Floor & Decor Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Floor and 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. As a reminder, this conference is being recorded.

Operator

I would now like to turn the conference over to your host, Wayne Hood, Senior Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to Floor and Decor's fiscal 2024 Q1 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 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. Floor and Decor assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company will discuss non GAAP financial measures as defined by SEC Regulation G.

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 measures can be found in the earnings press release, which is available on our Investor Relations website at ir. Flooranddecor.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.

Speaker 2

Thank you, Wayne, and everyone for joining us on our fiscal 2024 Q1 earnings conference call. During today's call, Trevor and I will discuss some of our fiscal 2024 Q1 earnings highlights. Then Brian will provide a more in-depth review of our Q1 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 Q1 diluted earnings per share of $0.46 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.

Speaker 2

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 touch points, 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.

Speaker 2

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 intelligent tools to drive sales and engagement with inactive and new PROs.

Speaker 2

Additionally, we continue to drive sales with innovative new products like XL Slabs that were added to 17 additional locations in the Q1, 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 lot quantities and providing them with a high level of service across all touch points. 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 26. We know many agencies are working very hard to reopen the channel as quickly as possible and we thank them for their efforts.

Speaker 2

We have a 1,500,000 square foot state of the art distribution center near the Port of Baltimore, one of our 4 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.

Speaker 2

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 open. 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, 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.

Speaker 2

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.

Speaker 1

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 Q1 of fiscal 2024, our sales declined by 2.2% to $1,97,300,000 with comparable store sales falling by 11.6% from the same period last year. As expected, comparable store sales sequentially improved as we cycle 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.

Speaker 1

Our fiscal 2024 second quarter to date comparable store sales declined 9.3% from the same period last year. As discussed in our fiscal 20 23 Q4 prior earnings conference call, we expect the first half of twenty twenty four 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.

Speaker 1

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 Q4 of fiscal 2023, our fiscal 2024 Q1 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.

Speaker 1

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 1st quarter comparable stores average ticket increased by 7.3% and by 1.1% in the 2nd quarter before declining by 2.8% in the 3rd quarter and by 4.7% in the 4th quarter. In the Q1 of fiscal 2024, our average ticket sequentially improved slightly declining 4.2% from the last year as we began to lap 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 Q4 of fiscal 2023, a 6.8% decline in the 3rd quarter, 7.1% decline in the 2nd quarter and a 9.9% decline in the 1st quarter.

Speaker 1

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.

Speaker 1

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 Q1 of fiscal 2024, we saw sequential improvement in organic traffic and connected customer sales increased by 1.1% from last year, which resulted in a 100 basis points increase in the sales penetration to 19%.

Speaker 1

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 Q1 design sales growth was better than the company's overall sales performance.

Speaker 1

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 Q1 of fiscal 2024, we opened 4 new warehouse format stores ending the quarter with 2 25 stores, an increase of 16% from the same period last year. These openings include new warehouse format stores in Mansfield, Texas Summerville, Florida Glen Burnie, Maryland and Augusta, Georgia.

Speaker 1

We have a busy fiscal 2024 2nd quarter opening plan and have already opened 4 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. Fiscal 2024, we anticipate about 30% of our new warehouse store openings will be in the first half of the year.

Speaker 1

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 4th quarter. Turning my comments to pros. The Q1 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.

Speaker 1

Notably, this mindset led comparable store sales in the Q1 for insulation materials exceeding the company average. Consequently, the 1st quarter sales penetration rate for insulation materials increased 200 basis points from last year and 2 20 basis points among the top 20 percent 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 Dashboard and CRM tools to drive engagement with new, inactive and active pros. In the Q1, we launched new tools that will better measure the effectiveness of our StorePro sales managers' contact journey.

Speaker 1

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 Pro's 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.

Speaker 1

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 Q1 of fiscal 2024, we hosted 25 National Tile Contractor Association and 5 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 Q1 sales from our regional account managers exceeded our expectations and then were significantly above last year.

Speaker 1

We ended the Q1 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' 1st 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 Q1 of fiscal 2024 with an 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 homebuilders.

Speaker 1

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 model to navigate this challenging macroeconomic environment successfully. Let me now turn the call over to Brian.

Speaker 3

Thank you, Tom and Trevor. I want to express my gratitude to all of our associates who contributed to our fiscal 2024 Q1 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 $0.46 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.

Speaker 3

Now let me discuss some of the changes among the significant line items in our fiscal 2024 Q1 income statement, balance sheet and statement of cash flows as well as our outlook for the remainder of the year. Our fiscal 2024 Q1 gross margin rate was better than expected, increasing 100 basis points to 42.8%. This was mainly due to favorable supply chain cost and to a lesser extent product cost. 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 Q1 selling and store operating expenses increased by $30,700,000 or 10.1 percent to $334,300,000 from the same period last year.

Speaker 3

This growth was primarily driven by an increase of $39,600,000 from operating 31 additional stores versus the same period last year and $3,500,000 at Spartan, partially offset by a decrease of $12,400,000 at our comparable stores. As a percentage of sales, fiscal 2024 Q1 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 Q1 general and administrative expenses of $66,800,000 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 $4,900,000 for personnel expenses related to additional staff and to a lesser extent incentive compensation.

Speaker 3

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 Q1 preopening expenses of $9,600,000 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 Q1 net interest expense decreased $2,900,000 or 59.8 percent 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.

Speaker 3

Our fiscal 2024 Q1 adjusted EBITDA of 123,000,000 decreased by 17.8 percent 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 $50,000,000 and diluted earnings per share of $0.46 following by 30.3% from the same period last year. Our fiscal 2024 Q1 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.

Speaker 3

We are pleased that our fiscal 2024 Q1 inventory decreased 6.7 percent to $1,000,000,000 from the end of fiscal 2023 and declined 12.6 percent from the Q1 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 Q1 with $698,200,000 of unrestricted liquidity, consisting of $57,400,000 in cash and cash equivalents and $640,800,000 available for borrowing under the EMEA 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.

Speaker 3

The absolute sales of existing home sales may have bottomed at 3,850,000 units in October of last year, but they are choppy, improving sequentially to 4,380,000 units in February 2024 before falling to 4,190,000 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 $4,770,100,000 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 twenty twenty four. That is not to say we don't expect sequential, quarterly improvement in comparable store sales.

Speaker 3

We expect our fiscal 2024 Q1 comparable store sales decline of 11.6% to represent the trough through 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 percent to 42.8 percent. 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 Q1 of fiscal 2024.

Speaker 3

As a reminder, every 100 basis points change in annual comparable store sales compared with our plan impacts earnings by approximately $0.10 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 Q1 results, we now expect our fiscal 2024 full year interest expense to approximate $9,000,000 to $11,000,000 and our tax rate to approximate 20%. 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 in an aging housing stack. We still see a path to achieving our long term goal of mid to high teens adjusted EBITDA margin.

Speaker 3

Operator, we would now like to take questions.

Operator

Thank you. And our first question comes from the line of Chris Horvers with JPMorgan. Please proceed.

Speaker 4

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?

Speaker 4

And related to that, how reflective is demand to mortgage rates are above or below 7%?

Speaker 2

Hey, Chris, this is Tom. I'll start and Brian can jump in. The quarter we 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?

Speaker 2

It was negative 14 to negative Negative 10.7. Negative 10.7 to negative 10 and now we're negative 9.3. So the comps moderating, we're going to be up against easier comparisons to further along we get into the year. So we'll see how that plays out. We are affected.

Speaker 2

Interest rates are continuing to go up at the last report, 7.5% to back to that approaching 8%. It's the highest spend of the year. We don't

Speaker 1

know how that's going to affect.

Speaker 2

We've only got existing home sales reported through the month of March. They step back in the month of March. So it's hard to tell what that will happen. I think interest rates will have an effect on existing home sales and make it a challenge.

Speaker 4

I guess maybe asked 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?

Speaker 3

Yes. 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 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 trending more towards the lower end.

Speaker 2

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 $4,100,000 annualized for only 1 month went above that $4,100,000 ish and that was in the month of February that just occurred, which is 4.38. So 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 comp positive.

Speaker 1

Exactly. And then just to reiterate what we said

Speaker 3

on the last quarter, we do expect sequential improvement in both transactions and ticket with the biggest movement coming in transaction. So if you think about it, we just said in Q1 at negative 7%. We'll get towards the end of the year and being flat to slightly positive. And then same thing on ticket is down 4.2% in Q1. That will stay kind of where it is and then move towards hopefully getting flat towards the end of the year.

Speaker 3

So both of those movements are based on easier compare and then slightly improvement through the year.

Speaker 4

Got it. So if I were just going to reward 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 happened in the first half and that's why you expect a loan in the range?

Speaker 1

Yes. That's right.

Speaker 4

Got it. Thanks very much.

Operator

Our next question comes from the line of Simon Gutman with Morgan Stanley. Please proceed.

Speaker 5

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 pro are you able to decipher that?

Speaker 1

Hey, Simeon, this is Trevor.

Speaker 2

The rest started off having issues,

Speaker 1

a good 6 to 8 months before the rest 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. So 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. So, places like North Texas and Florida and Georgia, and they didn't it's a just

Speaker 3

to

Speaker 1

call it the just to call it the housing recession for lack of better terms started out West and worked its way East. And so that's why they're doing better. And conversely, that's why some of our stores in Texas and Florida and Georgia and markets like that, the mid Atlantic are having a Got it. Okay

Speaker 5

Got it. Okay. And my follow-up is, you also said in the West, 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, 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 I was 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?

Speaker 1

Yes, 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 4 quarters. That's obviously a little bit nice to see and that could be timing. But yes, generally speaking, our cannibalization is dictated by where we're opening stores and what kind of store we're opening against. And so if you're opening a brand new beautiful bigger store against the older smaller store, and it's closed within, call it, 30 minutes or less, you're going to have higher cannibalization.

Speaker 1

If it's a big store going up against another new big store, that's, call it, 45 minute drive time, you're not going to see as much cannibalization. And I think we said this year, I think some 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.

Speaker 5

Got it. Okay. Thanks. Good luck.

Operator

The next question comes from the line of Michael Lasser with UBS. Please proceed.

Speaker 6

Good evening. Thank you so much for taking my question. How do you think your relative market share trended in the Q1 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.

Speaker 2

Yes, Michael, this is Tom. I'll take a shot at that first. It's hard to know in the Q1 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.

Speaker 2

When you look at last year, Floor and Decor grew our revenue by 3.5% and Catalina predicted the market went down 5.2. The big boxes comp negative and flooring was worse than them. And across the publicly traded competitors, Tile Shop, Lumber Liquidators, they're all negative. Mohawk reported North American sales negative. So we were positive.

Speaker 2

In the Q1, only Mohawks reported out. They reported negative. And while we're negative, we're slightly better than they were. So and I don't think much changed. When you look at the Q1, I haven't seen much of a change.

Speaker 2

So I would anticipate that we're continuing to take market share in a really tough market.

Speaker 6

Okay. My follow-up is 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?

Speaker 2

I mean, quarter to date, again, the comps modestly getting better month over month. So it's we would have hoped it would get better quicker. March has existed on sales taking a step backwards. There's a lag to what we see there. But when you look at it, I mean, we're we just we've been in this since June of last year, this really low 4,100,000 ish existing home sales and with only 1 month being up

Speaker 1

at 4.38, which is February. So,

Speaker 2

it just gives us a pause as we think about the rest of the year. When we're more, Spring is a very important selling 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 Q2.

Speaker 6

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 Floor Decor was not well positioned for? Would it be that your prices became uncompetitive or maybe more competitive? What would be that scenario?

Speaker 1

Hi, Chris. This is Trevor. I think just reading a lot of the other large consumer products companies that have reported here recently, they had 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 as that consumer stay under pressure.

Speaker 1

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, 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 feels a little stretched.

Speaker 2

Yes. And Michael, I would just say that the where we compete across every category we saw that hasn't changed. I mean, our stores are 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

Speaker 1

that would give it a challenge. Got you. All right.

Speaker 6

Thank you very much and good luck.

Speaker 1

Thank you, Michael.

Operator

And our next question comes from the line of Chuck Grom with Gordon Haskett Research. Please proceed.

Speaker 1

Hey, thanks very much. Good afternoon. I'll just maybe I'll try 2 part here. Can you just remind us on the store openings, just to switch gears, 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?

Speaker 1

And then I guess as a follow-up, if comps were to continue to trend down in the high single digit rate, say, through the 2nd or Q3, I guess, how do you think about store growth in 2025 and 2026? I'm sure you've already begun that planning process. Thanks. You want to

Speaker 2

take the first part and I'll take

Speaker 1

the second part, Trevor? On the yes, I was looking to see I don't have it off top of my head, I mean, it was a smaller format. 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. 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 than existing markets.

Speaker 2

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 that will be we gave guidance of 30 to 35 stores, so believe we'll be within that range.

Speaker 2

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've been 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 the 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.

Speaker 2

We still believe that 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

Speaker 1

how the back half goes. And just I'll just look real quick while Tom was giving that elegant response that I think we have 7 of our stores roughly or they're going to be the small format stores this year.

Speaker 6

Okay, great. Thank you, guys.

Operator

And the next question comes from the line of Zach Fadem with Wells Fargo. Please proceed.

Speaker 7

Hey, good afternoon. So as we look back over the years, we've seen a lot of tailwinds both internally and externally from aging housing stock, you've had shipped to hard surface, house slippers, etcetera, and then some company specific tailwinds like designers, pro loyalty, etcetera. 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?

Speaker 1

I'll take this is Trevor. I'll take a stab at that. I mean, I think we're making investments in key categories today that we think is unique to us when you look at our stores. XL Labs, as Tom talked about, that's one area. Larger type products are trending better.

Speaker 1

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 to adjacent categories. I think on the macro front, so those are the things that yes, I mean, we've got great merchants.

Speaker 1

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 7 or 8 years, as you've got 130,000,000 housing units in the United States, 80 percent of them are over 20 years old. On average, they're 40 years old, and there's just a replacement cycle that has to happen. So I do think everybody in this space, including us, should do well over the medium to long term just because we've got and 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. And so that's part of the reason house values continue to go up and up.

Speaker 1

So I think for us over the medium and the long term, we're feeling good. And I think 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. And I feel like even though our business isn't great, 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.

Speaker 3

Zach, I was going to say is even outside the 4 walls too, we're super excited about the opportunity in commercial as well. So we're in 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.

Speaker 2

And 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 assortment today, but I didn't compare comp of 20%. So it's just we're just in a tough macro. This too shall pass.

Speaker 2

It's just a question of when.

Speaker 3

Thanks for the time.

Operator

And the next question comes from the line of Steven Zaccone with Citi. Please proceed.

Speaker 4

Frank, good afternoon guys. Thanks for taking my question. I wanted to follow-up on 2 points that have already been asked. The first on the West, so what are you actually seeing that's driving 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?

Speaker 3

Yes. 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.

Speaker 3

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 numbers. So I can't quote exactly what it is. I'm going to say exactly what Trevor just said is, 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 over 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.

Speaker 3

To Trevor's point, it's more planned cannibalization on our side.

Speaker 1

Yes. So I think long, long term, assuming we're still opening this level of store count, it will come down just because we 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 seventy-thirty, seventy in existing stores and 30 in new markets. Some point, it would 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.

Speaker 1

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.

Operator

And the next question comes from the line of Stephen Forbes with Guggenheim Securities. Please proceed.

Speaker 8

Good evening. Trevor, I think you mentioned installation materials. I was curious maybe if 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?

Speaker 1

Yes. 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 2 years ago now, Arsan, where we brought in some of the best brands. That's the one part of our business where brands matter. So we brought in 2 of the best brands that are out there for installation and setting type products that really matter to the pros.

Speaker 1

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 team some really good reporting on where we were underpenetrated with pros. And so we have exceptional CRM data that is at our hands of our pro desk, so they can see this Pro is at 17% of installation. Our best Pros are 25% to 30% installation. So I think it's a lot of work that our store operations and our merchandising teams have done.

Speaker 1

I don't know that it will ever get there, but we understand the industry, it's roughly almost 25 percent of the total sales are installation materials. When you put our 2 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.

Speaker 1

And so, yes, we've done a good job there and we've got more opportunity to continue to focus on that.

Speaker 2

Perfect answer. The only thing I would add to your answer is, I think just a lot of times the purchase of the product and the purchase of the installation materials occurs at 2 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, we 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

Speaker 1

not to drive by 5 or 6 other stores to

Speaker 2

get to our store and will somewhat. So that penetration should continue to go up.

Operator

And the next question comes from the line of Seth Sigman with Barclays. Please proceed.

Speaker 6

Hey, everyone. My question is on average ticket down 4.2%, a little bit better than it's been. 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?

Speaker 6

And then I guess the other side of it could be, do you think this could be one of

Speaker 2

the factors that perhaps is just different for a while

Speaker 6

in the context of some 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.

Speaker 2

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 the as low as existing home sales, the amount of flippers that are out of the market right now.

Speaker 2

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. So I believe that when existing home sales come back up to that $5,000,000 annualized that our job sizes will go back to what they've historically been. But it's going to be dependent on that improvement. So I don't think there's anything fundamentally changed with the way people buy the category. I think the square footage drop is just a product of what's common with existing home sales.

Speaker 2

So I'll let you answer the other part.

Speaker 3

Yes, I'll take the first part. This is Brian. So yes, I mean we've kind of bottomed out. Whenever we talked about all through last year, it was sequentially declining. I think from Q4 to Q1, it kind of moderated.

Speaker 3

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. So some of the bigger projects is more laminate and vinyl and

Speaker 1

other things that we've alluded to

Speaker 3

and so that's 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 main menu of vinyl categories and wood categories that go into these bigger rooms as well.

Operator

And the next question comes from the line of Justin Kleber with Robert W. Baird. Please proceed.

Speaker 4

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 starts 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 rational? Thanks.

Speaker 2

Look, I think the independents are 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.

Speaker 2

So 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, better 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.

Speaker 2

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.

Operator

And the next question comes from the line of David Bellinger with Mizuho Securities. Please proceed.

Speaker 9

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 work 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?

Speaker 3

Yes, this is Brian. I'll take a stab at it and then Trevor can talk and 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.

Speaker 3

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.

Operator

And the next question comes from the line of Greg Melich with Evercore ISI. Please proceed.

Speaker 10

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 7 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 4 to flat is that project size or is it at a mix shift or deflation turning to a little bit of inflation?

Speaker 10

Just help us give a little more guidepost on those two factors?

Speaker 3

Yes. 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.

Speaker 3

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 needed to at least maintain where it is today coming off of Q4 and then slightly improving. If you remember the original guide was around 4,000,000 units to 4,300,000. 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.

Speaker 3

I mean, 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 kind of fan out a little bit more and take more than that 3 months. So that's one of the things is we need the lag to stay compressed to that kind of 2 to 3 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 flat in Q4 average ticket.

Speaker 1

Yes. Q1, we were down 9.9%, I'll call it 10% in transactions. Last year, when we by the time we get to Q4, we go down to 4.9%. So as Brian mentioned, we're just we do have got easier comparisons. And our thesis when we originally gave guidance that we didn't really change in this one is that existing home sales will continue to improve throughout the year.

Speaker 1

So we are expecting the macro to help us some and then going up gives us a year comparisons.

Operator

And the next question comes from the line of Seth Basham with Wedbush Securities. Please proceed.

Speaker 3

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?

Speaker 2

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 has gone up.

Speaker 2

That's a product that is brand recognition that'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.

Speaker 2

Our spreads versus the competition are significant enough that lowering the price usually just transfers the customer from one SKU to another in our store versus changing the volume of the store.

Operator

And the next question comes from the line of Robbie Ohmes with Bank of America. Please proceed.

Speaker 11

Hey, guys. Maybe a follow-up on that question. I think last quarter this quarter you kind of talked about the opportunity buys and deals of the week and value at the

Speaker 1

Yes.

Speaker 2

Yes. Same trends, customers when they're buying, they're still leaning towards the better

Speaker 1

and best products across all of our departments.

Speaker 2

So it's when they're opting to do the project, they're getting what they want. Now we're look, we're in a 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 trying to make deals, trying to get customers to engage and close on sales.

Speaker 2

So and we'll continue to do that. We'll continue to stay aggressive and try to drive that message. But back is when somebody is doing a

Speaker 1

flooring job, they're still stepping up to the better and best.

Operator

And the next question comes from the line of Chris Bottiglieri with BNP Paribas. Please proceed.

Speaker 1

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 has been filled to stomach internally. Can you talk about the ways you've taken cost of the business or slowed investment as sales have declined? How do we think about incremental SG and A when existing home sales does return to normal and comps go up?

Speaker 1

Like is there a rule of thumb we could think about when, say, comps go up 10% when

Speaker 3

does SG and A do in that scenario?

Speaker 2

If comps go up by 10%, we're going to flow through incredibly well because if we learned anything, we have taken cost out. We have been much more aggressive across every line of our P and L trying to execute upon a plan when sales aren't working in our favor. So and we don't plan on adding back. There's a you'll add back some costs as sales go up, but in general, we should flow through incremental sales pretty well.

Speaker 3

And just as a reminder, we're at 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.

Speaker 1

Yeah. Cost structure has gone down, our gross margin rate has gone up. So our flow through should be better than the strong positive comping.

Operator

And the next question comes from the line of Jonathan Matuszewski with Jefferies. Please proceed.

Speaker 12

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 Pro Premier and training classes and designer services.

Speaker 12

Is, but maybe beyond that, what are you hearing from those pros? Do they skew to a certain region? Any more color you can give us on what's driving them to actually increase transactions with you year over year? Thanks.

Speaker 1

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 if 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.

Speaker 1

And because we have good technology and just good business practices, we know who those pros are and we do exceptional job of taking care of them.

Operator

And our last question will come from the line of Joe Feldman with Telsey Advisory Group. Please proceed.

Speaker 2

Yes. Hey, guys. Thanks for taking the question. It was actually somewhat similar to what Jonathan has just asked, but wanted to take a different approach in terms of the other 80% of the PROs where I feel like that's a little bit of a change from the last call or 2 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.

Speaker 2

I'm just curious what you're seeing and

Speaker 1

hearing from those other guys. Presumably, it's just more

Speaker 6

of the same like it's just

Speaker 1

We 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 in our we'll see what everybody reports. But historically we've been the best performing by a long shot. And 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.

Speaker 1

And our pros tell us they're just not having as many jobs. And we were Steve and I were our Head of Store Operations was with 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. Just less flooring work to be done in this environment where existing home sales are down 40% from the peak.

Speaker 3

Look, I appreciate we had a good amount

Speaker 2

of time for question and answer today. We appreciate that. We appreciate all of your interest. We look forward to giving you more thorough update as we get to the end of this quarter. Thanks, everybody.

Operator

Thank you. This concludes today's conference. You may now disconnect your lines. Enjoy the rest of your day.

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Key Takeaways

  • Floor & Decor reported Q1 EPS of $0.46, beating expectations by expanding gross margin by 100 bps to 42.8% and tightly controlling expenses despite a 2.2% sales decline.
  • Comparable store sales fell 11.6% in Q1 but showed sequential improvement—from ‑14.7% in January to ‑10% in March—with management expecting Q1 to be the trough and comps to improve each quarter.
  • The supply chain team quickly rerouted inventory around the Baltimore bridge collapse—using alternate East Coast ports, dedicated trucking and barges—to keep stores stocked with minimal profit impact.
  • Eight new warehouse-format stores opened in Q1 and early Q2, and the company remains on track to open 30–35 stores in fiscal 2024, while expanding designer services and Pro-customer engagement.
  • Full-year sales guidance was narrowed toward the low end of $4.60–4.77 billion, with confidence in maintaining a 42.6–42.8% gross margin rate and modest expense growth, though results hinge on housing market trends.
AI Generated. May Contain Errors.
Earnings Conference Call
Floor & Decor Q1 2024
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