Earnings Transcript for FND - Q4 Fiscal Year 2024

Operator: Greetings, and welcome to the Floor & Decor Holdings Fourth Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Wayne Hood, Senior Vice President of IR. Thank you, Wayne. You may begin.

Wayne Hood: Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's fiscal 2024 fourth quarter earnings conference call. Joining me on our call today are Tom Taylor, Chief Executive Officer, and Bryan Langley, Executive Vice President and Chief Financial Officer. Before we start, I want to remind everyone of the company's Safe Harbor language. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risk and uncertainties. Any statement that refers to expectations, projections, or other characterizations of future events, including financial projections or future market conditions, is a forward-looking statement. The company's actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Floor & Decor assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company will discuss non-GAAP financial measures as defined by SEC Regulation G. We believe non-GAAP disclosures enable investors to understand better our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our investor relations website at irfloorandecor.com. A recorded replay of this call and related materials will be available on our Investor Relations website. Let me now turn the call over to Tom.

Tom Taylor: Thank you, Wayne, and everyone for joining us on our fiscal 2024 fourth quarter and full year earnings conference call. During today's call, Bryan and I will discuss some of our fiscal 2024 fourth quarter and full year earnings highlights, then Bryan will share our thoughts about Fiscal 2025. Let me start by saying how excited we were to announce in January the appointment of Brad Paulson as our new President, reporting directly to me. As many of you know, he will succeed Trevor, who is retiring in March after a remarkable 14-year career with us. We wish him well. Brad brings nearly two decades of relevant experience and will be a valuable addition to our executive team, helping to lead the next chapter of Floor & Decor's growth. Most recently, he served as the CEO of North America for Rent-to-Kill Initial PLC, a global leader in pest control, hygiene, and wellness services. Prior to Rent-to-Kill, Brad was CEO of Rexel USA, a leading electrical parts distributor. He has held the position of Chief Operating Officer at HD Supply and has had various leadership and merchandising roles at the Home Depot. Brad is an accomplished leader with experience in retail, commercial, and service-based organizations. His deep understandings of home improvement, merchandising, retail and commercial sales, and supply chain operations will be particularly valuable to our company. Moreover, his customer service and associate support principles align perfectly with our core values. Let me now comment about our fiscal 2024 fourth quarter and full-year earnings results. Our leadership team is proud of our store and store support teams. Despite the challenges we faced within hard surface flooring category in fiscal 2024, they successfully executed our sales and customer service initiatives to grow our market share while diligently managing costs. Thanks to their collective efforts, we reported better-than-expected comparable store sales, earnings flow-through, operating cash flow, and earnings per share for the fourth quarter of fiscal 2024. We delivered fiscal 2024 fourth quarter diluted earnings of $0.44 per share, which includes a favorable $6.8 million, or $0.05 per share, net benefit from a derivative litigation settlement in December of 2024. This net settlement benefit was not contemplated in our prior earnings guides. For the fiscal 2024 year, we reported diluted earnings of $1.90 per share, which includes the $0.05 net benefit from the settlement proceeds. As Bryan will discuss in more detail, we are in a strong financial position that allows us to navigate through the short term and at the same time make long-term growth investments during the cyclical downturn in flooring. Specifically, we continue to invest in opening new stores of various sizes in new and existing markets and innovative and trend-forward merchandise, technology, and our associates. This has allowed us to grow our market share despite the industry contracting and prepared us to maximize sales and profitability once the industry's cyclical growth accelerates to historical rates. We take a long-term view when making these investments as we are optimistic about the secular spending opportunities in hard-surface flooring and our adjacent categories. The demand for housing continues to outpace supply, and the 40-year median age of owner-occupied housing is continuing to increase. We believe the supply and demand imbalance in housing and aging housing stock remains a significant secular growth opportunity, as older homes will need updates after the past several years of postponed remodeling. Turning to our new warehouse store format growth, December 2024 marked a historic milestone in our company's growth journey. We opened our 250th store in North Seattle, Washington, reaching the halfway point towards our vision of operating 500 warehouse format stores in various size markets across the United States. Over the past three years, we have opened 93 warehouse format stores, including locations in five new states, underscoring our commitment to strategic growth despite the cyclical pressures in our industry. We remain excited about our future sales and earnings growth prospects, as approximately 55% of our stores have opened in the last five years, leaving what we believe is plenty of room for growth along the maturity curve. Our commitment to opening new warehouse stores has contributed to our market share growth and positions us well for when industry fundamentals improve. In the fourth quarter of fiscal 2024, we opened 10 new warehouse format stores, culminating in 30 new warehouse format stores opened in fiscal 2024. At the end of fiscal 2024, we operated 251 warehouse format stores and five design studios in 38 states. In the first quarter of fiscal 2025, we have already opened new warehouse format stores in Venice, Florida, and Covington, Louisiana. We plan to open seven new warehouse format stores in the first half of 2025, including Covington, Oregon, Kissimmee, Florida, San Antonio, Texas, and two stores in California, Gilroy and Chula Vista. Currently, we plan to open 25 new warehouse format stores in fiscal 2025 and close one store at the end of the first quarter of fiscal 2025. Most of our new stores will be located in existing markets. If macroeconomic conditions are less favorable than we anticipate, we have flexibility to adjust this number downward, as most of these openings are slated for the second half of the fiscal year. We recognize we cannot control the short-term cyclical pressures affecting the hard surface flooring industry and their impact on the first-year sales of our new stores we open. However, we have identified specific strategic actions we can take to maximize their chances for success during this challenging period. In fiscal 2025, we plan to be more intentional about reaching new customers. We intend to emphasize impression-driving media and messaging updates to grow local brand awareness. By taking these actions, we believe we can expand our brand awareness, attract more new homeowners and pros, and create a strong foundation for long-term growth. Moving to our total and comparable store sales, our fiscal 2024 fourth quarter total sales increased by 5.7% from the same period last year, and comparable store sales decreased by a better-than-expected 0.8%. For the 2024 year, our total sales increased by 0.9% to $4.456 billion, driven by the opening of 30 new warehouse format stores and growth at Spartan Surfaces. While our fiscal 2024 comparable store sales declined by 7.1%, we saw improvement each quarter, with the fourth quarter being the strongest of the year. Fourth quarter comparable store sales decreased by 0.8%, a notable improvement from a 6.4% decline in the third quarter, a 9% decline in the second quarter, and an 11.6% decline in the first quarter. The improvement sequential sales trend partially reflects long-awaited modest growth in existing home sales. Despite elevated mortgage interest rates, existing home sales rose for the third straight month in December, the longest growth streak since early to mid-2021. Our fourth quarter average ticket comp increased by 1.3%, the only quarterly increase in fiscal 2024. Our average ticket comp benefited from a favorable product mix and the positive impacts of hurricanes Helene and Milton. Additionally, the enhancements we have made in associate training, including micro-learning sessions, are yielding positive results. The training boosts their confidence in articulating the features and benefits along our merchandising continuum. Fourth quarter comparable transactions continued to sequentially improve, declining by 2.1% from the same period last year. Breaking down our comparable store sales by month, October declined by 4.8%, which followed an increase of 8.1% in November and a 4.8% decline in December. Adjusting for the Thanksgiving holiday shift from fiscal November to December, comparable store sales for November and December combined grew by 1.2% from the same period last year. We estimate the fiscal 2024 fourth quarter benefit to our comparable store sales from hurricanes Helene and Milton was approximately 110 basis points. In the first quarter of fiscal 2025, our quarter-to-date comparable store sales have decreased 1.7%. From a regional perspective, we continue to see encouraging comparable store sales trends emerging from our west division, where fourth quarter comparable store sales grew modestly year-over-year. Our hearts go out to all of those impacted by the California wildfires, which only impacted our San Gabriel and Woodland Hills stores for a few days. Among our merchandising categories, the fourth quarter total sales growth in wood, installation materials, stone, decorative accessories, and adjacent categories increased above the company average compared to the same period last year. The sales growth in these categories reflect successful merchandising initiatives to grow these categories. We expect these initiatives to benefit us in 2025 and beyond. The sales growth in laminate and vinyl and tile were below the company average but showed sequential improvement. In fiscal 2025, we are excited to continue delivering new innovative products and programs to our homeowners and pros. We will expand our merchandise offerings and adjacent categories, including testing a high quality, stylish, semi-custom cabinet program at approximately 40 warehouse stores and online in the first quarter. We can now offer online semi-custom cabinets, express ship plywood cabinets, cabinet accessories, decorative hardware, and cabinet samples that we can ship to the job site. This initiative helps our homeowners and pro customers complete kitchens and other cabinet projects and is expected to drive incremental sales growth to our stores. Furthermore, we will reset decorative accessories to improve the customer experience and productivity further. We'll also continue expanding our outdoor and pool offerings and XL Slab program. I will now discuss our supply chain and how we expect to manage anticipated tariffs in 2025. First, we are pleased that the International Longshoremen's Association and the U.S. Maritime Alliance reached an agreement in January. As a result, we did not experience any material supply chain disruptions. As we enter fiscal 2025, our merchandise installs are strong. We continue to closely monitor the fluid developments regarding tariffs on products we sell, particularly trade disputes between the U.S. and China. These trade disputes will lead to additional tariffs beyond the previous 25% imposed on most products that we sell that are produced in China. For example, on February 1st, an additional 10% tariff was denounced for all products from China. As previously discussed, we have been actively working to mitigate tariff cost pressures over the past five years by successfully diversifying our countries of origin. In fiscal 2024, China accounted for approximately 18% of the products we sold, down from approximately 25% in fiscal 2023 and approximately 50% in fiscal 2018. In the fourth quarter of fiscal 2024, China accounted for approximately 16 of the products we sold. We expect our diversification strategies to continue to meaningfully reduce our reliance on China in 2025 and beyond. We source products made in Canada and Mexico, and the portion of our products sold in these countries for fiscal 2024 was not material. We are proud to report that the United States is now our largest country of manufacturer, accounting for approximately 27% of the products we sold in fiscal 2024, up from approximately 20% in fiscal 2018. Regardless of any new tariff timings and potential impacts, our strategy remains the same. First, we expect to continue negotiating costs with our vendor partners to mitigate the incremental costs. And second, we will continue sourcing from alternative countries where it makes sense. Third, we will increase retail pricing as we deem appropriate while maintaining our price gaps. We believe our scale and worldwide direct sourcing model for more than 240 vendors in 26 countries is a competitive advantage, particularly amongst independent flooring retailers and distributors. Shifting to our connected customer pillar of growth, our fiscal 2024 fourth quarter connected customer sales increased by 6% compared to the same period last year, accounting for approximately 18% of sales. For the full year, connected customer sales rose by 3%, accounting for approximately 19% of sales. In fiscal 2025 and beyond, we plan to continue integrating our processes and technology solutions to provide an inspirational, robust, and seamless personalized experience across all of our engagement channels. To that end, we are continuing to work towards ensuring continuity between our website and stores. Moreover, we plan to continue improving our website and mobile download speed and visual navigation. We believe we have an edge with visual, shoppable content in our online image sets and galleries. These image sets and galleries promote inspiration and infuse project selling throughout the customer journey. We are excited to add more inspiring, designer, and user-generated content in 2025, which will benefit our free design services. In support, we plan to expand our long-form content library by including care guides, refinishing guides, and more in-depth articles. Overall, we expect these strategies, among others, to further improve our brand affinity. In fiscal 2024, we adopted a more convenient confirmed-to-pay payment option, which allows customers to provide payment information more conveniently and allows individuals they authorize to finalize the purchase and pick up those products on their behalf. Confirmed-to-pay is replacing an outdated paper-based process. It has proven to be a successful payment option with high adoption, particularly among pros, making it easier to transact with us. We believe this can slightly pressure our connected customer sales penetration metric as sales shift from point-of-sale, from online, and other payment options. However, we better serve our pros and homeowners with multiple seamless payment options. This is just a change in the geography of where and how customers will transact with us. Let me comment on design services. We are pleased to report that design service sales growth significantly accelerated throughout fiscal 2024, with the fourth quarter being the strongest. These results reflect strong transaction growth and our commitment to design services staffing at a time when labor hours were diligently managed. Additionally, our designers are focused on closing high-value design opportunities and building brand awareness and project credibility with homeowners and pros. Consequently, we achieved the highest net promoter score for design services since we began measuring it. In summary, we are successfully executing our strategy of offering homeowners and pros an elevated and personalized design experience across in-store, online, and in-home channels. These combined efforts led to a remarkable year for our design services, highlighting our commitment to excellence and customer satisfaction. Turning my comments to pros, we're pleased to report that the total sales to pros continue to grow in the fourth quarter of fiscal 2024, accounting for approximately 50% of our total sales. Pro-comparable store sales improved sequentially throughout through 2024. These results demonstrate that our grassroots supply house approach is effective, focusing on engagement and nurturing strong relationships with pros. We continue to benefit from partnering with native advertising platforms that provide a practical and cost-efficient way to attract and retain new pros. Additionally, we benefit from our pro service managers spending more time outside of our stores and in new zip codes, where they directly engage with pros to build brand awareness, understand their needs, and provide tailored solutions. Finally, we successfully held 144 educational events in our stores in 2024 and plan to have 155 events in 2025. We believe these events are industry-leading and hard-surface flooring, and fiscal 2025 will focus on driving growth among new pros and re-engaging inactive pros. Finally, I'll discuss our commercial business. Fiscal 2024 fourth quarter sales at Spartan Surfaces declined 17.9% from the same period of last year. The sales decline is primarily due to weakness in the multifamily residential market, pricing pressures in the commercial LVT market, and difficult comparisons against record December sales at Spartan last year. Collectively, these factors pressured Spartan's fiscal 2024 fourth quarter and full year gross margin and EBIT. In fiscal 2024, Spartan Surfaces sales grew by 10.1% to $215.2 million compared to last year, but EBIT declined 25.4% to $14.3 million from $19.1 million in fiscal 2023, primarily due to pressure on the gross margin rate. In fiscal 2025, Spartan will continue to focus on the healthcare, education, senior living, and hospitality sectors. As previously discussed, these are high-specification sectors of the commercial flooring market, where the opportunity for long-term growth and profitability is greatest. These sectors generally have high quote-to-conversion rates, reoccurring revenue, and more attractive profitability. We plan to continue making investments in sales representative growth, particularly in those sectors that are most important to us. Additionally, we plan to continue building out Spartan's infrastructure to support growth at scale and achieve our long-term market share and profitability objectives. The necessary long-term investments we are making will impact Spartan's near-term EBIT, with fiscal 2025 EBIT rate expected to be about flat with fiscal 2024. However, they are critical to driving significant market share growth in the coming years. It's important to note that the investment cycle and return timeline in our commercial business differs from what many of you are familiar with within our retail operations, reflecting the distinct nature and opportunities of the commercial sector. Over the long term, Spartan Services aims to become a disruptive leader in the specified commercial flooring industry by establishing a comprehensive nationwide sales network. This network would prioritize high-specification products and leverage strong relationships to provide superior availability, delivery, and service nationwide. Let me now turn the call over to Bryan.

Bryan Langley: Thank you, Tom. In fiscal 2024, we successfully grew our market share while effectively managing our profitability, balance sheet, inventory, and cash flows, even amid a decline in demand for hard-surface flooring. I am extremely proud of the resiliency of our business model, even though the contracting flooring industry is putting immense pressure on other specialty flooring retailers in this environment. As Tom mentioned, we are pleased to be in a strong financial position, allowing us to continue investing in new store growth, technology enhancements, and our associates. Our investments in our associates' training and development enable us to proudly announce that our net promoter score reached a record high in January 2025. This achievement underscores our associates' ongoing dedication to serving our homeowners and pros with any hard-surface flooring project. As we embark on fiscal 2025, we believe that we have the right teams and strategies in place to control the controllables and flex our business model as market fundamentals change. Now, let me discuss some of the changes among the significant line items in our fourth quarter and full year income statement, balance sheet, and statement of cash flows, as well as our outlook for 2025. We continue to be pleased with how we are managing and expanding our gross margin. Our fiscal 2024 fourth quarter gross profit rose by 8.9%, driven by a year-over-year increase of approximately 130 basis points and our gross margin rate to 43.5%. Our fiscal 2024 full-year gross profit grew by 3.8%, driven by a rise in sales and an increase in our gross margin rate of approximately 120 basis points to 43.3% from 42.1% in the same period last year. The full-year gross margin rate of 43.3% was in line with our previous guidance of 43.2% to 43.3%. The increase in gross margin rate for the fourth quarter and full year is primarily due to lower supply chain costs. Our fiscal 2024 fourth quarter selling and store operating expenses increased by 10.1% to 347.4 million from the same period last year. The 31.9 million increase in selling and store operating expenses was primarily driven by 40.9 million for new stores, partially offset by a decrease of 8.3 million in our comparable stores. As a percentage of sales, selling and store operating expenses increased by approximately 130 basis points to 31.4% from the same period last year. Our fiscal 2024 full-year selling and store operating expenses increased by 123.1 million or 9.9% from last year. The increase in these expenses was primarily driven by 156.7 million for new stores and 5.6 million at Spartan, partially offset by a decrease of 39.2 million in our comparable store expenses. As a percentage of sales, selling and store operating expenses de-leveraged by approximately 250 basis points to 30.6%. The de-levering of these expenses was better than we expected primarily due to higher than forecasted sales and effective expense management which led to strong earnings flow through. Our fiscal 2024 fourth quarter general and administrative expenses decreased by 5.4% to 64.0 million from the same period last year. As a percentage of sales, fourth quarter general and administrative expenses leveraged by approximately 70 basis points to 5.8%. A couple of expense items impacted our fourth quarter general and administrative expense line including an increase of 3.3 million in personnel expenses from higher incentive compensation and additional staffing costs which was more than offset by the legal settlement recovery benefit of 6.8 million. Additionally, expenses related to our ERP implementation were approximately 2.5 million which was in line with our expectations. Our fiscal 2024 full year general and administrative expenses increased 5.3% from the same period last year. As a percentage of sales, general and administrative expenses de-leveraged approximately 30 basis points to 6.0% from 5.7% in the same period last year. Moving to pre-opening expenses, our fiscal 2024 fourth quarter pre-opening expenses of 10.6 million decreased 16.6% from the same period last year. As a percentage of sales, pre-opening expenses leveraged by approximately 30 basis points to 0.9% compared to the same period last year. This decrease resulted from a decline in the number of new store openings compared to the same period last year. Our fiscal 2024 full year pre-opening expenses decreased 3.1% from the same period last year. As a percentage of sales, pre-opening expenses leveraged by approximately 10 basis points to 0.9% from 1.0% in the same period last year. Fiscal 2024 fourth quarter interest expense net decreased 0.9 million or approximately 103.8% from the same period last year. Our fiscal 2024 full year interest expense net declined 72.0% to 2.8 million below our most recent annual guidance of approximately 4 million driven by higher interest income on higher cash balances from the same period last year. Our fiscal 2024 fourth quarter effective tax rate increased to 19.9% from 18.1% in the same period last year. The increase was primarily due to a decrease in excess tax benefits related to stock-based compensation awards. Our fiscal 2024 full year effective tax rate declined to 18.8% from 21.0% in the same period last year in line with our most recent guidance of approximately 18%. The year-over-year decrease was primarily due to a decrease in state income taxes and an increase in excess tax benefits related to stock-based compensation awards. Our fiscal 2024 fourth quarter adjusted EBITDA increased 11.1% to 119.8 million exceeding total sales growth of 5.7% primarily due to the 130-basis point increase and our gross margin rate. Our fourth quarter adjusted EBITDA margin rate increased 50 basis points to 10.8% from 10.3% in the same period last year. Our fiscal 2024 full year adjusted EBITDA declined 7.0% to 512.5 million which exceeded our most recent guidance of 490 million to 500 million primarily due to higher than forecasted sales. For the fiscal 2024 full year our adjusted EBITDA margin rate declined 100 basis points to 11.5% from 12.5% in the same period last year. Our fiscal 2024 full year depreciation amortization was 232.5 million. Moving on to our balance sheet liquidity we maintain a strong balance sheet concluding fiscal 2024 with 200.3 million in debt and 187.7 million in cash and cash equivalents. In terms of liquidity we ended fiscal 2024 with 905.7 million of unrestricted liquidity consisting of 187.7 million in cash and cash equivalents and 718.0 million available for borrowing under our ABL facility. As of December 26, 2024 our inventory increased by 2.4% to 1.1 billion from the same period last year. Fiscal 2024 capital expenditures including those accrued at the end of the period declined to 376.3 million from 566.3 million in the same period last year and were in line with our previous guidance of 360 million to 390 million. The decrease in capital expenditures was primarily due to the timing of spend for the class of 2024 occurring more in fiscal 2023 and pushing more of the class of 2025 spend into fiscal 2025. Additionally in the second half of fiscal 2024 we started to realize some of the 1 million to 1.5 million cost out savings from construction and optimizing the box size. We expect to fully realize these savings for stores opening in the back half of 2025. We believe our strong financial position provides us the flexibility to navigate the macroeconomic environment while pursuing prudent strategic growth within our existing capital structure. Turning to our fiscal 2025 outlook, we entered 2025 facing considerable geopolitical and policy uncertainty and mixed leading economic indicators. While existing home sales grew modestly for the third straight month in December to 4.2 million units affordability remains challenging and steady interest rate cuts seem less likely than they did last year. It's unclear how these factors will flow through to the economy and the foreign industry specifically. Therefore we are carefully planning fiscal 2025 and are providing a wide range of potential earnings outcomes in our earnings guidance. We expect to have better visibility for fiscal 2025 following March and April, which are more important months that should inform us better about 2025's outlook. As a reminder every one-point change in comparable store sales compared with our annual plan impacts earnings by approximately $0.10 per share. Let me now share our thoughts about fiscal 2025 and our guidance. Total sales are expected to be in the range of $4.740 billion to $4.900 billion or increased by 6.5% to 10% from fiscal 2024. As Tom mentioned this guidance reflects the planned opening of 25 new warehouse format stores. Comparable store sales are estimated to be flat to an increase of 3%. Average ticket comp is estimated to be up low single digits. Transaction comp is estimated to be slightly negative to up low single digits. Gross margin rate is expected to be approximately 43.4% to 43.7%. Our gross margin rate is expected to be adversely impacted by approximately 60 to 70 basis points from the two new distribution centers which is incorporated into our guidance. The low end of our guidance assumes our gross margin rate is approximately the same throughout the year. The high end of our guidance assumes the second half gross margin rate could be higher than the first half. Selling and store operating expenses as a percentage of sales are estimated to be approximately 31.0% to 31.5%. General and administrative expenses as a percentage of sales are estimated to be approximately 6%. General and administrative expenses include approximately $9 million related to our finance and merchandising ERP implementation. Pre-opening expenses as a percentage of sales are estimated to be approximately 0.7%. Interest expense net is expected to be approximately $3 million. Tax rate is expected to be approximately 21% to 22%. Depreciation and amortization expense is expected to be approximately $245 million. Adjusted EBITDA is expected to be approximately $540 million to $575 million. Diluted earnings per share is estimated to be in the range of $1.80 to $2.10. Diluted weighted average shares outstanding is estimated to be approximately 109 million shares. Moving on to capital expenditures, our fiscal 2025 capital expenditures are planned to be in the range of $330 million to $400 million including capital expenditures accrued. We intend to open 25 warehouse format stores and begin construction on stores opening in fiscal 2026. Collectively, these investments are expected to require $200 million to $245 million. We plan to invest approximately $20 million to $25 million in new distribution centers in Seattle and Baltimore. We intend to invest approximately $50 million to $60 million in existing stores and distribution centers. And finally, we plan to continue to invest in information, technology infrastructure, e-commerce, and other store support center initiatives using approximately $60 million to $70 million. Operator, we would now like to take questions.

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

Michael Lasser: So, given the slightly weaker performance quarter-to-date, what do you think is driving that, and how have you factored in some of the potential from the change in administration into your outlook for the year, such as tighter immigration policy and the impact that that could have on the workforce who would be consuming your product? Thank you.

Tom Taylor: Hey, Michael. This is Tom. I would preface with the slight slowdown in comp from Q -- quarter-to-date versus Q4. There's a lot of weather noise. We've had parts of the country that have gotten snow that don't get snow, forced shutdowns, and week-to-week we have to close stores, and that's affected our quarter-to-date business, in my opinion. I think that's a part of it. We, in our business, historically, when there's been weather impacts, it comes back. We get it. So, it comes back over time. So, we'll see how that plays out. We're certainly prepared for it. Stores are in good shape, and we're ready for it. As far as the immigration policy changes into our forecast, it's too early to tell. We hear the same thing that you hear, that there's pressure on some of the contractor workforce, but so far, I don't think that that's playing anything into our demand, and as we learn more, we certainly would communicate more.

Michael Lasser: Okay. My follow-up question is, you saw much greater flow through in the fourth quarter than your normal rule of thumb would suggest. So, how telling is that experience moving forward? Meaning, if you comp up 5% this year rather than the 0% to 3% that you were expecting, how should we think about the incrementality or the flow through to the model? Would it be above the $0.10 per point of comp that you guided to? Thank you.

Tom Taylor: Yes. I'll let Bryan handle more of the numbers part, but yes, Michael, I mean, the fourth quarter is a bit of a demonstration of what happens when sales come. When sales are better than we think, we flow through pretty well. I think we've done a good job over the last 18 months to two years of taking costs out of the business, and we're not adding it back. So, when sales surprise us in a positive way, we flow through well, and if that number grew to five, we would flow through really well. So, we hope that happens. I'll let Bryan fill in the blanks on the number side if you want to.

Bryan Langley: Hey, Michael, it's Bryan. So, obviously, you saw we had pretty strong flow through. Just when you're looking at that, don't forget that in Q4, we also had 6.8 million benefit related to a derivative legal settlement. So, when you take that out, that was worth 60 basis points within Q4. So, when you back that out, I think our more natural flow through was in the low 40s. As I'm looking at it, there were a couple other benefits that hit in Q4. Traditionally, our flow through model would be low 30s to mid 30s. We communicated on the last call as sales pick up because we've got 25% of our stores on minimum hours that we should see higher flow through. So, we should see that in 2025, somewhere in the high 30s range. So, you're right. That low 40 was a bit higher than what we would expect, but I still would expect if we step above our 3%, we should flow through in the high 30s at minimum.

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

Simeon Gutman: Good afternoon, everyone. Hey, I would like to follow up on incremental margins. Same topic. The business is levering on negative comps. So, the idea that there are not expenses that need to come back, and I know the guidance doesn't imply that, and Bryan, you mentioned the one point of comp, $0.10 of EPS, which basically says normalcy. I think you still have ERP going on. So, what has changed, or what are you doing that you can continue managing SG&A and put your range that dollars don't need to come back when the top line returns?

Bryan Langley: I mean, look, there'll still be investment. I mean, we flex our hours around transactions. If you think about our stores, we still average about 55% fixed cost, 45% variable. The two biggest variable components are labor, like our personnel within the stores, and so we need to make sure that we match that with transactions. So, again, on the upside or downside, we can flex those. And then there's also some discretionary spend where we're constantly refreshing the stores. We have reflows, resets. We have so much innovation and newness that we need to make sure that we showcase that. Those are the two biggest buckets that we have to kind of flex within there. So, I mean, we still have the opportunity to do that. Again, I think you just heard me say 25% of our stores are on minimum hours. So, again, if things were to step down, that's 75% of our fleet that we could still kind of flex within there. And then on the way up, again, we don't need to invest as much, which creates that higher flow-through. So, again, you're always chasing yourself on the way up. On the way down, you can never quite cut fast enough, but --

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

Bryan Langley: Yes. Over the last two years, because I combined them, we've taken out 42.2 million from our comparable stores over the last two years. And in Q4 alone, if you look at the two-year stack, we've taken out 12.9 million. So, our teams have been resilient. Our service score is as high as they've ever been. So, I mean, we're in a good place today, but again, we need to make sure we take care of our customer first, and that's what we'll do.

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

Tom Taylor: Yes. I mean, I'll start. I'll let Bryan weigh in a little bit. We, 55% of our stores are still in their maturity curve. So, we're expecting a benefit from those stores as the year goes on. Our comp waterfall has stayed intact. So, we've opened a little bit less stores, but the waterfall stayed intact. So, we should get some benefit of those stores that are immature. We're not expecting housing to rebound to historical levels. We're anticipating that housing is going to bounce along, and hopefully it's better than it was a year ago. As I've said on multiple calls, I believe that if the existing home sales get into a positive territory for a consistent amount of time, that we should be able to grow our same-store sales in that environment because more people will be buying hard-surface flooring.

Bryan Langley: And, Simeon, I'll just give you a little bit of color on that. So, you're right. We do expect sequential improvement in our comp. Obviously, as Tom alluded to, quarter-to-date, we're down one-seven. So, we expect comps in Q1 to be down just slightly, low-single digits. And you're right. It's sequential improvement, but we still expect low-single digits throughout every quarter. Q4 is going to be a little pressure just because we're lapping what we just did in Q4 of this year. So, there was a little bit of an uptick there. But again, it should be low-single digits across our average ticket. It's pretty much trends remain the same throughout all four quarters, and it's transactions, as Tom alluded to, that we expect to improve. So, at the high end, existing home sales would have to get a little bit better, but again, to Tom's point, not back to historic levels. We do still expect this to be a slow grind, as we said on the last call.

Operator: Thank you. Our next question comes to Chris Horvers with JPMorgan Chase & Company. Please proceed.

Chris Horvers: I had a follow-up there. I mean, it's just as you think about the cadence of the year, do you think that whether the hurricane lift is bigger in the first quarter than it was in the fourth quarter? There was some pressure to start November in terms of a headwind from the actual hurricanes, and insurance payments seem to be more delayed. So, is that a bigger number? And then on the other side of it, you're going to lap existing home sales a little mini-rebound here. You look at pending home sales numbers are running down sort of mid-single digit. So what is the hurricane, the offset that doesn't create more of a near-term divot here in the first to second quarter from lapping that better home sales number?

Bryan Langley: Hey, this is Bryan. I'll take a stab, and then, you know, Tom can jump in. The benefit so far quarter to date is it's in line with what we said for Q4. So, the offset of that is what Tom said, which is really just, some of the storm impacts that we've seen. So, when you think about it, that should be there. Most hurricanes for us depends on if it's flood or if it's wind damage. But if it's flooding, we'll see the biggest impact the first two quarters, if not the third quarter. We see the arc of that usually go about 16 to 20 months. It can, but it dissipates pretty quickly after it gets past that second to third quarter of impact. And that's what's implied in the guidance that we gave.

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

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

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

Zach Fadem: Congrats on the progress. As you think through the incremental new tariffs, the higher supply chain costs, maybe we could start with the game plan for like-for-like pricing in 2025. I think you mentioned some increases coming. And then when you think about your price gaps versus peers, like, how have those evolved through 2024? And how do you factor that in 2025?

Tom Taylor: [Technical Difficulty] that's how we can deal with it. What's happened so far, we think we can deal with the China change pretty well. We've done a good job negotiating with our suppliers. But if we can't, then we'll take prices up. I think our – versus our competition.

Operator: We apologize for the technical difficulty. [Technical Difficulty]

Operator: Okay, great. Zach Fadem, I believe.

Zach Fadem: I'm here, yes. Did you get the question that I asked?

Operator: Zach, you may proceed with your question.

Tom Taylor: Okay, Alicia, we're ready.

Zach Fadem: Yes, not sure if you heard the first question or not, but basically, it was on the game plan for like-for-like price increases in 2025, where your price gaps versus peers have been trending in 24, and how you factor that into the changing environment.

Operator: Apologize, we lost the connection again. [Technical Difficulty]

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

Zach Fadem: No problem.

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

Tom Taylor: Yes, sorry for the technology difficulty. So, I'm not sure if we heard the last question. So, go ahead.

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

Tom Taylor: Yes, so, what I said, price gap versus peers, we still feel pretty good. When you look back historically, our spreads versus the people we compete with, they remain intact and we're comfortable with that. And I think what I said earlier is, and I don't know if you guys heard me on the tariff part of it, we'll deal with the tariffs the way that we've always had. We'll first negotiate with our supplier. The second is we'll try to continue to diversify out of countries that are affected. And then third, if we have to pass price, we will. Our main competition is the independents. We're comfortable with our spreads and we've got the ability to flex price if we have to flex price. So we're paying attention and trying to react to the news as it comes. Our buying from 250 suppliers in 25-plus countries is a tremendous advantage and it gives us lots of flexibility. So, I feel good on the pricing front, feel good without -- from what I know today, I feel good about our ability to address the tariffs that could change because things are a little fluid, but we'll be prepared.

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

Bryan Langley: Yes, exactly. So, new store productivity should be similar to the past kind of two years that we're seeing. It's still kind of below our historical targets, as we think about that. And then on the gross margin piece, you're right, the 60 to 70 is the full year amount. It will start in Q1 around 30 basis points and then kind of grow throughout the year. So, we'll exit with a much higher impact but then grow into it as we continue to open more stores.

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

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

Tom Taylor: So, I'll start. Ersan's here with me in case I've missed something. So, first, I would say on wood and stone, yeah, we're pleased with what we're seeing. Our merchants have done a good job continuing to improve our assortments across the lines. We're in better stock because those have come in and helped. Certainly, we've had a major competitor close some stores. We've probably seen some benefit from that as well. From a stone perspective, we've rolled out an outdoor program in stores that's having a positive effect that's added categories to the stone department. Same thing. We've added some new products in stone that that's probably benefiting as well, but we're pleased with that. I am pleased with the trajectory of vinyl and laminate. If you look at it quarter-by-quarter, we continue to improve in a pretty significant way, and we are in terrific in stock. Merchants have done a good job with new products within the category. Some new signing in the department to make it easier to understand, but overall, we feel real good about the trajectory of what's going on in that business as well.

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

Steven Forbes: Tom, Bryan, maybe a complex question, but I feel like an important one. You guys mentioned the waterfall benefit to comp, and I think a lot of us are just trying to better understand what's transpiring within the store cohorts. The question is, one, can you reframe what the sales and EBITDA margin profile is at what you would define as a mature store today versus historic disclosures? Then any way to help us contextualize what is the comp spread that you're seeing as we think about maybe the 2023 cohort versus the 2022 cohort, as we try to contextualize or better understand what you're framing as the waterfall likely turns to a potential positive contributor?

Bryan Langley: I'll answer the latter first. We've never given what that waterfall is, other than to say it's a material, meaningful difference between our new stores and our mature stores. What I would tell you is today, obviously, with the macro environment the way it is, our stores that are five years or older today are doing about a little over $22 million, close to $22.5 million, but they're still producing EBITDA in the low 20s. They're still extremely profitable. They're still producing, but obviously, the volumes have come down a little bit. To conceptualize, again, the comp waterfall, we've just never given that level of granularity. We've never been that specific about it, other than to say there is a material difference between, obviously, our new store comp, all the way down to what we'd consider a mature store.

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

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

Tom Taylor: Yes, I do. We still are hearing anecdotal closings across the country of different competitors. I've said before, the longer that this goes on, the more that plays in our benefit because we've continued to invest in the stores and continue to grow. I think from a competitive standpoint, we're in as good a shape as we've ever been. Yes, and what is a good example? You saw a competitor close a bunch of stores. We're probably seeing some of the benefit of that. If we see more close, we'll see the benefit. The stores are in terrific shape. Our inventory levels are great. The new products are really good. We have multiple initiatives to try to control what we can control. We're ready when it comes.

Bryan Langley: Service scores are as high as they've ever been.

Tom Taylor: Correct.

Operator: Thank you. Our last question comes to the line of Karen Short with Melius Research. Please proceed.

Karen Short: It's actually Melius, but I think you all know that. Good to speak to you. I just was curious, with the lower cost structure in general, could you help frame whether or not there would be more torque, I guess, on the upside to EPS with a 1% delta in comps? Or would you look at it as more of a scenario where you would invest and that flow-through would still be that kind of $0.10 range to EPS with the 1% delta in comps? Thanks.

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

Trevor Lang: Yes. First, I'll say I'm so proud. After eight years, I mean, it seemed that we got to what these calls was doing well. I do think so. Our gross margin has gone up nicely over the last two or three years, and our cost structure has come down, as Bryan articulated earlier. And so, if sales are good, I mean, there's certainly investments we want to make, but we'll do that at a measured pace. And so, yes, I think it's possible, like you saw in Q4, that when sales are better than planned, we're going to flow through very nicely. And as we've always been, if there's investments that we need to make that are going to be material, we'll disclose those.

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

Bryan Langley: We will. And just to give you guys context around it, this is Bryan. So, at the midpoint of our guide, our mature stores are actually leveraging its environment. The only thing that's causing the deleverage is the new stores coming in. But exactly as Trevor alluded to, as we move up that, as you start approaching 5%, the entire ecosystem starts to lever. So, we lever even inclusive of, because that's a question you guys always have. So, I just wanted to tell you, if we were to get up to a 5% comp, the entire store and selling line leverages. And so, that's always been our case, is mid-single digits. In this cost structure, it will take about a 5% comp for the entire base to lever.

Tom Taylor: Thank you, Bryan. And thank everyone for joining the call. Sorry we had a little bit of technical difficulty, and hopefully we got to everyone's questions. I'd like to thank Trevor. This is Trevor's last call. He's asked if he could come tomorrow. I've said no, but we appreciate all of his contributions over the last 14 years. We certainly wouldn't be here without him, so we wish him well. Thank you.

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