Q2 2021 Floor & Decor Holdings Inc Earnings Call
[music].
Good afternoon, and welcome to the floor and decor holdings second quarter 2021 earnings call.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then 1 on the telephone keypad tweets drawing a question. Please press Star then 2.
Please note. This event is being recorded on.
Now I'll turn the conference over to Wayne Hood, Vice President of Investor Relations. Please go ahead.
Thank you operator, and good afternoon, everyone. Joining me on our earnings call today are Tom Taylor, Chief Executive Officer, Lisa Laube, President and Trevor Lang Executive Vice President and Chief Financial Officer before we get started I would like to remind everyone of the Companys Safe Harbor language comments made.
During this conference call and webcast contain forward looking statements within the meeting.
And how we are positioned to further grow our market share of the residential and commercial segments of the hard surface floor and market in 2021 and beyond.
Trevor will then review our financial performance and discuss how we were thinking about the remainder of fiscal 2021.
And then we will open the call for your questions.
Begin by thanking all of our associates for the fantastic job they continue to do.
I am proud of our 2021 financial results, but I am even prouder of how our associates have stepped up during these challenging times to serve our customers and each other in the communities where they work I am very grateful for the culture, we embrace it floor on decor.
I would also like to say, thank you to our Bender community and our supply chain partners are enduring partnerships with them have allowed us to continue to grow during these challenging times.
Turning to our record physical 2021 second quarter earnings results, we believe our strong execution, coupled with the favorable economic environment is enabling us to achieve record sales and profitability in fiscal 2021, we are excited about being on a path towards delivering our 13th consecutive year of positive.
Store sales growth in fiscal 2021 equally driven by new and returning customers are.
Our fiscal 2021 second quarter total sales increased 86% to $861 million from $462.4 million in the same period last year and grew 28.6% on a 2 year compounded annual growth rate basis when compared.
To the second quarter of fiscal 2019.
1 of the new store openings in fiscal 2021, which in turn leads to improved new store productivity from more operating weeks, we intend to open 6 new warehouse stores in the third quarter of fiscal 2021 towards our planned 27, new warehouse stores opening in fiscal 2021, representing 23.
Percent growth from fiscal 2020.
We remain pleased with the sales performance among all our warehouse store vintages, but we're particularly happy with the sales and earnings flow through of some of our most mature warehouse stores in fiscal 2021. Additionally, our strong results from fiscal 2021 reinforce our belief that the new store classes of 2020 and <unk>.
2021 will likely represent the strongest first year sales and profit classes in our history. This is a direct result of our real estate team increasingly bringing to us preferred site options and excellent execution, among our visual merchandising training marketing and store teams.
For example, we are excited to have opened our second warehouse store on long Island in Commack in July and we'll open our third long island location and Bohemia. Later this year, we have a strong pipeline of 13 additional warehouse store openings and 2 design studio store openings planned for the remainder of the year.
Moving on to our second pillar of growth growing our comparable store sales.
We continue to be very pleased with our comparable store sales growth momentum and the broad based strength, we see across all of our merchandising categories and 11 geographic regions all of our merchandising categories experienced double digit comparable store sales growth in the second quarter of fiscal 2021 with <unk>.
<unk> up 7 departments comp store sales growing over 50% comparable store sales growth in our laminate and luxury vinyl plank decorative accessories installation materials and adjacent categories or above the company average, we're particularly excited about the emerging growth we're experiencing in our adjacent categories.
As they collectively represent large incremental growth opportunities.
In the second quarter. We also continued to see our customers moving up to the better and best price points within our merchandising assortments, which positively impacted our gross margin rate. This is where our customers will often find new formats sizes innovations and performance higher end materials and stunning entre and visuals debt.
On the spectrum of style and visual preferences.
We believe the shift upward along the merchandising assortment.
The result sequentially moderated as we began to psychopaths improving monthly sales results last year from our store is beginning to reopen from curbside delivery only in early may.
With all stores opened in early June we call our fiscal 2022nd quarter comparable store sales declined 58% in April and $26, 1% in may before increasing 7.7% in June we're pleased with the start to the third quarter of fiscal 2021, where are comparable store sales.
Are up about 11% quarter to date, let.
Let me now turn my comments to our supply chain in inventory, we like many companies are having to navigate through the constraints in the global supply chain to address this challenge we added significantly more capacity this year to our ocean in North American logistics to align with our strong growth, particularly from Asia, Europe and Brazil.
As we have discussed where a large importer and are fortunate to have agreements with our dedicated fleet, 1 way asset based carriers and ocean carriers to secure additional capacity and minimize costs, where we can we have been created with creative with our inbound freight by adding non containerized options taken.
Advantage of additional capacity such as new services of extra loader vessels on.
On board multiple new providers to carry our free expanding our ports of entry and increasing our transload activities in various ports, we believe our ability to pivot multiple alternative is a clear competitive advantage in these challenging times.
Particularly when compared with independent hard surface line retailers we.
We believe that these strategies on a broad assortments have enabled us to offer our homeowners and prose alternative products, where some out of stocks have occurred without materially impacting our sales and gross margin how.
However, consistent with what we have said during our last 2 calls we expect these costs to be a headwind to our gross margin right in the second half of 2021 and into 2022.
Our third strategic pillar of growth is expanding our connected customer experience as expected our fiscal 2021 second quarter E. Commerce sales declined about 1% from last year as we were comparing against unusual 192% growth last year from customer shifting to online purchases as the.
Internal portion of our stores were closed to the public for the majority of the quarter.
Relatedly, our fiscal 2021 second quarter E Commerce sales penetration rate declined to 16% from an unusually high rate of 33% in the second quarter of last year.
We are pleased that were measured on a 2 year compound annual growth rate basis, our second quarter E. Commerce sales remains strong growing 70% from 2019.2021.
Let me turn my comments to some of the enhancements we made to our website in the second quarter of fiscal 2021 towards delivering unmatched personalized customer experience.
Really the most important was the margin pickup scheduling capability, which allows online customers to select a pickup time on line after orders of picked in our stores. Additionally, we upgraded our website was wild website with search suggestions that we believe will increase items being added towards the checkout cart.
Finally, we redesign and better organized helps help center section of our website to more quickly find answers to common questions. As we look forward. We are working on other initiatives that include reducing the number of checkout pages to accelerate the checkout process for our customers. We believe these investments among others will lead to further strong.
E Commerce performance metrics and growth for years to come.
[noise], our fourth pillar of growth press on the successful investments, we are making in our pro and commercial customers to grow our market share. We continue to see strong double digit comparable store sales growth from our pro customers in the second quarter of fiscal 2021. These strong sales reflect our growing brand awareness and our efforts to driving.
Engagement with an eye towards developing strong and long lasting relationships with pro customers.
We are very pleased that the new pro contacts increased double digit in the second quarter of fiscal 2021 from the same period last year. This is a testament to our in store teams as well as continually improving service offerings like our PPR loyalty and credit offerings. Additionally, we are launching pro education events and pardon.
Your ship with National tile contractors Association that will include 24 workshops and 5 certification courses.
Finally, we look forward to our upcoming annual pro appreciation month, we're all stores will celebrate our pro customers through sweepstake prizes and virtual training we.
We believe these promotional events drive meaningful new pro engagement relationships and contacts.
Turning to our growth and our award winning pro Premier rewards PPR program, we're thrilled that the second quarter enrollment in the CPR program jumped 120% from the same period last year.
We now have over 230000, PPR members and have significant new member growth potential ahead of US. These members accounts for about 81% of our pro sales and shop with his 2 times more frequently and spend 2.5 times more than non PPR prose.
As we look to the remainder of fiscal 2021 and 2022, we are exploring opportunities that will further drive pro engagement and increase awareness of our value proposition we.
See opportunities to grow on market share by introducing PPR tears.
Skew based bonus point promotions and pro credit card incentives that will further drive engagement.
We continued to be pleased with the strong growth in commercial sales, particularly those sales that are originated from a regional account managers are Rams, which are now and most of our major markets. While sales from a regional account managers are small relative to the size of a retail business. We are excited about the growth opportunity and plan to add approximately.
Long term competitive advantage through our free design services before.
Before I close I would like to give you a brief update on our acquisition of Spartan surfaces, which we completed on June 4th 2021.
We remain very excited about the prospects for Spartan surfaces to incrementally accelerate our growth and the fragmented commercial market flooring market and create value through revenue and product cost synergies over the last 60 days, we have focused on our attention on integrating certain functional areas, including human resources.
As in information technology, legal and regulatory and finance, we have been pleased with the integration progress of these functional areas and were elated with Spartans June operating performance.
Post closing we have collaborated in more detail about the synergistic growth opportunities.
While Spartan will not be material to our fiscal 2021 results. We are excited about its value creation potential.
We'll now turn the call over to Trevor to discuss in more detail our fiscal 2021 first quarter results.
Thanks, Tom I would also like to express my appreciation to all of our associates for their enduring hard work and dedication towards serving our customers are.
A record fiscal 2021 second quarter and year to date financial results are a testament to the excellent excellent execution of our strategies by our associates and the strength of our business model.
We now discuss some of the changes among the major lie on items on our fiscal 2021 second quarter income statement balance sheet and statement of cash flow.
I will then discuss how we're thinking about the remainder of fiscal 2021.
As a reminder, these results include our acquisition of Spartan services, which was completed on June 4th Sparklers roles were not material to our fiscal 2021 second quarter earnings, but they were modestly accretive for the second quarter.
As Tom mentioned, our fiscal 2021 second quarter total sales increased 86% and are comparable store sales grew 68, 4% from the same period last year.
While 68.4% growth in comparable store sales is an impressive rebound from last year, 28% decline in comparable store sales on access to our stores with women's as a curbside pickup we are exceptionally pleased on on a 2 year compounded annual growth rate basis, our fiscal 2021 second quarter comparable store sales increased 14.8.
Percent from 2019 on.
On that same basis are year to day comparable store sales have grown at a $15, 1% compounded annual rate, which is well above our long term target of mid to high single digit comparable store sales growth.
We are particularly pleased with the sales performance of our older vintage of stores and their contribution to our second quarter comparable store sales growth as well as the consistency across all the regions of our country.
Our fiscal 2021 second quarter gross profit increased 85, 8% to a record of 365.400 million from 196.700 million in the same period last year.
The increase in gross profit was driven by the 86% increase on our fiscal 2021 second quarter total sales as our gross margin rate was flat at 42, 5% versus the same period last year.
We are pleased with our 2021 second quarter gross margin rate performance considering were cycling past 60 basis points increase in the second quarter of fiscal 2020 compared to 2019. Additionally are 2021 second quarter gross profit included a $2.5 million decrease to the estimated tariff refund receivables that impacted our gross margin.
By about 30 basis points.
Turning to our fiscal second quarter of 2021 expenses.
Selling and store operating expenses increased to 66.600 million or $48, 1% from the same period last year the.
The increase was primarily attributable to the 22, new warehouse stores open since June 25th 2020, as well as additional staffing required to align with the strong sales growth.
Nevertheless are strong sales enabled us to leverage our second quarter selling in store operating expenses.
10 basis points to 23.8% from 29.9% in the same period last year.
Furthermore, we are pleased that our fiscal 2021 second quarter expense rate was 210 basis points below fiscal 2019 second quarter rate of 25, 9%.
Our second quarter general and administrative expenses increased 19.100 million or $56, 7% from the same period last year, primarily due to the higher incentive compensation and cost to support store growth, including store support staff and higher depreciation related technology and other store support center investments.
Additionally, we incurred 3.200 million and acquisition related costs in the quarter on a rate basis, our general and administrative expenses leveraged approximately 120 basis points to $6, 1% from 7.3% last year on higher sales.
Preopening expenses during the second quarter increased $5 million 600000 on 161.9% from the same period last year.
This increase is primarily the result of an increase in the number of stores that we either open over preparing to open compared to the same prior year period, we opened 7 warehouse stores. During the <unk> wings ended July 1st 2021, as compared to openings to warehouse stores. During the 13 weeks ended June 25th 2020.
Second quarter net interest expense decreased $1 million for 43.9% from the same period last year.
The decrease in interest expense was primarily due to a decrease in the interest related to lower revolver line of credit borrowings and a decrease in the terminal interest rates compared to the corresponding prior year period.
Our fiscal 2021 second quarter provision for income taxes was 14.300 million compared to a 12.200 million benefit in the same period last year.
As a result, and effective tax rate was 14.8% compared to a negative 61.6% in the same period last year the.
The increasingly effective tax rate was primarily due to the recognition of income tax benefits in connection with the cares Act in 2000, 2020 and higher earnings during the current quarter without a proportional increase in available tax credits.
Moving on to our profitability or second quarter of 2021, adjusted EBITDA margin rate increased to 600 basis points to $15, 9% from 9.9% in the same period last year.
As a result, our fiscal 2021 second quarter adjusted EBITDA increased 200.8% to a record 137 million from $45 million 600000 in the same period last year.
Consequently, we delivered a stronger than expected to fiscal 2021 second quarter earnings per share.
Our second quarter GAAP net income increased 159.1% to $82 million under a thousand or 77 per diluted share from $32 million or 30 per diluted share last year.
Our second quarter adjusted net income increased 485% to 78.300 million or 73 cents per adjusted diluted share from 13.400 million or 13 per adjusted diluted share last year.
We ended the second quarter with 107 million 300 diluted weighted average shares outstanding compared with 105.500 million shares last year.
Moving on to our fiscal 2021 balance sheet and cash flow are strong fiscal 2021 financial results favorable trade payables and higher inventory turnover drove significant increase in our operating cash flow.
For the 26 weeks ended July 1st 2021 are operating cash flow more than doubled to 256.600 million from 96.700 million in the same period last year.
We ended the second quarter with 366.100 million in cash on our balance sheet and anticipate using a significant portion of that cash to fund our capital spending an inventory requirements in the second half of fiscal 2021.
Our fiscal 2021 second quarter inventory increased 15% from the same period last year, and 5% year to date, which is well below our sales growth due to the constraints on the global supply chain.
Houston facility in Los Angeles that will allow us to maximise cargo weight, leading to fuel containers, which will drive ocean freight and drapes savings beginning in fiscal 2022.
Collectively these plans are expected to require $70 million to $74 million.
We continue making investments an existing store remodeling and expansion projects and existing distribution centers using approximately $52 million to $56 million.
Finally, we plan to continue to invest in information technology infrastructure E Commerce and other store support center initiatives, using approximately 28 million to $30 million.
Let me now turn my comments as to how we're thinking about the second half of fiscal 2021.
From a macro economic perspective fiscal and monetary policies look to remain very accommodative over the intermediate term.
June existing home sales seemed to have steadied and an annualized rate of 5.900 million a healthy right.
Home prices are at all time highs, which allows for the reinvestment back into the home allow mortgage rates are up from the end of last year. They are still at historic lows.
The second on demand for homes continues to exceed available supply, which we believe will continue to lead to growth and home price appreciation and support home reinvestment projects are.
Our sales growth has remained robust across geographies and merchandise categories and the pro backlog remains strong.
While we are optimistic about the prospects of a sustained economic recovery in the second half of fiscal 2021 and into 2022 and the momentum in our business. We recognize that business risks remain elevated for that reason, we are continuing our practice of not providing specific annual sales and earnings per share guidance.
<unk> many provide you some context and items to consider for the remainder of the fiscal year.
As many of you know we like many companies will be cycling past increasingly difficult comparable store sales and margin comparisons in the second half of fiscal 2021.
As a reminder, our fiscal 2023rd and fourth quarter comparable store sales increased 18.4% and 21.6% respectively.
Moreover, our fiscal 2023rd quarter in fourth quarter gross margin increased 200 basis points, and 90 basis points versus 2019 on and adjusted basis, taking out unique items called out on our previous non-GAAP reconciliation and the impact of the 53rd week in 2020.
As we look forward, we are facing rising product and freight costs from capacity challenges in the global supply chain.
While we have plans to effectively manage these higher costs. They are likely to change the complexion of our P&L in the short term as we are discussing prior calls we are likely to see a year over year decline in our gross margin right in the second half of 2021 due to the outside increases in gross margin rate last year and the rising cost this year that said on and adjusted basis on.
Gross margin right for the second half of 2021 is expected to be slightly higher than the same period of fiscal 2019, but below our house of the second half of 2020.
To mitigate these rising product and freight costs and related gross margin the rate pressures, we have plans to selectively raise prices on certain products where necessary.
Our current expectation is these price increases will be modest in 2021.
It's important to keep in mind that any price adjustments that we may make will be rolling and will be with an eye towards maintaining our price leadership and protecting our value proposition we.
We are fortunate to have a broad assortment, where we can make selected strategic price adjustments without materially impacting auspices.
<unk> the city.
We believe these actions coupled with our underlying organic growth could lead to a rate of comparable store sales growth in the short term that could be at the upper end or above the long term comparable store sales target of mid to high single digit growth.
As Tom mentioned, our quarter today comparable store sales were up about 11% on top of the very healthy comparable store sales of 16% quarter to date last year.
Turning to our selling his store operating expenses, we expect our fiscal 2021 third quarter spelling of store operating expenses to deleverage compared to our third quarter of fiscal 2020, when we leverage these expenses by 130 basis points in the same period are comparable store selling from store operating expenses leveraged 220 basis points.
Recall the outside of the expense leverage on the third quarter of 2020 was a direct result of our sales exceeding our plans store labor hours as customer demand accelerated.
While we are expecting our selling historic operating expenses to Deleveraged in the third quarter of fiscal 2021, they are expected to leverage when compared to fiscal 2019.
As we look forward to the fourth quarter, we would expect modest leverage over the same period last year.
Our preopening expenses as a percentage of sales expected to be higher in fiscal 2022 to opening 27, new stores. This year versus only 13 last year and for the year. We are modeling our preopening expenses as a percentage of sales for the fiscal year to be close to 2019. When we also do our store count on 20%.
Our general on administrative expenses as a percentage of sales are not expected to change significantly in the second half of 2021, we are expecting the right to be approximately 6%.
We are planning planning on a depreciation and amortization to be approximately $150 million 117 million and we are planning on our interest expense to be approximately $5 million unchanged from our prior guidance.
Diluted weighted average shares outstanding is estimated to be 107 million in our fiscal 2021 tax rate is estimated to be slightly above 24%.
As a reminder, this guidance does not take into consideration the tax benefits due to the impact of stock options exercises that may occur in fiscal 2021.
We also expect our yearend inventory balance to be approximately $1 billion, an increase from the $654 million at the end of fiscal 2020.
The expected increase is being driven primarily by 2 investments first we intend to bring in a portion of the Chinese new year in Chinese new year inventory a couple of months early landing in November and December to try to mitigate the current international container capacity issues.
That exists and second we're making an investment to improve our in stock inventories of key issues.
Even with these investments our inventory turns will approach 3 X. This year the highest on our company's history.
While there are some manageable challenges in the global supply chain that will change the complexion of our P&L on the short term are longer term growth algorithm is unchanged. We continue to see 20% unit growth mid to high single digit comparable store sales growth and a modest gross margin improve it over the long term that leads us to net income growth growth of at least 25% on.
Compounded annual growth rate basis.
Entire executive team is incredibly proud of how we are performed on it now turn the call back over to Tom.
Thanks Trevor.
We also announced today that Lisa lobby has informed us on August 3rd 2021 that she intends to retire on April 30 April 30th 2022, we should joined the company as an executive Vice President and Chief Merchandising Officer in 2012 and was promoted to President in February of 2020. She has been a critical part of floor.
And of course success and growth over the last decade, and I can't thank her enough for her leadership vision and friendship her influence can be seen in each of our stores. Let me now turn on the call over Lisa Lisa to briefly talk about her decision and how she came to it. Thanks.
Thanks, Tom.
Events have in the past year have really caused me to reflect on like important to me and to my family I can't tell you how many times a second word some day and may have been I, finally decided rather than talking about it we would define it there's never a great time to leave and I will certainly accompany and all of our shakes, yet, but I've never felt better about leaving and now we have any.
Credible strategy and long term plan, an amazing team who doesn't depend on me to continue this journey.
All of my direct report taken with us from more than 8 years and know what they're doing a guidance to where we are today and are excited about hearing sworn decor ended the future we have a <unk> an experienced <unk> leaders.
EVP of store operations, Steve Danny in our 3 DDP had a combined 85 years of experience in retailing and 35 at floor and decor, our senior Vice President of merchandising archive same and had 25 years of experience in the hearts of exploring industry and it's been like foreign decor for 17 years and collectively.
Our senior merchandising leaders have almost 100 years of experience it F&D. These.
These leaders have a deep understanding of the hard surface flooring industry and unmatched relationships that are over 200 suppliers around the world.
It's also important to note that Tom Trevor and I have been involved in all aspects of our strategy in day to day operations in the business for almost 10 years together and they will continue to make sure that we are focusing on merchandising as a foundation of our company I could never leave if I wasn't 100% confident and a legacy I leave behind I'll be here until next April.
Emmeline sharing and we had a smooth and seamless transition, let me turn the call back over to accounts.
Thanks, Lisa while traveling on our leadership team will Miss lease and we're excited on as ever about being part of the growth that lies ahead of us with that I will turn the question I'll turn the call over questions.
Hey, Kim deal now became the question and answer session.
To ask questions, you'll make price is cash.
On 1 on our telephone keypad <unk> speakers Halama crispy capital R headset before pressing the keys.
Swisher dying a question on this price tag didn't think too.
At this time, you pause momentarily trust from our Hosner.
Our first question comes Karen short from back. Please. Please go ahead.
Hi, Thank you very much and congratulations lease on your retirement.
I wanted to ask to sit in the near term question on a bigger picture question, maybe could you maybe.
Okay, and we lost Ya.
Operator.
We'll come back to Karen and I will come back again.
Okay. Our next question comes from Chris from from J P. Morgan.
Thanks, Good afternoon, and congratulations on a great quarter and you don't leave a lot of room for questions could you just give so much greater detail [laughter], but.
Let me try and first congratulations lease on retirement, obviously on great career.
So my first question is I mean.
There was a modest deceleration on 2 year basis over the months of of <unk> and into cured. It quarter to date do you think that was just fading stimulus was it anything to do with sort of a share of wallet as people are sort of a head out on vacation how are you thinking about that.
Yeah, I'd think of it I mean look at.
If you'd have asked me 6 months ago, when they got the July of free B being able to post.
And 11 in July on top of the 16 from last year I, probably wouldn't have guessed had I mean businesses is still pretty strong, but the deceleration is to be expected and I think it's it's a little bit of both Chris but I think certainly consumers are getting back out there out of their homes their back into restaurants, there back traveling.
And some of that sure wallet, certainly it's going to shift, but overall the demand and the business is still pretty good.
Trevor has your has a gross margin outlook I mean directionally, it's it's similar to what you've said prior.
Has it has sort of the free pressures on supply chain pressures are they are they worse than than he thought 3 months ago, and then as you think about.
Next year do you expect to recapture some of these pressures.
As you pass through pricing.
[noise] Thanks, Chris the answer to the first question is yes, the supply chain and what's happened over the last 3 months is definitely gotten more complex and the cost of gone on more than we had anticipated, but I think the benefit for us and again, we have the benefit of having a big broad field team that feeds US information every single week when you look at the the pricing we.
Versus the market out there whether it's our larger competitors are smaller competitors, we still as good as we've ever felt and when we look at the assortment and the uniqueness of what we're doing we feel great that day and leads us to the answer that you've heard really for over 3 years from us which is R. We have very good teams and good systems will allow us to model. This that we still think we can get to a similar.
Gross profit dollar amount, but as you guys have heard me say again for 3 years. The math of that is if you have a skew for a cost for 1 dollar and you're selling your for $2 at the cost goes up to a dollar $500.10, we still think we can raise retails by that same 5 to 10 cents and get to the same gross profit dollar number which mathematically will bring down your right.
So hopefully that answers both of those questions.
[noise] I'm on next question comes from kind of Getman from Martin's tally.
Hey, everyone. Its simian congratulations Lisa nice corner, Hey, can I start on the on the top line can you talk about I may have missed it average order value on the second quarter versus the first quarter versus a year ago in relation to volume and then looking at the sales environment. How are you looking at.
On it I guess Trevor on Tom regarding.
Sales per store are you looking at 2 years stacks through your stacks I kind of got the guidance. So it's helpful. But curious what the best way you think to look at your businesses.
Yes, our accounts were most of that by transactions again, I think our transactions Thomas around 3 or maybe closer to 4%.
And that's that's a similar trend over both a 1 and a 2 year basis.
Last quarter, when we give you guys an update we said at the time for the quarter are total sales were up on a 28 about 20, 25% of on a 2 year CAGR basis.
Excluding Spartan from any of these numbers that number accelerated a little bit to almost 29%.
As the second quarter and we also came up with a metric that I mentioned in my mind.
Prepared remarks that when you look at our comparable store sales on a 2 year basis again, taking the 2019 base here and looking at what that isn't the only 1 in our 2 year cake or sales were 15.3% on Q1.
14.8% in queue too and they are running about 12, 8%. So is Tom mentioned, we have seen a bit of a deceleration, but still well above our longterm expectations and and I think where we were when we sit and look relative to what we see in the marketplace.
We're in a fantastic position so it's hard to say what the rest of the year is going to hold whether that deceleration continues or not obviously, we're going up against an increasingly large compares towards the end of the year.
But I think we.
Laid out how we're thinking about the rest of the year.
Our next question comes from Mike on last time, we C U B S.
Good evening, Thank God for taking my question.
It can you and congratulations Lisa.
On the gross margin.
You unpack or dimension lie.
Magnitude of the pressure that you're going to experience from the transportation costs versus.
The.
The input costs on on the product side.
Sure, but I think you mentioned that the gross margin the backup.
About 2019, implying.
Well over 100 basis points of pressure in the next couple of quarters.
And a.
A good portion of it is.
The product cost inflation that you're not able to pass along in the form of price increases why should we expect that debate.
I think you read the tea leaves right, we do expect gross margin right to come down.
Based on the cost increases we are seeing today when you look at the proportion of what's driving up our cost it's more on the supply chain saw that it is on the vendor side.
And I think based on how our inventory turns you're right we are going to be doing with us in 2022.
I'll just I'll reiterate we have an incredibly strong merchandising team, we know exactly where we need to look to retail increases if and when they come.
And we've got a strong plan to execute it and so we're I think the math drive is pretty straightforward based on the goalposts I gave you of being above 2019 gross margin right, but being below last year's historic highs.
We should think about the rest of this year and kind of leaving on into next year.
It's hard to say, what's gonna happen more maybe on a little optimistic that once the holiday shipping happens for veterinary affect our business, but really the shipping industry that maybe there'll be some better capacity rates capacity and rates as we get on the 22 and hopefully that will brings out on some of these very very unique cost pressures that we're all facing today.
<unk>.
On our next question comes from Steven Forbes.
Hi Securities.
Good evening and also extending my congrats to day Lisa.
Oh.
I'll I'll have to focus on the mature store trends right you seem to sort of highlight it and the prepared remarks here. So curious that would provide some additional context.
Round give me on the line.
Strength on the mature store a footprint as you would define it I don't know if you could sort of talk to to your gross kangaroos and the mature store base of any sort of insight as we think about what's happening here.
Yeah go ahead on there.
As we said on the prepare count as I like travelling I give some of the detail on numbers as she said in the prepared comments that are mature fleet. It's been a really pleasant surprise the amount of growth rates from seeing across the country they've been doing evidently <unk>. Yeah. I mean, I was just Ah reflect on it.
Looking through the details across all of our 11 regions and they're all performing exceptionally well, there's not 1 pocket or area of the country that that's really driving this but if you go back pre.
[noise] Covid, some kind of talking about the end of 2000, 1920 or or stores over 5 years old will probably doing about $22 million in sales and maybe making about $5 million for awhile EBITDA now those numbers now are closer to $26 million and getting close to 25% for wall profit, which is about 6 and a half million dollars.
Sales per square foot or up to $357 per square foot. So so we have seen incredible strength certainly the economy in the macro was doing a lot of that but as we look at what our competitors are publishing their numbers as well, they're not anywhere near us.
Speech through the culture speech due to what the merchandising teams on the new real estate that we're seeing out there have a supply chain has continued to do a great job. So.
It is quite incredible what we've seen over the last.
Few years as we.
Continue to evolve and improve our model.
Our next question comes from time slash from back place.
Hi, Thanks, very much sorry about that before I never would have thought a landline would be less reliable.
Anyway, so at least as I was saying I congratulations on your retirement and I guess I just had a couple of questions. So the first day just following up I think on.
Christmas question, So looking at the pets and takes on the gross margin for the second half obviously you maintain the dollar gross profit dollar if you're raising prices, which pressures margin and then free it sounds like it is going to be a little bit more of a pressure, but can you just kind of dimensionalize. Those 2 and then I had a bigger picture question.
And can take stuff dimensionalized.
Yeah, I'll, just say that the vast majority of our product cost of the product itself, you know, 80% plus of the product is protocols and we're not seen today the volatility we're seeing in the in the supply chain.
Wasn't that long ago, you would get a container out of Asia for less than 2 or $3000 and now on the spot market you could be seeing things at $20000 and it was just really really unique interesting times, but again, it's a customer to O'brien in the supply chain team has done a soulless coming earlier, they they locked up capacity, they're bringing an alternative.
Ways of bringing product that we never would have thought alternative ports alternative ships.
That's why when you look at our in stocks versus I think the competitors you see us in a better and better shape, especially versus the smaller competitors out there which is.
60% of the of the industry today so.
On the margin of Kansas anything as I said is there'll be remodeling them to be below last year's the store chi's, but above 2019 that gives you a pretty narrow range and when you do that math, depending on which of the sales you're going to see where we're very very nice good growth based on current expectations and gross profit dollars over the last year, but before can you ask your big bigger picture question.
I would just say just a couple of things just on the on the margin side of it 1 we mentioned a couple of times the amount of experience we have on our merchandising teams they have lived through.
An unbelievable a balance of having to deal with tariffs over the last few years and have been having on how do we keep our margin rates consistent as we're dealing with the complexity of that they've done an outstanding job and this is just a testament to the.
Many years of experience that we have within our merchants and the job that they do the second day. It says we have a lot of initiatives that have been helping gross margin that aren't going away that will continue we're continuing to see our consumers stepping up to better on best products, where we tend to make a better margin right and if you go into the stores and you see kind of the assortment that were that were leaning towards we've got we've never.
<unk> product line reviewed so the product assortment that's coming in to the store is just terrific and consumers are stepping up to better and best that helps margin and then if you compound that with what we've done within our installation accessories Department, where we really created a nice supply house in there and then you combine that with what we're doing and design services, which we tend to have a higher margin right. When we should have a designer.
Involved in sales all of those things helped to improve margin over the long haul. So why we're going to have some headwinds and some challenges that we have to deal with the overall strategy is go to the overall strategy is working in the long term.
B Bob.
Okay. That's helpful. Thanks, and then I just wanted to see I mean, I think last quarter. You commented that web traffic was kind of a.
Leading indicator of sales. So I'm wondering if you could talk a little bit about what you're saying in terms of the pipeline and then specifically on DIY versus the Crow whether exist in your store are based on web traffic more specifically.
Sure and since lease is not retiring until April will let her answer that question [laughter].
With me for quite a long time, so [laughter] anyway, you know, it's a hard thing to look at web traffic versus last year. The case last year for the quarter is when we were closed so it was it was really different animal.
What we are seeing is if you go way back free Covid, our web traffic or got traffic on our web sales were about 12% of our sales and for last quarter. They were 16%. So we continued he really nice growth and even as we come out and now we're kind of camping stores opened its doors open our traffic is up on the website, which is great.
Continuing to see a lot of strength there on a lot of interest in the product category and your question on pro versus homeowner still I think as we talked about last time hold on home owner growth is a little bit stronger than pro growth of both growing nicely.
And we're very very excited about that too and it remains to be seen as Tom embedded Trevor at that said you know like people.
[noise] out more and doing things more how that may shifted over time on that.
For today, we're we're very happy with that segment.
Oh.
[noise] on our next question comes from Tacky Graham from Garden Heskett.
[laughter] alright, good afternoon, Congratulates as well I was wondering if you guys could just speak to new category growth opportunities both on on.
The commercial pregnant also okay, some categories, which it sounds like you're in a more excited about recently I guess, where it penetration is today on both fronts, where do you think they can go to and then also as a follow up just remind us what the margin profile of both of those segments look like.
So.
Can be given the script.
Uh-huh penetration.
2% since we're at 2% today and that 1.
Yeah, we're at 1.6% of the day, sorry about that and we.
I I couldn't be more pleased with each adjacent category that we have entered into each 1 of them has.
Has been a pleasant surprise, it's all incremental.
Our stores are excited about it.
And that number will continue to grow I don't think we publicly said that it's going to be a bigger piece of our business in the future for sure. We just are finishing we close on our stores were not even by the end of this year will have gone through on reset all the stores to show them. The way we want us that's not complete today and we're having the success we are having without that so and then I would also say that there's more categories to come.
I don't I wouldn't put a number out there, but it's going to be bigger than 1.6% and it's something that we're hard surface flooring retailer first we're not gonna get distracted with that but there are some things our customers want to complete the project and we've proved these big stores give us the ability to flex space and to to adamant as we go over time.
From a margin standpoint.
Our goal is to get them to the margin rates that we run on the rest of the store, they're a little bit less than that today, but as we learn more about them than we buy them better. We think we can continue to improve those rates.
And then the only thing I'd say on the commercial side is as I mentioned, we're hiring 15, new regional account managers I think we ended last year with maybe 22 or 23.
We're very excited about what we're seeing there and it's getting validated about what sport and is teaching us we hire those people will take some a little while to get up to speed hopefully do half million, maybe a little bit more than that and sales are first year and by the time they get up to maturity. We think they are doing 2.2 and a half probably closer to $3 million in sales and we're currently exceeding those numbers today.
But they are performing well and just 1 other number because it comes right off the face of the Tin can you just to give you a sense on adjacent categories last year for the 6 months ended we did $5.9 million in sales and this year for the 6 months ended we've done $25.8 million in sales so.
The team's doing great. There's new things are thinking about the space looks great where you with the way, we re floated and so more to come there and the last thing I would say at least on.
Absolutely confident of even though at the margin rate currently has a little bit lower it's absolutely an incremental sell rights on like you were thinking I will take this floor versus this vanity when you pick the flooring and the installation you decided to take advantage of its an incremental sale and if you think about it too. It's a it's not labor intensive out we're adding very easy category, where customers could describe them go so it's working well.
On our next question comes from Lisa So cute please bank of America.
Great. Thank you guys given that they're still a fair amount of uncertainty such that you're still not providing guidance to the ear. How are you thinking about allocation of capital on whether it's also need to maintain elevated levels of cash as you have for the last 6 quarters Michelle.
Great question.
We do want to keep a little conservative right, where growth company, where 1 of the few guys growing at 20% what we're absolutely confident others. Tom mentioned the biggest as you guys because I get a lot of detail on Capex, where we're spending our stores as we're investing that capital back into the store. That's the vast majority were getting well over 20% Irr's. When we look at both attended on the 20 year basis.
The next area that we're investing in as our distribution centers.
You know when you read what's happening where there is no distribution center capacity and costs are going up.
What we're doing in Houston for example, where where on about distribution center. We know there's a very very high return on invested capital.
There. The next 2 really are investing back into our stores as we've mentioned things like.
Making room for the adjacent categories and investing in some of our older stores, we see a nice return when we've taken older store and we remerchandising, we figured out how to lower that cost over time, and then technology.
And the and the e-commerce platform, so even though there may be some uncertainty in the short term. These are long term investments that we've got a 10 year record of improving and stuff to get too excited but when you look at our return on on invested capital over the last 3 years has gone up substantially in so.
We've got a very strong conviction that we're going to get a very good return on that investment capital on the cash piece of it we do have a lot of cash.
Last year, we cut our stores in our business took off so we ended up having a lot of cash, but we're going to use a lot of that this year. When you look at our Capex, we're going on more than double our capex. This year versus last year, that's going to be of use of cash and then as I mentioned.
We're going on with $1 billion in inventory versus the 654 million, we had last year and so that cash balance is gonna come down it's not going to go to zero, but that customer is gonna come down as we get to the end of the year as we make the investment in the Capex as well as in the inventory.
Our next question comes from Justin Dryburgh from bars.
Yeah, Hey, guys. Thanks for taking the question and congratulations.
Just wanted to ask about new stores and the the new store waterfall and it seems like every year, you're stores are delivering higher and higher a you vs.
You've just given that base I mean, how are you thinking about the maturation care or a new stores, maybe relative to what you historically seen in the business.
Yeah. We this is Trevor we've historically said the new stores at about 400 basis points to our overall cough.
It's hard to measure in this environment, where were we calmed down 21 last year on the comfort of 68.
Unfortunately been wrong every year I've been here on this every year to your point is when I got here new store as a baby do 8 or 9.
Wasn't that long ago. They were you intend to 12 now we quote on our 10-K 13 to 15 and it looks like the class of stores are certainly going to get the higher and maybe above the higher end of that for the class of 20 and 21 as Tom mentioned mathematically I still think that 400 basis points is going to shrink because if you have a new store that ultimately going to get to 22 or $24 million now now opening at 50 million versus it used to.
At 12 or $13 million on mathematically the constantly on it come down so I hope I'm wrong I hope that.
5 year number average I talked about keeps going up but I do think as we think about the future. Because these new stores are opening up so much better and so much more profitable, but mathematically that 400 basis points is gonna come down as we look to the future.
But it's a good thing because the beginning numbers are much much higher numbers are much will take on.
[noise] have our final question comes from China, Jonathan and Martha Kent.
This case from Jeff price. Please go ahead.
Great. Thanks for squeeze me in and a quarter guide.
2 question first 1 lots of room to go domestically with new stores can you give it to your latest thoughts on potential market entry into Canada, and how do you think about the hard surface flooring buying preferences of pros and DIY customers up there versus the U S.
So I believe that Canada is a terrific market.
I have been fortunate to be in home improvement for I can't believe how old on getting but I've been in home improvement for a very long time and seen home improvement around the world and there is nothing like blown decor anywhere in the world and flooring really.
Particularly in Canada is.
Really bought the same way that it's spot here on the U S. A competitive landscape looks the same way. It is here in the U S. We know will be successful when the time's right to go there.
When we're ready to talk about going there were certainly going to let let the world know I think when we get to our our analysts.
Our analysts meeting and to get to next year, then we'll talk a little bit more about that.
But I know, it's an opportunity in Canada and beyond so it's just a question. It's not a question of if it's just a question of what.
So look I I want to thank everyone.
For participation in the call today I know are are comments were longer than usual and there were long sometimes in general but.
Certainly we are we have a lot to a lot of information that we wanted to provide for you today.
Including leases announcement, Lisa will be here until April of next year and she's committed to stay on every investor call and heavy on every earnings call that we do so certainly she'll be here and we will have plenty of time to say goodbye to her so thanks for joining bank for your interest and we will talk to you soon.
They call France has now concluded day. Thank you for attending today's presentation you may now disconnect.
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