Q1 2022 Floor & Decor Holdings Inc Earnings Call
Greetings, ladies and gentlemen, and welcome to sow and take hold its first quarter of 2022 conference call.
At this time, all participants are in listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference please space strong zero and your telephone keypad.
As a reminder, this conference call is being recorded.
It is normal tissue to introduce your host Mr. Wayne Hood, Vice President of Investor Relations.
Thank you operator, and good afternoon, everyone. Joining me on our first quarter earnings Conference call. Today are Tom Taylor, Chief Executive Officer, Trevor Lang Executive Vice President and Chief Financial Officer, and <unk>, <unk> Executive Vice President of merchandising.
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 of $19 95, and are subject to risks and uncertainties any statements that refers to expectations projections.
<unk> or other characterizations of future events, including financial projections or future market conditions is a forward looking statement the company's actual future results could differ materially from those expressed in such forward looking looking statements for any reason, including those listed in its SEC filings, Florida.
<unk> 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 measure can be found in the earnings release, which is available on our Investor Relations website at IR <unk> Dot Com a recorded replay of this call together with related materials will be available on our Investor Relations website, Let me now.
I'll turn the call over to Tom.
Yeah.
Thank you Wayne and everyone for joining us on our fiscal 2022 first quarter earnings conference call. During today's call I will discuss some of the highlights of our 2022 first quarter earnings Trevor will then review our financial performance in more detail and discuss how we are thinking about the remainder of 2022, we will.
And then open the call for your questions.
We enter fiscal 2022 with good momentum in our business and are pleased to deliver first quarter sales and earnings that exceeded expectations, especially concerned considering lapping record sales and earnings last year were.
We are proud that our store commercial and support teams continue to successfully execute our growth strategies in a dynamic and challenging industry wide operating environment, we believe our competitive moat from our product price and access to inventory standpoint has never been stronger.
Giving us added confidence in our ability to continue to grow our market share in a wide range of macroeconomic challenges.
Moreover, we are happy that our investments in associate wages and training resulted in better staffing lower turnover and a 100 basis point sequential increase in our composite customer service score.
Investing in our associates as core to our culture and success collectively these efforts contributed to record fiscal 2022 first quarter sales total sales increased 31, 5% to $1 billion and comparable store sales grew 14, 3% from last year.
Exceeding expectations.
Fiscal 2022, adjusted first quarter earnings per share declined one 5% to 67.
From the previous year's record earnings of 68 per share also exceeding our expectations.
Let me turn my comments to our new store openings during the first quarter of fiscal 2022, we opened six new warehouse format stores compared with seven stores during the same period last year.
We opened one store in January two stores in February and three stores in March and in the first quarter of 2022 with 166 warehouse format stores in 34 States. We are excited to have opened our first store in Portland, Oregon, Mark market in the first quarter of two.
2022 and are pleased with its early performance.
Additionally, we are delighted with the strong acceptance of our newest store in long Island and Garden City in New York.
We remain on plan to open nine stores in the second quarter.
32, total warehouse format stores in fiscal 2022.
We evaluate each lease as they come up for renewal and as such we plan to close our South Lake store in Atlanta in the second quarter of fiscal <unk>.
Fiscal 2022. This store was the second store opened by flow into core and we intend to reposition the store to an expected better location in 2023.
The net store openings would bring our total warehouse format store count to 191 stores at the end of fiscal 2022.
As discussed at our March Investor Day meeting, we forecast a path towards operating at least 500 warehouse format stores over time.
In plain, we would only be 38% built out by the end of fiscal 2022.
Moreover, 58% of our warehouse stores had been opened after 2016 with an average storage of just two three years for this group of stores.
<unk>. We believe these stores will continue to move up their sales maturity curve and support our longer term comparable store sales growth target of mid to high single digit growth.
In the first quarter of fiscal 2022, we opened three design studios, including February openings in Miami, Florida, and Houston, Texas in March we opened the Tyson's corner, Virginia. We now operate five design studios and have plans to open one additional design studio in Atlanta during the second half.
Our fiscal 2022.
Let me now discuss in more detail our comparable store sales.
First quarter demand for hard surface flooring remains strong, particularly among pros with broad based strength across most merchandise categories and all store classes.
Particularly pleased with the sales performance of some of our most mature stores, where many had their strongest sales week ever in the quarter.
We experienced double digit comparable store sales growth in all divisions led by the us out.
Our comparable store sales increased 11, 5% in January 23, 5% in February and 10, 1% in March bringing the first quarter growth to 14, 3% as a reminder, last year's comparable store sales increased 31% in January 19, two.
Percent in February and 41, 3% in March as.
As we look to the second quarter of fiscal 2022, our April comparable store sales increased nine 9% and are up nine 7% month to date in may in line with our expectations as we lapped our most difficult comparisons.
The first quarter comparable store sales increase of 14, 3% was driven by a 16, 7% increase in our average ticket as expected the increase in the average ticket is mainly due to retail price increases to mitigate cost increases continuing strong sales in laminate and vinyl and ongoing customer.
Preferences towards our better and best price points across all departments.
Our first quarter average ticket also benefited from an increase in the sales penetration rate from our designer led initiatives and e-commerce, both of which have an average ticket above the company average.
First quarter 2022 comparable store transactions declined two 1% from last year, which was sequentially lower than the 7% decline in the fourth quarter of fiscal 2021.
First quarter comparable store sales among pros continue to grow faster than our homeowner ourselves as we successfully executed a holistic growth strategy that leans into relationship building and growing our wallet share pros accounted for 33, 1% of our sales in the first quarter of 2022.
We are pleased that the top 10% of our pros shop with us an average.
11 times in the first quarter and their average spend was up 25% over last year validating the strength of our growing brand equity. We continue to believe our in stock job lot quantities are a clear competitive advantage during the current disruptions in the global supply chain let.
Let me turn to growth from our E Commerce business. The investments, we are making towards improving our web experience by focusing on product content and conversion are working first quarter E. Commerce sales increased 46% from last year and accounted for 17, 7% of sales compared with 15, 4% in the same.
Period, the previous year and 16, 4% in the fourth quarter of 2021, we are pleased with traffic to our website and double digit conversion growth on both desktop and mobile devices. As we look ahead, we will continue to optimize our customers' digital experience and focus on product and inspirational cons.
Yes.
Let me now discuss the progress we are making with design services. We are focused on building a consistent high touch best in class and seamless design service experience for our homeowners and pro customers in our stores, we find that not only is our average ticket and gross margin higher when the desire designer is involved.
But our customer experience score is material materially higher.
So we have been doubling down and design by investing and designers and we have begun testing and enhanced organizational structure that we believe will improve our ability to attract and retain high caliber designers by providing them with clear career path opportunities. We are pleased that the focused attention and investments we are making in design.
Contributed to a marked improvement in designer turnover in the first quarter of 2022, and the Companys highest quarterly appointment penetration rate.
We are in the early stages of benefiting from these initiatives and are excited about building awareness and familiarity with our design services.
Let me turn my comments to our progress in commercial which includes Spartan surfaces, and our regional account managers or Rams that work with our stores as a reminder, Spartan services target is 60% of our commercial addressable market by focusing on A&D firms that have large projects with hard product specification.
<unk> and long lead times by comparison, our regional account managers focus on 40% of the commercial market where projects generally have soft product specifications or no product specifications.
We are successfully integrating critical functional areas with Spartan surfaces, and implementing strategies to accelerate growth in 2022 and beyond.
To that end, we acquired Wisconsin based distributor K R. S incorporated in February of 2022, while <unk> is small and not material to our results. They are a leader in commercial hard surface flooring in Wisconsin.
And are an example of how we can expand nationally when we find the right opportunity and partners. We remain excited about Spartans growth prospects and are pleased that their first quarter 2022 sales and earnings results exceeded our expectations. Following a strong 2021 as.
As we look ahead, we are encouraged to see that AIA is architecture Billings index for March increased to 58 from a score of 51 three in February implying continued growth in billings and commercial flooring demands. We are pleased that first quarter sales from our ramp increased 88% year over year.
We are continuing to build out our regional account managers with the addition of seven ramps in the first quarter of fiscal 2022 towards our plan to onboard 16 ramp in 2022, let.
Let me update you about how we are navigating constraints and the global supply chain as we assess U S port congestion and its impact on our supply chain costs and distribution capability to our stores. We continue to see that the ports of Los Angeles and long Beach remain our most significant challenge.
However, we continue to divert to other ports and increase our dray capacity to minimize this impact congestion in the port of Los Angeles, and long Beach have taken a step backwards.
Two first quarter earnings results.
Thank you Tom we are pleased to deliver fiscal 2022 first quarter total sales of $1 billion comparable store sales growth of 14.3% and earnings that exceeded our expectations and.
Our first quarter sales of $1 billion was approximately equal to our full yourselves in fiscal 2016, the year before we went public.
We are excited to be on track to deliver our 14th consecutive year of comparable store sales growth in 2022.
This growth is a fantastic accomplishment considering last year's very strong results.
Let me know discuss some of the changes among significant line items in our fiscal 2022 first quarter income statement balance sheet and statement of cash flow then I will discuss how we're thinking about the remainder of fiscal 2022.
Our first quarter gross profit increased to $21, 1% from last year, driven by a 31 and a half per cent increase in total sales. The first quarter gross margin rate decreased 340 basis points to 39.7% from 43.1% last year, primarily due to higher supply chain and freight costs and lapping last your strong.
Long 60 basis point increase.
Gross margin rate was better than our mid 39% expectations shared on our last call and above the 38, 8% were reported in the fourth quarter of 2021.
I want to acknowledge the thoughtful hardwork by all of our teams to manage our gross margin. During this inflationary time with substantial supply chain complexity and cost increases are teams that a remarkable job through pricing actions and other margin driving initiatives.
First quarter selling in store operating expenses increased 31.4% from the same period last year and was flat as a percentage of sales at 24.3% year over year modestly better than expected. The increasing cost was primarily attributable to 26, new warehouse format stores and three new designs to news opened since April one too.
2021 and.
And additional staffing and operating since it's along with our strong sales growth.
Comparable store selling in store operating expenses as a percentage of comparable store sales decreased approximately 60 basis points. The decreased province, primarily reflects leveraging our advertising and occupancy costs from the $14 three per cent growth in comparable store sales.
First quarter general and administrative expenses increased $24, 1% and leveraged 30 basis points to 5.3% from 5.6 per cent last year due to lower year over year incentive compensation.
The opening expenses during the 13 weeks ended March 31st 2022 increased $2.9 million or $42, 1% compared to the prior year quarter. The increase is primarily the result of an increase in the number of stores that we either opened or planning to open compared to the prior year period.
Moving onto our profitability first quarter first quarter adjusted EBITDA grew 6.8% trailing are 31.5% growth in total sales due to a 300 basis points decline in EBITDA margin rate the 13.2% from last year's record 16.2%.
We are lapping a 300 basis point increase in last year's EBITDA margin right from significant improvement in gross margin rates and expense leverage in 2021.
First quarter GAAP net income decreased six 4% to $71 million $75 million 800000 in the same period last year gap diluted earnings per share decreased 7% to 66.
From 71, and the same period last year.
First quarter non-GAAP adjusted net income decreased 1.5% to 71.600 million from 72.700 million in the same period last year.
First quarter adjusted earnings per share declined 1.5% 67 from previous years record earnings of 68 cents per share exceeding our expectations.
We ended the first quarter with 107.500 million diluted weighted average shares outstanding compared with $107 million 100000 last year.
A complete reconciliation of our gap to non-GAAP earnings can be found in today's earnings press release.
Turning to our balance sheet and cash flow, our inventory was $1 billion $100 million up $542 million or 89% from last year to.
Increase your driven by making investments to improve our in stock inventory inflation. The opening of 26, new stores since the first quarter of last year.
Our first quarter of 2021, any inventory was only up 3% over the first quarter of 2020.
Comparing or any inventory at the at the end of the first quarter of 2020 to the first quarter of 2022, the two year compounded annual growth rate was in line with our sales growth over the same period.
Net caches and operating into activities was was a negative $3.3 million for the 13 weeks ended March 31, 2022, compared with net cash provided by operating activities of $101 million for the 13 weeks ended April 1st 2021.
The decrease in net cash provided by operating activities was primary the result of the net increase in inventory and other working capital line items to support our growth.
Let me now turn my comments to how we're thinking about the macroeconomic environment.
We continue to believe important long term secular trends of support growth and home improvement spending Easter.
These trends are well documented and include the inventory of new and existing home sales is at the lowest level in recent recorded history and aging housing stock, where 80% of the homes of 20 plus years old in need of investment and repair substantial home equity remote work from home trends and the growing ranks of millennials entering the prime home buying years that's.
In the short run the Federal Reserve is now on a path to expeditiously raise interest rates shrinking its balance sheet and tightening financial conditions to bring inflation under control Phillips price stability goal effected. These policy changes is that as interest rates rise that's likely means a cooling an existing home sales on price appreciation home equity values and potentially so.
Lower spending rates that we must consider.
Partially offsetting these headwinds is tremendous home equity wages continued to be high and unemployment lobe as well as consumers and businesses balance sheets or strong, which will allow them to make investments that they deem necessary.
Considering these factors and the potential impact on our business. We continue to expect our 2022 comparable store sales growth will be within the range of 10.5% to 13%.
Coming in behind the sales and earned range could be more challenging than previously contemplated due to the recent changes in the macro economic and geopolitical environment, such as rising interest rates and mortgage rates continued declines an existing home sales record high inflation and still a difficult supply chain.
It's still early in the year, but we wanted to be prudent in assessing potential outcomes are sales guidance contemplates continued declines in comparable store transactions throughout the rest of the fiscal 2022 or.
Fourth quarter of 2021 comparable store transactions declined 0.7%.
Our first quarter of 2022 comparable store sales transactions declined to 1%.
March 2022 was down for 4% and second quarter to date transactions have decreased 6.7% in line with our expectations. As we are currently lapping some of our strongest results from last year.
All transactions are expected to decrease for the remainder of 2022 are comparable store sales range is unchanged as it reflects the ongoing preference for our better and best products for an accord initiatives price increases to mitigate product and supply chain cost pressures.
We believe our prior fiscal 2022 earnings per share guidance range is still achievable largely driven by our sales growth and increasing our gross margin right to approach, 41% as we exit 2022.
Are differentiated business model and value proposition, our strongest ever giving us confidence that we will continue to grow our market share in any macroeconomic environment. We are reaffirming our fiscal 2022 sales and earnings outlook range. We provided at the beginning of the year and included in today's press release and.
In closing our entire leadership team is encouraged by the strong start to fiscal 2022, and we are very excited about the growth is still lives in front of US we would like to personally. Thank all of our associates and vendor partners for their great work, they're doing everyday to serve our customers operator, we would now like to take questions.
Thank you very much ladies and changed so literally unhappy conducting a patient authorization.
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[noise]. Okay. This question comes from Steve <unk>.
Hi.
Enable.
Cover.
Let's take a step back and just focus on.
The unit growth sort of plans you a longer term curious how the change in the macro is impacting how're you guys are approaching the real estate pipeline.
Should we should we still expect you to sort of to the plan for that 20 per cent growth and.
2023, or or have you taken a more cautious approach to building the pipeline here.
No change in our plans done unit growth.
Pipeline is robust new stores are performing well.
This is an opportunity to take market share and so now the the short answer that there's not a change in our strategy and 20 per cent unit.
The only thing I would add to it is we're getting our cashback and two and a half to three years.
It's early in the year, but the class of 22 is.
Appears to be a really strong class of stores were making.
Close to probably over $3 million and four while even though the first year that number just close to 6 million by by your five so even if things were to decelerate. So I'm, we're not seeing that today, we're not sure that's going to happen, but even if they wanted to celebrate decelerate from wherever today, we're gonna get a return on capital.
Double our cost of capital and so we still think that's going to be a very prudent continued investment for us.
A follow up on on the store model and really.
Predictability of your <unk>.
Curious if you could provide some color on on how the sale build within sort of a new market where that were those sales are coming from today versus maybe three or five years ago.
Are you still sort of creating local market share demand or are you pulling more from independence or how do you sort of think about the predictability of that year, one sales belt.
I'll start Trevor can jump in I would say a couple of things as we've opened more stores our ability to predict has gotten better more stores, we get in our base.
The better our analytics are unpredictable at the first year sales are going to be I don't think there's too much change from the standpoint, historically, we we feel like we take the third out of the home improvement Center market. We take you know a little over a third out of the independents and then we tend to grow the market because people will take on larger jobs when they come in.
To our stores would be more rooms, when they come into our store. So we see some increased demand I don't think that's changed a whole lot.
I don't have any data that says different stores.
Those last few years have been terrific I think the better.
A couple of things are a real estate team has done a better job over the last three years of getting better locations are sites are more visible than they've historically been there and that's helped and I think as we've grown the base over the last 10 years, our awareness is better so when we open the store, particularly in a new market. It does.
A lot of times better than we anticipated it would do pros end up coming to the stores more often because they become more convenient.
Yeah. The only thing I would add is there's really two main drivers that allow us to see what a stores or predict what a store is gonna do.
First off if you want to an existing market. We've got really good stores around there. So we're opening stores in Atlanta in Texas, Florida, and Arizona and California.
As we said the analyst days stores sores started kind of 15 to 17 million to make at least two and a half million dollars and four while EBITDA. When we open at those existing markets of stores are materially higher than that and so we have super good confidence and knowledge.
What the stores are going to do an existing markets. When we go to new markets. It really is determined by three things. It's density of population. It's household value and household income and since we have fairly good knowledge of what that is we got it.
A good real estate team of good finance team of good consulting partners that help us make those decisions were fairly good at predicting those things as well, but it's really those three demographic factors that will dictate what new stores perform at and as a class we've been been really good at forecasting and coming in at those numbers.
Thank you.
Thank you. The next question comes from sex taken off.
A false pumpkin.
Hey, good afternoon could you talk a bit more about your pricing actions in Q1 versus Q4, where you sit today versus the full year plan and is there any way to quantify the level of share gains you typically see as your price gaps widening versus peers.
The lots of that question I'll do my best to start and I guess, Trevor can land and maybe our son if needed. So we've continued as we said we took a modest price increases as we were exiting 2021 in the first quarter. We continued to take price increases to offset increased.
By chain costs.
And so we're finding our ability to pass on prices. Good the way we look at the market.
Pay really close attention to our competition, both independence and big box and are spread we feel as in a really good place while taking price.
So we've been able to to do that and it's working it's not the sole piece of what's driving our ticket. We've got lots of initiatives that are driving tickets, we see customer stepping into better and best you see our design penetration and e-commerce, which which drive which tickets are helping that as well and we're seeing more square footage per transaction.
And so all of those things are benefiting the ticket at the same time.
Can you got it.
So I just wanted to know exactly when you when you look at our when you get a chance to look that you'll see our margin came in a little bit better than we were planning for you know we took out in the mid 39, we came in and maybe 20 basis points ahead of that and the retail increases we took in Q4 relative R Q1 relative to queue for we're actually lower so modest increase was less modest or.
Lower I should maybe a better way to say that then the increases we took so we're we feel really good about our pricing relative to what we see in the industry you guys see what Mohawk and Sean a lot of big domestic manufacturers were talking about retail increase or so it seems that a fantastic job in managing it is still very difficult supply chain environment with lots of moving parts very vulgar.
<unk>, but but so far so good.
Got it that that's helpful. And then cover as you think about the plans for the rest of the year you outline clear positive today around high project demand healthy consumer balance sheets, but as you square that with the looming headwinds around rising mortgage rates and potentially slowing housing turnover I'm curious.
To what extent you believe these potential headwinds need to materialize in order to impact the second half outlook.
And we spent more time analyzing the forecast this year than I think any time in my 11 years, and specifically call that out in my commentary about what we're seeing in decelerated transaction trends grew down 2% in the second quarter and then we were down almost 7% quarter today, those trends I've gotten a little bit better and may.
And so we're planning on those.
Decelerating trends to continue every quarter for the rest of the year. So we're not putting our heads in the sand we are absolutely assuming that it's gonna be a bit of a more difficult environment. We're not economists. We don't we don't know, but we certainly pay attention to things that affect our business.
But our modeling tells us based on what we're seeing today with pro with design with other centric initiatives with our commercial sales.
Along with the retail increases that we feel like we're going to have to pass along because of the higher costs were incurring more.
More than offset that and we see our comps.
For this quarter, probably close to what we're doing now maybe we think this is probably the trough and then as we get back into Q3 and Q4, we'd see our comps growing up a little bit.
Primarily because a lot of the higher cost will incur will be in the back half of the year. So that's a long answer but.
So far as steady as she goes we were pleased to have exceeded our expectations in January February March and April came in line with our plan. So we've been doing pretty good so far thinking about the forecast that either coming in at or above the forecast. Yeah. I think the only thing I'd I'd add to the back half compensation is what what what was it.
And my prepared comments <unk>.
58% of our stores are less than five years old so they're still maturing and that you know.
Berkeley has benefited our comp line.
And then we.
We mentioned our mode, often but I do think the mode is pretty significant out I think our ability to take share at a faster rate I think we've been taking share at a faster rate.
Since this global supply chain prices started happening I do think are in stocks are on it.
And a terrific physician and continue to improve.
I just think our merchants have done a fabulous job trend my product.
We're just we're.
Really far ahead of the trends and and I think that that's helping us gainshare.
At a quicker rate, which should help in the back half as well.
Very helpful. I appreciate the time.
In fact.
Thank you. The next question comes from Michael <unk>.
Good evening. Thanks, a lot for taking my question Trevor in your prepared remarks, you mentioned that it might be more difficult to hit the high end up your comp range for this year.
What is motivating you to see that is it 67 per cent traffic decline.
That you've experienced thus far this quarter is at five consecutive quarters for five consecutive months of declines in in total housing turnover is it <unk>.
30 year fixed rate mortgage that's now at 5.5% I assume you are going to say all of the above but is there one that that's motivating you to say.
More than the others.
I think that's a good summary, Michael we had our we had our last call on the day that Russia, and basically Ukraine. So energy costs are gone up.
Fed has been even clear about interest rates rising and mortgage rates were us all today at the mortgage rates are what $5 3%.
If you just take a simple mortgage that takes your 350000, our mortgage and take your payment 2000 versus 1500 Bucks that's $6000 a year, that's coming out of Middle income Americans.
Call. So those all those macroeconomic factors and geopolitical factors. It just sort of gotten tougher since we had the last call for performing great today.
We're not economists, but we just think there's been enough macro commentary around things that could affect our business.
Giving us a call.
But the commentary.
Okay. My follow up question is.
In that case, how low can your calm speed this year and you still hit the low end of your EPS guidance.
I think if you look I mean, we said 10 and a half is what we had in the guidance I think if we see things start to Trinity below that we.
We looked at this recently if you historically, we'd say 60% of our costs are more fixed the nature more 40 per cent, we've been over the years, a bill to lower that to kind of 50 545.
But if you know if you're having a really difficult environment, we could even go after some what are traditionally fixed call. So we would obviously very quickly start looking at cost there's a fairly large incentive compensation payment that is mathematical that goes through our.
R SG&A bookstore in corporate.
So if we if we saw a trend that we're a lot off that off of what we're seeing we would obviously be much more aggressive and lowering our also said simply I think that's been the athletes what would tell us that we would be able to hit the low into the EPS, we're not seeing that today and if we got below that number we would start to get more aggressive on the call or <unk>.
<unk>.
Understood. Thank you very much and good luck.
Thank you and next question comes from check from Austin Gordon <unk>.
Hey, Thanks, a lot guys.
Good afternoon query results.
And some evidence across retail over the past month of some demand destruction on price increases. So I was curious and I I think the answer is no but I wanted to see if you can elaborate if you've seen any of that in your business over the past couple of months.
One thing I would say I mean, our businesses decelerated, but it was planned for we're up against really big numbers last year. When you look at March and April there was a pretty big benefit we got because of the Texas freeze that.
Texas and some of the surrounding stores are hardest dollar comparisons are right now.
And and as we said in the call and you guys saw on the results, we actually exceeded our sales and earnings expectations in April was essentially at plan.
So <unk>.
We're not seeing it today I guess, we're coming in at or above our plans through the first four months and one week of the year I would say it or should I go back to what I said earlier, just some from a price of one thing I didn't mention I'll <unk> I'll get two but the just the way we look at price and the way we compare ourselves.
Across the people that we compete with are the spread is consistent to what it has historically been.
So you feel you feel good about that and then secondarily like I pay attention to competitive markdowns.
And we're actually running less competitive dollar mark down so we did a year ago enterprising price environment. So.
I feel good about our pricing.
But I'm in the stores all the time and we don't hear anecdotally consumers are expected prices to increase in their accepting of that that's not the <unk>. So at this point.
It's probably worth maybe one more thing we called out our inventory.
Our supply chain team came to us well over a year ago, now and said hey, we need to be aggressive and getting inventory and earlier, we mentioned on each of the last three calls that we were bringing in Chinese new your order's early and so we found ourselves in a position where are in stock levels, even though they're not maybe where we'd like them. They are much better than the competition and so I think that's another thing that's helping are busy.
This is the fact that we've got more inventory and our inventory team our merchandising team our supply chain team to come at a cost, but I've done a good job of keeping their keeping us in stock relative to what we're seeing in the competition. So I think that's another thing that's.
Helping our business is the fact that we've got inventory and a lot of others do not that's right.
Okay, Great and then I met my follow up a little bit unrelated given that the commercial business is growing and becoming a bigger piece of the business I was wondering how cyclical it's been during past Verizon right cycles.
I think fluctuated, we're fairly new into it there was such a <unk>.
Trough, when Covid hit and a lot of those commercial areas that there's just a lot of deferred maintenance that needs to be done you guys probably heard Tom talk about the architectural indexes is fairly gross when we look at our backlog both on our our commercial business as well as Spartans commercial business. It looks very good so hard to think about 2023 at the.
Point, but everything we can see this year is that because you know it's a longer lead time does not like a consumer business, where the consumer may or may not show up as a contraction feels everything we're seeing today is great I'm. Tom mentioned Spartan has just been fantastic Q1, as well as the Rams. It. So those are 2022 is going to be a strong year for commercial for us.
Okay great.
Thank you.
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<unk>.
Thanks, and good evening, guys. So I guess as we think about just in the very.
Very near term if if if it it sounds like there's really nothing that's happening in the business that's outside of your expectations from.
Tray down our trade up our transaction growth declines in pricing. So you know if.
If we if we held the three <unk> from April that would suggest an 11% comp in the second quarter.
Following up on an earlier question is that how we should think about the business and and then you know.
How do we think about when those price increases actually come through because I mean theoretically.
Radically if nothing else changes that would lead to <unk> our acceleration.
The only <unk> I think you were close on current quarter of Ian are modeling suggested that.
If current trends continue we would actually be really close to where we called out roughly 10 today. So I'm not sure we'd be at 11, but maybe.
And then as we get to the back part of the year, because we don't we don't look at comps as much as we look at the raw volume in the trends we're running out today.
We think that that we're at the trough and Q2 and comps would be closer to what we did in Q1 as you think about Q3 and Q4 and it's hard to look at three year trends, but but because of COVID-19 made it. So unique if you go back and look at three years and look at our queue. One three year stack and then you look at our queue three in our queue for three years.
<unk>.
They're going to be fairly commensurate and that's been consistent with our business. We don't have a seasonal business. We don't have a promotional business so that might be another way to think about it just looked at the three year stack in our modeling with suggest that.
She'll be around where we are in Q1.
Got it yeah, it's probably just stack versus kanger and then on on the gross margin what what drove the upside I know you had some the fees that Jimmy marriage.
Add impact you in early in the fourth quarter and probably earlier in the air is that is that all gone and so how does that change the calculus of how they.
Gross margin looks in in terms of where you can actually get to I think on the last call you talked about.
Two or maybe slightly better.
Than that.
That that 41% on exit.
Yeah, I think the 20 basis points, we'd be in Q1, there was a lot of the emergency attention. Good guys that were better than we were plan. It's definitely not gone we are still taking on lots of cost and not so much in detention, but in to merge we're taking on lots of course.
I think as we think about the rest of the year. They are currently and again, it's very volatile. We said this six months ago, and we ended up not being true, but the current view of the world is that costs are coming down a bit on the spot market to come down again, we're managing to <unk>. The demerged the detention pieces better so that's probably where the upside to be.
As well as the retail increases to date and can we feel really good about our competitive position. So yeah I would say.
Demerged detention current spot markets mixed.
<unk> continues it could be an opportunity for us.
And.
So if we were to have upset that's where it would come from the only the only thing I would add tremors that we are better and best categories are still our best copies categories. Those so they're still but then that's a benefit to margin and that's been helping and then our designer penetrations increase and that's also benefits margin.
Those those are things that are within our control and then the consumers gravitating towards.
That's great. Thank you very much.
Thank you. The next question comes Sean Shimmying Heckman of Morgan Stanley .
Hi, This is Jackie assessment on first Ternion just back on the price elasticity question are you guys seeing anything on the high or low end consumer with pricing Tiffany.
<unk> I mean, our our best performing categories are better and best.
<unk>, so customers are still coming in and stepping up to the highest prices that we have I think an ark and hard surface long I do believe the trend is critically important people don't do these jobs all the time there so when they come in I think they're gonna buy what they like and it tends to be with us, it's a better and best so not seen much of it.
Consumers continuing to spend alot.
Gotcha. Thank you and just a quick follow up question can you talk a little bit about the backlog of pipeline of projects.
It's mostly a retail business. So we don't have a ton of backlog in our business.
The vast majority what we sell is a residential remodel the.
The commercial business is expected to be a fairly large from a small basis.
Overly significant for us today, so we feel good about the backlog in the commercial business, but again, that's relatively small versus you over $4 billion in sales will do this year.
And from the consumer perspective inappropriate fective.
It's still strong.
The only thing we can go we don't have data from the pros the shopping or stores everyday beyond what they tell us and then it's their backlog is still robust, they're they're out and markets. It's.
They are weeks away from getting jobs done and they've got a good pipeline.
From what they tell us and we ask that question across the country. So we feel like the backlogs pretty good.
Thank you and <unk>.
Hi, This is actually <unk>. Thanks for taking our questions are you able to parse out how much of your business comes from replacement within the context of <unk> remodeling.
This is what you would characterize as more.
More discretionary purchases and.
And maybe.
So much related to that talk about the resiliency of the model and a saucer macro in light of.
More discretionary of the business nature of the business, presumably relative to the broader home improvement space and housing potentially continuing to slow down from here.
If I understood. The first part of the question. The vast majority of what we sell is a residential remodel how much of that is replacement versus trend versus maintenance I don't think we have a good I don't think we know that.
And I will tell you as far as cycles.
We have a low price leader in my experience here in my experience in other retailers are better operator, and the low price leader takes a lot more market share and downtime, especially when you have the inventory like we do and we double digit comps in 2009 wouldn't be overall how's it was pretty tough and then we saw a bit of a cycle word.
Mortgage rates went up very fast in late 2017 early 2018.
We did see a deceleration in our business between Q1 and Q2 of 2018 I think it's a lot different now because the home equity in the wealthy people have but even then we meaningfully outperformed the market and so those are the only two cycles that I can speak to.
<unk> been here, but I do believe that there were much stronger better company and the price becomes more important the low price leader, usually does a lot better.
Thank you. The next question comes from break <unk> often Nicole.
Thanks, I I wanted to follow up on the the mix and pricing impact that sounds like mixed design center et cetera was probably a majority of the ticket growth year on year would that be fair.
I think.
The the.
The biggest part of our growth is definitely with somewhat combination of all it's better best it's price.
E com tickets, a lot higher designer tickets or the pro tickets higher.
All those things are working in concert I don't know for a transaction.
So I guess, what I'm trying to get at is if all those are are tailwinds right. Now I think he started to layer and pricing in the back half of last year and let's just pick a number let's say pricing was five per cent.
Should we expect that to accelerate on a year over year basis.
And the comp the next couple of quarters or is that something that you expect to sort of roll and roll off on a year over year.
I think as we think about the back half of the year, we're expecting more retail because our we're expecting higher supply chain costs.
Or international container cost as you guys know or.
Even though the spot market is down northern lockup capacity us and others are adding more capacity.
Isn't that long ago, we were paying $1500 for container now we're paying a lot more than that now so because those costs will come in in the back part of the year. That's when we see probably some more of the retail increases being higher in the back half of 2022 relative to what we've seen today.
Okay and could you update us on what percentage of your sales are important in either from China are from Europe .
Given the supply chain challenges in the world.
Yeah, I think we're Asia is.
25, well, that's China, but overall Asia, there's a higher percentage of that is probably close to 40, I think europe's less than less.
Less than 30.
Got it thanks, and good luck guys.
Thank you. The next question comes from.
<unk> <unk> <unk>.
A <unk> good evening, just to clarify relative to when you last spoke to us in February how 'bout to change some pumps toy transactions and average ticket for 2022 and you cop guidance now.
To date, we've been better.
Sales payment better than we had thought our comps were a little bit better. The the trends were on right now or are essentially where we were I think as we think about the rest of the year, though we with what's changed as we are expecting a continued deceleration in transactions I'm not so sure we knew that when we.
Originally gave the guidance. So we are assuming slightly more.
Deceleration transactions, but we're also planning on slightly higher increase in retail us more than offset that so the overall comp.
Ended up at the same place.
Is it a couple of hundred basis points in each direction offsetting until that the most part.
I think it changes a little bit by quarter. We think Q2 is probably the biggest deceleration, we see and transactions and then it becomes a lot more modest at the back part of the year and again, we're not economists I think that's the big driver now what happens and how quick the fed reaction does that really impact consumer confidence and spending but we are current views that the <unk>.
Celebration will be the highest in queue too and.
And then you'll see a much more modest deceleration as you get to the back half of the years that we're currently thinking about it.
Got it thank you very much.
Thank you. The next question comes from Justin Heather on pot.
Hey, guys.
Justin Claver prepare can you hear me.
Yep.
Yeah. So.
So I wanted to.
Operating leverage you had mentioned the 60 basis points of leverage on comp store sales are on comp stores and I guess I would've thought on a 14 comp.
Got more leverage is that just the fact of stores last year were running lean on.
On the staffing perspective, and you've recently, obviously made wage investments or is there anything else, we should be aware of from a timing standpoint.
Two things I guess I'd call out last year, we started the year with only 11% new stores right cause we really ratchet down our sure growth and the year of Covid Willie ended with 11% new stores.
And.
We're now up to 20% now that's the total not just the Comping store. So we've got a lot more new newer stores and our SG&A in our newest orders runs at 50 per cent higher costs that are more mature. So just so you know we took a pause at one year Covid and as you started Q1 of 2021, you're going up versus 2022 you.
Just got a lot more younger stores in the base they have much higher SG&A and then the second piece of that is yeah. We're in an inflationary environment and certainly were Labour wise, we have a lot of other retailers will talk about the investments maybe we made a made a fairly significant increase in raises in July of last year. We became a 15 dollar minimum retailer in January of this year and so it it.
Take us while the anniversary those two increases as well.
Those are the those are the big things on P is also right that the store last year.
We were chasing staffing last year and we're in a pretty good place now and stuff that we weren't but the last couple of years.
Right.
Okay. No. That's helpful. This is unrelated on I wanted to ask about Paris does that is I believe that the USTR reinstated certain exclusion on Chinese imports.
In a month or so ago. It wasn't clear to me, which categories were being excluded or are you guys seeing any relief.
From from that recent decision and if so.
Are you flying that to the bottom line or do you give that back to the consumer in the form of lower prices similar to how you operated a few years ago. Thank you.
Look at our side and now we're just we're not aware of any changes that are impacting Chinese tariffs, Brian Robbins design I don't know if he knows bedding.
Hey, Tommy that's Bryan there is has been no change we just keep on waiting for the we hope that towards the end of the second quarter. There may be some relief for right now we're not looking for anything to change.
Thank you.
Okay.
Thanks.
[noise]. Thank you. The next question comes chunk, Chris spell check any of BNP Paradise.
Hey, guys fixing the question.
I'm trying to understand how much visibility into the.
<unk> so the business like typically how long is the purchase cycle this category for one.
<unk> customer <unk> purchase and I guess my question would be.
You're looking at Leeds of those training similar to transactions are you seeing any kind of different.
Any kind of different level of activity relative to make a transaction should say thank you.
Yeah.
I'd say, we're not really seeing any major trend shifts.
And samples or.
Anything that would lead us to believe things are changing materially.
Gotcha, Okay. That's helpful and then I'm just gonna ask about inventory unrelatedly.
Sounds like you, maybe just catching up on some pent up levels in stocks somewhere you wanted to pay their crew, 10% quarter on quarter on a per store basis perspective, and how you take an inventory.
Pushed over the course of 22, if you're kind of planning.
<unk>, because the shutdowns in China, or how you should take it the determined that much looking forward.
So we are definitely planning on increasing our inventory this year part of its inflation to us we're taking on these costs that's driving it up.
And as we exit the year as good as our business has been it would have been better had we had better in stock. So so yes, we've got a really good system in a fairly large team of people that think about where we need to improve our in stocks and so we continue to make progress each quarter over the last four quarters.
But there's still more work to do to improve our in stock. So we would expect assuming we don't have any major issues with what's going on in Shanghai right now in China, We would expect our inventories to continue to increase at a slightly faster rate themselves for the rest of the year, but that's gonna be good because we're going to get in boxing categories. We know that we're lenient today.
Okay. Thank you.
Thank you and upon all Christian comes from the line of <unk> of tank.
Yeah. Good afternoon, Thanks for taking my question.
On the new stores. Thanks for sharing you know the update of the numbers, but.
Are you seeing any delays related to the materials. If I recall you know a lot of the stores were going to be back have waited this year, but I'm just wondering if you're seeing any that might even slip to 2023, just because I.
I keep hearing about more material delays and permitting issues related to real estate out there. Thanks.
Certainly there's challenges, but we don't anticipate having any problem getting our 20 per cent unit growth. We have we had some problems at the end of last year, but some fixturing coming out of China that was for a design studios or the Delair design studios, but there.
Doesn't count on our 20 per cent unit Grosso shortage.
Short answer is it's a more challenging environment and it's historically been but we think we can navigate it.
That's great to hear thanks, and then just one other kind of unrelated question.
You mentioned the training and the improved training you guys have done that's helping retain associates and drive better productivity.
I, probably should know this but can you remind us some of the things that you have changed with regard to the training that is is helping to improve that.
So we made changes every year and enhancements every year, it's the way that we train our associates and the way we train our managers and spent a lot of time.
I would say we have over index and train our managers on how to onboard associates. Our fastest turnover comes in the early part of an associates tenure at Florida courts, It's a tough environment to work and we still have your stuff. So.
We've done a pretty good job and spending time with our managers to make sure that they're really holding the associates hand through the first three to six months of their boarding that seems to be in combination with lots of other things helping.
Reduce our turnover, we're seeing improvement in our turnover rates, we think that in combination with wages, it's been beneficial as far as product training we've.
Been good we're good we continue to change it and revolve it and make it better and better we're never satisfied with how good it is but there's just too many changes to list for a call like this.
Got it.
Thank you ma'am I appreciate it.
Well I appreciate everyone's interested in the results and I appreciate the questions.
For our associates that are listening we certainly appreciate everything that you are doing.
These challenging times, but thanks for your interest and we look forward to talking to you the next quarter.
Thank you ladies Sanchez.
<unk> had a conference.
May now disconnect your lines. Thank you for your participation.
[music].