Hello and welcome to the Floor & Decor Holdings, Inc. Fourth Quarter 2023 Conference Call. It's now my pleasure to turn the conference over to Wayne Hood, Vice President of Investor Relations. Please go ahead, Wayne.

Thank you, operator, and good afternoon everyone. Welcome to Floor & Decor's fiscal 2023 fourth quarter earnings conference call. Joining me on our call today are Tom Taylor, Chief Executive Officer; Trevor Lang, President; and Bryan Langley, Executive Vice President and Chief Financial Officer. Before we get started, I 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's no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company will discuss non-GAAP financial measures as defined by SEC Regulation G. We believe non-GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the 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 2023 fourth quarter earnings conference call. During today's call, Trevor and I will discuss some of our fiscal 2023 fourth quarter and full-year earnings highlights; then Bryan will provide a more in-depth view of our fourth quarter and full year financial performance and share our thoughts about some of our financial projections for fiscal 2024. We are pleased to deliver better-than-expected fiscal 2023 diluted earnings per share of $0.34, primarily due to total and comparable store sales that exceeded our updated expectations we communicated on our third quarter earnings call. For the fiscal 2023 year, we delivered diluted earnings per share of $2.28 exceeding our updated guidance of $2.14 to $2.24 per share. Throughout the year, we are proud to have grown our market share and effectively managed our profitability, balance sheet, inventory, and cash flow, while continuing to make significant long-term growth investments towards our goal of operating 500 warehouse stores in the United States over time. As Bryan will discuss in more detail, we generated $238.6 million in free cash flow in fiscal 2023. We achieved these fiscal 2023 results, despite the headwinds caused by existing home sales declining to a seasonally adjusted annualized rate of 3.8 million units in December, a decade low as 30-year mortgage rates spiked higher to 8% in October and personal consumer consumption expenditures continue to normalize to services and away from large ticket discretionary goods. Against this backdrop, we executed what we can control in 2023, by opening 31 new stores, successfully executing our sales-driving initiatives, strategically growing our gross margin rate by 160 basis points year-over-year, maintaining our competitive price cuts, continuing to deliver exciting innovation and newness in merchandising assortments, and further diversifying our countries of origin to reduce costs and mitigate risks. Importantly, we are prudently managing expenses without sacrificing the customer experience. We are thrilled that our customer service scores remain near record high levels and are building on our excellent service scores in early 2024. We are particularly pleased to receive high scores for service, selection, and professional staff. These attributes are essential when consumer spending and the category slow, resulting in declining transactions. We find that typically an assisted customer's average ticket is significantly higher than unassisted customers. Achieving and building on these results over any housing-related spending cycle requires us to make ongoing commitments to investing in our associates, finding ways to simplify store processes, and deploying technology in-store and online to provide a seamless customer experience. We proudly promoted approximately 1,550 associates and created 2,000 new jobs in 2023. Our commitment to our associates resulted in notably higher associate retention in 2023, which we believe will help us control costs and support our growth for years to come. We believe that by making these long-term investments, we will further build our competitive moat and grow our market share. As we look to fiscal 2024 and beyond, we remain focused on executing our key growth strategies. We are fortunate that the strength of our business model, balance sheet, and cash flow allows us to prudently invest in new and existing stores, merchandising growth initiatives, technology, and our commercial business in the face of challenging industry fundamentals. As Bryan will discuss in more detail, we are approaching fiscal 2024 with continued rigor in our expense and inventory management and prudent discipline in our growth investments in capital spending, as we navigate industry headwinds. We have a long history of overcoming challenges with a strong and agile execution. And we believe this period just represents another challenge to overcome in our journey to 500 stores. We will continue to make prudent investments that we believe will well position us for accelerated sales market share and strong earnings growth when industry fundamentals improve. Let me now turn the call over to Trevor.

Thanks, Tom. I also want to express my appreciation to all of our associates for their unwavering dedication and collaboration towards serving our customers and executing our key growth initiatives. Our fiscal 2023 total fourth quarter sales of $1,048,100,000 were flat compared to the fourth quarter of fiscal 2022. Comparable store sales declined at a better-than-expected 9.4%, primarily from the successful execution of our sales-driving initiatives and cycling past easier sales comparisons. Monthly, comparable store sales improved, declining 11.6% in October, 10% in November, and 6.7% in December. Regionally, our fourth quarter comparable store sales in the East were the strongest with the decline in the West division improving from the third quarter. Fourth quarter comparable store sales in tile, wood, installation materials, and adjacent categories were better than the 9.4% overall comparable store sales decline. Within our merchandise assortments, we continue to see ongoing customer preferences towards our better and best price point products, where we offer industry-leading innovation, trends, and styles at an everyday low price. On an annual basis, our fiscal 2023 total sales increased 3.5% to a record $4,413,900,000 primarily from the opening of 31 new warehouse format stores and growth in our commercial business. Our fiscal 2023 comparable store sales declined 7.1% from fiscal 2022 which is modestly better than our expectations of a 7.8% to an 8.5% comparable store sales decline. As a reminder, we are comparing against fiscal 2022 comparable store sales growth of 9.2% when monthly annualized existing home sales averaged 5.1 million units and 30-year mortgage rates averaged 5.5%. I will now discuss our fiscal 2023 transactions and average ticket. Fiscal 2023 comparable store transactions declined 9.9% in the first quarter, 7.1% in the second quarter, 6.8% in the third quarter, and a better-than-expected 4.9% in the fourth quarter. For the fiscal 2023 year, our comparable store transaction declined 7.2% compared to a 6.6% decline in fiscal 2022. Our fiscal 2023 fourth quarter comparable store average ticket remained under pressure. After growing 7.3% in the first quarter and 1.1% in the second quarter, our average ticket declined by 2.8% in the third and 4.7% in the fourth quarter. The deteriorating sequential trends reflect the macroeconomic housing headwinds, which created an ongoing drag from customers purchasing less square footage, secondary to retail price increases in fiscal 2022, and the impact of our strategic decision to selectively lower retail prices on specific SKUs. For the fiscal year 2023, our comparable store average ticket increased 0.2%. Turning to our early fiscal 2024 sales trends. Our fiscal 2024 first quarter-to-date comparable store sales are down 12.8% in line with the 2024 sales and earnings guidance we provided in today's press release. Our comparable store sales declined 14.7% in January, but have improved to a 10.9% decline in February month-to-date. As discussed in prior earnings conference calls, we expect the first half of 2024 to represent our most challenging sales period as existing home sales could remain below 4 million units, and we faced our most difficult sales comparisons of the year. Additionally, inclement weather caused us to reduce store hours in many of our stores in January and high wind and rain storms impacted our California stores in early February. Turning my comments to our connected customer growth. We are pleased that our connected customer strategies resonate with our customers even when search interest in the flooring category is down from last year. Our 2023 fourth quarter connected customer sales increased 7.6% from last year. As a result, the fourth quarter sales penetration increased approximately 160 basis points to 18.7% from 17.1% last year. For the year, connected customer sales increased 9.7% from last year accounting for 18.7% of our fiscal 2023 sales compared with 17.4% in 2022. We are successfully integrating our processes and technology solutions towards a seamless in-store and online experience. We see customers who visit our stores and interact with our website spend substantially more than single-channel customers, and we plan to continue to enhance these strategies. As we look to 2024 and beyond, we have initiatives intended to drive organic growth to our website and further optimize the customer search experience. These include further improving our website speed, and the quality of our website search, adding content to drive inspiration, and refining our online merchandising process to drive efficiency. Over time, we will enrich search results by infusing customer shopping behavior to inform personalized results. We continue to be pleased with our design services offering. This free service to our homeowners and pros exemplifies how we can drive exceptional customer service through engagement. Engagement leads to high customer satisfaction scores, positive social media comments, meaningfully higher average ticket and adjacent category sales, margin and market share with homeowner and Pro customers. We ended fiscal 2023 with 904 designers including in-home designers in select markets. We have plans to continue to grow this theme in 2024, and we believe there is a further opportunity for collaboration between our designers and Pro partners to drive sales. Furthermore, we are streamlining our processes and performance reporting towards team performance to drive additional sales, productivity, and conversion. Our design teams are focused on leveraging the power of our CRM solution where they can prioritize high-value sales opportunities from key project quotes to ensure we have consistent, timely, and thorough follow-up. Additionally, we are adding insulation estimating tools with our partner installations Made Easy, following wizard tool to deliver a complete project summary and are making enhancements to our design schedules. Finally, we are reducing friction in the customer tender process by adding point-of-sale registers in a hotline to our designed guests. Moving on to our warehouse store format pillar growth. We remain excited about the long-term opportunity to operate 500 warehouse stores in the United States. We are fortunate that our strong balance sheet and cash flow enabled us to prudently invest in new store growth during an industry downturn. We opened 14 new warehouse format stores in the fourth quarter and 31 in fiscal 2023, ending fiscal 2023 operating 221 warehouse stores and five design studios across 36 states. On December 29, 2023, one day after the end of fiscal 2023, we opened our Mansfield Texas Warehouse store due to permitting delays the Mansfield store opening slipped out of fiscal 2023 fourth quarter ended fiscal 2024 first quarter. We expect to open 30 to 35 new warehouse stores in fiscal 2024, unchanged from our prior guidance. Most of our fiscal 2024 warehouse store openings will be in large existing markets in the east and the south where we continue to solidify and grow our market share. In fiscal 2024, we anticipate about 30% of our new warehouse store openings will be in the first half of the year and most of those openings will be in April and May. We expect the remaining 70% of our fiscal 2024 new warehouse store openings will be in the second half of the year as we continue to face ongoing industry-wide construction delays. Because we are not fully built out in the United States, we believe we can navigate these ongoing construction delays with a flexible range of market openings and store sizes from 55,000 to 80,000 square feet. We expect about 25% to 30% of our planned 2024 new warehouse store openings could be in smaller format stores. While these smaller format stores will naturally have lower first-year pro forma sales than the larger store cohort in larger markets, we believe their operating margins can be as profitable as our existing stores due to their lower costs. Turning my comments to Pro. We proudly continue growing our market share with our Pros by embracing a supply house mindset. We believe embodying this mindset with specific strategies contributed to comparable store sales and installation materials growing throughout 2023. In the fourth quarter of fiscal 2023, Pro tendered sales accounted for approximately 45% of our sales compared with approximately 44% in fiscal 2022. For fiscal 2023, Pro tendered sales accounted for approximately 45% of our sales compared with approximately 42% in fiscal 2022. Pro sales growth continued to outpace our homeowner sales in the fourth quarter and the full year of fiscal 2023. In fiscal 2024, we expect to continue growing our market share with flooring Pros by leveraging our Pro dashboards and CRM tools to drive engagement with new, inactive, and active Pros. We are continuing to build long-term relationships, and to accomplish this, we are focused on having our Pro services managers or PSMs spend most of their time in the field with a comprehensive measurable plan to drive Pro contacts and conversion. To better measure the effectiveness of our PSMs' contact journey, we are now providing them with enhanced reporting that will enable them and field leadership to better understand the effectiveness of their contact and close journey and adjust tactics where necessary. We are also excited about continuing to deepen our relationship with Pro customers by continuing to partner with trade associations to host educational events. We believe providing educational events is increasingly important to Pros as the flooring installation process in certain categories is new and more complex. We see a significant lift in sales from Pros attending these events and have plans to expand these events in 2024. In the fourth quarter of fiscal 2023, we hosted 33 educational events and trained approximately 530 Pros. We have 123 educational events in the entire year compared to 71 in 2022. We look forward to hosting about 145 educational events in 2024. We are continuing to find new solutions to identify Pros that may not have shopped with us and are focused on introducing them to our brand. We continue to be pleased with the strong sales growth from our Regional Account Managers or RAMs. As a reminder, Regional Account Managers serve customers who require specialized account and project management that can be supported by our stores. For that reason, their sales are included within our warehouse store sales. We ended fiscal 2023 with 60 RAMs, almost double our fiscal 2021 RAM count of 32. Let me now discuss our commercial sales. We are incredibly pleased with Spartan Services' fiscal 2023 fourth quarter and full year sales and earnings results which exceeded our expectations and were accretive to earnings. The leadership team continued to build its national presence by adding 23 incremental A&D and contractor reps including those from the June 2023 Sales Master acquisition, ending the year with 86 reps. In 2024, we plan to continue to drive sales and market share growth through opportunistic acquisitions, organic rep growth, and boosting rep productivity. We are excited to see Spartan's awareness growing thereby enabling them to attract stronger talent. We also have plans to further integrate Sales Master to drive synergies and penetrate top MSAs, particularly in New York City. Additionally, we are excited to enhance Spartan's core further with the private brands including community cobalt and other proprietary brands which will help grow their market share in healthcare, education, hospitality, homebuilders, and the multifamily commercial. These proprietary brands exemplify how Spartan is leveraging Floor & Decor merchants and supply chain teams to design and curate exclusive flooring and wall tile products for commercial specifiers supported by a deep nationally available inventory. Our strategic growth plans for Spartan will continue to index them to more economically attractive, less cyclical and price-sensitive healthcare and education commercial segments. As discussed in prior earnings calls, we remain excited about the long-term commercial market opportunity and our strategies. We remain confident that we have the right people, strategies, and business model to continue successfully navigating this challenging macroeconomic environment. I will now turn the call over to Bryan to discuss our fiscal 2023 fourth quarter financial results in more detail and share our outlook for fiscal 2024.

Thank you, Tom and Trevor. As CFO, I take great pride in how our teams have navigated the macroeconomic challenges affecting our business. Their focused efforts allowed us to maintain market share growth and manage our profitability, balance sheet, inventory, and cash flow through fiscal 2023, even amid a contraction in the flooring industry year-over-year. We achieved a 3.5% increase in sales and generated $803.6 million in operating cash flow while investing $565 million in capital, resulting in $238.6 million in free cash flow. As we move into fiscal 2024, we do so from a position of strength, believing we will continue to grow our market share by focusing on what we can control. I will now discuss the significant changes in our fiscal 2023 fourth quarter and full-year income statement, balance sheet, and cash flows, as well as our outlook for 2024, starting with gross profit. In prior earnings calls, we mentioned that we are strategically managing our profitability by focusing on growing our gross margin rate. For the fiscal 2023 fourth quarter, gross profit increased by 1.4% on flat sales from the same period last year, mainly due to a 60 basis point rise in our gross margin rate to 42.2%. This increase was primarily due to improved product margins from lower supply chain costs. For the full year of fiscal 2023, gross profit grew by 7.6% on sales growth of 3.5% from the previous year, driven by a year-over-year increase of 160 basis points in our gross margin rate. This improvement in the gross margin rate can be largely attributed to lower supply chain costs that began in late 2022 and are expected to benefit us in fiscal 2024. Regarding our selling and store operating expenses, the fourth quarter expenses for fiscal 2023 amounted to $315.6 million, an increase of 12.7% compared to the same period last year. This growth is mainly attributed to higher occupancy and store expenses from operating 30 more warehouse stores compared to last year, although we offset this with expense reductions of $4.6 million in our comparable stores. As a percentage of sales, selling and store operating expenses increased by 340 basis points to 30.1% from the same period last year due to the addition of warehouse stores and the impact of lower comparable store sales. For the full year, selling and store operating expenses rose by $160.8 million or 14.9% compared to last year, primarily driven by new stores. This increase also led to a decrease in selling and store operating expenses as a percentage of sales by around 280 basis points to 28.1% compared to last year. Moving to general and administrative expenses, the fourth quarter general and administrative expenses for fiscal 2023 were $67.7 million, an increase of 31.6% from the same period last year. This growth results from investments to support our store growth, including additional staffing and higher administrative costs. As a percentage of sales, these expenses increased by 160 basis points to 6.5% due to the decline in our comparable store sales. For the full year, general and administrative expenses rose by 18.2%, largely driven by costs associated with store growth. Our general and administrative expenses as a percentage of sales increased by about 70 basis points to 5.7%. For pre-opening expenses, the amount for the fourth quarter of fiscal 2023 was $12.8 million, a 30.8% increase from last year, primarily resulting from more new store openings and costs associated with delays in store openings. In terms of interest expense, our fourth quarter net interest expense fell to $0.9 million, down from $5.3 million the previous year, mainly due to lower borrowings and increased interest income from our derivatives. The effective tax rate for the fourth quarter decreased to 18.1% from 22.6% last year, largely due to benefits related to stock-based compensation. Turning to adjusted EBITDA, our fiscal 2023 fourth quarter adjusted EBITDA was $107.8 million, down by 24.7% compared to last year, primarily due to expenses stemming from the decline in comparable store sales. This led to a 46.4% decrease in fourth-quarter net income to $37.1 million, with diluted earnings per share dropping by 46.9% to $0.34 from the previous year. Regarding our balance sheet and cash flow, we maintain a strong position that allows us to grow prudently even during industry contractions. We are particularly satisfied with our working capital and inventory management. By the end of fiscal 2023, our inventory amounted to $1.1 billion, a decline of 14.4% compared to last year, generating a favorable year-over-year swing in operating cash flow of $478.3 million. Our capital expenditures totaled $566.3 million, which aligns with our guidance range. This has enabled us to produce $238.6 million in free cash flow, with no borrowings under our ABL facility at the fiscal year's end. We ended 2023 with $752.8 million in unrestricted liquidity, including $34.4 million in cash and cash equivalents and $718.4 million available for borrowing. We have successfully diversified our countries of origin to reduce inventory costs and mitigate risks. In 2023, we sourced products from 26 countries, with a notable decrease in products produced in China from 50% in 2018 to about 25% in 2023. We expect continuing diversification strategies to support our gross margin rate in 2024 and beyond. We do not expect the recent attacks on cargo ships in the Red Sea to significantly impact our international shipments or ocean shipping costs, as only a few of our shipments go through that area. As we assess our fiscal 2024 outlook, there remains uncertainty about the timing of growth in existing home sales and hard surface flooring spending, primarily influenced by mortgage interest rates and housing affordability. While mortgage rates have decreased from around 8% last October, they remain high, and potential rate cuts in 2024 could be slower than previously expected. Consequently, we are planning for ongoing headwinds in existing home sales and consumer spending, affecting our business. Taking all these factors into account, we have provided a wider range of potential earnings for fiscal 2024. Our fiscal 2024 sales are expected to be between $4.6 billion and $4.770 billion, representing a growth of around 4% to 8%. We anticipate comparable store sales to decline by 2% to 5.5%, with the first half particularly challenging, though we expect to reverse this trend toward growth in the fourth quarter. Existing home sales are expected to improve gradually throughout the year, exiting at around 4.3 million units in our upper forecast and approximately four million in our lower forecast. We estimate a decline in our comparable average ticket and transactions but expect both metrics to improve throughout the year. For fiscal 2024, we project continued expansion of our gross margin rate, with an overarching expectation of around 42.6% to 42.8%. Our selling and store operating expenses are expected to be around 30% of sales due to the declines in comparable store sales. General and administrative expenses are estimated to be about 6% of sales, slightly higher than in 2023, while pre-opening expenses are expected to remain flat at about 1% of sales. Interest expenses are projected to be around $12 million to $14 million, reflecting increased borrowings. We estimate adjusted EBITDA to range from $520 million to $569 million, which represents a decline or slight growth, with margins expected to be around 11.3% to 11.7%. Diluted earnings per share are projected to fall between $1.75 and $2.05, calculated with an estimated 109 million weighted-average shares outstanding. Regarding capital expenditures, we plan for a range of $400 million to $475 million in fiscal 2024, primarily sourced from cash flow and borrowings. Our investment plans include opening 30 to 35 warehouse stores, relocating two stores, and starting construction for future openings. We will also invest in remodeling existing stores and enhancing our IT infrastructure, e-commerce, and support initiatives. In closing, our business model has proven resilient, allowing us to grow our market share amid industry uncertainty. On behalf of the executive team, I want to express gratitude and extend a personal thank you to our associates. We would now like to open the floor for questions.

Thank you. Our first question is from Michael Lasser from UBS. Your line is now live.

Good evening. Thank you so much for taking my question. One of the pieces of feedback that we've been hearing is that Floor & Decor had been overly optimistic about the depth of the downturn that the flooring category was going to experience heading into 2023. So what did you learn? And why is it different that you're not being overly optimistic this time, to expect that your comps are going to flatten out or turn positive by the fourth quarter of this year?

Hey Michael, this is Trevor. We definitely analyze all available data with our internal resources and also consider the economists' outlook. Last year around this time, there were expectations for interest rates to decrease and existing home sales to rise, and it seems like that's beginning to happen again, especially with some improvement on the mortgage rate front. We received some positive news today with existing home sales coming in at $4 million compared to $3.7 million, which was not the case last year when things continued to decline. The Fed was more aggressive, leading to higher mortgage rates and worsening home sales. That's the significant difference compared to last year. This year, we will have to see if those macroeconomic predictions hold true. If mortgage rates keep falling, they were at 8% recently and are now just below 7%. Even though it’s just one month, the improvement in existing home sales is promising. If this trend continues, it should provide us with a more favorable environment. Finally, when we assess our performance against others in the flooring industry, even though our earnings declined by about 18%, we are still performing significantly better than our competitors. In a tough market, I believe we've done well.

I would say the only thing I'd add is that, I think we're being a little bit more conservative than we were last year in our approach to existing home sales. So we're still expecting them to get a little bit better by the time we end the year as an evident in Bryan Langley's prepared comments. But I think last year we were more optimistic that the interest rates were coming and it would be better. And we're not anticipating that as much this year.

Got you. And my follow-up question is on Floor & Decor's market share, especially in more mature markets or more mature locations. What evidence you have to point to Floor & Decor market share trends? I think there's some debate about what's happening within those markets and how that is influencing the productivity of some of the more mature flooring core locations. Thank you.

Hey, Michael, this is Bryan. I'll jump in first. So we believe that we're still taking accelerated market share, the same way we were in 2022. Historically, we were taking about one point of market share across the industry, and so in the past two years we think we've taken anywhere from 150 to 200 basis points of market share. I mean we feel really confident and really good about our mature markets that we're in today. And we're still gaining share with Pros and still getting share of wallet there. So we're still getting traction in even our most mature markets versus our new ones.

The only thing I would add, if you look at our larger competitors that are 30% of the industry, from what we can tell we're meaningfully outperforming them. And when you look at the three or so public companies that are also selling flooring, we're meaningfully outperforming them. And so from everything we can tell, we're growing at a much faster rate on the residential side. And then on the commercial side, which is small for us but still on the commercial side, we're growing that business pretty fast right now.

Thank you very much. I appreciate it.

Thank you. Our next question is coming from Simeon Gutman from Morgan Stanley. Your line is now live.

Hey. Good afternoon, guys. I wanted to ask on all the good decremental margin question. Bryan you said, I think you said, $0.10 for every point of sale we were getting a little bit less meaning we're getting like 25% on the way down. Curious, if that's about right. And then if that's right it may be because you're getting good gross margin expansion, and does that mean the incrementals on the other way actually could be bigger than what they've been historically?

I think within the guidance range, it's pretty close to that $0.10. I think it just depends on how far you are outside the range, which would dictate that because then obviously your incentive compensation and other things tend to slope differently, so it really depends on how far you are from the plan that will drive that. So I think last year we were just so far from the original plan that the flow-through was a little bit different. This year, as we set the plan that's why I say it's versus kind of the way we plan, I feel pretty good about that $0.10 on the up and downside. But once you get outside of a normal range, then it does start to deviate a little bit from there. It can move anywhere from $0.10 to $0.12 to $0.13, but it sounds like it moves to $0.20, you can have margins up or down anywhere from $0.35 flow through to $0.30.

Okay. And then a follow-up is on the CapEx. The number is a bit lower on roughly the same store number of stores it was much higher I think four to $475 million versus the $560 last year. So my question is first getting to the $500 million did that always like have an asterisk for maybe smaller stores? Or does the smaller store get you to even a bigger number now?

We have always planned to have three different store sizes, and we currently operate stores of all those sizes. It was always our assumption that in some markets where we only have one store, those stores could be smaller. In certain locations, it is only feasible to fit a small store. While we prefer the larger ones, entering urban areas can sometimes make it challenging to secure larger spaces, so smaller stores have always been part of our expectation of managing a total of 500 stores.

Good. And then Simeon I'll just jump in and tell you a little bit on the CapEx guide. Most of the reduction is actually spent for the future class. There is a little bit tied to the type of store we're opening as well. We have our ground-up leases versus our second-use facilities. This year we've got a little bit more second-use facility. I think it's about 60%, whereas, last year we were 60% ground-ups, so that's a little bit of a change as well. So it's a little bit of the class of 2025 spend that will happen this year versus what we've done in the past as well as the type of facility. Another thing that I want to talk about as well is we had communicated previously that we would have spent for our Northwest Seattle distribution center. We've been able to actually push that out without any effect on our operation. So you'll see just a little bit of spend this year where we had previously communicated you would see spend for a distribution center as well.

Thanks, everyone. Good luck.

Thank you. Next question is coming from Zach Fadem from Wells Fargo. Your line is now live.

Hey, good afternoon. So first one for me on store OpEx, because I think you said a quarter ago that a small percent of your stores were on minimum hours. And I'm curious first of all where are you with that today? And then for 2024, is the game plan more about managing the stores to maintain a level of profitability? Or do you balance that with keeping the store staffed to drive growth when the category inflects?

Yes, I believe that about one-quarter of our stores are currently operating at minimum hours. We've assessed this and made some adjustments to the minimum hours for this year. In my view, considering the volumes our stores are handling, the current minimum hours seem appropriate, and we generally avoid going below that threshold. It's essential to maintain a certain number of hours to effectively operate the store and manage the flow of products. Therefore, if any of those stores were to experience a decrease in volume, we likely wouldn't adjust their hours, as there is a minimal number of hours required to run a store efficiently.

Got it. And then with existing home sales hovering around this $4 million level today, you mentioned the levels embedded in the 2024 outlook. But curious, at what level you would need to see for the business to step back into positive comp territory and to sustain positive comps?

So I'll take a stab at that. I said on previous calls that I felt like existing home sales would have to turn positive year-over-year. And I think when they do that for a sustained amount of time that will give us a much better shot of posting positive same-store sales growth. So when they turn positive, there’s a bit of like it doesn't come instantaneously to customers, but there's within a three-month window we feel like those comps could turn positive.

If you examine NAR's data, we fell below four million units starting in September 2023. This indicates that there's a slight delay involved. If we begin to see four million units or more around that September period, accounting for a lag of two to three months, we should start observing positive comparisons for the business. That's why I mentioned in my prepared remarks that we believe we will start from our current position, likely seeing low double-digit growth in Q1 and then moving to flat or positive in Q4. That's the timeline we have in mind.

I think just longer term, Zach, the high we get on existing home sales is $6.5 million. We're now at a 40-year low of 3.78%. I think the median is probably 5% to 5.5%. So I just think we've got aged houses. We have a lot of millennials and Gen X who are going to urgent that they need homes. And so as we get past this time assuming mortgage rates continue to come down this is going to be a really good sector long term.

Thanks for the time, guys.

Our next question is coming from Steven Forbes from Guggenheim Securities. Your line is now live.

Thanks everyone. Trevor, maybe I'll just focus on a follow-up to your response right there. A lot of sort of just debate about what the sort of post-recovery comp profile looks like inclusive of cannibalization and also just your relative strength in the end market. So any way to help frame like what you think the comp profile should or could return to, if we get back to a more normalized macro with $5.5 million existing home sales? Is this still based on your relative positioning in the business in the industry like a mid- to high single-digit comp story? Or has something's changed? I would love to just hear how you guys are thinking about the next three to five years here?

Yeah. I think if we go back to 5.5% depending on how fast we got there, I mean that would be a pretty big lift to us. Obviously, that would be fantastic. We would love that. I think the things we've done throughout the last certainly 13 years that I've been here have positioned ourselves to be even better. And again, when we compare ourselves just financially comparing ourselves to our peers our performance is pretty meaningfully outperforming. What our team has done with the assortment and the operations team marketing, the way we handle our website, I mean all of those things as you heard in my prepared comments we continue to invest in this cycle. So I think our competitive position is as good as it's ever been as a category killer. And when it turns, we’re in great shape. But I think the other thing short term, when it actually turns, we're in the best in-stock levels we've ever been in. So we've seen that happen in my 13 years here when business gets strong and we have really good in-stocks and a really good curated assortment at local at the store level then we'll take off like a rocket. We just we need something to happen in the macro to help store those consumers to come in and buy from us.

I agree with everything you've said. Additionally, because we’ve remained focused on our strategy and continued to open stores during a challenging market, we now have a number of new stores that should provide significant growth as the market recovers. Since they started off slowly, we can expect an incremental boost from these stores.

Thank you. Next question is coming from Steven Zaccone from Citi. Your line is now live.

Hey, good afternoon everybody. I wanted to ask about unit opening plans for 2025. So, I think last time you guys spoke to us it's tough to make changes to 2024 in a short timeframe. But as you think to beyond the next 12 months, if we're in an environment where rates maybe stay a little bit elevated, is that a concern that maybe you should pull back on some unit openings?

I will address that question. 2025 is quite far off, so we’re not ready to discuss our store opening plans for that year. However, it will largely depend on the macro environment and the trends in existing home sales. If we see a year-over-year increase in existing home sales, we are confident in proceeding with our store openings as long as the return on investment remains consistent with historical trends. We will monitor how this year unfolds. Today's news on existing home sales is encouraging, and we hope that this positive trend continues. By the middle of this year, we will have ample opportunity to assess our store count and will have more information at that time.

The only thing I'd add to Tom this year I think close to 75% of our stores are in existing markets. And as we grow, we're going to have more of that because there just won't be as many new markets. And we have a much better understanding and conviction on what our return on invested capital and our returns are in our existing markets just because when you open your seventh store in a market or your 10th store in a market there's much less guessing versus when you have to go to a new market. And so we would obviously take that into consideration. If indeed things aren't as good and it's more difficult, the places we would consider possibly paring back, which is again that would be very unusual for the last 100 years of housing in America. But if that was true, that's probably where we pare back it's probably more of the new markets because we still get good returns in existing markets and that's where the majority of our stores are going.

And the final comment on new store openings is all of this nothing changes our view that there'll be that we can have 500 stores. So it's just a question of timing.

Thank you. Next question is coming from Seth Sigman from Barclays. Your line is now live.

Great. Hey everybody. I wanted to focus on pricing. It does seem like there is a little bit more noise in the industry around discounts and maybe prices starting to come down. I'm curious what you're seeing your strategy is going to be here? And maybe just put it in the context of some of the price changes that you've been testing through the year. Where does that stand today? Thank you.

Hi, this is Ersan. The changes we observe in the market are not unreasonable; sometimes promotional activities involve lower-quality or clearance items. We've noticed some price reductions and an increase in home centers, but the independence factor hasn't changed much. We have been testing retail changes since last February, and as we mentioned in the last quarter, certain products aimed primarily at professionals showed a good return, although some results were inconclusive. We continue to evaluate our balanced portfolio and adjust retail prices as necessary. We believe we still maintain a strong position against our competition and aim to sustain that.

Thank you. Next question is coming from Chuck Grom from Gordon Haskett. Your line is now live.

Hi. This is Eric on for Chuck. I had a question on gross margin, which you're expecting a nice incremental improvement this year. So what are the additional drivers driving expansion? And also just given that the top line has been soft, why not reinvest some of that in the price to drive incremental volume? I guess what have you seen on the price elasticity of those products in which you have lowered prices?

I will take some of that, and maybe Ersan can add on later. As we have indicated, we believe there are ongoing benefits to gross margins, partly from continued reductions in supply chain costs that will manifest over time. Our merchants have excelled in negotiating costs in a challenging market, where vendors are keen to sell their products. Our merchants are skilled at asking for competitive pricing and have been effective in securing it. Additionally, as we have diversified sourcing beyond China and identified new countries of origin, we've successfully achieved improved gross margins. Furthermore, consumers are increasingly gravitating towards higher-quality products in our stores, which yield better margins, and our designers are contributing significantly to our sales, further improving our margins. Consequently, we believe that margin rates can continue to decrease without necessitating price increases, which is a positive outlook for us. We also reinvest in pricing strategies. As Ersan noted, we have tested various areas of the store by lowering prices to observe the effects on sales volume. When we obtain definitive results demonstrating success, we will persist in that strategy and maintain our focus on it.

Thank you. Next question is coming from Greg Melich from Evercore. Your line is now live.

Hi. Thanks. I wanted to follow up on the ticket progression, maybe it ties in with the pricing and mix question. But if we think about that comp improvement you talked about through the year, it sounds like it's pretty much all transactions and traffic getting better. Would you expect the ticket to sort of be steady through the year? Or would that also have a similar progression as you go through your guidance?

Let me just went first, and Bryan has got something he wants to say too. When you look at what's going on with our ticket right now being down in the mid-single digits, it's really driven by our laminate business, which last year was our largest category. This is really laminate and vinyl together. That's really driven by people who are doing much smaller projects, and you have a lot less health slipping, right? When you were at five million six million existing home sales, there was a lot of investment that we need to go into those homes, and you would do full homes or full floors or things like that. Now, what you see is our square footage has come down pretty meaningfully in the double digits because people are doing either their main bathroom or powder baths or things like that. That's part of the reason our tile business is doing well and our installation business is doing well relative. So, that's probably the biggest driver. That is by far the biggest driver of our ticket is that laminate and LVT. And so when existing home sales go back up, which we're optimistic they will and they have for the last 40 years, we would expect that ticket to go back up because hopefully, people are flipping houses and they're working on bigger rooms as well.

Yes. I mean look, I would just add. So from the ticket perspective that's going to drive, but you're right; the majority of the change in our comp is going to be led by transactions. And so that's also on the back of existing home sales. So as those start to lap weaker numbers in the back half, it will be a transaction-led story, but also ticket will improve throughout the year as well, so...

Thank you. Our next question is coming from Robby Ohmes from Bank of America. Your line is now live.

Hey thanks for taking my question. I was curious how you're taking the inventory down so much. What the secret sauce is there. Are you guys reducing SKUs? Are you bringing in a lot less? Are you spreading inventory from existing stores into the new stores you can bring in a lot less that helping the freight cost situation as well? How are you going to bring the inventory down?

We had year-over-year, I think we're high single-digit, low double-digit SKUs that were down versus last year. But probably more important than that is again, we weren't impression, but we saw late last year that the trends were like they were going to improve, and we felt like we could take some actions in late 2022 and then early into 2023. We were fortunately right on that and we're able to bring it down. As I mentioned, our inventory replenishment team and our merchandising team have done a fantastic job even though our inventory is down 14%. Our in-stocks are probably the best I can remember in a long time. And so yes, our team has jointly managed that this year, and we think when the customer is ready they're going to be very pleased to come in when we get more traffic.

Thank you. Our next question is coming from Justin Kleber from Robert W. Baird. Your line is now live.

Thanks. Good afternoon everyone. Just as it relates to the smaller format stores as we think about modeling new store contribution in '24 any color just how we should think about the year one sales of those smaller stores relative to that $14 million to $16 million benchmark you typically talk about I guess for an average store?

They're lower. Speaking about it that way, they're lower, but we have stores like the one we're planning to open in Brooklyn, which we believe will be much higher. Our goal is to create a balanced portfolio of stores to achieve numbers around $14 million to $16 million. You'll notice in our 10-K that we're slightly below that goal for the class of 2022, close to the lower end of it. We've opened almost half of our class of 2023, so it's probably too early to assess that class, but we expect due to the macro environment to be below the low end of those goals for now. When the macro situation improves, we anticipate those numbers will significantly improve as well.

Yes. The only thing I'd add is that in a single store market, the smaller stores will be less numerous. But if the smaller stores are in a normal-sized market, then the volumes are very close to what a normal store would be.

And as Trevor alluded to in the call, the operating margins can be just as good as the large stores. And so the profitability is going to be there because a lot of those will have lower cost structures. So your operating margin can be just as good.

Yes. We were looking at a couple of stores in Knoxville and Sarasota and a couple of other markets that are pretty small square footage stores, but do 50% above average store volumes. And so we can operate a very productive profitable small store that is and again in this case, these stores are much smaller but they do way better than the average store. So we're thoughtful and smart about it.

Thank you. Our final question today is coming from Jonathan Matuszewski from Jefferies. Your line is now live.

Great. Thanks for squeezing me in and good evening. Just a follow-up on the store opening plan. I know it's early for 2025 but I just want to understand again that the smaller store penetration in 2024, is that specific to this kind of macro housing backdrop? Or should we expect 25% to 30% of new warehouse openings going forward being in that smaller format? Just wanted clarification there. Thanks.

I guess I'd say two things. One, I think we're Bryan maybe in the 10-K we say we're around 77,000 square feet our average store. I think the class of this year, I think it's not that far off of that. So I don't want to make too much of that. We're just trying to be transparent that we are going to be opening more smaller stores than we have a very big store that we're opening in New York that's somewhat offsetting it. So I think as we look forward, I don't know that we're going to have a meaningful change because again we're trying to hit that blended average of those new store economics that I mentioned earlier.

Okay. So that brings us to the end of the call. I'd like to thank everyone for joining us today. I do have I want to take a minute; it's a bittersweet day at Floor & Decor. We have one of our long-term executives, our Executive Vice President of Strategic Business Development and Supply Chain, Brian Robbins has and we announced this a while back that Bryan is going to move on to the next chapter of his professional life and personal life. And Brian's been here for 13 years or almost – it feels like 13 years not quite but Brian has been here he joined right after I did. He's built up an incredible supply chain function at Floor & Decor, built an incredible team. He's led our real estate team in development over the last few years, and he was behind our first acquisition that has turned out to be a huge success for us. So Brian is a friend and Brian is going to always be part of the Floor & Decor family but we wanted to take a minute and wish him well. So Brian, we wish you well. I know you'll miss these but we're appreciative of all your contributions to the company. I'd like to thank all the associates who listening to the call. Thank all the analysts for your interest in our business. We look forward to updating you on the second quarter call – on the first quarter call. Thank you.

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