Q1 2023 Floor & Decor Holdings Inc Earnings Call
Greetings, ladies and gentlemen, and won't come to the fluent Pico Holdings' first quarter of 2023 conference call.
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A question and answer session will follow the formal presentation.
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As a reminder, this country is being recorded.
Now I'd like to turn the country itself would shoot Mr. Wayne Hood, Vice President of Investor Relations.
Thank you operator, and good afternoon, everyone. Welcome to floor <unk> decor is fiscal 'twenty three first quarter earnings conference call. Joining me on our call today are Tom Taylor, Chief Executive Officer, Trevor Lang, President and Brian Langley Executive Vice President and Chief Financial Officer.
Before we start.
I want to remind everyone of the Companys Safe Harbor language comments made during this conference call and webcast contain forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95, and are subject to risks and uncertainties any statement that refers to expectations projections.
Actions 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, including those listed in its 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.
Table 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 <unk>.
IR dot floor and decor 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 2023 first quarter earnings conference call. During today's call Trevor and I will discuss some of our fiscal 2023 first quarter earnings highlights then Brian will provide a more in depth review of our first quarter performance and share our thoughts about the <unk>.
<unk> of fiscal 2023.
In the first quarter of fiscal 2023, we delivered diluted earnings per share of <unk> 66.
In line with our expectations and flat versus the previous year.
We take pride in these earnings results as we believe they demonstrate the continued strong execution of our key long term growth strategies and our remarkable agility in adapting to significant year over year declines in existing home sales amidst the broader macroeconomic challenges we continue to face in 2023.
As we look forward, we expect existing home sales to remain challenging in 2023 and customers to increasingly prioritize value and savings seeking out those retailers that best meet these needs. We believe we are well positioned to navigate these headwinds and grow our market share even as the flooring IND.
History contracts in 2023.
Because we source our products from 24 countries and over 240 suppliers, we were able to deliver low product prices and compelling value options across a broad range of products. Our broad assortments feature an exceptional range of price points and features and benefits for consumers looking to install.
The hard surface flooring.
Are there more we're building on our value proposition in 2023 by passing along some favorable supply chain costs to our customers by selectively lowering prices on specific skus.
We intend to maintain our widen our product price gaps with our competition and our monitoring unit price elasticity to enable us to drive incremental growth.
We have introduced new lower price signage in our stores and website further reinforcing our strong value message. Additionally, we are leading with compelling value options at the front of our stores and in our merchandising and caps.
While maintaining our price leadership position. We are also focused on winning by driving newness and innovation through exciting new programs and initiatives in 2023.
Finally, we are intently focused on driving further engagement with our homeowner and pro customers in 2023.
Before I turn the call over to Trevor I would like to say how inspiring it was to see our store managers leave our March annual meeting excited about developing market specific plans to grow their market share in this challenging period and embraced the new store growth opportunities ahead of US. Let me now turn the call to Trevor to discuss our first quarter sales and growth.
Pillars.
Thanks, Tom.
We're incredibly pleased with the energy in our stores and how they are executing our strategies to grow our market share during this challenging macroeconomic period.
We are further emphasizing our everyday low prices trend forward assortments of inside job lot quantities and leading customer service provided by our store associates.
We have made significant investments in our associate training and wages over the past few years, leading to improved customer service and essential attribute in this challenging period.
We're not playing catch up with associate wages and are pleased these investments are paying off reachable.
For each of the last two quarters, we have seen a year over year improvement in turnover.
Our fiscal 2023 first quarter key customer net promoter score increased by approximately 500 basis points from the first quarter of 2022.
We are delighted to see that associate helpfulness ranked the highest among customer satisfaction attributes.
Recently, it was announced by Yelp that Florida or was the top ranked non food retailer about customers and their most loved brands ranking having knowledgeable store associates is extremely important in the customer flooring purchase journey ranking above low prices and we are proud to be leading the competition on this important attribute.
In 2023, our store managers are focused on having the best sales associates on the floor at the right time to drive conversion engaging with homeowners as well as our pros. We've also made important improvements for our stores to better follow up on our coach to drive better conversion.
We're finding ways to manage our non customer facing expenses, better and tactically manage our payroll hours without sacrificing our customer service.
Let me now turn my comments to our fiscal 2023 first quarter total sales.
Although our first quarter sales increased nine 1% to $1 $100 million and comparable store sales declined three 3% from the same period last year, which was in line with our expectations.
Parallel store sales declined 1% in January .
Negative three 7% in February and negative five 2% in March.
We estimate hurricane in positively impacted our first quarter comparable store sales growth by about 100 basis points similar to the fourth quarter of fiscal 2022.
Our fiscal 2023 second quarter to date comparable store sales were down six 2% from the same period last year.
Turning to our 2023 first quarter transactions and average ticket performance.
Comparable store transactions declined nine 9% from last year in line with our expectations and an improvement from our 10, 4% decline in the fourth quarter of fiscal 2022.
Our 2023 first quarter average ticket growth sequentially decelerated to seven 3% from 14, 4% in the fourth quarter of fiscal 2022.
The sequential decelerating growth is due to customers purchasing less square footage and strategically lowering product prices.
We continue to see ongoing customer preferences toward our better and best price point products, where we offer industry, leading innovation trends and styles at low prices.
Overall, we see our consumers transacting less often and purchasing less square footage, but when considering flooring they prefer our higher margins better and best price point merchandise offerings.
I will now discuss our new store pillar of growth in the first quarter of fiscal 2023, we opened three new warehouse format stores, bringing our total to 194 warehouse stores across 36 states.
During the quarter, we closed our original design studio in New Orleans at the lease expired and it did not align with our current prototype, leaving us with five design studios.
As we plan for the second quarter of 2023, we are excited about achieving another milestone in our company's history with the opening of our memory, Louisiana store in May which will be our 200th warehouse store, we have opened in our history.
In addition to opening memory, we intend to open eight additional warehouse stores in the second quarter, including three new markets Temple, Texas, Huntsville, Alabama, and Grand Rapids, Michigan.
We will also expand our presence in the greater Washington, DC market with an opening in Aspen Hill, Maryland.
Furthermore, we will continue our expansion in Florida by opening two warehouse stores in Orlando and one in Fort Myers.
These openings are part of our goal of opening 32% to 35 warehouse stores in 2023.
As discussed in the last earnings call. Most of our 2023, new warehouse store openings are expected to be in existing markets and weighted to the second half of the year.
We have considered potential construction delays by waiting the openings to the second half of 2023.
Looking beyond 2023, we expect construction delays to ease and anticipate a more balanced quarterly store opening cadence that will lead to more warehouse store operating weeks.
Turning to our pro business, our fiscal 2023 first quarter total cells to pros increased 19, 1% and accounted for 42, 1% of ourselves and increase of 385 basis points from last year.
Total comparable store sales increased six 9% from last year, driven by a six 1% growth in average ticket and a 7% increase in transactions. We continue to grow our pro context and are excited about refinements, we are making in our customer relationship management or CRM dashboard tools that will further allow us to optimize and enhance our lead.
Capabilities and drive engagement.
We are pleased our pros continue demonstrating a strong appreciation for the value of our industry, leading pro Premier loyalty program or PPR as first quarter redemptions grew 95% from last year, we seek to build sticky relationships and lifetime value with pros through education and training about flooring products installation and design solutions.
We aim to be the premier destination destination for pro education by expanding our industry partnerships in the first quarter of 2023, we hosted 27 educational workshops training over 680 pros for the year, we have 121 pro educational workshop events planned.
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These investments are working as those trained pros in the first quarter significantly increased their spending with us from last year.
Turning to our E Commerce business, our fiscal 2023 first quarter E. Commerce sales increased 10, 2% from last year and accounted for 18% of our sales compared with 17, 7% in the previous year.
In 2023, our E. Commerce team is focused on executing strategies aimed at optimizing our customers' digital experience towards further improving conversion.
Proving our price filtering experience and are executing a stronger value message on our website to reflect the current economic challenges. Moreover.
Moreover, we have added new low price banners to certain skus that further express our unbeatable prices and unmatched selection reinforcing our value proposition.
We continue to be focused on current trends, adding inspirational and user generated content and expanding into new categories by recently, extending our outdoor category with put options.
We are emphasizing accelerating our web page load speeds, improving web page load speed has several benefits, including better user experiences higher engagement lower bounce rates higher customer satisfaction scores better search rankings and an improved mobile experience.
Moving on to our design services, we aim to continue strengthening our competitive moat through a well executed in store and developing in home design services offerings.
And first quarter 2023 design sales increased substantially from last year. We now have over 930 designers working in our stores with plans to have over 1000 designers by the end of the year.
As discussed in prior calls, we see higher customer service scores average tickets basket selling insulation materials adjacent category sales and gross margins. When are involved in 2023, we are focused on improving and measuring designer productivity by leveraging our CRM tools systems technology and follow a process is to elevate the <unk>.
<unk> experience further to maximize conversion.
Moving to our commercial flooring business, which includes Spartan surfaces, and our regional account managers or Rams, which work with our stores. We continue to be pleased with our sales and earnings growth at Spartan services and our Rams. We believe the strong first quarter and trailing 12 month sales and earning results further affirmed that our strategy to grow our commercial market share.
There are working.
Farms' fiscal 2023 first quarter sales increased by 31, 7% from the first quarter of 2022, and EBIT increased by 73, 5%, primarily due to better than expected increases in the gross margin rate. We are encouraged about the remainder of 2023 of Spartans new quoted project trends.
A key leading indicator shows consistent growth. Additionally, we are excited about continuing our rapid growth of our organic and inorganic repetitions across the United States towards achieving a national footprint. We ended the first quarter of fiscal 2023 with approximately 65 Spartan reps.
We are particularly pleased with the commercial order productivity of our more mature reps and our acquired Rep groups are outperforming our pro forma.
<unk> fiscal 2023 first quarter sales meaningfully exceeded our expectations, increasing 70% from the first quarter of 2022. We ended the first quarter of fiscal 2023 with approximately 50 Rams as discussed in prior earnings calls we remain excited about the commercial market opportunity 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 we have the right teams strategies and an agile business model, which we believe will allow us to continue to successfully navigate the challenging macroeconomic environment.
I will now turn the call over to Brian to discuss our fiscal 2023 first quarter financial results in more detail and share our outlook for the remainder of the year.
Thank you, Tom and Trevor our first quarter financial performance performance is once again, a testament to the strength of our business model. Despite the significant year over year declines in existing home sales and the adverse impact on our business, we were able to effectively manage our profitability by successfully executing our gross margin rate recapture plans.
And manage our expenses as efficiently as a result, we deliver 2023 first quarter diluted earnings per share of <unk> 66.
In line with our expectations and flat to 2022, let.
Let me now turn my discussion to some changes among the significant line items in our first quarter income statement balance sheet and statement of cash flows.
Then I will discuss our outlook for the remainder of the year.
We are pleased that our fiscal 2023 first quarter gross margin rate increased 210 basis points to 41, 8% primarily from our decision to raise retail prices last year to offset higher supply chain and product costs.
These results increase our confidence in achieving our 2023 gross margin exit rate target of 42%. As a reminder, we are now able to selectively lower retail prices, while simultaneously recapturing gross margin rate as lower supply chain costs move through our income statement in fiscal 2023.
We expect this to result in a substantial year over year increase in gross margin rate in fiscal 2023 with most of the expansion in the first half of fiscal 2023.
Our fiscal 2023 first quarter, selling and store operating expenses increased to $303 7 million or 21, 7% from the same period last year.
As a percentage of sales selling and store operating expenses increased 280 basis points to 27, 1% compared to last year in line with our expectations.
The cost increase was primarily attributable to 28 additional warehouse stores operating since March 31, 2022 ways.
Wage rate increases.
Credit card transaction processing fees and deleverage in occupancy and other fixed cost, resulting from three 3% decline in comparable store sales.
We expect our annual selling and store operating expenses to approximate 27% of sales.
<unk> from our prior guidance.
Our fiscal 2023 first quarter general and administrative expenses increased to $61 9 million or 13, 3% from the same period last year.
The increase is due to investments we are making to support our store growth, including increased store support staff.
Depreciation related to technology and other store support center investments and operating expenses related to our <unk> subsidiary.
As a percentage of sales general and administrative expenses increased 20 basis points to five 5% from five 3% last year, primarily from deleverage caused by lower year over year comparable store sales.
Pre opening expenses of eight zero million decreased 19, 3% from the same period last year. The decrease is primarily the result of fewer new store openings compared to the prior year period.
First quarter net interest expense increased to $4 9 million from $1 2 million in the same period last year. The $3 7 million increase 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 partially offset by increases in <unk>.
<unk> interest.
Income tax expense was $19 1 million compared to $21 9 million in the same period last year.
Our first quarter effective tax rate declined 250 basis points to 21, 1% from 23, 6% in the same period last year. The decrease in the effective tax rate was primarily due to year over year increases in excess tax benefits related to stock based compensation awards excluding.
Excluding the impact of excess tax benefits, our first quarter tax rate was approximately 24, 6% compared to 24, 4% in the same period last year.
Let me now turn my comments to our profitability, our first quarter net income increased <unk>, 8% to $71 5 million and diluted earnings per share of <unk> 66 was flat compared to last year and in line with our expectations.
We ended the first quarter with $107 7 million diluted weighted average shares outstanding compared with $107 5 million last year.
Our adjusted EBITDA increased 10, 2% to $149 6 million from the same period last year, our first quarter adjusted EBITDA margin increased to 13, 3% from 13, 2% last year, a complete reconciliation of net income to adjusted EBITDA can be found in today's earnings press release.
Moving onto our balance sheet and cash flow.
We are pleased that our first quarter total inventory decreased eight 6% from December 2022 to $1 2 billion in line with our expectations.
The decline in total inventory and other working capital initiatives enabled us to report first quarter cash flow from operations of $250 3 million, a $253 6 million positive swing in year over year operating cash flow.
We expect working capital improvement for the full year as we anticipate inventory to grow at a slower rate than sales and from the benefit of expanded Aps. We ended the first quarter with $665 2 million of unrestricted liquidity consisting of $5 million in cash and cash equivalents and $660 2 million of available.
<unk> for borrowing under the ABL facility.
Let me turn my comments to how we are thinking about the macroeconomic environment and the remainder of 2023.
The long term secular trends that underpin growth in home improvement spending and our 500 store opportunity in the U S remain as relevant as ever we are pleased to be able to make investments even during a declining housing cycle to extend our competitive moat with the intent of growing our market share and being even stronger at the helm.
As the cycle turns.
The well established factor supporting long term home improvement spending include a historically low inventory of new and existing homes for sale.
An aging housing stock where over 80% of homes are 20, plus years old and require investment repair and significant home equity.
Are there more as more millennials enter their prime home buying years, we are well positioned to capitalize on this growing market.
In the short run the Federal reserve continues to be on a path expeditiously raising interest rates.
<unk> balance sheet, and tightening financial conditions to bring on inflation under control to fulfill its price stability goal.
The effect of these policy changes has led to significant declines in year over year existing home sales.
Moderating home price appreciation and home and home equity values and slowing growth in spending that is outside of our control.
That said, we are encouraged by moderating year over year declines in existing home sales that emerged in February and March but we recognize that two months is not a trend and there remain headwinds as we move through the remainder of the year.
These headwinds into consideration and their potential impact on our business. We continue to expect our annual 2023 comparable store sales growth to be within the range of flat to down 3% and diluted earnings per share to be in the range of $2 55 to $2 85.
Unchanged from our prior guidance.
However, achieving the high end of this sales and earnings range could be more challenging from further pressure on existing home sales are deeper than expected economic recession or a prolonged shift in spending from durable to services that further slows demand. It is still early in the year, but we want to be prudent and assessing potential sales and earnings outcomes.
In fiscal 2023.
As a reminder, the earnings flow through impact from a one percentage point change in comparable store sales approximate <unk> 10 per share for the full year and approximately eight for each comp point for the remaining three quarters of the year. Let me provide some additional context about how we were thinking about the remainder of the year.
We expect our fiscal 2023 second quarter comparable store sales to sequentially decline into potentially represent the largest decline of the year before returning to growth in the fourth quarter of fiscal 2023.
Currently we expect second quarter earnings to represent trough earnings and to be slightly lower than the first quarter for sequentially improving in the second half of the year.
Primarily in the fourth quarter.
Our expectations contemplate continued declines in comparable store transactions.
In the first half of 2023 before returning to growth in the second half of the year, primarily in the fourth quarter.
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.
The strategic price reductions, we are making to improve our transactions and global market share and contracting industry is expected to lead to a slight decline in our average ticket in the second half of the year. So.
So we believe we'll improve our transaction trends as we move through the year, Let me now turn the call back to Tom.
Thanks, Brian .
In closing, we believe our ability to continue to make strategic investments in a year marked by a contraction in the industry growth will enable us to accelerate our market share in 2023 and beyond particularly among pros as a reminder, we increased our market share by 200 basis points to approximately 10% in <unk>.
2022.
And we are thrilled that the early first quarter 2023 market share data points to another strong year.
We expect 2023 could be particularly difficult for independents to manage pricing inventory and marketing during a contracting sales period, when compared to our large or larger scale direct sourcing business model.
We remain committed to investing in our associates opening 32 to 35, new warehouse format stores remodeling existing stores and enhancing our technology and e-commerce platform to improve the customer experience, while 2023 will be a challenging year. We are intent on further widening our competitive.
Pettitte moat, managing our profitability and laying the foundation for accelerated earnings growth into 2024 and beyond.
In closing we owe.
Our success to our associates' hard work and dedication who serve our customers with excellence every day operator, we would now like to take questions.
Thank you. Thank you very much that we will now be conducting a question and answer session.
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The first question comes from Steven Zaccone of Citi.
Simeon Thanks for taking my question.
Brian I wanted to follow up on the same store sales guidance for the balance of the year. Thanks for the detail on the cadence, but specifically on the second quarter. When you say the largest decline should we assume this quarter to date trend kind of holds and youll probably be enough down mid single digit range and then if that's the case, how do you see the building blocks.
To achieve the high end of the full year range, just seems to have been a pretty big acceleration in the back half. So how do we think through that.
Yes, no. Thanks for the question look I think you kind of note a little bit there. So as we think about Q2 will be down I think the way that we don't really get the quarterly guidance, but we said that that will be the largest decline. We do think it should get slightly better from where it is today as you think about it and then as we think about the second half we will expect sequential improvement with growth in the fourth quarter.
<unk>, obviously to achieve the high end you'd have to have a decent amount of growth in the fourth quarter to offset the 33 that we had in Q1, where we are today should see slight improvement from there, but then as it grows throughout the fourth fourth quarter, but there are a couple of things there transactions are in line with that the transactions are expected to be in the high single digit negative for the first half and then sequentially improve.
The growth in the fourth quarter as well so theres a couple of reasons why one where against easier compares so remember Q2, and Q3 were high single digit declines in 'twenty.
<unk> 2022, and in Q4 was down 10, 4%. So part of the story is what we're lapping against we also expect transaction improvements from the pricing actions that we've taken and then third we also expect sequential improvement in existing home sales throughout the year as seen in both February and March there up from that trough of 4 million units. So we think as that continues to.
Improved throughout the year, so just thinking about the assumptions the assumptions embedded within our plan, we've got existing home sales sequentially improving from a lower mortgage rates off a peak of 7% in October of 2022, which as I. Just mentioned you were encouraged by what we've seen in February and March and the improvement in existing home sales.
Great. That's helpful. And then I mean, just to follow up on the April deceleration is it doesn't seem that big from March, but it's still a step down I think people are trying to grapple with how much is.
Weather and other data points out there on the consumer is there anything you're seeing in the month of April .
A notable change in trend, while there its pro or DIY or just traffic trends be it would be helpful to get some color.
This is Tom I'll start and if Trevor Burns I want to add feel free.
The only thing with April .
A little bit tricky is Easter fell in April spring break was in April and as we've experienced coming out of Covid holiday weeks.
Had lot more traveling a lot where consumers spend going to leisure and entertainment.
Then before so I think thats part of April we've seen a little bit of the improvement in the month of May so.
We're encouraged by that but I think more than anything whether it doesn't impact us all that much. It may ship business, a little bit there was some adverse weather, but I believe it ties much more into how the consumer spent their time and their money during the month of April .
Okay. Thanks for all the detail.
Okay.
Thank you. The next question comes from Zach <unk> of Wells Fargo.
Hey, good afternoon could you talk to the performance of your mature store comps in the quarter relative to the newer stores in the comp base and maybe help US bridge the gap between the two along with the impact of cannibalization to get to your down three comp and is there any reason to believe that the new.
Store maturity curve.
For the newer stores in the comp base could change in this tougher backdrop.
So I'll answer the last part first thing.
I don't think its going to change the actual curve itself I think what youre doing is youre, starting with just a little bit more of a base is the way I would think about the new stores, but we are still seeing we're seeing significant growth in those the same way. We have we started 6% productivity and work our way up through the first five years kind of getting to the mature base and then after three three I don't think theres any disproportionate amount.
GAAP between what we've seen historically from the mature performance versus our kind of new store ramp up there I think cannibalization was slightly higher we never really give that number but it was just slightly higher than Q1, just due to the 13 stores that we opened in Q4. So I do think you saw a little bit more of an impact there, but nothing really to call out.
Okay and then the additional color you provided on the comp and EPS cadence from Q2 to Q4 could you talk about specifically what you're seeing in the business for the macro today to suggest that Q2 will will be the trough and then.
Given that you didn't provide the cadence initially could you talk about what's changed here versus your initial expectations provided a quarter ago.
Yes, I mean look we were in line in Q1, so I don't know that a lot has really changed other than Q2, I mean look as we talked about existing themselves right. That's our highest correlated metric and again, we've seen improvement in February in both March and so we know there is a bit of a lag there and so as we think about the back half gives us a little bit more confidence.
And what we see today.
We're at $4 million and I think it went to $4 seven and back down to four four so both February and March were above kind of that 4 million trough that we saw exiting Q4 and into January . So I think that gives us a little bit more conviction about where we'll be in the back half of that growth that we're expecting to get.
So just where we see it today, we think Q2 will be the trough.
I don't know.
That makes sense that or anything.
All good I appreciate the time.
Sir.
Thank you the next.
Question comes from Simeon Gutman of Morgan Stanley .
Good afternoon, everyone.
The quarter to date stepped down and apologies to harp on this.
It sounded the way Tom described it where transactions if people are taking time off et cetera or are you also seeing a further step down in footage purchase that that's my first question.
Little bit of both so.
So we have seen square footage slow.
From what it's been historically.
So but.
Yes, but it's much more it's much more the foot traffic problem during the month of April but as I said.
April .
Told you, but I think by reasons are around April .
We're seeing some improvement as we get to the month of May.
I think this is Trevor one thing just worth mentioning as we as we forecast the business you do it at a fairly granular level, we take the current trends that we're seeing in the business and then we make an assumption on what's going to happen for the rest of the year as we said we expect existing home sales as we exited the year hopefully get closer to $474 eight maybe $4 nine.
And we think the combination of the fact that we're going up against easier comparisons as well as the macro getting better.
That's going to be the driver I mean, the fed seems like theyre going to be pausing rates most of the banks that we've talked to see mortgage rates getting certainly below 6% some haven't been as low as 5%. So it's a combination of our current trends.
Plus what we're seeing in the macro is what gives us some confidence going up against easier comparisons that our business will continue to accelerate and we're five weeks into the quarter. So that doesn't make the whole year, but we're doing really well against that forecast.
And quick follow up on gross margin.
Pretty close to that 42 already I think it was said it'll be up substantially in the first half.
So if freight comes down it feels like.
Past that 42, Mark I think thats been asked prior.
And then I was maybe a little confused it sounded like youre investing in price, but youre content with gaps or are you actually maintaining price gaps or you're widening them.
Yes. This is Tom I'll I'll go first so yes, we're pleased with our mortgage margin recapture.
We did that we've been accomplishing that while taking price at the same time, so supply chain costs continue to come down our team has done an excellent job.
And managing that or passing some along we like the Optionality I mean, we're going to continue to watch what happens to the elasticity of the Skus as we adjust price.
Monitor that and if we see that thats going to be beneficial to transactions or if we're going to get more square footage than will be a little more aggressive but it is possible that we could keep keep a lot of that margin.
And our margin rates would exit higher than we anticipated.
On your other question, yes, I mean, we watch our pricing versus the competition very closely and we feel great about where our pricing is versus the competition.
Our merchants have done a fantastic job on some of these price reductions being very thoughtful about.
Wherein the assortment, we can make those improvements and it's early but as Tom mentioned the elasticity that we're seeing.
As encouraging so as those supply chain costs continued to come down, which we expect they will.
We'll balance that growth goal of growing the gross margin, but also making strategic investments in price that we think will drive incremental volume.
And it gives us optionality to manage the P&L to the changing complexion through payroll and other things like that.
Margins that lever that we have so it's good to have that optionality.
Thank you. The next question comes from Steven Forbes with Guggenheim Partners.
Good afternoon.
Tom Trevor Brian I wanted to start with homeowner trends I think it was Trevor gave us the breakdown of.
Pro pumps, but you can.
First transaction I was wonder if you could do that for homeowner.
In DIY and then just comment on how you sort of expect the.
Strategic price investments to impact.
<unk> trends within the homeowner.
Yes.
Into the back half here.
So I don't know if we have the homeowner trends at our fingertips, but obviously they are below where the where the pro is.
And then on the the expectation I mean, the pricing, we feel but we invested it in areas that matter, the most and where we're going to have the biggest impact and there are in some of those skus include skus that really matter to the pros. So I think we've been strategic on where we're going to take those price reductions.
I will just reiterate for last time, the earlier reads on elasticity or positive macro event indicated that the two together, both our segmentation or the pro a homeowner. So if we were down three three and we know we were up six 7% and pro you can just literally to the university would be down about 10% roughly on the homeowner side.
The price.
The as we as we look at pricing as we've adjusted it hasn't been all that much but where we have.
It is going to benefit you think the pro it was in our store much more frequently they'll see it and we want them to see it and we think it will benefit.
Yeah.
And then and then maybe just a quick follow up on the pro.
Do you think about awareness I don't know if you can sort of frame for us where awareness sits with the pro in both new and existing markets.
And then the opportunity right to grow the member base. This year, just given the value proposition some of these investments et cetera, maybe.
And maybe comment on if there are any sort of targeted our planned initiatives.
But you have in the pipeline here.
They're really pressing awareness factor.
Yes, I mean, our pro awareness is high I think it's in the 80% for the vast majority of our markets maybe some of the new markets might be a little bit lower than that but we have very good aided brand awareness with our pros.
And our.
Our business well I think we're.
It's a mosaic of things that we're doing to service that pro it starts with great customer service in stores with great assortment that is curated for the market.
It's prices that matter and Skus they care about.
It's a dedicated team to take care of them.
A great loyalty program. We're testing this tiered based program that we're excited about.
Our in stocks are better than they were last year, we see our in stocks continuing to prove even from the good rate right. I mean, I think all those things together working concert that we think will continue to take market share. We also have great CRM tools that allow us to follow up with those pros.
I'll speak to just a couple of.
Things that we're doing to increase awareness as well or this should help awareness.
<unk> recently, we put in a feature where our stores when when someone comes in and works with the designer.
And we don't know the pro.
The pro is not in our system now our teams can follow up we werent capturing that information historically.
Same thing goes if a pro picks up product and they are not in our database. We now can contact them, that's new relatively new we've had it for a little bit of time, but that should help us get to pros, who may not be familiar with us too.
We're back out on the street after Covid, our protein statements storm, while we were trying to keep up with the business and now we have the ability to get back out and go find new pros in the stores and our stores are out doing that pounding the pavement and then third and it was mentioned in the it's been mentioned in our in our scripts over the last few scripts, we're doing an excellent job.
Getting president and doing training across.
Whether it's our vendors our TCA, we're doing classes and we are impacting more pros all of those things should help continue to build our brand awareness.
Thank you. The next question comes from Michael Lasser of UBS.
Good evening. Thanks, a lot for taking my question Tom techniques are arguing.
Nucor has assumed in this guidance that trends are going to get better based on the macro in comparison and havent factored in the prospect of a recession that could not only impact consumer spending, but also the prospect of the ability for the consumer.
Buy a home, which in turn would negative.
<unk> negatively impact housing turnover and that's going to cause downside risks to not only this year, but also next year from farm to Corp.
Why is that wrong.
I mean I think we.
We believe that as existing home sales turn positive towards the end of the year.
We'll see benefit from that historically, we've got a great correlation with existing home sales.
We think that number.
As we said on our previous two calls we don't believe that number goes below $4 million of that number stays will start having an increase as we get to the back half of the year.
We're taking share Michael at a really good rate.
Our indications are that.
In this market that's contracting we're taking share quicker this year than we did last year.
So I think from a share perspective.
Existing home sales turning positive.
Those things will benefit us.
Yes, I mean, Michael if you think about it is 19 months of year over year declines that we've had in existing home sales I mean at some point Thats got to it's got to come out again, we have our house view, we've kind of given you guys out as well that every comp points worth 10 cents of EPS.
We believe our categories <unk> been in a recession is there I guess that so as we get to where things get positive towards back half of the year, we think that gives a little bit better.
Okay.
Follow up question is how much E ink.
Independents and other players in the industry have already reduced price and how much do you think they will reduce price in the event that demand dropped further.
Yes. This is Trevor I mean, we are fortunate we have merchants to live in all of our 12 regions 13 regions, but we do detailed price shops every week and as we said earlier when we look at our pricing not just against our larger competitors.
But even our smaller competitors, we think our price gaps are at or as good as they've ever been.
They have taken a look it's we have seen price come down others are passing on supply chain savings as well, but as Trevor said earlier, we're confident in our spread versus them, we're not seeing irrational behavior within the marketplace.
So we felt we feel good about.
That part of the boat.
And I think most everybody prognosis with maybe just in case there is new people on the phone when you look at our pricing versus the independents demonstrably below we're not talking five or 10% in many cases it could be.
2030, somebody who just 50% a 100% below.
Are there price might be 100% above ours, and so even if they were to lower their prices more than we are which we haven't seen our prices are so much below the independents that we.
Don't think that that's going to put pressure on us.
Thank you, ladies and gentlemen in the interest of time and the length of the question queue.
Please limit yourself to one question.
Thank you. The next question comes from Chuck Grom with Gordon Haskett.
Procured as timing there so I'll try to sneak in.
I'm wondering if you could share transactions by month during the quarter for us and also quarter to date and then what.
If there was any performance differences by region, particularly in some of these.
Parts of the country warehousing is seen more price compression over the past several months.
I'll take the first part by Brian looking at the transaction part up so we're seeing more pressure in the west.
Where the housing challenges the more significant we're seeing those same challenges I think the good news for US is were less mature in the west.
We've got good density in the west, but the stores tend to be a little bit younger so theres still gaining awareness and gaining market share. So hopefully that helps offset a little bit of that softness, but there's definitely been a change in trajectory in the west over the last six months.
Thinking about the trend so the quarter was 99 down negative transaction comp was $8 seven down in January 2008 down in February and 10, one down in March so really didn't deviate that much kind of as we move throughout so to Tom's point. The average ticket change was due to us lapping higher retail from last year as well as square footage being down just a little bit.
Our transactions.
Thank you.
<unk> comes from Karen short with credit Suisse.
Hey, thanks very much.
A quick couple of quick questions.
With respect to propose I think you made a comment that you thought.
<unk>.
Okay.
So I wanted to clarify that and then the second question I just had it.
I think you talked about in prior quarter.
<unk>.
Oddity prices kind of come down year, more likely to actually bring down prices.
Seems like that's maybe not one year from today, So I just wanted to clarify that.
Yeah, I'll take a stab at that and then Tom and Brian can weigh in as well.
On the pros, yes, I think we are seeing backlog sort of revert back to the mean they were so high in <unk> and so strong for such a long period of time. After we bought opened up in the second half of 2020.
This is a bit of a generalized statement, but generally if you want a protocol to your house to do a measurement of your quote you can have been there within a week and then theyre going to have that quote assuming you agree to them once you agree with them.
After that you can.
You can have that installed we spent a lot of time with a substantial amount of our pros.
In total, we probably talked too close to a 1000 of our pros over the last over the last.
Several months and what they are telling us is they're busy they've got plenty of remodels are doing construction. They are taking on new kinds of work.
Biggest piece of the business that has slowed and it makes sense. When you look at existing home sales being down 2025, 30% is the house Flipper piece, that's the big piece of the pro business that I think has slowed as just not as many house flipping of items going on.
And on the pricing front.
I would say again as we said a couple of times within our prices are as good as they've been versus the competition, we have lowered prices this year.
And we have seen competition lower prices this year, but I think we've been.
Thoughtful and maintaining or in some cases, improving our prices versus our competition and we have lowered prices.
Thank you. The next question comes from Seth Sigman of Barclays.
Hey, guys I wanted to focus a little bit on SG&A, specifically store Opex, which I think was up about 3% per average store.
I'm pretty sure that's above what you had implied in the full year guidance is there anything one off or timing related that we should be thinking about.
And just.
How should we build that out through the rest of the year. If I recall you had also planned for lower volume in your expense outlook. So just how do we think about the levers if comps do stay at this level.
Yes. This is Brian I'll go ahead and take that so we came in at 27, 1% of sales I think we guided to 27% for the year and so as you think about that going across it.
Going to be 27, our expectations, 27% for the year and pretty steady kind of throughout each quarter. So that's the way that I can help you kind of model that.
And that's why we guided to.
And on a per store basis, just to kind of clarify that as well so versus last year. It is up just slightly and majority of that is due to depreciation.
Thank you. The next question comes from Kate Mcshane of Goldman Sachs.
Hi, good afternoon. Thanks for taking our question I Wonder if you could dimensionalize a share gain you are seeing any further I know you mentioned you expect accelerating chances here, Tom but what are you comparing account I just would imagine that things are from a competitive standpoint, given the supply chain challenges in inventory disruption.
Thirdly, some good share gain taken last year, but just.
Just how should what should we assume for share gains this year versus what you saw in 2022.
Ben I'll start modestly better.
I think we're taking a good.
Good amount of share I think the independents.
Have a difficult time navigating in this environment I think people are looking for value. We are the low cost leader our prices are the best and I think that's bringing people that are doing flooring jobs into our stores. So I just think because of the nature of this macro environment that our ability to take share versus independents is pretty significant.
Second and its what were kind of what we're seeing.
If you'd look.
Mark did their call and Mark talked about North American sales were North American sales were down a little over 11%.
We'll call them other some soft surface of that so it's not all hard surface, but our total sales were up 9% in the quarter.
And if you look at our market share versus the growth in the industry. When you look at our market insights and some of the other people that provide that.
On the market growing at the same rate. We are in we had one of the largest credit card issuers at least for their business, which they own a substantial portion of the U S credit card business show that since 2020, we'd had over 500 basis points of market share gain relative to what they saw from their other people buying from specialty flooring as well so the three ways we.
And related shows in all cases, we're gaining market share in this environment.
Thank you. The next question comes from Jonathan Matuszewski of G.
Jefferies.
Yes.
Great. Good afternoon. Thanks for taking my question the trade up to better and best Skus has been helping gross margin for a while now it sounds like that continued Q1is this dynamic anticipated to continue as we move throughout the year and basically is is this.
Dynamic factored into the gross margin guidance. Thanks, so much.
Hi, This is Sam.
Better and best penetration climate, and continuing to improve year over year end.
We see them, even when the NPD retail reductions we took the approach of the balanced portfolio approach. So that we can have a better shopping experience for our customers at this point. So you see the trend going into beta embraces the continent, I think I think when if a consumer is going to do the job in their home.
They're going to buy what they want so.
Less consumers are coming in and opting to buy but I think if they're doing the job they're going to buy what they want and that they tend to gravitate towards the better and best our merchants have done an outstanding job continuing to go we never stopped doing product line reviews, we never stop bringing in new products that we're planning for the long game. This is this is a moment in time. This is a difficult macro but we know on the.
The other side of this we'll be ready for it so.
I expect those trends to continue.
And that should continue to help margins and thats into our assumptions.
Thank you. The next question comes from Justin Kleber of Bad.
Yes. Good afternoon, everyone. Thanks for taking the question just another follow up here on the price reductions.
How much have you rolled back prices and it wasn't clear to me are you already seeing customers respond to lower prices or are you just expecting that to happen.
Because I think you said Tom that transactions decelerated in April from the March rate. So just want some clarification there. Thank you.
Transactions were flat in April .
So in line with our expectations, it's too early to understand the elasticity and the price changes we've taken.
If you go into the stores Youll see theyre signing in the stores, where we've taken the prices down.
And our expectation as I mentioned on the previous call I mean part of it is we want a standard low cost leader, we took price for the first time since I've been here, we took price of supply chain costs were coming down we felt that.
Need to pass some of that back to our to our professional customers and supply chain costs have gone the other way too.
They are partners and we want to be their partners in the long run. So we felt it was prudent it's too early to tell the benefits of it.
We've maintained our spread while taking the prices.
Down, but as I said earlier, we're going to watch elasticity and we'll be thoughtful in what we pass along for the remainder of the year.
Thank you. The next question comes from Seth Basham of can we push securities.
Hi, This is Nathan Friedman on for SaaS, Thanks for taking our questions and I'll try to squeeze two in here.
First as you start to reduce some of your freight vendor contracts should we be contemplating some gross margin benefits now that freight costs have come down significantly or is this not as material as the benefit Time's passed and then secondly, it may not be as large of an issue as it was in the past given some navigation out of Asia, but we've read about regulatory changes regarding.
Imports from Asia being interrupted with the U S requiring proof of supply chain compliance as part of a forced labor Protection Act. So my question. There is just curious if you. If there is any impact you're seeing that we should be contemplating or considering or if this is further helping some share gains as others struggle. Thank you very much.
So our.
Try to answer both of those for you real quick this Brian .
From a cost perspective, just keep in mind that warrant a weighted average costing system. So all of that favorable supply chain impact that we've gotten from a cash basis or from a contract basis in Q4 and early here in Q1 will bleed in throughout the year for those have been contemplated kind of throughout the year and Thats part of what allows us to have the optionality to give some of that back to our consumers.
If that is contemplated in there and we do expect to continue to receive savings throughout the year with that and as far as your second question for the weaker compliance up to date there have been no action that have impacted our business and so just to expand a little bit we're focused on working with our suppliers to prevent disruptions by continuing to map their supply chains monitor there.
Material sourcing and being prepared to respond to U S customs, if and when needed.
Thank you. The next question comes from Chris <unk> of Jpmorgan.
Thanks, Good evening guys.
My only question is as you think about the average footage increase that you've seen maybe since 2019. How did you think about that in terms of laying that lay in the guidance out.
We went back down to more of a pre COVID-19 size average project, what would that represent from a from a comp headwind perspective.
Yeah.
I'm not sure.
We're looking at each other Chris that's a really good question.
To understand I think that our average square foot pre COVID-19 was probably better than it is today.
Front of me, but I would say this is a pre tax was up slightly but I wouldn't say that it's materially different Chris the way that I would say that.
It is down slightly as we talked about our square foot per transaction is a little bit less but it's tough when you thing about projects because they come in two times three four times, where do they come in once and kind of bundle that together so square foot for US we tend to look at it on a project basis as well as on a per transaction and so let's say on a project basis. It is down a little bit from pre COVID-19, but but I wouldn't say that it's.
Early life.
Theres other complexities in that to our pro business is probably 30% of ourselves back then and now it's over 40% pro tendering at our design business was much less.
Materials and it is now we know one of our designers are involved the project size goes up as well so just as a friend.
Very different business now than it was back then.
Thank you. Your final question comes from the line of Liz Suzuki of Bank of America.
Great. Thank you for squeezing me in.
Just had a question about the inventory you mentioned that it was down in the quarter in the fourth quarter and just wondering what that looked like in the units and whether there was some intentional destocking there based on what youre seeing in demand.
Yes, I mean look units were down.
From year end, because you're a demo from December 2020 were down eight 6%. So yes, I mean, some of that with us putting some pressure on orders just getting it in line, but you will see that grow year over year as we exit the year, it's just going to grow at a slower rate modestly slower rate than you will for sale, but there were units down I mean that was I would just say that our but our in stocks are there any thoughts of that are in stock.
Our in stocks are terrific and there are a lot better than the Oreo.
And most of our stores are going to open in the back half of 65% are opening in the back half and Thats part of the inventory build as well as as we get into the back half and as we open more stores early in 2024, youre going to see some of that buildup.
So I appreciate everyone joining the call.
Thanks for your for your questions and we look forward to updating you.
Next quarter. Thank you.
Goodbye.
Thank you Sir.
Ladies and gentlemen that does conclude today's teleconference. Thank you for attending and even now disconnect your lines.
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