Q3 2019 Earnings Call
Greetings and welcome to Floren Day course third quarter 2019 earnings conference call. At this time, all participants are willing to listen only mode.
A question answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Mr. Wayne Hood, Vice President Investor Relations. Thank you you may begin.
Thank you and good morning, everyone. Joining me on our call today or Tom Taylor, Chief Executive Officer, Trevor Lane Executive Vice President and Chief Financial Officer also in the room as Lisa lobby Executive Vice President and Chief Merchandising Officer, who will join us where the Kuni session before we get started I'd like to remind you that.
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 any statement that refers to expectations projections are characterizations of future events, including financial projections or future.
Mark conditions is a forward looking statement the company's actual future results could differ materially from those expressed in such forward looking statement for any reason, including those listed and its SEC filings or into core assumes no obligation to update any such forward looking statements. Please also note that past performance or mark.
Get information is not a guarantee of future results. During this conference call. The company will discuss non-GAAP financial measures as defined by SEC regulation G. We believe non-GAAP disclosure 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 Dot Florent core Dot Com a recorded replay of this call together with related materials will be available on our IND.
Mr Relations website now let me turn the call over to Tom. Thank you Wayne and thanks, everyone for joining us on our third quarter 2019 earnings conference call on todays call I will discuss the highlights of our third quarter results as well as the progress we're making on each of our strategic growth initiatives.
However, will then review our third quarter financial performance and updated outlook in more detail and then we will open the call for your questions.
We are pleased with our third quarter 2019 results as total sales increased 19.5% to a record 521.1 billion from 435.9 million last year. Despite an estimated 70 basis point headwind to our comparable store sales caused by hurricane during.
As we anticipated our third quarter comparable store sales growth accelerated from the first half of 2019% to 4.6% from 3.1% and was in line with our expectation of 4% to 5.5% growth excluding Houston, our comparable store sales increased 6% from last year.
We are pleased with our third quarter sales growth of 19.5% considering third quarter us hard surface flooring square foot sales could have increased only 1.3% from last year. According to Catalina research moving on to earnings we reported third quarter 2019, GAAP diluted earnings per share.
Share of 39 cents, a 56% increase from 25 cents in the third quarter of 2018, our adjusted third quarter 2019 diluted earnings per share increased 12.5% to 27 cents from 24 cents in the third quarter of 2018 and was above.
The high end of our expectations of 25 to 26 cents.
Let me now discuss some of the drivers of our third quarter 2019 sales and earnings earnings growth and how we see the remainder of the year as a reminder, the core pillars that we focus on to achieve our long term sales and earnings growth targets are one opening large warehouse.
Stores in new and existing markets at a 20% annual rate to growing our comparable store sales mid to high single digit three invested in our pro customer.
And for expanding our connected customer experience I will now touched on the progress we're making on each of these growth initiatives first opening new large warehouse stores, we opened seven new warehouse stores in the third quarter of 2019, bringing the year to date total of warehouse stores that we operate to 113 stores.
Up 18.9% from 95 warehouse stores last year.
In the third quarter, we opened three new warehouse stores in July , including New stores in Saint Louis, Missouri, Thornton, Colorado, and El Paso, Texas in August we opened a new store in Pine build North Carolina and in September we opened three new warehouse stores in Marino Valley, California, Wichita, Kansas and Herb.
Park, Illinois.
As we look to the fourth quarter of 2019, we expect to open seven new stores of which four new stores opened in October Columbus, Ohio, North Charleston, South Carolina, Shelby Township, Michigan and on both Texas, We expect to finish the year by opening three new stores in November including.
Two stores in California, and a new store and Tolleson, Arizona.
Through September we have successfully opened 13, new warehouse yours and are on plan to open 20, new stores in 2019, this will be our seventh consecutive year of 20% average annual unit growth.
We remain particularly pleased with our 2019 class of new stores.
This class of stores is on track to be our best in class of new stores from a first year sales perspective. This is a direct result of our continuing efforts to open more inspirational and engaging stores are unique localized assortment strategies are growing band brand awareness and the benefits of scale from opening stores in exist.
In markets among our 2019 class of new stores, 60% will be opened in existing markets in 2019 compared to 35% in 2018.
Beyond 2019, we remain excited about the strong pipeline of new stores that we have lined up which will allow us to sustain 20% unit growth for the foreseeable future. We expect as we grow our store base that our brand awareness will continue to grow to that end, we have seen significant increase in our consumer brand awareness.
In 2019, increasing seven points to 64% for 57% last year, including a three point increase in unaided brand awareness that 13%. According to a third party said.
Our research tells us that if we can get customers to shop, our brand in store or online before making a purchase decision they buy from US 77% of the time building brand awareness is an important part of growing our market share as we have strategies that will convert those aware of Florida core into shoppers and in turn into purchases.
After we convert them into purchasers, we want them to become loyal and be brand advocates.
Moving onto our second pillar of growth comparable store sales, our third quarter comparable store sales growth of 4.6% was at the midpoint of our guidance of 4% to 5.5% growth as hurricane Dorian slow traffic into our Florida stores late in the quarter.
Which as we mentioned was an estimate an estimated drag of about 70 basis points to our comparable store sales.
Increase in our third quarter comparable store sales was largely driven by 2.8% growth in our comparable store average ticket and a 1.8% growth in our comparable customer transactions on the two year stack basis, our third quarter comparable store average ticket grew 1.4%, which was equal to the second quarters two year stack growth.
We were pleased to see the sequential acceleration in our third quarter, two year stack growth rate in transactions to 14.5% from 13.1% in the second quarter of 2019.
Turning to our sales performance within our merchandising categories consistent with prior quarters, our strongest sales growth sales growth continues to come from our laminate and Bridget core luxury vinyl flank category, where we have an industry leading assortment.
Third quarter sales in the category increased 38.7% to 116 million and accounted for 22% of ourselves up 300 basis points from 19% last year, our strategies to accelerate growth an installation materials continued to deliver strong results third quarter sales increased 20.
7.1% and are up 27.5% year to date the sales penetration in the category is up about 100 basis points to 17% from 16% last year.
As I look at our tile business, we're making progress as our sales in the third quarter grew at a faster rate than the second quarter, but we're still working through some product transitions as a result of moving sourcing away from China, which will cover shortly.
We believe our strategies to bring trended innovation like our maximum then tile is a contributing factor to the improvement across all merchandising categories. We continue to see the strongest growth at the better and best price points.
We continue to build on the successful strategies to drive incremental growth by adding adjacent merchandising categories. For example, we now have bathroom vanities and 32 stores and expect them to be an all new stores. In 2020, we're pleased with the early results and we'll continue to build out our assortments and delivery options.
While we will always be a hard surface flooring retailer our adjacent merchandise programs are currently small in isolation, they represent incremental scalable adjacent growth opportunities and help us meet that demand, we see from our professional and do it yourself customers.
We're also continuing to build on our design services and our seen significant traction.
Exciting to see the number of appointments exceeded 100000 through the third quarter of 2019, which is almost double over the same period last year to further build on this growth customers now can set up design appointments on their mobile devices, we expect to build on our conversion as our CRM systems will take.
Yes from mostly a manual follow a process to one that is driven by task prompts to ensure their as timely follow up as we have discussed in prior quarters. When these designer is involved with the customer our average transaction size can be three to four times greater than our company average.
Expanding to the connected customer experiences our third pillar of growth, we continue to see robust growth from our connected customer strategies, our third quarter E. Commerce sales increased 54% and accounted for 10.2% of our tender sales up about 225 basis points from last year on the back of.
Double digit growth and traffic.
Part of our strategy to drive growth comes from adding new online tools that make the customer purchase journey less intimidating into third quarter, we added measurement calculators for square footage mortar sealant and moldings, making it easier to determine the materials needed for the four flooring project.
Our main product landing page was also modified to reflect these additions.
To build on this we expect to add a wound visualizer in the fourth quarter of 2019, which will be personalized by room experience and integrated with our shopping cart and tender on a project online.
Our fourth pillar of growth comes from investing Holistically and our professional customers as we have discussed in the past investing in our pro customers to drive loyalty and brand efficacy is a strategic priority of ours as we look to increase our share of wallet with their existing pros as well as engage with pros that do not currently shop with us.
Important enablers to grow our market share include our pro Premier points based rewards program, our pro partner services and our pro AV Let me speak to how each of these are contributing to growth first our pro Premier rewards program, which launched in third quarter of last year continued to grow enrollment.
On average, we see a meaningfully higher rate of comparable store sales growth in stores that have strong enrollment and are excited about further driving awareness and enroll.
Moving to our pro partner services program, where we have an unbroken of service offerings, which give our pro significant cost savings in the third quarter, we added Lenovo to our stable to partners, bringing the total number of partners to 17. We now believe we have a critical mass of partners, which will enable us to drive further engagement through our programs.
Relative cost savings offered to our pros by our partners.
We continue to be pleased with the growth in the number of pros that are using our proactive which was launched last year over 35000 pros have now downloaded this application as we have discussed in prior quarters pros can use the app for receipt tracking order details skew search inventory lookup quote build order function.
And you PC scan and tender purchase we expect usage to grow as we continue to build out our womens features and functionality, including scheduled pickup and pro checking.
Through our pro Premier rewards program, our pro AV and our pro partners. We're gathering critical information that is being integrated into our CRM database to deliver better personalization. Collectively. These are examples of how we continued to add capabilities that enable us to drive engagement customer satisfaction.
And wallet market share among certain segments of the pro market.
Separately, we continued to build out our outside commercial sales infrastructure in the third quarter as we discussed in the second quarter earnings call. These regional account managers are outside our stores and focus on larger job sizes and like commercial projects that are store teams are not adequately able to serve while our commercial sales remain small and isolate.
And relative to our total sales the segment sales growth continues to far exceed our total sales growth.
Now, let me turn my comments to how we're thinking about the macroeconomic and geopolitical factors that affect our industry and the company.
Let me start by saying that we remain very pleased with our merchandise merchandising and supply chain teams efforts to mitigate the impact of tariffs on our product costs.
As a reminder, about half of the products. We sell were imported from China. In 2018, we're fortunate that we have a very flexible global supply chain and an experienced merchandising and supply chain organizations that have allowed us to quickly diversify our country's boards.
We continue to expect the percentage of product that we sell that are out sourced from China to decline to the mid thirtys by the end of 2019 and to be less than 20% overtime.
Moving onto the potential impact of countervailing and anti dumping duties imposed on ceramic tiles tile wall and tile Deco that are sourced from China.
As explained by our 10-Q in September 2019, the Department of Commerce reached a preliminary determination that imports from China, where subsidized and imposed preliminary duty rate of 103.8%. The department of Commerce is expected to reach its preliminary determinations as to the level of anti dumping.
If any in early two November 2019.
Once the department of Commerce has reached its preliminary determinations. It will instruct the us customs and border protection to require cash deposits based on these preliminary rates. These determinations are preliminary only and are subject to revision or recession, either by the department of Commerce is final determinations expire.
Acted in March of 2020 or in the US International Trade Commission spinal determination with respect to injury. Shortly thereafter, if orders are issued the final rates will be determined during an administrative review and approximately two years, while it's too early to determine what the outcome of this investigation will be and what impact if.
Any there will have on the company, we have aggressively move the effective skews that are subject to countervailing and anti dumping from China to avoid the increase duty costs.
Among the macroeconomic metric that impact our industry and company, namely existing home sales in home price appreciation, we like many others remain cautiously optimistic that the decline in mortgage interest rates will serve as a catalyst to moderate the persistent year over year decline in existing home sales that occurred in 2018 and early.
2019, we have been encouraged that existing home sales began to turn the corner in the second quarter of 2019 and are now growing year over year, albeit modestly.
On the other hand home prices as measured by case Shiller.
Have moderated to low single digit growth from mid single digit growth.
Watch many other housing metrics, but we rely more on our company specific drivers, which we believe we'll need to mid single to high single digit comparable store sales growth over the long term.
As we think about the remainder of 2019 and beyond we continue to believe that we will grow our market share and hard surface flooring through our ongoing innovation strategies and by operating consumers easy affordable and updated stylish loan solutions before I turn the call over to Trevor I would just like to close by saying that we believe our third quarter and.
Year to date 2019 results continue to validate the strength of our value proposition in up in the hard surface flooring industry I would like to thank all of our associates for their hard work and exceptional service to our customers I will now turn the call over the Trevor to discuss more of the details of our third quarter results and our updated 2019 outlook.
Thanks, Tom I'm going to concentrate my comments with some of the changes among the major items in our third quarter 2019 income statement balance sheet and cash flow statements and then discuss our outlook for the fourth quarter of 2019.
Tom already discussed our 2019 third quarter sales results. So I will start with our third quarter gross margin.
On a dollar basis, our gross profit increased 20%, which was slightly higher than our 19.5% sales growth our as our gross margin expanded 10 basis points to 41% for 40.9% last year.
This increase in gross margin was primarily attributable to higher product gross margin.
Turning to our third quarter expenses selling store operating expenses increased 25.4% to 137 million from 109.200 million last year, and deleverage 130 basis points, primarily from our new store.
As we have discussed in prior quarters, our new store selling and operating expenses as a percentage of sales are approximately 50% higher than our stores opened greater than one year, which results in near term operating expense deleverage.
Our comparable store selling in store operating expense ratio increased by approximately 20 basis points from last year as we incurred higher operating expense related to store merchandising initiatives and advertising expense when compared to last year.
These expenses are timing related for the nine months ended September 26, we continue to obtain nice expense and operating margin leverage for our comparable stores.
Our third quarter general and administrative expenses increased 40.7% to $37 million 200000 from 26, and a half million last year inclusive of unique items, which are reconciled in our earnings release in third quarter. We took an impairment charge of 4.100 million related to our related to exiting our former store support center.
As discussed in previous earnings calls, we've now completed the relocation to our new store support center and this impairment relates to the two exiting our former store support center in October we execute an agreement with our former landlord to terminate this lease.
We will take a 2.100 million charge in the fourth quarter for the lease terminations as well as approximately $400000, an accelerated depreciation and rent costs associated with the former store support center, which is included in our guidance excluding unique items, which are mostly related to our store support center relocation costs, our third quarter general and administrative expenses increased 19.
0.4%.
Our third quarter 2019, Preopening expenses declined 1.8% to 8.200 million from 8.300 million last year and leverage 30 basis points year over year.
The favorable Preopening expense leverage is primarily due to an enhanced store opening process, which shortens the period. It takes to open new stores, thereby lessening pre occupancy costs as well as opening fewer stores and higher costs metropolitan markets in the third quarter 2019, when compared to the third quarter 2018.
Our third quarter interest expense declined 8.9% to $2 million from $2.200 million last year. The decrease in interest expense was primarily due to lowering our average third quarter debt balance to 146.600 million from $160.600 million last year, as well as ending the quarter with $84 million $100000 in cash.
Turning to our third quarter profitability, our third quarter adjusted EBITDA increased 16.8% to 57.100 million from 48.900 million last year and was inline with our guidance of $57 million to 58, and a half million. Our adjusted EBITDA margin rate declined to 20 basis points to 11% from 11.2% last year.
And was inline with our expectations or 11% of 11.1%.
Adjusted third quarter net income increased 9.9% to 28 million of 100000 from 25, and a half million last year.
Our adjusted earnings per share increased 12.5% to 27 cents from 24 cents last year, which was one cent above the high end of our guidance of 25 cents to 26 cents.
We ended the quarter with $105 million 200000 diluted weighted average shares outstanding compared with 104.600 million last year and our guidance of 104.900 million.
Moving on to third quarter balance sheet and cash flow total third quarter inventory increased 19.9% from last year's third quarter and is up 2.7% year to date the rate of growth is inline with our expectations. The improvements we are making our 2019 working capital have contributed to a 45.9% increase in our operating cash flow to 209.
Million 600000, as a result, our free cash flow double the 68.600 million from 34.300 million last year. It was a contributing factor to the 83 and a half million dollars positive swing in our cash and cash equivalents as of September 26, 2019, We had 306 9.600 million unrestricted liquidity.
Consisting of 84.100 million cash and cash equivalents and $285 million 500000 immediately available under our ABL facility.
Now turning to our earnings guidance, while we are pleased with our third quarter and year to date results. The fourth quarter has started off slower than we anticipated as a result, we are trimming the top end of our adjusted 2019 guidance and now look for fiscal 2019, adjusted diluted earnings per share of $1.90 to $1.10 versus our prior X.
Vacations of $1.90 to $1.12.
Let me now I'll discuss some of the more important building blocks to our Recasted fiscal 2019 earnings outlook.
We are still planning on our quarterly sales growth to sequential accelerate in the fourth quarter 2019, albeit at a slower rate than previously forecasted the acceleration is still expected to come from strategic price increases to offset the impact of 25% Chinese tariffs more new stores ending the comparable store sales base and the drag from Houston Abating as we've now reached.
The second anniversary of Hurricane Harbor.
That said, we're now planning on a lower comparable store sales growth rate in the fourth quarter versus our prior guidance based on current quarter today trends.
There are four reasons behind our lower fourth quarter comparable store sales growth first traffic has not accelerate at the rate at which we thought it would curve.
Second we are seeing higher new store sales calculation cannibalization as some of our new stores are doing very well and pulling more cells from existing stores than we had contemplated third we have seen an increase in our out of stock and tile inwood as we transition away from China sourced product and fourth we currently have not had to increase retails as much as we had originally.
Antiquated as our cost have not increased at the same rate was modeled this summer.
We believe the majority of these transit these are transitory issues that should abate as we move into fiscal 2020.
We believe the class of 2020 will not be as cannibalistic next year. We are actively working to improve our end stocks and it currently does not appear that there will be higher tariffs in the near future.
I also mentioned I think it's worth mentioning that if you exclude our stores in Houston that are negative comping due to abnormally high volumes due to hurricane Harvey and our stores that have been strategically cannibalized. Our comparable store sales are currently in the low double digit range. We continue to have a healthy business.
We expect our fourth quarter 2019 sales to be in the range of $523 million to $529 million, an increase of 20% to 21% versus the fourth quarter of 2018. This growth outlook is based on a comparable store sales growth of 4% the 5% excluding the Houston market, we expect our comparable store sales to be in the range of 5% to 6%.
We expect our fourth quarter gross margin rate to decline by about 100 basis points due primarily to opening our new distribution center in Baltimore, Maryland, where we are incur about $4 million in cost fourth approximately 70 basis points. We're excited to open this brand new state of the are 1.5 million square foot distribution center, one of the largest buildings in the state.
Our new Baltimore distribution center increases our distribution capacity by 50% and will serve about a quarter of our current stores.
The distribution center will start to leverage these upfront costs in 2020 as it begins shipping to stores and our supply chain gets the benefit of lower stem miles.
Excluding approximately $2.5 million of previously mentioned termination and other costs associated with the relocation of our to our new store support center, we expect our fourth quarter operating margin to be approximately 6%. This is down from the fourth quarter of 2018, adjusted operating margins due primarily to the cost tied to our new Baltimore distribution Center and one.
Million $100000 in incremental costs related to our new larger store support center.
Diluted earnings per share for the fourth quarter is expected to be 18 to 19 cents and our adjusted diluted earnings per share is expected to be 20 to 21 cents.
We are assuming 105.400 million weighted average fully diluted shares outstanding for the fourth quarter 2019, we're planning on our adjusted EBITDA for the fourth quarter of 2019 52.100 million $54 million, an increase of approximately 17, 21% over the fourth quarter of 2018.
Turning to our full year outlook, we expect net sales for fiscal 2019 to be in a range of $2.041 billion $2 billion $47 million, an increase of approximately 20% to 21% versus fiscal 2018.
This net sales growth outlook is based on 20, new warehouse store openings and a comparable store sales increase of approximately 4%.
Excluding the impact of Houston, we are finding on fiscal 2019 comparable store sales increased approximately 6.1%.
Assuming we achieve our full year comparable store sales growth expectations, we're proud to be able to accomplish this above industry growth rates yet again.
We have had substantial success in improving our gross margin rate through the first nine months of 2019 with 25% tariffs on Chinese imported products, even with tariffs now increasing from 10% to 25% on Chinese flooring imports and taking on an incremental $400 in cost open our new Baltimore distribution center in the fourth quarter of 2019, we plan.
I have a modest increase in gross margins of approximately 20 to 30 basis points for the full year. This speaks to the strength of our model and our talented merchandising and supply changes.
Moving on to full year SG announcements, we continue to expect total estimated deleverage as a percentage of sales through the new stores.
Fiscal 2019 diluted earnings per share is expected to be a $1.28 to $1.29 and adjusted diluted earnings per share is expected to be a dollar nine to $1.10.
Diluted weighted average shares outstanding and expect to be 104.900 million and our fiscal 2019 tax rate is still estimated to be 23.3% for the remainder of fiscal 2019.
As a reminder, this guidance does not consider the tax benefit the impact of stock option exercises that may occur in fiscal 2019.
We expect fiscal 2019, adjusted EBITDA to be in the range of 236 million to 238 nine an increase of approximately 20, 324% over fiscal 2018.
Total capital expenditures in fiscal 2019 are now plan to be between 203 million to 213 million versus our prior 205 to 250 million guidance and will remain funded primarily by cash flows generated from operations.
Our fiscal 2019 capital spending plans reflect the following growth investments.
Opening 20 stores and start construction on stores opening in early 2020, using approximately 131 million to 137 million of cash.
And investing in existing store remodeling projects in our distribution centers, using approximately 35 million to $37 million or cash.
Investors are new store support center information technology infrastructure E Commerce and other source reports in the center initiatives of approximately $37 million or $39 million in cash.
Following our proud of how we perform in 2019, we look forward to fiscal 2020, I would like to thank all of our employees for the great work, they're doing to democratize hard surface flooring, while also serving our customers.
At this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
You May press star to if you'd like to remove your question from the Q. We ask that you. Please limit to one question and one follow up one moment. Please while we poll for questions.
My first question comes from Seth Sigman with Credit Suisse. Please proceed with your question.
Hey, guys. Good morning, Thanks for taking the question I wanted to follow up on the product transitions that you talked about on the back of tariff can you just discuss where you are in that transition today. When do you think that gets resolved and if you could give us any sort of color on how much that may have impacted Q3, and does that impact actually increase in Q4 is there a bigger impact.
Q4 that would be helpful. Thanks.
Yes. This is Tom Hayes SaaS I will take the first half of that so look do the tariffs anti dumping and countervailing, we've been very active the transitioning skews out of China.
As you know in 2018, 50% of our sales came from skews out of China that number will be down to the mid thirtys by the end of this year and going even lower and in the future.
With that Theres, a lot of moving parts in our in stock hasn't been as good as we'd like it to be within within a couple of our categories that are affected it's hard to put an exact number on it because when you have 300 options and tile and you're out of a few skews. The tile you try to get another tile into the customers hands, but sometimes that isn't possible.
So we are continuing to work on it we think that are out of stock situation will be much better by the time, we get to the first quarter. So we're.
At this at the answer.
Okay. That's helpful. And then I guess related on the pricing topic, you mentioned that you didn't need to raise pricing as much is that because of your ability to change sourcing or.
Any more color on that and then.
I guess related what does the implication when you look at your pricing versus competitors should we be assuming that your price advantage is actually widening here I just any more color on that would be helpful.
Yes so.
For sure our merchants did a better job that we had anticipated.
We're fortunate to have an excellent team in place on both the supply chain side and on the merchandising side and they did a really good job of negotiating with our suppliers and moving product quicker than we thought so we haven't had take a lot of the price increases that we had anticipated.
So that they were pleased with with that performance most of the other question. So.
I guess the evaluation on that I mean, just the price gap versus your direct competitors and how you. So I'd say during the independent instead, it's probably widening that we've gotten better and I think during the with the the big box competition spaced in pretty consistent.
Great all right. Thanks, guys.
Our next question comes from tax item with Wells Fargo. Please proceed with your question.
Hey, good morning, guys. So first question on the slower start to October and as we recalibrate our comp buildup for Q4 could you walk us through your new expectations here for the impact of price I think was previously 250 basis points and as well as new stores entering the comp basin.
Amortization.
These factors changed relative to how youre thinking about them.
Last quarter to get to that 4% to 5%.
I'll, let I'll, let Trevor start and take you through kind of how.
What drove the change.
Zach this trevor.
Estimates I'm about to give you our directional as Tom mentioned, it's very hard to measure some of these things because one we have no cost of 300 physicians of tile just because they're out of a few you don't know maybe the pick another skewed you had but you're right we listed for items.
We would estimate that the cannibalization, we just opened a handful of stores more than a handful of stores really most of our new stores that are exceeding our volume expectations and we're obviously very proud of that fact, I get the profitability a lot faster.
They're just doing incredibly well and four because of that we would estimate that maybe a 100 225 basis points of the comp that we've adjusted for the fourth quarters, just due to these new stores going exceptionally well and taken more volume out of our existing stores.
Second we talked about out of stocks.
We would estimate and made that costing US 50 to 200 basis points really in our town are what businesses is where we've got the bigger out of stocks and then finally on the price as Tom mentioned, our merchandising and supply chain seems to just isn't great job of getting cost out of the of the both the product in the supply chain and maybe that's 20 to 50 basis points. So if you if you add those two up you'd get probably 170 to.
375 basis points of that change and I think the remainder of it is its argenis factors that early into traffic.
That is no it does not seem to traffic expectations that we had so less as best we can do directionally to reconcile the change in the guidance that we had when we talk to you in July versus today.
Got it really helpful. So that was a change there and then.
So I know you won't provide 2020 guidance for a little while but just given all the moving parts around.
Chris Countervailing duties and then also then new DC I'm, hoping you could add some clarity into what the first half of next year should look like at least at the gross margin line from from a modeling perspective.
Yes, I'll take a crack at that we're not done with our budgeting process, but we are confident at this point based on everything we booked we see we would expect total sales comp store sales and profitability to grow at a faster rate as we get into 2020 versus 2019 again, we've got to finish some of those analyses up.
All things you know, we're not going to have a Houston headwind.
Hopefully have never talked about again after this quarter.
We do believe we're going to be in any a better macro environment from a housing perspective, you guys will remember Q4, starting and 18 was one of the worst existing housing turnover, so that really persisted through the first half of this year. We now have three months in a row of existing Homesale turning positive.
Mortgage rates are now down 100 basis points from where they were last year Thats historically led to an increase in existing home sales and so.
And the fact that there will be some tariff increase prices and at least the first half of next year, because we didn't we start doing that until July or August and so those things all lead us to a better sales comp sales and profit perspective, and the final thing I'm as we see the world today and again, we'll update you guys in March we're going to open the most amount of new stores in the first quarter of next year than we've ever opened there were.
We're proud of that that's the eight years I've been here, we really wanted to get to that and so we're excited to add a lot more new stores open.
The first half of the air which again as part of their is our total cells, but there will be higher than than they are the growth will be higher than it is this year from a from a profit perspective, though because we have this the Baltimore distribution center that there were opening late and kind of November this year.
Because the new corporate office will be a little bit more expense, while opening new stores is an incredibly good thing for us for the year.
There will be some pressure because we have preopening expenses and things like that and so I do think it's going to be kind of a smile type format, where your for your first half of next year will not be as profitable growth as the second half of next year.
But we do believe we're going to have as I mentioned, a better topline growth and bottom line growth as we look at 2020.
Got it appreciate the color Trevor thanks for the time.
Our next question comes from Christopher Harvests with JP Morgan. Please proceed with your question.
Thanks, Good morning, guys.
I had a question just a clarification you. He said you still expect comps to accelerate and for Q in your guiding.
Four to five ended of four six.
In the third quarter, and then had a question about triple what your basin that guide on and is that assuming.
Cobras trend stays there are you action, assuming any acceleration in November and December because presumably the push from Dorian who is 70 bips to three Q in out and we will recapture that that should be up 100 basis points benefit top told there. So just trying to reconcile all that.
Yes, so out Hey, Chris This is Tom I'll start and then travel will jump in so yes, our guidance for the quarter, while October started off less than we had.
It's still was an acceleration from the third quarter and it was chosen by any other measurement was a good not just wasn't as good as we thought and we do anticipate that things.
We'll continue to accelerate as we get to November and December . So Im just this is Trevor Im just looking here October .
But it was a second best month, we've had a year. So far so so it is a bit better, but we do believe that our comps will continue to accelerate as we get into November December again, we're getting further away from Merck and Harvey we've got more new stores coming into the comp base and especially in December .
And last year, and there's usually a bit of a lag I think you guys I'll know that but last year really November December is when you have incredible fall off and existing home sales and so for those reasons. We do believe that November December was slightly better than.
October but again October was was better than Q3, and because the third best month.
And do you think that the recapture of Doreen was all in October is that something that leads out over.
The entirety in for Q.
What's interesting about hurricanes for US is if they're heavy rain hurricanes like we saw in Harvey that obviously helps our business a lot about when you have a hurricane like Dorian that that scares everybody and they spent a lot of their discretionary income to try and make their homes safer, yes, Thats just lost discretionary income. So you don't know if you give as much.
That back and so because dorian thank goodness.
Just kind of skirted the east coast of Florida people went out spend a lot of their discretionary income on fortified our house to avoid what could have been a big catastrophe. So we don't see as much of that come back like we would historically and in a big rain type work and so maybe we'll get some of that back but.
Important we're not planning so we're not we're not planning.
Okay. So just to clarify on your guiding.
And in Fourq, you with what you did in Threeq Q, so what's the acceleration comment.
Well I think we comps for six in in Q3.
And I guess, if you see the high end of that comp.
Since we gave will be higher.
Got it thanks, so much.
Our next question comes from Simeon Gutman with Morgan Stanley . Please proceed with your question.
Thanks, Good morning, so it sounds like October was a decent month, just does not as much traffic as you thought can you talk about how broad base.
That that not as much traffic comment reflects or did you did you make your plan or did you think you'd get get into your plan. Some places and then just any explanation why traffic wasn't as good as you thought and this is going up is as far off but how do you rollouts that it's not something you know competitive, whereas you know some competitors doing something different.
This Trevor I would say, we lowered our guidance in Q4. So so obviously our total wasn't as strong as we had originally thought.
We do we do a fairly detailed re forecast in October and so as we were seeing that performance we were down.
We've seen the slowdown it's not one category, it's not one region of the country. It has been fairly broad based.
Lets say on the competition fraud, as we mentioned versus the independents, we feel as good as we've ever felt I think they're feeling the pinch of the complexity of all this macro economic geopolitical more so than we are just because we've been hard for so in some cases with of even getting inventory versus we care a lot of inventory. So I think we've gotten better versus the independents and the home centers we go.
Mostly we have big regional teams that live and breathe in the eight regions that we quantify our regions by they're sitting of analysis every single week on what they're seeing and what the competitive set is doing and I think what we've said for the three years or public in order to eight years I've been here they get better there obviously focused on this category, but we're also getting better too and so I do believe.
They are getting better.
I think if we'll see what they report when they come out with their numbers, but this year, we meaningfully outperformed and I think they've not called out hard surface flooring is comping above company average. So it does how to answer that yeah. I think look our competitive moat really hasn't changed there is always been resets that go on within the home in Burma centers are always resetting upgrading.
Trying to improve not just deploying department, but departments across their stores. We certainly are we pay attention to that but it doesn't we 78000 square foot stores that are just different than we have the broadest in stock assortment by alive. So I think our competitive mode as well intact.
Okay and my my follow up.
I guess part of the traffic improvement or that you Mr plan a little.
Did you assume that the at this point you'd see a bigger benefit from existing home sales Inflecting and then can you talk about the typical lag we've had only a couple of months now of improvement it's been modestly as you said, but on what what when should we see a response to that.
Yes, I think our modeling shows somewhere between three to six months and we were expecting tracking to get better when we give guidance the summer not so much that we because we thought the environment would give a ton better but we knew we were coming up against big negative numbers I mean really when you look as though when you break apart by month, there was really in November and especially December where that where that existing home sales fell off.
So.
But we as you said as we said, we just haven't quite seen that quite yet.
Okay, great. Thanks, Good luck in the fourth quarter.
Thanks.
As a reminder, please keep it to one question and we thank you. Our next question comes from Michael Lasser with you BS. Please proceed with your question.
Good morning. This has done a nice free on for Michael Lasser. Thanks, a lot for taking my question.
I wanted to tender for later price increases.
Just on asking it was when you have actually raise prices however, consumers reacted to it and from what are you seeing from the rest of the competition income so.
Their price increases.
Hi, This is Lisa so we actually did earlier any year as we were getting it lets take care for coming we get quite unique top Dev test across our chain and did not see dramatic impact.
As you can add a few unit velocity equity raise price until April of this price increases out very aggressive chain has been saying, we have not seen any material impact and the amount of units or square foot that we're selling.
So, yes, I think that from that perspective, where we're at very happy that from a competitive perspective were in line with everyone out and the customer I understand.
Hi.
Thank you and as a follow up on the traffic being a slower than expected in October do you think it could also be more macro related with the decline in existing home sales come from here and there are you don't paying.
My question.
At the back I here.
Very hard to say I mean, we've looked at as Trevor mentioned in his comments, we've looked at it had lots of different ways, and it's really hard to pinpoint but.
Let us really hard to say.
Okay fair enough. Thanks.
Our next question comes from Kate Mcshane with Goldman Sachs. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
A question specifically around mechanical patients.
Thank you that shouldn't be as much and 2020, but wondering if Dave.
I got to be the case it can be classes of stores are getting better why there would be less capitalization.
This.
Except new markets versus existing markets for 20, 20% 2019.
Yes, I think in 2020, we will look at will open in less existing markets than we did this year. This year. We were it's 60. When this this year we were at 60, 40, and our new markets, which was more than the year before so we're cannibalizing more this year next year should get a little bit less cannibalization, but not this we're still going to cannibalize.
Look we we cannibalize.
Strategically right, where our goal is to grow total market share and women to provide the customer with the best experience. So a lot of cases were opening stores on top of higher buying stores older stores and they.
We're pretty good are predicting the new source elsewhere with sometimes we struggled with predicting the cannibalization, but we're learning every store that we open.
Okay, and just a follow up.
Have you seen a different.
In.
Turkey for cross looks is it happening across most of the payer in regional difference.
Can you talk about your.
Good morning tourist stores versus the newer stores.
Yeah. So I, we have looked at a cost we only have 100 stores in a region. So we obviously analyze that closely.
We have seen.
Been consistent Theres, a couple of reasons that a little bit better than they were in the third quarter, but for the most part we've seen a very consistent.
And again from product category perspective, we haven't seen it all come in one category as we mentioned solid wood.
I've got some in stocks as we transition away from.
China.
But theres not one category and there's not one region of the country that weekend, specifically tied to.
Thank you.
Our next question comes from Jonathan managers ski with Jefferies. Please proceed with your question.
Yes, good morning, guys. Thanks for taking my questions.
You alluded to some out of stocks and wood and tile is there any way to help.
Help us understand like the magnitude.
Whether it be kind of percentage of total skis for those categories. Thanks.
And we broke up from one of the break apart the numbers.
Again, but yeah, I think we normally kind of run in the in the mid to low ninetys in stocks.
And in those cases, we've seen those numbers go in that and somewhere the eightys, but as we said we think we'll we're actively pursuing with opportunity buys as well as getting in stock with some of the new vendors as we get into.
First part of next year in from a comp perspective, and again. This is very directional because it's hard to know exactly what the customer bought something else. We estimated for the fourth quarter that the obvious box office, maybe somewhere between 50 to 200 basis points and I think that what we tried to mentioned earlier too this is a little bit.
Difficult to say exactly what an out of.
Caution, Florida core because it's one thing if you're out of a certain water heater you can tell specifically what that what Peter cells and with US when you have 300 options and tile within a given store if you're out of certain new hope you can get another when your customers hand, but you always can't so it's just it's a little bit hard to pick we don't know exactly how many customers walked out with something else, but we know that we didnt have.
Everything we wanted in building.
Makes sense and then just a follow up.
You have a few stores in the northeast now they seem to be meeting some high internal expectations.
How should we think about this region in the context, if your longer term store plans and.
Does it change your view as it relates to kind of that 400 target longer term. Thanks.
Yeah, we're certainly excited with what's going on in the northeast and we're working hard to access more real estate there we will.
That's a very important.
Home improvement market and is very important market that.
We will grow in we're not ready to talk about our store count yet that will come in time, but we feel good about our 400.
Thank you.
Our next.
From Matt Mcclintock with Raymond James. Please proceed with your question.
And we can't hear Matt our is your line muted.
I will go to the next question.
Okay.
Great we still can't be Rob you there.
I'm here, yes.
Let me go to it.
Yeah, why don't we go to the next question.
Our next question comes from Chuck Grom with Gordon Haskett. Please proceed with your question.
Hey, Good morning, guys can you just touched set for us.
The degree of price increases in the third quarter, and then I guess, what you've changed in the fourth quarter. So far I think you said last period that you expected about 80 to 90 basis points of a benefit to the conference parent price increases and I think the fourth quarter was expected to be 200 250. This if those numbers are right and I guess do you think you're seeing some.
Yes.
Yeah on on the demand side, maybe that could be country contributing to some of the softness here in the month.
Yes, we did go back and look at Q3, and we do estimate it was about actually 80 basis points in our Q3 comp that came from the limited skews, where we raise resells.
You're right on last call, we said 200 and 250 basis.
Points, we thought it might be towards the higher end of that number when we talk to you guys. In July our current expectation is that as we've talked about for merchants to the supply chains and we've got some cost out that have allowed us not to after his increases that number probably closer to 200 basis points on the elasticity leased it touched on this I'll just reiterate we did a fairly exhaustive study with.
It Doesnt stores looking at test versus control over a six month period of time.
Where we raise retail to see what would happen and we really didnt see a lot of elasticities and I just as a reminder, I'll point out you guys. You have a vast majority of what we sell is private label effort.
Meeting its very difficult to compare what we sell to other people and.
We have 76000 square foot stores versus maybe three to 5000 square foot in the home centers and maybe three to 10000 square foot in us and independent and so we have a massive assortment benefit that helps us as well and so I think because our merchants that an incredibly good job with better and best.
Yes, and how you bring assortment together.
If there are minor tweaks pricing.
Consumer still once that total project along with all the other benefits that we have four in the quarter. So today, we have not seen them at a meaningful asked us any change.
For the modest price increases we passed along.
Okay, that's helpful and just as a.
Profile for the Horvers question earlier about October being greater than what you did in the third quarter, obviously means it's greater than 4.6%.
It looks like you guys are being a little bit conservative here and I'm. Just wondering if you think that's the case and then and along with that can you just remind us how the fourth quarter of 18 comp progress throughout the.
The the period that did in November and December was.
These year periods for you just wondering how we should think about the complexity of the comps.
Yeah, I think I don't have 18 right in front of me, but we don't have really a seasonal business.
It's a fairly consistent business.
And so.
We put a lot of time and effort into re forecasting these numbers the entire executive team along with all of our staff helps us do that and we call that as we see it today, yes, theres lots of lots of moving parts with.
But products go into new suppliers.
Products go into new.
Trees.
Those theres just a lot of moving parts, so we want to be prudent.
Makes sense. Thank you.
Our next question comes from Steve Forbes with Guggenheim Securities. Please proceed with your question.
Good morning.
I wanted to focus back on the Baltimore DC right you mentioned the 4 million.
Dollars a cost hitting the personnel in the fourth quarter right associate with the opening but can you help us conceptualize the run rate operating cost as we look at 2020, and then discuss right the potential cadence and benefit of three future reduction in stem miles.
As productivity ramp thank you.
Yes, Steve this is Trevor so that new DC.
We're really only taken possession in November and December and if you do the math I think it's going to cost us some portion of $20 million.
For full year run rate as we look to 2020.
Again, we only got 4 million of that in this year's DNL. So obviously will be higher cost next year.
With that said again, we plan on growing sales and profits at a faster rate in 2020.
Currently we are well relative to 2019.
We're on a weighted average cost method and so what what that means for our systems is that as we start to ship from that Baltimore distribution Center. For example, when it goes for three Washington, DC stores, you can imagine the transportation cost to get the Baltimore to Washington, DC or the Midwest with the northeast is a lot lower.
And so we're still working through that math.
But by the time, you get to a full year run rate, which will happen in late Q2, as we sort of worked through all that lower cost inventory coming into the base because of over seven miles.
Well, maybe get as much of a third of that back due to lower stem miles and again, we're still finalizing those calculations.
But we will definitely.
Offset some of those costs.
Thank you.
Our final question comes from Greg Melich of with Evercore. Please proceed with your question.
Hi, Thanks, guys.
I'll have a bit on margins and and what we saw in a.
Third quarter.
And then what should we expect and into the base going into next year, you talked a little bit about.
Profitability so.
Specifically, if we back out the Baltimore in the store support center.
Would what would that shannay of de leveraged in the quarter.
Let me.
Break it into its component parts, we break out on our SEC filings our store operating expenses are preopening expenses, and what we call DNA, which is our corporate expenses.
We are planning on having slightly higher store operating expenses.
Based on the models here, you're kind of in the mid 27% range that we were at 27.3.
3% last year, so we're going to have modestly higher store operating expenses and that's really tied to the number of new stores that are in somebody's more expensive markets.
As well as we're spending more on our new stores, where we're getting a good return on spending more those new stores, but we're spending more on capex and some.
In some of these markets so thats the modest deleverage and we're having at the store leverage.
Opening expenses actually will be down relative to the same time last year.
As we've mentioned in a couple of calls before our real estate team and our visual merchandising teams done a great job of 15 months out of the process.
And so we actually believe our pre opening expenses in Q4, we modestly down.
Down.
And then find when you get out a corporate last year, we were at I think a 6.9% was our corporate expenses. If you back out the two and a half million dollars that we talked about four terminating the lease with our former store support center.
I think we'll kind of being just above 5.5%. So when you blend all those together and you.
All the way down to kind of adjusted operating margin was I'd kind of set my prepared comments that the only reason we're.
We are.
Were flattish if you back out the Baltimore DC and you back out the costs associated with exiting our former shore support center.
Got it and that that difference that we saw in the third quarter.
So that we should expect to anniversary third quarter next year effectively.
Yeah I think.
My view today is and we're not done with the budget and so we'll give you guys an update in more granularity and March is that because of the incremental costs associated with new sort support center. We're opening a lot more stores in the first quarter of next year as well as our corporate office our profits.
I will not grow at the rate in the first half of the year as they will for the back half of your and so you're going to definitely have the tale of two halves, but that being said for the full fiscal year and have started with Peter from third time for the full fiscal year to see the world today, assuming no major change in macro environment, either positive or negative we would expect sales and comp sales in both.
Profits to go to faster rate in 2020 than they than they are 2019.
That's helpful. And then this is another question just a clarification.
If I could sneak it in.
October is that the biggest month of the fourth quarter.
Scott the nature of your business on a weekly on a weekly volume basis, yes, but on a total.
And basis, no because we have a four or five and so we have five weeks in the month of month of December . So we've got an extra week in there but are still very balanced visit those are good selling weakness you're seeing correct got it alright. Thanks, guys. Good luck.
Thank you.
At this time I'd like to turn the call back to management for closing.
As in comments.
Look I appreciate everyone joining the call and for your interest in the business I also know that a lot of our associates listening to the call I'd like to thank all of them.
Okay.
We really have something special here is Trevor said in his prepared comments. If you think about it we're still if you took out usten and.
I got our Cannibalized stores, we're still count, 10% or better load. So we feel really good about what's going on the new stores have been received extremely well our service scores are off the charts. So we appreciate your guys interest and we appreciate all the associates and other hard work and we'll talk to the next quarter.
This concludes.
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