Q1 2018 Earnings Call

All participants are in a listen only mode. As a reminder, this conference call is being recorded today Thursday may 3rd 2018, I will now turn the call over to Matt Mcconnell manager of Investor Relations at floor and decor. Thank you you may begin.

Thank you Danielle good morning, everyone, Hi, Matt Mcconnell manager of Investor Relations 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 laser lobby executive Vice President and Chief Merchandising Officer, who will join us for the Q&A session before we get started I'd like to remind you of the Companys Safe Harbor language.

<unk> made during this conference call and webcast contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties any 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 <unk>.

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 course seems 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 release, which is available on our Investor Relations website, IR about four and record 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 thank you to everyone for joining our call. Our first quarter results demonstrated the strength of our business model as we continue to gain market share and disrupt our residential hard surface flooring industry with our innovative fashion forward and trend right products.

We have a tremendous opportunity this year as we'll be opening new stores and new densely populated markets in Boston Long Island Mcf.

I am confident in our strategy and the team we have in place to execute our initiatives.

Our success is a credit to all of our associates and we would like to thank them for all of their hard work and dedication to our customers.

Now turning to our first quarter results total sales increased 31% to $403 million, our comparable store sales increase of 15, 6% was driven primarily by transaction growth of 13, 4% our adjusted diluted earnings per share doubled to 26.

All categories had positive comps with laminate luxury vinyl plank and installation accessories comps above the company average as expected. We saw an estimated 400 basis point comp benefit due to the demand from hurricane Harvey, which moderated from last quarter's estimated 800 basis points tailwind.

Excluding the comparable stores sales impacted by Hurricane Harvey our first quarter comps increased just over 11%.

Our consistent comparable store sales growth over the last nine years has not come from one just initiative or strategy. There are many many talented people and initiatives responsible for our growth.

And we are constantly challenging ourselves to change to evolve and better serve our customers. The strength of our business reflects the fact that our differentiated concept is resonating as we continued to build brand awareness and gain market share now let me briefly outline our key strategic priorities and progress for 2018.

As a reminder, our priorities are new store growth, increasing comparable store sales growth expanding the connected customer experience and continuing to invest in the pro customer first new store growth in the first quarter. We opened one new store in St. Petersburg, Florida for a total of 84 warehouse format.

Stores in the second quarter, we plan to open four new stores, including two new markets, Seattle, and Virginia Beach, as well as opening new stores in the existing markets of Denver and Salt Lake City.

We're looking forward to serving these communities as we continue expanding our store base and increasing awareness of the Florida core brands. We have signed leases for all 17, new stores planned for 2018, and we're excited to be entering some of the best housing markets in the country are.

Our improving new store economics gives us the confidence that this is the right time to enter enter these densely populated markets. We believe these stores will be more productive over time and a good return on investment our strong new store performance as evidenced in our class of 2017 stores, which is on track to exceed the record.

<unk> of our class of 2016 stores in both first year sales and store operating profit illustrating the great execution of our real estate and store operating teams.

Second increasing comparable store sales a distinct advantage at Florida court as our product dominance centered around innovation as well as our trend right products broad assortment and in stock job lot quantities across every hard surface flooring category, we sell.

We continue investing to enhance our customer experience by focusing on our service <unk>.

Improved visual merchandising both in store and online.

Optimized marketing strategies.

Redesign consultation and new technology to further integrate our connected customer experience, regardless of how our customer shops in store or online. These investments are focused on providing a positive experience for both our consumers and our pro customers as we continue opening new stores and increasing awareness of the Florida core brand.

We believe there is significant opportunity to gain market share.

We remain confident we will grow faster than the market and capture market share in our residential hard surface flooring industry.

Third expanding the connected customer experience, our integrated connected customer strategy is working well and gaining traction as our online sales continue to grow at a faster rate than our total sales growth.

Sales tendered through our website accounted for six 5% of total sales in the first quarter, we have become even more convinced that our multichannel strategy builds confidence in the buying process and that each channel builds on the other the.

The vast majority of our customers prefer to pick up their website orders in our store, which tells us having a physical presence to see touch and learn more about our products is very important.

Our website chat services and call Center served as important education and research tools as well as a source of inspiration for new and existing customers prior to and after shopping in store.

Our research indicates that approximately 70% of customers that ultimately buy from US visit our website. During the research period. Our research also indicates that if a customer is in the market to buy hard surface flooring, and we can get shoppers to visit a floor and decor store, we can convert them over 80% of the time.

Given the reach of our site it broadens the exposure of our brands by helping introduce new customers to Florida core and offers existing customers the convenience of an additional channel.

We are continuing to add content like how to videos to help educate the do it yourself and pro customer.

We also want to inspire and engage customers through vignettes as well as interacting on popular social media sites consumers today want an integrated experience and we will continue investing in improving the integrated offering that we provide them.

Fourth continuing to invest in the pro customer many of our pro customers are in our stores every week their average spend is greater than that of a typical end user in the pros are very important to us we're working on many initiatives to better cater to this important repeat customer base.

These initiatives include our pro App.

And expanded rewards program.

Faster delivery and improved credit offerings, we expect it will take time to fully rollout these initiatives and the initial results from our test markets are encouraging. We believe we are in the middle innings of our pro opportunity with a long runway ahead and look forward to providing updates throughout the year.

Finally.

Over the last five years, we have grown our new stores and an average growth rate of 22% comparable store sales at an average rate of 17, 5% and sales and adjusted EBITDA at a 33% and 44% annual growth rate respectively over that same time period.

Reinvesting back into the business to support future growth has become core to our philosophy as a growth company, we continually analyze our needs and try to plan investments ahead of when they become necessary. The great illustration of our philosophy of reinvesting back into the business is the recent transition of our Miami DC to our newly expanded Savannah.

Additionally, we expanded our Houston DC by 150000 square feet. During the first quarter. We also plan to increase our la DC by an additional 350000 square feet in the back half of 2018.

These investments are critical to support our 20% new unit growth strategy in the years ahead.

As we look to our next decade of growth, we need to expand our store support center, and we will very likely relocate or enlarge our current store support center.

Trevor will share in a moment, but we believe this new solution will.

We will service for at least the next decade.

So in summary, it was a great quarter and we continue to make good progress against each of our strategic priorities further improving our capabilities and customer value proposition before I end I want to thank all of our team members for the great job. They do day in day out it is their commitment and dedication to Florida core which enables the strong and consistent performance.

<unk> you have seen us deliver.

I'll now turn the call over to Trevor our CFO and head of pro services to go over our financial results and guidance.

Thank you Tom and good morning, everyone I will review, our first quarter 2018 results and then discuss our outlook for the second quarter and the remainder of fiscal 2018, we.

We delivered another strong quarter continued to see positive momentum across all product categories and regions and we continue to make key strategic investments first.

First quarter again demonstrates that our business model provides a distinct competitive advantage that creates a positive customer experience whether in store or through our website.

Net sales in the first quarter of 2018 increased 31, 1% to 402.900 million compared to 307.300 million in the first quarter of 2017, we ended the quarter with 84 total warehouse format stores, an increase of 12 stores were 17% versus the end of the prior year period.

Our first quarter comparable store sales increased 15, 6% and was driven by a combination of post hurricane demand in Houston market estimated to be approximately 400 basis points as well as the continued positive momentum in our other markets outside of Houston, Our first quarter comp increase was driven largely by transaction growth, though both transactions and average ticket increased year.

Over year.

Now on to profitability gross profit increased 31, 8% to $165 million 400000 in the first quarter from a 125.500 million in the first quarter of fiscal 2017.

<unk> margin increased by approximately 20 basis points to 41% from 41, 8% in the first quarter of 2017. The increase in gross margin rate was primarily due to leveraging our distribution center costs across increased sales worth approximately 10 basis points and another approximately 10 basis points to lower due to lower shrink and damage.

As a percentage of sales total SG&A leveraged approximately 150 basis points to 31, 9% compared to the first quarter of 2017, primarily due to leveraging our store and pre opening expenses as I mentioned previously we opened one store in the first quarter of 2018 versus three in the first quarter of 2017, which partially contributed to the year over year leverage of our SG&A costs.

Additionally, in the first quarter, we had lower than planned expenses in a number of areas, including marketing and operating expenses, which benefited SG&A for the quarter. However, this primarily it was timing due to the spending.

The majority of this spending will come in the later three quarters are.

Our strong sales growth gross margin expansion and SG&A leverage drove a 61% increase in operating income during the first quarter to $36 5 million as compared to 22.700 million in the first quarter of fiscal 2017 Apo.

Operating margin increased 170 basis points to 90, 191% versus the prior year period.

Our interest expense for the first quarter was 1.800 million compared to $5 million 400000 in the prior year period.

The decrease in interest expense versus last year is primarily due to using the IPO proceeds from the second quarter of 2017 to pay down our debt as well as a lower average interest rate.

In the first quarter of 2018, we also recognized the benefit of approximately a $5 million due a mark to market adjustment on an interest rate cap, which was not contemplated in our guidance.

Our reported provision for income taxes in the first quarter was 2.900 million compared to $6 million 100000 in the first quarter of 2017. The decrease in the effective tax rate was primarily due to the exercise of stock options in the first quarter of 2018 and due to tax reform passed in December 2017, we have adjusted the stock option benefit out of the 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.

Reconciliation of these non-GAAP metrics to their most directly comparable GAAP financial measures can be found in our earnings release issued in connection with this call adjusted.

Adjusted net income and adjusted diluted earnings per share were <unk> $26 million 700000, or 26 cents per diluted share in the first quarter of 2018 compared to $13 million 200000, or <unk> 13 per share in the first quarter of 2017.

This revenue represents an increase in adjusted net income of $13 million $600 or 103% <unk>.

Adjusted EBITDA in the first quarter increased 49, 9% to 47.800 million compared to adjusted EBITDA of 31 million. Another 1000 in the first quarter of 2017.

As I reflect on the quarter I would explain the better than planned adjusted EPS is approximately <unk> <unk> due to better operating performance <unk> due to the timing of spending and approximately <unk> <unk> due to the favorable mark to market adjustment on one of our interest rate caps.

We ended the quarter with $160 million 100000 of cash and available liquidity under our revolving credit facility and $177 million 600, a borrowing borrowings outstanding our inventory balance at the end of the first quarter was $427 million, which was down 1 million from the end of fiscal 2017, but up about 35% versus the first quarter of 2017.

Now turning to our guidance as you saw from our press release, we are raising our sales and adjusted EPS guidance for the year. Following a very strong first quarter, a few points I want to make about our outlook for fiscal 2018, we continue to expect our comparable store sales, excluding Houston to be in the high single digit to low double digits and for the Houston benefit to moderate.

As we move throughout the year.

Second our outlook now assumes a modest decline in gross margin for fiscal 2018 like other businesses, we are absorbing higher transportation costs, mainly due to actively locking in excess capacity contracted domestic trucking assets.

While our contract significantly mitigate the higher cost versus being entirely on the spot market that requires to lock in adequate capacity to support our projected growth and we are still working to fully utilize these trucking assets.

We're also seeing some product mix headwinds in the Houston market and lastly, we will be selling through the remainder of our higher landed cost Miami DC inventory over the remainder of this year.

These headwinds are reflected in the assumptions that our gross margins will be down about 70 to 80 basis points in the second quarter improving from this level in the third quarter and by the time, we get to the fourth quarter. We believe gross margins will be about flat to last year.

Third as mentioned on the last call. We made the strategic decision to enter Boston Long Island in Seattle, our success in markets like Chicago, New Jersey, Washington, D C and Los Angeles, along with improved performance from our class of 2016, and 2017, new stores relative to our previous classes of new stores gives us confidence that now is the right time to step into these larger.

In denser markets.

Since these are more expensive markets relative to prior store openings. We estimate this will require an additional investment of more than $10 million and store operating and pre opening expenses compared to what we've invested in fiscal 2017 in previous years.

Even with this much higher investment in new store operating in store startup expenses relative to prior years. We believe we can manage to obtain moderate operating expense leverage for fiscal 2018, which should lead to flat operating margins for fiscal 2018.

And finally as Tom mentioned, we are evaluating various opportunities as it relates to our store support center here in Atlanta, and we will provide further details on our second quarter call. This summer.

Our team has done a fantastic job of assessing options and we currently believe our ongoing store support center costs will be below what we had forecasted in our long term financial plan completed last year, even as we take on additional space.

A relocation could result in nonrecurring lease buyout move noncash write up costs of up to $13 million. The vast majority of which will be recognized this year with some portion occurring in the first half of 2019.

Our intention would be call out these unique costs and a reconciliation of non-GAAP metrics in our quarterly earnings release, So there would be no impact on adjusted earnings.

Taking these factors into account for the second quarter of fiscal 2018, we expect net sales to be in the range of $430 million to $437 million, an increase of 25% to 27% versus the second quarter of fiscal 2017. This growth outlook is based on a comparable store sales increase in the range of 11% to 13%.

Our second quarter outlook assumes a year over year operating margin decline of approximately 140 to 160 basis points 70 to 80 basis points of this decline is due to lower expected gross margin in the second quarter due to the factors I just discussed.

We're also planning on our second quarter store startup expenses to increase to $8 million versus $3 million last year due to <unk>.

Planned opening of four stores in the second quarter and eight stores in the third quarter. The most number of new stores, we've ever opened in the six month period.

Also as I previously mentioned, we are also entering new more expensive markets. This is not only increasing our store startup costs, but also increasing our new store operating costs.

Adjusted diluted earnings per share for the second quarter of 2018 are expected to be in the range of 23% to 25 and.

An increase of 15% to 25%.

We are also assuming just over 105 million weighted average shares outstanding for the second quarter of 2018.

We expect our adjusted EBITDA for the second quarter of 2018 to be $46 million pointed to 49.100 million, an increase of 6% to 12% over the second quarter of fiscal 2017.

For the full year, we now expect net sales to be in the range of $1 $705 million to $1 $735 million, an increase of 23% to 25% versus fiscal 2017.

The net sales growth outlook is based on 17, new warehouse store openings with 20% new store growth and an assumed comparable store sales increase of nine 5% to 11, 5%.

We are modestly increasing the high end of our adjusted EPS and narrowing the bottom end of the range for fiscal 2018, and we now anticipate our adjusted EPS to be in the range of <unk> 93 to $1 <unk>.

Diluted weighted average shares outstanding are still estimated to be in the range of $105 million in our fiscal 2018 normalized effective tax rate is estimated to be 23, 4% for the remaining three quarters of fiscal 2018.

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 other possible discrete tax adjustments.

We expect fiscal 2018, adjusted EBITDA to be in the range of $191 million to $201 million, an increase of $20 to 27% over fiscal 2017.

Capex for the year is planned to be in the range of $150 million to $158 million in total with $91 million to $93 million of this capital budget being spent on the 17, new store openings in 2834% to $36 million is earmarked for store Remodels and distribution centers, the remainder of our capex approximately 25% to $29 million will be directed towards it infrastructure.

E Commerce and store support center initiatives, the higher Capex versus what we discussed on March versus due to the potential store support center relocation.

All other details related to the results and guidance. Please refer to our earnings release and with that operator, I think we'll turn it over to questions.

Thank you at this time, we will be conducting a question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad.

Emission tone will indicate that your line is in the question queue.

You May press Star two if you need to remove your question from the queue.

Participants using speaker equipment, it may be necessary to pick up your handset prior to pressing the star keys.

Yes.

Our first question comes from the line of Seth Sigman with Credit Suisse. Please proceed your line of Bison.

Hey, guys. Thanks for taking my question nice quarter.

Clarifications I guess, just first on the hurricane benefit it seems to be tracking pretty much as expected, but just curious is there anything that leads you to believe that the impact for the year is going to be different than you expected previously either better or worse at this point.

So yes it is.

From the top line. It is absolutely tracking like we predicted which is hard to believe considering it's.

Historic flood.

We haven't dealt with something like that as a company before.

Kind of a onetime event, but our team did a really good job predicting what's happening on the topline as Trevor mentioned, we've got some.

Some mix issues that were hard to predict on as people rebuild exactly what they were going to buy when they were going to buy and that's put some margin pressure in the market.

But overall, we're pleased with what's going on there.

We will it hasnt changed our yearly outlook, but again, it's kind of a onetime event.

Yes.

We will see how it plays out but as of today.

We thought it was going to happen is happening.

Okay. That's helpful. And then just as we think about the margin bridge for the second quarter, Trevor Egypt through a lot of the different drivers there.

Guess I'm trying to figure out on a comparable store basis.

What is really implied here. So if we look at the first quarter your store level operating expenses looked.

It looked like it leveraged 80 bps on a consolidated basis, but actually a 160 basis points on a comparable store basis and as we look at the guidance for the second quarter. It seems to imply a lot less leverage on a comparable store basis is that is that just conservative is that math right I'm just trying to figure out what some of the moving pieces would be within that.

If you could walk us through that would be helpful.

Yeah. Good question.

Apologize in advance for the confusion of our of our P&L, but it's all due to the new store timing. If you just looked at our stores that are pre 2017, we're getting nice operating leverage out of that fairly consistent with the operating leverage we got in Q1, because the comps are pretty close so what appears to be the deleveraging of it.

100% of that has to do with the new stores that we're opening in 18 and the timing of some of those new stores. When we're coming in there for example, as I mentioned this is a different line item on our P&L and we break it out for to be clear our store startup cost youre going from 3 million to $8 2 million. So thats, a 173% increase and again that has to do with opening the most number of new stores, we've ever opened in a six month period of time associated with.

That is will be taken on occupancy costs and labor costs and marketing costs.

And as I mentioned in my prepared comments for the year that some portion of $10 million step up just because we're in those expensive market. So.

Simply say that.

To back out the pre 2017 stores the operating leverage that you saw in Q1 will be fairly consistent in Q2, all of the deleveraging Youre seeing comes from the newer stores that we're opening in just opening in these more expensive densely populated markets. Okay, alright, thanks for clarifying.

And our next question comes from Elizabeth Suzuki with Bank of America Merrill Lynch.

Hey, Good morning, guys can you just quantify the year over year increase in freight costs.

As well as raw materials, if any and your ability to pass those cost increases to your customers.

In your product categories, obviously quite heavy.

Move around so I would imagine this construct going up quite a lot. So just wanted to get some clarification on how you manage that.

Sure. This is Tom I will tackle some of that question and let Trevor talk about domestic freight.

But we're seeing we're seeing headwinds and domestic freight from a price from a commodity increase standpoint, we really haven't been all that effect that we've seen a little bit and the solid wood side of our business.

But it's nothing that.

That we can't deal with or that we're unable to pass along if we have to the activity has been a little bit more than historic.

But nothing nothing thats out of out of out of the realm on supply chain.

Domestic freight we do have some headwinds. However, you wanted to touch on that yes, I would call. It two things as we think about the rest of the year.

The Miami store location or a distribution center relocation.

A fair amount of this in the overall gross margin, we expect to be higher when we get all of that inventory, which we've now done out of that Miami DC into our Savannah DC.

But the landed margins will be slightly lower because of the domestic trucking cost to get that product down down to Florida.

But because our new Savannah distribution center is so large and so efficient and so much less costly. The overall gross margin impact is better but there are going to be some headwinds as we move throughout the rest of the year to move through that higher.

Miami distribution center landed cost inventory, so I know, that's a bit confusing, but we do see that as kind of a 5% to six month issue as we move through that Savannah distribution, we move to that Miami inventory Thats moving up to our Savannah distribution center and on the domestic transportation costs. I think you are right. If you look at our international costs, our drayage costs our duties all those things.

Changing materially.

We were fortunate that we were very aggressive in leasing and taking ownership of over 70% of our domestic transportation costs through a dedicated fleet.

We aggressively leased into or kind of procured those assets.

And we didn't quite we didn't need quite as many as we had.

And so thats got some excess capacity in those and so as our sales continue to grow we're maybe going to give back some of those assets. We also see that mitigating as we get towards the end of the year as we think about our gross margins and I've said this in the prepared comments, but just to mention that we call. It 70 to 80 basis points in Q2 coming down from that as we get into Q3 and by the end of the year, we think gross margins will be.

Closer to flat. So these are issues that are we think kind of.

Effective in Q2, and Q3 and as we get to the end of the year. We think we've worked through those.

Great. That's really helpful. And then can you just talk about the growth rate.

Sales chip product choices DIY in the quarter and whether there is there was an appreciable difference between the two and then any big potential MRO opportunities Johnstown.

So yes this is Tom.

We'll talk about.

The DIY versus the probe we don't break that apart yet we're getting to the point, we're working aggressively on CRM, where we'll have better visibility to what goes on in with each segment of customer.

But when you're comping at a double digit rate.

Both consumers appear to be doing very well.

As we look at.

The pro activity in the back side of our store has remained consistent if not increased.

Again, we don't have specific measures, but again I've said it on the last call as well when we're confident this kind of rate all customers have good demand for the product and were getting our awareness continues to get better. If you think about our awareness levels. It's still unaided awareness is at about 10% for our company. So people are just getting to know who we are as we open more stores I think.

Get more do it yourself once in the store and more people learn about the brand new do it yourself, which will drag more pros in the stores because a lot of them use pros, who don't know about it so.

Both both segments are doing well and we.

Anticipate that will continue to happen.

The only thing I would add to that list. We have done two fairly large studies in the last six months that do through surveys and exit interviews and talking to our customers and we think that mix has not changed meaningfully over the last five years.

Probably recall, but about 40% of our customers, we see as DIY purchasers about 40%, where the pro pays for the product and 20% by yourself customers, which are customers. We define the effects of the consumer paid for it but they were influenced by some professional customer and that Hasnt changed a lot. We don't think thats changed either on the MRO space.

We are also.

That business is a much smaller base, but we do see our larger sales to our bigger corporate customers growing at a faster rate, but again, albeit from a much lower base. So that's that's within the commercial division that we started we are that is ramping nicely. We're getting a lot of bigger sales from that but in the stores, we've always sold to <unk>.

<unk> motels that customer has always been a core staple to our professional business that runs through the registers in our stores and that business I think our proteins in the stores or do a better job of going out of networking within their own areas to sell to more of that maintenance repair.

<unk>.

Great. Thanks very much.

Our next question comes from Michael Lasser with UBS.

Good morning. This is a still a nice good.

Filling in for Michael Lasser, Thanks, a lot for taking our questions.

So your SG&A per store and the SG&A per square feet growth was meaningfully.

Below the last several quarters, so what really changed in the first quarter compared to what you were seeing in the past seven quarters.

Outperformance.

It's pretty simple, we only opened one store versus opening a lot of stores those new stores, because they do less volume than our mature stores and they have higher costs at our new stores. When you opened fewer stores relative to previous periods that will give the.

Actually an appearance that our SG&A.

As more efficient, but again it really just had to do with we opened a lot of stores in the back half of last year. When we opened one store in the first quarter of this year.

Okay. Thank you.

And as a follow up can you can you provide some thoughts on how.

Rising rate it came back to a category what you're seeing in the marketplace now that rates have risen a bit and.

And then and how much would rates you really have to rise before it begins to act as an impediment category growth.

We are in pilot on.

It really focuses on better communication for the professional to get a hold of the protest and get in and out of the store quickly. So they can they will have an opposite I'm on my way I'm in the parking lot here and we can have the product and you get out even quicker. We've also put invested and we have Ah monitors in the back of the store.

Or the customers can see so they know where they're at in the pecking order of getting their order pulled and getting it out to the truck. So just lots of investments on.

Lots of investments that have happened and lots of a mess investments still still coming to us, which will help speed that pro up now how does that turned into sales.

The better we can make the experience I mean, the pros love our our broadest assortment in stock every day, we don't have any special order, we don't compete against them. So their shopping experience on the buying side is really good begin also a free design services. We just do a lot to cater to them, but it has been a frustration of there so we can't get them out quicker.

So I think the quicker we get him out the back of the store happier there'll be and the more they'll buy from it. So I don't know if it's a instantaneous sales lift but I think in time, we'll definitely get more of their wallet.

As we execute better with these initiatives so long answer, but we've done so much.

It just kind of worth going through the whole story.

Lot going on here.

I guess my other question would be just high high level.

One of the interesting aspects of of your story upon the IPO was that it really seems like you haven't found a mature store.

Yet to date and I was wondering.

It's absolutely are we still are you still at that point, where your order stores are growing I'm not trying to get to a point, where you break growth by vintage out every year or anything like that but just.

What or how have your thoughts on maturity store maturity evolved over the past year and a half relative to when you came out to the original markets. Thanks, Yeah I mean.

When you have nine when our 10th year of double digit same store sales growth.

When our unaided awareness is still.

A very anemic level.

All stores are still maturing when you are confident this rave we're getting we're getting growth out of our oldest stores are getting growth of again grew up out of all of our stores that were not cannibalizing. So.

Whether or not you can define that as do we understand maturity I think until we get to more of a we're investing a lot. We've taken a lot of the tax not a lot, but a portion of the tax form benefit that we've got more investment in better marketing campaigns and trying to spread the word of our brands as we open more stores that helps our awareness.

So I think the more awareness, we can get there are still a lot of share to be taken there's still a ton of independent foreign stores and.

That we compete against and and then the publicly traded people that sell our product we compete against them. They are still more sure to be had so long way around of.

We've been competent this rayford.

And our 10th year, when you're compromised all stores continue to do well.

Thanks, a lot for the color best of luck alright.

Hi, Thanks.

Our next question comes from Chris.

J P Morgan.

Thanks. Good morning, guys. So you you swung the gross margin outlook by about 100 basis points relative to the prior guide, but you also raise the outlook for earnings for the year is so so my question is what are the offsets are you dialing back previously planned investments just a little bit of incentive cops swing.

Or is that a change in posture to the extent that the earnings outlook is is less conservative than perhaps where he started the year.

This is Trevor so sales are a little bit higher than the current forecasts were obviously a little further through the year. We've now completed our first quarter, you're right. We did take our gross margin expectations down.

And we went through and as we saw what we really felt like we need to spend this year.

We tightened it up a little bit and so you're right margin is down sales are up and we've taken SG&A costs out of the business.

This is kind of how we got there.

And.

Guess, where where you saw those pools of SG&A opportunity to offset.

Really across most of the business you know a little bit out of the store is not a lot some here and probably more of it here in the corporate office.

We've been investing at a very high clip for going on my seven years here and those areas, where we felt like we could we didn't have to invest quite as heavily this year and as we get throughout the year.

Just pull back thing incentive composite very immaterial.

Impact so far we're fairly close on what we thought when we built the original forecast.

Understood and.

Eight or just sort of a general cadence not only within the quarter, but relative to last year there's been.

Some modest moderation in the.

The underlying growth rate in the market. So can you talk about was that is that certainly broadly felt across the categories or is it any particular category stand out you did see some nice ticket improvement in this quarter and was there any any sort of stand out on the cadence within the first quarter as well.

Not really the trends have been relatively consistent.

So the businesses that have grown at a faster rate continue to be the same businesses as in previous quarter. So.

So we haven't seen anything from a category perspective, I think that.

Still the durability components that have been added to a lot of our wood categories.

Continued to drive people into the stores and.

I still think that innovation is relatively new and I think the innovation around inkjet technology in the fashion components of the product we carry that continue to resonate as well so we're not seeing.

Any difference in department performance and we've seen over the last few quarter.

And then my last question is on the luxury vinyl planned category I mean, how do you think your value prop stands out there in the market have you seen.

Competition step up.

From an assortment and the promotion perspective, thanks very much.

Yes.

Certainly it is one of the fastest growing category industry and for for US as well, we think that our guiding proposition one of the best out there we were.

First to market on water resistant laminate, we followed that up with Nucor. We've now got a new program Darryl locks that isn't that isn't that waterproof space and the customer is really really liked that product. So yes, we see it all over from a competitive perspective that we are very confident in what we're doing in the new programs that we're introducing.

Excellent. Thanks.

Our next question is from that password with Goldman Sachs. Your line of sight.

Thanks, so much good morning, guys.

My first question relates to the pro loyalty program you spoke about the profit per loyalty and it's starting to get traction up can you talk about the pace at which you would expect this program to start to move the needle on the top line like do you feel there was some benefit to the business here in Q1.

And if not at what point would you start to see it.

Really impact the numbers.

Yeah. So we're we're not fully rolled out on the pro loyalty program. It's in progress we have in our pilot markets.

A benefit versus control markets.

We're thoughtfully rolling that out we got we should have it within all markets by the end of the year takes time too.

To get benefit from it while we saw improvements versus the control market.

There is an enrollment period, where we get people involved in it.

There is education period, where once we get them enrolled we've got to really teach in the benefits of it and.

And we think that the real benefit comes in the out years. Our goal is to get more of the share of our pros walls by creating this loyalty program make a memo trying to do more of their spend with us so long way round over getting some benefit now when we get it rolled out in the rest of the country and it's going to provide benefit over the years to come.

The only thing I would add to that map 100%.

I agree with Tom said, but we're also integrating in with the holistic CRM strategy CRM not just for our professional customers, but also for our do it yourself customers and we're putting in some world class technology and talent to help us manage that process and as Tom mentioned those those processes are all about the next three to five years, you don't want to just see a quick left a note.

So we are very encouraged.

With the technology, we're very encouraged with the team that's putting it in we are very encouraged with Tom mentioned on the tests versus control markets, where we've been testing loyalty program will be giving you guys a fairly detailed update on that probably in Q3 and Q4 as we get more traction there, but it looks very encouraging at this point, great and then I have a couple of follow ups unexpendable.

The first is thinking about the leverage point I'm looking out to next year when presumably.

Houston.

Will be out of the.

No longer be aiding the comps you'll be copying against it.

To some degree.

What do you think the leverage point is for the business or do you think it will look like next year.

In terms of what kind of same store sales, you'll need to hold the SG&A ratio flat I'm asking that question considering what you said about the cost of market entries along with the fact that clearly you have some expense levers and as you said in answer to a question a couple of minutes ago.

I'll break it into so I think when you look at our storage was called the pre 2017 stores.

Just with inflation and things of that nature, we probably need at three ish plus percent just to to make sure we're getting.

Flat operating margins so to the extent, we do better than 3%.

We'll get which could operating margins out of the pre 2017 stores I just think about the stores that were opening and 18 and 19. Those 18 stores are going to need to perform well historically as you guys know our new source of constant two to three times the rate.

And therefore, we've got a substantial amount of leveraged and that next year and so I do think that will continue to happen.