Yahoo Finance Floor & Decor Holdings, Inc. (NYSE:FND) Q1 2024 Earnings Call Transcript
Floor & Decor Holdings, Inc. (NYSE:FND) Q1 2024 Earnings Call Transcript May 2, 2024
Floor & Decor Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Floor & Decor Holdings, Inc. First Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Wayne Hood, Senior Vice President of Investor Relations. Please go ahead.
Wayne Hood: Thank you, operator, and good afternoon, everyone. Welcome to Floor & Décor’s fiscal 2024 first quarter earnings conference call. Joining me on our call today are Tom Taylor, Chief Executive Officer; Trevor Lang, President; and Bryan Langley, Executive Vice President and Chief Financial Officer. Before we start, I want to remind everyone of the company’s Safe Harbor language. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Any 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 & 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. We believe non-GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measures can be found in the earnings press release, which is available on our Investor Relations website at ir.flooranddecor.com.
The 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.
Tom Taylor: Thank you, Wayne, and everyone, for joining us on our fiscal 2024 first quarter earnings conference call. During today’s call, Trevor and I will discuss some of our fiscal 2024 first quarter earnings highlights. Then Bryan will provide a more in-depth review of our first quarter financial performance and share our thoughts about some of our financial projections for the remainder of fiscal 2024. We are pleased to report fiscal 2024, first quarter diluted earnings per share of $0.46, which surpassed our expectations. We take pride in these results as they demonstrate how our teams can manage our profitability by continuing to strategically grow our gross margin rate and prudently manage expenses without sacrificing customer service amid ongoing weak demand for hard surface flooring.
These results are a testament to our store associates’ hard work and dedication, reflecting their tireless work to drive sales and engagement with our homeowner and Pro customers daily. We are happy to report that their efforts continue to result in high customer service scores across all our touch points, which helps set us apart from our competition. During this uncertain demand period for hard surface flooring, it’s important for us to focus on what we can control. Therefore, we’ve taken steps to reinforce our price and value messaging at the front of our stores. We do this by offering bulk out displays of opportunity buys, deals of the weak and compelling adjacent category offerings. Our strategy also includes having well equipped salespeople and designers on the floor at the right time.
We proactively agreed and assist customers who enter our stores by asking them what project are you working on? This approach helps us drive conversions and customer satisfaction. We are also diligent about following up on open quotes and are focused on closing high-value opportunities in design and Pro using our CRM solutions. We use our CRM data and business intelligence tools to drive sales and engagement with inactive, active and new Pros. Additionally, we continue to drive sales with innovative new products like XL [ph] labs that were added to 17 additional locations in the first quarter, bringing the offering to 130 warehouse stores. While demand for hard surface flooring is likely to remain challenged in the near-term, we remain committed to offering our customers innovative and stylish hard surface products of superior quality at everyday low prices in job lot quantities and providing them with a high level of service across all touch points.
These values are fundamental to our growth strategy, and we believe that will help us increase our market share and create lifetime value among homeowners and Pros. Let me briefly turn my comments to the tragedy in Baltimore caused by the Francis Scott Key Bridge collapse on March 26. We know many agencies are working very hard to reopen the channel as quickly as possible, and we thank them for their efforts. We have a 1.5 million square foot state-of-the-art distribution center near the port of Baltimore, one of our four distribution centers in the United States. This facility is open and operating normally. Accepted now received products from other ports. As many of you know, we have a strong experienced distribution and supply chain leadership team with a long history of successfully overcoming unexpected global distribution and supply chain challenges.
We have proudly called on them, again, and as expected, they quickly implemented strategies to ensure the timely flow of inventory to our stores with only a modest impact on profitability. We are working closely with our ocean carrier partners to divert containers to the nearby ports of New York, New Jersey, Norfolk and other East Coast ports. We are leveraging our existing dedicated trucking fleets to help mitigate the cost impacts of transporting products to our distribution center. Recently, a channel that can accommodate smaller commercial vessels open. We will shortly begin moving products on barge vessels utilizing this channel to replenish our distribution center as well. We are hopeful the Baltimore port will start operating normally by the end of May estimate of the Army Corps of Engineers.
Before turning the call over to Trevor, I would like to take a moment to express how proud our leadership is of our team’s ability to manage our profitability, inventory and capital spending despite the challenges posed by weak flooring demand. By doing so, we can continue to make significant strategic growth investments with a long-term goal of operating 500 warehouse stores in the United States. Trevor will share more details about our busy fiscal 2024 second quarter new warehouse store opening plan, which includes the opening of a new 129,000 square foot warehouse format store in Brooklyn, New York. We welcome the people of New York to visit the store and embark on their next inspirational flooring project. Let me now turn the call over to Trevor.
Trevor Lang: Thanks, Tom. We take pride in the execution of our sales-driving initiatives by all of our associates to grow our market share and manage our profitability despite the near-term challenges in the demand for hard surface floored. In the first quarter of fiscal 2024, our sales declined by 2.2% to $1,097.3 million, with comparable store sales falling by 11.6% from the same period last year. As expected, comparable store sales sequentially improved as we cycle past easier sales comparisons and successfully execute our sales-driving initiatives. Monthly comparable store sales declined 14.7% in January, 10.7% in February and 10% in March. Our fiscal 2024, second quarter-to-date comparable store sales declined 9.3% from the same period last year.
As discussed in our fiscal 2023 fourth quarter prior earnings conference call, we expect the first half of 2024 to represent our most challenging comparable sales period. From a regional standpoint, we are seeing some, albeit early positive sales trends emerging from our West division. Comparable store sales are improving sequentially and are better than the company average. The West division was the first to experience softening sales in 2022 and has been less impacted by cannibalization compared to other divisions due to fewer new store openings. Comparable store sales were similar in our East and South divisions, excluding the impact of opening new stores. Turning to our sales trends by merchandise categories. Like the fourth quarter of fiscal 2023, our fiscal 2024 first quarter comparable store sales in tile, wood, insulation materials and adjacent categories were better than the overall decline of 11.6% in comparable store sales.
Laminate and vinyl remains our weakest merchandise category. We are pleased that our merchandise strategies continue to resonate with our customers as they remain consistently drawn towards our better and best price point products, which offer industry-leading innovation, trends and styles at everyday low prices. We are happy that the successful execution of our merchandising strategies continues to lead to a sales mix shift to higher-margin products. Let me comment about our comparable store sales, average ticket and transaction trends. Recall that our fiscal 2023, first quarter comparable stores average ticket increased by 7.3% and by 1.1% in the second quarter before declining by 2.8% in the third quarter and by 4.7% in the fourth quarter.
In the first quarter of fiscal 2024, our average ticket sequentially improved slightly declining 4.2% from the last year as we began to lap strategic price reductions we took in 2023. In terms of transactions, our 2024, first quarter comparable store transactions fell 7.7%, compared to a 4.9% decline in the fourth quarter of fiscal 2023, a 6.8% decline in the third quarter, a 7.1% decline in the second quarter and a 9.9% decline in the first quarter. The trends largely reflect the macroeconomic headwinds as well as customers are purchasing less square footage and undertaking smaller projects. Turning my comments to our connected customer pillar of growth. We are happy to see that our connected customer strategies continue to resonate with our homeowner and Pro customers.
It's worth noting that our customers can engage with us through 10 different touch points during their purchase journey. Achieving a unified execution among these touch points as crucial to the customer experience and a competitive advantage over the independents, particularly for high consideration purchases like flooring. We've observed that customers who visit our stores and engage with our website spend substantially more than single-channel customers. On our most recent earnings call, we discussed how we are integrating our processes and technology solutions to further develop a seamless in-store and online experience. To continue enhancing these strategies, we focused on driving organic traffic growth to our website and further optimizing the customer search experience.
We plan to achieve this by improving our website speed and the quality of our website search, adding inspiring content for customers and refining our online merchandise processes to increase efficiency. In the first quarter of fiscal 2024, we saw a sequential improvement in organic traffic and connected customer sales increased by 1.1% from last year, which resulted in a 100 basis points increase in the sales penetration to 19%. We continue to be pleased with our design services. Our design teams are focused on delivering an elevated design experience through engagement with designers who are passionate about our customer service and our products. The teams are focused on driving engagement, selling the entire project, and following up on high-value sales opportunities by leveraging the power of our CRM solution.
Furthermore, our designers are collaborating with the Pro desk to build relationships with contractors. We are happy to report that our first quarter design sales growth was better than the company's overall sales performance. As a result, the design sales penetration increased sequentially and year-over-year. Moreover, we are pleased that our Net Promoter Score improved sequentially and that efforts to grow our basket selling are working. Moving to our new warehouse store format pillar of growth, in the first quarter of fiscal 2024, we opened four new warehouse format stores ending the quarter with 225 stores, an increase of 16% from the same period last year. These openings include new warehouse format stores in Mansfield, Texas; Summerville, Florida; Glen Burnie, Maryland; and Augusta, Georgia.
We have a busy fiscal 2024 second quarter opening plan and have already opened four new warehouse stores, including Lone Tree, Colorado; Bremerton, Washington; Brooklyn, New York; and Hendersonville, Tennessee. In June, we expect to open new warehouse stores in West Palm Beach, Florida and Columbus, Georgia. We plan to open 30 to 35 new warehouse format stores in fiscal 2024 across various large, medium and small market sizes unchanged from our previous guidance. Most of the 2024 warehouse format store openings are expected to be in large existing markets in the East and the South, where we continue to grow our market share. In fiscal 2024, we anticipate about 30% of our new warehouse store openings will be in the first half of the year. We expect the remaining 70% of our fiscal 2024 new warehouse store openings will be in the second half with the majority of the openings in the fourth quarter.
Turning my comments to Pros. In the first quarter of fiscal 2024, Pros accounted for approximately 45% of sales. Top 20% of our Pros are busy, increasing their average order frequency moderately from last year. We are pleased that our market share with our Pros continues to grow, particularly among our top Pros due to our engagement and supply house mindset. Notably, this mindset led comparable store sales in the first quarter for insulation materials exceeding the company average. Consequently, the first quarter sales penetration rate for insulation materials increased 200 basis points from last year and 220 basis points among the top 20% of our Pros. We are excited about the opportunity to grow our market share further in this underpenetrated pro heavy merchandise category.
We intend to grow our market share fully with Pros by leveraging our Pro dashboards and CRM tools to drive engagement with new, inactive, and active Pros. In the first quarter, we launched a new tools that will better measure the effectiveness of our Store Pro sales managers contact journey. We now provide enhanced reporting to help our field leadership better understand the effectiveness of their contact and closed journey. Furthermore, we have begun to partner with native advertising platforms within bank's digital channels that should provide us with a practical and cost-efficient avenue to drive new Pro acquisitions. We also see an opportunity to drive engagement by increasing the number of Pro customer roundtables we host quarterly. These successful networking events allows us to further understand Pro's needs better and update them on new initiatives and investments we are making that will benefit their business.
Finally, we continue to deepen our relationship with Pros by partnering with trade associations to host educational events. Increasingly, education events are important to our Pros as installation in certain categories is complex. Importantly, we see a significant lift in sales from Pros attending these events. In the first quarter of fiscal 2024, we hosted 25 national tower contractor association and five National Wood Flooring Association educational events training approximately 580 Pros. We are excited to host about 145 educational events in 2024. We are pleased that the first quarter sales from our regional account managers exceeded our expectations and then were significantly above last year. We ended the first quarter of fiscal 2024 with 65 regional account managers compared with 60 at the end of fiscal 2023.
Let's now discuss our commercial business. Spartan Surfaces first quarter sales exceeded our expectations, increasing significantly from last year due to the acquisition of Sales Master in June 2023. With the acquisition of Sales Master, we ended the first quarter of fiscal 2024 with 81 reps compared to 65 at the end of March 2023. Spartan continues to progress in its diversification strategy, reindexing to health care, education, hospitality and homebuilders. Health care is an excellent example of an attractive commercial segment that is less sensitive to economic cycles, price and specification flipping due to its installed location. In 2024, we plan to continue to drive sales and market share growth through opportunistic acquisitions, organic rep growth and boosting rep productivity.
In closing, we remain confident that we have the right people, strategies and business model to navigate this challenging macroeconomic environment successfully. Let me now turn the call over to Bryan.
Bryan Langley: Thank you, Tom, and Trevor. I want to express my gratitude to all of our associates who contributed to our fiscal 2024 first quarter results. Your hard work, dedication and commitment enabled us to remain flexible, strong and resilient which allowed us to exceed our expectations at a time when customer spending on discretionary hard surface flooring is uncertain. Although first quarter sales fell at the low end of our expectations, we delivered diluted earnings per share of $0.46 surpassing our expectations. This achievement is due to the diligent efforts of our teams in delivering on our gross margin expansion plan and prudently managing expenses and capital spending. Now let me discuss some of the changes among the significant line items in our fiscal 2024 first quarter income statement, balance sheet and statement of cash flows as well as our outlook for the remainder of the year.
Our fiscal 2024 first quarter gross margin rate was better than expected, increasing 100 basis points to 42.8%. This was mainly due to favorable supply chain cost and to a lesser extent, product cost. The increase in our gross margin rate enabled us to grow our gross profit by 0.2% from the same period last year despite a 2.2% decline in sales. Our fiscal 2024 first quarter selling and store operating expenses increased by $30.7 million or 10.1% to $334.3 million from the same period last year. This growth was primarily driven by an increase of $39.6 million from operating 31 additional stores versus the same period last year and $3.5 million at Spartan, partially offset by a decrease of $12.4 million at our comparable stores. As a percentage of sales, fiscal 2024 first quarter selling and store operating expenses delevered by 340 basis points to 30.5% from the same period last year.
This expense deleverage is due to the decrease in comparable store sales and the addition of new stores. Our fiscal 2024 first quarter general and administrative expenses of $66.8 million increased by 7.9% from the same period last year. The growth is attributed to the investments we continue to make to support our store growth including growth of $4.9 million for personnel expenses related to additional staff and to a lesser extent, incentive compensation. Due to the decline in our first quarter sales, general and administrative expenses deleveraged 60 basis points to 6.1% as a percentage of sales. Our fiscal 2024 first quarter preopening expenses of $9.6 million increased 19.6% from the same period last year. The year-over-year increase primarily resulted from the timing of spend for new stores.
Our fiscal 2024 first quarter net interest expense decreased $2.9 million or 59.8% from the same period last year. The reduction in interest expense is due to lower average borrowings under our ABL facility, higher interest income from our interest rate cap derivative contracts and an increase in capitalized interest, partially offset by interest rate increases on outstanding debt. Our fiscal 2024 first quarter adjusted EBITDA of $123.0 million decreased by 17.8% from the same period last year, primarily due to expense deleverage from the decline in our comparable store sales. Depreciation and amortization increased 21.7%, contributing to net income declining by 30% to $50.0 million and diluted earnings per share of $0.46, falling [ph] by 30.3% from the same period last year.
Our fiscal 2024 first quarter effective tax rate of 12.8% decreased from 21.1% in the same period last year, primarily due to increased tax benefits related to stock-based compensation awards. Moving on to our balance sheet and cash flow. We continue to maintain a strong balance sheet which allows us to prudently grow within our existing capital structure even during a period of industry contraction. We are pleased that our fiscal 2024 first quarter inventory decreased 6.7% and to $1.0 billion from the end of fiscal 2023 and declined 12.6% from the first quarter of fiscal 2023. As discussed in our prior earnings call, we anticipate inventory to grow slightly faster than sales as we exit 2024 due to most of our 2024 new store openings being late in the year and planned 2025 store openings.
We ended the fiscal 2024 first quarter with $698.2 million of unrestricted liquidity, consisting of $57.4 million in cash and cash equivalents and $640.8 million available for borrowing under the ABL facility. Let me now discuss how we were thinking about the macroeconomic environment and our financial performance for the remainder of 2024. There remains considerable uncertainty about the timing and slope of potential improvement in existing home sales and hard surface flooring spending in 2024. The absolute sales of existing home sales may have bottomed at 3.85 million units in October of last year, but they are choppy, improving sequentially to 4.38 million units in February 2024 before falling to 4.19 million units in March. Unfortunately, the direction and absolute level of 30-year mortgage interest rates are rising again and housing affordability and spending on large ticket discretionary durable goods remain headwinds.
For these reasons, we believe fiscal 2024 full year sales could be at the low end of our guidance of $4.600 billion to $4.770 billion as the timing and slope of improvement could be more elongated. We expect to gain a better line of sight about the timing and slope of sales over the next several months, which will better inform us about the second half of 2024. That is not to say we don’t expect sequential quarterly improvement in comparable store sales. We expect our fiscal 2024 first quarter comparable store sales decline of 11.6% to represent the trough for the year and comparable store sales to improve sequentially throughout the year from easier sales comparisons and improving transactions. In the meantime, we believe we can manage our profitability.
The successful execution of our gross margin expansion plan gives us more confidence in the top end of our annual 2024 gross margin guidance of 42.6% to 42.8%. As we look to the remainder of fiscal 2024, we expect to prudently manage selling and store operating expenses, we anticipate modest sequential growth in selling and store operating expense dollars from the first quarter of fiscal 2024. As a reminder, every 100 basis points change in annual comparable store sales compared with our plan impacts earnings by approximately $0.10 per share. Our ability to manage our gross margin, prudently manage expenses and lower interest and tax expense enables us to manage our profitability in this uncertain period. Based on our fiscal 2024 first quarter results, we now expect our fiscal 2024 full year interest expense to approximate $9 million to $11 million and our tax rate to approximate 20%.
Over the long run, we remain excited about the well-documented structural opportunities in repair/remodel and flooring spend, including housing demand that exceeds supply in an aging housing stock. We still see a path to achieving our long-term goal of mid to high teens adjusted EBITDA margin. Operator, we would now like to take questions.
Operator: Thank you. [Operator Instructions] And our first question comes from the line of Chris Horvers with JPMorgan. Please proceed.
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