Floor & Decor Holdings, Inc. Price & Performance (FND)

Thank you, operator, and good afternoon, everyone. Welcome to Floor and Decor's fiscal twenty twenty four fourth quarter earnings conference call. Joining me on our call today are Tom Taylor, Chief Executive Officer and Brian Langley, Executive Vice President and Chief Financial Officer. Before we start, I want to remind everyone that the company's Safe Harbor language Comments made during this conference call and webcast contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. Any statement that refers to expectations, projections, or other characterizations of future events, including financial projections or future market conditions, is a forward looking statement The company's actual future results could differ materially from those expressed in such forward looking statements for any reason. Including those listed its SEC filings Florin de Porsos assumes no obligation to update any such forward looking statements. Please also note that past performance Floor market information is not a guarantee of future results. During this conference call, the company will discuss non GAAP financial measures as defined by SEC Regulation G. We believe non GAAP disclosures enable investors to understand better Our core operating performance on a comparable basis between periods A reconciliation of each of these non GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release which is available on our Investor Relations website at irfloranddecor.com.

Recorded replay of this call and related materials will be available on our Investor Relations website me now turn the call over to Tom. Thank you, Wayne, and everyone for joining us on our fiscal twenty twenty four fourth quarter and full year earnings conference call. We were to announce in January the appointment of Brad Paulson as our new President. Reporting directly to me. As many of you know, he will succeed Trevor, who is retiring in March after a remarkable fourteen year career with us. We wish him well. Brad brings nearly two decades of relevant experience and will be a valuable addition to our executive team. Helping to lead the next chapter of Floor and Decor's growth. Most recently, he served as the CEO of North America for Rent A Kill Initial PLC, a global leader in pest control hygiene and wellness services. Prior to Rent two Kill, Brad was CEO of Rexel USA, a leading electrical parts He has held the position of Chief Operating Officer at HD Supply has had various leadership and merchandising roles at The Home Depot. Brad is an accomplished leader with experience in retail, commercial and service based organizations. His deep understanding of home improvement merchandising, retail and commercial sales and supply chain operations be particularly valuable to our company.

Moreover, his customer service and associate support principles align perfectly with our core values. Let me now comment about our fiscal twenty twenty four fourth quarter and full year earnings results. Our leadership team is proud of our store and store support teams. Despite the challenges we faced within hard surface Floor category in fiscal twenty twenty four, they successfully executed our sales and customer service initiatives to grow our market share while diligently managing costs. Thanks to their collective efforts, we reported better than expect comparable store sales earnings flow through, operating cash flow and earnings per share for the fourth quarter of fiscal twenty twenty four. We delivered fiscal twenty twenty four fourth quarter diluted earnings of $0.44 per share, which includes a favorable $6,800,000 or $0.05 per share net benefit from a derivative litigation settlement in December of twenty twenty four. This net settlement benefit was not contemplated in our prior earnings guidance. For the fiscal twenty twenty four year, we reported diluted earnings of $1.9 per share, which includes the $0.05 net benefit from the settlement proceeds. As Brian will discuss in more detail, we are in a strong financial position that allows us to navigate through the short term and at the same time make long term growth investments during the cyclical downturn [indiscernible] Specifically, we continue to invest in opening new stores of various sizes and new and existing markets and innovative and trend forward merchandise.

Technology, and our associates. This has allowed us to grow our market share to and prepared us to maximize sales and profitability once the industry's cyclical growth accelerates to historical rates. We take a long term view when making these investments as we are optimistic about the secular spending opportunities in hard surface flooring and our adjacent categories. The demand for housing continues to outpace supply, and the forty year median age of owner occupied housing is continuing to increase. We believe the supply and demand in balance in housing, and aging housing stock remains a significant secular growth Turning to our new warehouse store format growth. December 2024 marked a historic milestone in our company's the journey We opened our two hundred and fiftieth store in North Seattle, Washington reaching the halfway point towards our vision of operating 500 warehouse format stores in various size markets across The United States. Over the past three years, we have opened 93 warehouse format stores including locations in five new states, underscoring our commitment to strategic growth to We remain excited about our future sales and earnings growth prospects as approximately 55% of our stores leaving what we believe is plenty of room for growth along the maturity curve.

Our commitment to opening new warehouse stores has contributed to our market share positions us well when industry fundamentals improve. In the fourth quarter of fiscal twenty twenty four, we opened 10 new warehouse format stores, culminating in 30 new warehouse format stores opened in the fiscal twenty four. At the end of fiscal twenty twenty four, we operated two fifty one warehouse format stores and five design studios 38 states. In the first quarter of fiscal twenty twenty five, we have already opened new warehouse format stores in Venice, Florida and Covington, Louisiana. Plan to open seven new warehouse format stores in the the first half of twenty twenty five [indiscernible] Tovatin, Oregon, Kissimmee, Florida San Antonio, Texas and two stores in California Gilroy and Chula Vista. Fiscal twenty twenty five and close one store at the end of the first quarter of fiscal twenty twenty five. Most of our new stores will be located in existing markets. If macroeconomic conditions are less favorable than we anticipate, we we have flexibility to adjust this number downward. As most of these openings are slated for the second half of the fiscal year. We recognize we cannot control the short term cyclical pressures affecting the hard surface of our new stores we opened.

However, we have identified specific strategic actions we can take to maximize their chances for success during this challenging period. In fiscal twenty twenty five, we plan to be more We intend to emphasize impression driving media and messaging updates grow local brand awareness. By taking these actions, we believe we can expand our brand awareness, attract more new homeowners and pros and create a strong for long term growth. Moving to our total and comparable store sales. Our fiscal twenty twenty four fourth quarter total sales increased by 5.7% from the same period last year. And comparable store sales decreased by a better than expected 0.8%. For the 2024 year, our total sales increased by 0.9 to $4,456,000,000 driven by the opening of 30 new warehouse format stores and growth at Spartan Surfaces. While our fiscal twenty twenty four comparable store sales declined by seven point with the fourth quarter being the strongest of the year. Fourth quarter comparable store sales decreased by 0.8% a notable improvement from a 6.4% decline the third quarter a 9% decline in the second quarter and 11.6% decline in the first quarter. The improvement sequential sales trend partially reflects long awaited modest growth in existing home sales.

Despite elevated mortgage interest rates, existing home sales rose the longest growth streak since early to mid-twenty twenty one. Our fourth quarter average ticket comp increased by 1.3 the only quarterly increase in fiscal twenty twenty four. Our average ticket comp benefited from a favorable product mix and the positive impacts of hurricanes, Helene and Milton. Additionally, the enhancements we have made in associate training including micro learning sessions yielding positive results. The training boosts their confidence in articulating the features and benefits along our merchandising continuum. Fourth quarter comparable transactions continued to sequentially improve declining by 2.1% from the same period last year. Breaking down our comparable store sales by month, October declined by 4.8% which followed an increase of 8.1% in November and a 4.8% decline in December. Adjusting for the Thanksgiving holiday shift from fiscal November to December, comparable store sales for November and December combined grew by 1.2% We estimate the fiscal twenty twenty four fourth quarter benefit to our comparable store sales from Hurricane Celine and Milton was approximately 110 basis points. In the first quarter of fiscal twenty twenty five, our quarter to date comparable store sales have decreased 1.7%. From a regional perspective, we continue to see encouraging comparable store sales trends emerging from our West Division, where fourth quarter comparable store sales grew modestly year over year.

Our hearts go out to all of those impacted by the California wildfires Floor. Which only impacted our San Gabriel and Woodland Hills stores for a few days. Among our merchandising categories, the fourth quarter total sales growth in wood, installation materials stone, decorative accessories and adjacent categories increased above the company average compared to the same period last year. The sales growth in these categories reflects successful merchandising initiatives to grow these categories. We expect these initiatives to benefit us in 2025 and beyond. Sales growth in laminate and vinyl and tile were below the company average but showed sequential improvement. In fiscal twenty twenty five, we are excited to continue delivering new innovative products and programs to our homeowners and pros. We will expand our merchandise offerings in adjacent categories, including testing a high quality, stylish, semi custom cabinet program at approximately 40 warehouse stores and online in the first quarter. We can now offer online semi custom cabinets express ship plywood cabinets, cabinet accessories, decorative hardware and cabinet samples that we can ship to the job site. This initiative helps our homeowners and pro customers complete kitchens, and other cabinet projects and is expected to drive incremental sales growth to our Furthermore, we will reset decorative accessories to improve the customer experience and productivity further.

We will also continue expanding our outdoor and pool offerings I will now discuss our supply chain and how we expect to manage anticipated tariffs in 2025. First, we are pleased that the International Longshoremen's Association and the U. S. Maritime Alliance reached an agreement in January. As a result, we did not experience any material supply chain disruptions. As we enter fiscal twenty twenty five, our merchandise in are strong. We continue to closely monitor the fluid developments regarding tariffs on products we sell, particularly trade disputes between The U. S. And China. These trade disputes will lead to additional tariffs beyond the 25 previous 25% imposed on most products that we sell that are produced in China. For example, on February 1, an additional 10% tariff As previously discussed, we have been actively working to mitigate tariff cost pressures over the past five years by successfully diversifying our countries of origin. In fiscal twenty twenty four, China accounted for approximately 18% of the products we sold down from approximately 25% in fiscal twenty twenty three and approximately 50% in fiscal twenty eighteen. In the fourth quarter of fiscal twenty twenty four, China accounted for approximately 16% of the products we sold.

We expect our diversification strategies to continue to meaningfully reduce our reliance on China in 2025 and beyond. We source products made in Canada and Mexico, a portion of our products sold in these countries for fiscal twenty twenty four was not material. We are proud to report that The United States is now our largest country of manufacturer, a we sold in fiscal twenty twenty four, up from approximately 20% in fiscal twenty eighteen. Regardless of any new tariffs, timings and potential impacts, our strategy remains the same. First, we expect to continue negotiating costs with our vendor partners to mitigate the incremental cost. And second, we will continue sourcing from alternative countries where it makes sense. Third, we will increase retail pricing as we deem appropriate while maintaining our price gaps. We believe our scale and worldwide direct sourcing model for more than two forty vendors in 26 countries particularly amongst independent flooring retailers and distributors. Shifting to our connected customer, pillar of growth. Our fiscal twenty twenty four fourth quarter connected customer sales increased by 6% compared to the same period last year accounting for approximately 18% of sales. For the full year, connected customer sales were accounting for approximately 19% of sales.

In fiscal twenty twenty five and beyond, we plan to continue integrating our process and technology solutions to provide an inspirational robust and seamless personalized experience across all of our engagement channels. To that end, we are continuing to work towards ensuring continuity between our website and stores. Moreover, plan to continue improving our website and mobile download speed We believe we have an edge with visual shoppable content and our online image sets and galleries. These image sets and galleries promote inspiration, and infuse project selling throughout the customer journey. We are excited to add more inspiring, designer and user generated content in 2025 which will benefit our free design services. In support, we plan to expand our long form content library by refinishing guides and more in-depth articles. Overall, we expect these strategies among others to further improve our brand In fiscal twenty twenty four, we adopted a more convenient which allows customers to provide payment information more conveniently and allows individuals they authorize to finalize the purchase and pick up those products on their behalf. Confirmed to pay is replacing an outdated paper based process. Particularly among pros making it easier to transact with us. We believe this could slightly pressure our connected customer sales penetration metric as sales shift from point of sale from online and other payment options.

However, we better serve our pros and homeowners with multiple seamless payment options. This is just a change in the geography of where and how customers will transact with us. Let me comment on design services. We are pleased to report that design service sales growth significantly accelerated throughout fiscal twenty twenty four with the fourth quarter being the strongest. These results reflect strong transaction growth and our commitment to design and services staffing at a time when labor hours were diligently managed. Additionally, our designers are focused on closing high value design opportunities and building brand awareness and project credibility with homeowners and pros Consequently, we achieved the highest Net Promoter Score for design services since we began measuring it. In summary, we are successfully executing our strategy of offering Homeowners and Pros an elevated and personalized design experience across in store online and in home channels. These combined efforts led to a remarkable year for our design services. Highlighting our commitment to excellence and customer satisfaction. Turning my comments to PROS, we're pleased to report total sales to PROS continued to grow in the fourth quarter of fiscal twenty twenty four, accounting for approximately 50% of our total sales.

Pro comparable store sales improved sequentially throughout through 2024. These results demonstrate that our grassroots supply house approach is effective focusing on engagement and nurturing strong relationships with pros. We continue to benefit from partnering with native advertising plant platforms that provide a practical and cost efficient way to attract and retain new pros. Additionally, we benefit from our pro service managers spending more time out where they directly engage with pros to build brand awareness, understand their needs and provide tailored solutions. Finally, I'll discuss our commercial business. Fiscal twenty twenty four fourth quarter sales at Spartan Services Fiscal twenty twenty four fourth quarter sales at Spartan Services declined 17.9% from the same period last year. The sales decline is primarily due to weakness in the multifamily residential market pricing pressures in the commercial LVT market and difficult comparisons against record assemble sales at Spartan last Collectively, these factors pressured Spartans fiscal twenty twenty four fourth quarter and full year gross margin and EBIT. In fiscal twenty twenty four, Spartan Surfaces sales grew by 10.1% to hundred and $15,200,000 compared to last year, but EBIT declined 25.4% to $14,300,000 from $19,100,000 in fiscal twenty twenty three, primarily due to pressure on the gross margin rate.

In fiscal twenty twenty five's Spartan will continue to focus on the healthcare, education, senior living and hospitality sectors. As previously discussed, these are high specification sectors of the commercial flooring market where the opportunity for long term growth and profitability is greatest. These sectors generally have high quarter conversion rates reoccurring revenue and more attractive profitability. We plan to continue making investments in in sales representative growth particularly in those sectors that are most important to us. Additionally, we plan to continue building out Spartan's infrastructure to support growth at scale and achieve our long term market share and profitability objectives. Necessary long term investments we are making will impact Spartan's near term EBIT with fiscal twenty twenty five EBIT rate expected to be about flat with fiscal twenty twenty four, However, they are critical to driving significant market share growth in the coming years. Important to note that the investment cycle and return timeline in our commercial business differ from what many you are familiar with within our retail operations, reflecting the distinct nature and opportunities of the commercial sector. Over the long term Spartan Services aims to become a disruptive leader in the specified commercial flooring industry by establishing a comprehensive nationwide sales network.

This network would prioritize high specification products and leverage strong relationships to provide superior availability [indiscernible] and service nationwide. Let me now turn the call over to Brian. Thank you, Tom. In fiscal twenty twenty four, we successfully grew our market share while effectively managing our profitability balance sheet even amid a decline in demand for hard surface flooring. I'm extremely proud of the resiliency of our business model even though the contracting Floor industry is putting immense pressure on other specialty foreign retailers in this environment, As Tom mentioned, we were pleased to be in a strong financial position allowing us to continue investing in new store growth, technology enhancements and our associates. Our investments in our associates' training and development enable us to proudly announce that our Net Promoter Score reached a record high in January 2025. This achievement underscores our associates' ongoing dedication to serving our homeowners, and pros with any of the hard surface flooring project. As we embark on fiscal twenty twenty five, we believe that we have the right teams, strategies in place to control the controllables and flex our business model as market fundamentals change. Now let me discuss some of the changes among the significant line items in our fourth quarter and full year income statement balance sheet and statement of cash Floor, as well as our outlook for 2025.

We continue to be pleased with how we are managing and expanding our gross margin. Our fiscal twenty twenty four fourth quarter gross profit rose by 8.9% driven by a year over year increase of approximately 130 basis points and our gross margin rate to 43.5%. Our fiscal twenty twenty four full year gross profit grew by 3.8% driven by a rise in sales and an increase in our gross margin rate of approximately 120 basis points to 43.3% from 42.1% in the same period last year. The full year gross margin rate of 43.3% was in line with our previous guidance of 43.2% to 43.3%.

The increase in gross margin rate for the fourth quarter and full year is primarily due lower supply chain costs. Our fiscal twenty twenty four fourth quarter selling and store operating expenses increased by 10.1% to 347,400,000.0 from the same period last year. The $31,900,000 increase in selling and store operating expenses was primarily driven by $40,900,000 for new stores partially offset by a decrease of $8,300,000 in our comparable stores. As a percentage of sales, selling and store operating expenses increased by approximately 130 basis points to 31.4% from the same period last year. Our fiscal twenty twenty four full year selling and store operating expenses increased by $123,100,000 or 9.9% from last year. The increase in these expenses was primarily driven by 156,700,000.0 for new stores and 5,600,000.0 at Spartan partially offset by a decrease of $39,200,000 in our comparable expenses. As a percentage of sales, selling and store operating expenses deleveraged by approximately two fifty basis points to 30.6% The delevering of these expenses was better than we expected primarily due to higher than forecasted sales and effective expense management which led to strong earnings Our fiscal twenty twenty four fourth quarter general and administrative [indiscernible] decreased by 5.4% to $64,000,000 Floor the same period last year.

As a percentage of sales, fourth quarter general and administrative expenses leveraged by approximately 70 basis points to 5.8%. A couple of expense items impacted our fourth quarter general and administrative expense including an increase of $3,300,000 in personnel expenses from higher incentive compensation and by the legal settlement recovery benefit of $6,800,000 Additionally, expenses related to our ERP implementation were approximately $2,500,000 which was in line with our expectations. Our fiscal twenty twenty four full year general and administrative expenses increased 5.3% the same period last year. As a percentage of sales, general and administrative expenses deleveraged approximately 30 basis points to 6% from 5.7% the same period last year. Moving to preopening expenses, our fiscal twenty twenty four fourth quarter preopening expenses of $10,600,000 decreased 16.6% from the same period last year. As a percentage of sales, preopening expenses leveraged approximately 30 basis points 0.9% compared to the same period last year. This decrease resulted from a decline in the number of new store openings compared to the same period last year. Our fiscal twenty twenty four full year reopening expenses decreased 3.1% from the same period last year. As a percentage of sales, preopening expenses leveraged by approximately 10 basis points to 0.9% from 1% in the same period last year.

Fiscal twenty twenty four fourth quarter interest expense net decreased $900,000 or approximately 103.8% from the same period last year. Our fiscal twenty twenty four full year interest expense net declined 72% to 2,800,000.0 below our most recent annual guidance of approximately 4,000,000 driven by higher interest income on higher cash balances from the same period last year. Our fiscal twenty twenty four fourth quarter effective tax rate increased to 19.9% from 18.1% in the same period last year. The increase was primarily due to a decrease in excess tax benefits related to stock based compensation awards. Our fiscal twenty twenty four full year effective tax rate declined to 18.8% from 21% in the same period last year. In line with our most recent guidance of approximately 18%. The year over year decrease was primarily due to a decrease in state income taxes and an increase in excess tax benefits related to stock based compensation. Our fiscal twenty twenty four fourth quarter adjusted EBITDA increased 11.1% to $119,800,000 exceeding total sales growth of 5.7% primarily due to the 130 basis point increase in our gross margin rate. Our fourth quarter adjusted EBITDA margin rate increased 50 basis points to 10.8% from 10.3% in the same period last year.

Our fiscal twenty twenty four full year adjusted EBITDA declined 7% to 512,500,000.0 which exceeded our most recent guidance of $490,000,000 to $500,000,000 primarily due to higher than forecasted sales. For the fiscal twenty twenty four full year our adjusted EBITDA margin rate declined 100 basis points to 11.5% from 12.5% in the same period last year. Our fiscal twenty twenty four full year depreciation and amortization was $232,500,000 Moving on to our balance sheet liquidity. We maintain a strong balance sheet concluding fiscal twenty twenty four $200,300,000 in debt and $187,700,000 in cash and cash equivalents. In terms of liquidity, we ended fiscal twenty twenty four with $905,700,000 of unrestricted liquidity consisting of $187,700,000 in cash and cash equivalents and $718,000,000 available for borrowing under our ABL facility. As of 12/26/2024, our inventory increased by 2.4% to 1,100,000,000.0 from the same period last year. Fiscal 2024 capital expenditures, including those accrued at the end of the period, declined to 376,300,000.0 from $566,300,000 in the same period last year and were in line with our previous guidance of $360,000,000 to $390,000,000 The decrease in capital expenditures was primarily due for the Class of 2024 occurring more in fiscal twenty twenty three and pushing more of the Class of 2025 Additionally, the second half of fiscal twenty twenty four, we we started to realize some of the $1,000,000 to $1,500,000 cost out [indiscernible] And optimizing the box size.

We expect to fully realize these savings for stores opening in the back half of twenty twenty five. We believe our strong financial position provides us the flexibility to navigate the macroeconomic environment while pursuing prudent strategic growth within our existing capital structure.

Turning to our fiscal twenty twenty five outlook.

We entered 2025 facing considerable geopolitical and policy uncertainty and mixed leading economic indicators.

While existing home sales grew modestly, third straight month in December to 4,200,000 units affordability remains challenging steady interest rate cuts seem less likely than they did last year. It's unclear how these factors will flow through to the economy Therefore, we are carefully planning fiscal twenty twenty five and are providing a wide range of potential earnings outcomes We expect to have better visibility for fiscal twenty twenty five following March and April which are more important months, that should inform us better about twenty twenty five's outlook. As a reminder, every one point change in comparable store sales compared with our annual plan impacts earnings by approximately $0.1 per share. Let me now share our thoughts about fiscal twenty twenty five and our guidance. Total sales are expected to be in the range of 4,740,000,000.00 to 4,900,000,000.0 or increased by 6.5% to 10% from fiscal twenty twenty four. As Tom mentioned, this guidance reflects the planned opening of 25 new warehouse format stores. Comparable store sales are estimated to be flat to an increase of 3%. Average ticket comp is estimated to be up low single digits Transaction comp is estimated to be slightly negative to up low single digits.

Gross margin rate is expected to be approximately 43.4% to 43.7%. Our gross margin rate is expected to be adversely impacted by approximately 60 to 70 basis points from the two new distribution centers which is incorporated into our guidance. Low end of our guidance assumes our gross margin rate is approximately the same throughout the year The high end of our guidance assumes the second half gross margin rate could be higher than the first half. Selling and store operating expenses as a percentage of sales are estimated to be approximately 31% to 31.5 General and administrative expenses as a percentage of sales are estimated to be approximately 6%. $9,000,000 related to our finance and merchandising ERP implementation. Preopening expenses as a a percentage of sales are estimated to be approximately 0.7%. Interest expense net is expected to be approximately $3,000,000 tax rate is expected to be approximately 21% to 22% depreciation and amortization expense is expected to be approximately $245,000,000 dollars to $575,000,000 Diluted earnings per share estimated to be in the range of $1.8 to $2.1 to be approximately 109,000,000 shares. Moving on to capital expenditures. Our fiscal twenty twenty five capital expenditures are planned to be in the range of $330,000,000 to $400,000,000 including capital expenditures accrued.

We intend to open 25 warehouse format stores and begin construction on stores opening in fiscal twenty twenty six Collectively, these investments are expected to require $200,000,000 plan to invest approximately $20,000,000 to 25,000,000 new distribution centers in Seattle and Baltimore, intend to invest approximately $50,000,000 to $60,000,000 in existing stores and distribution centers And finally, we plan to continue to invest in information, technology infrastructure e commerce and other store support center initiatives using approximately $130,000,000 Operator, we would now like to take questions. Thank you. We will now be conducting a question and answer Thank you. Our first question comes from the line of Michael Lasser with UBS. Please proceed.

Good evening. Thank you so much for taking my question.

So given the slightly weaker performance quarter to date, what do you think is is driving that? And how have you factored in some of the potential from the change in administration into your outlook for the year. Such as tighter immigration policy and the impact that that could have on the workforce consuming your product? Thank you. Hey, Michael, this is Tom.

I would preface with the slight slowdown in comp from Q quarter to date versus Q4, there's a lot of weather noise. We've had parts of the country that have gotten snowed that don't get snow, that have forced shutdowns and week to week we have to close stores and that's affected our quarter to date business in my opinion. I think that's a part of it. We in our business historically when there's been weather in impacts, it comes back. We get it. So it comes back over time. So we'll see how that plays out. We're certainly prepared for it. Stores are in good shape and we're ready for it. As far as the immigration policy changes into our forecast it's too early to tell. We hear the same thing that you hear that there's pressure on some of the contractor workforce But so far, I don't think that that's playing anything into our demand. And as we learn more, we'd certainly would communicate more. Okay. My follow-up question My follow-up question is you saw much greater flow through in the fourth quarter than your normal rule of thumb would suggest. So how telling is that Experian moving forward, meaning if you comp up 5% this year rather than the 0% to 3% that you are expecting how should we think about the incremental mentality or the flow through to the model it be above the $10 per point of comp in that you guided to?

Thank you.

I'll let Brian handle more of the number numbers part. But yes, Michael, I mean the fourth quarter is a bit of a demonstration of what happens when sales come. When sales are better than we think, we would flow through pretty well. We have think we've done a good job over the last eight eighteen months to two years of taking costs out of the business and we're not adding it back. So when sales surprise us in a positive way, we flow through well. And if that number grew to five, we'd would flow through really well. So we hope that Amazon, Brian, fill in blanks on the number side if you want to. Yes. Hey, Michael, it's Brian.

So obviously, you saw we had pretty strong Floor through just you're looking at that, don't forget that in Q4, we also had $6,800,000 benefit related to a derivative legal settlement. So when you take that out, that was worth 60 basis points. Within Q4. So when you back that out, I think our more natural flow through was in the low As I'm looking at it, there were a couple of other benefits that hit in Q4.

Traditionally, our filter model would be low 30s to mid-30s. We've communicated on the last call as sales pick up because we've got 25% of our stores on minimum hours. That we should see higher flow through. So we should see that in 2025, somewhere in high 30s range. So you're right that low 40s was a higher than what we would expect, but I still would expect if we step above our 3% we should flow through in the high 30s at minimum.

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

Good afternoon, everyone. Hey, I want to like to follow-up on incremental margins. Same topic. The business is levering on negative comps. So the idea that there are not expenses that need to come back and I know the guidance doesn't imply that and Brian you mentioned the one point of comp $0.1 of EPS, which basically says normalcy I think you still have ERP going on So what has changed or what are you doing that you can continue managing SG and A in such a range that dollars don't need to come back when the top line returns? There will still be investment. I mean, we flex our hours around transactions. If you think about our stores, we still average about 55% fixed cost, 45% variable. The two biggest variable components are labor, like our personnel within the stores. And so we need to make sure that we match that with transactions. So again, on the upside or downside, we can flex those.

And then there's also some discretionary spend where we're constantly refreshing the stores. We have repos, resets, We have so much innovation and newness that we need to make sure that we showcase that. Those are the two biggest buckets that we have to kind of flex within there. So assuming we still have the opportunity to do that. I think you just heard me say 25% of our stores are on minimum hours. So again, if things were to step down, that's 75% of our fleet that we could still kind of flex within there.

And then on the way up, again, we don't need to invest as much, which creates that higher flow through. So again, you're always chasing yourself on the way up, the way down, you can never quite cut fast enough.

But I'd add just I'd add a We've been investing through the downturn. So we don't have to catch up investment. So the hours will flow as they flow over 25% of the stores on minimum hours, the sales go up and that the flow through on that is really good because we don't add hours to that.

Over the last two years, because I combined them we've taken out 42,200,000.0 our comparable stores over the last two years. And in Q4 alone, if you look at the two year stack, taken out $12,900,000 So our teams have been resilient. Our service scores as high as they've ever been. So I mean we're in a good place today, but again we need to make sure take care of our customer first. Quick follow-up on the guidance the zero to three if you get to the middle to the high end in series, you would be exiting the year in mid to high single digits. Don't know if you said this in the prepared remarks, I only heard that there was some flex in store count if the back [indiscernible] you assume? Is this just maturation or just immature stores comping into this comp base and therefore you're getting to those mid single digit comps by the end of the year?

Thanks.

I mean, I'll start and let Brian wait a little bit. 55% of our stores are still in their curve So we're expecting to benefit from those stores as the year goes on our comp waterfall has stayed intact. So we've opened a little bit less stores but the waterfall stayed intact. So we should get some benefit of those stores that are immature. Are not expecting housing to rebound to historical levels. Anticipating that housing is going to bounce along and hopefully it's better than it was a year ago. As I've said on multiple calls, I believe that if the existing home sales get into a positive territory for a consistent amount of time that we should be able to grow our same store sales in that environment because more people will be buying hard surface flooring.

And Simeon, I was just giving you a little bit color on that. So you're right, we do expect sequential improvement in our comp. Obviously, as Tom alluded to, So we expect comps in Q1 to be down just slightly low single digits, you're right, it's sequential improvement, but we still expect low single digits throughout every quarter. Q4 is going to be a little pressure just because we're lapping. Did in Q4 of this year. So there was a little bit of an uptick there. Again, it should be low single digits across our average ticket. It's pretty much trends remain the same throughout all four quarters and its transactions, as Tom alluded to, that expect to improve. So at the high end, existing home sales would have to get a little bit better, but again to Tom's point, not not back to historic levels. We do still expect this to be a slow grind as we said on the last call.

Thank you. Our next question comes from the line of Chris Hovers with JPMorgan Chase and Company. Please proceed.

Thanks. Good evening, guys. I had a follow-up there. I mean, it's just so you as you think about the cadence of the year, do you think the weather, the hurricane lift is is bigger in the first quarter than it was in the fourth quarter? There was some pressure to start to start November in terms of a headwind from the actual hurricanes and insurance payments are seem to be more delayed. So is that a bigger number And then on the other side of it, you're going to lap existing home sales a little mini rebound here You look at pending home sales numbers are running down sort of mid single digit. So is the hurricane the offset that doesn't create more of a near term dividend Here in the first to second quarter from lapping that better home sales number?

This is Brian. I'll take it stab and then Tom can benefit so far quarter to date is it's in line with what we said for Q4. So the offset of that is what Tom said, which is really just some of the storm impact that we've seen So when you think about it, that should be there. Most hurricanes for us, depending on if it's flood or if it's wind damage, but if it's flooding, we'll see the biggest impact the first two quarters, if not the third quarter we see the arc of that usually go about sixteen to twenty months it can, but it dissipates pretty quickly after it gets past that second to third quarter. Of impact. And that's what's implied in the guidance that we gave.

Okay. So no, so there's no like tough lap on a year over year basis on existing home sales. Earlier in the year that would slow the business further? No, year over year, you're right. When you look at February and March, they were really strong numbers last year. And then once you get past that, the number dips below 4.2 and continues kind of throughout the year until you hit what Tom said in his prepared remarks where October, November, December started to pick back up. So you're right, the summer months will have much easier compares in existing home Thank you. Our next question comes from the line of Zach Bhatum with Wells Fargo. Please proceed.

Hey, good afternoon and congrats on the progress.

We think through the incremental new tariffs, the higher supply supply chain costs, maybe we could start with the game plan for like for like pricing in 2025. I think you mentioned some increases coming. And then when you think about your price gaps versus peers, like how have those evolved through 'twenty four? And how do you factor that in 2025?

We can deal with it. What's happened so far, we think we can deal with the China change.

Pretty well. We've done a good job of diversifying out of there. We're doing a good job negotiating with our suppliers. But if we can't, then we'll take prices up. I think our versus our [indiscernible] technical difficulty.

Alicia, can you hear me? We are here. We are here.

You are here, All right, Ty, speaking now. I put the other line on hold.

Yes, we can hear you.

Alicia, can you hear us? Yes. Hey, operator.

We're ready.

Okay, great. Zach Sadam, I believe Zach, you may proceed with your question.

Okay. Lisa, I'm ready.

Yes. Not sure if you heard the first question or not, but Basically, it was on the game plan for like for like pricing gaps versus peers have been trending in 2024. And how you factor that into the changing environment?

Apologize we lost the connection again. Matt, can you hear us? Matt, you dialing in up there over here?

Now you dialing it up there or here? [indiscernible] Apologize that we are facing technical difficulties. Zach, if you wouldn't mind waiting for a few more moments?

No problem.

Thank you.

Thank you guys for your patience. I believe, we have the speakers back on the line. [indiscernible] Sorry for the technology difficulty. So I'm not sure if we heard the last question. So go ahead. [indiscernible] Tom, it's the price gap versus peers and the pricing question. I think we missed that one.

Yes. So what I said price gap versus peers, we still feel pretty good. When you look back historically, our spreads versus the people we compete with are are they remain intact and we're comfortable with that. And I think what I said earlier is I don't know if you guys heard me on the tariff part of it, we'll deal with the tariffs the way that we've always have. We'll first negotiate with our supplier. The second is we'll try to continue to diversify out of countries that are affected. Then third, if we have to pass price, we will.

Our main competition is the independents. We're comfortable with our spreads and we've got the ability to flex price if we have to flex price. We're paying attention and trying to react to the news as it comes.

Our buying from two fifty suppliers in 25 plus countries is a tremendous advantage and it gives us lots of flexibility. So I feel good on the pricing front, feel good without from what I know today, I feel good about our ability to address the tariffs. Could change because things are a little Floor, but we'll be prepared.

Got it. And then just two quick ones for Brian. Hopefully, I only need to ask one time.

First of all, 25 new store productivity, how are you thinking about that? And then on the 60 bps to 70 bps of DC cost, is that even through the year or is it more double that but second half weighted? Yes. Hey, Zach. So neutral productivity should be the similar to the past kind of two years that we're seeing. It's still kind of below our historical targets as we think about that. And then on the gross margin piece, right, the $60,000,000 to $70,000,000 is the full year amount.

It will start in Q1 around 30 basis points and then kind of grow throughout the year. So we'll exit with a much higher impact, but then grow into it as we continue to open more stores. Got it. Thanks for the time guys. Yes. Thank you.

Thank you. Due to the nature of the technical issue, we will extend the call for a little bit. But we please ask that you refrain to only one question for so we may answer as many participants as possible.

Our next question comes from the line of Seth Sigman with Barclays. Please proceed.

A couple of product questions. Anything to read into wood and stone being positive and leading the improvement here I'm curious on LVT, It did seem to improve in the quarter, but still tracking below the How do you feel about that? Do you think that just reflects demand for the category being weak? Or do you think something has changed competitively for that category?

So I'll start. Ersan is here with me in case I'd miss something. But I'll so first, I would say on Wood and Stone, yes, pleased with what we're seeing. Our merchants have done a good job continuing to improve our assortments across the lines. We're in better stock because those have come in and helped. Certainly, we've had a major competitor close some stores, probably seeing some benefit from that as well. From a stone perspective, we've rolled out an outdoor program in stores that having a positive effect that's added categories to the stone department. Same thing, we've added some new products in stone that that's probably acting benefiting as well, but we're pleased with that. I am pleased with the trajectory of vinyl laminate We've if you you look at it quarter by quarter, we continue to improve in a pretty significant way and we are in terrific in stock. Merchants have done a good job with new products within the category. Some new signing in the department to make it easier to understand But overall, we feel real good about the trajectory of what's going on in that business as well.

Thank you. Our next question comes from the line of Stephen Forbes with Guggenheim Securities. Please proceed. Good afternoon, guys. Tom, Brian, maybe a complex question, but I feel like an important one You guys mentioned the waterfall benefit to to comp and I think a lot of us are just trying to better understand sort of what's transpiring within the the store cohorts. So the question is, one, can you reframe sort of what the sales and EBITDA margin profile is at at what you would define as a mature store today versus historic disclosures And then any way to help us contextualize sort of what is the comp spread that you're seeing as we think about maybe the 2023 cohort versus the 2020 cohort As we sort of try to contextualize or better understand what you're framing as the waterfall likely turns to a potential positive contributor?

Yes. It's we've I'll answer the latter first. We've never given what that waterfall is. I'm going to say it's a material meaningful difference between our new stores and our mature stores. But what I would tell you is today, obviously, with the macro environment the way it is, our stores that are five years or older today are doing about a little over $22,000,000 close to $22,500,000 but they're still producing EBITDA in the low 20s. So they're still extremely profitable, they're still producing, but obviously the volumes have come down a little bit. So to conceptualize again the calm waterfall, we just never that level of granularity. So So we've never been that specific about it. Other than to say there's a material difference between obviously our new store comp all the way down to what we've considered mature store.

Well, Thank you. Our next question comes from of Chuck Grom with Gordon Haskett. Please proceed.

Hey, good evening. Just a quick one Floor me. Just with smaller peers struggling, you touched on in a minute. Just curious what you're seeing from the competitive landscape and if you think you are starting to gain share over the past few months from competitor closings?

Yes, I do. I mean, we still are hearing anecdotal closings across the country of different competitors. I do think that I've said before, the longer that this goes on, more that plays on our benefit, because we've continued to invest in the store to continue to grow. So I think from a competitive standpoint, we're in as good a shape as we've ever been. Yes. And what is a good example of you saw a competitor close a bunch of stores, we're probably seeing some of the benefit of that. And if we see more close, we'll see the benefit. I mean, the stores are in terrific shape. Our inventory levels are great.

The new products are really good. We have multiple initiatives trying to control what we can control. So we're ready when it comes.

And service scores are the size they've ever been.

Correct.

Thank you. Our last question comes from the line of Karen Short with Melusis Research. Please proceed. Hi, thanks very much. It's actually Melius, but I think you all know that. Speak to you. I just was curious, with the lower cost structure in Could you help frame whether or not there would be more torque, I guess, on the upside to EPS with a 1% delta in comp Or would you look at it as more of a scenario where you would invest and that flow through would still be that kind of $0.1 range to EPS would 1% delta in cost.

Thanks.

So in honor of Trevor's last call, we're going to let Trevor answer that. Trevor? Yes. First, I'd say I'm so proud after eight years.

I mean, the team that we've gotten to these calls is doing well. I do think so. Our gross margin has gone up nicely. Over the last two or three years and our cost structure has come down. As Brian articulated earlier. And so so sales are good. I mean, there's certainly investments we want to make, but we'll do that in a measured pace. And so yes, I think it's possible like you saw in Q4 that when sales are better than planned, we're going to flow through very nice And as we've always been, if there's investments that we need to make that are going to be material, we'll disclose those. I think the only thing I'd add to what Trevor said, over the since we've been public, we've always had cycles where we've outperformed and we've made decisions [indiscernible] We'll want to see some sustained before we invest too much back into any infrastructure, we'll want to see performance strong for a while.

So that's why I do think that we'll flow through at the rates that Brian talked about.

We will. And just to give you guys context around it, this is Brian. So at the midpoint of our guide, our mature stores are ASH levering in this environment. The only thing that's causing the deleverage is the new stores coming in. Exactly as Trevor alluded to, as we move up that that as you start approaching 5%, the entire ecosystem starts to lever.

So we lever even inclusive of because that's a question you guys always have. I just wanted to tell you if we were to get up to a 5% comp, the entire store and selling line leverage is. And so that's always been our case as mid single digits.

In this cost structure, it will take about a 5% comp for the entire base to lever.

Thank you, Brian. And thank thank everyone for joining the call. Sorry we had a little bit of technical difficulty and hopefully we got to everyone's questions. I'd like to thank Trevor. This is Trevor's last call. He's asked if he could come tomorrow. I've said no, so but we appreciate all of his contributions over the last fourteen years. We certainly wouldn't be here without so we wish him well. Thank you.