Floor & Decor Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 20, 2025

There are 10 speakers on the call.

Operator

Greetings, and welcome to the Floor and Decor Holdings Fourth Quarter twenty twenty four Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Wayne Hood, Senior Vice President of IR.

Operator

Thank you, Wayne. You may begin.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to Floor and Decor's fiscal twenty twenty four fourth quarter earnings conference call. Joining me on our call today are Tom Taylor, Chief Executive Officer 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 that are subject to risks and uncertainties.

Speaker 1

Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions, is a forward looking statement. The company's actual future results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its SEC filings. Floor and Decor assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company will discuss non GAAP financial measures as defined by SEC Regulation G.

Speaker 1

We believe non GAAP disclosures enable investors to understand better our core operating performance on a comparable basis between periods. A reconciliation of each of these non GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our Investor Relations website at irflorendecor.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.

Speaker 2

Thank you, Wayne, and everyone for joining us on our fiscal twenty twenty four fourth quarter and full year earnings conference call. During today's call, Brian and I will discuss some of our fiscal twenty twenty four fourth quarter and full year earnings highlights, then Brian will share our thoughts about fiscal twenty twenty five. Let me start by saying how excited we were to announce in January the appointment of Brad Paulson as our new President, reporting directly to me. As many of you know, he will succeed Trevor, who is retiring in March after a remarkable fourteen year career with us. We wish him well.

Speaker 2

Brad brings nearly two decades of relevant experience and will be a valuable addition to our executive team, helping to lead the next chapter of Floor and Decor's growth. Most recently, he served as the CEO of North America for Rentokill Initial PLC, a global leader in pest control, hygiene and wellness services. Prior to Rentokill, Brad was CEO of Rexill USA, a leading electrical parts distributor. He has held the position of Chief Operating Officer at HD Supply and has had various leadership and merchandising roles at The Home Depot. Brad is an accomplished leader with experience in retail, commercial and service based organizations.

Speaker 2

His deep understandings of home improvement, merchandising, retail and commercial sales and supply chain operations will be particularly valuable to our company. Moreover, his customer service and associate support principles align perfectly with our core values. Let me now comment about our fiscal twenty twenty four fourth quarter and full year earnings results. Our leadership team is proud of our store and store support teams. Despite the challenges we face within hard surface flooring category in fiscal twenty twenty four, they successfully executed our sales and customer service initiatives to grow our market share while diligently managing costs.

Speaker 2

Thanks to their collective efforts, we reported better than expected comparable store sales, earnings flow through, operating cash flow and earnings per share for the fourth quarter of fiscal twenty twenty four. We delivered fiscal twenty twenty four fourth quarter diluted earnings of $0.44 per share, which includes a favorable $6,800,000 or $0.05 per share net benefit from a derivative litigation settlement in December of twenty twenty four. This net settlement benefit was not contemplated in our prior earnings guidance. For the fiscal twenty twenty four year, we reported diluted earnings of $1.9 per share, which includes the $0.05 net benefit from the settlement proceeds. As Brian will discuss in more detail, we are in a strong financial position that allows us to navigate through the short term and at the same time make long term growth investments during this cyclical downturn in flooring.

Speaker 2

Specifically, we continue to invest in opening new stores of various sizes and new and existing markets and innovative and trend forward merchandise, technology and our associates. This has allowed us to grow our market share despite the industry contracting and prepared us to maximize sales and profitability once the industry's cyclical growth accelerates to historical rates. We take a long term view when making these investments as we are optimistic about the secular spending opportunities in hard surface flooring and our adjacent categories. The demand for housing continues to outpace supply and the forty year median age of owner occupied housing is continuing to increase. We believe the supply and demand imbalance in housing and aging housing stock remains a significant secular growth opportunity as older homes will need updates after the past several years of postponed remodeling.

Speaker 2

Turning to our new warehouse store format growth. December 2024 marked a historic milestone in our company's growth journey. We opened our two hundred and fiftieth store in North Seattle, Washington, reaching the halfway point towards our vision of operating 500 warehouse format stores in various size markets across The United States. Over the past three years, we have opened 93 warehouse format stores, including locations in five new states, underscoring our commitment to strategic growth despite the cyclical pressures in our industry. We remain excited about our future sales and earnings growth prospects as approximately 55 of our stores have opened in the last five years, leaving what we believe is plenty of room for growth along the maturity curve.

Speaker 2

Our commitment to opening new warehouse stores has contributed to our market share growth and positions us well for when industry fundamentals improve. In the fourth quarter of fiscal twenty twenty four, we opened 10 new warehouse format stores, culminating in 30 new warehouse format stores opened in fiscal twenty twenty four. At the end of fiscal twenty twenty four, we operated two fifty one warehouse format stores and five design studios in 38 states. In the first quarter of fiscal twenty twenty five, we have already opened new warehouse format stores in Venice, Florida and Covington, Louisiana. We plan to open seven new warehouse format stores in the first half of twenty twenty five including Toulton, Oregon Kissimmee, Florida San Antonio, Texas and two stores in California, Gilroy and Chula Vista.

Speaker 2

Currently, we plan to open 25 new warehouse format stores in fiscal twenty twenty five and close one store at the end of the first quarter of fiscal twenty twenty five. Most of our new stores will be located in existing markets. If macroeconomic conditions are less favorable than we anticipate, we have flexibility to adjust this number downward as most of these openings are slated for the second half of the fiscal year. We recognize we cannot control the short term cyclical pressures affecting the hard surface flooring industry and their impact on the first year sales of our new stores we open. However, we have identified specific strategic actions we can take to maximize their chances for success during this challenging period.

Speaker 2

In fiscal twenty twenty five, we plan to be more intentional about reaching new customers. We intend to emphasize impression driving media and messaging updates to grow local brand awareness. By taking these actions, we believe we can expand our brand awareness, attract more new homeowners and pros and create a strong foundation for long term growth. Moving to our total and comparable store sales. Our fiscal twenty twenty four fourth quarter total sales increased by 5.7% from the same period last year and comparable store sales decreased by a better than expected 0.8%.

Speaker 2

For the 2024 year, our total sales increased by 0.9% to $456,004,000 driven by the opening of 30 new warehouse format stores and growth at Spartan Surfaces. While our fiscal twenty twenty four comparable store sales declined by 7.1%, we saw improvement each quarter with the fourth quarter being the strongest of the year. Fourth quarter comparable store sales decreased by 0.8%, a notable improvement from a 6.4% decline in the third quarter, a 9% decline in the second quarter, and an 11.6% decline in the first quarter. The improved sequential sales trend partially reflects long awaited modest growth in existing home sales. Despite elevated mortgage interest rates, existing home sales rose for the third straight month in December, the longest growth streak since early to mid-twenty twenty one.

Speaker 2

Our fourth quarter average ticket comp increased by 1.3, the only quarterly increase in fiscal twenty twenty four. Our average ticket comp benefited from a favorable product mix and the positive impacts of hurricanes Helene and Milton. Additionally, the enhancements we have made in associate training, including micro learning sessions, are yielding positive results. The training boosts their confidence in articulating the features and benefits along our merchandising continuum. Fourth quarter comparable transactions continued to sequentially improve declining by 2.1% from the same period last year.

Speaker 2

Breaking down our comparable store sales by month, October declined by 4.8%, which followed an increase of 8.1% in November and a 4.8% decline in December. Adjusting for the Thanksgiving holiday shift from fiscal November to December, comparable store sales for November and December combined grew by 1.2% from the same period last year. We estimate the fiscal twenty twenty four fourth quarter benefit to our comparable store sales from Hurricanes Helene and Milton was approximately 110 basis points. In the first quarter of fiscal twenty twenty five, our quarter to date comparable store sales have decreased 1.7%. From a regional perspective, we continue to see encouraging comparable store sales trends emerging from our West Division, where fourth quarter comparable store sales grew modestly year over year.

Speaker 2

Our hearts go out to all of those impacted by the California wildflowers, which only impacted our San Gabriel and Woodland Hills stores for a few days. Among our merchandising categories, the fourth quarter total sales growth in wood, installation materials, stone, decorative accessories and adjacent categories increased above the company average compared to the same period last year. The sales growth in these categories reflects successful merchandising initiatives to grow these categories. We expect these initiatives to benefit us in 2025 and beyond. The sales growth in laminate and vinyl and tile were below the company average, but showed sequential improvement.

Speaker 2

In fiscal twenty twenty five, we are excited to continue delivering new innovative products and programs to our homeowners and pros. We will expand our merchandise offerings in adjacent categories, including testing a high quality, stylish, semi custom cabinet program at approximately 40 warehouse stores and online in the first quarter. We can now offer online semi custom cabinets, express ship plywood cabinets, cabinet accessories, decorative hardware and cabinet samples that we can ship to the job site. This initiative helps our homeowners and pro customers complete kitchens and other cabinet projects and is expected to drive incremental sales growth to our stores. Furthermore, we will reset decorative accessories to improve the customer experience and productivity further.

Speaker 2

We'll also continue expanding our outdoor and pool offerings and XL Slab program. I will now discuss our supply chain and how we expect to manage anticipated tariffs in 2025. First, we are pleased that the International Longshoremen's Association and the U. S. Maritime Alliance reached an agreement in January.

Speaker 2

As a result, we did not experience any material supply chain disruptions. As we enter fiscal twenty twenty five, our merchandise in stocks are strong. We continue to closely monitor the fluid developments regarding tariffs on products we sell, particularly trade disputes between The U. S. And China.

Speaker 2

These trade disputes will lead to additional tariffs beyond the previous 25% imposed on most products that we sell that are produced in China. For example, on February 1, an additional 10% tariff was announced for all products from China. As previously discussed, we have been actively working to mitigate tariff cost pressures over the past five years by successfully diversifying our countries of origin. In fiscal twenty twenty four, China accounted for approximately 18% of the products we sold, down from approximately 25% in fiscal twenty twenty three and approximately 50% in fiscal twenty eighteen. In the fourth quarter of fiscal twenty twenty four, China accounted for approximately 16% of the products we sold.

Speaker 2

We expect our diversification strategies to continue to meaningfully reduce our reliance on China in 2025 and beyond. We source products made in Canada and Mexico and the portion of our products sold in these countries for fiscal twenty twenty four was not material. We are proud to report that The United States is now our largest country of manufacturer accounting for approximately 27% of the products we sold in fiscal twenty twenty four, up from approximately 20% in fiscal twenty eighteen. Regardless of any new tariffs timings and potential impacts, our strategy remains the same. First, we expect to continue negotiating costs with our vendor partners to mitigate the incremental costs.

Speaker 2

And second, we will continue sourcing from alternative countries where it makes sense. Third, we will increase retail pricing as we deem appropriate while maintaining our price gaps. We believe our scale and worldwide direct sourcing model for more than two forty vendors in 26 countries is a competitive advantage, particularly amongst independent flooring retailers and distributors. Shifting to our connected customer pillar of growth, Our fiscal twenty twenty four fourth quarter connected customer sales increased by 6% compared to the same period last year, accounting for approximately 18% of sales. For the full year, connected customer sales rose by 3%, accounting for approximately 19% of sales.

Speaker 2

In fiscal twenty twenty five and beyond, we plan to continue integrating our processes and technology solutions to provide an inspirational, robust and seamless personalized experience across all of our engagement channels. To that end, we are continuing to work towards ensuring continuity between our website and stores. Moreover, we plan to continue improving our website and mobile download speed and visual navigation. We believe we have an edge with visual, shoppable content in our online image sets and galleries. These image sets and galleries promote inspiration and infuse project selling throughout the customer journey.

Speaker 2

We are excited to add more inspiring designer and user generated content in 2025, which will benefit our free design services. In support, we plan to expand our long form content library by including care guides, refinishing guides and more in-depth articles. Overall, we expect these strategies among others to further improve our brand affinity. In fiscal twenty twenty four, we adopted a more convenient confirm to pay payment option, which allows customers to provide payment information more conveniently and allows individuals they authorize to finalize the purchase and pick up those products on their behalf. Confirm to Pay is replacing an outdated paper based process.

Speaker 2

It has proven to be a successful payment option with high adoption, particularly among pros, making it easier to transact with us. We believe this could slightly pressure our connected customer sales penetration metric as sales shift from point of sale from online and other payment options. However, we better serve our pros and homeowners with multiple seamless payment options. This is just a change in the geography of where and how customers will transact with us. Let me comment on design services.

Speaker 2

We are pleased to report that design service sales growth significantly accelerated throughout fiscal twenty twenty four with the fourth quarter being the strongest. These results reflect strong transaction growth and our commitment to design services staffing at a time when labor hours were diligently managed. Additionally, our designers are focused on closing high value design opportunities and building brand awareness and project credibility with homeowners and pros. Consequently, we achieved the highest Net Promoter Score for design services since we began measuring it. In summary, we are successfully executing our strategy of offering homeowners and pros an elevated and personalized design experience across in store, online and in home channels.

Speaker 2

These combined efforts led to a remarkable year for our design services, highlighting our commitment to excellence and customer satisfaction. Turning my comments to PROS. We're pleased to report that the total sales to PROS continued to grow in the fourth quarter of fiscal twenty twenty four, accounting for approximately 50% of our total sales. Pro comparable store sales improved sequentially throughout 2024. These results demonstrate that our grassroots supply house approach is effective focusing on engagement and nurturing strong relationships with pros.

Speaker 2

We continue to benefit from partnering with native advertising platforms that provide a practical and cost efficient way to attract and retain new pros. Additionally, we benefit from our pro service managers spending more time outside of our stores and in new zip codes, where they directly engage with pros to build brand awareness, understand their needs and provide tailored solutions. Finally, we successfully held 144 educational events in our stores in 2024 and plan to have 155 events in 2025. We believe these events are industry leading in hard surface flooring and physical 2025 will focus on driving growth among new pros and reengaging inactive pros. Finally, I'll discuss our commercial business.

Speaker 2

Fiscal twenty twenty four fourth quarter sales at Spartan Services declined 17.9% from the same period last year. The sales decline is primarily due to weakness in the multifamily residential market, pricing pressures in the commercial LVT market and difficult comparisons against record December sales at Spartan last year. Collectively, these factors pressured Spartan's fiscal twenty twenty four fourth quarter and full year gross margin and EBIT. In fiscal twenty twenty four, Spartan Surfaces sales grew by 10.1% to $215,200,000 compared to last year, but EBIT declined 25.4% to $14,300,000 from $19,100,000 in fiscal twenty twenty three, primarily due to pressure on the gross margin rate. In fiscal twenty twenty five, Spartan will continue to focus on the healthcare, education, senior living and hospitality sectors.

Speaker 2

As previously discussed, these are high specification sectors of the commercial flooring market where the opportunity for long term growth and profitability is greatest. These sectors generally have high quarter conversion rates, reoccurring revenue and more attractive profitability. We plan to continue making investments in sales representative growth, particularly in those sectors that are most important to us. Additionally, we plan to continue building out Spartan's infrastructure to support growth at scale and achieve our long term market share and profitability objectives. The necessary long term investments we are making will impact Spartan's near term EBIT with fiscal twenty twenty five EBIT rate expected to be about flat with fiscal twenty twenty four.

Speaker 2

However, they are critical to driving significant market share growth in the coming years. It's important to note that the investment cycle and return timeline in our commercial business differs from what many of you are familiar with within our retail operations, reflecting the distinct nature and opportunities of the commercial sector. Over the long term, Spartan Services aims to become a disruptive leader in the specified commercial flooring industry by establishing a comprehensive nationwide sales network. This network would prioritize high specification products and leverage strong relationships to provide superior availability, delivery and service nationwide. Let me now turn the call over to Brian.

Speaker 3

Thank you, Tom. In fiscal twenty twenty four, we successfully grew our market share while effectively managing our profitability, balance sheet, inventory and cash flows even amid a decline in demand for hard surface flooring. I'm extremely proud of the resiliency of our business model even though the contracting flooring industry is putting immense pressure on other specialty flooring retailers in this environment. As Tom mentioned, we are pleased to be in a strong financial position allowing us to continue investing in new store growth, technology enhancements and our associates. Our investments in our associates training and development enable us to proudly announce that our Net Promoter Score reached a record high in January 2025.

Speaker 3

This achievement underscores our associates' ongoing dedication to serving our homeowners and pros with any of the hard surface flooring project. As we embark on fiscal twenty twenty five, we believe that we have the right teams and strategies in place to control the controllables and flex our business model as market fundamentals change. Now, let me discuss some of the changes among the significant line items in our fourth quarter and full year income statement, balance sheet and statement of cash flows, as well as our outlook for 2025. We continue to be pleased with how we are managing and expanding our gross margin. Our fiscal twenty twenty four fourth quarter gross profit rose by 8.9% driven by a year over year increase of approximately 130 basis points and our gross margin rate to 43.5%.

Speaker 3

Our fiscal twenty twenty four full year gross profit grew by 3.8% driven by a rise in sales and an increase in our gross margin rate of approximately 120 basis points to 43.3% from 42.1% in the same period last year. The full year gross margin rate of 43.3% was in line with our previous guidance of 43.2% to 43.3%. The increase in gross margin rate for the fourth quarter and full year is primarily due to lower supply chain costs. Our fiscal twenty twenty four fourth quarter selling and store operating expenses increased by 10.1% to $347,400,000 from the same period last year. The $31,900,000 increase in selling and store operating expenses was primarily driven by $40,900,000 for new stores, partially offset by a decrease of $8,300,000 in our comparable stores.

Speaker 3

As a percentage of sales, selling and store operating expenses increased by approximately 130 basis points to 31.4% from the same period last year. Our fiscal twenty twenty four full year selling and store operating expenses increased by $123,100,000 or 9.9% from last year. The increase in these expenses was primarily driven by 156,700,000 for new stores and $5,600,000 at Spartan, partially offset by a decrease of $39,200,000 in our comparable store expenses. As a percentage of sales, selling and store operating expenses deleveraged by approximately two fifty basis points to 30.6%. The delevering of these expenses was better than we expected, primarily due to higher than forecasted sales and effective expense management, which led to strong earnings flow through.

Speaker 3

Our fiscal twenty twenty four fourth quarter general and administrative expenses decreased by 5.4% to $64,000,000 from the same period last year. As a percentage of sales, fourth quarter general and administrative expenses leveraged by approximately 70 basis points to 5.8%. A couple of expense items impacted our fourth quarter general and administrative expense line, including an increase of $3,300,000 in personnel expenses from higher incentive compensation and additional staffing costs, which was more than offset by the legal settlement recovery benefit of $6,800,000 Additionally, expenses related to our ERP implementation were approximately $2,500,000 which was in line with our expectations. Our fiscal twenty twenty four full year general and administrative expenses increased 5.3% from the same period last year. As a percentage of sales, general and administrative expenses deleveraged approximately 30 basis points to 6% from 5.7 in the same period last year.

Speaker 3

Moving to pre opening expenses, our fiscal twenty twenty four fourth quarter pre opening expenses of $10,600,000 decreased 16.6% from the same period last year. As a percentage of sales, pre opening expenses leveraged by approximately 30 basis points to 0.9% compared to the same period last year. This decrease resulted from a decline in the number of new store openings compared to the same period last year. Our fiscal twenty twenty four full year preopening expenses decreased 3.1% from the same period last year. As a percentage of sales, pre opening expenses leveraged by approximately 10 basis points to 0.9% from 1% in the same period last year.

Speaker 3

Fiscal twenty twenty four fourth quarter interest expense net decreased $900,000 or approximately 103.8% from the same period last year. Our fiscal twenty twenty four full year interest expense net declined 72% to $2,800,000 below our most recent annual guidance of approximately $4,000,000 driven by higher interest income on higher cash balances from the same period last year. Our fiscal twenty twenty four fourth quarter effective tax rate increased to 19.9% from 18.1% in the same period last year. The increase was primarily due to a decrease in excess tax benefits related to stock based compensation awards. Our fiscal twenty twenty four full year effective tax rate declined to 18.8% from 21% in the same period last year, in line with our most recent guidance of approximately 18%.

Speaker 3

The year over year decrease was primarily due to a decrease in state income taxes and an increase in excess tax benefits related to stock based compensation awards. Our fiscal twenty twenty four fourth quarter adjusted EBITDA increased 11.1% to $119,800,000 exceeding total sales growth of 5.7% primarily due to the 130 basis point increase in our gross margin rate. Our fourth quarter adjusted EBITDA margin rate increased 50 basis points to 10.8% from 10.3% in the same period last year. Our fiscal twenty twenty four full year adjusted EBITDA declined 7% to $512,500,000 which exceeded our most recent guidance of $490,000,000 to $500,000,000 primarily due to higher than forecasted sales. For the fiscal twenty twenty four full year, our adjusted EBITDA margin rate declined 100 basis points to 11.5% from 12.5% in the same period last year.

Speaker 3

Our fiscal twenty twenty four full year depreciation and amortization was $232,500,000 Moving on to our balance sheet and liquidity, we maintain a strong balance sheet concluding fiscal twenty twenty four with $200,300,000 in debt and $187,700,000 in cash and cash equivalents. In terms of liquidity, we ended fiscal twenty twenty four with $905,700,000 of unrestricted liquidity, consisting of $187,700,000 in cash and cash equivalents and $718,000,000 available for borrowing under our ABL facility. As of 12/26/2024, our inventory increased by 2.4% to $1,100,000,000 from the same period last year. Fiscal twenty twenty four capital expenditures, including those accrued at the end of the period, declined to $376,300,000 from $566,300,000 in the same period last year and were in line with our previous guidance of $360,000,000 to $390,000,000 dollars The decrease in capital expenditures was primarily due to the timing of spend for the class of 2024 occurring more in fiscal twenty twenty three and pushing more of the class of 2025 spend into fiscal twenty twenty five. Additionally, in the second half of fiscal twenty twenty four, we started to realize some of the $1,000,000 to $1,500,000 cost out savings from construction and optimizing the box size.

Speaker 3

We expect to fully realize these savings for stores opening in the back half of twenty twenty five. We believe our strong financial position provides us the flexibility to navigate the macroeconomic environment while pursuing prudent strategic growth within our existing capital structure. Turning to our fiscal twenty twenty five outlook. We enter 2025 facing considerable geopolitical and policy uncertainty and mixed leading economic indicators. While existing home sales grew modestly for the third straight month in December to 4,200,000 units, affordability remains challenging and steady interest rate cuts seem less likely than they did last year.

Speaker 3

It's unclear how these factors will flow through to the economy and the flooring industry specifically. Therefore, we are carefully planning fiscal twenty twenty five and are providing a wide range of potential earnings outcomes in our earnings guidance. We expect to have better visibility for fiscal twenty twenty five following March and April, which are more important months that should inform us better about twenty twenty five's outlook. As a reminder, every one point change in comparable store sales compared with our annual plan impacts earnings by approximately $0.1 per share. Let me now share our thoughts about fiscal twenty twenty five and our guidance.

Speaker 3

Total sales are expected to be in the range of $4,740,000,000 to $4,900,000,000 or increased by 6.5% to 10% from fiscal twenty twenty four. As Tom mentioned, this guidance reflects the planned opening of 25 new warehouse format stores. Comparable store sales are estimated to be flat to an increase of 3%. Average ticket comp is estimated to be up low single digits. Transaction comp is estimated to be slightly negative to up low single digits.

Speaker 3

Gross margin rate is expected to be approximately 43.4% to 43.7%. Our gross margin rate is expected to be adversely impacted by approximately 60 to 70 basis points from the two new distribution centers, which is incorporated into our guidance. The low end of our guidance assumes our gross margin rate is approximately the same throughout the year. The high end of our guidance assumes the second half gross margin rate could be higher than the first half. Selling and store operating expenses as a percentage of sales are estimated to be approximately 31% to 31.5%.

Speaker 3

General and administrative expenses as a percentage of sales are estimated to be approximately 6%. General and administrative expenses include approximately $9,000,000 related to our finance and merchandising ERP implementation. Pre opening expenses as a percentage of sales are estimated to be approximately 0.7%. Interest expense net is expected to be approximately $3,000,000 tax rate is expected to be approximately 21% to 22% depreciation and amortization expense is expected to be approximately $245,000,000 Adjusted EBITDA is expected to be approximately $540,000,000 to $575,000,000 Diluted earnings per share is estimated to be in the range of $1.8 to $2.1 Diluted weighted average shares outstanding is estimated to be approximately 109,000,000 shares. Moving on to capital expenditures, our fiscal twenty twenty five capital expenditures are planned to be in the range of three thirty million dollars to $400,000,000 including capital expenditures accrued.

Speaker 3

We intend to open 25 warehouse format stores and begin construction on stores opening in fiscal twenty twenty six. Collectively, these investments are expected to require $200,000,000 to $245,000,000 We plan to invest approximately $20,000,000 to $25,000,000 dollars in new distribution centers in Seattle and Baltimore. We intend to invest approximately $50,000,000 to $60,000,000 in existing stores and distribution centers. And finally, we plan to continue to invest in information, technology infrastructure, e commerce and other store support center initiatives using approximately $60,000,000 to $70,000,000 Operator, we would now like to take questions.

Operator

Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Michael Lasser with UBS. Please proceed.

Speaker 4

Good evening. Thank you so much for taking my question. So given the slightly weaker performance quarter to date, what do you think is driving that? And how have you factored in some of the potential from a change in administration into your outlook for the year, such as tighter immigration policy and the impact that that could have on the workforce who would be consuming your product? Thank you.

Speaker 2

Hey, Michael, this is Tom. I would preface with the slight slowdown in comp from Q quarter to date versus Q4. There's a lot of weather noise. We've had parts of the country that have gotten snow that don't get snow, that forced shutdowns and week to week we have to close stores and that's affected our quarter to date business. In my opinion, I think that's a part of it.

Speaker 2

We in our business historically when there's been weather impacts, it comes back. We get it. So it comes back over time. So we'll see how that plays out. We're certainly prepared for it.

Speaker 2

The stores are in good shape and we're ready for it. As far as the immigration policy changes into our forecast, it's too early to tell. We hear the same thing that you hear that there's pressure on some of the contractor workforce. But so far, I don't think that that's playing anything into our demand. And as we learn more, we certainly would communicate more.

Speaker 3

Okay.

Speaker 4

My follow-up question is you saw much greater flow through in the fourth quarter than your normal rule of thumb would suggest. So how telling is that experience moving forward? Meaning, if you comp up 5% this year rather than the 0% to 3% that you are expecting, how should we think about the incrementality or the flow through to the model, could it be above the $0.1 per point of comp that you guided to?

Speaker 3

Thank you.

Speaker 2

Yes. I'll let Brian handle more of the numbers part. But yes, Michael, I mean, the fourth quarter is a bit of a demonstration of what happens when sales come. When sales are better than we think, we flow through pretty well. We have I think we've done a good job over the last eighteen months to two years of taking costs out of the business and we're not adding it back.

Speaker 2

So when sales surprise us in a positive way, we flow through well. And if that number grew to five, we would flow through really well. So we hope that happens. I'll let Brian fill in the blanks on the number side of it if you want to.

Speaker 3

Yes. Hey, Michael, it's Brian. So obviously, you saw we had pretty strong flows through. Just when you're looking at that, don't forget that in Q4, we also had $6,800,000 benefit related to a derivative legal settlement. So when you take that out, that was worth 60 basis points within Q4.

Speaker 3

So when you back that out, I think our more natural flow through was in the low 40s. As I'm looking at it, there were a couple of other benefits that hit in Q4. Traditionally, our flow through model would be low 30s to mid 30s. We communicated on the last call as sales pick up because we've got 25% of our stores on minimum hours that we should see higher flow through. So we should see that in 2025 somewhere in the high 30s range.

Speaker 3

So you're right that that low 40 was a bit higher than what we would expect, but I still would expect if we step above our 3%, we should flow through in the high 30s at minimum. Thank you very much. Good luck.

Operator

Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed.

Speaker 5

Good afternoon, everyone. Hey, I want to like to follow-up on incremental margins, same topic. The business is levering on negative comps. So the idea that there are not expenses that need to come back and I know the guidance doesn't imply that and Brian you mentioned the one point of comp 0.1 dollars of EPS, which basically says normalcy. I think you still have ERP going on.

Speaker 5

So what has changed or what is what are you doing that you can continue managing SG and A in such a range that dollars don't need to come back when the top line returns?

Speaker 3

There will still be investment. I mean, we flex our hours around transactions. If you think about our stores, we still average about 55% fixed cost, 45% variable. The two biggest variable components are labor, like our personnel within the stores. And so we need to make sure that we match that with transactions.

Speaker 3

So again, on the upside or downside, we can flex those. And then there's also some discretionary spend where we're constantly refreshing the stores. We have reflows, resets. We have so much innovation and newness that we need to make sure that we showcase that. Those are the two biggest buckets that we have to kind of flex within there.

Speaker 3

So assuming we still have the opportunity to do that. Again, I think you just heard me say 25 of our stores are on minimum hours. So again, if things were to step down, that's 75% of our fleet that we could still kind of flex within there. And then on the way up, again, we don't need to invest as much, which creates that higher flow through. So again, you're always chasing yourself on the way up.

Speaker 3

On the way down, you can never quite cut fast enough.

Speaker 2

I'd add just a couple of things. We've been investing through the downturn. So we don't have to catch up investment. So the hours will flow as they flow over 25% of the stores on minimum hours, the sales go up and that the flow through on that is really good because we don't have to we don't add hours to that.

Speaker 3

Yes. Over the last two years, because I combined them, we've taken out $42,200,000 from our comparable stores over the last two years. And in Q4 alone, if you look at the two year stack, we've taken out $12,900,000 So our teams have been resilient. Our service score is as high as they've ever been. So I mean, we're in a good place today, but again, we need to make sure we take care of our customer first.

Speaker 5

Quick follow-up on the guidance, the zero to three. If you get to the middle to the high end in series, you would be exiting the year in mid to high single digits. I don't know if you said this in the prepared remarks. I only heard that there was some flex in store count if the backdrop changes, but curious what type of housing backdrop you assume? Is this just maturation or just immature stores comping into this comp base and therefore you're getting to those mid single digit comps by the end of the year?

Speaker 5

Thanks.

Speaker 2

Yes. I mean, I'll start and let Brian win a little bit. We 55% of our stores are still in their maturity curve. So we're expecting a benefit from those stores as the year goes on. Our comp waterfall stayed intact.

Speaker 2

So we've opened a little bit less stores, but the waterfall stayed intact. So we should get some benefit of those stores that are immature. We are not expecting housing to rebound to historical levels. We're anticipating that housing is going to bounce along and hopefully it's better than it was a year ago. As I've said on multiple calls, I believe that if the existing home sales get into a positive territory for a consistent amount of time that we should be able to grow our same store sales in that environment because more people will be buying hard surface flooring.

Speaker 3

Yes. And Simeon, I'll just give you a little bit of color on that. So you're right. We do expect sequential improvement in our comp. Obviously, as Tom alluded to, quarter to date, we're down 1.7%.

Speaker 3

So we expect comps in Q1 to be down just slightly, low single digits. And you're right, it's sequential improvement, but we still expect low single digits throughout every quarter. Q4 is going to be a little pressure just because we're lapping what we just did in Q4 of this year. So there was a little bit of an uptick there. But again, it should be low single digits across our average ticket.

Speaker 3

It's pretty much trends remain the same throughout all four quarters and its transactions, as Tom alluded to, that we expect to improve. So at the high end, existing home sales would have to get a little bit better, but again to Tom's point, not back to historic levels. We do still expect this to be a slow grind as we said on the last call.

Operator

Thank you. Our next question comes from the line of Chris Hovers with JPMorgan Chase and Company. Please proceed.

Speaker 6

Thanks. Good evening, guys. I had a follow-up there. I mean, it's just as you think about the cadence of the year, do you think the weather, the hurricane lift is bigger in the first quarter than it was in the fourth quarter? There was some pressure to start November in terms of a headwind from the actual hurricanes and insurance payments are seem to be more delayed.

Speaker 6

So is that a bigger number? And then on the other side of it, you're going to lap existing home sales at a little mini rebound here. You look at pending home sales numbers are running down sort of mid single digit. So what's is the hurricane the offset that doesn't create more of a near term divot here in the first to second quarter from lapping that better home sales number?

Speaker 3

This is Brian. I'll take a stab and then Tom can jump in. The benefit so far quarter to date is it's in line with what we said for Q4. So the offset of that is what Tom said, which is really just some of the storm impacts that we've seen. So when you think about it, that should be there.

Speaker 3

Most hurricanes for us depends on if it's flood or if it's wind damage. But if it's flooding, we'll see the biggest impact the first two quarters, if not the third quarter. We see the arc of that usually go about sixteen to twenty months. It can, but it dissipates pretty quickly after it gets past that second to third quarter of impact. And that's what's implied in the guidance that we gave.

Speaker 6

Okay. So there's no like tough lap on a year over year basis on existing home sales earlier in the year that would slow the business further?

Speaker 3

No. Year over year, you're right. When you look at February and March, they were really strong numbers last year. And then once you get past that, the number dips below 4.2 and continues kind of throughout the year until you hit what Tom said in his prepared remarks where October, November, December started to pick back up. So you're right, the summer months will have much easier compares in existing home sales.

Operator

Thank you. Our next question comes from the line of Zack Fadem with Wells Fargo. Please proceed.

Speaker 7

Hey, good afternoon and congrats on the progress. As you think through the incremental new tariffs, the higher supply chain costs, maybe we could start with the game plan for like for like pricing in 2025? I think you mentioned some increases coming. And then when you think about your price gaps versus peers, like how have those evolved through 'twenty four? And how do you factor that in 2025?

Speaker 2

How we can deal with it? What's happened so far, we think we can deal with the China change pretty well. We've done a good job of diversifying out of there. We're doing a good job negotiating with our suppliers. But if we can't, then we will take prices up.

Speaker 2

I think, our versus our

Speaker 7

Okay.

Operator

We apologize for the technical difficulty. Yes, we can hear you now. Sorry, speaking now, I put the other line on hold. Yes, we can hear you.

Speaker 8

Alicia, can you hear us?

Speaker 7

Yes. Yes. We're ready.

Operator

Okay, great. Zack Fadem, I believe

Speaker 7

Yes, I'm here. Yes.

Operator

Zack, you may proceed with your question. Okay.

Speaker 3

Okay. Lisa, we're

Speaker 7

ready. Yes. Not sure if you heard the first question or not, but basically it was on the game plan for like for like price increases in 2025, where your price gaps versus peers have been trending in 2024 and how you factor that into the changing environment?

Speaker 3

And

Operator

Apologize, we lost the connection again. Matt, can you hear us?

Speaker 3

Matt, are you dialing in up there or over here? Is this Dimely?

Operator

Apologize that we are facing technical difficulties. Zack, if you wouldn't mind waiting for a few more moments.

Speaker 7

No problem.

Operator

Thank you. Thank you guys for your patience. I believe we have the speakers back on the line.

Speaker 2

Sorry for the technology difficulty. So I'm not sure if we heard the last question. So go ahead.

Speaker 7

Yes. Tom, it's the price gap versus peers and the price increase question. I think we missed that one.

Speaker 2

Yes. So when I said price gap versus peers, we still feel pretty good. When you look back historically, our spreads versus the people we compete with are they remain intact and we're comfortable with that. And I think what I said earlier is and I don't know if you guys heard me on the tariff part of it, we'll deal with the tariffs the way that we've always have. We'll first negotiate with our supplier.

Speaker 2

The second is, we'll try to continue to diversify out of countries that are affected. And then third, if we have to pass price, we will. Our main competition is the independents. We're comfortable with our spreads and we've got the ability to flex price if we have to flex price. So, we're paying attention and trying to react to the news as it comes.

Speaker 2

Our buying from two fifty suppliers in 25 plus countries is a tremendous advantage and it gives us lots of flexibility. So, I feel good on the pricing front, feel good without from what I know today, I feel good about our ability to address the tariffs that could change because things are a little fluid, but we'll be prepared.

Speaker 7

Got it. And then just two quick ones for Brian. Hopefully, I only need to ask one time. First of all, 25 new store productivity, how are you thinking about that? And then on the 60 bps to 70 bps of DC cost, is that even through the year or is it more double that, but second half weighted?

Speaker 3

Yes. Hey, Zach. So neutral productivity should be similar to the past kind of two years that we're seeing. It's still kind of below our historical targets, as we think about that. And then on the gross margin piece, you're right, the 60 to 70 is the full year amount.

Speaker 3

It will start in Q1 around 30 basis points and then kind of grow throughout the year. So we'll exit with a much higher impact, but then grow into it as we continue to open more stores.

Speaker 7

Got it. Thanks for the time, guys.

Speaker 3

Yes. Thank you.

Operator

Thank you. Due to the nature of the technical issue, we will extend the call for a little bit, but we please ask that you refrain to only one question for so we may answer as many participants as possible. Our next question comes from the line of Seth Sigman with Barclays. Please proceed.

Speaker 4

A couple product questions. Anything to read into wood and stone being positive and leading the improvement here? And then I'm curious on LVT, it did seem to improve in the quarter, but still tracking below the company average. How do you feel about that? Do you think that just reflects demand for the category being weak?

Speaker 4

Or do you think something has changed competitively for that category? Thanks so much.

Speaker 2

So I'll start. Ursun's here with me in case I'd miss something. But I'll so first I would say on Wood and Stone, yes, we're pleased with what we're seeing. Our merchants have done a good job continuing to approve our assortments across the lines. We're in better stock because those have come in and helped.

Speaker 2

Certainly, we've had a major competitor close some stores, probably seen some benefit from that as well. From a stone perspective, we've rolled out an outdoor program in stores that's having a positive effect that's added categories to the stone department. Same thing, we've added some new products in stone that that's probably acting benefiting as well, but we're pleased with that. I am pleased with the trajectory of vinyl and laminate. If you look at it quarter by quarter, we continue to improve in a pretty significant way and we are in terrific in stock.

Speaker 2

Merchants have done a good job with new products within the category, some new signing in the departments make it easier to understand. But overall, we feel real good about the trajectory of what's going on in that business as well.

Operator

Thank you. Our next question comes from the line of Stephen Forbes with Guggenheim Securities. Please proceed.

Speaker 8

Good afternoon, guys. Tom, Brian, maybe a complex question, but I feel like an important one. You guys mentioned the waterfall benefit to comp. And I think a lot of us are just trying to better understand sort of what's transpiring within the store cohorts. So the question is, one, can you reframe sort of what the sales and EBITDA margin profile is at what you would define as a mature store today versus historic disclosures?

Speaker 8

And then any way to help us contextualize sort of what is the comp spread that you're seeing as we think about maybe the 2023 cohort versus the twenty twenty two cohort? As we sort of try to contextualize or better understand what you're framing as the waterfall likely turns to a potential positive contributor?

Speaker 3

Yes, it's we've I'll answer the latter first. We've never given what that waterfall is. I'm going to say it's a material meaningful difference between our new stores and our mature stores. But what I would tell you is today, obviously, with the macro environment the way it is, our stores that are five years or older today are doing about a little over $22,000,000 close to $22,500,000 but they're still producing EBITDA in the low 20s. And so they're still extremely profitable, they're still producing, but obviously the volumes have come down a little bit.

Speaker 3

So to contextualize again the comp waterfall, we've just never given that level of granularity. So we've never been that specific about it other than to say there is a material difference between obviously our new store comp all the way down to what we would consider a mature store.

Operator

Thank you. Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed.

Speaker 1

Hey, good evening. Just a quick one for me. Just with smaller peers struggling, you touched on in a minute. Just curious, what you're seeing from the competitive landscape and if you think you are starting to gain share over the past few months from competitive closings?

Speaker 2

Yes, I do. I mean, we still are hearing anecdotal closings across the country of different competitors. I do think that I've said before, the longer that this goes on, the more that plays on our benefit, because we've continued to invest in the stores and continue to grow. So I think from a competitive standpoint, we're in as good a shape as we've ever been. Yes.

Speaker 2

And what is a good example of you saw a competitor close a bunch of stores, we're probably seeing some of the benefit of that. And if we see more close, we'll see the benefit. I mean, the stores are in terrific shape. Our inventory levels are great. The new products are really good.

Speaker 2

We have multiple initiatives to try to control what we can control. So we're ready when

Speaker 3

it comes. And service scores are size they've ever been. Correct.

Operator

Thank you. Our last question comes from the line of Karen Short with Melusis Research. Please proceed.

Speaker 9

Hi, thanks very much. It's actually Melius, but I think you all know that. Good to speak to you. I just was curious with the lower cost structure in general, could you help frame whether or not there would be more torque, I guess, on the upside to EPS with a 1% delta in comps? Or would you look at it as more of a scenario where you would invest and that flow through would still be that kind of $0.1 range to EPS with the 1% delta in comp?

Speaker 9

Thanks.

Speaker 2

So in honor of Trevor's last call, we're going to let Trevor answer that. Trevor?

Speaker 7

Yes. First, I'd say I'm so proud after eight years. I mean, the team that we've gotten to these calls is doing well. I do think so. Our gross margin has gone up nicely over the last two or three years and our cost structure has come down as Brian articulated earlier.

Speaker 7

And so, sales are good. I mean, there's certainly investments we want to make,

Speaker 4

but we'll do that at

Speaker 7

a measured pace. And so, yes, I think it's possible like you saw in Q4 that when sales are better than planned, we're going to flow through very nicely. And as we've always been, if there's investments that we need to make that are going

Speaker 2

to be material, we'll disclose those. I mean, I think the only thing I'd add to what Trevor said, over the since we've been public, we've always had cycles where we've outperformed and we've made decisions on what we had to invest in. I think in this cycle that we're in now, we'll want to see some sustained before we invest too much back into any infrastructure, we'll want to see performance strong for a while. So that's why I do think that will flow through at the rates that Brian talked about.

Speaker 3

We will. And just to give you guys context around it, this is Brian. So at the midpoint of our guide, our mature stores are actually levering in this environment. The only thing that's causing the deleverage is the new stores coming in. But exactly as Trevor alluded to, as we move up that as you start approaching 5%, the entire ecosystem starts to lever.

Speaker 3

So So we lever even inclusive of, because that's the question you guys always have. So I just wanted to tell you, if we were to get up to a 5% comp, the entire store and selling line leverages. And so that's always been our case as mid single digits. In this cost structure, it will take about a 5% comp for the entire base to lever.

Speaker 2

Thank you, Brian, and thank everyone for joining the call. Sorry, we had a little bit of technical difficulty and hopefully we got to everyone's questions. I'd like to thank Trevor. This is Trevor's last call. He's asked if he could come to Moore.

Speaker 2

I've said no. So, but we appreciate all of his contributions over the last fourteen years. We certainly wouldn't be here without him. So, we wish him well. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Floor & Decor Q4 2024
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