Floor & Decor Holdings, Inc. (FND) Q4 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. This is Floor & Decor's Fourth Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded today, Thursday, March 1, 2018. [Operator Instructions] I would now turn the call over to Matt McConnell, Manager of Investor Relations at Floor & Decor. Please go ahead.

Thank you, Stacy. Good morning, everyone. I am Matt McConnell, Manager of Investor Relations. Joining me on our call today are Tom Taylor, Chief Executive Officer; and Trevor Lang, Executive Vice President and Chief Financial Officer. Also in the room is Lisa Laube, Executive Vice President and Chief Merchandising Officer who will join us for the Q&A session. Before we get started, I would like to remind you of the Company's Safe Harbor language. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Any statement that refers to expectations, projections or other characterizations of future events including financial projections or future market conditions is a forward-looking statement. The company's actual future results could differ materially from those expressed in such forward-looking statement for any reason including those listed in it'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 may discuss non-GAAP financial measures as defined by SEC Regulation G. 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 the Investor Relations website, ir.flooranddecor.com. A recorded replay of this call together with related materials will be available on our Investor Relations website, ir.flooranddecor.com. Now, let me turn the call over to Tom.

Thank you, Matt, and thank you everyone for joining our call. Fiscal 2017 marked our 9th consecutive year of double-digit comp growth averaging 15% per year. We believe our strong financial results are a reflection of our unique business model and disciplined culture of innovation and reinvestment that had disrupted the residential hard surface foreign industry. We're excited to carry this momentum into 2018. We would like to thank all of our associates for their hard work and dedication to our customers throughout the year. Now turning to our fourth quarter results, they were exceptional. Sales increased 40% to $390 million driven by a comparable same-store sales increase of 24.4% and adjusted diluted earnings per share growth of 72.7% to $0.19. We had broad-based growth including double-digit comparable store sales increases across all six regions. From a category perspective, all categories had positive comps with laminate LVP, tilings, place and accessories above the Company average. Our comparable store sales increase was aided by an estimated 800 basis points related to the increased sales and our five used and comparable store sales due to Hurricane Harvey. The entire Floor & Decor team from our 21 states reacted quickly to serve the Houston market. Excluding the five comparable stores impacted by Hurricane Harvey, fourth quarter comps increased 16.2% which speaks to the underlying strength of our core business, Trevor will provide more details on the impact from Harvey as it relates to our 2018 outlook in his remarks. During the fourth quarter, we successfully relocated our Savannah distribution center to a new 1.4 million square foot facility which was our second DC relocation in 2017, along with the move of our Los Angeles DC in the first quarter of 2017 and expanding our Houston DC in the third quarter of 2017 we expanded our total DC square footage capacity to 2.9 million square feet in 2017; 2.4x where we started the year. This was a significant task and credit goes to all of our associates and mall business was a great accomplishment. In the first quarter of 2018 we expanded our Houston DC, a 150,000 square feet and plan to complete the transition from our Miami DC to our newly expanded Savannah DC. Also in the second half of 2018 we plan to expand our current LA DC footage by an additional 350,000 square feet. These are great examples of how we're reinvesting back into the Company to support our future growth. Fiscal year 2018 sales grew 31.8% to $1.4 billion, comparable store sales increased 16.6%, and adjusted diluted earnings per share grew 53.3% to $0.69. In 2017 we opened 14 new stores ending the year with 83 warehouse format stores averaging 73,000 square feet. We remain committed to grow our store base by approximately 20% annually for the foreseeable future as we have for each of the past five years. We successfully opened in multiple new markets including four new states; Alabama, Kansas, Kentucky and Wisconsin, while maintaining a healthy mix of new store openings in existing markets where we already operate successfully. While these new stores have not yet hit their one-year anniversary we are very pleased with their performance as a group. We are also pleased with the performance of our categories which all comp positive in 2017. Categories performing above the Company average for the full year included laminate LVP and decorative accessories. 2017 was another year in renovation across multiple fronts like waterproof [ph] and water-resilient laminate, higher end Decor products and innovative installation solutions could save our pros, time and money. Turning to the key drivers behind our strength and our financial results; as I mentioned on prior calls, there is not just one solution or strategy that drives our 9th consecutive year of double-digit comp growth. Our business model and our unparalleled customer value proposition is just different from anyone else's allowing us to continue to gain market share as consumers become aware of our concept. The combination of our business model, core values and growing hard surface flooring market in the U.S. has led to our double-digit growth over the last 9 years. Now let me briefly outline our key strategic priorities and share our goals for 2018. As a reminder, our priorities are new store growth, increasing comparable store sales growth, expanding the connected customer experience, and continuing to invest in the pro-customer. New store growth; we have signed leases for 16 of the 17 planned new stores for 2018. This year we plan to open stores in Boston, Long Island and Seattle as new stores in existing markets that have already successfully, as well as in markets that have successful stores operating today. As Trevor will touch on, while the new cities we are targeting are more expensive to enter, my experience in the residential repair retail industry indicates that the stores in these cities will be more productive over the long-term. We're excited to enter these new markets and plan to put our best foot forward to serve these communities. We believe they will provide a good return on investment. The 12 store class of 2016 and 14 store class of 2017 are both exceeding our expectations and their financial results are meaningfully exceeding the early results of previews new store vintages. Our improving economics of new stores opening new and existing markets gives me the confidence that this is the right time to enter these larger markets. Overtime, we look forward to building our presence in these important geographies and introducing more new customers to the Floor & Decor brand and experience. Our teams of new store openings this year will be backend awaited and we expect to open our first new store to open at the end of fiscal March. Our next goal of increasing comparable store sales; we're pleased with our momentum but we believe there are always opportunities to improve. Our 2018 initiatives were centered around continued product innovation, newness, improved localized assortments, more productive inventory as well strategies to improve the experience for our Pro and DIY customer. We continue investing to enhance our customer experience by focusing on our service, optimizing marketing strategies, improving business merchandising, both in-store and online plus providing pre-design consultation and further integrated our connected customer experience. As we continue to increase the awareness of Floor & Decor brand, we believe there is significant opportunity to gain market share. Our studies indicate that we can get a customer to experience the Floor & Decor brand in-store or online prior to making a purchase decision, we convert them 80% of the time. With the benefit of tax reform which lowered our effective tax rate and provided additional opportunity for investment, and the insights from a recently completed customer purchasing past study we mentioned in our last call, we're accelerating investments in three broad areas. One, marketing; we will pilot increased marketing campaigns in selected markets to see if additional advertising focused on TV and digital can drive higher sales and increased brand awareness. Two, sales; we're accelerating investments in our website and customer call center, and improving technology tools to enhance micro-merchandising, we also plan to invest in new solutions for delivery which we believe is a large opportunity for us. And finally, people; we're fortunate to have a talented team of associates committed to serving our customers. We intend to reward them by promoting our best leaders into key positions, enhancing our benefits, implementing an employee stock purchase plan subject to shareholder approval, and provide better training. We believe these investments will help pertain our best and brightest. Next goal is expanding the connected customer experience. We know that our customers and potential customers look to flooranddecor.com for hard surface flooring inspiration and education but they often research the category, sometimes before even visiting the store. We continue to invest in our website, call center and new technologies to enhance the overall functionality and to improve our customer experience regardless of where they shop with us. One example, we are filing is our project estimator tool which helps focus associates and customer selected installation accessories. We are consistently increasing content like how two videos and inspirational win yet. We're interacting with customers on Instagram, Facebook and Pinterest; our buy online pick up and store program continues to drive traffic not just to our website but also back to our stores as approximately 85% of online purchases are picked up in the store. In 2018 we'll also implement technology solutions to lower freight costs and get products to our customers faster. Our customers have expressed that they like an integrated social store and online experience are making strides to approve upon early successes. Currently our sales procured online are about 6% of total sales and growing at a faster rate than our total sales growth. The next goal of continuing to invest in the Pro customer. Given the importance of our Pro customer over the last several years, we have invested across multiple factors to improve the Pro experience including; our stores now have rebranded in-store Pro strategic located to make it easy for the Pro's to get in and get out of the store fast. Our stores are staffed by a Pro sales team with dedicated phone lines and direct access. We offer free storage and design services to help with any projects, we have better delivery option than in prior years and in 2017 we brought a worldclass CRM tool to our Pro teams. Finally, we invested industry specific marketing and industry trade shows to stimulate brand awareness and clearly articulate the benefits of shopping with Floor & Décor. We are always focused on how to get better and we have spent a lot of time researching our Pro customers and developing clear strategies to improve our business. Several of the initiatives in the pipeline include a Pro App, better and faster delivery options, rewards programs, and improved credit offerings; it will take time to roll out these initiatives and we look forward to updating everyone on our progress throughout the year. We're still in the early innings of maximizing our Pro business and we see strong growth runway ahead. Finally, we have made investments in both, technology and talent in our commercial initiative, and while this is small I believe it can be a meaningful business for us. In fact in 2017, just two years after starting this business, it already has sales above an average mature store. I believe we have laid the foundation for success in commercial a large and growing market. In summary, 2017 was a very successful year for Floor & Decor which we accomplished many key milestones. We delivered our 5th consecutive year of over 30% sales growth. Our 9th consecutive year of double-digit comp growth, and our store footprint has more than doubled in the last 5 years. Over 70% of our new store management positions were filled via internal promotion which is something I am very proud of and hope to be able to continue for years to come. In April 2017, we also made the important transition from being a private to a public company; it has been a tremendous experience for all of our associates but our focus now is on 2018 and beyond. As mentioned before, we have a number of strategic priorities to execute and we must remain disciplined on the cost front while maintaining our philosophy of thoughtfully reinvesting back in the business to drive growth. We expect 2018 to be another great year for Floor & Decor and we're confident in the team we have in place. Trevor will go through the details of our guidance in a moment. Before I end, I want to thank all of our associates; it's their hard work and passion that keeps our customers coming back and drive our operational and financial performance. I'll now turn the call over to Trevor, our CFO and Head of Pro Services to go over our financial results and guidance.

Thanks Tom, and good morning everyone. I will review our fourth quarter and full year 2017 results, and then discuss our outlook for fiscal 2018. Fiscal 2017 was our best year on record with our highest sales and profit. Our positive fourth quarter and full year 2017 growth was broad-based, we posted double-digit comparable store sales increases in all 6 regions and all of our product categories posted positive comparable store sales gains. Our investments in people, innovative products, a connected customer experience, visually inspiring stores, Pro along with our unique large format stores, in-stock inventory model continues to resonate with both consumers and professional customers. Net sales in the fourth quarter of 2017 increased 40% to $389,500,000 from $278,300,000 in the fourth quarter of 2016. We ended the quarter with 83 total warehouse format stores, an increase of 14 stores or approximately 20% versus the 69 stores at the end of the prior year period. During the quarter we opened 3 new stores in Alexandria, Virginia; Austin, Texas; and Overland Park, Kansas; and we continue to be very pleased with the performance of our new stores opening during the year. Our fourth quarter comparable store sales increased 24.4% and this was on top of a 14% comp store sales increase in the prior year period. Our fourth quarter comp store sales were driven by a combination of post hurricane demand in the Houston market, as well as continued positive momentum in other markets outside of Houston. Excluding our five comparable stores in Houston, our comparable store sales increased 16.2%. So much for the rest of the year, the fourth quarter comp increase was driven largely by transaction growth, though both transactions and average ticket increase for the year. Now onto profitability; gross profit increased 41.5% to 162,400,000 in the fourth quarter from 114,700,000 in the fourth quarter of fiscal 2016. Gross margin increased approximately 50 basis points to 41.7% in the fourth quarter of fiscal 2017 from 41.2% in the fourth quarter of fiscal 2016. This increase in gross margin was driven primarily by 70 basis points increase in product margin which was a result of favorable product mix and higher products margins, slightly offset by 25 basis points due to the increase in higher distribution costs as a result of the substantial expansion our distribution centered network as Tom previously mentioned. As a percentage of sales, total SG&A leveraged 70 basis points to 33.4% compared to the fourth quarter of 2016. SG&A leverage came entirely from leveraging our stores on -- store expenses on higher sales. Our expense leverage on higher sales was partially offset by the 14 new stores we've opened during the year given our new stores operating expenses generally run about 50% higher as a percentage of sales in their first year of operation than our mature stores. Since we're growing our store base by approximately 20% a year, this will partially mitigate any operating leverage we're getting from our more mature stores. Our strong sales growth, gross margin expansion, and leveraged SG&A drove a 62.2% increase in operating income during the fourth quarter to $32.4 million as compared to $20 million in the fourth quarter of fiscal 2016. Our reported provision for income taxes in the fourth quarter was a benefit of $18 million compared to a benefit of $3,800,000 in the fourth quarter of 2016. The tax benefit was primarily driven by $10,600,000 excess tax benefit related to the exercise of stock options in the fourth quarter of 2017 in accordance with ASU 2016-09, as well as the $17,800,000 benefit from revaluing our deferred tax liability in connection with the new tax legislation passed in December 2017. We have adjusted both onetime benefits out of our calculation of adjusted diluted earnings per share in today's release. Before I discuss net income and guidance, please note that I will discuss both GAAP and non-GAAP measures as described in our earnings release. We believe our non-GAAP disclosures enables investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of these non-GAAP metrics to the most directly comparable GAAP financial measures can be found in our earnings release issued in connection with this call. Adjusted net income and adjusted diluted earnings per share were $19,900,000 or $0.19 per adjusted diluted share for the fourth quarter of 2017 as compared to $11,300,000 or $0.11 per adjusted diluted share in the fourth quarter of 2016. This represents an increase in adjusted net income of $8,700,000 or 77%. Adjusted EBITDA for the fourth quarter increased 54.5% to $43.5 million compared to adjusted EBITDA of $28,100,000 in the fourth quarter of fiscal 2006. For the year net sales grew 31.8% to $1.4 billion compared to $1.1 billion and comparable store sales increased 16.6%. For the year we estimate that Hurricane Harvey added just over 200 basis points to our comps, almost all of that coming in the fourth quarter of 2007. Adjusted net income for 2007 increased 58.8% over the prior year to $71 million or $0.69 per adjusted diluted share as compared to $44,700,000 or $0.45 per adjusted diluted share for fiscal 2016. Our full year adjusted tax rate was 35.9%, adjusted EBITDA in 2017 increased 46.5% to $158,800,000 as compared to $108,400,000 in fiscal 2016. Overall, we are very pleased with our full year fiscal 2017 results; we believe we are striking the right balance between growing ourselves in earnings while investing for the long-term. We ended the quarter with $146,700,000 in cash and available liquidity under our revolving credit facility, and $193,500,000 of borrowings outstanding. Our inventory balance at the end of fiscal 2007 was $428 million, up $134,200,000 or 46% from fiscal 2016. As described previously, the increase was driven by additional 14 new stores opened in 2017, as well as previously mentioned strategic investments as we completed our large Savannah distribution center relocation in the fourth quarter combined with continued preparations for the Miami distribution center shutdown in 2018. We also decided to make strategic investments to improve key and stock positions in anticipation of the Chinese New Year shut down. Now turning to first quarter and full year fiscal 2018 guidance; there are three new events I want to explain before giving guidance. First, as it relates to post Harvey hurricane demand in Houston, we have said our experience with prior hurricanes and flooding events, as well as others in the industry suggest that lift in sales in Houston should continue to the third quarter of 2018 but moderate in each excessive quarter as we get further away from the hurricanes. Therefore, we are planning for elevated comparable store sales in our Houston market over the first three quarters of 2018 moderating in each successive quarter. In our fourth quarter 2017 comparable store sales were 24.4%, an estimated 800 basis points of which was due to the Houston demand. Because of the hurricane, our model assumes fourth quarter 2018 comparable store sales will moderate to the mid-single digit range. We expect our comparable store sales, excluding Houston to be in the high single digits to low double digits for all of 2018. Second, as Tom mentioned we have made a strategic decision to enter Boston, Long Island and Seattle. Our success in Chicago, New Jersey, Washington D.C. and Los Angeles, along with improved performance from our class of 2016 and 2017 new stores gives us confidence now is the right time to step into these larger markets. However, since these are more expensive markets related to prior new store openings, we estimate this will require an additional investment of slightly more than $10 million in operating and pre-opening expenses compared to what we invested in fiscal 2017 and previous years. We are confident that these more expensive markets will have a positive return on investment, and be more successful in the long-term but in the initial year of opening these stores will have an incremental cost. For example, our store start-up expense in 2018 is expected to increase approximately 75% to $29 million versus fiscal 2017. I would also point out that our new store open cadence will be backend weighted in 2018 relative to the previous years, so we're not getting as much sales from the new stores as we have historically simply do our opening stores later in the year relative to the prior years. Third, as we previously noted, we expect to see significant benefit in 2018 and beyond due to tax reform passed in December 2017. We estimate our effective tax rate will decline by about 1,200 basis points in 2018 to an estimated 23.7% versus 2017. We were already reinvesting back into the business at a high rate even before tax reform, however, as Tom already outlined as a result of tax reform we have taken this opportunity to accelerate our high priority strategic investments that we believe will further drive sales and further strengthen our strategic position. These incremental investments are estimated to be about 25% of the tax savings we expect to receive due to tax reform. We expect these initiatives will cost us about 30 basis points to operating margin. As a result of the investments along with our new stores planned to open in Boston, Long Island and Seattle, we expect our operating margins will be about flat for fiscal 2018 even though we are forecasting accelerated net income growth. We are confident these investments are the right thing to do for the business, will further distance our model from the competition, and will position us for further growth in 2019 and beyond. Taking these factors into account with a strong economy and tax reform as a net positive for the residential repair and remodel market, for the first quarter of 2018 we expect net sales to be in the range of approximately $397 million to $402 million, an increase of 29% to 31% versus the first quarter fiscal 2017. This growth outlook is based upon a comparable store sales increase of 14% to 15%. We are planning on 100 basis points to 110 basis points increase in operating margin to a range of 8.4% to 8.5% in the first quarter. GAAP diluted earnings per share for the first quarter of 2018 is expected to be in the range of $0.22 to $0.23, an increase of 69% to 77%. We are assuming a $105 million weighted average diluted shares outstanding for the first quarter of 2018, we expect adjusted EBITDA for the first quarter of 2018 to be $45 million to $46 million, an increase of 41% to 45% over the first quarter of fiscal 2017. Turning to our full year outlook; we now expect sales for fiscal 2018 to be in the range of $1.690 billion to $1.730 billion, an increase of 22% to 25% versus fiscal 2007. This net sales growth outlook is based on '17 new warehouse store openings and assume comparable store sales increase in the 8.5% range to 11.5% range. We expect modest improvement in gross margin due to higher product margin and leveraging our supply chain cost on higher sales, we expect our store selling operating expenses to remain about flat as a percentage of sales versus last year. While we plan to get leverage out of our comping stores, this is largely mitigated by higher costs and new stores as previously discussed. We expect our store start-up expenses to increase by about 75% due to entering these higher cost new markets, as well as an increased number of store openings. We expect our modest leverage out of our corporate general administrative expenses. Diluted earnings per share for fiscal 2018 is expected to be $0.91 to $1 a share, diluted weighted average shares outstanding is estimated to be $105,300,000 and fiscal 2018 tax rate is estimated to be 23.7%. As a reminder, this guidance does not consider the tax benefit due to the impact of stock option exercises that may occur in fiscal 2018. We expect fiscal 2018 adjusted EBITDA to be in the range of $189 million to $201 million, an increase of 19% to 27% over fiscal 2017. With respect to capital expenditures in fiscal 2018, we expect to spend about $140 million to $150 million in total with $89 million to $93 million of this capital budget spent on the 17 new store openings in 2018. $28 million to $32 million is earmarked for store remodels and distribution centers, the remainder of our CapEx, approximately $23 million to $25 million will be directed towards IT infrastructure, e-commerce and store support center initiatives. For all details for our results and guidance please refer to our earnings release. I think with that operator, we would like to turn it over to the Q&A portion of the call.

[Operator Instructions] Our first question comes from Elizabeth Suzuki with Bank of America Merrill Lynch. Please go ahead.

As you ramp up your investments with the benefit of tax reform; first, am I correct that you said you'd invest about 25% of the savings? Did I touch that number correctly?

Correct.

When do you think the benefits of those investments really start to be seen? And are those investments being a little more backend loaded in the year or are they just going to kind of flow throughout?

I mean the benefits are -- it's -- we're invested in three areas. We've mentioned marketing, we're going to invest and do some marketing initiative to see if we can drive sales with that, if we can improve awareness; we're not to doing that across the Company, we're doing in market so we can test, pilot, learn and then roll out going forward. Our whole goal, our awareness is still at a level that we'd like to improve, we want to get more people to understand the Floor & Decor brand, we think turning that up and learning from that will be beneficial. The people investments are focused around retention, continuing to reduce turnover in our stores, making this a great place to work; and then the initiatives are -- you don't get -- we can improve delivery option, it doesn't have an immediate impact on sales, we can improve technology micro-merchandising, it doesn't have an immediate impact but overtime we'll get benefits of it. So, we think all the things that we're doing are right, we could see some modest benefit towards the back half of this year and into the beginning part of next year.

And just to add a little bit was, some portion of $9 million and we're not just spending that immediately, right. So those costs will come kind of throughout the year, we do think because those cost once they get up and running and our consumers and our employees get the benefit of it, we'll start to see hopefully more of that benefit in kind of later part of this year into 2019.

Similarly, on the store openings which you said are going to be a little backend loaded in the year. So I would assume that the costs associated in the CapEx going into the stores is also going to be backend loaded; so we should expect more of the margin impact to be than later in the year?

I think that's right. If you look at our store start-up expense for Q1, it's actually going to be below last year. We opened three new stores in the first quarter of last year versus really only opening one on almost the last day of the quarter. So we are getting a benefit from the timing in the first quarter of the year. But as we view it to the back half of the year, that's when we plan to see the increase in some of that spending; so we will have a stronger first half of fiscal 2018 relative to the back half. Also because of the hurricane -- that will also add to the fact that the first half of 2018 will be stronger than the backhalf, both -- all will be very good but as Thomas was very clear over the last two earnings releases, the Houston hurricanes is going to make things a little unique for the fourth quarter of last year and the first two to three quarters of this year.

Our next question comes from Michael Lasser with UBS. Please go ahead.

More and more of your specialty years are talking about the impact that promotions and new competitors are having on the market, presumably that's you. How do you see that having in their response to that having an effect on your business?

We think we have a unique business model, a unique value proposition that's just different than everybody else's. And every competitor has their unique strengths and things we try to learn from them and try to improve our business the way we do things; but we're going to continue staying focused on what we do, we think our value proposition is different; and -- so we're going to keep doing what we do and learn from them what we can and we don't see a huge difference in kind of what's going on within the marketplace that's affecting us.

Tom, you're not expecting the environment to get more promotional in response to the construction that your model is having on the marketplace?

I mean I don't think so, it's not like we've been -- we've been growing at this rate, entering new markets for -- the whole five years I've been here, we've been opening 20% new stores per year, so we're adding markets. We've seen our competitors try lots of different things and it's just so -- we're different, they all do things that are good but our value proposition -- our total value proposition is just different, so I'm not expecting things to be any different than we've faced over the last few years.

The only thing I would add to is, if you think about the level of investment, you know we've invested most of our free cash flow back into the business. For a long period of time, I think Lisa, Brian, Tom and I feel better about the talent in the technology and the infrastructure than we ever have, and we've got a good economic backdrop as well. So we feel very good about where we are strategically positioned and we feel really good about where the economy is, and we think we are further distance than we've ever been from our competition.

My follow-up question is, you're going to make some investments in trying to increase your awareness this year; where do you think your awareness is some of you more mature markets and where do you think it is overall?

So for overall, and we look at it differently, we look at acting sooner versus process. From a consumer perspective our awareness is 64% but it's only 10% unaided, so we still have a huge opportunity in front of us from a consumer perspective to know who we are and think of us first. On the Pro side, it's higher of course, we're around about 80% market awareness in which about half is aided and about the other half is unaided, and we also know from our research we still don't get that market or the share of wallet that we would like to get from our Pro's. So we think we've still got a very long runway in front of us, certainly our more mature markets, markets like Atlanta, Dallas and Miami where we've been longer, those numbers are stronger; but even in those markets it is still a huge opportunity for us.

Our next question comes from Matt McClintock with Barclays. Please go ahead.

We've seen much more subdued results in this most recent quarter at a number of your competitors and your business continues to run along at it's extremely high rate if not accelerate; and I was just wondering is there anything specific to the last quarter that has change competitively or that you're doing differently or anything like that -- for the industry that's changed, that you can call out that would create such a dramatic difference in performance for one quarter?

Not really. I mean, as I said kind of matter all along, it's not one thing we can point to that has driven this kind of performance over this amount of time. We've improved everything from the product within our stores, we've improved the way we service our professional customers, we've improved the way we market, we've improved the way we train; there's no one thing that's different and no one thing got different towards the end of the year that drove the separation in performance. Again, I just think that people are becoming more aware of us, we're entering markets where the stores are -- when you're opening stores at this pace you're increasing the awareness of your brand by just opening the stores and I believe as we continue to increase awareness and get customers in our stores; remember, if we can get a customer in the store that's buying a category, we're going to convert them 80% of the time because our total value proposition is just different. So as our awareness gets better and as we open more stores, and we've opened a lot of stores by the way in the third and fourth quarter and that helps our awareness and that helps drive performance.

That thing, I know Wall Street will focus on our publicly traded competitors but you have to remember that's not our biggest competition, right. We are the independent, we're much more Pro focused than they are and they're much more consumers focused. Our consumer is just very different, we have a more stable consumer in the sense that 60% of our business is influenced by the professional customer versus the DIY customer, and because we service that professional trades person I think we just have a much more consistent business and that's another very differentiating factor when you think about us versus our publicly traded competitors.

The commercial business, you talked about that Tom; seems like that business is coming along nicely, growing nicely and you're talking about taking 25% of your savings and reinvesting back into the overall business. Is a portion of that going to be dedicated towards commercial and how do you see the commercial business ramping from here over the next couple of years?

I'll let Trevor handle that ramping part but we've already -- yes, there will be some investment because of corporate tax reform into the commercial but we're already investing at a pretty aggressive rate over the last couple of years, we continue to have resource to that department. There is a long tail in commercial owned share, where if you're bidding on buildings and projects like that you don't just get them and turn them into delivered sales automatically, there is a long time lag with that. But we're pleased with what our -- the jobs that we're landing and kind of what's in the pipeline of what's coming in the future. I'll let Trevor talk a little bit about the ramp.

When we talk about commercial, we talk about commercial sales both coming from in our stores and then the true commercial division together. We get big jobs, both out of our stores and our commercial division, so it's about 1% of sales today which is great from nothing two years ago. I think more to come on that as we talk throughout the year, we are investing a lot in technology and people for those folks that still fairly immaterial. But when you look at the overall market, that commercial market -- some portion of 20% to 30% of the entire market, and the same value proposition that has made us successful in the residential repair market; we have those same benefits for the commercial space and it's a very disaggregated space with competition that is not large competitors and because of our sourcing abilities we think we will continue to grow market share there. So more to come in the future as we continue to grow that business. We do think it will continue to grow for the next few years at a faster rate than the total sales of the retail business.

Our next question comes from Christopher Horvers with JP Morgan.

You're assuming that your stores outside of Houston I think are up high single digit to low double digit; you've talked about in the mid-teens growth rate in the market over the past few quarters, is there something that's changing there? Are you seeing something different in the business or you just sort of looking at the laps and saying, hey let's try to be prudent here?

Certainly a little bit of the latter, but I do think if you look otherwise four or five years, the overall market has been pretty good and residential repair -- flooring, we and the market are planning to grow but not grow at the same rate just because the last few years have been so strong. So we think our positioning -- we will continue to grow at a faster rate than market. I think our mature stores will continue to grow at a faster rate than the market. But just as we and everybody else forecast, they slightly lower growth in the overall market we're kind of bringing ourselves along with that slowing of the overall market.

Relative to what sort of -- I guess third parties are saying about, expected growth for '18?

Yes, I think most of what I've read Chris is that we are expecting the overall macro -- or in our market as well as the overall macro flooring market to be great but not to be as great as it has been for the last three or four years.

We get a lot of questions in terms of your ability to be the price leader in the market, certainly versus specialty but you've talked about versus your -- the Big Box competitors; being a price leader can you talk about what drives that? Do you think you buy better and as you think about the long-term, as you grow the number of stores I think some specialty competitors have run into issues in terms of not -- it becoming cumbersome, sourcing from more vendors rather than fewer vendors; so is there sort of dis-economies of scale as you grow?

Yes, I mean -- look, it's -- certainly we buy -- if you look at independent flooring stores, generally we buy different than that; we're direct to the source, we've got a lot of merchants dedicated to the category, we have an Asia sourcing office for those merchants finding the right suppliers. We have a complex supply chain, we've had over 200 suppliers for a while, so it's -- we don't anticipate that number to grow much but they change out over the course of time. We worked very hard to partner with our suppliers, so they are best in rate side-by-side with us and we posted a huge comp last year in our in-stocks as a company we're never better; so our suppliers are doing a good job of keeping up with those investments side-by-side. From a price standpoint; I mean look, we do our best to make sure that we're giving our customer the best value that they can possibly have, and we certainly are -- we watch the competition. As Trevor mentioned, the competition is broad, it's more than just the home improvement centers, it's the independent flooring stores and we try to watch to make sure that we're maintaining that price perception within our customers and our Pro's can trust us. So the only other thing I would say is that our assortments are broad in every category that we sell and so we're able to -- when you look at the total value proposition across the whole line of products that's where we try to continue better, you can't just look at opening price points, you have to look across the total line and we tend to be able to offer very good opportunity -- a good value for our customers.

Just one thing I'd add to that; we've spent a lot of time and resources certainly over the last five years for a lot in the last six or seven months, and what we found from our customers, prices isn't the top four reasons they buy from us. As Tom mentioned, it's the total value proposition; the biggest thing that matters to our customers is selection of product, having that 73,000 square foot box within stock inventories, combine that with super great quality products that people can trust, with an educated sales force and an integrated technology, and we're going to have the lowest price, that's the way to think about it. So people don't just buy from us because we have low prices, we do; people buy from us because they have confidence that we have a selection, the quality, and we can educate them to make a really good decision for what's a fairly expensive complicated purchase. So price is important but I wouldn't say it's the very most important thing for the decision-making process.

Anything about the gross margin cadence this year considering the supply chain investments? Thanks very much.

No, the overall gross margin throughout the year -- our plan is to have sort of modest growth in gross margin every single quarter.

Our next question comes from Matt Fassler with Goldman Sachs.

Two high level questions, really about the market as you see it. First of all, obviously you have great efforts in Pro and in commercial, if you think about the underlying drivers of the business from the market level; what do you see happening to DIY demand relative to Pro demand to the extent that you can discern that bottoms-up from your numbers?

It's hard for us to separate DIY demand versus Pro demand. If you look at the fourth quarter when you're comping double-digit in every region across the country, demand is coming good from both customer segments. As you look at what we're guiding in the first quarter that takes that context run, kind of what we're seeing in the business. So we're seeing continued demand for product, I think the innovations last year -- not just last year but over the last few years and durability in vinyl and laminate have continued to drive people to want to change maybe more quicker than they have; and innovations around fashion within porcelain slimmer tile I think have also driven people to change. So I think the demand is still good, I think it's still a project that people are going to do in their homes.

From a macro perspective, if you think about we've got higher job growth, higher income growth, the value of people households which is generally speaking the most important attribute we see, obviously how you grow factors because the value of the household is going up. The only headwinds we see is, obviously mortgage rates are planning to go up a little bit, the average mortgage right now is 4.2%, people expect that to go up a little bit. Tax reform net is a positive for us but there could be some headwinds with the loss of the tax deduction for your mortgage interest and taxes. But net-net from a macro perspective, as I mentioned previously we think it's going to be good, I'm just not sure it's going to be the very high growth we've seen over the last three years.

And then secondly, as you think about e-commerce details on the investments that you're making; what's your observation in consumer's propensity to shop online? Are there any changes to technology or display or anything like that that you would see as incremental triggers to drive that channel shift more so?

Yes, I mean we have seen as we -- those are the comments Trevor mentioned, our e-commerce business continues to grow at a faster clip than the total company, and we continue to see the customer more and more comfortable shopping online. I think the best thing about our e-commerce business is that we have our brick-and-mortar stores as well because for us it really is about a connected customer experience and we know that our customers go back and forth between the website and the stores. And so for us it's about creating inspiration, it's about educating the customers, it's about giving them a great experience online that helps them to understand why we're the best place to shop and really to help the stores complete that purchase as well.

Our next question comes from [indiscernible].

My first question is around CapEx; could you provide a little more color there. Is any of the tax reform reinvestment going into CapEx first of all?

Yes, the biggest piece of our CapEx investment for tax reform specifically is in technology solutions technology solutions for our call center, technology solutions for web, technology solutions to the workflow solutions to our corporate and stores to more easily understand what we want them to get done. [Technical Difficulty] I think if you think about the math of it, we are -- the comp in Houston was unnatural in Q4, it was an exceptionally high and customers reacted faster and they came in and they got what they needed and now they're back to their lives. So we do think Houston will be a lot lower in Q1 relative to Q4, still very strong and above what would be a normal run rate in Q2 and Q3 will be even less than that. So we're 63% through with the quarter, we have very good visibility, we've taken that all into consideration. So I would just say that we we've put a lot of thought to this plan and we have good visibility.

Yes, and I think as we've said on other calls, if we're fortunate to be on the line then we'll flow through it as 20% to 25% and we're pleased with the momentum in the business as reflected in our first quarter guidance. And As Trevor said, it will moderate each quarter and Houston is still doing terrific but it is going to moderate the further we get away from the storm.

Our next question comes from Zach [ph] with Wells Fargo.

Could you walk us through expectations for gross margins through a little more detail and maybe comment a little on some of the moving parts beyond product margins in mix? I mean you said, modest benefit from DC but are there any other expenses like rising freight costs that we should keep in mind this year?

Our model is pretty simple, we're expecting all of that improvement in gross margin or the vast majority of improvement in gross margin I should say coming from better products and within that we do think it's going to be mostly a mix benefit and we'll give the teams credit, they've taken cost out both from a product perspective and the supply chain perspective. That being said, incorporated in our guidance is higher fuel costs, higher domestic trucking costs, we're fortunate we've put in a technology and we have really talented people in the supply chain that entered in the long-term contract, so we're not as exposed to people who don't have long-term contracts, they credit our supply chain for being forward thinking on that but we do plan on some inflation in the gross margin line as well as our labor costs, we've also planned for increased labor costs there and that's all contemplated in the guidance we've given you. So our model is of that complex, the vast majority of our gross margin is in product, if a very small percentage of our gross margin that's fixed cost DC supply chain cost, so that modest gross margin improvement we talked about is almost all going to come from product margins.

And you mentioned the '17 vintages had been your best performing; how much of it do you think goes to macro and how much is simply the fact you've gotten better managing the new store process? And with the latest '17 vintages, is there anything new that you've learned that you would plan to tweak with the '18 stores?

'16 and '17 were equally better than we thought they were going to be and there's lots of reasons for that. I think we've absolutely -- we've learned a lot opening this many stores since 2012 and that 20% rate every year, we've kind of learned a little bit more, we've implemented our learnings into it. Our awareness is getting better so that's certainly helped in how the new stores ramp, the stores were opening to existing markets are absolutely opening quicker than they have historically opened but there's no learnings from -- we're not going to tweak much of what we've done, we think what we did is working pretty well. So for me I think it's -- we've gotten a lot better at it, we've implemented the changes the way we opened the store, how early we put people into the market, how we survey to get new pros, how we do the grand opening events, how we market to the customers; all of that has improved over the last couple of years kind of like we're at. And I think a lot of the reasons store is getting better is just awareness continues to improve and across the country, now it's -- we open stores in new markets and they've heard of us, I mean that's beneficial and that only gets better the more stores that we opened. So share a little bit the macro market when there's a demand in our category that's going to have benefit but I think most of our benefit has been things that we've done.

Our next question comes from Dan Binder with Jefferies.

You talked a bit about the hurricane benefit earlier, I was just curious; what -- within a range being two-thirds to your quarter, what roughly do you think that hurricane benefit will look like in Q1 and is it fair to assume that you're tracking in line with the plan right now or a little bit better?

We're absolutely in line with what we thought was going to happen, somewhere between 400 basis points and 500 basis points impact.

My second question was around the Pro initiatives; you mentioned rewards program, I'm not sure if that's underway yet but just curious how you think about -- what that might look like and if there is any kind of margin considerations around that? I think if you're a Pro at the Big Box guys, you get access to the spin room, you get some discounts and that seems to help them a bit. I'm just curious if you're thinking something along the lines there as well as you want to go to that next level on Pro penetration?

So discounting is a four letter word for Décor, we don't discount. What it's really designed about is how do we be a better business partner with them; so we do much better job in those markets of training our Pro's. We offer them business solutions, things like payroll and worker's comp. We try to expedite their delivery to get them in and out of the back of the store faster, dedicated Pro team to servicing them but there is a points based element to it as well, and it's designed as a win-win type solution, the more they spend with us, the more of the wall that we get with them, the higher points they get and then they can redeem those points for kind of anything they want; vacations, golf clubs, that type of solution. So we've been testing it now for well over a year, we did enter into this slightly because we do want to make sure that we were doing an appropriate way the test results and the third year stores that we've been doing it versus the controlled markets have been very encouraging. We'll talk to you guys more about it this summer but the test versus control market have been very encouraging and we do plan on rolling it out in kind of the mid to later part of 2018. Again, we'll talk to you guys more about that as we get throughout the year.

So presumably those rewards have some cost to them? As you scale it, is that -- do you think that's going to really move the needle a lot on the gross margin?

Yes, those points are there. They are not that much and again, you only get the points to the extent you spend incremental sales and because our store operating flow-through is such is a net -- very accretive incremental spend for us because again, you only get the points to the extend you give us more sales. So there is a slightly higher cost but as I mentioned, you only get them when you drive sales increases.

Our next question comes from [indiscernible].

I had a quick question on inventory, it's up 45% on the year versus 40% sales growth. I was wondering, looking ahead you guys continue to expect inventory growth outpace the sales growth? And then I have a quick follow-up.

No, we do not. We expect each of the quarters income growth to slow as we go throughout. And by the time we get to the end of the year, we expect our inventory to grow at a rate slower than our sales growth. And we just had really three unique events this year that as I mentioned, moving our biggest and most important distribution center, we just did not want to run out of inventory as we move that Savannah in the kind of late November/December timeframe. Concurrent with that we're shutting down our Miami DC which is frankly our second most important DC, we won't have plenty of inventories, we shut down that Miami DC, we're extensively done with shutting down that Miami DC. And then our sales are up 40% in the fourth quarter, we had substantial sales growth and we're going after product to make sure we improve our in-stocks. And then finally, I would say we've done a better job and Lisa is six years here now with us; but we were more methodical in Chinese New Year purchases and we knew we had some in-stock opportunities for key categories that we can improve upon. So long answer to a simple question but no, we think our inventory relative to our sales growth will continue to get better as we move throughout 2018.

And then just a quick question on the percent of store managers you guys hired from within, obviously that's very helpful from an associate knowledge standpoint. How does that number trended overtime from the 70% you guys talked about today; is it going up or -- I guess any color on that will helpful?

It's going up, it's gotten better in each of the last three years but it's -- over the last five years we've built out a training department, we've -- as we've grown like this, we've had to pull people from the field into the store support center, so there was a point where we were taking up a lot of town and we had to bring more people in from the outside than we'd like to but the number is stable, but my goal is to get it keep it between 70% and 75%, we want to be able to create opportunities for people to move ahead in their lives, we think that's something that's unique that's here and we continue to invest in our training department to make our training more robust, to make sure when our managers as we're moving them along internally that when they get to the store they're ready to run the store. So the numbers gotten better and we hope to continue to get better.

Our next question comes [indiscernible].

The product innovation was a bigger driver of sales last year and how should we think of product innovation going forward; are there other things coming or are there any new trends in flooring that we should be watching out for in the coming year?

There's always innovations coming. We've seen a lot over the five years that I've been here and I've seen a lot over my long history in home improvement; so there is always new things coming, we'll introduce new innovative products as the year goes on, both from the fashion side and both from the durability side and it will be across departments that we have. So I think it continues and -- but I still think it's in the early innings. I think water-resistant laminate, waterproof vinyls, those are things that are relatively still in their early ages of what they can be and more and more consumers are getting to understand what the benefits of those products are. So I still think there is a good upside benefit in stimulating customers to change out their flooring because of those innovations that have been introduced, we still think we're in early ends with what the initial innovations are going to deliver and there is more coming on.

I think that's exactly why we have an excellent merchandising team, they have a lot of experience, they go to every show in the world in flooring, we have great vendor partners and so we are always working on the next new things. So I think we can definitely expect to see more new innovation.

As you do keep opening new stores which obviously is what we're expecting but how do you maintain the culture? I understand you can promote managers that have been with the Company for a while and put them in new places but how do you maintain that with so many new employees starting, especially in new markets, maintain the culture that you have that has driven the growth for so long and really keep it going, keep it sort of that entrepreneurial spirit and that small but kind of thought process?

It's incredibly important to us. I believe our culture is a unique differentiator from us and our competition. I'm sure every CEO is going to say something to that effect but I really believe we have something special here, I was fortunate to grow up at a company that had a terrific culture led by terrific leaders, and I was there when we went from a handful of stores to thousands of stores, and I learned what we did right and learned what we did wrong and I try to apply that here in the way we do things. And we are -- we have a super a very robust regional support team that keeps leaders in our company, close to our associates, we do videos through our executive team, that videos through our stores, we communicate -- every manager before they get promoted has to come for a full training time and flown into core university here at our store support center where they get exposure to our founder and to the executive team of the company, I mean it's incredibly important and that we'll -- it's something that we won't allow to change and we try to make sure that we promote the right people and make sure that they embrace the leadership styles and qualities that we have, and so far we've done good, I feel like the culture here today is as good as the day I started and we've doubled in our size. So we're going to keep that going.

I'd like to turn the call over to Tom Taylor for closing comments.

Thanks. I appreciate everyone's interest in our business. I appreciate you participating in our call and we look forward to talking to you. Thanks.

This concludes today's teleconference. You may disconnect your lines at this time.