Floor & Decor Holdings, Inc. Q2 2025 earnings call

Thank you, Operator, and good afternoon, everyone. Welcome to Floor & Decor fiscal 2025 second quarter earnings conference call. Joining me on our call today are Tom Taylor, Chief Executive Officer; Brad Paulsen, President; and Bryan Langley, Executive Vice President and Chief Financial Officer. Before we start, I want to remind everyone of the company's safe harbor language. Comments made during this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. These statements are subject to risks and uncertainties that could cause actual future results to differ materially from those expressed in these forward-looking statements for any reason, including those listed at the end of the earnings release and in the company's 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 call, the company will discuss certain non-GAAP financial measures. We believe these measures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings release, which is available on our Investor Relations website at ir.flooranddecor.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.

Thank you, Wayne, and everyone for joining us on our fiscal 2025 second quarter earnings conference call. During today's conference call, Brad, Bryan, and I will discuss some of our second quarter earnings highlights. Bryan will share our thoughts about the remainder of fiscal 2025. We are pleased to report that for the second quarter of fiscal 2025, our Diluted earnings per share increased by 11.5% to $0.58 compared to $0.52 in the same period last year, reaching the high end of our expectations. Sales for the quarter rose by 7.1% to $1,214 million. Comparable store sales increased by 0.4%, marking the first quarterly increase since the fourth quarter of fiscal 2022. These results reflect the strength of our business fundamentals and the steadfast dedication of our associates. In a period marked by continued economic uncertainty, heightened complexity, and shifting market conditions, our team rose to the challenge.

They remain focused and executing our strategic priorities with unwavering discipline and resolve. We are truly grateful for their contributions. Let me now discuss our new warehouse format store growth. In the second quarter of fiscal 2025, we opened three new warehouse format stores in Kissimmee, Florida, San Antonio, Texas, and Chula Vista, California. We are especially pleased to have opened in Chula Vista, as it marks our first warehouse format store to open in California in close to three years. Year to date, we have opened seven new warehouse format stores, ending the second quarter with 257 locations, up approximately 12% from 230 stores in the same period last year. We have a busy second half of the year new warehouse format store opening schedule, with most openings scheduled for the late third quarter and early fourth quarter.

We remain on track to open 20 new warehouse format stores in fiscal 2025, primarily across large and mid-sized existing markets. Looking ahead to fiscal 2026, we currently anticipate opening at least 20 new warehouse format stores. As previously discussed, our company is well positioned to support the opening of more than 20 new warehouse format stores annually, once housing market conditions improve. That said, we remain committed to a disciplined and agile growth strategy. Should the housing market or broader economic environment underperform relative to our expectations, we are prepared to adjust our expansion plans accordingly to ensure prudent capital allocation and long-term value creation. As you are aware, one of the most consequential challenges we and others across our industry continue to face is mitigating the impact of tariffs on our products.

To assist with our execution in an uncertain and complex environment, we have continued to rely on our dedicated Tariff Steering Committee. This committee is tasked with guiding alignment on our top priorities and maintaining agility and discipline in our operational planning. This committee builds on our proven track record of managing prior tariffs and duties, leveraging both our experience and scale and flexibility of our operations to position us to navigate today's uncertainty and complexity, which we believe is significantly better than many of our competitors. With that context in mind, I'd like to take a minute to outline and update the key actions we're taking to mitigate universal, reciprocal, and sectoral tariffs to position the business for continued growth.

First, we continue to actively negotiate and collaborate with our vendors to mitigate the higher incremental tariffs on the products we sell, as we have successfully done with prior tariff increases. Second, we continue to execute our product diversification and sourcing strategies with strong momentum. This includes the broad range of products we sell, as well as the countries from which we source them. Our direct global sourcing network spans over 240 vendors across 26 countries, enabling us to secure the highest quality products at the most competitive prices. In fiscal 2025, we continue to onboard more suppliers, factories, and products, further enhancing our agility and supply chain resilience. We believe our scale and direct global sourcing model provides a significant competitive advantage, particularly over the independent flooring retailers and distributors.

Third, we continue to apply a balanced portfolio approach to product pricing while effectively managing our Gross margin rate and overall profitability. As we noted on our first quarter conference call, we've seen some independent retailers and distributors implement high single-digit or even higher price increases in response to tariffs. We believe tariffs will continue to pressure independents, who are already contending with weak industry fundamentals that have persisted over the past three years. Amid the challenging market environment, we have also observed a shift among some retailers towards emphasizing opening price point products, which often feature lower product specifications compared to our offerings. As discussed during our first quarter earnings conference call, we will continue to adjust our retail prices both upward and downward as needed to help mitigate the impact of tariffs and competition.

That said, we remain committed to maintaining our pricing gaps and reinforcing our everyday low price message. It is important to note that our broad and diverse merchandise assortments provide customers with more pricing options than our competitors, further strengthening our market position. Put simply, we believe our competitive moat is enhanced when we combine price leadership and other key business attributes, such as broad assortments, in-stock job lot quantities, inspirational new products, service offerings, and knowledgeable associates that meet the evolving needs of our customers. Finally, as we mentioned in our first quarter earnings call, customers are asking for products produced in the United States, and we have already taken action to identify American-made products in our stores. The United States is now our largest country of manufacture, accounting for approximately 27% of the products we sold in fiscal 2024, up from approximately 20% in fiscal 2018.

Let me now turn the call over to Brad.

Thanks, Tom. I'd like to take a moment to express my sincere appreciation to our entire team for their strong performance in the second quarter. These results are a clear reflection of the disciplined execution of our growth strategies, the agility of our operations, and the unwavering commitment of our associates. I'm especially proud of how we've navigated the challenges posed by tariffs and global supply chain shifts. We believe that our proactive approach and operational flexibility continue to set us apart in the industry. Let me now discuss our second quarter sales. As Tom mentioned, our second quarter Comparable store sales increased 0.4% year-over-year, which was at the midpoint of our expectations and an improvement from the 1.8% decline in the first quarter. Second quarter comparable transactions declined 3.3%, and comparable average ticket increased 3.8% from the same period last year.

By month, our Comparable store sales increased by 1.7% in April, 0.6% in May, and declined 0.8% in June. From a regional perspective, Comparable store sales in the west division continue to outperform the company for the quarter and year to date. We estimate the second quarter benefit to our Comparable store sales from Hurricane Helene and Milton was approximately 40 basis points compared with 100 basis points in the first quarter and 110 basis points in the fourth quarter of fiscal 2024. Our fiscal 2025 third quarter to date Comparable store sales have declined by 1%. In the second quarter, we saw the strongest relative sales growth across several merchandise categories, including wood, installation materials, and adjacent categories. We are pleased that customers continue to gravitate towards our better and best-tier products, where our value proposition is most compelling and our price advantage is most evident.

As we look ahead to the remainder of fiscal 2025, we're excited to continue introducing a range of innovative products and programs tailored to meet the evolving needs of our customers. These include new designs, expanded color palettes, enhanced textures, and products with heightened realism that closely replicate the look and feel of natural materials. Our largest initiatives this year remain unchanged and include the continued rollout of kitchen cabinets, the expansion of our outdoor product assortment, and the growth of our XL slab program. These efforts reflect our commitment to delivering differentiated, high-quality solutions that inspire customers and drive long-term growth. Turning to our connected customer and design services pillars of growth. In the second quarter of fiscal 2025, connected customer sales rose by 2% year over year, now accounting for approximately 19% of sales.

We're encouraged by our key engagement metrics, including healthy growth in weekly active users, a notable increase in organic traffic and conversions, and a sequential improvement in our comparable average ticket. Our design services continue to be a standout performer in the second quarter, delivering strong sequential and year-over-year sales growth. Year to date, both total and Comparable store sales also significantly outpaced the company average, fueled by a sharp increase in customer transactions. This performance highlights the strength of our design services model, combining expert in-store designers, personalized customer experience, and collaboration with pros on complex projects. These elements are driving deeper engagement and higher value outcomes. When our designers are involved, the impact is clear. The average ticket is significantly higher, and Gross margin rates rise substantially. This reinforces the strategic importance of design services in elevating our brand and driving profitable growth.

We're excited to build on this momentum by continuing to invest in our design talent and convert more high-value opportunities, both in-store and online. Turning my comments to pro, we're pleased to report that in the second quarter of fiscal 2025, total and Comparable store sales to pros once again outpaced the company's overall growth, accounting for approximately 50% of sales. This strong performance was fueled by increases in both transactions and average ticket size. A key driver of this momentum is our commitment to delivering a consistent, best-in-class pro experience at the pro desk, which contributed to a significant year-over-year increase in our Pro Net Promoter Score during the quarter. Furthermore, our pro service managers are actively engaging pros in the field, expanding into new zip codes to better understand their needs and provide tailored solutions.

We're also deepening pro loyalty through community events and partnerships with trade associations, with a strong focus on education. In the second quarter alone, we hosted 43 in-store educational events, part of our broader plan to hold 155 events in fiscal 2025, reinforcing our commitment to supporting pros with valuable resources and expertise. To further build brand awareness and drive engagement, we're executing targeted pro marketing blitzes and leveraging lead generation tools, supported by cost-efficient advertising platforms that help us attract and retain new pros. These efforts are delivering results as we continue to see the benefits of our focus on high-quality lead generation and strengthening relationships with both new and existing pros. Finally, let me discuss our commercial business. Spartan Surfaces delivered stronger than expected sales and EBIT results for the second quarter of fiscal 2025, with sales rising approximately 7% year-over-year.

Notably, June marked the strongest month in the company's history. Spartan continues to build momentum by focusing on establishing a strong national presence in high-specification sectors such as healthcare, education, hospitality, and senior living. These sectors offer compelling long-term growth and profitability potential, characterized by higher quote-to-conversion rates, recurring revenue streams, and more attractive margins. We're also encouraged by the growing success of Spartan's private label brands, which is leading to increased quotes and orders. To support long-term growth, Spartan is making targeted investments in expanding its sales force across key verticals and markets, as well as in its leadership team. These investments, combined with ongoing economic uncertainty, may result in fiscal 2025 EBIT remaining roughly flat compared to fiscal 2024. This outlook is consistent with our previous expectations. We continue to believe that Spartan's strategic priorities position the company for growth and long-term value creation.

In closing, we remain focused on driving market share growth and long-term shareholder value as we navigate an extended bottom in the housing market. We believe the momentum we built in the first half of fiscal 2025 positions us well for the remainder of the year and beyond. Let me now turn the call over to Bryan.

Thank you, Brad and Tom. As Tom highlighted, we are very pleased with our second quarter financial performance. We believe this performance speaks to the strength and execution of our growth strategies and our continued focus on cost discipline. These efforts contributed to us reporting second quarter Comparable store sales growth of 0.4%, our first positive Comparable store sales since the fourth quarter of 2022, and Diluted earnings per share of $0.58, up 11.5% from last year. The second quarter is a clear demonstration of how we believe our team is driving value to increase our market share in a challenging macro environment that we expect will continue for the remainder of 2025. Let me now discuss some of the changes among the significant line items in our second quarter income statement, balance sheet, and statement of cash flows, as well as our updated outlook for fiscal 2025.

We continue to be pleased with how we are managing and expanding our Gross margin rate. In the second quarter, gross profit rose by 8.5% compared to the same period last year. The growth in gross profit was primarily driven by a 7.1% increase in sales and an approximately 60 basis points improvement in the Gross margin rate, which rose to 43.9%, primarily due to lower supply chain costs. Second quarter selling and store operating expenses of $376.2 million increased by 10.2% from the same period last year. The increase in selling and store operating expenses was primarily driven by $33.8 million for new stores. As a percentage of sales, selling and store operating expenses increased by approximately 90 basis points to 31.0% from the same period last year. The expense deleverage was primarily attributable to the addition of new stores.

Second quarter general and administrative expenses of $69.4 million increased 2.6% from the same period last year. The increase was primarily attributed to the investments we continue to make to support our store growth, including a $3.5 million increase in personnel expenses, partially offset by a $2.1 million decrease in other operating expenses. As a percentage of sales, general and administrative expenses decreased by approximately 30 basis points to 5.7%, reflecting both a decline in other operating expenses and the leverage of our G&A cost on higher sales volume. ERP-related expenses totaled $2.2 million for the quarter, in line with our expectation. Second quarter Pre-opening expenses led to a reduction in the number of stores opened and future stores that we were preparing to open compared to the same period last year.

Second quarter net interest expense of $1.1 million increased $0.4 million, or 62.3%, from the same period last year. The increase was due to a decrease in interest capitalized, partially offset by higher interest income as a result of higher cash balances. The second quarter effective tax rate increased to 21.8% from 19.8% in the same period last year. The effective tax rate increase was primarily due to a decrease in the excess tax benefits related to stock-based compensation awards. Second quarter adjusted EBITDA of $150.2 million increased 9.7% from the same period last year. Our second quarter adjusted EBITDA margin rate was 12.4%, an increase of approximately 30 basis points from the same period last year. The growth was primarily due to higher sales and an increase in our Gross margin rate.

Moving on to our balance sheet, at the end of the second quarter, inventory increased by 7% to $1.2 billion compared to December 26, 2024. On a year-over-year basis, inventory was up 17%, primarily driven by the timing of receipts and the need to support the opening of our Seattle distribution center. Looking ahead, we expect inventory to be up modestly at the end of fiscal 2025 compared to last year. In terms of liquidity, we ended the quarter with $876.9 million in unrestricted liquidity, consisting of $176.9 million in cash and cash equivalents, and $700 million available under our ABL facility. Turning to our fiscal 2025 outlook, the U.S. consumer remains broadly resilient, supported by a solid labor market, low unemployment, and steady job growth, sustaining household incomes, while Personal consumption expenditures on services continue to show resilience.

Spending on discretionary big-ticket durables and large projects remains challenged amid ongoing economic uncertainty, elevated mortgage rates, and persistent housing affordability headwinds. Affordability remains a major constraint as mortgage rates continue to hover above 6.6% and home prices are at all-time highs, discouraging both first-time and existing buyers. existing home sales sequentially fell 2.7% in June to a seasonally adjusted annual rate of 3.93 million units, marking the lowest level in nine months. Looking ahead, we do not expect significant changes in consumer behavior or housing activity for the remainder of 2025. The labor market is likely to remain a stabilizing force, and while inflation and policy uncertainty may continue to weigh on sentiment, the underlying fundamentals point to a steady, if cautious, consumer and housing market. Our guidance reflects the impact of all negotiated tariffs, and for countries not finalized, we incorporated universal tariffs.

Let me now discuss our updated fiscal 2025 earnings guidance. Total sales are expected to be in the range of $4,660 million to $4,750 million, or increased by 5% to 7% from fiscal 2024. We are planning to open 20 new warehouse format stores. Comparable store sales are estimated to be down 2% to flat. Average ticket comp is estimated to be up low to mid-single digits. Transaction comp is estimated to be down low to mid-single digits. The Gross margin rate is expected to be approximately 43.5% to 43.7%. As a reminder, 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. We estimate that our second quarter Gross margin rate of 43.9% will represent the high quarter for the year.

Selling and store operating expenses as a percentage of sales are estimated to be approximately 31.5% to 32%. The high end of our guidance assumes our first quarter and fourth quarters are the most pressured from a rate perspective due to the timing of new stores. 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 the finance and merchandising ERP implementation. Pre-opening expenses as a percentage of sales are estimated to be approximately 0.6%. Interest expense net is expected to be approximately $5 million. Our 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 $520 million to $550 million. Diluted earnings per share is estimated to be in the range of $1.75 to $2.

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 $280 million to $320 million, including capital expenditures accrued. We intend to open 20 warehouse format stores and begin construction on stores opening in fiscal 2026. Collectively, these investments are expected to require approximately $180 million to $205 million. We plan to invest approximately $20 million to $25 million in new distribution centers in Seattle and Baltimore. We intend to invest approximately $45 million to $50 million in existing stores and existing distribution centers. Finally, we plan to continue to invest in information technology infrastructure, e-commerce, and other store support center initiatives using approximately $35 million to $40 million. Additionally, we anticipate incurring approximately $20 million in deferred SaaS ERP implementation costs, which are not included in capital expenditures.

Before I close, I want to extend a heartfelt thank you to our store associates across the country. Your dedication, hard work, and daily commitment to serving our customers are what drive our results. We're incredibly grateful for everything you do to support our business and our customers. Thank you. Operator, we would now like to take questions.