floor & decor\'s (fnd) ceo tom taylor on q2 2019 results - earnings call transcript

by:KKR Stone     2020-04-09
Floors and decorations (NYSE:FND)
Second quarter August 1 2019 earnings call 2019 p. m. 4: 30 ETCompany participant Swayne Hood-stom Taylor, Vice President of Investor Relations-Executive Vice President and Chief Financial Officer lisa Laube-Executive Vice President and Chief Marketing Officer conference call Boge-stifer michael lather-ushuk glum-Gordon hasketz Fadden-Wells welcome to the floor and decor holding company call in the second quarter.
At this time, all the participants were listening. only mode.
A short questionand-
An answer session will be held after the official speech. [
Operation instructions]
As a reminder, the meeting is being recorded.
I\'m happy to introduce Wayne Hood to you now.
Thank you, good afternoon.
I was on the phone today with Tom Taylor, chief executive;
Lang, executive vice president and chief financial officer;
Lisa Laube, executive vice president and chief sales officer, is also in the room and she will attend our Q & A meeting.
Before we begin, I would like to remind you that the comments made in this conference call and webcast contain the forwarding --
Forward-looking statements in the sense of the Private Securities Litigation Reform Act of 1995 are at risk and uncertainty.
Any statement referring to expectations, forecasts or features of future events, including financial forecasts or future market conditions, is forward-looking --
Statement.
The company\'s actual results in the future may differ significantly from the above-mentioned expected results --
Find reports for any reason, including those listed in the SEC file.
There is no obligation on the floor and decoration to update any such forwarding-
Look at the report.
Please note that past performance or market information does not guarantee future performance.
In this call, the company will discuss
GAAP financial measures defined by SEC Regulation GWe believe non-
GAAP disclosure enables investors to better understand our core operational performance on a comparable basis for different periods.
Check each non
GAAP measures the most directly comparable GAAP financial measures can be found in the earnings press release, which can be found on ir\'s investor networking site. flooranddecor. com.
Our investor relations website will provide a recorded replay of this call as well as related materials.
Now let me transfer the phone to Tom.
Tom Taylor thanks Wayne for attending our 2019 earnings call for the second quarter.
We are satisfied with the results of 2019 earnings in the second quarter, as the earnings per share we deliver exceeds the high end of our guidance on strong sales growth in new stores, 3% of the same store sales growth and good consumption time.
As we look ahead to the rest of the year, we believe we are in a strong competitive position in implementing our strategy and responding to unprecedented changes in difficult times
From the point of view of tariffs and potential anti-dumping and countervailing duties, the surface flooring industry.
Total sales rose 19 in the second quarter.
8% to a record $520.
$3 million, $434.
3 million last year.
Comparable store sales increased by 3% to 14. 4% on a two-
Year stack basis.
Not including sales at the Houston market where we still ride our bikes
Our comparable store sales increased by 5 due to Hurricane Harvey. 5% and a 14. 1% on a two-
Year stack basis.
Continue to make profits.
We report a diluted earnings per share of $0 for the second quarter. 42, a 10.
Increased by 5% from $0. 38 last year.
Our adjusted diluted earnings per share for the second quarter were $0.
34 per share, up 25.
9% higher than last year\'s $0. 27 and $0.
Above 03 our guide high-end $0. 29 to $0. 31 per share.
Let me now discuss some of the drivers of our 2019 sales and revenue growth in the second quarter and how we look at this year\'s balance.
We focus on the core pillars of achieving our long-term goals
We expect 8% of the market share to be: 1. Opening new warehouse format stores in new and existing markets at an annual growth rate of 20%;
Second, increase our comparable store sales in the middle of the yearto high single-
By providing in-, digital range
Store good, better and best products at low prices every day;
Third, expand and enhance the experience of connected customers;
The fourth is to enhance the customer experience.
I will now talk about some of them and how they contribute to our growth.
First, the new large warehouse stores.
Compared to four stores last year, we successfully opened three new warehouse stores in 2019, which made this yearto-
The total number of warehouse stores we operate reached 106, an increase of 20.
At the end of the second quarter of last year, 5% from 88 warehouse stores.
In June, we opened second-quarter markets in Fort Worth, Texas, Florida, Tampa, and Saugus, Massachusetts, all of which were successful for us.
While we are still in the early stages of the new store lifecycle, we are very pleased with the sales contribution of the new store.
The new store has contributed to our development. than-
Total sales are expected to increase year-on-year in the second quarterover-
The production efficiency of our new store has improved for one year.
The performance of our new store gives us more confidence, and as more new stores enter the base of comparable store sales, our comparable store sales will continue to accelerate in the second half of 2019.
When we enter the third quarter, we expect to open 7 stores, 3 of which have opened in July.
Louis, Missouri, Northern Colorado, and El Paso, Texas.
Most of the remaining vacancies in the third quarter are expected to be in September.
We are still planning to open 20 new stores in 2019, which will represent an average growth of 20% for our seventh consecutive year.
We continue to anticipate that 60% of our 2019 new stores will open in the existing market, compared to 35% in 2018.
Over 2019, we are still excited about the powerful channels of potential stores and strive to achieve a more balanced pace of store opening in 2020 and beyond.
As a reminder, the 109 stores we currently operate are only a fraction of our potential US market. S. store base.
For example, our successful opening at Massimo usetts Saugus represents only our second store in the Boston area, and we believe we have an important growth track there.
Continue our second pillar of growth for comparable store sales.
Our comparable store sales grew 3% in the second quarter, reaching our high-end expectations of 1% to 3% growth.
Our monthly comparable store sales momentum has improved throughout the quarter, which makes us optimistic about the further acceleration of comparable store sales in the second half of 2019.
We are also encouraged that our strongest growth continues to come from what we call the best products, which are often more unique to flooring and decor.
Our big shop and deep down
Inventory inventory gives us a unique abilityof-
Sort our competitors.
Stop shopping for our customers.
One of the indicators to measure market share growth, comparable store transactions increased by 1 in the second quarter.
1%, but increased by 3. 2% and 12. 7% on a two-
Annual stack base excluding Houston.
Our average ticket for comparable stores increased by 1.
In the second quarter, the average fare in most of our categories increased by 9%.
Turn to our sales performance in the commodity category.
Our strongest sales growth continues to come from our category of laminated and rigid core luxury vinyl plates with a total sales growth of 39.
Growth of 8% over last year, accounting for 20.
Sales in the second quarter were 8%, up about 300 basis points from last year.
We continue to be very satisfied with the sales growth and attachment rate we experienced at a higher level
Security installation accessories category.
In the second quarter, total sales in the department increased by 30%, accounting for 17% of our sales, an increase of 130 basis points over last year.
We expect this momentum to be established in 2019 and beyond as we have increased the department leadership incentives, metrics, and changes to our website to accelerate growth and improve customer experience
When we consider the rest of 2019 and beyond, we still believe that we will try to expand our market share.
Get surface flooring through our ongoing innovation initiatives and by providing consumers with simple, cost-effective and updated fashion flooring solutions.
Among the many products we were excited about in 2019, there is one that is simple-to-install, thin-
Floor decoration company exclusive tile brand under the brand of Maximo tiles.
This tile selection has been successful in our Florida market and will be promoted to all of our stores in 2019.
This type of tile is thinner than traditional tiles and has multiple colors and finishes that can be installed on existing tiles.
We also continue to build on our success strategy to drive incremental growth by adding additional adhesive commodity categories to our existing KKR countertop and shower door projects.
In the second quarter, we have started testing vanity and vanity sets as well as bath fittings.
We will continue to add these programs to more stores as we succeed.
Expanding the connected customer experience is the third pillar of our growth.
Our connected customer strategy continues to drive
From the growth of traffic and conversion rate, sales achieved a digit growth.
Our second quarter.
Business sales increased by 60% over last year, accounting for 10% of our bid sales, compared with 8% at the end of 2018.
As a reminder, we estimate that 70% of customers who end up buying from us will visit our website during the purchase process.
What excites us is that around 85% of online sales are growing in our stores, which gives us another unique opportunity to engage with our customers, to ensure that they have all the materials they need to complete the project
Sales opportunities.
This also further demonstrates the importance of synergy between our physical stores and our e-commerce
The e-commerce platform is decided in the purchase journey.
We keep seeing the electronics of our customers.
Commercial engagement with tools like my order, which allows us to work with customers to build their orders on the aisles on mobile devices so they can buy on the same day, and road to the ground faster or faster
Mail the details to them so they can consider or change the product and eventually lean towards them when ready.
In the third quarter, we plan to add an improved room visualization tool to provide more customization.
Our fourth pillar of growth comes from a comprehensive investment in professional customers.
Investing in our professional customers is to increase loyalty is our strategic priority as we want to increase our share of wallet with existing professionals and reach out to us with professionals who are not currently buying.
One of the key tools we launched in 2018 is our professional loyalty program for excellence, as well as a range of business services needed.
We are very pleased with our reward program, and the number of registrations has increased by 49% since the end of 2018.
It is important that we see more and more people now.
The average redemption rate, which is the measure of our project strength, shows our engagement.
In other words, our PRO Premier Rewards program is valuable and attractive, which in turn encourages our professionals to come back to shop more frequently.
In the stores with the highest Pro Premier engagement and redemption rates, we see higher comparable sales growth in stores compared to those that are not far away in their project development process.
We are proud that our project ranked second in the Loyalty360 Awards, beating many well-known brands.
We also added two professional partners in the second quarter, Sunbelt bharals and [indiscernible].
Our professional partners are third parties that offer unique discounts or benefits to our professional members.
We currently have 17 partners that provide us with a sufficient number to enable us to shift our attention to this important pillar of our loyalty enhancement program.
In the second quarter, we saw Pro partners activities grow by 28% over 2019, validating the demand for these services.
We are also pleased with the growth in the number of professionals using the PRO app we launched last year.
Professionals can use the app for receiving tracking, order details, SKU search, inventory lookup, quotations, order features, UPC scans, and bidding purchases.
Over the last 90 days we have seen a significant increase in last year as we further enhance our awareness, functionality and functionality including timeline and Pro check-in.
All in all, these are examples of how we continue to increase our capabilities, enabling us to drive engagement, customer satisfaction, and wallet market share.
We continue to make progress in developing small but important business operations.
We have developed and piloted an external regional customer sales strategy that makes the most of our stores and links us to the customer management business of independent floor retailers and supply companies, these companies have always supported this segment.
We believe that these are mainly new incremental sales from commercial customers who may never have purchased them from retail, thus opening up a large part of the commercial floor for us.
We are in the early stages of solving this business area, but we see a huge opportunity to disrupt the business of commercial flooring, as we have done in the residential flooring business.
These sales provide a high return on capital as they take advantage of our existing supply chain and the store infrastructure without working capital or capital expenditure.
We also continue to be excited about our designer plans and how they impact our sales and customer experience.
As we strengthen our design center and provide our designers with new tools such as tablets to help their customers, we continue to see the results of improvements.
In the second quarter alone, we saw that the appointment of designers doubled last year, and the conversion rate of our design consultation increased significantly compared with last year.
Most importantly, we know that we have the highest customer satisfaction when designers help our customers. Word-of-
Mouth is still one of the biggest ways we can satisfy our customers and get new ones.
Our free design service is an integral part of free advertising.
Now, let me talk about how we think about the macroeconomic and geopolitical factors that affect our industry and our companies.
Let me start by talking about how we plan to continue to mitigate the cost impact of tariffs on the goods we import from China, which has historically been the source of about 50% of the goods we sell.
I will then discuss the potential impact of the proposed anti-dumping duties or the addition of countervailing duties or CVD on tiles from China, after review by the International Trade Commission, or ITC, Commerce Department, or DOC, this was initiated by a petition submitted by the North American ceramic tile Commission.
First, the issue of tariffs.
We have a flexible global supply chain and experienced commodity organizations, which allows us to accelerate our plans to start in 2018 and diversify our origin to reduce procurement risks.
Therefore, there will be meaningful changes in our countries of origin in 2019 and beyond.
Specifically, by the end of 2019, we expect the proportion of goods purchased from China to fall to the medium term.
30% range from 50% in 2018.
We are confident that this number will continue to decline in 2020 and beyond.
Next, discuss the potential impact of adding and CVD on tiles from China.
We see and plan to significantly reduce the number of tiles purchased from China by the end of 2019, as we accelerate our actions to diversify the country of origin.
Tiles, wall tiles and decorative tiles will all be subject to new tariffs, accounting for about 34% of our sales this year, of which about 39% are from China.
We believe we can lower our China.
SOURCE tile exposed to low single
Due to our early actions in moving procurement to other countries, by the end of 2019, the digital range as a percentage of total sales.
We believe that growth from more than 20 countries, the breadth of product lines and the flexible direct procurement model provide us with a clear competitive advantage.
We operate under an extended preliminary established schedule and, if correct, we will find out at the beginning of September what is the proposed CVD rate and the industry believes we will find growth rates in early November.
The Ministry of Commerce finally determined that the right to increase and countervailing duties may not appear until 2020, followed by the international trade center in 2020.
We have identified our inventory receiving process around these timelines and are confident that our strategy will help mitigate these potential cost increases.
In the macroeconomic indicators that affect our industry and our companies, that is, existing home sales and rising house prices, we are like many others, cautious optimism that the recent fall in interest rates will serve as a catalyst for easing for a yearover-
Existing home sales, which began in early 2018, continued to decline in 2019.
Recent housing data suggest that this trend is likely to improve, especially in the second half of 2019 when existing housing sales are easier.
As many of you know, this yearover-
The decline in sales of old houses slowed down. On April, we can be encouraged from the evening of 2019, the first quarter, 2018, and the second half of 2019.
That is, we have a company.
We believe that in the second half of 2019, specific drivers will accelerate the growth of our comparable store sales in turn.
Specifically, more new stores will enter our comparable store sales base, and as we move forward in 2019, the Houston market sales difficulties caused by Hurricane Harvey will be further alleviated.
In addition, we plan to continue to drive sales growth by leveraging our merchandise sales, internal sales
Advantages of stores and websites.
As many of you know, one of our core strengths is our sales organization that has been working on the next generation of products for innovation and trends
The floors and decorations are unique in many cases.
As we move forward in the rest of 2019, you will see more.
Before I transfer the call to Trevor, I would like to thank our colleagues for their hard work, service and execution for our clients.
I am now transferring the call to Trevor to discuss more details about our second quarter results and the 2019 outlook.
Thank you, Tom.
I will focus on some changes to the main items in our 2019 income statement, balance sheet and cash flow statement, and then discuss our outlook for the rest of 2019 and this year.
Tom has discussed our sales of 2019 in the second quarter, so I will start with the gross profit margin in the second quarter and the gross profit margin has risen by 100 basis points to 41 basis points.
9% more than last year\'s 40.
9%, slightly higher than the 70 basis points we planned to increase to 80 basis points.
Compared with last year, the increase in gross margin is mainly due to the increase in gross margin of products.
The increase in product profit is due to favorable negotiations with our suppliers, improved sales strategy, including higher sales by our superiors --
Some strategic retail prices have risen.
Let me now discuss some of the various expenses and differences of last year.
Our sales and store operating expenses increased by 24% in the second quarter to $134.
$6 million, $108.
6 million last year and last year
90 basis points were utilized, mainly due to the higher cost of checking in at the store, which was partially offset by the use of our advertising fees.
90 basis points for the fee
The leverage is entirely from our new store.
Sales and operating expenses of our new store as a percentage of sales are about 50% higher than stores that have opened more than a year, which leads to close
Regular operating expensesleverage.
Taking into account the disadvantages we face in the Houston market, we continue to take advantage of the cost of our existing stores and are pleased with this achievement in 2019, due to the impact of Hurricane Harvey, we got into a lot of sales growth in 2018.
Our pre-opening spending for the second quarter was reduced by 3. 3% to $6.
4 million from $6.
Last year, 6 million, leverage 30 basis. .
The main reason for the decline was opening in a lower-priced market and strengthening our opening process, which led us to shorten the time to open a new store, thus reducing the cost of check-in before opening.
We opened three new stores this year, relocated one, and opened four new stores last year.
Our general and administrative expenses increased by 22 in the second quarter. 8% to $30.
9 million from $25.
2 million, unique items including reconciliation in our earnings release.
This is better than expected, mainly because of the time we are now planning to spend in the second half of 2019.
Our interest expenditure increased in the second quarter. 6% to $2.
2 million, in line with our expectations.
Our adjusted net income for the second quarter increased by 24. 5% to $35.
3 million of $28.
4 million last year.
Adjusted earnings per share increased by 25. 9% to $0. 34 and was $0.
Above 03 high-end our guidance.
About $0.
This is better 02-than-
The expected result was due to the transfer of certain costs to the second half of 2019.
$0 left
01 is because of betterthan-
Expected sales and gross profit margin.
We ended the second quarter at 104.
Compared with 8 million, the diluted weighted average tradable shares of 104.
9 million last year.
Turn to Adjusted EBITDA for second quarter growth. Stronger-than-
The expected sales growth, coupled with good Gross profit margin and good expense management, resulted in 31.
The second quarter grew by 4%, with the adjusted EBITDA at $66.
From $50 to $6 million.
It was $7 million last year, exceeding our $60 guidance.
Between $8 million and $63 million.
Our Adjusted EBITDA margin expanded by 110 basis points to 12 basis points. 8% from 11.
Although we have invested heavily in supporting our long-term development, there are still 7% last year. term growth.
Continue our balance sheet for the second quarter.
We continued to maintain a strong financial position and ended the second quarter at $325.
The total amount of available working capital, including $51, was $7 million.
Cash and cash equivalents were $5 million and $274.
2 million of the credit line that has never been withdrawn to support our growth plan.
Inventory management was good in the second quarter, with only 3 additions.
Although the 2% tariff has had an impact on Chinese imports, it is still 10% compared with the same period last year.
Nevertheless, we expect our inventory to increase year by yearover-
The year before the end of 2019.
This will reflect support for the inventory construction of 20 new stores, the opening of more new stores in early 2020, and we plan to open the new Baltimore DC in the fourth quarter with a 25% tariff on Chinese imports, further improve our goodsStock position.
Our improvements in managing inventory, accounts receivable and trade payables contributed to a 45-year increase. 6% year-over-
Our annual growth-to-
Operating cash flow reached $122. 2 million.
This in turn results in free cash flow exceeding the $78 capital expenditure we need.
2 million and increase the cash and cash equivalents on hand to $51. 5 million.
Let\'s talk about our earnings guidance now.
As you can see in our press release, we are updating our 2019 sales and revenue outlook to reflect the results of the second quarter and the changes in our outlook for imposing import tariffs on products from China
25% the implementation of the tariff was late and was initially considered earlier this year. We saw that the supplier negotiations were successful and managed through relevant higher costs, our inventory status and our assumptions about possible anti-dumping and countervailing duties on Chinese tile imports are reflected in our outlook.
You will recall that the 2019 revenue guidance assumption we provided earlier in May 2 imposed a 25% tariff on our products will be postponed to further notice.
However, in the medium term
Shortly after our earnings were released, the United StatesS.
Trade Representative office takes action to set a 25% tax rate in the United StatesS.
Hard port of China-
Imported surface flooring.
So we revised our outlook to reflect the impact of the 25% tax rate.
As we have discussed in the past, we expect that the overall impact of a 25% tariff on Chinese flooring will change the state of our income statement-but overall net income is neutral.
I think it is important to point out that our pricing philosophy and strategy have been maintained-in order to keep our industry --leading-everyday low-
The price strategy has not changed.
I will now discuss some of the more important components.
The revenue outlook is forecast at 2019.
As we discussed in the last two earnings calls, we expect our comparable store sales to continue to accelerate for the rest of 2019, as with Hurricane Harvey\'s second anniversary, comparable store sales in Houston will decline, and will be higher than the new store concentration that entered the comp base in the second half of 2019.
In the second quarter, we saw continuous acceleration in comparable store sales.
In addition, now that the 25% tariff has come into effect, we plan to strategically increase the retail sales of the remaining Chinese imports.
Obviously, we are now more aware of how much resources we will get from China than we did earlier this year.
As Tom has already discussed, our sales and supply chain team has done a lot of work on cost and we believe that if we don\'t get lower costs or sources from different countries, we only need to increase the retail price of the goods moderately.
These modest changes in retail are reflected in comparable store sales growth expectations, with sales rising slightly in the second half of 2019.
As discussed in the last two calls, the implementation of the increase in tariffs will moderately reduce our gross margin expectations as we intend to pass on only the incremental costs that we bear, without passing profits from new tariffs.
With regard to our outlook for the third quarter, we expect our 2019 sales in the third quarter to be in the range of $0. 52 billion to $0. 527 billion, up 19% to 21% from 2018.
This growth outlook is based on a 4% to 5 increase in comparable store sales. 5%.
Excluding the Houston market, we expect our comparable store sales to be within 5. 5% to 7%.
Excluding the estimated cost of our relocation to the new store support center, we expect our operating profit margin to be around 7%.
Diluted earnings per share for the third quarter are expected to be $0. 22 to $0.
24. Adjusted diluted earnings per share are expected to be $0. 25 to $0. 26.
We assume 104.
The weighted average of 9 million shares issued in the third quarter of 2019 was diluted.
We expect the adjusted EBITDA in 2019 to be $57 million to $58.
5 million, an increase of about 16% to 20% from the third quarter of fiscal 2018.
Turn to our outlook for the year.
We expect net sales for fiscal 2019 to be within $2.
Between $60 billion and $2.
75 billion, an increase of 20% to 21% from fiscal 2018.
This net sales growth outlook is based on the opening of 20 new warehouse stores and a 4 increase in comparable store sales. 5% to 5. 5%.
Excluding the impact of Houston, we plan to increase comparable store sales by 2019 to 7% in fiscal 8%.
Assuming we have achieved comparable store sales growth expectations throughout the year, we are proud to be able to achieve the above targets
In the most challenging housing environment in a decade, industry growth rates have reappeared.
In the first half of 2019, we achieved great success in raising gross profit margin and imposed a 10% tariff on Chinese imports.
Even if these tariffs have now increased from 10% of China\'s flooring imports to 25% and incurred an additional $5 million when opening our new Baltimore DC in 2019, we plan to increase the gross profit margin by about 10 basis points to 20 basis points moderately throughout the year.
This illustrates our model and the strength of our talented sales and supply chain team.
Our SG & A fee for the whole year.
We continue to expect A slight decline in SG & A Total
Percentage of new store sales.
Diluted earnings per share for fiscal 2019 are expected to be $1. 14 to $1.
Adjusted diluted earnings per share are expected to be $1. 09 to $1. 12.
The diluted weighted average stock issued is expected to be 104 shares.
7 million, and our tax rate for fiscal 2019 is estimated to be 23.
The rest of the year is 3%.
As a reminder, this guide does not consider the tax benefits arising from the impact of possible stock option trading in fiscal 2019.
We expect the Adjusted EBITDA for fiscal 2019 to be in the range of $0. 238 billion to $0. 243 billion, an increase of approximately 24% to 27% over fiscal 2018.
With regard to capital expenditure for fiscal 2019, we have slightly reduced the range of $0. 22 billion to $0. 23 billion to $0. 205 billion to $0. 215 billion.
Capital expenditure is expected to decline, mainly because the time and cost of the 2020-class store planned to open in early 2020 are clearer.
Also, as it relates to 2020, please keep in mind that there will be a fiscal 53 week for 2020.
With this, I think I will transfer the phone to Tom and ask him to make a few concluding remarks.
Tom Taylor is proud of our performance in early 2019 and we are planning another successful year.
We firmly believe that we will have the best days and look forward to providing you with the latest information after the third quarter results.
We will answer your question now. Question-and-
Thank you. [
Operation instructions]
Our first question came from Simon Gutman at Morgan Stanley.
Please continue.
West Mai GutmanThanks.
Sorry for the noise.
The first problem is that at the midpoint of Q1 you have reduced the comp by about 300 basis points and now you have increased it by about 100.
Just to confirm the adjustment based entirely on the price.
Maybe you can talk about the basic speed of the business.
Tom Taylor started.
I\'m Tom, and Trevor can plug in.
So yes, I mean, we do.
We are lucky that the time of the tariff has changed from 3 to 4. June.
It gives us the ability to clean up more inventory before it is in stock
Our suppliers are doing better than we expected in terms of negotiation.
In conclusion, therefore, we have done better in implementing and diversifying our country of origin.
So equal until-or do not have to raise the price as we imagined, we do not have to raise the price in advance as we imagined. Trevor LangYes.
This is Trevor.
Next, when you look at the whole year, we think that the comps we do in the fiscal year may add 80 basis points to 90 basis points, and when we reach the fourth quarter, due to the tariff, this raises comps to nearly 200 basis points to 250 basis points.
Tom outlined some reasons why it won\'t be so much.
Another thing I would like to point out is that when you look at our sales guidance for this year, due to the performance of our new store, we have received more general sales guidance than its comp section.
If the store opens earlier and the new store performs better, our new store will book the time.
So, exceeding the offset is probably some of the higher comp you might see.
West Mai GutmanOkay.
Tom, how did you ship from China so quickly without affecting the quality of execution?
Many of your suppliers have spare capacity overseas?
I think there are two questions you can answer, Lisa.
Why are we transferring supplies so quickly?
I think he\'s a little . . . . . . Trevor Lange, do they have excess capacity elsewhere in Europe? Lisa laubersoli.
Yes, this is Lisa.
So, since we have the border tax day, we know that.
It has been more than two years since the discussion.
So we started this effort and really considered diversifying outside of China.
With these different actions, we have been able to accelerate this.
Thankfully, we have a very experienced sales team.
We have partnerships with suppliers in 23 countries.
So it\'s not difficult for us to move some categories.
In fact, we decided to continue to take some quick steps when we found that tariffs would happen.
So we have started getting products from other countries in some of our categories.
As we said earlier this year, about 50% of our business will come from China and by the end of this year we think we will enter the medium term30s.
So we have been doing it for a long time.
Thank you.
The next question comes from John Bowler at stifield.
Please continue.
Thank you, John. Good afternoon.
Congrats you for a good quarter.
I was wondering if you could discuss for you the time to increase the floor of China imports.
Do you have to raise the price?
When is your inventory cost?
When can we see retail adjustments? Thank you.
This is John Trevor Lang.
Therefore, the tariff of 25% has increased from 10% in the medium termJune.
So, this starts to get into our cost calculation at this point.
We, like everyone, pre-clean as much inventory as possible.
So in the middle
It was not until the end of June that these costs began to be invested.
We doubled our inventory six times.
In one month, we use the weighted average cost calculation method.
So you\'ll start to see slowly, from now until the end of the third quarter, the cost will follow as our inventory becomes more and more important in the fourth quarter.
That\'s why I mentioned the growth in retail and the growth in the third quarter was small, but, as we move into the fourth quarter, comps could reach 200 basis points to 250 basis points.
We made another point earlier this year, just to make it again.
During that time, the reason for our profit margin decline is that we will not increase prices on these tariffs or any resources that we cannot get, anything that we cannot get a better cost, we will all pass on this growth to consumers.
Next is John Bowen. up to that.
I think the growth of what you call LVPs and laminate is impressive, almost 40%.
With this pricing you expect to experience in the fourth quarter, I wonder if you expect growth rates to change or slow down in these categories to see how the other categories are performing, like it\'s not too bad?
Or is the price change not enough to affect it? Thank you.
Tom Taylor thinks the price change is not enough to affect it.
I think as we continue to develop our luxury vinyl plate variety and continue to bring better features and benefits, better durability, I think consumers will still buy it.
I think it\'s still a great category for us and I think it\'s still a great category for us.
Thank you, John.
The next question comes from Michael Lasser of UBS.
Please continue.
Michael LasserGreetings.
Thank you very much for answering my question.
Starting this year, you may have to make assumptions about the overall market for the floor and your share in it.
As you have reflected in the middle of the year, is the market better or worse than you think?
Is your share better or worse than you think?
Tom Taylor will give it a try.
I think the market may be a little worse than we thought.
I think our share is probably better than we thought.
Michael LasserAnd looking forward to the future now, do you think the market will improve from here?
Tom, I know this is the beginning of the year and it\'s not fair. But how do you consider the possibility that prices of many consumer goods may rise in the second half of this year?
What do you think about the effect that the interior of the floor is calculated?
Tom Taylor Zinc Citrate Tablets, as I said in my comments at the end of my prepared speech, we are cautiously optimistic that the rate cut will help with existing home sales and at best ease those sales.
So we feel good about it-we feel good about it and don\'t think we feel good about it.
We don\'t know much about the tweet previously posted on White about the tariffs on the next batch of products.
It has no different impact on us, but it will have a different impact on consumers.
But we are satisfied with our performance in the market. Trevor LangYes.
The only thing I want to add is.
If-we \'ve finally seen a glimmer of hope that the upcoming home sales have actually increased, which has a high correlation with the actual increase in home sales, it all feels better.
Our interest rate is more than 100 basis points lower than last year.
So if we do see a pick-up in the sales turnover of existing homes, we think this will lead to an improvement in what we have seen over the last 18 months, and the sales of existing homes have been declining. Tom TaylorYes.
I mean, it\'s a-it\'s not a simple environment, if you look at it.
If you look at the second quarter, we achieve the high end of everything we think we will achieve.
So it feels good.
Michael LasserAnd said this, what does this mean for the fourth quarter, is this a pretty significant ramp?
The sales in the store are about 9%.
Will these large stores enter the comp base in the larger market?
Or is there anything else there?
Trever, you can also think about it.
But, if you look at the last two years, 70% of our vacancies have occurred in the second half of the year.
Therefore, our first year comp Store and second year comp Store are usually very good, and comp is very good in history.
Those who enter the comp base should give us a good downwind. Trevor LangYes.
As we mentioned, if you look at its components, 200 basis points to 250 basis points are due to tariffs.
We expect new stores to continue to operate at a higher rate.
You may remember that, as we have revealed and made public, we have seen-Historically, our new store has contributed 400 basis points to our total comps, because as Tom later this year, we have a higher percentage of people entering the comp base.
This will push it.
Finally, for noncomp stores-sorry, for those older stores, we hope they will get better as we are in a very difficult housing market.
As Tom has just mentioned, once we reach the beginning of September, not far from now, we will be on the second anniversary of Hurricane Harvey.
Therefore, Hurricane Harvey will not bring us too much headwinds.
In the fourth quarter, these were the main factors that led to a much higher salary.
Thank you so much, Michael LasserThank. Good luck.
The next question comes from Chuck Grom and Gordon Haskett.
Please continue.
Chuck grombank you.
Right here, again on comp.
If we look at the comp trend in Houston and superimpose it to 2Q to 3Q, this is about an improvement of 250 basis points.
I just want to know if you can open the package, how much is the company
Specifically, what is the price of the new store?
I know you have talked about the price impact for the fourth quarter.
I was just wondering if you could hold our hand in the third quarter. Tom TaylorYes.
I don\'t-are you talking from Q1 to Q2?
Trevor Ronno, second to third
Chuck, GromQ2 to q3Tom TaylorYes.
Two years ago, comp had some noise due to Hurricane Irma in Florida.
We had two hurricanes that year.
Hurricane Irma had a negative impact on our flooring business in the third quarter, so there was not much growth.
So I think it has a lot to do with the fact that we were a little uptick last year, and that\'s the other side because we haven\'t had a negative headwind in 18 years, and that\'s probably more important than anything. Chuck GromOkay.
I\'m just with independents and just wondering if you can talk to them about what you see, given the price increase, do you think you have been able to gain some market share in the last few months?
Tom rodlori thinks we have gained market share in the past few months, a little longer than that.
The non-partisan is-we see that the price of non-partisan people is earlier than what we have to do.
So yes, I think that gives us the ability to share. So yes. Chuck GromGreat. Thank you.
The next question comes from Wells Fadem and Wells Fargo.
Please continue.
Good morning, Zach FademHey, everybody-afternoon.
In terms of gross margin, there are two very strong quarterly expansions here, and it looks like you expect a drop in the second half of the year.
Can you take us through the moving part? Inventory pull-
Forward sales with tariffs-
By now at a higher price.
When we get into the fourth quarter, can you talk about this? With the increase in DC costs, how should we expect the rhythm to play?
Zach, Trevor longyes. This is Trevor. You’re right.
As we said just now, we rose 120 basis points and 100 basis points in the first quarter.
This is a combination of things.
Lisa and her team did more in terms of sourcing and cost spending than we expected.
Earlier this year, we had some mixed advantages in both decoration and installation accessories.
Our high-
Margin category, recently with our installation attachment category.
And then in some cases we took some retail.
This is what is driven.
If you look at the third and fourth quarters, especially our current expectations for gross margin for the third quarter will be a little flat.
There are two things that push this forward.
One is that last year, as soon as the tariffs were in place, Lisa\'s team rushed up again and got some vendor accommodation that would benefit us.
She may remember we talked about this on the last phone call.
We will not do this again this year.
It\'s kind of like a-
We got a time benefit from some suppliers who helped us pay 10% tariffs.
In addition, due to the tariff, we will have a moderate headwind in the third quarter.
We now charge only a fraction of the 25% tariff.
That\'s why you don\'t see the same 100 basis point increase when you look at Q3 relative to q2.
Then in the fourth quarter, we expect the gross profit margin to drop from 120.
The Baltimore special zone is $5 million, about 90 basis points.
At that time, the tariffs were almost completely digested.
Therefore, this is about 100 basis points, which is offset by the profit margin of the product.
So you can get back to 120 basis points.
So a lot of moving parts with DCs and tariffs and something like that went into the market, but I think that\'s coordinated for every quarter of the remaining two quarters.
Zach fardengott
Then it could be Tom and Lisa.
Can you please talk about the impact of some new initiatives, such as design services for neighboring categories, from a larger perspective?
What are the expectations for comp in the second half?
So far, how do you think this will trend?
Also, in your announced business sales team, wonder if you can talk more about it. Thanks.
Tom Taylor thought-so I\'ll try-you mentioned a lot in that regard, if I remember.
So the first question about the design service is that we are very happy with the progress of the design service.
I think so-it appears in our customer service.
One is that we made more design appointments.
We-what we do in so many stores is incredible.
When these colleagues make design appointments with clients, they do two things.
First, they are very satisfied with them.
Our customer service score is higher than ever before.
This is also a big part of it.
They sold the whole project.
We have seen great results in the installation of accessories, and their designers are very good at installation.
They will let customers know how important work is to tile work.
So they did a great job selling the whole project.
Third, they sell things better, the best.
Let\'s see-when you separate our average unit retail, our best thing is gone --
Good things for us.
So what designers sell is better.
So I can\'t be happy anymore.
I do think we are in the early stages.
So we will continue to work there.
Adjacent categories, we have been talking about, we will go into some adjacent categories.
The impact on comp is negligible.
As we mentioned in the script, we are just driving, we are driving the dresser, we are driving the dresser, we are driving the bath hardware.
We like the result so far.
We are very happy about this.
This character over time.
We will continue to do these things.
We have a large store and we have the ability to adjust our space when we think it is appropriate.
So it\'s still hard for us.
Surface flooring retailer, but we will-the customer asks for something about this project and we think we can do it well and we will.
But so far we are happy with the results.
Then commercial advertising.
We did a great job in the business space of the store.
We have started our sales position outside of the region and have really solved a lot of larger customers.
We are in the early stages.
We have a few of these guys.
So far, we like what we see.
Because of the results we see, we will add more in the future.
This makes it possible for us to get some customers who have not been shopping in retail stores in history, or larger customers than our existing customers, so that we can visit them, go there, work-
We think this may be a useful project.
Zach fardengott
I appreciate the color very much.
Thank you, Tom Taylor.
The next one is Peter Keith from Piper Jaffray.
Please continue.
Hey guys. Thanks.
Guys, it\'s a good quarter in a seemingly tough environment.
I was wondering if you could talk about potential price increases.
Whether or not these items are accepted by consumers seems to have a place to consume-price increases, especially for big ticket consumers who may consider buying prices for a few weeks.
Do you have any tests on prices at this point to see if there is any flexibility, or maybe there is a pause dynamic where consumers hesitate once they see the price of the goods they are concerned about rising? Tom TaylorYes.
Peter, I\'ll start first, and then Lisa can upload a little bit at this point.
We have discussed in a few phone calls that when you look at the floor purchased in total, the SKU you have to raise the price is only part of the total cost of the project.
So you see, the installation accessories are not affected by the tariffs.
These prices have not changed.
The labor force portion is then not affected by the tariff, which is usually 50% of the total purchase volume.
So when you have to raise the price, it\'s just a small part of the whole floor work.
We raise prices like every retailer we observe, and when we have a chance, we can maintain our price advantage, and we have adjusted the prices of consumers.
Unit volume is not affected.
So we now-as this year goes on, it depends on the sentiment of the consumer and what they think about the overall economy.
But so far we have done it and we feel good about it. Peter keithook.
This is very helpful, Tom.
Maybe there\'s another issue you mentioned about anti-dumping in your prepared comments.
So it looks like the potential anti-dumping duty is a bigger deal and a preliminary decision could be reached in November.
I\'m sure you \'ve looked into every detail.
In some cases, there is sometimes a retroactive obligation between two months and three months.
I think I have heard you say that you will not expect any duties until the beginning of 2020.
Can you confirm it?
Can you confirm that we don\'t need to worry about looking back when we are considering the second half of 2019?
Trevor Lambert, this is Trevor.
I think your idea is right.
So just to clarify.
So we think we will find the answer in this regard.
This is the lower of both.
We think we will find this in early September.
This price has no effect on them.
And then they say, well, we will change that speed.
So let\'s -- I just choose a number.
For example, they put in 3% pounds.
They will finish the work early next year and then go back.
And anti-dumping, you\'re right.
That is usually a supplier. specific rate.
It is usually proposed much more than that.
We will find this in early November and then they will finish it early next year.
The last part of your question is that you are correct.
When they put the two rates, the rate at the beginning of September, the rate at the beginning of November, countervailing and anti-dumping, together, they may go back 90 days ago.
We don\'t know, but our experts tell us that this is generally unlikely to happen.
But you\'re right, we don\'t know until it happens.
It is for this reason that Lisa LaubeAnd we really accelerated our departure from China on these products.
Products that may be affected account for only 13% of our sales.
Thankfully, we have made progress on the vast majority due to tariffs.
So the change is a little faster.
Therefore, we are pleased that we will be able to ship these items out of China in a timely manner.
Peter keithook is amazing.
Maybe just to clarify, so if there is this ruling in early November, let\'s say you have considered some factors in your guidance.
If we do find it at that time, then there may be some traceability dynamics that may be new for the entire guidance outlook.
Right?
Yes, Trevor Lange.
If anything goes back to 90 days that no one knows, we can\'t predict. That’s right. Peter KeithYes. Fair enough. Okay.
Thank you very much and good luck in the second half.
The next question comes from Seth Sigman at Credit Suisse.
Please continue.
Seth SigmanHey.
Thank you for answering this question.
Tom, in the early days of the conference call, you mentioned that comps is constantly improving every month during the quarter.
Can you elaborate on that?
This seems to be some of your kickers in the second half of the year, like pricing and new store access to the comp base.
This will not really help in the second quarter.
So I\'m just curious, what do you think is driving the improvement of this trend?
Trevor Lange believes that in the first phase, Houston\'s comparison has become easier.
They are still hard to run, but they are gentle every month.
Therefore, this enables us to make sequential improvements in comps.
I think you know that we continue to focus on our work on installing accessories, and the work we do in the design center, and a lot of the things we do on the floor help to speed up sales. So.
Tom Taylor, the only thing I want to add is . . . . . . Trevor Lange\'s comparison is a little easier than the same period last year.
Tom Taylor is right.
SigmanGot, Seth. Okay.
Just the next few.
I may have missed the price increase.
But do you guys quantify if there is any impact on pricing this quarter?
Then what are your expectations for the third and fourth quarters?
It sounds like prices have risen more in the fourth quarter, but how do we see the impact of the third quarter?
Yes, Trevor langso.
I\'m Trevor again.
We don\'t have any substantial or significant price increases to say, which, of course, has much to do with tariffs, because these tariffs have been accompanied-tariffs of 10% to 25% did not occur until the medium termJune.
The third quarter is below 1% and then, as we said, the fourth quarter may reflect 200 basis points to 250 basis points.
SigmanGot, Seth. Okay.
Just a quick follow-up-
Stock and location there.
Your inventory has dropped.
Store base for the last few quarters.
Given all of the purchase changes, I\'m just curious, what do you think of your inventory status today?
I would like to support your ability in comp acceleration to grow your very active store in the second half of the year? Thanks. Trevor LangYes.
Thank you for asking.
You\'re right, we did a great job managing inventory.
That added a part of 3%, and in addition to that, our store increased by 20%.
But we feel good about our stock.
We always have a chance-
Inventory, we get better in this every year, but we are satisfied with our overall composition and the quantity of stock.
As I pointed out in the prepared comments, when we arrived at the end of the year, for all these reasons, we currently expect inventory to be as high as 30% to 35%.
We put more inventory in the new Baltimore special zone.
We will open more stores in early 2020.
We never did that.
So we are excited about having a better pace of opening a shop, but we have to receive stock in advance to get there.
We will still receive inventory from China and pay them an additional 15% tariff.
We always shoot for a better future.
So you don\'t see the level of inventory growth.
That would be-by the end of the year, it could be as high as 30%, or even slightly higher than 30%.
Tom Taylor will say-I have something to take stock.
I agree with Trevor. I think our in-
The stock position is very good.
When we have problems internallystock.
When you have so many kinds of in-
There are stock products in each category and usually you can give customers something before they leave the building.
So we really feel good.
But another thing Lisa and her team did better.
We have very small inventory of customs clearance, which is the best case.
We are at a very low level which helps our total inventory productivity.
Seth Sigman WeiThanks guys.
The next question comes from Steve Forbes of Guggenheim Securities.
Please continue.
Steve said hello to you.
I want to start with people.
You mentioned the strength of the new store this year.
But given the mix of rights between the new market and the existing market, how is the eating situation this year?
Then, can you talk about what is the typical cannibalism impact of new stores based on proximity?
I\'m Trevor Long Steve.
At present, the number of people we eat is slightly higher than last year in the first six months of the actual number.
It\'s actually just below the level two years ago.
We do plan to make it higher as we develop throughout the year.
As you may have heard Tom say, 70% of our stores opened in the second quarter of this year.
60% of our new stores are in the existing market.
So we do plan that by the time we get into the fourth quarter, our eaters are probably the highest.
This is known and well thought out in the guidance we give.
In most cases, you guys can follow this well when we eat up the store and after 13 months the store starts to compete again.
So we got the best of both worlds and we were sure it was much more expensive.
The store, which has been devouring for a year, has begun to respond positively to any reason, and we have seen this for 8 years here.
Therefore, we are very happy that these new stores opened in such a high number and gained more profits.
You hear us say that this really started with 2016 of the class, and our first year\'s profit has more than doubled.
A large part of this is due to higher overall sales and gross margin.
The last thing is the rate of cannibalism.
We\'re in pre-
The deeper you usually see and the closer the store is, you may think it will be very common.
But the closer the store is, we may eat for a while in a place 20% kilometers north.
It drops as soon as you leave the store for more than 30 minutes to 45 minutes, maybe 10%, maybe 15%, and then once you get over 45 minutes
The minutes drive is negligible.
I just followed Steve. up.
Yes, you have already talked about it-you have given us a lot of color on gross margin.
I think your thoughts are right, given the outlook for gross margin for the fourth quarter as a result of the two towers in Baltimore special zone.
I don\'t know if you can comment on how we should consider pricing strategies when we start working on models in the first half of 2020, or generally only 2020?
Shouldn\'t there be any reason to think that when we look out, this dynamic between gross margin calculation and gross margin calculation will become more correct? Tom TaylorYes.
Let me hear it from a very high level and then I will go into more granularity.
Suppose there is no substantial difference between the environment and today.
We think it will be better.
We are committed to our long term
Long-term growth targets, both from the top
Line perspective and middle line
The growth rate of our cadence business in our 20 s and revenue remained at a low level.
So we feel very good about it.
The three of us just finished.
The planning process year has a strong feeling of where we are going.
This is as good as we feel about the plan.
Specifically, if you are talking about the beginning of next year, your idea is correct.
In the first half of this year, we will face more gross margin challenges, because it is clear that Baltimore only exists in the fourth quarter of this year, and will stay here for four quarters next year.
To a lesser extent, this has nothing to do with gross margin, but through our store support center, we will choose a new store support center in the fourth quarter of this year, and we all have it in the fourth quarter of next year.
But, as I mentioned, we are not ready to give guidance when we think about the year.
But we are happy with our sales and revenue growth capabilities next year, even though we will take on additional costs for Baltimore DC.
The last thing I would like to mention about Baltimore special zone is that you will hear us again reiterate that there is incremental cost in Baltimore special zone because we have staff and rental fees etc.
But there will also be a fairly good reduction in domestic shipping costs as Baltimore DC will be very close to our store in the medium term
Atlantic Ocean, Northeast, Midwest.
Therefore, we will not completely offset the cost of DC.
However, by reducing the cost of domestic transportation, we will be able to offset a large part of the DC.
Thanks Steve.
The last question comes from Seth Basham of Wedbush Securities.
Please continue.
Thank you very much. Good afternoon.
My first question is to clarify.
Think about the monthly pay trends for the second quarter.
Maybe two days in Houston.
Annual inventory base.
Can you please clarify or confirm if you have seen an acceleration of the trend throughout the quarter?
Let\'s take a look at Trevor Lange. On a two-year, yes.
Look here. Two-
I don\'t know if we have this situation.
I think it may be closer to plain in both.
Year stack basis.
Seth BashamGot. Okay.
Second, consider the pricing environment.
I have a few questions about this.
But when you see your big box competitor.
How do you see them changing prices in the last two months?
Have you seen them increase their retail sales?
Did you see those sticks?
Do you have any corresponding actions?
Tom mccllorwe certainly focuses on big box retailers.
There is always a change in price, there is a rise and fall.
We see this and react where we need to respond.
In terms of pricing, the way we compete has not changed.
We want to be a valuable retailer.
Fortunately, we play more than just to do well at a good price. We play at a better and best price.
We have a lot of things that they don\'t have where we can continue to be aggressive.
So we saw them.
They are hard to deal with, but we have a unique value proposition that is completely different from what they compete.
Or they can compete with it.
Seth BashamUnderstood.
Thank you very much. Good luck.
This is the end of today\'s conference call.
I want to transfer the phone to Tom for his conclusion.
Thank you for all the questions today.
Thank you for your attention.
We are looking forward to the talks next quarter.
I just wanted to end up with some of the comments that we do have a lot of credit.
The floor environment is tough this year and if you want to find it in the second quarter we can achieve all the high
The purpose of our guidance, which we think we can achieve, is still able to grow at the top of 20% --
Production line growth is over
The deal in the quarter and the avenues store performed very well.
I know many of our colleagues are listening to the phone.
We are very proud of what we have achieved this quarter.
Looking forward to talking to you in the third quarter.
This concludes today\'s meeting.
Thank you for your participation.
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