you'll miss these, but we're appreciative of all your contributions to the company. I'd like to thank all the associates who are listening to the call. Thank all the analysts for your interest in our business. We look forward to updating you on the second quarter call on the Q1 call.

Speaker 2

Thank you.

Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation

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Earnings Conference Call
Floor & Decor Q4 2023
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