Earnings Call: Q1 2017

May 25, 2017

Good afternoon, ladies and gentlemen. This is Floor and Decor's First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference call is being recorded today, Thursday, May 25, 2017. I will now turn the call over to Matt McConnell, Manager of Investor Relations at Floor and Decor. Go ahead, sir. Thanks, Andrew. Good afternoon, everyone. I'm Matt McConnell, Manager of Investor Relations. Joining me on our call today are Tom Taylor, Chief Executive Officer and Trevor Lang, Executive Vice President and Chief Financial Officer. Also in the room is Lisa Labbe, Executive Vice President and Chief Merchandising Officer, who will join us for the Q and A session. Before we get started, I'd like to inform 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 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 may discuss non GAAP financial measures as defined by SEC Regulation G. 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. Thorendecor.com. A recorded replay of this call, together with related materials, will be available on the Investor Relations website, ir. Thorendecor.com. Now, let me turn the call over to Tom. Thank you, Matt. Good afternoon, everyone, and thanks for joining us on our first conference call as a public company. It's an exciting time at Floor and Decor. Our brand is resonating with customers and we're enjoying continued strong growth. Floor and Decor is a highly differentiated multi channel hard surface flooring and accessory business that we believe offers the industry's broadest in stock assortment at everyday low prices with best in class customer service that meets the needs of our customers. We believe we are democratizing hard surface flooring. It's not easy to fully understand what we are doing unless you have been in one of our stores. If you haven't, we hope you can see one soon. I will begin today's call by discussing the highlights of our Q1 results and then outline our key growth initiatives for the future. Net sales in the Q1 increased by 30.6% to $307,300,000 from $235,300,000 in the Q1 of fiscal 2016. Our 12.8% 1st quarter comp comes on top of the 22.4% comp that we delivered in the Q1 2016. Diluted earnings per share increased 63% from the Q1 of 2016 to $0.13 and adjusted diluted earnings per share grew 86% from the Q1 of 2016 to $0.13 From fiscal 2012 to fiscal 2016, we've seen an average annual comp of 16.5%, a 32.9% total sales compounded annual growth rate and the 35.1% adjusted EBITDA compounded annual growth rate. The strong top and bottom line growth continued in the Q1 of fiscal 2017 further illustrating the strength of our business model and the value we provide to our customers. Based on the strength of the 1st 4 months of fiscal 2017, we are anticipating strong sales and earnings for the Q2 and full fiscal year and Trevor will walk you through those details in a minute. Floor and Decor provides a one stop shopping experience for everything needed for hard surface flooring, in stock product quantities and best in class customer service for the needs of both pro and do it yourself customers. Our stores are big, approximately 72,000 square feet and are dedicated to hard surface flooring across tile, stone, wood, laminate, decorative and installation accessories with an unparalleled assortment of good, better and best merchandise offered at everyday low prices. We provide inspirational stores and an integrated website that helps customers imagine what is possible. Against the favorable backdrop of growing hard surface retail sales and the still fragmented nature of the industry, we believe we are well positioned to deliver on our growth goals. Today, our store base consists of 72 warehouse format stores in 17 states. Our new store growth strategy is to grow units by approximately 20 percent per year over the next several years in new and existing markets with the potential for 400 stores across the U. S. Within the next 15 years. In the Q1, our 3 new store openings were in the existing markets of Texas, California and Illinois. Our new store growth is planned to be balanced across new and existing markets and we are very pleased with our strong new store performance. In addition, we completed our first store relocation in the company's history in San Antonio, Texas. And while it is still early, the increased sales results of this relocation are very encouraging. Our comparable store sales growth continues to be primarily driven by transactions. 4 of our 6 regions achieved a double digit comparable store sales growth and all regions were positive. Our e commerce sales growth continues to exceed that of the total company further reinforcing our integrated connected customer initiatives for the future. Net sales in the Q1 increased by 30.6 percent to $307,300,000 from $235,300,000 in the Q1 of fiscal 2016. Our 12.8 percent 1st quarter comp comes on top of the 22.4% comp that we delivered in the Q1 of 2016. Diluted earnings per share increased 63% from the Q1 of 2016 to $0.13 and adjusted diluted earnings per share grew 86% from the Q1 of 2016 to $0.13 From fiscal 2012 to fiscal 2016, we've seen an average annual comp of 16.5 percent, a 32.9% total sales compounded annual growth rate and a 35.1% adjusted EBITDA compounded annual growth rate. The strong top and bottom line growth continued in the Q1 of fiscal 2017 further illustrating the strength of our business model and the value we provide to our customers. Based on the strength of the 1st 4 months of fiscal 2017, we are anticipating strong sales and earnings for the Q2 and full fiscal year and Trevor will walk you through those details in a minute. Floor and Decor provides a one stop shopping experience for everything needed for hard surface flooring. In stock product quantities and best in class customer service to the needs of both pro and do it yourself customers. Our stores are big, approximately 72,000 square feet and are dedicated to hard surface flooring across tile, stone, wood, laminate, decorative and installation accessories with an unparalleled assortment of good, better and best merchandise offered at everyday low prices. We provide inspirational stores and integrated website that helps customers imagine what is possible. Against the favorable backdrop of growing hard surface retail sales and the still fragmented nature of the industry, we believe we are well positioned to deliver on our growth goals. Today, our store base consists of 72 warehouse format stores in 17 states. Our new store growth strategy is to grow units by approximately 20% per year over the next several years in new and existing markets with a potential for 400 stores across the U. S. Within the next 15 years. In the Q1, our 3 new store openings were in the existing markets of Texas, California and Illinois. Our new store growth is planned to be balanced across new and existing markets and we are very pleased with our strong new store performance. In addition, we completed our 1st store relocation in the company's history in San Antonio, Texas. And while it is still early, the increased sales results of this relocation are very encouraging. Our comparable store sales growth continues to be primarily driven by transactions. 4 of our 6 regions achieved a double digit comparable store sales growth and all regions were positive. Our e commerce sales growth continues to exceed that of the total company further reinforcing our integrated connected customer strategies. From a category perspective, laminate, decorative and installation accessories performed above the company average, comp and tile, stone and wood performed below. We offer a broad and diverse mix of hard surface loin across product categories and are therefore well positioned to capitalize on any category shifts that might occur as innovation and trends in flooring ebb and flow. At Floor and Decor, we strive to consistently improve our product offerings and customer service solutions. We are the one stop shop for hard surface flooring needs to both the consumers and the pros. I'd like to say we're democratizing the hard surface flooring category. Our unique supply chain that we have built and improved over the last 17 years effectively removes layers of middlemen, which increases our speed to market while driving down our product cost, allowing us to provide trend right products at the best values for our customers. We continually invest in a localized merchandising strategy with assortments planned and adjusted based on market and region preferences. We believe we identify and promote trends and innovation in our assortment, so that our product categories are compelling and relevant to each individual store. We have created and staffed design centers to inspire our customers. Additionally, the Pro Zones in each of our stores serve the unique needs of pros. We consistently invest in our teams, system, infrastructures and capabilities to drive our competitive advantages and you should expect to see us maintain this philosophy of reinvestment as we grow and scale Floor and Decor to realize the substantial growth opportunities that exist. This reinvestment helps drive constantly improving customer experience, which in turn drives continued market share gains. I'm proud that our customer service scores are at the highest they have been since we began measuring it 4 years ago. It's a testament to our teams, leaders, culture and investments. Looking ahead, we're focusing on leveraging our distinct competitive advantages and capitalizing on the significant growth potential that exists for Flow and Decor. Our key growth priorities are: 1st, new store growth. As impressive as our historical comp performance has been, we are a white space story. With only 72 stores today, we have the opportunity to increase our store footprint by 6 times for a total potential of 400 stores in the U. S. This provides us with long runway of store growth ahead and we plan to increase our store count by approximately 20% annually for the next several years. We have a disciplined site selection process and an experienced real estate team in place to execute on our store growth goals. We plan to continue to open a balanced portfolio of stores with about half in new markets and half in existing markets. With only 7 stores in the state of California and one in the Northeast, there is plenty of opportunity in these very attractive markets for us and there's still much growth potential in many of our existing markets like Texas and Florida, for example, where we still have fill in opportunities. The stores we opened in 2016 are the best in our history and we're excited about the class of 2017. 2nd, increased comparable store sales. With the maturation curve of our new stores combined with our comp driving initiatives, including product innovation, visual merchandising improvements, pro and designer strategies and in store investments we expect to drive a continued healthy comp for the foreseeable future. Also the awareness of floor and decor is still limited in new and even existing markets and we'll continue to increase brand awareness as we grow our store base, which will help drive our comp growth as well. 3rd, expand connected customer experience. We know that the hard surface flooring category is heavily researched and that our spend a lot of time on our website researching their purchase before coming into the store or buying directly through our website. So our goal is to inspire, interact and engage with our customers online through inspirational vignettes, videos, products and education. In fact, we know that 71% of our customers visit our website during the purchase process. So their experience is very important to us. Our store associates also play a very important to our omni channel strategy and we're focused a lot of time and training on to our associates. Our stores have dedicated design centers that range from 1500 to 2000 square feet and we offer free design service to all customers who ask for it. We are always striving to make that experience better who ask for it. We are always striving to make that experience better for them and going forward we will invest in a new CRM system, personalized content based on location, purchase and browsing history and tools to increase omni channel customer engagement and assist store associates. E commerce sales were approximately 5 and assist store associates. E commerce sales were approximately 5% of our sales in the Q1 of 2017. Our stores remain critically important to this connected customer experience given that approximately 90% of our e commerce purchases are picked up in the store. We believe this is largely due to our high professional customer concentration, heavy and unbranded product and lack of product familiarity by the DIY customer. 4th, continue to invest in the Pro customer. We've made a lot of progress and are doing well with the Pro customer, but we still are in the early innings of what we believe we can do for them. We love the Pro customer. They do far more projects than the average do it yourself customer and they help raise the awareness of our brand. Therefore, it is important that we continue to invest in the Pro customer to drive this segment of our business. These investments include growing our store and regional Pro customer sales force, holding store led industry networking events, showcasing and training our Pro customers on new product and technology, offering free design and storage solutions to our Pro customers and providing a dedicated in store protein to service their needs. Finally, we don't compete with our Pro customers by providing installation services. We are their partners. This is another way we differentiate ourselves from the competition. Our commitment to reinvest back in our business is key in executing the strategy that I just touched on. Our focus is to further strengthen our competitive position and elevate an already good customer experience by continuing to invest in people, merchandising, marketing, supply chain, real estate, pinpoint solutions, infrastructure, e commerce and pro customer strategies. Despite our philosophy of reinvestment with strong top line growth we are planning, we expect to enhance our margins and generate some modest operating leverage this year. I want to take this opportunity to thank everyone who contributed to our very successful initial public offering in April. And most importantly, I want to thank those serving our customers online and in our stores. With their help, fiscal 2017 is off to a great start. It is the dedication of our talented team of people and their disciplined execution of our strategies that has resulted in our success to date and will drive our success going forward. We have a long and attractive runway of growth ahead of us and are focused on delivering against the many opportunities to grow our footprint and our brand, while improving our culture Thanks Thanks, Tom, and good afternoon, everyone. I will begin our remarks with a review of the Q1 2017 results and then discuss our outlook for the Q2 and the full fiscal year 2017. Due to our highly differentiated business model and great execution by our associates, we continued our streak of robust comparable store sales growth. Our net sales in the Q1 of fiscal 2017 were $307,300,000 up 30.6 percent from $235,300,000 in the Q1 of fiscal 2016. We ended the quarter with 72 stores, an increase of 12 new stores or 20% versus the 60 stores at the end of the Q1 of fiscal 2016. In the Q1, we opened 3 stores in Texas, Illinois and California. Our new non comparable stores, which we define as stores that have been opened in the past year, continue to deliver very strong performance across all markets. The 12 new stores opened in fiscal 2016 look to be the best class of stores we have ever opened. We're looking at their 1st year sales, operating profit and EBITDA. And the 3 stores opened this year are off to a great start. With 72 stores today and the potential for 400 stores within 15 years, new store growth is our most attractive opportunity and we are keenly focused on investing and executing our new store openings. Let me briefly review our general parameters and target new store model. For all new stores, we target 3rd year net sales of $14,500,000 and full wall EBITDA margins of roughly 17.5%. We define 4 wall EBITDA for any period as adjusted EBITDA for the period before corporate and general administrative expenses and distribution center expenses. This compares to net sales of $10,000,000 to $13,000,000 or about 11.5 percent 4 wall EBITDA margins in year 1. We target a total initial cash investment per store of approximately $4,000,000 to $5,000,000 which includes initial inventory net of our payables, preopening expenses and CapEx net of tenant improvement allowances, resulting in an expected payback of 2 to 3 years with over a 50% cash on cash return by year 3. We plan to continue opening a balanced portfolio of new stores in both existing and new markets. 1st quarter comparable store sales increased 12.8 percent and that's on top of a 22.4 percent comparable store sales increase in the Q1 of fiscal 2016. Our comps were fairly consistent throughout the quarter when adjusting for the Easter shift. As Tom mentioned, the strength of our comp was broad based and driven by transaction growth. Now on to profitability. Gross profit increased 33.6 percent to $125,500,000 in the Q1 from $93,900,000 in the Q1 of fiscal 2016. Gross margin increased about 90 basis points to 40.8% in the 0.8% in the Q1 due to higher product margins worth about 160 basis points, somewhat offset by higher distribution or DC costs worth approximately 70 basis points. Breaking down 160 basis points of higher product margin, approximately 50 basis points was due to a timing benefit on our vendor rebates with an estimated offset coming in the Q4 of 2017. The remainder of the higher product margin was due to lower capitalized supply chain costs and the benefit of mix of selling fatter and best products. As discussed in our S-one, we successfully moved our Los Angeles distribution center from Long Beach to Moreno Valley, California, expanding our space from 220,000 square feet to approximately 750,000 square feet with the ability to get it up to 1,100,000 square feet over time to support our continued West Coast expansion. We incurred costs of approximately $1,500,000 in duplicate rent and relocation costs worth about 50 basis points for the quarter. This was the majority of the deleveraging of our distribution center costs. We are on track to significantly expand and move our Savannah distribution center to a new 1,400,000 square feet distribution center in the Q4 of this year. We anticipate we will incur costs of less than $1,000,000 in the Q4 of 2017 move our inventory from its current facility to the new facility. Once the Savannah project is completed, we think we have enough DC capacity for approximately 110 stores. As a percentage of sales, all of our operating expenses decreased about 50 basis points to 33 point 5% from 34% in the Q1 of 2016, despite incurring about $600,000 in costs associated with our IPO or about 20 basis points of deleveraging. All of our operating expense leverage came from our stores opened greater than 1 year and our store support center leveraging cost on higher sales, somewhat offset by the 12 new stores we have opened since the end of Q1 of 2016. Our new store operating expenses generally run about 50% higher as a percentage of sales in their 1st year of our operation than our older stores. And since we are adding about 20% new stores a year, this mitigates large operating expense leverage we are getting from our stores older than greater older than 1 year. Due to strong sales growth, gross margin expansion and management expenses, our operating income for the Q1 increased 62.4 percent to $22,700,000 as compared to operating income of $14,000,000 in the Q1 of fiscal 2016. Our operating margin increased 150 basis points to 7.4% in the Q1. Our effective tax rate for the Q1 was 35.5 percent compared to 38.1 percent in the Q1 of 2016. The Q1 rate benefited by relieving a state valuation allowance of approximately $200,000 or 1.1 percent for our tax rate. Before I discuss our net income and our guidance, I want to reiterate that as I mentioned in the introduction, I will discuss both GAAP and non GAAP measures. As described in our Q1 earnings release, we believe our non GAAP disclosure enables investors to understand our core business on a comparable IPO adjusted basis between periods. A reconciliation of each of these non GAAP metrics and the most directly comparable GAAP financial measure can be found in our earnings release issued in connection with this call. Adjusted net income was $13,000,000 or $0.13 per adjusted diluted share as compared to 7,200,000 dollars or $0.07 per adjusted diluted share in the Q1 of 2016. This represents an increase in adjusted net income of $5,900,000 sorry, dollars 5,900,000 or 82%. Adjusted EBITDA for the Q1 increased 58.7 percent to $31,900,000 compared to adjusted EBITDA of $20,100,000 in the Q1 of fiscal 2016. We ended the quarter with $173,400,000 in cash and available liquidity under our revolving credit facility and $363,600,000 in outstanding borrowings. Our inventory balance was $316,500,000 up $31,600,000 or 11% from the Q1 of fiscal 2016. In the Q1 of 2017, we improved the timing of our Chinese New Year receipts compared to 2016 inventory growth, which was much lower, which increased our inventory turns. At the beginning of the Q2, we completed a repricing of our term loan facility, which we refer to as the term loan repricing. The term loan repricing reduced the applicable margin on our term loan facility by 75 basis points to LIBOR plus 3.50 basis points subject to a 1% floor. As you are aware, subsequent to our Q1, we completed our initial public offering and closed it on May 2, 2017. Net proceeds to the company after underwriting discounts and fees and IPO related costs were approximately $192,000,000 which we used to repay approximately 55 percent of the indebtedness under our term loan facility. We expect our leverage ratio to be under 1.5x by the end of the second quarter. The repayment will result in a loss on extinguishment of debt in the amount of 5 $400,000 which will be recognized in the Q2 of fiscal 2017. Given this debt reduction, we were able to reduce our applicable margin on our term loan by another 50 basis points to LIBOR plus 300 subject to the same 1% floor beginning in the Q4 of fiscal 2017. Now turning to our Q2 and full year fiscal 2017 guidance. For those of you who don't know us well, we operate in a large market, approximately $17,000,000,000 of which we estimate we are about 5% of the market today. This market is fragmented and growing and we have built a highly differentiated specialty hard surface flooring business that we believe is difficult to replicate. From a macro perspective, private fixed residential investment as a percentage of GDP is still below historic norms. Home price appreciation continues to grow. Housing turnover and household formation continue to be strong. Our houses are aging and carpet is ceding market share to hard surface flooring. All of these support continued growth in our sector. Competitively, we believe our culture of reinvestment and differentiation has allowed us to grow profitably for a long period of time. In March, we completed our 97th month of same store sales growth with positive comparable same store sales growth since March of 2,009. We plan to continue that trend for the rest of fiscal 2017 and for the foreseeable future. For the Q2 of fiscal 2017, net sales are expected to be in the $329,000,000 to $336,000,000 or an increase of 24% to 26% versus the Q2 of fiscal 2016. The remainder of our new store openings are planned for the back half of fiscal twenty seventeen. Currently, we are planning on 6 new store openings in the Q3 of fiscal 2017 and 5 new store openings in the Q4 of fiscal 2017. Net sales growth outlook is based on an assumed comparable store sales increase of 10% to 12%. We're planning for a modest increase in operating margin driven by a double digit comparable store sales growth, modest gross margin improvement and leveraging our operating expenses and no new stores opening in the second quarter. GAAP diluted EPS is expected to be in the range of $0.13 to $0.15 with adjusted diluted EPS to be in the range of $0.17 to $0.18 based on assumed adjusted diluted weighted average shares outstanding of 103,000,000. We expect adjusted EBITDA to be in the range of $39,000,000 to $42,000,000 an increase of 23% to 30% over the Q2 of fiscal 2016. For the full year of 2017, net sales expected to be $1,285,000,000 to $1,304,000,000 an increase of 22% to 24% versus fiscal 2016. Net sales growth outlook is based on 14 new store openings and an assumed comparable store sales increase of 8% to 10%. For the year, we are planning on a slight improvement in gross margin even while expanding our DC capacity over 90% with large DC moves in Los Angeles and Savannah. We are planning modest leverage of our operating expenses and therefore modest improvement in our operating margin and EBITDA margin. Diluted EPS is expected to be $0.49 to $0.52 with adjusted diluted EPS to be in the range of $0.54 to $0.57 based on an adjusted diluted weighted average shares outstanding of 102,900,000. We expect adjusted EBITDA to be in the range of $138,000,000 to $142,000,000 an increase of 27% to 31% over fiscal 2016. We expect our tax rate to be approximately 37% for the remainder of fiscal 2017. Our tax guidance for both the quarter and the year does not consider the potential positive impact of the new stock based compensation accounting standard that became effective this year ASU number 20 sixteen-nine, which requires excess income tax benefits for stock option exercises to be recorded to the income statement as a reduction of tax expense instead of additional paid in capital on the balance sheet. We will report on the impact, if any, with future quarterly release results. With respect to capital expenditures in fiscal 2017, we plan to spend about $95,000,000 to $104,000,000 We expect to devote $50,000,000 to $54,000,000 of our capital budget to the 14 planned 2017 store openings as well as towards construction of stores that will open in early 2018. Dollars 32,000,000 to $35,000,000 is earmarked for the 6 to 8 store remodels and other store investments, including approximately $10,000,000 related to the relocation of 2 of our 4 distribution centers. The remainder of our CapEx will be directed towards IT, our connected customer strategies and store support center investments. I would also like to mention that our year end 2017 inventory is planned to grow somewhere between 30 percent to 35% over fiscal 2016. We are making the strategic investment to prepare for our large Savannah and Miami distribution center relocations at the end of this year and to improve key in stock inventory positions. For all of the details related to our results and guidance, please refer to our earnings release. With that, I'd like to turn the call back over to the operator and start our Q and A session. Operator? Thank And we do have our first question from Matt McClintock from Barclays. Please go ahead, sir. Hi, yes. Good afternoon, everyone. Congrats on the successful IPO and welcome to the public markets. Thanks Matt. Thanks Matt. Thanks Matt. Hey, so my first question, Trevor, you talked about the longer term shift away from carpet and more towards hard surface flooring. A couple of weeks ago, one of your larger competitors actually called out strength in their carpet business. I think it would be helpful if you maybe, 1, go into some of the factors that's driving that shift towards hard surface flooring and then maybe near term, just address that comment. Are you seeing anything different? Yes. Tom and Lisa may weigh in on this too as well. So it's been over a 15 year trend where carpet has ceded market share to hard surface flooring and it's really a result of the phenomenal product that's available, the technology that's available, waterproof technology, inkjet technology, inkwaterjet cutting technology, the newness with which we can introduce new products into the assortment. And so I really just think it has a lot to do with the innovation that exists in the category and the pricing is more comparable or closer, I should say, than it was in carpet 10 or 15 years ago as well. So look, we've talked about it a lot. Look, carpet is still a big business and something that while the trends have certainly worked in hard surface flooring flooring benefits, and we think that continues for some of the reasons that Trevor mentioned. I just think when you look at the when you go across any category within our store, and if you just take the time to look at what's happened on the innovation of the product, everything from the durability of it to the look of it to the feel of it, there's just been over the last few years just a ton of innovation within this category. And I think that's getting customers to shift relatively quick. So I believe it continues. Think when you walk and you look at what you can buy a porcelain tile today that has a stone look or a wood look, for what you are going to pay for carpet, I think these customers are likely to continue to shift over at a pretty decent clip for us. Thanks a lot for that. And if I could ask a follow-up, just in terms of new store openings, no new stores planned for the Q2. That's in line with our expectations. But looking forward, how should we think about store openings and the cadence of store openings throughout the year? We'll get better. I mean, this year, we have a little lumpiness that we don't like. Certainly, it's nice to spread that balance across the year so that the workload for our store teams and for our stores get better. So you should think about it on a more consistent basis. And as we look out to next year stores, we feel pretty good about the cadence that we'll be able to deliver to those stores. They won't be so lumpy. Matt, the only thing I'd add to that is we have stores right on the bubble. It could open a day earlier, a day later, which literally could flip it between Q2 and Q3. And we have the same issue with Q3. Now the expenses shouldn't be that meaningful because those kind of fall over a number of months. But it's possible that one store could open earlier in Q2. It's possible that the 6 stores we talked about for Q3, some of those could and 5 for Q4, those could move over quarters. It really shouldn't affect the financials because it's not all that material, but we still have a little bit of movement to those times. But we feel good about the 14 for the year. Thanks a lot. Congratulations again and best of luck. Thank you. And moving on to our next question, we have Michael Lasser from UBS. Please go ahead, sir. Good evening. Thanks a lot for taking my question. As you looked in the Q1, did your pro business how does your pro business compare to your DIY business? And then within your pro business, how does it break down between new pros and the increasing business that you're doing with your existing PROs? Yes, Michael, this is Tom. It's difficult for us to measure today. As I said, we're investing in CRM. We'll have better information as we look forward out into next year and beyond. When I look at a 12.8% comp, I'd say it's a little bit of both, right? I think our existing pros are buying a little bit more than they historically have and I think we're getting lots of new people into our stores. If you look at the composition of the comp, in the Q1, it was entirely driven by transaction, so we've paid lots more customers into experience our brand. So today we can't give you specifics on exactly how which one is growing at which rate, but with that type of comp and that type of transaction growth, both segments are doing better. Don, do you have a sense for how concentrated your grow customer base is? How deep are you reaching into their wallet? And what's the opportunity to expand your reach to new customers? Yes, this is Trevor, Michael. Our current view, we've done some analysis around that. We think we still don't have the majority of their business. And it obviously changes depending on the maturity of the relationship and the maturity of the store. But our current analysis suggests that we don't have the majority of the business. We're obviously working to continue to take more of that. But as Tom said, we're still in the early innings of continuing to grow that business and take that business and get them to spend more with us. Yes. If you think about it, we have improved the experience of that customer a great deal in the last 4 years, but we still have ways to go. And a lot of those improvements just happened in a pro customer. They take time. They've got to give you several at bats to make sure that you're going to pitch through them the right way. So we still think we're in our early innings. We like the traction that we're getting. We think we're going to continue to get more and more of their wallet as we continue to improve the service levels at the back end of the store. So, I feel good about the trajectory of where we're going. And then my follow-up question is on the inventory position. It looks like it was up, according to the info we have, about 11% year over year. Is that right? Do you feel like you had appropriate stock levels given the demand that you saw, which was triple the growth in the inventory? And did that play into some of the margin dynamics where you mentioned, I think, unit cap as one of the drivers of your margin expansion during the period? Yes. So it was a planned decrease in inventory relative to this year. Lisa and Lisa team and the supply chain team got together and really came up with a more thoughtful strategy on how we'd receive our Chinese New Year product this year. Going way back, we received a lot of that at the end of fiscal 2015, and we just we received that kind of later as we thought about that and when you compare fiscal 2016 receipts to fiscal 2017 receipts. And it just was a more thoughtful timing for us. And so that's kind of a one time benefit. We won't have that same benefit next year. We feel great about where we are from a physician perspective. We don't believe there's any major holes. We've always got a few opportunities with some in stocks, but for the most part, we feel really good about our inventory position. It's very clean. We do a very diligent job of making sure we move through old inventory. We're in one of the best positions we've been in in my 6 years here. So it was a planned inventory decrease. And as I mentioned, we get to the end of the year, we're going to see the opposite of that where the increase in inventory is going to be closer to the sales growth. So I would just add a couple of points. I think that one of the ways to think about us, we have 80% of the products replenished. We've got a terrific replenishment system that our owners were thoughtful and get us investing early in the game. So our product comes in well. When we chase the benefit of having the broadest in stock assortment is if you're when you carry 2 50 positions of tile in a store, if you're out of 1, you usually have something that looks close to it, you're able to get the benefit and not lose the sale. So we feel really good about our in stock position today. And then just, Trevor, on the Unicap, did that does the lower inventory play a role in the margin dynamics for the quarter? Not really for us. We are planning on our margins being pretty good for the rest of the year. If you back out the 90% expansion in our distribution center and some of those one time costs I mentioned in my prepared comments, that's about 50 basis points for the year of margin deleveraging we're having. And so we are planning on our overall product margins increasing for the back half of the year. So we've kept our inventory clean under Lisa's leadership. We plan to continue to do so. And so we are planning on having nice product margin expansion this year, just somewhat masked by the fact that we're having a very large increase in our distribution center capacity. Awesome. Thank you so much and good luck. Thank you. Thank you. We'll take our next question from Denise Chai from Bank of America. Go ahead, ma'am. Thank you. So most of your new stores this year are opening in the back half. So could you kind of shed some light on how much cannibalization is implied in your comp guidance? And at the same time, could you talk about what you've actually seen when you have intentionally planted another store near a high volume store just to take some of the pressure off in terms of that cannibalization? Yes. Part of the benefit of our strategy, Denise, is since we've been opening a lot of stores here, again going on my 6 years here, we've been fairly diligent about opening half of those stores in existing markets and half of those stores in new markets. And so the cannibalization is baked into our numbers, right? We've been doing it that way for a long period of time. And so we're seeing a little bit higher cannibalization this year because the other side of some of those new stores being the best new stores in our company's history is they're taking some market share from some of our highly successful and that was very intentional. So it's our cannibalization is known for. We plan for it. It is up a little bit this year, but we feel really good about where we are and don't see a lot of cannibalization change as we look through the rest of the year. Yes. I would just say, Denise, too, that we're still growing and we're still trying to understand exactly how close our stores can be to each other. We'll learn a lot as we open stores in denser markets. But the good news is the overall blend, we may be slightly off in our cannibalization estimates, but our new stores are doing better. So the blend of the 2 has been better forever. So and it's it got really strong in the last year. So we are going to continue to cannibalize stores. We want the customer experience to be really good in our stores. And sometimes if they creep up too high volume, we can get choked. So we're purposely trying to go through and make sure we're thoughtful about where we're opening our new stores in the existing markets. Okay. Thanks. And just a follow-up on ProCredit. Where does that offering stand now? So ProCredit for us is pretty small. Our overall credit sales are right around 10% of our total sales. The majority the vast majority of that is in commercial sorry, is in the consumer, the DIY. Our pro credit is pretty nascent today. We're testing a couple of things in Chicago and Texas and evaluating other alternatives for us. We think that's an opportunity. As Tom said, again, we're kind of in the early innings. So more to come on that hopefully in the next year or so as those tests in Texas and Chicago teach us something. Okay. Thank you. Our next question comes from Matt Fassler from Goldman Sachs. Please go ahead, sir. Hi, thanks very much. This is Katie Price on for Matt. Wanted to ask you guys about the implied back half comp, which would be a pretty steep deceleration from the levels that you're putting up in the first half. What do you think is going to slow down the comp that you guys have guided that way? Hey, Katie, this is Trevor. We're if you just do the math on that, you're right. We're assuming kind of a high single digit comp for the back half of the year. And we've been fairly consistent. I know we haven't been public all that long, but we've been fairly consistent as we just don't plan our business at the double digit basis. We want to make sure we keep our cost structure in line. It allows us to prioritize our biggest investments for the rest of the year. What we've told people for the rest of the year. What we've told people though, and I think we'll be able to consistently say at least for the foreseeable future is, if we're fortunate enough to be on the top line that people should think about that flow through coming in above 20%. But it's just discipline that we've stayed with where we just don't like to comp plan our comps that way. As far as the business itself, it's obviously performing well. The macro backdrop is extremely good. Our competitors are doing pretty good. And so we feel good about the back half of the business, but we just don't like to plan the business that way. Yes. I'd echo what Trevor said. We want to be thoughtful in how we think about our business. We're doing all we can to continue double digit same store sales growth, but hard to plan for. So we'll be thoughtful and do the best that we can. Our next question comes from Seth Sigman from Credit Suisse. You've talked a little bit about just the consistency in comp trends across regions and vintages in the past, which has been a great story. Can you just update us on that and whether you're seeing any major differences over the last quarter or so? No differences. We're seeing strength across all age groups of stores. We're seeing strengths across all regions. The regions that didn't have double digit same store sales growth where we purposely those are the regions we filled in, in a meaningful way. So that strength has been consistent. Okay. And as you think about growth opportunities, you outlined a few, but beyond store growth, what are you most excited about from a merchandising perspective, maybe new category opportunities and what could be most incremental as you look out over the next year or so? We're excited about a lot. I'll let Lisa here, so I'm going to let Lisa chime in. I would just say that the first thing I would say is innovation within hard surface flooring continues to have me excited. We have a product review center here in Atlanta and we change out our products often from the standpoint where our merchants are always bringing in new things for our stores to select. I was there yesterday and saw the next wave of new generation stuff that's coming across multiple departments. It's not one single thing that I could point to and say, all right, well, there's going to be innovation in water resistant laminate that's going to be very exciting or innovation in inkjet technology or innovation within water jet, mosaics. There's innovation in the mall and it all has us pretty excited. The vendors and our merchants continue to do a great job in evolving this category. So that excites me. I would say that water resistant across multiple we just introduced water resistant bamboo. So now we have water resistant laminate. We have waterproof Nucor and then we have water resistant bamboo in the store. The customers' reaction to all of those has been terrific. We've got more on the horizon coming there. I think that excites me well as well. And the last thing I'd say and then I'll hand it to Lisa, who I probably said everything that she was going to say. So the last thing I'd say is we are testing some adjacent categories. We're very pleased with the development of those adjacent categories and how they're doing. Again, those are categories that are difficult to buy, but that our customers need. So we got 2 tests that we're going that should help contribute in the future. I didn't think you want to add anything on that? No. I think you have not covered it. I think the most important point though that you said is that our vendors and our merchants are spending all of their time looking for the next best thing and that's really what gives us courage and the thought that we'll continue to do well. Yes. Okay. Thanks very much. Our next question comes from Alan Rifkin from BTIG. Please go ahead. Thank you. My first question, with respect to the gross margin increasing 90 basis points, it was mentioned that increased product margins actually rose 160. I was wondering if maybe you can talk about the sustainability of that number. And then what was the reason for the relocation? And then I do have a follow-up, please. Yes, this is Trevor. I'll take a quick stab at that. So the 160, just remember, as I said in my prepared comments, we had a fairly large benefit for the quarter because of timing of rebates. For the year, we feel good about our rebates. We're really just aligning the rebate so that the percentage is fairly consistent across year and it's really more of an accounting thing is the reason we had to do that. For the year, as I mentioned, we think our margins will be kind of flattish, maybe up just a tick, and that's taking on an additional 50 basis points for the big expansion of the distribution center. So the math of that would tell you that our overall product margin is going to be up 50, 60 basis points. A lot of that has to do with great efforts on our supply chain. Certainly, our merchants are taking cost out of the business as well. But with the supply chain, it's just been doing a fantastic job over the last 18 months in putting in new technology and infrastructure and contracts to take supply chain costs out. And because that affects all SKUs, we're seeing all of our product margins go up. And the other thing I would probably say is, again, Lisa's team has done a fantastic job on good, better, invest. And as we execute that and put the assortment together well and sell the entire project better, we're seeing a lift in our margins this year. And I do want to point out, Lisa reminded me earlier, that we do a very good job of making sure we also invest back in price and quality, making sure we have the best quality possible and making sure that we are going to be the price leader in the markets we serve. And the second question, why did we relocate San Antonio? I'd break it down into a few reasons. So one, a lot of our buildings are under leased. When the lease term comes up, we look at the building and sell it. We've been talking about doing a relo since I've got here. But San Antonio, we happen to have a store that needed a full remodel, so it would have taken a major investment to get it up to the standards that we're seeking. 2, the egress out of the store was difficult for our professional customers, so we like the store. It's easy to get in and get out of. And then we just had a great building that popped up in the market that was in a very comparable rent rate. So we were able to didn't have to do the remodel, able to get a slightly better location for our pros to get in and get out of and be able to deliver a brand new experience for our customers. And just one last thing just to add to that. It's like everything in the business. We're just pruning the business, making it a little sharper. We've got a handful of stores. We don't have many, maybe 2 to 4 that over time will want to do those things. And we kind of have the same metrics for it. As I mentioned in my opening comments, we want to get our cash back in 2 to 3 years for new stores. When we make those major remodels, we want to get our cash back sorry, those major relocations like that. We want to get our cash back in 2 to 3 years. As Tom mentioned, we're fortunate that store seems to be performing well above plan, so our ROI is going to probably be a little bit higher than that. But we don't have a lot of stores we need to relocate. We only have a hand field that we'll do. We're kind of currently thinking about 1 per year. And we've only done one, but so far so good. It's looking really well. Okay. Thank you, Trevor. My second question is for Tom. Tom, what we've seen in our years of following retail is that sometimes the most limiting factor for fast hyper growth retailers such as yourself is human capital. Can you maybe talk about just a little bit what training is going on the average tenure of a store manager and how you're going to control the human capital aspect going forward as you continue to grow store base by 20% annually? Thank you. Sure. Thanks, Alan. Well, I'll preface that, I learned a lot at a terrific retailer that I spent some time with. I was in my previous role in home improvement, I was there and we were opening a store every 42 hours for multiple years. So I learned the good things and the bad things about that. When I joined Floor and Decor, we started investing in scalability. So we invested we're a small company. When I joined, we're only $300,000,000 but we invested in a learning department, a significant learning department. So our managers go through Floor and Decor University. They get trained. They have to we bring people in and put them in training capacity. We built a budget around DEM IT. So we hire in people and get them they have to spend significant time in the field. We have lots of those folks in the organization that we budgeted for, so they're ready to take our stores as we grow. Additionally, like I said, we have last year, we were able to promote 75% of our promotions internally, and that's what our goal is, is to promote 75% internally. So by reinforcing the training that we invested in here in the store support center, we have field trainers as well. We've been able to hire in at the right pace, not too much because we want to promote and let people grow their careers here at Florham Decor and see them achieve things they didn't think were possible. So between that, I just think significant investment and budgeting the resources to make sure that we've got enough people in the pipeline to support the growth. The only thing I would add too, Alan, is if you look at our store manager, we have a single digit store manager turnover and so very low. And if you go one level above that, talking about our department managers, an average store will have anywhere from 5 to 10 department managers, that's in the mid teen range. And so that's very low from my experience in retail. So we've just got great leaders. We teach them, we treat them well, we pay them well and they generally stick around. Last thing I'd say is we're fortunate to have really terrific owners that allowed us in a private company to give equity down to our Sturm Edge lever. So every one of our managers have skin in the game. They're owner of the business and we know as an owner they're going to run that business better. Thank you. Congratulations. Thank you, Alan. Thanks, Alan. We'll take our next question from Dan Bender from Jefferies. Please go ahead. Thanks. Ed, my congratulations on a fantastic IPO. Just a couple of questions for you today. First on your 2nd quarter guidance, I know you guys tend to want to be conservative, especially out of the gate. Just curious on the comp guidance, can you give us some hints as to how you're tracking relative to that so far in the quarter? Are you within the range or above it? And then my second question was around the regional performance. I think you mentioned that 2 of the regions were below double digit. I'm sure they were great. I'm just curious if there was anything unique about those regions and how they were tracking? Hey, Dan. Thanks. We've got wonderful advisors and our advisors have said we should not give intra quarter guidance. So we're going to follow that guidance. But we put a lot of thought and time and effort into our guidance that we put together. We obviously are we have great systems. We know ourselves every 3 hours including every metric you'd want to know. So we took all that into consideration when we put our guidance together. And as I mentioned before, we just we don't like to plan the business in a double digit comp range and that has served us well over my 6 years here. So we're going to continue to plan the business at a fairly high single digit comp level. And if we beat, again, hopefully, you guys and we'll be able to report that we'll be able to pull that through at an operating margin much heavier or higher than our current 7.5% operating margin level. Yes. And then as far as the region performance, I have no concerns. I can look at our comp performance. I can look at it by store and see where it is affected by us. And with a growth strategy of 50% of our stores going into existing markets and 50% into new markets, we're purposely putting stores near our higher volume stores that make the customer experience better in those stores. So I don't have any concerns. We're seeing strength across all the country. We don't have any pockets of where we think something different is going on competitively or something different is going on from an economy standpoint. And if I could, since you didn't answer my first question, I'll just add one more. The flow through, you talked about 20% flow through for upside in sales in terms of the margin. Is that conservative just leaving yourself room to invest in something more discretionary? Or is there something structural about the model that keeps it at that level? Yes. No, we obviously flowed through better than in Q1. We do have a very healthy appetite for investment. We've got a long vision for how do we continue to differentiate ourselves and make us new. Tom, Lisa mentioned CRM, omnichannel initiatives, supply chain, 90% increase in supply chain. We've got a few things about the customer we want to learn more, so maybe some customer segmentation study. So yes, long answer to a simple question, which is we have been flowing through better than that, but we want to leave ourselves room to continue to invest in the business. Yes. I mean, I think I just would say, look, we've got a we have a track record of pulling investments in. Over the last 4 years, we've made decisions as the year has gone on to do things that were that need to be done that we maybe were figuring to do in the longer term. We pulled them ahead. We want to reinvest in our business and we're trying to be thoughtful. We look at what we're guiding, what we're telling people and if we can pull investments in that are going to make our business better in the out years, then we'll do that. Great. Congrats and good luck in Q2. Thanks. Thank you. Our next question comes from Peter Keith from Piper Jaffray. Congrats from me for a very successful IPO. I want to follow-up on Alan's question around product margin. So I know you got I think it was a 50 basis point one time benefit, but I wasn't quite clear on the drivers to product margin if it was mix or within the categories. If you could provide a little more color there, it would be helpful. So the majority of the increase was most of our product margins are increasing because of the supply chain benefits we're getting. So those supply chain benefits obviously affect every SKU, not just one individual department. We actually don't measure it at, let's say, exactly how much of it is basis points for supply chain versus margin. But it's safe to say the majority of it is due to better supply chain. We also Tom mentioned in his prepared comments that our accessories and our decorative accessories comped at above company average. Those are our higher margin departments and so there was some mix benefit to it. And then again, the final piece of it as well is again Lisa's team has just done a great job putting together the assortment well. And within that, you're selling a higher penetration of your better and best projects. Yes. That's what I was going to say. I think that across every department, if you go through and walk the store, Peter, and you look, you see in every department, we've done the merchants have done terrific job of offering the stores the ability to select better stuff. And in every department we've got better stuff, and do some of that better stuff sells at a higher rate than an opening price point at a higher margin rate. So I think we've done a good job there. The other thing that Trevor didn't mention is, the same thing we've done in Pro, we're beginning to do on the design side of our business. And the better our designers become in the store, the more they engage with our customers, the better project they sell and the more things they can add on to a sale, and they may be able to add stuff in instead of higher margin rate. So the improvement in our designer experience is also benefiting that margin line across all the departments. Okay. Maybe I'll ask another follow-up question and maybe even we could at least answer. When you look at the better and best products that you're bringing in across the store, are you fully positioned there, invest? Or do you still feel like there's opportunity to bring in even higher price point items at this point? No, we don't think we're done at all. Every time we think that we hit the top, the customer tells us that they have a huge appetite. And so, no, we will continue across all of the categories to offer more, better and best products. We offer all those products at the same kind of value that we offer our opening price point and our customers recognize that. And so they're willing to spend more to get great products because it's still an unbelievable value for them. Okay, great. One other separate question I want to ask. So one of your large box competitors last week had mentioned some significant strength in the luxury vinyl plank. Could you give us an indication of how that category is performing for you? Yes. It has done extremely well for us. Also, I think Tom mentioned in his comments that laminate has trended above the average and part of the laminate category, the way we look at that laminate luxury vinyl plank, WCC product is all in there. And yes, those products are doing very well. It goes a lot back to what Tom mentioned about the innovation, the durability, the water resistant piece. Our customers are really responding very well to that. All right. Thank you very much and good luck this quarter. Thank you. Thanks, Peter. Our next question is from Zack Fadem from Wells Fargo. Please go ahead. Thanks for taking my question. You mentioned transaction was the major component of the comps rather than ticket in the quarter. And I believe this has been an ongoing trend, correct? So in terms of what's driving the lower ticket growth, can you talk about the contributing factors here? And then as you model out your business going forward, how should we think about the transaction versus ticket split over the next couple of years? This is Trevor. I'll take a stab at that. Lisa and Tom may weigh in as well. So there's really three things on the lower ticket this quarter. First, our samples were very strong. If you back out our samples, our ticket was almost flat. And so we've had just a nice lift in samples. That's a great leading indicator for us because obviously when people buy samples, we hopefully can convince them to come back in and buy the flooring. The second thing that really drove it was, as Tom mentioned, our wood business and our stone natural stone businesses, those businesses were below the company average. And because those are generally higher ticket and higher square footage sales, it brought down our ticket. Those are the 3 things I'd point out for the average ticket. That I do think it's just a blip. I think the average ticket for the year will be fine and will go back up. But it just so happened that we just had a lot of phenomenal things in other departments that did better than those. And Tom kind of mentioned this, but just to be clear for some people who don't know this is we're fairly agnostic as to what departments take off in this business. And because we have everything under hard surface flooring, so if it's tile this year, that's great. If it's wood next year, that's great. If it's stone the year after that, that's fine too. We've got a great group of merchandising people who generally see those trends, can influence those trends and we'll make sure we have inventory to run through those trends. Yes. And I think the other thing I'd say too, Trevor, is that we want to put what the customer needs into their hands. And if it's it depends that's on whatever price is right for the customer. So we're not going to be driven to try to push them into the higher price stuff, whatever is the right value for them. We want to democratize the category so that we do that. The other thing I'd say is, as we're continuing to improve in our Pro business, the Pros are coming in a little more frequently and they're not buying everything on one trip. They're coming in, they're buying a bag of grout or they're buying some of their adhesive supplies using us a little bit more like a 711 and just making a business just the food stop. So some of that is going to drag ticket down, but at the end of the day, that's okay. Okay. That's helpful. And can you talk a little bit about how your pro customer penetration trends for a new store, particularly in a new market? And then as a store reaches maturity, how long does it typically take for the pros to come along and ultimately get to that overall 60% of sales level that you guys have talked about? Yes. I think in a newer market, look, we do a lot of grassroots marketing, a lot of efforts in the before we way before we get into a store, we're belly to belly in a market trying to talk to pros and tell them about our concept because they just don't get it. Like everyone, if they haven't been in the Floor and Decor, they're not going to understand kind of the total value proposition that we provide. So in a new store and again, the pro customers, they don't always switch right away, so it takes a little time. So certainly, that split in a new store is different than an existing store, but it grows rapidly. If you look at the maturity curve of our stores and how they comp in the 2nd, 3rd year, it takes a little bit of time to get pros to experience the brand. But as they do, they tell more pros about it. They get more do it yourselfers in there and then it takes off. And by I would say by year 2, year 3, we're in that sixty-forty split within our stores. So and I said a few times that even our best stores are at that similar rate. There's just more of both. There's more pros and there's more DIYers in there than our best stores. That makes sense. That's helpful. Thanks a lot guys. Best of luck. Okay. Thank you. Thank you. And that is all the time we have for questions. Mr. Tom Taylor, I'd like to turn the conference back to you for any additional or closing remarks. Okay. Well, look, I appreciate everyone taking the time to join us on our first earnings call. So we're excited to be able to engage with you and to be able to answer your questions. We look forward to spending more time with you in the future. Thanks, everybody. This concludes today's call. Thank you for your participation. You may now disconnect.