Greeting, ladies and gentlemen, and welcome to Floor & Decor's First Quarter of 2022 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Mr. Wayne Hood, Vice President of Investor Relations.

Thank you, operator, and good afternoon, everyone. Joining me on our first 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 measures 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. Let me now turn the call over to Tom.

Thank you, Wayne, and everyone for joining us on our fiscal 2022 first quarter earnings conference call. During today's call, I will discuss some of the highlights of our 2022 first quarter earnings. Trevor will then review our financial performance in more detail and discuss how we are thinking about the remainder of 2022. We will then open the call for your questions. We enter fiscal 2022 with good momentum in our business and are pleased to deliver first quarter sales and earnings that exceeded expectations, especially considering lapping record sales and earnings last year. We are proud that our store, commercial and support teams continue to successfully execute our growth strategies in a dynamic and challenging industry-wide operating environment. We believe our competitive moat from a product, price, and access to inventory standpoint has never been stronger, giving us added confidence in our ability to continue to grow our market share despite a wide range of macroeconomic challenges. Moreover, we are happy that our investments in associate wages and training resulted in better staffing, lower turnover, and a 100 basis point sequential increase in our composite customer service score. Investing in our associates is core to our culture and success. Collectively, these efforts contributed to record fiscal 2022 first quarter sales. Total sales increased 31.5% to $1 billion, and comparable store sales grew 14.3% from last year, exceeding expectations. Fiscal 2022 adjusted first quarter earnings per share declined 1.5% to $0.67 from the previous year's record earnings of $0.68 per share, also exceeding our expectations. Let me turn my comments to our new store openings. During the first quarter of fiscal 2022, we opened six new warehouse format stores compared to seven stores during the same period last year. We opened one store in January, two stores in February, and three stores in March, ending the first quarter of 2022 with 166 warehouse format stores in 34 states. We are excited to have opened our first store in Portland, Oregon, market in the first quarter of 2022 and are pleased with its early performance. Additionally, we are delighted with the strong acceptance of our newest store on Long Island in Garden City, New York. We remain on plan to open nine stores in the second quarter and 32 total warehouse format stores in fiscal 2022. We evaluate each lease as they come up for renewal and as such, we plan to close our South Lake store in Atlanta in the second quarter of fiscal 2022. This store was the second store opened by Floor & Decor, and we intend to reposition the store to an expected better location in 2023. The net store openings would bring our total warehouse format store count to 191 stores at the end of fiscal 2022. As discussed at our March Investor Day meeting, we forecast a path towards operating at least 500 warehouse format stores over time. In time, we will only be 38% built out by the end of fiscal 2022. Moreover, 58% of our warehouse stores have been opened after 2016 with an average storage of just 2.3 years for this group of stores. Collectively, we believe these stores will continue to move up their sales maturity curve and support our longer-term comparable store sales growth target of mid to high single-digit growth. In the first quarter of fiscal 2022, we opened three design studios, including February openings in Miami, Florida, and Houston, Texas. In March, we opened at Tysons Corner, Virginia. We now operate five design studios and have plans to open one additional design studio in Atlanta during the second half of fiscal 2022. Let me now discuss in more detail our comparable store sales. First quarter demand for hard surface flooring remains strong, particularly among professionals, with broad-based strength across most merchandise categories and all store classes. We are particularly pleased with the sales performance of some of our most mature stores where many had their strongest sales weeks ever in the quarter. We experienced double-digit comparable store sales growth in all divisions, led by the south. Our comparable store sales increased 11.5% in January, 23.5% in February, and 10.1% in March, bringing the first quarter growth to 14.3%. As a reminder, last year's comparable store sales increased 30.1% in January, 19.2% in February, and 41.3% in March. As we look to the second quarter of fiscal 2022, our April comparable store sales increased 9.9% and are up 9.7% month-to-date in May, in line with our expectations as we lap our most difficult comparisons. The first quarter comparable store sales increase of 14.3% was driven by a 16.7% increase in our average ticket. As expected, the increase in the average ticket is mainly due to retail price increases to mitigate cost increases, continuing strong sales in laminate and vinyl and the ongoing customer preference towards our better and best price points across all departments. Our first quarter average ticket also benefited from an increase in the sales penetration rate from our designer-led initiatives and e-commerce, both of which have an average ticket above the company average. First quarter 2022 comparable store transactions declined 2.1% from last year, which was sequentially lower than the 0.7% decline in the fourth quarter of fiscal 2021. First quarter comparable store sales among professionals continue to grow faster than our homeowner sales as we successfully executed a holistic Pro strategy that leans into relationship building and growing our wallet share. Professionals accounted for 33.1% of our sales in the first quarter of 2022. We are pleased that the top 10% of our professionals shop with us an average of 11 times in the first quarter, and their average spend was up 25% over last year, validating the strength of our growing brand equity. We continue to believe our in-stock job block quantities are a clear competitive advantage during the current disruptions in the global supply chain. Let me turn to growth from our e-commerce business. The investments we are making towards improving our web experience by focusing on product content and conversion are working. First quarter e-commerce sales increased 46% from last year and accounted for 17.7% of sales compared with 15.4% in the same period of the previous year and 16.4% in the fourth quarter of 2021. We are pleased with traffic to our website and double-digit conversion growth on both desktop and mobile devices. As we look ahead, we'll continue to optimize our customers’ digital experience and focus on product and inspirational content. Let me now discuss the progress we are making with design services. We are focused on building a consistent, high-touch, best-in-class, and seamless design service experience for our homeowners and professional customers in our stores. We find that not only is our average ticket and gross margin higher when a designer is involved, but our customer experience score is materially higher. So we have been doubling down on design by investing in designers, and we have begun testing an enhanced organizational structure that we believe will improve our ability to attract and retain high-caliber designers by providing them with clear career path opportunities. We are pleased that the focused attention and investments we are making in design contributed to a marked improvement in designer turnover in the first quarter of 2022 and the company's highest quarterly appointment penetration rate. We are in the early stages of benefiting from these initiatives and are excited about building awareness and familiarity with our design services. Let me turn my comments to our progress in commercial, which includes Spartan Surfaces and our regional account managers or RAMs that work with our stores. As a reminder, Spartan Services targets 60% of our commercial addressable market by focusing on architecture and design firms that have large projects with hard product specifications and long lead times. By comparison, our regional account managers focus on 40% of their commercial market where projects generally have soft product specifications or no product specifications. We are successfully integrating critical functional areas with Spartan Surfaces and implementing strategies to accelerate growth in 2022 and beyond. To that end, we acquired Wisconsin-based distributor KRS Incorporated in February of 2022. While KRS is small and not material to our results, they are a leader in commercial hard surface flooring in Wisconsin and are an example of how we can expand nationally. When we find the right opportunities and partners, we remain excited about Spartan's growth prospects and are pleased that their first quarter 2022 sales and earnings results exceeded our expectations following a strong 2021. As we look ahead, we are encouraged to see that AIA's Architecture Billings Index for March increased to 58 from a score of 51.3 in February, implying continued growth in billings and commercial flooring demand. We are pleased that first quarter sales from our RAMs increased 88% year-over-year. We are continuing to build out our regional account managers with the addition of seven RAMs in the first quarter of fiscal 2022, towards our plan to onboard 16 RAMs in 2022. Let me update you about how we are navigating constraints in the global supply chain. As we assess U.S. port congestion and its impact on our supply chain costs and distribution capability to our stores, we continue to see that the ports of Los Angeles and Long Beach remain our most significant challenge. However, we continue to divert through other ports and increase our dry capacity to minimize this impact. Congestion in the ports of Los Angeles and Long Beach has taken a step backward in recent weeks as more ships leave Asia following the Lunar New Year. We are closely monitoring this trend and the impact of COVID-19 lockdowns in Shanghai, China. But at this point, it is not having a greater than expected net effect on our business. We are also monitoring labor contract negotiations between West Coast ports and the International Longshoreman and Warehouse Union that expires July 1. We believe it is likely there could be a work slowdown or slowdown measures put in place during contract negotiations. As we discussed at our March Investor Day meeting, we are planning on higher ocean freight costs throughout 2022. At this juncture, we have no major port concerns from our Houston, Savannah, or Baltimore distribution centers. Before turning the call over to Trevor, I want to thank all of our Floor & Decor associates for their collective hard work in our stores, distribution centers, and store support centers to serve our customers. Together, we continue to prove to be an agile, resilient, and resourceful company. I'll now turn the call over to Trevor to discuss in more detail our fiscal 2022 first quarter earnings results.

Thank you, Tom. We are pleased to deliver fiscal 2022 first quarter total sales of $1 billion, comparable store sales growth of 14.3%, and earnings that exceeded our expectations. In dollars, our first quarter sales of $1 billion was approximately equal to our full year sales in fiscal 2016, the year before we went public. We are excited to be on track to deliver our 14th consecutive year of comparable store sales growth in 2022. This growth is a fantastic accomplishment considering last year’s very strong results. Let me now discuss some of the changes among the significant line items in our fiscal 2022 first quarter income statement, balance sheet, and statement of cash flow. Our first quarter gross profit increased 21.1% from last year, driven by a 31.5% increase in total sales. The first quarter gross margin rate decreased 340 basis points to 39.7% from 43.1% last year, primarily due to higher supply chain and freight costs and last year’s strong 60 basis point increase. The gross margin rate was better than our mid-39% expectation shared on our last call and above the 38.8% we reported in the fourth quarter of 2021. I want to acknowledge the thoughtful hard work by all of our teams to manage our gross margin during this inflationary time with substantial supply chain complexity and cost increases. Our teams did a remarkable job through pricing actions and other margin driving initiatives. First quarter selling and store operating expenses increased 31.4% from the same period last year and was flat as a percentage of sales at 24.3% year-over-year, modestly better than expected. The increasing costs were primarily attributable to 26 new warehouse format stores and three new design studios opened since April 1, 2021, and additional staffing and operating expenses aligned with our strong sales growth. Comparable store selling and store operating expenses as a percentage of comparable store sales decreased approximately 60 basis points. The decrease primarily reflects leveraging our advertising and occupancy costs from the 14.3% growth in comparable store sales. First quarter general and administrative expenses increased 24.1% and leveraged 30 basis points to 5.3% from 5.6% last year due to lower year-over-year incentive compensation. Reopening expenses during the 13 weeks ended March 31, 2022, increased $2.9 million or 42.1% compared to the prior year quarter. The increase primarily results from an increase in the number of stores that we either opened or planned to open compared to the prior year period. Moving on to our profitability. First quarter adjusted EBITDA grew 6.8%, trailing our 31.5% growth in total sales due to a 300 basis points decline in EBITDA margin rate to 13.2% from last year’s record 16.2%. We are lapping a 300 basis point increase in last year’s EBITDA margin rate from significant improvement in gross margin rate and expense leverage in 2021. First quarter GAAP net income decreased 6.4% to $71 million from $75.8 million in the same period last year. GAAP diluted earnings per share decreased 7% to $0.66 from $0.71 in the same period last year. First quarter non-GAAP adjusted net income decreased 1.5% to $71.6 million from $72.7 million in the same period last year. First quarter adjusted earnings per share declined 1.5% to $0.67 from the previous year’s record earnings of $0.68 per share, exceeding our expectations. We ended the first quarter with 107,500,000 diluted weighted average shares outstanding compared with 107,100,000 last year. A complete reconciliation of our GAAP to non-GAAP earnings can be found in today’s earnings press release. Turning to our balance sheet and cash flow. Our inventory was $1.1 billion, up $542 million or 89% from last year. The increase was driven by making investments to improve our in-stock inventory, inflation, and the opening of 26 new stores since the first quarter of last year. Our first quarter ending inventory was only up 3% over the first quarter of 2020. Comparing our ending inventory at the end of the first quarter of 2020 to the first quarter of 2022, the two-year compounded annual growth rate was in line with our sales growth over the same period. Net cash used in operating activities was a negative $3.3 million for the 13 weeks ended March 31, 2022, compared with net cash provided by operating activities of $101 million for the 13 weeks ended April 1, 2021. The decrease in net cash provided by operating activities was primarily the result of a net increase in inventory and other working capital line items to support our growth. Let me now turn my comments to how we’re thinking about the macroeconomic environment. We continue to believe important long-term secular trends support growth and home improvement spending. These trends are well documented and include the inventory of new and existing home sales at the lowest level in recent recorded history, aging housing stock where 80% of the homes are 20-plus years old and are in need of investment for repair, substantial home equity, remote work trends, and the growing ranks of millennials entering their prime home-buying years. That said, in the short run, the Federal Reserve is now on a path to expeditiously raise interest rates, shrinking its balance sheet and tightening financial conditions to bring inflation under control in order to fulfill its price stability goal. The effective outcome of these policy changes means that as interest rates rise, this likely results in a cooling of existing home sales, home price appreciation, home equity values, and potentially slower spending rates that we must consider. Partially offsetting these headwinds is tremendous home equity, high wages, and low unemployment, as well as strong consumer and business balance sheets, which will allow them to make investments as they deem necessary. Considering these factors and the potential impact on our business, we continue to expect our 2022 comparable store sales growth will be within the range of 10.5% to 13%, although coming to the high end of the sales and earnings range could be more challenging than previously contemplated due to the recent changes in the macroeconomic and geopolitical environment, such as rising interest rates and mortgage rates, continued declines in existing home sales, record high inflation, and a still difficult supply chain. It’s still early in the year, but we want to be prudent in assessing potential outcomes. Our sales guidance contemplates continued declines in comparable store transactions throughout the rest of fiscal 2022. Our fourth quarter 2021 comparable store transactions declined 0.7%. Our first quarter 2022 comparable store transactions declined 2.1%. March 2022 was down 4.4% and second quarter-to-date transactions have decreased 6.7% in line with our expectations as we are currently lapping some of our strongest results from last year. While transactions are expected to decrease for the remainder of 2022, our comparable store sales range remains unchanged as it reflects the ongoing preference for our better and best products, Floor & Decor initiatives, and price increases to mitigate product and supply chain cost pressures. We believe our prior fiscal 2022 earnings per share guidance range is still achievable, largely driven by our sales growth and increasing our gross margin rate to approach 41% as we exit 2022. Our differentiated business model and value proposition are stronger than ever, giving us confidence that we will continue to grow our market share in any macroeconomic environment. We are reaffirming our fiscal 2022 sales and earnings outlook range we provided at the beginning of the year and included in today’s press release. In closing, our entire leadership team is encouraged by the strong start to fiscal 2022, and we are very excited about the growth that still lies in front of us. We would like to personally thank all of our associates and vendor partners for their great work they’re doing every day to serve our customers.

Thank you very much, sir. The first question comes from Steve Forbes of Guggenheim.

Good evening. Tom, Trevor, maybe just take a step back and just focus on the unit growth sort of plans, longer-term. Curious how the change in the macro is impacting? How you guys are approaching the real estate pipeline. Should we still expect you to sort of plan for that 20% growth in 2023? Or are you taking a more cautious approach to building the pipeline here?

No change in our plans on unit growth. Our pipeline is robust. New stores are performing well. This is an opportunity to take market share. And so no, the short answer, there’s not a change in our strategy in 20% unit.

The only thing I’d add to it is we’re getting our cash back in 2.5 to three years. It’s early in the year, but the class of 2022 appears to be a really strong class of stores. We’re making close to probably over $3 million in full volume first year, that number gets close to $6 million by year five. So even if things were to decelerate some, we’re not seeing that today. We’re not sure that’s going to happen, but even if they were to decelerate from where we’re today, we’re going to get a return on capital that’s double our cost of capital. And so we still think that’s going to be a very prudent continued investment for us.

And maybe a follow-up on the store model and really the predictability of year one sales. Curious if you could provide some color on how the sales build within sort of a new market? Where those sales are coming from today versus maybe three or five years ago? Are you still sort of creating local market share demand or are you pulling more from independents? Or how do you sort of think about the predictability of that year one sales build?

I’ll start, Trevor can jump in. I would say a couple of things. As we’ve opened more stores, our ability to predict has gotten better. The more stores we get in our base, the better our analytics are in predicting what the first year sales are going to be. I don’t think there’s too much change from the standpoint historically. We feel like we take a third out of the home improvement center market. We take a little over a third out of the independents, and then we tend to grow the market, because people will take on larger jobs when they come into our stores or do more rooms when they come into our stores. So we see some increased demand. I don’t think that’s changed a whole lot. I don’t have any data that says different stores have – those last few years have been terrific. I think a couple of things: our real estate team has done a better job over the last three years of getting better locations. Our sites are more visible than they’ve historically been, and that’s helped. And I think as we’ve grown the base over the last 10 years, our awareness is better. So when we open a store, particularly in our new market, it does a lot of times better than we anticipated, and pros end up coming to the stores more often because they become more convenient.

Yes. And the only thing I would add is there are really two main drivers that allow us to see what stores are going to do or predict what a store is going to do. First, in an existing market, we’ve got really good stores around there. So, we’re opening stores in Atlanta and Texas and Florida and Arizona and California. As we said at the Analyst Day, stores start at kind of $15 million to $17 million and make at least $2.5 million in full EBITDA. When we open in those existing markets, the stores are materially higher than that. And so we have super good confidence and knowledge of what the stores are going to do in existing markets. When we go to new markets, it’s really determined by three things: it’s density of population, it’s household value, and household income. And since we have fairly good knowledge of what that is, we have a good real estate team, a good finance team, and good consulting partners that help us make those decisions. We’re fairly good at predicting those things as well, but it’s really those three demographic factors that will dictate what new stores perform at. As a class, we’ve been really good at forecasting and coming in at those numbers.

Thank you.

Thank you. The next question comes from Zack Fadem of Wells Fargo.

Good afternoon. Could you talk a bit more about your pricing actions in Q1 versus Q4? Where you sit today versus the full year plan? And is there any way to quantify the level of share gains you typically see as your price gaps widen versus peers?

A lot to that question. I’ll do my best to start and I guess Trevor can weigh in and maybe Ersan if needed. So, we’ve continued, as we said, we took modest price increases as we were exiting 2021. In the first quarter, we continued to take price increases to offset increased supply chain costs. And so we’re finding our ability to pass on price is good. The way we look at the market, we pay really close attention to our competition, both independents and big box, and our spread, we feel is in a really good place while taking price. So we’ve been able to do that and it’s working; it’s not the sole piece of what’s driving our ticket. We’ve got lots of initiatives that are driving tickets. We see customers stepping into better and best. We see our design penetration in e-commerce, which drives average tickets, helping that as well. And we’re seeing more square footage per transaction in our stores, so all of those things are benefiting the ticket at the same time.

Got it.

Sorry. I just want – Zack, when you look at our – when you get a chance to look at our margin, it came in a little bit better than we were planning for. We said kind of a mid-39; I think we came in maybe 20 basis points ahead of that. And the retail increases we took in Q4 relative to – or Q1 relative to Q4 were actually lower. So the modest increase was actually less than modest or lower; maybe there’s a better way to say that than the increases we took. So we feel really good about our pricing relative to what we see in the industry. You guys see what Mohawk and Shaw and a lot of big domestic manufacturers are talking about retail increases. So the team’s done a fantastic job managing it. It’s still a very difficult supply chain environment with lots of moving parts; very volatile, but so far, so good.

Got it. That’s helpful. And then, Trevor, as you think about the plan for the rest of the year, you outlined clear positives today around high project demand, healthy consumer balance sheets. But as you square that with the looming headwinds around rising mortgage rates and potentially slowing housing turnover, I’m curious to what extent you believe these potential headwinds need to materialize in order to impact the second half outlook?

We spent more time analyzing the forecast this year than I think at any time in my 11 years. And I specifically called that out in my commentary about what we’re seeing in decelerated transaction trends. We were down 2% in the second quarter and then we are down almost 7% quarter-to-date. Those trends have gotten a little bit better in May. And so we’re planning on those decelerating trends to continue every quarter for the rest of the year. So, we’re not putting our heads in the sand. We are absolutely assuming that it’s going to be a bit of a more difficult environment. We’re not economists; we don’t know. But we certainly pay attention to things that affect our business. But our modeling tells us, based on what we’re seeing today with professionals, with design, with other centric initiatives, with our commercial sales, along with the retail increases that we feel we’re going to have to pass along because of the higher costs we’re incurring, will more than offset that. And we see our comps for this quarter probably close to what we’re doing now. Maybe we think this is probably the trough. And then as we get back into Q3 and Q4, we’d see our comps going up a little bit. Again, primarily because a lot of the higher costs we’ll incur will be in the back half of the year. So that’s a long answer. But so far, steady as she goes. We were pleased to have exceeded our expectations in January, February, March, and April, which came in line with our plans. So, we’ve been doing pretty good so far, thinking about the forecast neither coming in at or above the forecast.

Yes. I think the only thing I’d add to the back half conversation is, as I mentioned in my prepared comments, 58% of our stores are less than five years old, so they’re still maturing. And that historically has benefited our comparable sales line. And I – we mention our moat often, but I do think the moat is pretty significant. I think our ability to take market share is at a faster rate. I think we’ve been taking share at a faster rate since this global supply chain crisis started happening. I do think our in-stocks are in a terrific position and continue to improve. And I just think our merchants have done a fabulous job and are trend-right with product. We’re just really far ahead of the trends, and I think that’s helping us gain share at a quicker rate, which should help in the back half as well.

Very helpful. Appreciate the time.

Thank you. The next question comes from Michael Lasser of UBS.

Good evening. Thanks a lot for taking my question. Trevor, in your prepared remarks, you mentioned that it might be more difficult to hit the high end of your comp range for this year. What is motivating you to say that? Is it the 6% to 7% traffic decline that you’ve experienced thus far this quarter? Is it the five consecutive quarters – for five consecutive months of declines in total housing turnover? Is it the 30-year fixed rate mortgage that’s now at 5.5%? I assume you’re going to say all of the above, but is there one that’s motivating you to say more than the others?

I think that’s a good summary, Michael. We had our last call on the day that Russia invaded Ukraine. So energy costs have gone up. The Fed has been even clearer about interest rates rising in mortgage rates. We all saw today that the mortgage rates are at 5.3%. If you just take a simple mortgage, that takes your – $350,000 mortgage, that takes your payments to $2,000 versus $1,500. That’s $6,000 a year that’s coming out of middle-income Americas’ cost. So those macroeconomic factors and geopolitical factors have just sort of gotten tougher since we had the last call. We’re performing great to date. Again, we’re not economists, but we just think there’s enough macro commentary around things that could affect our business that’s giving us that commentary.

Okay. My follow-up question is, in that case, how low can your comps be this year and you still hit the low end of your EPS guidance?

I think if you look – I mean we said 10.5% is what we had in the guidance. I think if we see things start to trend below that – we relooked at this recently. Historically, we’d say 60% of our costs are more fixed in nature and more 40%. We’ve been – over the years have been able to lower that to kind of 55%, 45%. But if you get in a really difficult environment, we could even go after some of our traditionally fixed costs. So we would obviously be very quick to look at costs. There’s a fairly large incentive compensation payment that is mathematical, that goes to our SG&A, both store and corporate. And so if we saw trends that were a lot off of where we’re seeing, we would obviously be much more aggressive in lowering our costs. So it’s that simple. I think that 10.5% is what would tell us that we would be able to hit the low end of the EPS. We’re not seeing that today. If we got below that number, we would start to get more aggressive on the cost side of our business.

Understood. Thank you very much and good luck.

Thank you. The next question comes from Chuck Grom from Gordon Haskett.

Hey, thanks a lot guys. Good afternoon. Great results. There’s been some evidence across retail the past month of some demand destruction on price increases. So, I was curious – and I think the answer is no, but I want to see if you can elaborate, if you’ve seen any of that in your business over the past couple of months?

One thing I’d say, I mean our business has decelerated, but it was planned for. We’re up against really big numbers from last year. When you look at March and April, there was a pretty big benefit we got because of the Texas freeze that hit Texas and some of the surrounding stores. So our hardest dollar comparisons are right now. And as we said in the call, and you guys saw in the results, we actually exceeded our sales and earnings expectations in April which was essentially at plan. So, we’re not seeing it today. We’re coming in at or above our plans through the first four months and one week of the year.

Yes. And I’d say, I go back to what I said earlier; just from a pricing – one thing I didn’t mention, which I’ll get to, but just from the way we look at price and the way we compare ourselves across the people that we compete with, our spread is consistent with what it’s historically been. So, you feel good about that. And then, secondarily, I pay attention to competitive markdowns. We’re actually running less competitive dollar markdowns than we did a year ago in a rising price environment. So, I feel good about our price. And I don’t – I’m in the stores all the time, and we don’t hear anecdotally. I think consumers have expected prices to increase, and they’re accepting of that; that’s not determining sales at this point.

The other thing – this is probably worth mentioning one more thing. We called out our inventory. Our supply chain team came to us well over a year ago now and said, hey, we need to be aggressive in getting inventory in earlier. We mentioned on each of the last three calls that we were bringing in Chinese New Year orders early. And so we find ourselves in a position where our in-stock levels, even though they’re not maybe where we’d like them, they’re much better than the competition. And so I think that’s another thing that’s helping our business is the fact that we’ve got more inventory than – our inventory team, our merchandising team, our supply chain team, to come at a cost. But they’ve done a good job of keeping us in stock relative to what we’re seeing in the competition. So, I think that’s another thing that’s helping our business is the fact that we’ve got inventory and a lot of others do not.

That’s right.

Okay. Great. And then my follow-up, a little bit unrelated. Given that the commercial business is growing and becoming a bigger piece of the business, I was wondering how cyclical it’s been during past rising rate cycles.

I think for us, we’re fairly new into it. There was such a trough when COVID hit in a lot of those commercial areas that there’s just a lot of deferred maintenance that needs to be done. You guys probably heard Tom talk about the architectural index; it’s fairly gross. When we look at our backlog, both on our commercial business and Spartan’s commercial business, it looks very good. So hard to think about 2023 at this point, but everything we can see this year is because it’s longer lead times. It’s not like a consumer business where the consumer may or may not show up; these are contracts and POs. Everything we’re seeing today is great. I think Tom mentioned Spartan had just a fantastic Q1 as well as the RAMs did. So, it feels like 2022 is going to be a strong year for commercial for us.

Okay, great. Thanks.

Thank you. The next question comes from Chris Horvers of JPMorgan.

Thanks and good evening guys. So, I guess as we think about just in the very near term, if – it sounds like there’s really nothing that’s happening in the business that’s outside of your expectations from trade down or trade up or transaction growth or declines in pricing. So, if we held the three-year CAGR from April, that would suggest an 11% comp in the second quarter. So following up on an earlier question, is that how we should think about the business? And then how do we think about when those price increases actually come through? Because, I mean, theoretically, if nothing else changes, that would lead to CAGR acceleration?

The only – I think you’re close on current quarter. I mean, our modeling suggests that if the current trends continue, we’d actually be really close to what we called out roughly 10% today. So, I’m not sure we’d be at 11%, but maybe. And then as we get to the back part of the year, because we don’t look at comps as much as we look at the raw volume and the trends we’re running at today, we think that we’re at the trough in Q2, and comps would be closer to what we did in Q1 as you think about Q3 and Q4. And it’s hard to look at three-year trends. But because COVID made it so unique, if you go back and look at three years and look at our Q1 three-year stack, and then you look at our Q3 and our Q4 three-year stack, they’re going to be fairly commensurate, and that’s been consistent with our business. We don’t have a seasonal business; we don’t have a promotional business. And so that might be another way to think about it is look at the three-year stack, and our modeling would suggest that it should be around where we are in Q1.

Got it. Yes, probably just stack versus CAGR. And then on the gross margin, what drove the upside? I know you had some delays, the demurrage that had impacted you in early in the fourth quarter and probably earlier in the year. Is that all gone? And so how does that change the calculus of how the gross margin looks and in terms of where you can get to? I think on the last call, you talked about up to or maybe slightly better than that 41% on exit.

I think the 20 basis points we beat in Q1 – there was a lot of demerage and detention, good guys. That’s – we’re better than we were planning. It’s definitely not gone. We are still taking on lots of costs and not so much in detention, but in demerge, we’re taking on lots of costs. I think as we think about the rest of the year, they’re currently – and again, it’s very volatile. We said this six months ago and we ended up not being true. But the current view of the world is that costs are coming down a bit. The spot markets have come down. Again, we’re managing the demerge and the detention pieces better. So that’s probably where the upside could be as well as the retail increases to date. Again, we feel really good about our competitive position. So yes, I would say demerged retention, current spot markets, and mix continue. Could be an opportunity for us. And so that’s – if we were to have upside, that’s where it would come from.

Yes. The only thing I’d add, Trevor, is that we are – our better and best categories are still our best-comping categories. So they’re still – and that’s a benefit to margin, and that’s been helping. And then our designer penetration is increasing, that’s also a benefit to margin. So those are things that are within our control and then the consumer is gravitating towards.

That’s great. Thank you very much.

Thank you. The next question comes from Simeon Gutman of Morgan Stanley.

Hi, this is Jackie Sussman on for Simeon. Just back on the price elasticity question, are you guys seeing anything on the high or low end consumer with price elasticity?

I mean, our best-performing categories are better and best categories, so customers are still coming in and stepping up to the highest prices that we have. I think in our hard surface floor, and I do believe the trend is critically important, people don’t do these jobs all the time. So when they come in, I think they’re going to buy what they like, and it tends to be with us; it’s our better and best. So I’m not seeing much of a shift; consumers continue to spend a lot.

Got you. And just a quick follow-up question. Can you talk a little bit about the backlog or pipeline of projects?

It's mostly a retail business. So we don't have a ton of backlog in our business. The vast majority of what we sell is a residential remodel. The commercial business is expected to be up fairly large from a small base, but it's still not overly significant for us today. So, we feel good about the backlog in the commercial business. But again, that's relatively small compared to the over $4 billion in sales we’ll do this year. From a consumer perspective and the Pro perspective, it’s still strong.

Yes. I mean the only thing we can go by is we don't have data from the Pros that shop in our stores every day beyond what they tell us. And then it’s – their backlog is still robust. They’re out in markets. It’s – they’re weeks away from getting jobs done, and they've got a good pipeline from what they tell us, and we ask that question across the country. So we feel like the backlog is pretty good.

Thank you. The next question comes from Karen Short of Barclays.

This is actually Zeyn Burak on for Karen. Thanks for taking our questions. Are you able to parse out how much of your business comes from replacement within the context of repair and remodeling versus what you would characterize as more discretionary purchases? And maybe somewhat related to that, talk about the resiliency of the model in a softer macro in light of the more discretionary nature of the business presumably relative to the broader home improvement space and housing potentially continuing to slow down from here?

If I understood the first part of the question, the vast majority of what we sell is a residential remodel. How much of that is replacement versus trend versus maintenance? I don't think we have a good – I don't think we know that. And I will tell you, as far as cycles, we are the low-price leader. My experience here and in other retailers is that the better operator and the low-price leader takes a lot more market share in downtime, especially when you have the inventory like we do. And we had double-digit comps in 2009 when the overall housing was pretty tough. Then we saw a bit of a cycle where mortgage rates went up very fast in late 2017 and early 2018. We did see a deceleration in our business between Q1 and Q2 of 2018. I think it's a lot different now because of the home equity and the wealth that people have. But even then, we meaningfully outperformed the market. Those are the only two cycles that I can speak to while I’ve been here, but I do believe we're a much stronger and better company. If price becomes more important, the low-price leader usually does a lot better.

Thank you. The next question comes from Greg Melich of Evercore.

Thanks. I wanted to follow up on the mix and pricing impact. It sounds like mix, design center, etc., was probably a majority of the ticket growth year-on-year. Would that be fair?

I think, yes, the biggest part of our growth is definitely with – well, it's a combination of all. It's better and best, it's price, it's – e-commerce ticket's a lot higher, designer ticket's higher, the Pro ticket's higher. All those things are working in across our categories.

So I guess what I'm trying to get at is if all those are tailwinds right now, I think you started to layer in pricing in the back half of last year. If we just pick a number, let's say pricing was 5%, should we expect that to accelerate on a year-over-year basis in the comp in the next couple of quarters? Or is that something that you expect to sort of roll in and roll off year-over-year?

I think as we think about the back half of the year, we're expecting more retail because we're expecting higher supply chain costs. Our international container costs, as you guys know, were even in the spot market's down in order to lock up capacity with us and others adding more capacity. It wasn't that long ago we were paying $1,500 for a container. Now we're paying a lot more than that now. So because those costs will come in the back part of the year, that's when we see probably some more of the retail increases being higher in the back half of 2022, relative to what we've seen to date.

And could you update us on what percentage of your sales are imported, either from China or from Europe, given the supply chain challenges in the world?

Yes. I think we’re – Asia's... 25.

Well, that's China. But overall, Asia is a higher percentage than that. It's probably close to 40%. I think Europe is less than 30%.

Got it. Thanks and good luck guys.

Thank you. The next question comes from Seth Basham of Wedbush.

Hey, thanks a lot and good evening. Just to clarify, relative to when you last spoke to us in February, how much of changing some comp store transactions and average ticket for 2022 in your comp guidance now?

To date, we've been better. Our sales came in better than we had thought. Our comps were a little bit better. The trends we're on right now are essentially where we were I think as we think about the rest of the year, though. What’s changed is we are expecting a continued deceleration in transactions. I'm not sure we knew that when we originally gave the guidance. So we're assuming a slightly more – a slightly higher deceleration in transactions, but we're also planning on a slightly higher increase in retailers to more than offset that. So the overall comp ends up at the same place.

Is it a couple hundred basis points in each direction offsetting each other of those parts?

I think it changes a little bit by quarter. We think Q2 is probably the biggest deceleration we see in transactions. Then it becomes a lot more modest at the back part of the year. Again, we're not economists. I think the big driver on that is what happens and how quickly the Fed reacts and does that really impact consumer confidence and spending. But our current view is that the deceleration will be the highest in Q2, and then you'll see a much more modest deceleration as you get to the back half of the year, is how we're currently thinking about it.

Got it. Thank you very much.

Thank you. The next question comes from Justin Kleber of Baird.

Yes, hi guys. Justin Kleber from Baird. Can you hear me?

Yes.

Yes. So I wanted to ask about operating leverage. You had mentioned the 60 basis points of leverage on comp store sales – or on comp stores. And I guess I would have thought on a 14 comp, you would have got more leverage. Is that just the fact of stores last year were running lean from a staffing perspective and you've recently obviously made wage investments? Or is there anything else we should be aware of from a timing standpoint?

Two things, I guess, I’d call out. Last year, we started the year with only 11% new stores, right? Because we really ratcheted down our store growth in the year of COVID when we ended with 11% new stores. We’re now up to 20%. Now that’s the total, not just the comping stores. So we’ve got a lot more newer stores, and our SG&A in our newer stores runs at 50% higher cost than our more mature stores. Just so – we took a pause that one year for COVID, and as you started Q1 of 2021, you’re going up versus 2022. You just got a lot more younger stores in the base. They have much higher SG&A. And then the second piece of that is, yes, we’re in an inflationary environment. Certainly, we’re – labor-wise, we and a lot of other retailers have talked about the investments we made. We made a fairly significant increase in raises in July of last year. We became a $15 minimum retailer in January of this year. It will take us a while to anniversary those two increases as well. Those are the big things.

He’s also right that the stores weren't – last year.

Yes, we were chasing staffing last year, and we're in a pretty good place now in staffing that we weren't for the last couple of years.

Okay. That's helpful. And then just unrelated on – I wanted to ask about tariffs as I believe the USTR reinstated certain exclusion on Chinese imports a month or so ago. It wasn't clear to me which categories were being excluded. Are you guys seeing any relief from that recent decision? And if so, are you flowing that to the bottom line? Or do you give that back to the consumer in the form of lower prices, similar to how you operated a few years ago? Thank you.

Looking at Justin, we're just – we're not aware of any changes that are impacting Chinese tariffs.

Hi Tom, it's Brian. There has been no change. We just keep on waiting for the – we hope that towards the end of the second quarter, there may be some relief. But right now, we're not looking for anything to change.

Thank you.

Okay, thanks.

Thank you. The next question comes from Chris Bottiglieri of BNP Paribas.

Hey guys. Thanks for taking the questions. Just trying to understand how much visibility you have into the DIYs of the business. Like typically, how long is the purchase cycle in this category from when you begin to track a customer versus they ultimately purchase? And I guess my question would be as you look at leads, are those trending similar to transactions? Or are you seeing any kind of different level of activity relative to negative transactions you've seen? Thank you.

Yes. I’d say we’re not really seeing any major trend shifts in samples or anything that would lead us to believe things are changing materially.

Got it. Okay. That's helpful. And then I just wanted to ask about inventory; unrelatedly. It sounds like you were maybe just catching up on some pent-up level of in-stocks from where you wanted to be that grew 10% quarter-on-quarter on a per store basis. Just want to get a perspective on how you think about inventory per store over the course of 2022, if you’re kind of planning is the shutdowns in China? Or how should we think of the turn of that metric looking forward?

We're definitely planning on increasing our inventory this year. Part of its inflation too, as we're taking on these costs, that's driving it up. As we exit the year, as good as our business has been, it would have been better had we had better in-stock. So yes, we’ve got a really good system and a fairly large team of people that think about where we need to improve our in-stocks. We've continued to make progress each quarter over the last four quarters. But there's still more work to do to improve our in-stock. So we would expect our – assuming we don't have any major issues with what's going on in Shanghai right now, in China, we would expect our inventories to continue to increase at a slightly faster rate than sales for the rest of the year. But that's going to be good because we're going to get in stocks in categories we know that we're lean in today.

Got it. Makes sense. Thank you.

Thank you. And our final question comes from the line of Joe Feldman of TAG.

Yes. Hey good afternoon guys. Thanks for taking my question. On the new stores, thanks for sharing the update of the numbers, but are you seeing any delays related to materials? If I recall, a lot of the stores were going to be back half weighted this year, but I'm just wondering if you're seeing any that might even slip to 2023? Just because I keep hearing about more material delays and permitting issues related to real estate out there. Thanks.

Certainly, there are challenges, but we don't anticipate having any problems getting our 20% unit growth. We had some problems at the end of last year with some fixturing coming out of China that was for our design studios. We had to delay our design studios, but that doesn't count in our 20% unit growth. So short answer is it's a more challenging environment than it's historically been, but we think we can navigate it.

Got it. That's great to hear. Thanks. And then just one other kind of unrelated question. You mentioned the training and the improved training you guys have done that's helping retain associates and drive better productivity. I probably should know this, but can you remind us some of the things that you have changed regarding the training that is helping to improve that?

So we make changes every year and enhancements every year to the way that we train our associates and the way that we train our managers. We've spent a lot of time – I would say we've over-indexed in training our managers on how to onboard associates. Our fastest turnover comes in the early part of an associate's tenure at Floor & Decor. It's a tough environment to work in. We sell heavy stuff. So we've done a pretty good job of spending time with our managers to ensure that they're really holding the associates' hand through the first three to six months of their onboarding. That seems to be, in combination with lots of other things, helping reduce our turnover. We're seeing improvement in our turnover rates, and we think that in combination with wages has been beneficial. As for product training, we've been good. We are good. We continue to change it and evolve it and make it better and better. We're never satisfied with how good it is, but there are just too many changes to list for a call like this.

Got it.

Thank you. I appreciate everyone's interest in our results, and I appreciate the questions. For our associates that are listening, we certainly appreciate everything that you're doing in these challenging times. But thank you for your interest, and we look forward to talking to you in the next quarter.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect your lines. Thank you for your participation.