Q3 2023 Floor & Decor Holdings Inc Earnings Call
Greetings welcome to Florida, Descartes Holdings incorporated fiscal 2023 third quarter conference call.
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A question and answer session will follow the formal presentation.
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At this time I'll now turn the conference over to Wayne Hood, Vice President of Investor Relations. Mr. Hooked you may begin.
Thank you operator, and good afternoon, everyone. Welcome to floor <unk> decor is fiscal 2023 third 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 company's safe Harbor language comments made during this conference call and webcast contain forward looking statements within the meaning of.
The private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties any statements that refers to expectations projections or other characterizations of future events, including financial projections or future market conditions is it until they were looking statement.
The company's actual future results could differ materially from those expressed in such forward looking statements for any reason, including in those listed in its SEC filings floor and decor assumes no obligation to update any such forward looking statements. Please also note that past performance.
The market information is not a guarantee of future results. During this conference call. The company will discuss non-GAAP financial measures as defined by SEC regulation G. We believe non-GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between.
Periods.
A reconciliation of each of these non-GAAP measures to the mostly directly comparable GAAP financial measure can be found in the earnings press release, which is available on our Investor Relations website at IR dot floor and decor Dot com a recorded replay of this call 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 third quarter earnings Conference call.
During today's call traveling I will discuss some of our physical 2023 third quarter earnings highlights then Brian will provide a more in depth review of our third quarter financial performance and share our thoughts about some of our financial projections for the remainder of fiscal 2023.
We were proud to deliver third quarter diluted earnings per share of <unk> 61.
Specially amidst the continuing economic challenges posed by 30 year mortgage interest rates that are now at about 8% near record low existing home sales of $3 96 million units annualized in September.
Ongoing pressures on housing affordability and the slowing sales of large ticket discretionary products are physical 2023 third quarter financial results are a testament to our company's agility and commitment to executing our key growth and customer engagement strategies, which we believe will continue to widen our competitive moat.
As many of you know our industry and company have been affected by the federal Reserve's current interest rate policies aimed at curbing economic growth and moderating inflation, 2% overtime.
The lagged effect of these policies is exerting greater than expected pressure on existing home sales and in turn ourselves than we previously expected.
We were expecting that existing home sales would approximate four one to $4 3 million units annualized as we moved into the second half of 2023, but regret regrettably. This is not materialized to date as Brian will discuss in more detail, we have experienced an unexpected accelerated decline in comparable store sales.
From the lagged effect of these policies and the early part of the fourth quarter of 2023 and have begun to tighten expenses further in November to align with the recent accelerated decline.
We believe the ongoing impact of these monetary policies will continue to suppress home remodeling into fiscal 2024, which could lead to a decline in our comparable store sales for the year. Therefore, we believe it is prudent to approach physical 2024 with more rigor in our expense management and added discipline and our growth investments and cap.
Spending. Additionally, we think it is important to add a level of flexibility and optionality to our operating and store opening plans in 2024, given the current macroeconomic environment I am proud of how our teams have stepped up to this short term challenge we are not standing still and see evidence that our strategies to grow our market share in this.
<unk> period, our working even when industry sales are contracted.
We're fortunate that the strength of our business model balance sheet and cash flow allow us to continue investing in the new stores and merchandising growth initiatives in the face of these near term headwinds for example, we intend to test an outdoor department within Archstone Department in 10 to 12 stores early next year, including full outdoor focused in yet.
And select design centers to better show our assortment.
I believe that our demonstrated history of strong and agile execution, coupled with the investments we continue to make a new warehouse stores and merchandising will position us for accelerating sales market share and strong earnings growth when the industry growth returns, let me now turn the call over to Trevor.
Thanks, Tom I also want to express my appreciation to all of our associates for their dedicated dedication to serving our customers and executing our key growth initiatives towards operating at least 500 stores in the U S. It is important to note that we view ourselves as a young disruptive growth company with only 207 warehouse stores in the U S. At the end of the third quarter of fiscal two.
2023, we continue to make important long term investments as we have conviction that over the long term, we can achieve returns above our weighted average cost of capital just to similar investments have allowed us to be approximately 20 times. The size. We were just over a decade ago, when Tom and I arrived at four in the Corp. We have demonstrated that we can manage a growth business focused on long term profitable.
<unk> and return on capital during difficult periods, such as in 2018, when existing home sales decline.
19, when the U S government imposed tariffs as well as anti dumping and countervailing duties on many of our products from China and if you are in 2020 one during the COVID-19 shutdown and the related supply chain disruptions.
Tom mentioned, we are not standing still as we navigate this challenging period of contracting industry sales growth and profit have never been a straight line, but when measured over the long term. We believe we are well positioned we intend to continue growing through this cyclical housing downturn by capitalizing on our everyday low prices value driven options trend right product Assortments in fact.
Job lot quantities and exceptional customer service provided by our store associates.
Turning to our fiscal 2023 third quarter sales total sales increased by 9% to $1 billion $100 million from the same period last year, our fiscal 2023 third quarter comparable store sales fell nine 3% from last year.
Comparable store sales declined eight 2% in July 10, 1% in August at nine 7% in September.
As a reminder, our fiscal 2022 third quarter comparable store sales increased 11, 6% due to a 19, 5% growth in our average ticket.
Our fiscal 2023 third quarter comparable transactions declined six 8% and our comparable store average ticket declined by two 8%. While we are encouraged the sequential decline in transactions improved from the peak declines of 10, 4% in the fourth quarter of fiscal 2022, and nine 9% in the first quarter of fiscal 2023.
Our average ticket remains under pressure.
Pressure reflects cycling past retail increases last year customers continuing to purchase less square footage and the impact of strategic decisions to lower retail pricing selectively on specific skus.
We continue to see homeowners and pros engaging in fewer and smaller scale flooring projects and they are a very intentional in their purchase decisions. For example, they are choosing a single bathroom project Redwood.
Rather than a bathroom and kitchen project or two room project, rather than a three room project.
Additionally, the cost of financing projects has risen due to increased interest rates fewer subsidized financing programs and tighter lending standards.
We believe these factors are contributing to us selling less square footage when compared to last year.
That said when consumers considering a flooring purchase we continue to see ongoing customer preferences towards our better and best product price point products, where we offer industry, leading innovation trends and styles at everyday low prices.
From a regional perspective comparable store sales in our western and southern divisions were the weakest in the third quarter of fiscal 2023 from a merchandising perspective, our initiatives in tile installation materials and adjacent categories led to comparable store sales that were meaningfully above the company average.
We are pleased that our total sales through our e-commerce with our increased eight 3% year over year as a result of the sales penetration rate increased 160 basis points to 18, 9% from 17, 3% last year further reaffirming that our connected customer strategies to drive engagement are working we're also continuing to invest in design services to drive engagement with home.
<unk> and pros by further expanding our in home design test in the third quarter.
We have found that when our designers engage with homeowners in their homes, we increase our ability to become involved with larger projects.
Turning to our early early fiscal 2023 fourth quarter sales trends, our fourth quarter to date comparable store sales were down 11, 9% below what we expected coming into the quarter and greater than the third quarter's decline of nine 3%.
Sequentially, we updated our fiscal 2023 earnings guidance in today's press release to take into consideration the slowing sales trends.
I will now discuss our new store pillar of growth in the third quarter of fiscal 2023, we opened five new warehouse stores, including two new warehouse store openings, and upstate New York, and Boston, Buffalo and Rochester, both new markets for us.
Third quarter.
Operating 200, 700 warehouse stores and five design studios across 36 states since the beginning of this year through today, we have opened 22, new warehouse stores, including five new warehouse stores in October moving us closer towards achieving our 32, new store opening plan for fiscal 2023.
Early October we continued our upstate New York store building build out by opening a new warehouse store in Albany.
We're excited to continue building, our presence and brand awareness in New York and New Jersey in the fourth quarter of fiscal 2023 with planned openings in five new warehouse stores. In these states. We plan to open. These will include new warehouse stores in Ocean Township, abnormal Princeton and Springfield, New Jersey in Port Chester, New York, We plan to.
Continued building, our New York expansion in 2024, with a new warehouse store in Brooklyn.
As we continue our growth we also decided to close an older warehouse store in Houston future strategically, placing stores in the market surrounding the store in the third quarter as the lease expired.
Ongoing industry wide construction delays in the third quarter, we had to push some of our late September 2023 warehouse store openings into the fourth quarter. These construction delays are due to a general contractor struggling to secure qualified subcontractors and local government municipalities remaining under staff, particularly in the northeast.
Some cases municipal government staffing levels are below pre pandemic levels. Consequently, obtaining all the necessary building inspections and approvals sometimes takes as much as three times longer.
Moreover, we have recently began experiencing delays with utility companies missing data and delaying work due to the constrained capacity of their workforces. As a result, these delays have been outside of our control and connected power water and sewer and gas services through our new stores.
Turning my comments to our pros, which accounted for approximately 44% of our third quarter tender sales compared with 43% in the same period last year and 44% in the second quarter of fiscal 2023, we are leveraging a pro dashboard and CRM tools and celebrating pros with events like our annual appropriation month in September this annual event, which generated 68.
<unk> thousand per registrations, including giveaways and store prizes nationwide sweepstakes free installation materials and educational Webinars. We were pleased with the incremental new pro business generated from this event and its impact on our installation materials cells, where we have seen a significant where we see a significant market share opportunity with our pros.
While our overall fiscal 2023 third quarter comparable store sales declined nine 3% from last year, a probe comparable store sales continue to outperform our homeowner cells and our installation materials grew modestly as we focused on increasing our market share in a contracting market.
Additionally, we continue developing our other strategies to deepen our relationship with our pros for example were participating participating in the national tile contractors Association or the <unk> TCA with educational events, enabling our partners to use our pro premier points for Mtc a membership. The membership includes a range of benefits, including training and vouchers to be used in our stores.
So similarly, we partnered with the National Wood Flooring Association of third quarter to build on our brand awareness as a destination store for what.
This aligns with our plans have all of our stores with updated what inspiration centers by the end of 2023, providing educational events is increasingly important to close as the installation and certain large format category is new and more complex to install year.
Year to date, we have trained over 2000 pros by working with the TCA and we're on track to hold 128 educational events in 2023 compared with 71 in 2022.
Our CRM data affirms that our pro wallet share growth initiatives are working in the third quarter, we saw growth in our returning pro customers and spending growth among our top crows engaged in flooring projects from an operational standpoint, we have process improvements underway that will make it easier for our top growth interact with us and build close on large projects.
We manage our profitability, we continue aligning our store payroll hours with the decline in sales in a rigorously managing our corporate G&A expense importantly, we believe we are doing this in a way that does not compromise customer facing service. In fact, we are very pleased that our customer service scores remain high. Moreover, we continue to manage our total inventory effectively and are glad that our.
Merchandize in stock levels is better than they had been in years.
Finally, we are continually continuing to fortify our strong pricing move by strategically adjusting retail prices on specific skus using a portfolio approach while at the same time, improving our gross margin rate year over year.
Turning to our commercial business, our subsidiary Spartan services reported another strong quarter with fiscal 2023 third quarter total sales increasing by 47, 5% from last year. Additionally, the company announced an exciting new line of floor and wall tiles under the <unk> brand name in October.
More in line exemplifies how smart and can work with flow into core merchants and supply chain teams to design and curate exclusive flooring and wall tile products for commercial specifier that are supported by a deep inventory that is available nationally Pal is a higher margin business that we believe is mostly incremental business for Spartan has historically they have not sold myself.
We're continuing to build out our regional account managers, where our third quarter sales increased 32% from the same period last year.
Looking forward, we see growth in our new coating projects in sample requests is remaining healthy but moderating the moderating growth is consistent with the September Abi index, which saw a $44 eight reading down from $48. One last months moving below in the positive territory of above 50. In response, we are rigorously managing our administrative expenses and <unk>.
<unk> plans and commercial as discussed in prior earnings calls we remain excited about the long term commercial market opportunity and our strategies.
We are confident that we have the right people strategies business model to continue to successfully navigate this challenging macroeconomic environment I will now turn the call over to Brian to discuss our fiscal 2023 third quarter financial results in more detail and share our outlook for the remainder of the year.
Thanks, Trevor as Tom mentioned, we are proud to report fiscal 2023 third quarter diluted earnings per share of 61.
Which was at the high end of our expectation despite third quarter sales that were modestly below our expectations.
Like the previous quarters in 2023, we achieved these results by delivering on our commitment to growing our gross margin rate year over year, while managing our competitive price gaps and growing our market share.
So im equally pleased with how we are managing our inventory and merchandise and stock levels, which enabled us to report a $691 7 million positive swing in year over year operating cash flow and a significant increase in free cash flow.
Now, let me turn my discussion to some of the changes among the significant line items in our third quarter income statement balance sheet and statement of cash flows in each case compared to the same period last year unless otherwise stated.
Then I will discuss our outlook for the remainder of the year and provide a framework for how we're thinking about fiscal 2024.
Third quarter total sales increased 0.9% from last year. However, gross profit grew four 5% due to a 130 basis points increase in our gross margin rate to 42, 2% from 48% last year.
The increase in gross margin rate is primarily due to retail price increases we took last year, coupled with a decrease in supply chain costs. Starting in late 2022 that continued into the third quarter of 2023.
As a reminder, we are on 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 through the remainder of 2023.
Third quarter, selling and store operating expenses increased nine 9% to $308 6 million the.
The growth is primarily attributable to higher occupancy costs related to an increase in the number of warehouse stores operating since September 29, 2020 to wage rate increases and higher credit card transaction processing fees.
As a percentage of sales selling and store operating expenses increased approximately 230 basis points to 27, 9% from last year the.
The increase was primarily due to the deleveraging of occupancy and other fixed costs from a decrease in comparable store sales.
Third quarter General and administrative expenses increased nine 5% to $59 9 million from last year.
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 foreign subsidiaries as a percentage of sales general and administrative expenses Deleveraged 30 basis points to five three.
<unk> from five 3% last year.
But the expense rate improved from the second and first quarters of 2023.
The year over year increase in expense rate is primarily due to the decrease in comparable store sales, partially offset by lower incentive compensation accruals.
Third quarter pre opening expenses increased by 37.0% to $14 2 million from last year. The increase primarily resulted from an increase in the number of future stores that we were preparing to open compared to the same periods a year ago as well as costs related to delays in new store openings.
Third quarter net interest expense decreased to $1 2 million from $3 2 million last year, the $1 $8 million decrease in interest expense is better than planned and primarily due to a decrease in average borrowings outstanding under our ABL facility.
And an increase in interim interest capitalized partially offset by interest rate increases on outstanding debt.
Third quarter income tax expense was $17 6 million compared to $22 5 million from last year. The effective tax rate decreased by 170 basis points to 21, 1% from 22, 8% the previous year, primarily due to increased tax benefits related to stock based compensation.
Excluding the impact of excess tax benefits, our third quarter tax rate was approximately 23, 7% compared to 23, 9% last year.
Third quarter adjusted EBITDA decreased by four 7% to $140 9 million from last year, primarily from expense deleverage from the nine 3% decline in our comparable store sales. However, EBIT declined by a larger 16, 6% from last year due to a 27, 1% increase in depreciation.
And amortization expense.
Third quarter net income declined by a more moderate at 13, 5% from last year due to a lower effective income tax rate and lower interest expense than the previous year.
Diluted earnings per share fell to 14, 1% to 61 from.
71 last year you.
You can find a complete reconciliation of our GAAP to non-GAAP earnings and today's earnings press release moving.
Moving on to our balance sheet and cash flow.
We are continuing to maintain a strong balance sheet. During this uncertain period, our total inventory as of the end of the third quarter decreased by 16, 3% to $1 1 billion from the end of the third quarter last year and decreased by 14, 5% from the end of fiscal 2022.
The declining inventory coupled with an increase in trade accounts payable and other working capital initiatives enabled us to report a $691 $7 million favorable swing in year over year operating cash flow and a significant year over year increase to free cash flow.
The improvement in our cash flow allowed us to reduce borrowings under our ABL facility to zero at the end of the third quarter, which enabled us to reduce our debt by $178 5 million to $202 9 million from last year.
The strength of our balance sheet will benefit us as we remain committed to making investments that we believe will drive further market share gains during a period of industry contraction.
We ended the third quarter with $758 9 million of them.
Restricted liquidity consists.
Consisting of $61 $6 million in cash and cash equivalents and 697 3 million available for borrowing under our ABL facility.
I'll now turn my comments to how we are thinking about the remainder of the year and how it compares with our previous expectations.
During the third quarter of 2023, 30 year mortgage interest rates continue to rise and our touch in 8%.
The prior peak of 734% in July.
At the same time that July Federal Reserve Senior loan Officer survey reported that lending standards across all categories of residential real estate tightened.
And we expect further tightening of loan standards in the second half of 2023.
Meanwhile, demand weakened for all residential real estate loan categories.
Home prices have moderated, but they remain elevated from previous years. According to the National Association of Realtors.
Medium price of an existing single family home in September increased two 8% to 394000 from last year, which still represents a 26, 3% increase from 312000 in September of 2020.
These increased costs, coupled with increases in property taxes and insurance and following savings buffers continue to erode housing affordability for many homeowners, leaving all but the highest income cohorts able to afford homeownership.
Consequently existing home sales reached a near record low of $396 million annualized in September which was below our expectations of $4 one to $4 3 million annualized units that supported our prior outlook for the second half of 2023.
We are prudently expecting these trends to continue to create headwinds for our sales in the short term.
Taking this into consideration let me reframe, how we're thinking about the fourth quarter of 2023 and provide some preliminary guardrails to take into consideration for 2024.
As Tom mentioned, we have experienced an unexpected accelerated decline in our comparable store sales from the lagged effect that these policies and the early part of the fourth quarter of 2023.
Taking this into account we have updated our 2023 sales and earnings guidance, which now reflects the potential that the accelerated decline in our comparable store sales could be sustained for the remainder of the fourth quarter.
We hope we're wrong, but we now expect 2023 fourth quarter comparable store sales could decline in a range of 12% to 15% from last year.
In response, we have already initiated expense tightening measures in November and will further tighten them in December with an eye towards not adversely impacting our customer bases.
Let me now provide some more details.
We now expect fiscal 2023 total sales to approximate $4 $345 million.
$4 $385 million compared with our prior guidance of $4 $460 million to $4 billion $530 million comparable store sales are expected to decline seven 8% to eight 5% compared with our prior guidance of five 5% seven zero percent decline.
We expect our 2023 fourth quarter gross margin to be flat or modestly improve.
Sequentially, leading to an annual and fourth quarter improvement year over year.
We expect fiscal 2023 diluted earnings per share to be in the range of $2 14.
To $2 24.
This implies fourth quarter diluted earnings per share of <unk> 20 to.
<unk>.
The updated 2023 annual earnings guidance compares with our prior guidance of $2 30 to $2.50.
Fiscal 2023, adjusted EBITDA is expected to be in the range of 535 million to $550 million compared with our prior guidance of $570 million to $595 million depreciation and amortization expense of approximately 200 million unchanged from our prior guidance.
Net interest expense of approximately $11 5 million compared with our prior guidance of 16 million to $17 million.
Tax rate of approximately 21, 5%.
Diluted weighted average shares outstanding of approximately $108 million unchanged from our prior guidance.
Opened 32, new warehouse stores.
<unk> from our prior guidance.
We've reduced our 2023 planned capital expenditures to $550 million to $575 million from our prior guidance of $590 million to $630 million.
At this juncture, we believe it is prudent to moderate and add optionality to our 2024, new warehouse store openings with revised opening plan of 30 to 35 warehouse stores compared with our prior expectations of at least 35 stores.
It is important to recognize that this still would represent mid teen store growth.
We are still developing our detailed sales plans for 2024, but we expect that if existing home sales remain at the current levels are comparable store sales could decline next year in particular, we anticipate our comparable store sales could decline more in the first half versus the second half of the year given our sales comparisons from 2023.
As such we have action plans to align our expense structure with this potential near term decline. We continue to expect modest improvement in our gross margin rate next year from our fiscal fourth quarter exit rate.
Let me turn the call back to Tom for some closing remarks, thanks, Brian in the short term, we see opportunity amid the uncertainty. We believe that we have demonstrated that we can manage through uncertainty and seek to use this opportunity to seize more market share as the industry contracts, while the timing of a sustained recovery in existing.
Home sales and growth in our industry continues to be elusive and pushed out by most of the economists we believe the longer term outlook for home improvement spending remains bright.
That said, we believe we should be prudent when approaching 2024 with more rigor towards managing our controllable expenses and discretionary capital spending that does not mean, we are not making growth investments. We expect to continue to invest in 2024 by opening new warehouse stores, which we believe will further widen our competitive.
Moat and leave us in an even stronger position for significant earnings power when the industry fundamentals improve.
Longer target of operating at least 500 warehouse stores in the U S and achieving a mid to high teen EBITDA margin is unchanged operator, we would now like to take questions.
Thank you.
At this time, we'll be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you and our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your questions.
Hey, guys. Good afternoon. My question is on the fourth quarter.
Some of the expense rational rationalization is happening is that the run rate that we run into 'twenty four or does it get better meaning if you annualize the earnings from the fourth quarter and I guess, the decremental margin. It paints a pretty tough picture I don't want to try to see why that's wrong.
Yes.
So I mean this is Trevor it's a good question. So we're not done with our planning process for 2024, given the current economic headwinds and comparable store sales are likely to be negative next year based on current sales trends and as Brian mentioned, probably have larger negative comps in the first part of the year versus the second part of the year.
We are focused on continuing to resize our expense structure based on the slower sales trends and we believe we can have a moderate increase in gross margin next year, but we don't believe that you take the Q4 run rate.
And extrapolate that for fiscal 2024 annualized EPS, we think we will do better than that and we're working through that as we speak obviously a lot of unknowns out there with mortgage rates and where the consumer is.
And how they're going to invest in renovation today, but we are creating optionality and scenario planning, if things get better or worse and worse.
We'll give you a more detailed update in 2024.
Is there anything on the vendor side, that's changing are they getting more aggressive meaning are they.
Lowering price or getting more aggressive in some of the deals that you're seeing.
This is Tom so I'll take that so.
Part of our improvement in gross margin that we're seeing now and that we will continue to see next year is in our merchant is doing a good job of working with our suppliers and getting first cost reductions so when.
When we're moving suppliers were getting better better buys with our existing suppliers businesses, it's tougher for them, so, they're making concessions and our merchants do a good job of negotiating so yeah, we should see some benefit from that we're seeing it now and it should continue into next year.
Thanks Best of luck.
The next question is from the line of Chris <unk> with Jpmorgan. Please proceed with your questions.
Thanks, Good evening, guys. So thinking about what just happened in the past month in terms of the deceleration in the business can you just deconstruct that a little bit.
Is it is it traffic and ticket breaking sort of the stacks and youre, implying that the monthly is really deteriorate. If you look at on a monthly.
Multiyear basis, so what changed.
In terms of traffic versus ticket and you also mentioned that the southern region also was in the worst category, which was not true in the second quarter. So is there a change in Texas, and Florida that Youre seeing in I guess.
The last part of that question is as you think about the cadence of the months was there anything observable around let's say the <unk>.
War or any sort of shocked that you saw on a weekly basis.
So I'll take the first part of this is Brian then Tom will kind of take a second or third part. So just I think it's easier if I talk about what was any prior guidance versus what we're seeing today kind of unbundle Q4, a little bit and the trends we're seeing.
So our comp was obviously negative mid single digits is what we were thinking now thats at a negative 12% to negative 15% to.
To talk about transaction and ticket we had transactions in Q4 in the prior guidance, we're going to be about flat now we're expecting that to be mid single digits to high single digit decline. So you are seeing a bigger drop in transactions from the expectation that we were that we were at and then ticket was a low single digit decline that we had previously guided to now that's more like a mid single digit decline. So you can see.
The biggest I guess deviation from our expectation in Q4 is really around transactions, but do we think about that two year stack or anything else transactions are really going to see the bigger the bigger deviation from Q3 to Q4 months of that.
The only thing I would say, Chris that it's probably a bit different.
When we were.
What it was three months ago.
As mortgage rates about ticked up in closer to 8% existing home sales are now below $4 million, which hasnt happened that often in the last.
It has not happened that often in the last 40 plus years and so it's just it's been a bit of a deteriorating environment since we talked last and yes.
Ill go ahead, I was going to say and just on the average ticket.
Our square foot project is continuing to go down so that's what's driving down a lot of that average ticket to go from a low single digit to kind of mid single digit declines. So a lot of its around that project size.
Yes.
And Chris I'll try to hit the last two parts of the question.
Yes.
We're going up against easier compares so he thinks that you would think that you know things would have been better, but as Trevor mentioned with interest rates being higher than we thought existing home sales deteriorating worse than we thought and then what's happening with the world.
But the conflicts around the globe.
They're all probably having an effect on the consumer and hurting their ability to shop. So I don't know exactly like I can't pinpoint or deterioration has been.
It's been all through since the quarter started so I'm not sure which one of those is affected at the most of bumps sure. It's a little bit of each as far as the comment on the south.
Yes, south was performing pretty well.
We started seeing deterioration in the west first and in the South is just kind of getting to where the west the challenges of the western space and we think we're seeing that a little bit more now than we were at the beginning part of the year.
Got it and then my follow up is Tommy mentioned earlier this year that existing home sales for a flat you could see a positive outcome on the comp side youre leaning towards less negative in the back half of the year, So presumably youll get to a point of flat existing home sales.
In the back half so is the difference now is it.
You have to annualize through the project size had one.
I mean do you have a little bit of the project size headwinds I think that's a fair point.
We're still not <unk>.
Getting existing home sales and when you when we look out existing home sales what we're up against is still we're going to be below that by all anticipation at $3 9 million annualize in September.
We don't we're not planning for that to get much better which would still be we'd still be in a declining home sales environment I do believe that if we can get to flat existing home sales year over year, but we can comp.
Existing home sales are comping positive that's good for our business may not immediately but in time, but as we look forward. You know you look to next if you'd look to next year, you've got in the first half of the year February there was $4 6 million homes annualized March $4 4 million of annualized April four three maybe $4 three with what we saw in September and even though.
Interest rates arent coming not going up as of right now and people are excited about that we're not anticipating them to go down and so we think that that's going to put a challenge onto the business.
Got it thanks very much.
Yes.
Our next question is coming from the line of Michael Lasser with UBS. Please proceed with your question.
Good evening. Thanks, a lot for taking my question Tom in your remarks, you noted how you have optionality to change your store growth so under what conditions would floor and decor choose to slow down store growth in 2024, and 2025, and then what would you need to see.
See in order to Reaccelerate it and does this have any bearing on the ability to have 500 stores over the long term.
I'll take the last part that's the easy one no there's no change in our outlook as I said in the script. There is no change in our 500 store plan. So no change in our mid teen EBITDA margins EBIT margins I mean, we don't see much change over the long term. It is just the pace of getting there.
Would make me change your reconsider store growth as we've said historically and Trevor and Bryan can weigh in.
If the stores if our liquidity became a challenge and we had to push back capital expenditures, we'd certainly.
That would give us a moment of pause or if the returns on the store is it right now to be in this macro environment and still have our new store class at the low end of the pro forma.
That's not horrible and considering this macro environment. So if that deteriorated further than that would give us pause, but as we sit here today and as we see the world we're comfortable with giving a range of 30 to 35, if things deteriorate from here to the next quarter then we'll let you know.
Yeah, Michael the other thing I was just going to add to that is if you look at our mature class of stores our stores doing five stores are five years or older.
They're still doing $26 million in sales and making $6 1 million and four wall EBITDA and if you look at our stores that are 10 years older. Some of our best class of stores and how Theyre doing.
Almost $28 6 million in sales and $7 million of four wall EBITDA. So this is a point in time, it's a rough point in time are arguably other than the housing recession in 2007 through 10.
One of the worst ones and so we're very confident that we're going to get well above a 25% cost of capital return on cost of capital.
Long term as you think about because these are obviously 15 to 20 year investment so.
As Tom said, we're going to watch it will be close, but we feel good about.
Are these returns will be long term.
Yeah.
My follow up question is it's really anyone's guess right now what the cost might be next year, but you have given us a rule of thumb that decremental margin.
Around 35%. So if you lost $100 million of sales in the $35 million of profit.
Are there any locations or close to any location, where youre running into minimum staffing levels or.
Other constraints such that if you comped down next year at the same rate that you would.
Our this year the decremental margins will be worse than your rule of thumb and does it change at all if more of your comp decline next year is ticket driven rather than traffic driven.
Yes about 20 business drove about 20% of our stores, maybe just nudge above that are on minimum hours today and our gross margin rate is higher now than it was then too so yeah I think if.
If things are not at our expectations or if things are worse I think it's likely you would see that flow through rate be a little bit higher.
I don't know if it gets to 40% but.
That is a reasonable expectation.
And Hey, Michael This is Brian.
That 10 per comp point, 35% flow through rate, that's usually against the plan not necessarily year over year to travelers point, we do expect modest improvement in gross margin, which will help offset some of that so when you guys are thinking about your model and youre thinking about the comp its really a changing comp against the plan not necessarily year over year do you always have step investments, where you have changes that we can go in and do but that gross margin is the lever.
That will help kind of offset some of that I just want to make one comment on the on the store labor.
We pay very close attention to our customer service scores and how they feel about their experience within our stores and as we adjust hours. We're trying to do it where we can take tasks away from the store or we can change the way we operate bring things in during the day due tasking during the day that we've historically done at night. So that we've got good presence on the floor. So.
As we as we adjust those hours, we're going to do.
Certainly certainly pay attention to customer experience because we know this is Trevor said this is a moment in time, we will get through this and then when we come out on the other side, we don't want our brand damage to anyway.
Thank you very much good luck.
Thanks, Michael.
Our next question is from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.
Thanks, a lot I'm curious, what you're seeing from the competition over the past few months and maybe even in October, particularly independents is pricing still rational or if things started to change.
Yeah.
I'll start and I'll, let her son.
And I think from the big box perspectives.
The big box are always they're always trying to improve always trying to compete.
I wouldn't say that it's much different than it's historically been.
So it's just some there are people there are certainly we have to pay attention and it is just difficult with the spare the square footage that they dedicate for them to compete with us on the independents.
Think there'd be more aggressive there theyre desperate this is a tough market and by all indications.
If we're struggling on the top line. They are struggling worse. So yeah, I think there have been a little bit more aggressive, but then being aggressive doesn't really bother us because our spread against them so significant that the.
We still feel like we compete with them very well I don't know if youre seeing anything different in the market.
That's absolutely right I think the changes that we see are not the rationale at all and then also in some cases on days of promotional activity that we see they said definitely Indian carrier quality of product not in comparison to what we do but they are paying close attention to it and nothing irrational.
Okay, Great and then just Holistically, Tom you talked about holding the 42% gross margin rate, but but.
But at what point would you sacrifice that to.
To invest in price and try to induce activity or do you feel like the price actions on price reduction efforts that you've made over the past year, but I would tell you that that's not that potentially wouldn't be successful.
And about that longer term.
Yes, I would say, we certainly have played around with price and multiple tests in multiple markets and we tend to price against ourselves. So a customer comes within the store and they're trading down to something that we adjust price on so the only place where we see good traction is in.
Installation materials, which is what the profile is often we have been more aggressive on the pricing side on that will continue to be aggressive there because we know that pros in the store every other week, we want to make sure that we're getting them taken care of so.
And our ability to grow gross margin, we can still be aggressive within installation materials to be aggressive with price, but because we're getting gross margin from first cost reduction we're getting it from lower freight expense, our better and best penetration has really remained unchanged still driving business, that's growing gross margin and innovation and newness. So.
This isn't a category where this is there's a lack of traffic in the marketplace buying the category versus this is a pricing issue. So I feel very comfortable with where our pricing that will continue to be aggressive with installation materials.
But will drive gross margin improvement through our other levers.
Okay. Thanks, Tom.
Thanks, Bob.
Our next question is from the line of Seth Sigman with Barclays. Please proceed with your questions Hey, everyone. Thanks for taking the question.
I wanted to follow up on the slowing performance that you saw in the third quarter and then again into the fourth quarter. What are you seeing in terms of mature stores versus newer stores and part of it that is just context around how you have a lot of new stores that are supposed to come into the comp base here in the fourth quarter I think they were expected to contribute positively so I'm curious.
Whether that is part of what's changed here as well.
Hey, this is Brian so I'll kind of start and let Tom or Trevor jump in if they need to.
It was kind of broad based across we still were positive comp for the class of 'twenty two so the new stores coming in the base for positive in Q3, albeit kind of low single digits, where they were at when you think about it we comped nine three still.
Still keep that same kind of waterfall, that's always there in that 3% to four point range and so if you think about our most mature stores. They were comping down in that low double digit range and so that's kind of held true across the board.
Again, we've seen it across it's not that our most mature stores are deviating from that trend at all.
Got it Okay and then just one follow up question around the fourth quarter thinking about the margins here.
Trying to go through the math I mean, you said gross margin should be similar maybe up sequentially. I mean does that imply more deleverage than you typically would see I mean is there any other reason why you would see that impact is that just waited store openings in the fourth quarter or anything else that you would highlight there.
Yes. This is financial jump in so yes, I mean look it.
It's all around the sales declines so in Commscope from 93 to down 12. Your most mature stores are going to see a little bit more deleverage that's really what's driving it so you're right we should be at if not modestly above sequentially in gross margin. So we will delever a little bit more that's kind of where time and Trevor alluded to is there are things we're going to action. It is just hard to change your business over 30 days. So we're taking a hard look at it we're take.
Those actions today in November and into December, but again, we're halfway through the quarter. So that's going to cause a little bit more deleverage, but again, we feel confident that's not the proxy for next year in each quarter.
Just one other thing I would call out is we're opening 15 of our 30 plus stores.
Our new stores SG&A is materially higher than our mature stores. So we're opening almost.
Not quite half of our stores in one quarter and Q4 is a little bit lower volume on a relative basis because of the holidays Thanksgiving and Christmas and so it's both what Brian saying plus we have a disproportionate amount of new stores opening in Q4, this year, even relative to last year.
Got it okay. Thank you.
Our next question is from the line of Steve Forbes with Guggenheim. Please proceed with your question.
Good evening everyone.
Tom maybe just a follow up on a comment you made about the new class of stores performing at the low end of performance, where maybe for Bryan as well can you guys. Just reframe the cost to build year, one sales and EBITDA for US and then comment on how the 'twenty 'twenty four classes of stores are currently being planned relative to those metrics given the <unk>.
<unk> Q2 earnings.
Yeah. This is Trevor I'll jump in Brian commented as well.
And we've said for years that we think new stores do somewhere between $14 million to $16 million in sales in the brown $3 million and four wall EBITDA.
We're probably going to be slightly below that $14 million in sales. So there is obviously a little bit of profitability, but fortunately our gross margin rate has gone up and so our profitability is not going to be down that much because our gross margin rate is performing nicely.
And so overall profitability is not going to be that far off I think today, we're spending it depends on whether its a build to suit or second use facility, but call it $10 million $10 million in Capex, we don't have to.
Spend much on working capital because of our days payable we put inventory in the stores, but we have a pretty long days payable.
So it's not much above that $10 million and our performance.
Feel very confident again after opening 200 plus stores over the last 12 years, we've been here, we're going to get above the 12% return on invested capital when you measure it over a 20 year period of time.
And we've done much better than that most of our history, but there's been inflation in all sells a little bit lower now so hope that answers your question, but.
I think the sales will be lower than that $14 million for a year or so.
But the profitability will not be that much off the $3 million because our gross margin rate is higher than what we've seen historically for the stores that opened a little bit below that pro forma for them to get to that $28 million to $30 million, obviously, that's going to be a comp tailwind kind of skip a wind in our sales throughout the next couple of years, you guys thinking about that too.
And then just a quick follow up on the you.
You mentioned comps for CRO above.
DIY when a company average any any specificity.
Sitting there on how the pro comp is trending in the quarter.
It was slightly negative.
Thank you.
Thank you.
Closer to a mid single digit negative I apologize I was looking at the wrong number yes, Q3 from Q2, we did see a little bit more deceleration in our pro because it was down about I think we quoted was down 1% in Q2 and in Q3, it's down roughly about five 5%.
Thank you.
And now I'll turn the last one it's possible to ask questions. We ask you. Please limit yourself to one question.
Our next question is from the line of Jonathan manage this scheme with Jefferies. Please proceed with your questions.
Great. Thanks, so much one question with two parts.
Part is on <unk>.
2024 units for 2023 has been an odd year in terms of.
Warehouses opening cadence I think we have around half of them opening in <unk> and I know, it's early but could you give us a ballpark view of the cadence for 2024, and how youre thinking about the split between new and existing that's the first part.
Yes. This is trevor.
Our cadence will be moderately better we'll do more in the first half of the year.
But we're still probably going to have a decent amount of stores to open in September and December so the cadence will be better.
We'll give you more details on that in the February call is because we finalize up those but we still have a little bit more in the back half of the year.
The second part of the question yes.
Second part was on the comments about 2020 for gross margin being up.
And it sounds like supplier concessions may be a primary driver just curious whether we need.
To see flat behavior from the consumer in terms of.
Mix.
<unk> is growth margin expansion possible, if we do see a potential trade down from better and best products.
I still think so.
We haven't seen that yet and we are in.
Like we are in the worst of it and we still haven't seen the customer shipped down to.
Buying a they're doing smaller projects, but they're not stepping into the opening price point. The good products are still buying more better and best those are continues to lead the way in.
With all of the.
Things strategic things that we're doing ourselves between innovation within the category, we will bring that into better margin rates between designer influence on sales you've got 935 designers in 200 stores.
They're getting better and better so their influence on gross margin and selling more additional items to the to the projects that come with higher margin, whether it's trends or drains or whatever I think those things along with supplier concessions give us the ability even if the consumer were to trade, which I don't think would happen to still grow gross margin. This is <unk>.
Brian So just don't forget too as I mentioned in the pre remarks.
Weighted average cost.
All the savings that still continued into this year from supply chain and product costs are going to work their way through into early next year as well. So it's not necessarily you need additional concessions next year to even see that kind of sequential step up a little bit.
Thank you. Our next question is from the line of Steven Zaccone with Citi. Please proceed with your question.
Yeah. Thanks for taking my question I wanted to follow up on that last point. So the fact that we've seen that's better best side of the business is still holding up well are you concern that flows into next year. I mean, do you think that we'll likely see trade down I guess in that environment. How do you think about your competitive positioning.
So.
As I've said.
This call in a few calls I don't see it changing I think that when a consumer when the end user elects to do a project in our category I think the difference in buying to better and best isn't all that significant if you think about if they are buying for a bathroom to step up to the better and best product isn't all that significant so.
The differences within the looks of the product.
Size of the product I, just think I see consumers that elect to do that job to continue to buy the better and best stuff, but just look that much better within the store.
Before travel goes sorry, just the other thing I was just going to say is that from a competitive standpoint, that's the good thing for us because on the on the real better and better stuff, we're competing against the independents and no matter how irrational if they.
Get aggressive in their price, we're still going to be so much better for them are the moat against them is just so wide. So.
I just I think projects May continue the size of projects may continue to be a challenge. So until this passes but I don't think better and best is going to change significantly so far it hasnt.
The next question is from the line us.
Fashion with Wedbush Securities. Please proceed with your question.
Hi, This is Nathan Friedman on for Seth Thanks for taking my question.
Just wanted to ask about 2020 core you mentioned the risk for potentially negative comps.
Based on the broader environment, but can you help us understand how operating margins.
Low single digit comps, even after all the cost cuts that you are going to take.
Yes, I was just trying to.
I think we're just too early to talk about that yeah. We're still in the planning process. We kind of gave some of the comments around sales and gross margin and stuff, but I mean.
If comps are negative I would expect our operating margins to be under pressure.
Thank you. Our next question is from the line of Keith Hughes with <unk> Securities. Please proceed with your question.
Thank you spent a lot of talking to industry and LPT and issues of importing I was was that an issue for you in the quarter and I notice.
The.
Laminate Lvg category well underperformed the average sales, we just just generally where that product is going.
It has nothing to do with in stock.
Our in stock within the store and in that category is at all time highs. Our in stock is great. So as you are talking about less capital.
I mean on the Rhino side, I think it could be related to deal. So the job sizes all of them at vinyl mainly go to a bigger room, especially at the job sizes get smaller and language why now would be the immediate impact.
Category compared to the others.
Yes, that's exactly why you see tile increasing as a percentage as well more bathrooms and other things like that just to put a bow on it yes, we're doing a lot more smaller projects, we know thats going into a bathroom and in a bathroom you usually go to trial. So that's why we call business one of the reasons Sal business performing so much better than the laminate is youre much.
Tile in the bathroom in Atlanta, but even though some of our laminate, we could put them out right.
Our next question is from the line of Andrew Carter with Stifel. Please proceed with your question.
Building upon that you're not worried about out of stocks right now I think youre parts were down 8% how much more could you continue with kind of negative purchases and then kind of building on that for cash flow are you still committed to the kind of three year Capex targets you laid out at the Investor Day, Therefore, big step up next year or does next year look kind of similar to this.
This year in terms of Capex. Thanks.
Yes, the vast majority of our inventory is replenishment based so we buy based on what we sell.
So I don't think there'll be any big changes as we mentioned earlier, we made some aggressive moves late last year that are benefiting us on the inventory line as we get to the end of the year I would expect our inventory levels to be down kind of in the mid single digit range is what we're.
What we're thinking about for for that and the second part of the question again on Capex, Yes. So for next year as we talk about it just think about our the only thing thats going to cause a step up and if you remember from the analyst day is the two distribution centers that will have to come online right. Now those are one is going to be late 'twenty early 'twenty five and the other one is going to be kind of more middle.
2025, those are the only two reasons that you would see a step investment next year, so you'll see a little bit towards the back half and capital expenditures just for that.
Our next question comes from the line of Greg Melick with Evercore ISI. Please proceed with your question.
Hi, Thanks, I wanted to follow up on the store openings into next year, you said that you have.
I saw some optionality, which makes a lot of sense, but theres still more front end loaded is that because there's a natural cadence of where you're already pregnant with a store and youre going to have to do it and what does that lead time.
As you think about flexibility into the back half of next year and beyond.
So repeat the question again, I want to make sure I understand it well.
Well I guess, we're going to do 35, plus stores next year now, it's 30% to 35.
So I'm wondering.
Well, if you decide to not open a store.
How much in advance do you have to make that decision before the balls are rolling.
Okay.
Yes, like nine months and so we have the ability to still.
We're working on all of our sites for next year, we have optionality to do up to 35 sites. We can push those sites into the following year, if we had to towards the back.
So we have optionality.
On a good majority of the sites, but it takes nine months to make that decision yet so the ones that are opening earlier, obviously they are under construction, we feel good about them. They are in great locations and so those are the ones that you want to try to pull in as fast as you can because again some sales of other no sales for pushing them out.
Thank you.
Our last question comes from Justin Kleber with Baird. Please proceed with your question.
Hey, Thanks, Good evening, everyone. Just wanted to follow up on that new store performance question.
My math would suggest youre in recent stores are annualizing at maybe $10 million or so in year, one it sounds like you've pushed back against that given your comments about the stores being at the low end.
Of your pro forma so just wanted to clarify were you thinking youre when sales are going to land for recent stores and then what type of AAV do you need in order to breakeven on a four wall basis in year one thank you.
Yes, so I'll take the first part of that and then Tom whichever can jump in if they want any clarity right now we're looking at this year's class is probably going to average about 13 to 14, so whenever we say kind of at or below that that pro forma range. So I would say that this year's classes looking at 13, 14, which again, we're still happy with and pleased with given the macro environment that they're opening today and then.
I would say from a breakeven standpoint, it really depends on location depends on everything and so does the cost structure amongst the class can be significantly different so from a breakeven standpoint, we haven't really given that but most of the time, it's around 8 million to $10 million, depending on where the location is from a breakeven standpoint, just given the cost structure right.
Yes.
Okay, well, we appreciate the questions and appreciate your interest we look forward to updating you throughout the quarter and we will talk to in the next call. Thank you everybody.
Goodbye.
That concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.