Q4 2021 Floor & Decor Holdings Inc Earnings Call
Hello, and welcome to the floor and decor fourth quarter and fiscal year 2021 conference call and webcast. At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
If you should require operator assistance. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It's now my pleasure to turn the call over to Wayne Hood, Vice President Investor Relations. Please go ahead.
Thank you operator, and good afternoon, everyone. Joining me on our earnings Conference call Today are Tom Taylor, Chief Executive Officer, Lisa Laube, President and Trevor Lang Executive Vice President and Chief Financial Officer before we get started I would like to remind everyone of the Companys Safe Harbor language comments made during this conference call and webcast.
Contain forward looking statements within the meaning of.
The private Securities Litigation Reform Act up 1995, and are subject to risks and uncertainties any statement that refers to expectations projections or other characterizations of future events, including financial projections or future market conditions is a forward looking statement the company's actual future results could differ.
Clearly from those expressed in such forward looking statements for any reason, including those listed in its SEC filings for home decor assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results.
During this conference call the company will discuss non-GAAP financial measures as defined by SEC regulation G. We believe non-GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial.
Measures can be found in the earnings press release, which is available on our Investor Relations website at IR floor and decor Dot Com a recorded replay of this call together with related materials will be available on our Investor Relations website, Let me now turn the call over to Tom.
Thank you Wayne and thanks to everyone for joining us on our fiscal 2021 fourth quarter earnings Conference call today's call will discuss some of the highlights of the strong fiscal 2021 fourth quarter and 2021 full year earnings results Trevor will review, our financial performance in more detail and discuss how we are thinking about.
Fiscal 2022, we will then open the call for your questions let.
Let me start by saying that we are proud to have achieved several milestones in fiscal 2021, and most important continued to grow our market share in a challenging environment. Despite the continued challenges presented by COVID-19 widespread disruption in the global supply chain and related cost headwinds, we delivered record Phil.
2021 sales and earnings results on a 13 week to 13 week basis, our fiscal 2021 adjusted fourth quarter earnings increased seven 3% to <unk> 44 from <unk> 41 last year on a two year compound annual growth rate basis, our adjusted earnings per share increased.
<unk>, 31% from 2019.
We are happy that our strong results enabled.
Record incentive payouts through our bonus and achieve programs in 2021. Additionally, we raised our minimum starting wage to $15 per hour effective January one 2022, placing us in the first quintile of retailers over the past six months, we have increased our average store wage by 5%.
To over $17 per hour from approximately $16 per hour in July 2021, we believe this will help improve retention and associate turnover.
Our fiscal 2021 fourth quarter total sales increased 26, 4% to $914 $3 million from last year exceeding expectations adjusting to remove the extra week last year, our fourth quarter 13 week to 13 week total sales increased 34, 1%.
Our full year fiscal 2021 total sales increased 41, 5% to a record $3 4 billion, which is more than double our fiscal 2018 sales despite having to moderate our new store openings in 2020 due to COVID-19 pandemic.
On a 52 week to 52 week basis, our full year 2021 total sales increased 44%.
Our fiscal 2021 fourth quarter comparable store sales increased 14% on top of a strong 21, 6% growth last year.
Comparable store sales increased 17, 2% on a two year compound annual growth rate basis from 2019, the highest two year quarterly growth rate in fiscal 2021, our full year 2021 comparable store sales increased 27, 6% and 15 four.
Sent on a two year compound annual basis, culminating in 13 years of growth in our comparable store sales let.
Let me turn my comments to our new store openings during the fourth quarter of fiscal 2021, we opened seven new warehouse format stores compared with five new stores during the same period last year.
We opened four stores in October and three stores in November .
For the 2021 fiscal year, we opened 27, new warehouse format stores, representing 23% growth from fiscal 2020. We ended 2021 operating 160 warehouse format stores and two design studios in 33 states further extending our.
Store footprint and brand awareness.
We plan to open 32, new warehouse format stores in fiscal 2022, and expect about 56% of the store openings to be in existing markets and 44% and new markets.
Among the 32, new warehouse store openings, we expect seven will be owned we are taking advantage of our strong balance sheet and cash flow by intentionally shifting some of our new store development to owned locations from lease projects. We have seen a good return on this additional investment.
The shift increases our control of new store projects significantly increases our store level EBITDA by lowering rent and occupancy expense and improves our store opening cadence.
We intend to open six new warehouse stores in the first quarter of fiscal 2022, including a new warehouse store in Garden City, New York expected in March we are excited about continuing to build our store footprint in the northeast and this opening will bring us to four warehouse stores that we operate on long Island New York.
We expect the balanced opening cadence of about 50% of our new warehouse stores opening in the first half.
Second half of fiscal 2022, we intend to open four design studios, including three in the first quarter of fiscal 2022, one in Miami, Florida, One in Vienna, Virginia at Tysons corner and one in Houston, Texas. The design studios are small format stores strategically located in densely.
Populated higher income metropolitan markets that we would not be able to operate a large warehouse store economically.
As we look beyond 2022, we're excited to announce that we have expanded our new store opportunity in the United States. We now believe we have a path to operating at least 500 warehouse format stores over the next eight to 10 years compared with our prior market expectations of operating at at least 400 warehouses.
Walmart stores.
Performance of our new stores opened over the past three years, coupled with the strong performance from our more seasoned stores and our market refresh information reinforce our conviction and our new store opportunity, we intend to get into more details at our upcoming analyst day on March 16, the webcast details of which will be available on our <unk>.
Bester relations page.
Let me now discuss in more detail our comparable store sales monthly our comparable store sales increased 16, 2% in October 10, 9% in November and 14, 8% in December culminating in a 14% growth in the fourth quarter of 2021 Thanksgiving week, a lower volume.
For US moved into November from December last year, which is the main difference in November and December comparable store sales. We are pleased with our fourth quarter sales exit rate and the start to the first quarter of fiscal 2022.
Our January comparable store sales increased 11, 5%.
And our up to 23, 9% month to date in February .
Our fourth quarter comparable store sales growth was driven by a 14, 8% increase in average ticket, which is primarily being driven by higher average retail per square foot. We also saw a slight increase in square foot comp per ticket. The increase in average ticket is mainly due to continued strong sales in laminate and vinyl.
Ongoing customer preferences towards our better and best price points across all departments and to a lesser extent retail price increase to mitigate cost increases.
Additionally, our average ticket benefited from an increase in the sales contribution from our designer led initiatives, our higher sales penetration in E Commerce, and a higher pro sales penetration rate all of which have an average ticket above the company average.
While fourth quarter transactions declined 7% from the same period last year, they increased 10% on a compounded annual basis from 2019, which is slightly above the nine 8% growth in the third quarter of 2021, the two year compound annual growth rate in transactions of 10%.
And modest year over year growth and our square foot square footage sold per comp store transaction reinforces our belief that we continue to gain market share.
At this juncture, we are pleased that the modest price increases that we have taken to cover the rising costs are having an elastic impact on demand.
Let me now turn my comments to how we are navigating the constraints and the global supply chain. Our supply chain teams continue to work aggressively to secure international Ocean carrier capacity to meet our strong demand.
To do so we have significant we have added significantly more capacity to our ocean and North American logistics, particularly from Asia, Europe , and Brazil. Consequently, our in stocks continued to trend in the right direction supporting our strong sales growth. We believe this strategy combined with our broad assortments enables us to offer.
Offer our homeowners and pros alternative products, where some out of stocks have occurred elsewhere. However.
However, we faced intermediate term cost headwinds in pursuing this strategy.
Particularly from elevated ocean container costs as well as the emerge and detention costs, particularly in the Los Angeles Port in the fourth quarter of 2021, our ocean freight costs, which represent our highest supply chain cost more than doubled from 2020.
Given the ocean capacity constraints that are driving higher container rates and demurrage and detention cost we are planning on higher ocean freight costs throughout 2022.
As a reminder, we didn't see material increases in supply chain costs until the final four months of fiscal 2021 as.
As we studied the market and our competition, we believe our holistic value proposition is the best it has ever been simply said, we don't believe anyone offers the breadth of in stock product visual inspiration compelling assortment or services, we offer and certainly not at our prices.
Because of this we will continue to judiciously raised retails throughout 2022, and this heightened inflationary environment.
And we plan to grow our gross margin rate throughout 2022 relative to the 38, 8% we achieved in the fourth quarter of fiscal 2021 with the goal of exiting the fourth quarter of 2022 with a gross margin rate approaching approximately 41%.
While none of us knows the future it seems reasonable that the global and U S supply chain issues will abate at some point in the future and if this occurs in late 2022 or early 2023, we see a path for gross margin rate to continue to grow as we move into 2023 and 2024.
Our third strategic pillar of growth is expanding our connected customer experience on the.
13 week to 13 week basis, our fourth quarter E. Commerce sales increased 45, 1% from last year and 61, 7% when measured on a two year compound annual growth rate basis from fiscal 2019 as a result, our fourth quarter E Commerce sales penetration rate increased one one.
Hundred 90 basis points to 16, 4% from 14, 5% last year.
For the year, our e-commerce sales increased 32% year over year and on a 52 week to 52 week basis and accounted for 16, 1% of our sales compared with 17, 4% in 2020 and nine 4% in 2019. These results exceeded our expectations and validated that we are making.
Correct investments in our connected customer capabilities.
We continue to enhance our web experience focusing on content and conversions that said our stores remain integral to our connected customer strategy. For example, about 79% of web sales and 88% of web orders were picked up in the stores in the fourth quarter.
Our fourth pillar of growth restaurant and the investments we are making in our pro and commercial customers to grow our market share. We are pleased that our strategies to grow our pro wallet share, particularly among our top pros are working.
For the full year, our pro sales increased 44, 1% from last year exceeding $1 billion a milestone in the company's history. Our pro sales continued to grow at a faster pace than our homeowner ourselves. We are pleased that our top pros are shopping more often and spending more with us to build lifetime value the average.
Spend of our top 10% of pros was 24% higher compared to the top 10% in 2020.
Validating the strength of our growing brand equity indeed.
Indeed, our brand tracker data shows that our brand equity with pros improved in 2021 from 2020.
We see the pros increasingly shop with us as their spend increases due to our large in stock selection of high quality low cost trend rate flooring products website, and pro Premier App, which increasingly resonates with pros.
Importantly, we believe our in stock job lot quantities are a clear competitive advantage during the current disruptions in the global supply chain. We are pleased that enrollment in our pro Premier rewards program or PPR increased 56% in 2021 from 2020.
EPR sign ups are positively correlated with store performance in 2021, PPR pros spend three times as much as non PPR pros and shop with US two six times as frequently points redeemed a measure of the program's value increased 63% in 2021.
Turning to sales growth from our commercial regional account managers or Rams and Spartan surfaces. We are happy that the 2021 sales from Rams increased 61% from 2020.
Let me turn my comments to Spartan surfaces. We are focused on successfully integrating critical functional areas and understanding Spartans needs to prepare the company for accelerating growth in 2022 and beyond.
We are pleased to say that the integration has been going exceptionally well contributing to management meeting 100% of their earn out performance metrics and related payout associated with 2021 as.
As we look to 2022 Spartan is expected to begin to leverage opportunities with our supply chain management, lowering our core products and organic and inorganic sales reps additions.
Overtime, we expect commercial sales to become a material part of our growth as we leverage our core strengths and merchandising direct sourcing and Spartans commercial sales rep.
Let me now discuss our progress with our design services the fifth pillar of our growth as we have discussed in the past we are focused on building a consistent high touch best in class and seamless designer service experience for our homeowners and pro customers in our stores to that end, we are enhancing key productivity metrics, adding.
New technology to improve the customer experience and refining our design organizational reporting structure, we believe the new organizational structure enhances our ability to grow this business and attract and retain high caliber designers by providing them with career clear career path opportunities collectively we are pleased that our.
<unk> on design services led to a 78% increase in design appointments in 2021.
Notably our 2021 annual design sales penetration rate increased 440 basis points as a reminder, the gross margin and average ticket is higher than the company average when a designer is involved we are excited to build on these investments in 2022 and grow the awareness and familiarity with our design services.
We are also pleased with our design, our Dallas design studio, where the pro forma metrics are slightly ahead of expectations. We look forward to walking through our Miami design studio in Doral warehouse storm with analysts attending our March 16th Analyst meeting in Miami, Florida.
Before turning the call over to Trevor I want to thank all of our Florida core associates for their collective hard work every day in our stores distribution centers and store support center to serve our customers.
Want to particularly thank our merchandising and supply chain teams that continue to work tirelessly to ensure we have inventory sourcing flexibility to meet the strong demand despite ongoing disruption in the global supply chain collectively.
Collectively we have yet again proved to be a company that is agile resilient and resourceful.
Now I'll turn the call over to Trevor to discuss our fiscal 2021 fourth quarter and full year 2021, earning results in more detail.
Thank you as Tom mentioned, we are proud to have achieved several milestones in fiscal 2021 despite.
Despite the continuing challenges presented by COVID-19 widespread disruptions in the global supply chain and related cost headwinds. Additionally, like many companies we have been managing our business through ongoing tight labor market.
We have proven to be a company that manages through these disruptions by being agile and resourceful at meeting our customers' high demand in this environment as evidenced by our strong sales momentum that has continued into fiscal 2022.
To meet the increased demand and continue to grow our market share. We are intensely focused on improving our stores in stock merchandise assortments.
While our sales continue to reflect strong demand some challenges remain in the supply chain costs, particularly in emerge and retention cost that arose primarily from port congestion.
Cost remains somewhat unpredictable, particularly at the Los Angeles Port and reduced our fiscal 2021 fourth quarter earnings by about <unk> <unk> per share compared with the expectations. We shared with you on our last call.
Said another way excluding these unexpected costs there were over and above our forecast our fourth quarter adjusted earnings per share would have been an estimated 49 versus the reported adjusted earnings per share of 44.
For these reasons, we have provided a wider range of fiscal 2022 earnings guidance to account for this near term predictability and higher overall supply chain costs, we expect our earnings guidance range to narrow as we move throughout fiscal 2022.
Let me now turn my comments to some of the changes among the significant line items in our fiscal 2021 fourth quarter income statement balance sheet and statement of cash flows and then ill further discuss our thinking about fiscal 2022.
As a reminder, our fiscal 2020 year, which ended December 31, 2020 was a 53 week period. The extra week added an estimated <unk> <unk> to our diluted earnings per share in fiscal 2020.
More details pertaining to the impact of this extra week in fiscal 2020 can be found in today's press release.
Turning to gross margin our fiscal 2021 fourth quarter gross margin rate contracted to 38, 8% from 42, 5% in fiscal 2020, which was below our expected range of 39% to 40%.
The larger than expected decline was due to higher than expected emerged and the pension cost that accelerated at the end of the fourth quarter, reducing our gross margin rate by about 70 basis points compared to the internal expectations of our gross margin timing of these expenses prevented us from raising retail fast enough to offset these charges emerge fees our assessment.
Containers that sit inside of the ports in transit to our facilities and detention fees are assessed when containers are not returned to the port timely which in many cases are outside of our control due to extreme poor congestion primarily in Los Angeles.
We are managing these costs and planning fiscal 2022 price increases based on the current environment.
Turning to our fiscal 2021 fourth quarter expenses, our fourth quarter, selling and store operating expenses increased 23, 4% to $235 million 700000 from $191 million 101000 last year.
As a percentage of sales we leveraged these expenses by approximately 60 basis points, primarily from our strong sales growth.
Additionally, as a reminder, we paid $2 $5 million in spot bonuses to our store associates and reimbursed store short store support center associates for salary reductions. They took during COVID-19 pandemic in 2020 that led to some modest year over year incentive compensation leverage in 2021 on a 13 week to 13 week basis, our selling and store operating expenses increased.
Eight 4% and leveraged approximately 110 basis points when removing the additional week of sales in 2020.
Our fiscal 2021 fourth quarter GAAP net income decreased 12, 7% to 49.900 million.
$57 million 100000 in the same period last year.
Our GAAP diluted earnings per share decreased 14, 8% to <unk> 46 from 54 in the same period last year.
Our fiscal 2021 fourth quarter non-GAAP adjusted net income decreased six 1% to 47.100 million from $50 million 200000 in the same period last year.
Our fiscal 2021 fourth quarter non-GAAP adjusted diluted earnings per share was <unk> 44 down six 4% from the <unk> 47 in the fourth quarter of fiscal 2020.
Excluding the additional week of cells and estimated profit due to the 50 <unk> week in the fourth quarter of 2020, our adjusted EPS grew seven 3% and on a two year CAGR basis, our fourth quarter 2021, adjusted EPS grew 31% are.
A complete reconciliation of our GAAP and non-GAAP earnings can be found in today's earnings press release.
Moving onto our balance sheet and cash flow at the end of December 32021, our net inventory increased 54% from the same period last year to approximately $1 billion.
The increase in inventory was in line with our expectations of a $900 million to $1 billion that we provided in our third quarter fiscal 2021 earnings call.
As a reminder, these expected increases in inventory was driven primarily by two strategic investments first investments made to improve our in stock inventory on key Skus and second bringing in a portion of the Chinese new year inventory a couple of months early to try to mitigate the international container capacity issues. We made the strategic decision to build up our inventory levels heading into 2022 and we are.
We made these investments given the strong demand environment.
Fiscal 2021 cash flow from operations was 301.300 million down 104.800 million from the same period last year, primarily due to our inventory investments.
Turning to our capital expenditures for fiscal 2021, our capital expenditures totaled 475.300 million.
Including capital expenditures accrued at the end of the period, our fiscal 2021 capital spending was funded by cash flow generated from operations and existing cash on hand.
Let me turn my comments to how we're thinking about the macroeconomic macroeconomic environment in fiscal 2022 from.
From a macroeconomic perspective, we are planning on 2022 to be a good year. The secular demand in housing continues to exceed available supply, which has led to an acceleration in home price appreciation.
We believe these factors combined with record levels of homeowner equity an aging housing stock should further support home remodeling spending.
In addition, we serve a higher income consumer and they have substantially higher wealth and home equity relative to pre pandemic levels and there continues to be innovation in our category.
With that said, we are monitoring factors, such as todays Russian invasion of Ukraine, and other geopolitical events rising interest and mortgage rates modest decline in existing home sales inflationary pressures impacting the consumer and uncertainties related to the pandemic.
Let me discuss the details of our 'twenty two outlook.
Our assumptions are based on opening 32, new warehouse stores for New design Studios and a continued favorable macroeconomic backdrop that I just outlined.
However, we cannot currently estimate any impact Russia's invasion of Ukraine may have on our business.
We are planning for higher supply chain and vendor product costs throughout 2022. Additionally in order to lock in international.
Painter capacity to support our growth for the second half of 2022, we are planning on international container cost to continue to grow throughout 2022.
As Tom mentioned it is our intention to pass along these cost increases and grow our gross margin rate throughout 2022 relative to the fourth quarter of 2021, when our gross margin rate was 38, 8%.
We expect our net sales for fiscal 2022 to be in the range of 4.285 billion to $4 $375 million, an increase of 25% to 27% we're planning on.
On a comparable store sales growth of 10, 5% to 13% driven by our business model, a good macroeconomic backdrop and raising retail prices throughout 2022 to offset the anticipated higher supply chain and vendor product cost, which is remarkable considering the tough comp growth we had in fiscal 2021 as well as the second half of 2020.
Moving on to how we're thinking about gross margins expenses and adjusted EBITDA.
Gross margin in the first quarter of 2022 is expected to be in the mid 39% range.
Our full year fiscal 2022 gross margin is expected to be around 39, 5% slightly above 40%.
We're planning on our fourth quarter 2022, gross margin approaching 41% with expected sequential improvement in each quarter from mid 39% in the first quarter.
While the complexion of our P&L will change in 2022. We believe these are not structural changes we are actively taking measures to combat and counter rising costs by implementing price adjustments prudently contracting our fixed and spot market capacity with ocean carriers and continually shifting our sourcing to regions, where we can reduce costs.
On the expense side, we like many other retailers are facing wage pressure.
Our average hourly wage rate is now over $17 an hour and we are proud to be a retailer with a $15 an hour minimum starting wage we will continue to invest in our people and retain and attract our best talent and we are glad to see our fourth quarter 2021 turnover decrease as we make these important investments.
As a result, selling and store operating expenses are expected to be slightly above 24% for 2022, but below the 24, 7% in fiscal 2021.
We believe these are good long term investments in our people that will continue to yield a return.
Pre opening expenses are planned to be around 8% of cells leveraging slightly from the 1% in fiscal 2021.
We are planning on general and administrative expenses slightly above 5% leveraging from fiscal 2021.
We expect our adjusted EBITDA to grow 19% to 26% in fiscal 2022 to approximately 575 million to $610 million.
Our adjusted EBITDA margin rate is expected to be 13, 4% to 14%.
Importantly, we continue to see a path towards our expected medium term margin rate of mid teens and longer term adjusted EBITDA margin in the high teens.
Fiscal 2022 diluted earnings per share expected to be in the range of $2 75 to $3 with a midpoint of $2 88.
Diluted weighted average shares outstanding is estimated to be approximately 108.400 million.
Moving on to how we're thinking about capital expenditures as we look at fiscal 2022, our total capital expenditures are planned to be between approximately 550 million to $590 million and are expected to be funded primarily by cash flow generated from operations and cash on hand.
More specifically, we intend to make the following capital expenditures in 2022.
We intend to open 32 warehouse format stores four small format design studios and start construction on store opening stores that are going to open in fiscal 2022 23.
Collectively these investments are expected to require 405 million to $430 million of cash in fiscal 2022.
Most of the year over year increase reflects an acceleration in store openings to 32, new warehouse stores compared with 27 warehouse stores opened in the last year and the strategic decision to shift more towards owned locations from lease projects for the reasons Tom mentioned earlier.
We plan to invest in these existing store remodeling and expansion projects in distribution centers, using approximately $100 million to $110 million in cash.
Finally, we plan to continue to invest in information technology infrastructure E Commerce, and other store support center initiatives, using approximately $45 million to $50 million of cash.
In closing I would like to say that our entire leadership team is very proud of how we performed in 2021 and we remain encouraged by the momentum that has continued into fiscal 2022.
The strength of our business model is more evident now than ever given the complex supply chain in an inflationary environment. We are operating in and we believe we are in a unique position to continue to gain market share.
Our entire executive team I'd like to personally thank all of our associates and our vendor partners for the great work. They do every day to serve our customers.
Our March 16th we will be hosting the Companys first analyst conference in Miami, Florida, where we look forward to providing an update on the long term strategy and financial outlook.
It will be webcast for those who cannot join US you can reach out to our Investor Relations team. If you have any questions operator, I'll now turn it over to questions.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. We ask you. Please ask one question and one follow up then return to the Q1 moment. Please while we poll for questions. Our first question.
It is coming from Michael Lasser from UBS. Your line is now live.
Good evening, Thanks, a lot for taking my question.
My first question is on price increases how much price did you take in the fourth quarter. What did you see from others within the industry and how much price do you expect to take over the next few quarters to recoup the gross margin pressure that you experienced in the fourth quarter.
I'll start Michael out there.
More than one question, but so we chose the wrong.
Yes, it's a long long question lots of comments so.
No.
Yes.
Modest price increases in the fourth quarter to cover supply chain costs like we said that we were going to do.
In the marketplace.
We're seeing.
Everyone's taking price prices moving more than I've seen price move since I've been here.
Catalina just came out with a report that said hard surface flooring square footage pricing was up over 8% in the fourth quarter, our price increases were nowhere near that.
When we took price increases.
Didn't see really much change as evidenced in our business in the fourth quarter evidenced in our business into the first quarter.
We look at it and like I said, we'll be judicious in raising prices, we're not going to give the amount of price that we're going to increase that's kind of we're going to keep that close to the vest, but we'll certainly be thoughtful nothing's changed in our value. The way we approach value amount would be the low price leader nothing change we think of it as in terms of price is just one element of the decision making.
Right. So we know our spread has been good and it will continue to be good but we've offered so much to the experience and no. One really does what we do between pro services design services inspiration broadest in stock assortment across micro merchandising you can go on and on no. One really does what we do and we don't hear much from the from the customer about our pricing here.
It's really good like we don't when we find out and we've got to change the price because of competitive reasons cousin associates out somewhere more sudden than it is because the customer brings us to our attention. So we feel good about our ability to.
Price the way we need to.
Hey, Michael I'm, not going to add much to that only to say just to put some real numbers to it if you look at our two year transaction comp.
It was 10% in Q3 and it was also 10% in Q4. So when you look at it on that basis to Toms comment to date, we haven't seen any elasticity so far in elasticity.
And I think when you look at what we're seeing as Tom said it in the competitive.
Others are taking our prices more than us.
So my follow up question is if the industry is taking up prices by an average of 8% and Florida court not near that level that would mean that price gaps have widened.
And as you just outlined there is a host of other.
Compelling factors that would make someone want to shop at floor and decor.
How install that where price gaps have widened.
Youre incurring significant gross margin pressure.
Against those how do you get back to your gross margin level.
We had experienced previously and can you get back to a gross margin that you had.
Orient in 2020, and the 42 high 42% range.
We think over the long term, yes, right. So we're going to start that journey this year.
And some of it is going to come from from price this year, but it's more than just price rigel I mean, what's happening in our business to us.
The gravitation towards better and best products, which run at a higher margin rate that also helps margin our efforts around design services, when we get the designers and Bob themselves, we tend to get a higher margin from a designer sale.
Mark that we've done in the supply house side of our business on installation accessories has been incredible so our ability to sell the whole basket, which has a better blended margin all of those things will help and if you think that as I said in my prepared comments and if you look out and you think that the supply chain costs, we'll get better as we get to the end of this year and maybe into two.
'twenty three that also will help in gross margin rate over time. So we will start getting back to where we were this year and will finish getting back to where we were over there over the years after that.
And I think the reason, we specifically called out Demerged detention most people didn't even know what those things work until the third or fourth quarter. Those millions of dollars of cost that we and many others who are taking on because things are getting stuck in the port where we don't have control to get them out or return the containers, that's going to fix itself at some point I cant say when.
But I think those are kind of costs that are happening now and then early 2022 that I think most people think as you get to the end of the year and hopefully into next year, but those costs go away as those costs go away margin rate goes up nicely.
Okay. Thank you very much.
Thank you. Our next question is coming from Chuck Grom from Gordon Haskett. Your line is now live.
Hey, How's it going guys John Clark on for Chuck.
Yes, I guess can you guys isolate the benefit in FY 'twenty, one from spark and I guess kind of how is that impacting your sales growth outlook for FY 'twenty two.
Still a pretty small I mean, we disclosed this in our 10-K I think it's less than two or 3% of our sales today.
The acquisition was all about the long term.
We are a great company and they are executing well they really own that part of the commercial business that might have been a little bit harder for us to get in the first year was really about let's get them integrated.
Build the relationship let's start exposing them to our inventories so they can potentially start selling our inventory, let's help them grow their sales reps.
And so that's exactly what we're doing so it won't be a material part of our growth in 'twenty, two but I think as we look into 'twenty three 'twenty four we think both that business as well as our Ram business.
There is going to get a lot bigger if you will.
Talk a little bit about this in our in our March meeting when we're going to do a little bit more deeper dive and what we think the next three years look like.
Big industry at 60% the size of the residential remodel industry, rather than a lot of success in commercial both on the Ram side than the Spartan side and could we someday have 345 hundred reps doing three $4 million more piece I mean, that's what the goal is long term all of the advantages that we carry in the box that serves the repair them.
<unk> customer in the flooring experts it exists in the commercial space our supply chain advantages the brought in stocks, but the deep inventory levels that we carry all of those advantage exists in the commercial space. So we think it's a big opportunity and it will be meaningful overtime.
Yes.
Best of luck guys.
Thank you. Thank you. Thank you. Our next question is coming from Simeon Gutman from Morgan Stanley . Your line is now live.
Hey, everyone. Good afternoon, so going back to the pricing question gross margin.
I guess this year you guided initially last year, you talked about managing the gross profit dollars and that's all clear in your guidance is there any reason why you don't want to manage more quickly to rate and take pricing up and you even said theres pricing gap, there's price gaps and if youre not seeing the elasticity why can't this process maybe be quicker.
Than you think.
Yes, I mean, we are accelerating from what we talked about in the fourth quarter right. So we are going to be a little bit more aggressive in it.
But we want to be thoughtful as I said in the fourth quarter call.
A lot of the independents that we can.
Pete with they're still having a hard time accessing inventory and.
We want to make sure that where our prices are sharp so that we continue to take market share at an accelerated pace and we think we are so we're going to be thoughtful across every line in the category and take prices, we see fit.
<unk> taken a step up from what we thought in the fourth quarter.
And then maybe a follow up can you can you share what product costs, maybe rise like the percentage of product costs are rising by in any any quantification on how much your distribution costs or freight costs have risen by.
I don't think we're sharing any exact number on that but I would say that the supply chain cost that is vast majority vendor product cost increases that we've seen so far has been pretty small.
Thank you, ladies and gentlemen in the interest of time, we ask you. Please limit yourselves to one question that return to the queue. Our next question is coming from Karen short from Barclays. Your line is now live.
Oh, hi, thanks very much.
The unit growth.
What you could.
Two in terms of how and what you changed within your.
I guess analytics on expanding or increasing the number of unit potential and then at one time.
Hey, Karen this is Trevor.
Good question, we're obviously very excited to take the store count out lots changed since we went public five years ago, We've got a fantastic real estate team. We've got some really good advisors to help them I'd call out just a handful of things first of all the market continues to grow hard surface flooring continues to grow it's growing at a very good clip.
Also.
Hard surface flooring, youre, taking a bigger share than soft surface flooring, which is giving us a bigger opportunity we're selling more things we have adjacent categories, we're selling broader.
<unk> within adjacent flooring.
We've got a bunch of markets now where we've got eight 910 I think in one market. We got 11 stores in some of those stores are close to each other and not only the new stores doing fantastic and our comps in those new stores are doing fantastic our old stores are doing fantastic.
And then finally I think just because the profitability of the model has gotten so much better over the last five years, we can just substantiate stores in smaller markets and so we've got I don't know 10 or 20 stores that are in some of these smaller markets that are performing really well for us. So we do a very detailed look across all 330 million Americans all the 530.
40 Msas.
And we look at all the <unk>.
Mcgrath and Psychographic profiles that produced a successful customer in a store.
And we run that through our algorithms and our advisors and it actually gives us the list of where those 500 stores are going to be so.
What's changed since we had that original 400 store target five years ago, I would add to try but we're going to talk more about it at the analyst meeting in Florida.
Hopefully that folks will attend so we'll give provide even more color on it.
But I would one thing I would add too as Trevor mentioned, we've got markets with 11 stores I've said from for the last couple of years that we really needed to fill out some more densely populated markets to understand kind of how close the stores can be and how many stores. We can have a tight in a tight band and we're starting to learn more as our base is over 160 stores now.
Thank you. Our next question is coming from Greg <unk> from Evercore ISI. Your line is now live.
Hi, Thanks.
If you look at your comp guide for the year could.
Could you help us a little bit in terms of how you see that average ticket growth of 14%.
Flowing in if you will as it anniversaries.
Youre chasing price a bit so it just seems to me that if your.
Average ticket was up 14% or more in the fourth quarter.
Hi.
What would be the split of average ticket and I guess transaction growth through the year.
So what's interesting when you look at our.
Transaction being down 7% in the fourth quarter. When you actually look at our square foot per transaction is actually up over 2% and I think a couple of things are driving that one our pro business is incredibly strong relative to our homeowner business. The homeowner business is doing well, but the pro business is doing bigger the pro ticket is almost two five times larger.
<unk> been the homeowner ticket so that's putting more square foot on every single ticket.
And so I think we.
We're becoming more efficient per ticket. The other thing that's really driving our ticket is the consumers are voting with their checkbook and theyre, putting no more better and best and that drives up our ticket in our laminate category is also a pretty large square footage.
No.
Summarize that down to the answer Youre, asking I mean, I think it is possible that our transactions are kind of like they they have been in the low single digit negatives, but I don't see anything that changes with the pro with what we're doing with design with the consumers still picking the categories that they're picking that would keep that ticket elevated. So so said simply I think most.
Of that comp that we're going to have for the rest of the year is going to be driven by ticket.
Thank you. Your next question is coming from Steven Forbes from Guggenheim. Your line is now live.
Good evening.
Hello, I want to focus on.
My question two part one.
In prior periods, you've mentioned the percentage of product sales from perfectly on premier.
Premier members. So can you comment on that and how that ratio. If it is finished for 'twenty 'twenty. One and then as we think about pro growth for 2022 any color directionally on the anticipated rate of growth within that customer group.
Yes, I think 80% of our active pros defined as frozen chocolates in the last year.
I think almost 80% of them are in some form or shape involved with our PPR programs. Most of our pros are engaged in it as I think Tom mentioned the ticket for.
For those people that are in the program I think the tick up three times as high we get better.
Scores from those pros as well.
I think.
When you look at how strong the pro business is and we think about the future. We've obviously listened to some of our competitors' calls the environment is really good for the pro they've got as much work as they want.
I saw a stat from one of the big banks today that there is something like $6 five trillion more value in People's homes than there was back in 2019, and so theres plenty of dry powder, we serve a higher income customer they've also got record levels of cash and equity portfolio. So they're going to want to do things those homes. Those people are generally going to win these pros to put those things in.
So I think we're set up well and then you add to it again.
Again, just where we are from an assortment perspective, and an inventory level perspective, those things are important approach and we can give them something unique they can't find it somewhere else. We got it in stock a lot of our competitors do not and so all of those things tend to lead us to the belief that our pro business will continue to be strong for the foreseeable future.
Thank you. Our next question is coming from Jonathan Matuszewski from Jefferies. Your line is now live.
Hey, guys. Thanks for taking my question.
Mine was on design services sounds like Youre, making a lot of progress there penetration is up can you remind us the percentage of transactions that utilize design services that more than half less than half.
And Relatedly what percentage of your customers just simply don't have awareness that these services are available feels like that that ladder.
Great.
It could be better low hanging fruit.
Hi, This is Lisa so that's not a number that we've given out I will tell you well less than half. So there is a lot of opportunity I don't think we know the number or the awareness for our design services, but anecdotally I would tell you it's pretty darn low we often get customers that are in the store and that's the first thing is yes.
Pre design services. So our goal over time is for design services to become a real competitive differentiator and that's the reason or one of the reasons they come to shop. It not a service that they find about once they get to the store for all the other reasons to shop.
We believe there is a very very long runway on design services right.
The other thing to just point out as Trevor I think mentioned earlier, it's a much higher average ticket much higher conversion.
Higher margin and the average customer service scores are very high as well. So there's a lot of reasons that this is a big initiative for us.
I've said it before we've had does that.
On the merchandising side of the design center has been good for a long time in the operating side is getting better and better. We are taking the same approach that we took with pro years ago, where we put put people in charge of it they start building a program around it we start getting consistent service from store to store.
<unk> career paths for our designers give them the right tools and we've just made a ton of progress so that services.
And our best customer service ratings are from customers, who use the service. So we think it's a big opportunity.
Thank you next question is coming from Zack <unk> from Wells Fargo. Your line is now live.
Hi, This is Eric on for Zach.
Your EBITDA.
Our strong fiscal 'twenty, one comp the outlook for 'twenty two is still yes.
It was above your long term algo to mid high single digits. Just curious if you can talk about the building blocks to getting to the 10, 13% comp outlook, how much is market growth versus share gains new store waterfall et cetera. So how long do you think you can stay above our long term algorithm going forward.
Yeah, I mean, I'll start by saying I don't think micros, the balls better than anybody elses, but we are in an environment, where we're doing with cost increases primarily in the supply chain, but also we are expecting some vendor product cost increases we're planning on passing along those cost increases and as Tom mentioned actually growing our gross margin on top of that.
And so I think as I mentioned earlier I think the most of our comps is going to be coming on the back of ticket because we still have more retail increases to put into the system based on the cost increases that we're anticipating.
I think as long as we're in this inflationary environment. The ticket is going to continue to be elevated and that's going to give us a confidence above our long term algorithm.
I don't know the future, but let's let's all be hopeful that some of these supply chain issues do abate as we get to the end of 'twenty, two and into 'twenty three.
Those costs go away, we likely would then lower our retails, because we don't need to keep the retail.
At the level, we'd like to keep a good distance between our competition and then you could see the same store sales decelerating some but at that time, the gross margin rate goes back up nicely and we still get to our profit growth.
I don't want to say too much from what we're doing in a couple of weeks of March but.
Our view is still that over the long term, we can grow our profit.
5% on a three year CAGR basis.
Just the complexion of the P&L is going to change this year higher inflation, therefore higher topline if inflation goes back down then you can see the top line being slower lower and then the gross margin rate being higher and you still get to a very good profit growth.
The next question is coming from Christopher <unk> from Jpmorgan. Your line is now live.
Hi, Good evening, it's Christian Christian on for Craig.
Understanding that the mix and ticket mix.
Mix and volumes are driving ticket can you just give some color on how youre thinking about comp cadence through the year and how inflation factors into that given.
Given the supply chain product costs will be increasing through the year do you expect to take price.
Again in the second half of the year.
Clearly our current expectation is.
We have a weighted average cost system and so our inventory turns are just over two times a year. So as we expect to see those cost as I mentioned in my prepared comments grow throughout the year that we would expect our cost to increase throughout the year and that we would grow our retails.
Throughout the year as well.
We are obviously going up against going on three years as we get to the end of the year incredibly.
Incredibly high comps, we comped on average over 20%.
The back half of 2020, we just posted a 27 six comp for this year and so when you look at the back half of the year the comp we're up against bigger numbers.
So our current expectation is will be.
In the.
It's not going to be all that different by quarter, we will be in the sort of mid to low teens, depending on the guidance range we gave.
As we think about the rest of the year, we don't have a promotional business. We don't do a lot of discounting and things like that so.
Fairly consistent as we move throughout the first half of the year versus the second half of the year.
Thank you. Our next question is coming from Kate Mcshane from Goldman Sachs. Your line is now live.
Hi, This is patrik hollander on for Kate We just wanted to ask about what kind of product innovation is coming to the flooring category in 2022, and how the strategy will evolve around getting customers to trade up to better and best in the 2022.
I mean as we have for the.
Last many years as we continue to focus on innovation and durability and we continue to focus on trends and so as you look at that.
We've talked about the Opex program.
Pretty new for us.
Our resilient product is doing extremely well it is in the best price point back at the highest price point, we have between laminate and vinyl and it's doing extremely well. So we will continue to expand that as far as trends as you've heard us talk before about large format and whether that be in Tyler and wood and that continues to expand we've got fantastic.
Youll see in a couple of weeks and Florida on large slabs, which is a brand new category for us to get in that it's very logistically challenged.
But the customers are responding well to that already so our merchants have done a great job, even though they haven't been able to travel internationally for the last couple of years to continue to work with our vendor partners to innovate. So I think youll continue to see more and more from us like I said, mostly around the durability technology side, and then on led trend in fashion and the.
Second part of the question was how do we get customers to buy it how are we getting and that goes it really ties into what our design initiatives that we keep talking about we know if we get the designers involved and it's easy to get customers to step up when you think about the total price of the job getting them to step up to something that's better and best isn't that significant jump when they're spending that much on a hard surface flooring job. So.
The more designers can get there the more they can help get that customer step up and also the other thing I'd say is we get customers to step up even when we don't take care of them. The right way just the way we present inspiration in our store, it's very easy for a customer to work and see the better and best products differently than you would see it in a lot of people that we compete with.
Thank you. Your next question is coming from Stephen is a calling from Citi. Your line is now live.
Great. Good evening, Thanks for taking my question guys.
Had a question on the overall demand environment. So when you look at the business on a CAGR basis. He referenced the fourth quarter was actually the highest level of growth and it sounds like that's continuing in the first quarter to date I guess as you look at your business do you attribute the acceleration to an overall pickup in spending in the market or are you actually seeing some accelerating share gains when it comes to pros and new store.
Performance and then just briefly within the 2022 outlook. How do you expect the pro side of the business to perform versus DIY. Thanks very much.
Okay I'll take the first one.
You can take the second one that I think from my perspective, I do think that we're taking share at a bit of an accelerated pace I think that.
Inventory levels within the independents is strained because of the all of the global supply chain issues that we've talked about it's just been challenging we've made conscious decisions to spend significantly more on supply chain to make sure. We're our priority one is to be in stock. So we put a priority on that we brought in Chinese new year early I mean, we've just done a lot to have the inventory in the stores.
So I do feel like it's coming more from a share gain perspective than anything else and Trevor you want to hit the question yes.
I mentioned this briefly earlier about the fact that.
We serve a higher income customer was record wealth that exists in household values as well as cash and stock market portfolios and those people want help with their products.
Everything we've talked to our pros I know some of our larger competitors at the same thing earlier this week that the pros they've got as much work as they want.
And we're doing a great job of taking care of our gross our view is the pro business will continue to be strong as we as we look into 2022.
Thank you. Our final question today is coming from Justin Kleber from Baird. Your line is now live.
Yeah, Hey, guys. Thanks for taking the question just a longer term one on the leverage point in the model and whether you think it's changed at all given some of the cost pressures like wages.
Just trying understand what level of comp.
Going forward beyond 2022.
When we're not in this double digit same store sales environment, what what's the right leverage point, we should think about from an opex perspective. Thanks.
This is Trevor as long as we're doing 20% unit growth and we are adding stores in more expensive markets.
It's going to be above your typical 3% to 4% because the advertising cost a lot more in those markets labor costs more usually the rent costs more.
So our historical long term algorithm and so all the complexities of the last few years, what's kind of the mid to upper single digit comps get a little leverage out of SG&A and grow gross margin would get you to 25% net income growth I think thats basically if we ever get back to a central.
I think thats still plays into account and we should have an elevated comp as long as we're doing 20% unit growth because you have so many new stores almost 50% of the chain is less than five years old and so youll have a lot of those new stores running up that maturation curve. So we will need call. It mid to slightly above mid single digit comp as long as we're executing 20% unit growth to get leverage in the <unk>.
And again Thats when things are a little bit more constant, which we're obviously not in that environment today.
Thank you.
Make some.
Alright.
I'll make some closing comments now okay. So look first I would like to thank everyone for their interest in our company and participating in our call.
Certainly appreciate that.
I'd like to recognize and thank this is leases last call as a as a participant she could listen in on the next few calls, but it's our last call as a participant I can't I can't emphasize how much she has done for.
For our company.
Wouldn't be the company we are without a share her contributions are too we meant to do list. Most of you have known and work with them and have seen what she has done for our company, but we wish you well in retirement that is what it's all about so that we can make it. So people can go off and live their dream. So we're certainly happy for and happy that she has built a tremendous bench of great people behind or so we will continue to make Florida court what it is.
Today, so thanks for everyone's interest in the call and thank you Lisa for all you've done.
Thank you that does conclude today's telecom goodbye.
You may disconnect your lines at this time and have a wonderful day, we thank you for your participation today.