Greetings, and welcome to the Floor & Decor Holdings First Quarter 2025 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. It is now my pleasure to introduce you to your host, Senior Vice President of Investor Relations, Wayne Hood. Thank you, Wayne. You may begin.

Thank you, operator. And good afternoon, everyone. Welcome to Floor & Decor’s fiscal 2025 first quarter earnings conference call. Joining me on our call today are Tom Taylor, Chief Executive Officer; Brad Paulsen, 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 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 2025 first quarter earnings conference call. During today’s conference call, Brad, Bryan and I will discuss some of our fiscal 2025 first quarter earnings highlights. Then Bryan will share our thoughts about fiscal 2025. We are pleased to deliver fiscal 2025 first quarter diluted earnings per share of $0.45, compared to $0.46 per share in the same period last year. This result exceeded the low end of our first quarter earnings expectations, even though comparable store sales were at the lower end of our forecast. Our fiscal year 2025 first quarter total sales increased by 5.8% to $1.161 billion from $1.97 billion in the same period last year. Brad and I have visited many of our stores over the past few months, giving us a great opportunity to see firsthand the dedication and hard work of our associates, who engage with and serve our homeowners and professional customers every day. We could not be more pleased that our first quarter results demonstrate how effectively they continue executing our growth strategies, achieving record customer satisfaction scores, managing our expenses and profitability, and growing our market share even as sales in the hard surface flooring industry contract. The first quarter results are a testament to how we are focused on what we can control during this uncertain period. As you know, we are operating in an economic environment marked by high volatility, uncertainty, lack of clarity and the tail risk of a recession. While we don't know how this could impact consumer spending for the remainder of fiscal 2025, we have a proactive, flexible plan we are implementing and executing. First, as many of you know, we successfully managed an increase in tariffs back in 2018 and 2019 by pursuing strategies to grow our market share and protect our profitability. Today, we intend to employ similar strategies to achieve these goals in 2025 and beyond. That said, unlike in 2018 and 2019, we believe managing today's tariffs, uncertainty and complexity at scale and speed could be more challenging for some competitors in the hard surface flooring industry. To address this increased complexity, we have organized a Tariff Steering Committee. This committee will ensure we stay focused on executing our top priorities and remain agile in our operational plans as needed. For instance, following the US announcement of a 90-day pause on all reciprocal tariffs, excluding China, we expedited purchase orders to maximize the likelihood they arrive before the end of the pause on July 9, 2025. This exemplifies how we are executing and will continue to execute at speed and scale. Second, we are actively negotiating and collaborating with our vendors to mitigate the higher incremental tariffs on the products we sell. As we have successfully done with prior tariff increases, we believe we have the strategic option to thoughtfully widen our price gaps further, reinforcing our everyday low price value proposition against independence and to grow our market share. We have already observed some retailers and distributors communicate price increases of high single digits to as much as 50%. Third, we will continue to effectively implement our sourcing diversification strategies to find the highest quality products at the lowest possible price for both our homeowner and professional customers. Our scale and worldwide direct sourcing model, which involves over 240 vendors and 26 countries, provide us with flexibility and a competitive advantage, particularly compared to independent flooring retailers and distributors. Fourth, it is likely that we'll need to raise prices to mitigate some of the incremental tariffs following our negotiations. If we do so, we'll continue to use the balanced portfolio approach to product pricing, ensuring a consistent pricing structure across different product categories, while managing our gross margin rate and profitability. Fifth, customers are asking for products produced in the United States, and we have already taken action to identify American-made products in our stores. As we discussed in our fiscal 2024 fourth quarter earnings call, we are proud to report that the United States is now our largest country of manufacture, accounting for approximately 27% of the products we sold in fiscal 2024, up from approximately 20% in fiscal 2018. Turning to China. In fiscal year 2024, China accounted for 18% of the products we sold, declining from approximately 25% in fiscal 2023, and approximately 50% in fiscal 2018. In the fourth quarter of fiscal 2024, this figure dropped to approximately 16%. Based on current market conditions and the universal tariffs that are in place, we anticipate our receipts from China to approximate mid to low single digits of our total receipts as we exit fiscal 2025. For instance, in the first quarter of fiscal 2025, we placed our last purchase order from China for laminate and vinyl, our largest product category, successfully diversifying to other countries. Additionally, we paused all purchase orders from China to evaluate the fluid environment and our assortments relative to our competition. While some specific products can only be sourced from China, our industry-leading broad assortment and innovation enable us to offer homeowners and professional customers alternative options if product costs from China become untenable to US consumers. We believe our size and growth potential position us well to navigate the uncertainty in the market. We are proud to be the second largest retailer of hard surface flooring in the United States. This underscores the strength of our differentiated business model and the effectiveness of our growth strategies we have meticulously pursued since our inception in 2000. Let me turn my comments to new warehouse and store format growth. In the first quarter of fiscal 2025, we opened four new warehouse-format stores, including openings in Venice, Florida; Covington, Louisiana; Tualatin, Oregon; and Gilroy, California. As part of our market optimization efforts, we elected to close our oldest and smallest store in Austin, Texas as the lease expired. We have been strategically positioning other nearby Floor & Decor stores in Austin to maximize the market potential. We plan to open two new warehouse-format stores in the second quarter of fiscal 2025, including Kissimmee, Florida, which opened in April, and San Antonio, Texas later this month. As we discussed in prior earnings conference calls, if the macroeconomic conditions become less favorable than anticipated, we have the flexibility to lower our annual store opening plan as most openings were slated for the second half of fiscal 2025. With that in mind and the potential for slowing economic growth in the second half of fiscal 2025, we plan to open 20 new warehouse-format stores in fiscal 2025, compared with our prior expectation of 25 warehouse-format stores, mainly across large and mid-size existing markets. We will push the delayed five store openings from fiscal 2025 to our 2026 new warehouse store pipeline. If economic conditions worsen from our current expectations, we have the ability to further reduce fiscal 2025 openings. It is important to note that our company is built for more than 20 new annual warehouse store openings per year when macroeconomic conditions improve.

Thanks, Tom. As Tom mentioned, we spent the majority of my first two months visiting stores and interacting with both our team members and customers. These visits have served me as an incredible process for me to learn our business and better appreciate the special people-first culture here at Floor & Decor. At each stop during our travels, I've been highly impressed with the talent of our teams, their passion for serving our customers, and the team's overall excitement about the future potential of our business. Let me now discuss our sales. First quarter fiscal 2025 comparable store sales decreased by 1.8% from the same period last year at the low end of our expectations. From a regional perspective, comparable store sales in the West Division outperformed the company's 1.8% decline. By month, our company comparable store sales declined by 1.4% in January, 1.5% in February, and 2.2% in March. We estimate the first quarter benefit to our comparable store sales from Hurricanes Helene and Milton was approximately 100 basis points compared with approximately 110 basis points in the fourth quarter of fiscal 2024. We estimate the adverse impact of winter storms on our comparable store sales was approximately 50 basis points. In the second quarter of fiscal 2025, we are pleased that our quarter-to-date comparable store sales increased by 1.1%. Among our major merchandise categories, first quarter fiscal 2025 sales growth was strongest in laminate, luxury vinyl plank, wood, installation materials, and adjacent categories. In adjacent categories, we successfully expanded our merchandise offering with a high-quality, semi-custom cabinet program available in approximately 42 warehouse stores and online. We now offer online semi-custom cabinets, express ship plywood cabinets, cabinet accessories, decorative hardware, and cabinet samples that we can ship directly to the job site. As we look ahead to the remainder of fiscal 2025, we are excited to continue delivering new, innovative products and programs to our homeowners and pros. This includes new designs, colors, textures, and enhanced realism on tile and vinyl products that closely mimic some natural products. Cabinets, outdoor products, and the expansion of our XL slab program will represent our largest projects in fiscal 2025. Shifting to our connected customer pillar of growth, our first quarter fiscal 2025 connected customer sales increased by 2.1% from the same period last year, now accounting for approximately 18.3% of sales. We were pleased with the strong year-over-year growth in weekly active users, organic traffic, and sequential improvement in our comparable average ticket. Building on these gains, we enhanced our online design scheduler, resulting in a notable increase in first-quarter design appointments. Additionally, in collaboration with our merchants and supplier partners, our connected customer team expanded our website offering with a wide selection of fully assembled semi-custom cabinets. To support the launch of these semi-custom cabinets, our connected customer team partnered with our marketing team to develop a dedicated cabinet blog. Looking ahead, we remain excited about adding more inspiring designer and user-generated content in 2025. Overall, we expect these strategies, among others, to improve the customer experience and further grow our brand affinity. Let me comment on design services. We are pleased to report that our design services have maintained strong momentum into the first quarter of fiscal 2025. Sales growth was significantly above the overall company performance and is well balanced between comparable transactions and comparable average ticket growth. These results reflect our commitment to design services, which include having trained designers in our stores, providing a personalized design experience, and collaborating with pros on projects. We will build on this success and continue to focus on converting high-value design opportunities. It is important to remember that when our talented designers are involved in a project, the average ticket amount more than doubles and the gross margin rate increases significantly. This underscores our designers' vital role in driving our success with an elevated and personalized in-store and online design experience. Turning my comments to pro, we are pleased to report that sales and comparable store sales to pros continued to grow in the first quarter of fiscal 2025 compared to the same period last year, accounting for approximately 50% of total sales. This growth surpassed the company's overall sales performance from growth in both comparable transactions and comparable ticket. These results continue to demonstrate that our supply house approach is effective, focusing on engagement and nurturing strong relationships with pros. We are focused on speed and accuracy in the load-out process and ensuring we have the best support at the Pro desk. As a result, we maintain a high Pro net promoter score. To attract new pros, we are building brand awareness with our pro marketing and tools to generate leads and contacts. Our marketing and awareness strategies include email campaigns to drive awareness of new products. We continue to benefit from partnering with advertising platforms that provide a practical and cost-efficient way to attract and retain new pros. We plan to enhance this program with a new strategy targeting lapsed and infrequently shopping pros. We also continue to benefit from our Pro Service Managers spending more time outside our stores and in new ZIP codes where they directly engage with pros to build brand awareness, understand their needs, and provide tailored solutions. Finally, in the first quarter, we successfully held 46 educational events in our stores, which is part of our plan to have 155 events in fiscal 2025. We believe these events are industry-leading in the hard surface flooring industry. Finally, I will discuss our commercial business. Overall, economic uncertainty continues to pressure the commercial market, particularly the multifamily segment. This uncertainty, coupled with a potential for slowing economic growth, is leading to a more cautious industry outlook around starting new projects and quotes in fiscal 2025. Nonetheless, Spartan Surfaces' first quarter fiscal 2025 sales increased by 3.8% from the same period last year as we lapped our most difficult comparison to last year. EBIT increased by 1.7% from the same period last year, in line with our expectations. In fiscal 2025, Spartan will continue to execute its plan to diversify away from multifamily and focus on developing a comprehensive national presence in the healthcare, education, senior living, and hospitality sectors. These are high specification sectors of the commercial flooring market, where the opportunity for long-term growth and profitability is greatest. These sectors generally have high quote-to-conversion rates, recurring revenue, and more attractive profitability. Additionally, we are pleased that Spartan's gross margin rate is benefiting from growth in higher margin private label brands and buying synergies with Floor & Decor. As we discussed during our fiscal 2024 fourth quarter earnings call, we are making the necessary investments to support Spartan's long-term growth prospects. These investments, coupled with the economic uncertainty, are likely to mean Spartan's fiscal 2025 EBIT could be approximately flat compared to fiscal 2024, unchanged from our prior expectation.

Thank you, Brad and Tom. We are pleased with our financial performance for the first quarter of fiscal 2025. Our team's resilience and dedication were evident as they demonstrated excellent execution across both operations and merchandising and delivered tight expense control amid uneven consumer spending. Our gross margin continued to be well managed, exceeding our expectations. As Tom mentioned, these efforts enabled us to report first quarter fiscal 2025 diluted earnings per share of $0.45, exceeding the lower end of our expectation. We are in a strong financial position with ample liquidity to navigate the economic uncertainty. As we have in the past, we can continue making prudent growth investments in new stores, product innovation and new inventory, new distribution centers, technology, and most importantly, our people to grow our market share. Now, let me discuss some of the changes among the significant line items in our first quarter fiscal 2025 income statement, balance sheet, and statement of cash flows, as well as our outlook for 2025. We continue to be pleased with how we are managing and expanding our gross margin. Our first quarter fiscal 2025 gross profit rose by 8.1% from the same period last year. The increase in gross profit was primarily driven by the 5.8% increase in sales and a 100 basis point increase in gross margin rate to 43.8% from the same period last year, primarily due to lower supply chain costs. Our first quarter fiscal 2025 selling and store operating expenses increased by 10.3% to $368.8 million from the same period last year. The increase in selling and store operating expenses was primarily driven by $38.5 million for new stores, partially offset by a decrease of $5.0 million at our comparable stores. As a percentage of net sales, selling and store operating expenses increased by approximately 130 basis points to 31.8% from the same period last year. The expense deleverage was primarily attributable to the addition of new stores and deleverage from a decrease in comparable store sales. Our first quarter fiscal 2025 general and administrative expenses increased by 3.5% to $69.1 million from the same period last year. The increase was primarily attributed to the investments we continue to make to support our store growth, including growth of $2.9 million in personnel expenses. As a percentage of sales, first quarter general and administrative expenses leveraged by approximately 10 basis points to 6.0% from the same period last year. Our ERP expenses in the first quarter were $1.8 million in line with our expectations. Our first quarter fiscal 2025 pre-opening expenses decreased $3.6 million, or 37.5%, compared to the same period last year. The decrease was primarily due to a decrease in the number of future stores that we were preparing to open compared to the same period last year. First quarter fiscal 2025 interest expense net decreased $0.4 million, or 20.8% from the same period last year due to lower average interest rates and lower average outstanding borrowings. Our first quarter fiscal 2025 effective tax rate increased to 22.0% from 12.8% in the same period last year. The effective tax rate increase was primarily due to a decrease in excess tax benefits related to stock-based compensation awards. Our first quarter fiscal 2025 adjusted EBITDA increased 5.5% to $129.8 million from the same period last year. The growth was primarily due to the 5.8% increase in sales and the 100 basis points increase in our gross margin rate. Our first quarter adjusted EBITDA margin rate was 11.2%, flat from the same period last year. Moving on to our balance sheet and liquidity. We maintained a strong balance sheet and are pleased with our ability to manage our inventory. In terms of liquidity, we ended the first quarter of fiscal 2025 with $949.8 million of unrestricted liquidity, consisting of $186.9 million in cash and cash equivalents, and $762.9 million available for borrowing under our AVL facility. Our inventory, as of March 27, 2025, increased by 5% to $1.2 billion from December 26, 2024. Turning to our fiscal 2025 outlook. Since we provided fiscal 2025 earnings guidance on February 20, 2025, the global economic and political environment has become increasingly uncertain, unclear, and complex. In March, existing home sales fell by 5.9% from February, reaching a seasonally adjusted annual rate of 4.02 million, the lowest reading for March since 2009, and a 2.4% decline year-over-year. Housing affordability challenges, driven by higher mortgage rates and elevated home prices, continue to pose obstacles to sustained growth in existing home sales. The current environment has the potential to increase inflation, low economic and consumer spending growth, and carry the tail risk of a recession. Consequently, we are updating our fiscal 2025 earnings guidance to take into consideration the uncertain economic environment. This guidance still carries risk due to the ongoing uncertainties. Let me share some thoughts about our fiscal 2025 guidance. The guidance assumes the impact of universal tariffs, but does not contemplate reciprocal tariffs outside of China. Total sales are expected to be in the range of $4,660 million to $4,800 million, or increase by 5% to 8% from fiscal 2024. We are planning to open 20 new warehouse format stores, comparable store sales are estimated to be down 2% to an increase of 1%. Average ticket comp is estimated to be up low to mid-single-digits. Transaction comp is estimated to be down low to mid-single-digits. Gross margin rate is expected to be approximately 43.5% to 43.8%. As a reminder, our gross margin rate is expected to be adversely impacted by approximately 60 basis points to 70 basis points from the two new distribution centers, which is incorporated into our guidance. We estimate that our second quarter gross margin rate will represent the high watermark for the year, and the back half of the year will be lower than the first half in both the high-end and low-end of guidance. Selling and store operating expenses as a percentage of sales are estimated to be approximately 31.5% to 32%. The high end of the guidance assumes our first and fourth quarters are the most pressured from a rate perspective, due to the timing of new stores. General and administrative expenses, as a percentage of sales are estimated to be approximately 6%. General and administrative expenses include approximately $9 million related to our finance and merchandising ERP implementation. Pre-opening expenses as a percentage of sales are estimated to be approximately 0.6%. Interest expense net is expected to be approximately $5 million. Our tax rate is expected to be approximately 21% to 22%. Depreciation and amortization expense is expected to be approximately $245 million. Adjusted EBITDA is expected to be approximately $520 million to $560 million. Diluted earnings per share is estimated to be in the range of $1.70 to $2. Diluted weighted average shares outstanding is estimated to be approximately 109 million shares. Moving on to capital expenditures, our fiscal 2025 capital expenditures are planned to be in the range of $310 million to $360 million, including capital expenditures accrued. We intend to open 20 warehouse format stores and begin construction on stores opening in fiscal 2026. Collectively, these investments are expected to require approximately $200 million to $235 million. The reduction of new store openings from 25 to 20 does not have a material impact on our fiscal 2025 capital expenditures, as most of the capital spending for these stores will still be in fiscal 2025. We plan to invest approximately $20 million to $25 million in new distribution centers in Seattle and Baltimore. We intend to invest approximately $50 million to $55 million in existing stores and existing distribution centers. And finally, we plan to continue to invest in information technology infrastructure, e-commerce and other store support center initiatives using approximately $40 million to $45 million. Also, we will incur an additional $20 million of deferred SaaS ERP implementation costs in other assets not included in capital expenditures.

We would now like to take questions.

Great. Thanks. Hey, everybody. I wanted to just follow-up on the guidance and confirm the tariff impact and how you're thinking about it here. Sounds like it includes the 145% in China. And then universal tariffs outside of that. Can you talk more specifically about how you've embedded the impact in here, how you're thinking about pricing and the margin impact, because you're lowering EPS slightly? Seems like mostly for sales. So is the message that you can basically offset the tariff impact. Thanks so much.

Yes. So there's a lot into that. Seth, this is Tom. I'll start. And just first off, as we said in our prepared comments. We have experience in dealing with tariffs before, our merchants have done an outstanding job looking at what's on the table today. And with the tariffs and making the necessary negotiations, necessary moves and contemplating necessary price increases to offset the impact of those tariffs, as we also mentioned, China, we've made really good progress in diversifying outside of China. And as we said, by the end of the fourth quarter, we anticipate our receipts to be down to that mid-single-digit range, which is from if you go back to 2017, we were 50% of our sales were coming out of China. So we've continued to make nice efforts along that. And with that, we've expected to offset we'll have some modest price increases if the tariffs go in. But looking at what we're hearing from what we're seeing in the marketplace today, we can do that and maintain our spreads pretty easily.

And the only thing I would add is, in my prepared remarks, you heard me say it embedded in the average ticket comp being up mid-single digits to up low single digits, that incorporates a little bit of modest retail, as Tom mentioned. And so again, it's universal tariffs. Ersan and team have done a great job of first negotiating with the vendors. And so we believe that we can maintain our margin rate versus in the past where we really maintained gross profit dollars. We think this go around, just given the impact, that's embedded within the guide.

Okay. Thank you for that. And then as you think about reducing your exposure to China, can you talk a little bit more about how you're going to manage the gap in the assortment? Do you foresee any sort of transition period as it relates to product and availability? And I guess, ultimately, looking out, does it have any margin implications in the future? Thanks.

We are pleased with our efforts to diversify beyond China. This has been part of our ongoing strategy, and we have expedited our plans due to the considerable tariffs imposed. While we recognize that there are certain products that can only be sourced from China, the impact on our offerings is minimal. We anticipate only a slight decrease in availability. I am confident that our diverse range of products will meet our customers' needs without significant shortages.

And I mean, throughout this entire process, any time we diversify, we'll be able to get at, if not better specifications at, if not better costs as well. That's what's helped us expand our gross margin throughout this process.

Okay. Very helpful. Thanks guys.

Good evening. Thank you for taking my question. There is a perception that the business has weakened. You have lowered your guidance even before the tariffs impact your business and the broader economy, which could lead to additional downside risk and the guidance reduction might not fully reflect that. Can you explain why that perception is incorrect? What is the minimum earnings figure you are considering for this year if a recession occurs and impacts the flooring category further?

Michael, this is Tom. I'll do my best to answer that, but these are unprecedented times. As we've mentioned, we will focus on what we can control. It’s quite challenging to forecast consumer demand for the second half of the year. I believe our stores, product selection, service, and execution are at their best. I feel confident that we are gaining market share and I appreciate the trends we're observing, but it's hard to predict the future. There are factors beyond our control. We will manage the tariff situation to the best of our ability, as we always have. We have established plans to handle various scenarios from an expense perspective. If sales continue to decline, we are prepared to reduce costs and manage the business effectively. While there is a lot of speculation about how severe the situation may become, none of us really have a clear answer. In the meantime, we will do our best to execute our strategy.

Yeah, this is Bryan. Just to give a little bit of clarity, the guidance assumes that things stay kind of similar from a sales perspective at the high end, but the low end does assume things do drop off. And so we do assume that sequentially, it would decline in the low end. When you think about it from a comp perspective, the high end of the guidance assumes comps are positive, low single-digits kind of throughout the remainder of the year, with Q3 being the peak. Just remember, we've got a much harder compare in Q4 when you guys are thinking about that due to lapping the hurricane benefit and improved existing home sales in Q4 last year as they stepped up. So, we are being prudent. We are being thoughtful. And when you look at our Q1 sales, as we mentioned on the call, they were towards the low end of our guidance for Q1 comps. And so that's really what we're looking at. That plus kind of the start to Q2 just gives us that range that we settled at. So I mean, we do have a little bit of a drop in the low end. So, we're not necessarily just holding action.

My follow-up question pertains to the tariffs. It’s clearly a rapidly changing situation. Have you observed any price increases throughout the industry? Can you provide details on that? Additionally, has Floor & Decor adjusted prices due to the higher cost of inventory, and when do you anticipate seeing those changes?

Yeah, Michael we have we have seen prices come up in independence and we've seen some of the larger flooring suppliers put announcements out that prices will be going up. So, yes, we have seen that. We have not taken prices yet beyond our normal course of business, where we're always moving prices around up and down, depending on what's going on in the competitive marketplace. But because of the way we turn our inventory and our preparation for this event, we haven't had to take price yet. So, that will begin as we get, you know, past the next couple of months.

Thank you very much. And good luck.

Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hey, everyone. Thanks. So my first question is on the store, the unit growth, how did you arrive at 20? Instead of a different number? I guess if you did, you contemplate going lower and then the scenario, Tom, in which you take it even lower, obviously, recession. That could. Self-explanatory. If existing home sales dip below $4 million, what's the criteria in which you're using at this point? You know, outside of recession?

Yeah. I mean, going down to 20, it was just the first batch. We looked at, and we debated going back going down further. We haven't seen evidence. We need to go down further yet; these are good locations. We believe in them over the long-term. And as we reported, quarter to date, our sales are positive comping. It's been a while since we've been able to say that. But, yes, if things turn worse and it's not so much an existing home sales barometer, although there's a great correlation to that, to our comps. But it would really be if we saw deterioration in the business and if we started to see ourselves falling beyond the low end of our guide, then we'd contemplate pushing the store count down even lower. But we haven't seen that yet, so no need to take more action. My guess is, by the time we get to the next quarter's call, we'll have more information. And if we need to go down further, we have the ability to do that.

My follow-up has two parts. First, regarding the Q2 pickup, is that related to ticket sales or order turnover? Secondly, I believe Brian addressed tariffs earlier. If you are adjusting prices in certain areas, why is the top line outlook lower? Is that only applicable to the first quarter, while the outlook for the second half is expected to be higher? Perhaps I missed that.

So I'm not sure I understand. The second part, but I will do my best to answer it. I think first, when we look at our guide and we're contemplating some ticket, increase historically when we've taken our prices up that's been a net positive for our sales line. We see some small erosion in transaction, but offset by average ticket historically. But because the back-end is a little bit unpredictable with how the consumer is going to be behaving, we want it to be prudent in the way we think about that. There are a lot of other economic pressures on force on the consumer side. So we don't know exactly sure, if history is going to repeat itself when we take modest price increase. So that's the first part of it.

Yeah. I mean, look, Tom touched on it a little bit, but operating in the back half is also just general demand. Okay, just given the environment that we're in. So they may not be necessarily correlated to us taking prices up or down. But it's really just how much spin can there be, how much PC is correlated to flooring and those kinds of things. So it's us just looking at the environment and trying to call it.

Yeah. The other part of the question was the improvement in trend. It's really we've seen improvement trend across everything. Transactions have gotten a little bit better, tickets gotten a little bit better. And we're just seeing a little bit better strength in more areas in the country than just the West so all those things has an impact for the improvement.

Okay. Thanks for the clarity.

Thanks. Good evening guys. So I guess following up on that the acceleration that you've seen in the first month of the quarter, is that just like some of the weather headwinds abating, or do you think the consumer knows that or thinks that flooring is an imported item where there could be some acceleration in demand maybe just pulling, getting their contractor to move faster and potentially creating a divot later on.

I think that's possible, but we noticed some improvement when the announcement about tariffs was made. We saw a slight improvement in the sales trend, and it has remained consistent. The initial news may have caused some immediate sales closures that were previously delayed, but we've performed well throughout the first month of the quarter. Looking back at last year, our stock levels are better, and we have introduced new items. Our outdoor department rollout is contributing positively, and we've just launched kitchens, which are showing promise. So, while there may have been some limited pull forward from tariffs, I don't think it has had a major impact. Most of the changes are due to how we're executing within the business.

Hey. This is Brian and you know, more of the pickup sequentially was ticket both transactions and ticket have picked up. But ticket has led the way. So that tells me that's not necessarily pull forward as much.

Thank you. So my follow-up is you navigated the global supply chain crisis really well. You've moved your sourcing really quickly. As you think about that structural advantage that you have from a sourcing perspective does sort of the potential post-tariff world diminish that in any way? Like, given that there's more opportunity to source domestically, that's a lot less complex, less costly for your competitors and in the Independent. So, does that somehow diminish? Like at the end of the day, do you source from fewer number of countries and more in the US than you did prior to the tariffs? Thanks very much.

It's a challenging question to address, but as we evaluate our situation today, we are actually sourcing from more countries than we were a few years back. Currently, we've increased our sourcing from 22 to 26 countries. Additionally, there isn't sufficient domestic capacity to meet the demand in our category. Therefore, I don't expect our advantage of international sourcing to significantly change in the future. Ersan?

Hi. This is Ersan. I just want to add a few other things too. I mean, first of all, Tom kind of said it that there is not enough US production capacity to satisfy the US demand. And this will impact the whole industry. And – but at the same time, there are some product types that are not producing US at all. It has to come as an import. And even with some universal tariff numbers, the still bringing from overseas is cheaper than some of the prices in the United States. That's why the advantage is still there. And diversification with buying from many different countries gives us the flexibility to switch from one to another a lot easier.

Awesome. Thanks very much, guys.

Good evening. Tom, maybe just following up on sort of the philosophical approach to deploying growth capital here. As we think about the 2026, should we be sort of thinking about it differently than we have in the past? And maybe in the idea of more profit management or balancing profit with growth. Any sort of like higher level thoughts on how you're sort of steering the team in the business as we think about just the deployment of growth capital. Not just this year, but also over the coming years as you're trying to sort of manage margin, manage profitability in a complex backdrop here.

Yes, I mean complex backdrop would be an understatement. But it's too early to talk about 2026 for sure. We're having those discussions today. We still have lots of real estate opportunity and lots of white space in front of us to grow into. It's going to depend on how we see, if there's a line of sight to interest rates coming down, if there's a line of sight to existing home sales improving then I would anticipate our sales would follow that, and then we would have. Then we would go and we would push to open more stores than we're opening today. But it's just it's too early to tell. We will be thoughtful in managing growth and profit. We're trying to manage our balance sheet incredibly well that provides a ton of flexibility. And so a long way around of saying, I don't have the answer for 2026 if things stayed like they were today, then yes, I would anticipate us to continue to have batten down the hatches and run the business the best that we can. If we see a line of sight towards improvement, then we would increase our store rate from here.

And there are strategic opportunities as well. We could always push towards a commercial or other things to have….

That's correct. Yes, we have other things to invest in for sure.

And then maybe just a follow-up on that. I think you guys have spoken in the past that the new store cohorts sort of have moved in tandem here, right. Where – year one, year two, year three year four, year five productivity profile has sort of moved in conjunction with one another. Are you seeing any difference today? Like where that a year two comps may be breaking out versus year four comps versus sort of how the pro forma model is changing or are we still sort of seeing the store classes perform like for like, right versus the performance.

This is Brian. It's our comp waterfall is still intact. It's compressed slightly, but it's still intact. It's just albeit all at a lower base now. So we are still seeing growth in year two, year three, year four, and then year five towards maturing. So, you know in today's environment, even in the environment we're in, we're still seeing kind of that comp maturation and that comp waterfall.

Great. Good afternoon. Thanks very much for taking my question. I wanted to understand the guidance revision because the sales guidance cut is a little bit bigger than your typical or excuse me, the EPS guidance cut is a little bit less than your typical that down one comp is $0.10 of EPS. So maybe Bryan, can you just flush out, how you feel about managing the SG&A side of the P&L? Are you able to scale down minimum hours to greater than 25% of the fleet? Just help us understand that.

So I'll answer the second part first, and then go into the first part. So in today's environment, we're actually about 30% of our stores are on minimum hours. So there's still 70% that we can look at from a transaction basis and flex those hours. I just want to set the stage because again, you're asking about how much is left. And again, kudos goes to all of our teams and the stores and operating teams specifically. We took $3 million out of our comp stores in Q4 of 2023. Last year, we were able to take out $39 million. This year in Q1 already we've taken out $5 million. So when you add up across those six quarters, we've taken out approximately $47 million of costs from our comparable stores. So the teams are just doing an incredible job controlling what they can control. And again, we've still got about 70% of our stores labor. Is that biggest kind of item that we can flex. There's still a little bit of discretionary spend that we can look at. There's a little bit in advertising some other things. So I do think that there still is more room if we need to feel good about where we are today. And you're right, every comp point traditionally is worth $0.10 a comp. So, our original guidance was flat to up three. The new guidance is down two to up one. So you would assume that that two-point flex would have dropped us to 190. It's because of the cost controls and also reducing the store count from 25 to 20. Some of the pre-opening expenses, you'll have a little bit of savings there. So there are a couple of things embedded in the guidance that help us get back up to that two. But really as reduction of store count and just great cost management and also gross margin, right. Our gross margin is running a little bit higher than we anticipated in Q1 as well. So again, it's a combination of all of those things that gives us the confidence to only have to drop it $0.10 on the high end versus what you would traditionally see as 20.

Okay. And then just a follow up, in terms of gross margin, then the impact from tariffs, it sounds like it's basically gross margin neutral. Is that the right way to think about it?

Our goal is to maintain our gross margin rate. So previously I think what Bryan said earlier in the call was that historically, we would try to manage to the dollars. But we believe we can manage to gross margin rate if the universal tariff stays. If reciprocal tariffs go in place, that's a different story. And we’ll update you if that happens.

And just to follow up on that. If reciprocal tariffs do come in, depending on the timing, again, we turn two times a year. So that really will impact 2026 a lot more heavily than '25. So as you guys are building that out, we’ll have more conversations around that later. But even if after the pause for tariffs do come in, it really will start to impact us more in 2026.

Thank you. Our last question comes from the line of Oliver Wintermantel with Evercore ISI. Please proceed.

Hi, guys. Just a clarification, did you guys mention what ticket versus traffic was in the first quarter?

Bryan?

Its ticket is, average ticket was up 2.1, transactions were down 3.8, that's how we get to that negative 1.8 comp in Q1.

Perfect, thanks. And then just on the second quarter, quarter to day trend, did you see any trade down in those numbers or maybe from a category perspective, have you seen any difference there versus the first quarter?

Nope, we haven't. It's very consistent. We measure what happens with our better and best products and we've continued to see customers, when they come into the store, they're still buying better and best, so no change in consumer behavior.

Thank you. Our next question comes from the line of Robbie Holmes with Bank of America. Please proceed.

Hey, thanks for taking my question. I was hoping you guys could give a little bit more on the maintaining the gross margin percent goal. Maybe could you sort of rank order, you know, how you would do that from, you know, is pricing probably the number one thing? How much, I mean, supply chain costs coming down, help the gross margin again this quarter, how much more room is there, and other things that maybe you haven't mentioned that give you the confidence in that goal to maintain the gross margin in this tariff environment?

I don't know that I'll rank them for you, but I'll mention them for you. So, yes, we've been able to yield some better costs as we move products around the world. The consumer continues to buy up in our assortments, which provide a better rate of the product that the consumers are buying. That is a benefit. We have continued to benefit from supply chain costs year-over-year, and year-over-year we're seeing that the benefit of that is in our gross margin, and that is being helpful. We have an emphasis on design and our designers when their designer sales are up in the company. We've got more designers in the company we've had historically. And in their sales, we tend to run a higher gross margin rate than we do if the designer's not engaged in the project. So all of those things give us good feeling that we can continue to grow gross margin. And the last lever is price. In the event that we can continue to grow gross margin. And the last lever is price in the event that we can't diversify to the right place. If we can't negotiate enough, then looking at the spreads versus our competition, we feel like we can still take price to protect that rate. So it will be a little bit of everything that helps us get there. And again, this is in the universal tariff environment, and it's not easy. I'm not saying that this is going to be an easy task, but so far we've demonstrated we've been able to manage gross margin pretty well over the last few years.

And the power of that is really demonstrated when you look at the impact from the two new distribution centers. I think as we said on the call, it's going to impact 60 to 70 basis points, but that drag was really 30 basis points in line with our expectations from Q1. And that will sequentially get larger and larger kind of as you go throughout the year as we start operating those facilities and so everything we're doing is even in the face of that, so when you think about the power of our gross even more than just year-over-year.

Thank you. Our next question comes from the line of David Bellinger with Mizuho Securities. Please proceed.

Hey, everyone. Thanks for the question. One for Bryan, on the guidance, just a clarification of what exactly is in there? The China 145% versus rest of the world, is that in the guide to the balance of the year? Or does something change once the 90-day pause lapses? And then also in the China exposure going from 18 down to mid-single digits? Can you talk about where that sourcing is going to? Is there a one or two or three specific countries that are picking up those volumes? Thank you.

I'll take the first part.

And I’ll take the second. We are proud that the USA now accounts for 27% of our sales, benefiting significantly from increased manufacturing and sourcing within the country. However, our operations are global. As I mentioned earlier, we are expanding the range of countries we source from and have grown our vendor base from around 220-225 to 240 suppliers. Our sourcing efforts span worldwide and will continue to do so. We conduct product line reviews across all our categories a couple of times a year, meticulously searching the globe for the best places to purchase products. Our team of merchants dedicated to each category is unmatched in the industry. This global approach will persist.

Second part. So embedded in the guidance is universal tariffs for the remainder of the year, except for China. So after the 90-day pause, we're just assuming that the universal tariffs will stay in place. If that changes, obviously, we'll update the assumptions within our guidance. But again, even after the 90-day pause, if reciprocal tariffs do come into place, given our turns and given the lead times of our inventory, it really will be an impact more so to 2026 than 2025. There will be a little bit of impact in Q4.

Thank you. Our next question comes from the line of Max Rakhlenko with TD Cowen. Please proceed.

Hey guys. Thanks a lot. Just curious how differentiated do you think your sourcing mix is compared to the peer set? As far as country of origin and specifically China, as obviously you have the ability to be quite nimble, which I'm guessing that most of your peers will not be able to do?

Hi. We believe that our China dependency that favorable rates compared to our competition. Looking at the skew count with the competition, and I think we are more diverse than any other country, and we believe that it's an advantage, even though there's universal across many countries. But we believe that we can constantly adjust from moving from country to country based on where the geopolitical risks arise.

And just to clarify, just for everybody on the call.

Sorry, I just want to real quick clarification, even for the last answer as well as the mid-single digits to low single digits is on purchases. So that's really us talking about the exposure risk. Sales will be higher than that as we're bleeding through the inventory that we have. So I just want to be clear on that, as you guys are thinking about modeling and as we're talking about.

I do think, the question of competitive advantage, I do believe at the end of this, the longer this cycle lasts, the harder it is that our sourcing model will be a competitive advantage and it will be very hard for the independent hard surface flooring companies to survive. I mean, they have to buy from a middleman and it's very difficult to source. So the way we do it has been an advantage and will remain an advantage and I think is the longer this lasts, the less competition that will exist when we come out of it.

Thank you. Our last question comes from the line of Chuck Grom with Gordon Haskett. Please proceed.

Thank you very much. Reducing your China exposure to 5% is significant. I'm considering how this shift might impact your innovation and whether it affects your ability to grow in that category. Additionally, regarding competition and the pressure you're facing, would it be beneficial to adjust pricing to capture market share, or have past strategies proven successful enough? Those are a couple of philosophical questions to ponder.

I believe that innovation in fashion and durability comes from all over the world. We've had good ideas come from China, Italy, and the US. Innovation is global, so I don't think we will lose any advantage in that regard, nor do I think the category will. As for pricing, we've previously tried lowering prices on our basic flooring products, but historically, that has resulted in lower sales. When we do this, customers tend to switch between our own products since our pricing compared to competitors is pretty favorable. The only place where this strategy has worked is with installation materials, and we continue to explore ways to drive demand there. We see this as an opportunity to gain market share, so we'll be aggressive where we can and learn from our recent pricing experiments as we move forward. Thank you for the philosophical questions. And that concludes the call. I want to thank everyone for joining today and for their interest. I was hoping for more questions for Brad, but perhaps next time we’ll have more. Brad has done a fantastic job, and we are excited about his contributions so far in such a short time. We look forward to providing updates in the next quarter. Thank you.

Goodbye.