Q2 2023 Floor & Decor Holdings Inc Earnings Call
Good afternoon, and welcome to the Florida Court Holdings incorporated second quarter 2023 conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded at this time I would like.
The hand, the call to Wayne Hood, Vice President of Investor Relations. Thank you you may begin. Thank you operator, and good afternoon, everyone. Welcome to floor <unk> decor is fiscal 2023 second 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 meeting of the <unk>.
<unk> Securities Litigation Reform Act of 1095 and are subject to risks and uncertainties any statement that refers to expectations projections or other characterizations of future events, including financial projections.
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.
Disclosures enable investors to understand better our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our Investor Relations website at IR.
<unk> 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 2023 second quarter earnings Conference call. During today's call Trevor and I will discuss some of our fiscal 2023 second quarter highlights and Brian will provide a more in depth review of our second quarter financial performance and share our thoughts about our projections for the rig.
<unk> of fiscal 2023.
Let me start by saying how pleased we are that amidst the economic challenges of rising mortgage rates and near record low existing home sales. We delivered fiscal 2023 second quarter diluted earnings per share of <unk>, 66, which exceeded our expectations.
These financial results reflect our team's intense focus on what we can control during this challenging period.
We are executing our growth and customer service strategies at an elevated level investing in new and existing stores and effectively managing our profitability when sales are modestly below our expectations.
There have now been 22 consecutive months of year over year declines in existing home sales from rising mortgage rates, which continues to create intermediate term headwinds to our sales growth.
Notwithstanding these headwinds we continued to deliver on our growth plans by opening nine new warehouse stores in the second quarter, including our 200 store opening in <unk>, Louisiana. We are proud that our growth led us to open a new England region, which creates exciting promotional opportunities for our field organization.
Moreover, we are fortunate that the strength of our balance sheet and cash flows allows us to continue to invest in our existing stores and drive inspiration and newness at a time when the industry is contracted.
In the second quarter of fiscal 2023, we executed 49 design center refreshes, including 34 exciting new XL slab and yes, 153 decorative accessory resets and by the end of 2023, we expect that all stores will have an updated would inspiration center.
When industry demand turns we believe these investments will position us for accelerated market share growth. We continue to successfully execute our plans to strategically reduce retail prices on specific skus, while at the same time growing our gross margin rates sequentially and year over year.
Our product price gaps are as strong as ever and unlike items they sequentially widened during the second quarter.
Moreover, we have been successfully diversifying our product sourcing away from China in 2022, our products sourced from China declined to approximately 29% of sales from 50% in 2018, and we see a path.
To further reduce this percentage meaningfully over time.
Through our agile diversification strategies, we have demonstrated that we can reduce our product costs drive product innovation and newness achieved optimal economies of scale and lower our geopolitical risks from tariffs and more recently you F. L. P enforcement efforts turning to commercial not.
Only are we pleased with the emerging organic growth at Spartan surfaces, but we were able to build on their successes by acquiring sales master floor solutions in June as we look forward, we expect existing home sales to be more challenging than we previously contemplated and customers to increasingly prioritized value and savings seeking out.
Those retailers that best meet these needs. We believe we are well positioned to navigate a longer duration of weak existing home sales headwinds and grow our market share even as the flooring industry contracts in 2023, let.
Let me now turn the call over to Trevor to discuss our second quarter sales and growth pillars.
Thanks, Tom.
We're incredibly pleased with how our stores are executing strategies to grow our market share. During this challenging period, we're focused on driving top line sales growth in the second half of 2023 through new product introductions compelling bulk out price displays at the front of our stores basket selling open quote conversion select SKU price reductions.
And engagement and loyalty strategies, particularly amongst our top pros.
We will continue emphasizing our everyday low prices on a broad assortment of top quality and trim board products are in stock job lot quantities and in store and online customer experience.
We're pleased our second quarter customer service scores remain at all time highs.
At the same time, we are protecting our profitability by flexing payroll hours to align with transactions improving operational efficiencies across the organization optimizing our media mix and advertising spend for the most effective return and moderating discretionary spending let.
Let me turn my comments to fiscal 2023 second quarter sales.
Total sales increased four 2% to $1 billion $100 million from last year and comparable store sales declined 6%, which was modestly below our expectations.
Comparable store sales fell six 6% in April five 5% in May and 6% in June .
From a regional perspective, I'd like to first quarter sales in our Western Division remain the weakest.
Our fiscal 2023 third quarter to date.
Parable store sales are down eight 4%, which is reflected in our updated earnings guidance provided in today's press release.
Turning to our fiscal 2023 second quarter transaction and average ticket performance comparable store transactions declined seven 1% from last year, which was modestly below our expectations, but an improvement from the nine 9% decline in the first quarter and a 10, 4% decline in the fourth quarter of fiscal 2022, our second quarter average ticket growth of one.
One 1% sequentially decelerated from seven 3% in the first quarter and 14, 4% in the fourth quarter of 2022.
Sequential decelerating growth in our average ticket is mainly due to retail increases last year that we are now starting to anniversary at a more meaningful way as well as customers purchasing less square footage and our strategic decision to selectively lower retail prices on specific skus.
Overall homeowners and pros are engaging and fewer projects and are undertaking smaller scale flooring projects and are very intentional in their purchase decisions.
For example, they are choosing a single bathroom project, rather than a bathroom and a kitchen project or a full room project rather than a fiber and project. Additionally, the cost of financing projects has risen due to the increase in interest rates fewer subsidized financing programs and tighter lending standards collectively we believe these factors are contributing to us selling less.
Our footage when compared with last year.
When the consumers are considering a flooring project, we continue to see an ongoing customer preferences towards our better and best price points products.
Where we offer industry, leading innovation trends and styles of everyday low prices. Indeed, we are excited about the new skus landing in our stores in the second half of the year.
Sequentially, we believe we can grow our market share even while the industry is contracted I will.
Now I'll discuss our new store pillar of growth in the second quarter of fiscal 2020 through we opened nine new warehouse format stores towards our goal of opening 32 warehouse format stores for the year among the nine new warehouse store openings three opened in each month of the quarter with one opening on the last day of the quarter.
We celebrated a milestone and our compelling growth story in early may by completing our 200th warehouse store opening in <unk>, Louisiana.
I want to take a moment to recognize all of the people that made this possible.
Each year I believe we get better at opening new stores and they are better than the previous class and I'm excited about the new stores, we have in the pipeline to open towards achieving our 500 U S store potential.
We have a busy 11, new warehouse store opening plan for the third quarter of fiscal 2023, including a record setting monthly store opening plan of nine new stores in the month of September .
Moreover, we are excited about our plan to open four new stores in new markets in the third quarter, including Buffalo Rochester in Albany, New York and Minneapolis, Minnesota.
Among the 32 warehouse format stores, we intend to open in fiscal 2023, 59% will be in existing and 41% in new markets. As a reminder, we consider any market where our stores have been opened less than three years to be a new market.
Looking beyond 2023, we expect construction delays to ease and anticipate a more balanced quarterly store opening cadence, which will lead to more warehouse store operating weeks.
Turning to our pro business, our fiscal 2023 second quarter total sales to pros increased by eight 3% and accounted for 43% of solar cells.
Comparable store sales declined one 1% from last year, driven by a decline in transactions, while second quarter comparable store sales to pros declined slightly from last year. We are pleased with our engagement metrics were our top pros continue to spend more with us compared with last year, resulting in a growing wallet share. Furthermore, we are pleased that our pros continue derma.
Trading a strong appreciation for the value of our industry, leading pro Premier rewards loyalty program over 80% of our pro sales are from PPR members and second quarter PPR points redeemed increased by 73% from last year, we continue to grow our pro context and are excited about the refinements, we are making in our customer relationship management or CRM dashboard.
Tools, which will which will further allow us to optimize and enhance our lead capabilities and drive engagement.
We also build sticky relationships and lifetime value with pros through education and training about flooring products installation and design solutions.
As discussed in prior earnings call, we aim to be the premier destination for our pro education by expanding our industry partnerships in the second quarter of 2023, we hope to 'twenty seven educational workshops training over 500 grows we have 121 pro educational workshop events planned for the year compared to <unk> 71 in 2022.
We believe these investments are working as those trained process have significantly increased their spending with us from last year.
Turning to our E Commerce business our E. Commerce team continues to focus on executing strategies to drive track it traffic and optimizing our customers' digital experience.
In the second quarter, we drove 20 million clicks to our website.
Our fiscal 2023 second quarter E. Commerce sales increased 12, 6% from last year and accounted for 19, 1% of ourselves compared to 17, 5% in the previous year and 18% in the first quarter of 2023.
Importantly, our digital and physical assets are working together, 79% of customers who purchased in stores that have been to our website importantly about 80% of our online sales are picked up in store.
From a merchandising perspective, we continue to be focused on current trends, adding inspirational and user generated content and expanding into new categories.
Moving onto our design services, we believe our design services strategy are working we're driving an elevated level of service versus our competition from trained designers capable of managing any size project with any customer.
We are now have we now have about five designers per store, which gives us coverage for all days and hours of business. We have equipped designers with hardware and design software, which allows us to give customers a better and more consistent experience. Our in home design test is now in six markets and we are pleased with the results.
In home design allows us to work with the project space, including reviewing samples taking measurements and defining the customer style.
This experience also allows us to produce better visualization tools to help customers make the buying decision in the second quarter of 2023, our design sales penetration increased 335 basis points from last year. We now have about 930 designers working in our stores with plans to have over 1000 designers by the end of the year.
Moving onto commercial flooring business.
Foreign services reported another strong quarter further reaffirming that our strategies to grow our commercial market share are working smart.
<unk> fiscal 2023 second quarter total sales increased by 45% from last year. We are pleased that Spartans gross margin and EBITDA margin rate continues to be better than expected, which was partially offset by transaction costs from cells master in the quarter.
We are equally pleased with our regional account managers or Rams that work with our stores and that are not included in Spartans financial results. Our Ram second quarter total sales increased 39% from last year.
In June we took another step towards growing our commercial business when Spartan services acquired sales Master flooring solutions, a top distributor of commercial flooring in the New York City market.
The acquisition significantly expands and deepens our presence in the large and highly fragmented in New York City at New England markets. We're excited about leveraging sales matched our strong contracted relationships in their core markets large sundries offerings delivery and logistics network and great customer service as we expand in the northeast. We believe these attributes will result in higher win rates.
We expect sales master to benefit from increased purchasing power better inventory levels and logistics enhancing the value they deliver to their customers 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 are confident that we have the right people strategies and business model to continue navigating this challenging macroeconomic environment successfully I will now turn the call over to Brian to discuss our fiscal 2023 second quarter financial results in more detail and to share our outlook.
For the remainder of the year.
Thank you, Tom and Trevor I want to begin by thanking all of our associates and vendor partners for their hard work and dedication to serving our customers every day.
I am, particularly proud of our fiscal 2023 second quarter financial results as they demonstrate how we can grow our market share and manage our profitability during a period of industry contraction.
We are executing our new store growth and gross margin recapture plans and effectively managing our expenses importantly, we successfully managed our inventory and other working capital, which led to a $469 million positive swing in operating cash flow from the same period last year.
We accomplished these results despite rising mortgage rates during the quarter, leading to the existing home sales that took a step back from where they were at the end of the first quarter of 2023 to near record lows.
Let me turn my discussion to some of the changes among the significant line items in our second quarter income statement balance sheet and statement of cash flows.
Then I will discuss our outlook for the remainder of the year.
We are successfully executing our plans to grow our gross margin second quarter gross margin rate grew sequentially and year over year, our second quarter gross margin rate increased approximately 220 basis points to 42, 2% from 42% last year.
Exceeding our expectations and sequentially improving from 41, 8% in the first quarter of fiscal 2023. The increase in gross margin rate is primarily due to retail price increases we took last year to mitigate higher year over year supply chain and product costs. As a reminder, we are in the weighted average cost method of accounting and as such the supply chain.
Cost reductions we started to experience late last year and into this year are still working their way through our income statement and will continue to benefit the back half of 2023.
Second quarter, selling and store operating expenses increased 16, 1% to $311 4 million inline with our expectations.
The growth is primarily attributable to higher occupancy costs related to 29 additional warehouse stores operating since June 32022.
Wage rate increases and higher credit card transaction processing fees.
As a percentage of sales selling and store operating expenses increased approximately 290 basis points to 27, 4% from last year.
290 basis points increase was modestly above our expectations, primarily due to deleverage in occupancy and other fixed costs from the decline in our comparable store sales.
Second quarter General and administrative expenses increased by 19, 2% from last year modestly above our expectations.
The growth is due to investments to support our store growth, including increased store support staff.
Higher depreciation related to technology and other store support center investments and operating expenses related to our <unk> subsidiary, including approximately 900000 of transaction costs associated with the acquisition of sales Master.
As a percentage of sales general and administrative expenses Deleveraged 60 basis points to five 5% from four 9% last year, primarily due to the decline in our comparable store sales.
Preopening expenses increased by 16, 5% to 10.0 million from last year in line with our expectations.
The increase primarily resulted from an increase in the number of future stores, we were preparing to open compared to the prior year.
Second quarter net interest expense increased $2 9 million from $1 7 million in the same period last year.
The $1 2 million increase in interest expense is primarily due to an increase in average borrowings outstanding under our ABL facility and interest rate increases on outstanding debt, partially offset by increases in capitalized interest and interest income from our interest rate cap derivative contracts.
Our second quarter income tax expense was $20 6 million compared to $22 9 million in the same period last year.
The effective tax rate increased by 50 basis points to 22, 4% from 21, 9% the previous year, primarily due to $1 62 in limitations excluding.
Excluding the impact of excess tax benefits, our second quarter tax rate was approximately 24, 5% compared to 23, 9% in the same period last year.
While second quarter sales were modestly below our expectations, we demonstrated that we can effectively manage our profitability as industry growth contracts.
Second quarter adjusted EBITDA grew one 7% to $152 8 million and diluted earnings per share of <unk> 66.
Which exceeded our expectations in today's earnings press release, you can find a complete reconciliation of our GAAP to non-GAAP earnings.
Moving onto our balance sheet and cash flow. We are pleased that our inventory as of June 2009, 2023 decreased by 12, 8% to $1 2 billion from last year and decreased by nine 3% from the end of fiscal 2022.
The decline in inventory, coupled with an increase in trade accounts payable along with other working capital initiatives enabled us to report a $468 8 million positive swing in year over year operating cash flow and a significant year over year increase in free cash flow.
The improvement in our cash flow allowed us to reduce borrowings under our ABL facility, which in turn enabled us to reduce our debt by $35 2 million to $238 4 million from the same period last year.
Consequently, we haven't even stronger balance sheet, which will be a benefit to us as we weather the industry's contraction and make strategic investments like our recent acquisitions sales faster.
We ended the second quarter with $703 3 million of unrestricted liquidity, consisting of $4 2 million in cash and cash equivalents and $699 1 million available for borrowing under the ABL facility.
Let me now turn my comments to how we are thinking about the second half of 2023 and how this compares with our previous expectations.
The Federal Reserve has continued tightening financial conditions by raising the federal funds rate to five in the quarter to five 5% in July and continue shrinking its balance sheet to bring inflation under control to achieve its 2% inflation rate objective over time.
These ongoing monetary policy decisions led to mortgage interest rates rising to over 7% in second quarter and 734% in July which led to existing home sales slipping back to $4 6 million units in June from their prior recent peak of $4 five 5 million units in February and 443 million units in March.
When we reported our fiscal 2023 first quarter as.
As we think about the long and variable lagged impact of these ongoing monetary policy actions and the likelihood that mortgage rates are now less likely to fall to 5% to 6% over the next five months.
We now prudently expect existing home sales to exit 2023 around $4 1 million to $4 3 million units and remain near record lows.
This unit level is below our previous 2023 exit rate assumption of $4 7 million to $4 9 million units annualized as we discussed in the first quarter.
Second while home price appreciation has moderated they remain elevated from previous years, which coupled with rising mortgage rates makes housing affordability challenges accordingly.
According to NAR the medium price of an existing single family home was $416000 in June 2023 up 39% from $300000 in 2020.
Our monthly payment is now 26, 7% of income compared with 14, 7% in 2022.
Taking these intermediate term headwinds and our recent sales trends into consideration, we prudently revised our fiscal 2023 sales and earnings guidance lower to reflect these ongoing headwinds.
While the macroeconomic environment does presents some near term challenges, we believe the long term secular trends that underpin growth in home improvement spending and our potential market share in 500 store opportunity in the U S remain as relevant as ever.
We remain committed to making the investments that we believe will further expand our competitive moat and drive market share gains during this downturn to better position ourselves for when the existing home sales cycle turns.
The well established factors supporting long term home improvement spending include significant home equity.
Historically, low inventory of new and existing homes for sale and an aging housing stock where over 80% of homes are 20 plus years old.
More as more millennials enter their prime home buying years, we are well positioned to capitalize on this growing market.
Now I'll provide some more detail pertaining to our updated fiscal 2023 full year outlook.
Net sales of approximately $4 $460 million to $4 billion $530 million compared with our prior guidance of $4 $610 million to $4.750 billion.
Comparable store sales decline of approximately 7% to five 5% compared with our prior guidance of down 3% to flat.
We expect Q3 to be the lowest comp of the year.
As a reminder, we are lapping a 10, 4% decline in transactions in Q4 of 2022 versus a six 7% decline in transactions in Q3 of 2022.
The earnings flow through impact from a one percentage point change in comp is approximately <unk> <unk> per share for the full year and approximately <unk> <unk> for each comp point for the remaining two quarters of the year.
Diluted earnings per share of approximately $2 30.
To $2 50.
Compared with our prior guidance of $2 55 to $2 85.
We expect Q4 earnings to be the lowest of the year.
Adjusted EBITDA of approximately $570 million to $595 million compared with our prior guidance of $605 million to $650 million.
Depreciation and amortization expense of approximately $200 million compared with our prior guidance of $190 million.
Net interest expense of approximately 16 million to $17 million compared with our prior guidance of $17 million to $18 million.
Tax rate of approximately 22% compared with our prior guidance of 23%.
Diluted weighted average shares outstanding of approximately $108 million unchanged from our prior guidance.
Opened 32, new warehouse format stores from our prior guidance of 32% to 35 stores.
Capital expenditures of approximately $590 million to $630 million compared with our prior guidance of $620 million to $675 million.
Let me now pass the call back to Tom for some closing remarks.
Thanks, Brian .
These are challenging times for everyone in our segment of the home improvement industry, but we believe we have a proven differentiated business model and the right talent to execute our growth strategy is to continue to grow our market share. We believe our ability to continue to make strategic investments in a year marked by sales contraction in the industry will enable.
Us to accelerate our market share in 2023 and beyond particularly among pros.
We expect 2023 could be particularly difficult for independents to manage pricing inventory and marketing and our contracted sales period, when compared to our larger scale direct sourcing business model.
We believe we are managing our business to accelerate our market share and deliver significant earnings power when the industry returns to growth. We believe our long term earnings growth algorithm remains intact I want to thank all of our associates and vendor partners for their hard work and dedication to serving our customers every day operator, we would now like to take.
Questions.
Thank you we will now be conducting a question and answer session.
Like to ask a question. Please press star one on your telephone keypad.
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Press Star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
Our first questions come from the line of Michael Lasser with UBS. Please proceed with your questions.
Good evening, Thanks, a lot for taking my question.
What are the trends at your most mature stores and the reason why.
Because there is a debate about the degree to which.
Our Florida core might've been over earning for the last few years because of things like whole house renovation.
<unk>.
Makes sense.
Money that you can point to the consumer.
So the key is what is a realistic level of sales productivity for your most mature store.
Hey, Michael This is Trevor I'll take a crack at that and Brian may weigh in as well I think I think our mature stores are maybe 200 basis points below our.
Total comp that we reported there.
And as to how much was over earned during the Covid period, I mean, theres something to that I don't know that we can specifically know what that number is.
But obviously, we went through that back then people stuck at home and they couldnt travel and they invested in their home because they were working from home. So there's probably some truth to that but I'm not sure. We can tell you exactly how much of that was part of our when we had the strong results in 2020 one in the first half of 'twenty two.
Yeah, Hey, Michael I'll jump in I will just all kind of unbundled the comp a little bit and talk a little bit about the mature stores as well. So if you think about it if you follow sorry, we were down three three in Q1 down 6% in Q2, what Trevor said on the call is we're down eight four now.
That would imply that the back half on the high end is around six three in the back half on the low end is at nine 3%.
The reason that we believe Q4 will improve from Q3 as restocking against our weakest transactions in Q4, if you remember they were down 10, 4% in Q3, they were down six 7%.
The reason really is that we also opened 13 were 32 stores or 40% were in Q4 of last year. So all of those are going to start to enter into the comp base in Q4 as well.
And then to piggyback on travelers point embedded in this guidance is high single digit to low double digit declines for mature stores. So that's embedded within kind of the numbers that we gave you. So our new store classes are still comping positive to travelers points are there.
Our new stores are a little bit lower than what we got it to.
Our mature stores.
Got it.
So Brian when the dust settles.
Do you think your new your mature stores on average are going to be doing from a sales per store.
Heading into 2024.
As you think about 2024.
Is your change to the guidance you're simply pushing off.
The timing of the recovery.
Or is this more of an acknowledgment that our stores were over earning and theyre going to it's going to take some time for them to find.
Sustainable level. Thank you so much.
Yes, it's more of a push off we would say we don't think that they've they've come down any reason, obviously theyre negative comp in this year, but there's no reason they wouldn't earn back to where they were we don't believe they over achieved to their long term goals as long as existing home sales are staying at this level.
But it gives us some some challenge and we've got to continue to fight to take market share during this time, but.
This is just a push out to when things get better.
Alright, Thank you very much good luck.
Thanks, Michael.
Thank you. Our next question is coming from the line of Steven <unk> with Citi. Please proceed with your questions.
Great. Good afternoon. Thanks for taking my question I wanted to ask about the market growth rate with your guidance, calling for down mid singles to down side. Then how do you expect the market overall is performing and then when you think about the change in guidance.
Ross DIY versus pro and maybe product categories.
Size of the project what do you think is really coming in weaker than expected by the by the biggest magnitude.
I'll take the first part and then Trevor you can take the second part this is Tom So I would say.
The market is growing.
At a slower pace than we are we're still growing I mean, we havent negative comp environment, but as we open stores, we are still growing so.
In the quarter, we were up 4%.
And year to date, I think we're up somewhere around 6%. So we're growing and when you just look at the <unk>.
People that we compete with other publically publicly traded there their growth is significant tile shop reported today there were negative eight four lumber in the first period in the first quarter was negative 15, Mohawk reported North America was down 9%. So we're growing so we believe we're taking market share at a pretty at a pretty good clip.
And the market is absolutely.
And much worse condition than we are.
And if I understand the second question.
Our pro business continues to do well relative to the rest of the business, we talked about our commercial small, but our commercial business continues to do incredibly well both from the Spartan side in our regional account managers.
On the on the retail side the consumer the DIY, that's the part that struggle and we measure that closely that's the part of the business is leased.
The ability to control and as Tom mentioned <unk> had call. It five five to 6 million existing home sales turnover for much of the last 50 years, we're now at $4 million.
This cycle is now 22 months into it.
It Hasnt got any better interest rates are back our mortgage rates are back above 7%.
And so it's just the time of compression on the on the just the housing cycle, we feel as good as ever about our medium and long term outlooks, we just need to get past this cycle.
Okay great.
Oh up I had was on just the competitive dynamics that you're seeing in the market right now given your comments about value and savings how do you feel about your price gaps and do you see the competitive dynamic changing as we get into the back half of the year and into next year.
I'll take that this is Tom.
I feel good.
About our price gaps versus our competition, we monitor those on a on a feels.
It feels like a daily basis, but we monitor amount a weekly basis, and we feel as good as ever.
About how we're competing in the marketplace.
As I look forward to I think it's going to get worse. So I think it is going to get more challenging.
As Trevor said this is the 22nd.
<unk> months of negative existing home sales. This has been a tough market for people, who sell our category for a while and so.
We're going to continue to monitor that we're going to continue to protect our moat. We know we're getting new customers every day that are looking for value in this type of environment. So we feel good about our price gaps and we will continue to make sure that they stay good.
Okay. Thanks for taking my questions.
Thank you. Our next question is come from the line of Steven Forbes with Guggenheim. Please proceed with your questions.
Good evening, Tom Tom O'brien.
I wanted to focus on the.
The updated capital spending plan. So I guess first just wanted to confirm that the reduction for the year is solely tied to the three stores.
That were pulled out and then I'm curious if you can maybe give us a preview on how you're thinking about 2024 in terms of the store pipeline.
What level of capital spending youre sort of comfortable planning for as we think through the free cash flow implications of the guidance revision.
Hey, Stephen I'll start and then Tom and Trevor will jump in on the very first question. The reduction is actually more tied to fewer land purchases that we had contemplated in the original guide and then a little bit for the spend of 24. Those three stores were still spending on there really just kind of pushing into next year. So it's not that we've cut that or anything else.
Really tied to more just spending for the future class, a 24% and land purchase that we have and we're still looking to own probably 5% to 10% of any given class. So it's just a little bit less than we had kind of predict at the beginning of the year. That's right I'll take the second part of the question.
As we said through our script.
So in the last couple of calls.
We know this is a cycle things will be difficult, we're running the business the best of our ability, but we're trying to gain market share and we know that nothing's changed in our 500 store algorithm. So we plan to open at least 35 stores next year as we sit here today, that's how we see the world is that we plan to open at least 35 stores next year, we may update that as we get into the next.
Quarter, but we've got our.
Our class of 24 pipeline is terrific.
Got.
Got a store in Brooklyn that we're going to open up more stores in the northeast stores and our good market. So we're excited about the pipeline and going to continue down that path.
Yeah.
Thank you and then maybe just a quick follow up for Brian .
As we think back.
Sort of a selling store operating expense deleverage of experienced revenues experienced year to date.
Can you can you help break that down into comparable store deleverage versus the weight of the new growth.
Yes.
Yes, the majority of it is going to be in the.
Mature stores and so when you think about it what I said in the prepared remarks, we have seen wage rate increases higher credit card transaction processing fees and so the new stores are still there and in the same way that they have we have been able to come back kind of that inflation, but the cost on a like for like store is almost equal from where it was last year. So the deleverage is almost all due to just.
The decrease in sales. So it is all because we negatively comping at those stores, we've been able to kind of hold costs flat, even with inflation coming in by flexing, our store hours and cutting discretionary spend.
Okay.
Thank you.
Thank you. Our next question is coming from the line of Chuck Grom with Gordon Haskett. Please proceed with your questions.
Thanks very much.
My question is on the recent uptick in rates.
Having caught on.
What youre hearing from the pros and <unk> current plans for projects over the next call it six to nine months.
Yes.
I've talked to a lot of pros.
Over the last several months and very still have decent backlogs is what they tell us we're talking hundreds and hundreds of pros across the United States. They saw decent backlogs, but it has slowed a little bit.
And when you're when you're turning over $5 five 6 million homes. There is a lot bigger projects that are being done right when someone's going to sell a home. They may have to invest in multiple bedrooms and bathrooms <unk> kitchens.
Now that existing home sales is bumping along at $4 1 million, which again is one of the lowest we've seen in the last 50 years people are just doing much smaller projects.
Posted on a whole floor, maybe they just do a bathroom or kitchen and so they've also said the size of their projects has come down to that.
Thats, probably the biggest thing thats changed for us relative to when we started the year transactions are pretty close to what we thought the ticket is pretty close to what we thought but some of the square footage size of the jobs has come down and I don't know that we would have thought.
That was going to happen.
So thats probably the biggest change as people are just doing smaller jobs is a lot less houses are turning over.
Okay, Great. Thank you and then my second question is just on new store productivity you opened nine stores I think you said three within each month of each month of the quarter and I think Theres. One store that you opened up on the last day of the MSP is much lower than it's been.
Calculate around 61%. So is there anything going on there that would drive that lower.
The way I always think about that as we disclosed in our 10-K, we think our new stores should do anywhere from 14, five to $16 $16 $5 million in sales in first year, and we sort of build our portfolio of stores around those metrics. When things were incredible we were doing $16 5 million and as you look at the class of 19, 2020 one.
The class of 'twenty, two and early in 'twenty three that number is probably more around 14 5 million in sales and so as you've seen our same store sales come down just because there is less people in the market you have seen our new store sales productivity come down so.
Do I think that number is going to go back up to 15, 15, 516, I think as the economy recovers it will and those stores or those stores or we're making probably over three or they were making over $3 million and four wall EBITDA in year, one and now that youre going to a $1 million or so less maybe a little bit more than $1 million or so less than that in this current environment.
Pull that through kind of in the mid to high Thirty's and so they're going to make still a really good.
Just under $2 million or just over just under $3 million, maybe $2 $5 million, but theyre still very productive stores and theyre going to give us a return on invested capital well above our cost of capital.
And this is Brian it gives us more of a maturation curve as well as they mature because there and ultimately you can ultimately get to the same.
To your point right.
Exactly thank you.
Thank you. Our next question is coming from the line of Simeon Gutman with Morgan Stanley . Please proceed with your questions.
Good afternoon, everyone I wanted to ask first about gross margins. They are still benefiting and I think you mentioned there is still a little bit of a benefit through the back half of the year.
Does it flipped to a headwind I think part of the question is what happens with price and you mentioned there were some selective.
I guess, taking price down, but curious how it wraps into 'twenty four I know, it's early to talk about it but curious if it does flip over.
Yes.
It is early to talk about 'twenty four.
Where our margin I've been very pleased with our ability to protect our value pass some price alone back to our professional customers, who saw us taking price up.
And just continuing to improve margin like as I said in the script and we've been able to do it sequentially and then year over year.
That goes into 2024 I do believe that we have the ability to continue.
Continue to.
Prove our margin rates were going up.
We're watching where we have taken price down and measuring unit elasticity has seen if we're getting a benefit it's inconclusive now, but we're watching it but I think between our own initiatives of selling better and best products and.
And design initiatives and continuing to watch our supply chain do a great job of getting costs out and our merchants buying better.
I think we have the ability to exceed our historical gross margin rates.
How quick that comes.
To be determined will talk about 'twenty four as we get closer to it but I do think we'll have improvement.
Yes.
And then.
It's actually it's another 24 I'm hesitant to talk about it but it's more about the housing market.
Trevor mentioned that the consumer just spending a little bit less.
There was a debate in this industry that the wealth in homeowners locked in or stay in effect would continue to drive.
The industry.
Not necessarily supportive, but not not not avoid negative comps, but it looks like let's say existing home sales don't grow in 'twenty, four which some are forecasting.
Like how do you I know, it's early again, but how do you think about this.
This wealth effect is there enough for this business or the industry to grow or it could be a longer transition period.
I mean, I think that's difficult to answer I'll take a stab we're all kind of look at each other who is going to answer that one.
I would say.
As I look into next year, even if the.
Just need existing home sales have been running in the negative 20% range. So if we get as we start lapping as we get into the fourth quarter that won't be if they stay at this 4142 like we think we're going to exit the year. Then they are not negative 20% they are flat or slightly up and as we go into next year, we think that could get better and if existing home sales are better than.
They were year over year, we think that benefits us now and I also think there's going to be some pent up demand.
Amount of slowdown in the business as you get to next year I think people will become more and patient and then we may take on more projects and our consumers are they slant to a little higher and their balance sheets look pretty good. So we do think that hopefully that will as time goes on and people are going to say you know what I've waited long enough I'm going to redo that bathroom I'm gonna redo that.
So I think between existing home sales, probably slight maybe low but they are not going to be 20% year over year low and then I think.
As time goes on I do think people will take a more because of the value of their homes is pretty good.
This is Brian I mean, if the duration last longer as youre alluding to if it if it does it's going to put a lot more pressure independent competitors, which could also allow us to gain even more market share. So just one way to think that's true.
Good point.
Thanks, guys.
Thank you our next questions come from the line of <unk> with Wells Fargo. Please proceed with your questions.
Hey, good afternoon, I'm going to follow up a bit on that last question and maybe you could talk about about the historical correlation between your business and existing home sales and how that relationship has held up or changed over the years and then just considering.
Dynamics around rates and home prices and all the folks who've locked in low mortgage rate.
Is there any reason to believe that the historical correlation is still the right way to think about modeling your business or could that actually change.
I do think that's been the highest macroeconomic factor that correlates to our business you can go back and look at.
Late 17, 18, or 18 and 19, when an existing home sales slowed when interest rates went up and our business decelerated. Some obviously you've seen that same thing happen starting last year in July existing home sales fell a lot.
Anywhere from 20% to 35% per month for as we said at the last 12 months and you saw our business slow down an extra turn negative for the first time. So yes, I think thats right I think as Tom mentioned, though I don't it doesn't feel like we're going to go way below 4 million existing home. So if you look over the last 50 years I think that's only happened once.
So we just need them to quit being so negative.
And I think then we can we can grow we can grow from there.
As our view I mean, when we look at our model and what we're doing versus the competition, we're continuing to make huge strides forward.
I think we feel good about our people our turnover is low our customer service scores are high our innovation in the assortment is fantastic.
So.
That's my best answer, Yes don't mind too I wouldn't say I mean, much different I don't think that there's anything top end in the last year or two that's going to change that existing home sales aren't good for us.
Home sales are positive year over year, that's a good thing for pharma growth.
Got it I appreciate the color and then I think you made a change to your private label credit card curious if you've seen any impact from the chain tightening credit terms as a whole on specifically on that card as well as for your customers in general as well as the prep.
Very perceptive, we did make a change in may.
We went with a bigger vendor that we felt was more aligned with us.
Early reads it looks like their approval rate is slightly better than that.
Previous provider.
And we feel good about and they're big partner.
They do a lot of private bank the largest private label credit card company in United States that they are a good partner with us.
And we're optimistic about it.
No.
Got it I appreciate the time guys.
Exactly.
Thank you and the interests of our remaining time.
To get to as many questions as possible. We ask that you. Please limit yourself to one question.
Our next question comes from the line of Seth Sigman with Barclays. Please proceed with your question.
Okay, great. Thanks, Hey, everybody. So a lot of the slowdown here is happening through average ticket and I guess, we're all trying to figure out where that settles. Your average ticket is up let's say, 25% versus 2019 and it seems like a portion of that was same SKU price increases, but may be a bigger piece of that was the impact from larger projects in.
<unk>. So I was hoping you can maybe break that down for us a little bit more how much upside to ticket came from that increase in average square footage per project and then how do you think about where that normalizes. So physical back to 2019 levels physical lower based on EHS, how do you think about that.
I think our ticket will bounce around out where thats going to be this year and then.
<unk>.
I think it's going to grow in the future because our ecommerce business is our highest ticket and that will hopefully continue to grow at a fast rate themselves like it has for the last 12 years, our pro ticket is higher than our homeowner business that we're hopeful will continue to grow our design ticket is higher design is a big.
Big focus for us as Tom mentioned, Thats up 330 basis points. So I think we just got to kind of level out and see what this year is.
Our Ram sales, which really have most of those get tendered to the stores. Those are big commercial sales those are all higher ticket. So my expectation is once we get through this.
One of the worst housing markets, we've seen in the last 50 years those strategic initiatives that we're focused on will drive ticket growth and then the final thing I mentioned is our merchants continue to have great job people are doing less square footage, but they're still continuing to focus on better and best and our pricing generally speaking when you look at our pricing.
Better investor not competing as much with the home centers, there were competing against the independents and our value equation goes up a lot and that's why that part of our business continues to take market share is because our better and best assortment is incredible and our pricing differential versus our competition is also very high and then the last thing I would say along with those benefits us.
Once existing home sales go positive.
And then people start doing can they get back to doing this trial as we mentioned earlier in the call and one of the questions that people will do more rooms in their house when people move into a house they do more rooms and today when they're staying in the same asset or in the room at a time, so when that gets back into the blend of the average ticket that's a good thing.
Thank you. Our next question comes from the line of Jonathan <unk> with Jefferies. Please proceed with your question.
Hey, good afternoon.
My question has two parts.
The strong gross margin result, this quarter and exceeded what we had been thinking for late 'twenty three so as such how should we be thinking about <unk> and <unk> gross margin should we be planning for sequential improvements from from recent levels and then Relatedly for gross margin Tom you mentioned that the <unk>.
Pricing rollbacks had been inconclusive.
You just share any more detail, maybe where <unk> seen success, maybe where you haven't thanks so much.
Hey, Jonathan This is Bryan I'll start and then pass over to Tom So for the gross margin.
Q1, we were at 41 eight Q2 at 42, two so obviously, we did exceed our own internal expectations as well, we do think the back half is going to be at if not slightly better than that 42, two so for the full year, we should be around kind of that 42, 2% on a full year basis, which tells you the back half should be slightly better than where we just exited.
And then just.
But I mentioned earlier that our test results are inconclusive I would say that remains the case they aren't conclusive. It's very hard some some appear to have worked well some appear to have not made a difference it's hard to ascertain if we've just shifted a customer within our own store to a different SKU because of our.
So broad that come in and we've effected the price on one thing and it takes it from one SKU to another so there's some difficulty but we do see some benefits of certain departments that we see more benefit than others and we're going to continue to lean on that learning and apply that as we think about more price reductions in the future.
Thank you. Our next question comes from the line of Karen short with Credit Suisse. Please proceed with your question.
Hi, Thanks very much.
Two questions so far.
First is when we think about comp deleverage as it relates to delever.
Deleverage.
You.
Remind me what the actual relays.
Our relationship is on that so like if you have 1% comp.
What.
That would mean for EBIT.
So this year every comp point is worth about $40 million. So when you flow that through its usually in the mid <unk>. So for each comp flex, that's where we get that Tencent in EPS that we think for the full year.
So for the back half every comp point changes worth about <unk> <unk> to be about half of that so it's worth $20 million in the back half.
Thank you. Our next question comes from the line of Chris <unk> with BNP Paribas. Please proceed with your question.
Hey, Thanks for taking the question.
However, thats started hurting in new home construction Division I guess why now I mean, historically what have been some of the constraints that prevent the Florida court itself. After its end market work smart and for that matter. Thank you.
I didn't get the question you talked about the new builder.
Talking about commercial or excuse me, the new builder within spar, yes, although certainly higher sales master it yes or no.
Our press release, it's art and what's kind of get to the new home construction channel not that accurate, yes, okay. Yes.
Yes.
Barton did a press release on someone that they've hired that's going to help them with sorry, where we werent sure. If it was a sales not sure your question or a recent hire question sorry about that so yes.
<unk> recently did a press release.
Person that we hired that's helping us think about our new construction opportunities. It is a segment that Spartan has not really focused on historically.
We had we do a good job at Florida core through a ramp with custom homebuilders, but we really don't do much in the new construction side. So we wanted to get some force power in there to help US we think it's a big opportunity.
Got a board member for.
From Pulte homes, whose help us think about that business differently and to help us educate us about that business differently. So we think it's a big opportunity and if you look at what's going on with new home sales today as the existing home inventory is so low.
That's a sector that is doing well and we think we can provide good opportunities. There. So we want to make it a more meaningful part of our business in the future. Thus we hired someone really good.
Thank you. Our next question comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question.
Hi, Good afternoon, I just wanted to follow up on a couple of your comments regarding.
Increased focus on value by containers, but youre still seeing a mix shift to better invest first of all is accurate can you square that away and second of all as you move forward are you, adding more merchandize to service that opening price point.
So when we talk about Val.
Value.
I'll start with the first my first.
Kind of feelings about it.
When a customer elects to do the job and their house, they're still electing to buy the best product that we have in the store is the better and best product.
The value is still important to them and the value proposition on our better and best products, because mainly we compete with independents on that the spread is really significant so we think when someone's going to do the job they are still going to be looking for.
They want to have the better and best products in their stores and we think in their homes and we think that our our competitive moat around those products is better so.
We are paying.
Paying attention to opening price point, we always do we know that's very important for particularly the flip our business we know that.
<unk>, so we pay attention our merchants do a good job of always updating our opening price points I wouldn't say, we've added to our opening price points I'd say its pretty much consistent to what we've historically done.
Thank you. Our next question comes from the line of Justin Kleber Baird. Please proceed with your question.
Yes. Good afternoon, everyone. Thanks for taking the question can you guys just talk about what's driving the deceleration in comps quarter to date is transactions, taking a step back or is it related to ticket.
And then kind of.
Part of that question on the sequential improvement you've seen in transactions here in <unk> did you comment on pro.
I'm curious how that trended relative to <unk>. Thank you.
Hey, Jeff and I'll take the first part of it and maybe Trevor can jump in on the pro side. So the number one thing that led to the deceleration is around transactions. It's all tied to the existing home sales step down that will kind of see so if you remember existing home sales.
Over 4 million they stepped up a four six in fab four four in March and then it started to decline back down to four three in April for three main and down to <unk> in June that's really around transactions that are leading to that negative <unk> four more so than the average ticket is actually in line with our expectations.
On the pro side, it has decelerated as well, but its still outperforming the homeowner.
Or the DIY business.
Thank you. Our next question comes from the line of Keith Hughes with <unk> Securities. Please proceed with your question.
Yes. This is building on the last question so in the guidance in the second half.
As ticket and add subtraction, what kind of numbers are we looking at.
Got it.
So ticket in the back half will actually be negative.
So it's been sequentially declining as we expect a kind of throughout the year and so you have that kind of influx of your crossover point transactions will get better, but really they're less worse. So both states does stay down as well, but ticket will crossover and cut into negative for the back half of the year.
Thank you. Our final question comes from the line of Greg Melick with Evercore. Please proceed with your question.
Thanks.
I'd love to follow up and if you already answered. This please just tell him that I dropped off there in the middle but on category mix, just because it's changed so much over the years I'd love to get an update.
On how the mix is really driven between category I think you said yourself seeing trade up.
But I'd love to know what it's doing.
Laminates versus what and what that does to your gross margins.
So we do see the what I'm gonna call. The manmade products continue to outperform the natural products. So on the wood look side of the business laminate and rigid core vinyl are taking share from.
Wood.
On the corporate house out of the business, the mostly porcelain tile, but portion of ceramic tile versus the natural stone businesses are continuing to perform better than the stone businesses. So so the answer is.
The man made products are better.
Most all regard same thing is going on in Deco.
And the margin profile for those categories and the manmade products are better than the natural products that tickets.
But the margin profile in the gym ROI is higher for the natural products I'm, sorry for the man made products.
This is Brian before the call and did I just wanted to jump in and kind of help you guys a little bit with the modeling can fund a natural way to make a transition and.
Just I know it's not the question that was asked but the original guide had storage zone are some of the store operating expenses of 27% of sales. We now feel like thats going to be 27, 5% to 28% for the year General and administrative was 5% of sales in the original guide that's going to be closer to five six to $5 seven for the year Preopening expenses will still be maintaining around that 1%.
<unk> and.
So I just wanted you guys to have that as well just kind of help with the model.
So that concludes our question and answer portion of the call.
I appreciate everyone's interest in our second quarter earnings.
Outlook for the year.
We appreciate.
Everything that everyone is doing this is we feel like we're doing everything we can to.
To balance our profitability, while at the same time, taking market share and ready for the other side of a down cycle. So.
Look forward to updating you on the next call.
Goodbye.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your evening.