Q2 2022 Floor & Decor Holdings Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the floor and decor Holdings incorporated conference call. All lines have been placed on a listen only mode and the floor will be opened for questions and comments. Following the presentation. If you should require assistance throughout the conference. Please press star zero on your telephone keypad to reach a live operator.
At this time, it's my pleasure to turn the floor over to your host Wayne Hood, Vice President of Investor Relations, Sir the floor is yours.
Thank you operator, and good afternoon, everyone. Joining me on our second 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.
It's made during this conference call and webcast.
Forward looking statements within the meeting.
The private Securities Litigation Reform Act of 1095 and are subject to risks and uncertainties any statements that refers to expectations projections or other characterizations of future events, including financial projections or future market conditions is a forward looking statement the company's <unk>.
<unk> future results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its SEC filings floor and 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 measure can be found in the earnings press release, which is available on our Investor Relations website at IR dot 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 everyone for joining us on our fiscal 2022 second quarter earnings Conference call. During today's call I will discuss some of the highlights of our 2022 second quarter earnings Trevor will then review our financial performance in more detail and discuss how we are thinking about the remainder of 2022.
Before we get started I wanted to take a moment to comment on our exciting announcements today that Trevor will be promoted to the role of president from Executive Vice President and Chief financial officer of floor and decor.
Following leases announced retirement last summer, we conducted an extensive internal and external search for this important role.
We concluded the <unk> deep knowledge and passion for our company culture strategies products and industry knowledge make him the right person for this critical role.
In addition to being an outstanding CFO over the last 11 years Trevor has been a vital thought leader and responsible for our information technology strategies and the strong growth of our pro and commercial Ram businesses. We are enthusiastic about continuing to partner with Trevor as we execute our long term plan towards 17.
Billion dollars in sales in 500 stores the company will conduct a surge of internal and external candidates for a new chief financial officer, and travelers promotion will be effective upon the appointment of a new CFO .
Turning to our second quarter earnings results, we're pleased to deliver better than expected fiscal 2022 second quarter adjusted diluted earnings per share of <unk> 76 per share. These earnings results are particularly gratifying to us when we consider our previous year's record sales and profits the current.
Operating environment, which includes extra ordinary high inflation rising mortgage rates 10 months of declining year over year existing home sales and higher global supply chain costs and congestion, we're proud of our teams and how they consistently execute our growth strategies and successfully manage our profitability I want to thank our associates.
<unk> and vendor partners for their hard work and dedication as we navigate the near term macroeconomic challenges, we believe our competitive moat from people product price and access to inventory is strong, giving us added confidence in our ability to continue to grow our market share even in a dip.
Global macroeconomic environment.
During the second quarter of fiscal 2022, we opened nine warehouse format stores compared with seven stores. During the same period last year, including six warehouse stores in new markets. We opened six stores in April two in May and one in June we continued to build out our existing markets with openings in Atlanta.
Chicago and Houston as noted in our first quarter earnings call. We closed our South Lake warehouse store in Atlanta in the second quarter. Therefore, we ended the quarter with 174 warehouse stores in 34 States. We plan to open eight warehouse format stores in the third quarter of fiscal 2022.
Including our first store in Minneapolis.
Most of these third quarter warehouse store openings will be in existing markets and will open later in the third quarter of fiscal 2022, we have successfully opened 15 warehouse stores year to date and are pleased at 47% of our planned openings were opened in the first half of this year leading to more operating weeks.
We intend to open 32, new warehouse format stores in fiscal 2022, eight of which will be owned locations. The opening of our Atlanta design studio, which is expected in the fourth quarter will bring six design studios in operation at the end of fiscal 2022.
Turning to our fiscal 2022 second quarter sales growth total sales increased 26, 7% to a record of nearly $1 1 billion and.
And comparable store sales increased nine 2% compared with 68, 4% growth in comparable store sales in the same period last year.
On a three year compound annual geometric growth rate basis, our second quarter comparable store sales increased 13, 4% versus 15, 4% in the first quarter and 13, 4% in the fourth quarter of fiscal 2021.
Our second quarter comparable store sales results were slightly below our expectations of about 10%, primarily due to transaction headwinds from homeowners returning to traveling over summer weekends, and federal holidays and slowing macroeconomic demand.
Our weekday sales from our pros and homeowners remained strong monthly our comparable store sales increased nine 9% in April eight 5% in May and nine 3% in June we are pleased with the start to the third quarter of fiscal 2022, where our comparable store sales are up 13%.
Quarter to date.
As expected second quarter comparable store sales were driven by 17, 9% growth in our average ticket or average ticket benefited from the following factors an increase in retail prices to mitigate cost pressures and increase in sales penetration of laminate and vinyl and an increase in the sales penetration of our higher.
Your ticket pro E Commerce and designer led initiatives.
Additionally, we continue to see ongoing customer preferences towards our better and best price points.
Our second quarter comparable store customer transactions declined seven 3% from last year. As a reminder, we are comparing with comparable store transaction growth of 62, 1% in the second quarter of fiscal 2021.
Moving to our pro business, we are successfully executing our holistic growth strategy to grow our wallet share among pros, our second quarter total and comparable store pro sales growth were significantly above the company's growth rate. Consequently, pros accounted for approximately 39% of our sales growth in the.
Second quarter of 2022 up 500 basis points from the previous year.
Notably CRO comparable transactions increased by over 6% from the same period last year validating that our strategy is to grow our market share. Among pros are working we are pleased that the top 20% of our pros have spent 20% more with us year to date.
A key strategy to driving this growth rests on building the awareness and value of our pro Premier rewards program or PPR.
Graham's value as demonstrated in the enrollment and from points redeemed today over 80% of our pro sales come from PPR members and points redeemed increased 45% year over year in the second quarter. We are also pleased to offer the opportunity to our pros to redeem points towards social good.
One recent example is our partnership with restoring vision, a global nonprofit working to ensure that people living in in progress to communities have equitable access to glass.
Turning to our growth from our e-commerce business as discussed during prior calls our E. Commerce team continues executing strategies that we believe will further optimize our customers' digital experience, including focusing on product inspirational content and conversion are.
Our second quarter E Commerce sales increased 34% from last year and accounted for 17, 5% of sales compared with 16% in the previous year's period.
Let me now discuss the exciting progress we are making with design services.
As we have discussed in prior calls we are focused on building a consistent high touch best in class and seamless designer service experience for our homeowners and pros to that end, we have been doubling down on our investments in technology and people and design. We now have over 800 designers in our stores with clear roles and <unk>.
Exciting career paths and we plan on continuing to grow these teams in the second quarter, we rolled out our in home design service offering in Washington D C market.
Which follows in home design offering launches in Houston, Dallas and Miami in the third quarter, we will launch our in home design services and Atlanta.
We are pleased that our designer strategies are working in the second quarter of fiscal 2022, designed total and comparable store sales growth were significantly above the company's growth rate design.
Design sales penetration increased almost 500 basis points from last year with all regions posting the strongest sales penetration ever.
The design comparable store sales growth was well balanced between transaction and average ticket. We continue to find that when a designer becomes involved with the project, we see a higher customer satisfaction score a higher average ticket higher basket selling attachment rates higher penetration rates for our adjacent categories and a higher gross margin we're in.
Early stages of benefiting from these initiatives and are excited about building awareness and familiarity and familiarity with our design services let.
Let me turn my comments to our growth in commercial which includes Spartan surfaces, and our regional account managers or Rams that works with our stores as a reminder, Spartans services focus is primarily on the A&D community and large commercial contractors and flooring installers are ramps focus is more downstream on smaller.
Owners operators smaller commercial contractors and flooring installers.
We have completed the integration of critical functional areas with Spartan surfaces and are implementing strategies to accelerate growth in 2022 and beyond.
We are leveraging floor and of course access to product logistics and distribution centers. Additionally, through spot and we are continuing to expand nationally by acquiring smaller experienced commercial flooring sales distributors in the second quarter, We acquired Ohio based source one contract group.
They are another example of how we can expand nationally when we find the right opportunity and partners we.
We are excited about the Spartans growth prospects and its financial performance. They are second quarter sales and earnings results. Once again exceeded our expectations. Following a very strong first quarter. We are also pleased that our second quarter sales from our regional account managers or Rams increased 80% year over year and 34% from.
The first quarter.
We continued building out our regional account managers by adding four ramps in the second quarter of fiscal 2022 with the intent of Onboarding 16 ramps in 2022.
Overall, we remain excited about the commercial market opportunity and our commercial strategy. Let me update you about the global supply chain at this juncture. We believe we are past the peak pain from the capacity constraints in the overall global supply chain.
We have been able to reduce our overall ocean and trucking spend and effectively manage our teu ocean capacity needs. While at the same time, improving our merchandise in stock levels. As a reminder, we do not have the inventory subject to the seasonal markdown risks that some other retailers have reported we continue to monitor.
Contract negotiations between West Coast ports, and the international Longshoreman and warehouse Union, the Labor Union and West Coast ports did not come to a labor agreement before the contract expired on July one however, both sides continue to negotiate and we have not experienced any disruption.
We're encouraged by recent trends in the global supply chain, but we are planning on higher ocean year over year freight rates throughout 2022, most of the benefit from these current trends will likely impact our results in the fiscal 2023 is our inventory is on the weighted average cost method of accounting.
In closing I would like to reiterate how pleased we are with our second quarter and our year to date financial results. We are excited to be on track to report our 14th consecutive year of comparable store sales growth we.
We are demonstrating that we have the right teams strategies and agile business model to navigate the global supply chain challenges inflationary pressures and a weakening housing market I'll now turn the call over to Trevor to discuss more in detail our fiscal 2022 second quarter financial results and our outlook for the remainder of the year.
Thanks, Tom I want to thank Tom and the board from a promotion to President <unk>.
Credibly excited to take on this new role and this is only possible because of the fantastic group of leaders I get to work with every day the entire executive team is blessed to work with some of the best leaders in retail and I believe we have clarity on our growth opportunities in Florida, <unk> best days lie in the future.
I would also like to recognize look Olson being promoted to our Chief Accounting Officer also announced today and.
And is three years with us Lucas at a fantastic job and well deserving of this new role.
Turning to our results I will discuss some of the changes among the significant line items in our fiscal 2022 second quarter income statement balance sheet and cash flow statement.
I'll then discuss how we are thinking about the remainder of fiscal 2022.
Our fiscal 2022 second quarter gross profit increased 19, 4% to 436.300 million from last year. The gross margin rate decreased a less than expected 250 basis points to 40%.
Lower merchandize margins drove the decline due to a higher year over year supply chain and freight costs.
All of our teams continue to do an outstanding job managing our gross profit in this complex global supply chain in an inflationary environment. We are pleased to continue executing our stated strategy to grow our gross margin rates sequentially versus the fourth quarter of 2021.
Selling and store operating expenses increased 38% to $268 million 200000 from last year in line with our expectations.
The increase was primarily attributable to 27 net new warehouse stores opened since July one 2021, additional staffing required to align with our sales growth higher depreciation credit card transaction processing fees and advertising expense as a percentage of sales selling and store operating expenses increased 70 basis points to.
<unk> 24, 5% from 23, 8% in the same period last year driven entirely by our new stores as a reminder, in the second quarter of last year, we leveraged our selling and store operating expenses 610 basis points due to strong sales growth we.
We are pleased that our second quarter, selling and store operating expenses rate was flat with the same period on a comparable store basis.
Second quarter General and administrative expenses increased a half a percentage point and as a percentage of sales leveraged approximately 120 basis points to four 9% from six 1% last year.
The expense leverage was primarily due to a lower accruals for employee incentive compensation. The absence of current year period acquisition and integration expenses and lower year over year consulting expenses. As a reminder, we incurred $3 200000 and acquisition related expenses related to the Spartan surfaces last year.
Core operating expenses decreased four 7% to 8.600 million from 9 million last year due to favorable occupancy rates and other new store operating expenses.
Second quarter net interest expense increased $400000 or 29, 3% from the same period last year the.
The increase in interest expense was primarily due to an increase in interest rates on our outstanding debt and ABL borrowings, partially offset by an increase in capitalized interest.
Going onto our profitability second quarter adjusted EBITDA grew nine 7% to 150.300 million from last year's record $137 million.
On a rate basis, our second quarter EBITDA margin declined 210 basis points to 13, 8% from last year's record 15, 9%, primarily due to the decline in our gross margin rate.
Second quarter GAAP net income and diluted earnings per share declined one 3% to 81.800 million and <unk> 76 per share respectively or.
Our second quarter adjusted net income increased three 5% to $81 million 100000 from $78.300 million last year.
We are pleased that our second quarter adjusted diluted earnings per share.
Increased four 1% to <unk> 76 from last year's record 73 per share last year exceeding our expectations.
We ended the second quarter with 107.300 million diluted weighted average shares outstanding.
A complete reconciliation of our GAAP to non-GAAP earnings can be found in today's earnings release.
Moving onto our balance sheet, our inventory at the end of the second quarter of fiscal 2022 was $1 $300 million, an increase of 97% from the same period last year and 33, 3% from the end of fiscal 2021.
The inventory growth reflects our new store growth intentional investments, we've been making to improve our in stock inventory inflation additional new innovative skus and higher in transit inventory.
As we think about the purchase orders receipt flow and inflation in the second half of 2022, we expect our year end inventory to be moderately above our fiscal 2020 to annual sales growth primarily due to inflation as Tom mentioned, we do not have inventory subject to seasonal merchandise markdowns that other retailers have reported or the <unk>.
Six weeks ended June 32022, net cash provided by our operating activities was 7.900 million compared to 256.600 million in the same period last year the.
The decrease in operating cash flow was primarily the result of our growth in inventory are investing outflows increased seven 8% to $210 million 600000 from 195.500 million last year due to investments to support our store growth as well as investing more in existing stores.
These investments caused us to increase our net borrowings under our ABL loan facility to 68.600 million at the end of the second quarter of 2022.
At the end of the second quarter, we had $350 million 100000, and unrestricted liquidity Amelia available to us, including $6 million 200000 in cash and cash equivalents and 308.900 million available borrowing under our ABL.
Sequent to the end of the second quarter, we prudently increased the size of our ABL facility to $800 million from $400 million and extended the term from February 2025 to July 2027, due to the macroeconomic uncertainty.
We want to maintain maximum flexibility flexibility to continue our growth plans.
And maximize the leverage from our growth in our asset borrowing base.
We expect ABL borrowings to peak in the third quarter before going down at the end of the year.
Let me turn my comments to how we're thinking about the second half of fiscal 2022.
Our first quarter 2022 earnings conference call, we said that achieving the top end of our earnings guidance of $2 75 to $3 that we provided at the beginning of 2022 could be more challenging.
We have seen accelerating inflation effect consumers and tightening monetary policy slow economic growth in the housing market.
<unk> home sales have declined for 10 months in a row with steeper declines in recent months and mortgage rates are about double what they were a year ago.
We expect continued aggressive tightening of monetary policy and high inflation and results in more challenging macroeconomic backdrop for the second half of 2022.
We're planning for continued year over year declines in transactions in the second half of 2022.
Our second quarter, seven 3% decline in transactions compared with the first quarter's two 1% decline reaffirms this view we.
We are pleased with the start of our over the third quarter of 2022 were quarter to date comparable store sales are up about 13% and transaction declines are slightly better than the second quarter's seven 3% as we begin cycling past easier transaction comparisons.
That said, we believe it's prudent to prepare for slightly lower comparable store sales in the second half of 2022 relative to our original forecast due to the declining macroeconomic environment.
With that in mind, we are planning on a comparable store sales growth to decelerate from the third quarter to date comps of 13% to a high single digit comp as we approach the end of the year. We now expect our fiscal 2022 adjusted diluted earnings per share could be in the range of $2 65 to $2 80.
At the midpoint of this range the updated guidance would represent about a 5% reduction from our prior guidance and 12% growth from last year's adjusted diluted earnings per share demonstrating the agility and durability of our business during a challenging economic periods.
Let me provide some other building blocks to consider in the second half of 2022.
We are still working to achieve sequential improvement in our gross margin rate in the second half of 2022 the sequential.
Improvement was primarily the result of price increases we are making to mitigate the cost pressures primarily in the global supply chain to and to restore our gross margin rate we.
We expect the sequential improvement in our gross margin rate to drive most of the accelerating EBIT dollar growth in the second half of 2022.
We hope to achieve high single digit to low double digit adjusted EBIT growth in the third quarter. Following the two 9% growth we reported in the second quarter of fiscal 2022.
The fourth quarter of 2022 is expected to be our strongest growth rate in EBIT for the year as we cycled past last year's 370 basis points decline in gross margin rates.
Let me now provide some of the revised guidance pertaining to our fiscal 2022 full year outlook.
We expect sales to be approximately $4 $290 million to $4 billion $330 million compared with our prior guidance of $4 285 million to $4 $375 million.
Comparable store sales growth of approximately 10% to 11% compared with our prior guidance of 10, 5% to 13%.
Adjusted diluted earnings per share to be in the range of $2 65, $2 80, compared with our prior guidance of $2 75 to $3.
Adjusted EBITDA in the range of 565 million to $580 million compared with our prior guidance of 575 million to $610 million.
Depreciation and amortization expense of approximately $153 million compared with our prior guidance of $151 million.
Net interest expense of $9 5 million compared with our prior guidance of $7 million due to higher borrowings and interest rates.
Tax rate of approximately 25%, excluding tax benefits, resulting from stock option exercises and the vesting of restricted stock and restricted stock units unchanged from our prior guidance.
<unk> weighted average shares outstanding of 107.500 million compared with our prior guidance of 108.400 million shares.
We plan to open 32, new warehouse format stores enforced mall design studios unchanged from our prior guidance.
We lowered our capital expenditure expectations to $480 million to $500 million from our prior guidance of $550 million to $590 million, primarily due to not acquiring owned real estate and not spending as much on non critical capital spending projects, we still intend to own more stores, but the opportunities are not likely to come up this year.
In closing these are challenging times for everyone, but we believe we are in a unique and agile business model and have right talent to execute our growth strategy is to continue to grow our market share.
With that I'd like to thank all of our associates and our partners for their hard work and dedication to serving our customers every day, operator, I'll now turn it over to you for Q&A.
Thank you the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time.
In the interest of time, you only ask one question.
Again, ladies and gentlemen that star one and then for your question has been answered you could remove yourself from the queue by pressing one.
And our first question comes from Zach <unk>.
Wells Fargo go ahead Zach.
Hey, Good afternoon, guys John Park on for Zach I guess can you share the latest on the pricing environment I guess, how much price you guys took in the quarter and what Youre seeing out there from both the big box and independents.
Yes, I'll take that this is Tom.
We don't give out how much price, we've taken but we have taken price.
We feel very confident in how we're competing in the marketplace.
The big boxes and the independents.
We feel like the moat around our pricing cost is still pretty good.
Next.
Sorry about that our next question comes from Steve.
Stephen is that coming from Citi go ahead Stephen.
Great. Thanks for taking my question Trevor Congrats on the promotion.
Wanted to talk about second half expectations and a bit more detail could you talk about how you think about ticket versus transactions. It sounds like slightly better than what you saw in the second quarter from a transaction standpoint and then.
Just higher level macro clearly getting weaker you referenced but your guidance.
Still looks like about the algo comps in the back half so how do we bridge the difference between the macro weakening and maybe.
Same store sales guidance, it still looks pretty good overall.
Thank you very much one correction I want to make I think in the prepared comments I might have said.
25% tax rate and I wanted to just clear that up and then it's in the release.
Taking a 24% tax rate so I apologize I think in the prepared comments I didn't get that so as we think about the next.
Six months that are in front of us as Tom mentioned first off we're comping, 13% business is better in July and obviously comp stores is almost is also a reflection of what happened last year and on a gross sales basis. We believe our compares are a little easier in Q3 relative to what they were in Q2 just on are you going to.
Gross basis, our Q2 numbers were the hardest numbers, we were up against.
So thats part of the reason within Q3, and then listen we're not economists, but we obviously read a lot we pay attention existing home sales are as Tom mentioned slowed, especially in the last few months mortgage rates are back down a little bit now, but they were up at close to 6% inflation is high and with people spending out of their savings and eventually that will stop as well. So we're just trying to be prudent.
And expect that as we go into the fourth quarter that things may slow a bit.
Hope were wrong, and we're not economists, but we felt like it just made sense to plan the business a little bit conservatively get our cost structure in line such that if things are slower our cost structure is appropriately weighted towards that and then if things are better then we'll have some upside.
And our next question comes from Simeon.
Goodman from Morgan Stanley go ahead.
Hi, This is Jackie on for Simeon. Thanks, so much for taking our question.
Just more of a macro is there any way you can give us some color as to what percent of the business is coming from existing home sales versus non turnover units.
I know you don't know precisely, but if there was any kind of sense of things changing.
I mean I'll start Trevor then you can answer.
We don't know exactly as you said, it's very hard to say, where the sales come from historically here over the last 10 years when existing home sales have been good we've.
Outperformed the market in a meaningful way and when existing home sales have slowed our business has been more challenged so.
It's hard to anticipate exactly as Trevor said, we're not we're not economists, we don't know exactly whats going to happen.
But we're just trying to be prudent and kind of the way we think about things so.
Like I said, we're off to a good start in this quarter, but you are not sure about the back half. So you want to just make sure you're thoughtful yes, only thing I would add Tom is exactly right is every cycle is different and what's so different about this cycle.
Is 95% of the homes in the U S <unk>.
Increased in value they are not probably going to turnover.
On a good mortgage rate and so those people who aren't going to turn over their homes that are going to be in their homes. They have discretionary income, whereas in most cases when you have negative existing home sales you also have negative equity value or at least home buying is going down and so that's a little bit different in this environment.
The people that are going to stay in their homes have the ability to invest in.
We think we've got incredible assortment.
And can service them.
Thank you and our next question comes from Chuck Grom from Gordon Haskett go ahead Chuck.
So thanks a lot.
We will cover on the promotional levels, Eric just on the profile and speaking with people on those throughout the quarter. It sounds like backlogs remain really good just kind of curious what you guys are hearing from the pro customer and then just as a follow up on the monthly improvement in July <unk>. So a few hundred basis points.
A an improvement I'm just curious why do you think the business has accelerated visit did you take up pricing a little bit more in the month of July or has it been transactions just repeat your question that for us. Thanks.
So I'll take the probe card cover you can take the second part. So this is Tom.
Say on the pro part we're hearing the same things our pros are busy it's annick.
Anecdotal in nature store tours and talking to our teams.
Our pros are still busy and we when we look at our business to you look at it during the week versus during the weekend.
It's better during the week the poser in the stores and the shopping as we mentioned in our part of that average ticket growth. We're seeing too is just our penetration of pro business and design business and E Commerce businesses, all increasing so all of that is doing well.
Which in turn units. So we feel we feel good about the backlog that are pros have and the amount of business that's in front of them.
Yes.
On the sales front, the comps have accelerated and the transactions are actually doing a little bit better than the negative seven we posted four July and Thats, partly a reflection of last year not just this year. This year is strong, but we just had a little bit easier comparison July last year.
And our next question comes from Greg <unk> from Evercore go ahead Craig.
Hi, Thanks.
Just quickly follow up on the inflation.
And then with gross margin we're coming there.
It sounded like ASP was the biggest driver of the ticket but was it was a majority in wood inflation will be the number one part of that.
And then on gross margin linked to that or are we still on path to approach, 41% I think that was the number you gave last quarter Trevor.
41% gross margin is that still on the cards or do you think it's below that.
Yes, I think.
On the ticket we also have some specific.
Strategies that are helping our ticket.
As we called out last quarter I'll, just reiterate again, our rigid core vinyl.
This continues to be strong within that we're seeing people upgrade to better invest our total better investors also improving so thats driving ticket up our E. Commerce business continues to be incredibly strong e-commerce tickets a lot higher than the in store ticket. Our design strategies are really taking off we probably are as pleased with has ever been in that business recently and we've got a lot more.
<unk> penetration relative to we've ever had in the company that's a much higher ticket and in our pro business is strong. It is probably the probe is probably the strongest we've had in at least my tenure here. That's also a much higher ticket, but yes, we're raising retails as well.
We haven't given specificity, but of that 17% ticket increase theres, a fair amount of it being ticket and then Theres a fair amount of it are those for the core centric things that I mentioned as well and what was the second part was.
What was the startup or Greg.
What it means to gross margins I know in the past you talked about gross margins approaching 41, yeah. We obviously anticipate didn't put that in there I think if we hit the high end of the guidance, we probably will get closer to approaching 41, which obviously is our goal.
But if we're at the low end of the guidance then it might be just a tick below approaching 41.
Got it thanks and good luck.
Thanks, Greg.
Thank you and our next question is from Steve Forbes from Guggenheim Securities Go ahead, Steve.
Good afternoon, Tom Trevor and congrats Trevor as well.
Maybe just a follow up on Chuck's question regarding the pro sales outlook.
Appreciate the color in the quarter of 39% of sales, but curious if you could help us sort of frame.
The full year outlook as implied by the guidance is mid to high <unk> percent of sales the right level to expect for pro sales for the full year as we move throughout.
Okay, Yeah, I think so.
I don't know how much more specificity, we don't really break it apart like that but there is nothing that I see that says that the penetration of our business from the <unk> perspective is going to change gotten better as the years gone and I anticipate that that that continues.
Thank you.
Thank you and our next question comes from Peter Keith from Piper Sandler Go ahead Peter.
Hi, Thanks, good afternoon, everyone.
Congratulation to Trevor as well.
So it sounds like it's as strong as ever.
This provided the market tail on that on that DIY side.
Does that continue to hold it pretty strong or have you seen any any capex slowdown in DIY.
Tom mentioned this in his prepared comments I think after two years people decided to take vacations go to Ballgames.
I've certainly heard that from other retailers as well we saw that as Tom mentioned, given the weakened business on some of the holiday business, but then we'd see the business to be stronger and so I do think that that consumer.
After not being able to enjoy a nice long vacation and maybe other services that they haven't done they enjoyed the summer.
Think as people get back to school and Youre not taking as many holidays, we'll see how that plays out.
The only thing I'd add is as.
As August has started when the first week of August now and it feels like people are the ongoing vacation and business continues to be pretty good for us. So.
Nothing else to add.
Okay.
Thank you and our next question comes from Christopher <unk> from Jpmorgan go ahead.
Hi, Good evening, it's Christian currently now on for Chris.
Congrats to Trevor.
Could you speak to the cadence of the traffic of traffic through the quarter and any way you look at it excluding the impact of comparisons.
Three years and then as you look at the back half are you taking more price than you originally anticipated given.
Traffic.
Any color on how you think.
Back to the volume in the back half would be helpful.
Yes ill give you transactions because I have good Intel on that traffic, we don't have quite as good of Intel on that but we just saw a moderate deceleration every single month throughout the quarter of Q2.
We exited we called out we were down four four in transactions in March the fiscal month of March.
We were down seven 7% for the quarter and so you just saw things kind of slowly go down from a transaction perspective.
On that and as far as <unk>.
Pricing throughout the rest of the year.
The answer is yes, we believe retailers will continue to go up.
Supply chain costs, while they're not as volatile as they once were what we see and what we are expecting is higher international container costs, maybe a little bit lower domestic transportation cost still some congestion with demurrage and detention throughout the U S and so we're expecting those costs to continue in everything we're reading and the trust in the press.
That's not just for the core that's across everybody who's bringing stuff over the ocean into the United States. So we do expect retail to go up and as we said our goal is to continue to sequentially grow our gross margins and build them back.
And if we hit the high end of the guidance, we hope it will approach, 41% gross margin and the only thing I'd add on the spread.
We feel good about how the spread between our competition from a pricing perspective.
<unk> held up throughout the course of this year.
The other thing I'd say too is that.
The publicly traded manufacturers you can read there are price increases there's a lot of them are posted and theyre, increasing price at a faster rate than us and they are passing it on to the independents faster than they are faster than we are seeing so that gives us the ability to compete against the independents, even in more significant way and I would also say that with selling in our stores.
As our consumers continue to elevate to the better and best product that it really puts us more in competition with the independent surface hard surface flooring stores, and we feel pretty good about about our pricing versus up.
Really helpful. Thanks.
Sorry about that thank you and the next question comes from Liz Suzuki from Bank of America go ahead Louis.
Great. Thank you see you had mentioned that you don't have the problem of markdown risk from sitting on seasonal inventory, but in your anticipation of a softer demand environment are you slowing your orders from suppliers at this point.
Yes, yes, absolutely.
Absolutely pain are paying attention to that and we've taken a cautious view and made adjustments as we look to the back half of the year. That's why I think if you look in the prepared comments that we delivered by the end of the year, we felt like inventory will be slightly over what our sales growth. It. So.
We feel good about what our inventory position will be.
Challenging can go walk in our stores today and try to pick what's what's the discontinued.
R R.
One of those items you can't tell it's good inventory it looks the same as our and a lot of cases, it's as good as as the new stuff. We brought in so theres no. We're not worried about having a market down to make it go away. It's good product that will sell.
Right right and then.
Just thinking about the product mix that you are planning for the second half I would assume that the.
Anticipation of stronger pro demand versus DIY.
They continue to impact the mix that you are bringing into the stores.
Sure, Yes, I mean, if that <unk>.
Pros buy across the store and they are buying for the end user who buys across all departments. So.
But we certainly pay attention to that and feel comfortable with what we're bringing in we feel good about and our inventory position. Our in stock as you would expect with that type of inventory increases as good as it's been all year.
Great. Thank you.
And our next question comes from Johnson Madam. Please go ahead Sir.
Great. Thanks for taking my question could you help us walk through the near and medium term impact of the potential repeal in.
301 tariffs.
Specifically interested in when you would think to rolled back pricing potentially its something were announced.
And when you expect to.
The.
Lower costs flowing through onto the P&L. Thanks, so much.
Yes, I mean, we obviously think that would be a good thing because theres just not the domestic manufacturing capability for the vast majority of what those tariffs are and so the consumer would win in that scenario not just from Florida core, but really anywhere.
It will take us just a bit of time to roll that through our margin because the inventory thats sitting in our distribution centers as in what they call a free trade zone, and it's likely that we would have to pay tariffs on that because it's been received state side.
All of that inventory in our distribution center would likely have to pay the 25% tariff, but eventually.
We're merchants at heart and watches those costs come down and as those costs come down we would likely take our retail Samsung. We also are going to watch what's going on in the market.
See what our competitors are doing last time. This happened everybody was pretty rational including us when we've been dealing with this inflation now for a year all of our competitors have been seem to be fairly rational as well. So if that were to happen. It would take a number of months that did you actually get a bit of a benefit probably upfront because the retailers don't generally come down as fast as the cost come down.
But eventually I would expect the marketplace to take place and as costs would come down you would see retail has come down, but you still will probably be a little bit better are you definitely would be a little bit better on the gross margin rate.
When that occurs so we hope it happens we think it's a I think the American consumer.
Thanks.
Thank you and the next question comes from Chris.
Larry.
Pete.
Yes.
Paris go ahead Sir.
Hey, great Steve Mcmanus on for Chris Thanks for taking our questions and congrats Trevor.
So I was just curious.
If you could speak to your exposure to the new homebuilding channel.
What's the exposure to that end channel and is that largely through through your stores or more so through the Ram business.
This is Tom.
It's insignificant, we do very very very little new homebuilding.
We don't really sell today, and we think it's an opportunity in the future, but we really don't sell to the big builders.
We do new homebuilding, it's more of a custom homebuilder, who buys out of one of our stores.
And they are usually less impacted by things like this so it's insignificant.
Okay, great. Thanks, a lot appreciate it guys.
Yes.
And our next question comes from Justin Kleber from Black Bear.
Go ahead Sir.
Yes, good afternoon, Tom Roberts, Justin Kleber of Baird.
Wanted to ask just a follow up to your response there to jonathan's question.
Costs continue to decline or if tariffs are removed and you guys ultimately lower retails I mean would you expect.
A favorable unit response from lower retail and I'm, just trying to understand how the top line looks.
If and when average ticket growth returns to more historic levels in that in that low single digit range.
I'd say it depends on what happens with the competition right. So if we passed along and that tariff savings in our competition decided not to pass that tariff savings, but I think our unit sales will go up so.
And then the natural environment.
We'll have to wait and see.
Okay, just to confirm though as you guys have been raising retails do you feel like you've seen any negative elasticity.
I mean, I would just say more from a macro perspective that this is the first time in our history. The transactions have been negative in the company.
And I think thats sequentially macro partially comparison, yes, that's right.
Okay. Thank you guys.
And our next question comes from David Bellinger.
Okay and partners go ahead David.
Hey, Thanks, and congrats as Trevor as well. So my question coming out that's given us some of your comments that Q2 comps tracked a little below internal expectations.
When you step back and look at some of the leading indicators of the business like the web traffic or the number of samples consumers are requesting what are those telling you about the next several quarters and is in fact, a slower housing market could have more of an impact on the forward outlook not just in the back half of the year, but for 2023 as well. Thank you Ed.
I wish I had a clear answer for you I would say its mixed I mean, the sample business is good thats a good leading indicator of our samples are sample cells are looking good our website traffic has decelerated.
Not not just across us we can track it against other people everybody.
Our web traffic has decelerated and the pro business, while incredibly strong some of our pro business Theyre measurements, we have seen they've told us that some of their measurements have slowed so it's kind of a mixed bag of samples were positive, but you have seen us you've seen a deceleration.
<unk> and web traffic as well as.
The pros doing measurements, which ultimately leads to the to the.
Sure.
So the other thing I'd say about our pros, though they've been very resilient their close rates have improved so they may be seeing less people, but they're doing a better job of closing.
When you were talking process, let's be specific.
That is correct information on Asia installations installation, maybe it's not all of those.
With people, we have visibility to.
Thank you and our next question comes from Joe Feldman from Telsey Advisory go ahead Joe.
Yeah, Hey, guys good afternoon.
I wanted to ask about.
Merchandise a little bit.
Didn't hear you guys comment too much on maybe the color of what we're selling you often mentioned laminates or.
Subway tile or just some color there.
And to tie that with your comment about the inventory seeing some of the increase relating to innovation in the product in Q.
Curious if there are some new things that you guys are seeing out there that you are bringing in.
Customer.
Thanks.
Hi, Hi, Hi, this is Sean.
<unk> ambition is certainly getting more accepting by are accepted by our customers.
Large format product back bigger wider and longer product still get attraction of course, laminate and vinyl still get and cotton.
More than company average and sales and also continued newness and innovation in every category as much as we can.
Great Thanks, and congrats John .
Sorry about that.
Thank you. The next the next and last question comes from Anthony <unk> from Loop capital markets go ahead Anthony.
Thank you so much for squeezing my question first off Trevor My congratulations very very well deserved.
First time I met you I thought you were central casting for a CEO position, so not not a big surprise from my perspective.
So obviously, it's been a lot of things have been covered on the call.
Wondering if you can give any update on the five design studios just in terms of how those are performing relative to your expectations.
Key learnings are at this point and what's your if you have any sort of update in terms of where do you think the <unk>.
Long term.
Our footprint could be thank you.
Don't have an update for the long term the long term how many will have that's that's a work in progress we've got with five up and running today, we're opening up another one here in Atlanta.
And the next month or so we're opening in the next one in Atlanta I am pleased with Im pleased with.
Two things I would say the ones now that have been open longer.
Dallas store, which opened first.
Continued to ramp.
Can flow in the quarter does so.
Really pleased with that the new wins have started off a little bit better than the Dallas stores started off.
It continues we're learning a lot about attracting designers into the stores getting architects in the store I think we're tracking a little bit different customer, which is what we had hoped to in those stores.
It's a look at where our company that way.
We don't settle we're always pilot and always thinking about the next idea we're not going to go to quick with this we want to make sure that we get it right.
But so far so good and I would just say, let's get the next one open give us a bit of time and then we'll update you on what we think the future is.
Got it.
The rest of the year.
Thank you.
So.
That was the last question so I'll close the call by thanking you all for your interest in floor and decor. Thank you for your questions.
Congratulations again to Trevor.
Well deserved promotion.
We're excited about what he can do as he transitions into his next role with floor and decor to those associates that are listening in thank you for all your hard work and incredible job greatly appreciated and we will talk to you guys on the next call. Thank you.
Thank you.
This does conclude today's conference. We thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Yes.
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