Q3 2022 Floor & Decor Holdings Inc Earnings Call
Good afternoon, and welcome to the floor and decor Holdings third quarter 2022 conference call.
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I would now like to turn the conference over to Wayne Hood VP Investor Relations. Please go ahead.
Thank you operator, and good afternoon, everyone. Joining me on our third quarter earnings Conference call. Today are Tom Taylor, Chief Executive Officer, and Trevor Lang Executive Vice President and Chief Financial Officer.
Before we get started I would like to remind everyone of the company's safe Harbor language comments made during this conference call and webcast contain forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95, and are subject to risks and uncertainties any statements there.
It refers to expectations projections or other characterizations of future events, including financial projections or future market conditions is a forward looking statement the company's actual future results could differ materially from those expressed in such forward looking statements for any reason.
<unk> those listed in its SEC filings.
And of course 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 third quarter earnings conference call. During today's call I will discuss some of the highlights of our fiscal 2022 third quarter earnings Trevor will then review our financial performance in more detail and discuss how we are thinking about the remainder of 2022.
We are pleased with our fiscal 2022 third quarter and year to date financial results and excited about approaching 14 consecutive years of comparable store sales growth a significant accomplishment considering the current macroeconomic challenges. Additionally, we are pleased with the execution of our growth strategies and gross.
Margin rate recapture which enabled us to deliver better than expected third quarter 2022, adjusted diluted earnings per share of <unk> 70 per.
Per share an increase of 16, 7% from last year's <unk> 60 per share.
Solid financial results reflect the strength of our business model and the outstanding work that all of our associates to serve our pros and homeowner customers better everyday as demonstrated in our recent customer satisfaction scores are three month customer satisfaction service score was one of the highest in our history further Val.
<unk> that the investments, we are making and associate wages and training are working.
I want to take a moment to particularly express my sincere gratitude to our associates in Florida for their hard work and deep dedication to their communities and each other.
Cause of their efforts, we quickly reopened our stores to serve our customers impacted by hurricane in as they begin recovery and rebuilding efforts.
Turning to our new store growth.
We opened four new warehouse format stores in the third quarter of fiscal 2022, including one store in physical August and Threet and physical September .
Compared with our planned eight warehouse store openings in the third quarter, the lower than expected openings is primarily due to industry construction delays and hurricane in which pushed our fern Park, Florida opening into the fourth quarter.
As a result of these factors, we now intend to open 13 warehouse format stores in the fourth quarter of fiscal 2020 to achieving our 32 warehouse store annual our opening plan and ending the year with 191 warehouse stores.
Fourth quarter to date, we have opened seven of our planned 13 warehouse store openings. We are excited to open a design studio in Atlanta, Georgia in October we now operate six design studios, including studios in Dallas, Houston, Miami, Washington, DC suburb Tysons corner, New Orleans ended.
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As we think about our new warehouse store openings in fiscal 2023, we believe it is prudent to plan a range of 32 to 35 stores and for the openings to be weighted in the second half of the year.
By doing so we can take into account potential ongoing construction delays and be patient about finding the best real estate opportunities for our long term goal of 500 U S warehouse stores.
Third quarter total sales increased 25, 2% from last year to approximately $1 $1 billion, our third quarter comparable store sales increased 11, 6% compared to the third quarter of 2021, including 12% in July 13, 7% in August .
At nine 6% in September .
As expected laminate and vinyl remain our strongest merchandise category as we look forward, we expect a weak housing market and a slowing economy will continue to weigh on our transactions into the fourth quarter of fiscal 2022 and throughout fiscal 2023.
As a reminder, our fiscal 2021 fourth quarter comparable store sales increased by 14%.
Looking for a moderately more difficult sequential comparison versus 10, 9% growth in the third quarter of fiscal 2021, our fourth quarter to date comparable store sales are up about 5% as compared to the same period last year.
Let me comment on the impact Hurricane Ian has had on us since it made landfall on September 28 2022.
We were fortunate that none of our stores were materially damage in the third quarter. We had 26 closed store days and 19, partially closed days. It was gratifying to see our associates take immediate operational and merchandising actions to quickly reopen our stores to serve our customers as they begin recovery and rebuilding.
For example, we quickly positioned 1400 pallets of vinyl in South Florida to help those needing to replace their flooring from flooding.
Our quick actions are remarkable for a company of our size. We estimate the storm was a drag on our comparable store sales growth by 130 basis points at September and 50 basis points for the third quarter at this juncture. It is difficult to estimate with any degree of precision the potential benefit over the coming months and years.
<unk> from the billions of dollars in residential and commercial flood loss damage from Hurricane Ian.
We are however, well positioned for the rebuilding demand due to our substantial market share and value positioning, Florida not to mention being able to deliver sufficient job lot quantities at the lowest price.
Our third quarter comparable store sales were driven by a 19, 5% growth in our average ticket compared with 17, 9% growth in the second quarter of fiscal 2022 our.
Our average ticket growth continues to benefit from an increase in retail prices to mitigate cost pressures and increase in the sales penetration of laminate and vinyl and an increase in sales penetration from our high ticket Pro E Commerce and designer led initiatives, we continue to see ongoing customer preferences.
Our better and best price points, where we offer industry, leading innovation trends and styles at the lowest price.
Third quarter comparable store transactions declined six 7% from last year slightly improving from the seven 3% decline in the second quarter of fiscal 2022.
As a reminder, our transactions turned negative in late November of fiscal 2021, and we're down <unk>, 7% for the fourth quarter of fiscal 2021.
We will start cycling past mid to high single single.
Those transaction declines in the second quarter of fiscal 2023.
Turning to our pro business.
We are successfully executing our holistic strategy to grow our wallet share among pros in the third quarter total and comparable store sales to pros exceeded the company's total sales growth of 25, 2%.
Consequently, pros accounted for 47% of our third quarter sales up from 39% in the second quarter of fiscal 2022.
Notably pro comparable transactions continued to be strong increasing by seven 4% from the third quarter of 2021.
Moreover, we are pleased that the pros that make up the top 10% of sales spent 24% on average more than last year. So we're excited about our growing engagement with pros and the opportunity to continue growing our pro contacts in the third quarter, we created 29000, new probe card.
Tax supported by events like our third annual pro appreciation events. This year. This yearly event celebrates pros everywhere with giveaways and free weekly virtual installation classes. This year the event generated a 67% increase in net new opted in pro <unk>.
Next from last year the.
The growth was significantly above our expectations and reflected our growing brand awareness as we look to the fourth quarter of fiscal 2022 and beyond we are focused on further strengthening our teams at the pro desk to build on the execution of our key priorities and objectives to that end, we are investing resources in <unk>.
Our leadership training and development, including an initial framework appropriate path.
We are fortunate that the growth ahead.
<unk> gives us gives our protein members of unique career opportunity.
Additionally, we are refreshing our pro certification programs and expect all team members to be certified by the end of fiscal 2022.
We were excited about launching our new pro connect account management tool, enabling deeper tracking and account management approach by our associates. These among other strategies and tools are aimed at building relationships and lifetime value with pros.
Turning to our e-commerce business as discussed during prior calls our E. Commerce team continues executing strategies that will further optimize our customers' digital experience, including focusing on product inspirational contact and conversion.
Our third quarter E Commerce sales increased 31% from last year and accounted for 17, 3% of sales compared with 16 four.
4% in the same period last year.
We are pleased that the e-commerce average ticket comp grew at a faster rate year over year in the third quarter than the company average ticket comp.
Turning to the growth opportunities and design services. We believe there is significant opportunity with design services to strengthen our competitive moat and are continuing to commit resources to this free service. We now have over 900 designers in our warehouse stores or about five designers per store. Additionally, we bill.
There is an opportunity to become involved with whole home or multi room renovations by offering in home design services.
As such we now provide in home design services, and Washington D C Houston, Dallas, Miami and Atlanta, as we have discussed in prior calls when designers that are involved in projects, we see higher customer service scores.
Average tickets installation materials sales adjacent category sales and gross margins.
For these reasons, we are focused on designer staffing requirements to ensure we have the right designers in the right place at the right time and are executing follow up and elevated service behaviors that maximize conversion.
We believe our strategies are working.
Third quarter total and comparable store design sales growth were significantly above the company's growth rate. We are pleased to see strong growth in both transactions and average ticket. Let me turn my comments to growth in our commercial flooring business, which includes Spartan services, and our regional account managers or Rams, which work with our stores.
We are very pleased that the sales and earnings growth at Spartan surfaces.
Third quarter sales and earnings results once again exceeded our expectations Spartans third quarter sales increased by 45, 3% compared to the third quarter of 2021, and EBIT increased by 63, 3% from the same period last year.
Our non Spartan commercial sales also remained strong.
As we have discussed in prior earnings calls, we remain excited about the commercial market opportunities and our commercial strategies.
In closing, we believe that we have demonstrated that we have the right teams and strategies and agile business model to navigate the challenging macroeconomic environment successfully.
We approach the end of this year, we're focused on setting ourselves up for continued success into fiscal 2023 and beyond I will now turn the call over to Trevor to discuss in more detail our fiscal 2022 third quarter financial results and our outlook for the remainder of the year.
Thanks, Tom we delivered another very solid quarter and nine months of financial results growing our sales and our operating income while up against record performance in each of the last two years and amid a housing downturn caused by rising interest rates and persistently high inflation.
Our results are a testament to the strong execution of our growth strategies, the strength of our business model and most importantly, our people. We are particularly proud of these results were achieved in a period of 40 year high inflation supply chain cost volatility.
Kris and mortgage rates and 13 months of year over year declines in existing home sales for September existing home sales down 23, 8% versus the same period last year, representing the largest year over year decline over the last 13 months.
Let me now turn my comments to some of the changes among other significant line items in our fiscal 2022 third quarter income statement balance sheet and statement of cash flows.
I will then discuss how we are thinking about the remainder of fiscal 2022.
We are pleased with the sequential improvement we are making towards recapturing our gross margin rate.
Our third quarter gross margin rate decreased a better than expected 90 basis points to 48% from 41, 7% last year, increasing our confidence in achieving our target of approaching 41% by the end of fiscal 2022.
The better than expected sequential improvement in our gross margin rate is primarily due to lower supply chain costs as well as strategic retail price increases.
As expected selling and store operating expenses increased 28, 4% to $280 million 700000 from $218 million 700000. During the same quarter last year due to new store openings and additional staffing to support our sales growth are selling and store operating expenses Deleveraged 70 basis points to 25, 6% from <unk>.
Four 9% last year due entirely to new stores as our comparable stores leveraged 10 basis points versus last year, we experienced higher credit card transaction processing fees wage rate pressure and higher depreciation expense associated with new stores, partially offset by leveraging our rent cost on higher sales third quarter general and administrative expenses.
<unk> increased four 2% to 54.700 million from 52.500 million last year, leveraging 100 basis points from the same quarter last year.
General and administrative expense growth is primarily due to higher personnel and operating costs to support our store growth, including increased store support staff. The majority of the leverage came from lower incentive compensation accruals.
Preopening expenses decreased three 2% to 10.400 million from $10 million 700000. During the same quarter last year. The decrease was primarily due to the shift in the timing of new store openings compared to the previous year's period.
Third quarter net interest expense increased 1.900 million or 169, 8% from the same period last year. The increase in interest expense was primarily due to an increase in our ABL facility borrowings and interest rate increases on our outstanding debt, partially offset by an increase in capitalized interest.
Our third quarter, adjusted EBITDA increased a better than expected, 23% to 147.900 million from $120 million 200000 last year, primarily due to our sales performance in managing our cost structure well.
We're pleased that our third quarter EBITDA margin declined by less than expected 20 basis points to 13, 5% from 13, 7% last year, given the inflationary cost pressures we face.
4.900 million in the same period last year.
A decrease in operating cash flow was primarily a result of a 31% growth in our inventory and the timing of inventory receipts and payments at.
At the end of the third quarter of fiscal 2022, we ended with 601.800 million unrestricted liquidity Amelia available, including 7.700 million of cash.
And equivalents as well as 594.100 million for borrowings under our ABL facilities.
Now update you on our 2022 capital expenditure plans.
We previously estimated fiscal 2022 capital expenditures to approximate $480 million or $500 million. We now expect our fiscal 2022 capital expenditure approximate $445 million to $465 million down about 7% from our prior guidance, primarily due to construction delays for new store openings in 2023.
I will now turn that comes to how we're thinking about the fourth quarter of fiscal 2022.
The federal open market Committee is unprecedented interest rate increases this year are having a direct impact on the housing market and we'll have a lag effect on slower economic growth and inflation well into 2000 twenty-three. Therefore, we are prudently expecting our transactions to continue to decline in the high single to low double digit range in the fourth quarter.
Fiscal 2022 unchanged from our prior expectations we.
We expect our fiscal 2022 annual comparable store sales to increase within a range of 9% to 10%.
Our annual fiscal 2022 total sales are now expected to approximately $4 billion $250 million to $4 billion $285 million compared with our prior guidance of $4 billion $290 million to $4 billion $330 million, primarily due to a more difficult macroeconomic environment and the associated slight lowering of are comparable store sale.
Expectations and the timing of our new store openings.
Improvement, we are experiencing our product margin from favorable supply chain costs relative to two relative to our internal plans gives us more confidence that we can achieve a target of approaching at 41% gross margin rates in the fourth quarter of 2022.
Our annual adjusted EBITDA is now expected to be $565 million or $575 million compared with our prior guidance of 565 million $580 million.
We expect depreciation and amortization expense to approximate $153 million unchanged from our prior guidance.
Net interest expense of $11 million compared with our prior guidance of $95 billion due primarily to higher interest rates.
The tax rate of approximately 24%, which excludes tax benefits, resulting from stock option exercises and the best thing of restricted stock in restricted stock units unchanged from our prior guidance.
Diluted weighted average shares outstanding as are now expected to be 107.500 million also unchanged from our prior guidance.
And we expect fiscal 2022 annual adjusted diluted earnings per share to be in the range of $2.65 to $2.75 compared with our private prior guidance $2.65 to $2.80.
Let me close by saying how proud our executive team has been of the performance of our business given the extra challenges we have to navigate I would also like to acknowledge our associates and our vendor partners for their commitment to serving our customers each and every day.
Operator, we will now take your questions.
Thank you we will now begin our question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speaker phone. Please pick up your handset before pressing the keys Twitch.
Withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
First question will be from Chuck Graff with Gordon Haskett. Please go ahead.
Thanks, a lot congrats on like a quarter.
Curious when you look at the earliest of early leading indicators for the business, whether that's website searches product samples I'm curious, what you're seeing and how's that influencing your your planning assumptions for the next couple of years, but from a comp and store growth perspective.
Hey, Chuck this is Trevor.
Think you've seen us have a deceleration in our comps as we move through the year deceleration in transactions as the macro environment has gotten a little bit more difficult.
Based on the guidance, we gave we've just double.
Double digit comp and I think Tom said, we were up 5% quarter today. So far so our view is as things get tougher we're going to see a deceleration comp and almost all of that driven by trends transactions.
Okay Fair enough and then on the inventory build Trevor is there any way to unpack.
That 58% increase across the floor buckets that you gave new stores.
Improving in stocks inflation, and new skews, an interest to remind US you expect to get back to close to sales growth by the end of by the end of the fourth quarter is that correct.
Yeah I'll answer the second one first which is yeah. Our expectation is that we're going to have a mid 20% sales growth and we would expect our inventory to grow at a slightly higher rates than that and most of that is you get to the end of the year the growth above the sales would be due to inflation or actual number of units will not be up more than our sales growth just to inflation.
Impact of it.
I don't think we went through and reconcile the inventory growth across those categories, probably inflation in new skews is going to be the largest driver of that increase in inventory and for.
For the third quarter that we just ended.
Okay, great. Thank you.
And how our next question will come from Stevens account from Citigroup. Please go ahead.
Great. Good afternoon, everyone. Thanks for taking my question.
I wanted to ask around the corner to date commentary regarding our five could you talk a bit more about what you're seeing in the business, maybe what's driving that deceleration on a month over month basis are there any big differences by region to kind of call out.
I'd say I'd say a couple of things first off October of last year was a difficult compare where our comp last year in the month of October was 16, two versus September was $10 eight last year. So we're wrapping a little bit more difficult October .
Trevor mentioned and as we said or.
The transactions continued to decelerate the effects of what's going on within the macroeconomic environment or we're not immune to that so we're seeing some of that with this thought it'd be prudent.
A little bit below what we thought we'd be during the month of October but.
So we thought it'd be prudent to make sure that we were thoughtful about the rest of the year.
From a regional standpoint, we're pretty consistent across the country I would say, there's a maybe a little bit of deceleration in the west coast of the United States is a little bit a little bit different a little bit slow and a little bit faster than some of the other parts, but but but but not materially enough. It's just it's a little different than historical.
Thank you. The next question will be from Zach fade them with Wells Fargo. Please go ahead.
Hey, good afternoon could you walk us through the average ticket drivers and a little bit more detail and perhaps carve out the impact of incremental pricing the new skew innovation you called out.
Versus the impact of your initiatives such as designing pro and then as we look forward to queue for an end in 2023, how should we think about the average ticket versus transaction track.
This is true.
Yes. This is trevor.
The first half of the year more of our ticket because you've got a strong ticket all year more of our ticket was coming from the initiatives that we were driving it you guys probably is here to stay on the last two calls are pro business continues to be exceptionally strong that's a higher ticket R.
R E Commerce and design businesses are strong that's a materially higher ticket.
As a rigid core vinyl business continues to be strong that's one of the highest tickets we have in the company.
And consumers are still to this point still picking better invest in so for the first half of the year. It had more to do with those initiatives and less to do with the inflationary retail increases the back half of the year, it's probably becoming more on some of the retail increases we've had to push through because of the inflationary environment and a lot of those higher supply chain costs working through our weighted average cost system.
Was was projected and is coming to fruition that we're passing along more of those retail increases. So as you think about the back half of 2022.
A bigger component of that high ticket is being driven by the retail increases although our mentioned all those for initiatives Pro design E Commerce and good better best continue to be a big part of our ticket.
I think as we think about next year.
When we.
I would expect that we're going to have a lot of the same meaning that I would expect if we said on the call that our transactions are going to be down in the high single digits to low double digits as we exit this year or Q1 compares are pretty difficult is probably the hardest compare we have as we get into 2023. So I would expect those those those transaction trend to continue.
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From a ticket perspective, though as I mentioned earlier, we didn't have a lot of very material increase in ticket in the early part of the year. So we still should have some ticket upside as we start next year, because where we where we started with pricing increases was was pretty modest where we're going to end with pricing increases is going to be higher. So I think some of the trends you've seen most of this year I would expect.
[noise] transactions to continue to be negative at least through the first half of the year until we come up against easier comparisons in the second half of the year, but somewhat offset by a higher ticket because of the retail increases at the end of 2022 are going to be higher than when we started in 2022.
Got it that's that's helpful and second could you talk to the latest class of new store metrics relative to where things are trending a year or two ago. When housing fundamentalists were much more robust and then.
This is the first time, we senior business in this particular housing backdrop to what extent should we expect the new store model to moderate in terms of 2023, new star productivity as well as the cop waterfall impact.
Yeah. If you look at the class of 20 in the class at 21, they're basically you over 2000 fully anniversary of the classes when he was pretty much anniversary.
Stores are great. They are doing close to $60 million in sales and doing over $3 million for while EBITDA in the first year or so they're doing exceptionally well I think the class of 22, we've got a lot to open right. We're opening 13 of the 32 stores. This quarter. So we obviously have a lot to wait on those.
But I think they're going to be similar I mean, we'll see how that plays out the volume is maybe a little bit lower just because the backdrops is what it is but but I'm still hopeful that those stores are going to do somewhere in the high 15 below 50 million dollar sales range and and hopefully keep it around that $3 million for while EBITDA. So it looks like the class is going to be good.
The stores that we had to open this quarter.
They're really good markets that we know how to operate very well so.
So we're feeling good about the class of 22, and we will see on costs of twenty-three, but as we look at it from a pro forma basis.
I realize we're walking into a tougher macro environment, but from a pro forma basis with electric class of twenty-three also it looks like a good class of stores.
Got it I appreciate your time.
Yeah.
And the next question is from Christopher Whoever's from J P. Morgan. Please go ahead.
Thanks, Good evening guys. So my first question is how do you think about the the long term structural gross margin of the business you talked about.
<unk>, 41% and there was some upside in the third quarter. If we went back to you know 2019. It was 40 182020 was 42 and a half. So I guess what are the what are the puts and takes around.
Getting back to that and is there any sort of concerned that you know.
If.
As as sort of the effect of housing.
Causes a category to slow down that may be the independence.
Become more promotional, especially if they're now sourcing some product that that's arriving with the last frame.
Hey, Chris This is Tom I'll start on the question. There is a lot there I I still think that over time, we can get back to the historical margin right. We're not we're not talking about next year yet.
But we saw a nice improvement this year, we've been able to achieve what we wanted to achieve and getting our margins coming up we ended last year in the 39 75 range and we're going to end. This year is Trevor set approach and 41.
As we get to next year as we get to the middle part of the year, we're going to continue to get some benefit from the supply chain cause we're seeing some of that now versus what we anticipated, but when you look at year over year comparisons you get to the back half, we'll see some of that so that should give us some help on the margin side and we have our own initiatives things that we're doing with the designers we talked about where we are.
<unk> 900 designers in the stores, that's still I think we're still in the early innings of how we're going to serve customers with the design initiative when they get involved we do get a better average I mean, excuse me a better gross margin on those cells.
We've got better and best continues to do well and will continue to push on that that will help our margins. So long way around I. We've got some internal initiatives and then we should get some supply chain benefit, which can help us start getting back to historical margin rates, the time of getting back to him as a bit a bit of a question Mark we're still working on what twenty-three will look like and then we'll talk about.
Put it as we get closer to it but but I certainly have every intention of getting back there from a competitive standpoint.
We're in a difficult environment now I mean, you can look at our publicly traded competitors and kind of how they're performing in the independence.
I feel like they often performed like are publicly traded independents. So excuse me publicly traded peers. So I think they are in a difficult environment Chris.
If their promotional we're seeing some of that now, but it's nothing that gives us any alarm or price spread is still significantly better. So I'm less worried about that affecting our gross margin than than than anything else.
And whichever you want to add.
I think I'll just give us on the credit I mean, I think the proprietary nature of some of the products that we have in the categories that were performing well and are very difficult to emulate we own a lot of those brands and technologies for some of the best categories that will make it very difficult for certainly the smaller competitors, which is 60 per cent of the industry, but it's probably more of that than ourselves because of.
That's where you'll get the better and best products I, just think our assortment in our sourcing and our team have done just a much better job there and it'll be hard for the independence to compete with those products.
[noise]. So then just as a follow up I mean I know this has been asked a lot of you in the past few months, but.
Your price caps relative.
To the independence, I mean should of why didn't given how you've passed.
Past price on on a lag with the inventory turn so could you maybe talk about how you see how your price caps have widened over the past year.
Putting that contacts.
<unk> earlier comment.
Yeah, I mean I.
I feel.
<unk>, if you want to chime in but I I, we feel very good about our spreads versus the independence, we we check our competition on a weekly basis.
And this is a difficult category to compare prices, but as we look at it as we see the world the spreads in our opinion or better today than they have been historically so.
We feel really good about the moat around pricing.
You got it thanks, very much guys best of luck.
The next question is from Michael Lasser from UBS. Please go ahead.
Good evening, Thanks, a lot for taking my question.
That you you don't have any more insight into what the macro what's gonna bring than we do but you do have more insight into the sensitivity of your P&L for 2023 into how your sales might respond. So if you were to calm down 5% next year, what do you think.
Operating margin will look like in that type of outcome.
You are saying, if our comps for actually negative five per cent next year just to understand the question Michael.
That's exactly right.
I don't think that's gonna happen I guess would be my first answered, but if that were to happen I mean as you would expect our operating margins are going to go down.
We would have to run that through the model is a lot of variables.
To do that.
But you are operating margins would be down and I just would comment to that this is <unk>.
Potential valley right and we're looking over the valley, where a plane in for the long game, we're not going to.
We're still open 32 to 35 stores next year and we've got a long way to get the 500 stores and grow a big commercial business. So we're not going to overreact and do anything stupid. The jeopardizes, our long term strategies in the event that it that much more than I do think to just I guess, one thing helping on the model.
If that were to happen I think we've just hopefully said kind of a mid thirties. So it may be a slight higher mid 30 on the downside scenario from a from a flow through perspective. So if somebody were really wanted a model that negative of a comp U.
You could use a mid thirties to above a mid 30 flow through on whatever that math to look like.
Would that change at all given some of the gross margin drivers that you have in your ability to recapture some of the gross margin that you brought.
Yeah, I mean, that's why we that's exactly why we need to run through the model and to get to that level of of negativity, which again I don't that doesn't we don't currently see that being the case for next year.
But yeah, especially if things are that bad for us what they are going to be like in the industry is going to be a lot worse.
Supply chain costs would likely be coming down a lot more they're probably more abundant labor and all those things so that would be something that that that hopefully we would.
Hopefully, we could possibly do a bit better than that.
M M. A follow up question is on the fourth quarter outlook outlook. So you said you had did not change your transaction guidance or your transaction assumption. So inevitably that means you lower your ticket assumption so why would that be the case.
Mmm could there be upside to the to the fourth quarter comp outlook, if you start to see.
Hurricane related spending come through and is there any way to inform the arc of that looks like based on the experience that you had.
In Houston, a few years ago.
On the first question I would say a big part of the sales reduction had to do with the new stores as Tom mentioned, we open fewer new stores than we thought and that cascaded later end of the quarter. So about half of that reduction in sales in the fourth quarter versus what where the street was before his just due to the timing of the new source. The other piece of it is yeah. We.
We are not going to raise our retails as much as we would've fought back in July and August will be created guidance, partly because our teams have done a good job on costs. So we don't have to pass along some of those retail increases and those are the two main reasons as far as a hurricane in.
That's just a very different hurricane hurricane the one we had in Houston Hurricane Harvey back in 2017 in that case, the hurricane came in and it parked over Houston and it just poured rain and we saw our business take off immediately as we all know about hurricane Ian is much more destructive a lot of stuff got destroyed and it really it's only affecting a small.
Portion of our stores in southwest, Florida, maybe up a little bit through the Orlando market as well, we're gonna get a little bit benefit up through central Northern Central Florida, as well, but also where three times the size, whereas the company then as well so it would be much less impactful. So let's go have a little benefit.
It.
Lesson. It's currently running I think less than 50 basis points benefits of October .
But again I think Tom lives. There you can give us more details is going to be a long tail because the destruction was a lot worse and it wasn't Harvey so there'll be a modest benefit from their period of time, but apparently it's pretty small.
Thank you very much.
Thank you. The next the next question is from Steven Forbes from Guggenheim. Please go ahead.
Good morning town Forever.
The focus on on the pros. So curious if you can give us an update on the number of appropriate. Your members you have on the platform today and.
And then maybe just comment on any high level thoughts in terms of our our high level sort of indications that you're seeing from their behavior. How are they engaging is it is it any different how they speaking to their sort of pipeline of jobs et cetera, any insight there would be helpful.
Yeah, I I don't have any specific number but I think 80 per cent of our active pros are part of the loyalty program and we'd started to find that as an actor pro someone who's purchase from us within the last 12 months. So so the vast majority of our pros or on the P. P. R program, we talked about historically I think the P. P. R. Members are gonna to 80 per cent of our transaction now. So this is a hard number to call.
But historically they spend three times as much as they have in the past.
Tom quoted this number or pro business, where the pros actually transacting with us with their credit card is over 40 per cent of our sales just over a year ago that was like 33% 30 per cent. So we've had a meaningful increase.
Pope per Premier is one of the solutions why that is there's many things why they buy from US it's inside quantities. It's the quality of the product is the quality of the sales team. It's inspirational nature of the website. It's free design services store your product with this liberal return policies and so while the loyalty program is one of them.
Any important solutions and is performing exceptionally well.
It's part of a holistic strategy to continue services part those proses one other thing I mentioned, we did this year that's been a huge home run as we're one of the only retailer's.
It gives very detailed training on how to install products like large format tall. As an example, and that's been tremendously well received we see the sales. After we give those trains for those pros grow up a lot. So I think a couple a couple of things to add to Trevor is.
Pro transactions were up 7% during the corner, which was good and are the are the top 10% of our P. P. I remember spent 24 per cent more than they did a year ago. So the longer they get in the program the more that they spend with us that's an encouraging sign and then the last thing is we signed up 29000, new froze.
You think about that that's 185 stores and it really difficult macro to be able to sign up another 29000 pros during the quarter and that's all good for the long term. So the pro business. We're pleased with it we're fortunate to have it because in a difficult macro environment.
Got to eat and they're gonna find business, they're going to lower their prices to consumers to get that business. So the better we can be with the <unk>.
The better off that they can help us.
Muscle through the difficult macro.
And and maybe just a follow up on that right because they.
They obviously have to either have to stimulate demand and they could do with their labor. So yeah.
Yeah, what what can you do strategically to really drive loyalty you know and be there for your pro partners here during a challenging macro as you think about really shoring up that loyalty, while chair dynamic as we had.
And then the next cycle.
I mentioned a piece of Trevor mentioned, one basic training of our pros, we do we're doing training classes with our professionals to teach them how to install things that have it installed before that helps them grow their business.
Loyalty program has over 20 different service components that help them figure out how to grow their business better. So they can get access to help a payroll helped to build a website whatever it is to help them grow the business.
They are prices are better than everybody. So they can come in and they can access inventory at the best price in the market. All of those things help are are pros grow their business. So we've always treated or prose. His partner, we don't install the product. They know that you don't have to worry about setting their customers into our stores and losing the customer because someone's gonna offer them.
Install so I think we do a lot to help them grow the business and I.
Think our efforts and it shows in our results.
Thank you.
And the next question is from Simeon Guttman from Morgan Stanley . Please go ahead.
Hey, Tom Hey, Trevor.
Theoretical macro question.
This time, it's different argument consumers staying in homes because of high mortgage rates.
Is there anything empirical why that could support a better macro and where do you stand on this because we're struggling with this concept I'm curious how you guys think about it.
I think that's right I mean since 2019 home prices are up 46% four trillion dollars more value in those homes.
That that that's likely to come down some as the appreciation kind of so I was a little bit with it with mortgage rates went up a muscle homes being sold but people got a lot of value and I think if you were in a.
Three bedroom ready to go get that four bedroom because your family's growing but you can't afford to then I think you're more likely to invest in the existing home you have and I know some of our larger competitors of talked about that piece of whether business continues to be strong as well as our our view is that if it wasn't for the home equity value. Yeah that this will be a much tougher environment, but the people who have got money and the only thing for us when you look at the existing home sale.
Data when you really dig into the details of it the big reductions are in the lower income housing and you have much less of a reduction in the moderate to higher income housing and we have an average consumer income of $100000. So.
That feels better to us and then I looked at some data today, if you look at where the majority of our sales come from we have over 50, 60% of ourselves are coming from net migration states, meaning, Nevada, Arizona, Texas, Florida, Georgia, the Carolinas and so we have a disproportionate amount of our sales and some of those good states as well so it was gonna be it.
Macroenvironment for who knows how long, but I think we're well positioned from where our stores or.
What our assortment looks like.
And what we can do propose that others can't that will put us in a better position than most.
Just one thing to that cover the.
The point about people, not moving and staying within their homes and deciding to invest in their flooring.
This is going to be a different cycle for us on the ship with just the innovation within the products is so much different that if you bought flowing five years ago.
So much better options today like that innovation and bashing just changes or you are flowing feels a little bit quicker just from a parents standpoint, so hopefully that can stimulate some demand and help again offset some of the challenges macro presents.
And in this topic, either was covered and prepared remarks or maybe on a question.
Can you frame how much price.
And I know not an exact number but how much of 2020 twos price do you carry into twenty-three and you said I think transactions are flattening out within that what's happening I guess with units, meaning or people buying as big projects as if that's the right way to look at it thinking of units are actually stabilizing and I Don.
If you look at the business that way.
Yeah, We watch square footage pretty closely and it's a similar trend of the transactions, we actually we're doing better for the first seven months of the year, but here recently, we've seen a bit of a deceleration are square foot per transaction as well.
But part of the reason that our ticket was stronger.
Is the fact that people were doing especially with are pros being a bigger piece of our business.
Square footage was doing a bit better but that has decelerated a bit.
As of the last three months as well.
Thanks, Good luck.
Ladies and gentlemen in the interest of time, we please ask that you limit yourself to just one question.
At this time or move to our next question, which is from David Dellinger with M. K M partners. Please go ahead.
Hey, guys. Thanks for the question and.
Another one on quarter to date.
Appreciate the tougher comp and last year's October that you called out, but it's still a pretty meaningful deceleration on a three year geometric stack basis here. So your comments or on the pro seem pretty constructive to date.
Is that deceleration all from DIY and was there anything different price call. It late in the queue three period or early into queue for that went to that quick down shifting comps.
I think I mean, I'm just looking at my own three year Geometrics, assuming I did my math right.
I think we had a a 13 or 15 in Q1 13, foreign Q2, 13, six and Q3, and we're probably going to be a little bit below that in Q4 on a wall just well number basis, yeah that mid single digit comp was a pretty pretty Ah.
It was definitely lower than it was previous quarter. The other thing to taken mine is.
Most of this year, we weren't going up against retail increases.
As we got into the queue for last year right. We started seeing those heavy supply chain cost increases and kind of September August and so we started having price increases modestly, but we started having some price increases. So now we're going up against last year. When we were actually raising retail. So there's a ticket component of that where we won't have quite as much ticket just because we're raising prices at this point last year.
But I think the bigger portion of it just has to do with the transaction deceleration blowing into the negative high single digits versus low double digits as we settlement quarter. We just finished our transactions were down just over six per cent.
And that mostly has to do with DIY versus pro is that correct.
Oh sure 100 per cent are are pro businesses actually positive.
Got it I appreciate it thanks, yes.
And the next question is from Anthony Tacoma with loop capital. Please go ahead.
Good afternoon. Thanks for taking my question just took a real quick one anything that you would call out in terms of.
Store associate turnover and or wages.
Yeah, I'll wage rate, we continue like most retailers are investing in the wage rate our wage rate continues to go up for us to hire and retain that the top talent that we need we have continued to make investments we also <unk>.
Designer has become a bigger initiative for US I think comments. This border last quarterly we have over 900 designers in our stores as you would expect we pay a higher designer now they have a much articulate better gross margin, but better customer interaction. So you get a good return on those investments and so are our average wage rate continues to increase.
Turnover is higher than it has been historically.
We are working hard to to to see how we can improve upon that but we're definitely running at a higher turnover rate than we run historically.
That's helpful. Thank you.
And the next question will be from Joe Feldman with Telsey Advisory. Please go ahead.
Yeah, Hi, good afternoon guys.
Wanted to ask about the commercial business for a minute and I know, it's not as bigger partner degree you have given us a lot of info on the consumer side and the pro side, but with the commercial side of the business I mean, what was driving the growth. It was pretty significant is it just.
A small base, but it seems like something more is going on there that I was hoping you could just share a little more color on.
Yeah, I mean, a few things. So Spartan has we've had a couple of small bolt on acquisitions to our spot in business that have made that growth more meaningful Spartans has begun initially was we bought them.
We were working on helping a mainly on the supply chain side, but over the last quarter, they're starting to get access to more of our products. So they're they're getting to be able to sell out of a broader assortment.
We've encouraged <unk> to invest quicker and outside salespeople I wish they had done and that has also contributed so I think I'm. The two other commercial said there was a bit of pet up demand it's different than the homeowner during COVID-19 commercial kind of slowed and then the segments that were in in commercial through Spartan those are seeing some benefit after after I.
So we feel good about how it performs so far and we feel good about how we anticipated to perform looking forward.
Alright, thanks, guys.
And our final question today will come from Jonathan <unk> with Jeffries. Please go ahead.
Great. Thanks for squeezing me and just a quick question on I in stock inventory levels, Tom or Trevor any update there in terms of improvement and where any categories, where you may be seen out of stocks persist. Thanks. So much.
Are in stock is the best it's been a year.
Stores look good service levels are good.
No categories, we've seen nicer covers across all our categories. So we we feel really good about are in stock and combined with what's going on with surfing sinister I mentioned it in my prepared comments to service squares of the highest I've ever been so I feel like were executed at a really high level to capture sharing this difficult market.
Okay. So that's the that concludes the questions. We have a number of questions in the queue. So I will close the call I do want to say that this we anticipate that guarantee that we anticipate that this is chavez final call as the CFO he's.
Not to participate in the call is going forward.
Tell them that it will be another call. So, but he may talk a little bit less. So we certainly appreciate all of his efforts as a CFO and getting this as a public company to today, we look forward to what it's gonna do as president, but definitely wanted to recognize as he transitions.
More to come at our announcement on our CFO soon and and you'll hear it when we're ready to announce it.
Appreciate all your interest talk to you in the next call.
Yeah. Thank you Sir the conference has now conclude bye. Thank you for joining today's presentation you may now disconnect.
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