Earnings Call: Q2 2018

Aug 2, 2018

Good morning, ladies and gentlemen. This is Floor and Decor's Second Quarter 2018 Earnings Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded today, Thursday, August 2, 2018. I would now like to turn the call over to Matt McConnell, Manager of Investor Relations at Floor and Decor. Please go ahead. Thank you. Good morning, everyone. Joining me on our call today are Tom Taylor, Officer and Trevor Lang, Executive Vice President and Chief Financial Officer. Also in the room is Lisa Laube, Executive Vice President and Chief Merchandising Officer, who will join us for the Q and A session. Before we get started, I would like to remind you 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 reasons, 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 may discuss non GAAP financial measures as defined by SEC Regulation G. The 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, ir.4anddecor.com. A recorded replay of this call, together with related materials, will be available on our Investor Relations website, ir. Flooranddecor.com. Now let me turn the call over to Tom. Thank you, Matt, and thank you to everyone joining our call. We are pleased with the performance of our business in the Q2 as we generated comparable same store sales growth of 11.4% and total sales growth of 26%. For 9.5 years, our same store sales growth has been above 10%, demonstrating the strength of our business model over a long time. The investments we have made in our stores, a broad trend right assortment of good, better, invest in stock inventory, combined with a unique low cost direct sourcing supply chain that allows us to offer everyday low prices has consistently worked. Over the last several years, we have focused on improving our assortment, technology investments, including a connected customer experience, material enhancing our supply chain and increasing regional leadership to support our decentralized service oriented culture. We opened our 90th store today in Port St. Lucie, Florida, and I feel fantastic about our historical performance and even better about our future white space opportunity as we continue our path to 400 stores in the U. S. Our success is a direct result of the terrific team and their hard work. Now turning to our 2nd quarter results. Total sales increased 26 percent to $434,000,000 Comparable store sales increased by 11.4%, driven primarily by transaction growth of 12%, and our adjusted diluted earnings per share increased 35 percent to $0.27 With the exception of stone, all of our categories had positive comps with laminate luxury vinyl plank, decorative accessories and installation materials comping above the company average. As expected, we saw an estimated 280 basis points comp benefit due to demand from Hurricane Harvey, which moderated from last quarter's estimated 400 basis points tailwind. Excluding the comparable stores impacted by Hurricane Harvey, 2nd quarter comps increased by 8.6%. We opened 4 new stores during the quarter, ending with a total of 88 stores at the end of June, and we remain on pace to grow our store footprint by 20% in 2018. Now let me briefly highlight recent accomplishments and outline our key strategic priorities for 2018. As a reminder, our priorities are new store growth, increasing comparable store sales growth, expanding the connected customer experience and continuing to invest in the Pro customer. First, new store growth. The 4 new stores opened in the quarter are off to a very good start, including our first store in Seattle, one of the 3 densely populated new markets we are entering this year. We plan on opening 7 new stores in the Q3, several of them in new markets, including Boston, a second store in Seattle, Oklahoma City, Indianapolis and Albuquerque. For the year, we plan to open a slightly higher mix of new stores in new markets. Our Class of 2016 and projected 2017 new stores, 1st year sales and 4 wall EBITDA has improved substantially from previous years and is above our pro form a expectations. To better illustrate this, our class of 2015 new stores saw 1st year sales of approximately $10,400,000 and 4 wall EBITDA of $800,000 While our class of 20 16 new stores saw 1st year sales of approximately $12,700,000 and 4 wall EBITDA of $1,900,000 shortening the payback period to 1.7 years from 2.4 years. Not all of our 2017 new stores have hit their 1 year anniversary yet, but it appears they will do even better than the class of 2016, our best new store class performance ever. While it is still very early, the class of new stores have opened in 2018 are performing very well. As we continue opening new stores and increasing the awareness of the Floor and Decor brand, we believe there is a significant opportunity to gain market share and continue generating great returns. It is worth noting that as our new store sales performed 20% to 30% higher in the 1st year compared to prior vintages, this affects our comparable store sales growth. 2nd, increasing comparable store sales. A distinct advantage of Floor and Decor is our product dominance centered around low cost enabled by direct sourcing, innovation, trend right products and in stock job quantities. These advantages are enabled by the significant investments we have made in our global supply chain and distribution centers, which we continue to invest and build upon. We are getting better at finding and bringing new products to the market even faster. We believe our free design consultation services are unique to the industry. Our stores are staffed with a team of designers that help our customers create a unique project. And we have given our stores technology tools to enable them to better serve customers, including online scheduling, design tools and tablets. Our average ticket and customer satisfaction is much higher when a designer is involved in a sale, and we believe we are in the early innings of more fully developing the strategy. 3rd, expanding the connected customer experience. Our integrated connected customer strategy is working well as online sales continue to grow at a much faster rate than our total sales growth. Sales tendered through our website accounted for approximately 7% of total sales in the Q2, about 200 basis points more than the Q2 last year. Regardless of how our customer shops in store or online, these investments are focused on providing positive experience for both our consumers and our pro customers. Our research tells us that if a customer is in the market to buy hard surface flooring and we can get them to visit a floor and decor, we can convert them over 80% of the time. Our research also indicates approximately 70% of customers that ultimately buy from us visit our website during the research period. The majority of our customers prefer to pick up their website orders in our stores, which tells us having a physical presence to see, touch and learn more about our products is critical. As we expand our physical footprint, this will increase our digital reach, increasing an advantageous omnichannel cycle. We are upgrading our chat and call center services, all of which work to educate and inspire new and existing customers prior to or after shopping in our stores. Consumers today want an integrated experience and we will continue investing in and improving that experience. We believe these investments are working as we have consistently seen our website sales conversion rates increasing. 4th, continuing to invest in the Pro customer. Many of our Pro customers shop with us often and their average spend is greater than that of the typical end user. They shop with us because we are a one stop shop for everything they need, most importantly, in stock job quantities of the best trend right products and installation materials. We have invested in multiple solutions to help our pros run their businesses better, such as a dedicated in store and web pro services team, dedicated registers, a new pro app that simplifies their business with us, CRM technology to manage our relationship, technology to get them in and out of our stores faster, delivery, a dedicated pro phone line, enhanced credit solutions, free storage and many others. We are excited that by the end of the Q3, we will have our Pro Premier loyalty program rolled out into all of our stores. We believe this is one of the industry's best total loyalty solutions and should allow us to continue to see increases in comp sales. This does not happen overnight. It takes time to get adoption from the pros, but we believe this will enhance and produce more loyalty. Keep in mind, less than half our customers are likely to participate in this program as it is designed for our pro customers. In summary, it was another solid quarter and we continue to make good progress against each of our strategic priorities by further improving our capabilities and customer value proposition. Before turning the call over to Trevor, I want to acknowledge the revision we provided to our full year outlook. We complete a thorough forecast each quarter and we felt it prudent slightly adjust our guidance based on current trends and uncertainty due to lapping unprecedented hurricane impact on our stores last year. That said, we continue to believe the industry will grow in the mid single digit growth rate and that our model will continue to outperform this growth rate over the long term as we continue to grow our store base by 20% per year and our comparable same store sales. I believe we are well positioned to continue to take market share for the foreseeable future like we have done for a decade. It is an exciting time here at Floor and Decor, and we feel really good about the culture and talent to drive our growth for years to come. I want to thank our associates for another strong quarter and turn the call over to Trevor Lang, our CFO and Head of Pro Services, to go over our financial results and guidance. Thanks, Tom, and good morning, everyone. I will review our Q2 2018 results and then discuss our outlook for the Q3 and the remainder of fiscal 2018. We delivered another solid quarter, further demonstrating that our differentiated business model is a competitive advantage that continues to resonate with both our pro and DIY consumers. As Tom outlined, we believe the strategies we have been pursuing over the last 5 years are working well and are especially proud of our new store 1st year sales and profit performance. Net sales in the Q2 of 2018 increased 26.2 percent to $434,300,000 from $344,000,000 in the Q2 of 2017. We ended the quarter with 88 total warehouse format stores, increase of 15 stores or 20.5 percent versus the end of the prior year period. Our 2nd quarter comparable store sales increased 11.4%. Our comp was again driven by transaction growth, while our dollars per transaction declined slightly. Our comparable store sales, excluding the Houston market, which continues to benefit from post Hurricane Harvey flooding related building efforts, increased approximately 8.6%. Now on to profitability. Gross profit increased 24.9 percent to $177,600,000 in the Q2 from $142,200,000 in the Q2 of fiscal 2017. Gross margin decreased approximately 40 basis points to 40.9% from 41.3% in the Q2 of fiscal 2017. This decrease in gross margin rate was primarily due to factors we outlined last quarter, higher domestic trucking primarily due to higher fuel costs in our Miami distribution center relocation and product mix. As a percentage of sales, total SG and A deleveraged approximately 90 basis points to 32.3% compared to the Q2 of 2017 due to new stores. Our total operating expenses deleveraged due to the preopening and operating expenses of opening 4 new stores in the Q2 of 2018 versus 1 new store in the Q2 of 2017. Our stores opened more than 2 years, obtaining approximately 100 basis points of leverage. In addition, as previously discussed on the last two calls, we are opening a new, more densely populated markets that have higher preopening and operating costs. This also impacted our Q2 operating expenses, but we believe the long term potential of these markets is worth making the investment worthwhile. Operating income increased 9.2% during the Q2 to 37,200,000 dollars as compared to $34,100,000 in the Q2 of fiscal 2017. Operating margin decreased 130 basis points to 8.6% versus the prior year period. Our interest expense for the Q2 was $2,100,000 compared to 3,400,000 dollars in the prior year period. The decrease in interest versus last year is primarily due to using the IPO proceeds from the Q2 of 2017 to pay down debt. Our reported provision for income taxes for the Q2 was a benefit of 4,700,000 dollars compared to an expense of $4,900,000 in the Q2 of 2017. The decrease in our effective tax rate was primarily due to the recognition of excess tax benefits related to stock options exercised as well as tax reform passed in December 2017. We have adjusted the stock option benefit out of our calculation of adjusted earnings in today's release. Before I discuss net income and 2018 guidance, please note that I will discuss both GAAP and non GAAP measures. As described in our earnings release, we believe our non GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of these non GAAP metrics to the most directly comparable GAAP financial measures can be found in our earnings release issued in connection with this call. Adjusted net income and adjusted diluted earnings per share were $28,400,000 or $0.27 per diluted share for the Q2 of 2018 compared to $20,600,000 or $0.20 per diluted share in the Q2 of 2017. This represents an increase in adjusted net income of $7,800,000 or 37.7 percent. Adjusted EBITDA for the 2nd quarter increased 16% to $50,700,000 compared to adjusted EBITDA of $43,700,000 in the Q2 of fiscal 20 17. We ended the quarter with $176,500,000 in cash and available liquidity under our revolving credit facility and $164,400,000 of borrowings outstanding. Our inventory balance at the end of the 2nd quarter was $432,400,000 up $4,500,000 from the end of fiscal 2017 and up 17.7% versus the Q2 of 2017. Now turning to our guidance. As you saw from our press release, given our performance for the first half of the year and our expectation for the remainder of 2018, we are revising our 2018 annual guidance range as a result of the following three factors. 1st, we expect our comparable store sales excluding Houston to be 9% to 10.5% range for the second half of twenty eighteen reflecting recent trends in our business. 2nd, we have had some stores opening later than we had originally planned in the Q4. And 3rd and final, due to the reduction of sales expectations combined with lower assumed product margins, primarily due to anticipated mix changes in domestic freight costs, we now expect gross margins to be down 50 to 60 basis points for the second half of the year. As discussed on our Q1 call, we continue to expect an increase of over $10,000,000 in store operating and pre opening expenses for the year as a whole given our entry into new more densely populated and expensive markets like Boston, Seattle and Long Island. As an example, we are planning on our fiscal 2018 preopening expenses to increase approximately 60%. Taking these factors into account for the Q3 of fiscal 2018, we expect net sales to be in the range of $427,000,000 to 433,000,000 dollars an increase of 24% to 26% versus the Q3 of fiscal 2017. This growth outlook is based on comparable store sales increase in the 9.5% to 10.5% range. Our 3rd quarter outlook assumes year over year operating margin decline of approximately 70 to 110 basis points, 60 to 80 basis points of this decline is due to lower expected gross margin in the 3rd quarter as I discussed on our last call resulting from higher domestic trucking primarily due to higher fuel cost in our Miami distribution center relocation and product mix with the remaining decline due to our lower sales expectations and updated product margin forecast. Adjusted diluted earnings per share for the Q3 of 2018 are expected to be in the range of $0.21 to $0.23 an increase of 24% to 35%. We are assuming 105,200,000 weighted average diluted shares outstanding for the Q3 of 2018. We expect adjusted EBITDA for the Q3 of 2018 to be $46,000,000 to 48,000,000 dollars an increase of 16% to 21% over the Q3 of fiscal 2017. Based on current trends, our 4th quarter guidance assumes a low single digit comparable store sales increase against the 24.4 percent Houston driven 4th quarter 2017 comparable store sales increase. We have also reflected the later new store openings in our non comp sales outlook. The lower expected 4th quarter sales combined with slightly lower planned gross margin as well as the timing of store preopening expenses shifting into the 4th quarter have all been factored into our outlook. For the full year, we now expect sales to be $1,696,000,000 to $1,710,000,000 an increase of 23% to 24% versus fiscal 2017. This net sales growth outlook is based on 17 new warehouse store openings or 20% new store growth and an assumed comparable store sales increase of 9% to 10%. We now anticipate adjusted diluted earnings per share of $0.93 to $0.96 an increase of 35% to 39% over fiscal 2017. Diluted weighted average shares outstanding are estimated to be approximately 105,100,000 and our fiscal 2018 normalized effective tax rate is expected to be 23.4% for the remainder of the year. As a reminder, this guidance does not consider the tax benefit due to impact of stock option exercises that may occur in fiscal 2018 or other possible discrete tax adjustments. We expect fiscal 2018 adjusted EBITDA to be in the range of $189,000,000 to $193,000,000 an increase of 19% to 22% over fiscal 2017. I also want to note that we are also still evaluating opportunities as it relates to our planned 2019 store support center relocation and would call out any material related costs to the store support center relocation and our reconciliation of non GAAP metrics in our quarterly earnings release so there would not be an impact on our adjusted earnings. CapEx for the year is now expected to be in the range of $160,000,000 to $167,000,000 in total with $99,000,000 to $102,000,000 of this capital budget being spent on 17 new store openings in 2018 as well as construction of stores opening in early 2019. Dollars 34,000,000 to $36,000,000 is earmarked for store remodels including one relocation and our distribution centers. The remainder of our CapEx approximately $27,000,000 to $29,000,000 will be directed towards IT, e commerce and other store support center initiatives. Finally, I want to touch on the Chinese tariffs currently being proposed. Through the Q2 of 2018, we imported approximately 47% of our products from China. The situation is still fluid and we continue to watch it closely as negotiations continue. We believe we have multiple avenues for addressing rising input costs including raise retails second, we can renegotiate costs with our vendors and third, source from a different country. We have an experienced merchandising team and they have great relationships around the world and we are moving quickly to mitigate this potential cost increase as best possible. We have options and we will update you on our next call as this plays out. With that, operator, I think we'd like to turn it over to Q and A. At this time, we will be conducting a question and answer session. Our first question comes from the line of Elizabeth Suzuki with Bank of America Merrill Lynch. Please proceed with your question. Great. Good morning. From a sales standpoint, were there any categories or that underperformed relative to your expectation or that have started to slow more recently that resulted in the lower comp guidance? From a category perspective and a geography perspective, everything slowed like consistently. There wasn't a it's not a particular category. Stone has been a category all year that's been a challenge, but more of that's a shift of people buying other hard surface form categories in the store. But I'd say that the trend is broad based. Okay. And just one quick one on the tariffs on imported goods from China. What percentage of your product is 47% in the first half that you import, but what percentage of those products are on the most recent list of proposed items for tariffs? Almost all of them. Okay. All right. Thanks. Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question. Good morning. Thanks a lot for taking my question. Floor and Decor success has not gone unnoticed by its competition and we're starting to see some others emulate the attributes of your model that are so successful such as lumber liquidators holding more job lot quantities or Home Depot rearranging some of the vignettes associated with flooring. So do you think that part of the reason you're experiencing a bit of a slowdown is due to competitive factors? Or is this just we're getting later in the cycle and flooring is flowing demand for flooring overall is slowing a touch as a result? Yes. Mike, look, I'll touch on a couple of thoughts. I mean, first, look, our total sales grew 26%. We are we comped over 11% for the quarter. If things do get harder, if you look at our company and I'll get to the competition point in a second, but yes, the comps get harder. If you go back 5 years ago, the average mature floor and decor did $13,000,000 10 years ago, it did $10,000,000 We've averaged over the last 5 years over 15% comps. Our average mature store to date is $20,000,000 It does get harder to lap those stores. And if you put that in combination with our new stores over the last 3 years, each class of new stores got a little bit better. And as they enter the comp base, it's as those volumes have increased, that gets a little bit harder to comp too. So look, we've got a healthy business, 26% growth is terrific. And if you go look back over the last few years kind of what we've been doing and our comps are terrific. So I'm proud of what we've accomplished. The second thing from a competitive standpoint, look, our competition as long as I've been here 6 years, the competition is always reacting, changing, whether it's be the big boxes or the independents. This is a very fragmented market. And they're always changing and they're always getting better. And at the end, that helps the consumer get a better value proposition. But when you look at Floor and Decor, we're changing too. So it's not like the competitors aren't changing and we're not in the first half of this year, we've added a pro app. We've enhanced the pickup times at the back of our store. We've continued to add new products. So we're not seeing our hands. We think the competition is good. We have a lot of respect for the competition. We learn from the competition, but we change at the same pace. So Tom, it seems like you're suggesting maybe you're just getting closer to peak realistic ongoing volumes in some of your locations. Do you have an updated view on what a targeted sales per store number is for the long run? And the second part of that question is, have sales slowed faster than what you expected? Presumably, they have because you took down the guidance from where it was 90 days ago. Look, it's there's a lot of uncertainty as we go into the back half of the year. I'm confident in what we're doing. I have a tremendous belief in the amount of stores that we can open. This is a wide space story. The comps will get difficult, but look, we comped over 11 in the quarter. Our total growth is 26%. So I feel good about the strategy we have in place. Okay. Good luck with the second half. Our next question comes from the line of Zach Fadem with Wells Fargo. Please proceed with your question. Hey, good morning guys. On the gross margin line in terms of magnitude, could you help us bridge the gap between product margin mix and then the impact of higher freight and DC costs in the quarter? And on these items, you mentioned product mix going forward, but what should we anticipate in terms of magnitude just for the second half of the year? This is Trevor. It's really when you look at the details, it's both. I don't think we can quantify it by 1 because obviously domestic transportation affects all of our categories. And the mix impact, we had a lot of benefits last year in all of our businesses. As you look at the strongest businesses we have this year with our laminate business and our LVP business, some of those categories are lower margin. And because some of those categories also have things like underlayment included in them, it affects some of our insulation accessories where we're not selling as much underlayment and stuff. So I think we said for the back half of the year, we're planning on 40 to 60 basis points of flat to lower gross margin and it's a combination of both. Got it. And could you talk a little more about innovation in the category? How much has this been a benefit over the past couple of quarters? And is there anything new or in the pipeline that you're excited about? And with respect to that, anything we should keep in mind just from a mix or margin perspective going forward? Sure. This is Tom. I'll start and then Lisa's here. I'll let her follow. I'll try not to take all of her points. But first look, innovation across hard surface flooring has been a tremendous driver of certainly our performance over the last 5 years. And over the last we've tried to be first to market in innovation. So whether it be water resistant products, whether it be fashion, whether it's inkjet tile, we always try to be kind of on the fashion forefront and on the durability forefront. And they've been big drivers. We've had water resistant products now for going on 3 years, and that product category has continued to expand and do very well. But we've had it for 3 years. So it's kind of like that store point that I made earlier. When you're lapping those numbers, it gets more a little bit more difficult because we're doing so much. But innovation, we do a product line review across every department and every category frequently. So we're always bringing in the newest, latest, greatest things. I'll let Lisa talk a little bit of the what else is coming on the horizon. No, I think the 2 biggest trends that we've been seeing certainly durability is 1, which is led by the water resistant and waterproof, but there are other factors there as well. So we continue to try to find new durability stories for our customers. They appreciate that value. And then the other piece is just being really trend right, better invest. We've talked about that before and we still don't know how high it's high there. The higher prices we bring in, we still have incredible values in all of that products and our customers really responding very positively. So I would say both from a kind of trend perspective as well as a durability perspective, our merchants are out there every day, working on developing new and exciting products. Thanks, guys. Appreciate the time. Thank you. Our next question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question. Thanks. Good morning. So I was trying to dig into the sort of implied underlying ex hurricane rate. So do you expect to get the 50 basis points of hurricane headwinds back in the Q3? And then in the Q4, you had an 8 point benefit from Harvey. So what's sort of the implication of what we have to get back there and what the underlying trend that the guidance reflects? Good morning, Chris. This is Trevor. Let's talk about Q3 first, then we'll talk about Q4. So for Q3, if you just talk about the Houston Harvey hurricane, the impact is about flattish for the Q3. We lost a bunch of sales in kind of early August and I'm sorry, late August early September, but then the business got very strong in kind of mid September on through the end of Q4. So just Houston alone is flattish. But you're right, there was Hurricane Irma as well last year, and that really impacted our Florida stores, which is a substantial portion of our sales. And so you're right, last year, we said it was some portion of 2 50 basis points. Our current expectation for the Q3, excluding Houston, is that we're going to be in that kind of 9% to 10.5% range as we think about the Q3. As you move on to the Q4, you guys will recall, we called out the benefit in Houston was over 100% comp individually, and you're right, it was an 800 point benefit last year's Q4. As we've modeled the Q4 this year, we currently think that will be a headwind of approximately 650 basis points to 8.50 basis points as we think about the Q4 because we're obviously going up up against a huge comp in that Houston market. For the year, interestingly enough, when all of that shakes out, the 400 basis points in Q1, some portion of 300 or just under 300 basis points in Q2, flattish for Q3 and Q4. It worked out to be kind of flattish for the year and that's all reflected in our comp. So a lot of confusion going on with the 2 different hurricanes in there. But if you just break out the back half of the year, if you just look at our back half of the year expectations, that kind of 9% to 10.5% comp range is what we that kind of 9% to 10.5% comp range is what we expect, excluding the Houston stores. I got you. So that's excluding so right. So that 4th quarter, it looks like you're, yes, sort of 9 ish in terms of expectations. So So the cadence of the year has decelerated. So you sort of hit a peak in terms of the underlying ex weather trend in the Q4 and you back that out, it's decelerating. And it looks like based on what you just said, you're assuming sort of this 9 ish trends stays going forward and you're sort of holding actually slightly accelerating on a stack basis. So can you talk about how the cadence has been over the first half of the year? I know you don't like to talk about it when you see the decelerating trend, it's something that investors care about. And then secondarily, as you think about 2019, this 9% to 10% -ish kind of growth in the back half, originally you I think in the ahead of the IPO, you talked about 100 basis point decay rate in comp as you look out to by year. So do you still expect that to be the case? So just a quick reminder for last year. If you exclude the hurricanes last year, our comps essentially accelerated throughout the year. We comped up 12% in Q1 last year, excluding there was obviously no hurricanes in. Then we comped up close to 14% in Q2. And then the back half of the year, excluding both the hurricanes, we comped up about 16%. So our business progressively got better each of the quarters last year, excluding the hurricanes. This year, as we're looking forward, yes, again, we're basically excluding the hurricanes, we're assuming kind of 9% to 10.5% up against higher comps as we think about the last half of this year. Again, in 2019, we're not ready to talk about the guidance yet, but we do believe that we can continue to grow our business at a higher rate than the industry. Most of the forecast we've seen do assume some moderation. You guys remember we called out over the last 5 years, the industry has grown at some portion of 9% on average per year over the last 5 years. And most of the industry experts think that's going to be more in the mid single digit comp range. And that's obviously affecting, we think, current business as well as we look to the future. So our model is predicated on a mid to upper single digit comp, getting a slight amount of leverage out of gross margin. And that will lead to some portion of hopefully 25% net income growth. And we are working to that. We still believe that's true on average. There will always be some noise in our numbers just because of the timing of distribution center openings or new store openings. But over a longer term basis, we're still committed to those goals and believe those goals are achievable that we put out when we did the IPO. Yes. I would just follow on, Chris, just echoing kind of what Trevor said. We believe in the strategies that we're doing. Our new stores are performing terrific. It's a healthy business. I mean, we grew at 26% for the quarter. So we're confident. We like what's going on with our new stores. We like the cadence of our new stores next year. We like the locations of our new stores next year. So we're excited about what that could bring. So just to try to pinpoint on the cadence question. So you guided 11% to 13% at the start of the quarter. Easter ended with an 11.4%. So it would appear that there was a deceleration. So what gives you the confidence that things are stabilizing as implied into the back half outlook? So this is Trevor again. So when we gave guidance, our April comps were in line with what we gave guidance at that time. We obviously knew what our results were at that point. So you're right, the back part after the earnings release is when our business slowed a bit. And it's been pretty consistent subsequent to that, and that's all reflected in the comp guidance that we've given. We're fortunate. We still only have just over 80 stores. We have the ability to look at every store by month, by week and by through the rest of the year. 2 things to call on as you think about, you're right. We are expecting that, that comp gets a little bit better into Q3 and Q4, as we mentioned. We lost $7,000,000 to $8,000,000 in sales last year due to the 2 hurricanes. We're not expecting any hurricane loss, so we should have a bit of a pickup relative to where we were in Q3 and Q4 and then in Q3. And then as we get to Q4, again, excluding the Houston business, we've got the most amount of new stores coming into the comp base than we've ever had. We've got 5 new stores coming in, in Q3, another 5 stores coming in Q4, and our new stores generally provide a comp base. So that's also why we feel a little bit better as we look into Q4 as well. So hopefully that helps explain why we would assume business comps excluding Houston are a little bit better as we get into Q3 and Q4. Super helpful. Thanks very much. Our next question comes from the line of Seth Sigman with Credit Suisse. Please proceed with your question. Thanks. Good morning, guys. Just a couple of follow-up questions here. First, just in terms of the gross margin, for the quarter it actually came in a little bit better than what you laid out last quarter. Can you just give us a sense of what the delta was there? And then you're suggesting more pressure in the Q3 and then in the back half overall. Can you just clarify what is exactly changing? What's incremental in the back half versus what you just saw in the Q2? Thank you. 2nd quarter product margins came in a little bit better than we thought they would. So in the back half, it's very similar to what we talked about in the last earnings call, Trevor. Yes. We base things based on current trends. And when we look at the mix of what's selling, as well as higher domestic transportation costs, we're seeing fuel costs go up, obviously, like a lot of other folks. And so as we see the current trends in the business, that's what's reflected in there. So hopefully that answers your question. Okay. And then just a couple of follow-up questions on the comps here. So when you look at the product category disclosure that you provide in the filings, it does suggest that there are some shifts happening here. It seems like the biggest deceleration this year has been in tile and then how you break out laminate and LVT categories. Just any more color on why that would be? Is that an industry or consumer trend? Or do you think the competitive offering in those categories specifically may be changing? Thank you. Seth, I mean, I addressed it a little bit earlier. Just a couple of points. One, we have had water resistant products now. We're going into our 3rd year of water resistant product. They've expanded significantly. We started off with a handful of SKUs and laminate and now it's turned into Nucor and Duralux and more in AquaGuard. So as those have expanded, if you think about that category, that pulls from tile. People were buying my opinion is that water resistant category, you can use people were using tile in their bathrooms and in their kitchens. And this category is made specifically so you can put it in a compliant in those places. So we're absolutely seeing a shift. They sell the our tile comps are still decent. They're still good. But you can clearly see customers are electing to put water resistant categories into places in the home where they would have originally put tile. And that has a couple of effects on us. So one is we're fortunate we carry everything under one roof, and we want to provide the customer what they need. So they can go from department to department and make those elections. But when they buy those categories, they sell a little bit less per square foot. So the cops are little bit affected by that. There could be a little bit of drag on that. And then 2, when they buy tile, everything that goes along with that tile project runs at a pretty decent margin rate. And you lose that, particularly if they're electing to the vinyl SKUs. So we've seen great strength in those vinyl and laminate categories and there's kind of a double effect. It affects our mix. There's some margin pressure with that and it affects the total sales just because of it sells a little bit less foot. And then on the other hand, you've seen a nice acceleration in decorative accessories and even more so in actual accessories and tools. Just any initiatives specifically targeted around those categories that you think that may be helping? I think that our merchants continue to do an outstanding job of finding better and best products. If you walk the deco departments today, we've expanded and gone into much better products than we had 3 years ago. That's continued to evolve. Tile deco has been a huge success for us as well. And we put a lot of energy into that deco department. We reset it every year and we're constantly bringing this stuff in. So the initiatives is really around newness 1. And then the second initiative is our designer initiative. We hired a design czar, a Head of Design for our company about a year ago, and she's really getting traction within our stores and our we're putting a real emphasis on our designer capabilities within that design center in the store. So that certainly is helping our Deco business as well. On the installation accessories, it's the same a similar story. We've got a terrific merchant in there who's done a nice job of adding some additional categories and upgrading the categories we've had. Our Pro business is healthy, so that's also going to drive that section of the store as well. So I think our energies around the Pro customer are helping that and I think our energies around the product that we're putting into that accessory the installation accessories department is helping it as well. Okay. Thanks, guys. Our next question comes from the line of Matt Fassler with Goldman Sachs. Please proceed with your question. Thanks a lot and good morning everybody. My first question relates to working capital and specifically to inventory, which came in a bit lower than we expected. You obviously talked about the sales trends over the course of the quarter. Presumably, you may have moved it in that direction deliberately. Can you talk about the delta and inventory growth from Q1 to Q2? How much of that was premeditated and kind of where that inventory sits mix wise versus where you'd like it to be? Matt, this is Trevor. I feel great about our inventory position. We will always have some timing of especially in the first half of the year based on when Chinese New Year receipts hit. We knew we would have a big increase last year. We talked about that just based on the timing of when we wanted to land things relative to getting those into our stores and the product categories. But Lisa is here as well. Her team does a great job managing our inventory. And we feel good about the quality of our inventory and what we need for the rest of the year. Yes. Our in stock rates are as high as they've been in 5 years. To the extent that you're up, I think 18% in total at quarter end and on a per square foot basis, I haven't done the math, but it looks like you're probably down year on year. Is this sort of the bottom from the inventory cycle? Do you ramp on a square foot basis from here? Or is this a growth rate that you think can persist through your end? End? Through the end of the year, our current expectation is that inventory, I'm talking about year end specifically, but that our year end inventory will grow to slightly lower rate than sales is our current expectation. Okay, understood. Secondly, I think you answered this when you spoke just a moment ago about the mix shift to LVT and waterproof technologies from ceramic and tile. But would that be where the contraction and ticket comes from? I think your ticket was up about 2% in Q1. I think that's slightly in Q2. Is that all about mix in your view? Yes. That's a fair assumption. And also just trying to discern between essentially customer interest in the category and what we could tie in to macro more broadly and some of the dynamics that you just discussed within the category, which seems like they're quite important when you think about the mix shift, the fashion shift, if you will, within the business. What's your sense about the vitality of the flooring business if you take out the mix and margin dynamics associated with some of the fairly rapid changes in customer taste and product evolution? I think product evolution continues to be good. I think that there's still a good amount of consumers who are just getting themselves aware about the new stuff that's coming to the marketplace over the course of time. The market the compounded annual growth rate in the market over the last 5 years has been pretty robust at over 9%. I mean, so it's that's a very healthy market that doesn't last forever. And our comps have been they average a lot more than that. Our total growth average is a lot more than that, that doesn't last forever. So I still think that there's look, we have again, I've said it a couple of times, I mean, we've been good comps and 26% growth. There's still a lot of energy around the category. And then finally, you spoke about different remedies in case in the event that the tariff regime that's currently being discussed goes through. One that you spoke about was essentially moving production to other countries. How long does it take to do that in your category? Are we talking quarters? Are we talking years? And is the capacity is there capacity out there that could accommodate this relatively quickly? Yes. I'll let Lisa touch on that and I'll add in. Yes. We actually feel really good about it. We source today from about 20 countries in most of our categories, not all, but most of our categories are sourced in multiple countries. And so we think that we will be able to move things fairly easily. There's a couple of categories that can only be sorted out, but we will find all of our competition will find same issue. And in some of those cases, that's where the retail will be passed along. But in some of our big categories, tile is for instance, we actually source a lot of product out of the U. S, out of Spain, Italy, South America, Mexico. And so we have a lot of options and those things can be moved fairly quickly. Yes. And I would say a couple of other things, Matt. This isn't new. Whether it's been a border tax or a tariff, it's been talked about for a while. So it's we didn't have the first conversation about this a month ago. We've been talking about it for a while. I would also say that some of our better our bigger Chinese suppliers have made investments in rest of the world. So we're able to switch some production there too. So it depends on category to the rate of speed that we can do it, but it's certainly things that can happen and it is one of those uncertainties at the back half of the year that we're certainly paying attention to. Thank you, guys. Our next question comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question. Thanks a lot and good morning. My first question is just around product margins. Q2, you mentioned they came in better than expected and you're basing your guidance based on what's selling. Are we expecting a bigger shift away from the higher margin tile category in the second half to add the pressure on product margins in the second half that you guided to? Yes. This is Trevor again. I mean all those factors, as we said, based on the current trends of the business are factored in there, and that's part of the reason we took the margins down. Again, Q3 is fairly consistent with what we said last time. But as we looked at those trends for the Q4, we are planning on 4th quarter being slightly below what we said last time. So again, I just summarized it's based on current trends and the mix of what we're selling now versus what we were selling for most of last year and into the Q1 of this year. Got it. The 4th quarter dynamics, do they relate to what you're selling in Houston and you're getting more margin there than you are anticipating going forward? No. Okay, great. Then the second question is just thinking about the sales outlook. You've touched on this a bunch, but not taking anything away from your strong absolute and relative performance, but can you isolate what's leading to a lower comp growth outlook? Is it simply category growth slowing? Or do you think that there's something else that might be impacting your sales growth rate? I'd go back to what I said in the beginning. There's a lot of uncertainty in the back half of the year. There is our numbers have gotten significantly larger, right? So 5 years ago, those stores averaged $13,000,000 10 years ago, they averaged $10,000,000 Now they average $20,000,000 Those get harder. Our new store performance over the last 3 years has continued to get better and better and better. And those stores getting having them comp at the historical rates that that has happened gets harder. So that is that's the reason for our reflection in our guidance. Got it. And my last question is thinking about some of the product category trends. You've spoken to your success with AquaGuard. I think you introduced the new HydroShield product not too long ago. Can you comment on how that's performing and whether it's cannibalistic or not? It's performing very well. It is meant to be an option for a customer to step up from vinyl and get a laminate product at a lesser price and it's different than our the initial AquaGuard that we brought in, but it's performing well. We wanted to cannibalize off of regular laminate and we want customers to step up from vinyl categories and that's how it's behaving so far. Great. Thank you very much. Thank you. Our next question comes from the line of Peter Keith with Piper Jaffray. Please proceed with your question. Hey, guys. Thanks. Good morning. On this mix shift and Trevor, you were Q4, maybe the mix is going to be a little bit different than you thought. I can understand, I think LVT is taking share, but that's not really a new dynamic. So I guess I'm still unclear as to what's really changed from not only this year, but even last year. And then is there something that's changing that may continue for a while? Peter, this is Trevor. When you looked at last year, we had most of our categories margins increasing as well as a favorable mix. So just looking for example, the tile business last year, not only was tile business doing better, but the margins were increasing within tile. And so we had both a mix benefit from a macro perspective and a mix benefit in each of the departments themselves. And that's part of the reason we had higher gross margins. When you fast forward to what's going on this year, as we mentioned on the last call and again this call is we are seeing higher domestic transportation costs. Big piece of that is because of the Miami move that we think will work through over time. But we're also seeing higher fuel costs. That's somewhat new news relative to what we had seen for last year and into the Q1 as well. And then where we are now, too, if you look at the back half of the year, the acceleration in tile in some of those businesses is not as strong as it was last year. And then even within some of those categories, again, the mix in there, we're not seeing the same higher margin categories growing at the rate they were in the past. So that's why we really try to summarize it as the domestic transportation cost as well as the mix both at a category level and then within the categories as well. Okay. And is the so it looks like it's mostly on the tile category in terms of mix and product or like for like margins holding in tile or is it sounds like is it kind of mix shift within that tile category that's changed? It's both on tile specifically. It's part of the Miami move because Miami is a huge seller of tile. They sell a lot of tile and stone down there. And so there's a mix because of the distribution center move. And then within, if you look at other areas within Tahoe as well, just what the customers are buying is not the same margin as we've seen in the past. Okay. A separate question. We know that waterproof is becoming increasingly important for the consumer and we're seeing that now with all of your competition advertising waterproof pretty aggressively. I will give you guys credit. I think you classify things as water resistant, not waterproof, which is the more appropriate not waterproof, which is the more appropriate characterization. But do you feel that maybe that increased adding of waterproof has maybe caused a little bleed out with competition here in the recent weeks to months? No. I mean, I think that they're bringing awareness to the category. That can be a good thing. Customers are going to shop at multiple places before they buy their flooring. So I think the more the consumer gets aware that water resistant exists, that we're likely to benefit from that. Yes. And I think that our associates, they well understand the characteristics of our product as well as that sold in other places and they can easily articulate that to customers so that they understand that the quality differences are there and it's simply what someone's choosing to call it does not necessarily make it better. Okay, very good. Thank you very much. Our next question comes from the line of John Baugh with Stifel. Please proceed with your question. Thank you. Good morning. So, just driving again at this mix shift, which we all know about. But within all of your categories, are you seeing a degradation of product margin on a like for like basis? And if not, what categories are holding up or going up? Or are they all sort of shifting to a like for like, not a mix shift, some kind of lower product margin? This is Trevor again. The domestic freight obviously affects all of our products as we see higher fuel costs. And because the eastern part of the country is the largest portion of our sales and a lot of those are impacted by that Miami distribution center move, That's affecting most of our categories because most of our inventory goes through our distribution centers. And then again, so that's probably the largest portion of it. And just saying it again, within categories, what people are buying, tile and insulation accessories, the mix within those categories is also what people are buying as a slightly lower margin as well. So that's why it's both a mix component as well as a domestic transportation component. Okay. Thank you. And then, as we think about the ticket, which I think you alluded earlier being down due to the mix shift, I assume we don't anticipate this mix shift changing in the next few quarters that will continue. So how do we think about the tick generally been up and now it's down influencing comp up, I don't know, 2, 3, 4 quarters? Thank you. Yes. This is Trevor again. The ticket is a very minor and I think we disclosed the amount in our 10 Q. It's an incredibly minor. Most of it is traffic, therefore, driving transactions. We just have less traffic coming into the stores and therefore less transactions. The ticket component, as Tom mentioned, when you have some of the water resistant categories, you can have a lower ticket because a lot of the products have underlayment and things like that included versus other products that didn't have that where you would have add on sales with that. Yes. Our ticket was flat for the quarter. I mean, it's not it's slightly down, but it just it's a hair. Our comps are driven by transactions because we're taking share. Great. And then my last question was SG and A. If I read it right in the queue, you break out sort of the comp store SG and A and G and A component. And I believe compared to the Q1, the quarter delevered on both. And is that just high end relating to store openings? Because in my mind, if we're talking comp store, that's excluded, but help me with the moving pieces within SG and A. Thank you. Yes. You're right, John. You want to break those 2 apart. If you look at our existing stores, our comp stores, we're getting leverage in SG and A there, as you would expect on an 11.4% comp. But because we opened 4 new stores in the Q2 this year versus 1 new store, the overall SG and A is the highest when those new stores open. And so since we had 4 times the number of new stores open in the Q2 of this year relative to last year, those early months of higher SG and A impacted. And then the final thing I mentioned, I said this in my prepared comments, is as we're entering these more densely populated markets, they have higher advertising, higher labor, higher occupancy costs, and that's also a function of it as well. Great. Thanks. Good luck. Our next question comes from the line of Anthony Chukumba with Loop Capital Markets. Please proceed with your question. Good morning. Thanks for taking my question. I guess my first question is on the Pro customer. You mentioned that you have the new Pro app and the Pro customer loyalty program will be coming later this year. Just any I wanted to see if there's any learnings that you've had over the last several months from the Pro app and some and from the other relatively new Pro initiatives? So when we introduced our Pro app to some of our best Pro customers a while back, we want to ensure before we roll an app out across the country that it's been piloted, that we get feedback from our customers. We understand what works, what doesn't work, what the customer is going to use and what they're not going to use. So we feel we've got a lot of learnings on what's important to them. Certainly, it helps keeps our pros organized. They have their ability to look at their product purchases over real time to be able to go in and plan and see inventory across our stores. And then most importantly, to be able to communicate within our stores to get in and out of the pack. To our pros, being able to pick up their product quickly in the behind the stores is very important and we've made significant investments in that area of the store to speed them up and get them out. So we spend lots of time with them, with lots of focus groups and lots of discussion and feel like our app is on the right track and we're rolling it out now across the country. Secondarily, the Pro Loyalty is something else. We piloted that for going back now. It's been over 18 months ago we started the pilot on that. It's doing the same thing, learning. Our loyalty program is a partnership program with our professional customers. It gives them the ability to access things that help their business as well as access and recognize them, let them access gifts and things like that for when they purchase more. We've learned what they like about it, what they don't like about it and it's rolling out. So both of the programs we feel really good about and we think our investments within the Pro customer continue to pay off. Got it. That's helpful. And then just one last question. I mean, you mentioned that the overall category growth has sort of slowed from sort of high single digits, kind of mid single digits. I mean, how much of that do you think is due to the slowdown in existing home sales? Yes. Anthony, this is Trevor. I mean, we've been very fortunate for most of the last 5 to 6 years where most of the macro tailwinds were in our favor. We had low interest rates, housing turnover was getting better, household appreciation was getting better. And all of that led to an industry growth of some portion of 9% on average per year. We as Americans are only adding 1% new homes and less than 1% new homes and the value of the homes is going up. So you're seeing a headwind for the first time and turnover has not increased I think now for 3 or 4 months. It's actually declined. Interest rates are obviously going up and some of the new tax laws are not as beneficial as they were in certain states. And so for the first time really in most of our history for the last 6 or 7 years, we've got some headwinds in macroeconomics. And certainly, I think that has some play on the overall macro home sector as well as the foreign sector. I think the thing with us is our we will outperform the market. We have outperformed the market. We're still our awareness level is still not very high. People don't know who Floor and Decor is. The more stores we open, the more awareness and improve. The more we'll drive people into stores. When we drive into our stores, we think we can convert them. So whatever the housing market dictates, we're in a good place because of how we're growing and people are finding us. That's helpful. Thank you. Our final question comes from the line of Jonathan Matuszewski with Jefferies. Please proceed with your question. Hey, guys. Thanks for taking my questions. First one is on new store economics. Obviously, they've continued to surpass prior vintages. What are some of the changes you're making that are positively influencing the initial performance here from a sales and profitability standpoint, just beyond greater brand awareness? So I mean, we've learned a lot, right? So we've opened over 20% units now for over 5 years and as we've gotten better each year because we've learned. So I would say that the events surrounding our grand openings, the energy around our grassroots marketing, how we train the people within our stores. I certainly think we're seeing tremendous benefit to getting customers familiar with our stores as they open. And most of that is belly to belly grassroots and we just do it better than we've historically done. And we get more people at those grand opening events than we've ever gotten in the past. 2, I would say that our locations are they've improved. We tried lots of things in the 1st couple of years where we would put the locations of our stores. And I think that we've done a better job of getting bigger stores. Certainly, the store size has increased a little bit, making them visible, finding the right locations, visible from the highway, easy access in and out of our Pros. I think that's helping the ramp of the store as well. And then we've learned a lot in the way we market in the stores as well. We've continued to evolve in the way we tell customers about our stores and get them in. So it's not it's really not one thing. We've learned a lot over the last 5 years and applying them all is helping our grand openings and our 1st year store sales to just be incredible versus what they historically were. Great. That's helpful. And then just secondly, I believe the CRM software aimed at understanding the pro a little bit better, I think that's targeted to be done in 3Q, but any early learnings there, any tweaks you're thinking of making in terms targeting that pro? I wouldn't say there's anything yet that we've really learned. We will have the technology done by probably end of Q3. And Q4, we'll really start to be able to analyze that data and see what it shows us. So we really we do look forward to being able to get that access to that information for all of our customers because we do believe it will help us be more efficient and more effective with the marketing that we do. Great. Thanks so much, guys. Okay. Well, thank you. Listen, I appreciate everyone's interest in joining the call, and we'll talk to you next quarter. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.