Floor & Decor Holdings, Inc. Q4 FY2025 Earnings Call

Greetings, and welcome to the Floor & Decor Holdings Fourth Quarter 2025 Conference Call. Please note that this conference is being recorded. I will now turn the conference over to our 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 Fourth Quarter and Full Year Earnings Conference Call. Joining me today are Tom Taylor, Executive Chair; Brad Paulsen, Chief Executive Officer; and Bryan Langley, Executive Vice President and Chief Financial Officer. Before we begin, 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 ending 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 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 thanks to everyone joining us today for our Fiscal 2025 Fourth Quarter and Full Year Earnings Conference Call. During today's conference call, Brad, Bryan, and I will be walking through the key highlights from the quarter and the full year. Then Bryan will share how we're approaching Fiscal 2026 and the priorities that are shaping our outlook. We're pleased to deliver fiscal 2025 fourth quarter diluted earnings per share of $0.36, which was in line with the midpoint of our earnings guidance provided on our third quarter earnings conference call. For the full fiscal year, diluted earnings per share was $1.92 compared with $1.90 in the prior year. As a reminder, last year's results include $6.8 million or $0.05 per share of net benefit related to the derivative litigation settlement in the fourth quarter of 2024. Our fourth quarter sales increased 2% to $1.130 billion, while comparable store sales declined 4.8%. For the full fiscal year, sales grew 5.1% to $4.684 billion and comparable store sales declined 1.8%, which was near the low end of our expectations. I'm incredibly proud of what our teams accomplished in 2025. Despite pressure on comparable store sales driven by softness in existing home sales activities and shifts to smaller flooring projects, we expanded our market share, navigated tariff complexities, increased our gross margin rate, opened 20 new stores and delivered year-over-year earnings growth. This performance reflects our unwavering commitment to disciplined execution and strategic investment in our future. It also reinforces our confidence in our long-term strategy and in the opportunities ahead for our customers, our associates and our shareholders. With that said, let me now turn the call over to Brad.

Thanks, Tom. I want to begin by also recognizing our more than 13,500 associates across the company. Their customer-focused commitment throughout 2025 enabled us to execute effectively in a complex and challenging environment and delivering exceptional customer experience. We are proud to have achieved record Net Promoter Scores in 2025, which underscore and validate our associates' efforts. The progress we made by expanding our footprint, strengthening our capabilities, controlling expenses, and gaining market share demonstrates the strength of our operating model and the discipline of our teams. As we enter 2026, we have a clear set of initiatives designed to further grow our market share and drive sales and profitability in any economic environment. Our priorities are aligned with the areas where we see the greatest opportunity. New store productivity will remain a major focus. We opened 20 new warehouse-format stores in 2025 and plan to open 20 more in 2026. Ensuring these locations ramp efficiently and deliver stronger early results is a top priority, and I'll speak more about the actions driving that performance in a moment. We are investing in initiatives that deepen customer loyalty and translate directly into greater wallet share with our Pro customers. The key priority is accelerating our Pro market share by advancing our supply house capabilities in key categories such as installation materials, and by relaunching an enhanced Pro loyalty offering. In Fiscal 2026, we will focus on the design, development, and testing required for a Pro Loyalty 2.0 relaunch in early 2027, which is expected to introduce a differentiated Pro experience with expanded personalization capabilities. To further strengthen our supply house value proposition, we are piloting enhancements to Pro pricing supported by an improved delivery offering for this customer segment. Together, these and other initiatives build long-term capabilities that are expected to significantly increase switching costs and deepen our strategic advantage with Pro customers. Maintaining strong gross margin performance will continue to be a priority in Fiscal 2026. We are prepared to take modest retail pricing actions to help offset the expected impact of tariffs and to manage both margin rate and dollars. As a reminder, we have made meaningful progress in diversifying our product sourcing. China represented 3% of our fourth quarter receipts, down from 12.5% in the prior year. Our teams have consistently executed well in navigating difficult environments, and we remain confident in our ability to manage through these dynamics with discipline and success. We are building a scalable, strategic account-driven B2B foundation that supports the phase expansion of our regional commercial account managers. This team, which totaled 67 at the end of 2025 and operates outside our stores, enhances our ability to capture additional commercial market share through our stores in key markets. Collectively, we believe these asset-light growth investments will increase engagement, improve retention and expand lifetime value among our highest-value commercial customers. Driving annual supply chain productivity improvement is a top priority over the next few years. We are piloting an initiative over the next several months that is designed to deliver a meaningful reduction in distribution center to store lead times by improving network responsiveness, inventory flow, and store service levels. This work is expected to strengthen our ability to move product through the network more efficiently, support better in-stock performance for our customers, and increase inventory turns. These are just some of the initiatives that give us confidence that we can continue to grow ahead of the market even in a year when industry demand may face ongoing headwinds. Our priorities remain clear: Stay disciplined; invest where we have structural advantages; and execute with even more operational rigor.

Thank you, Brad. As we wrap up fiscal 2025, our financial performance underscores the resilience of our business model and the effectiveness of our financial discipline despite ongoing pressure in the hard surface flooring category. I'm extremely proud of how the entire company continued to effectively manage our profitability, inventory, cash flow, and balance sheet, playing a key role in supporting our financial performance in 2025. Importantly, we were able to maintain this discipline while continuing to invest in expanding our capabilities to support long-term growth. Now let me discuss some of the changes among the significant line items in our fourth quarter and full year financial statements as well as our outlook for 2026. We continue to be pleased with our gross margin performance. Our fourth quarter gross profit increased by $9.8 million or 2.0% compared to the same period last year. Our gross margin of 43.5% was flat year-over-year and up 10 basis points sequentially, landing within our expected range. Gross margin benefited from favorable product margin, inclusive of higher duties and tariffs starting to impact us, offset by the expansion of our distribution center network in Seattle and Baltimore, which as anticipated, had a gross margin pressure of approximately 90 basis points year-over-year. These distribution center investments position us to support the next phase of growth with greater speed, efficiency, and reliability. While they create some near-term gross margin pressure, they meaningfully strengthen our long-term operating capabilities and enhance the value we deliver to customers. For the full year, gross profit increased $115.7 million or 6.0%, driven by 5.1% sales growth and a 30 basis point improvement in gross margin to 43.6% from the same period last year. Our gross margin expansion was driven by favorable product margin due to lower supply chain costs partially offset by higher distribution center costs. Our distribution center investments impacted gross margin by approximately 70 basis points, consistent with our expectations.

Thanks, Bryan. Let me offer a few closing remarks before we take your questions. With Brad stepping into the CEO role, he'll now be leading these calls going forward, and I'm excited for you to hear from him in that capacity. As I transition into the executive chair role, I will remain closely involved in the business, focusing on the long-term strategic initiatives Brad and I have been developing to support our growth. I'm energized by the opportunity to concentrate even more on these long-range priorities and the work that will drive our next chapter. Brad and I are fully aligned on our long-term vision, our culture, and the associates who make this company exceptional. Floor & Decor has been a meaningful part of my life, and I look forward to continuing to contribute to the work that will shape its future. Operator, we'll now take questions.

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

All right. Thank you very much. Well, Tom, good luck to you in your new role. You've done a nice job of building a category killer in the space. I did want to pivot the first question over to Brad. So Brad, as you're moving into the CEO role now and you're in the chair, you mentioned a couple of initiatives around Pro loyalty and supply chain, but I'm curious what you think of some of the biggest areas of opportunity perhaps to drive some acceleration or operational improvement?

Thanks for the question. I would say I've been really over the course of the last 11 months or so, really, really impressed with the operational capabilities and discipline of the team. I think there's no better example of that when you look at the service scores that we were able to deliver in 2025 despite 30% of our stores being on minimum hours. And that's kind of a one team effort to make that happen. But you're right, we certainly see opportunities for us as an organization. We are laser-focused on getting the core of our business growing again. And a key component to that is improved new store performance. And I know we had a pretty detailed description in our prepared remarks on how we're going to do that. But again, the organization is fully focused on delivering meaningful improvement over what we've seen from a kind of first year sales performance relative to our last three years. I'd say that would be number one. Number two, and I've talked about this in past calls, I think digital experience for us is a real opportunity. At the highest level, we want our customers to have the same great experience on our digital platforms that they have in our stores. And today, that in some cases, just doesn't happen. The good news is we've hired a new leader over that part of our business. She's got a compelling vision and a very practical plan on how we're going to make that happen. And you'll certainly hear more about that on future calls. And then supply chain. Yes, supply chain is certainly an opportunity. And the way that I frame that as an organization, we're at a maturity level now where that's got to be a priority. And the priority is delivering improved productivity across our entire supply chain every year. And the way that I would frame that is it's very much a singles and doubles approach at this point. And I say that because it doesn't require transformational investment, it's really process and people and just saying that's going to be a priority for our business.

So let's start with the comp guide. Any thoughts on cadence of the year? You mentioned low visibility in terms of demand right now. I'm just curious what you're embedding in terms of the shape of the year of comps and particularly if there's a Q1 guide that we should anchor to? And then separately, any thoughts on the impact of some of those key markets like Texas and Florida versus other markets? And any change in spread between those two.

Sure. I'll begin and then pass it to Bryan for a more detailed response. At a high level, when we consider our guidance, we need to account for a variety of outcomes. Looking back at our recent performance in Q4, we experienced somewhat softer demand than anticipated. We understood it would be a challenging quarter, but the softness was particularly noticeable in November and December. However, we were very pleased with our performance in January, especially following a positive December report on existing home sales. I would note that much of our strength in January came from the last three weeks of the month, as the first week was influenced by the holiday. Those three weeks were quite strong. Unfortunately, we faced a significant weather challenge in February, which impacted our demand. When we experience a weather event like that, it takes time to recover. As mentioned in our prepared remarks, we expect it will take this quarter and possibly more to return demand to our business. Reflecting on the last three years and our guidance, considering the information we have now, we felt it was prudent and thoughtful to set the guidance as we did. Bryan, would you like to go into some of the details regarding their questions?

Yes, good question, Zach. So 2026, we expect second half comps to be better than the first half, with Q3 being the high mark for the year. On a three-year stack, that's the way I look at it because it removes the noise from the hurricanes. We expect sequential improvement each quarter on both the low and high end of the guide. And then to give a little bit of clarity, as Brad was talking about the February storms, those storms impacted approximately 55% of our stores and contributed almost 200 to 300 basis points of quarter-to-date pressure on comps or $12 million to $18 million. So going into the year, our initial model assumed Q1 comp will be slightly negative prior to those storms happening just because we are lapping the 100 basis points benefit from hurricanes, Milton and Helene coming into this year. So all of the pressure we've seen early on has really been transaction-based. We feel really good about what's happening with quarter-to-date average ticket.

Got it. And then on the Pro strategy, curious to what extent you think the EDLP strategy has been a headwind for your Pro business, considering no incremental discounts. And as you think through the next iteration of Pro loyalty, curious to what extent you'd consider tweaking the pricing architecture to perhaps better incentivize the Pro?

Great question. Maybe I start on why the Pro is so important for our business. We've shared that Pro sales are right around 50% of our overall sales. When you think about the remaining 50% of our sales, we think the Pro influence is up to 20 points of that 50 points. So there's no customer that we serve that's more influential than the Pro customer. We really, really like the Pro experience that we have. And I generally divide that into three components: service; assortment; and price. When we think about what we do in-store to support the Pro from a Pro desk dedicated pickup location. We'll store their product for up to seven days, I feel like we've got a very differentiated offering for that individual. From an assortment perspective, we're very proud of our assortment, particularly when you think about our supply house strategy that we have in installation materials and the ability when a Pro comes to our stores, they have a level of confidence that they're going to have the job lot quantities they need to walk out of the store to be able to do the job that they're headed to. The price piece, I think EDLP has been obviously very successful for us. We built a multibillion-dollar Pro business based on it. But when we look at the competitive landscape on both sides, on big box and independents, they've got a different pricing strategy where our Pros are able to get some form of rebates and discounts. And why that is important is because certain Pros, not all Pros, but certain Pros use that gap between what we call shelf price and the kind of net price as profit for their business. So when you factor in, there's a financial switching cost and generally, a long-standing personal relationship with independents, it's certainly something that we've looked at for a period of time and said, 'Hey, we need to figure that out at some point in time.' We were really intentional on the script saying that we're going to take all of 2026 to develop a plan because it does touch all parts of our business. And the way we view that opportunity is a chance for us to develop a deep relationship with that Pro across all three of those aspects that I mentioned. So we're excited. We think this is going to be a meaningful step forward for our business, but it's going to require a lot of work, a lot of thought and a lot of testing before we're ready to go national with it.

So my first question is a follow-up to the prior question, which is that improvement that you saw in January, was that sort of equally spread across regions. So for example, did California hold serve? Or did that actually accelerate? And then importantly, in those southern markets where home prices are under pressure currently, did you see relief in those markets and to what extent?

Yes. The good news is we saw really broad-based improvement in January. And what I like to say, all geographies in all categories. The only merchandising category that had a little bit of pressure was laminate and vinyl, and we touched on that in the script. But we were really pleased outside of a market or two where we had pretty heavy cannibalization, we saw a nice kind of year-over-year improvement.

Tom, if we asked you three years ago, whether you saw a three-year downturn would have led to significant market share gains for Floor & Decor, both because of the strategies that have been deployed as well as the prospect of independents and regional players going out of business. You probably would have said, your market share gains would accelerate meaningfully over that time period, yet as we look at the same-store sales performance in the fourth quarter, it's probably similar, maybe a little bit lower than the performance of the flooring market overall. So how have your share gains not accelerated? And how does that inform how you think about the go-forward as the recovery unfolds, especially as you might experience more cannibalization with more of your stores in infill markets?

I thought I was finished with this, Michael. Let me break down that question a bit. Yes, I do believe we have gained market share over the last three years. We can certainly discuss how much share we've taken and whether we measure that through total growth or same-store sales. We've managed to continue growing throughout the downturn by opening new stores. So while the question of whether we should have taken more share is valid, I think we've executed well on store innovations, product innovations, and pricing strategies as we analyze them from shelf to shelf. A vital aspect for us to continue gaining share, possibly at an accelerated pace, hinges on the initiatives that Brad has introduced, such as rethinking our loyalty program and improving our tier system for our pros to enhance their loyalty. With the new addition to our team, I believe they are approaching these issues positively, and I expect it will benefit us over the next few years. I had expected you to ask if I thought three years ago that this downturn would last this long, and my answer would be an emphatic no. I didn't anticipate we’d still be around this $4 million or lower annualized home sales. I hope what we saw in December continues as the weather improves, following the trends we noticed in January, indicating that we are indeed gaining market share.

Michael, one point of clarification. I just want to let you guys know, we do anticipate cannibalization to meaningfully decrease as we get into 2026. When we were opening 31 or 32 stores a couple of years ago, 30 stores. Last year, we opened 20 and it's really the cannibalization effect of those 20 stores. So even though we're opening more infills as we get into 2026 and beyond, the amount of cannibalization should actually decrease just because of the amount of stores that we're opening. So again, that should help benefit as we move forward.

Can you speak to the competitive environment and how your price gaps are trending today versus prior to tariffs taking in? Just curious if you're seeing any notable changes?

I have described the competitive environment as rational. I would say pricing and promotional activity is in line with expectations. Again, the only exception would be the laminate and vinyl discussion that we've had. And on that, it's really the vinyl part of laminate and vinyl where we're seeing that. Our gaps continue to be, I'd say, in line with historical trends. We've got a range that we like to be in. Every category is a little bit different. But pricing is an area that our team leads for us. We'll continue to invest in people and process there and try to leverage the science of pricing as best we can.

New store productivity has been a nice bright spot the past couple of quarters. Is that largely just from opening up more stores in existing markets? Or can we just talk about that? I mean, the prior six-quarter average is in the low 50s. So moving from the low 50s to the high 80s is a nice step up. So curious what's driving it and the sustainability?

I believe we have more confidence in the stores we're opening today. Additionally, the number of stores being opened is significant, with a higher volume each quarter. For instance, we opened 8 stores in Q4, 5 in Q3, and previously 3 stores in Q2 and 4 in Q1. This rhythm of store openings is likely to enhance new store productivity, especially when considering their contribution to sales.

Yes, you're absolutely right. There were many opportunities, and we have been working to optimize the business throughout 2025. We still have a lot to address in 2026. As an executive team, we have only 30% of our fleet operating at minimum hours, which means 70% can still flex with transactions. We will continue to apply pressure on G&A as we have been. We've made significant moves later this year, and as we move into 2026, you'll start to see the benefits from those efforts. There are plenty of options available for us to meet the earnings guidance we've provided, and we've accomplished a lot this year.

All right. I know the script was a little bit long today. I appreciate the patience with that. Thanks for joining the call, and we appreciate your support. Operator, I'll turn it back to you.

Thank you. And that concludes today's call. All parties may now disconnect. Have a good day.