Greetings and welcome to the Floor & Decor Holdings Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Wayne Hood, Vice President of Investor Relations. Please go ahead sir.

Thank you and good morning everyone. 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 statements for any reasons, including those listed in its SEC filings. Floor & Decor assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss non-GAAP financial measures as defined by SEC Regulation G. A reconciliation of each 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 Web site, ir.flooranddecor.com. A recorded replay of this call together with related materials will be available on our Investor Relations Web site, again, ir.flooranddecor.com. With that, let me turn the call over to Tom Taylor. Thanks Tom.

Thank you, Wayne, and thanks to everyone for joining our fourth quarter 2018 earnings conference call. We are very pleased to review our fourth quarter and full year 2018 results as well as discuss our plans for fiscal 2019. Total fourth quarter sales from 12.1% to $436.7 million from $389.5 million last year and was at the high-end of our guidance of $429 million to $437 million provided on our third quarter 2018 earnings conference call. Adjusted diluted earnings per share for the fourth quarter were $0.20 per share exceeding the high-end of our guidance of $0.16 to $0.19. We are pleased with our results considering some of the unique challenges we faced and overcame in the fourth quarter of 2018. First, as many of you know, we were lapping a strong 24.4% growth in comparable store sales in last year's fourth quarter driven partly by the Houston market due to the benefit from Hurricane Harvey last year. Despite these difficult sales comparisons and forecasting challenges following the hurricane, our comparable store sales grew at 0.5% in line with our expectations. Our comparable store sales excluding Houston remain strong up 8.7% from the fourth quarter last year and in line with our long-term expectations of mid to high single-digit growth. Second, our merchandising team successfully mitigated the cost pressures from the 10% tariffs and we have solid plans in place to further diversify our company's margin by year end. Third, we successfully opened five new stores in the fourth quarter versus three new stores in the fourth quarter last year including the opening of our 100 store in Burlingame, California. And finally, we successfully managed through a decelerating housing market with strong results to demonstrate the relative strength of our business model and our market share growth. I would like…

Thanks Tom. I'm going to concentrate my comments on some of the changes among the major items in our income statement, balance sheet and cash flow statements. And then, discuss our 2019 earnings release growth outlook. Tom already discussed our fourth quarter and full year 2018 sales results. So I will start with our fourth quarter gross margin rate where we experienced a 30 basis points year-over-year decline to 41.4%. The gross margin rate decline was better than we expected due to favorable cost out negotiations and rebates with our vendors as well as targeted retail changes which were somewhat offset by higher year-over-year inventory shrink and inventory reserves. Moving on to expenses, our store SG&A expenses grew 16.5% and deleveraged 110 basis points to 27.3% from 26.2% last year, recall we are comparing against 70 basis point leverage last year that came from the 24.4% growth in our comparable store sales making for difficult comparisons. The majority of the store SG&A deleverage was due to opening 12 of the 17 stores in the second half of 2018. Our new stores have much higher SG&A in the first half of their operations versus the back half and we had a very heavy concentration of new store SG&A in the fourth quarter of 2018. Store pre-opening expenses totaled $8,300,000 compared to $2,700,000 last year which was modestly above the $7.5 million, we guided during our third quarter conference call. This increase reflects five new store openings that opened late in the quarter versus three stores last year and some new store expenses for a planned first quarter of 2019 openings that shifted into the quarter. Our fourth quarter corporate SG&A expense totaled $30,300,000, an increase of 20.9% from last year and deleverage 40 basis points to 6.9% from 6.5% last year.…

Thanks Trevor. I'm proud of our team's execution and performance of the business even with some housing headwinds we faced in 2018. We're excited about the opportunities entering 2019 and we firmly believe our best days are ahead of us. We would now like to take your questions.

At this time, we will be conducting a question-and answer-session. In interest of time, please limit yourself to one question and one follow-up question. [Operator Instructions] Our first question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Good morning. Thanks a lot for taking my question. I am sure you don't want to provide a ton of detail on how tariffs are influencing the P&L for this year. But can you give us a sense for how much price you're going to take in response to a 25% tariff. And if we assume your gross margins up a little bit rather than down 40 like you guided to, that would add anywhere from $0.05 to $0.07 EPS. So is that how we should think about the contribution to your P&L, if the 25% does not go through? And then, I have a follow-up.

Hey, Michael. This is Trevor. Thank you for that. You're correct. Our comps do assume the 25% tariffs are going into effect. We didn't want to give an exact number on that just for competitive reasons. And I think as you said correctly that our margins, we do believe the plan would go up if we weren't -- if we don't have the tariffs go into place. Although because the tariffs are implicit in our sales rather there may be some sales difference in some of those assumptions. But, yes, we do believe as the tariffs don't go into place that will be a net positive for the consumer as well as a net positive for [fourth quarter] [ph].

Yes. We plan this price as the last resort. I mean we're in -- we're working hard and diversifying where we've got the product from Lisa and her team have done a really terrific job in negotiating with our suppliers to get cost out and we've got a good plan in place in the effect that they do go through.

And my follow up question is, if we back out some of the hurricane impacts over the last couple of quarters, looks like you're guiding a debate point to a 7% comp x-hurricane. That would be a bit of a slowdown from a 8.7 that you reported in the fourth quarter. So can you give us a sense for what you're seeing so far to start the year, is the slow down in housing starting to impact your or further impacting your trends or is it weather or some something else going on?

Yes. I think first of and looked at macro -- I'm getting an echo. I'll touch a little bit on macro and then I'll talk a little bit about the sales. But look we're not economists, we see the same step that you do and then competitor see, housing turnover declines have continued for almost all of 2013 household affordability is a bit challenged. The increase in household buys are predicted to be slowing but the data we see about the repair, remodel industry it may be slowing, but it's not falling off a cliff. We still think that consumers healthy. We believe were posted in the upper single digit comps and that type of environment that's really good. So our guidance reflects what we've said in our long-term plans mid-to-upper single digits. That's how we plan the business that's how we think about the business. In the fourth quarter, if you think about it, our total sales were still in line with the high-end of our guidance. An 8.7 comp in this type of environment is very good. And if you go back in the second quarter 8.6 comp, third quarter is a bit of an anomaly because of all the storm effects in the fourth quarter opposed to 8.7. We're really pleased with the way we're operating the business.

Hey Michael. One thing I just want to follow-up on because I know we threw a lot of numbers at you guys. But our comps for the full year excluding Houston and we think Houston's probably a 200 to 250 basis point drag on this year would be closer to 8% to 10%. So very healthy growth in the environment we're operating in and we think well above industry standards.

Darn good. Good luck with the rest of the year.

Thanks.

Our next question comes from the line of Chris Horvers with JPMorgan. Please proceed with your question.

Thanks. Good morning guys. I just want to follow up on that last question. So I mean you are assuming the core comp does decelerate in the first quarter, so just is this conservatism, you tend to like to be raised, did a great job on that in the fourth quarter. Is it somehow you're seeing a change in the consumer in terms of the brass of the projects that are taking on and the amount of ticket clearly that's a focus for 2019 for you. So just further follow-up on why you're assuming the core [complexity weather] [ph] ticks down.

Yes. I think Houston's probably is what's driving us the most complexity there. If you look at our Q1 comps excluding Houston, they're assuming a mid 8% comp and that's essentially what we posted in Q4. And I think commented in Q2 as well. So the business has been fairly consistent and we expect that to continue through the first quarter of this year. And as I mentioned in my prepared comments because of tariffs because of higher concentration of new stores opening in the back part of the year as well as Houston abating, we expect our comps to accelerate throughout the rest of the year.

Yes. And I think what we're seeing what the consumers are buying in the stores. We're seeing average unit retail as a good thing. Customers, we're not seeing them step down to a lower price point items. We're still seeing step up to better invest. So we still think the consumer is in a pretty good place.

Understood. And then as a follow-up, can you talk about sort of what's the embedded comp that you get from new store maturation. How is that evolving in this area? But, a high penetration of stores outside that opened in the past couple years outside of core markets. So is that a net benefit for this year? And then, as you go forward given there's going to be more stores opening in markets existing markets this year, how do you think about that -- into that waterfall benefit as you look out to 2020. Thanks very much.

Chris, this is Trevor. We looked at this in detail again at the end of the fourth quarter and when we went public, we probably disclosed about 400 basis points of lift because of our new stores comping at a much higher rate than our more mature stores. We looked at that again for the year fiscal 2018 as was the fourth quarter and it's still running about 400 basis points, which is quite impressive considering the overall first year volumes have gone up pretty substantially in the Class of '16 and '17 and the other Class of 18 will be a good class of stores as well. So as we look to the -- as we look to 2019, we have planned that to be a little bit more conservative just because our new stores have performed better. Hopefully, we're wrong again and it continues to perform at that same rate. But it's been about 400 basis points and it's been pretty consistent. So answered that.

Thank you.

Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Thanks. Good morning. My first one, I want to hit on the macro. One more time. So when we saw you at ICR, your commentary felt reassuring. That's more of my words than yours. In that you described the 2018 is somewhat decelerating, but that you were seeing signs of stabilization. Is there anything different from what you were seeing at that point, which I assume reflected more of the fourth quarter than how the beginning of the year has played out. Any variability Tom, you mentioned you're not really seeing anybody trade down. So I just want to probe how you felt then versus what you're seeing to start the year.

Yes. I don't feel much different. But I said at ICRs consistent to what we see today. It's still -- the consumer is still healthy. Customers are still buying up the line. The market is maybe not as great as it was two to three years ago. But we still feel it's a good market to participate in. And when you think about the company and I've said it before, we're still -- we have 10% unaided [board winners] [ph] people don't know who we are they're still finding us. We've got almost 50% of our stores are less than three years old. We're continuing to take share at a pretty high rate. There's still a secular shift from carpet into hard surface lawn. We just have a lot of factors that help us no matter what happens within the economy.

Okay. My follow-up is on EBIT margin. It looks like the implied range broadly for next year is somewhere between 7 and 8 on EBIT. And I wanted to ask thinking about it over time, will more of the leverage and the margin come from just fixed costs in terms of expense leverage or gross through direct sourcing and supply chain? And then, can you just clarify, Trevor, you mentioned one item that's an add back to adjusted EBITDA, can you just give us what other items are within the guide for 2019 that are in adjusted EBITDA?

Yes. So I think your assumptions on our EBIT margins are in the ballpark. On an adjusted basis really the big adjustment we'll have this coming year for adjusted EBIT will be the relocation of our store support center. And then, for the fiscal year '19 all of our adjustments will be similar. We will have an add back -- the only new add back, I think we'll have will be the corporate office relocation is really only new add back, I think we're going to have on a go forward basis.

And then long-term as far as the leverage in the model?

Yes. Thank you. So I think our view is that we want to get a little bit of leverage out of both. We want to continue to be the low price leader. We're confident and our prices are low. We watch that very closely every week. And so, but we do think there's -- we'll hopefully get some leverage out of distribution centers and shrink and things of that nature. So we do think there's a modest amount of gross margin opportunity for us as we look to the future. And then, on operating expenses, as we've said for '18 and some of that into '19 it took us some portion of $10 million to step into these more expensive markets. Those will get completely embedded into total basis; we get 12 months of operating expenses in 2019. So we would expect to get SG&A leverage. So our current expectation as we look out long-term is hopefully a little bit for margin and a little bit from SG&A.

Great. Thanks. Good luck.

Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Thanks. Good morning. Guys, can you just walk through the shift in the gross margin complexion from the fourth quarter, which was down about -- I think you guys are down 30 basis points to the expectation for it to be up 70 to 80. If you could just maybe just walk through mix transportation, anything on supply chain strength.

This is Trevor. Most of what happened in the fourth quarter, obviously, was a lot happened late with the tariffs going into effect in September 24. Tom kind of mentioned this on the last call Lisa talked about it. Most of that beat was the merchandising team hustled and went out and got accommodations and rebates and better costing than we had planned for. Shrink was a little bit actually below our plan or worse than our plan and we actually donate a little bit more inventory to advertise at the end of year as well. But the majority of that beat was the merchandising team doing a good job and getting cost out.

And then, just your expectation for it to be up in the first quarter so much like what's shifting?

So the biggest driver of what's driving Q1 gross margin being higher is, we added a substantial amount of distribution in capacity in late 2017. And therefore, in Q1, it was all new 2018. Now that we're a year beyond that we really didn't add any distribution center capacity in 2018. We're going to get a fair amount of leverage, the majority of that gross margin beat is in distribution center leverage for Q1. And then, the remaining piece is our product margins are just performing a bit stronger as well.

Okay. That's helpful. And then, second question would be, just in light of the 10% increase that took place in the fall. I'm curious what you're seeing from some of the independents and how they reacted and if that's been an opportunity in near term future to take market share?

Hi. This is Lisa. We've seen a few of the independents start to take price up. I think it may be a little bit more challenging for some of them just having the distributors and the way that they sourced products for us. We go direct to the source. So we have the ear of the person that really makes those decisions. And so we've been very fortunate that we've had very good luck getting cost out working with our vendors. So, we have seen a little from the independents and would expect to continue to see that.

Okay. Great. Thanks a lot.

Our next question comes from the line of Matt McClintock with Barclays. Please proceed with your question.

Yes. Good morning everyone. Tom, I wanted to talk about the accessory attach rate. It seems like you're really focused on that as a huge opportunity. In terms of putting that in the incentive comp plan for the year, for the stores, is that something that's new for the first time in 2019? And then, Trevor, are you embedding any gross margin improvement or sequential improvement from selling more accessories this year in 2019? Thanks.

Yes. So that is a -- it's something that we've been talking about it all through. So, the whole time I've been here, we've talked about attachment selling and selling total project, you find oftentimes, the customers leave our stores and they don't have all the accessories that they need to install the projects. And that frustrates us and we've talked and talked and talked and we thought we found during the middle part of the year and we really started putting the pressure on rigid core vinyl to make sure that we're putting stuff with that. As we were measuring it more, talking about it more we started to see a benefit and we saw better attachment rate. And as we thought about next year, our store managers plans and our department managers bonus plans are -- they were pretty simplistic in their approach. We said let's -- we had been talking for years of what other metric can be put in there to get them to focus on it. And he said attachment selling in my mind is two things. It really -- it improves customer service. So it's such a benefit for the customer for our associates to do a good job of saying, hey, don't leave here without buying vapor barrier if you're buying rigid vinyl core make sure or sell that coat around molding. It's really good for the customer. So they have to make a second trip. And then, it's also really good for us because we saw gross margins. So this is a brand new thing for us. We just got out of our store managers meeting that we did in January, sold it to the group, as I've toward the stores, we've seen a lot of excitement within the stores, it's a pretty good way for them to make it easy part of their bonus. So new and we're excited about what it can contribute.

Hey, Matt. This is Trevor. We did not plan a lot of gross margin of appreciation because of this. That is a higher margin gross product, so if we have as much success as we're hopeful to, we'll talk about that over the coming quarters.

Perfect. And then, just as my second follow-up, Tom -- and both Trevor, you're experiencing a lot of deleverage on SG&A from opening stores later in the year. I know this question has been asked before. But as we get into 2020, 2021 and beyond, at what point will you be able to simplify the store opening schedules so that you start to get those open earlier in the year? Thanks.

One thing I will mention we are opening three stores in Q1 of this year versus only opening one store last year. So that is definitely put some SG&A leverage, our new stores have incredible return. But their upfront SG&A is incredibly high because we spend a lot of time training our employees, a lot of advertising, brand awareness and those kind of things. So, that has put some downward pressure on SG&A in Q1. As we also mentioned as we think about 2020, we're certainly just finishing up our 2019 plan, but as we do think about 2020, we are finally after Tom and I've been here for eight years, we do plan on have -- we're going to have a more balanced cadence of new store openings as opposed to this year we're 75% of our stores are open in the back half of the year. And so there might be a little bit of pressure in early 2020 just because we're going to have open those stores earlier. But we know when we open our stores earlier the overall profit for the year is much higher. And so, I think 2020 will be a little bit -- we won't have as much leverage in the first half to 2020 as we were on the back half of 2020. Again, only because we're going to finally open the cadence of stores more equally throughout the year versus being so back end loaded.

And I would say our real estate pipeline is the best that it's been since I've been here.

Thanks a lot of that color guys. Best of luck.

Thanks Matt.

In the interest of time, we please ask that you ask one question. Our next question comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question.

Thanks a lot and good morning. My question is around the fourth quarter comp in terms of regional performance, is there any color that you can share outside of Houston?

As I said in my opening comments look there's always different operating areas that we want to push to get better benefit. But overall, I'm pleased with the performance around the country. We saw pretty consistent performance across everywhere. So no real comments.

Okay. And I follow up, Lisa in regard to the pricing competitive environment. You mentioned there have been some moves by independents. But what about the big box competitors, how they reacted in terms of pricing for some of the Chinese imported products that are affected by tariffs and how you guys responded?

I would not say that we've seen anything dramatically different from our big box competitors. And it's the same as it's been since I've been here. And we have prices up a day and down a day. So it is a constant game. And so, I have not -- I wouldn't say that if anything dramatically different there.

Thank you.

Our next question comes from the line of Liz Suzuki with Bank of America. Please proceed with your question.

Great. Thanks guys. This is on store proceeds, you maintained a pretty great pace of new store growth. Have you had any difficulty in finding qualified managers to run your new stores or in getting the right mix of locally tailored product when you're opening so many new stores a year? And at what point do you think it does get difficult to continue that 20% pace?

And I think we've done. I think from the store manager perspective, we're in better shape today than we were when we first started opening 20% units. We've built out a training department and we've built our curriculum. We've been able to recruit fairly well. I mean there's not many retailers that have the type of growth that we have. We give our managers equity so people want to come and be part of this growth. So we've had a good balance of getting good recruits and a good balance of developing our own people. And we feel good about the pipeline of talent that we have. So I don't see any pressure in that as of today. I feel it's almost like the real estate pipeline. I feel really good with our talent pipeline very similar I feel on that. On getting the stores sorted right now we're in most major places. There's not -- when we talked about the new openings for next year the amount of new markets we're doing will be the least that it's been since I've been here, 65% of the stores next year fill-in stores. And we've gotten really good at getting what the mix is. We have dedicated teams that help us get this assortment right to begin with. And we've been pretty good at it, if not missing the mark. So I also think we've got good process in place. We have a good way to navigate as we go into new markets. I like the way that our densely populated big markets have started off sort of those stores very well. So I feel like we've got the process down and after seven years of opening 20% unit growth we've got a lot figured out.

All right. Great. Thank you.

Our next question comes from the line of Peter Keith with Piper Jaffray. Please proceed with your question.

Hey, thanks. Good morning. Thanks for taking the question. I just want to dig back in on gross margin for the fourth quarter and looking forward. So it looks like there was quite a bit of upside from the rebates and cost out. And I was wondering, if that's a bit more of a structural change that will continue to flow into 2019. And then, secondarily, interesting you did not call our supply chain which has been a big headwind. So, Trevor, I know you've talked about a majority of your transportation's in-house for the lower fuel rates now starting to become a benefit for you. Thanks a lot.

I think you summarized it well, Peter. This is Trevor. The merchandising team they hustled and did some great work force and margins were better and you're right. We call that out as being secondary to the distribution center benefit we're getting in Q1 of 2019. But we do -- we are seeing higher planned margins and that's been reflected in the plans. On the supply chain side of things, you're right. Things have calmed down a bit and we've done a good job of managing. Our team is incredibly flexible. We have done a great job with our asset-backed carriers as well as our dedicated fleet to negotiate good long-term contracts. And so we feel much better about where that is today. And your final comment is correct, we don't expect to have the same kind of fuel surcharges, if fuel stays where it is today as we get to the back half of 2019. But still having slightly above where it was in the first part of '18. But our supply chain team feels much better and more stable versus the increasing cost that we saw throughout -- most of 2018.

Okay. Thanks a lot. Good luck.

Thanks Peter.

Our next question comes from the line of Steve Forbes with Guggenheim. Please proceed with your question.

Good morning. Maybe just a two part question, Tom, so the first part being around the first quarter. Any color on whether the polar vortex impacted the guidance range or are you seeing anything from that cold weather. And then, the second part is being the 200 basis point drag from Houston that you called out for the full year. I think its 450 right in the first quarter. Maybe just some color on the cadence of that drag as we move throughout the whole year.

Yes. I'll take the first part. And Trevor can talk a little about Houston. Polar vortex isn't aren't fun, right. So you definitely see an impact of how a consumer behaves when it's negative 30 degrees in a market. And we have stores that are in some of those markets. But hard surface flooring, it's not like if you have a really wet winter or it's -- the category is just a delay in purchase. So, we typically see as weather hits, if it affects the given month, we get it back within the next month. Historically, our categories rebounded pretty well. So, we don't like it. We wish weather didn't play but we don't allow ourselves to talk about it and we tell our teams if we take a hit because it's negative 55 when it gets to be positive 55, we'll make it up.

Hey, Steve. This is Trevor. For the Houston negative impact, why do you think it's some portion of 450 basis points for Q1 is how we're forecasting it. Q2 gets a little bit better maybe 200 to 250 basis points headwind. And then, for both of Q3 and Q4, we expect 100 to 150 basis of headwind. And then, for the year that would work out through about 200 to 250 basis points of headwind because of Houston. And then, as we get into 2020 hopefully never talked about it again.

Thank you.

Our last question comes from the line of Jonathan Matuszewski with Jefferies. Please proceed with your question.

Great. Thanks for taking my questions guys. First one just on the supply chain, you mentioned plans to diversify country of origin throughout this year. Can you just give a little bit on the timeline, the cadence for that diversification where you are moving imports from et cetera? And then, I have a follow-up.

Sure. This is Lisa. So, we are working on some of those things now and we have target by department where we are trying to leave China. And it also somewhat depends on if the 25% tariff go through, if the 10% stays kind of depends on what happens as to what our plans will be exactly. As we are planning right now the 25% to go through, we will begin moving product as early as the next month or two and that will continue throughout the year depending on the vendors ability to get going to with us. So, in some cases, there are factories that we work within China that are moving to other countries and we are moving with them. And there are other times where we are going and getting new vendors or increasing our purchases from existing vendors in countries outside of China. So, kind of long way around to saying, it will start within the next month or two and continue through the year.

Great. That's helpful. And then, just a follow-up. I think you guys mentioned labor specialization pilot last quarter. Could you just refresh us on the progress there in terms of, I guess specializing labor for merchandising versus selling and versus stocking and any expectations for rolling that out to a larger percentage of the fleet?

Yes. So, we definitely -- we have more than one labor pilot. But, the big labor pilot that we have is in -- now it's in multiple stores and multiple parts of the country. And we are very pleased with the results that we are seeing from it. It really takes and makes kind of puts the designer type capabilities of associates within the whole store. So, instead of having a specialist in stone and a specialist in wood, we have people who can sell total projects around the store. We are very pleased with the result. It's rolling into -- because we have done it a lot in new stores to start. And now, we are rolling it back into existing stores within the quarter that we are in now. And as it progresses and we continue to see positive results. We will look at increasing the speed of the rollout. We will continue to see what we have been seeing. Going good.

Okay. Well, listen, I appreciate everyone joining our call today. I want to thank all of our associates again for all the hard work. We look forward to updating you on the first quarter call. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.