Good day, ladies and gentlemen, and welcome to the Floor & Decor Holdings, Inc. Conference Call. All lines have been placed on a listen-only mode and the floor will be opened for question and comments following the presentation. [Operator Instructions] At this time, it's my pleasure to turn the floor over to your host, Wayne Hood, Vice President of Investor Relations. Sir, the floor is yours.

Thank you, operator, and good afternoon, everyone. Joining me on our second quarter earnings conference call today are Tom Taylor, Chief Executive Officer; Trevor Lang, Executive Vice President and Chief Financial Officer; and Ersan Sayman, Executive Vice President of Merchandising. Before we get started, I would like to remind everyone 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 will discuss non-GAAP financial measures as defined by SEC Regulation G. We believe non-GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our Investor Relations website at ir.flooranddecor.com. A recorded replay of this call, together with the related materials will be available on our Investor Relations website. Let me now turn the call over to Tom.

Thank you, Wayne, and everyone for joining us on our fiscal 2022 second quarter earnings conference call. During today's call, I will discuss some of the highlights of our 2022 second quarter earnings. Trevor will then review our financial performance in more detail and discuss how we are thinking about the remainder of 2022. Before we get started, I wanted to take a moment to comment on our exciting announcement today that Trevor will be promoted to the role of President from Executive Vice President and Chief Financial Officer of Floor & Decor. Following Lisa's announced retirement last summer, we conducted an extensive internal and external search for this important role. We concluded that Trevor's deep knowledge and passion for our company, culture, strategies, products and industry knowledge make him the right person for this critical role. In addition to being an outstanding CFO over the last 11 years, Trevor has been a vital thought leader and responsible for our information technology strategies and the strong growth of our Pro and commercial RAM businesses. We are enthusiastic about continuing to partner with Trevor as we execute our long-term plan towards $17 billion in sales and 500 stores. The company will conduct a search of internal and external candidates for a new Chief Financial Officer, and Trevor's promotion will be effective upon the appointment of a new CFO. Turning to our second quarter earnings results. We are pleased to deliver better than expected fiscal 2022 second quarter adjusted diluted earnings per share of $0.76 per share. These earnings results are particularly gratifying to us when we consider our previous year's record sales and profits, the current operating environment, which includes extraordinary high inflation, rising mortgage rates, 10 months of declining year-over-year existing home sales and higher global supply chain cost and…

Thanks, Tom. I want to thank Tom and the board from my promotion to President. I'm incredibly excited to take on this new role, and this is only possible because of the fantastic group of leaders I get to work with every day. The entire executive team is blessed to work with some of the best leaders in retail, and I believe we have clarity on our growth opportunities and Floor & Decor's best days lie in the future. I would also like to recognize Luke Olson being promoted to our Chief Accounting Officer, also announced today. In his three years with us, Luc has done a fantastic job and well deserving of this new role. Turning to our results. I will discuss some of the changes among the significant line items in our fiscal 2022 second quarter income statement, balance sheet and cash flow statement. I will then discuss how we are thinking about the remainder of fiscal 2022. Our fiscal 2022 second quarter gross profit increased 19.4% to $436.3 million from last year. The gross margin rate decreased a less-than-expected 250 basis points to 40%. Lower merchandise margins drove the decline due to a higher year-over-year supply chain and freight costs. All of our teams continue to do an outstanding job managing our gross profit in this complex global supply chain and inflationary environment. We are pleased to continue executing our stated strategy to grow our gross margin rate sequentially versus the fourth quarter of 2021. Selling and store operating expenses increased 30.8% to $268.2 million from last year, in line with our expectations. The increase was primarily attributable to 27 net new warehouse stores opened since July 1, 2021, additional staffing required to align with our sales growth, higher depreciation, credit card transaction processing fees and advertising…

Thank you. The floor is open for questions. [Operator Instructions] And our first question comes from Zach Saham from Wells Fargo. Go ahead Zach.

Hi. Good afternoon, guys. This is John Parke on for Zach. I guess can you just share the latest on the pricing environment? I guess, how much price you guys took in the quarter and what you're seeing out there from both the big box and independents?

Yes, I'll take that. This is Tom. We don't give out how much price we've taken, but we have taken price. We feel very confident on how we're competing in the marketplace versus the big boxes and the independents. We feel like the moat around our pricing cost is still pretty good. Next.

Sorry about that. Our next question comes from Steven Zaccone from Citi. Go ahead, Steven.

Great. Thanks for taking my question. Trevor, congrats on the promotion. I wanted to talk about second half expectations in a bit more detail. Could you talk about how you think about ticket versus transactions? It sounds like slightly better than what you saw in the second quarter from a transaction standpoint. And then just higher level, the macro clearly getting weaker, you referenced, but your guidance still looks like above Algo comps in the back half. So how do we bridge the difference between the macro weakening and maybe same-store sales guidance, it still looks pretty good overall.

Thank you very much. One correction I want to make. I think in the prepared comments, I might have said a 25% tax rate, and I want to just clear that up and then it's in the release, we're expecting a 24% tax rate. So apologize, I think in the prepared comments, I didn't get that. So as we think about the next six months that are in front of us, as Tom mentioned, first off, we're comping 13%. Business is better in July. And obviously, comp stores is almost -- is also a reflection of what happened last year. And on just gross sales basis, we believe our compares are a little easier in Q3 relative to what they were in Q2, just on a gross basis, our Q2 numbers were the hardest numbers we were up against. So that's part of the reason we think Q3. And then, listen, we're not economists, but we obviously read a lot. We pay attention existing home sales are, as Tom mentioned, have slowed, especially in the last few months. Mortgage rates are back down a little bit now, but they were up at close to 6%. Inflation is high and we know people are spending out of their savings and eventually that will stop as well. So we're just trying to be prudent and expect that as we go into the fourth quarter, that things may slow a bit. We hope we're wrong, and we're not economists, but we feel like it just made sense to plan the business a little bit conservatively to get our cost structure in line, such that if things are slower, our cost structure is appropriately weighted towards that. And if things are better, then we'll have some upside.

And our next question comes from Simeon Gutman from Morgan Stanley. Go ahead.

Hi. This is Jackie on for Simeon. Thank you so much taking our question. Just more on the macro. Is there any way you can give us some color as to what percent of the business is coming from existing home sales versus non turnover units -- we know you don't know precisely, but if there's any kind of sense of things changing.

I mean I'll start, Trevor, then you can answer. We don't know exactly, but as you said, it's very hard to say where the sales come from. Historically here over the last 10 years when existing home sales have been good we've outperformed the market in a meaningful way. And when existing home sales have slowed, our business has been more challenged. So -- it's hard to anticipate exactly as Trevor said, we're not economists. We don't know exactly what's going to happen, but we're just trying to be prudent in kind of the way we think about things. So -- like I said, we're off to a good start in this quarter, but we're not sure about the back half. So we want to just make sure you're thoughtful.

Yes. And the only thing I would add, Tom is exactly right, is every cycle is different. And what's so different about this cycle is 95% of the homes in the U.S. are increased in value. They're not probably going to turn over. They're sitting on a good mortgage rate. And so those people who aren't going to turn over their homes that are going to be in their homes, they have discretionary income, whereas in most cases when you have negative existing home sales, you also have negative equity value or at least home values going down. And so that's a little bit different in this environment. So the people that are going to stay in their homes have the ability to invest and -- we think we've got an incredible assortment and can service them.

Thank you. And our next question comes from Chuck Grom from Gordon Haskett. Go ahead, Chuck.

Thanks a lot. And congrats, Trevor on the promotion, well deserved. Just on the Pro front and speaking with people on those throughout the quarter, it sounds like backlogs remain really good. Just kind of curious what you guys are hearing from the Pro customer. And then just as a follow-up -- as a follow-up, on the monthly improvement in July on the three-year geo stack, it's a few hundred basis points of an improvement. Just curious why you think the business has accelerated. Did you take up pricing a little bit more in the month of July? Or has it been transactions? Just if you could flush that out for us. Thanks.

I'll take the Pro part, Trevor, you can take the second part. So this is Tom. I'd say on the Pro part, we're hearing the same things. Our Pros are busy. It's anecdotal in nature, store tours and talking to our teams, our Pros are still busy. And when we look at our business, too, you look at it during the week versus during the weekend, it's better during the week. The Pros are in the stores and they're shopping. As we mentioned in our average -- part of that average ticket growth we're seeing, too, is just our penetration of Pro business and design business and e-commerce business is all increasing. So all of that's doing well, which in turn -- so we feel good about the backlog that our Pros have and the amount of business that's in front of them.

Yes. And on the sales front, the comps have accelerated and the transactions have actually doing a little bit better than the negative 7% we posted for July. Again, that's partly a reflection of last year, not just this year, this year is strong, but -- we just had a little bit easier comparison in July of last year.

And our next question comes from Greg Melich from Evercore. Go ahead, Greg.

Hi. Thanks. I just quickly follow up on the inflation and then with gross margin we’re coming there. It sounds like ASP was the biggest driver of the ticket, but was it a majority? And would inflation be the number one part of that? And then on gross margin linked to that, are we still on path to approach 41%. I think that was the number you gave last quarter, Trevor, 41% gross margin. Is that still in the cards? Or do you think it's below that?

I think on the ticket, we also have some specific strategies that are helping our ticket. As we called out last quarter, I'll just reiterate again, our rigid core vinyl business continues to be strong within that. We're seeing people upgrade to better and best -- our total better and best is also improving. So that's driving ticket up. Our e-commerce business continues to be incredibly strong. E-commerce tickets a lot higher than the in-store ticket. Our design strategies are really taking off. We probably are as pleased with who's ever been in that business recently, and we've got a lot more design penetration relative to we've ever had in the company. That's a much higher ticket. And our Pro business is strong. It's probably -- the Pro business is probably the strongest we've had in at least my tenure here. That's also a much higher ticket. But yes, we're raising retails as well. We haven't given specificity but of that 17% ticket increase, there's a fair amount of it being ticket and then there's a fair amount of those that fall into core centric things that I mentioned as well. And what was the second part was -- what was the top, Greg?

What it means to gross margins? I know in the past, you talked about gross margins --

Yes, we obviously intentionally didn't put that in. I think if we hit the high end of the guidance, we probably will get closer to approaching 41, which obviously is our goal. But if we're at the low end of the guidance, then we might be just a tick below approaching 41.

Got it. Thanks and good luck.

Thanks, Greg.

Thank you. And our next question is from Steve Forbes from Guggenheim Securities. Go ahead, Steve.

Good afternoon, Tom, Trevor. And congrats, Trevor as well. Maybe just a follow-up on Chuck's question regarding the Pro sales outlook. I appreciate the color in the quarter, 39% of sales. But curious if you could help us sort of frame the full year outlook as implied by the guide is mid- to high 30s percent of sales the right level to expect for Pro sales for the full year as we move throughout.

Yes, I think so.

I mean, I don't know how much more specific. We don't really break it apart like that, but there's nothing that I see that says that the penetration of our business from the Pro perspective is going to change, gotten better as the year has gone and I anticipate that, that continues.

Thank you.

Thank you. And our next question comes from Peter Keith from Piper Sandler. Go ahead, Peter.

Hi. Thanks. Good afternoon everyone. And my congratulation to Trevor as well. So Pro business sounds like it's as strong as ever. I was wondering if you could just provide a little more detail on the DIY side. Does that continue to hold it pretty strong? Or have you seen any traffic slowdown on DIY?

Tom mentioned this in his prepared comments. I think after two years, people decided to take vacations, go to ball games. I've certainly heard that from other retailers as well. We saw that, as Tom mentioned, kind of on the weekend business on some of the holiday business. But then we see the business be stronger. And so I do think that consumer after not being able to enjoy a nice long vacation and maybe other services that they haven't done, they enjoyed it this summer. And I think as people get back to school and not taking as many holidays, we'll see how that plays out.

Yes. I mean the only thing I'd add is as August has started when in the first week of August now, and it feels like people are ongoing vacation and business continues to be pretty good for us. So I’ll just add.

Thank you. And our next question comes from Christopher Horvers from JPMorgan. Go ahead.

Hi. Good evening. It's Christian Carlino on for Chris. Big congrats to Trevor. Could you speak to the cadence of traffic through the quarter? Any way you look at it excluding the impact of comparisons, whether it's not just at three years. And then as you look to the back half, are you taking more price than you originally anticipated given an expected traffic? And any color on how you’d expect staff to evolve in the back half would be helpful.

Yes. I'll give you transactions because I have good intel on that traffic. We don't have quite as good of intel on that. But we just saw a moderate deceleration every single month throughout the quarter of Q2. We exited -- we called out, we were down 4.4% in transactions in March -- the fiscal month of March. We said we were down 7.7% for the quarter. And so you just saw things kind of slowly go down from a transaction perspective on that. And as far as pricing throughout the rest of the year, the answer is, yes, we believe retails will continue to go up. Supply chain costs, while they're not as volatile as they once were, what we see and what we are expecting is higher international container cost, maybe a little bit lower domestic transportation costs, still some congestion with demerge and detention throughout the U.S. And so we're expecting those costs to continue. And everything we're reading in the press is that that's not just for in the core. That's across everybody who's bringing stuff over the ocean into the United States. So we do expect retails to go up. And as we said, our goal is to continue to sequentially grow our gross margins and build them back and if we hit the high end of the guidance, we hope that will approach 41% gross margin.

And the only thing I'd add on the spread, we feel good about how the spread between our competition from a pricing perspective has held up throughout the course of this year. And the other thing I'd say, too, is that the publicly traded manufacturers you can read, there are price increases that a lot of them are posted that they're increasing price at a faster rate than us, and they're passing it on to their -- faster than they are -- faster than we are seeing. So that gives us the ability to compete against the independence even in a more significant way. And I would also say that what's selling in our stores is a -- as the consumers continue to elevate to that better and best product, it really puts us more in competition with the independent hard surface long stores, and we feel pretty good about our pricing versus that.

Really helpful. Thanks.

Sorry about that. Thank you. And the next question comes from Liz Suzuki from Bank of America. Go ahead, Liz.

Great. Thank you. So you had mentioned that you don't have the problem of markdown risk from sitting on seasonal inventory. But in your anticipation of a softer demand environment, are you slowing your orders from suppliers at this point?

Yes. I mean we're absolutely paying attention to that, and we've taken a cautious view and made adjustments as we look to the back half of the year. That's why I think if you look in the prepared comments that we delivered by the end of the year, we felt like inventory would be slightly over what our sales growth is. So we feel good about what our inventory position will be. And I would challenge you can go walk in our stores today and try to pick what's discontinued or one of those items you can't tell. It's good inventory. It looks the same as our -- in a lot of cases, it's as good as the new stuff we brought in. So there's no -- we're not worried about having a market down to make it go away. It's a good product, it will sell.

Right, right. And then just thinking about the product mix that you're planning for the second half, I would assume that the anticipation of stronger Pro demand versus DIY is likely to continue to impact the mix that you're bringing into stores?

Sure. Yes. I mean if that -- I mean, Pros buy across the store and they're buying for the end user who buys across all departments. So -- but we certainly pay attention to that and feel comfortable with what we're bringing in, we feel good about our inventory position. Our in-stock, as you'd expect with that type of inventory increase as good as it's been all year.

Great. Thank you.

And our next question comes from Jonathan Matuszewski. Go ahead, sir.

Great. Thanks for taking my question. Could you help us walk through the near and medium-term impact of a potential repeal in 301 tariffs? Specifically interested in when you would think to roll back pricing potentially if something were announced? And when do you expect to see lower COGS flowing through onto the P&L. Thanks so much.

Yes. I mean we obviously think that would be a good thing because there's just not the domestic manufacturing capability for the vast majority of what those tariffs are. And so the consumer would win in that scenario, not just from Floor & Decor, but really anywhere. It will take just a bit of time to roll that through our margin because the inventory that's sitting in our distribution centers is what they call a free trade zone, and it's likely that we would have to pay tariffs on that because it's been received state side. So all that inventory in our distribution center would likely have to pay the 25% tariff. But eventually, we're merchants at heart, and we'll watch as those costs come down. And as those costs come down, we would likely take our retail down some. We also are going to watch what's going on in the market and see what our competitors are doing. Last time this happened, everybody was pretty rational, including us. When we've been dealing with this inflation now for a year, all of our competitors have been -- seem to be fairly rational as well. So if that were to happen, it would take a number of months that you actually get a bit of a benefit probably upfront because the retails don't generally come down as fast as the costs come down. But eventually, I would expect the marketplace to take place. And as costs would come down, you would see retails come down, but you still will probably be a little bit better -- you definitely would be a little bit better on the gross margin rate when that occurs. So we hope it happens. We think it's the right thing for the American consumer.

Thank you. And the next question comes from Chris Bottiglieri from BNP Paribas. Go ahead, sir.

Hi. Great. Steve McManus on for Chris. Thanks for taking our questions. And congrats, Trevor. So I was just curious if you could speak to your exposure to the new homebuilding channel, what's the exposure to that end channel? And is that largely through your stores or more so through the RAM business.

It's -- this is Tom. It's insignificant. We do very, very, very little new home building. We don't really sell today, and we think it's an opportunity in the future, but we really don't sell to the big builders. If we do new homebuilding, it's more of a custom homebuilder who buys out of one of our stores, and they're usually less impacted by things like this. So it's insignificant.

Okay. Great. Thanks a lot. Appreciate it, guys.

And our next question comes from Justin Kleber from Baird. Go ahead, sir.

Yeah. Good afternoon. Tom and Trevor. It’s Justin Kleber of Baird. Wanted to ask just a follow-up to your response there to Jonathan's question. If costs continue to decline or if tariffs are removed, and you guys ultimately lower retails. I mean would you expect a favorable unit response from lower retail? I'm just trying to understand how the top line looks if and when average ticket growth returns to more historic levels in that low single-digit range.

I'd say it depends on what happens with the competition, right? So if we passed along that tariff savings and our competition decided not to pass on that tariff savings, and I think our unit sales would go up. So in the natural environment, we'll have to wait and see.

Okay. Just to confirm though, as you guys have been raising retailers, do you feel like you've seen any negative elasticity?

I mean I would just say more from a macro perspective that this is the first time in our history that transactions have been negative in the company, and I think that's --

Partially macro, partially comparable.

Yes, that's right.

Okay. Thank you, guys.

And our next question comes from David Bellinger from MKM Partners. Go ahead, David.

Hi. Thanks and congrats to Trevor as well. So my question, coming at this given some of your comments that Q2 comps tracked a little below internal expectations. So when you step back and look at some of the leading indicators of the business like web traffic or the number of samples consumers are requesting, what are those telling you about the next several quarters? And if, in fact, a slower housing market could have more of an impact on the forward outlook, not just in the back half of the year, but for 2023 as well. Thanks, guys.

I wish I had a clear answer for you. I'd say it's mixed. I mean the sample business is good. That's a good leading indicator. Our sample sales are looking good. Our website traffic has decelerated. But it's not just across us, we can track it against other people. Everybody’s web traffic has decelerated in the Pro business, while incredibly strong, some of our Pro business, their measurements, we have seen -- they've told us that some of their measurements have slowed. So it's kind of a mixed bag, samples were positive, but you have seen a deceleration in web traffic as well as the Pros doing measurements, which ultimately leads to the sell. The other thing I'd say about our Pros though, they've been very resilient. Their close rates have improved. So they may be seeing less people, but they're doing a better job of closing.

When you're talking Pros, to be specifics, that's our [Multiple Speakers] installation made easy. It's not all of the process.

That's people we have visibility to.

Thank you. And our next question comes from Joe Feldman from Tesley Advisory. Go ahead, Joe.

Hey, guys. Good afternoon. Wanted to ask about merchandise a little bit. I didn't hear you guys comment too much on maybe the color of what was selling. You often mentioned laminates or subway tile or just some color there. And to tie that with your comment about the inventory seeing some of the increase relating to innovation in the product and I was just curious if there are some new things that you guys are seeing out there that you're bringing in for the customer. Thanks.

This is Ersan. We continue to see our getting more accepting by our -- accepted by our customers. Large-format products like bigger, wider and longer products still get traction. Of course, laminate and vinyl’s still get more than company average sales and also we continued newness and innovation in every category as much as we can.

Great. Thanks. And congrats Trevor.

Sorry about that. Thank you. The next and last question comes from Anthony Chukumba from Loop Capital Markets. Go ahead, Antony.

Thank you so much for squeezing my question. And first off, Trevor my congratulations, very, very well deserved. From the first time I met you, I thought you were central casting for a CEO position, so not a big surprise from my perspective. Obviously, it's been a lot of things that have been covered on the call. I was just wondering if you can give any update on the five design studios just in terms of how those are performing relative to your expectations. what the key learning’s are at this point? And what your -- if you have any sort of update in terms of what you think the long-term store footprint could be? Thank you.

I don't have an update for the long term, how many we'll have. That's a work in progress. We've got five up and running today. We're opening up another one here in Atlanta in the next month or so. We're opening the next one in Atlanta. I'm pleased with how -- two things I would say, the ones now that have been open longer, our Dallas store, which opened first, it's continued to ramp a lot like Floor & Decor. So we're really pleased with that. The new ones have started off a little bit better than the Dallas store started off. It continues. We're learning a lot about attracting designers into the stores, getting architects in the store. We think we're tracking a little bit different customer, which is what we had hoped in those stores. So it's a -- look, it's a -- we're a company that we don't settle. We're always piloting and always thinking about the next idea. We're not going to go too quick with this. We want to make sure that we get it right. But so far, so good. And I would just say let us get the next one open. Give us a bit of time, and then we'll update you on what we think the future is.

Got it. Good luck on the rest of the year.

Thank you. So that was the last question, so I'll close the call by thanking you all for your interest in Floor & Decor. Thank you for your questions. Congratulations again to Trevor on a well-deserved promotion. We're excited about what he can do as he transitions into his next role with Floor & Décor. To those associates that are listening, thank you for all your hard work, incredible job, greatly appreciated. And we'll talk to you guys all on the next call. Thank you.

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