Greetings, and welcome to the Floor & Decor Holdings, Inc. Fourth Quarter 2022 Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce to your host, Wayne Hood, Vice President of Investor Relations. Thank you, Wayne. You may begin.

Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's fourth quarter and fiscal '22 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 start, I want 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 our 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.

Thank you, Wayne, and everyone, for joining us on our fiscal 2022 fourth quarter earnings conference call. During today's call, Trevor and I will discuss some of the highlights of our fiscal 2022 fourth quarter earnings. Then Bryan will provide a more in-depth review of our fourth quarter performance and share our thoughts about fiscal 2023. We are pleased to announce that our 2022 fourth quarter adjusted diluted earnings per share increased by 45.5% to $0.64 from $0.44 last year, exceeding the $0.53 to $0.63 per share guidance range that we provided on our 2022 third quarter earnings conference call. Our full year 2022 adjusted diluted earnings per share increased by 13.1% to $2.76 from $2.44 in 2021. Notably, our full year 2022 adjusted diluted earnings per share are slightly above the low end of our guidance range of $2.75 to $3 per share that we provided at the beginning of fiscal 2022, which did not contemplate the economic and geopolitical headwinds we faced during the year that were unknown at the time. We are particularly pleased to achieve these financial results considering the challenging macroeconomic environment, including steep mortgage rate increases and moderating growth in home prices. These factors contributed to significant year-over-year declines in existing home sales in 2022, particularly in October, November and December when they declined 28.4%, 35.5% and 34%, respectively. Despite these significant headwinds, we continued to grow our market share by remaining agile, executing our key growth strategies and investing in initiatives that further widened our competitive moat. We continue to deliver on our gross margin rate recapture plans by executing our pricing strategies and from favorable supply chain costs, which contributed to our better-than-expected fourth quarter earnings results. Ocean freight rates have declined significantly due to lower global market demand and the easing of port congestion. In addition, we have seen material reductions in demurrage, tension and drayage costs and softening in domestic logistic rates. Collectively, we believe these will provide a tailwind to our gross margin rate in fiscal 2023 and 2024. These improving supply chain costs should enable us to strategically pass certain cost savings to our homeowner and Pro customers and continue to grow our market share as we move through fiscal 2023 and beyond. As we enter 2023, we intend to manage our stores in a way that reflects the current economic environment. That is to say we will further lean into capitalizing on our low prices, broad in-stock assortments and industry-leading customer service provided by our store associates. To further enhance our customer service, we introduced FIT teams or field installation teams to handle daily tasks, allowing sales associates more time to engage with customers. We completed the rollout of these teams to six key markets in the fourth quarter of 2022 and plan to have 12 markets with FIT teams at the end of 2023. We are proud of our best-in-class customer service and that we finished 2022 with our highest customer service scores. Our homeowners and Pros rely on us to provide them with a wealth of information and style inspiration at the lowest possible price. Before I turn the call over to Trevor, I want to touch on a couple of management and Board-related items. First, I'd like to remind everyone that in February of 2020, our Board of Directors authorized retention grants for our executives that were tied to three main goals: doubling our adjusted EBIT over a three year period, maintaining the prescribed return on invested capital and stock performance that exceeded our peer group. We are pleased to announce that we have successfully achieved these financial targets. We believe that aligning management's interest with long-term shareholder value creation should be the cornerstone of our executive compensation strategy. For that reason, our Board of Directors again approved equity retention grants for our executive team linked to achieving specific long-term financial goals and total shareholder return. We will provide more information on these grants in our upcoming proxy statement. Second, I'd like to turn everyone's attention to our press release today on the nomination of Melissa Kersey to join our Board. She's currently the Chief Human Resource Officer at Tractor Supply and previously held senior roles at McDonald's and Walmart. We believe Melissa's background will be valuable to our continued growth and that her nomination is consistent with our approach of adding diverse individuals with skills and experiences that will support our strategic growth objectives. Let me now turn the call over to Trevor to discuss our sales and some of our growth pillars.

Thanks, Tom. Before I get started, I would like to express my deepest appreciation to all of our associates and vendor partners for their invaluable contributions to our financial success in 2022. In my role as President, I'm spending more time in stores and gaining even more appreciation of the associates for their dedication and hard work that goes into achieving these results. Thank you for all your unwavering commitment to our company. Let me now discuss our fiscal 2022 fourth quarter and full year sales. Fourth quarter sales increased 14.6% to $1,048,100,000 from $914,300,000 last year. Approximately in line with the midpoint of our guidance provided during our fiscal 2022 third quarter earnings conference call. Our fiscal 2022 full year sales increased 24.2% to a record $4.3 billion, which represents a more than doubling of our sales over a three year period. Our fourth quarter comparable store sales growth was at the low end of our expectations, increasing 2.5% from the same period last year, including 5.6% in October, 1.3% in November and 0.6% in December. We estimate Hurricane Ian positively impacted our fourth quarter comparable store sales growth by approximately 100 basis points. The closed door effect from Winter Storm Elliott did not have a material impact on our comparable store sales growth for the quarter. During the fourth quarter, laminate and vinyl tile installation materials and adjacent categories were the strongest performing product categories, surpassing the company's overall average sales growth. Our fiscal 2022 full year comparable store sales increased by 9.2% from last year at the low end of our guidance of 9% to 10% growth provided on our fiscal 2022 third quarter earnings conference call. Our fiscal 2023 first quarter to-date comparable store sales are down 2.3% from the same period last year, which is in line with our expectations. I will now discuss the growth in our average ticket. Our fiscal 2022 fourth quarter comparable store sales were driven by 14.4% growth in average ticket compared with 19.5% in the third quarter of fiscal 2022. Our average ticket growth continues to benefit from an increase in retail prices to mitigate cost pressures and increase in sales penetration of laminate and vinyl and an increase in sales penetration from our higher ticket Pro, e-commerce and design-led initiatives. On the other hand, weakness in our higher average ticket natural products acted as a drag on our overall average ticket. Year-over-year, we continue to see ongoing customer preferences toward our better and best price points where we offer industry-leading innovation, trends and styles at the lowest price points. Turning to our transactions. The rapid increase in mortgage interest rates, significant declines in existing home sales and moderating growth in home prices caused us to experience a steady sequential decrease in our transactions in fiscal 2022 culminating in the fourth quarter comparable store sales transaction decline of 10.4% from last year. That said, the fourth quarter transaction decline was approximately in line with our expectations and our business model continues to be resilient. I will now discuss our new store pillar of growth. In the fourth quarter of 2022, we successfully opened 13 warehouse stores, including three in October and five in both November and December. This accomplishment allows us to achieve our goal of opening 32 warehouse stores in fiscal 2022 despite the challenges posed by industry-wide construction delays. At the end of fiscal 2022, we operated 191 warehouse stores and six design studios across 36 states and now have a presence in the top 25 MSAs in the United States. As previously discussed during our fiscal 2022 third quarter earnings conference call, we believe it is prudent to plan a range of 32 to 35 warehouse store openings in fiscal 2023 and for them to be primarily in existing markets and weighted towards the second half of the year. Awaiting the openings to the second half of 2023, we consider potential construction delays. In the first quarter of fiscal 2023, we intend to open four warehouse locations and are pleased that two have already opened in January and February. As we look beyond 2023 and into 2024, we expect construction delays to ease and anticipate a more balanced quarterly store opening cadence that will lead to more warehouse stores operating weeks. Let me turn our comments to our design studios. At this juncture, we now believe that we have sufficiently large and diverse group of design studios open that we can monitor and refine before accelerating growth further in this area. Turning to our Pro business. Our strategy to expand our market share among Pros continues to be successful. In the fourth quarter of 2022, our pro comparable store sales increased by 18.8% and transactions by 3.9% from the fourth quarter of 2021. Pros accounted for 42.2% of our 2022 fourth quarter sales and 40.6% of our 2022 full year sales. By comparison, Pros accounted for 35% of our fiscal 2021 full year sales. Our efforts to drive engagement continue to be successful. We added approximately 30,000 new Pro contacts during the fourth quarter of 2022 and our enrollment in our industry-leading Pro Premier Rewards or PPR program, where our most active Pros are members increased by 24% compared with the previous year. Pros also continued to demonstrate a strong appreciation for the value of our PPR program with a 90% increase in the number of points redeemed compared with the same period last year. We also build sticky relationships and lifetime value with Pros through education and training about flooring products, installation and design solutions. We look to partner with Pros and hosted 71 workshops and trained 1,600 Pros through our education and training strategies in 2022. Pros have told us, and I quote, 'I'm impressed with the way Floor & Decor looks beyond just selling the products. Their hosting and supporting of training events demonstrates their commitment to high-quality lasting installations. Our major keys to help my business grow.' Importantly, Pros tell us they feel more educated after training and express a very high likelihood to recommend to other tradespeople. We intend to build on these important education and training strategies in fiscal 2023 and beyond. Additionally, we remain focused on further strengthening our teams and reporting tools and dashboards that our Pro to build on the execution of key priorities and objectives.

Thank you, Tom and Trevor. I'm excited to represent such a resilient company with so many great associates. Over the years, we have proven that we can navigate unexpected economic events outside of our control, including significant tariffs, antidumping and countervailing duties on our products, which caused us to continue our successful sourcing diversification efforts while expanding gross margin. The COVID-19 pandemic caused us to close our stores for some time, forcing us to develop alternative solutions to serve our customers. Most recently, we successfully navigated significant declines in existing home sales, global supply chain constraints and considerable cost inflation, all while recording record sales and profit. We manage these headwinds in 2022 and that allowed us to report fiscal 2022 adjusted diluted earnings per share that were still within the range of $2.75 to $3 per share we provided at the beginning of 2022, validating the strength of our teams and the agility and durability of our business model. Let me now discuss some of the changes among the significant line items in our fiscal 2022 fourth quarter income statement, balance sheet and statement of cash flows and then discuss how we were thinking about 2023. Turning to our fourth quarter gross margin. We are pleased that our merchandising, supply chain and store teams continued to deliver on our gross margin recapture plan. Our fourth quarter gross margin rate increased 280 basis points to 41.6% from 38.8% in the same period last year, exceeding our expectations of 41%. The better-than-expected improvement is primarily due to higher product margins from lower freight costs, favorable inventory shrink and damage and lower distribution center costs. Moving on to our fourth quarter expenses. Our fourth quarter selling and store operating expenses increased by 18.8% to $280.0 million from $235.7 million in the same period last year. As a percentage of sales, these expenses deleveraged approximately 90 basis points, driven by new stores and deleverage from our mature stores, primarily in payroll, credit card transaction fees and depreciation. Fourth quarter general and administrative expenses increased by 2.7% to $51.4 million from $50.1 million in the same period last year. As a percentage of sales, general and administrative expenses levered 60 basis points to 4.9%, primarily due to lower incentive compensation. Preopening expenses increased by 26.4% to $9.8 million from $7.7 million in the same period last year. The increase is primarily due to opening 13 new stores in 2022 compared to seven new stores in the same period last year. Fourth quarter net interest expense increased by $4.2 million to $5.3 million from $1.1 million in the same period last year. The growth in interest expense is in line with our expectations and is primarily due to an increase in borrowings under our ABL facility and interest rate increases. Let me now turn my comments to our profitability. Our gross margin recapture efforts successfully drove a 270 basis point increase in our fourth quarter adjusted EBITDA margin to 13.7% from 11% in the same period last year. As a result, adjusted EBITDA grew by 42% from the same period last year. Our fourth quarter GAAP net income increased by 38.8% to $69.2 million and diluted earnings per share increased by 39.1% to $0.64 per share. Fourth quarter adjusted net income increased by 46.2% to $68.9 million and adjusted diluted earnings per share increased by 45.5% to $0.64 from $0.44 in the same period last year. Our fourth quarter weighted average diluted shares were 107.4 million. Reconciliations of our GAAP to non-GAAP earnings can be found in today's press release. Moving on to our balance sheet and cash flow. As of December 29, 2022, inventory increased 28.2% to $1.3 billion from last year, in line with expectations and modestly above our sales growth of 24.2%. As discussed in the third quarter earnings conference call, we expected inventory to grow above our full year fiscal 2022 sales growth, primarily due to inflation. Our fiscal 2022 cash flow from operations of $112.5 million declined $188.9 million from 2021, primarily due to growth in our inventory and drop in payables due to timing of receipts. Fiscal 2022 capital expenditures including capital expenditures accrued at the end of the period totaled $486.0 million compared with $475.3 million last year, above our guidance of $445 million to $465 million driven by timing of spend on the class of 2023 stores. These capital expenditures were funded by cash flow from operations, existing cash on hand and borrowings under our ABL facility. We ended fiscal 2022 with $566.3 million of liquidity and $210.2 million outstanding on our ABL compared with no borrowings at the end of fiscal 2021. Let me now turn my comments to how we are thinking about the macroeconomic environment and our fiscal 2023 sales and earnings guidance. As you will see in today's earnings press release, we are providing a wider guidance range than in prior years to reflect the prevailing macroeconomic uncertainty. Our fiscal 2023 annual comparable store sales are expected to be flat to down 3% from last year, reflecting continued declines in existing home sales throughout most of 2023 from higher interest rates, moderating growth in home prices and strategic price reductions we expect to take from the benefit of lower freight costs. Fiscal 2023 sales are expected to increase by 8% to 11% from last year, which assumes 65% of our planned 32 to 35 warehouse store openings occurring in the second half of the year. We look forward to the full year sales and profit opportunity in fiscal 2024 from the 2023 stores opening late in the year. Our strategic balanced approach to price reductions is expected to moderate our growth in average ticket but improve our transaction trends as we move throughout the year. As a reminder, we start to cycle past high single-digit declines in transactions in the second and third quarters of fiscal 2023 before comparing against a 10.4% decline in the fourth quarter of 2022. Taken together, we look for comparable store sales to decline through the third quarter before returning to growth in the fourth quarter. As we think about growth in inventory to support our new stores and sales growth in 2023, we expect inventory to grow at a slower rate than sales. The complexion of our P&L and profit growth drivers will change throughout the year as we strategically reinvest cost savings and select price reductions. Because we are using a balanced approach to reducing our retails from cost savings, we expect to continue demonstrating strong year-over-year improvement in gross margin rate in 2023 with the most significant improvement in the first half of the year. We expect sequential improvement in our gross margin rate throughout the year, approaching 42% as we exit 2023. Our selling and store operating expenses are expected to be approximately 27% of sales at the midpoint of our sales guidance. The year-over-year deleverage from 2022 is primarily due to new stores as well as continued investments in wages and merchandising initiatives and higher credit card transaction fees. Preopening expenses are planned to be around 1% of sales, flat to 2022. We are planning in general and administrative expenses to be approximately 5% of sales at the midpoint of our sales guidance, slightly above 2022. The slight increase reflects continued investments to support our growth initiatives and incentive compensation recapture. Interest expense is expected to be approximately $17 million to $18 million. The increase over 2022 is primarily due to an increase in borrowings under our ABL facility and interest rate increases. We expect our adjusted EBITDA to grow 5% to 12% to approximately $605 million to $650 million. Our adjusted EBITDA margin rate is expected to be approximately 13% to 13.5%. Importantly, we continue to see a path towards our expected medium-term margin rate of mid-teens and longer-term margin rate in the high teens. 2023 diluted earnings per share are expected to be in the range of $2.55 to $2.85. Diluted weighted average shares outstanding is estimated to be 108 million shares. Moving on to how we were thinking about capital expenditures. Fiscal 2023 capital expenditures are planned to be in the range of $620 million to $675 million and be funded primarily by cash flow from operations and borrowings under our ABL facility. More specifically, we intend to make the following capital expenditures in fiscal 2023. We intend to open 32 to 35 warehouse format stores, relocate stores and begin construction on stores opening in fiscal 2024. Collectively, these investments are expected to require $495 million to $525 million. The year-over-year increase reflects three main drivers: first, we plan to improve the store opening cadence in 2024, resulting in more stores opening earlier. As a result, we will incur more CapEx in 2023 associated with the 2024 openings. Second, we are transitioning to more ground-up projects versus second-use facilities that require more upfront capital in exchange for lower rent. Third, higher construction costs for motion. Additionally, we plan to invest in existing store remodeling projects and distribution centers using approximately $95 million to $110 million. And finally, we plan to continue to invest in information technology, infrastructure, e-commerce and other store support center initiatives using approximately $30 million to $40 million. In closing, I am grateful for my new role as CFO, and eagerly anticipate taking on the challenges that may arise in this uncertain macroeconomic environment. In my eight years at Floor & Decor, I have never been more confident in our business model and the talented associates that make up our team. We have demonstrated our ability to grow our market share in the face of uncertainty. On behalf of the executive team, I want to express our gratitude and extend a personal thank you to our associates. We recognize and appreciate the hard work and dedication you bring to serving our customers every day.

We would now like to take questions.

Hi guys, good afternoon. I wanted to ask about the forward curve on housing. We have existing home sales down a lot. You mentioned the numbers yet comps were positive. They just turned negative, I guess. So does your view that we have a stronger, I guess, back half? Does that mean existing home sales don't get worse? Does it factor in anything around pricing or that maybe it is just this time is different, and that will allow the comp to reaccelerate in the second half?

Yes, Simeon, this is Trevor. Our view is - first off, I'd say we're not economists, but our sales range flat to down 3% assumes existing home sales trough at about 4 million units in 2023, which is where they are today, placing them back against the most recent trough of 4 million in May 2020. As we think about pricing, we would expect that the pricing continues to probably decelerate with interest rates being high and likely to go higher as we think about the rest of the year. I think if we're wrong and existing home sales continue to sequentially decline from 4 million units and move towards a historical low of 3.5 million existing home sales, then there could be risk to our plan. And one other thing, because I know you guys follow a lot of companies that I think is worth contemplating as we've given this guidance. This model assumes - so this forecast assumes our mature stores will be down more than the 3% - negative 3% to flat that we've given guidance for. But we get the benefit of all those new stores because we've opened 20% stores it takes all your stores years to mature. That's what brings it back up to that flat to 3%.

And Simeon, as you think about it, too, you've heard us state this before, but as a reminder, every comp point is worth about $41 million in sales at about $0.10 in EPS. So that equates to about 20 basis points of operating margin just as you guys may flex up or down differently than we do.

Got it, okay. Non-macro, the way you measure sales and your market share, I'm guessing your denominator as a data set, we don't see. Are you seeing your core business market share so non-commercial stable, accelerating? Can you give us some color there?

This is Tom. I'll give that a shot. We believe our market share continues to increase. Things that we read from Catalina indicate that. And then when you just look at kind of our total sales. Total sales in 2022 grew 24.2%. We were able to post a pretty decent comp for the year. And when you look around the competitive landscape reports on our category, they don't seem to be too close to how our performance is. So yes, I, from everything that we see, we're taking share in a pretty meaningful way.

Thanks guys, good luck.

Hi, thanks very much. Good to talk to you again. So a couple of questions just with respect to your margin assumptions on EBIT. There are a lot of companies that are looking to have kind of flattish margins relative to pre-pandemic and you're obviously guiding to significantly higher margins, kind of 8.8% relative to 2019. So I wanted to parse that out a little bit? And then I just wanted to ask about new store productivity in terms of how we should think about that. I obviously realize there is timing and back-end loaded with respect to this current year, but looking at new store productivity, how we should think about that?

Karen, are you talking about gross margin or operating margin, just to be specific on your margin?

Operating margin.

I'll go first, this is Trevor. I mean, our volumes are just higher than they were at that time, and we've hopefully been efficient and thoughtful about where we've made investments. Our stores over five years old are getting close to $29 million in sales and close to $7 million in four-wall EBITDA. And so as those volumes have come up in the last three years, we've leveraged components of our P&L.

Yes, I mean as you think about Karen as well, we've talked about the complexity of the P&L changing a little bit. So we do have - we have had significant gross margin recapture, and we plan on gross margin sequentially increasing every quarter throughout 2023, so you will see a slight increase due to new stores kind of in our SG&A. But as you think about it, it's offset by our gross margin recapture throughout 2023.

Thanks, got it. And then just how to think about new store productivity just going forward in general in '23 and '24?

Yes. Today, just like we said at the Analyst Day and our 10-K, you probably haven't read yet all 100 pages, but we still believe that new stores will do $14 million to $16 million in first year sales. We think we can get those stores to do around $3 million of four-wall EBITDA. And as I just mentioned, they run up that maturation curve and hopefully, they get to $28 million, $29 million and get close to $7 million in four-wall EBITDA. As I studied the class of '23 and what we know so far about '24, they pick a good class of stores. And we think there's going to be those metrics that I've just mentioned. We're optimistic that we're going to hit those even though the environment is not nearly as good as it was in the second half of '20 - all of '21 in the first part of '22.

Right, they started about 60% productivity. So we should see pretty meaningful gains from that 2024 with the late store openings this year.

Hi, good afternoon guys. Could you walk us through your expectations for category growth relative to your flat to down 3% comp guide? And as you think about the macro and housing indicators out there today, what factors do you need to see to give you confidence that 2023 will be the trough year, for you in the category as opposed to seeing the pressures linger into '24?

Yes, I think for us - when we look at our own specific numbers, they get easier, obviously, as we move through the year. Our transactions were down around 7% for Q2 and Q3 then they were down just over 10%. If we make it to the summer with continued negative existing home sales, which seems like for sure, that's going to happen. That's going to be two full years of negative existing home sales. And from what I read, I know inflation has been a little bit pesky. But it does feel like that the Fed is going to sort of be done with what they need to do on interest rates, either in the summer or the springtime. And hopefully, mortgage rates even start to come down in the back part of the year and then we're going up against easier compares as well and then you start to see a rebound. And then as we all know, there's just a very aged housing stock that is going to be in need of investment. So - and I think on the category perspective, you can see some of this in our filings, but our tile business is strong right now. Our installation categories are strong right now. People are resonating with what we're doing in those categories. Our rigid core vinyl was strong in the fourth quarter as well. And so those big categories that you've historically seen us do well in, I would expect that those are what's going to drive the business as we continue into 2023.

And just as a reminder, that we'll flex our stores to whatever is so. So, if you target our growth out of vinyl then we'll expand more in the vinyl section, and tile continues to do well. We'll continue to expand on that. We have the flexibility because we're in all categories.

Got it. And on that note, you were able to hold your store expense line flat sequentially in Q4 despite opening 13 new stores, which I think is the first for you, excluding the pandemic. So when you say you're operating your stores to reflect the current economic environment, can you talk a little bit more about what exactly that means? And how should we think about just the cadence of deleverage on that line as we move through '23?

Yes, I mean, at the end of - when you compare Q4 to Q3, we have - from a labor perspective, is generally our biggest opportunity or we can flex up or flex down. We've tried to sort of simplify that and just give the hours a similar amount of hours throughout the year. And so, we don't see massive increases or decreases in labor and operating costs sort of quarter-over-quarter. As we think about where we are going in 2023, we have assumed a continued increase in labor, right? We've seen that happen. We and every other retailer have invested in the labor. We think that's been a good payoff. We've recently seen both our full time and our part-time turnover come down pretty meaningful. So we feel like we've made the right balance of investment in labor to lower that turnover. We are going to see a pretty big increase in tender costs, credit card fees this year. We're switching to a provider mid-year. And just with LIBOR up, those costs will go up or I should say those costs are going up. But we think we can offset that with marketing and some other components of the operating expenses as we look to 2023.

Yes. Zach, just to call it out, we actually saw a 110 basis points increase from Q3 to Q4 in our store expenses. So when you look at that, as you exit Q4, which has a much higher because we opened 13 new stores, you'll start to see that as actually kind of the complexion that we'll see similar into 2023 because we'll average about 27% at the midpoint. So what you see in Q4 is kind of similar to that, as new stores start to come into the class as well in 2023.

Good evening. Thank you for taking my questions. I have two main questions: first, how severe will this year be, and second, what is the outlook for next year? Regarding the first question, if we account for the negative transactions you mentioned throughout this year, how will that impact your store volumes on a unit basis compared to 2019, particularly in your more established stores? I also have one follow-up.

Yes, we will still be significantly higher than 2019. In the recently completed year, stores over five years old generated close to $29 million. I don't have the exact figure from 2019, but I am quite certain it was below $25 million back then. So if we expect to have flat comparable sales, I don't foresee much change in that situation.

And then my follow-up question is how negative would your comp need to be this year in order for you to pull back on your store growth in 2024? Is there any condition under which you would moderate your store opening plans?

I'll answer that. At this point, no, Michael. Our plans are to continue to run the business effectively. I think we've demonstrated our ability to be agile and execute on what we say we're going to deliver. We'll be smart in the way we run our business. This is a marathon, not a sprint, and we're in it for the long term. Things would have to get significantly worse for us to consider lowering our store count. We had 32 to 35 this year. We haven't given a number for next year, but I feel pretty confident that it will be around that number.

I believe there are only two factors that could hold us back. First, if there were a liquidity issue for any reason, we might be a bit cautious, but we don't anticipate this happening. Second, a significant decline in our return on invested capital could be a concern. Our cost of capital ranges from the high single digits to low double digits, depending on various factors. Despite potential increases in costs due to inflation for opening new stores, we still expect a return in the high 20s on our invested capital. Therefore, I don't foresee any liquidity problems or significant changes in our return on invested capital. We will continue to invest through cycles, just as we have for the past decade.

Right. To summarize what Trevor mentioned earlier, the class of '22 appears to be promising, and our outlook for openings in '23 and '24 also looks very positive.

Hi, thanks. Good afternoon, and congrats on a really good year. Really helping you guys provide the monthly comp gain. So I was wondering if you could provide transactions by five months in the fourth quarter and also what transactions are doing so far year-to-date in January and February?

Yes, sure. Look, I can give you the monthly cadence and transactions. So for us, in Q4 transactions were down 9.3 in October, 11.4 in November and 10.5 for December. So pretty consistent throughout the quarter.

Okay. And any color in January and February so far?

Yes, cost very consistent with Q4.

How we finished the quarter has been fairly consistent.

Okay. And any color on transactions in markets where housing turnover has slowed more than the rest of the country? Is there any delineation that you could provide?

I would say the West is performing a little bit softer than the rest of the country, and that seems to tie into existing home sales under a little bit more pressure. So that's what we see.

Okay. Great. And then one last one for me, just a follow-up on Karen's question on new store productivity. Over the past couple of years, you've had great NSP that's averaged close to 90%. This quarter was in the low 60s, at least on our math and model. Just curious if there was anything timing that led to that or anything else you guys could point to?

I think we opened those stores in the fourth quarter later than ideal. Additionally, we don't operate a highly seasonal business, but during the fourth quarter, especially around Thanksgiving and Christmas, our volume tends to be low. This might create the impression of lower new store dynamics, but it's primarily due to the timing of those openings.

Exactly. We opened 13 of our 32 stores in the full. And remember, we're going to have 55% of our openings in the back half of this year, too.

Good evening, guys. I wanted to focus, Tom. I think you briefly talked about the FIT rollout. I was curious if you could maybe expand on that initiative in terms of sort of the size of the program today, supporting members? And what do you expect it to scale to, how we should think about the net cost of the initiative? And then what are you hearing from the stores in terms of the excitement about what they can do to alleviate some of the tasking responsibilities?

Yes. So the 15 we put in, it's really in an effort to continue to improve customer service within our stores. So anything we can do to take the tasks away from associates during the day so that they can focus on just taking care of the professional customers and do-it-yourself customers to come into the store. That's our whole goal. So we started playing around with the pilot a while ago in one market. We really like what we saw. The feedback from the stores was terrific. So we're in six markets as we exit this year, and then we're going to open up 12 as we get into next year. And again, all of the effort is we think the presentation within the store gets a little bit better, and we think that the customer service of the stores will get a little bit better.

And then just in terms of investment into the program on whether it's gross or net terms?

It funds it. There's a small cost involved, but most of the hours come from within the stores and are managed by a centralized team in a slightly different way.

Great. Good afternoon. Thanks for taking my questions. I wanted to ask about the decision to implement the strategic price reductions for this year. Is that purely due to costs coming down? Or is there something you're seeing in the competitive landscape with your price gaps? And then can tickets still be positive this year despite the strategic price reductions?

This is Tom. I will begin by discussing pricing. As we mentioned earlier, our goal is to continue recovering margins throughout the year. We believe that ongoing supply chain cost reductions will allow us to lower prices where necessary. This strategy is not in response to competitive market pressures but is aimed at strengthening our cash flow and enabling us to capture market share more quickly. Additionally, we have significant influence from professional customers who experienced notable price increases last year, and as our supply chain costs decrease, we will be ready to pass some of those savings back to our partners.

Yes. And then on the second part of the question, yes, I mean, look, if the strategic price reductions could have us be at a negative comp, but it would be a very, very low negative comp in the back half if that was the case. But keep in mind, too, we're also lapping the highest increases that we had in average ticket in Q3 and Q4 of 2022. So it's a much harder compare.

Okay. Great, thanks for that. The follow-up I had was just on gross margin. So thanks for the detail on '23. But if you look over the medium term, do you see potential for gross margin rate to go back above that prior peak that the business had a 2.5? What are the drivers to see gross margin rate go back above that prior peak besides just recouping some of the supply chain costs?

I do think you can go above the prior peak. This is Tom. And I think it's for a few reasons. One, within the store, we've made tremendous progress, as you heard when Trevor was speaking, we've got over 900 designers in our stores. So their design initiative has taken an improved service within our store, and we know when the designer is related, we intend to sell a bit of a higher-margin basket. Two, the supply house strategy, what we've done with the installation accessories department, the categories we've added, they're helping us from a margin perspective. They're getting more frequency within the professional business, and I think that could help. And then lastly, selling better and better and best products, we make more margin on. They continue to do better in our stores, even in light of the macro environment, the customers are still buying those better and best products. So as I look at all of that and understand what's happening within the dynamic of our supply chain costs, I do believe now that we will be able to exceed. It's a question of time, but I believe we'll be able to exceed that high-end margin rate that we had.

Yes. Look, just to piggyback on the top of that, we're going to be methodical about our gross margin as the complexion of the P&L changes we may need to strive from a little bit higher, as Tom mentioned, on that, just to achieve our long-term higher-teen EBITDA margin rate. So we're being kind of methodical and strategic about that as well.

Hi, thanks. Good afternoon. Without kind of beating a dead horse, I just wondered if you could maybe talk through the circumstances in which you would expect to do better than your guide or maybe at the high end of your guide versus the low end of your guide? And then we were just wondering if there were any updates with regards to sourcing, if there were any changes in the sourcing environment that may be different in '23 than 2022?

Yes, I'll take a stab at this and then Tom and Bryan may weigh in. I mean, I think if the Fed was to lower rates for any reason and that drove existing home sales being higher. I think if the consumer is less focused on services, right, you can read any report you want that the consumer is spending a lot more on services than they are on hard goods because they spent so much on hard goods for the three years of COVID. Those two things can be net positives for us. I think we're certainly super pleased with our competitive standpoint when we look around at who we're competing with. We feel great about where we are from that perspective. So those may be the upside I would call out.

I'd agree.

What is the second part of the question?

I just was wondering about any kind of change in the sourcing environment in '23 versus what was experienced in '22.

No. I mean we're always trying to find the lowest cost provider, no matter what country it's in. As you know, we have over 225 suppliers in over 20 countries. Those countries are constantly changing our penetration. Per country are constantly changing wherever we can get the best product. I don't anticipate 2023 to be significantly different than any of the last couple of years.

Hi, this is Sarah Park on for Liz Suzuki. I was wondering if you can speak to how you're thinking about private label mix in the current environment when the consumer is getting more price sensitive.

I will address that. The majority of our products are private label. Most of our level 1 SKUs in the hard surface long categories are typically our own brands. The only area where brand matters is in installation accessories, where we offer name brands that professionals prefer. I do not foresee any changes to our private label strategy, and I believe our current approach is effective.

I wanted to ask about Pro outpacing DIY. It seems like pro traffic is still up and all the decline is on the DIY side. Is there any indication that this is starting to change? Or do you expect DIY to improve by the end of '23 in your guidance?

Greg, this is Trevor. I think you're exactly right. Our Pro business is performing well. We did a pretty deep dive with our Pros towards the end of the year, early this year. And what we hear from them is their business is strong across the country. They probably are not at their historic backlogs, but their backlogs are still strong. They feel like they've got plenty of business and don't feel concerned about their business and it's strong. I think on the homeowner side, man, it certainly feels like that's going to have to change. And whether that's going to be something with mortgage rates or existing home sales changing, but it does feel like at some point, that's going to change because we're now rounding out 1.5 years maybe close to two where Pro has been much stronger than homeowner.

Hi, good afternoon, everyone. On the gross margin guide, is the starting point for 1Q effectively, the 41.6 you exited the year at? And have you contemplated any trade down from better, best into your planning assumptions or do you not see that as much of a risk?

Yes, I'll take the first part of it and then kind of head it off. So yes, I mean, you're spot on. So the starting point is really exiting Q4 and then we expect sequential improvement kind of from there. So that's the right thought and then I'll let.

Yes, we don't expect to have too much trade and we haven't seen that. Even as of today, as we look into the month of January and as we look into the fourth quarter, customers that are electing to still do hard surface flooring jobs are still electing to use better and best products. And so, I think that if they make the decision and they can afford to do the flooring project that they're willing to spend what they want to get the floor they need. So we're not seeing the trade down as of today. And this is - we're in the middle of this, and we haven't seen it yet. So I don't foresee that change.

That's right. Yes, we've got a sophisticated merchandising team that they're sharp on their line structure. So we haven't seen a trade down.

Hi, good evening. Thanks for squeezing me in. Just one question on pricing, it sounds like you're not going to be taking down prices as much as your supply chain costs are coming down. I guess my question is, is that how you think the industry, your competitors are going to react as well? And I guess, if not, I suppose you'd be planning for your price gap to narrow a bit in 2023. Just how should we think about, I guess, your overall price gap that's contemplated in 2023 versus your competitors? Thanks.

I'll start with - we feel good about our competitive price gap that we're managing with today. And you're correct that we're not anticipating on dollar for dollar flowing back into price, all of the savings in supply chain. As Bryan mentioned earlier, some of the complexities within the P&L change, and we've got long-term EBIT margins that we want to hit. So that will change a little bit. But our spread in the market is good. We anticipate it to continue to be good. So I am not - I don't have a - we will watch it and react accordingly if we see it, what we're seeing within the marketplace today. We're very confident in what we're doing.

Great, thanks for taking the question. I wanted to follow-up on the competition question to some extent. It sounds like pricing is still rational, but I'm curious, what are you seeing in terms of inventory across the channel right now? And maybe if you could just frame your own inventory position, how much of the growth that we're seeing year-over-year is inflation versus units? And then I have one pricing follow-up? Thank you.

I'll start - this is Tom. I'll start with the pricing part and Trevor or Ersan, if you want to hit kind of what you're seeing from an inventory level standpoint. I think from a pricing standpoint, we're seeing it seems like the big box competition is always aggressive price movement in price. We certainly have to pay attention to them, which we'll continue to do. From an independent channel, we haven't seen much in pricing. I think they have learned from previous recessions and they're being cautious in eroding their margins to a significant extent. So that's why I feel like our spread is probably better than it's been against the independent channel than it's historically been. So we hope that, that stays rational from an inventory level standpoint.

Okay. And this is Ersan. Inventory levels close to competition seems to be high and seem to be in good shape at this point for them.

I don't know that they're high. I mean they're in stock. We went from a lot of last - sure they didn't have inventory as everyone was chasing everything. But in general, we're - that's what we see. It's hard to tell for sure.

And on the inflation piece, I mean, inflation was a big reason why our inventory grew at a faster pace than sales, just to tie that in as well.

Hi, thanks for the question. So you mentioned earlier the benefit of newer stores maturing in the sales were flowing through the comps, that helps you to get you to the full year guide. So first, can you size the comp lift you're planning from that subset of maturing stores? And two, it seems like at this point, you're not contemplating some type of slower ramp in those units because of the macro environment. So is that a correct assumption? Thank you.

Yes, so your question, yes, so we believe that it adds about three to four comp point is what our new stores kind of add to that. So said another way, our mature stores will really be down three to six is kind of the way to think about it.

And we haven't given the number just be completely transparent on that, though, but that number is somewhat offset by cannibalization, right? Roughly 65% of our stores are in existing markets. And so that isn't all flowing through because obviously the math wouldn't work either. So, there is some cannibalization as - oh sorry about 50% of our stores are going into, existing markets.

And I think the second part of your question, it would be tampered just a little bit by the macroeconomic environment, but not that much.

Hi guys, thanks for taking my call. We've talked a lot about the potential impact of existing home sales on the outlook for the business. And I was wondering if you could talk explicitly about the mix of your business as you see it, that is actually project business driven by I just bought a home or I am selling my home and getting it ready versus I'm in my house and I need to do a floor or kitchen or other hard surface. And then I have one follow-up on the mix of Pro versus DIY?

I'll start and Trevor can add. I don't think we exactly know the - how much of the business is driven by housing and someone saying, hey, I'm going to sell my house, let me change my floors before I sell it. Or I just bought a house, let me change my floors because I just bought it, and I don't like the carpet in the bedrooms. But I do know this, while I don't know what percentage of the business it is, I know that it doesn't hurt when housing turns over? There's, a percentage of those customers that are absolutely redoing their flooring. So I can't say for Floor & Decor exactly what that number is, how many of our transactions go to that. But when existing home sales are positive, we have wind to our backs. And when existing home sales are negative, it's wind in our base. So that's what we have to deal with. I don't know, Trevor, if there's anything to back side of the question.

That's right. I mean, I've been here 12 years. We've had three downturns in existing home sales. And every time we've seen our comps slow.

Thank you very much. I want to emphasize how pleased I am with our execution during the challenging year of 2022. To be at the low end of our guidance, especially given that we set it on the day the Ukraine war began and did not expect the Federal Reserve to raise interest rates so aggressively, is noteworthy. We also didn't foresee the impact of the Ukraine conflict on natural gas prices. Achieving results at the lower end of expectations is something we can take pride in. Our service scores have reached new heights, and turnover for both part-time and full-time associates continues to decrease. Despite facing one of the toughest environments for new store openings in my decade with the company, we successfully opened 32 stores. I am incredibly proud of our teams and their performance. We view this as a marathon, not a sprint, recognizing that we are in a cyclical period, but things will improve. We will keep investing to strengthen our competitive position, and we are looking forward to what this year holds for us. I appreciate everyone's interest and participation in the call. Thank you.

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