Floor & Decor Holdings, Inc. Q3 FY2025 Earnings Call

Greetings, and welcome to the Floor & Decor Holdings, Inc. Third Quarter 2025 Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Wayne Hood, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's Fiscal 2025 Third 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 our 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 conference call, the company will discuss certain non-GAAP financial measures. We believe these measures enable investors to better understand our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the 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 third quarter earnings conference call. During today's conference call, Brad, Bryan and I will discuss our third quarter earnings highlights, then Bryan will share our thoughts about the remainder of fiscal 2025. Before we get started, I want to share some exciting news that was announced this afternoon alongside our earnings release. I am thrilled to announce that our Board of Directors has appointed Brad Paulsen, currently serving as President, to succeed me as Chief Executive Officer and become a member of the Board of Directors effective at the start of our fiscal 2026 year. I am looking forward to transitioning into the role of Executive Chair of the Board, where I will focus on shaping our long-term strategic vision and unlocking new avenues for growth. I am incredibly proud of what we accomplished over the past 13 years, but we have even greater opportunities ahead, and Brad is an excellent partner for that journey. From day one, his deep experience across retail, commercial and services has been evident. He brings strengths and perspectives that complement mine and more importantly, align with the needs of our future. He's a trusted partner, a proven leader and someone I'm confident will lead our exceptional teams and guide our company forward with clarity and purpose. Let me now pass the call over to Brad.

Thanks, Tom. Over the past 8 months, I've had the privilege of working closely with Tom and our incredible team and gaining a deep understanding of Floor & Decor's unique culture and business model. I'm excited and honored to step into this role and lead our next phase of growth, scaling towards 500 warehouse stores and accelerating our commercial flooring expansion. Our associates are at the heart of this company, and together, we'll continue delivering exceptional value and service to homeowners and pros across the country. I'm excited about what's ahead and grateful to the Board and Tom for the opportunity to help shape our future. Let me now turn the call back to Tom.

Thanks, Brad. Let's now turn to our third quarter earnings results. We are pleased to report fiscal 2025 third quarter diluted earnings per share of $0.53, a 10.4% increase over the prior year's $0.48. This result exceeded the high end of our guidance range and marks our second consecutive quarter of double-digit earnings per share growth, underscoring our operational discipline amid persistently soft demand in the hard surface flooring industry. Total sales grew 5.5% to $1.180 billion, while comparable store sales declined 1.2% from the same period last year, approaching the low end of our expectations. We're proud of our disciplined expense management and gross margin performance, which reflect the successful execution of our tariff mitigation strategies. We believe these efforts enable us to maintain healthy merchandising price gaps on like items compared with our competition, protect our profitability and position ourselves strategically for accelerated growth when the hard surface flooring market rebounds. I want to acknowledge the focus, agility and operational excellence our teams have demonstrated throughout this quarter and year. We are especially pleased to share that in September, our stores achieved their highest Net Promoter Scores ever, a clear reflection of the outstanding service they continue to deliver every day. Their ability to execute our strategies in an uncertain and complex environment has been a key driver of our performance and continues to reinforce the strength of our operating model. We remain confident that existing home sales and demand for hard surface flooring will recover over time. When that happens, we believe we'll be well positioned with more stores, lower costs, greater market share, superior customer experience and a leaner operating model. We're playing the long game with discipline and intention as we build long-term earnings power. Let me now discuss our new warehouse format store growth. During the third quarter of fiscal 2025, we opened 5 new stores with most opening later in the quarter. This expansion included reentering the Charlotte market with our first store opening there in over 2 years and establishing our presence in Myrtle Beach, South Carolina, our first entry into this market. Year-to-date, through the third quarter, we opened 12 new locations and closed 1, ending the period with 262 stores, a 9% increase from 241 stores in the same period last year. We're on track to open 20 new stores in fiscal 2025, primarily across markets where we already have a presence and plan to maintain this pace with another 20 openings in fiscal 2026. To support our growth in the Western region, we opened our fifth distribution center during the third quarter, a 1.1 million square-foot facility in the Seattle-Tacoma metropolitan area. This addition enhances our supply chain capacity, further diversifies our ports of entry and enables faster, more efficient service to our stores. These openings, along with our expanded distribution capabilities, reflect our broader store growth strategy. We are deliberately maintaining flexibility to adjust the pace and location of new store openings in response to any near-term shifts in the economic and housing landscape while capitalizing on emerging site opportunities. This agile, responsive approach enables us to optimize capital deployment amid the decline in the hard surface flooring category and reinforces our commitment to delivering sustainable long-term value for shareholders. We're steadily advancing towards our long-term goal of operating 500 warehouse format stores across the United States. Our development pipeline reflects a strategic mix of store sizes and market types, including Tier 1 locations such as North Scottsdale, Arizona, which opened in September and Staten Island, New York scheduled to open next year. We're also expanding into smaller volume markets like Winston-Salem, North Carolina and Boise, Idaho, where we've successfully tailored store footprints and assortments to meet expected local demand. Capital spending and operating expenses in these smaller volume markets are calibrated to meet our return thresholds. While these smaller volume locations have always been a deliberate part of our growth strategy, they are not expected to represent most of our store footprint as we scale towards 500 locations. Most of our locations are expected to be in large and midsized markets. We are pleased to have made meaningful progress in reducing our overall new store construction costs. The initial investment for our fiscal 2025 class of new stores is estimated to be about $1.5 million lower than our fiscal 2023 class, with further meaningful improvement expected for the class of 2026. The class of 2026 will benefit from our efforts to reduce costs and optimize store size over the past year as well as more second-use sites in the pipeline. We are managing these costs diligently while continuing to invest in our stores, store experience and associates to drive returns as industry conditions improve. Our disciplined approach to expansion and capital allocation is validated by the performance of recent store classes. Despite persistent macroeconomic pressures and a prolonged downturn in the hard surface flooring industry, our 2021 through 2024 store classes have achieved comparable store sales growth even when accounting for cannibalization. This performance highlights the resilience of our business model and our ability to grow our market share in a declining market. It's important to contextualize our results with the broader industry backdrop. We've been operating in an environment marked by sustained softness in consumer demand and limited category growth over the past few years. In addition to these macroeconomic pressures, we encountered construction and permitting delays in some large and midsized markets. As a result, we elected to open more stores in small markets to mitigate these headwinds. Taken together, these factors have reshaped short-term performance benchmarks for first year store openings, and we recognize that we are not immune to their effects. While our new store classes are achieving comparable store sales and market share growth, average first year sales among classes of 2023, 2024 and 2025 are approximately $11 million, which is below our long-term target of $14 million to $16 million. Nonetheless, this performance aligns with what we would anticipate in a contracting industry and what we believe could be trough level performance. As a relatively young company, we're gaining experience with the full spectrum of flooring cycles. While we've seen what peak performance can look like coming out of the COVID-19 period with first year store sales exceeding our long-term target range of $14 million to $16 million, this is our first time operating through a sustained downturn in the category. We know what trough level ROI metrics look like and importantly, how they continue to exceed our weighted average cost of capital. The actions we have taken strengthen our strategic edge and position us to accelerate growth and return metrics as the industry recovers. Let me now turn the call over to Brad.

Thanks, Tom. I want to echo your appreciation for the incredible work our teams have delivered this quarter and year-to-date. In an environment marked by persistent housing market pressures and evolving consumer preferences, their ability to stay focused, agile and customer-centric has been nothing short of exceptional. Achieving our highest ever Net Promoter Scores in September is a clear signal that our focus on experience and engagement is resonating. It's also a reminder that even in a tough macro backdrop, excellence in execution drives loyalty, trust and long-term growth. Let me now discuss our fiscal 2025 third quarter and early fourth quarter-to-date sales. Comparable store sales declined by 1.2% in the third quarter compared to the same period last year. On a monthly basis, comparable store sales decreased by 0.6% in July, 0.4% in August and 2.2% in September, reflecting sustained pressure on discretionary spending from elevated 30-year mortgage rates, which remained stubbornly above 6% and stretched housing affordability. Existing home sales continue to hover around an annualized pace of 4 million units, showing little meaningful improvement. These persistent housing market challenges, combined with a modestly tougher year-over-year October sales comparison and continued consumer preference for smaller projects contributed to a 2% decline in our comparable store sales for the fourth quarter to-date. As a reminder, the fiscal 2024 fourth quarter benefit to our comparable store sales from Hurricanes Helene and Milton was approximately 110 basis points, which makes for a more difficult fourth quarter sales comparison in 2025. This is expected to contribute to a fiscal 2025 fourth quarter decline in comparable store sales. From a performance driver perspective, the third quarter decline in comparable store sales was driven by a 3% decrease in transaction, partially offset by a 1.8% increase in average ticket. The decline in transactions aligned with the midpoint of our expectations, while average ticket was at the low end of our guidance. The sequential decline in average ticket is primarily due to changes in our product mix. Regionally, third quarter comparable store sales in the West division continued to outperform the company average for both the quarter and year-to-date, underscoring the relative strength of that division. Looking ahead, we remain committed to delivering a strong value proposition through our low prices and differentiated high-quality range of flooring solutions and services that inspire our customers and drive sustainable long-term growth. Throughout the year, we've continued to launch innovative products and programs tailored to meet the evolving needs of our diverse customer base. These offerings feature fresh designs, expanded color pallets, enhanced textures and heightened realism, authentically capturing the look and feel of natural materials. Some of our core strategic priorities for the year remain unchanged and include rolling out kitchen cabinets to approximately 200 stores by the end of 2025, expanding our outdoor and pool product assortments to around 80 stores and growing our XL slabs program to nearly 200 locations. Turning to our design services and connected customer pillars of growth. Design services continued to deliver robust year-over-year sales growth fueled by sustained increases in customer transactions. Both total and comparable store sales for design services significantly outperformed the company for the quarter and year-to-date. We view design services as a competitive moat, a differentiated capability anchored in deep customer engagement, project-based selling and operational excellence. Our top-performing stores consistently demonstrate strong leadership involvement, collaborative team culture and disciplined execution across staffing, training and task management. Some of the biggest wins come from following up on open quotes where our sales teams actively connect customers with designers to drive conversion and attachment. Looking ahead, we expect continued momentum by prioritizing quote follow-up and enhancing our sales mix across adjacent categories and installation materials. In the third quarter, connected customer sales rose 2% year-over-year, representing 18.8% of total sales. Connected customer average ticket continued to grow from last year, while transactions remain under pressure. Turning my comments to Pro and homeowner sales. Sales to Pro customers rose year-over-year in the third quarter, modestly outpacing overall company growth and representing approximately 50% of total sales. Comparable store sales for Pros were essentially flat versus the same period last year, driven by a slight decline in transactions and a small increase in average ticket. These results align with direct feedback from our Pro customer base who cite economic headwinds and reduced activity in remodels. Reflecting these dynamics, we continue to see a shift towards smaller projects such as tile-focused bathroom projects, kitchens and restoration work. Pro satisfaction remains high, with strong engagement across tile, insulation materials and wood categories, underscoring their loyalty beyond a single category. Our product quality, service and in-stock reliability remains strong with Pros. Meanwhile, comparable store sales among homeowners, though still negative, showed meaningful sequential improvement in the third quarter. This was fueled by improvement in new and returning customers, supported by targeted campaigns and data-informed meet-up planning. Finally, let me discuss our commercial business. Amid ongoing softness in commercial multifamily housing projects, Spartan Surfaces delivered 13.3% year-over-year sales growth in the third quarter. Many multifamily developers have sequentially paused or delayed purchase orders due to tighter financing, elevated construction costs and cautious capital markets. This slowdown has contributed to elevated promotional activity in luxury vinyl tile, a category heavily used in multifamily applications. Spartan's growing presence in high-specification sectors such as health care, education, hospitality and senior living helps mitigate some of these headwinds. Let me now turn the call over to Bryan.

Thank you, Tom, and Brad. Our third quarter results underscore the strength of our operating model and our disciplined approach to growth and expense management. Our balance sheet remains a source of strength. We ended the quarter with $893.5 million in unrestricted liquidity, including $204.5 million in cash and cash equivalents, reinforcing our financial flexibility and capacity to invest in growth, capture market share and deliver long-term value for shareholders even amid a challenging demand environment. Now let's walk through the key changes in our third quarter income statement, balance sheet and statement of cash flows. Our fiscal 2025 third quarter gross margin rate decreased by approximately 10 basis points to 43.4% from 43.5% in the same period last year, in line with our expectations. The year-over-year decrease is primarily due to an increase in distribution center costs from the opening of our Seattle distribution center and costs related to the future opening of our second Baltimore distribution center. These costs impacted the third quarter by approximately 90 basis points, partially offset by favorable product margin. The sequential decrease in our gross margin rate from 43.9% in the second quarter was primarily due to the increase in our distribution center cost. Our fiscal 2025 third quarter selling and store operating expenses increased by 7.3% to $363.8 million from the same period last year, better than our expectations. The growth in selling and store operating expenses is primarily driven by an increase of $30.1 million from noncomparable stores. As a percentage of sales, these expenses rose approximately 50 basis points to 30.8%, a modest increase that came in better than expected. This deleverage was mainly due to new store openings and a decline in comparable store sales. We were pleased with how we diligently managed expenses among our mature stores compared to the same period last year. Our fiscal 2025 third quarter general and administrative expenses of $67.6 million were flat compared to the same period last year, slightly better than our expectations. As a percentage of sales, general and administrative expenses decreased by approximately 40 basis points to 5.7%, primarily driven by the leverage of our general and administrative costs on higher net sales. We are pleased that our expenses were flat to last year while we continue to open stores and see sales growth. Our fiscal 2025 third quarter preopening expenses decreased by 32.2% to $8.6 million from the same period last year, in line with our expectations. The decrease was primarily due to a decrease in the number of stores that we opened, and lower relocation expenses compared to the corresponding prior year period. Our fiscal 2025 third quarter net interest expense increased by $0.4 million to $0.6 million from the same period last year, better than our expectations. The increase in interest expense is due to a decrease in interest capitalized, partially offset by lower average interest rates and lower average outstanding borrowings. Our fiscal 2025 third quarter effective tax rate decreased to 19.8% from 21.8% in the same period last year, better than our expectations. The decrease is primarily due to lower state income taxes and higher federal tax credits. The favorability to our expectations in interest expense and tax expense contributed approximately $0.02 of benefit to diluted earnings per share below operating income. Our fiscal 2025 third quarter adjusted EBITDA increased 4.4% to $138.8 million. Our third quarter adjusted EBITDA margin rate was 11.8%, a decline of approximately 10 basis points, primarily due to expense deleverage from the decline in our comparable store sales. Moving on to our balance sheet and cash flow. At the end of the third quarter, inventory increased by approximately 2.8% to $1.2 billion compared to December 26, 2024, and was up 11.3% year-over-year. The year-over-year increase was primarily driven by new stores and the need to support the opening of our new Seattle distribution center. Despite the inventory build and the decline in trade accounts payable, we generated $257.8 million of net cash from operating activities year-to-date. Turning to our fiscal 2025 outlook. With 2 months left in fiscal 2025, we anticipate little divergence from the prevailing housing sector trends. Consumer spending is likely to remain restrained, particularly on big-ticket discretionary durable goods with a preference for smaller scale projects. Recent indicators suggest that the existing home sales market may be stabilizing as mortgage rates have moved lower and may continue to ease. September existing home sales rose 1.5% month-over-month and 4.1% year-over-year, holding steady at approximately 4.06 million units. This consistency may signal an inflection point as we head into 2026. While signs of stabilization are emerging, we believe the strength and slope of any recovery remain uncertain, reflecting broader macroeconomic cross currents and evolving customer sentiment. Let me now discuss our updated fiscal 2025 earnings guidance. Total sales are expected to be in the range of $4.660 billion to $4.710 billion or an increase of 5% to 6% from fiscal 2024. We are planning to open 20 new warehouse format stores. Comparable store sales are estimated to be down 2% to down 1%. Average ticket comp is estimated to be up low single digits. Transaction comp is estimated to be down low to mid-single digits. The gross margin rate is expected to be approximately 43.6% to 43.7%. As a reminder, our gross margin rate is expected to be adversely impacted by approximately 70 basis points for fiscal 2025 from the 2 new distribution centers, which is incorporated into our guidance. The impact was approximately 30 basis points in Q1, 60 basis points in Q2 and 90 basis points in Q3 and estimated to be approximately 100 basis points in Q4. Selling and store operating expenses as a percentage of sales are estimated to be approximately 31.5%. 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. As a reminder, the fourth quarter of fiscal 2024 included a benefit of $6.8 million or $0.05 of earnings per share related to a derivative litigation settlement. Preopening expenses as a percentage of sales are estimated to be approximately 0.6%. Interest expense net is expected to be approximately $4 million. Tax rate is expected to be approximately 21%. Depreciation and amortization expense is expected to be approximately $240 million. Adjusted EBITDA is expected to be approximately $530 million to $545 million. Diluted earnings per share is estimated to be in the range of $1.87 to $1.97. Diluted weighted average shares outstanding is estimated to be approximately 108.5 million shares. Moving on to our capital expenditures. Our fiscal 2025 capital expenditures are planned to be in the range of $280 million to $300 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 $200 million. We plan to invest approximately $20 million in new distribution centers in Seattle and Baltimore. We intend to invest approximately $45 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. Additionally, we anticipate incurring approximately $30 million in deferred SaaS ERP implementation costs, which are included in other long-term assets and not in capital expenditures. Before we turn it over for questions, I'd like to take a moment to recognize and thank our associates across the organization. The results we've discussed reflect their continued commitment to operational excellence and to delivering outstanding service to our customers. Their efforts remain pivotal to our success and are fundamental to the strength of our current performance and in driving our long-term growth. Operator, we would now like to take questions.

And the first question comes from Christopher Horvers with JPMorgan.

Tom, you're rightly viewed by investors as a Founder, CEO for Floor & Decor. The business model and culture really took off when you got involved and it got better as you built. Whether valid or not, the extended period of subdued sales and the impact on lower new store productivity that you talked about is also coincident with the timing of you stepping back to the Executive Chair role while there's a bigger emphasis on growing commercial as a company growth driver. So how do you respond to investors that might perceive the timing is something more concerning regarding the timing of a potential recovery or the core store growth opportunity?

I appreciate your opening comments. Floor & Decor is important to me, but I'm committed to staying. We were lucky to find Brad, who has quickly integrated and demonstrated a strong track record. He's been welcomed by our team, which is excellent. While it's challenging to predict the exact timing of the market recovery, I will remain involved. Brad and I will work together closely to continue growing the business. I've shared my thoughts on new store productivity, and we understand what a downturn looks like. We have a solid group of stores planned for next year and have reduced costs. We're confident that next year's costs will be lower than this year's, which have already decreased significantly since 2023. I mentioned in previous calls that we are shifting focus to more mid-tier and top-tier markets, which will be reflected in our 2026 plans. We are a growing company, learning to navigate peak and trough periods. I believe this is the right time for this transition, and Brad is the right person to lead us into the next phase. This also allows me to focus on growth opportunities, and I am eager to engage more in that area of the business.

I appreciate your response. Considering current mortgage rates, what impact could this have on existing home sales in '26 compared to our year-to-date performance? If we are indeed at a low point, it seems that existing home sales might increase by 3% to 4% even with mortgage rates around low 6%. How do you envision the comparison will look? What will the business environment be like in this scenario? On one hand, could the new store openings lead to a greater increase than the 3% to 4%? On the other hand, in significant markets like Texas and Florida, home prices are declining, and factors such as affordability and potential overbuilding could pose challenges. How do you consider all these factors in a hypothetical situation with existing home sales growing by 3% to 4% next year?

Yes, I think it's too early to discuss next year. I've mentioned in previous quarters that if existing home sales are positive, it gives the company a good chance to perform well. We're seeing a modest increase, but it's just from one month. We'll have to see if this trend continues. We're encouraged that existing home sales are showing some signs of improvement, and we hope to see more significant growth. If existing home sales nationwide are doing well, we can expect good results. We are still opening new stores, which helps, although not to the extent it did a few years ago. As I noted, all the stores we’ve opened in the last three sets are performing positively, even with new stores opening nearby. Nearly 50% of our stores are under five years old, and if we can leverage the improvements in existing home sales along with the freshness of those stores, I believe we can achieve strong results. However, we’re not ready to discuss projections for 2026 yet, as we are still in the planning phase. That's my initial assessment.

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

This is Zach on for Simeon. Home equity lines of credit are starting to rise. So are there any signs the funds are being used or deployed towards flooring or may be able to do so in the near term?

When home equity lines increase, it's generally positive for home improvement. It's too early to make definitive conclusions, but we are noticing encouraging signs in many regions with positive same-store sales growth. This increase in home equity suggests that as people withdraw funds from their homes, they are likely to invest in home improvement, which should benefit us in the long run.

That's helpful. And just as a quick follow-up, I appreciate the color you've given on the new store performance by vintage. Can you speak to how you're able to attribute this slowdown to a contracting industry versus something else like potentially greater competition or something like that?

I believe this is primarily an issue related to the contracting market. When you examine the competitive landscape among publicly reported flooring retailers and hard surface flooring manufacturers, everyone is facing a negative environment, yet our overall growth remains positive. Recently, we've opened stores in smaller markets that are declining, and compared to our competitors, Floor & Decor is performing better. Therefore, I am confident that as the market improves, the performance of our new stores will enhance from its current state.

And that's a portfolio number. We still have new stores in the past 3 classes that have performed very well in their first year sales in highly competitive markets. So we know that we still see that even today. And so we do believe it's the market backdrop.

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

So the narrative for a long time is the longer the downturn that goes on, the more likely it is that Floor & Decor was going to gain share from the independents and regional chains closing. There have been some store closings like LL Flooring. You now have Tile Shop delisting. You're attributing the weakness just to malaise across the flooring category, but it does seem like your same-store sales are getting worse. Why in light of all of that, are you seeing a degradation in the trend?

I don't think they're getting significantly worse. We're essentially staying at the same level. Last quarter, we had a positive comparable sales growth. This quarter is slightly down at 1.2%. All the data we analyze regarding hard surface flooring indicates we're performing better. We managed to grow over 5% last quarter as a company, and despite the hard surface flooring sector experiencing a downturn, we seem to be outpacing our competitors.

And Michael, when you look at it on a 2-year stack, every quarter is sequentially improving. So that's something to keep in mind, too, is that as we continue to go through this and things start to stabilize, we've been on a downward trajectory. So the comps become a much harder compare as we move throughout this process. So I think Q1 was a negative 13.3% on a 2-year stack. Q2 was a negative 8.6%. Q3 was a negative 7.6%. Even at the low end of guide, it's implied that, that will improve into Q4.

Your guidance suggests a notable improvement in the 2-year stack. What factors are contributing to your optimism? Are you noticing any signs that the larger retailers are becoming more aggressive in the flooring and related categories, which might require you to adjust and potentially sacrifice some gross margin?

We closely monitor how the large retailers compete with us. They are strong competitors, and I don’t think they’ve become more unpredictable than they were in the past. We adjust our prices weekly based on different competitors across the country. Our stores are very aware of their competition, whether it's independent retailers or larger chains, and prices change frequently. I don’t feel we are sacrificing gross margin because of this. In fact, quite the opposite is true; despite the challenging tariff environment, we've successfully managed to enhance our gross margin by adapting our product sourcing while navigating these difficulties. From a competitive perspective, the market is certainly tough, but we are confident in our pricing strategy and our ability to compete effectively.

When examining our gross margin, we experienced a decrease of 10 basis points year-over-year, with a 90 basis points impact from our distribution centers. This indicates that our product margin improved by 80 basis points year-over-year. The teams are doing an exceptional job pushing this forward even in current conditions. In terms of comparable sales, we don’t create projections based solely on comps. Instead, we focus on sales trends and build accordingly. At the midpoint of our guidance, sales are expected to follow the trend seen through Q3. Although the comparison over two years suggests improvement over three years, the figures remain consistent. Therefore, our primary focus is on maintaining these sales trends, and we anticipate stability through Q4 based on the exit rate of Q3.

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

Tom, Brad, congrats to both of you guys. I wanted to follow up on the distribution of your store performance. You alluded to some green shoots that you're seeing across the store base. I guess with comps still down overall across the company, I'm curious how concentrated are the declines perhaps among a small subset of problem stores? Obviously, I'm adjusting or excluding for the hurricanes here, but just trying to figure out the concentration of the declines. And is there a small group of stores that are dragging down the rest of the base?

I wouldn't say the situation is as widespread today as it has been over the last three years. Chris mentioned earlier about the pressures in housing markets in Texas and Florida. We have a high volume and a large number of stores in those areas, and they are facing significant pressure due to the state of existing home sales. Looking at the rest of the country, the West has been performing well for some time, and we've also seen improvements in the northern markets and other areas. However, some of our oldest and most established markets are experiencing the greatest pressure on existing home sales, and we need to find ways to counter that. Ideally, if interest rates decrease, we expect to see an improvement in existing home sales, which should, in turn, positively affect those states over time.

Okay. And then just thinking about pricing for a second here. There have been some growing concerns across retail about elasticity as other retailers have taken price up, not just in your category, but broader. Can you quantify the price changes that you've made to date and the consumer response?

We've implemented small price increases over the course of the year. Our higher-end products are continuing to outperform our lower-end offerings. When customers choose to undertake a project, they still purchase what they want. If they find better value in the higher quality products, they opt for those. For a few quarters now, I've mentioned uncertainty regarding how inflation will impact consumer confidence, especially as they deal with rising prices in other retailers and categories. This effect remains unclear. However, in our stores, I observe that customers are buying more expensive and better quality products, even though they are taking on fewer projects and covering less square footage.

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

Congrats, Tom and Brad as well. Tom, this transition to sort of bigger picture shaping the long-term strategic vision, love to maybe hear you share some words with us on where you're sort of going to prioritize your time as you think about the greatest opportunities for Floor & Decor and for Brad to take over. Is there anything you're sort of willing to share with us on how you sort of think about customer mix opportunities, product mix, service opportunities? Would love to just hear high-level thinking here.

Sure. I have three key growth objectives that I believe are important for us to focus on. In the short term, we are launching an outdoor department, a kitchen cabinet opportunity, and a slab opportunity across the country. We're also reevaluating our loyalty program. These are immediate goals that I am eager to work on alongside Ersan, Steve, and the team to help them succeed. Each of these areas has the potential to enhance our existing stores and contribute to growth in same-store sales next year, regardless of the current condition of the hard surface flooring market. In the midterm, our focus will shift towards accelerating our efforts in the commercial sector, leveraging Brad's valuable expertise and ideas, while collaborating with Kevin Jablon to speed up progress. There are larger initiatives within our outdoor segment that we are considering, and we see significant opportunities in adjacent categories to expand our total addressable market and maximize store productivity. Looking at the long term, we will renew our focus on the design studio concept, which had been somewhat neglected. We also see international opportunities beyond the United States, which will require time and commitment. Additionally, we're exploring prospects outside the Lower 48, which will necessitate some extra effort. I am enthusiastic about these opportunities and am ready to collaborate closely with the team. My aim isn't just to reach 500 stores; I'm keen to lead us towards a much larger growth trajectory for Floor & Decor, marking a new chapter beyond just the 500 stores.

I appreciate that. Maybe just a quick follow-up on one of the short-term initiatives, kitchen cabinets in particular. Would love to hear sort of how we should think about this rollout, right? The current vignette we're displaying in the stores. Is there a plan in place to sort of maybe expand that, create a bigger showroom or experience for the customer? And even thinking about like is 2026 a period of time where maybe there's some remodel capital or existing store capital as well?

Yes, because the costs for our new stores are decreasing, we can invest in both our outdoor and kitchen strategies. We are developing several initiatives and will provide more details as they progress. We plan to enhance the display of kitchen cabinets and expand the design center space dedicated to them. Currently, we are in the initial phase of a pilot program to track this opportunity in the store. The initial display is set to be installed in the Pro area and the décor department, but it hasn’t been rolled out to all our stores yet. We need to complete that rollout before implementing some larger ideas, which we will share as we move into next year.

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

I guess I just missed the cutoff here for two. But Brad and Tom, congrats to you both. Actually, I got a question for Bryan. You talked about the 80 basis points of core margin improvement when you exclude the DC impact. Maybe you could walk us through expectations on that line for 2026?

Zach, it's probably a little too early for us to talk about 2026 at this point. Whenever we look at it, I guess the guidance I would give you is I don't really see a reason why that would go backwards. We're still in the planning process to figure out what next year is going to look like. We've got a lot of things in the hopper, as Tom just talked about, a lot of things to kind of figure out. And so as we model those and get those incorporated, we'll have more to communicate. But from where we sit today, we feel really good about where our gross margin rate is running from a product perspective. There'll be a little bit of DC headwind still to come as we fully operate our second Baltimore distribution center. So when you're thinking about modeling from a product margin perspective, where we sit today, we feel comfortable with, there may be slight movements within that. But what you will see a movement in is when we start to fully operate our second Baltimore distribution center because in Q3, we started to operate Seattle. So that's fully embedded within our numbers. But as you step into next year, there is a slight step investment, but that really is just for the people to operate the building. We're already getting hit with a lot of the rent and other kind of fixed costs that you see within that. So as you think about gross margin and stepping into next year, still a lot of planning to do. As Tom mentioned, we're not ready to talk about '26, but hopefully, that can help, give a little bit of guardrails.

Your next question comes from the line of Chuck Grom with Gordon Haskett.

Congrats to both you guys. Question is on commercial. You've talked about moving faster. Curious if you could discuss how you're evaluating the build versus buy decision while also taking advantage of the retail opportunity as well.

Yes. I'll start on Spartan, and then you can talk a little bit about the commercial opportunity within stores. So this is Tom. I would say we challenged Kevin, our CEO of Spartan, as we ended last year and we're going into this year. We wanted this year to be a year of investment in that business. We know him being a little bit more aggressive in incurring some cost in the beginning to add more sales folks will turn into a greater return as we get towards the end of the year and into next year. We saw that in the initial stages of our investment, and we're going to see it again, we believe, going forward. So we pushed him on the internal side. After Brad got here, and I would say probably 90 days into Brad's tenure and spending a little bit more time up there, we told him bring us more opportunities and bring them quicker. So when we're ready to share more, we will share more. But we think that Kevin can do both. We think that we have the ability to grow Spartan by doing some acquisition like we did when we initially bought the company and added a couple of bolt-ons and growing internally with our sales force. So this year, it's been much more about the salespeople being added to the organization. But as we get towards the end of this year and into next year, our hopes are that we'll be bringing a little bit more acquisitions.

And when we think about the kind of total commercial umbrella, we always talk about 3 segments. Tom just talked about Spartan, and that customer, again, is high complexity, high specification. That is going to be a combination of build and buy like he just described. We then have our Pro desk in the store that serves a professional customer that's generally lower complexity, low specification. That's going to be built. We feel really good about our experience there. We're at the right maturity level. But we're also excited about the share of wallet gains that we think we're going to get over time with some of the initiatives that we've talked about externally over the last few months. And then all the space in between Spartan and our Pro desk is what we've targeted for our RAM team, regional account managers. That also will be a build. We brought new leadership into the organization over the last 90 days. As I shared with many of you, right now, the focus is building the right foundation, kind of the go slow to go fast, ensuring that we have the right people, process and technology in place. But we're really excited. We're really excited. We think that's a big opportunity. It's a huge market for us where we have currently really small share.

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

Congrats to everybody. I want to ask about design services. So that seems to be performing well. What do you need to do in order to get that more top of mind for customers? Do you need installation capabilities? Is it a higher advertising intensity? Just what do you need to do? And what are the plans to sort of unlock a higher level of design services?

This is Tom. I believe we can enhance our narrative more effectively through improved marketing and direct communication with our customers regarding our design services. It's not about installation, as we currently do not install and have no intentions of entering that area. Our relationship with professional customers is crucial, and we want them to feel confident sending their customers to our store without fear of losing a sale to Floor & Decor's installation services. We will maintain this approach. However, we can better share our story. We have initiatives in place to have our designers leave the design center and engage with customers directly in the store to explain our design services. This is a vital aspect of our value proposition. Our service scores improve when a designer is involved, resulting in higher sales tickets and better margin blends. We just need to keep communicating this message. We have made hiring decisions to support this effort.

Yes. The only thing that I would say, and Tom hit the nail on the head when we talk about design, just tell them the story, driving awareness. But also Steve Denny, who's responsible for that organization, really focused and I'd say being thoughtful around how we can increase the frequency of interactions between designer and customers that come into the store, and that's both homeowners and Pros. I agree with Tom's point. We think it's a differentiator from a service perspective. If you look at other competitors like us, they don't offer that service, especially free service. So you're going to hear more about that in the future, but we're certainly encouraged by what we're seeing right now.

The next question comes from the line of Peter Keith with Piper Sandler.

Tom, congrats. You've done a great job during your tenure there. Brad, look forward to working with you more closely. Maybe to follow up on the last question. I'm curious what you guys are doing from a brand awareness and advertising standpoint. We're seeing a number of other companies in home-related areas that have advertised consistently start to bounce off the bottom. So are you guys increasing, decreasing ad spend? And then looking to raise awareness, are you looking at other channels like social media? And what are you doing to lean in there?

Peter, great question. And that's a part of our business that we're always looking at. We're blessed with a very good team here. And I think our capabilities continue to get better and better. When we think about how we allocate our spend across our total budget, that's changed over the last couple of years. And as a brand that's not well known like other competitors in the space, a big part of where we spend our money is to tell them the story, who is Floor & Decor. And that's going to be an area that we continue to invest in because we think we've got a great story to tell. At the same time, in this environment where we know there's limited demand, we've got to be really tactical and technical about getting as much of that demand as possible. So I think we've executed well, always room for progress. The other piece is that's a space where technology feels like it's changing every day on how you talk to customers, and we're doing our best to stay in front of that.

The next question comes from the line of Jonathan Matuszewski with Jefferies.

It was on labor inflation. Curious what you're seeing there in terms of wages for industry tradespeople. Anything you've been hearing from IME in the second half that may be different from the first half, again, on the labor side versus the product side?

I'll start, and I guess, Bryan, you can weigh in. This is Tom. I have not heard of labor inflation or the cost of the install going up because of the lack of labor. That could be the case in some markets. But overall, I would say that, that's not something that we're dealing with. In fact, I think because of the pressure in the category that on the installation side, I think the contractors are being very aggressive themselves to kind of keep a book of business. So they're probably a little less expensive than they've been. But there may be pockets in the country where there's been some impact where they've lost some professional flooring installers, and that may cause an issue. But I think in general, for the company, that's not the case.

And the last question will come from the line of Steven Zaccone with Citi.

Congrats, Tom and Brad, on the changes there. My question on average ticket. So you said it was at the low end of your expectations. You cited mix. Can you elaborate a bit more what that means? Are you seeing any signs of trade down out of the better and best? And then what's embedded in your outlook for fourth quarter comps transactions versus ticket?

I'll cover the first half and then pass it to Bryan for the latter part. As a reminder, we experienced a 1.8% increase in ticket sales, which is at the lower end of our guidance. There are two main factors contributing to this. First, there has been a change in product mix, particularly in the laminate and vinyl categories, which are experiencing slower growth and represent a higher ticket item in our stores. Secondly, as Tom mentioned in his response, we've observed a slight decrease in job sizes, which affects the average square footage for each job. These two factors together have created some pressure on the average ticket. Bryan, would you like to address the second half of this?

Steve, the implied guide for ticket is essentially flat for Q4. And so when you take that implied in transactions is kind of low to mid-single digits, so for Q4. That will wrap up for the full year in the guide that I gave earlier.

So that concludes the questions. I want to thank you all for joining. And in closing, I just want to take a minute for a couple of words. I want to underscore our unwavering commitment to playing the long game with discipline, focus and a clear strategy to build long-term earnings power. Over the past 2 years, we reduced operating expenses in our comparable stores by approximately $50 million and continue to identify new opportunities to scale with greater efficiency. We've meaningfully lowered new store construction costs, created a more leverageable growth model that allows us to expand faster and more profitable as the market strengthens. With nearly 50% of our locations less than 5 years old, the fleet is modern, requiring no major reinvestment to support growth. These efficiencies are not temporary, they're foundational, allowing future revenue to scale. As industry conditions improve, we'll be growing with a larger fleet of stores, lower operating expenses, stronger market share and a superior customer service experience, all powered by a leaner, more agile operating model. We're not just preparing for the future, we're actively shaping it. Thank you for your interest in the call, and we look forward to talking to you next quarter.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.