Greetings, and welcome to the Floor & Decor Holdings, Inc. First Quarter 2024 Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Wayne Hood, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's fiscal 2024 First 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 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 the earnings press release, which is available on our Investor Relations website. The 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 2024 First Quarter Earnings Conference Call. During today's call, Trevor and I will discuss some of our fiscal 2024 first quarter earnings highlights. Then Bryan will provide a more in-depth review of our first quarter financial performance and share our thoughts about some of our financial projections for the remainder of fiscal 2024. We are pleased to report fiscal 2024 first quarter diluted earnings per share of $0.46, which surpassed our expectations. We take pride in these results as they demonstrate how our teams can manage our profitability by continuing to strategically grow our gross margin rate and prudently manage expenses without sacrificing customer service amid ongoing weak demand for hard surface flooring. These results are a testament to our store associates' hard work and dedication, reflecting their tireless work to drive sales and engagement with our homeowner and Pro customers daily. We are happy to report that their efforts continue to result in high customer service scores across all our touch points, which helps set us apart from our competition. During this uncertain demand period for hard surface flooring, it's important for us to focus on what we can control. Therefore, we've taken steps to reinforce our price and value messaging at the front of our stores. We do this by offering bulk-out displays of opportunity buys and compelling adjacent category offerings. Our strategy also includes having well-equipped salespeople and designers on the floor at the right time. We proactively greet and assist customers who enter our stores by asking them what project they are working on. This approach helps us drive conversions and customer satisfaction. We are also diligent about following up on open quotes and focused on closing high-value opportunities in design and Pro using our CRM solutions. Additionally, we continue to drive sales with innovative new products like XL slabs that were added to 17 additional locations in the first quarter, bringing the offering to 130 warehouse stores. While demand for hard surface flooring is likely to remain challenged in the near term, we remain committed to offering our customers innovative and stylish hard surface products of superior quality at everyday low prices and providing them with a high level of service across all touch points. These values are fundamental to our growth strategy, and we believe that will help us increase our market share and create lifetime value among homeowners and pros. Let me briefly turn my comments to the tragedy in Baltimore caused by the Francis Scott Key Bridge collapse on March 26. We know many agencies are working very hard to reopen the channel as quickly as possible, and we thank them for their efforts. We have a 1.5 million square foot state-of-the-art distribution center near the port of Baltimore, one of our four distribution centers in the United States. This facility is open and operating normally. We have a strong experienced distribution and supply chain leadership team with a long history of successfully overcoming unexpected global distribution and supply chain challenges. We proudly called on them again and, as expected, they quickly implemented strategies to ensure the timely flow of inventory to our stores, with only a modest impact on profitability. We are working closely with our ocean carrier partners to divert containers to the nearby ports of New York, New Jersey, Norfolk, and other East Coast ports. Recently, a channel that can accommodate smaller commercial vessels opened. We will shortly begin moving products on barge vessels utilizing this channel to replenish our distribution center as well. We are hopeful the Baltimore port will start operating normally by the end of May. Before turning the call over to Trevor, I would like to express how proud our leadership is of our team's ability to manage our profitability, inventory, and capital spending despite the challenges posed by weak flooring demand. By doing so, we can continue to make significant strategic growth investments with a long-term goal of operating 500 warehouse stores in the United States. Trevor will share more details about our busy fiscal 2024 second quarter new warehouse store opening plan, which includes the opening of a new 129,000 square foot warehouse format store in Brooklyn, New York. We welcome the people of New York to visit the store and embark on their next inspirational flooring project.

Thanks, Tom. We take pride in the execution of our sales-driving initiatives by all of our associates to grow our market share and manage our profitability despite the near-term challenges in demand for hard surface flooring. In the first quarter of fiscal 2024, our sales declined by 2.2% to $1,097.3 million, with comparable store sales falling by 11.6% from the same period last year. As expected, comparable store sales sequentially improved as we cycle past easier sales comparisons and successfully execute our sales-driving initiatives. Monthly comparable store sales declined 14.7% in January, 10.7% in February, and 10% in March. Our fiscal 2024 second quarter-to-date comparable store sales declined 9.3% from the same period last year. From a regional standpoint, we are seeing some early positive sales trends emerging from our West division. Comparable store sales are improving sequentially and are better than the company average. The West division was the first to experience softening sales in 2022 and has been less impacted by cannibalization compared to other divisions due to fewer new store openings. Comparable store sales were similar in our East and South divisions, excluding the impact of opening new stores. Turning to our sales trends by merchandise categories. Like the fourth quarter of fiscal 2023, our fiscal 2024 first quarter comparable store sales in tile, wood, installation materials, and adjacent categories were better than the overall decline of 11.6% in comparable store sales. Laminate and vinyl remains our weakest merchandise category. We are pleased that our merchandise strategies continue to resonate with our customers as they remain consistently drawn to our better and best price point products, which offer industry-leading innovation, trends, and styles at everyday low prices. We are happy that the successful execution of our merchandising strategies continues to lead to a sales mix shift to higher-margin products. Let me comment about our comparable store sales, average ticket, and transaction trends. In the first quarter of fiscal 2024, our average ticket sequentially improved slightly, declining 4.2% from last year as we began to lap strategic price reductions we took in 2023. In terms of transactions, our 2024 first quarter comparable store transactions fell 7.7%, compared to a 4.9% decline in the fourth quarter of fiscal 2023, a 6.8% decline in the third quarter, a 7.1% decline in the second quarter, and a 9.9% decline in the first quarter. The trends largely reflect the macroeconomic headwinds as customers are purchasing less square footage and undertaking smaller projects. Turning my comments to our connected customer pillar of growth. We are happy to see that our connected customer strategies continue to resonate with our homeowner and Pro customers. It's worth noting that our customers can engage with us through 10 different touch points during their purchase journey. Achieving a unified execution among these touch points is crucial to the customer experience and a competitive advantage over the independents, particularly for high consideration purchases like flooring. We've observed that customers who visit our stores and engage with our website spend substantially more than single-channel customers. On our most recent earnings call, we discussed how we are integrating our processes and technology solutions to further develop a seamless in-store and online experience. In the first quarter of fiscal 2024, we saw a sequential improvement in organic traffic, and connected customer sales increased by 1.1% from last year, which resulted in a 100 basis points increase in sales penetration to 19%. We continue to be pleased with our design services. Our design teams are focused on delivering an elevated design experience through engagement with designers who are passionate about our customer service and our products. The teams are focused on driving engagement, selling the entire project, and following up on high-value sales opportunities by leveraging the power of our CRM solution. Furthermore, our designers are collaborating with the Pro desk to build relationships with contractors. We are happy to report that our first quarter design sales growth was better than the company's overall sales performance. As a result, the design sales penetration increased sequentially and year-over-year. Moreover, we are pleased that our Net Promoter Score improved sequentially and that efforts to grow our basket selling are working. Moving to our new warehouse store format pillar of growth, in the first quarter of fiscal 2024, we opened 4 new warehouse format stores, ending the quarter with 225 stores, an increase of 16% from the same period last year. These openings include new warehouse format stores in Mansfield, Texas; Summerfield, Florida; Glen Burnie, Maryland; and Augusta, Georgia. We have a busy fiscal 2024 second quarter opening plan and have already opened 4 new warehouse stores, including Lone Tree, Colorado; Bremerton, Washington; Brooklyn, New York; and Hendersonville, Tennessee. In June, we expect to open new warehouse stores in West Palm Beach, Florida, and Columbus, Georgia. We plan to open 30 to 35 new warehouse format stores in fiscal 2024 across various large, medium, and small market sizes unchanged from our previous guidance. Most of the 2024 warehouse format store openings are expected to be in large existing markets in the East and the South, where we continue to 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. We expect the remaining 70% of our fiscal 2024 new warehouse store openings will be in the second half, with the majority of the openings in the fourth quarter. Turning my comments to pros. In the first quarter of fiscal 2024, pros accounted for approximately 45% of sales. The top 20% of our pros are busy, increasing their average order frequency moderately from last year. We are pleased that our market share with our pros continues to grow, particularly among our top pros due to our engagement and supply house mindset. Notably, this mindset led comparable store sales in the first quarter for installation materials exceeding the company average. Consequently, the first quarter sales penetration rate for installation materials increased 200 basis points from last year and 220 basis points among the top 20% of our pros. We are excited about the opportunity to grow our market share further in this underpenetrated Pro-heavy merchandise category. We intend to grow our market share fully with pros by leveraging our Pro dashboards and CRM tools to drive engagement with new, inactive, and active pros. In the first quarter, we launched new tools that will better measure the effectiveness of our Store Pro sales managers contact journey. We now provide enhanced reporting to help our field leadership better understand the effectiveness of their contact and closure journey. Furthermore, we have begun to partner with native advertising platforms within bank's digital channels that should provide us with a practical and cost-effective avenue to drive new Pro acquisitions.

Thank you, Tom, and Trevor. I want to express my gratitude to all of our associates who contributed to our fiscal 2024 first quarter results. Your hard work, dedication, and commitment enabled us to remain flexible, strong, and resilient, allowing us to exceed our expectations at a time when customer spending on discretionary hard surface flooring is uncertain. Although first quarter sales fell at the low end of our expectations, we delivered diluted earnings per share of $0.46 surpassing our expectations. This achievement is due to the diligent efforts of our teams in delivering on our gross margin expansion plan and prudently managing expenses and capital spending. Now, let me discuss some of the changes among the significant line items in our fiscal 2024 first quarter income statement, balance sheet, and statement of cash flows, as well as our outlook for the remainder of the year. Our fiscal 2024 first quarter gross margin rate was better than expected, increasing 100 basis points to 42.8%. This was mainly due to favorable supply chain costs and, to a lesser extent, product costs. The increase in our gross margin rate enabled us to grow our gross profit by 0.2% from the same period last year despite a 2.2% decline in sales. Our fiscal 2024 first quarter selling and store operating expenses increased by $30.7 million or 10.1% to $334.3 million from the same period last year. This growth was primarily driven by an increase of $39.6 million from operating 31 additional stores versus the same period last year and $3.5 million at Spartan, partially offset by a decrease of $12.4 million at our comparable stores. As a percentage of sales, fiscal 2024 first quarter selling and store operating expenses delevered by 340 basis points to 30.5% from the same period last year. This expense deleverage is due to the decrease in comparable store sales and the addition of new stores. Our fiscal 2024 first quarter general and administrative expenses of $66.8 million increased by 7.9% from the same period last year. The growth is attributed to the investments we continue to make to support our store growth including growth of $4.9 million for personnel expenses related to additional staff and to a lesser extent, incentive compensation. Due to the decline in our first quarter sales, general and administrative expenses deleveraged 60 basis points to 6.1% as a percentage of sales. Our fiscal 2024 first quarter preopening expenses of $9.6 million increased 19.6% from the same period last year. The year-over-year increase primarily resulted from the timing of spend for new stores. Our fiscal 2024 first quarter net interest expense decreased $2.9 million or 59.8% from the same period last year. The reduction in interest expense is due to lower average borrowings under our ABL facility, higher interest income from our interest rate cap derivative contracts, and an increase in capitalized interest, partially offset by interest rate increases on outstanding debt. Our fiscal 2024 first quarter adjusted EBITDA of $123.0 million decreased by 17.8% from the same period last year, primarily due to expense deleverage from the decline in our comparable store sales. Depreciation and amortization increased 21.7%, contributing to net income declining by 30% to $50.0 million and diluted earnings per share of $0.46, which is a decline of 30.3% from the same period last year. Our fiscal 2024 first quarter effective tax rate of 12.8% decreased from 21.1% in the same period last year, primarily due to increased tax benefits related to stock-based compensation awards. Moving on to our balance sheet and cash flow. We continue to maintain a strong balance sheet which allows us to prudently grow within our existing capital structure even during a period of industry contraction. We are pleased that our fiscal 2024 first quarter inventory decreased 6.7% to $1.0 billion from the end of fiscal 2023 and declined 12.6% from the first quarter of fiscal 2023. We ended the fiscal 2024 first quarter with $698.2 million of unrestricted liquidity, consisting of $57.4 million in cash and cash equivalents and $640.8 million available for borrowing under the ABL facility. Let me now discuss how we are thinking about the macroeconomic environment and our financial performance for the remainder of 2024. There remains considerable uncertainty about the timing and slope of potential improvement in existing home sales and hard surface flooring spending in 2024. The absolute sales of existing home sales may have bottomed at 3.85 million units in October of last year, but they are choppy, improving sequentially to 4.38 million units in February 2024 before falling to 4.19 million units in March. Unfortunately, the direction and absolute level of 30-year mortgage interest rates are rising again and housing affordability and spending on large ticket discretionary durable goods remain headwinds. For these reasons, we believe fiscal 2024 full year sales could be at the low end of our guidance of $4.600 billion to $4.770 billion as the timing and slope of improvement could be more elongated. We expect to gain a better line of sight about the timing and slope of sales over the next several months, which will better inform us about the second half of 2024.

That is not to say we don't expect sequential quarterly improvement in comparable store sales. We expect our fiscal 2024 first quarter comparable store sales decline of 11.6% to represent the trough for the year, and comparable store sales to improve sequentially throughout the year from easier sales comparisons and improving transactions. In the meantime, we believe we can manage our profitability. The successful execution of our gross margin expansion plan gives us more confidence in the top end of our annual 2024 gross margin guidance of 42.6% to 42.8%. As we look to the remainder of fiscal 2024, we expect to prudently manage selling and store operating expenses. We anticipate modest sequential growth in selling and store operating expense dollars from the first quarter of fiscal 2024. Based on our fiscal 2024 first quarter results, we now expect our fiscal 2024 full year interest expense to approximate $9 million to $11 million and our tax rate to approximate 20%. Over the long run, we remain excited about the structural opportunities in repair/remodel and flooring spend, including housing demand that exceeds supply in an aging housing stock. We still see a path to achieving our long-term goal of mid- to high-teens adjusted EBITDA margin. Operator, we would now like to take questions.

Our first question comes from Chris Horvers with JPMorgan.

My first question is, can you talk about how the quarter played out relative to your expectations? I think January had some weather impact. How did it proceed from there and through April? And related to that, how reflexive is demand to mortgage rates above or below 7%?

Chris, this is Tom. I'll begin, and Bryan can add in. The quarter showed improvement each month. We started January with a decline of 14%, which improved to negative 10%, and now we're at negative 9.3%. As we move further into the year, we'll face easier comparisons. We will have to see how this trend continues. Interest rates are rising, currently at 7.5% and nearing 8%, which is the highest this year. It’s uncertain how this will impact us since we only have existing home sales data until March, making it difficult to predict future outcomes. I believe that rising interest rates will influence existing home sales and present challenges.

Maybe asked another way, how much more are you sort of implicitly back half weighting the sales relative to what you thought a few months ago?

Yes. I mean I think that's what you heard in the prepared remarks is that we're trending towards the lower end. So we're not putting more to the back half. We do expect things perhaps to get slightly better from where we are today, but that's reflected in that guide. And that's why we kind of alluded in the call that we're trending more towards the lower end.

And Chris, the only thing else I would say is, the further we get into the year, I mean, you started in June of last year, we started bumping along below $4.1 million annualized for only 1 month above that $4.1 million. That was in February at $4.38 million. So as we start lapping those numbers, the year-over-year spread gets a little bit better. As soon as they turn positive, we do think there'll be a lag, but then it gives us a better opportunity to comp positively.

Exactly. I mean, just to reiterate what we said on the last quarter, we do expect sequential improvement in both transactions and ticket with the biggest movement coming in transactions. If you think about it, we just sit in Q1 at negative 7%, we'll get towards the end of the year and being flat to slightly positive. The same thing on ticket, it's down 4% in Q1. That will stay where it is and then hopefully getting flat towards the end of the year. So both of those movements are based on easier compare and slightly improvement through the year.

Got it. So if I were just going to reword it, like essentially, your back half view is largely unchanged, and it's really just what's happened in the first half, and that's why you expect the low end of the range?

Yes, that's right.

Yes, that's right.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

It's Simeon. The comments that were made on the West, I don't know if it was normalizing or improving. Can I ask if that's happening against easy compares or you're seeing some reacceleration? And then is that DIY or Pro? Are you able to decipher that?

Simeon, this is Trevor. The West started off having issues a good 6 to 8 months before the rest of the business in 2022. So they've had this now for longer. They have been dealing with this for a longer period of time because they had some of the more strenuous negative existing home sales to start off with. We think they're going up against easier comparisons. I think some of the housing malaise that affected everybody has come across the United States, and now we're seeing some of that more difficult in some of our bigger markets. So places like North Texas and Florida, Georgia, and maybe to a lesser extent in the Midwest and the Northeast. I think just to call it the housing recession for lack of a better term started out West and worked its way east. And so that's why they're doing better. And conversely, that's why some of our stores in Texas and Florida and Georgia and markets like that, the Mid-Atlantic are having a harder time because they just didn't hit them at the same time as the hit out West.

Got it. Okay. And my follow-up is, you also said in the West, maybe some stores not as cannibalized from growth. The cannibalization rate of the business, is that more controlled by the percentage opening? How much you're opening stores in the region versus the industry's health?

Yes. I think it's more of the latter. Our cannibalization last quarter was actually a little bit better than we'd seen in the previous four quarters, that's obviously nice to see. But yes, generally speaking, our cannibalization is dictated by where we're opening stores and what kind of store we're opening against. If you're opening a brand-new, beautiful bigger store against an older, smaller store, you're going to have higher cannibalization. If it's a big store going up against another new big store that's, call it, a 45-minute drive time, you're not going to see as much cannibalization. I think we said this year, I think some 70% of our stores are in existing markets, which is probably similar to last year as well. So I think we own that cannibalization more than the market factors.

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

How do you think your relative market share trended in the first quarter versus where it had been, especially in more mature markets? And what's happened quarter-to-date, especially in light of your comments that you think you'll hit the low end of the full year top line range?

Yes, Michael, this is Tom. I'll take a shot at that first. So it's hard to know in the first quarter kind of what happened from a market share perspective, not everyone's reported yet. So you have to take a minute to digest everyone's numbers to see. When you look at last year, Floor & Decor grew our revenue by 3.5%, and competitors predicted the market went down $5.2 million, while big boxes comp negative and flooring was worse than them. Across the publicly traded competitors, we were positive in the first quarter, only Mohawk reported out, and they were negative, while we were slightly better than they were. So, I don't think much changed. When you look at the competition and the competitive landscape, I think the way we were competing last year versus the way we compete in the first quarter, I haven't seen much of a change. So I would anticipate that we're continuing to take market share in a really tough market.

Okay. My follow-up is there anything you could say about what's been happening quarter-to-date, especially in light of the comments on getting to the low end of the full year guidance range?

Quarter-to-date, the comparison is slightly improving month-over-month. We had hoped for a quicker improvement. March's existing sales have dipped, which shows a lag in what we're observing. Since June of last year, we've seen consistently low existing home sales around $4.1 million, with only one month, February, exceeding that figure. This makes us cautious as we consider the remainder of the year. Spring is crucial for existing home sales, and we will have more insight when we receive the April data and as we see what happens in May and June. If existing home sales perform well, we will benefit, but if not, it will be more challenging.

Can I just dig into that, Tom, is there a case? Or what would be the case where your trends become disconnected from existing home sales?

Chris, this is Trevor. I think just reading a lot of the other large consumer products companies that have reported here recently, they had a common theme, and it's just that the consumer is under pressure. Inflation is still a little bit high, savings rates have been drawn down. They don't have the same level of discretionary spending power that they had. That's probably the only thing that's one of the things that we're watching closely.

The way we compete across every category, we saw that hasn't changed. Our stores are still competitive across every department that we participate in. I don't think there's anything fundamental in the model that would affect that. It's much more the health of the consumer that would be a challenge.

And our next question comes from Chuck Grom with Gordon Haskett research.

Could you provide an update on the store openings? Specifically, how many are in the smaller format locations? Also, regarding your long-term target of 500 stores, can you clarify the mix of small versus large locations?

On the smaller format stores, I think it's less than 20% of our stores, maybe less than 30% of our stores are going to be in the smaller format this year. That's mostly in smaller markets, but that could also be if we're opening a store in a more tertiary market that's further out in existing markets.

Yes. And 2025 is a long way away, so we're not prepared to talk about what our new store growth will be in 2025. We have slowed our new store growth down since existing home sales became under pressure. We went from opening 20% new units per year to now this year, it will be about 30 to 35 stores. We still believe we'll be within that range. We'll watch as the year progresses and make a determination on next year and let you know as we get to that determination. For now, we won't grow at all costs. We're being thoughtful about the way we invest in the business.

And I just looked real quick while Tom was giving that elegant response to that, I think we have roughly 7 of our stores going to be the small format stores this year.

And the next question comes from the line of Zach Fadem with Wells Fargo.

So as we look back over the years, we've seen a lot of tailwinds both internally and externally from aging housing stock, you've had a shift to hard surface, house slippers, etc., and then some company-specific tailwinds like designers and Pro loyalty, etc. As we think about the next category upswing, could you walk us through what you think the next round of tailwinds could be both internal and external? And is it fair to say that your comps on the next upswing could be as strong as they've been over the last upswing?

I'll take that. I think we're making investments in key categories today that are unique to us when you look at our stores, XL slabs that Tom talked about, that's one area. Larger type products are trending better. While the stores are big, that's a nice category. It's small today, but if you look at our adjacent categories, that category is growing. We've got ideas there where we could continue to add adjacent categories. On the macro front, those are things that, yes, I mean, we got great merchants. We've been thinking of ways to drive merchandising strategies that are unique to us, and we'll continue to do that. I think on the long term, as you've heard us say many times over the last 7-8 years is you've got 130 million housing units in the United States. 80% of them are over 20 years old. While on average, they're 40 years old, and there's just a replacement cycle that has to happen. So I do think everybody in this space, including us, should do well over the medium to long term. The reason house values continue to go up and up.

Zach, I would say even outside the four walls too, we're super excited about the opportunity in commercial as well. So we're in the early innings there. That should accelerate total sales growth over the next couple of years.

And lastly, I think Trevor kind of mentioned, I would just say that we haven't changed anything with our product line view strategy. We're continuing to bring in newness across every department. Newness in fashion, newness in durability, across every department. As the market turns, I feel better about our product availability today. It's just a tough macro environment. This too shall pass; it's just a question of when.

The next question comes from the line of Steven Zaccone with Citi.

I wanted to follow up on two points that have already been asked. The first on the West. What are you actually seeing that's driving the improvement? Is it more traffic? Are you actually starting to see some larger project sizes? And on the second aspect, cannibalization, can you remind us what is that right now as a drag to the comp? What is the long-term goal for cannibalization?

Yes. So it's more transaction-based. Our size has increased slightly, but it's not the main driver. It's really around activity so it's traffic and transactions on the West Coast that we're starting to see health out there. As for cannibalization, we've never actually given the number, so I can't quote exactly what it is. I will say it was slightly favorable compared to historical trends in Q1, but it's relatively in line, and we expect it to stay there probably over the next couple of years.

Long, long term, assuming we're still opening at this level of store count, it will come down just because you won't have as many new store openings. But I think the other side is our new store productivity will get better. I've seen it here and at other companies I worked at when you open the second and fifth stores. For example, in Houston, the first five stores did well, but the second five stores did incredibly well.

The next question comes from the line of Steven Forbes with Guggenheim Securities.

Trevor, I think you mentioned installation materials. I was curious to focus on that with my question on how are you sort of thinking about what the right penetration in terms of the opportunity is? How penetration varies across the store fleet today? Is there anything in particular that you've seen as a driver of success in the stores with the highest penetration now?

Yes. I think it's a lot of heavy lifting by the merchandising team and the store operations team. We made some great dedicated strategies going on two years ago, where we brought in two of the best brands out there for installation and setting type products that matter to the pros. We increased our in-stocks so they could have confidence that we had the in-stock jobs when they needed them. We got our pro team some good reporting on where we were underpenetrated with pros. Our exceptional CRM data allows us to see this pro at 17% penetration while our best pros are at 25% to 30% penetration. I don't know that it will ever get there, but we understand the industry. It's roughly, I mean, almost 25% of total sales are installation materials. When we put our two installation materials categories together, I think we're close to 20%. So our goal is to continue to grow it; it was our best performing category last year.

Perfect answer. The only thing I would add is that the purchase of the product and the purchase of the installation materials occurs at two different times. The end user may make one purchase and the Pro makes the other. When we didn't have markets built out, you had to drive past a lot of home improvement centers to get to a Floor & Decor. The more Floor & Decors we have in the market and take the drive time out, the more convenient we are for pros.

The next question comes from the line of Seth Sigman with Barclays.

My question is on average ticket down 42%, a little bit better than it's been. Over the last few quarters, you've talked a lot about the decline in project sizes. Can you just remind us where we are in that correction? Are we close to cycling that? Do you think this could be a factor that perhaps is just different for a while in the context of some of the consumer pressures?

I'll take the second part of the question. I think project sizes will come back to what they were historically. Our job sizes today relate to existing home sales and the amount of flippers that are out of the market right now. There's a correlation when someone's buying or selling a house. They tend to redo the whole house's flooring versus doing a small project. So I believe that when existing home sales come back up to that $5 million annualized, our job sizes will return to historical norms, but it's going to depend on that improvement.

Yes. I'll take the first part. Whenever we talked about it all through last year and were sequentially declining, I think we moderated from Q4 to Q1. I think we've kind of hit the bottom. It's tied to stay-in-place activity, which is more small powder bathrooms and things like that. We saw a pickup in tiles as well if you look at our categories. If it's some of the bigger projects, it's more laminate and vinyl and other things that have stressed that category. I agree with Tom; as we see a pickup in size, you should also start to see that in laminate and vinyl categories and categories that go in bigger rooms as well.

And the next question comes from the line of Justin Kleber with Robert W. Baird.

Just wanted to ask more of a hypothetical one related to pricing and gross margin. If some of the mom-and-pop or regional competitors start getting more aggressive with price, would you feel the need to maintain a similar price spread? Or are your gaps so wide today that you would be comfortable not necessarily responding if pricing in the industry gets rational?

I think the independents are aggressive, and they have been aggressive. Our spreads are good against them. If they start getting more aggressive, we'll be able to deal with that. Our local managers are responsible for price. So if they have an independent that's aggressive, they have the ability to change their price and bring down their prices to respond to that competition. Our gross margin improvements have been coming from better supply chain costs, and merchants are doing a better job of getting costs from the suppliers.

And the next question comes from the line of David Bellinger with Mizuho Securities.

As a follow-up on gross margins and just the cadence. Should we still expect a sequential improvement through the year? And if total revenues and comps trend towards the low end of the guidance range, can gross margins continue to move higher?

Yes. From where we sit today, we still feel good about the high end, which is 42.8%. You could see slight improvement from there. The one caveat to that is we need to think about the impact of the Baltimore distribution center. That's one of the things we’re looking at that could be a headwind. We still feel good about the high end and, thus, a slight increase from what we alluded to in the 42.6%, 42.8%, but I wouldn't expect meaningful improvement from there.

And the next question comes from the line of Greg Melich with Evercore ISI.

I'd love to follow up on what gets comps better through the year. What do you think needs to be in place for transaction counts to improve from negative 7% to flat? And how much improvement would necessitate project size or mix shift?

Yes, the majority of it is actually just your compare. The expectation for improvement in transactions is primarily on an easier compare. There is a slight improvement needed from existing home sales. So if you're asking us without pinning down an exact number, it needs to maintain where it is today, slightly improving to be flat to slightly improve in transactions. We do expect sequential improvement. But the flow back in project size should improve as home sales rebound.

Yes, for Q1, we were down 10% in transactions last year. So by Q4, we should move towards being flat given easier comparisons and improving transactions.

And the next question comes from the line of Seth Basham with Wedbush Securities.

My question is if you have any updated thoughts on price elasticity related to those retail price reductions? Any changes in your viewpoint there?

We're always testing. We'll drop prices on a product or product category across flooring categories. We don't see much of an improvement when we do it or consistent enough to say, 'all right, that's automatically beneficial.' We see benefits in the installation materials category when we reduce prices; our penetration has gone up. That’s a product with brand recognition. We know that’s a benefit. We'll continue to drive that category. But we haven't seen enough benefit.

And the next question comes from the line of Robert Ohmes with Bank of America.

Maybe a follow-up on that question. Last quarter, you talked about the opportunity buys and deals of the week at the front of the stores. Are you still seeing consumers leaning toward better and best?

Yes, the same trends. Customers, when they buy, lean towards the better and best products across all departments. When they are out, they are opting to do the project and getting what they want. We're trying everything; we're aggressive at the front of the stores with opening price points and deals to engage customers.

And the next question comes from the line of Christopher Bottiglieri with BNP Paribas.

Since you've been a growth company, can you talk about how you've taken costs out of the business or slowed investment? How do we think about incremental SG&A when existing home sales return to normal and comps go up? Is there a rule of thumb for if the comps go up 10%?

If comps go up by 10%, we're going to flow through incredibly well. We've taken costs out; we have been aggressive across every line of our P&L. We don't plan on adding back many costs as sales go up. We already have been thoughtful about the way we're investing in the business.

A typical breakdown is about 55% fixed cost, 45% variable within the stores. That's going to drive a lot of that flow through as well.

Our cost structure has gone down; our gross margin rate has gone up. So our flow-through should be better for positive comps.

And the last question will come from the line of Jonathan Matuszewski with Jefferies.

Just a question on your most valuable pros. The top 20% of pros were increasing their order frequency year-over-year. Can you elaborate on that? They are presumably more integrated into your ecosystem with Pro Premier and training classes, but beyond that, what are you hearing from those pros?

Sure. There's a significant component of our successful Pro strategy focused on relationships. Making sure that pros are taken care of in a way they aren't elsewhere is important. Our ancillary services add features and benefits to why they shop with us. Because we have good technology and practices, we know who those pros are and do an exceptional job of taking care of them.

And our last question comes from the line of Joe Feldman with Telsey Advisory Group.

It was actually somewhat similar to what Jonathan has just asked, but I wanted to take a different approach. In terms of the other 80% of the pros, you're isolating it to the best pros that are holding up. I'm just curious what you're seeing and hearing from those other pros.

There's just not as much business out there. We're the best-performing and we'll see with our reports that we went from sales up in mid- to low single digits last year to actually having total sales lower. Our pros told us they're just not having as many jobs. They were even doing plumbing work or fences to stay busy during this down period. There's just less flooring work to be done in this environment with existing home sales down 40% from the peak.

I appreciate all the time for question and answer today. We appreciate all of your interest. We look forward to giving you a more thorough update as we get to the end of this quarter. Thanks, everybody.

Thank you. This concludes today's conference. You may now disconnect your lines. Enjoy the rest of your day.