Title

Presentation

Floor & Decor Holdings, Inc. reports earnings inline with expectations. Reported EPS is $0.45 EPS, expectations were $0.45.

Operator: Greetings, and welcome to the Floor & Decor Holdings First Quarter 2025 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Senior Vice President of Investor Relations, Wayne Hood. Thank you, Wayne. You may begin.

Wayne Hood: Thank you, operator. And good afternoon, everyone. Welcome to Floor & Decor’s fiscal 2025 first quarter earnings conference call. Joining me on our call today are Tom Taylor, Chief Executive Officer; Brad Paulsen, President and Bryan Langley, Executive Vice President and Chief Financial Officer. Before we start, I want to remind everyone of the company’s Safe Harbor language. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risk and uncertainties. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions, is a forward-looking statement.

The company’s actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Floor & Decor assumes no obligation to update any such forward-looking statements. Please note that past performance or market information is not a guarantee of future results. During this conference call, the company will discuss non-GAAP financial measures as defined by SEC Regulation G. We believe non-GAAP disclosures enable investors to understand better our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our Investor Relations website at ir.flooranddecor.com.

A recorded replay of this call and related materials will be available on our Investor Relations website. Let me now turn the call over to Tom.

Tom Taylor: Thank you, Wayne, and everyone for joining us on our fiscal 2025 first quarter earnings conference call. During today’s conference call, Brad, Bryan and I will discuss some of our fiscal 2025 first quarter earnings highlights. Then Bryan will share our thoughts about fiscal 2025. We are pleased to deliver fiscal 2025 first quarter diluted earnings per share of $0.45, compared to $0.46 per share in the same period last year. This result exceeded the low end of our first quarter earnings expectations, even though comparable store sales were at the lower end of our forecast. Our fiscal year 2025 first quarter total sales increased by 5.8% to $1.161 billion from $1.97 billion in the same period last year. Brad and I have visited many of our stores over the past few months, giving us a great opportunity to see firsthand the dedication and hard work of our associates, who engage with and serve our homeowners and professional customers every day.

We could not be more pleased, than our first quarter results demonstrate how effectively they continue executing our growth strategies, achieving record customer satisfaction scores, managing our expenses and profitability, and growing our market share even as sales and the hard surface flooring industry contract. The first quarter results are a testament to how we are focused on what we can control during this uncertain period. As you know, we are operating in an economic environment marked by high volatility, uncertainty, lack of clarity and the tail risk of a recession. While we don’t know how this could impact consumer spending for the remainder of fiscal 2025, we have a proactive, flexible plan we are implementing and executing. First, as many of you know, we successfully managed an increase in tariffs back in 2018 and 2019 by pursuing strategies to grow our market share and protect our profitability.

Today, we intend to employ similar strategies to achieve these goals in 2025 and beyond. That said, unlike in 2018 and 2019, we believe managing today’s tariffs, uncertainty and complexity at scale and speed could be more challenging for some competitors in the hard surface flooring industry. To address this increased complexity, we have organized tariff Steering Committee. This committee will ensure we stay focused on executing our top priorities and remain agile in our operational plans as needed. For instance, following the US announcement of a 90 day pause on all reciprocal tariffs, excluding China, we expedited purchase orders to maximize the likelihood they arrive before the end of the pause on July 9, 2025. This exemplifies how we are executing and will continue to execute at speed and scale.

Second, we are actively negotiating and collaborating with our vendors to mitigate the higher incremental tariffs on the products we sell. As we have successfully done with prior tariff increases, we believe we have the strategic option to thoughtfully widen our price gaps further, reinforcing our everyday low price value proposition against independence and to grow our market share. We have already observed some retailers and distributors communicate price increases of high single digits to as much as 50%. Third, we will continue to effectively implement our sourcing diversification strategies to find the highest quality products at the lowest possible price for both our homeowner and professional customers. Our scale and worldwide direct sourcing model, which involves over 240 vendors and 26 countries, provide us with flexibility and a competitive advantage, particularly compared to independent flooring retailers and distributors.

Fourth, it is likely that we’ll need to raise prices to mitigate some of the incremental tariffs following our negotiations. If we do so, we’ll continue to use the balanced portfolio approach to product pricing, ensuring a consistent pricing structure across different product categories, while managing our gross margin rate and profitability. Fifth, customers are asking for products produced in the United States, and we have already taken action to identify American made products in our stores. As we discussed in our fiscal 2024 fourth quarter earnings call, we are proud to report that the United States is now our largest country of manufacture, accounting for approximately 27% of the products we sold in fiscal 2024, up from approximately 20% in fiscal 2018.

Turning to China. In fiscal year 2024, China accounted for 18% of the products we sold, declining from approximately 25% in fiscal 2023, and approximately 50% in fiscal 2018. In the fourth quarter of fiscal 2024, this figure dropped to approximately 16%. Based on current market conditions and the universal tariffs that are in place, we anticipate our receipts from China to approximate mid to low single digits of our total receipts as we exit fiscal 2025. For instance, in the first quarter of fiscal 2025, we placed our last purchase order from China for laminate and vinyl, our largest product category, successfully diversifying to other countries. Additionally, we paused all purchase orders from China to evaluate the fluid environment and our assortments relative to our competition.

While some specific products can only be sourced from China, our industry leading broad assortment and innovation enable us to offer homeowners and professional customer’s alternative options if product costs from China become untenable to US consumers. We believe our size and growth potential position us well to navigate the uncertainty in the market. We are proud to be the second largest retailer of hard surface flooring in the United States. This underscores the strength of our differentiated business model and the effectiveness of our growth strategies. We meticulously pursued since our inception in 2000. Let me turn my comments to new warehouse and store format growth. In the first quarter of fiscal 2025, we opened four new warehouse-format stores, including openings in Venice, Florida; Covington, Louisiana; Tualatin, Oregon; and Gilroy, California.

As part of our market optimization efforts, we elected to close our oldest store and smallest store in Austin, Texas as the lease expired. We have been strategically positioning other nearby Floor & Decor stores in Austin to maximize the market potential. We plan to open two new warehouse-format stores in the second quarter of fiscal 2025, including Kissimmee, Florida, which opened in April, and San Antonio, Texas later this month. As we discussed in prior earnings conference calls, if the macroeconomic conditions become less favorable than anticipated, we have the flexibility to lower our annual store opening plan as most openings were slated for the second half of fiscal 2025. With that in mind and the potential for slowing economic growth in the second half of fiscal 2025, we plan to open 20 new warehouse-format stores in fiscal 2025, compared with our prior expectation of 25 warehouse-format stores, mainly across large and mid-size existing markets.

We will push the delayed five store openings from fiscal 2025 to our 2026 new warehouse store pipeline. If economic conditions worsen from our current expectations, we have the ability to further reduce fiscal 2025 openings. It is important to note that our company is built for more than 20 new annual warehouse store openings per year when macroeconomic conditions improve. Let me now turn the call over to Brad.

Brad Paulsen: Thanks, Tom. As Tom mentioned, we spent the majority of my first two months visiting stores and interacting with both our team members and customers. These visits have served us an incredible process for me to learn our business and better appreciate the special people first culture here at Floor & Decor. At each stop during our travels, I’ve been highly impressed with the talent of our teams, their passion for serving our customers, and the team’s overall excitement about the future potential of our business. Let me now discuss our sales. First quarter fiscal 2025 comparable store sales decreased by 1.8% from the same period last year at the low end of our expectations. From a regional perspective, comparable store sales in the West Division outperformed the company’s 1.8% decline.

By month, our company comparable store sales declined by 1.4% in January, 1.5% in February, and 2.2% in March. We estimate the first quarter benefit to our comparable store sales from Hurricanes Helene and Milton was approximately 100 basis points compared with approximately 110 basis points in the fourth quarter of fiscal 2024. We estimate the adverse impact of winter storms on our comparable store sales was approximately 50 basis points. In the second quarter of fiscal 2025, we are pleased that our quarter-to-date comparable store sales increased by 1.1%. Among our major merchandise categories, first quarter fiscal 2025 sales growth was strongest in laminate, and luxury vinyl plank, wood, installation materials, and adjacent categories. In adjacent categories, we successfully expanded our merchandise offering with a high-quality, semi-custom cabinet program available in approximately 42 warehouse stores and online.

We now offer online semi-custom cabinets, express ship plywood cabinets, cabinet accessories, decorative hardware, and cabinet samples that we can ship directly to the job site. As we look ahead to the remainder of fiscal 2025, we are excited to continue delivering new, innovative products and programs to our homeowners and pros. This includes new designs, colors, textures, and enhanced realism on tile and vinyl products that closely mimic some natural products. Cabinets, outdoor products, and the expansion of our XL slab program will represent our largest projects in fiscal 2025. Shifting to our connected customer pillar of growth, our first quarter fiscal 2025 connected customer sales increased by 2.1% from the same period last year, now accounting for approximately 18.3% of sales.

We were pleased with the strong year-over-year growth in weekly active users, organic traffic, and sequential improvement in our comparable average ticket. Building on these gains, we enhanced our online design scheduler, resulting in a notable increase in first-quarter design appointments. Additionally, in collaboration with our merchants and supplier partners, our connected customer team expanded our website offering with a wide selection of fully assembled semi-custom cabinets. To support the launch of these semi-custom cabinets, our connected customer team also partnered with our marketing team to develop a dedicated cabinet blog. Looking ahead, we remain excited about adding more inspiring designer and user-generated content in 2025. Overall, we expect these strategies, among others, to improve the customer experience and further grow our brand affinity.

Let me comment on design services. We are pleased to report that our design services have maintained strong momentum into the first quarter of fiscal 2025. Sales growth was significantly above the overall company performance and is well balanced between comparable transactions and comparable average ticket growth. These results reflect our commitment to design services, which include having trained designers in our stores, providing a personalized design experience, and collaborating with pros on projects. We will build on this success and continue to focus on converting high-value design opportunities. It is important to remember that when our talented designers are involved in a project, the average ticket amount more than doubles and the gross margin rate increases significantly.

This underscores our designers vital role in driving our success with an elevated and personalized in-store and online design experience turning my comments to pro, we are pleased to report that sales and comparable store sales to Pros continued to grow in the first quarter of fiscal 2025 compared to the same period last year, accounting for approximately 50% of total sales. This growth surpassed the company’s overall sales performance from growth in both comparable transactions and comparable ticket. These results continue to demonstrate that our supply house approach is effective, focusing on engagement and nurturing strong relationships with Pros. We are focused on speed and accuracy in the load out process and ensuring we have the best support at the Pro desk.

As a result, we maintain a high Pro net Promoter Score. To attract new Pros, we are building brand awareness with our Pro marketing and tools to generate leads and contacts. Our marketing and awareness strategies include email campaigns to drive awareness of new products. We continue to benefit from partnering with advertising platforms that provide a practical and cost efficient way to attract and retain new Pros. We plan to enhance this program with a new strategy targeting lapsed and infrequently shopping Pros. We also continue to benefit from our Pro Service Managers spending more time outside our stores and in new ZIP codes where they directly engage with Pros to build brand awareness, understand their needs, and provide tailored solutions.

Finally, in the first quarter, we successfully held 46 educational events in our stores, which is part of our plan to have 155 events in fiscal 2025. We believe these events are industry-leading in the hard surface flooring industry. Finally, I will discuss our commercial business. Overall, economic uncertainty continues to pressure the commercial market, particularly the multifamily segment. This uncertainty, coupled with a potential for slowing economic growth, is leading to a more cautious industry outlook around starting new projects and quotes in fiscal 2025. Nonetheless, Spartan Surfaces’ first quarter fiscal 2025 sales increased by 3.8% from the same period last year as we lapped our most difficult comparison to last year. EBIT increased by 1.7% from the same period last year, in line with our expectation.

In fiscal 2025, Spartan will continue to execute its plan to diversify away from multifamily and focus on developing a comprehensive national presence in the healthcare, education, senior living, and hospitality sectors. These are high specification sectors of the commercial flooring market, where the opportunity for long term growth and profitability is greatest. These sectors generally have high quote-to-conversion rates, recurring revenue, and more attractive profitability. Additionally, we are pleased that Spartan’s gross margin rate is benefiting from growth in higher margin private label brands and buying synergies with Floor & Decor. As we discussed during our fiscal 2024 fourth quarter earnings call, we are making the necessary investments to support Spartan’s long-term growth prospects.

These investments, coupled with the economic uncertainty, are likely to mean Spartan’s fiscal 2025 EBIT could be approximately flat compared to fiscal 2024, unchanged from our prior expectation. Let me now turn the call over to Bryan.

Bryan Langley: Thank you, Brad and Tom. We are pleased with our financial performance for the first quarter of fiscal 2025. Our team’s resilience and dedication were evident as they demonstrated excellent execution across both operations and merchandising, and delivered tight expense control amid uneven consumer spending. Our gross margin continued to be well managed exceeding our expectations. As Tom mentioned, these efforts enabled us to report first quarter fiscal 2025 diluted earnings per share of $0.45, exceeding the lower end of our expectation. We are in a strong financial position with ample liquidity to navigate the economic uncertainty. As we have in the past, we can continue making prudent growth investments in new stores, product innovation and newness inventory, new distribution centers, technology, and most importantly, our people to grow our market share.

Now, let me discuss some of the changes among the significant line items in our first quarter fiscal 2025 income statement, balance sheet, and statement of cash flows, as well as our outlook for 2025. We continue to be pleased with how we are managing and expanding our gross margin. Our first quarter fiscal 2025 gross profit rose by 8.1% from the same period last year. The increase in gross profit was primarily driven by the 5.8% increase in sales and a 100 basis point increase in gross margin rate to 43.8% from the same period last year, primarily due to lower supply chain costs. Our first quarter fiscal 2025 selling and store operating expenses increased by 10.3% to $368.8 million from the same period last year. The increase in selling and store operating expenses was primarily driven by $38.5 million for new stores, partially offset by a decrease of $5.0 million at our comparable stores.

As a percentage of net sales, selling and store operating expenses increased by approximately 130 basis points to 31.8% from the same period last year. The expense deleverage was primarily attributable to the addition of new stores and deleverage from a decrease in comparable store sales. Our first quarter fiscal 2025 general and administrative expenses increased by 3.5% to $69.1 million from the same period last year. The increase was primarily attributed to the investments we continue to make to support our store growth, including growth of $2.9 million in personnel expenses. As a percentage of sales, first quarter general and administrative expenses leveraged by approximately 10 basis points to 6.0% from the same period last year. Our ERP expenses in the first quarter were $1.8 million in line with our expectations.

Our first quarter fiscal 2025 pre-opening expenses decreased $3.6 million, or 37.5%, compared to the same period last year. The decrease was primarily due to a decrease in the number of future stores that we were preparing to open compared to the same period last year. First quarter fiscal 2025 interest expense net decreased $0.4 million, or 20.8% from the same period last year due to lower average interest rates and lower average outstanding borrowings. Our first quarter fiscal 2025 effective tax rate increased 22.0% from 12.8% in the same period last year. The effective tax rate increase was primarily due to a decrease in excess tax benefits related to stock0based compensation awards. Our first quarter fiscal 2025 adjusted EBITDA increased 5.5% to $129.8 million from the same period last year.

The growth was primarily due to the 5.8% increase in sales and the 100 basis points increase in our gross margin rate. Our first quarter adjusted EBITDA margin rate was 11.2% flat from the same period last year. Moving on to our balance sheet and liquidity. We maintained a strong balance sheet and are pleased with our ability to manage our inventory. In terms of liquidity, we ended the first quarter of fiscal 2025 with $949.8 million of unrestricted liquidity, consisting of $186.9 million in cash and cash equivalents, and $762.9 million available for borrowing under our AVL facility. Our inventory, as of March 27, 2025, increased by 5% to 1.2 billion from December 26, 2024. Turning to our fiscal 2025 outlook. Since we provided fiscal 2025 earnings guidance on February 20, 2025, the global economic and political environment has become increasingly uncertain, unclear and complex.

In March, existing home sales fell by 5.9% from February, reaching a seasonally adjusted annual rate of 4.02 million, the lowest reading for March since 2009, and a 2.4% decline year-over-year. Housing affordability challenges, driven by higher mortgage rates and elevated home prices, continue to pose obstacles to sustained growth in existing home sales. The current environment has the potential to increase inflation, low economic and consumer spending growth, and carry the tail risk of a recession. Consequently, we are updating our fiscal 2025 earnings guidance to take into consideration the uncertain economic environment. This guidance still carries risk due to the ongoing uncertainties. Let me share some thoughts about our fiscal 2025 guidance.

The guidance assumes the impact of universal tariffs, but does not contemplate reciprocal tariffs outside of China. Total sales are expected to be in the range of $4,660 million to $4,800 million, or increase by 5% to 8% from fiscal 2024. We are planning to open 20 new warehouse format stores, comparable store sales are estimated to be down 2% to an increase of 1%. Average ticket comp is estimated to be up low to mid-single-digits. Transaction Comp is estimated to be down low to mid-single-digits. Gross margin rate is expected to be approximately 43.5% to 43.8%. As a reminder, our gross margin rate is expected to be adversely impacted by approximately 60 basis points to 70 basis points from the two new distribution centers, which is incorporated into our guidance.

We estimate that our second quarter gross margin rate will represent the high water mark for the year, and the back half of the year will be lower than the first half in both the high-end and low-end of guidance. Selling and store operating expenses as a percentage of sales are estimated to be approximately 31.5% to 32%. The high end of the guidance assumes our first and fourth quarters are the most pressured from a rate perspective, due to the timing of new stores. General and administrative expenses, as a percentage of sales are estimated to be approximately 6%. General and administrative expenses include approximately $9 million related to our finance and merchandising ERP implementation. Pre-opening expenses as a percentage of sales are estimated to be approximately 0.6%.

Interest expense net is expected to be approximately $5 million. Our tax rate is expected to be approximately 21% to 22%. Depreciation and amortization expense is expected to be approximately $245 million. Adjusted EBITDA is expected to be approximately $520 million to $560 million. Diluted earnings per share is estimated to be in the range of $1.70 to $2. Diluted weighted average shares outstanding is estimated to be approximately 109 million shares. Moving on to capital expenditures, our fiscal 2025 capital expenditures are planned to be in the range of $310 million to $360 million, including capital expenditures accrued. We intend to open 20 warehouse format stores and begin construction on stores opening in fiscal 2026. Collectively, these investments are expected to require approximately $200 million to $235 million.

The reduction of new store openings from 25 to 20 does not have a material impact on our fiscal 2025 capital expenditures, as most of the capital spending for these stores will still be in fiscal 2025. We plan to invest approximately $20 million to $25 million in new distribution centers in Seattle and Baltimore. We intend to invest approximately $50 million to $55 million in existing stores and existing distribution centers. And finally, we plan to continue to invest in information technology infrastructure, e-commerce and other store support center initiatives using approximately $40 million to $45 million. Also, we will incur an additional $20 million of deferred SaaS ERP implementation costs in other assets not included in capital expenditures.

Operator, we would now like to take questions.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. First question comes from the line of Seth Sigman with Barclays. Please proceed.

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

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

And with that, we’ve expected to offset we’ll have some modest price increases if the tariffs go in. But looking at what we’re hearing from what we’re seeing in the marketplace today, we can do that and maintain our spreads pretty easily.

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

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

Tom Taylor: We feel good about the efforts we’ve made to diversify outside of China. That has been an ongoing plan. We have accelerated a bit from how we were planning to do it because of the size of the tariff that’s been imposed. We don’t anticipate there’s — if we had product gaps, there are certain things that you can only get out of China, but it’s modest. And it would be — like I said, we’ll be down the mid-single digits. I feel comfortable that we’re not going to have with our broad assortments that we carry in the store that we’re not going to have lack of product availability from what our customers want.

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

Seth Sigman: Okay. Very helpful. Thanks guys.

Operator: Thank you. Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Michael Lasser: Good evening. Thank you so much for taking my question. So there’s a perception out there that the business has gotten weaker. You’ve taken down your guidance even before the impact of the tariffs both occurs to your business as well as the broader economy, which is going to usher in the potential for further downside risk and the guidance reduction may not fully take that into account. So why is that wrong? — minimum earnings number that you’re thinking about for this year if indeed a recession occurs and that has a further impact on the flooring category?

Tom Taylor: Michael, this is Tom. I will do my best with that answer, but I would just — this is a bit of unprecedented times. As we’ve said in our script, we are going to control what we can control. It’s very difficult to predict consumer demand in the back half of the year. I feel like our stores, our assortment, our service, the way we’re executing is as high as it’s ever been. I believe that we are taking share. I like the trends that we’re seeing today, but I don’t know what’s going to happen in the back half. There’s things that are out of our control. But from the tariff standpoint, we’ll manage it to the best of our abilities like we’ve done. From an expense standpoint, we certainly have a plan in place for all scenarios.

If sales continue to drop, we have scenarios in place to reduce cost and manage the business the best that we can. So it’s a good argument to say how bad things will get, but I don’t think any of us really know what that answer is. And in the meantime, we’ll execute the best that we can.

Bryan Langley: Yeah, this is Bryan. Just to give a little bit of clarity, the guidance assumes that things stay kind of similar from a sales perspective at the high end, but the low end does assume things do drop off. And so we do assume that sequentially, it would decline in the low end. When you think about it from a comp perspective, the high end of the guidance assumes comps are positive, low single-digits kind of throughout the remainder of the year, with Q3 being the peak. Just remember, we’ve got a much harder compare in Q4 when you guys are thinking about that due to lapping the hurricane benefit and improved existing home sales in Q4 last year as they stepped up. So, we are being prudent. We are being thoughtful. And when you look at our Q1 sales, as we mentioned on the call, they were towards the low end of our guidance for Q1 comps.

And so that’s really what we’re looking at. That plus kind of the start to Q2 just gives us that range that we settled at. So I mean, we do have a little bit of a drop in the low end. So, we’re not necessarily just holding action.

Michael Lasser: Very helpful. My follow-up question is on the tariffs. It’s obviously a very dynamic and fluid situation. Have you already seen price increases across the industry? Could you could you quantify that? And has Floor & Decor taken price — the higher cost inventory. When do you expect to start to see?

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

Michael Lasser: Thank you very much. And good luck.

Bryan Langley: Thank you.

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

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

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

Simeon Gutman: Okay. My follow-up — it’s two parts. On the Q2 the pickup, the quarter-to-date. Is that ticket or is that orders turnover? And then related. I think Brian answered this earlier on tariffs. If you’re taking price um, and you know, in some places. I guess why is that? Why is the top line outlook lower? Was that just for the first quarter and the back half outlook is higher implied? Maybe I missed that.

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

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

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

Simeon Gutman: Okay. Thanks for the clarity.

Operator: Thank you. Our next question comes from the line of Christopher Horvers with JPMorgan. Please proceed.

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

Tom Taylor: I don’t know, Chris. I think that that’s possible, but we saw a bit of improvement when the announcement was made about tariffs, not a bit of. Yeah, we saw a bit of a sales trend improvement, but it’s continued. And it’s been pretty consistent. So I think the initial news of it may have spurred some immediate closing of sales that may have been delayed further, but we’ve continued to be pretty good from — throughout this first month of the quarter. So I don’t know. I mean, I know when, I look at ourselves from last year, our in stocks are a bit better. We’ve got some newness. We’re we’ve got this outdoor department rolling out that’s contributing. We’ve just rolled out kitchens, which we’re starting to see some signs of life.

So we’re doing other things that are helping. So long way around of, I don’t think there’s a lot of pull forward from tariffs. I don’t think people have come in and said, oh, my gosh, you know, it’s going to happen. There may have been a little bit of that happen, but not a lot. I think it’s more in just the way we’re executing within the business.

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

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

Bryan Langley: I don’t, — it’s a difficult question to answer, but we’re in today’s world as we sit here today, we’re actually buying from more countries, not less than we were a few years ago. So we you know, we’ve gone up now, I think a couple years ago we’re like 22 countries now. We’re 26 countries. And there’s just there’s not enough domestic capacity to satisfy the category. So I don’t anticipate that our advantage of buying from around the world is going to change so significantly in the future. Ersan?

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

Q – Christopher Horvers: Awesome. Thanks very much, guys.

Operator: Thank you. Our next question comes from the line of Steven Forbes with Guggenheim Securities. Please proceed.

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

Tom Taylor: Yes, I mean complex backdrop would be an understatement. But it’s too early to talk about 2026 for sure. We’re having those discussions today. We still have lots of real estate opportunity and lots of white space in front of us to grow into. It’s going to depend on how we see, if there’s a line of sight to interest rates coming down, if there’s a line of sight to existing home sales, improving then I would anticipate our sales would follow that, and then we would have. Then we would go and we would push to open more stores than we’re opening today. But it’s just it’s too early to tell. We will be thoughtful in managing growth and profit. We’re trying to be – manage our balance sheet incredibly well that provides a ton of flexibility.

And so a long way around of saying, I don’t have the answer for 2026 if things stayed like they were today, then yes, I would anticipate us to continue to have batten down the hatches and run the business the best that we can. If we see a line of sight towards improvement, then we would increase our store rate from here.

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

Tom Taylor: That’s correct. Yes, we have other things to invest into for sure.

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

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

Steven Forbes: Thank you.

Operator: Thank you. Our next question comes from the line of Steven Zaccone with Citi. Please proceed.

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

Bryan Langley: So I’ll answer the second part first, and then and then go into the first part. So in today’s environment, we’re actually about 30% of our stores are on minimum hours. So there’s still 70% that we can look at from a transaction basis and flex those hours. I just want to set the stage because again, you’re asking about how much is left. And again, kudos goes to all of our teams and the stores and operating teams specifically. We took $3 million out of our comp stores in Q4 of 2023. Last year, we were able to take out $39 million. This year in Q1 already we’ve taken out $5 million. So when you add up across those six quarters, we’ve taken out approximately $47 million of costs from our comparable stores. So the teams are just doing an incredible job controlling what they can control.

And again, we’ve still got about 70% of our stores labor. Is that biggest kind of item that we can flex. There’s still a little bit of discretionary spend that, that we can look at. There’s a little bit in advertising some other things. So I do think that there still is more run room if we need to feel good about where we are today. And you’re right, every comp point traditionally is worth $0.10 a comp. So, our original guidance was flat to up three. The new guidance is down two to up one. So you would assume that that two point flex would have dropped us to 190. It’s because of the cost controls and also reducing the store count from 25 to 20. Some of the pre-opening expenses, you’ll have a little bit of savings there. So there are couple of things embedded in the guidance that help us get back up to that two.

But really as reduction of store count and just great cost management and also gross margin, right. Our gross margin is running a little bit higher than we anticipated in Q1 as well. So again, it’s a combination of all of those things that that gives us the confidence to only have to drop it $0.10 on the high end versus what you would traditionally see as 20.

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

Brad Paulsen: Our goal is to maintain our gross margin rate. So previous I think what Bryan said earlier in the call was that historically, we would try to manage to the dollars. But we believe we can manage to gross margin rate if the universal terroristic, not if reciprocal tariffs goes in place, that’s a different story. And we’ll update you if that happens.

Steven Zaccone: Okay. Understood. Thanks. Best of luck.

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

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Oliver Wintermantel with Evercore ISI. Please proceed.

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

Tom Taylor: Bryan?

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

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

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

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

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

Tom Taylor: I don’t know that I’ll rank them for you, but I’ll mention them for you. So, yes, we’ve been able to yield some better costs as we move products around the world. The consumer continues to buy up in our assortments, which provide a better rate of the product that the consumers are buying. That is a benefit. We have continued to benefit from supply chain costs year-over-year, and year-over-year we’re seeing that the benefit of that is in our gross margin, and that is being helpful. We have an emphasis on design and our designers when their designer sales are up in the company. We’ve got more designers in the company we’ve had historically. And in their sales, we tend to run a higher gross margin rate than we do if the designer’s not engaged in the project.

So all of those things give us good feeling that we can continue to grow gross margin. And the last lever is price. In the event that we can continue to grow gross margin. And the last lever is price in the event that we can’t diversify to the right place. If we can’t negotiate enough, then looking at the spreads versus our competition, we feel like we can still take price to protect that rate. So it will be a little bit of everything that helps us get there. And again, this is in the universal tariff environment, and it’s not easy. I’m not saying that, this is going to be an easy task, but so far we’ve demonstrated we’ve been able to manage gross margin pretty well over the last few years.

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

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

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

Tom Taylor: I’ll take the first part.

Bryan Langley: And I’ll take the second.

Tom Taylor: Go ahead and take the second.

Bryan Langley: Okay. So on the on the second, certainly we said in our script you heard us talk about that we’re proud that the USA now represents 27% of what we sell. They’ve been a big recipient of some manufacturing coming to the country and then us sourcing a little bit more from to the country. But really it’s everywhere. Our merchants, you know, as I mentioned, a couple of questions ago, we’re actually increasing the amount of countries that we bought from, and we’ve actually increased our vendor count. We used to be in that 220, 225 range. Now we’re up to 240 suppliers. But it’s really gone around the world and it’ll continue to go around the world. I mean, we do — the one thing we don’t talk a lot about. We do product line reviews on every category that we deal in.

We do it a couple times of year, and when we do that, we scour the world. We have more merchants dedicated to category than anybody. We scour the world. We find the right place to buy the product, and that’s where we get it from. And that will continue. So that answers the first part.

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

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

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

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

Tom Taylor: And just to clarify, just for everybody on the call.

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

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

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

Q – Chuck Grom: Hey, thanks very much. Getting down to 5% is a big number for you guys from China exposure. Just thinking about it from a different angle and innovation as you move away from China. And does that get diminished at all or do you still feel comfortable — your ability to grow the category. And then separately as you think about the competition to that last question and for intense pressure would it make sense to lean into price one of them or to try to gain market share or have you found enough to be effective in the past. So I guess a couple of philosophical questions.

Tom Taylor: Yeah. So, I’ll give my philosophical opinion and our son can weigh in if you disagree. I believe innovation in fashion and durability comes from around the world. I think we’ve had our vendors. We’ve had good ideas come out of China, and but we’ve had good ideas come out of Italy, and we’ve had great ideas come out of the US. So I think that innovation comes from around the world. So I don’t believe that we will lose any advantage. From that standpoint, I don’t think the category will lose any advantage from that standpoint. Son you agree or disagree. Okay. And then the second philosophical question, historically, we tried taking prices down in our level one flooring SKUs and historically that has led to less sales.

If we trade, we get customers trading amongst our own SKUs because our spread versus the competition is pretty decent. And so it hasn’t — the only place it’s really worked is an installation. materials. And we continue to experiment in installation materials and drive more demand there. We do see this that the only bright side of this is we feel like it’s a share — a share taking opportunity. So certainly we’ll be aggressive where we can be aggressive and we’ll learn from the pricing pilots that we’ve done over the last bit of time and apply them as we look forward. So I appreciate the philosophical questions. Thank you.

Tom Taylor: And that concludes — Appreciate it man. So look, I want to thank everyone for joining the call today. And thank everyone for their interest. I was hoping for more questions for Brad. I guess next time we’ll get more questions for Brad. Brad’s done great. We’re excited to what he’s contributing already in such a short early time. And we look forward to updating you in the next quarter. Thank you.

Operator: Goodbye.