Q4 2023 Floor & Decor Holdings Inc Earnings Call
Go ahead Wayne.
Wayne: Thank you operator, and good afternoon, everyone welcome to Florida cause physical 2023 fourth quarter earnings Conference call.
Wayne: 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 get started I want to remind everyone of the company's safe Harbor language comments made during this conference call and webcast contain forward.
Wayne: Looking statements within the meaning of the private Securities Litigation Reform Act of 1995 and are subject to risk and uncertainties <unk>.
Wayne: Any statement that refers to expectations.
Wayne: Projections or other characterizations of future events, including financial projections for future market conditions is a forward looking statement the.
Wayne: The company's actual future results could differ materially from those expressed in such forward looking statements for any reason, including those listed in a SEC filings.
Wayne: <unk> no obligation to update any such forward looking statements.
Wayne: Please also note that past performance for market information is not a guarantee of future results during.
Wayne: During this conference call the company will discuss non-GAAP financial measures as defined by SEC regulation G.
Wayne: We believe non-GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods a.
Wayne: A reconciliation of each of these non-GAAP measures.
Speaker Change: To the most directly comparable GAAP financial measure can be found any branch press release, which is available on our Investor Relations website at I R top floor and decor dotcom and recorded replay of this call and related materials will be available on our Investor Relations website, Let me now turn the call over.
Speaker Change: Tom.
Thomas V. Taylor: Thank you Wayne and everyone for joining us on our physical 2023 fourth quarter earnings Conference call.
Thomas V. Taylor: Today's call Trevor and I will discuss some of our fiscal 2023 fourth quarter and full year earnings highlights then Brian will provide a more in depth review of our fourth quarter and full year financial performance and share our thoughts about some of our financial projections for fiscal 2024, we are pleased.
Thomas V. Taylor: Deliver better than expected physical 2023 fourth quarter diluted earnings per share of 34 cents, primarily due to total and comparable store sales that exceeded our updated expectations. We communicated our third quarter earnings call for the physical 2023 year, we delivered diluted earnings per share.
Thomas V. Taylor: There are $2.28 exceeding are updated guidance of 214 to 224 per share.
Thomas V. Taylor: Throughout the year, we are proud to have grown our market share and effectively managed our profitability balance sheet inventory and cash flow, while continuing to make significant longterm growth investments towards our goal of operating 500 warehouse stores in the United States overtime as Brian will discuss in more detail we <unk>.
Thomas V. Taylor: Generated 238.6 million and keep free cash flow.
Trevor S. Lang: And physical 2023.
Trevor S. Lang: He achieved these physical 2023 results. Despite the headwinds caused by existing home sales declining to a seasonally adjusted annualized rate of 3.8 million units in December a decade, low is 30th mortgage rates Spike higher two 8% in October and personal consume.
Trevor S. Lang: Consumption.
Trevor S. Lang: Expenditures continued to normalize to services and away from large ticket discretionary goods against this backdrop, we executed what we can control in 2023 by opening 31, new stores successfully executing ourselves driving initiatives strategically growing our gross margin right by 160 <unk>.
Trevor S. Lang: Basis points year over year, maintaining our competitive price caps, continuing to deliver exciting innovation and newness and our merchandising assortments and further diversifying our countries of origin to produce cost and mitigate risks.
Trevor S. Lang: Importantly, weird prudently managing expenses without sacrificing the customer experience, we're thrilled that our customer service scores remain near record high levels in our building on our excellent service scores in early 2024.
Trevor S. Lang: We are particularly pleased to receive high scores for service selection and professional staff. These attributes are essential when consumer spending in the category slows, resulting in declining transactions. We find that typically an assistant customer's average ticket is significantly higher than unassisted customers achieving in building.
Trevor S. Lang: On these results over any housing related spending cycle requires us to make ongoing commitments to investing in our associates finding ways to simplify store processes and deploying technology in store and online to provide a seamless customer experience.
Trevor S. Lang: We proudly promoted approximately 1550 associates and created 2000, new jobs in 2023.
Trevor S. Lang: Our commitment to our associates resulted in notably higher associate retention in 2000, twenty-three, which we believe will help us control costs and support our growth for years to come we believe that by making long term investments will further build our competitive mode and grow our market share.
Trevor S. Lang: As we looked at physical 2024, and beyond we remain focused on executing our key growth strategies. We are fortunate the strength of our business model balance sheet and cash flow allows us to prudently invest in new and existing stores merchandising growth initiatives technology in our commercial business in the face of challenging and.
Trevor S. Lang: History from fundamentals.
Trevor S. Lang: As Brian will discuss in more detail, we're approaching fiscal 2024 with continued rigor in our expense in inventory management and prudent discipline in our growth investments and capital spending as we navigate industry headwinds.
Trevor S. Lang: We have a long history of overcoming challenges with a strong and agile execution and.
Trevor S. Lang: We believe this period just represents another challenge to overcome and our journey to 500 stores. We will continue to make prudent investments that we believe we're well positioned us for accelerated cells market share and strong earnings growth when industry funded fundamentals improve let me now turn the call over to Trevor.
Trevor S. Lang: Thanks, Tom I also want to express my appreciation to all of our associates for their unwavering dedication and collaboration towards serving our customers and executing our key growth initiatives fiscal.
Trevor S. Lang: Fiscal 2023 total fourth quarter sales of $1 billion 48.100 million flat compared to the fourth quarter of fiscal 2022 comparable store sales decline it better than expected nine 4% primarily from the successful execution of ourselves driving and initiatives and cycling past easier sales comparisons.
Trevor S. Lang: Monthly comparable store sales sequentially improved declining 11 six per cent of October 10% in November and 6.7% in December.
Trevor S. Lang: <unk>, our fourth quarter comparable so so so a store sales in the east or the strongest with a decline in the West division improving from the third quarter.
Trevor S. Lang: Fourth quarter comparable store sales and tile wood installation materials and adjacent categories were better than the 9.4% overall cops tour sales decline.
Trevor S. Lang: Within our merchandise Assortments, we continue to see ongoing customer preferences towards are better and best price point products, where we offer industry, leading innovation trends and styles and everyday low prices.
Trevor S. Lang: On an annual basis, our fiscal 2023 total sales increased 3% to 5% to a record $4 billion 413.900 million, primarily from our opening a 31, new warehouse format stores and growth in our commercial business. Our fiscal 2023 comparable store sales declined seven 1% from fiscal 2022, which is modestly better than our.
Trevor S. Lang: Expectations of the 7.8% to an 8.5% comparable store sales decline.
Trevor S. Lang: As a reminder, we are comparing gets fiscal 2022 comparable store sales growth of 9.2% when monthly annualized existing home sales averaged 5.1 million units and 30 year mortgage rates averaged 5.5%.
Trevor S. Lang: And I will discuss our fiscal 2023 transactions on average ticket.
Trevor S. Lang: Let's go 2023 comparable store comparable store transactions required 9.9% in the first quarter, 71% in the second quarter, 6.8% in the third quarter and a better than expected, 4.9% in the fourth quarter.
Trevor S. Lang: For the fiscal 2023 year are comparable store transactions declined 7.2% compared to a $6 six per cent decline in fiscal 2022.
Trevor S. Lang: A fiscal 2023 fourth quarter comparable store average ticket remained under pressure after growing 7.3% in the first quarter and 1.1% in the second quarter or average ticket declined by 2.8% in the third and 4.7% in the fourth quarter.
Trevor S. Lang: The deteriorating sequential trends reflect the macroeconomic housing headwinds, which created an ongoing drag from customers purchasing less square footage second class retail price increases in fiscal 2022, and the impact of our strategic decision to selectively lower retail prices on specific excuse.
Trevor S. Lang: For the fiscal year 2023 are comparable store average ticket increased 0.2%.
Trevor S. Lang: Turning to our early fiscal 2024 cells trends are fiscal 2024 first quarter today comparable store sales are down 12.8% in line with the 2024 sales and earnings guidance, we provided in today's press release.
Trevor S. Lang: <unk> ourselves a crime to $14 seven per cent of January but have improved to a 10.9% decline in February months a day.
Trevor S. Lang: As discussed in prior earnings Conference calls, we expect the first half of 2024 to represent our most challenged sales period as existing home sales could remain below 4 million units and we faced our most difficult sales comparisons of the year Adair.
Trevor S. Lang: Additionally, inclement weather caused us to reduce store hours and many of our stores in January and high wind and rain storms impacted our California stores in early February.
Trevor S. Lang: Certainly my comments are connected customer pillar of growth. We are pleased that are connected customer strategies resonate with our customers when searched interest in the foreign category is down from last year or.
Trevor S. Lang: 2023 fourth quarter connected customer sales increased seven six.
Trevor S. Lang: From last year.
Trevor S. Lang: As a result, the fourth quarter sales penetration increased approximately 160 basis points to 18.7% from 17.1% last year.
Trevor S. Lang: 40 year connected customer sales increased 9.7% from last year accounting for $18 seven per cent of our fiscal 2023 sales compared with 17.4% in 2022, we.
Trevor S. Lang: We are successfully integrating our processes and technology solutions.
Trevor S. Lang: Towards the seamless in store and online experience, we think customers you visit our stores and interact with our website's been substantially more than single channel customers and we plan.
It takes the ongoing industry wide construction delays.
Because we are not fully built out in the United States. We believe we can navigate these ongoing construction delays with a flexible range of market openings in store sizes from 55000 to 80000 square feet, we expect about 25% to 30% of our planned 2024, new warehouse store openings could be in smaller.
Matt stores.
These smaller format stores will naturally have lower first year pro forma cells than their larger store cohort in larger markets. We believe their operating margins can be as profitable as our existing stores due to their lower costs.
Turning my comments to probe, we probably continue growing our market share with our pros by embracing a supply house mindset. We believe embody this mindset with specific strategies contributed to comparable store sales and installation materials growing throughout 2023 in the fourth quarter of fiscal 2023 pros tendered pro tendered sales accounted for approximately 40.
5% of ourselves compared with approximately 44% in fiscal 2022.
For fiscal 2023 pros tender pro tendered sales accounted for approximately 45% of ourselves compared with approximately 42% in fiscal 2022.
<unk> sales growth continued to outpace our homeowner sells in the fourth quarter and the full year of fiscal 2024.
In fiscal 2024, we expect to continue growing our market share with flooring pros by leveraging our pro dashboards and CRM tools to drive engagement with new and inactive and active pros.
We are continuing to build long term relationships and to accomplish this we are focused on having our pro services managers or PSM spend most of their time in the field with a comprehensive comprehensive measurable plan to drive pro context and conversion to better measure the effectiveness of our Psm's contact journey, we are now providing them with enhanced reporting that will enable them.
And field leadership to better understand the effectiveness of their contact and closed journey and adjust tactics where necessary. We are also excited about continuing to deepen our relationship with pro customers by continuing to partner with trade associations to host educational events.
We believe providing educational events is increasingly important to pros as the flooring installation process in certain categories as new and more complex, we see a significant lift in sales from pros attending these events and have plans to expand these events in 2024 in the fourth quarter of fiscal 2023, we hosted 33 educational events and trained approximately 530 pros we held the hub.
23 educational events in the entire year compared with 71 in 2022, we.
We look forward to hosting about 145 educational events in 2024, we're continuing to find new solutions to identify pros that may not have shopped with us and our focus on introducing them to our brand.
We continue to be pleased with the strong sales growth from our regional account managers or Rams as a reminder, our regional account managers serve customers who require specialized account and project management that can be supported by our stores for that reason there sales are included within our warehouse store sales. We ended fiscal 2023 was 60 Rams almost double our fiscal 2021 Ram count of 32.
Let me now discuss our commercial sales we are incredibly pleased with Spartan Services' fiscal 2023 fourth quarter and full year sales and earnings results, which exceeded our expectations and were accretive to earnings. The leadership team continued to build its national presence by adding 23 incremental A&D and contract reps, including those from June from the June 2023 sales.
Master acquisition, ending the year with 86 reps in 2024, we plan to continue to drive sales and market share growth through opportunistic acquisitions organic rep growth.
And boosting rep productivity, we're excited to see Spartans awareness growing, thereby enabling them to attract stronger talent. We also have plans to further integrate sales mastered to drive synergies and penetrate top msas, particularly in New York City.
Additionally, we are excited to enhance <unk> core further with proprietary brands, including community cobalt anymore.
We made these proprietary bands will help grow their market share in healthcare education hospitality homebuilders in the multifamily commercial segments.
These proprietary brands exemplify how Spartan is leveraging Florida core merchants and supply chain teams to design and curious exclusive flooring and wall tile products for commercial specifier supported by a deep nationally available inventory.
Our strategic growth plans for Spartan will continue to index them to more economically attractive less cyclical and price sensitive health care and education commercial segments.
As discussed in prior earnings calls we remain excited about the long term commercial market opportunity and our strategies. We remain confident that we have the right people strategies and business models to continue successfully navigating this challenging macroeconomic environment I will now turn the call over to Brian to discuss our fiscal 2023 fourth quarter financial results in more detail and share our outlook for fiscal 2024.
Thank you, Tom and Forever and CFO I take immense pride in how our teams continue navigating the macroeconomic challenges that those headwinds to our business there.
Their focused efforts enabled us to sustain market share growth and effectively manage our profitability balance sheet inventory and cash flow throughout fiscal 2023, despite contraction in the flooring industry year over year.
We achieved a three 5% increase in sales and generated $803 6 million of operating cash flow, while investing 565 zero million and capital generating $238 6 million and free cash flow as.
As we embark on fiscal 2024, we do so from a position of strength and we believe we will continue to grow our market share by executing what we can control now lets discuss some of the changes among the significant line items in our fiscal 2023 fourth quarter and full year income statement balance sheet and statement of cash flows.
As well as our outlook for 2024.
I'll begin my discussion with gross profit as discussed in prior earnings calls, we are strategically managing our profitability by focusing on growing our gross margin rate fiscal 2023 fourth quarter gross profit increased by one 4% on flat sales from the same period last year, driven by a 60 basis points rise in our gross margin rate.
To 42, 2%.
The increase was primarily attributed to favorable product margins from lower supply chain cost fiscal 2023 full year gross profit grew seven 6% on sales growth of three 5% from the same period last year, driven by a year over year increase of 160 basis points and our gross margin rate.
The increase in gross margin rate can be largely attributed to lower supply chain costs that started in late 2022.
<unk> to continue to benefit us into fiscal 'twenty 'twenty four 'twenty.
Turning to our selling and store operating expenses.
Our selling and store operating expenses for fiscal 2023 fourth quarter of $315 6 million increased by 12, 7% from the same period last year.
This growth is primarily attributed to higher occupancy and store expenses stemming from operating 30 additional warehouse stores versus the same period last year offset by expense reductions in our comp stores of $4 6 million as we continue to manage expenses.
As a percentage of sales selling and store operating expenses Deleveraged by 340 basis points to 31% from the same period last year. This increase is primarily due to operating 30 additional warehouse stores and deleverage in occupancy and other fixed costs as well as store labor, resulting from a nine 4% decrease in our.
<unk> store sales.
For fiscal 2023 full year, selling and store operating expenses increased by $160 8 million or 14, 9% from the same period last year.
The increase in selling and store expenses was driven by $154 9 million for new stores and $8 9 million at Spartan, partially offset by a decrease of 3.0 a million and a comparable store expenses and.
As a percentage of sales selling and store operating expenses deleveraged by approximately 280 basis points to 28, 1% from the same period last year. This increase was primarily attributable to deleverage from a decrease in comparable store sales and new stores.
Turning to general and administrative expenses or.
Our fiscal 2023 fourth quarter general and administrative expenses of $67 7 million increased by 31, 6% from the same period last year. This growth is attributed to investments to support our store growth including.
Including increased store support center staff and investments as well as additional administrative costs, including higher incentive and equity compensation compared to the same period last year.
Wayne: As a percentage of sales general and administrative expenses Deleveraged 160 basis points to six 5% primarily due to deleverage caused by the decline in our comparable store sales.
Wayne: Fiscal 2023 full year general and administrative expenses increased 18, 2% from the same period last year. The increase was primarily comprised of cost to support store growth, including approximately $23 3 million for additional staff and $11 8 million and other administrative costs.
Wayne: Our general and administrative expenses as a percentage of sales de levered by approximately 70 basis points.
Wayne: To 547% from 5.0% in the same period last year the increase as a percentage of sales was primarily driven by the deleverage from a decrease in comparable store sales.
Wayne: Moving to Preopening expenses, our fiscal 2023 fourth quarter Preopening expenses of $12 8 million increased 38% from the same period last year, resulting in a deleverage of 30 basis points year over year. This.
Wayne: This increase primarily stems from the increase in the number of new store openings future.
Wayne: Future stores, we were preparing to open and rent and labor expenses incurred related to delays in getting our stores opened compared to the same period last year.
Wayne: Moving to interest expense for fiscal 2023 fourth quarter net interest expense was <unk> 9 million decreased $4 4 million from $5 3 million in the same period last year. The reduction in interest expense is primarily due to lower borrowings under our ABL facility and higher interest income from our interest rate cap.
Speaker Change: Derivative contracts.
Speaker Change: Turning to taxes.
Speaker Change: Our fiscal 2023 fourth quarter effective tax rate decreased by 450 basis points to 18, 1% from 22, 6%. The same period last year, primarily due to increased tax benefits related to stock based compensation Awards.
Speaker Change: Moving to adjusted EBITDA.
Thomas V. Taylor: Our fiscal 2023 fourth quarter adjusted EBITDA of $107 8 million decreased by 24, 7% from the same period last year, primarily due to expense deleverage from the decline in our comparable store sales.
Thomas V. Taylor: Consequently, fourth quarter net income declined by 46, 4% to $37 1 million and diluted earnings per share of 34 cents fell 46, 9% from the same period last year.
Thomas V. Taylor: Moving onto our balance sheet and cash flow.
Thomas V. Taylor: We maintain a strong balance sheet that we believe allows us to prudently grow within our existing capital structure, even during a period industry contraction, we are particularly pleased with our working capital and inventory management.
Thomas V. Taylor: As of the end of fiscal 2023 inventory of $1 1 billion decreased by 14, 4% from the same period last year generating a positive year over year swing in operating cash flow of $478 3 million.
Thomas V. Taylor: Fiscal 2023, our capital expenditures, including capital expenditures accrued at the end of the period totaled $566 3 million compared with 486.0 million. During the same period last year and within our most recent guidance range of 550 million to $575 million.
Thomas V. Taylor: Consequently, we are pleased to have delivered $238 6 million and free cash flow and had no borrowings under our ABL facility at the end of fiscal 2023. We believe this leaves us well positioned for 2024, we ended 2023 with $752 8 million of unrestricted liquidity.
Trevor S. Lang: Consisting of $34 4 million in cash and cash equivalents and $718 4 million available for borrowing under the ABL facility.
Trevor S. Lang: As Tom mentioned, we have continued diversifying our countries of origin to reduce our inventory cost and mitigate risk in 2023, we successfully sourced products from 26 countries compared to 24 countries in 2022.
Trevor S. Lang: Importantly in fiscal 2023, approximately 25% of the products. We sold were produced in China compared with approximately 50% in 2018.
Trevor S. Lang: We now proudly source approximately 23% of our sales from products that are produced in the United States, We anticipate our continuing diversification strategies to provide a tailwind to our gross margin rate in 2024 and beyond.
Trevor S. Lang: Relatedly, we don't believe the attacks on cargo ships moving through the Red Sea will have a material impact on the flow of our international shipments for ocean shipping costs in the United States.
Trevor S. Lang: Generally only a few of our international shipments are routed through the RNC.
Trevor S. Lang: For shipments that can bypass the red Sea, we increase the lead times from these origins to account for the added transit times around the Cape of good Hope in Africa. Additionally, we have multiyear contracts with some of the world's largest shippers with staggered contract end dates to manage our costs and mitigate risk.
Trevor S. Lang: We are not experiencing capacity issues or facing any material cost increases at this time.
Trevor S. Lang: Global demand is weaker in ocean carrier capacity is larger than during the COVID-19 pandemic period further reducing the risk of supply chain impacts as a reminder, our business is not highly influenced by seasonality or subject to promotional sales and we are in a very good inventory and cost position.
Speaker Change: Let me now discuss some of the assumptions behind our fiscal 2020 for sales and earnings outlook.
Speaker Change: There remains considerable uncertainty and debate about when existing home sales in hard surface flooring spending will return to year over year growth.
Trevor S. Lang: The discussion largely hinges on the direction and absolute level of 30 year mortgage interest rates housing affordability and spending on large ticket discretionary durable goods.
Trevor S. Lang: While we were pleased that 30 year mortgage interest rates have moved lower from our most recent peak of around 8% in October of 2023. They remain elevated. Moreover, it now appears that the pace of potential interest rate cuts in 2024 could be slower.
Trevor S. Lang: And more second half weighted and forecasters previously expected following the recent CPI and PPI report there.
Trevor S. Lang: Therefore, we are prudently planning for continuing headwinds in existing home sales.
Trevor S. Lang: Parent remodel spending and industry growth that is likely to put continued pressure on our business.
Trevor S. Lang: Taking all of these considerations into account, we provided a slightly wider range of potential earnings outcomes in fiscal 2024 as.
Trevor S. Lang: As a reminder, every 100 basis points change in comparable store sales compared with our plan impacts earnings by about <unk> 10 per share.
Trevor S. Lang: For the long run we remain excited about the well documented structural opportunities in repair and remodel influence then including housing demand that exceeds supply and an aging housing stock.
Trevor S. Lang: We still see a path to achieving our long term goal of mid to high teens adjusted EBITDA margin.
Trevor S. Lang: Turning to our fiscal 2020 for outlook.
Trevor S. Lang: Our fiscal 2024 sales are expected to be in the range of $4.600 billion to $4 billion and $770 million and increased by approximately 4% to 8% from fiscal 2023.
Trevor S. Lang: For fiscal 2024, our comparable store sales are estimated to decline 2% to five 5%.
Trevor S. Lang: We expect our comparable store sales to be the most challenged in the first half of fiscal 2024 with the first quarter comparable store sales likely decline low double digits.
Trevor S. Lang: We expect to be flat or return to growth in our comparable store sales in the fourth quarter of 2024.
Trevor S. Lang: We were using the assumption that existing home sales sequentially improved throughout the year and exit at approximately $4 3 million units in the fourth quarter of 2024, and our high end outlook and remaining around approximately 4 million units in our low end outlook.
Trevor S. Lang: For fiscal 2024.
Trevor S. Lang: We estimate our comparable average ticket to decline low single digits and estimate our comparable transaction to decline mid to low single digits, we expect sequential improvement in both comparable average ticket and comparable transactions throughout the year.
Trevor S. Lang: We expect our fiscal 2024 sales to continue to be impacted by lower new store productivity due to the environment and are backend loaded store opening cadence.
Trevor S. Lang: We expect continued sequential year over year gross margin rate expansion throughout 2024 from the fourth quarter of fiscal 2023.
Trevor S. Lang: We estimate the first quarter of fiscal 2024 to have the largest sequential and year over year gross margin rate increase.
Trevor S. Lang: We anticipate our full year fiscal 2024 gross margin rate could approximate 42, 6% to 42, 8%.
Trevor S. Lang: In fiscal 2024, we expect our selling and store operating expenses to approximate 30% of sales at the midpoint of our 2020 for outlook.
Trevor S. Lang: The year over year deleverage in expenses from 2023 is primarily attributed to the decline in our comparable store sales.
Trevor S. Lang: We expect the first quarter to be prime for pieces of new store openings late in 2023 as well as the Dupont may comparable store sales.
Trevor S. Lang: Additionally, the fourth quarter will be pressured due to most of our new store openings falling late in the third quarter and fourth quarters of 2024.
Trevor S. Lang: We estimate fiscal 2020 for general and administrative expenses to be approximately 6% of sales slightly above 2023.
Trevor S. Lang: The expense deleverage is caused by the decline in our comparable store sales and incentive and equity compensation recapture.
Trevor S. Lang: Fiscal 2020 for pre opening expenses are estimated to be approximately 1% of sales and flat to 2023.
Trevor S. Lang: Fiscal 2020 for interest expense is expected to be approximately 12 million to $14 million.
Trevor S. Lang: The increase over 2023 is primarily due to an increase in borrowings on our ABL facility and interest rate increases.
Trevor S. Lang: We estimate our fiscal Q4, adjusted EBITDA, approximately a decline by 5% or grow about 2% to approximately 520 million to 569.
Trevor S. Lang: Our adjusted EBITDA margin rate is expected to be approximately 11, 3% to 11, 7%.
Trevor S. Lang: For fiscal 2024 diluted earnings per share are estimated to be in the range of $1 75 to $2 <unk>.
Trevor S. Lang: Diluted weighted average shares outstanding is estimated to be approximately 109 million shares.
Trevor S. Lang: Moving on to capital expenditures.
Trevor S. Lang: Our fiscal 2024 capital expenditures are planned to be in the range of 400 million to $475 million compared with $566 3 million, including capital expenditures accrued at the end of the period in fiscal 2023 and to be funded primarily by cash flow from operations and borrowings under our ABL facility.
Trevor S. Lang: More specifically, we intend to make the following capital expenditures in fiscal 2024.
Trevor S. Lang: Tend to open 30 to 35 warehouse format stores relocate two stores and began construction on stores opening in fiscal 2025 collectively these investments are expected to require 315 million to $365 million.
Trevor S. Lang: We plan to invest in existing store remodeling projects and distribution centers, using approximately 60 million to $75 million.
Trevor S. Lang: And finally, we plan to continue to invest in information technology infrastructure E Commerce and other store support center initiatives using approximately 25 million to 35 million.
Trevor S. Lang: In closing the resiliency of our business model has demonstrated our ability to grow our market share in the face of uncertainty during a period of industry contraction.
Speaker Change: On behalf of the entire executive team I want to express our gratitude and extend a personal thank you to our associates.
Speaker Change: Operator, we would now like to take questions.
Speaker Change: Thank you will not be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad.
Speaker Change: Confirmation tone will indicate your line is in the question queue. You May press Star two if you like to remove yourself from the Q1 moment. Please while we poll for questions her.
Speaker Change: Our first question is coming from Michael Lasser from UBS. Your line is now live.
Michael Lasser: Yeah. Good evening. Thank you so much for taking my question one of the pieces of feedback that we've been hearing is that Florida core had been overly optimistic about the the the depth of the downturn that the flooring category was gonna experience heading into 2023.
Michael Lasser: So what what did you learn and why is it different that you are not being overly optimistic. This time to expect that your comps are going to flatten out or turn positive by the fourth quarter of this year.
Michael Lasser: Hey, Michael This is Trevor I I'd say, we certainly are not prescience, we take in all the data we can with our own internal resources and then we also look at the economist.
Trevor S. Lang: And you know last year around the same time people were expecting interest rates to go down and existing home sales to increase.
Michael Lasser: That is expected to happen again, and it is starting to happen a little bit on the mortgage rate side and I guess, we had a slight bit of good news on existing home sales today.
Michael Lasser: You know come in at 4 million versus $3, seven but that didn't happen last year things just kept getting worse, the fed was more aggressive and mortgage.
Michael Lasser: Mortgage rates kept going up in existing home sales just kept getting worse. So that's the big difference from last year. This.
Michael Lasser: This year, we'll see if those macroeconomic factors are correct, but assuming mortgage rates do continue to come down a little bit you know there were 8% not that long ago, I think theyre just under seven today and again, it's only one month, but we had a slight improvement in existing home sales that got published today if that continues to happen.
Michael Lasser: That would give us a better backdrop when we last final thing I'll say is when we compare our performance versus others in the flooring sector, even though our earnings were down about 18%.
Michael Lasser: There appear to be materially better than anybody else, we performed well in a difficult environment I think we performed well.
Speaker Change: Yes, I would say the only thing I'd add is that.
Michael Lasser: I think we're being a little bit more conservative than we were last year and our approach on existing home sales. So we're still expecting them to get a little bit better by the time, we enter the U S as evidenced in.
Michael Lasser: Brian language prepared comments, but I think last year, we were more optimistic that the interest rates were coming in it would be better.
Michael Lasser: We're not anticipating that as much this year.
Speaker Change: Got you.
Speaker Change: And my follow up question is on floor and of course market share, especially in our more mature markets where members your location.
Speaker Change: Whatever it is you have the point to point.
Speaker Change: And of course market share trends I think there's some debate about what's happening within those markets and how that is influencing the productivity of some of the more mature for the core location. Thank you.
Speaker Change: Hey, Michael This is Brian I'll jump in first so we believe that we're still taken accelerated market share same where we were in 2022. Historically, we were thinking about one point of market share across the industry and so in the past two years, we think we've taken anywhere from 150 to 200 basis points of market share I mean, we feel really confident and really good about our.
Speaker Change: Our mature markets that we're in today, and we're still gaining share with pros and still getting share of wallet. There. So we're still we're still getting traction and even our most mature markets versus our new ones.
Speaker Change: The only thing I would add if you look at our larger competitors that are 30% of the industry.
Speaker Change: From what we can tell we're meaningfully outperforming them and when you look at the <unk>.
Speaker Change: Three or so public companies.
Speaker Change: That are also selling flooring were meaningfully outperforming them.
Speaker Change: And so from everything we can tell we are growing at a much faster rate on the residential side and then on the commercial side, which is small for us, but still on the commercial side, we're growing that business pretty pretty fast right now.
Speaker Change: Thank you very much I appreciate it.
Speaker Change: Thank you next question is coming from Simeon Gutman from Morgan Stanley. Your line is now live.
Simeon Ari Gutman: Hey, good afternoon, guys I wanted to ask an oldie, but good Easter decremental margin question.
Simeon Ari Gutman: Brian You said I think you said 10 cents for every point of sale.
Simeon Ari Gutman: We were getting a little bit last meeting, we're getting like 25% on the way down curious if that's about right and then.
Simeon Ari Gutman: And if that's right and maybe because youre getting good gross margin expansion and does that mean, the incrementals on the other way actually it could be bigger than what they've been historically.
Speaker Change: I think within the guidance range, it's pretty close to that 10, I think it just depends on how far you are outside the range, which would dictate that because obviously your incentive compensation and other things.
Simeon Ari Gutman: Tend to slow differently. So it really depends on how far you are from the plan that that will drive that so I think last year. We were just so far from the original plan that the flow through was a little bit different this year as we look at as we set the plan. That's why I say, it's versus kind of the way we plan. It we feel pretty good about that 10 on the up and downside, but once you get outside of normal range than it does start to deviate a little bit.
Simeon Ari Gutman: From there it can move anywhere from 10 to 12 to 13, but its not like it moves to twenty-five sea.
Simeon Ari Gutman: So you're right you can have margins up or down anywhere from 35% flow through to kind of 30.
Speaker Change: Okay, and then a follow up is on the Capex.
Simeon Ari Gutman: The number is a bit lower on roughly the same store number of stores. It was much higher I think four to $4 75 versus the $5 60 last year. So my question is first getting to the 500 did.
Simeon Ari Gutman: Did that always have an astro for maybe smaller stores or does the smaller store gets you to even a bigger number now.
Speaker Change: No. We always had I'll I'll take that I'll take a stab at that and we always had in our plans that there would be a three different store sizes, we've got and we already operate today, we have stores that operate under all of those sizes. Today. So it was always in our assumption that some of the single markets that we are a single store markets. We operate in the stores could tend to be smaller and then Theres places where.
Speaker Change: You can only fit small stores. So we prefer the bigger ones, but you know if we're going into inner city places, it's sometimes it's harder to get so smaller stores have always been in that assumption of 500 stores and then I'll just jump in and say a little bit on the Capex Guide majority of the reduction is actually spend for the future class there is a little bit tied to the type of.
Simeon Ari Gutman: Store, we are opening as well we have you know our ground leases versus our second used facilities. This year, we've got a little bit more second used facility I think it's about 60%, whereas last year, we were 60% ground up and so that's a little bit of a change as well so it's a little bit of the class a twenty-five spend that'll happen this year versus what we've done in the past as well as kind of the type of facility.
Simeon Ari Gutman: Another thing that I wanted to talk about as well as we had communicated previously that we would have spent for our northwest Seattle distribution center, we've been able to actually push that out without any sort of affect our operation. So you'll see it just a little bit of spend this year, where we had previously communicated you would see spend for a distribution center as well.
Speaker Change: Thanks, everyone. Good luck.
Simeon Ari Gutman: Thank you next question is coming from Zach Freedom from Wells Fargo. Your line is allies.
Zachary Fadem: Hey, good afternoon. So first one for me on store Opex, because I think you said a quarter ago that a small percentage of your stores were on minimum hours in and I'm curious first of all where are you with that today and then for 2024 is the game plan more about managing the stores to maintain.
Simeon Ari Gutman: Our level of profitability or do you balance that with keeping the store staff to drive growth when the category in flex.
Simeon Ari Gutman: Yes, I think we're still at about a quarter of our stores today are at minimum hours now in this environment.
Simeon Ari Gutman: And obviously evaluated that and done some changes to what the minimum hours or this year I think on the let me say it this way I think at minimum hours for the store the volumes of the stores are doing.
Simeon Ari Gutman: We think that's the appropriate amount of hours and we don't we really try not to go below that minimum just when you think about the number of hours, we're open and the type of product, we're receiving it and getting it to the floor. So we can sell it so.
Simeon Ari Gutman: For those stores, if God forbid they were to go lower and volumes, we probably would not change their hours because theres just a minimum number of hours. It takes to operate a store.
Speaker Change: Got it and then with existing home sales hovering around this $4 million level. Today, you mentioned the level of embedded in the 2020 core outlook, but curious at what level you would need to see.
Simeon Ari Gutman: For the business to step back into positive comp territory.
Simeon Ari Gutman: Sustain positive comps.
Simeon Ari Gutman: Yeah.
Speaker Change: So I'll take a stab Brian you can fill in after the Ana I said it.
Speaker Change: Previous calls that I felt like existing home sales would have to turn positive year over year and I think it's when they do that for a sustained amount of time, but that gives us a much better shot of posting positive same store sales growth. So when when they turned positive there is a bit of a lag it doesn't come instantaneously customers, but there's you know within the three.
Simeon Ari Gutman: The window, we feel like that those costs could turn positive. If you. If you look at <unk> data, we were below 4 million units starting in September of 2023, so to tell us where theres a little bit of lag built in but if 4 million units or above start to happen around that September timeframe, you build and a little bit of a lag for two to three months, that's when we should be able.
Simeon Ari Gutman: To start to see positive comps for the business, which is why you heard me in the pre the pre remarks is we think we will start from where we are today or from where we are today, you're probably going to be in.
Simeon Ari Gutman: The low double digits in Q1, and then turning flat to positive in Q4, if that's kind of what's embedded type and I think just longer term you know the.
Simeon Ari Gutman: Hi, we get on existing home sales of $6 5 million. We're now at a 40 year low of $3 seven eight I think the median is probably five to five and a half. So I just think we've got aged houses. We got you know a lot of.
Simeon Ari Gutman: Millennials and Gen X that are gonna urgency that are going to come in and need homes and so as we get past the time, assuming mortgage rates continue to come down you know this is going to be a really good sector.
Simeon Ari Gutman: Long term.
Speaker Change: Thanks for the time guys.
Speaker Change: Thank you and the interest of time, we ask that going forward you. Please limit yourself to one question.
Speaker Change: Our next question is coming from Steven Forbes from Guggenheim Securities. Your line is my life.
Steven Forbes: Thanks, everyone Trevor maybe I'll just focus on a follow up to your response right there.
Steven Forbes: A lot of sort of just debate about what the sort of post recovery comp profile looks like inclusive about cannibalization and then also just your relative strength in the end market. So any way to help frame. What you think the comp profile should or could return to if if we get back to a more normal.
Speaker Change: <unk> macro with $5 5 million.
Speaker Change: Existing home sales are is still based on your relative positioning in the business and the industry I guess mid to high single digit comp story or or if something has changed.
Speaker Change: We'd love to just hear how you guys are thinking about the next three to five years here.
Speaker Change: Yeah, I think if we go back to five and a half depending on how fast we got there I mean that would be a pretty big lift to us obviously that would that would be fantastic. We would love that I think the things we've done throughout the last certainly 13 years that I've been here.
Speaker Change: Have positioned ourselves to be even better and again, when we compare ourselves just financially comparing ourselves to our peers our performance pretty meaningfully outperforms.
Speaker Change: What are some of the team have done with the assortment and Steve on the operations team.
Speaker Change: Marketing the way, we handle our website I mean, all of those things as you heard in my prepared comments, we continue to invest through the cycle. So I think our competitive position is as good as it's ever been as a category killer and when it turns we're.
Speaker Change: We're in great shape, but I think the other thing.
Speaker Change: Short term when it when it actually turns were in the best in stock levels, we've ever been and so we've seen that happen in my 13 years here when business gets strong and we have really good in stocks in a really good curated assortment of local at the store level. Then we will take off like a rocket we just we need something to happen in the macro that helped.
Speaker Change: Start of those consumers to come in and buy from US I would say that the only thing I'd add.
Speaker Change: I agree with everything you said I think the only thing I'd add is we've also because we stayed on track with our strategy and continue to open stores during a really difficult market that we've got a batch of new stores. So that should give us a really nice lift that they at.
Speaker Change: As the market recovers because they started off slow we should get an incremental lift from those stores.
Speaker Change: Thank you. Your next question is coming from Steven Zaccone from Citi. Your line is now live.
Steven Forbes: Good afternoon, everybody. Thanks for taking my question.
Steven Forbes: I wanted to ask about unit opening plans for 2025. So I think last time, you guys spoke to us it's tough to make changes to 'twenty four.
Steven Forbes: The short timeframe, but as you think beyond the next 12 months.
Steven Forbes: In an environment, where rates maybe stay a little bit elevated is that a concern that maybe you should pull back on some unit openings.
Speaker Change: So I will take that question 2025, it is a long ways away. So we're not quite prepared to talk about our store opening plans, then but I would just say that.
Steven Forbes: It's going to depend on a lot of it will depend on the macro environment and where existing home sales are falling and if we're seeing an increase year over year in existing home sales than we remain confident and nobody in our stores as long as the return on investment continues to look like it has historically so.
Steven Forbes: We'll watch how this year goes today was an encouraging sign with existing home sales in their release was encouraging.
Steven Forbes: We hope that that continues and as we get to the middle part of the year. We will have plenty of time to look at our store count as we get to the middle part of this year and we'll know more than the.
Speaker Change: Only thing I'd add.
Steven Forbes: Tom You know this year I think close to 75% of our stores are in existing markets and as we grow we're going to have more of that because there just won't be as many new markets and we have.
Steven Forbes: A much better understanding of conviction on what our return on invested capital and our returns are in our existing markets.
Steven Forbes: Just because you know when you open your seventh store in a market or your 10th store to market.
Steven Forbes: There's much less guessing versus when you have to go to a new market and so we would always take that into consideration if if if indeed things arent as good and it's more difficult. The places we would consider possibly paring back which to give me that would be very unusual for the last 100 years of housing in America, but if that was true that's probably where we'd pair back it's probably more of a new markets because we still get a good return.
Steven Forbes: In existing markets and Thats, where the majority of our stores are going Amit.
Steven Forbes: The final comment on new store openings is.
Steven Forbes: All of this nothing changes our view that there'll be we can have 500 stores.
Steven Forbes: So it's just a question of timing.
Steven Forbes: Thank you. Your next question is coming from Seth Sigman from Barclays. Your line is my life great.
Seth Sigman: Great Hey, everybody.
Seth Sigman: Wanted to focus on pricing it does seem like there is a little bit more noise in the industry around discounts at maybe prices starting to come down I'm curious what you're seeing what your strategy is going to be here and maybe just put in the context of some of the price changes that you've been testing through the year, where does that stand today. Thank you.
Steven Forbes: Hi, This is Sam the changes we've seen in the market are not irrational in some cases when there is a promotional activity, that's a lower quality or any clearance items could be there too I mean, we see some price reductions and increased at home centers, but independents did not change much.
Steven Forbes: I mean is we tested <unk> been testing the.
Steven Forbes: Retail changes since last February and then as we mentioned in the last quarter certain products that are sort of a maintenance approach had some return good return on some other.
Steven Forbes: Countless it and we continue to look at our balanced portfolio and then try to adjust our retails as needed and if we feel like our gap against the competition is still good and we intend to keep it that way.
Steven Forbes: Thank you. Your next question is coming from Chuck Grom from Gordon Haskett. Your line is now live.
Steven Forbes: Hi, This is Eric on for Chuck I had a question on gross margin, but you're expecting a nice incremental improvement. This year. So what are the additional drivers driving expansion and I also just given that the top line has been soft why not reinvest some of that in the price to drive incremental volume I guess, what have you seen on the price elasticity of those parks in which.
Steven Forbes: You have lowered prices.
Speaker Change: So I'll take I'll take some of that and maybe <unk> can jump in at the end. So yes, we as we guided we believe that we can continue to see benefits in gross margin some of that will come from continued.
Speaker Change: Continued decrease supply chain costs, which burn and over time, our merchants have also done an outstanding job of negotiating cost you know, it's a tough market right now so the vendors want to sell products that our merchants are very good at asking for price and they're doing a good job of get it and as we've as we've diversified outside of outside of China and found new countries of origin, we've been.
Speaker Change: To do that in a better gross margin rate so.
Speaker Change: Between that and then the last thing I would say is that the consumer is still leaning towards better and best products in our starwood blend at a higher margin and our designers are impacting more and more of our sales, which didnt end up impacting our margin all of that turns into we think the margin rates can continue to go down without having to take price. So we feel good about that we do.
Speaker Change: You invest back into prices or sudden mentioned, we've piloted multiple areas of the store, where we've taken price down to see what happens with the unit movement and when we have conclusive results where it works we continue to do that and we'll continue to focus on that.
Speaker Change: Thank you. Your next question is coming from Greg <unk> from Evercore. Your line is now live.
Greg: Hi, Thanks, I wanted to follow up on on the ticket progression, maybe it ties in with the pricing and mix question, but.
Greg: If we think about that comp improvement you talked about through the year. It sounds like it's pretty much all transactions and traffic getting better.
Greg: Do you expect the ticket.
Greg: It would be steady through the year or would that also have a similar progression.
Greg: As you go through your guidance.
Speaker Change: Let me just weigh in person I think Brian has got something he wants to say too when you look at what's going on with our ticket right now being down in the mid single digits, it's really driven by.
Trevor S. Lang: By our laminate business, which last year was our largest category at the vinyl and naturally invite all those are together.
Trevor S. Lang: That's really driven by people are doing much smaller projects and you have a lot less house flipping right. When you were five 6 million existing home sales. There was a lot of investment that we need to go into those homes and you would do for homes or full floors and things like that now what you see is our square footage has come down pretty meaningfully in the double digits because people are doing either their main bathroom or powder bathroom.
Speaker Change: Like that that's part of the reason our tile business is doing well in our installation business is doing well relative so that's probably the biggest driver of that is by far the biggest driver of our ticket is that laminate <unk> and so when the existing home sales go back up.
Speaker Change: We are optimistic they will and they have for the last 40 years.
Speaker Change: We would expect that ticket to go back up because hopefully people are flipping houses and they're working on bigger rooms as well.
Speaker Change: Yes, I mean look I would just add you're right. So from the ticket perspective, that's going to drive, but youre right. The majority of the change in our comp is going to be led by transactions and so that's also on the back of existing home sales. So as those start to lap weaker numbers in the back half.
Speaker Change: So it will it will be a transaction led story, but also ticket will improve throughout the year as well so.
Speaker Change: Thank you. Our next question is coming from Robby <unk> from Bank of America. Your line is now live.
Robby: Oh, Hey, thanks for taking my question.
Robby: I was curious how you are taking the inventory down so much what the secret sauce is there are you are you guys, reducing skus are you bringing.
Robby: Bringing in a lot less are you are you spreading inventory from existing stores into the new stores you can bring in a lot less it's not helping.
Robby: Freight cost situation as well like how are you doing to bring the inventory down.
Robby: We have year over year, I think were high single digit low double digits and Skus <unk> that were down.
Robby: Versus last year, but probably more important than that is again, we werent pressure, but we saw late last year that the trends in fact, they were going to improve and we felt like we could take some actions in late 2022, and then early into 2023.
Robby: We were fortunately right on that and we're able to bring it down as I mentioned, our inventory replenishment team and our merchandising team who've done a fantastic job, even though our inventories down 14%. Our in stocks are probably the best I can remember in a long time.
Robby: So yeah, our team as adroitly manage that this year and and we think when the customer is ready they're going to be very pleased to come in when we get more traffic.
Robby: Thank you next question is coming from Justin Kleber from Robert W. Baird. Your line is now live.
Robby: Yes.
Justin E. Kleber: Hey, Thanks, and good afternoon, everyone just as it relates to the smaller format stores I think about modeling new store contribution in 'twenty four.
Justin E. Kleber: Just how we should think about the year one sales of those smaller stores relative to that $14 million to $16 million benchmark you typically talk about.
Justin E. Kleber: For an average store.
Speaker Change: They are lower.
Justin E. Kleber: I mean generally speaking not always they are lower but then we've got stores like we said were open a store in Brooklyn, right. Then that's obviously going to be we believe we believe I believe a lot higher we work towards opening that balanced portfolio of stores to get those numbers around $14 million to $16 million.
Justin E. Kleber: As our goal you guys will notice when you read our 10-K will just say it now and brought it I've said it both last quarter as well.
Justin E. Kleber: We're slightly below that goal for the class of 'twenty to pretty close to the low end of that goal for the class of 'twenty. Two we opened almost half of our class a 'twenty three so it's probably too early to say for the class of 23, but we would expect because of the macro environment to be below the low end of those goals at this point and then again when the macro comes back we expect are those.
Justin E. Kleber: Numbers to get much better that's the only thing I'd add is that it.
Justin E. Kleber: In a single store market the smaller stores.
Justin E. Kleber: We will be less volume, but if it if the smaller stores and E. As in a normal sized market than the volumes very close to what on what an Astro again.
Justin E. Kleber: Trevor alluded to in the call as the operating margins can be just as good.
Justin E. Kleber: That is the large stores and so the profitability is going to be there because a lot of those will have lower cost structures. So your op margin can be just as good.
Justin E. Kleber: We were looking at a couple of stores in Knoxville in Sarasota, and a couple of other markets that are that are pretty small square footage stores, but do 50% above average store volumes and so we can operate a very productive profitable store small store.
Justin E. Kleber: And again in this case these stores are much smaller, but they do way better than the average store. So we're we're thoughtful and smart about it.
Justin E. Kleber: Thank you. Our final question today is coming from Jonathan <unk> from Jefferies. Your line is now live.
Jonathan: Oh, great. Thanks for squeezing me in.
Jonathan: Good evening, just a follow up on the store opening plan I know its early for 25, but just wanted to understand again.
Jonathan: Smaller store penetration.
Jonathan: In 2024 is that.
Jonathan: Thanks to this kind of macro housing backdrop or can we expect 25% to 30% of.
Jonathan: New warehouse openings going forward being in that smaller format just wanted a clarification there.
Speaker Change: I guess I'd say two things one I think we're Brian maybe in the 10-K, we say we're around 77000 square feet to our average store I think the class of this year I think it's not that far off of that so I don't I don't want to make too much of that we're just trying to be transparent that we are going to be opening more smaller stores and then we have a very big store that we're opening in new York that somewhat offsetting it.
Speaker Change: So I think as we look forward I don't know that we're gonna have a meaningful change because again, we're trying to hit that blended average of those new store economics that I mentioned earlier.
Speaker Change: Okay. So that brings us to the end of the call I'd like to thank everyone for joining us today I do have I want to take a minute and.
Speaker Change: It's a bittersweet day, it's growing the core with one of our long term.
Speaker Change: Executives are executive Vice President of strategic business development and supply chain, Brian Robbins has and.
Speaker Change: We announced this a while back that Brian is going to move on to the next chapter of his professional life and personal life and Brian has been here for 13 years or almost feels like 13 years not quite but Brian has been here. He joined right. After I did he.
Speaker Change: He has built up an incredible supply chain function of Florida, <unk> built an incredible team. He's led our real estate team and development over the last few years and he was behind our first acquisition that has turned out to be a huge success for us So Brian as a friend and Brian is going to always be part of the floor and decor family, but we wanted to take a minute and wish him.
Speaker Change: Well, so oh, Brian we wish you well I know you'll Miss these but we're appreciative of all your contributions to the company I'd like to thank all the associates are listening to the call. Thank all the all the analysts for your interest in our business. We look forward to updating you on our on the on the second quarter call on the first quarter call. Thank you.
Speaker Change: Thank you that does conclude today's teleconference and webcast you may disconnect at this time and have a wonderful day, we thank you for your participation today.