Floor & Decor Holdings, Inc. (FND) Q1 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Floor & Decor Q1 Earnings Conference Call. [Operator instructions]. Please note, this conference is being recorded. I would now like to turn the call over to your host, Mr. Wayne Hood, Investor Relations. Thank you, sir. You may begin.

Thank you, and good afternoon, everyone. Joining me on our call today are Tom Taylor, Chief Executive Officer; 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 reason, including those listed in its SEC filings. Floor & Decor assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company 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 our Investor Relations website at ir.flooranddecor.com. A recorded replay of this call, together with related materials, will be available on our Investor Relations website. Now let me turn the call over to Tom.

Thank you, Wayne, and thanks to everyone for joining us on our first quarter 2019 earnings conference call. We are very pleased with our first quarter results and the start to 2019 as we delivered earnings per share that exceeded the high end of our guidance on solid execution across all of our functional areas. Total sales increased 18.4% to a record $477 million from $403 million last year, in line with the guidance we provided on our fourth quarter earnings call. Comparable store sales grew 3.1% on top of last year's strong 15.6%, representing our 41st consecutive quarter of comparable same-store sales growth and further demonstrating the power and long-term growth potential of our highly differentiated, multichannel, hard-surface flooring business model. Excluding sales in the Houston market that is cycling past strong prior period results from Hurricane Harvey, our comparable store sales increased 7.1% on top of last year's 11.3% growth. We are pleased that over 50% of our stores had double-digit comparable same-store sales when excluding Houston and the impact from new store cannibalization. Moving on to earnings. We reported first quarter 2019 diluted earnings of $0.29 per share, a decrease of 3.3% from $0.30 per share in the first quarter of 2018. Our adjusted diluted earnings were $0.29 per share, up 11.5% from last year's $0.26 and above the high end of our $0.26 to $0.28 per share guidance driven by better-than-expected gross margin as well as effective expense control. Now let me discuss some of the drivers on our first quarter sales and earnings growth and how we see the landscape as we move into the second quarter of 2019 and the remainder of the year. As a reminder, the core pillars we focus on to help us achieve our long-term sales and earnings growth targets and grow our estimated 8% market share of the addressable $21 billion flooring industry are: opening new large warehouse stores; two, growing comparable store sales; three, expanding and improving our connected customer experience; and four, improving the Pro customer experience. I will now touch on each of these and how they are contributing to our growth. First, opening new large warehouse stores. We ended the quarter with 103 warehouse locations, which represents a fraction of our store potential in the United States. In the first quarter, we successfully opened 3 new warehouse stores in existing markets compared to 1 store opening last year. We opened Kirkwood, a store many of you have visited in Atlanta, bringing our total in that market to 7. We also opened our second store in Jacksonville, Florida and a store in Carson, California. All 3 stores are off to very nice starts. In the second quarter of 2019, we'll open 3 stores compared to 4 in the same quarter last year. Our second quarter new stores will include openings in Fort Worth, Texas; Tampa, Florida; and Saugus, Massachusetts, all successful markets where we already operate stores. The opening in Saugus, Massachusetts represents only our second store in the Boston area, where we believe we have a significant runway for growth. We remain on plan to open 20 new stores in 2019, which would represent, on average, our seventh consecutive year of 20% unit growth. We expect 60% of our new 2019 store openings will be in existing markets compared to 35% in 2018. Beyond 2019, we are excited about the strong pipeline of potential stores, and we have positioned ourselves for a more balanced store opening cadence in 2020. We are particularly pleased with the initial sales performance from our more densely populated markets, and we are excited about the potential number of stores that we can operate in these type of markets. Lastly, in the second quarter, we relocated our old Hialeah, Florida store to Doral, Florida. We have now relocated 3 stores in 3 different markets. In all 3 cases, we have seen a nice lift in the relocated store sales. We are encouraged by the return on our relocations today and plan to continue evaluating the opportunity to relocate additional stores as their lease ends. Moving on to our second pillar of growth, comparable store sales. Our first quarter 2019 comparable store sales growth of 3.1% was at the midpoint of our expectations. Comparable transactions remained the largest driver of our 3.1% first quarter comparable store sales growth, increasing 1.9% from last year. We saw an improved sequential and year-over-year trend on our average ticket, which was up 1.1% driven by growth in our water-resistant laminate, rigid core luxury vinyl plank and from growth in our installation and decorative accessories categories. Turning to our sales performance within our merchandising categories. Our strongest sales growth continued to come from our laminate and rigid core luxury vinyl plank category, where total sales increased 46% from last year and accounted for 20% of our sales versus 17% last year. Our installation accessories sales increased 25% from last year, and our decorative accessories sales also performed well, growing 20%. Our strategy is to drive total and comparable store sales from our higher-margin installation and decorative accessories categories are working, and we believe there is continued runway for growth. We expect this momentum to build in 2019 and beyond, and we have added incentives, measurement metrics and made changes to our website to accelerate growth and improve the customer experience. We believe that a significant portion of our current and future growth will come from how we engage with our Pros and DIY, BIY customers, both in-store and online. We believe that if we consistently deliver a differentiated experience across all of our touch points with our Pros and DIY, BIY customers, then we will continue to increase our market share. To that end, I am excited that we are making meaningful improvement in our customer satisfaction metrics. Our Net Promoter Score, which measures the willingness of customers to recommend our merchandise and services, reached an all-time high in the first quarter of 2019 as did our customer satisfaction scores. Our improvement in customer experience is also reflected in our Google Seller Ratings, where over 80% of our stores now have 4 stars or higher. The improvement is even more impressive when you consider that the number of reviews have almost tripled from last year. We believe these results reflect our ongoing initiatives to drive service in our stores and create a more consultative selling environment. We are also integrating our CRM platform with our Pros and designers towards our objective of offering a best-in-class designer service for hard-surface flooring that is free. These strategies as well as many others should continue to differentiate us and maintain our leadership position as the best place to buy hard-surface flooring. Expanding the connected customer is our third pillar of growth. Our e-commerce strategies continue to deliver traffic and sales results. In the first quarter of 2019, our e-commerce sales increased 64.5% from last year and now account for 9% of our sales tendered compared with 8% at the end of 2018. Looking more closely at those numbers. We are pleased to see a continuation in the robust growth in order volume, value and attachment rates. We estimate that about 70% of customers who ultimately buy from us will visit our website during their buying process. What is exciting to us is that about 85% of online sales are being picked up in our stores, which gives us another unique opportunity to engage with customers to make sure they have all the materials they need to complete their project and drive cross-selling opportunities. It also further demonstrates the importance of the synergy between our physical stores and our e-commerce platform in the purchase decision journey. We will continue to add tools and systems to better understand customer behavior and to deliver more personalization and further leverage our brand and e-commerce platform. And our fourth pillar of growth is investing in the Pro. As many of you know, investing in our Pro customers is another strategic priority of ours as we look to increase our share of wallet with our existing Pros as well as engage with Pros that do not currently shop with us. Last year, we rolled out our Pro Premier points-based rewards program along with an umbrella of service offerings and are pleased that we now have over 62,000 members, up 24% from 50,000 members at the end of 2018. Even though this program has only existed for a brief time, our stores that have embraced our reward solution have delivered higher comparable store sales. In 2019, we will continue to drive adoption and penetration within our store base and integrate this program into our CRM database to deliver better personalization. We're also pleased that we are seeing growth in the number of Pros that are using our PRO App that was launched last year. Recently, we lost -- we launched a Pro dashboard using our proprietary CRM solution. This new tool contains 12 key Pro-driven metrics that measure successes in areas of opportunities in each store. Collectively, these are examples of how we continue to add capabilities that enable us to drive engagement, customer satisfaction and wallet market share. Now let me turn my comments to how we are thinking about the macroeconomic and geopolitical factors that affect our industry and the company. I'll start with the latter. We are pleased that the proposed 25% tariffs on certain Chinese-made goods that were expected to go into effect March 1 have been postponed until further notice, as we believe it will be better for our customers and our business. That said, we are continuing to diversify our countries of origin to reduce business risk and expect to show meaningful diversification progress in 2019 and beyond. Among the macroeconomic metrics that impact our industry and company, namely existing home sales and home price appreciation, we, like many others, are cautiously optimistic that the recent pullback in interest rates will serve as a catalyst to moderate the persistent year-over-year decline in existing home sales that occurred in 2018 and early 2019. Recent housing data points to a potential for an improving trend, particularly in the second half of 2019, when existing home sales comparisons ease. That said, we have company-specific drivers that we believe will sequentially accelerate our comparable store sales growth in the second half of 2019. As previously mentioned, there will be more new stores entering our comparable store sales base and the difficult sales comparisons in the Houston market caused by Hurricane Harvey will further ease as we move through 2019. In addition, we plan to continue to drive sales growth by leveraging our merchandising, in-store and website strengths. As many of you know, one of our core strengths is our merchandising organization that is always looking towards the next generation of product that is innovative and trend-right and in many cases, exclusive to the Floor & Decor. I will now turn the call over to Trevor to discuss more details of our first quarter results and 2019 outlook.

Thanks, Tom. I'm going to concentrate my comments on some of the changes among the major items in the first quarter of 2019 income and balance sheet statements, and then discuss our outlook for the second quarter of 2019 and the remainder of the year. Tom already discussed our 2019 first quarter sales, so I will start with our first quarter gross margin rate, which increased 120 basis points to 42.2% from 41% last year. This year-over-year improvement in gross margin was about equally split between better product gross margin as well as leveraging our supply chain costs on higher sales. The improved product margins were due to favorable negotiations with our suppliers, improved merchandising strategies, including higher sales from higher-margin categories like installation and decorative accessories and some strategic retail increases. These gross margin results were above our guidance that contemplated 70 to 80 basis points increase in the first quarter of 2019 due primarily to lower inventory reserves, lower supply chain costs and slightly better product gross margins. Let me now discuss some of the various expenses that are contained in our press release and their variances to last year. I'll start with our selling and store operating expenses, which rose 24.2% to $127.4 million and deleveraged 130 basis points to 26.7% from 25.4% last year. All of the 130 basis points of store selling and operating expenses deleverage came from new stores, as our existing stores leverage their operating expenses on higher sales. We are pleased with the leverage our existing stores obtained in the first quarter, especially considering the headwinds faced in Houston market, where we are cycling the large sales increases in last year's first quarter due to Hurricane Harvey. Additionally, as we have previously talked about in 2018, we opened a higher percentage of new stores in new markets, including new stores in more densely populated markets which carry higher a cost. We opened 3 stores in the first quarter of 2019 compared with 1 store opening in the first quarter of last year. Our new store selling and operating expenses as a percentage of sales are approximately 50% higher than our stores opened greater than 1 year and this is the driver of our stores selling and operating expenses deleverage. Our first quarter general and administrative expenses increased 29.4% to $30.2 million from $23.3 million last year, inclusive of the unique items that are reconciled in our press release. Excluding these unique items, which are primarily related to the accelerated depreciation on our existing store support center as we prepare to leave our current building in the fourth quarter of 2019, our general and administrative expenses have increased 21%, which was slightly lower than what we had forecasted due to effective expense control. Our first quarter preopening expenses increased 35.4% to $4 million from $3 million last year, which was better than we expected on more favorable occupancy and advertising costs. Our interest expense was about $0.5 million higher than we had planned due to an interest rate cap mark-to-market adjustment that we have since terminated. Therefore, we do not expect this variability in our interest expense in the future. Before I discuss our first quarter net income, adjusted EBITDA and our updated 2019 annual guidance, please note that I will discuss both GAAP and non-GAAP measures as described in our earnings release. We believe non-GAAP disclosures enable 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 measures can be found in our earnings release issued in connection with this earnings conference call. Taken together, the combination of favorable gross margin and disciplined expense management enabled us to report a record first quarter adjusted EBITDA of $60.1 million, up 25.6% from the $47.8 million last year and exceeding our guidance of $56.1 million to $58.7 million. Our adjusted EBITDA margin rate expanded 70 basis points to 12.6% from 11.9% last year despite the significant investments we are making to support our long-term growth. Our first quarter adjusted net income increased 12.1% to $30 million from $26.7 million last year. Our first quarter adjusted earnings per share was $0.29, up 11.5% and $0.01 ahead of the high end of our guidance. We ended the first quarter with 104.3 million diluted weighted average shares outstanding compared with 104.7 million last year. Moving on to our first quarter balance sheet. We ended the first quarter with a very strong financial position with $274.1 million in total available liquidity to support our growth plans versus $160.9 million last year. While our total inventory was managed well, increasing 2.5% from the same period last year, we do expect it to be higher on a year-over-year basis at the end of 2019. This will reflect the inventory build to support 20 new stores, more new stores opening earlier in 2020 relative to 2019, our new Northeast D.C. and further improving of our merchandising in-stock positions. Now turning to our earnings guidance. As you saw in the press release, we are updating our 2019 sales and earnings outlook to reflect first quarter results and changes in the outlook on import tariffs imposed on products sourced from China. As you will recall, in our previous 2019 earnings guidance, we had assumed an implementation of a 25% tariff beginning in March 2019, which now looks to be postponed until further notice. Our prior guidance had assumed our 2019 sales would benefit by an undisclosed amount from the implementation of tariffs and the related price adjustments and our gross margin would be pressured from higher costs related to tariffs throughout the year with most of the pressure occurring in the third and fourth quarters. The overall net impact from the imposition of 25% tariffs was planned to be earnings neutral and that remains the case. Absent the tariff increase, we expect lower comps, gross margin rate modestly above 2018 and similar earnings levels. I will now discuss of the more important building blocks and composition of our 2019 recasted earnings outlook. We expect our second quarter 2019 net sales to be in the range of $505 million to $515 million, an increase of 16% to 19% versus the second quarter of 2018. This growth outlook is based on a comparable store sales growth of 1% to 3%. Excluding the Houston market, we expect our comparable store sales to be in the range of 3% to 5.5%. Excluding the estimated costs with our relocation to our new store support center, we expect our operating margin be in the range of 8.3% to 8.6%. Diluted earnings per share for the second quarter is expected to be $0.28 to $0.29 and adjusted diluted earnings is expected to be $0.29 to $0.31 per share. We are assuming 104.6 million weighted average diluted shares outstanding for the second quarter of 2019. We expect adjusted EBITDA for the second quarter of 2019 to be $60.8 million to $63 million, an increase of approximately 20% to 24% over the second quarter of fiscal 2018. Turning to our full year outlook. We expect our sales for fiscal 2019 to be in the range of $2.020 billion to $2.055 billion, an increase of 18% to 20% versus fiscal 2018. This net sales growth outlook is based on 20 new warehouse store openings and a comparable store sales increase of 3% to 5%. Excluding the impacts of Houston, we are planning our fiscal 2019 comparable store sales to be 5% to 7%. Since we are not planning on Chinese tariffs increasing from 10% to 25%, we now plan on gross margins increasing approximately 30 to 40 basis points for fiscal 2019 with the second quarter gross margins increasing approximately 70 to 80 basis points. Moving on to full year SG&A. We continue to expect SG&A to slightly deleverage as a percentage of sales due to new stores. Fiscal 2019 diluted earnings per share is expected to be $1.03 to $1.09, and adjusted diluted EPS is expected to be $1.07 to $1.12. Diluted average shares outstanding is expected to be 104.7 million and our fiscal 2019 tax rate is now estimated to be 23.3% for the remainder of the year. As a reminder, this guidance does not consider the tax benefit due to impact of stock option exercises that may occur in fiscal 2019. We expect fiscal 2019 adjusted EBITDA to be in the range of $235.5 million to $243 million, an increase of approximately 23% to 27% over fiscal 2018. With that, I'd like to turn the call back over to Tom for a few closing remarks.

I am proud of how we performed in early 2019 and are planning for another successful year. We firmly believe our best days lie ahead of us and look forward to updating you after our second quarter result. We'd now like to turn the call to your questions.

[Operator instructions] Our first question comes from the line of Zack Fadem with Wells Fargo.

This is Rick calling on for Zac. First question is just on the competitive environment. We've seen a lot of competitors are stepping up their flooring assortment, particularly in LVT. I'm just curious if you guys are seeing -- in terms of pricing and promotions, are you guys just seeing any changes in the pace of your market share gains?

Yes, I mean we're pleased with our -- when you look at that category, for us, I think in the first quarter, we had an increase in total of 46%. We are continuing to -- that category has been a driver for us for the last 3 years. Competition continues to -- we always -- we pay attention to what the big boxes do. We pay attention to what our publicly traded independent competitors do. We still feel like our mix is completely different, our SKU count. Lisa, do you want to expand a little bit on kind of our differences in SKU count?

Sure. So we -- certainly, everyone is going after this category in a big way. It's actually terrific that the customers, in total, have responded as well as they have. From a SKU count perspective, we have not seen a huge change in the gap. We still have, from our big-box perspective, anywhere depending on who you're comparing to and in what category, I would say kind of 5 to 10x more than you would find in stock. In a big-box competitor, our prices continue to be below in the market. And so we're very pleased with growth.

Great. And just one last one. Looking at the new store productivity this quarter, it looked lower than it has historically been, more in the high 70% range, just wondering if you can comment on that.

Yes, this is Trevor speaking. I think it's probably just the timing of when new stores opened versus the same time last year. We expect our new store productivity to be slightly better as we exit this year in 2018 -- sorry, 2019 versus 2018.

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

Trevor, the first question is you mentioned that you had built in some undisclosed amount into your sales for tariff before? Is the change that we're seeing now is that the entirety? Is it all tariff-driven? Or is there something else with the sales guidance that changed?

Yes, this is Trevor. The majority of that change is due to the tariffs not increasing from 10% to 25%. We also looked at the business and how it's performing, took all those trends and forecast it for the rest of the year. But yes, I would say the vast majority of the change we had is due to us not having to change retails due to tariffs.

Okay. And then just -- my follow-up is, I guess, the second half, there's a little bit of an implied acceleration to get to the full year outlook, not a major pickup. Can you share with us -- because Tom mentioned, existing home sales and a potential pickup. What -- how much of that acceleration into the second half would you put on macro versus internal efforts versus just the waterfall of your stores maturing?

Yes. I think if you just looked at our core business, excluding stores that are being cannibalized, excluding Houston, we're expecting that business to be fairly consistent with how the business has performed. What you're seeing that's driving the acceleration in the back half of the year is two things, really, we will get further and further away from the Houston. That's been a drag for our comps. And then secondly, we have a much higher proportion of new stores coming into the comp base. For example, in Q2, we have 2 new stores from the class of '18 and in the comp base. By the time we get into the end of the year, it's up to 15. So those are what is driving the majority of that acceleration. We're not economists, so what we did from the macro, as we're just thinking if we can look at the current trends, assume that going forward, if the housing turnover improved, which some people would do -- think will happen, we will obviously welcome that. That's how we think -- how we plan the rest of the year.

Yes. I mean, look, we want to be thoughtful in the way that we guide. If you look at the first quarter too and you just kind of look at how we performed and if you took out the stores that we purposely cannibalized and took out Houston, we saw a 50% of our stores comp better than 10. The stores opened pre-2015 -- minus Houston's store comp, better than 5. So we still feel good about what's going on.

Our next question comes from the line of Steve Forbes with Guggenheim Securities.

Maybe focusing on the 1% to 3% comp guidance for the second quarter. You think about just customer behaviors and what you're seeing at the store level. I mean, is there anything to call out here? Because it obviously is lower than what we saw it, from -- whether it's trade down, good, better and best, anything on the regional basis? I mean, we're really just trying to understand the health of the consumer today as you see it.

Yes. So I'll start and Trevor can jump in. We're trying to be thoughtful in the second quarter. We had a bit of a delay -- really delayed Easter. So we had kind of a mixed start. As we got into April, things have improved since the start of April. So we feel good about the current trends, but we wanted to be thoughtful in how we guided. But I look at the consumer, for us, our average -- we continue to see better and best doing better than good. We continue to see average unit retail continuing to be up across all the categories we're participating in, and our average ticket is up. So I mean for the consumer who are buying the category, we feel good about their health. We just -- we want to be thoughtful as we look at this quarter.

And just I would add one thing that we called out, I know we threw a lot of numbers at you, is if you exclude Houston, we are planning for a 3% to 5.5% comp. And so you still got some of those Houston headwinds coming in there. And I think you guys all follow the same housing metrics we follow. You had some pretty big declines in household turnover in Q4 and in the early part of Q1. And for us to continue to outperform the market like we have, we feel good about where the business is.

And then just a quick follow-up on maybe the drivers of upside in the gross margin profile of the business during the quarter, right, the 120 versus the guidance of 70 to 80. What was the surprise, I guess, relative to your expectation? And then what part of the benefit, right, that you saw should we expect to moderate in the second quarter?

So the product margin itself was actually fairly close to the guidance. We just -- some of our supply chain costs came in better than we had planned at our distribution centers. And then we also -- the team had some very good -- some inventory reserves came in better just as we didn't have the same markdowns reserves that we've had previously. So we've reflected all that as we thought about the rest of the year. The big takeup for the rest of the year in gross margins was obviously the 25% tariffs not going into effect, but we've reflected all that gross margin improvements. And again, I'm talking relative to the guidance. We've reflected all of that as we thought about the rest of the year guidance.

I think the other thing too, Trevor, we're getting some benefits within the mix of sales in our stores. We put -- as I mentioned in the last quarter's call, we put an incentive plan around -- for our management team to do a better job of selling the total project, so installation accessories in particular. And if you look, it's been -- we've done terrific. We've seen a nice increase in that department that runs a little bit better margin rate.

Our next question comes from line of Michael Lasser with UBS.

Trevor, you mentioned the 300 basis point reduction in your comp guidance was mostly due to tariffs. So how would you break that down between the lack of tariffs, and what it seems like you're pointing to is the slowdown in housing turnover now subsequently having an impact in your business. So how would you break that down?

Yes. I would just go back to -- we didn't give specifics on it, but I think the majority of that 300 basis points change is tied to the tariffs, and that's not having to change tariffs. And then yes, we reflected Q1's result as well. How we performed in the first quarter kind of came in at the midpoint of the range. And then the final point is exactly what you said, as the household turnover's been -- depending on what period of time you're looking at it, was lower than people had planned for, and that's how we reflect it. I do think as we -- we do think about the back half of the year, though, most people think because interest rates have now been -- they're not going up anymore. They're actually down a little bit, plus you're going to be up against some pretty big negative compares from household turnover. The people are more optimistic about the back part of the year.

Yes. And just look, for us, I mean, if you still look at the annual guidance, stores outside of Houston, we're planning for 5% to 7%. So if you look at it, as Trevor said, we've got so many stores entering the comp base, 2 in the second quarter, 9 in the third, 15 in the fourth quarter. Our comparisons from last year, they ease. The Houston comparison moderates. We shouldn't -- if the interest rate -- the pullback in interest rates stimulate the market like we're hoping that they do, like we think that they will, it's upside.

And Tom, you mentioned that the start to April was mixed, coupled with your reduction in comp guidance for the year. Do you think your stores are just reaching closer to run rate unit volumes after years of double-digit comps, now it's harder to gain share or maybe even...

No, no, no. I do not think that -- I think we -- look, our unaided brand awareness in the country is 10%. Our unaided brand awareness in markets where we're comping -- where our comp markets is 14%. No one knows who the hell we are still. So we still have tremendous upside to bring that awareness in. Our stores are -- we've got -- look, yes, it gets harder, right? So you have so many years of double-digit comps. That gets harder. But we don't have any store that's at capacity. We don't have any store that we can't do more business out of. So that's not the case.

Are you going to be testing a couple of new product categories in the back half of the year? Can you give us any more details now that you're closer to those test launching?

Yes. So we are adding 2 adjacent categories. One of them is in store now. It's bath hardware. Things that a customer needs to go with the project. So things like towel bars and hooks and things of that nature that we've never carried but our customers have asked for. It doesn't take a lot of space. It's a pretty easy business. So we're dabbling in that. And then we have vanities coming in that will be in pilot and to be in test. Both of these are tests. We'll make sure that they work. But the vanity initiative will be in second quarter...

Late second quarter.

Late second quarter on the vanity initiative. And we continue to be pleased with our countertop performance and our frameless shower doors. So look, the decor gives us a broader umbrella to try things, and we're going to continue to try things and as they work, we'll roll them out in a faster basis. But we're not going to forget that we're a specialty hard-surface flooring company and that's what we do first. But the big store gives us the ability to test, and we'll continue to do that.

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

Tom, you made an interesting comment in your prepared remarks that I wanted to dive into a little bit. You talked about the next innovative product potentially, and I was wondering if, given the fact that you tend to see new trends well before everybody else, are you already starting to see a different trend than LVP developing in your stores. You don't necessarily have to say what it is, but I'm just wondering if there is something that's becoming hotter than maybe even LVP at this point. That's my first question.

So I wouldn't say we're seeing the next innovation within that category. I mean we've got -- we've seen customer step up to better and best stuff. They're buying up the line and we have such a broad assortment and such opportunity. So we're able to offer some different things than others are able to offer. And we're seeing customers gravitate towards that. So I continue to be very pleased with what we've been able to do with the category to grow it 46% in the quarter after so many years of having the performance is just -- it's amazing. So we've got our space flexed right in stores. We've adjusted space, so it makes sense and customer seems to be buying up a little bit.

Okay. And then my second question is just -- it's been a while now since the 10% tariff was put in. Can you maybe talk about what you saw from the independents in terms of how they responded to it? And whether or not you have taken incremental market share on as a result of that?

Go ahead, Lisa.

Yes. Sure. No, I think we answered that it's pretty much the same as last quarter when we talked about that. We did see some independents. When they got to 10% tariff, they were very clear. They were no sense to their customers, there were absolutely price increases taken. We were already significantly below most of the independents or all of the independents that are out there. And so we haven't seen any further movement, just that, that we saw really more at the end of last year when the 10% first went in.

Our next question comes from the line of Seth Sigman with Credit Suisse.

I wanted to follow up on the 50% of the stores that were comping double digit. I know that was ex Houston and ex cannibalization. Anything more to share about those stores? Any specific characteristics? Are they younger stores? Is there a regional bias? Just would love to get a little bit more color on that. And I guess that double-digit trend, is that different than what you've seen there in the past?

So I guess I'll start, Trevor, and then you can add in. I think the interesting part for me -- yes, they slant towards maturing stores, but then again, when the pre-2015 stores are still comping 5, we've got a portion of them that are comping better than 10. So we still see solid performance really across all the age genres of the stores. I think the other interesting part, it's around the country. There's no particular place. We're having that type of performance in different states, in different regions. So it's pretty broad-based. I don't know, Trevor, anything to...

No, I think, you hit the right high notes. I would just say, when you look at the business, again excluding Houston, comping up 7, in an environment where household turnover was declining in the mid- to upper single digit for the last 6 or 7 months, it's good. I mean I think as we come into a better housing environment, our business will do better as well. So we're pleased with that performance. When we gave that mid- to upper single-digit comp for our long-term planning, that was in an equivalent environment. So for us to continue to hit that in a challenging environment just shows the strength of our model in a different -- difference versus our competitors who -- which likely will widen that gap in this environment.

Okay. Understood. And then you guys mentioned intentional cannibalization. The impact on comps from that, is that higher than it's been in the past? And I guess how should we be thinking about that over time?

Yes, this is Trevor again. It was a little higher in the first quarter. As you guys probably heard us say in the year-end call and reiterated it again this time, that 60% of our stores this year, we will open in existing markets versus last year we opened 35% of our new stores in existing markets. So it has -- it was a little bit higher in the first quarter. For the year, we think it might be a little bit higher, but really not meaningful versus where we were last year.

Our next question comes from the line of Christopher Horvers with JPMorgan.

So I wanted to follow up on the comps ex Houston. So in 4Q, you were at an 8.7%; in 1Q, you were at a 7.1%; and now you're saying, 3% to 5.5%. That's sort of like 305 -- 300 to 500 basis points in the underlying trend ex Houston. And I'm trying to reconcile that to the -- that most of the comp died down is from the tariffs. So trying to reconcile that math. And does it imply a steeper acceleration in the back half in the ex Houston markets?

This is Trevor, Chris. I think the way we built our forecast for the rest of the year was we took the current trend as we've seen them over the last 4 months and we forecasted them, assuming those trends will continue. Said another way, the existing housing turnover has been in kind of the mid-single-digit declines. We've kind of assumed that for the rest of the year. If those are better, then we think that's great news and it should provide upside for us. And if things turn down, which nobody thinks will happen, but if things turn down, then we'll have to evaluate that as well. On the step down that you mentioned, Q4 to Q1 and Q1 to Q2, our view is that, that's completely correlated to the step down we saw in existing housing turnover. As you guys probably saw in kind of late September of last year, you saw existing housing turnover get into the negative mid-single digits. And by the time you got to December, it was down as much as 10% and January was close to that. And so our view is we saw that in traffic, and that's the impact we saw.

And then could you -- everyone's so focused on macro and housing right now. So could you talk about like is there any particular regions -- salt [ph] state and back to something that comes up a lot in client conversations. Any particular regions where that moderation was sharper or not so sharp? It would be really interesting to understand. And then from a category perspective obviously the innovation in LVT in your product assortment driving very strong trends there. Where is that slowdown coming in? And is it coming in other product categories?

So I'd say on the product category piece of it, most of the categories that have stepped down are -- you guys can see it in our footnotes in our 10-Ks where we've had changes in sales. And then from a regional perspective...

We didn't really talk about region. But as I said, we do have -- we have strength across all parts of the country. We've got stores comping double digits in every state. So it's kind of difficult to say. But we don't really talk about the region performance.

Okay. Understood. And then just as we look forward, the gross margin last year, you seemed to have a pretty easy comparison there. Can you talk through how you're thinking about the drivers of gross margin in the second quarter?

Yes. The majority of, we think, that increase is just again what the -- a repeatable we talked about in the first quarters, we think the installation accessory focus that we put on the business is going to drive the increases. The merchants have done a great job with better and best. That's helping out gross margins. We don't believe we're going to have the same kind of supply chain headwinds we had last year on gross margins. And so those are the same drivers really that we saw in the first quarter is what we're planning for in the second quarter.

Our next question comes from the line of Greg Melich with Evercore ISI.

I had 2. One was just to make sure that I got the SG&A right. So we obviously have more openings in the second half, but we get more leverage in SG&A because there were more openings in last year's second half. There was no other moving pieces in that. That's just a straight -- but that's what's driving that?

Yes. I think if you're talking about just store-level SG&A. We do have a -- 14 of our 20 stores are planned to open in the back part of the year versus, I think, we had 12 stores last year. We said all of last year, and you're still seeing that this year, the reason we're not getting as much SG&A leverage out of stores is those stores that we opened in Boston and Long Island and in Seattle and the San Francisco Bay Area, as we anniversary those stores towards the end of this year, we do think we're setting ourselves up to get better new store -- our total store SG&A leverage as we get to the end of this year and then into 2020.

Got it. And then maybe a little bigger picture as you think about how the new stores come into the comp base. I realize the risk here is that once you do ex a bunch of different things, it gets a little funny. But if it's 5 to 7 as sort of the real trend ex Houston, how much of that is the new stores flowing into the base? Is it fair to say it's 300 or 400 basis point? Is that a fair estimate?

Yes.

Okay. And if you were to think about modeling out over time, is that still -- is there something as you go to next year and the year after, the next 20 stores, do you think that's sort of a good run rate since you don't have the unusual nature of last year's?

We're getting better at opening our new stores. Our new store volumes have gone up a lot in the last 3 or 4 years. We keep thinking that 400 basis points is going to moderate. We haven't seen that happen yet. We would actually be okay if that did moderate because that just means our stores are opening higher volumes. It looks like the class of '19 is going to be another great class of stores for us. So we keep thinking that's going to happen, but it hasn't happened yet. Those stores, even though they opened in higher volume, they comp really big, that first, and second and third year after the comp. So mathematically, I do think that's going to happen. But fortunately, I've been wrong and it hasn't happened yet.

Great. And then I guess last on the impact of tariffs on the competitive environment. Do you think, especially given the large-ticket nature of the product, there's any shift in how your competitors are thinking about pricing or passing through the 10% that already occurred, if we're not going to go to 25%?

I mean what we've seen in just reading our public competitors' comments, most of them have raised retails. If you talk about the manufacturing public companies that sell flooring as well as the retailers that sell flooring, most of them -- I think all of them talk about passing on price increases and as Lisa said, we certainly have seen it at the independent level. Our merchants have done a great job, both for being great merchants and thinking about how to assort the products and where you can make changes in the line. As you can see from our results, our margins were incredibly strong in the first quarter. So our team has managed it under a difficult environment incredibly well.

Yes. I think our merchants did a really phenomenal job in negotiating with our suppliers with the 10% tariffs we're approaching. We've been good partners of the suppliers. We've grown significantly with our suppliers. And we were able to get a lot of cost out which really -- which helped us. But we pay close attention to price. We are a value-retailer first. And we feel good about our pricing, where we stand.

Our next question comes from the line of Seth Basham with Wedbush.

My question is around gross margin guidance. You have a nice increase now embedded in your full year outlook. If we think about the drivers there, besides the 1Q beat, what else is key to that increase? Is it just tariffs and the expectation for no increase in tariffs? Or is it supply chain or other factors?

Yes, this is Trevor again. I'll take a stab at it. It's again more of what we saw in the first quarter. The merchants have done a great job getting cost out, as Tom just mentioned. They assorted the product and put the assortments together, that's improving our gross margin. Our emphasis on selling more installation accessories and making sure we complete that customer's job upfront, that's a higher-margin category for us. That's done good. And then for most of this year, again, we got to make sure we give the supply chain team some credit. We're leveraging those supply chain costs and not increasing those much until we get to the fourth quarter, where we are increasing our D.C. cost because we're opening that Northeast D.C. And so those are what I would call is related to gross margin and why we're increasing gross margins this year versus last year.

That's helpful. And if you look at it on a category-by-category basis, LVT, obviously a big growth category, are you seeing margins expand there, putting the tariff issue aside?

I'm just looking off the top of my head. I think our margins have continued to grow in that category. So yes, I believe that's the case.

Our next question comes from the line of Rick Nelson with Stephens.

So one of your competitors pointed to steep declines in the bamboo category. Wondering if you could provide some color around that. How much of your sales are derived from bamboo? And your experience with that business?

Sure. Yes, we heard the same, and we are seeing the same. We are seeing that category slow down. It is a very small portion of our wood business, which is only 10% of our total business. So for us, it's not a problem. But yes, just for that category, we have also seen that slowdown...

Yes. It's one of the benefits of the Floor & Decor model is that we have the ability to flex space in our stores to what is selling. So if bamboo slows, if that's coming on the -- if the business is going towards luxury vinyl plank or to laminate, then we expand the space of that category, we add SKUs to that category and decrease the SKUs in bamboos. So it's just a benefit of having all categories of hard-surface flooring under one roof.

Okay. That's fair. Also, a competitor opened a new store format in Orlando. I know you've got a couple of stores in that market. Any comments of what you're seeing there?

We're pleased with our business in Orlando. It's been really terrific. So we've got 2 stores there, and we like the way they're performing. We have a lot of respect for all of our competitors. We pay attention to what they do. We just think that our model is completely different. Our stores are -- they average over 75,000 square feet, all categories under one roof, locally assorted. It's just different than a little bit -- than a larger prototype from one of our competitors.

Our next question comes from the line of Elizabeth Suzuki with Bank of America Merrill Lynch.

Just given that you are presumably baking in almost 300 basis points of comp for the full year from price increases on Chinese imported goods over those like 3 quarters of the year that, that 25% tariff would have been in place. I mean it seems to indicate that you think that demand is fairly inelastic in the category. If you can pass through such a material price increase, do you think that's a fair categorization of the current demand environment?

I think we're the value leader, right? And so if those price increases were coming to us and everybody else who source from China, that was our assumption is that there was --- that we're going to be able to pass that along because we're the value leader in that category. And listen, we're always doing test and testing elasticity. And I think again the way we put our assortment together is just very different than our competitors and it allows us to have more ability to adjust price because a lot of what we sell is very difficult to find elsewhere.

And I think the other assumption is that we anticipate the whole market. The whole market would be going up and so our price spread would have stayed the same and when you look at hard-surface flooring as you went through on other calls, the biggest component to hard flooring job is the installation. That really wasn't changing. So when you look at the percentage of what the price increase was to the end user, even with a 25% tariffs, it wasn't all that big.

Okay. Great. And just one quick follow-up. It looks like there were several small positives in the change in outlook like slightly lower tax rate, slightly lower share count, D&A and interest expense. So anything mitigating those positives that you would call out since the 2.5 months or so that, that previous outlook was given?

No. I mean there were pretty small changes in most of those. I think our statutory tax rate went up just a tad. But they have modest changes just based on where we do a very detailed forecast process and we're not going to price much depreciation and some of those other things. So just true-ups based on 3 more months of information versus when we gave the last guidance update.

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

I have a quick question on the ticket margin rate, right? So sticker growth in the improved product margin, how much of that was attributable to the add-on sales you guys referenced and some of the initiatives you're doing in store to try to increase the basket size there, complete the project? And then I have a quick follow-up.

Yes. This is Trevor. I mean certainly some of that was due to our installation accessories. But as Tom walked through, we had increases in ticket in a number of categories. And so it's just -- again, I think as the merchants have put the assortments together well, we are seeing people put more stuff in the basket.

Yes, I think, look, we've -- as I've said earlier, we went from -- in the fourth quarter, installation accessories were up 18%, and in the first quarter, they were up 25%. We're definitely getting more things in the basket, right? All the energy that we put around getting our associates to sell the total project is working. And then I think the other thing impressive that I mentioned in my script is a small thing, but our servicers are really terrific and the better service we provide in store, the more we're going to sell the whole project. And if you -- it's not just installation accessories. We didn't talk much on this call about everything we're doing within the design initiative. We put a lot of energy into what our designers are doing which is helping our -- them add deco sales across the board, too. So between those 2 concentrated efforts, I really feel like that's helping.

That's helpful. And then, if I can, just one more on the tariffs. So I mean we kind of did a little bit of math in the back end, it sort of looks like about 2/3, 75% of that is the 300 basis point revision in guidance is from the tariffs. I don't know if you can sort of bless that. I know you've been asked in a couple of different ways. And then just on the -- if it was to go from 10% to 0, is there any more risk to this -- to the guidance, I guess being revised down, understanding that it would still be probably margin neutral if it goes to 0?

Yes, I think I'll just stay consistent with my answer to say the majority -- the majority was absolutely the tariffs. Again, Q1 reflected the midpoint of the guidance. And then just the housing turnover was the last bit of what we did on that. I think -- if the 10% tariffs went to 0, we would certainly welcome that. That would be welcome news to us and that would just allow you to be even sharper on our prices.

Our next question comes from line of Daniel Hofkin with William Blair.

Could you just provide a quick update on how the Pro Premier Loyalty Program was going so far? What you're learning? And then you talk about cannibalization, so my second question is just kind of what is that running now? Where has that been? What are you thinking about that going forward?

Yes, so we're pleased with what's going on with Pro Premier. We've now got 62,000 members joined. If you just think about it, we're still kind of in the early stages in getting it rolled out and getting people educated about it. We introduce the new CRM information that our stores can use. We have a thing called a Pro Dashboard that's in the store, which helps them really isolate how the Pros that have signed up in PRO Premier are doing. How often they're purchasing, when they're redeeming, if they're using our partner programs, which is kind of unique to the way our program rolls. So we're still kind of getting that message out there. We spent a lot of time looking at it. If they have a Pro shop in the store and they're not signed up for the program, and we do all we can to get them signed up. So we're pleased with the results of it. We're pleased we've got this amount of people on it. We think the number continues to go up from here.

Okay. And then on cannibalization?

Yes, I'm sorry, I missed that part of the question. But cannibalization was up a little bit in Q1. We think for the year, it will be fairly consistent, maybe up a little bit versus last year. It is how we've modeled the business for the rest of the year. And again, that's really driven by the fact that this year, we're opening 65% of our stores in existing markets versus last year we opened 35% of our stores in existing markets. I would say that the other piece of that is when we open new stores in new markets, most of you -- I'm sorry, new stores in existing markets, those are generally higher sales, higher profit and so we are expecting our class of '19 sales relative to '18 to be higher-volume, higher-profit stores for us.

I mean cannibalization is meaningful, but the new stores are doing really good. So we're really pleased on the way the new stores are doing. Look, just go back in the first quarter, our total sales growth was really good at 18%. So we feel good about what we're doing.

Our final question comes from the line of Jonathan Matuszewski with Jefferies.

First one, just has there been anything that surprised you in the new densely populated Northeast markets, whether it be kind of mix of product, price sensitivity of the customer, mix of Pro, e-commerce penetration, any metrics there that have been different from your initial expectations before entering the market?

They're good. So we really like what's going on in our densely populated market openings. They're performing well. I think it's -- our brand is resonating with the customers out there. I think what's interesting, particularly in the Northeast part of the country, is I was surprised how many people knew who we were that we were able to get the stores moving rather quickly. I know that there's really, really populated areas, but still sometimes you open up in populated areas and people don't know who you are, it takes a while to get them in the store. But because we've been in Florida for so long, people in the Northeast knew and they were just excited to see us get there. So I've been really pleased with the way that the stores have started off -- started up there. It's also the customers are -- we don't have Pro figured out yet there and we're really pleased with the performance of the store. I mean we think we have figured it out. We know how to get in. But it takes a while to get Pro customers in new markets to switch over. And so we're just getting that to happen and we're already pleased with the stores. So I'm excited to what I'll see what those stores do in year 2 and year 3.

Great. That's helpful. And then just a quick follow-up on relocations. Can you share a little bit in terms of the lift that you've seen from the 3 that you've done recently? And maybe other opportunities that you see across the fleet that could be worthy of a relocation?

Yes. This is Trevor. So the lifts have been in the double-digit range and these were already high-volume stores. So we're very encouraged that it appears that one of the relocations we did last year could likely be -- go from our ninth-highest volume store to our highest-volume store. And so we've seen some really good results from those relocations. The stores generally are getting relocated to better locations, better parking, much bigger stores. Just the visual aesthetics that we put into our new stores is really driving just a lot of volume. So it's a -- we will continue to look at that as stores come up at the end of the lease. We got a handful of stores that we probably will relocate. So it won't be overly meaningful, but it's absolutely the right business decision, and as Tom mentioned, the lift has been incredible.

Okay. Well, look, I appreciate everyone joining the call today. I appreciate your questions and your interest, and we'll talk to you in the second quarter. Thanks.

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