Floor & Decor Holdings, Inc. (FND) Earnings Call Transcript & Summary

Good morning, everyone. I'm Wayne Hood, Vice President of Investor Relations for Floor & Decor. And on the call with me today is Matt McConnell, who is also on the Investor Relations team; and our CFO, Trevor Lang, is on the call. And before we get started, I'd like to refer you to the standard safe harbor language included in our press release as we may make forward-looking statements within the meaning of our Private Litigation Securities Act of 1995 throughout the course of our presentation today. So we look forward to your questions, and I'll turn it over to Rick, which I think will have some dialogue with Trevor before we begin.

Thanks a lot, Wayne. Appreciate that. Good morning, everybody. Hopefully, you're safe and healthy in your locations, wherever that may be. As Wayne mentioned, I'm Rick Nelson. I cover the hard lines, especially retailers, for Stephens. We are super excited to have Floor & Decor with us today. Representing the company is Trevor Lang, company's CFO; Wayne Hood, who we just heard from, VP, Investor Relations; and Matt McConnell is Senior Manager, Investor Relations. Trevor, Wayne, Matt, thanks so much for joining us. This call is going to be a Q&A fireside chat format. So all participants are going to be in a listen-only mode, but you can send your questions to me. You can click on your screen to send those questions over or my direct e-mail is rnelson@stephens.com.

I thought the best way to start this is to ask Trevor to frame up the Floor & Decor story for those that may not be familiar with the company. I think there is fewer of those these days as you roll out the new format. But if you could discuss, Trevor, the value proposition, how you differentiate from competitors and how you size up the growth opportunity? I think that would be great.

Yes. I'll just start off, Rick, in just saying thank you very much for having us. I wish we were together in Nashville like we were last year. It's an incredible conference. You guys have a great franchise, and thank you very much for having us. And look forward to taking questions and talking through things. So those of you who don't know us, so Floor & Decor is a specialty retailer of hard surface flooring. We've been in business right about 20 years now. The current management team, I've been here, I'm running at my tenth year. Lisa Laube, our President, has been here over 9 years. And our CEO, Tom, has been here right at about 8 years now. So we've been together for a long period of time. And the model has been really successful for the entire 20 years. When we were invested in by our private equity partners back in 2010, they made some big investments in the team and in infrastructure. We made those big investments really starting in 2011 and '12 and kind of rounded out those investments as we ended '12 and ended '13. And ever since then we have been growing our units at 20% unit growth. We slowed that down because of COVID this year, but we think we'll get back to 20% unit growth next year. And the model has been incredibly successful. When I got here just over 10 years ago, I think we did something like just under $230 million in sales and over $30 million in EBITDA. Obviously, the business has been growing at about a 26% compound annual growth rate revenue since then. Some years higher, some years lower, but for the most part, growing pretty consistently over a long period of time. As we look at the business today, we really kind of have 5 key pillars of our growth. And they're built off the strengths of the business. And I'll talk about kind of who we are before I talk about the pillars. As a specialty retailer in a big box store, our stores are about 75% the size of an average home center. But we really -- but we only sell hard surface flooring and a few adjacent categories, whereas an average home center might have 3,000, maybe 5,000 square feet dedicated to hard surface flooring versus our stores average closer to 77,000 square feet. And so that allows us to have a much broader assortment. It allows us to have a very trend-right assortment. It allows us to carry in-stock inventory, which is incredibly important to that professional customer. We're, frankly, as much a supply house as we are even a retailer. And we have great sales associates. An average store has about 50 employees. And we have people who know very detailed specific information about wood or laminate or tile or natural stone, and that allows us to be very thoughtful about the assortment. And probably the other big thing that makes us very different from our competitors and a huge part of our success is we have the systems, the infrastructure and the talent to micro merchandise. And so when you walk in our stores in Tennessee, for example, where we would have been had the COVID not hit, you're going to see a lot more wood and rigid floor vinyl and water-resistant laminate. You go to our stores in Miami or Phoenix, you're going to see a lot more natural stone, and you're going to see a lot more tile. And the sales percentages in those stores are going to be pretty substantially different. And I think that's part of the biggest reason we haven't had a fast follow like many other specialty retailers have had over the last 30 or 40 years is we have great trend-right products, but we also were building the micro merchandise in individual markets. So as we think about the future, again, we have 5 key pillars of growth. The first and the most important of those is our new stores. We ended last quarter with 120 new stores. We think we can get to at least 400 stores. Our new stores have gotten bigger. The sales over -- starting in -- since 2017, the sales and the profitability have gone up substantially. We had a very good return on invested capital. We're getting our cash back in between 2 to 3 years. And we're driving over a 20% IRR, which is obviously well ahead of our cost of capital. And so -- and we're -- like all great merchant and retail organizations, we're always investing in fixing and improving on that new store format. We have big visual design centers. You can see in my background for those of you who are watching, big digital displays, great signage, really showing the product in its application versus if you walk on to many of our competitors, you're going to get a small piece of tile that's 8x8, and that's all you're going to be able to see. The next piece is comparable store sales growth. We think because the industry backdrop is going to be good, not just because of the COVID environment, but over the long term, hard surface flooring, we think is going to grow on a low year, 2% to 3% a year, and in a good year, above 5%. We think even our older stores can grow at that rate or more. Add to that, we're going to -- we've historically had a 20% unit growth rate -- that's the new -- back to 20% unit growth next year. That has historically provided us a 400 basis point comp lift because our new stores started in a lower environment, our mature stores that they may comp for a very high rate for a number of years. That historically provides us with a 400 basis point lift in comp. So I think that gives us a mid- to upper single-digit comp. And so comp store sales is our second pillar. Connected customer. That's what we call our omnichannel strategy. The website is about education and inspiration and then ease of transacting once you've done your research. And this category, probably more so than any other in retail, it's a hard category. People need to research. There's really no brands you can trust. It's not inexpensive to install. You need to get it right because once it's installed, we obviously can't pull it up. And so people really need an avenue to do research on their own. And then we think we have one of the best websites in specialty retailer. It again, inspires them about what the products could look like, educates them on how to do it, how to install the product and then after you've done that research it's super simple just to go ahead and buy them on. Next one, Pro, as I mentioned, is a big focus for us. We have -- we think the vast majority of our products are being put in by a professional installer. There are certainly some consumers who will take this project down by themselves, but we estimate the vast majority of our people that put this product in are using a professional customer. And so we are as much a supply house as we aren't even a retailer. And so we've invested in many things. We have a separate section of the store that takes care of the Pro and average store has in working 3 to 10 employees based on the volume of the store and services to Pro. We have great credit options for the Pro. We have free stores for the Pro. We have free design services for the Pro. We have, as I said, credit solutions for the Pro. We have a loyalty program that we think is doing well with the Pro. We have a great CRM systems so we can follow up with those Pros. And so Pros are another big pillar of our growth. And then the final pillar we added last year is our design services. Another thing that makes us unique. You can come into a Floor & Decor or you can actually schedule ahead of time, so you don't have to wait an appointment. And come in and work with an incredibly strong designer that can help you build out a whole house or can build out that small rural powder bathroom and it's completely free. We can help you with installation if you need some help there. Most likely, most of our customers actually have their professional installation. You can work back and forth with that designer over time. They can do you sketch ups and what the project is going to look like. And again, that's something that most of our competitors don't have and something that we're continuing to invest in. So it's been a great model. It's been a great run. And again, as we think about the future, we'll go from what we think is probably at least 400 stores versus the 128 we have today. We also opened recently a small design center in downtown Dallas. And basically, we didn't get a lot of -- even though we have 7 very successful, very high volume, very profitable stores in Dallas, we weren't getting a lot of that customer that lives inside [indiscernible], high income, high household value, densely populated urban customers weren't driving out to the suburbs. And so that's a way to expose ourselves to that customer. And then finally, we're investing in the commercial business. We have this incredibly trend-right products at a low cost. The competition is actually more diverse. We've not a big home center that we compete with in the commercial space. And so we've added these regional account managers to really go attack the commercial space, which is another big industry. So that's a long introduction, but our best days lie ahead of us, and we're making great investments to continue to support the growth there.

Great summery, Trevor. So same-store sales have improved sequentially. As the quarter progressed, you were up 16% in July, 18% at August and 21% in September. What do you think is driving that improvement? And how sustainable do you think this forward growth rate is? And what are the signposts we should be looking at as we try to assess the environment?

I would break it into 2 big camps. I think as we started opening our stores in late April, when we had all of our stores opening -- opened by the beginning of June, all of the historical drivers, macroeconomic drivers of our business completely decoupled, right? Because at that time, existing home sales were horrible, the new home construction was down just because of COVID. But yet, our business, as you mentioned, comping up 16% was quite incredible. I think the phenomenon we saw as we started opening up our stores, is obviously, everybody was sheltering in place or not going out and venturing out nearly as much. And so we had to find a way to be able to work efficiently from our homes. You combine that with the massive stimulus that the government put into the market to help the liquidity of folks. And then the massive savings rate. The savings rate in Q2, I think is probably similar in Q3 was kind of in the upper 20s versus a country that's only in the 5% to 7% range. And so people have to figure out a way to work from home, they have to figure out a way to help their kids work from home or help their parents. They're not spending money on that cruise or going to Disney or going out to eat. And that created an environment where people are investing massively in their homes, right? And you know this, everybody on the phone knows this, people doing incredibly well, loans performs basically incredibly well, the financial companies are doing well. And the sporting good stores are doing well. So that's probably the most pointing thing that has really driven our business from comping huge. The other thing I'd like to remind people is we were comping 6% in Q1 before we shut down our stores. And as you said, we're comping 18% in the fourth quarter -- or rather, third quarter, and that was close to 20% of September. So that's probably the biggest driver of what's driving our business today. The other thing that I think will help us, give us some legs as we think about the future is last month, according to National Association of Realtors, I think we have 6.5 million existing home sales turning over. I think that's the highest on record or close to it. As we all know, interest rates, the Fed has been clear that they will keep interest rates lower even if we get above 2% inflation. As you look historically over the last 50 years, when interest rates are low, that drives insistent home turnover and it drives refinancing, which drives higher home values and creates more discretionary income for people. And so we're in a good macroeconomic environment with low interest rates driving existing home values and driving existing home turnover and driving fairly significant increase in new home construction. I think those guys are getting close to their records as well. So how do you think of that? Is it short pull held together, how do you think about the future? I think everybody on the phone probably knows as much if not more than me. It looks like maybe the back half of next year, we'll have a broadly disseminated vaccine for COVID. Obviously, some good news on that front with the recent vaccine information. But obviously, that the first vaccinations are going to go to the people who are most at risk and the front line workers where it should go. So like, everybody else's might be at the back half of next year. So we could be in this environment where we're spending a lot more time at home, and we're not spending as much on leisure activities through the first half of next year. And then again, I think longer term, because interest rates are going to be low, that should keep existing home sales softly as kept that elevated. Household values are rising because there's a lot of demand. Those are the 2 most economic -- historically, the most important macroeconomic factors that have affected us as well. So to summarize all of that long statement, it feels like we're going to be in a decent strong backdrop for the foreseeable future.

Thank you for that. So e-commerce has been a big driver for lots of retail, Floor & Decor is no exception there. Your e-commerce sales last quarter were up about 111%, comprised 16.6% of your total sales, up from 10.2% a year ago. Can you talk about your e commerce offering, how you think it differentiates from other big box competitors and smaller mom-and-pop stores? The outlook there for e-commerce?

Yes. To me, I think that e-commerce is like a high tide that rises all the boats. And we feel like we've done a really good job of sort of integrating those 2 experiences together. And so just one -- many examples, but one simple example, you can come into a store, we have great technology in our stores. We have what we call sales floor enablers. There's 30 years -- they look like an iPhone, but they're hardened for it. We can build out a quote for you in the store for you to do that based on the right bathroom or right kitchen. You could say, you know what, let me go home, let me talk to my spouse. Let me talk with my designer and/or my architect or my installer. I go home and I spend some time with them. I changed a few things now, I can do that on the website. I can send it to my contractor and have them weighing on it. And then ultimately, as I make the decision, maybe I go to a few competitors just to see what's out there. I can just -- on Monday morning, wake up, transact online, Floor & Decor will store it for me for a day, a week, however long we need it. And then you can come pick it up. You can get credit online, or vice versa, right? You could do all this homework online. Like myself, personally I probably do a lot more homework online, maybe build a quote online, bring it into the store or when I get to the store, they bring it up on those sales floor enabler. I can say, yes, maybe pick this up, but that's not going to work because you're below grade. So you want to use this different product. And I didn't know that, right? So it's all about education. It's about inspiration. I mean I was just watching some of our videos online here recently about how do we put in a backsplash with a kitchen, and it's fantastic. Our new design was kind of walking customers through about -- if you put in granite as your fabricated kitchen countertops, here's how you need to think about it as far as backsplash because granite is very busy. But if you put in marble, you can put in something that's more busy on the backsplash. And so education is a big part of it. Inspiration is be part of it and an ease of transaction. And it's worked incredibly well for us. As I said before, I'm running out my tenure here, our web sales has grown at a much faster rate than our total sales. From our entire tenure here, and I think we've been thoughtful about the investments. And the other big thing, I think we've done a really good job, is how do we curate out of the stores, but how do we curate the website. This isn't like a Sony TV or a Tide bleach where I know what I want and I just order it on Amazon, right? I need help figuring out what's right for my home. And I think with the way we curate our stores on our website really helps those customers as well because in a marketplace where you just got 1,000 SKUs and methods put together, it's too hard to figure out for most people. But in ours because we have a very logical, thoughtful way we curate our stores, we do some of that on the website as well, and that really helps consumers as well. And then once you go to the stores or you do your research, we're going to have the lowest prices, right? So now you've got trend-right product that you voted for. If you've done your homework and nobody needs us on cost, but we have it in stock. It's probably there. The people learn quickly. These products behind me, as you see, those are manufacturing products and then changes, the dye lot change, natural stone changes, you go through the quarry, wood changes as you go through the forest. And so having those in-stock products that people can trust that my products are going look the way I want them to look, and I don't have to worry about dye lots or the quarry changing as it's manufactured out of the mountain -- or the trees change, will be of course, is another benefit for us.

So you -- Trevor talked early about -- to focus on the Pro. It accounts for approximately 60% of your sales. I know you oversee that effort. Yes, what does Floor & Decor do different from competitors in attracting the Pro and what is the value you see to the Pro and the stickiness of the Pro customer?

Yes. The Pros that are loyal to us and shop with us, what they tell us they love about our business is in-stock inventories matter to them. They want to be able to come in, if they need a half pound or a full pound or something, they want to be able to get it. They love the design aspect of our stores. They can bring their clients in. Their clients can work with them in the store. They can trust that we're going to have the lowest price. In many cases, our Pros will use our free design services. We can get their customers credit. And so we view is -- we're trying to be their one-stop shop. And then specifically for the Pros, then we can provide them credit whether you're small Pro, we can get you credit with our private label credit card. If you're a very big multi-family type client that pays with POs and invoices, we can service you there. You can store your products. So if you're a Pro -- if you're a small Pro and you want to do this job this week and the next job the next week, another job 3 weeks from now, you or your client can buy that inventory and store it with us. You can't do that with our competitors. And then we have a dedicated team, probably one of the most important things that Pros tell us is I need a relationship person that can help me. And like any business, they're going to have problems and issues and opportunities. And our stores have a dedicated Pro desk with a dedicated team that works with them to make sure that they're serviced or call ahead and say, "Hey, this is Joe. I'm going to be there in an hour, make sure you've got the inventory pooled, so I can pick it up and move. So having that relationship to handle those process is important. And then final, I would say, is our loyalty program. We put in that loyalty program. We're rounding out our second year of having that out there. And we see people on personal and social media all the time, maybe not so much in this COVID environment, but before COVID people were taking a -- buying golf clubs or taking their people -- taking their family and friends on cruises or getting gift cards to their clients and their associates. And so that loyalty program has been a success for us as well. So we're going to keep investing in those things. Our stores, we do a very detailed analysis of our Pros with an independent third-party that does this for a living. We've continued to see improvements over the last 5 years in the scoring that we get from our customers. And so we'll continue to make those investments in the Pro.

Just to follow up on the Pro, COVID has impacted lots of segments of the economy. How is the Pro holding up through this? And are they getting more in-house visits? Are people becoming more receptive to that, obviously, what your comps would suggest that they're performing quite well?

Yes. I think you summarized it right, Rick. The Pros, we talked to hundreds of Pros at the individual stores within -- with our regional team and then one of our vendors is a company that can help our customers with professional installation if they need. And so we have the ability to again talk to hundreds of Pros. And what you hear from them is they are as busy as they can be. Their backlogs are very high, their business is very strong, and they can have more business, but hiring installers is not easy. And so I think that while the natural reaction would be, while people don't want people in their homes in the COVID environment, we're seeing the Pros business being as strong as it's ever been. And -- so yes, I think people have figured out how to do this safely. And I think the smart Pros -- really, any professional person to do this, but they're keeping a safe social distance. They're wearing masks, they're wearing gloves. And they're very thoughtful about how they handle their customers. And because of that, more customers are getting comfortable with this. Yes, the Pros have as much business as they ever had is what we're seeing and reading from our professional customers.

Okay. I'd like to shift the conversation to store growth. You've got 128 stores in operation, 13 planned for this year. You're going to resume that 20% store growth target on a go-forward basis. How long do you think you can sustain that 20% growth rate? I realize the long-term target is 400 stores. Is that a number that you think is still viable or potential for more stores than that?

Yes. We do think we can continue for a period of time. I think what we said in our 10-K, and we actually changed the wording a little bit most recently in the last 10-K is we felt like we could go for the next several years. As you said, we'll open 13 stores this year, 20% unit growth next year will be 27 stores. I think as we get somewhere between 35, maybe 40 stores a year, that's starting to feel like the number of stores we'd be comfortable opening. We probably would stick at that level for a number of years. But certainly, our expectation is for the next several years, we can continue to support 20% growth. We've invested heavily in that team. We've got a great leader, Brian Robbins manages that group our executive team and he's a great leader that works for home, that runs that organization for us, very thoughtful. They've invested in the 2 things that are important for we all as a company that -- they've invested in talent and technology. And the investment in those two, we think it's going to allow us to scale and continue to support our growth. And so this year would have been our eighth year of 20% unit growth. So I guess we can all say we'll there for 7 years. But we got a long track record of doing 20% unit growth [indiscernible] the investments we've made in talent first and technology second. And that's going to allow us to continue to support that growth as we think about the next several years.

Trevor, do you see e-commerce, the growth in e-commerce at all changing the store format? Are you -- you mentioned earlier, you're planning bigger stores. But with the growth in e-commerce, might that shift on a go-forward basis?

I don't know. We'll see, right? I mean, the benefit for us is we got a long lead time before we get to 400 stores. I ultimately -- I think the executive team ultimately thinks, again, it's at least 400, 500 stores. Because the difference, again, with our business versus most of other retail is you need to see and test this product. There's no brands like Sony or Tide, as I talked about before. This is almost -- for us, it's almost all private label with the exception of maybe our installation accessories. And now even if you had brands in this industry, which you really don't, we have our own private label brands which are fantastic, but brands that the go across multiple retailers. They don't have that. You need to do that brand, you still need to go in to see the product because, as I mentioned earlier, these products change. How our biggest business dialogues change as it goes through the manufacturing process. Rigid floor vinyl, you need to come see it to make sure it's going to match the paint and the furniture in your home. And while technology continues to get better and digitalizes are good, nothing is as important as actually going to see and view that live product. And so for us, we do think that we will still need a number of stores from what we've said historically and what we're sticking by is we need at least 400 stores is the right answer. So yes, just -- it's a little bit different from us because ordering a Sony TV or Tide bleach online, I trust the brand. I know what they've done. I've seen them in the past. I know how that brand works. We just don't have that in this industry.

To open it up for questions from our audience. I've got some more I'll continue as those come in. But just an update if you could, Trevor, on the design studio, how that's performing relative to your expectations? And what sort of opportunity that presents?

Yes. It's something we always wanted to do. And we think Dallas, just -- it's a market we have 7 stores in the Dallas, Fort Worth area. Tom and I both lived in Dallas for a number of years, so we know the market really well. We also have the benefit with our CRM system. We have pretty good information. Most of our customers will store their information with it -- store their product with us. And so for that, we get their name and address and cell phone. And as we looked at that customer base, we weren't getting our fair share or a lot of the people that live -- the high income individual that lives inside the loop, that urban customer. They just don't drive up to Plano or [indiscernible] or to Colony or [indiscernible] or Arlington where we have stores, they just stay in town and pay walk for flooring. And so for us, it's a way to get exposure to a customer that we know wants flooring and -- but just won't drive to the suburbs or the exurbs. And our consumer [indiscernible]. So -- but we can't open 80,000 square foot stores in downtown Dallas or really downtown many locations. And so this design center, I think it's about 10,000 square feet. It's a way for us to show the entire assortment. Actually the assortment that we show there is actually a little bit bigger than our stores because we don't carry assortments for the -- It's a very visually inspired store. If you were to -- when you or our investors get a chance, you can see it. It's as good as any of our competitors, we think, actually better. And the products right there in our 7 stores. So we can have the inventory to the next day if you want. And it's also a super collaborative work space. So we've got great -- we've got many designers in that store. You can bring your own designer in if you want to bring in the store. We're working on solutions where we actually can come to your home and actually have a designer going to you home. And so we've only opened -- some of them have been opened up, I think, just over 3 months. Initial indications are great. We need to be open and see how it continues to perform. But again, it's core, it's a way for us to get to that higher income urban customer who is just not going to drive out to the suburbs. And so we do think it's an incremental sale on an incremental customer that we otherwise might not have gotten. So it's off to a great start. It's only been 3 months, but we're excited about it. And there's obviously a lot of those markets throughout the United States where we can't put 80,000 square foot stores and this gives us an option.