Floor & Decor Holdings, Inc. (FND) Q3 2024 Earnings Report, Transcript and Summary

Greetings, and welcome to the Floor & Decor Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Wayne Hood, Senior Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's Fiscal 2024 Third Quarter Earnings Conference Call. Joining me on our call today are Tom Taylor, Chief Executive Officer; Trevor Lang, President; and Bryan Langley, Executive Vice President and Chief Financial Officer. Before we get started, I wanted 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 understand better our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our Investor Relations website at ir.flooranddecor.com. A recorded replay of this call and related materials will be available on our Investor Relations website. Let me now turn the call over to Tom.

Comparable transactions were at the low end of our range of expectations due to the impact of the hurricanes declining by 4.1% from the same period last year. As a reminder, our third quarter comparable transactions and average ticket benefited from cycling past easier comparisons. We will continue to benefit from an easier sequential average ticket and transaction comparison in the fourth quarter of fiscal 2024. Comparable store sales in installation materials, decorative accessories and adjacent categories were better than the company average. Like prior quarters, our merchandising efforts continue to successfully drive sales towards our better and best price points. which offer industry-leading innovation, trends and styles at everyday low prices. Furthermore, these strategies continue leading to a shift in sales to higher-margin products, enhancing our profitability. Let me now turn the call over to Trevor to discuss a few more of our pillars of growth.

Thanks, Tom. I also want to express my gratitude to our associates for their hard work and dedication to serving our customers. We are tightly managing costs in our stores and store support center while ensuring this does not come at the expense of customer experience in our stores and online. Our teams are consistently executing our customer engagement plans at a high level, which resulted in record customer service scores in September. We are proudly moving the needle on this important customer engagement metrics like greeting, assisting and addressing customer questions. We achieved this with training and role playing. We know foreign projects come with complex questions and knowledgeable and engaging associates allow us to grow our market share despite challenging industry conditions. Their knowledge and commitment sets us apart and helps us thrive in the competitive market. . Shifting to our connected customer pillar of growth. Our fiscal 2024 third quarter connected customer sales increased by 3.4% and accounted for approximately 19% of sales. As previously discussed, we continued executing strategies towards driving organic and paid traffic growth to our website. We continue to integrate our processes and technology solutions to further develop a seamless in-store and personalized online experience. Plan to achieve this by continuing to improve the quality of website search, adding inspiring and user-generated content for customers and refining our online merchandising process to increase efficiency. The execution of these strategies is essential to growing our design services. Let me turn my comments to our design services. Our design services teams are committed to delivering an elevated and personalized design experience to our homeowners and pros across in-store, online and in-home channels. Their hard work and focus on high-value opportunities resulted in notable sequential growth in design total and comparable store sales during the third quarter of fiscal 2021. Consequently, our fiscal 2024 third quarter design total sales penetration increased significantly from the same period last year. We continue building on this growth, we developed strategies to build awareness and project credibility for design services on our website. We have enhanced design, scheduling and functionality and created online design galleries. These galleries provide an extensive source of inspiration for interior design by showcasing real life and designer-inspired projects with room-specific imagery. We are excited about how these galleries serve as sources of inspiration, providing beautiful ideas for any space or project. During my comments to Pro. Total sales to our Pros continued to grow in the third quarter of fiscal 2024, accounting for approximately 48% of retail sales. We continued to deliver sales and market share growth with a grassroot supply house mindset that focuses on nurturing strong relationships with our existing Pros and distracting new ones from outside of our warehouse stores. Our top priority is to build these relationships and elevate the Floor & Decor brand in a marketplace by consistently executing a set of priorities that delivers exceptional customer service with speed and precision. To achieve this, our Pro services managers are increasingly spending more time outside of our stores and in new ZIP codes directly engaging with Pros to understand their needs and provide tailored solutions. They are focused on minimum weekly Pro engagement targets, including facilitating a store tour that includes a mutant greet with our store Chief Executive Merchant. From a new store perspective, we have strengthened our new warehouse store [indiscernible] process with a larger team. This process involves intensive local marketing and competing outreach efforts to build brand awareness and customer relationships quickly, which helps new stores get off to a stronger start in markets where our brand awareness is not fully developed. In our stores, we continue to focus on staffing, training and scheduling that best aligns with demand. We prioritize having bilingual support at our Pro desk to reflect specific market needs and to enhance customer service. We're also driving growth by successfully partnering with native advertising platforms within bank's digital channels to provide us with a practical and cost-efficient way to attract and retain new Pros. We continue to drive loyalty with our Pro Premier Rewards loyalty program and our successful annual September Pro appreciation month, which included free classes, giveaways and nationwide sweepstakes. We successfully held 29 educational events in the third quarter of fiscal 2024 with over 425 attendees. These educational events have consistently driven higher sales with Pros who attend demonstrating a notable uptick in their purchasing activity especially in installation materials. We remain excited about hosting approximately 145 educational events in 2024, which we believe is industry-leading in the flooring industry. Finally, we are pleased that our sales from our regional account managers in the third quarter of fiscal 2024 exceeded our expectations. Let's now discuss our commercial business. Fiscal 2024, third quarter sales at Spartan Services continued to grow faster than the company average. Leadership team continues to execute on a set of disruptive strategies in the health care, education, senior living and hospitality sectors to the commercial flooring market. These are high specification sectors of the commercial flooring market where the opportunity for long-term growth and profitability are the greatest. These sectors generally have high quote conversion rates, recurring revenue and more attractive profitability. Over the long term, Spartan Services aims to become a disruptive leader in the specified commercial flooring industry by establishing a comprehensive nationwide sales network. This network would prioritize high specification products and leverage strong relationships to provide superior availability, delivery and service across the country. Over the next several years, we will continue making investments, sales representatives growth and infrastructure to build out to support our growth at scale and achieve our market share and profitability objectives. To conclude, we believe we have the right teams, strategic growth initiatives and resilient business model enabling us to navigate this challenging period. Let me now turn the call over to Bryan.

Thank you, Tom, and Trevor. I am proud of how our teams have successfully executed our strategies to grow our gross margin rate, control expenses, manage our inventory and supply chain and generate strong free cash flow. These achievements are a testament to our team's commitment and strategic approach to managing our profitability when industry growth is challenging. Now let me discuss some of the changes among the significant line items in our third quarter income statement, balance sheet and statement of cash flows. Our fiscal 2024 third quarter gross margin rate increased by 130 basis points to 43.5% from 42.2% in the same period last year, in line with our expectations. Year-over-year and sequential increase in gross margin rate is primarily due to favorable supply chain costs. Fiscal 2024 third quarter selling store operating expenses increased by 9.9% to $339.1 million from the same period last year. The growth in selling and store operating expenses is primarily driven by an increase of $37.3 million from operating 34 additional warehouse stores compared to the same period last year and $1.0 million at Spartan Services, partially offset by a decrease of $7.7 million at our comparable stores. The percentage of sales, selling and store operating expenses increased by approximately 240 basis points to 30.3% from the same period last year. This performance exceeded our expectations due to our stores successfully managing store payroll and other operating expenses. Fiscal 2024 third quarter general and administrative expenses increased by 13.1% to $67.7 million from the same period last year. This growth is attributed to higher incentive compensation of $7.0 million and additional staffing cost of $1.6 million to support our store growth. Percentage of sales G&A expenses deleveraged by approximately 80 basis points to 6.1%, primarily due to the decline in our comparable store sales. Our fiscal 2024 third quarter preopening expenses decreased by 10.5% to $12.7 million from the same period last year. The decrease was primarily due to a decrease in the number of future stores that we were preparing to open compared to the prior year period. Fiscal 2024 third quarter net interest expense decreased 84.8% to $0.2 million from the same period last year. The reduction in interest expense is due to a decrease in average amounts outstanding under our ABL facility, higher interest income from higher cash balances and an increase in interest capitalized, partially offset by lower interest income from our interest cap derivative contracts. Fiscal 2024 third quarter effective tax rate increased 70 basis points to 21.8% from 21.1% in the same period last year, primarily due to a decrease in excess tax benefits related to stock-based compensation awards. Fiscal 2024 third quarter adjusted EBITDA declined 5.7% and were $132.9 million, primarily due to expense deleverage from the decline in our comparable store sales. Depreciation and amortization increased 13.9%, contributing to net income declining by 21.6% to $51.7 million and diluted earnings per share of $0.38, falling by 21.3% from the same period last year. Moving on to our balance sheet and cash flow. We continue to maintain a strong balance sheet, which allows us to continue to prudently grow within our existing capital structure even during a period of industry contraction. We ended the third quarter with $803.1 million of unrestricted liquidity, consisting of $180.8 million in cash and cash equivalents and $622.3 million available for borrowing under the ABL facility. As of September 26, 2024, our inventory decreased by 5.4% to $1.0 billion from the same period last year. Let me now turn my comments to how we are thinking about full year fiscal 2024 and how it compares with our previous expectations. Sales are expected to approximate $4.4 billion to $4.43 billion compared with our prior guidance of $4.4 billion to $4.49 billion. Variable store sales are estimated to decline 7.5% and to 8.5% compared with our prior guidance of down 6.5% to 8.5%. Gross margin is expected to be approximately 43.2% to 43.3%, unchanged from our prior guidance. Selling and store operating expenses as a percentage of sales are expected to be approximately 31%. We expect the fourth quarter expense rate to be the most pressured of the year due to the timing of new store openings late in the third quarter and the fourth quarter. Preopening expenses as a percentage of sales are expected to be approximately 1%. General and administrative expenses as a percentage of sales are expected to be slightly above 6%. We expect the fourth quarter expense rate to be the most pressure to the year due to approximately $3 million of estimated ERP expenses. Depreciation and amortization expense is expected to be approximately $235 million, unchanged from our prior guidance. Net interest expense is expected to be approximately $4 million compared with our prior guidance of $6 million to $7 million. Tax rate is expected to be approximately 18% unchanged from our prior guidance. Adjusted EBITDA is expected to be approximately $490 million to $500 million compared with our prior guidance of $480 million to $505 million. Diluted earnings per share are estimated to be in the range of $1.65 to $1.75 compared with our prior guidance of $1.55 to $1.75. Diluted weighted average shares outstanding of approximately 108 million shares, unchanged from our prior guidance. Capital expenditures are expected to be approximately $360 million to $390 million compared with our prior guidance of $360 million to $410 million. The decline in capital expenditures is due to a change in the timing of new warehouse store openings for the class of 2025. We continue making prudent investments that we believe will result in strong earnings growth when industry fundamentals improve. I want to thank our associates and vendor partners for their dedication and contributions to serving our customers every day. Operator, we would now like to take questions.

[Operator Instructions]. Our first questions come from the line of Simeon Gutman with Morgan Stanley.

My first question, Tom mentioned in the prepared remarks, you described the environment as maybe grinding higher over the next 12 to 18 months. Can I ask what does that look like for Floor & Decor. Does that mean you'd open the 25 stores? And are you leaning in to invest into the grind higher? Or are you protecting margin?

So Simeon, this is Tom. So we said on the last call, 25 stores is what we're planning for next year. That has not changed. As I said, we've got flexibility if we get into next year, and we want to push out some of those openings. We have the ability to do that. But as we sit today, the plan is still the new 25%. We are prepared in the event if the market were to turn fast. We've got plenty of inventory in the system, the ability to react and get product quicker. Our stores are well staffed. We're ready to handle that if that were to be the case. We're being cautious and prudent. And it's nice to see the Fed taking some action and lowering interest rates. We hope that, that continues to happen, and we hope that, that spurs existing home sales to start to be positive. And we haven't seen that yet. But we're prepared for it in the event that it occurs. And when it occurs, we believe that our sales will follow that. .

And Simeon, this is Trevor. I think it's worth adding that we're not sitting idly by. We are taking cost out of the CapEx of the stores. Our gross margins are performing higher than they've historically been. -- and we're taking operating costs out of the new stores as well. So differently, if we're going to be in a bit more muted environment, we've taken a lot -- done a lot of research and a lot of work over the last 6 months to take costs out of the stores so that if we are in this muted environment, we can operate successful new stores at a lower operating cost and a higher gross margin to still give us a good return on capital.

And a quick follow-up on the macro, the level versus growth in existing home sales, which I'm sure you've had many times this question. When Tom mentioned the 500 stores over time, it was referenced that assuming the existing home sales reached some normalized level. But in the next months, quarters, years, it's all about the rate of change growth. That should be enough to get this business moving in the right direction. It's growth, not a certain number that may take several years back .

That’s right, Simon. I believe as existing home sales turn positive. That’s a net benefit for us, and that gives us the ability to start seeing our business trajectory improve.

Our next questions come from the line of Christopher Horvers with JPMorgan.

So a couple of follow-up questions. So the first question is, are your West Coast stores comping positively? If you look at some of the home price indexes and the existing home sales in certain markets on the West Coast, they are positive. I don't think to your West Coast stores have been positive prior to this, but are you seeing that inflection? .

This is Bryan. I'll take this one. We haven't inflected deposit yet, but they're meaningfully outperforming the rest of the chain. That's really the way we're talking about it right now. But we're hopeful that we crossed...

Yes. We like the existing home sales that we saw in the month of September that are coming out of the West. It is starting to show improvement, and we should see benefit from that. They're better than the company. We think that will continue.

Existing home sales in the West were up over 5% in September.

Right. up over 5%. So you do -- you did a down 6%. So you're pretty close to -- you're getting close to flat at this point in the West. Yes. Got it. So I guess a little bit of lag off of a positive existing home sales dynamics. So you sort of look at it from like trend following up on the prior question that it's not a comparison anymore. It's just more like we're coming to the bottom the trend is the trend. And if we can get back to positive existing, then we can be up. But if we stayed flat for an extended period of time, rates have been very volatile. Like do you think what factors would lead you to composite in that environment? Or is that just not how you don't think that could happen .

Well, I mean, look, our compares continue to ease. So the comparisons are going to get easier. And if existing home sales do turn positive, as I said, I think that, that's a net benefit for our business, more homes that are turning over, the better it is for our category. I think in the event that, that doesn't happen, let's say that there's a scenario where things stay flat. If interest rates continue to come down, then I think because of what's happened with household appreciation that more people will take cash out of their houses, they'll refi or cash out and then they'll apply that, historically, that's been applied into home improvement. And so I can't think of about everything to do than we do your bathroom in the event that you take money out of your house. So I'm hoping that in the event we don't see existing home sales if they stayed in that flat place, Chris, then the hope is that the rates continue to come down and because of what's happened with household appreciation, people take cash out and apply that to the category.

This is Trevor. This is a bit short term. But with Hurricane Helene and Hurricane Milton coming through, there's going to be some stores on the West side of Florida, maybe a few other markets that we believe will get a benefit. It's just really happened -- but we -- some of the early signs are we're going to get a bit of a benefit. Now we're obviously a lot bigger than we were when we had the huge benefit in Houston back in 2017 and '18. And it's early, but there likely is going to be some benefit because of the destruction of those 2 hurricanes that is very recent.

Well, I guess you read my mind on the follow-up, which is you talked about 19% of stores. Harvey was 6% of stores. On a 12-month basis, you saw a 400 basis point benefit from Harvey. Now granted, like I think maybe Milton is the 1 we should focus on and it's not quite that level of stores, but it's like 4% of stores. So do you think that we should just take that ratio, 4% of stores affected by million versus the 6 in Harvey versus that 4-point lift that you saw in a subsequent 12 months from Harvey? .

I think it's going to be much smaller. We're 20% of the size we are now when Harvey did. And today, what we're seeing is really, again, that West Coast of Florida, Tampa down to Sarasota, is where we're seeing the bigger impact. Over time, obviously, went through the Carolinas, there maybe a little bit more opportunity for some of the stores in there, but it will be a lot less impacted than Harvey.

I won’t pile on, but I would say, first, it’s a bit too early to know for sure. I think Harvey was a bit different. RV was a flooding event over a very much more significant geographical area. So – but look, it’s early. We’re prepared. We’re seeing good things come out of those stores now, but it’s just a little bit too early in a month from now, I think we’ll know a lot more, but we’re doing everything we can to capture that rebuild as it’s coming to us. .

Our next questions come from the line of Steven Forbes with Guggenheim Securities.

Tom Tremor, Bryan. Maybe just following up to start on ROIC. Lots of questions with investors on how to think about ROIC for the business. just especially given the challenging macro that you're operating it within. You talked about the 25 stores you're planning for next year. Any way to help frame how your -- how the pro forma is modeled around year 1 ROIC versus cost of capital. And maybe on that point, can you remind us sort of some of the work you've done to reduce the initial capital cost behind the new stores that you're planning for next year? .

Yes, I will -- this is Tom. I will go first, and I'm sure Trevor and Bryan will weigh in after we have done a tremendous amount of work to reduce the cost of our new store openings. So we've done that by rightsizing the stores. We've done that by taking noncustomer-facing things out of the store to reduce the cost while at the same time, we've reduced the cost of operating the store. So we've taken a really good approach in bringing it down. And then as we selected the 2025 stores, as we said earlier, we're trying to shoot with a bit more precision going to more markets that we know, going to voids that we know will perform better than going into a new market. So there's less new markets, more of a sure thing. So -- we think with what we've done with the cost of the store and the operating cost of the store and how our gross margins are improving, and selecting better stores that, that will improve as we get through 2025.

Yes. It will help alleviate some of the pressure. Obviously, in this macro environment today, we've been very transparent that our stores are turning off a little bit lower than our pro forma target that we were super in that $14 million to $16 million year 1. So given the macro backdrop, that will put pressure on ROIC, but everything Tom just mentioned, will help offset some of that. It won't fully offset it, but it will help offset and mitigate some of that. .

And then Bryan, maybe just a quick follow-up. As we think about the growth burden on the margin structure of the business as you sort of work through the environment, any way to help frame sort of how to think through selling and store operating expenses for next year given the growth plans for stores? Like what -- and I don't know if you can maybe talk through what level of comp, right, is sort of needed to hold the expense ratio at that 31% level that you guided this year to or anybody to sort of think through how we measure the growth burden next year?

We’re not ready to commit on our comment on 2025 yet. Obviously, we’ll take some sort of growth to hold just given the pressure of the late store openings in Q3 and the late store openings in Q4 of this year. Those will put a little bit of a drag next year on store and selling expenses. But more to come. We’re just now getting into the detailed budgeting process on our side. So more to come on the next call for that. We’ll give you guys obviously guidance and transparency around that, but we’re not ready to commit to the comp.

Our next questions come from the line of Zach Fadem with Wells Fargo.

When you look at your operating margin outlook this year, which is implied about 5%, how much would you say this is constrained by the new stores opened over the last year? And how does that drag compare to the margin drag in the past? And then as you start to think about a recovery scenario, how should we think about just snap back potential for your operating margins? .

Zach, this is Bryan. I'll start and then Trevor and Tom can jump in. I mean it's heavy pressure from the new stores that have come in, but there is still some also from a decline in costs. I mean you've got negative sales coming through, which will put pressure, but a lot of the pressure is still from our new stores. This is the first environment where I've been here for over 10 years, the first environment where I've seen our mature stores delever. So the sales pressure has put a little bit there, but still a lot from our new stores and even the new stores causing cannibalization on our existing stores without giving specifics on those two. As far as when it will snap back or what kind of glide path it's going to be, it won't snap back immediately, it will take time, but we should have significant earnings power given any sort of growth environment. So if we get into next year and there's any sort of growth environment you will see significant earnings power, but I don't think it goes back to historical levels overnight. I think it will take time to kind of get.

I'll add -- this is Tom. And I would say that we have learned to be more disciplined in our spending within our store support center, within the amount of projects that we undertake, within the amount of investment that we make, and we will be -- those lessons will continue to apply a sales rebound. So we should see benefit in kind of how we operate within our store support center and the investments that we make there. We should see the benefit as sales turn around. We would be more thoughtful on those investments. And then the last thing is 25% of our stores are running at minimum hours as soon as we see and sales start to kick around. We get really good flow throughout those stores. So that would be very helpful.

Yes. I think just to put numbers out and you guys will see in the release and in the 10-Q, we were able to decrease $7.7 million out of our comp stores year-to-date, that number is $30.8 million that we've taken out, I've got to give credit to our store associates because as Trevor mentioned on the call, our customer service scores are as high as they've ever been. So we're doing this in a way that it's not impacting the customer experience.

If I was modeling, and we have to set the plan, so this is -- once the plan is set, like once we give guidance next year, if there is upside, I think we feel pretty confident that you're going to flow through in the mid- to upper 30s on that incremental sales above the plan. And when you're operating at just above a 5% operating margin, if your sales are above that plan, flowing that through in the mid- to upper 30s is obviously very accretive to the operating margin and income.

Got it. And just if we enter, call it, the first half of '25 and comps remain negative similar to where we are today and the new store drag on the operating margins remains negative as it is today. Curious just to what extent you would push out new store openings into '26?

Well, we both, as I said at the beginning of the call, today, we're still planning on opening 25 stores. We put those stores to the back half of the year to give us flexibility in the event that we want to push stores out, we will make that decision. I guess is we'll make it by the time the next time we're on the call, we'll have better visibility to that, and it will depend on how our top line is trending. If things improve, we can benefit from the hurricane, we see some benefit from refi, existing home sales turn a little bit positive. Then yes, we would continue with our plan. If things were to get worse, then yes, certainly, we really think that and pull stores out.

[Operator Instructions] Our next question comes from the line of Seth Sigman with Barclays.

As you think about exiting what seems to be an air pocket, right, how do you think about how the industry has changed over the last couple of years versus pre-pandemic? And I'm really thinking about from a competitive perspective, is there anything that you see as different -- have you seen the industry shake out as you would have expected from the downturn? Because it does feel like we're starting to see a wider range of results. So just any context there.

I would say, and I’ll let Ersan can chime in after I go or Trevor, if you see anything different. I would say that there’ll be less competitors as we come out of this cycle. We’ve already seen some closures within – you heard Lumber Liquidators had to close stores. We had noise of distributors closing, noise of independents closing. So I believe that there’ll be less competitors when we enter the market. I think that we’ll continue to have to deal with home improvement centers, ebbing and flowing, getting better, getting worse and we’ll continue to have to deal with that like we always have. I don’t think that’s too much different than pre-COVID. And I don’t think the independents have changed so much in how they go about their business. . So I think the competitive advantages that we have today are similar to the competitive advantages we have pre-COVID, and I think they’ll be the same as this bubble passes.

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

Given -- if you assume the midpoint of your guide for this year, where will your per store transactions and per store traffic end up this year versus 2019? And how is that compared to what your perception of the industry might be? Obviously, the question is related to market share. Your stores are being burdened with more cannibalization. But if transactions and traffic are flattish versus 2019, and there's been some closures across the market, why wouldn't that metric be better than it is? .

This is Bryan. I’ll start and then Trevor and Tom can weigh in. When I look at kind of like the 5-year go CAGR, what’s implied in there is that we would exit at almost a flat transaction. And so our transactions are basically in line with where we were exited 2019 from an average ticket were higher, but that’s because of all the inflationary things that have happened post-2019. So when you think about that, our ticket is higher, but transactions are almost flat. And so that is burdened with cannibalization as we have opened a lot of stores during this down macro environment. But yes, transactions against that time period on a per store basis are relatively flat today from where they were, which historically and our long-term algorithm that we would have given back at the Analyst Day, we would have said mid-high single digits driven by mainly transactions. So it tells you that we believe there’s a lot of pent-up demand and some of those kind of things within the stores, given the fact that we are relatively flat to where we were back in 2019.

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

Sorry about that first call. I guess, with the category under duress, can you help us think about innovation in the pipeline on innovation products. What areas you're excited about over the next few years? And then installation materials were up 21% nicely here in the quarter. Can you talk about the success there? How much of that may be attributable to price actions and any other areas? .

Sure. This is Tom. I'll start, and then Ersan can jump in. I think from an innovation standpoint, we are trying to do more things than we've historically done. We've got a good program going on with the outdoor pilot where we're bringing in more outdoor products into our stores. So we try to expand the amount of things we can sell to our customer. We've continued down the path on our newness. Even since COVID, we've done the same amount of product line reviews that we've historically done. So there's constantly new products coming into the store. And I think we're continuing to add adjacent categories, add to our adjacent categories that make sense. So all of those things should help kind of on that out cycle. .

I just want to add a few other things that porcelain last, we've been expanding to more stores this year as well, and we continue to at those unique items such as 4x8, 4x9, 5x10 porcelain slabs to more stores to get the market going. On top of this, we also started the acoustic wood panels, and that's totally incremental business to our business. satiates are won by 7 to 7.7 wood panels that reduces the sound. And where we constantly tried to munis and innovation is going to be critical for the next year as well.

Yes. And there's more comment. We have another big adjacent category that we're going to pilot in the first quarter. So we're not sitting still. We're trying to be innovative and trying to continue to add to our offering to satisfy our customers. And as we come out of this and the market turns, it will even give us more ammunition to do better.

This is Trevor. Your question on insulation materials. Several years ago, we made a very strategic decision to go after a supply house strategy. So we added brands that really mattered to the professional customer. And we're seeing very good success with our professional customer, especially in the insulation materials category. And so we really just try to become a one-stop shop and have everything that think the brand needs. And again, that's probably going on 2 years now that that's been our best-performing big category.

Our next question comes from the line of Keith Hughes with Truist Securities.

You talked earlier about the ticket getting less negative, particularly the comps. But I guess we dig down into that. Are you seeing any product categories are seeing average selling price per square foot or whatever metrics start to move up and kind of levels of inflation coming in.

I'm not sure I completely got the question. Trevor?

Yes, I think it's on ticket. I mean our ticket is getting better. It's been, I think, a bigger component of our comp improving each of the last 3 quarters is our ticket relative to each quarter has gotten a bit better. The biggest issue we face with ticket today wouldn't laminate our largest ticket categories in the company. And when our business was very strong, and we had 6.5 million existing homes back in 2022, you had a lot of house slipping going on and people generally do much larger wood and laminate projects and you've got that many houses flipping. Now that we're down whatever is 42% down the 3.8 million existing home sales have nearly as many houses flipped. So people are staying in-house and they're focused much more on bathrooms and half bathrooms and those are much smaller jobs. And so the ticket issue that we're facing is predominantly almost completely driven by wood main business, as I said, because people just don't put their homes at the same rate that they were when the economy was stronger in house.

Yes. And we still are seeing when the customers elect to do the project that they’re still stepping into the better and best product that has continued to outperform with that good.

Our next question comes from the line of Oliver Wintermantel with Evercore ISI.

On the gross margin line, it looks like the fourth quarter gross margin implied guidance is still up year-over-year. If you could maybe talk a little bit about the drivers in the fourth quarter. And then just conceptually, I know you're not going to guide to 2025. But conceptually, how do you think about gross margins into next year? Is there an opportunity to reinvest in the business to drive traffic, a little bit of how you think about gross margins for next year?

Yes. We're continuing to see good benefits to our gross margin line from supply chain costs, and we're seeing the benefits of that and from customers electing to buy better and best products, which makes a better gross margin on. So those things continue to be a driver of gross margin. We think that will continue into the fourth quarter. As we look to next year, yes, this is still a challenging market for the category. So we're putting a lot of pressure on our merchants to buy as good as they can as we do product line of views and we get products from new vendors or new products from existing veterans. We're certainly challenged them on the cost side to make sure that we're trying to get our first cost to be as low as it possibly can, and pass that on to the bottom line. So yes, we are planning on to have gross margins improve again next year.

Yes. Just as a reminder, too, on top of that. This is Bryan. So just as a reminder, we do have optionality as we move into when you’re modeling, don’t forget that we will open 1 distribution center in the second half of 2025 in Seattle. And then there’s another 1 we’re planning to open in the very beginning of 2026. Both of those will put pressure on our gross margin rate as we’re in the back half and then entering into 2026. And then just as you guys ar’ thinking about the model, Q4 should relatively be in line with Q3 this year.

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

Historically, I think you've shared your conversion levels are around 80% on average. Obviously, traffic is challenged with housing turnover and stretched household budgets. But for the footsteps you are seeing in stores, how has conversion been trending? And is that still holding up even with those stores on minimum labor hours.

Yes. This is Trevor. We recently just conducted a pretty detailed brand tracker that we do quite often. And those trends continue. If you look at the customers that are aware, the shop, and then they convert those numbers that you quoted are very consistent with what we've seen previously. Issue is just the size of the people that are entering the market is just a lot less. But once we get them exposed to the brand, either online or in stores, then the conversion is very high for us.

Not just the conversion. The brand tracker scores in customer service amongst the pros [indiscernible] it your softwares were showing continued to show improvement. So not just the way we’re measuring it a monthly basis within our stores, but the branch at showed similar results. We’re pleased with how our stores are executing.

Our next question comes from the line of Peter Keith with Piper Sandler.

This is Alexia Morgan on for Peter Keith. We are hearing about headwinds on big ticket durables from election distraction. We're wondering if you've noticed this dynamic within your business? And then -- are you seeing any sales opportunity from the 90 or so lumber liquidator stores that are closing?

This is Trevor. I'll go first and then Tom or Bryan can weigh in. I mean we said this on the script, our Q4 to date comps have gotten better. And so we don't know that we've seen that yet. I mean that a reasonable expectation that happens every 4 years. But to date, again, our Q4 numbers have continually gotten better throughout the quarter. I don't know if we had anything to .

That’s true. So we haven’t seen that yet. And the Lumber Liquidators benefit as they close, we think that’s a net positive for us. There’ll be depending on where their stores are located, how close they are to ours, the ones that are closing. It’s good. We’ve been fortunate to get some – to be able to help place some of the displaced associates. We’ve been able to get higher them and give them an employment where in any event that a store is closed down and they’ve been affected. So again, that business will go somewhere. We think when we compete in that category when you look across what they sell versus what we sell, our offerings are better than most, so we should be in that beneficiary.

Our next question comes from the line of Karen Short with Melius.

Good to talk to you again. So my question was just on the implied 4Q guidance range. I mean it's a pretty wide range. So just wondering if you can give puts and takes on comps in general, but also EBITDA margins. I mean everything is a pretty wide range. So wondering if you could just talk to that a little more.

Yes. I mean it's still the macro environment that we're in. There's still a lot of volatility out there. Existing home sales just came in at 3.84 million readout for September. So there's still a little bit of movement in the macro that gives us just a little bit of pause to hold that range. I mean we did compress the range in half from the last readout. And so just -- most of it is around that, which is why when you think about our comp, what's implied in there is about a 2.5% to 6.5% down in Q4 to achieve 7.5% to 8.5% down for the full year. Most of that is around transactions. So our transactions would be implied around down mid-single digits with our ticket approximately flat in Q4. So most of the variability is just around transactions as we look at our business.

Our next question comes from the line of Philip Blee with William Blair.

You previously spoke a bit about the impact of rising freight costs, I think a minimal impact on fiscal 2024. And -- how does that play out, though, in 2025 if rates don't abate? And then would contracted capacity keep you insulated from the spot market if demand begins to be more meaningfully inflect?

This is Trevor. As we said, the majority of our rates are on rolling long-term rates. In the spring, kind of the late winter, early spring time frame is when we'll find out what those new rates are going to be. If the rates are higher because the spot market stays higher, then we and everybody else will have to deal with those higher rates. In the past, I've been here, I'm going 14 years at Floor & Decor. When we've seen higher rates, we've seen the market be rational and those higher rates are passed along, and we would probably expect that to be a similar case for us. 1 of the benefits we do have is we really -- we're not paying spot market rates at all today. And even if they do go up, we still have some of our contracts that will save us some money. And you really -- because we turn our inventory just over 2 times a year, you really wouldn't see those retail increases come until probably later Q3 and Q4. .

Our next question comes from the line of Molly Baum with Bank of America Merrill Lynch.

Robi had another earnings call this evening, but I wanted to follow up on ask question about the competitive dynamics, specifically as it relates to your EDLP strategy. So I'm curious how you feel about your price positioning at present. And specifically, as it relates to kind of the good categories and your breadth of opening price points. And I guess the last 1 on that piece, if you're still seeing relative elasticity from any price reductions.

This is Tom. We still feel good about our price spread versus the competition at the good level. We mainly compete with the home improvement centers. When we look apples-for-apples and features for features and line them up, we still feel like we are in a good position versus the competitors. So it’s a moving target. Things go up and things go down. We pay attention to that, just like I’m sure they do. And – but I feel good about kind of how we compete within the category against them. As we mentioned on previous calls, we’ve seen good reactions to adjusting price for products that are specific for Pros, so particularly in our installation materials we’ve seen benefit as we become more aggressive in that department to try to lower Pro to give us more of their wallet. So we’ll continue to put pilot with that and continue to move that within that department. And as looking at our results and should is paying some dividends.

Our last question will come from the line of Justin Kleber with Baird.

Just a clarification on the quarter-to-date comp. Does that include a drag from the hurricanes and store closures? Or has that headwind been offset by some early demand creation in those markets? And I guess, even more directly, does your implied 4Q guide include any lift from initial hurricane rebuild .

Justin, thanks for the question. This is Bryan. So our quarter to date, just to remind, it was down 4.2%. That is kind of neutral from storm impacts. So we did have a little bit of headwinds early on in the quarter, obviously, when the storms hit, it's kind of neutralized that throughout that as Tom and Trevor have mentioned that we've seen a little bit of business pickup. It's just too hard to tell right now, so it's not implied within our guidance is any sort of material pickup within that.

Coming of the release, like the storms came, and then people have to clean up so that there is a drag during a time, but as we've seen over since that's passed, things are better, but we'll see. We don't know for sure what the impact would be. . So I appreciate everyone joining us on the call. So we look forward to updating you on the next call. Thank you.

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.