Greetings. And welcome to the Floor & Decor Holdings, Inc. Second Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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.

Thank you, Operator, and good afternoon, everyone. Welcome to Floor & Décor’s fiscal 2024 second 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 that are subject to risk and uncertainties. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions, is a forward-looking statement. The company’s actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Floor & Decor assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company will discuss non-GAAP financial measures as defined by SEC Regulation G. We believe non-GAAP disclosures enable investors to understand better our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our investor relations website. 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 2024 second quarter earnings conference call. During today’s call, Trevor and I will discuss some of our fiscal 2024 second quarter earnings highlights. Then Bryan will provide a more in-depth review of our second quarter financial performance and share our thoughts about some of our updated outlook for fiscal 2024. Our fiscal 2024 second quarter total and comparable store sales were modestly below our expectations. However, our gross margin rate exceeded our expectations, which coupled with prudent expense management helped mitigate most of the impact of weak sales. As a result, we were able to report fiscal 2024 second quarter diluted earnings per share of $0.52, compared with $0.66 in the same period last year. We and our industry continue to contend with monetary policy affecting the housing market and repair and remodeling spending, including ongoing soft demand for large project discretionary hard surface flooring. Existing home sales have now declined year-over-year for almost three years. In the month of June, existing home sales declined 5.4% to a seasonally adjusted annual rate of $3.89 million, the lowest level since December 2023 and one of the lowest readings in 40 years. Housing affordability remains a hurdle for most buyers given elevated mortgage rates and record high home prices. Therefore, we are not seeing the resurgence in hard surface flooring demand that we had expected and believe some sustained mortgage interest rate relief is needed to improve existing home sales and flooring demand. Our revised fiscal 2024 sales and earnings outlook provided in today’s press release reflects this muted market environment. We understand the short-term challenges current market conditions pose and are adapting our strategies accordingly. We remain committed to executing strategies that we expect to help us continue to grow our market share while diligently working to manage our profitability and maintaining a strong balance sheet. We opened five new warehouse format stores in the second quarter of fiscal 2024, ending with 230 warehouse stores and five design studios compared with 203 warehouse stores and five design studios in the same period last year. For the full fiscal 2024 year, we now plan to open 30 new warehouse stores compared with our prior expectation of 30 to 35 stores. Looking forward to fiscal 2025 and considering current market conditions, we believe it is prudent to slow our new store opening pace to approximately 25 new warehouse stores. We are pivoting most of the new store openings to larger existing markets where our brand awareness is higher. We believe this increases the likelihood of successful store openings in a challenging housing backdrop. In fiscal 2025, we intend to focus on opening warehouse stores with the highest potential for success in this weak environment, thus maximizing our return on capital. As Bryan will discuss in more detail, we are using this period as an opportunity to better align sales projections and capital spending growth within the current environment. These actions have enabled us to reduce our fiscal 2025 capital investment per new store and increase the expected return for this class of stores by more than 200 basis points. As a reminder, most of the growth in capital spending per new store over the past few years reflects significant industry-wide increases in new store construction costs, a strategic decision to increase the number of self-development projects, which raised capital spending per store but lowered rent, and our entry into the Northeast where all costs are higher. Our long-term goal of operating 500 stores is supported by our ability to open stores in large, medium and smaller single-store markets across the United States to maximize our market share and profitability. We believe the slope and timeline of reaching 500 stores will be influenced by when we return to a historical normal level of existing home sales. We are fortunate to have a portfolio of store sizes that we can open to fit market needs ranging from 55,000 square feet to 80,000 square feet warehouse stores. Our ability to successfully operate this range of store sizes is underpinned by executing a local merchandising strategy at scale. Once we determine the market potential and store size, we micro-merchandise a targeted assortment for each store with input from our Regional Merchants, Chief Executive Merchants or Store Managers, and market analogs to optimize sales and inventory productivity. We are not simply spreading our assortments across the country. In fact, we see further opportunities for customer segmentation to drive assortment decisions to widen our competitive moat. In smaller single-store markets where our annualized sales per store could be less than larger markets, we are able to implement less costly labor and new store construction models. We can reduce our store footprint and SKUs without compromising our merchandising assortments or the customer experience. Because these markets are generally less expensive than larger markets, it’s easier to operate. We believe we can generate internal rates of return that exceed our weighted average cost of capital, making them attractive markets. We are pleased that the market demographics for these potential stores we plan to open in fiscal 2024 and 2025 have higher average household incomes and higher ownership rates than our 2023 store class. Collectively, we expect our planned openings to further solidify our market share and position us for strong growth when industry fundamentals improve. Before turning the call over to Trevor, I want to express our pride in our teams. Their hard work enables us to sustain customer service scores and engagement that are near all-time highs and to successfully manage our profitability, liquidity, inventory and capital spending during this challenging period. By doing so, we can position ourselves to continue growing our market share and make significant strategic growth investments towards our long-term goal of operating 500 warehouse stores in the United States. We currently intend to re-accelerate our new store opening cadence, as well as generate healthy operating margin expansion and earnings growth in a normalized environment. Let me now turn the call over to Trevor.

Thanks, Tom. I also want to express my gratitude to our associates for their hard work and dedication to serving our customers. Despite current market conditions, we are in a favorable position due to significant investments we have made over the last decade to build our business model that has significant competitive advantages. These investments continue to differentiate our results versus the competition. Many of you may notice that some of our competitors face significant challenges in the current market environment. Fortunately, we have a strong balance sheet and cash flow that allows us to continue to make investments in our associates, our new stores, merchandising, technology and distribution centers. Thus, we believe we can continue to grow our market share further in both the short- and long-term as we have done for almost 25 years. As Tom mentioned, we expect to generate healthy operating margin expansion and earnings growth in a normal housing environment. Turning to the second quarter fiscal 2024, our total sales declined by 0.2% to $1,133,100,000 and comparable store sales decreased 9% from the same period last year. Monthly, comparable store sales fell 8.9% in April, 9.7% in May, and 8.6% in June. Our fiscal 2024 third quarter to-date comparable store sales declined 7.7% from the same period last year. In the second quarter, like the first quarter of fiscal 2024, comparable store sales in the West division were better than our company average. As a reminder, our West division was the first to experience softening sales in 2022 and has been less impacted by cannibalization than other divisions due to fewer new store openings. Comparable store sales were similar in the East and South divisions. Let me comment about our comparable stores’ average ticket and transaction trends. In the second quarter fiscal 2024, our average ticket decreased by 4.3%, compared to the same period last year in line with the 4.2% decline in the first quarter of fiscal 2024. Comparable store transactions declined by 4.9%, compared to a 7.7% decline in the first quarter of 2024. These trends mainly stem from macroeconomic housing challenges and customer purchasing less square footage and undertaking smaller projects. Turning to our fiscal 2024 second quarter sales trends by merchandise categories, comparable store sales in decorative accessories, installation materials, adjacent categories, wood, stone and tile were all at or better than the overall comparable store sales which declined by 9%. We are pleased that our strategic merchandising efforts are successfully driving sales towards our better and best price points which offer industry-leading innovation, trends and styles at everyday low prices. Furthermore, these strategies continue to lead to a sales mix shift to higher margin products enhancing our profitability. We are also making continued strides in our strategy of diversifying the country of origin of our products and reducing our exposure to China. As a reminder, in fiscal 2023, China accounted for approximately 25% of the products we sold, compared with approximately 50% in fiscal 2018. We expect a meaningful reduction in fiscal 2024 from our continuing diversification strategies. Turning my comments to our connected customer pillar of growth, we remain pleased that our connected customer strategies continue to drive engagement and growth with our homeowner and Pro customers. Our second quarter connected customer sales increased by approximately 1% from the same period last year, largely due to growth in transactions. Consequently, connected customer sales accounted for 19.5% of the second quarter sales, compared with 19.1% in the same period last year and 19% in the first quarter of 2024. As a reminder, we continue to observe that customers who visit our stores and engage with our websites purchase substantially more than single channel customers. Therefore, we are continuing to integrate our processes and technology solutions to further develop a seamless in-store and personalized online experience. We are building on these strategies with a focus on driving organic traffic growth to our website and further optimizing the customer search experience. We plan to achieve this by improving our website speed and the quality of website search, adding inspiring and user-generated content for customers and refining our online merchandise process to increase efficiency. Turning to our design services, our design teams are focused on delivering an elevated design experience by working closely with our Pro desk to build relationships with our contractors, selling them entire projects to grow the basket size and following up on high-value sales opportunities. These strategies contributed to improved close rates and year-over-year growth in second quarter sales from design services. As a result, our fiscal 2024 second quarter design sales penetration increased meaningfully from the same period last year. Turning my comments to Pros, we are pleased second quarter sales to Pros improved sequentially and year-over-year accounting for approximately 48% of retail sales. As discussed in prior earnings calls, we are growing our market share with Pros by leveraging our Pro dashboards and CRM tools to drive engagement with new, inactive and active Pros. We have added tools to better measure the effectiveness of our Pro sales managers’ new Pro acquisition efforts. We continue investing in quarterly Pro roundtables, listening to our Pro customers and adapting our tools based on what we learn to drive better engagement. We also have invested in rolled-out payment technology to allow our Pros to authorize payment remotely, removing friction in how our pros do business with us. We continue to deepen our relationship with Pros by partnering with trade associations to host educational events. In the second quarter of fiscal 2024, we hosted 27 National Tower Contractor Association and eight National Wood Flooring Association education events, training approximately 533 Pros. We remain excited about hosting approximately 145 educational events in 2024, which we believe is industry-leading in flooring. Importantly, we see significant lift in sales from pros attending these events. Furthermore, we continue to partner with native advertising platforms within banks’ digital channels, providing a practical and cost-efficient way to successfully drive new Pro acquisitions. Finally, we are pleased that our sales from our regional account managers in the second quarter of fiscal 2024 exceeded our expectations. We ended the second quarter with 71 regional account managers, compared with 61 at the end of the second quarter of fiscal 2023.

Thank you, Tom and Trevor. I am incredibly proud of how our teams have stepped up to manage our profitability, balance sheet and inventory in fiscal 2024. I am particularly pleased with how we are growing our market share with Pros, which accounted for approximately 48% of retail sales in the second quarter of fiscal 2024. Additionally, our second quarter results underscore how we continue to execute our plans to grow our gross margin rate, diligently manage expenses and generate free cash flow in this muted market environment. Let me now discuss some of the changes among the significant line items in our second quarter income statement, balance sheet and statement of cash flows. Then I will discuss our outlook for the remainder of the year. Our fiscal 2024 second quarter gross margin rate increased by 110 basis points to 43.3% from 42.2% the same period last year, exceeding our expectations and improving by 50 basis points from 42.8% in the first quarter of fiscal 2024. The year-over-year increase in gross margin rate is primarily due to favorable supply chain costs. Our fiscal 2024 second quarter selling and store operating expenses increased by 9.6% to $341.4 million from the same period last year. The growth in selling and store operating expenses is primarily driven by an increase of $39.1 million from operating 27 additional warehouse stores compared to the same period last year and $1.8 million at Spartan Surfaces, partially offset by a decrease of $10.9 million at our comparable stores. As a percentage of sales, selling and store operating expenses increased by approximately 270 basis points to 30.1% from the same period last year. This expense deleverage is primarily due to the 9.0% decline in our second quarter comparable store sales and new store investments we continue to make to support our growth. Our fiscal 2024 second quarter general and administrative expenses increased by 6.9% to $67.7 million from the same period last year. The growth in G&A expense was less than we anticipated due to diligently managing our costs and lower than expected incentive compensation. G&A expense deleveraged approximately 50 basis points to 6.0%, primarily due to the 9% decline in our comparable store sales and investments we continue to make to support our store growth. Our fiscal 2024 second quarter pre-opening expenses increased by 6.5% to $10.6 million from the same period last year. The increase primarily reflects higher store relocation expenses compared to the prior year. Our fiscal 2024 second quarter net interest expense decreased 77.1% to $0.7 million from $2.9 million the same period last year. The reduction in interest expense is due to a decrease in average borrowings under the ABL facility and an increase in interest capitalized, partially offset by interest rate increases on outstanding debt and lower interest income from our interest cap derivative contracts. Our fiscal 2024 second quarter effective tax rate decreased to 19.8% from 22.4% in the same period last year, primarily due to increases in excess tax benefits related to stock-based compensation awards, partially offset by limitations on deductions for compensation to certain employees. Our fiscal 2024 second quarter adjusted EBITDA declined 10.4% to $136.9 million, primarily due to expense deleverage from the decline in our comparable store sales. Depreciation and amortization increased 17.6%, contributing to net income declining by 20.7% to $56.7 million and diluted earnings per share of $0.52, a decline of 21.2% from the same period last year. Moving on to our balance sheet and cash flow. We continue to maintain a strong balance sheet which allows us to continue to grow within our existing capital structure even during a period of industry contraction. We ended the second quarter with $772.1 million of unrestricted liquidity consisting of $138.1 million in cash and cash equivalents and $634.0 million available for borrowing under the ABL facility. Our inventory as of June 27, 2024 decreased by 11.5% to $1.0 billion from the same period last year and decreased by 6.2% from the end of fiscal 2023. Let me briefly comment on the recent rise in spot rates for ocean containers. As a reminder, we strategically enter into long-term contracts with our ocean carrier partners which provide us with dedicated capacity at a contracted rate and the rising spot market rates are not expected to have a material impact on us in fiscal 2024. Let me now discuss how we are thinking about our updated outlook for fiscal 2024 full year. Our fiscal 2024 sales are expected to be in the range of $4,400 million to $4,490 million, compared with our prior guidance of $4,600 million to $4,770 million. Comparable store sales are estimated to decline 6.5% to 8.5%, compared with our prior guidance of down 2% to 5.5%. The midpoint of this guidance assumes existing home sales and business trends remain relatively unchanged from current levels for the remainder of the year. We expect our comparable store sales to sequentially improve throughout the remainder of fiscal 2024 on both the high and low end of guidance primarily due to easier sales comparisons. As Tom mentioned, our third quarter to date comparable store sales declined 7.7%. We estimate our third quarter to date comparable store sales were adversely impacted by approximately 70 basis points from Hurricane Beryl. The primary impact of the July storm was wind damage and we are not anticipating an offsetting increase in demand as we have experienced following other storm events involving substantial flooding. Gross margin is expected to be approximately 43.2% to 43.3%. Depreciation and amortization expense is expected to be approximately $235 million, compared with our prior guidance of $230 million. Net interest expense is expected to be approximately $6 million to $7 million, compared with prior guidance of $9 million to $11 million. Tax rate is expected to be approximately 18%, compared with our prior guidance of 20%. Adjusted EBITDA is expected to be approximately $480 million to $505 million, compared with our prior guidance of $520 million to $560 million. Diluted earnings per share are estimated to be in the range of $1.55 to $1.75, compared with our prior guidance of $1.75 to $2.05. Diluted weighted average shares outstanding of approximately 108 million shares, compared with our prior guidance of 109 million shares. Capital expenditures are expected to be approximately $360 million to $410 million, compared with our prior guidance of $400 million to $475 million. The decline in capital expenditures is due to the reduction in new warehouse store openings to 30 stores from 30 to 35 stores as per our prior guidance. We are currently planning to open one distribution center in 2025 located in Seattle, Washington. We are strategically pushing the opening of our Baltimore distribution center to 2026 as the current industry environment does not require additional capacity. Additionally, we are benefiting from our inventory optimization efforts. We can quickly bring this capacity on as demand improves. In the second half of fiscal 2024, we are beginning a multiyear investment to upgrade portions of our Enterprise Resource Planning System that will replace our existing core financial and merchandising systems. We expect this investment to have a minimal impact on our fiscal 2024 earnings and is incorporated into our earnings and capital expenditures guidance. We continue making green investments that we believe position us for accelerated sales and market share and strong earnings growth when industry fundamentals improve. I want to thank our associates and vendor partners for their dedication and contributions to serving our customers every day.

We would now like to take questions.

Hey. Good afternoon. So, Tom, on the decision to reduce openings in 2025, how would you frame the go-forward between small format and large format stores? And then, given the historical advantage of big stores with depth of assortment, in-stock quantities, does this edge still hold if you pivot to smaller boxes?

Hey, Zach. I'll address the first part of your question first. As we look towards the class of 2025, we've initiated a significant effort to explore ways to open stores at a lower cost. Our team has successfully identified over $1.5 million in cost savings that will benefit the class of 2025, allowing us to achieve a better return on these stores. We aim for more improvements and our work is ongoing. Additionally, we have carefully reviewed our list of potential locations for 2025, selecting those with the highest chances of success. A greater number of these are situated in larger markets compared to the class of 2023, enhancing our prospects in those areas. Our brand awareness is also improving, which should lead to a stronger start for these stores. Regarding the class of 2025, we are intentionally scheduling these openings for the latter half of the year. We hope that by that time, interest rates will have decreased, providing us with more flexibility. We believe we will be in a more favorable environment with increased demand for our category, which should give these stores a better opportunity for a successful launch. We are indeed opening smaller stores in smaller markets, a strategy we also employed in the class of 2023. That class was approved back in 2021 when the circumstances were different, but we did adopt a smaller store model. The advantages of our broad assortment, consistent stock, appealing presentation, design elements, and services remain unchanged. Most of our small 55,000 square foot stores are opening in markets where there is less competition. For instance, there are significantly more competitors in Dallas, Texas, than in Temple, Texas. Thus, when we open these smaller stores, the competitive landscape varies, and we believe that our strengths will still apply even in smaller markets. Finally, we are confident that these smaller markets have the potential to achieve similar operating margins as the rest of our store fleet. Although they may not reach higher sales volumes due to their smaller size, they are also more cost-effective to operate, allowing us to maintain comparable operating margins.

Got it. Appreciate that. And then just assuming the lag from rate cut to existing home sales improvement to comparable sales improvement, could you share your latest recovery timeline and what type of environment do you think you would need to see in order to comp positive in 2025?

Hey, Zach. This is Bryan. I’ll start and then Tom and Trevor can weigh in. For us, I mean, just to be clear, the midpoint of our guide assumes that trends stay the same from Q2. So, we’re assuming basically on a comp basis, we’ll have sequential improvement in both the high and low end throughout the back half. But the majority of that improvement is mainly due to easier comparisons. So, you’re right, there is a lag that comes from interest rates changing to existing home sales to then where we impact that. We still feel like it’s somewhere around zero month to three months. So it is still a tight correlation whenever we have that. But if there was a rate cut in September, we’ll feel a little bit of that this year. So, to hit the high end of our guidance, things would have to get a little bit better. So, that’s incorporated in there. To hit the low end, things would have to get a little bit worse from where we were exiting Q2.

Yeah. I mean, the only thing I think I’d add, and we’ve said it before, we’d like to be in an environment where existing home sales are positive year-over-year. And we think as that turns that there’ll be more flooring demand in the market. So, there’ll be a lag to that and I don’t know when they’ll return. I certainly thought interest rates would have come down by now and I thought existing home sales would have been better by now, and that just hasn’t happened yet. So, if the Fed says they’re going to lower rates, we’ll see how the consumer holds up and only time will tell.

Thank you. Good evening, everyone. My first question is about the period when there were tariffs and freight issues. Can you provide an overview of what transpired during that time? I understand there was some pressure on gross margin rates, but there were also factors like inflation and ticket prices to consider. Could you remind us of the details? Additionally, how do you think the current situation differs? It seems like consumers are feeling priced out at this stage, and elasticity appears to be increasing. While I know this involves a lot of speculation, any insights you could share would be appreciated. Thank you.

Sure. Hey, Chris. This is Tom. When tariffs came the last time around, we were heavily dependent on China. We’ve taken now, when I joined the company, we were over 50% of what we got was out of China. That number’s down to less than 25% today and going down further. So, we’ll have less dependency there. When it happened, we moved products outside of China to move them to the other parts of the world where we could buy similar products at similar prices. And then things we couldn’t move, we passed that price along to the consumer and they were able to absorb it. What’s different this time, luckily, we have less, but we’re still getting to China to some extent; everyone’s got to get out of China. It’s things that maybe are only made in China. So, everyone’s going to have to deal with that pressure. Our merchants are continuing to look for ways to lessen the dependency on it and we’ll see how the consumer responds. My guess is they’ll step into a different product within the store. If the prices have to go up and they can’t afford it, they’ll step to something else out of our broad assortment.

Hey. I’ll follow up too. This is Bryan. The one difference between last time and this time too, so back in 2018 and 2019 was we only passed through the cost. Since 2023 and into 2024, we’ve actually been able to recapture a lot of that margin as well. So, now we’re protecting the margin rate. Last time the margin rate actually went down because we only passed through the cost itself.

Chris, this is Trevor. The last thing…

...Chris, I’d say is the other big benefit we have is, our prices are already fairly below all of our competitors. And so, we think that our competitors will feel it more painfully than us, and as Tom mentioned, it’s just so different because we were sourcing 50% of what we were buying now and that number is going to be a lot lower as we get into possible tariffs if there’s a change in the administration.

Yeah. First off, we usually have three-year rolling contracts. And so, we’ll feel it a little bit, we’ll have the lower rates for a little bit longer because not all of our contracts are up next spring, which is when most of the supply chain contracts come up. But yeah, I mean, if spot markets stay where they are, call it a third or whatever it’ll be that will come up for renewal next year is we likely would have higher rates. Our view is that all of our competitors in the past have passed that along. We would expect to see that again in this environment. I get your point that that still affects the consumer and the consumer stretch. But I guess said differently is I don’t think we’ll be in any different competitive position unless our competitors decide to meaningfully lower their gross margins, which historically they have not done.

Makes a lot of sense. Thanks very much.

Good evening. Thank you so much for taking my question. So, you’re on pace to have just under $18 million in sales per store this year versus $17 million on a reported basis in 2019. So, what percent of your stores right now have lower sales in traffic than they did in 2019? And outside of just very depressed existing home sales, why do you think a good chunk of your stores are producing lower volumes today than they were in 2019?

I'll provide a broad answer. I can certainly discuss the store count aspect. We are facing a challenging housing market. Before 2019, when we went public and through that year, existing home sales were consistently above 5.5 million, nearing 6 million annually. This was an excellent time for our category as people engaged in buying and selling homes, which positively affected our business. Fast forward to today, we experienced a temporary surge during COVID, and now we are working through that influx. Currently, we are in our third straight year of declining existing home sales, housing prices are extremely high, and household affordability is at a historic low. These factors impact every store in every market. As conditions improve, we believe sales volumes will return. We underestimated how favorable conditions were before COVID, and now our category faces increased challenges.

Yeah. Michael, this is Bryan. I’ll jump in. Look, on a store-by-store basis, it’s a little hard to analyze it that way because we do open in existing markets. So, we actually do put pressure on our own stores through cannibalization. What I would really point to is our five-year geo-CAGRs. And so, if you look at that, we’re still positive. Even on a transactions basis, our geo-CAGRs against 2019 from a geo-basis are still up just sub-1%. So, when you look at it in total and we look at the markets that we’re in and we look at comp in total, our transactions are still up from 2019. And so, I wouldn’t look at it necessarily on a store-by-store basis.

Got you. And then my follow-up question is, given the cycle that Floor & Decor has been through over the last several years, what do you think a normalized comp rate for the business is? Especially as you slow new stores, you’ll get less of a benefit from the waterfall effect of those new stores ramping to maturity. And there could be some structural changes in the category from the technology like LVT and LVP may mean that there’s just been less changing of flooring in the United States. And if interest rates come down and it inspires some existing home sales, but interest rates are coming down because of a leaking macro environment, how does that play into it as well?

Hey, Michael. This is Trevor. I’ll address that. We still have 130 million housing units in the United States, with 80% being over 20 years old and an average age of over 40 years. As Tom mentioned, there was a significant pull-forward of demand during COVID. However, eventually, people are likely to want to move or upgrade their homes. Research shows that flooring is typically one of the top investments people make before selling their home because it can help increase the price. Additionally, when moving into a new home, they also tend to invest in flooring to enhance its appearance. While it's uncertain how things will unfold, looking at the last 15 years, flooring sales have historically grown at rates of about 3% to 5% annually during favorable existing home sales periods. Even our most established stores might see that same rate of growth. So, if we consider a growth rate of 3%, it's true that we are opening fewer new stores, which means less of the cascading benefit that comes with new store maturation. Nevertheless, I believe some of that growth will continue. In a more normalized market, we should aim for mid-single-digit comp growth, and in a particularly strong year, it could reach high single-digit comp growth. We are confident that our business model is superior to many others in the industry. While the future is uncertain, we are fortunate to be in an industry dealing with aging housing, and flooring remains a high priority investment for homeowners, whether due to existing home sales or changing trends.

I think the only thing I’d add to is that if, depending on the slope of the recovery, you’re going to have, for us, I think, two of the things are benefit. We’ve continued to open. While we’re not open at the 20%-unit rate that we’ve opened historically, we’ve opened a lot of stores in the last couple of years in a down market. Those stores should accelerate pretty nicely in the event that the market starts to turn.

Good afternoon, everyone. I’ll ask one question, maybe a two-parter. First, if you look at the performance of immature stores, so maybe years two, three, and four, are they performing where they should, and I’m assuming they’re not because the environment is weak? And if you can adjust for the weakness of the macro, is that spread to where the industry is, is that about the same or is there something else within those cohorts? And then maybe the second part, Trevor mentioned that California was healthier because it was first in. Are there examples of markets that were last in that are still the weakest right now? Is that trend uniform across the country? Thank you.

On the second part, yeah. I mean, we’ve got markets that are big for us, particularly like Texas and Florida, and some in the Mid-Atlantic that are now starting to feel what we saw out West. That’s why the overall comp has come down over the previous three quarters or four quarters. Florida and Texas, places in the Mid-Atlantic, Washington, D.C., markets like that are much more meaningful for us just on raw volume numbers. So, yeah, as the housing weakness started out West and moved to the East, you’ve seen our comps follow that same trend. And then on the new store cohort, we still have a waterfall where, for example, our stores that we opened in 2023 that are now comping, they’re actually comping positive.

Hey. Thanks very much. Gross margins, real nice improvement here in the second quarter, north of 43%. Is this a good level to think about going forward beyond fiscal 2024 or do you think about investing some of that back in the price or other areas to stimulate demand?

Thank you for the question. This is Tom. We are pleased with our performance regarding gross margins. We've reinvested some pricing in areas where adjustments can enhance movement. We’ve worked to keep our prices competitive, especially on installation materials, which are frequently purchased by professionals. When we lower prices, we see an increase in unit sales. Overall, our pricing remains favorable compared to competitors. We regularly adjust prices every week based on market conditions. Since I joined, we have consistently improved gross margins for various reasons. Our team is doing an excellent job of managing product movement and securing better margins. The flooring category is currently under pressure, which allows us to negotiate better with existing vendors. Additionally, our in-store designers, of which we have over 900, help drive higher-ticket sales and better margins when they engage with customers. We expect margin expansion to continue into 2024, and that is our objective.

Hey, everyone. Thanks for taking the question. Just thinking about the recovery opportunity, the relationship to housing turnover makes sense, should drive an improvement in transactions at some point and actually your transaction decline was less bad in Q2. I guess I’m thinking about the project size issue, and therefore, average ticket. Are you seeing anything that could suggest that project sizes just don’t go back to what you’ve seen over the last few years? Is there any context on that? And then, I’ll tie it in with a product question as well. Just thinking about the laminate and LVP categories do seem to be underperforming quite a bit. It looks like down high-teens based on the 10-Q. So, any more perspective on that, why those categories are underperforming and maybe ties in with the project size? Thanks.

Yeah. Seth, this is Tom. I’ll address that and then others can add their thoughts if they’d like. In my view, as existing home sales increase, it benefits those categories. This encourages flippers to enter the market, taking on bigger projects like entire homes or basements. When existing home sales improve, that segment of the business will return, leading to larger project sizes. Typically, people working on their own homes focus on one project at a time, like a bathroom or kitchen, rather than renovating the whole house simultaneously. Additionally, when a house is bought and sold, it might sit vacant for a while, resulting in larger projects. Over time, as existing home sales stabilize, I believe our project sizes will return to pre-COVID levels. Another factor influencing laminate, particularly laminate and vinyl, is their easier installation process. During COVID, with people working from home and investing in their homes, these categories became more accessible for DIY projects. Many opted for simpler vinyl installations instead of complex tile work, which accelerated some business. So, these two aspects helped the situation, and as conditions improve, the category will also improve.

Good evening. Tom, I was hoping you could provide a little more detail around the cadence of the 2025 store opening plan. What does back loading mean? I don’t know if you could be more specific there. And also, what does it mean for the ability to extract or generate EPS growth while still leaning into the investment profile of the business? Like, is there any way to sort of frame, like, what sort of comp level or sales growth profile would be needed next year based on the current investment plans to get EPS growth higher next year or…

EPS higher? Yeah. I’ll take the first part of that and maybe Bryan can weigh in at the second. I mean, first, I’ll headline with, it’s way too early to talk about 2025. We’re trying to give you our first thoughts on kind of how we’re thinking about the class of 2025 stores. We get lots of questions about that. So, we wanted to give you how we’re thinking about it today and things could change, but this is how we see it today. The reason the stores are back and loaded is a bit purposeful. And when I say back and loaded, that means they’ll happen in the second half of the year. We will have some stores that open in the first half, but we’ll have more that open up in the back half. And part of that is, we think it’s going to take a minute for the market to get better, and the better that demand is in the category, the better the new stores will start. So, we think later in the year will be better. So, that’s why we’re, it also gives us flexibility in the stores that we select if we push them to the second half of the year. So, that’s the answer on that. And yeah, EPS answer, I guess I answered.

Yeah. We’re now ready to comment on 2025, kind of EPS and growth and what it’s going to take. Yeah, we’ve got a lot more planning to do as we get through the year. So, more to come on that as we provide guidance next year.

Great. Thanks very much for taking my question. I did want to understand the impact of slowing unit growth a bit more to the model. So, if you’re opening more in existing markets or the weight is more towards existing markets, is it fair to assume that there’s a little bit more cannibalization on comps? And then, conversely, just on the bottom line, if you’re slowing unit growth, does it somewhat lower the leverage threshold for the business, because like if we do get back to a slightly positive comp next year, can you start to leverage some of those fixed costs and operating expenses?

Yeah. I would just say, yes, that if we do open slightly more stores in existing markets, it will have more cannibalization. But because we’re going to have fewer stores as a percentage of total, we think the cannibalization probably goes down a little bit. So for example, this year, I think we’re going to open 13% new stores and next year, based on the 25, the estimated 25 stores, Tom mentioned, it’s more like 10% growth. And so the math of that would be cannibalization would probably be lower. Yeah, I mean, I think on the leverage point, as Tom mentioned, and you guys have all seen our gross margin has come up, and we’ve got a number of stores that are operating on much more minimum cost hours. So when we start to get back to comp positive, which hopefully will happen next year, we don’t know. But if it does, then yeah, we think the flow through should be higher on that, because we have a number of stores where the cost shouldn’t go up as much and we’re operating at a higher gross margin. So the flow through should be pretty high.

Yeah. Just keep in mind that our new stores are a drag; they actually add deleverage. And so as we open fewer stores next year, if it’s approximately 25, that’ll actually allow us to delever quicker, because you’ve got fewer new stores coming into that combination.

Hey, guys. Thanks for the question. It’s on the ERP, the Enterprise Resource Planning System. Just help us a little more detail there. Why is that needed now? Is there anything you’re looking to improve or something that’s lacking in the system today? And then just the second part in this multiyear rollout, can you help us frame? Are there any safeguards going into place to sort of limit just any type of disruption, whether on the merchandising side or something else? How should we think about all this and just any safeguards you guys are thinking about?

Yeah. This is Trevor. I’ve been here 13 years, and shortly after I got here, we knew we had an incredible business and we had to invest in technology to help us grow this business from some portion of $200 million to the $4.5 billion that we think we’ll do this year. And so we’ve been putting in best-of-breed technologies really for over 10 years and the vast majority of our systems are really good companies that are big companies that you guys would know, public companies that are SaaS-based companies, whether it’s CRM or HR or what we do with supply chain. And the last two that we need to invest in to move off off-prem old AS400 technology is our kind of core merchandising systems and our financial systems. And so, they’re not all that sexy or pretty, but they’re core to what you do to run the business. And so we’ve got a lot of experience in putting in new systems. As I mentioned earlier, we’ve done a lot of that over the last 10 or so years. And these are just the last two that are sitting on old technology that we need to move forward. So we’ve got, again, a good team that’s been here that entire time and we feel like we know what we’re doing. We picked an incredibly strong, very large player. And so when you hear the word ERP, don’t think of that in the same sense for us, because our stores, our systems that we’re putting in are going to be a small piece of that because we’ve already upgraded the rest of the best-of-breed technologies. These are just the last two to be put in.

Hey. This is Bryan. I’ll actually just jump in and weigh in a little bit, too, because I’m sure you guys have a question. But as I alluded to in the comments earlier, it’s not expected to have a material impact for the full year of 2024. So it’ll be minimal. But I do want to call out that it is one of the reasons that we should expect sequential modest pressure on G&A as a percentage of sales in the back half. So it will add just a little bit of pressure. And so we expect to be slightly above 6% for the full year. So that will put just a little bit of pressure, again, minimal for the full year, but a little bit of pressure in Q3 and Q4.

Hi. Thanks. I wanted to follow up on cash flow, sort of both from CapEx and inventory. I guess, how long can we keep inventory flat or down if we’re still opening stores? What’s the right level there? And then on the CapEx side, is the decline this year about next year’s openings or will next year’s CapEx, is that where we’ll see the decline come from fewer openings?

Hey. This is Bryan. I’ll take this and let Trevor and Tom weigh in if they need to. So when it comes to our free cash flow, we expect inventory, you asked on inventory, we expect inventory could be flat year-over-year as we kind of exit the year. But just remember, a lot of that has to do with us optimizing our inventory this year within our distribution centers and also reduction in supply chain costs. So I do think that as we exit this year and move into 2025, as we continue to add stores, I think you will see inventory pick up at that point, but it should hopefully grow in line with the rate of sales. So you will see a pickup there just as we add stores. So I think the inventory reductions will kind of be over as we exit 2024 and it kind of just normalized growth as we get into 2025. And then on the CapEx portion of that question, the majority of the drop really has to do with us opening 30 stores this year versus the original guide of 30 to 35. So it’s mainly that and then a little bit of timing for the spend of the class of 2025 stores, but most of it has to do with the reduction of five stores. Our average new store CapEx for the class of 2024 is around $10 million to $11 million. So if you drop those five stores, that’s the majority of the reduction in the high end. So, obviously, our self-development projects would be above that average and then our site use facilities would be below that average.

Hey, guys. Thanks a lot. Can you speak to competition and what you’re seeing out there? Are smaller peers increasingly struggling and if so, do you expect to see closures if the current environment persists? And then are peers being rational with price or are you starting to see price points move lower?

This is Tom. I’ll take the first part and others can weigh in if needed. We are hearing more pressure in the market. We meet with our field teams quarterly, and conduct weekly shop visits. Currently, competition seems to be struggling more than it has in the past three years as the market declines. This observation spans distributors, small independents, and publicly traded peers. Everyone seems to be under increased pressure. During the last significant housing downturn, there was less competition in hard surface flooring than before the decline, and I believe we will see a similar trend this time. From a pricing standpoint, decent independent competitors in some markets remain aggressive, but it is similar to what we experienced six months to a year ago. There isn’t much change. We do have a few competitors nationwide who are being more aggressive with pricing and giving away more, and we need to be vigilant about that. However, overall, the situation hasn’t changed significantly compared to the previous six months to a year. Our performance, measured against independent and distributor networks, as well as home improvement centers, remains strong.

Thanks. Good afternoon, guys. Just quickly on the gross margin. So real nice performance for Q2 and then you’ve got it up the full year pretty nicely. Is that purely a function of the lower supply chain costs, and if so, is that freight or is there like DC efficiencies, transportation efficiencies? Could you just help us understand the benefits there?

Yeah. This is Bryan. I’ll jump in and let Tom and Trevor jump in if they need to. So you’re right. The sequential improvement, so actually I’ll start. Year-over-year, we were up 110 basis points, Q2 versus Q2. That primarily was due to supply chain costs. The increase from Q1 to Q2 sequentially was really due to a couple of items. And so first, we had less than anticipated impact from the bridge collapse in Baltimore. Second, we had better operations and execution with lower shrink damage and overall markdowns. And then third, not having to pass-through as much supply chain savings in retail reductions than we had planned for, that allowed us to expand the margin rate, but also allowed us to maintain our price gaps in everyday low price strategy, which we’ll always kind of maintain that. So that really gives us conviction that the back half should be in line with the exit rate in Q2 or moderate improvement kind of to achieve that 43.2% to 43.3% for the full year. So, again, we have better visibility and conviction today based on those things that we saw in Q2 versus Q1.

Thank you. And the last question will come from the line of Jonathan Matuszewski with Jefferies. Please proceed.

Great. Good evening. Thanks for squeezing me in. In the past, you shared some insights regarding your most valuable Pro customers. I think historically you’ve said the top 20% of your Pros were increasing order frequency despite the challenged overall demand for the category. Maybe if you could refresh us on trends you’re seeing with your top 20% of Pros and how they’re behaving relative to your broader customer base, that’d be helpful? Thanks so much.

I don’t have the specific how our top 20% are doing, but our Pro business continues to outperform our overall business. So, yeah, we continue to see our Pro business continue to outperform and maybe we’ll have that for the next call. But, yeah, we’re pleased that our Pro business continues to perform better than our homeowner business. Yeah.

Okay. Well, we appreciate everyone’s interest in our company. We thank everyone for joining the call. We look forward to updating you on the next quarter.

Good-bye.

This concludes today’s conference. You may now disconnect your lines at this time. Enjoy the rest of your day.