Q4 2022 Floor & Decor Holdings Inc Earnings Call
Greetings and welcome to the floor and decor Holdings, Inc. Fourth quarter 2022 conference call.
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A brief question and answer session will follow the formal presentation.
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It is now my pleasure to introduce to your host Wayne Hood, Vice President of Investor Relations. Thank.
Thank you Wang you may begin.
Thank you operator, and good afternoon, everyone. Welcome to floor <unk> decor is fourth quarter and fiscal 'twenty Two earnings conference call. Joining me on our call today are Tom Taylor, Chief Executive Officer, Trevor Lang, President and Bryan <unk> Executive Vice President and Chief Financial Officer before we start.
I want 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 1095 and are subject to risks and uncertainties any statement that refers to expectations projections.
<unk> or other characterizations of future events, including financial projections or future market conditions is a forward looking statement the company's actual future results could differ materially from those expressed in such forward looking statements for any reason included including those listed.
SEC filings <unk> assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results.
During this conference call the company will discuss non-GAAP financial measures as defined by SEC regulation G. We believe non-GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP.
Financial measures can be found in our earnings press release, which is available on our Investor Relations website at IR Dot, Florida core Dot Com a recorded replay of this call and 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 fourth quarter earnings conference call. During today's call Trevor and I will discuss some of the highlights of our fiscal 2022 fourth quarter earnings then Brian will provide a more in depth review of our fourth quarter performance and share our thoughts.
About physical 2023.
We are pleased to announce that our 2022 fourth quarter adjusted diluted earnings per share increased by 45, 5% to 64 from 44 last year exceeding the 53 to <unk> 63 per share guidance range that we provided on our 2020.
<unk> third quarter earnings conference call.
Our full year 2022, adjusted diluted earnings per share increased by 13, 1% to $2 76 from $2 44 in 2021.
Notably our full year 2022, adjusted diluted earnings per share are slightly above the low end of our guidance range of $2 75 to $3 per share that we provided at the beginning of fiscal 2022, which did not contemplate the economic and geopolitical headwinds we faced during the year.
<unk> that were unknown at the time, we are particularly pleased to achieve these financial results, considering the challenging macroeconomic environment, including steep mortgage rate increases and moderating growth in home prices.
These factors contributed to significant year over year declines in existing home sales in 2022, particularly in October November and December when they declined to 28, 4% 35, 5% and 34% respectively. Despite the significant headwinds we continue to grow our market share.
I remain agile executing our key growth strategies and investing in initiatives that further widened our competitive moat.
We continued to deliver on our gross margin rate recapture plans.
By executing our pricing strategies and from favorable supply chain costs, which contributed to our better than expected fourth quarter earnings results Ocean freight rates have declined significantly due to lower global market demand and the easing of port congestion. In addition, we have seen material reductions in demurrage tension.
Drayage costs and softening.
In domestic logistic rates.
<unk>. We believe these will provide a tailwind to our gross margin rate in fiscal 2023 and 2020 for these.
These improvements supply chain costs should enable us to strategically past certain cost savings to our homeowner and pro customers and continue to grow our market share as we move through fiscal 2023 and beyond.
As we enter 2023, we intend to manage our stores in a way that reflects the current economic environment that is to say, we will further lean into capitalizing on our low prices brought in stock Assortments and industry, leading customer service provided by our store associates.
To further enhance our customer service, we introduced fit teams or field installation teams to handle daily tasks, allowing sales associates more time to engage with customers. We completed the rollout of these teams to six key markets in the fourth quarter of 2022 and plan to have 12 markets with FID teams at the end of 2023.
We are proud of our best in class customer service and that we finished 2022 with our highest customer service scores are homeowners and pros rely on us to provide them with a wealth of information and style inspiration at the lowest possible price before I turn the call over to Trevor I want to touch on a couple of <unk>.
Management and board related items first I'd like to remind everyone that in February of 2020, our board of directors authorized retention grants for our executives that were tied to three main goals doubling our adjusted EBIT over a three year period, maintaining the prescribed return on invested capital and stock performance.
We exceeded our peer group we are pleased to announce that we have successfully achieved these financial targets. We believe that aligning managements interest with long term shareholder value creation should be the cornerstone of our executive compensation strategy for that reason our board of directors again approved equity retention grants for our executive team.
<unk> linked to achieving specific long term financial goals and total shareholder return, we will provide more information on these grants in our upcoming proxy statement.
I'd like to turn everyone's attention to our press release today on the nomination of Melissa Kersey to join our board. She is currently the chief Human Resource officer at tractor supply and previously held senior roles at Mcdonalds and Walmart, We believe Melissa background will be valuable to our continued growth and that her nomination.
<unk> is consistent with our approach of adding diverse individuals with skills and experiences that will support our strategic growth objectives. Let me now turn the call over to Trevor to discuss our sales and some of our growth pillars.
Thanks, Tom before I get started I would like to express my deepest appreciation to all of our associates and vendor partners for their invaluable contributions to our financial success in 2022.
My role as President I am spending more time in stores and getting even more appreciation of the associates for their dedication and hard work that goes into achieving these results. Thank you for all your unwavering commitment to our company.
Let me now discuss our fiscal 2022 fourth quarter and full year sales.
Fourth quarter sales increased 14, 6% to $1 48.100 million from 914.300 million last year approximately in line with the midpoint of our guidance provided during our fiscal 2022 third quarter earnings Conference call.
Our fiscal 2022 full year sales increased 24, 2% to a record $4 3 billion, which represents a more than doubling of ourselves over a three year period.
Fourth quarter comparable store sales growth was at the low end of our expectations, increasing two 5% from the same period last year, including five 6% in October one 3% in November and <unk>, 6% in December .
We estimate hurricane positively impacted our fourth quarter comparable store sales growth by approximately 100 basis points.
Closed store effect from winter Storm Elliott did not have a material impact on our comparable store sales growth for the quarter.
During the fourth quarter laminate and vinyl.
Installation materials and adjacent categories were the strongest performing product categories, surpassing the companys overall average sales growth.
Our fiscal 2022 full year comparable store sales increased by nine 2% from last year at the low end of our guidance of 9% to 10% growth provided on our fiscal 2022 third quarter earnings conference call.
Fiscal 2023 first quarter today comparable store sales are down two 3% from the same period last year, which is in line with our expectations.
I will now discuss the growth in our average ticket.
Our fiscal 2022 fourth quarter comparable store sales were driven by 14, 4% growth in average ticket compared with 19, 5% in the third quarter of fiscal 2022.
Our average ticket growth continues to benefit from an increase in retail prices to mitigate cost pressures and increased sales penetration of laminate and vinyl and an increase in sales penetration from our higher ticket grow E Commerce and design led initiatives on the other hand weakness and a higher average ticket natural products.
It is a drag on our overall average ticket.
Year over year, we continue to see ongoing customer preferences toward our better and best price points, where we offer industry, leading innovation trends and styles at the lowest price points.
Turning to our transactions the rapid increase in mortgage interest rates significant declines in existing home sales and moderating growth in home prices caused us to experience a steady sequential decrease in our transactions in fiscal 2022, culminating in the fourth quarter comparable store sales transactions decline of 10, 4% from <unk>.
Last year.
That said the fourth quarter transaction decline was approximately in line with our expectations and our business model continues to be resilient.
I will now discuss our new store pillar of growth.
In the fourth quarter of 2022, we successfully opened 13 warehouse stores, including three in October and five in both November and December .
This accomplishment allows us to achieve our goal of opening 32 warehouse stores in fiscal 2022, despite the challenges posed by industry wide construction delays.
At the end of fiscal 2022, we operated 191 warehouse stores and six design studios across 36 States and now have a presence in the top 25 msas in the United States as previously discussed during our fiscal 2022 third quarter earnings Conference call. We believe it is prudent to plan a range of 32 to 35.
Warehouse store openings in fiscal 2023 and for them to be primarily in existing markets and weighted towards the second half of the year.
Awaiting the openings to the second half of 2023, we consider potential construction delays in the first quarter of fiscal 2023, we intend to open four warehouse locations and are pleased that two have already opened in January and February as we look beyond 2023 and into 2024, we expect construction delays to ease.
And anticipate a more balanced quarterly store opening cadence that will lead to more warehouse stores more warehouse store operating weeks.
Let me turn my comments to our design studios at this juncture. We now believe that we have sufficiently large and diverse group of design Studios open that we can monitor and refine before accelerating growth further in this area.
Turning to our pro business, our strategy to expand our market share among pros continues to be successful in the fourth quarter of 2022, our pro comparable store sales increased 18 point increased by 18, 8% and transactions by three 9% from the fourth quarter of 2021.
Those accounted for 42, 2% of our 2022 fourth quarter sales and 46% of our 2022 full year sales.
By comparison froze accounted for 35% of our fiscal 2021 full year sales our efforts to drive engagement continues to be successful.
We added approximately 30000, new probe contacts during the fourth quarter of 2022, and our enrollment in our industry, leading pro Premier rewards or PPR program, where our most active pros our members increased by 24% compared with the previous year.
<unk> also continued to demonstrate a strong appreciation for the value of our <unk> program with a 90% increase in the number of points redeemed compared with the same period last year.
We also build sticky relationships and lifetime value approach to education and trading about flooring products installation and design solutions, we look to partner with pros and hosted 71 workshops and trained 600 pros through our education and training strategies in 2022 protocol dose and I quote I am impressed with.
A way floor and decor looks beyond just selling the products, they're hosting and supporting of training events demonstrates their ability their commitment to high quality lasting installations are in major keys to help my business grow importantly, pros tell us they feel more educated after training and expressed at very high likelihood to recommend to other trades people we have.
To build on these important education and training strategies in fiscal 2023 and beyond.
Additionally, we remain focused on further strengthening our teams and reporting tools and dashboards that our pro desk to build on the execution of key priorities and objectives.
Turning to our E Commerce business, our fiscal 2022 fourth quarter E. Commerce sales increased 18, 3% from last year and accounted for 17, 1% of ourselves compared with 16, 4% in the previous year.
For fiscal 2022 full year E Commerce sales increased 31, 7% and accounted for 17, 4% of sales compared with 16, 1% in 2021.
As we enter 2023, our e-commerce team continues to execute strategies to further optimize our customers' digital experience, including focusing on product inspirational content and conversion. Additionally, we have improved our price filtering experience on our website to reflect the current economic challenges where consumers are likely to look for more value.
Moving onto our design services, we remain excited about the opportunity to strength, our competitive moat and grow our market share through a well executed in store design services offerings.
To that end, we have successfully executed a comprehensive design services strategy that includes adding four divisional designed leaders.
Growing the number of designers and our warehouse stores and providing them with clear career path and training to ensure success. We ended fiscal 2022 with more than 920 designers and manage over 550000 appointments during the year, our efforts led to total and comparable store sales.
Comparable store design sales growth for the fourth quarter and the full year, which were significantly above the company's growth rate.
We will continue to build on these strategies in 2023 by further optimizing our staffing requirements to ensure we have the right designers in the right place at the right time, we have implemented a great customer relationship management strategy technology and processes to allow for thoughtful and efficient follow up that we believe elevates the sales experience to maximize conversion.
As we have discussed in prior calls when designers and relevant projects, we see higher customer service scores higher average tickets insulation material sales are higher as well as adjacent category sales and gross margins.
Turning to our commercial form business, which include Spartan services in our regional account managers or Rams, which work with our stores. We continue to be very pleased with the sales and earnings growth as Spartan surfaces for fiscal 2022 fourth quarter sales and earnings results once again exceeded our expectations.
<unk> fourth quarter sales increased by a greater than 60% compared to the fourth quarter of 2021, and EBIT increased 370% from the same period last year.
Ah Rams fourth quarter sales increased 72, 4% compared to the fourth quarter of 2021.
As discussed in prior earnings calls, we remain excited about the commercial market opportunities and our strategies.
Finally, we are operating from a position of strength and are excited about the opportunity to continue to grow our market share in fiscal 2023 and beyond we have demonstrated that we have the right teams strategies and an agile business model to continue successfully navigating the challenges the challenging macroeconomic environment I will now turn the call over to Brian to discuss our 2000.
22 fourth quarter financial results in more detail and our outlook for 2023.
Thank you, Tom and Trevor I'm excited to represent such a resilient company with so many great associates over the years, we've proven that we can navigate unexpected economic events outside of our control, including significant tariffs antidumping and countervailing duties on our products, which caused us to continue our successful sourcing diversification efforts while <unk>.
Spanning gross margin the COVID-19 pandemic caused us to close our stores for some time, forcing us to develop alternative solutions to serve our customers. Most recently, we successfully navigated significant declines in existing wholesale global supply chain constraints and considerable cost inflation, all while recording record sales and profit.
We manage these headwinds in 2022 and that allowed US to report fiscal 2022 adjusted diluted earnings per share that were still within the range of $2 75 to $3 per share. We provided at the beginning of 2022 validating the strength of our teams and the agility and durability of our business model. Let me now discuss some of the changes among.
The significant line items in our fiscal 2022 fourth quarter income statement balance sheet and statement of cash flow and then discuss how we're thinking about 2023.
Turning to our fourth quarter gross margin we.
We were pleased that our merchandising supply chain and store teams continue to deliver on our gross margin recapture plans our fourth quarter gross margin rate increased 280 basis points to 41, 6% from 38, 8% in the same period last year.
Seeded our expectations of 41%.
Better than expected improvement is primarily due to higher product margins from lower freight costs favorable inventory shrink and damage and lower distributions aircrafts.
Moving on to our fourth quarter expenses.
Our fourth quarter, selling and store operating expenses increased by 18, 8% to $280 zero million dollars from $235 7 million in the same period last year as a percentage of sales. These expenses deleveraged approximately 90 basis points, driven by new stores and deleverage from our mature stores primarily in payroll.
Credit card transaction fees and depreciation.
Fourth quarter General and administrative expenses increased by two 7% to $51 4 million from $50 1 million in the same period last year as a percentage of sales general and administrative expenses Levered 60 basis points to four 9%, primarily due to lower incentive compensation.
Preopening expenses increased by 26, 4% to $9 8 million from $7 7 million in the same period last year. The increase was primarily due to opening 13, new stores in 2022 compared to seven new stores in the same period last year.
Fourth quarter net interest expense increased by $4 2 million to $5 3 million from $1 1 million in the same period last year. The growth in interest expense is in line with our expectations and is primarily due to an increase in borrowings under our ABL facility and interest rate increases.
Let me now turn my comments to our profitability our gross margin recapture efforts successfully drove a 270 basis point increase in our fourth quarter adjusted EBITDA margin to 13, 7% from 11% in the same period last year as a result, adjusted EBIT grew by 42% from the same period last.
Year, our fourth quarter GAAP net income increased by 38, 8% to $69 2 million and diluted earnings per share increased by 39, 1% to <unk> 64 per share.
Fourth quarter adjusted net income increased by 46, 2% to $68 9 million and adjusted diluted earnings per share increased by 45, 5% to 64 sets from 44 in the same period last year, our fourth quarter weighted average diluted shares were $107 4 million.
A reconciliation of our GAAP to non-GAAP earnings can be found in today's press release.
Moving onto our balance sheet and cash flow as of December 29, 2022 inventory increased 28, 2% to $1 3 billion for last year in line with expectations and modestly above our sales growth of 24, 2% as discussed in the third quarter earnings conference call, we expected inventory to grow above.
All of our full year fiscal 2022 sales growth, primarily due to inflation our fiscal 2022 cash flow from operations of $112 5 million declined $188 9 million from 2021, primarily due to growth in our inventory and drop in payables due to timing of receipts.
Fiscal 2022 capital expenditures, including capital expenditures accrued at the end of the period totaled 486.0 million compared with $475 $3 million last year above our guidance of 445 million to $465 million driven by timing of spend on the class of 2023 stores.
These capital expenditures were funded by cash flow from operations.
<unk> cash on hand, and borrowings under our ABL facility. We ended fiscal 2022 with $566 3 million of liquidity and $210 2 million outstanding on our ABL compared with no borrowings at the end of fiscal 2021.
Let me now turn my comments to how we were thinking about the macroeconomic environment and our fiscal 2023 sales and earnings guidance.
As you will see in todays earnings press release, we are providing a wider guidance range than in prior years to reflect the prevailing macroeconomic uncertainty.
Our fiscal 2023 annual comparable store sales are expected to be flat to down 3% from last year, reflecting continued declines in existing home sales throughout most of 2023 from higher interest rates moderating growth in home prices and strategic price reductions, we expect to take from a benefit of lower freight costs.
Fiscal 2023 sales are expected to increase by 8% to 11% from last year, which assumes 65% of our planned 32% to 35 warehouse store openings occur in the second half of the year. We look forward to the full year sales and profit opportunity in fiscal 2024 for the 2023 stores opening later.
A year.
Our strategic balanced approach to price reductions is expected to moderate our growth in average ticket, but improve our transaction trends as we move throughout the year.
As a reminder, we start to cycle past high single digit declines in transactions in the second and third quarters of fiscal 2023 before comparing against a 10, 4% decline in the fourth quarter of 2022.
Taken together, we look for comparable store sales to decline through the third quarter before returning to growth in the fourth quarter as we think about growth in inventory to support our new stores and sales growth in 2023, we expect inventory to grow at a slower rate than sales.
The complexion of our P&L.
Perfect growth drivers will change throughout the year as we strategically reinvest cost savings and select price reductions.
Because we were using a balanced approach to reducing our retail from cost savings. We expect to continue demonstrating strong year over year improvement in gross margin rate in 2023 with the most significant improvement in the first half of the year, we expect sequential improvement in our gross margin rate throughout the year approaching 42% as we exit 2023 or <unk>.
Selling and store operating expenses are expected to be approximately 27% of sales at the midpoint of our sales guidance the year over year deleverage from 2022 is primarily due to new stores as well as well as continued investments in wages and merchandising initiatives and higher credit card transaction fees.
Preopening expenses are planned to be around 1% of sales flat to 2022.
We are playing in general and administrative expenses to be approximately 5% of sales at the midpoint of our sales guidance slightly above 2022.
Slight increase reflects continued investments to support our growth initiatives and incentive compensation recapture.
Interest expense is expected to be approximately 17 million to $18 million increase over 2022 is primarily due to an increase in borrowings under our ABL facility and interest rate increases.
We expect our adjusted EBITDA to grow 5% to 12% to approximately $605 million to $650 million.
Our adjusted EBITDA margin rate is expected to be approximately 13% to 13, 5% importantly.
Importantly, we continue to see a path towards our expected medium term margin rate of mid teens and longer longer term margin rate in the high teens.
323 diluted earnings per share are expected to be in the range of $2 55 to $2 85.
Diluted weighted average shares outstanding is estimated to be 108 million shares.
Moving on to how we were thinking about capital expenditures.
Fiscal 2023 capital expenditures are planned to be in the range of $620 million. This Cisco $675 million and be funded primarily by cash flow from operations and borrowings under our ABL facility.
More specifically, we intend to make the following capital expenditures in fiscal 2023.
We intend to open 32% to 35 warehouse format stores relocate stores and begin construction of stores opening in fiscal 2024 collectively these investments are expected to require 495 million to $525 million.
The year over year increase reflects three main drivers.
First we plan to improve the store opening cadence in 2024, resulting in more stores opening earlier as a result, we will incur more capex in 2023 associated with the 2024 openings.
We are transitioning into more ground up projects versus second use facilities that require more upfront capital in exchange for lower rent.
Third higher construction costs from inflation.
Additionally, we plan to invest in existing store remodeling projects and distribution centers using approximately 95 million to $110 million and finally, we plan to continue to invest in information technology infrastructure E Commerce and other store support center initiatives using approximately $30 million to $40 million.
In closing I am grateful for my new role as CFO and eagerly anticipate taking on the challenges that may arise in this uncertain macroeconomic environment.
Eight years at Florida core I've never been more confident in our business model and the talented associates that make up our team we have demonstrated our ability to grow our market share in the face of uncertainty.
And behalf of the executive team I want to express our gratitude and extend a personal thank you to our associates, we recognize and appreciate the hard work and dedication you bring to serving our customers every day.
With that we will not we would now like to take questions.
Thank you.
We will now be conducting a question and answer session.
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One moment, please why we poll for questions.
We request participants to please restrict to one question and one follow up.
We have our first question from the line of Simeon Gutman with Morgan Stanley . Please go ahead.
Hey, guys good afternoon.
I wanted to ask about the forward curve on housing.
Existing home sales down a lot you mentioned the numbers yet comps were positive they just turned negative I guess.
So does your view that we have a stronger back half.
Does that mean existing home sales don't get worse.
Does it factor in anything around pricing or that maybe it is just this time is different and that will allow the comp to reaccelerate in the second half.
Yes, Simeon this is Trevor.
Our view is first of all I'd say, we're not economists, but our sales range of flat to down 3% assumes existing home sales trough at about 4 million units in 2023, which is where they are today.
Placing them back against the most recent trough of 4 million in May 2020.
As we think about.
Pricing, we would expect that the pricing continues to probably decelerate with interest rates being high and lastly to go higher as we think about the rest of the year.
If we're wrong and existing home sales continue to sequentially decline from 4 million units and move towards a historic low of $3 5 million existing home sells then there could be risk to our plan and one other thing because I know you guys follow a lot of companies that I think is worth.
Contemplating as we've given this guidance.
This model assumes so this forecast assumes our mature stores.
We'll be down more than the three.
Negative three to flat that we have given guidance for.
But we get the benefit of all those new stores, because we've opened 20% stores at Pixar your stores years to mature.
That's what brings it back up to that flat to 3%.
As you think about it too you've heard US say this before but as a reminder, every comp point is worth about $41 million in sales and about 10 in EPS that equate to about 20 basis points of operating margin. Just as you guys may flex up or down differently than they do.
Got it okay.
Non macro the way you measure sales and your market share I'm guessing your denominator as Dana said, we don't see are you seeing your core business market share. So noncommercial stable accelerating can you give us some color there.
Yes. This is Tom.
Give that a shot.
We believe our market share continues to increase things that we've read from Catalina indicate that and then when you just look at kind of our total sales total sales in 2022 grew 24, 2%.
Were able to post some pretty decent comp for the year and when you look around the competitive landscape reports on our category. They don't seem to be too close to what how our performances. So yes.
Everything that we see we're taking share in a pretty meaningful way.
Thanks, guys. Good luck.
Thank you we'll take next question from the line of Karen short with Credit Suisse. Please go ahead.
Hi, Thanks, very much good to talk to you again.
A couple of questions.
With respect to your margin assumptions on EBIT.
There are a lot of companies are looking to have.
Kind of flattish margins relative to pre pandemic and you're obviously guiding to significantly higher margins kind of eight 8% relative to 2019, So I wanted to parse that out a little bit.
And then I just wanted to ask about new store productivity in terms of how we should think about that it obviously realize there is timing and backend loaded with respect to this current year, but.
At new store productivity.
Think about that.
Fair enough you talking about gross margin or operating margin disputes with snapple.
Operating margin.
I'll go first this is Trevor I mean, our volumes just higher than they were.
At that time and we've.
Hopefully been efficient and thoughtful about where we've made investments.
Our stores over five years old are getting close to $29 million in sales and close to $7 million and four wall EBITDA and so as those volumes have come up in the last three years.
<unk> components of our P&L.
Yes, I mean, as you think about it carried us well, it's we've talked about the complexity the P&L changing a little bit. So we do have we have had significant gross margin recapture and we plan on gross margin sequentially, increasing every quarter throughout 2023. So you will see a slight increase due to new stores and our SG&A, but as you think about it it's.
Set by our gross margin recapture throughout 2020.
Okay got it and then just how to think about new store productivity just going forward in general in 'twenty, three and 'twenty four.
Yeah today, just like we said at the analyst day in our <unk>.
You, probably havent read yet all 100 pages, but.
We still believe that new stores will do $14 million to $16 million in first year sales. We think we can get those stores to do around $3 million of four wall EBITDA.
I just mentioned they run up that maturation curve and hopefully they get to 2008 and $29 million and get close to $7 million and four wall EBITDA as I studied the class of <unk> 23, and what we know so far about 24.
They've got a good class of stores and we think there's going to be those metrics that I just mentioned.
We're optimistic that we're going to hit those even though the environment is not nearly as good as it was in the second half of 'twenty all of 'twenty, one and the first part of 'twenty. Two that's right. They started about 60% productivity. So we should see pretty meaningful gains from that 224 with the laser openings this year.
Okay, great. Thank you.
Okay.
Thank you we'll take our next question from the line of Zack <unk> with Wells Fargo. Please go ahead.
Hey, good afternoon, guys could you walk us through your expectations for category growth relative to your flat to down three comp guide.
As you think about the macro and housing indicators out there today.
Factors do you need to see to give you confidence that 2023 will be the trough year for you in the category as opposed to seeing the pressures linger into 2004.
Okay.
First.
Yes.
I think for us.
When we look at our own specific numbers, they get easier obviously as we move through the year, our transactions were down around 7% for Q2 and Q3 than they were down just over 10%.
If we make it to the summer with continued negative existing home sales, which seems like for sure that's going to happen that's going to be two full years of negative existing home sales and from what I read I know inflation has been a little bit pesky, but it does feel like that the fed is going to sort of be done with what they need to do on interest rates either in the summer.
For the spring time, and hopefully mortgage rates, even start to come down in the back part of the year and then we're going up against easier compares as well.
And then you start to see a rebound and then as we all know there is just a very aged housing stock that is going to be in need of investment.
So I think on the category perspective.
You can see some of this in our filings, but our tile business is strong right now our installation categories are strong right now.
People are resonating with what we're doing in those categories. Our rigid core vinyl was strong in the fourth quarter as well and so those big categories that you've historically seen us do well in.
I would expect that those are what's going to drive the business as we can.
Continue into 2023.
And just as a reminder of that.
Flex our stores to whatever itself. So if you are getting.
Our growth outlook.
Vinyl and then will expand more on the vinyl section of tile continues to do well, we'll continue to expand in that we have the flexibility because we are in all categories.
Got it and on that note.
We're able to hold your store expense line flat sequentially in Q4, despite opening 13, new stores, which I think is a first for you excluding the pandemic. So when you say you're operating your stores to reflect the current economic environment can you talk a little bit more about what exactly that means and how should we think.
Just the cadence of deleverage on that line as we move through 'twenty three.
Yes, I mean at the end of.
When you compare Q4 to Q3, we have.
From a labor perspective is generally our biggest.
Opportunity or can flex up or flex down we've tried to sort of simplify that and just give the hours of similar amount of hours throughout the year and so we don't see massive increases or decreases in labor and operating cost sort of quarter over quarter.
As we think about where we are going into 2023, we have assumed the continued increase in labor right. We've seen that happen, we and every other retailer of invested in the labor, we think thats been a good pay off we've recently seen both our full time on our part time turnover come down pretty meaningful. So we feel like we've made the right balance of investment in.
Labor to lower that turnover, we are going to see a pretty big increase in.
Tender cost credit card fees this year.
Switching to a provider mid year.
Just with LIBOR up those costs will go up or I should say so.
Those costs are going up, but we think we can offset that with marketing and some other components of the operating expenses as we look to 2023 is that just.
Just to call. It out we actually saw a 110 basis points increase from Q3 to Q4 and our store expenses. So when you look at that as you exit Q4, which has a much higher because we opened 13 new stores Youll start to see that is actually kind of the complexion that we'll see similar into 2023, because will average about 27% at the midpoint. So what you see in Q4.
Similar as that as new store start to come into the classes while in 2023.
Got it thanks for the time guys.
Okay.
Thank you we're taking our next question from the line of Michael Glazer with UBS. Please go ahead.
Good evening. Thanks, a lot for taking my question. So 200 to make our number one hub added since youre going to be how roughly is it going to be and to what is next year look like so on the first question.
You roll out these negative transaction like you had.
Indicated through this year, where is that going to put your volumes in store volume.
On a unit basis.
This year versus where it was in 2019, especially in some of your mature stores and then I have one follow up.
Yes, I mean, we will still be higher than 2019 pretty pretty materially so.
This year that we just finished those stores over five years old.
Im doing close to close to $29 million I don't have what we did in 2019 have to go back and look at that but it was it was probably it was below $25 million I'm pretty confident back then and so we're going to have a flat comp.
I don't know that the complexion of that is going to change all that much.
And then my follow up question is how negative would you need to be this year in order for you to pull back on your store growth in 2024 and hear any condition under which you would moderate your store opening plan.
I'll answer that.
At this point no Michael.
Our plans are to continue to.
Run the business effectively I think we've demonstrated our ability to be agile and.
Execute on kind of what we say that we're going to deliver we will be smart in the way we run our business.
This is this is a marathon not a sprint and we're playing for the long game things would have to be turned significantly worse for us to consider lowering our store count.
Said, 30% to 35 this year, we haven't given a number for next year, but feel pretty confident that that will be around that number.
I think the other thing we've said historically, Michael there's only two things that would.
Inhibit us which is one if things got tight from a liquidity perspective for whatever reason right we might be a little cautious there we don't see that happening and then if we saw a material decline in our return on invested capital our cost of capital is probably somewhere between.
High single digits low double digits.
Pending on what factors you put in there and even with a slightly higher cost because there is inflation to open new stores, even with the higher cost. We still think we're getting a return in the high <unk>.
From a return on invested capital so I don't envision either having liquidity issue or the return on that invested capital changing much and so yes, we're going to just like we've done for the last decade, we're going to invest through cycles.
<unk> just.
Clothes that comment with what Trevor said earlier to that class of 22 looks to be a very good class and are what we're looking at for open in 'twenty three 'twenty four looks to be really good.
Yes.
Thanks, a lot and good luck.
Thank you. Thank you.
Thank you we take the next question from the line of Chuck Grom with Gordon Haskett. Please go ahead.
Hey, Thanks, good afternoon, and congrats on a really really good year.
It's really helping you guys provide the monthly comp cadence I was wondering if you could provide transactions five five months in the fourth quarter and also what transactions are going so far.
Year to date in January and February .
Yeah.
Yeah sure look I can I can give you the monthly cadence and transactions.
For us in Q4 transactions were down $9 three in October 11, four in November and 10, 5% for December so pretty.
Pretty consistent throughout the quarter.
Okay, and then any color in January and February so far.
Yes.
They are consistent with that in Q4, we exited that.
Thats kind of finish range they've been fairly consistent.
Okay, and any color on transactions in markets, where housing turnover has slowed more than the rest of the country has any delineation that you can provide.
I would just said the west.
Is performing a little bit softer than the rest of the country and that seems to tie into existing home sales under a little bit more pressure. So that's what we see.
Okay, Great and then one last one for me just to follow up on Karen's question on new store productivity over the past couple of years, you've had great NSP that's averaged close to 90%. This quarter was in the low sixty's at least.
<unk> a model just curious if there was anything timing that led to that or anything else. We that's the point too.
Yes, I would say the timing of when we open those stores in the fourth quarter was late and then also we don't have a real seasonal business, but in Q4.
The week of Thanksgiving the weeks around Christmas are pretty low volume.
So that may have the appearance of low NFC, but its just really more from the timing of those exactly.
Exactly we opened 13 of our 32 stores in the fall.
Okay.
We're going to have 5% of our openings in the back half of this year too so yeah.
And I think Thats why youre expecting on the speed of it a little bit weaker as well, okay. That's where that's why sales grew up 20% on a flat to negative three comp we would have an 8% to 11% sales growth. So that tells you right. There normally that's in the 15 to 16.
Yes, exactly okay. Thanks very much appreciate it.
Thank you ladies and gentlemen, please restrict questions to one question per participant we take next question from the line of Steven Forbes with Guggenheim Securities. Please go ahead.
Good evening guys.
I wanted to focus Tom I think you briefly talked about the <unk> rollout.
It was curious if you could maybe expand on that initiative in terms of sort of the size of the program today.
Supporting members.
What are you expecting it to scale to how we should think about the net cost of the initiatives.
What are you hearing from the stores in terms of the excitement about what they can do to.
To alleviate some of the tasks and responsibilities.
Yes. So the 15, we put in it's really in an effort to continue to improve customer service within our stores. So anything we can do to take tax away from associates. During the day. So that they can focus on just taking care of the professional customers and do it yourself customers that come in the store that's our whole goal.
So we started playing around with pilot a while ago in one market, we really like what we saw this feedback from the stores was terrific. So we're in six markets as we exit this year and then we're going to open up 12, as we get into next year.
All of the effort that we think the presentation within the store gets a little bit better and we think that the customer.
Service of the stores will get a little bit better.
And then just in terms of like investment into the program.
Whether it's gross or net terms.
It funds it.
It funds and it's got a little bit of cost, but the majority of it the hours come from within the stores and are just pulled into a centralized team that has managed a little bit differently.
Exciting thank you.
Thank you we'll take our next question from random Steven Zaccone with Citi. Please go ahead.
Great. Good afternoon, Thanks for taking my question.
I wanted to ask about the decision to implement the strategic price reductions for this year.
Is that purely due to cost coming down or is there something you are seeing in the competitive landscape with your price gaps and then can tickets there'll be positive this year, despite the strategic price reductions.
Although this is Tom I'll start on the on the price first.
We stated in our in our in our scripts, we plan to continue to recapture margin all as the year goes.
We do think.
Our supply chain costs are going to continue to give us the ability to take our prices down where we need to be.
It is not a reaction to anything going on the competitive marketplace. It is a to widen the moat.
<unk> to give us the ability to take share at a quicker basis and then lastly, I would say is we have a heavy pro influence in our business. They saw prices go up pretty significantly last year for the first time in my 10 years here and as supply chain costs come down there are partners, who are going to give some of that back.
Yes, and then on the second part of the question yes.
Yes, I mean look if if the strategic price reductions could have us be at a negative comp, but it would be a very very low negative comp in the back half if that was the case, but keep in mind too. We're also lapping the highest increases that we have an average ticket in Q3 and Q4 of 2022, so it's a much harder compare.
Okay, great. Thank you for that.
Follow up I had was just on gross margin. So thanks for the detail on 'twenty three but if you look over the medium term do you see potential for gross margin rate to go back above that prior peak at that business out of $42 five.
What are the drivers to see gross margin rate go back above that prior peak. Besides just recouping some of the supply chain costs.
I do think it can go above the prior peak this is Tom and I think it's.
For a few reasons one within the store.
We've made tremendous progress as you've heard when Trevor was speaking mcnabb over 900 designers in our stores. So that our design initiative has taken an improved service within our store and we know when the designers related we intend to sell a bit of a higher margin basket.
Two the supply house strategy, what we've done with the installation accessories department of the categories. We've added theyre, helping us from a margin perspective, they are getting more frequency within the professional business and I think that can help and then lastly, selling better and best the better and best products, we make more margin on that continued to do better in our stores even in <unk>.
Light of the macro environment that customers are still buying those better and best product. So as I look at all of that and understand what's happening within the dynamic of our supply chain costs.
I do believe now that we will be able to exceed its a question of time, but I believe we'll be able to exceed that high end margin rate that we had yes.
Yes, just to just to piggyback on top of that we're going to be methodical about our approach to gross margin as the complexity of the P&L changes.
We may need to strive for a little bit higher as Tom mentioned on that just to achieve our long term higher teen EBIT margin rate, so, we're being kind of methodical and strategic about that as well.
Thank you we'll take next question from the lineup Kate Mcshane with Goldman Sachs. Please go ahead.
Hi, Thanks, good afternoon.
Without kind of beating a dead horse. So I just wondered if you could maybe talk through the circumstances in which you would expect to do.
Better than your guide or maybe at the high end of your guide versus the low end of your guide and then we were just wondering if there were any updates with regards to sourcing if there were any changes in the sourcing environment that may be different in 23, then 2022.
Yeah, I'll take a stab at this and then Tom and Brian May weigh in I mean, I think the fed was to lower rates for any reason in that.
Drove existing home sales being higher I think if the consumer.
Is less focused on services right as you can read any report you want that the consumer spending a lot more on services than they are on hard goods because they spend so much in hard goods for the three years of code.
Those two things can be net positives for us.
I think were certain super pleased with our competitive standpoint, when we look around at who we're competing with we thought we feel great.
About where we are from that perspective.
But those might be the upside I would call out.
I would agree.
Sorry, what was that I'm getting all of the second part of the question.
I just was wondering about any kind of change in the sourcing environment and.
And 23 versus what <unk> experienced in 'twenty two.
No I mean, we're always trying to find the lowest cost provider and no matter what country. It is and as you know we have over 225 suppliers in over 20 countries. Those countries are constantly changing our penetration per country, you're constantly changing so wherever we can get the best product I don't anticipate 2023 to be Cigna.
<unk> different than any of the last couple of years.
Okay.
Thank you we'll take your next question is from the line of Liz Suzuki with Bank of America. Please go ahead.
Hi, This is Sarah park on for Liz Suzuki.
I was wondering if you can speak to how you're thinking about private label mix in the current environment when the consumer is getting more price sensitive.
So I'll take a stab at that where the majority of what we do is private label.
All of our.
Our level, one skus across hard surface flooring categories are generally our own brands.
Only place where brand is relevance as an installation accessories, where we carry named brands. The professionals want to use I don't anticipating any change in our strategy in private label.
I think what we're doing works well.
Thank you.
We'll take the next question from the line of Greg <unk> with Evercore ISI. Please go ahead.
Hi, Thanks, I wanted to ask about pro outpacing DIY. It seems like pro traffic is still up and all of the decline is on the DIY side.
Any sign of that starting to shift or do you would you expect DIY.
Through by the end of 'twenty, three and your guidance.
Greg This is Trevor.
I think.
Youre exactly right our pro business is performing well, we did a pretty deep dive with our approach towards the end of the year early this year.
What we hear from them is their business is strong across the country. They probably are not at the historic backlogs, but their backlogs are still strong I thought they've got plenty of business and.
I don't feel concerned about their business and strong I think on the homeowner side man. It certainly feels like that's going to have to change and whether thats going to be something with mortgage rates or existing home sales changing.
But it does feel like at some point, that's going to change because we are now rounding out.
Year, and a half maybe close to two where pro has been much stronger than homeowner.
Thank you.
Well take the next question from the line of Justin <unk> with Baird. Please go ahead.
Hey, good afternoon, everyone.
On the gross margin guide is the starting point for <unk> effectively the $41 six you exited the year at and have you contemplated any trade down from better best into your planning assumptions are or do you not see that as much of a risk.
Yes, I'll take the first part of it and they kind of hit it off so yes, I mean youre spot on so the starting point is really exited in Q4, and then we expect sequential improvement kind of from there. So that's the right thoughts and I'll, let yes, we don't.
We don't expect to have too much trade and we haven't seen even as of today and as we look into the month of January and as we look into the fourth quarter.
Customers that are electing to still do hard surface flooring jobs are still electing to use better and best products and so I think that if they make the decision that they can afford to do the flooring project that they are willing to spend what they want to get the floor. They need so we're not seeing a trade down as of today and.
This is we're in the middle of this and we haven't seen it yet so I don't foresee that changing that's right. Yeah. We've got a sophisticated merchandising team that their sharp on their line structure. So we haven't seen a trade down.
Thank you I'll take the next question from the line of Johnson <unk> with Jefferies. Please go ahead.
Hey, good evening and thanks for squeezing me in just one question on pricing it sounds like youre not going to be taking down prices as much as your supply chain costs are coming down.
Yes. My question is is that how you think the industry. Your competitors are going to react as well and I guess, if not I suppose you'd be planning for your price gap narrow a bit in 2023, just how should we think about I guess your overall price gap, that's contemplated in 2023 versus that Youre.
Competitors. Thanks.
I'll start with we feel good about our competitive price gap.
That we're managing with today and.
You are correct that we're not anticipating on dollar for dollar flowing back into price all of the savings in supply chain as Brian mentioned earlier some of the complexities within the P&L changed and we've got long term EBIT margins that we want to hit so that will change a little bit but.
Our spread in the market is good we anticipate it to continue to be good.
So I am not.
I don't have a we will watch it and react accordingly, if we see it but we're seeing within the marketplace. Today, we're very confident in what we're doing.
Thank you we'll take our next question from the line of Seth Sigman with Barclays. Please go ahead.
Great. Thanks for taking the question I wanted to follow up on the competition question to some extent it sounds like pricing is still rational but I'm curious what are you seeing in terms of inventory across the channel right now and maybe if you could just frame your own inventory position how much of the growth that we're seeing year over year is inflation versus units and then I have one pricing.
Follow up thank you.
I'll start this is Tom I'll start with the pricing part and Trevor on if you want to hit kind of what youre seeing from an inventory level standpoint, I think from a from a pricing standpoint, we're seeing.
It seems like.
The Big box competition is always aggressive price movement in price you certainly have to pay attention to them.
We will continue to do from an independent channel, but we haven't seen much in pricing.
I think they've learned from previous recessions.
And they're being cautious and eroding their margins to a significant extent so.
That's why I feel like our spreads probably better than it's been against the independent channel that has historically been so we hope that that stays rationale from an inventory level standpoint and.
And this is Amazon you mentioned levels.
Most of the competition seems to be high and seem to be in good shape. At this point for them I don't know that Theyre I mean theyre in stock. We went for a lot of last sure. They didn't have inventory as everyone was chasing everything but the but in general were.
That's what we say it's hard to tell for sure on the inflation piece I mean inflation was a big reason why our inventory grew at a faster pace in sales just a.
Tie that in as well.
Thank you we're taking next question from the line of David Bellinger with Roth MK Am. Please go ahead.
Hey, Thanks for the question. So you mentioned earlier.
Benefit of newer stores maturing in that the sales lift flowing through to comps that helps you to get you to the full year guide. So first can you size the comp lift you're planning from that subset of maturing stores and two it.
It seems like at this point youre not contemplating some type of slower ramp in those units because of the macro environment is that a correct assumption. Thank you.
Sorry, yes.
Question, Yes, so we believe that it adds about three to four comp point is what our new stores kind of add to that so said another way our mature stores will really be down three to six is kind of a way to think about it and we haven't given the number just to be completely transparent on that though but that that number is somewhat offset by cannibalization roughly 65% of our stores are in existing <unk>.
<unk>.
And so that isn't all flowing through because the math doesn't work either so there is some cannibalization is.
Slightly over 50% of our stores are going into existing markets and I think the second part of your question. It would be tampered, just a little bit by the macro economic environment, but not that much.
Thank you we'll take the final question from the line of Deane Rosenbloom with Bernstein. Please go ahead.
Hey, guys. Thanks for taking my call.
We've talked a lot about the potential impact of existing home sales on the outlook for the business and I was wondering if you could talk explicitly about the mix of your business as you see it that is actually project business driven by I, just bought a home or I am selling my home and getting it ready versus.
I'm in my house, and I need to do a floor kitchen or other hard surface.
And then I have one follow up on the mix of.
Pro versus DIY.
I'll start.
Trevor can we I don't think we exactly know.
How much of the business is driven by housing someone saying, hey, I'm going to sell my House, Let me change My Florida surprise solid.
Or I just bought a house, let me change my floors.
Because I just bought it and I don't like the carpet in the bedroom, but I do know this.
What percentage of the business. It is I know that it doesn't hurt when housing turnover there is.
There is a percentage of those customers that are absolutely redoing their flooring. So I can't I can't say for quantify exactly what that number is how many of our transactions go to that but.
Existing home sales are positive we have wind to our backs and with existing home sales are negative it's wind in our base. So.
What we have to deal with I don't know Trevor if theres anything to the back side of that question. That's right I mean I've been here 12 years, we've had three downturns in existing home sales and every time, we've seen our comps slow.
Yeah.
Got it and then the follow up is on the in terms of the growth of pro versus the growth of DIY is it possible that as you increase your penetration of pro customers that youre seeing pro customers purchasing for DIY errors, because they're essentially purchasing materials for jobs that the pros already had and essentially the pros are bringing in.
DIY customers that are showing up through the protocols for the pro desk on sales.
I mean listen it's possible I don't know the revenue until that says that but I don't think when you look broadly across retail.
Some of our larger competitors have called out that their businesses are strong as well. So we're certainly doing an incredible job, it's up from a year and a half ago is in the low thirties now we're in the low <unk>.
But I'm not sure that I can point to that they are spending more on behalf of the consumer.
I think that congestion we have reached the end health.
Yes. Please go ahead.
So I think that concludes the questions Theres no more questions right.
Alright, I don't look at.
I was just handing over for your closing comments over to you Sir.
So my closing comments. Thank you very much so look I would just like to.
To say that I.
I feel really good about the way we executed in a very difficult 2022 as I said in my script. If you think about it for us to be at the low end of our 22 guidance.
Given that we gave guidance the data Ukraine War started and we had we werent anticipating the feds to be as aggressive as they were as they were going to be in raising interest rates and I don't think we anticipated Ukraine warrant and its effect on natural gas pricing and what that would do and for us to come in below in with something to be very proud of our our service scores have never been better.
Our turnover across our part time and full time associates continue to come down.
Able to open 32 stores and one of the most difficult opening store environments that I've faced in my 10 years here, So really proud of our teams and the way they executed and we'd just say that.
We are and we're running a marathon not a sprint. This is a valley the cycle. It will it will improve in Florida <unk>.
In a better place on the other side of it we're going to continue to invest to widen the moat around our competition and we're excited about the.
About what this year can bring for us. So I appreciate everyone's interest and I appreciate everyone joining the call.
<unk>.
Goodbye, ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
[music].
Yes.