Good afternoon, ladies and gentlemen. This is Floor & 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 25th, 2017. I will now turn the call over to Matthew McConnell, Manager of Investor Relations at Floor & Decor. Go ahead, sir.
Thanks, Andrew. Good afternoon, everyone. I'm Matthew McConnell, Manager of Investor Relations. Joining me on the call today are Tom Taylor, Chief Executive Officer, and Trevor Lang, Executive Vice President and Chief Financial Officer. Also on the room is Lisa Laube, Executive Vice President and Chief Merchandising Officer, who will join us for the Q&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 that forward-looking statement. The company's actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings.
Floor & Decor assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company 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.flooranddecor.com. The recorded replay of this call, together with related materials, will be available on the investor relations website, ir.flooranddecor.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 & Decor. Our brand is resonating with customers and we're enjoying continued strong growth. Floor & 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 first quarter results and then outline our key growth initiatives for the future.
Net sales in the first quarter increased by 30.6% to $307.3 million from $235.3 million in the first quarter of fiscal 2016. Our 12.8% first quarter comp comes on top of the 22.4% comp that we delivered in the first quarter of 2016. Diluted earnings per share increased 63% from the first quarter of 2016 to $0.13, and adjusted diluted earnings per share grew 86% from the first quarter of 2016 to $0.13. From fiscal 2012 to fiscal 2016, we have seen an average annual comp of 16.5%, 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 first quarter 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 first four months of fiscal 2017, we are anticipating strong sales and earnings for the second quarter and full fiscal year. Trevor will walk you through those details in a minute. Floor & 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 sq ft, 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% 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 first quarter, our three 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.
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. Four of our six 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 for the future. Net sales in the first quarter increased by 30.6% to $307.3 million from $235.3 million in the first quarter of fiscal 2016. Our 12.8% first quarter comp comes on top of the 22.4% comp that we delivered in the first quarter of 2016. Diluted earnings per share increased 63% from the first quarter of 2016 to $0.13, and adjusted diluted earnings per share grew 86% from the first quarter of 2016 to $0.13.
From fiscal 2012 to fiscal 2016, we have seen an average annual comp of 16.5%, 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 first quarter 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 first four months of fiscal 2017, we are anticipating strong sales and earnings for the second quarter and full fiscal year. Trevor will walk you through those details in a minute. Floor & 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 sq ft, 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% 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 first quarter, our three 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. 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. 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. Four of our six regions achieved a double-digit comparable store sales growth. 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 perform above the company average. Carpet and tile, stone and wood perform below.
We offer a broad and diverse mix of hard surface flooring across product categories. Are therefore well positioned to capitalize on any category shifts that might occur as innovation and trends in flooring ebb and flow. At Floor & 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 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, systems, 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 & 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 am proud that our customer service scores are at the highest they have been since we began measuring it four 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 Floor & Decor. Our key growth priorities are, first, 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 six 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 seven 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. Second, increase 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.
The awareness of Floor & Decor is still limited in new and even existing markets, and we will continue to increase brand awareness as we grow our store base, which will help drive our comp growth as well. Third, expand connected customer experience. We know that the hard surface flooring category is heavily researched, and that our customers spend a lot of time on our website researching their purchase before coming into the store or buying directly through our website. 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, their experience is very important to us. Our store associates also play a very important to our omnichannel strategy, and we're focused a lot of time and training to our associates.
Our stores have dedicated design centers that range from 1,500 to 2,000 sq ft, and we offer free design service to all customers 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 omnichannel customer engagement and assist store associates. E-commerce sales were approximately 5% of our sales in the first quarter 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. Fourth, 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 DIY 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 pro team 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. 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 and philosophy of continued reinvestment to further strengthen our customer value proposition and support strong and sustainable top and bottom-line growth. I'll now turn the call over to Trevor, our Chief Financial Officer and head of pro services, to go over the financial results and guidance.
Thanks, Tom. Good afternoon, everyone. I will begin my remarks with a review of the first quarter 2017 results and then discuss our outlook for the second quarter 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 first quarter of fiscal 2017 were $307.3 million, up 30.6% from $235.3 million in the first quarter of fiscal 2016. We entered the quarter with 72 stores, an increase to 12 new stores or 20%, versus the 60 stores at the end of the first quarter of fiscal 2016. In the first quarter, we opened three stores in Texas, Illinois, and California. Our new non-comparable stores, which we define as stores that have been open in the past year, continued 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 when looking at their first-year sales, operating profit, and EBITDA. The three 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 third-year net sales of $14.5 million and four-wall EBITDA margins of roughly 17.5%. We define four-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 million-$13 million, or about 11.5% four-wall EBITDA margins in year one.
We target a total initial cash investment per store of approximately $4 million to $5 million, which includes initial inventory net of our payables, reopening expenses, in 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 three. We plan to continue opening a balanced portfolio of new stores in both existing and new markets. First quarter comparable store sales increased 12.8%. That's on top of a 22.4% comparable store sales increase in the first quarter 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. On to profitability. Gross profit increased 33.6% to $125.5 million in the first quarter, from $93.9 million in the first quarter of fiscal 2016.
Gross margin increased about 90 basis points to 40.8% in the first quarter 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 the 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 fourth quarter of 2017. The remainder of the higher product margin was due to lower capitalized supply chain costs and the benefit of mix of selling better and best products. As discussed on our S1, we successfully moved our Los Angeles distribution center from Long Beach to Moreno Valley, California, expanding our space from 220,000 sq ft to approximately 750,000 sq ft, with the ability to get up to 1.1 million sq ft over time to support our continued West Coast expansion.
We incurred costs of approximately $1.5 million 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 1.4 million square feet distribution center in the fourth quarter of this year. We anticipate we will incur costs of less than $1 million in the fourth quarter of 2017 to 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 33.5% from 34% in the first quarter 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 one year and our store support center leveraging costs on higher sales, somewhat offset by the 12 new stores we have opened since the end of the first quarter of 2016. Our new store operating expenses generally run about 50% higher as a percentage of sales in their first year of our operation than our older stores. Since we are adding about 20% new stores a year, this mitigates large operating expense leverage we are getting from our stores older than one year.
Due to the strong sales growth, gross margin expansion, and managing the expenses, our operating income for the first quarter increased 62.4% to $22.7 million, as compared to operating income of $14 million in the first quarter of fiscal 2016. Our operating margin increased 150 basis points to 7.4% in the first quarter. Our effective tax rate for the first quarter was 35.5%, compared to 38.1% in the first quarter of 2016. The first quarter rate benefited by relieving a state valuation allowance of approximately $200,000, or worth 1.1% 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 first quarter 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 million, or $0.13 per adjusted diluted share, as compared to $7.2 million or $0.07 per adjusted diluted share in the first quarter of 2016. This represents an increase in adjusted net income of $5.9 million or 82%. Adjusted EBITDA for the first quarter increased 58.7% to $31.9 million compared to adjusted EBITDA of $20.1 million in the first quarter of fiscal 2016. We ended the quarter with $173.4 million in cash and available liquidity under our revolving credit facility and $363.6 million in outstanding borrowings. Our inventory balance was $316.5 million, up $31.6 million, or 11%, from the first quarter of fiscal 2016.
In the first quarter 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 second quarter, 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 350 basis points, subject to a 1% floor. As you are aware, subsequent to our first quarter, we completed our initial public offering and closed it on May 2nd, 2017. Net proceeds to the company after underwriting discounts and fees and IPO-related costs were approximately $192 million, which we used to repay approximately 55% of the indebtedness under our term loan facility.
We expect our leverage ratio to be under one and a half times 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 second quarter 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 fourth quarter of fiscal 2017. Turning to our second quarter and full-year fiscal 2017 guidance. For those of you who don't know us well, we operate in a large market, approximately $17 billion, of which we estimate we are about 5% of the market today.
This market is fragmented and growing. 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. 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 2009. We plan to continue that trend for the rest of fiscal 2017 and for the foreseeable future.
For the second quarter of fiscal 2017, net sales are expected to be in the $329 million-$336 million, or an increase of 24%-26% versus the second quarter of fiscal 2016. The remainder of our new store openings are planned for the back half of fiscal 2017. Currently, we are planning on six new store openings in the third quarter of fiscal 2017 and five new store openings in the fourth quarter of fiscal 2017. Net sales growth outlook is based on an assumed comparable store sales increase of 10%-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-$0.15, with adjusted diluted EPS to be in the range of $0.17-$0.18 based on an assumed adjusted diluted weighted average shares outstanding of 103 million. We expect adjusted EBITDA to be in the range of $39 million-$42 million, an increase of 23%-30% over the second quarter of fiscal 2016. For the full year of 2017, net sales are expected to be $1 . 285 billion to $1.304 billion, an increase of 22%-24% versus fiscal 2016. Net sales growth outlook is based on 14 new store openings and an assumed comparable store sales increase of 8%-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-$0.52 with adjusted diluted EPS to be in the range of $0.54-$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 million-$142 million, an increase of 27%-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 2016-09, which requires excess income tax benefits for stock option exercises to be reported 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 million-$104 million. We expect to devote $50 million-$54 million of our capital budget to the 14 planned 2017 store openings, as well as towards construction of stores that will open in early 2018.
$32 million-$35 million is earmarked for the 6-8 store remodels and other store investments, including approximately $10 million related to the relocation of two of our four 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%-35% over fiscal 2016. We are making this 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 other 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&A session. Operator?
Thank you. If you'd like to ask a question on today's call, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question per person. Again, that is star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We do have our first question from Matthew McClintock from Barclays. Please go ahead, sir.
Hi. Yes. Good afternoon, everyone. Congrats on the successful IPO, and welcome to the public markets.
Thanks. Thanks, Matt.
Thanks, Matt.
Hey, 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, one, go into some of the factors that's driving that shift towards hard surface flooring, then maybe nearer term, just address that comment, are you seeing anything different?
Yeah, Tom and Lisa may weigh in on this too as well. 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, ink, water jet cutting technology, the newness with which we can introduce new products into the assortment. 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.
Yeah, look, we've talked about a lot. Look, Carpet's still a big business and something that while the trends have certainly worked in hard surface flooring's benefits, and we think that continues for some of the reasons that Trevor mentioned. I just think 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.
I think that's getting customers to shift relatively quick. I believe it continues. I 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 just customers are likely to continue to shift over at a pretty decent clip for us.
Thanks a lot for that. If I could ask a follow-up, just in terms of new store openings, no new stores planned for the second quarter. That's in line with our expectations. Looking forward, how should we think about store openings and the cadence of store openings throughout the year?
We'll get better. 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. You should think about it on a more consistent basis. As we look out to next year's stores, we feel pretty good about the cadence that we'll be able to deliver those stores, so 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 early or a day later, which literally could flip it between Q2 and Q3. We have the same issue with Q3. The expenses shouldn't be that meaningful because those kind of fall over a number of months. It's possible that one store could open earlier in Q2. It's possible that the six stores we talked about for Q3, and five for Q4, those could move a quarter. It really shouldn't affect the financials because it's not all that material, but we still have a little bit of movement of those times. We feel good about the 14 for the year.
Thanks a lot. Congratulations again, and best of luck.
Thank you.
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 first quarter, how did your pro business compare to your DIY business? Within your pro business, how did it break down between new pros and the increasing business that you're doing with your existing pros?
Yeah, 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 first quarter, it was entirely driven by transactions because we've gained lots more customers in to experience our brand. Today, we can't give you specifics on exactly which one's growing at what rate. With that type of comp and that type of transaction growth, both segments are doing better.
Tom, do you have a sense for how concentrated your pro customer base is? How deep are you reaching into their wallet, and what's the opportunity to expand your reach to new customers?
Yeah, 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. It obviously changes depending on the maturity of the relationship and the maturity of the store. 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. 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.
Yeah, if you think about it, we have improved the experience of that customer a great deal in the last four years, but we still have a ways to go. A lot of those improvements just happen in a pro customer. They take time. They got to give you several at-bats to make sure that you are going to pitch to them the right way. 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. Feel good about the trajectory of where we're going.
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 would triple the growth in the inventory? Did that play into some of the margin dynamics where you mentioned, I think, uniCap as one of the drivers of your margin expansion during the period?
Yeah. It was a planned decrease in inventory relative to this year. Lisa's 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. We received that kind of later as we thought about that and when you compare fiscal 2016 receipts to fiscal 2017 receipts. It just was a more thoughtful timing for us. 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 position 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 six years here. It was a planned inventory decrease. As I mentioned, when 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.
I would just add a couple of points. I think that one of the ways to think about us is 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. Our product comes in well. The benefit of having the broadest in-stock assortment is when you carry 250 positions of tile in a store, if you're out of one, you usually have something that looks close to it, you're able to get the benefit and not lose the sale. We feel really good about our in-stock position today.
Just Trevor, on the [inaudible], did the lower inventory play a role in the margin dynamics for the quarter?
Not really for us. We're 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 de-leveraging we're having. We are planning on our overall product margins increasing for the back half of the year. We've kept our inventory clean under Lisa's leadership. We plan to continue to do so. We are planning on having a nice product margin expansion this year. It's 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. Most of your new stores this year are opening in the back half. Could you kind of shed some light on how much cannibalization is implied in your comp guidance? 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?
Yeah. Part of the benefit of our strategy, Denise, is since we've been opening a lot of stores here, again, going on my six years here, we've been fairly diligent about opening half of those stores in existing markets and half of those stores in new markets. The cannibalization's baked into our numbers, right? We've been doing it that way for a long period of time. 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. Our cannibalization is known for, we plan for it.
It is up a little bit this year, we feel really good about where we are and don't see a lot of cannibalization change as we look to the rest of the year.
I would just say, Denise, too, that we're still growing, 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. 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 two has been better than ever. It got really strong in the last year. 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 in volume, we can get choked. 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. Just to follow up on pro credit, where does that offering stand now?
Pro credit for us is pretty small. Our overall credit sales are right around 10% of our total sales. The vast majority of that is in the consumer, the DIY. Our pro credit is pretty nascent today. We're testing a couple 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. 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 gonna slow down the comp that you guys have guided that way?
Hey, Katie, this is Trevor. 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. We've been fairly consistent. I know we haven't been public all that long, but we've been fairly consistent, is 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, though, and I think we'll be able to consistently say this 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%. It's just a discipline that we've stayed with where we just don't like to 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. We feel good about the back half of the business. We just don't like to plan the business that way.
Yeah. 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. We'll be thoughtful and do the best that we can.
Great. Thanks very much, guys.
Thank you.
Our next question comes from Seth Sigman from Credit Suisse. Please go ahead.
Thanks a lot. Good afternoon, guys.
Hey, Seth.
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?
Nope. 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 are where we purposefully those are the regions we filled in in a meaningful way. That strength has been consistent.
Okay. As you think about growth opportunities, you outlined a few, 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. Lisa's 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, 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 them all, it all has us pretty excited.
The vendors and our merchants continue to do a great job in evolving this category, that excites me. We just introduced water-resistant bamboo, now we have water-resistant laminate, we have waterproof NuCore, we have a 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 as well. The last thing I'd say, I'll hand it to Lisa, where I've probably said everything that she was going to say. The last thing I'd say is we're 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, that our customers need.
We've got two tests that we got like that are going that should help contribute in the future. Anything you want to add anything on this?
No, I think you about 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 thought that we'll continue to do well.
Yeah.
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? Then I do have a follow-up, please.
Yeah, this is Trevor. I'll take a quick stab at that. 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. 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. That's taking on an additional 50 basis points for the big expansion of the distribution center. The math of that would tell you that our overall product margins are 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 costs out of the business as well. With the supply chain, it's just done a fantastic job over the last 18 months in putting in new technology and infrastructure and contracts to take supply chain costs out. Because that affects all SKUs, we're seeing all of our product margins go up. The other thing I would probably say is, again, Lisa's team's done a fantastic job on good, better, and best. 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.
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. The second question, why did we relocate to San Antonio? I'd break it down into a few reasons. One, a lot of our buildings are under lease. When the lease term comes up, we look at the building and say, all right, we've been talking about doing a relo since I've got here. San Antonio, we happened 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.
Two, the ingress, egress out of the store was difficult for our professional customers. We like the stores easy to get in and get out of. We just had a great building that popped up in the market that was in a very comparable rent rate. We 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. Just one last thing just to add to that is, 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 two to four that over time we'll want to do those things. We kind of have the same metrics for it.
As I mentioned in my opening comments, we want to get our cash back in two to three years for new stores. When we make those major relocations like that, we want to get our cash back in two to three 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 on that, but we don't have a lot of stores we need to relocate. We only have a handful that we'll do. We're currently thinking about one per year. 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 hypergrowth 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 in my previous role in home improvement. I was there, we were opening a store every 42 hours for multiple years. I learned the good things and the bad things about that. When I joined Floor & Decor, we started investing in scalability. We're a small company. When I joined, we were only $300 million, we invested in a learning department, a significant learning department. Our managers go through Floor & Decor University. They get trained. We bring people in and put them in training capacity. We built a budget around DEMIT, we hire in people, and they have to spend significant time in the field.
We have lots of those folks in the organization that we budgeted for, they're ready to take our stores as we grow. Additionally, like I said, last year, we were able to promote 75% of our promotions internally, and that's what our goal is to promote 75 internally. 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 Floor & Decor and see them achieve things they didn't think were possible. 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.
Yeah.
We have a single-digit store manager turnover, very low. If you go one level above that, talking about our department managers, an average store will have anywhere from five to 10 department managers. That's in the mid-teen range. That's very low from my experience in retail. We've just got great leaders. We teach them, we treat them well, we pay them well, and they generally stick around.
The 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 store manager level. Every one of our managers has skin in the game. They're an owner of the business, and we know as an owner, they're going to run that business better.
Okay. Thank you. Congratulations.
Thank you, Al. Thanks, Alan.
We'll take our next question from Daniel Binder from Jefferies. Please go ahead.
Thanks. And my congratulations on a fantastic IPO. Just a couple of questions for you today. First, on your second 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? Then my second question was around the regional performance. I think you mentioned that two of the regions were below double-digit. I'm sure they were great, but 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. We put a lot of thought and time and effort into our guidance that we put together. We obviously have great systems. We know ourselves every three hours, including every metric you'd want to know. So we took all that into consideration when we put our guidance together. As I mentioned before, we don't like to plan the business in a double-digit comp range, and that has served us well over my six years here. So we're going to continue to plan the business at a fairly high single-digit comp level.
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.
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. 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 to make the customer experience better in those stores. I don't have any concerns. We're seeing strength across all of 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.
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?
We obviously flowed through better than that 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, omni-channel initiatives, supply chain, 90% increase in supply chain. We've got a few things about the customer we want to learn more, maybe do some customer segmentation study. 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.
I think I just would say, look, 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 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. Please go ahead.
Hi. Thanks for taking my question, and also congrats from me for a very successful IPO. I wanted to follow up on Alan's question around product margin. 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'd be helpful.
The majority of the increase was most of our product margins are increasing because of the supply chain benefits we're getting. Those supply chain benefits obviously affect every SKU, not just one individual department. We actually don't measure it as to say exactly how much of it's basis points for supply chain versus margin. 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 above company average. Those are our higher margin departments, there was some mixed benefit to it. Again, the final piece of it as well is, again, Lisa's team has just done a great job of putting together the assortment well. Within that, you're selling a higher penetration of your better and best projects.
Yeah. That's what I was going to say, is I think that across every department, if you go through and walk the store, Peter, and you look, you'll see in every department, the merchants have done a terrific job of offering the stores the ability to select better stuff. In every department, we've got better stuff, and some of that better stuff sells at a better, at a higher rate than an opening price point, at a higher margin rate. 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.
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 rates. 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 that maybe even we get Lisa to answer. When you look at the better and best products that you're bringing in across the store, are you fully positioned there in best, 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've hit the top, the customer tells us that they have a huge appetite. No, we will continue across all of the categories to offer more better and best product. We offer all those products at the same kind of value that we offer our opening price point, and our customers recognize that. 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 wanted to ask. 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?
Yeah, 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, WPC product is all in there. Yes, those products are doing very well. It goes a lot back to what Tom mentioned about the innovation, the durability, the water resistance 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 Zachary 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? In terms of what's driving the lower ticket growth, can you talk about the contributing factors here? 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. 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. 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 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 three things I'd point out for the average ticket. I do think it's just a blip.
I think the average ticket for the year will be fine and will go back up. It just so happened that we just had a lot of phenomenal things in other departments that did better than those. 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. 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'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.
I think the other thing I would say, too, Trevor, is that we want to put what the customer needs into their hands, and that's on whatever price is right for the customer. We're not going to be driven to try to push them into the higher priced stuff. Whatever's 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 7-Eleven than just making us just a food stop. Some of that is going to drag ticket down.
At the end of the day, that's okay.
Okay, that's helpful. Can you talk a little bit about how your pro customer penetration trends for a new store, particularly in a new market? 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?
Yeah, I think in a newer market, look, we do a lot of grassroots marketing, a lot of efforts 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 a Floor & Decor, they're not going to understand the total value proposition that we provide. In a new store, again, pro customers, they don't always switch right away, it takes a little time. 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 second, third year, it takes a little bit of time to get pros to experience the brand.
As they do, they tell more pros about it, they get more do-it-yourselfers in there, it takes off. I would say by year two, year three, we're in that 60/40 split within our stores. I've said a few times, even our best stores are at that similar rate. There's just more of both. There's more pros and there's more DIYers, and they're good in our best stores.
That makes sense. That's helpful. Thanks a lot, guys. Best of luck.
Okay, thank you.
Thank you.
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. 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.