Q3 2018 Earnings Call
All participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
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As a reminder, this conference being recorded I would now like to turn the conference over to your host today, Mr. Mac Mcconnell director of Investor Relations. Please proceed.
Thank you and good morning, everyone. Joining me on our call today are Tom Taylor, Chief Executive Officer, and Trevor Lang Executive Vice President and Chief Financial Officer also in the room is Lisa Laube Executive Vice President and Chief Merchandising Officer, who will join us for the Q&A session before.
Before we get started I would like to remind you that the company's safe Harbor language comments made during this conference call and webcast contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095 and are subject to risks and uncertainties.
Any statements that refers to expectations projections or other characterizations of future events, including financial projections or future market conditions is a forward looking statement.
The company's actual future results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its SEC filings.
During the core assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call. The company May discuss non-GAAP financial measures as defined by SEC regulation G. A reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press.
<unk> release, which is available on our Investor Relations website, IR Dot <unk> Dot com a recorded replay of this call together with related materials will be available on our Investor Relations website, IR Dot <unk> Dot Com now, let me turn the call over to Tom.
Thank you, Matt and thanks to everyone joining our call today, let me start by saying that I am very pleased with our third quarter results.
We achieved total sales growth of 26, 7% from the third quarter of 2017 to a record $435 9 million.
Comparable store sales grew 11, 1% on top of 13, 5% growth last year and adjusted EPS grew 41% from the same period of fiscal 2017, all exceeding our expectations. Our third quarter results reflect the ongoing strength of our differentiated business model and <unk>.
Compelling value proposition that continue to resonate with our consumers and pros. This further drives market share gains and on the very fragmented $20 billion hard surface flooring industry.
In the third quarter, we opened seven new stores, including six openings in new markets. We are excited about our openings in densely populated markets like Boston and our second store in Seattle. In addition, we successfully rolled out our pro Premier loyalty program companywide and are enthusiastic about the program's potential our team's focus.
It gives me the confidence in our future I believe that our current size. We are only a fraction of what we can ultimately achieve and we have significant growth opportunities ahead of us. It is an exciting time here at floor <unk> decor.
I wanted to thank our associates for all their hard work in serving our customers and communities now turning to the third quarter results.
We continued our nearly decade long streak of double digit comp store sales growth at the same time, we are we have been making substantial investments to support our growth. Despite.
Despite these investments we delivered third quarter operating income growth of nearly 20% and adjusted diluted EPS growth of 41% from the third quarter of 2017, we are especially pleased to have exceeded our third quarter revenue and earnings outlook. This occurred during a period that was particularly difficult to forecast due to last.
Years unprecedented impact to one third of our stores by Hurricane Irma and Harvey.
Our business during the third quarter outside of the storm affected areas comp 10%.
Looking to the future we continue to see significant market share gain opportunities as we expand our footprint and build brand awareness. We will continue to invest in our connected customer pro designer and DIY strategies, we are enhancing our marketing efforts to drive more traffic both online and in our stores with our.
Brand awareness is still low and our market share is still small we are well positioned to build on our share gains given the fragmented nature of our industry.
The key to our success has been and continues to be our people and the disciplined investments we make across all areas of our business a bit later I will touch on several of the investments that are increasing returns and driving growth to reiterate our key growth priorities and areas of investments are one opening new stores to increasing comparable store.
Sales three expanding the connected customer experience and four improving the pro customer experience.
Now let me briefly highlight the progress we made in the third quarter in each of these areas number one we continue to invest in new store growth, which remains our top priority. We continue to see a path towards at least 400 nationwide, Florida core stores. We have made a number of important changes in the way, we invest in and open our new stores.
These enhancements along with strong site selections have led to our class of 16 and projected 2017, new stores four wall EBITDA to more than double previous years and are above our pro forma expectations.
Our 2017, new stores have collectively not yet cycled past the one year anniversary. We continue to believe they will represent the best class of new stores in our history.
We opened seven new stores in the third quarter and remain on track to open 17, new stores. In 2018. This represents 20% growth from last year and is in line with our long term targets. We are excited about the class of 2018 stores, including those opened in densely populated metro markets like long Island, Boston San Francisco.
Cisco Bay area and Seattle, We believe these stores will drive substantial growth and profitability over time.
Our class of 2018 stores are open opening favorably and our work around the class of 2019 stores is well underway. We expect another year of 20% unit growth and this is a direct reflection of the strength and capabilities of our real estate team.
Number two we continue to invest in driving comparable store sales growth. We remain focused on key comp store sales growth driving initiatives, including product innovation visual merchandising improvements better training for our associates pro and designer strategies. We are also focused on investing in.
<unk> to provide superior experiences online and in store for both our pro and DIY customers. A few examples of investments we believe will serve the customers better.
We are in the early stages of standing up our customer relationship management or CRM solution to smartly identify our customers from multiple sources, which should help us better segment message and serve these customers over the coming years we.
We implemented a system for scheduling online appointments with our in store designers the increase in online appointments has far exceeded our expectations. We know when a customer spends time with one of our designers they spend far more than our average ticket. We also see both improved customer satisfaction stores and favorable customer reviews on social media.
When a designer is involved.
We are still early in adopting these new solutions to learn and serve our customers, but we are excited with the early results.
From a product and merchandising perspective, our expansive SKU offering visually inspiring design centers and displays along with our breadth of assortment continue to set us apart. This allows us to flex with the ebbs and flows both within and across product categories.
An example is our rigid core locking LDP within our LDP laminate category. The same confer additive advantages that have led to our industry, leading comparable store sales for a decade are clearly on display in this important category rigid core locking LBP has been our fastest growing product category for three.
Years.
Our in stock assortment is materially higher than the competition.
Our analysis shows that our products are better when compared with the competition when collectively comparing price thickness wear layer and warranty. Moreover, we have large visually inspiring displays that show our product an eight foot by three foot display doors. So customers can appreciate how products local look in their homes we can.
<unk> here from our customers and employees that customers want to see touch and feel product as well as have somewhat explain the features and benefits to them. This is an infrequent purchase and customers like help in making the right decision for their project in short our entire value proposition is different hard to replicate and it's been working consistently.
For a long period of time as witnessed by our strong comp store sales growth over the past 10 years next we continue to invest in expanding the connected customer experience.
Originating through our website continued to grow at a much faster rate than our total sales growth online sales accounted for over 8% of our total sales in the third quarter with over half of our all of our website web traffic coming from mobile about.
About 75% of our e-commerce customers pick up in store, which demonstrates the synergy between our physical footprint and ecommerce business. We expect continued expansion of our store footprint to be a key driver of e-commerce growth.
Recently, we made investments in machine learning on our website to help customers better identify products. They are looking for thereby improving their online shopping experience, we launched a redesign of our mobile website and a new tool called My project. This allows associates to build orders in the <unk> with the customer which helps our customers to extra.
The checkout process. Alternatively, we can email the order to our customers. So they can evaluate change and transact on our website and the convenience of their home or on their mobile device. It is important to note that 70% of customers, who ultimately buy from us will visit our website during the buying process. It is.
Will that our site is informative inspirational and offers customers the ability to shop floor and decor, however, and whenever is convenient for them.
We continue to invest in the pro customer experience, we completed the rollout of our pro Premier.
Rewards loyalty program companywide and believe over the long term it will generate a greater share of wallet and build loyalty with our pros. We have received very positive feedback we tested and tweaked the solution for over two years to get it right and we believe our pro Premier rewards program as an industry leader, we saw favorable lift in <unk>.
Sales in two different test environments in Phoenix, and West, Florida also for pros time is money and we have improved our pickup time to approximately 16 minutes a substantial improvement from a few years back. We now have technology in all of our stores and training to help our stores understand how to safely and quickly get our customers through.
The checkout process.
Now I want to take a minute to address tariffs.
Our experienced merchandising team has made meaningful strides in mitigating the risks of the imposed tariffs that were recently announced our strategy involves three distinct initiatives first we.
We immediately began negotiations with our Chinese vendor partners and have made substantial progress in lowering the cost of the goods we purchase from them.
We continue to make progress to diversify the country of origin from all products, where it makes sense to do so this will happen over time finally in areas, where we're not able to completely offset the increase in tariffs with cost reductions, we will judiciously adjust retail pricing with a focus on achieving our overarching.
Active of maintaining our strong and competitive value proposition in summary, we continue investing back in the business to provide both our customers and professional customers a truly unique customer experience. We remain focused on multiple areas across the business to support our growth and drive returns higher.
We have a long and attractive runway of growth ahead of US. We believe we will continue to gain market share as we leverage our winning retail formula of growing our store base four times across the U S and now I would like to turn the call over to Trevor Lang, our CFO and head of pro services to go over our financial results and guidance.
Thanks, Tom and good morning, everyone I'll review, our third quarter 2018 results and then discuss our outlook for the remainder of fiscal 2018.
We delivered another very solid quarter opening seven new stores entering six new markets continuing our track record of growing adjusted EPS at a faster rate than sales growth, while continuing to make important and significant investments to support our sustained long term growth.
Our new stores continue to perform very well and are providing a great return on investment and our comparable comparable store sales growth in our new stores and densely populated markets are outperforming the chain average, which is encouraging as we open more stores in the northeast and the West coast.
Net sales in the third quarter of 2018 increased 26, 7% to 435.900 million from 343.900 million in the third quarter of 2017.
We ended the quarter with 95 total warehouse format stores, an increase of 15 stores were 18, 8% versus the year end of the prior year period.
Our third quarter comparable store sales increased 11, 1% our comparable store sales growth was driven by transaction growth, partially offset by a slight decrease in average ticket.
We estimate that our third quarter 2018 comparable store sales growth, excluding the stores impacted by Hurricane Harvey and Irma would've been approximately 10%.
Now on to profitability gross profit increased.
25, 1% to $178 million 200000 in the third quarter from $142 million 500000 in the third quarter of fiscal 2017.
<unk> margin decreased by approximately 50 basis points to 49% from 41, 4% in the third quarter of fiscal 2017 the.
The year over year decline in gross margin rate was primarily due to higher domestic freight costs and higher inventory shrink as.
As a percentage of sales total operating expenses declined 10 basis points to 33% compared to the third quarter of 2017, the 10 basis points and year over year decline was driven by our general and administrative expenses, which are our store support center expenses typically incurred outside of our stores.
With slightly Deleveraged, our store expenses due to opening 15, new stores since the third quarter of 2017.
Our comparable store sales continued to demonstrate solid operating expense leverage of approximately 90 basis points in the third quarter as.
As previously discussed we are opening new stores in new more densely populated markets that have a higher preopening and operating costs for fiscal 2018, we expect an increase of over $10 million in store operating and pre opening expenses compared to fiscal 2017, given our entry into these new more densely populated and expensive markets.
Operating income increased 19, 7% during the third quarter to 34.200 million as compared to 28.600 million in the third quarter of fiscal 2017.
Operating margin decreased 40 basis points to seven 9% versus the prior year period.
Our interest expense in the third quarter was $2 million 200000, compared to 2.600 million in the prior year period. The decrease in interest expense versus last year is due to a combination of debt pay down and a decrease in average interest rate year over year.
Our reported provision for income taxes for the third quarter was $5 million 500000, or an effective tax rate of 17, 1% compared to $2 million seven or 10, 5% effective tax rate in the third quarter of 2017 the.
The increase in our effective tax rate was primarily due to the recognition of excess tax benefits related to stock options exercised in the prior year period we.
We have adjusted the stock option benefit out of our calculation of adjusted earnings today.
Before I discuss net income in 2018 guidance. Please note that I will discuss both GAAP and non-GAAP measures as described in our earnings release, we believe our non-GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of these non-GAAP metrics to their most directly comparable GAAP financial measures can be found in our earnings release.
<unk> issued in connection with this call.
Adjusted net income and adjusted diluted earnings per share were <unk>, $25 5 million or <unk> 24 per diluted share for the third quarter of 2018 compared to 17.300 million or <unk> 17 per adjusted diluted share in the third quarter of 2017. This represents an.
The increase in adjusted net income of $8 million 200000, or 47, 2% compared to the prior year period.
Adjusted EBITDA for the third quarter increased 23, 2% to $48 million 900000, compared to adjusted EBITDA of 39.700 million in the third quarter of fiscal 2017.
We ended the quarter with $190 million in cash and available liquidity under our revolving credit facility of $150 million of borrowings outstanding and no revolver debt.
Our inventory balance at the end of the third quarter was 403.800 million down $24 million 200000 from the end of fiscal 2017 and up 2% versus the third quarter of 2017.
Now turning to our earnings guidance as you saw on our press release, given our year to date performance and our expectation for Q4, we are raising the low end of our full year sales range, we're reiterating our full year comp and adjusted earnings per share outlook and trimming our full year adjusted EBITDA range by a little over $1 million.
Versus the annual guidance, we gave on our last call fiscal 2018 gross margin stayed consistent at an estimated 41%.
Store operating and pre opening expenses are slightly favorable, but we are taking on an additional $1 million in cost as we work towards Sarbanes Oxley compliance this year.
We expect fourth quarter fiscal 2018 net sales to be in the range of 429 million to 437 million, which represents a 10% to 12% growth from last year.
This fourth quarter outlook contemplates comparable store sales that were flat to up 2% from last year.
<unk> comparable store sales increased 24, 4% last year in the fourth quarter as our sales in our Houston market increased over 100% due to hurricane Harvey.
Our Houston stores alone accounted for 800 basis points of the 24, 4% comparable store sales increase last year.
As we built our guidance for the fourth quarter of 2018, we are assuming our Houston market stores experienced a comparable store sales decline in the mid 40% range, which is modestly higher than our previous expectations.
We estimate that our Houston market will create a 900 basis points headwind on our fourth quarter 2018 projected comparable store sales growth importantly.
Importantly, we expect our non Houston comparable store sales to remain strong and grow at an estimated nine to 10, 5%.
Our fourth quarter outlook also assumes a year over year decline in operating margin rate of over 200 basis points due to the following factors in priority order.
First higher new store Preopening expenses, which is planned to be approximately $7 5 million versus $2 700000 last year.
Second the deleveraging of our store operating expenses by over 100 basis points due entirely to new stores as well as the natural deleveraging that occurs when comparing against their Houston led 24, 4% comp last year.
And finally, an expected decline in gross margin due to higher domestic supply chain costs and higher shrink and damage.
As a result of these factors, we expect adjusted EBITDA for the fourth quarter of 2018 to be in the range of $40 million 300000 to 44.200 million versus $43 5 million last year adjusted.
Adjusted diluted earnings per share for the fourth quarter of 2018 is expected to be in the range of 16 to 19.
Versus <unk> 19 last year.
This assumes approximately 104.800 million weighted average diluted shares outstanding for the fourth quarter of 2018.
For the year, we expect sales to be in the range of $1.702 billion to $1 billion $710 million, an increase of 23% to 24% from fiscal 2017.
This outlook is based on 17 warehouse store openings or 20% new store growth and an assumed comparable store sales increase of 9% to 10% excluding Houston, we expect our comparable store sales to be approximately 10%.
We anticipate fiscal 2018, adjusted EPS of <unk> 93 to 96, an increase of 35% to 39% over fiscal 2017 diluted weighted average shares outstanding are estimated to be approximately 104.800 million in our fiscal 2018 normalized effective tax rate is estimated to be 23, 4% for the remainder of the.
Year.
As a reminder, this guidance does not consider the tax benefit due to the impact of stock option exercises that may occur in fiscal 2018 or possible discrete tax adjustments.
We expect fiscal 2018, adjusted EBITDA to be in the range of $188 million to $192 million, an increase of 18% to 21% over fiscal 2017.
Capex for the year is expected to be in the range of $161 million to $167 million in total with $103 million to $105 million of this capital budget being spent on the 17, new store openings in 2018 as well as the construction of stores opening in early 2019.
$33 million to $35 million earmarked for store remodels, including one relocation and our distribution centers.
The remainder of our Capex approximately $25 million to $27 million is directed towards our <unk>.
Our E Commerce and other store support center in there that shows.
We signed a new lease for our store support center, which is located only a few miles away from our current store support center.
We are still evaluating our options related to our current store support center.
If we decided to exit our current lease we can incur unique lease exit costs of up to $10 million or.
Our intention would be to call. These cost out in our reconciliation of non-GAAP metrics in our quarterly earnings release, So there will be no impact on our adjusted earnings.
We are still in the planning process for 2019 and consistent with last year, we plan to discuss our projections for 2019, when we have our year end earnings call in late February next year.
With that operator, we would like to turn it over to the Q&A portion of the call.
Thank you at this time, we will conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary, we can pick up your handset before pressing just darkies once again Thats star one at this time, one moment, while we poll for first question.
First question comes from Seth Sigman with Credit Suisse. Please proceed with your question.
Hey, good morning, guys. Thanks, a lot for taking the question and nice quarter.
My first question is just around the tariffs and Tom Thanks for the color on how Youre planning for that but I'm. Just wondering how do you think about your ability to pass through pricing, while still maintaining the price leadership in the category Thats works for so long as you see your competitors looking to pass through pricing also giving you room to also take up pricing, if you need to while still maintaining the price gap.
Where do you ultimately see that price gap narrowing.
Our goal is to maintain the price.
Price spread that we've enjoyed during the time here, if you think about the market and kind of the way people buy.
A lot of the market as independent hard surface flooring stores, which are already buying through middlemen and a few in.
And then certainly the home improvement centers, but our philosophy has not changed.
We buy direct from the source and a big part of buying direct from the source was taking the middleman out. So now tariffs could mean that the best source is not always in China. So I'll, let Lisa talk a little bit about where we're moving but from a price perspective, we.
Really been thoughtful we go through and we try to really look at where the product originates from and some of our products. The same situation's going to exist across everyone, who sells that product because the only place you can get it is China and those are the type of products that we'll look at but we're value retailer first.
We will do all we can to maintain the price spread that we've enjoyed and we think thats led to a lot of success I would add one thing to SaaS and that is when you look at the total flooring project. If you kind of deconstruct the flooring project and you look at how much of it is that skewed that is coming from China versus how much of its installation accessories, which are domestic versus how much of it is labor.
The real impact even with the 25% tariff is still mid single digits.
To the end user who has put doing a flooring job.
Have you guys embedded any sort of impact on sales or margins for the fourth quarter as it relates to tariffs and then just ultimately what is going to be the net effect of all these initiatives. All the planning you are doing around tariffs in terms of the impact it could have on sales and margins I guess under the the 10 person.
Scenario, and then under the potential 25% scenario.
Hi, This is Lisa I'll speak to that 10% scenario just that fourth quarter, that's right in front of us. So we have.
Adjusted a few prices not a lot that we don't believe that the 10% tariff that we have been saying since September 2004, it will have any impact on the margin for the fourth quarter as we get into the 25% our I'll, let trevor speak to that a little bit more yes, I do think.
We will not have much of an impact in the fourth quarters, how we've modeled it leases team has done an incredible job in being aggressive with our partners to get lower cost as soon as the tariffs were announced.
And also our inventory around our weighed average cost inventory system, because our inventory turns about two times a year by the time some of those cost fleet and it just won't have much of an impact as we look forward to 2019, we're not going to we're not ready to give guidance or talk about that in detail, but our plans are to work through the three initiatives that Tom mentioned right, we are going to aggressively take.
Our cost with our vendors, we are going to look at sourcing products elsewhere, where it makes sense.
And then the last resort is we will raise prices to the extent that the market will bear.
I'd just say one thing the raising prices the last resort our merchants have done if you think about our our category. Our company. We have a lot of merchants dedicated to hard surface flooring, we have a sourcing office and step one is negotiate with the supplier and our partners have been with US a long time and we've been very fortunate that we've been able to negotiate a lot of cost out.
To help us so I wouldn't get so caught up that were not offsetting tariffs completely with price. It's just something that is a lever that we'll look at.
Understood. Thanks, very much very helpful.
Our next question comes from Matt Mcclintock with Barclays. Please proceed with your question.
Hi, Yes, good morning, everyone and congrats on the pretty impressive comp on difficult comparison.
I was wondering just as a follow up to the last question you said that a 25% tariff will drive the mid single digit increase in the total job cost how does that compare with just how labor inflation over the last several years has has driven the cost cost inflation for the total cost of doing a flooring project.
This is Trevor when you look at the overall total cost leasing team has done a great job of analyzing those forces mid 30% is the actual cost of the product itself that goes into it that you didn't have to have all the installation accessories underlayment graph sets mortar sealers things like that most of those things are done sourced domestically and so we won't have.
Much of an impact there and it is rough math, but approximately the cost of the product per square foot lets say you put in call. It $2 50, a square foot you get another $2 50, a square foot for labor. So maybe half the cost is the labor.
We don't control the labor, but we frankly have not seen massive increases really significant increases in the cost of install per square foot silicon partitive environment. The pros revenue compete for business and so I do think.
There will be an increase in price a little bit as Lisa said, even at a 25% tariff if we didn't do anything the overall impact of about 5% we.
We do think there will be some slight increases there, but we have not seen to date significant increases in labor from the pros that we talk with if they're in and if there has been increase in labor over last years, it hasnt affected us.
Okay. That's helpful. And then just we've heard across the industry that there seems to be a broader shift or a broader trading trading downtrend within flooring to date and I was just wondering when you think about your business, how it's positioned in the value channel and the results. The strong results that you put up this quarter.
Could you talk to your thoughts on how much your business is benefiting from this broader trading downtrend that we're starting to see.
Great.
Yes. This is Trevor lately. So just handed me a note our better and best products are increasing as a percentage of our total sales I think what youre referencing is.
The product attributes that have come out, we'll just pick up a high growth department of pumps that are for the last three years as our rigid core LBP.
That can be in a less expensive product relative to higher end wood for example, or higher and wood look tile, but when you consider the overall installed cost per square foot with installation accessories.
The overall retail per square foot is not meaningfully different than the overall gross margin profile isn't meaningfully different.
Evidenced by that if you look at our comps for fiscal 2017, and you look at our total sales and comps for fiscal 2016 that also was our best performing department at that time, our comps were fantastic. Our gross margins were good as well and so our view is as long as the hard surface flooring market is growing we're going to have the best products and we're going to continue to lead with both.
Sales productivity.
With that quick two quick points.
One is when you Peel apart our numbers are better and best Skus are comping better than our good skus. So we're not seeing consumers step down in the.
The benefit of our model is that our store can flex to whatever selling in the store. So we react to that on a local store level.
Perfect. Thank you very much.
Yes.
Our next question comes from Elizabeth Suzuki with Bank of America. Please proceed with your question.
Great. Thanks.
Laminate <unk> gone from 12% of sales in 2016 to now running at about 18% of sales year to date and how how high do you think that ultimately gets in do you view that as a net positive trend as a retailer or are there product categories that arent growing as fast that would typically generate higher margins for you.
Yes so.
That category for the third year in a row continues to do really well for us as I said in my pre prepared remarks.
All of the competitive advantages that we have across the categories. We sell in the store exists within this category.
For us we've got initiatives in place when I talked in the last call I talked a little bit about the total the total cell and if we don't attach all of the attachments that go with it like molding and vapor barrier and things like that of that nature. Then the margin can be a bit challenged not a lot, but a bit but we've made.
Good progress in the last quarter, and we've got initiatives in place to narrow that gap so for us.
However, the customer wants our stores are now we've got a unique culture here our stores our merchandise at the local level and we have teams in place that flex space in the stores. So if that continues to increase and thats not a bad thing for us.
Alright, and then last quarter you guys had mentioned that you saw that slowing existing home turnover might be a pressure to the business over time and one of your large retail peers mentioned that strong home price appreciation is it positive positive offset to that pressure do you think flooring as the type a category, where homeowners are more likely to undertake that project when theyre move.
Going into a new home or does turnover not necessarily have as big.
As big of an impact does like rising home price appreciation.
I mean, we always cite that housing turnover helps we always cited rising housing value helps people will invest back in their homes as they go up in value I think they are both important to us but.
We're not economists and what happens in the market top of the market if I just pivot back to.
Inexpensive products from China, being able to sell below competition and building bad around really impressive store experience if they're the 25 per cent tariffs go through even if the terrorist cause it's in remain in place for awhile does that.
<unk> significant impact the floor and decor business model.
No as I as I said earlier I mean, when we talk about.
Be back for more than just trying to write so we buy from 20 countries. We have 225 suppliers now around the world and we will continue to diversify where we buy from our goal has always been to go where we get the best price. So we can pass it along to the consumer when you think about the supply chain, particularly that the independent to have to deal with there is a distributor in that.
There's multiple hands in the margin slice because they don't they're not able to buy direct we have a team in place to be able to buy direct from wherever is the cheapest in the in the world. So I don't believe that parents will are going to change the way the floor and decor does business. What are competitive advantages are Michael This is Trevor just one last thing.
<unk> team has done a pretty exhaustive study of where we believe our competition is giving their products and because we direct source, we're very transparent that about half of what we still comes from China, but as we've looked at the competition, but the big box and the independence, we believe a lot of what they're buying as well as coming from China and so.
Everybody's going to have to deal with this don't think of this is such that it's very disproportionate to Florida core because about 50% of what we buy we think a lot of what our competitors are buying a chronic arena as well.
Thank you very much.
Our next question comes from Christopher Harbors with J P. Morgan. Please proceed with your question.
Thank you good morning, guys.
Two questions on the Hurricane first and you think about the new outlook for the fourth quarter.
Up in terms of the impact could you help us through.
How do you think about that in terms of.
Cause they were trying to think about the first half of next year, where you still have a benefit is it that the.
There's more calm dollars that you're anniversarying isn't that the trends that you're seeing are just are moderating in the Houston market. How do you think about that.
This is Trevor I'll start off so you guys probably recall from last year, we called ounces, the Houston market cost up over 100% in the fourth quarter last year, we thought originally going into this looking at a two and three year trend when we looked at eight a decade ago, we thought maybe that would compound in the negative 35% we were incredibly accurate and are forecasting for the.
First nine months of the year as we got to the fourth quarter and we saw the actual results. It looks like it's going to be more like the mid forties. So we're just obviously updating you guys.
We do think as we get into the first half of next year. There will be continued headwinds in Houston, although albeit a lot less than what they are now Houston comp I think up 60% in Q1, and I think maybe at 40% in queue too. So they will abate. The first we go along.
And so I do think we're not ready to give guidance for next year, but I do think when we when we ultimately roll up our guidance mathematically.
Our comps will accelerate throughout 2019 for two reasons, one we will not be going up against the Houston headwinds and too as you looked at the cadence of our openings of our stores. This year, they're very back end loaded again and as those new stores come into the comp base. They still provide a substantial comp lift and because we will have more of those new stores coming into the call.
In the back half of 2019, we should have higher comps as we get to the back half of 2019.
Understood. That's very helpful. So in terms of the third quarter, you had talked about 150 to 180 basis points potential tailwind from the two hurricanes in September so it. It seems like you ended up at the sort of the low end of that range is that is that fair.
Yeah, I think we called out in my prepared comments that if you excluded both hurricane Harvey in Houston Hurricane Ermina in Florida.
Think about 110 basis points impact.
The business. So the 11, one comp that we actually.
Performed it would've been closer to a 10% com got.
Got it.
And then can you talk about just the overall category trends appreciate that the customer continues to trade up and clearly an encouraging sign so how did sort of luxury vinyl versus natural stone and tile and porcelain and so forth. Thank you.
Sure So I mean.
The third year in a row.
Luxury vinyl has been.
One of our fastest growing categories.
It's that customer we believe the shifting a little bit from.
Certainly from the wood categories, the most a little bit from tile maybe but.
It's kind of hard to know whether shifting from but our our strength is continues to be in the laminate and and the and the vinyl products more than and decorative accessories and regular accessories. All have been strong for us. So it's a wood is a little is a challenge for us, but we again, we think that's a shifting customers, Chris and stone has been a challenge that's softness and travel.
To a certain extent and customers shifting the porcelain tiles.
Thank you.
Thanks, Chris.
Our next question comes from John That's Olesky with Jeff. Please. Please proceed with your question.
Great. Thanks for taking my question I guess to start off so clearly the unit growth is still intact and comps are really robust 25% to your stack. This quarter could you just spend some time elaborating on that productivity opportunity and I think that's probably under appreciated and I know you mentioned the loyalty program better schedule.
<unk> of designer appointments.
<unk> you guys most excited about and what other levers do you think could be pulled in the coming corners to drive sales per square foot.
Yeah, I'll talk about the productivity one I mean, I think our average sales per square foot today is somewhere in the I think.
$270 range, if you look at our best 20% of our stores, they're close to $400. So we've got substantial upside in the sales productivity per stores Tom mentioned.
Over 40% of our stores or less than three years old or new stores tend to start with slightly lower volume, but as we get better brand awareness more pro shopping with those people understand what we're trying to accomplish we see substantial comps from our new stores, that's been as high as a 400 basis point lift to our total comps comes from our new stores. So we think there's plenty of productivity.
<unk>, we are always making enhancements the way, we handle with technology back into the store.
Technology actually help ourselves associates the website all of those things also help our productivity and so we think there is substantial upside to the overall productivity per store and through our web site as we look to the future.
Yeah.
I'll talk a little bit about some of the things. We're excited about you mentioned that I mentioned a lot of them in my script, but.
Too much to list of things that were kind of things that were doing but.
I'll just talk about four quickly.
Emphasis on the designer part of our store over the last few years, we put in design centers with all the stores there almost 2500 square feet in size on average we've got some bigger and some smaller but where we have spent a lot of time.
Upgrading the our design services and what our designers capabilities are and that is a big initiative that will talk more about as we get into the next couple of years, but certainly we're excited about what they are able to deliver were given them great tools and we're investing in them and we feel like we know when our designers are with.
And with a customer of the average ticket is much larger than our normal average ticket, we know that they sell the whole process. We're excited about that.
We're still in the middle into what we can do with our professional customers why we've done a lot over the last five six years.
As evidenced in this quarter, we finished rolling out pro Premier we finished rolling out a pro App, that's getting great reviews.
Enhancing our our delivery capabilities, but we're still we can still be a lot better. We're excited about that will bring us and then we have a huge a large initiative around kind of how we sell the customers and what the customer experiences in the store. We've got some pilots underway that that staff the store differently than we have historically staff that we're excited.
That will bring and then the last thing I'd say is that innovation within this category continues to be a driver of business and there's continued Lisa and her team have done a really nice job continuing to find great products and we're excited about the products that continue to come in our store and all of them should be drivers to help us to continue takes sure.
Great and then just a quick follow up.
So despite some software existing home sales data you guys have been really able to buck the trend and gain share in the industry.
Does your data suggests that's continuing to come from those 15000 independence out there and then also just anything to call out on regional trend.
I'm thinking just given the overall healthy comp number this quarter, it's probably broad based and you could very well be posting some nice numbers in areas warehousing may even be a bit softer so any color there would be helpful.
So the first part of the question was from it from a share standpoint.
Look we're taking we believe we're taking share from from from everywhere that we compete we think we take care from the independents, who takes we take share from Big box and then we think we grow the market to a certain extent. So there's no nothing new to report on kind of how we think we grow our market share and then from a regional perspective is Trevor man.
<unk> as I mentioned in my script, if you'd just minus out.
The.
The aroma in Harvey impacts, we're still double digit across the country. So we're seeing good trends.
Great. Thank you.
Our next question comes from Zack fight them with Wells Fargo. Please let's see with your question.
Hey, good morning, guys.
Could you talk a little bit about your approach to inventory ahead of the January tariffs. It looks like your inventory levels grew only about 2% in Q3, which is surprisingly low given the new star grow. So maybe you could if you could talk about the drivers there and then whether we should anticipate inventory build in queue for as you look to get ahead of the 25% tariffs neck.
Last year.
Zach This is Trevor just a quick reminder, last year, our inventory was up 47% at the end of the year. We had two very important distribution center moves we relocated or Savannah distribution center in late queue for shutdown or Miami distribution Center in early Q1, and so we really built up our inventory to stay in stock with those two.
Two large distribution center moves and because of that inventory over so elevated we just didn't need to make the same level of investment as we got to the end of the Q3 I don't Wanna take away from our inventory team they've done a fantastic job of managing our inventory the cheapest in stock and not grower inventory.
Yes like every other retailer we're doing everything we can to bring in as much of our inventory before the end of the year such that we can assuming those 25 per cent tariffs go into a place that we will receive those but we still even with our current projections are that our inventory at the end of the year will grow at a slower rate than our sales growth.
Got it and then for your cue for guidance and it looks like you're expecting you start productivity at least by the way I calculated to take a little bit of a step down I know you are opening some stores later in the quarter of it maybe you could walk us through just the moving parts whether they're.
Consideration, you're giving to the macro or are competitive environment, perhaps in some of your new markets.
Yes. This is Trevor again, it's actually a very simple story Houston.
So we had a new store in Houston that was part of the new store sales last year and if you go back and look at our queue for new store productivity. It was the highest it's been and again, that's a little misleading because one of our new stores was in Houston that.
Its sales went up substantially disliked the comp store, so as I mentioned rope over 100% that Houston store come came into the comp based in Q1. This year and so that's what has an indicating that our new store productivity is not as strong.
Got it that makes sense. Thanks, Trevor appreciate the time.
Thank you ladies and gentlemen at this time, please limit yourself to one question at this time, so we can get to as many questions in queue as possible. Our next question comes from Steve Forthwith Guggenheim Securities. Please proceed with your question.
Good morning.
I wanted to focus on the pro customer and specifically right as it relates to the rollout appropriate here can you can you comment on the overall acceptance of rewards verse, some financial incentive and.
And maybe our willingness right to transition if there is one right to financial incentive over time, what are the pros, saying.
This program continues to build.
And you guys build up that customer base.
Sure. This is Tom I will start and then handed over to Trevor is he's in charge of pro.
So far the acceptance has been terrific as we approached R.
Premier program in our so called loyalty program, we approached it with a plan to retreat are professionals like partners. We don't compete with them. We don't offer installed sales in the store.
We want them to be our partner so we approached it from a partnership standpoint. So we have an emphasis on services that approach and get for their business and we think that's a unique approach to kind of how we go about it and.
But but there is a gift program in there where they can take trips and they get recognized for how much they spend within our stores and so far the acceptance has been great. Trevor I don't know if you want to think.
Think targeted the points right I mean, it's a dual pronged approach, where we offer all about 13 different business services things like E Mail web site.
Lower worker's comp in general worse with the journal liability costs payroll services and then there's a points based component the more you spend the more points, we had a customer take a very nice cruise was here recently and got pictures posted all over social media all of his clients left of his clients and so we think it's a great program is we've Tom mentioned.
We're very slow to roll this out we tested for over two years into markets and saw a nice lift themselves.
And so it is an expensive program, but we think there's a good ROI on there.
Thank you I'll keep it the one thank you.
Our next question comes from Jeff small with city. Please proceed with your question.
Good morning. Thank you for taking my question. So I wanted to ask about expenses. It looks as though you did a nice job controlling costs across.
Both cards and SG&A in the quarter.
Gross margin coming in better than forecast, despite the product margin pressure and some nice leverage in terms of.
Comparable store operating expenses I was hoping you could provide some color on.
On the drivers of those those results across the two line items.
Yeah. This is Trevor.
The teams did a good job, it's probably nothing more to say about it than that I think.
Distribution centers manage their cost closely store operations, we watch their labor every single week, they manage their cost closely expect especially in the back half of the quarter.
All of the operating expenses travel across the board.
When we offer if you look at just rich.
Rigid core locking plank or stores have when I am getting to the number I mean, we have close to 50 skews available and leases team has done a good job of bringing better and burst into that category. So we're not just selling off of the low price points that the big boxes may carry we're able to sell a better product that.
Comes with a little bit better margin and we think between our initiatives around selling the whole job and our initiatives around.
Selling better invest in that category that we can offset any challenges that we may have.
Okay, great feedback thanks, a lot guys. Good luck.
Our last question comes from John Bob with Stifel. Please proceed with your question.
Thank you and kind of.
My congrats on the share gains he mentioned judicious pricing and I guess through either walking competitor stores or technology or bold you can see what competitors are doing daily I guess.
I'm curious all news imported tariff affected.
Products, what you've done versus what your competition, Don if you're able to give us any kinda early read.
On that thank you.
This is Trevor Yeah, I was gonna say, if you haven't seen a lot so far.
We were on the cost side, we've been very aggressive and we've taken cost out to offset that.
But we have not nor have we seen our competition do a lot so far with significantly affecting retail as those again is that product starts getting received and the boards and it's going into the orange nor.
Competitors costs.
There will likely we expect to be some retailers impact the majority of our offset on the imposed tariff now is on cost negotiations. So.
Where we keep a close side of the competition is you know this category is a is a bit different there's not a lot of brands in this category and features and benefits are different within products. So we do our best to monitor how weird pricing, we feel confident within our pricing.
Thank you good luck.
Thank you at.
At this time I would like to turn the call back over to Tom telephone closing comments.
I just I appreciate everyone's interest in joining our call today I want to again, thank all of our associates for the hard work. It was a tremendous quarter. We are really excited about what the future will bring we're in the early stages of what flown decor can be so we look forward to talking to you on the next call.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time and thank you for your participation.