Floor & Decor Holdings, Inc. Q2 FY2025 Earnings Call

Greetings and welcome to the Floor & Decor Holdings Second Quarter 2025 Conference Call. Please note that this call is being recorded. I will now turn the conference over to your host, Wayne Hood, Senior Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's Fiscal 2025 Second 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 call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. These statements are subject to risks and uncertainties that could cause actual future results to differ materially from those expressed in these forward-looking statements for any reason, including those listed at the end of the earnings release and in the company's 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 call, the company will discuss certain non-GAAP financial measures. We believe these measures 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 release, which is available on our Investor Relations website at ir.flooranddecor.com. A recorded replay of this call and related materials will be available on our Investor Relations website. Let me now turn the call over to Tom.

Thank you, Wayne, and everyone, for joining us on our fiscal 2025 second quarter earnings conference call. During today's conference call, Brad, Bryan, and I will discuss some of our second-quarter earnings highlights. Then Bryan will share our thoughts about the remainder of fiscal 2025. We are pleased to report that for the second quarter of fiscal 2025, our diluted earnings per share increased by 11.5% to $0.58 compared to $0.52 in the same period last year, reaching the high end of our expectations. Sales for the quarter rose by 7.1% to $1.214 billion. Comparable store sales increased by 0.4%, marking the first quarterly increase since the fourth quarter of fiscal 2022. These results reflect the strength of our business fundamentals and the steadfast dedication of our associates. In a period marked by continued economic uncertainty, heightened complexity, and shifting market conditions, our team rose to the challenge. They remain focused on executing our strategic priorities with unwavering discipline and resolve. We are truly grateful for their contributions. Let me now discuss our new warehouse format store growth. In the second quarter of fiscal 2025, we opened 3 new warehouse format stores in Kissimmee, Florida, San Antonio, Texas, and Chula Vista, California. We are especially pleased to have opened in Chula Vista as it marks our first warehouse format store to open in California in close to 3 years. Year-to-date, we have opened 7 new warehouse format stores ending the second quarter with 257 locations, up approximately 12% from 230 stores in the same period last year. We have a busy second half of the year, new warehouse format store opening schedule with most openings scheduled for the late third quarter and early fourth quarter. We remain on track to open 20 new warehouse format stores in fiscal 2025, primarily across large and midsized existing markets. Looking ahead to fiscal 2026, we currently anticipate opening at least 20 new warehouse format stores. As previously discussed, our company is well-positioned to support the opening of more than 20 new warehouse format stores annually once housing market conditions improve. That said, we remain committed to a disciplined and agile growth strategy. Should the housing market or broader economic environment underperform relative to our expectations, we are prepared to adjust our expansion plans accordingly to ensure prudent capital allocation and long-term value creation. As you are aware, one of the most consequential challenges we and others across our industry continue to face is mitigating the impact of tariffs on our products. To assist with our execution in an uncertain and complex environment, we have continued to rely on our dedicated tariff-steering committee. This committee is tasked with guiding alignment on our top priorities and maintaining agility and discipline in our operational planning. This committee builds on our proven track record of managing prior tariffs and duties, leveraging both our experience and scale and flexibility of our operations to position us to navigate today's uncertainty and complexity, which we believe is significantly better than many of our competitors. With that context in mind, I'd like to take a minute to outline and update the key actions we're taking to mitigate universal, reciprocal, and sectoral tariffs to position the business for continued growth. First, we continue to actively negotiate and collaborate with our vendors to mitigate the higher incremental tariffs on the products we sell as we have successfully done with prior tariff increases. Second, we continue to execute our product diversification and sourcing strategies with strong momentum. This includes a broad range of products we sell as well as the countries in which we source them. Our direct global sourcing network spans over 240 vendors across 26 countries, enabling us to secure the highest quality products at the most competitive prices. In fiscal 2025, we continue to onboard more suppliers, factories, and products, further enhancing our agility and supply chain resilience. We believe our scale and direct global sourcing model provides a significant competitive advantage, particularly over the independent flooring retailers and distributors. Third, we continue to apply a balanced portfolio approach to product price while effectively managing our gross margin rate and overall profitability. As we noted on our first quarter conference call, we've seen some independent retailers and distributors implement high single-digit or even higher price increases in response to tariffs. We believe tariffs will continue to pressure independents who are already contending with weak industry fundamentals that have persisted over the past 3 years. Amid the challenging market environment, we have also observed a shift among some retailers towards emphasizing opening price point products, which often feature lower product specifications as compared to our offerings. As discussed during our first quarter earnings conference call, we will continue to adjust our retail prices, both upward and downward as needed, to help mitigate the impact of tariffs and competition. That said, we remain committed to maintaining our pricing gaps and reinforcing our everyday low price message. It is important to note that our broad and diverse merchandise assortments provide customers with more pricing options than our competitors, further strengthening our market position. Put simply, we believe our competitive moat is enhanced when we combine price leadership and other key business attributes such as broad assortments, in-stock job lot quantities, inspirational new products, service offerings, and knowledgeable associates to meet the evolving needs of our customers. And finally, as we mentioned in our first quarter earnings call, customers are asking for products produced in the United States, and we have already taken action to identify American-made products in our stores. The United States is now our largest country of manufacturer, accounting for approximately 27% of the products we sold in fiscal 2024, up from approximately 20% in fiscal 2018.

Thanks, Tom. I'd like to take a moment to express my sincere appreciation to our entire team for their strong performance in the second quarter. These results are a clear reflection of the disciplined execution of our growth strategies, the agility of our operations, and the unwavering commitment of our associates. I'm especially proud of how we've navigated the challenges posed by tariffs and a global supply chain shift. We believe that our proactive approach and operational flexibility continue to set us apart in the industry. Let me now discuss our second quarter sales. As Tom mentioned, our second quarter comparable store sales increased 0.4% year-over-year, which was at the midpoint of our expectations and an improvement from the 1.8% decline in the first quarter. Second quarter comparable transactions declined 3.3%, and comparable average ticket increased 3.8% from the same period last year. By month, our comparable store sales increased by 1.7% in April, 0.6% in May, and declined 0.8% in June. From a regional perspective, comparable store sales in the West division continued to outperform the company for the quarter and year-to-date. We estimate the second quarter benefit to our comparable store sales from Hurricanes Helene and Milton was approximately 40 basis points compared with 100 basis points in the first quarter and 110 basis points in the fourth quarter of fiscal 2024. Our fiscal 2025 third quarter-to-date comparable store sales have declined by 1%. In the second quarter, we saw the strongest relative sales growth across several merchandise categories, including wood, installation materials, and adjacent categories. We are pleased that customers continue to gravitate towards our better and best tier products where our value proposition is most compelling and our price advantage is most evident. As we look ahead to the remainder of fiscal 2025, we're excited to continue introducing a range of innovative products and programs tailored to meet the evolving needs of our customers. These include new designs, expanded color palettes, enhanced textures, and products with heightened realism that closely replicate the look and feel of natural materials. Our largest initiatives this year remain unchanged and include the continued rollout of kitchen cabinets, the expansion of our outdoor product assortment, and the growth of our excel slab program. These efforts reflect our commitment to delivering differentiated high-quality solutions that inspire customers and drive long-term growth. Turning to our connected customer and design services pillars of growth. In the second quarter of fiscal 2025, connected customer sales rose by 2% year-over-year, now accounting for approximately 19% of sales. We're encouraged by our key engagement metrics, including healthy growth in weekly active users, a notable increase in organic traffic and conversions, and a sequential improvement in our comparable average ticket. Our design services continue to be a standout performer in the second quarter, delivering strong sequential and year-over-year sales growth. Year-to-date, both total and comparable store sales also significantly outpaced the company average, fueled by a sharp increase in customer transactions. This performance highlights the strength of our design services model, combining expert in-store designers, personalized customer experience, and collaboration with pros on complex projects. These elements are driving deeper engagement and higher value outcomes. When our designers are involved, the impact is clear. The average ticket is significantly higher and gross margin rates rise substantially. This reinforces the strategic importance of design services in elevating our brand and driving profitable growth. We're excited to build on this momentum by continuing to invest in our design talent and convert more high-value opportunities, both in-store and online. Turning my comments to pro. We're pleased to report that in the second quarter of fiscal 2025, total and comparable store sales to pros once again outpaced the company's overall growth, accounting for approximately 50% of sales. This strong performance was fueled by increases in both transactions and average ticket size. A key driver of this momentum is our commitment to delivering a consistent best-in-class pro experience at the pro desk, which contributed to a significant year-over-year increase in our pro Net Promoter Score during the quarter. Furthermore, our pro service managers are actively engaging pros in the field, expanding into new zip codes to better understand their needs and provide tailored solutions. We're also deepening pro loyalty through community events and partnerships with trade associations with a strong focus on education. In the second quarter alone, we hosted 43 in-store educational events, part of our broader plan to hold 155 events in fiscal 2025, reinforcing our commitment to supporting pros with valuable resources and expertise. To further build brand awareness and drive engagement, we're executing targeted pro marketing blitzes and leveraging lead generation tools supported by cost-efficient advertising platforms that help us attract and retain new pros. These efforts are delivering results as we continue to see the benefits of our focus on high-quality lead generation and strengthening relationships with both new and existing pros. Finally, let me discuss our commercial business. Spartan Surfaces delivered stronger-than-expected sales and EBIT results for the second quarter of fiscal 2025, with sales rising approximately 7% year-over-year. Notably, June marked the strongest month in the company's history. Spartan continues to build momentum by focusing on establishing a strong national presence in high-specification sectors such as health care, education, hospitality, and senior living. These sectors offer compelling long-term growth and profitability potential characterized by higher quote-to-conversion rates, recurring revenue streams, and more attractive margins. We're also encouraged by the growing success of Spartan's private label brands, which is leading to increased quotes and orders. To support long-term growth, Spartan is making targeted investments in expanding its sales force across key verticals and markets as well as in its leadership team. These investments, combined with ongoing economic uncertainty, may result in fiscal 2025 EBIT remaining roughly flat compared to fiscal 2024. This outlook is consistent with our previous expectations. We continue to believe that Spartan's strategic priorities position the company for growth and long-term value creation. In closing, we remain focused on driving market share growth and long-term shareholder value as we navigate an extended bottom in the housing market. We believe the momentum we built in the first half of fiscal 2025 positions us well for the remainder of the year and beyond. Let me now turn the call over to Bryan.

Thank you, Brad and Tom. As Tom highlighted, we are very pleased with our second quarter financial performance. We believe this performance speaks to the strength and execution of our growth strategies and our continued focus on cost discipline. These efforts contributed to us reporting second quarter comparable store sales growth of 0.4%, our first positive comparable store sales since the fourth quarter of 2022, and diluted earnings per share of $0.58, up 11.5% from last year. The second quarter is a clear demonstration of how we believe our team is driving value to increase our market share in a challenging macro environment that we expect will continue for the remainder of 2025. 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 as well as our updated outlook for fiscal 2025. We continue to be pleased with how we are managing and expanding our gross margin rate. In the second quarter, gross profit rose by 8.5% compared to the same period last year. The growth in gross profit was primarily driven by a 7.1% increase in sales and approximately 60 basis points improvement in the gross margin rate, which rose to 43.9%, primarily due to lower supply chain costs. Second quarter selling and store operating expenses of $376.2 million increased by 10.2% from the same period last year. The increase in selling and store operating expenses was primarily driven by $33.8 million for new stores. As a percentage of sales, selling and store operating expenses increased by approximately 90 basis points to 31.0% from the same period last year. The expense deleverage was primarily attributable to the addition of new stores. Second quarter general and administrative expenses of $69.4 million increased 2.6% from the same period last year. The increase was primarily attributed to the investments we continue to make to support our store growth, including a $3.5 million increase in personnel expenses, partially offset by a $2.1 million decrease in other operating expenses. As a percentage of sales, general and administrative expenses decreased by approximately 30 basis points to 5.7%, reflecting both a decline in other operating expenses and the leverage of our G&A cost on higher sales volume. ERP-related expenses totaled $2.2 million for the quarter, in line with our expectation. Second quarter preopening expenses of $5.1 million decreased $5.5 million or 51.8% compared to the same period last year. The decrease was primarily due to a reduction in the number of stores opened and future stores that we were preparing to open compared to the same period last year. Second quarter net interest expense of $1.1 million increased $0.4 million or 62.3% from the same period last year. The increase was due to a decrease in interest capitalized partially offset by higher interest income as a result of higher cash balances. The second quarter effective tax rate increased to 21.8% from 19.8% in the same period last year. The effective tax rate increase was primarily due to a decrease in the excess tax benefits related to stock-based compensation awards. Second quarter adjusted EBITDA of $150.2 million increased 9.7% from the same period last year. Our second-quarter adjusted EBITDA margin rate was 12.4%, an increase of approximately 30 basis points from the same period last year. The growth was primarily due to higher sales and an increase in our gross margin rate. Moving on to our balance sheet. At the end of the second quarter, inventory increased by 7% to $1.2 billion compared to December 26, 2024. On a year-over-year basis, inventory was up 17% primarily driven by the timing of receipts and the need to support the opening of our Seattle distribution center. Looking ahead, we expect inventory to be up modestly at the end of fiscal 2025 compared to last year. In terms of liquidity, we ended the quarter with $876.9 million in unrestricted liquidity, consisting of $176.9 million in cash and cash equivalents and $700 million available under our ABL facility. Turning to our fiscal 2025 outlook. The U.S. consumer remains broadly resilient supported by a solid labor market, low unemployment, and steady job growth sustaining household incomes. While personal consumption expenditures on services continue to show resilience, spending on discretionary big-ticket durables and large projects remains challenged amid ongoing economic uncertainty, elevated mortgage rates, and persistent housing affordability headwinds. Affordability remains a major constraint as mortgage rates continue to hover above 6.6% and home prices are at all-time highs, discouraging both first-time and existing buyers. Existing home sales sequentially fell 2.7% in June to a seasonally adjusted annual rate of 3.93 million units, marking the lowest level in 9 months. Looking ahead, we do not expect significant changes in consumer behavior or housing activity for the remainder of 2025. The labor market is likely to remain a stabilizing force, and while inflation and policy uncertainty may continue to weigh on sentiment, the underlying fundamentals point to a steady, if cautious, consumer and housing market. Our guidance reflects the impact of all negotiated tariffs, and for countries not finalized, we incorporated universal tariffs. Let me now discuss our updated fiscal 2025 earnings guidance. Total sales are expected to be in the range of $4.660 billion to $4.750 billion or increased by 5% to 7% from fiscal 2024. We are planning to open 20 new warehouse format stores. Comparable store sales are estimated to be down 2% to flat. 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. The gross margin rate is expected to be approximately 43.5% to 43.7%. As a reminder, our gross margin rate is expected to be adversely impacted by approximately 60 to 70 basis points from the 2 new distribution centers, which is incorporated into our guidance. We estimate that our second quarter gross margin rate of 43.9% will represent the high quarter for the year. Selling and store operating expenses as a percentage of sales are estimated to be approximately 31.5% to 32%. The high end of our guidance assumes our first quarter 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 the finance and merchandising ERP implementation. Preopening 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 $550 million. Diluted earnings per share is estimated to be in the range of $1.75 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 $280 million to $320 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 $180 million to $205 million. We plan to invest approximately $20 million to $25 million in new distribution centers in Seattle and Baltimore. We intend to invest approximately $45 million to $50 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 $35 million to $40 million. Additionally, we anticipate incurring approximately $20 million in deferred SaaS ERP implementation costs, which are not included in capital expenditures. Before I close, I want to extend a heartfelt thank you to our store associates across the country. Your dedication, hard work, and daily commitment to serving our customers are what drive our results. We are incredibly grateful for everything you do to support our business and our customers. Thank you. Operator, we would now like to take questions.

And our first question comes from Christopher Horvers with JPMorgan.

It's Barath Rao on for Chris. So ticket was up nicely during the quarter. I'm curious how much of that was tariff-induced pricing increases versus any sort of trade-up to better and best, as you mentioned. And then going off of that, it seems like the narrative so far has been low to mid-single price increases with the expectation to go higher as the year goes on. How are you thinking about price throughout the year given your inventory cycle? And any chance to come in higher than the low to mid-single-digit ticket comp?

A lot of questions in there. This is Tom. I will do my best. If I miss something, one of the team will jump in. I would say for the second quarter that we just finished, much of the benefit that came in average ticket came from mix. Our best performing department is wood, which carries a higher average ticket. So that effect helped us. Additionally, the price changes that we did in the second quarter were not material. We took some prices up, took some prices down. So I would say between wood and between better and best and minor price increases would have affected ticket in the second quarter. We will take some price in the back half of the year. We don't believe it will be that modest with what we know today. Things could change. But with what we know today about tariffs, we think we've done a good job in mitigating a lot of it through moving SKUs into negotiating with our vendors. We'll take some modest price increases. But we think we'll be able to manage it fairly well.

And this is Bryan. I mean, obviously, in the prepared remarks, our average ticket comp is assumed to be up low single digits to mid-single digits. So that helps kind of put the framework around what we believe through initiatives as well as modest price increases. And just as a heads up, Q4 will be the most pressure because we'll be lapping Hurricanes Milton and Helene from last year. So that will put a little bit of pressure on our ticket in Q4. That should help give you a sense of the magnitude of what we haven't been.

And maybe just go 3 for 3 here. I think an important piece just to think about our philosophy in the second half. We talked a lot about our merchandising team and how proud we are at what they do for us day in and day out. And I think they've really earned their stripes through this process. When I think about how we're going to handle pricing, the first thing is we've invested in pricing tests really certainly in the first half and going back into 2024. So we understand the elasticity of both categories and also the line structure inside the category. So I think we're well-positioned to understand how price moves are going to impact customer demand. And then the second piece to it that I think is really important is we're not doing a peanut butter spread here. Because we have that level of intelligence, we can be very surgical. And as we said in the prepared remarks, we can have that balanced portfolio approach to how we're going to tackle the pricing that's in front of us.

And your next question comes from Simeon Gutman with Morgan Stanley.

Two parts to my first question. The second half implied negative. And I think Bryan, you just clarified a little bit on the fourth quarter. Curious if you'd be willing to react to a consensus number for '26. I know it's early. I think the consensus is showing 4%. And thinking about the macro maybe not changing or getting better, tariffs, which should help in the immature stores, just thinking about the natural curve of the progression of this business, how would you react to that 4% number that's out there right now?

So this is Tom. I guess this one is for me. Yes. All right. So it's a little too early to react to 2026. We continue to hope that we see some improvement in existing home sales. I mean, we're just not seeing that yet. If you look at the last release on existing home sales, it was 3.93 million annualized. Rates continue to hover between 6.6% and 6.9%, making household affordability and turnover a bit of a challenge. So it's too early to know. You're right, we'll benefit from our new store maturing. Those factors will work in our favor. We'll be lapping easier numbers, which will also help us. We'll need to take some price because of tariffs, and those factors will be in our favor. But all that said, it's a little too early to react to next year's consensus.

Yes. I mean thinking about this year, I alluded to some of it that you had, but you're right. The midpoint of our guidance assumes that we stay at the current trends. So we're kind of bouncing around the bottom. The high end would assume things get slightly better. Obviously, the low end would assume things get slightly worse. The high end from a comp perspective would assume the second half are up low single-digit positive, with Q3 being the peak. As I mentioned before, we will be lapping both the hurricane benefit and EHS that picked up in Q4 of last year. So we had both of those. And then the low end would assume that we sequentially declined each quarter as you guys are kind of modeling now.

I think the only thing I'd add is that we're facing a really difficult macro environment that impacts the category, but we are taking action. We are introducing new products within our categories and expanding our adjacency category assortments. We plan to roll out outdoor products by the end of this year in nearly 70 stores, which is something we haven't done before. We're also focused on enhancing our design experience. We are making every effort to navigate through the challenges posed by the current state of existing home sales, and we are committed to exploring all options to drive our revenue.

Yes, that's fair. Could you elaborate on the changes in the spread between immature and mature? Is it improving or worsening? Could that alone be a driving factor? I understand you're not overly focused on that 4% number, but could it be the key driver next year if the macroeconomic conditions remain stable?

Simeon, this is Bryan. The waterfall comp is still intact as we've kind of mentioned. It hasn't gotten really better or worse over the last 12 months. I would say it's compressed a little bit from historical trends. Obviously, you would expect that, but our newer stores are outperforming our most mature stores, as you would expect. And so we will get a benefit from the stores we're opening. And I think you heard us say it as a lot of those stores will open kind of September, October, November, so late Q3, early Q4. So we'll start lapping those, but we will get comp benefit from the class of '24 as those are maturing into 2026 as well once they come into the comp base. So you will get a pickup from that. Again, not ready to commit to anything in 2026...

As existing home sales improve, the stores will benefit from the softer openings over the past three years. They should begin to ramp up nicely as conditions get better.

Your next question comes from Michael Lasser with UBS.

Throughout this conversation and up until now, the messaging has been Floor & Decor and the flooring market has been bouncing along the bottom. We continue to debate the timing and magnitude of a recovery. But what if this is simply the new norm where interest rates remain elevated, existing home sales remain subdued? How do you approach running the business differently? And how do you approach creating shareholder value differently?

So I would say that if things were to continue to run at this rate and if this was the norm, because of what we're lapping, our business should start to grow over the course of time. I would say that we've continued to invest in our in-store experience to get more out of our stores. We've got lots of commercial opportunities that we're excited about what's going on at commercially now. We would continue to invest in our commercial space. Brad's coming in has found additional opportunities of ways we can get better, and we would put investment behind that. But it is a possibility that we could bounce along at this rate of existing home sales for a time. But because we're bouncing along at this rate, it's not getting worse. Our promise has been getting worse over the last few years. So if we stabilize here, we think we got enough initiatives that we can continue to grow.

Got you. What does that translate to from a volume perspective, specifically sales per store? How does that look right now? If we assume growth just by maintaining the current levels, what would that mean for the profitability of the business over time?

So I think, look, our job is to continue to grow our earnings and to continue to improve our in-store productivity. So we have lots of initiatives that will help kind of enhance that. So I'm not exactly sure I can predict the part of inflection when things get better. But if they don't get better, I think we've demonstrated we have the ability to improve our gross margin rates. We have the ability to get sales from some of the new stuff we're adding within the store. We keep leaving no stone unturned.

Yes, Michael, just to give you a sense of magnitude, our stores that are 5 years and older are averaging approximately $22 million today. But from a profitability, they're still at 23% EBITDA. And so the stores are doing incredibly well from a flow-through perspective and from an earnings perspective. To Tom's point, we have a ton of internal initiatives where we'll continue to take market share. So even if things bounce around the bottom, we should be able to continue to put pressure on the competition, continue to take market share. We should be able to grow as long as things stabilize.

Exactly to Tom's point. There's a lot that we're doing internally to achieve this, and we will maintain our focus on costs as well. Long term, we still believe in the goal of mid-teens EBITDA, and we're still on that path.

And Bryan, that's very helpful. If you could frame your reference to where that cohort stood in 2019 or prior to this downturn, just to give some relative sense for those financial metrics today versus where they've been in the past.

Yes, Michael. If you're looking at the peak and trough, at peak, those stores were generating about $28 million in volume. Currently, they're at $22 million. Back in 2019, it was somewhere in between. Without providing exact numbers, we hope we're at the bottom now. Over the past 12 to 18 months, we've had around 3.9 million units, fluctuating between 4 and 4.1, and we’re still at $22 million. This is also considering the impact of strategic cannibalization. So when we evaluate our stores, we believe we are currently at the bottom with $22 million at peak, and towards the end of 2022, they were around $28 million in the trailing 12 months.

Your next question comes from Seth Sigman with Barclays.

I wanted to focus on pricing and market share maybe as a follow-up there. You talked about seeing high single-digit price increases across the industry. It seems like you've been more patient or perhaps able to raise just less than others. How do you see price gaps changing right now? And any signs that your market share could be accelerating on the back of this? Obviously, we see those gains in wood, but maybe outside of that.

Yes, when we examine market share within the industry, our total sales rose over 7% in the second quarter, and we experienced a positive same-store sales increase. Compared to publicly traded flooring companies and others in our category, we believe we are performing better and capturing more market share. I think the independent channels raised prices sooner and more aggressively because they had to. Our approach, aided by our slow-turning inventory, allowed us to delay price increases. As a result, the gap has likely widened, and we feel optimistic about this.

I would just reinforce the point that I made earlier about the understanding around the elasticity that we have in our categories. I think if you pair that with the micro pricing efforts that we have in local market, it gives us a really good sense of how the customer is responding to our moves. And collectively from the get-go, as we enter this tariff environment, we felt like we were going to be better positioned than our competition to navigate through this environment. And we absolutely view this as a market share gain opportunity. Now it's a very fluid environment. And again, because of that micro process that we have in place, we think we can react to changes at the local level while maintaining a really good perspective here in Atlanta through our merchant team.

Yes, I would say that we have gained market share when comparing ourselves to others in the market, such as independent flooring stores and larger retailers. Price is one factor in our competitive advantage, but it also includes the level of service we provide, which is at an all-time high. Our product assortments remain larger than our competitors', and we continue to introduce new products across all categories we offer. Our inventory levels are also at an all-time high, ensuring we have ample stock. Other aspects of our competitive edge are improving as well. While our prices are solid, we are well-positioned should the competition intensify.

Okay. Great. Very helpful. And then just from a margin perspective, as I think about tariffs, you talked about a lot of the mitigation efforts, but also how timing helps this year just based on the inventory turns. So I'm curious, when you look at the incremental tariffs today and what's changed versus even just 3 months ago, how does that change your view on what the impact could potentially be next year?

So I'll start, Bryan, then you can weigh in. So our margin, we've been able to manage it really well over the last couple of the years through the tariff environment. We are going to have some challenges with distribution centers coming online. There's a cost that will impact our gross margin and make it more of a challenge, but those are one-time costs, and we burn those off over the course of time. So I believe with what we know today with tariffs, we're going to do all we can to try to protect our rate and feel confident we can do that with the exception of having to deal with our distribution centers.

Yes. As we said on the last call, it was just universal tariffs and the 10%. We felt very confident in maintaining the rate. We knew reciprocal tariffs have put into place and put a little bit of pressure. But because of the job that Brad and Tom has talked about from our merchandising team, we've been able to mitigate a lot of that exposure. And so there may be slight pressure, but it's going to be very minimal pressure on gross margin rate from tariffs. More of it is going to come from what Tom talked about with some of the step investments that we have with the 2 new distribution centers coming online.

Your next question comes from Steven Forbes with Guggenheim Securities.

Tom, I was hoping to explore the company's reach from an income demographic perspective. How high do the income bands extend based on the model you have implemented in the market? Is the design studio format truly helping you reach new customers? If it isn't, how do you plan to potentially evolve the format, the assortment, or other growth opportunities to attract higher income consumers, especially considering that they may lead us out of the current economic situation?

Yes, I believe there are two sides to this. Firstly, we don’t often discuss our studios, but we are currently revisiting our studio strategy and are pleased with their performance. We have appointed a new leader, one of our top merchants, to oversee our in-store design experience and studios. We will provide more updates on our studio strategy as we approach the end of this year. Our stores attract customers from various income levels. Over the past decade, we have increasingly focused on better and best categories that resonate with all income levels. We operate in high-end areas as well as more modest neighborhoods, and both perform well. We intend to continue pushing our offerings in the better and best categories, as those are what customers are seeking in every market we serve. When customers embark on projects involving hard surfaces, they are moving up within the category. We view ourselves as somewhat similar to Costco, appealing to a higher-end clientele, as our income demographics tend to skew higher. Walking into our stores today, you will notice products that cater to more affluent homes. We plan to keep advancing our offerings. We are rethinking our approach to the studios, which will further attract high-end customers, and we will share more details once we make additional progress.

And then maybe just a follow-up. You mentioned commercial sort of being excited about various things to come. So maybe a 2-part question on that. The first is that we just revisit the Spartan profitability pressure, confirming that, that is all investment. And then second, can you give us any teasers on sort of the broader commercial growth plans here, the RAM strategy or what you sort of see on the horizon here as potential future uses of your capital?

We are pleased with the progress at Spartan. We have made significant investments in sales representatives at the beginning of this year to boost our sales growth. The results so far are encouraging, and we are satisfied with the current bids and the overall business trajectory. We are encouraging our team to propose ideas for even faster growth. We had slowed down on acquisitions during the downturn, but we believe we are now ready to expand our commercial efforts more. As we move forward, we will keep you informed. Additionally, we've appointed a new leader for our RAM organization who has a strong background, having worked at Home Depot Supply and Grainger. She brings valuable experience and a fresh perspective on how to expand our commercial space from our stores. We intend to focus on both Spartan and RAM as significant growth opportunities, and we believe we are still in the early stages of our commercial potential.

Your next question comes from Zack Fadem with Wells Fargo.

Can you level set us on how you're mixing today across good, better, and best since we know the latter has been outperforming for a while now? And Tom, you also mentioned some competitors shifting downstream a bit to opening price points. Any thoughts on how your opening price points are performing and if that elevated competition is having an impact?

So better and best has outcomped good for the last 3 years or so. So I think that continues to be the case within our assortments. There's not a material difference in how the good is performing as some of the competition has drifted into more opening price points. Even though there's more of it and it's more competitive, our opening price point is still better than their opening price point. We think that our features and benefits when you really look apples-to-apples, we feel pretty good about kind of how we compete on it. So while some competition, both on the big box and on the independent side are leaning more in that, I think they're just desperately looking for growth in the category and trying anything. But I feel good the way we compete there. And the performance of each segment is pretty consistent.

Got it. And then is it still fair to say that better and best, you're maintaining a wider price gap relative to peers compared to good? So as you think through potential price increases, can you just talk through where you think you may have the most flexibility or opportunity? And would it be more on that better and best as opposed to good?

Well, it relates back to what Brad mentioned earlier about our pricing strategy. We need to maintain our pricing by category. We can't just decide to optimize prices based on competition for a specific item. Our goal is for customers to logically progress from the lowest price point to the next highest and then to the best option. Would you like to add anything to that, Brad?

I think you nailed it for us. Having that surgical approach has allowed us to really make decisions where we think we're going to drive benefit to the organization. I would say, generally speaking, the gaps on opening price point and good are going to be tighter than what you would find on better and best. So yes, you're naturally going to have more flexibility from a dollars and cents perspective as you move up the line structure. But we've taken action from opening price point all the way up to best. So we feel really good about the strategy that we've implemented at this point. But as I've said a couple of times, it's very fluid, and we're watching both big box and independent actions very closely.

The next question comes from Steven Zaccone with Citi.

I wanted to just understand the second half thinking a bit more because it seems like the demand environment is coming in weaker than we all kind of expected, but that's offset by a bit better pricing, which is helping ticket. So maybe just help us understand how your view on the demand environment has changed. And then drilling down into the third quarter versus fourth quarter, can you just help us understand the comp progression? Because 4Q does have a little bit of a tougher compare lapping the hurricane, some ticket there. So just help us think through the third quarter versus fourth quarter.

Yes. Look, I'll start with the latter, Steve. So I think I said it earlier, but the high end would assume that the second half comps are low single-digit positive, with Q3 being the peak exactly as what you just mentioned is we're going to be lapping Helene, Milton and then also stronger EHS. So if you look at our cadence, we were down 1.8% in Q1. We just finished with a positive 0.4%. So in the back half, again, we would need to be positive to get to that kind of flat comp at the high end of the guide. Down to the low end, obviously, would assume that we sequentially decline each quarter. And so in the low end, we have baked in some assumption around demand decay. We're not sure. The environment is still fluid as Brad is mentioning. So we've kind of got both bounds. But if things just stay the same from where we are, that's right down the fairway right down the midpoint of our guidance.

And your next question comes from Peter Keith with Piper Sandler.

Tom, you had mentioned that you're targeting more than 20 stores for next year and you think you can do more than 20. I guess when we'll say, housing has stabilized. Trying to think about like kind of longer-term store opening rate. You did peak for a couple of years there at 30. So is it fair to say you'll probably land somewhere between 20 to 30 openings per year as we kind of look out 3 to 5 years?

Our current plan is to open 20 stores next year, but we have built in some flexibility. If conditions worsen, we might reduce that number, and if they improve, we can increase it. The decision will depend on demand and existing home sales. We have sufficient real estate opportunities and talent to accelerate our growth, but we're being cautious with our capital management. If the market conditions improve, we could consider opening more than 20 stores in the next few years, but we need to wait for the right environment.

Peter, this is Bryan. Yes. I mean our infrastructure is built for more than 20. So when things get better, we can accelerate from that 20. Not ready to commit to where a cap would be, but it would be north of 20. And we're built for more than 20 today, if things were to be better.

And your next question comes from Kate McShane with Goldman Sachs.

You did mention that 26% of your product is now made in the U.S. And we've heard anecdotally that even U.S. manufacturers are now starting to feel higher costs as a result of tariffs and maybe just being in a more inflationary environment. We were just wondering if you're seeing this at all on that particular side of the product.

This is Ersan. Currently, the U.S. accounts for 27% of our sales, and we have not yet experienced any cost increases from the U.S. If that changes, we will continue to diversify as we typically do globally, but as of now, we have not seen that.

And your next question comes from Chuck Grom with Gordon Haskett.

You guys have done a great job framing up the gross margin line in 2025 here. And notwithstanding the 60 to 70 basis points of pressure that probably wraps from the DC openings into next year. But can you help us think about the puts and takes beyond this year on the gross margin line? And what could drive it higher? Do you want to drive it higher? Or do you feel like 44% is a good long-term rate?

This is a great question and one that we often debate internally. There are many factors influencing gross margin. On the positive side, we believe that consumers will continue to choose higher quality products, which would benefit gross margin. While we are performing well with our service line, there is room for improvement in our design services that could also enhance gross margin. When a designer interacts with a customer, it positively impacts the gross margin. Additionally, Ersan and his team have successfully managed product movement across vendors globally, resulting in some margin benefits due to better purchasing opportunities. On the downside, as our commercial business expands, it operates at a lower gross margin, and faster growth in that area could challenge our overall gross margin. Some of the adjacent categories we are exploring do not maintain the same margin levels, but we are comfortable with that as they do not require substantial effort to sell and positively impact store operating margins. Overall, we are currently experiencing a high gross margin, and while I don't believe we have reached our peak, the timing of future improvements is uncertain. We have plans to consolidate two distribution centers next year and other internal initiatives that will take time. I see potential for higher gross margins in the future, but progress will likely be gradual, and we are not prepared to set a definitive gross margin target at this point.

Your next question comes from Greg Melich with Evercore ISI.

I'd love to follow up on the progression of comps in the second quarter and then even more into the back half. If I just think about tariffs coming in the majority of the product, I get sort of 300 or 400 basis points of ticket if it were to flow-through. Is it fair to say that you're expecting transactions growth or units per basket to go down to offset that with the comp trend remaining flattish?

This is Bryan. I'll take that Greg. So yes, I mean, look, we've got a little bit of compression in our ticket assumed in the guide. We think there may be a little bit of pressure on job size, but transactions also are going to be down. So you're right. Average ticket is still assumed to be up single digits to that mid-single digit. But within that, also with a little bit of compression in basket size or project size potentially embedded in the ticket. And then transactions obviously would be down low single digits to mid-single digits to get to that flat to down 2%.

Remember, the hurricane had a benefit to average ticket and the hurricane had a benefit to transactions, and we'll be lapping that as we get past October.

And your next question comes from David Bellinger with Mizuho Securities.

I wanted to ask on Spartan Surfaces. I think you mentioned in the prepared remarks that you saw one of the best months in the company's history. That's despite all these external pressures we've been talking about throughout this call. So what's behind that strength? Is there some new unlock that potentially enables a higher pace of growth from here? What's going on with Spartan and why that sort of outperformed despite a still slow external macro here?

Yes. Just to build on Tom's comments from earlier, we are very pleased with Spartan. Love that business, very strong management team. And I think we've communicated in the past, there has been a shift from a vertical prioritization. We called it out in the prepared remarks, a big focus now on education, hospitality, health care, and senior living. We've moved away from multifamily or I should say, less focus on multifamily, which has certainly helped. And then the second piece, we've added some really good talent from a salesperson perspective. And while there is a ramp on that, generally, we are seeing nice returns from that investment.

And the last question comes from the line of Robby Ohmes with Bank of America.

My question is whether you could compare and contrast what you're observing between the homeowner customer and the pro customer. Specifically, have you seen any pull forward overall? Is there any difference between the two segments of the business? Are there differences in what the pro is buying compared to a homeowner regarding the shift towards better and best products? Do you believe it will remain balanced at 50-50, or do you think the pro will continue to move up? I would appreciate your thoughts on this.

Thank God for our professionals. We are very satisfied with our professional business. When we analyze our operations by day, the weekends present challenges, as we need more homeowners engaged in our category. We believe that existing home sales significantly influence that homeowner interest. People often renovate their homes before or after selling. While existing home sales are under pressure and showing a negative year-over-year trend in the high $3 million range, this affects our customers. The purchasing behavior of both homeowners and professionals is quite similar. Both types of customers are buying for homeowners and continue to invest in the better and best segments of our business. We have not witnessed a significant shift in behavior. However, we have noticed that as existing home sales decline, homeowners tend to take on smaller projects, opting for backsplashes instead of full kitchens or complete renovations. We are doing everything possible to stimulate interest among homeowners. Our marketing focuses on creating new spaces, fulfilling dreams, and showcasing inspiration. We are heavily emphasizing our design initiative to encourage customer engagement in our category. We are pleased with the progress in both the professional and homeowner segments, but we seek to attract more homeowners to our stores. Thank you for joining us on the call today. To our associates listening in, we appreciate all of your efforts in delivering excellent performance in both financial and service aspects. We couldn't be happier and look forward to providing updates on our next call. Thank you.

This concludes today's conference. All parties may disconnect. Have a good day.