Floor & Decor Holdings, Inc. Q3 2025 earnings call

Thank you, Operator, and good afternoon, everyone. Welcome to Floor & Decor fiscal 2025 third 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 risk 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 our 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 conference 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 press 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 third quarter earnings conference call. During today's conference call, Brad, Bryan, and I will discuss our third quarter earnings highlights. Bryan will share our thoughts about the remainder of fiscal 2025. Before we get started, I want to share some exciting news that was announced this afternoon alongside our earnings release. I am thrilled to announce that our Board of Directors has appointed Brad Paulsen, currently serving as President, to succeed me as Chief Executive Officer and become a member of the Board of Directors effective at the start of our fiscal 2026 year. I am looking forward to transitioning into the role of Executive Chair of the Board, where I will focus on shaping our long-term strategic vision and unlocking new avenues for growth. I am incredibly proud of what we accomplished over the past 13 years.

We have even greater opportunities ahead. Brad is an excellent partner for that journey. From day one, his deep experience across retail, commercial, and services has been evident. He's bringing strengths and perspectives that complement mine and, more importantly, align with the needs of our future. He's a trusted partner, a proven leader, and someone I'm confident will lead our exceptional teams and guide our company forward with clarity and purpose. Let me now pass the call over to Brad.

Thanks, Tom. Over the past eight months, I've had the privilege of working closely with Tom and our incredible team and gaining a deep understanding of Floor & Decor's unique culture and business model. I'm excited and honored to step into this role and lead our next phase of growth, scaling towards 500 warehouse-format stores and accelerating our commercial flooring distribution expansion. Our associates are at the heart of this company, and together we'll continue delivering exceptional value and service to homeowners and pros across the country. I'm excited about what's ahead and grateful to the Board and Tom for the opportunity to help shape our future. Let me now turn the call back to Tom.

Thanks, Brad. Let's now turn to our third quarter earnings results. We are pleased to report fiscal 2025 third quarter diluted earnings per share of $0.53, a 10.4% increase over the prior year, prior year's $0.48. This result exceeded the high end of our guidance range and marks our second consecutive quarter of double-digit earnings per share growth, underscoring our operational discipline amid persistently soft demand in the hard surface flooring industry. Total sales grew 5.5% to $1,180 million, while comparable store sales declined at 1.2% from the same period last year, approaching the low end of our expectations. We're proud of our disciplined expense management and gross margin performance, which reflect a successful execution of our tariff mitigation strategies.

We believe these efforts enable us to maintain healthy merchandising price gaps on like items compared with our competition, protect our profitability, and position ourselves strategically for accelerated growth when the hard surface flooring market rebounds. I want to acknowledge the focus, agility, and operational excellence our teams have demonstrated throughout this quarter and year. We are especially pleased to share that in September, our stores achieved their highest net promoter scores ever, a clear reflection of the outstanding service they continue to deliver every day. Their ability to execute our strategies in an uncertain and complex environment has been a key driver of our performance and continues to reinforce the strength of our operating model. We remain confident that existing home sales and demand for hard surface flooring will recover over time.

When that happens, we believe we'll be well positioned with more stores, lower costs, greater market share, superior customer experience, and a leaner operating model. We're playing the long game with discipline and intention as we build long-term earnings power. Let me now discuss our new warehouse-format store growth. During the third quarter of fiscal 2025, we opened five new stores, with most opening later in the quarter. This expansion included re-entering the Charlotte market with our first store opening there in over two years and establishing our presence in Myrtle Beach, South Carolina, our first entry into this market. Year to date, through the third quarter, we opened 12 new locations and closed one, ending the period with 262 stores, a 9% increase from 241 stores in the same period last year.

We're on track to open 20 new stores in fiscal 2025, primarily across markets where we already have a presence, and plan to maintain this pace with another 20 openings in fiscal 2026. To support our growth in the Western region, we opened our fifth distribution center during the third quarter, a 1.1 million square foot facility in the Seattle, Tacoma metropolitan area. This addition enhances our supply chain capacity, further diversifies our ports of entry, and enables faster, more efficient service to our stores. These openings, along with our expanded distribution capabilities, reflect our broader store growth strategy. We are deliberately maintaining flexibility to adjust the pace and location of new store openings in response to any near-term shifts in the economic and housing landscape while capitalizing on emerging site opportunities.

This agile, responsive approach enables us to optimize capital deployment amid the decline in the hard surface flooring category and reinforces our commitment to delivering sustainable long-term value for shareholders. We're steadily advancing towards our long-term goal of operating 500 warehouse-format stores across the United States. Our development pipeline reflects a strategic mix of store sizes and market types, including tier one locations such as North Scottsdale, Arizona, which opened in September, and Staten Island, New York, scheduled to open next year. We're also expanding into smaller volume markets like Winston-Salem, North Carolina, and Boise, Idaho, where we've successfully tailored store footprints and assortments to meet expected local demand. Capital spending and operating expenses in these smaller volume markets are calibrated to meet our return thresholds.

While these smaller volume locations have always been a deliberate part of our growth strategy, they are not expected to represent most of our store footprint as we scale towards 500 locations. Most of our locations are expected to be in large and mid-sized markets. We are pleased to have made meaningful progress in reducing our overall new store construction cost. The initial investment for our fiscal 2025 class of new stores is estimated to be about $1.5 million lower than our fiscal 2023 class, with further meaningful improvement expected for the class of 2026. The class of 2026 will benefit from our efforts to reduce costs and optimize the store size over the past year, as well as more second-use sites in the pipeline. We are managing these costs diligently while continuing to invest in our stores, store experience, and associates to drive returns as industry conditions improve.

Our disciplined approach to expansion and capital allocation is validated by the performance of recent store classes. Despite persistent macroeconomic pressures and a prolonged downturn in the hard surface flooring industry, our 2021 through 2024 store classes have achieved comparable store sales growth even when accounting for cannibalization. This performance highlights the resilience of our business model and our ability to grow our market share in a declining market. It's important to contextualize our results with the broader industry backdrop. We've been operating in an environment marked by sustained softness in consumer demand and limited category growth over the past few years. In addition to these macroeconomic pressures, we encountered construction and permitting delays in some large and mid-sized markets. As a result, we elected to open more stores in small markets to mitigate these headwinds.

Taken together, these factors have reshaped short-term performance benchmarks for first-year store openings, and we recognize that we are not immune to their effects. While our new store classes are achieving comparable store sales and market share growth, average first-year sales among classes of 2023, 2024, and 2025 are approximately $11 million, which is below our long-term target of $14 million-$16 million. Nonetheless, this performance aligns with what we would anticipate in a contracting industry and what we believe could be trough-level performance. As a relatively young company, we're gaining experience with the full spectrum of flooring cycles. While we've seen what peak performance can look like coming out of the COVID-19 period, with first-year store sales exceeding our long-term target range of $14 million-$16 million, this is our first time operating through a sustained downturn in the category.

We know what trough-level ROI metrics look like, and importantly, how they continue to exceed our weighted average cost of capital. The actions we have taken strengthen our strategic edge and position us to accelerate growth and return metrics as the industry recovers. Let me now turn the call over to Brad.

Thanks, Tom. I want to echo your appreciation for the incredible work our teams have delivered this quarter and year to date. In an environment marked by persistent housing market pressures and evolving consumer preferences, their ability to stay focused, agile, and customer-centric has been nothing short of exceptional. Achieving our highest-ever net promoter scores in September is a clear signal that our focus on experience and engagement is resonating. It's also a reminder that even in a tough macro backdrop, excellence in execution drives loyalty, trust, and long-term growth. Let me now discuss our fiscal 2025 third quarter and early fourth quarter-to-date sales. Comparable store sales declined by 1.2% in the third quarter compared to the same period last year. On a monthly basis, comparable store sales decreased by 0.6% in July, 0.4% in August, and 2.2% in September.

Reflecting sustained pressure on discretionary spending from elevated 30-year mortgage rates, which remained stubbornly above 6% in stretched housing affordability. Existing home sales continue to hover around an annualized pace of 4 million units, showing little meaningful improvement. These persistent housing market challenges, combined with a modestly tougher year-over-year October sales comparison and continued consumer preference for smaller projects, contributed to a 2% decline in our comparable store sales for the fourth quarter to date. As a reminder, the fiscal 2024 fourth quarter benefit to our comparable store sales from Hurricanes Helene and Milton was approximately 110 basis points, which makes for a more difficult fourth quarter sales comparison in 2025. This is expected to contribute to a fiscal 2025 fourth quarter decline in comparable store sales.

From a performance driver perspective, the third quarter decline in comparable store sales was driven by a 3% decrease in transactions, partially offset by a 1.8% increase in average ticket. The decline in transactions aligned with the midpoint of our expectations, while average ticket was at the low end of our guidance. The sequential decline in average ticket is primarily due to changes in our product mix. Regionally, third quarter comparable store sales in the West division continued to outperform the company average for both the quarter and year-to-date, underscoring the relative strength of that division. Looking ahead, we remain committed to delivering a strong value proposition through our low prices and differentiated high-quality range of flooring solutions and services that inspire our customers and drive sustainable long-term growth.

Throughout the year, we've continued to launch innovative products and programs tailored to meet the evolving needs of our diverse customer base. These offerings feature fresh designs, expanded color palettes, enhanced textures, and heightened realism, authentically capturing the look and feel of natural materials. Some of our core strategic priorities for the year remain unchanged and include rolling out kitchen cabinets to approximately 200 stores by the end of 2025, expanding our outdoor and pool product assortments to around 80 stores, and growing our XL Slab program to nearly 200 locations. Turning to our design services and connected customer pillars of growth, design services continue to deliver robust year-over-year sales growth fueled by sustained increases in customer transactions. Both total and comparable store sales for design services significantly outperform the company for the quarter and year-to-date.

We view design services as a competitive moat, a differentiated capability anchored in deep customer engagement, project-based selling, and operational excellence. Our top-performing stores consistently demonstrate strong leadership involvement, collaborative team culture, and disciplined execution across staffing, training, and task management. Some of the biggest wins come from following up on open quotes, where our sales teams actively connect customers with designers to drive conversion and attachment. Looking ahead, we expect continued momentum by prioritizing quote follow-up and enhancing our sales mix across adjacent categories and installation materials. In the third quarter, connected customer sales rose 2% year-over-year, representing 18.8% of total sales. Connected customer average ticket continued to grow from last year, while transactions remained under pressure. Turning my comments to Pro and homeowner sales, sales to Pro customers rose year-over-year in the third quarter, modestly outpacing overall company growth and representing approximately 50% of total sales.

Comparable store sales for Pros were essentially flat versus the same period last year, driven by a slight decline in transactions and a small increase in average ticket. These results align with direct feedback from our Pro customer base, who cite economic headwinds and reduced activity in remodels. Reflecting these dynamics, we continue to see a shift toward smaller projects such as tile-focused bathroom projects, kitchens, and restoration work. Pro satisfaction remains high, with strong engagement across tile, installation materials, and wood categories, underscoring their loyalty beyond a single category. Our product quality, service, and in-stock reliability remained strong with Pros. Meanwhile, comparable store sales among homeowners, though still negative, showed meaningful sequential improvement in the third quarter. This was fueled by improvement in new and returning customers, supported by targeted campaigns, and data-informed meetup planning. Finally, let me discuss our commercial business.

Amid ongoing softness in commercial multifamily housing projects, Spartan Services delivered 13.3% year-over-year sales growth in the third quarter. Many multifamily developers have sequentially paused or delayed purchase orders due to tighter financing, elevated construction costs, and cautious capital markets. This slowdown has contributed to elevated promotional activity in luxury vinyl tile, a category heavily used in multifamily applications. Spartan's growing presence in high-specification sectors such as healthcare, education, hospitality, and senior living helps mitigate some of these headwinds. Let me now turn the call over to Bryan. Thank you, Tom, and Brad. Our third quarter results underscore the strength of our operating model and our disciplined approach to growth and expense management. Our balance sheet remains a source of strength.

We ended the quarter with $893.5 million in unrestricted liquidity, including $204.5 million in cash and cash equivalents, reinforcing our financial flexibility and capacity to invest in growth, capture market share, and deliver long-term value for shareholders, even amid a challenging demand environment. Now, let's walk through the key changes in our third quarter income statement, balance sheet, and statement of cash flows. Our fiscal 2025 third quarter gross margin rate decreased by approximately 10 basis points to 43.4% from 43.5% in the same period last year, in line with our expectations. The year-over-year decrease is primarily due to an increase in distribution center costs from the opening of our Seattle distribution center and costs related to the future opening of our second Baltimore distribution center. These costs impacted the third quarter by approximately 90 basis points, partially offset by favorable product margin.

The sequential decrease in our gross margin rate from 43.9% in the second quarter was primarily due to the increase in our distribution center cost. Our fiscal 2025 third quarter selling and store operating expenses increased by 7.3% to $363.8 million from the same period last year, better than our expectations. The growth in selling and store operating expenses is primarily driven by an increase of $30.1 million from non-comparable stores. As a percentage of sales, these expenses rose approximately 50 basis points to 30.8%, a modest increase that came in better than expected. This deleverage was mainly due to new store openings and a decline in comparable store sales. We were pleased with how we diligently managed expenses among our mature stores compared to the same period last year.

Our fiscal 2025 third quarter general and administrative expenses of $67.6 million were flat compared to the same period last year, slightly better than our expectations. As a percentage of sales, general and administrative expenses decreased by approximately 40 basis points to 5.7%, primarily driven by the leverage of our general administrative cost on higher net sales. We are pleased that our expenses were flat to last year while we continue to open stores and see sales growth. Our fiscal 2025 third quarter pre-opening expenses decreased by 32.2% to $8.6 million from the same period last year, in line with our expectations. The decrease was primarily due to a decrease in the number of stores that we opened and lower relocation expenses compared to the corresponding prior year period.

Our fiscal 2025 third quarter net interest expense increased by $0.4 million-$0.6 million from the same period last year, better than our expectations. The increase in interest expense is due to a decrease in interest capitalized, partially offset by lower average interest rates and lower average outstanding borrowings. Our fiscal 2025 third quarter effective tax rate decreased to 19.8% from 21.8% in the same period last year, better than our expectations. The decrease is primarily due to lower state income taxes and higher federal tax credits. The favorability to our expectations in interest expense and tax expense contributed approximately $0.02 of benefit to diluted EPS below operating income. Our fiscal 2025 third quarter adjusted EBITDA increased 4.4% to $138.8 million.

Our third quarter adjusted EBITDA margin rate was 11.8%, a decline of approximately 10 basis points, primarily due to expense deleverage from the decline in our comparable store sales. Moving on to our balance sheet and cash flow. At the end of the third quarter, inventory increased by approximately 2.8% to $1.2 billion compared to December 26, 2024, and was up 11.3% year-over-year. The year-over-year increase was primarily driven by new stores and the need to support the opening of our new Seattle distribution center. Despite the inventory build and the decline in trade accounts payable, we generated $257.8 million of net cash from operating activities year-to-date. Turning to our fiscal 2025 outlook, with two months left in fiscal 2025, we anticipate little divergence from the prevailing housing sector trends. Consumer spending is likely to remain restrained, particularly on big-ticket discretionary durable goods, with a preference for smaller-scale projects.