Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Gross margin rate exceeded expectations, increasing by 110 basis points to 43.3% from 42.2% in the same period last year.
- Opened five new warehouse format stores in the second quarter of fiscal 2024, ending with 230 warehouse stores and five design studios.
- Strategic merchandising efforts are successfully driving sales towards higher margin products, enhancing profitability.
- Continued diversification of product sourcing, reducing exposure to China from approximately 50% in fiscal 2018 to 25% in fiscal 2023.
- Pro sales improved sequentially and year over year, accounting for approximately 48% of retail sales.
Negative Points
- Total and comparable store sales were modestly below expectations, with a 0.2% decline in total sales and a 9% decrease in comparable store sales.
- Diluted earnings per share decreased to $0.52 from $0.66 in the same period last year.
- Existing home sales have declined year over year for almost three years, impacting demand for large project discretionary hard-surface flooring.
- Revised fiscal 2024 sales and earnings outlook reflects a muted market environment, with expected sales in the range of $4,400 million to $4,490 million, down from prior guidance of $4,600 million to $4,770 million.
- Plan to slow new store opening pace to approximately 25 new warehouse stores in fiscal 2025, down from the prior expectation of 30 to 35 stores.
Q & A Highlights
Q: On the decision to reduce openings in 2025, how would you frame the go forward between small format and large format stores? Does the edge of big stores with depth of assortment and stock still hold if you pivot to smaller boxes?
A: (Thomas Taylor, CEO) We have identified over $1.5 million in cost benefits for the class of 2025 stores, aiming for better returns. We are focusing on larger markets for 2025, where brand awareness is higher, and backloading store openings to the second half of the year, hoping for a better macro environment. Smaller stores in less competitive markets can still achieve the same operating margins as larger stores.
Q: Could you share your latest recovery timeline and what type of environment is needed to see positive comps in 2025?
A: (Bryan Langley, CFO) The midpoint of our guidance assumes trends stay the same from Q2, with sequential improvement due to easier comparisons. There is typically a zero to three-month lag from interest rate changes to existing home sales impact. For positive comps, we need existing home sales to be positive year over year.
Q: Can you remind us what happened during the last tariff and freight increases, and how is it different this time?
A: (Thomas Taylor, CEO) Last time, we moved products outside of China and passed on costs to consumers. Now, we have reduced dependency on China to less than 25%. We are better positioned to protect margins and maintain competitive pricing.
Q: What percent of your stores have lower sales and traffic than in 2019, and why are some stores producing lower volumes today?
A: (Thomas Taylor, CEO) The macro housing environment is challenging, with existing home sales down for three consecutive years and housing affordability at a 40-year high. This affects all stores. (Bryan Langley, CFO) On a geographic basis, our transactions are still up from 2019.
Q: What do you think is a normalized comp rate for the business, especially as you slow new store openings?
A: (Trevor Lang, President) Historically, in a good environment, comps grew 3-5% per year. We hope to achieve mid-single digit comps in a normalized environment, with potential for high single digits in good years. The aged housing stock in the U.S. supports long-term demand for flooring.
Q: Are immature stores performing where they should, and are there markets that are still the weakest?
A: (Trevor Lang, President) Newer stores are comping positive, with older stores comping more negatively. Markets like Texas and Florida, which were last to feel the housing weakness, are now more impacted.
Q: Is the current gross margin level sustainable, or will you invest some of it back into price or other areas?
A: (Thomas Taylor, CEO) We have invested in price in certain categories but overall, our prices remain competitive. We believe we can continue to expand margins through better buying, mix improvements, and designer sales.
Q: Are project sizes likely to return to pre-COVID levels, and why are laminate and LVT categories underperforming?
A: (Thomas Taylor, CEO) Larger projects are more likely when existing home sales improve. During COVID, easier installation processes for laminate and vinyl led to higher sales. As the market normalizes, we expect these categories to recover.
Q: Can you provide more detail on the cadence of the 2025 store opening plan and its impact on EPS growth?
A: (Thomas Taylor, CEO) We plan to backload store openings to the second half of 2025, hoping for a better market environment. (Bryan Langley, CFO) We are not ready to comment on 2025 EPS growth yet.
Q: How will slowing unit growth impact the model, particularly regarding cannibalization and leverage?
A: (Trevor Lang, President) Opening more stores in existing markets may increase cannibalization, but overall, it should be lower due to fewer new stores. Slower unit growth should help leverage fixed costs and improve flow-through when comps turn positive.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
