Operator: Thank you. Next question is coming from Steven Zaccone from Citi. Your line is now live.
Steven Zaccone: Hey, good afternoon everybody. Thanks for taking my question. I wanted to ask about unit opening plans for 2025. So, I think last time you guys spoke to us it’s tough to make changes to 2024 in a short timeframe. But as you think to beyond the next 12 months, if we’re in an environment where rates maybe stay a little bit elevated, is that a concern that maybe you should pull back on some unit openings?
Tom Taylor: So, I will take that question. 2025 is a long ways away. So, were not quite prepared to talk about our store opening plans then. But I would just say that it’s going to depend on a lot will depend on the macro environment and where existing home sales are falling. And if we’re seeing an increase year-over-year in existing home sales, we remain confident in opening our stores as long as the return on investment continues to look like it has historically. So, we’ll watch how this year goes. Today was an encouraging sign with the existing home sales in the release. It was encouraging. We hope that that continues. And as we get to the middle part of the year. We will have plenty of time to look at our store count as we get to the middle part of this year and we’ll know more then.
Trevor Lang: The only thing I’d add to Tom this year I think close to 75% of our stores are in existing markets. And as we grow, we’re going to have more of that because there just won’t be as many new markets. And we have a much better understanding and conviction on what our return on invested capital and our returns are in our existing markets just because when you open your seventh store in a market or your 10th store in a market there’s much less guessing versus when you have to go to a new market. And so we would obviously take that into consideration. If indeed things aren’t as good and it’s more difficult the places we would consider possibly paring back which is again that would be very unusual for the last 100 years of housing in America. But if that was true that’s probably where we pare back it’s probably more of the new markets because we still get good returns in existing markets and that’s where the majority of our stores are going.
Tom Taylor: And the final comment on new store openings is all of this nothing changes our view that there’ll be that we can have 500 stores. So it’s just a question of timing.
Operator: Thank you. Next question is coming from Seth Sigman from Barclays. Your line is now live.
Seth Sigman: Great. Hey everybody. I wanted to focus on pricing. It does seem like there is a little bit more noise in the industry around discounts and maybe prices starting to come down. I’m curious what you’re seeing your strategy is going to be here? And maybe just put it in the context of some of the price changes that you’ve been testing through the year. Where does that stand today? Thank you.
Ersan Sayman: Hi, this is Ersan. The changes we see in the market are not irrational in some cases when there is a promotional activity, that’s a lower quality or any clearance item could be there too. I mean we see some price reductions and increase the home centers but independence did not change much. I mean we tested — we’ve been testing the retail changes since last February. And as we mentioned in the last quarter, certain products that are served mainly to Pros had some return. Good return on some others it was inconclusive. We continue to look at our balanced portfolio and then try to adjust retails as needed. And we feel like our gap against the competition is still good and we intend to keep it that way.
Operator: Thank you. Next question is coming from Chuck Grom from Gordon Haskett. Your line is now live.
Unidentified Analyst: Hi. This is Eric on for Chuck. I had a question on gross margin, which you’re expecting a nice incremental improvement this year. So what are the additional drivers driving expansion? And also just given that the top line has been soft, why not reinvest some of that in the price to drive incremental volume, I guess what have you seen on the price elasticity of those products in which you have lowered prices?
Tom Taylor: So I’ll take some of that and maybe Ersan can jump in at the end. So yes, we — as we’ve guided, we believe that we can continue to see benefits in gross margin, some of that will come from continued decreased supply chain costs which burn in over time. Our merchants have also done an outstanding job of negotiating costs. It’s a tough market right now. So the vendors want to sell product and our merchants are very good at asking for price and they’re doing a good job to get it. And as we’ve diversified outside of China and found new countries of origin, we’ve been able to do that at a better gross margin rate. So between that, and then the last thing I would say is that the consumer is still leaning towards better and best products in our store were blend at a higher margin, and our designers are impacting more and more of our sales, which end up impacting our margin.
All of that turns into we think the margin rates can continue to go down without having to take price. So, we feel good about that. We do invest back into price. As Ersan mentioned, we’ve piloted multiple areas of the store. We’ve taken price down to see what happens with the unit movement and when we have conclusive results where it works we continue to do that and we’ll continue to focus on that.
Operator: Thank you. Next question is coming from Greg Melich from Evercore. Your line is now live.
Greg Melich: Hi. Thanks. I wanted to follow-up on the ticket progression maybe it ties in with the pricing and mix question. But if we think about that comp improvement you talked about through the year, it sounds like it’s pretty much all transactions and traffic getting better. Would you expect the ticket to sort of be steady through the year? Or would that also have a similar progression as you go through your guidance?
Trevor Lang: Let me just went first and Bryan has got something he wants to say too. When you look at what’s going on with our ticket right now being down in the mid-single-digits, it’s really driven by our laminate business, which last year was our largest category,
Greg Melich: The vinyl.
Trevor Lang: And that’s really laminate and vinyl those are together. That’s really driven by people are doing much smaller projects and you have a lot less health slipping, right? When you were five million six million existing home sales, there was a lot of investment that we need to go into those homes and you would do full homes or full floors or things like that. Now, what you see as our square footage has come down pretty meaningfully in the double-digits because people are doing either their main bathroom or powder baths or things like that. That’s part of the reason our tile business is doing well and our installation business is doing well relative. So, that’s probably the biggest driver. That is by far the biggest driver of our ticket is that laminate and LVT.
And so when existing home sales go back up which we’re optimistic they will and they have for the last 40 years, we would expect that ticket to go back up because hopefully people are flipping houses and they’re working on bigger rooms as well.
Bryan Langley: Yes. I mean look, I would just add. So from the ticket perspective that’s going to drive, but you’re right the majority of the change in our comp is going to be led by transactions. And so that’s also on the back of existing home sales. So as those start to lap weaker numbers in the back half, it will be a transaction-led story, but also ticket will improve throughout the year as well, so…
Operator: Thank you. Our next question is coming from Robby Ohmes from Bank of America. Your line is now live.
Robby Ohmes: Hey thanks for taking my question. I was curious how you’re taking the inventory down so much. What the secret sauce is there. Are you guys reducing SKUs? Are you bringing in a lot less? Are you spreading inventory from existing stores into the new stores you can bring in a lot less that helping the freight cost situation as well? How are you going to bring the inventory down?
Trevor Lang: We had year-over-year, I think we’re high single digit low double digits and SKUs that were down versus last year. But probably more important than that is again, we weren’t impression, but we saw late last year that the trends like they were going to improve and we felt like we could take some actions in late 2022 and then early into 2023. We were fortunately right on that and we’re able to bring it down. As I mentioned, our inventory replenishment team and our merchandising team have done a fantastic job even though our inventory is down 14%. Our in-stocks are probably the best I can remember in a long time. And so yes our team has jointly managed that this year and we think when the customer is ready they’re going to be very pleased to come in when we get more traffic.
Operator: Thank you. Our next question is coming from Justin Kleber from Robert W. Baird. Your line is now live.
Justin Kleber: Thanks. Good afternoon everyone. Just as it relates to the smaller format stores as we think about modeling new store contribution in ’24 any color just how we should think about the year one sales of those smaller stores relative to that $14 million to $16 million benchmark you typically talk about I guess for an average store?
Trevor Lang: They’re lower. I mean speaking that always they’re lower but then we’ve got stores like we’ve said we’re going to open a store in Brooklyn right? And that’s obviously going to be — we believe a lot higher. We work towards opening that balanced portfolio of stores to get those numbers around $14 million to $16 million is our goal. You guys will notice when you read our 10-K we’ll just say it now and Bryan and I said it both last quarter as well. We’re slightly below that goal for the class of 2022, pretty close to the low end of that goal for the class of 2022. We opened almost half of our class of 2023 so it’s probably too early to say for the class of 2023 but we would expect because of the macro environment to be below the low end of those goals at this point. And then again, when the macro comes back, we expect those numbers to get much better.
Tom Taylor: Yes. The only thing I’d add is that in a single store market, the smaller stores will be less Bryan. But if the smaller stores is in a normal sized market then the volumes very close to what a normal store would be.
Bryan Langley: And as Trevor alluded to in the call, the operating margins can be just as good as the large stores. And so the profitability is going to be there because a lot of those will have lower cost structures. So your op margin can be just as good.
Trevor Lang: Yes. We were looking at a couple of stores in Knoxville and Sarasota and a couple of other markets that are pretty small square footage stores, but do 50% above average store volumes. And so we can operate a very productive profitable store – small store that is and again in this case, these stores are much smaller but they do way better than the average store. So we’re thoughtful and smart about it.
Operator: Thank you. Our final question today is coming from Jonathan Matuszewski from Jefferies. Your line is now live.
Jonathan Matuszewski: Great. Thanks for squeezing me in and good evening. Just a follow-up on the store opening plan. I know it’s early for 2025 but I just want to understand again that the smaller store penetration in 2024, is that specific to this kind of macro housing backdrop? Or should we expect 25% to 30% of new warehouse openings going forward being in that smaller format? Just wanted clarification there. Thanks.
Trevor Lang: I guess I’d say two things. One, I think we’re Bryan maybe in the 10-K we say we’re around 77000 square feet our average store. I think the class of this year, I think it’s not that far off of that. So I don’t want to make too much of that. We’re just trying to be transparent that we are going to be opening more smaller stores then we have a very big store that we’re opening in New York that’s somewhat offsetting it. So I think as we look forward, I don’t know that we’re going to have a meaningful change because again we’re trying to hit that blended average of those new store economics that I mentioned earlier.
Tom Taylor: Okay. So that brings us to the end of the call. I’d like to thank everyone for joining us today. I do have I want to take a minute. It’s a bitter sweet day at Floor & Decor. We have one of our long-term executives, our Executive Vice President of Strategic Business Development and Supply Chain, Brian Robbins has and we announced this a while back that Bryan is going to move on to the next chapter of his professional life and personal life. And Brian’s been here for 13 years or almost – it feels like 13 years not quite but Brian has been here he joined right after I did. He’s built up an incredible supply chain function at Floor & Decor built an incredible team. He’s led our real estate team in development over the last few years and he was behind our first acquisition that has turned out to be a huge success for us.
So Brian is a friend and Brian is going to always be part of the Floor & Decor family but we wanted to take a minute and wish him well. So Brian, we wish you well. I know you’ll miss these but we’re appreciative of all your contributions to the company. I’d like to thank all the associates who listening to the call. Thank all the analysts for your interest in our business. We look forward to updating you on the second quarter call – on the first quarter call. Thank you.
Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.
