Matt McConnell - Manager, IR Tom Taylor - CEO Trevor Lang - EVP & CFO Lisa Laube - EVP & Chief Merchandising Officer.

Matt McClintock - Barclay's Michael Lasser - UBS Denise Chai - Bank of America Katie Price - Goldman Sachs Seth Sigman - Credit Suisse Alan Ruskin - BTIG Daniel Binder - Jefferies Peter Keith - Piper Jaffray.

Good afternoon ladies and gentlemen to Floor & Décor's First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder this conference call is being recorded today Thursday May 25 2017. I will now turn the call over to Matt McConnell, Manager of Investor Relations at Floor & Décor. Go ahead sir..

Good afternoon, everyone. I am Matt McConnell, Manager of Investor Relations. Joining me on call today are Tom Taylor, Chief Executive Officer; and Trevor Lang, Executive Vice President and Chief Financial Officer. Also in the room is, Lisa Laube, Executive Vice President and Chief Merchandising Officer who will join us for the Q&A session.

Before we get started, I'd like to inform you of the company's safe harbor language. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties.

Any statement that refers to expectations, [indiscernible], or other characterizations at future events including financial projections or future market conditions is a forward-looking statement.

The company's actual future results could differ materially from those expressed in such forward-looking statement for any reason including those listed in the SEC filings. Floor & Décor assumes no obligation to update any such forward-looking statements.

Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss non-GAAP financial measures as defined by SEC Regulation D.

Reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release which is available on our investor relations website IR.flooranddecor.com and record a replay of this call together with related materials will be available on the investor relations website ir.flooranddecor.com.

Now, let me turn the call over to Tom..

Thank you, Matt. Good afternoon everyone and thanks for joining us on our first conference call as a public company. It's an exciting time to flow in the quarter. Our brand is resonating with customers and we're enjoying continued strong growth.

Florida & Decor is a highly differentiated multi-channel hard surface flooring and accessory business that we believe offers the industry's broadest in-stock assortment at everyday low prices with best in class customer service that meets the needs of our customers. We believe we are democratizing hard surface flooring.

It's not easy to fully understand what we are doing unless you have been in one of our stores. If you haven't we hope you can see one soon. I'll begin today's call by discussing highlights of our first quarter results and then outline our key growth initiatives for the future.

Net sales in the first quarter increased by 30.6% to $307.3 million from $235.3 million in the first quarter of fiscal 2016 a 12.8% first quarter comp comes on top of the 22.4% comp that we delivered in the first quarter of 2016.

Diluted earnings per share increased 63% from the first quarter of 2016 to $0.13 and adjusted diluted earnings per share grew 86% from the first quarter of 2016 to $0.13.

From fiscal 2012 to fiscal 2016, we have seen an average annual comp of 16.5% a 32.9% total sales compounded annual growth rate and the 35.1% adjusted EBITDA compounded annual growth rate. The strong top and bottom line growth continued in the first quarter of fiscal 2017.

Further illustrating the strength of our business model and the value we provide to our customers. Based on the strength of the first four months of fiscal 2017, we are anticipating strong sales and earnings for the second quarter and full fiscal year. And Trevor will walk you through those details in a minute.

Floor & Decor provides a one-stop shopping experience for everything needed for hard surface flooring. In-stock product quantities and best in class customer service to the needs of both Pro and Do It Yourself customers.

Our stores are big, approximately 72,000 square feet and are dedicated to hard surface flooring across tile, stone, word, laminate, decorative and installation accessories with an unparalleled assortment of good, better, and best merchandise offered at everyday low prices.

We provide inspirational stores and integrated website that helps customers imagine what is possible. Against the salable backdrop of growing hard surface retail sales and the still fragmented nature of the industry, we believe we are well positioned to deliver on our growth goals.

Today our store base consists of 72 warehouse format stores in 17 states. Our new store growth strategy is to grow units by approximately 20% per year over the next several years in new and existing markets with the potential for 400 stores across the US within the next 15 years.

In the first quarter, our three new store openings were in the existing markets of Texas, California, and Illinois. Our new store growth is planned to balanced across new and existing markets and we're very pleased with our strong new store performance.

In addition, we completed our first store relocation in the company's history in San Antonio, Texas. And while it is still early the increased sales results on this relocation are very encouraging. Our comparable store sales growth continues to be primarily driven by transactions.

Four of our six regions achieved double-digit comparable store sales growth and all regions were positive. Our e-commerce sales growth continues to exceed that of the total company further reinforcing our integrated connected customer strategies.

From a category perspective, laminate, decorative and installation accessories performed above the company average. Comp in tile, stone and wood performed below.

We offer a broad and diverse mix of hard surface flooring across product categories and are therefore well positioned to capitalize on any category shifts that might occur as innovation in trends in flooring ebb and flow. At Floor & Decor we strive to consistently improve our product offerings and customer service solutions.

We are the one-stop shop for hard surface flooring needs to both the consumers and the Pro's. I like to say we're democratizing the hard surface flooring category.

Our unique supply chain that we have built and improved over the last 17 years effectively removes layers of middlemen which increase our speed to market while driving down our product cost allowing us to provide trend right products at the best values for our customers.

We continually invest in a localized merchandising strategy with assortments planned and adjusted based on market and region preferences. We believe we identify and promote trends and innovation in our assortment so that our product categories are compelling and relevant to each individual store.

We have created staff design centers to inspire our customers. Additionally the Pro zones in each of our stores serve unique needs of Pro's.

We consistently invest in our team, system, infrastructures and capabilities to drive our competitive advantages and you should expect to see us maintain this philosophy of reinvestment as we grow and scale Floor & Decor to realize the substantial growth opportunities that exist.

This reinvestment helps drive constantly improving customer experience, which in turn drives continued market share gains. I am proud that our customer service scores are the highest they've been since we began measuring it 4 years ago. It's a testament to our team, leaders, culture and investments.

Looking ahead, we're focusing on leveraging our distinct competitive advantages and capitalizing on the significant growth potential that exists for Floor & Decor. Our key growth priorities are; first, new store growth.

As impressive as our historical comp performance has been we are a white space story with only 72 stores today, we have the opportunity to increase our store footprint by six times for a total potential of 400 stores in the US.

This provides us with long runway of store growth ahead and we plan to increase our store count by approximately 20% annually for the next several years. We have a disciplined site selection process and an experienced real estate team in place to execute on our strong growth goals.

We plan to continue to open a balanced portfolio of stores with about half in new markets and half in existing markets.

With only seven stores in the state of California and one in the northeast there's plenty of opportunity in these very attractive markets for us and there is still much growth potential in many of our existing markets like Texas and Florida for example, where we still have filling opportunities.

The stores we opened in 2016 are the best in our history and we're excited about the class of 2017. Second, increased comparable store sales.

With the maturation curve of our new stores combined with our comp driving initiatives including product innovation visual merchandise and improvements, Pro end designer strategy and in-store investments we expect to drive a continued healthy comp for the foreseeable future.

Also the awareness of Floor & Decor is still limited in new and even existing markets and will continue to increase brand awareness as we grow our store base which will help drive our comp growth as well. Third, expand connected customer experience.

We know that the hard surface flooring category is heavily researched and that our customers spend a lot of time on our website researching their purchase before coming into the store or buying directly through our website.

So our goal is to inspire, interact, and engage with our customer's online and inspirational then yes, videos, products, and education. In fact we know that 71% of our customers visit our website during the purchase process. So their experience is very important to us.

Our store associates also play a very important to our omnichannel strategy and we are focused a lot of time in training to our associates. Our stores have dedicated design centers that range from 1500 to 2000 square feet and we offer free design service to all customers who ask for it.

We are always striving to make that experience better for them and going forward, we will invest in a new CRM system, personalized content based on location, purchase and browsing history and tools to increase omnichannel customer engagement and assist store associates. E-commerce sales were approximately 5% of our sales in the first quarter of 2017.

Our stores remain critically important to this connected customer experience given that approximately 90% of our economic purchases are picked up in the store. We believe this is what is largely due to our high professional customer concentration, heavy and unbranded product, and lack of product familiarity by the DIY customer.

Fourth, continue to invest in the Pro customer. We've made a lot of progress and we're doing well with the Pro customer, but we are still in the early innings of what we believe we can do for them. We love the Pro customer, they do far more projects than the average Do It Yourself customer and they help raise the awareness of our brand.

Therefore it is important that we continue to invest in the Pro customer to drive this segment of our business.

These investments include growing our store and regional Pro customer sales force holding store lead in industry networking event showcasing and training our Pro customers on new product of technology, offering free design and storage solutions to our Pro customers and provide a dedicated in-store Pro team to service the needs.

Finally, we don't compete with our Pro customers by providing installation services. We are their partners. This is another way we differentiate ourselves from the competition. Our commitment to reinvest back in our business is key in executing the strategy that I just touched on.

Our focus is to further strengthen our competitive position and elevate an already good customer experience by continuing to invest in people, merchandising, marketing, supply chain, real estate, pinpoint solutions, infrastructure, e-commerce and Pro customer strategies.

Despite our philosophy of reinvestment with strong top line growth, we are planning, we expect to enhance our margins and generate some modest operating leverage this year. I want to take this opportunity to thank everyone who contributed to our very successful initial public offering in April.

And most importantly, I want to thank those serving our customers online and in our stores. With their help fiscal 2017 is off to a great start. It is the dedication of our talented team of people and their disciplined execution of our strategy that has resulted in our success to-date and will drive our success going forward.

We have a long and attractive runway of growth ahead of us and are focused on delivering against the many opportunities to grow our footprint and our brand while improving our culture and philosophy of continued reinvestment to further strengthen our customer value proposition and support strong and sustainable top and bottom line growth.

I'll now turn the call over to Trevor, our Chief Financial Officer and head of Pro services to go over the financial results and guidance..

Thanks, Tom and good afternoon everyone. I will begin my remarks with the review of the first quarter 2017 results and then discuss our outlook for the second quarter and the full fiscal year 2017. Due to our highly differentiated business model and great execution by our associates, we continued our streak of robust comparable store sales growth.

Our net sales in the first quarter of fiscal 2017 were $307.3 million up 30.6% from $235.3 million in the first quarter of fiscal 2016. We ended the quarter with 70 stores an increase of 12 new stores or 20% versus the 60 stores at the end of first quarter of fiscal 2016. In the first quarter, we opened three stores in Texas Illinois and California.

Our new non comparable stores which we define as stores that have been opened in the past year continued to deliver very strong performance across all markets. The 12 new stores opened in fiscal 2016 look to be the best class of stores, we have ever opened.

And looking at their first year sales, operating profit and EBITDA and the three stores opened this year are off to a great start. With 72 sources today and the potential for 400 stores within 15 years new store growth is our most attractive opportunity and we are keenly focused on investing and our new store openings.

Let me briefly review our general parameters and target new store model. For all new stores we target third year net sales of $14.5 million and for all EBITDA margins are roughly 17.5%. We define for our EBITDA for any period as adjusted EBITDA for the period before corporate and general administrative expenses and distribution center expenses.

This compares to net sales of $10 million to $13 million or about 11.5% overall EBITDA margins in year one.

We target a total initial cash investment per store approximately $4 million to $5 million, which includes initial inventory net of our payables, reopening expenses and CapEx net of tenant improvement allowances resulting in an expected payback of two to three years with over 50% cash on cash return by year three.

We plan to continue opening a balanced portfolio of new stores in both existing and new markets. First quarter comparable store sales increased 12.8% and that's on top of the 22.4% comparable store sales increase in the first quarter of fiscal 2016. Our comps were fairly consistent throughout the quarter when adjusting for the Easter shift.

As Tom mentioned, the strength of our comp was broad based and driven by transaction growth. Now on the profitability, gross profit increased 33.6% to a $125.5 in the first quarter from $93.9 million in the first quarter of fiscal 2016.

Gross margin increased about 90 basis points to 40.8% in the first quarter due to higher product margins worth about 150 basis points. Some were offset by higher distribution or DC cost worth approximately 70 basis points.

Breaking down the 160 basis points of higher product margin approximately 50 basis points was due to a timing benefit on our vendor rebate with an estimate offset coming in the fourth quarter of 2017. The remainder of the higher product margin was due to lower supply chain costs and the benefit of mix of selling better and best products.

As discussed in our S-1, we've successfully moved our Los Angeles distribution center from Long Beach to Marino Valley, California expanding our space from 220,000 square feet to approximate 750,000 square feet with the ability to get up to 1.1 million square feet overtime to support our continued West Coast expansion.

We incurred cost of approximately 1.5 million in duplicate rent and relocation costs worth about 50 basis points for the quarter. This was the majority of the de-leveraging of our distribution center cost.

We are on track to significantly expand and move our Savannah distribution center to a new 1.4 million square feet distribution center in the fourth quarter of this year. We anticipate we will incur cost of less than $1 million in the fourth quarter of 2017 to move our inventory from its current facility to the new facility.

Once the Savannah project is completed, we think we have enough DC capacity for approximately 110 stores. As a percentage of sales all of our operating expenses decreased about 50 basis or 33.5% from 34% in the first quarter of 2016. Despite incurring about $600,000 in costs associated with our IPO or about 20 basis points of deleveraging.

All of our operating expense leverage came from our stores open greater than one year and our store support centre leveraging cost on higher sales, some were offset by the 12 new stores we have opened since the end of the first quarter of 2016.

Our new store operating expenses generally were about 50% higher to percentage of sales in their first year of our operation than our older stores. And since we're adding about 20% new stores a year this mitigates large operating expense leverage we are getting from our stores older than 1 year.

Good to strong sales growth, gross margin expansion and managing the expenses are operating income for the first quarter increased 62.4% to $22.7 million as compared to operating income of $14 million in the first quarter of fiscal 2016. Our operating margin increased 150 basis points to 7.4% in the first quarter.

Our effective tax rate for the first quarter was 35.5% compared to 38.1% in the first quarter of 2016. The first quarter rate benefited by relating a date valuation allowance of approximately $200,000 or 1.1% for our tax rate.

Before I discuss our net income or guidance, I want to reiterate that as I mentioned in the introduction, I will discuss both GAAP and non-GAAP measures. As described in our first quarter earnings release. We believe our non-GAAP disclosure enables investors to understand our core business on a comparable adjusted basis between periods.

A reconciliation of each of the non GAAP metrics and the most directly comparable GAAP financial measure can be found in our earnings release issues in connection with this call.

Adjusted net income of $13 million or $0.13 per adjusted diluted share, as compared to $7.2 million or $0.07 cents per adjusted diluted share in the first quarter of 2016 this represents an increase in adjusted net income of $5.9 million or 82%.

Adjusted EBITDA for the first quarter increased 58.7% to $31.9 million compared to adjusted EBITDA of $20.1 million in the first quarter of fiscal 2016. We ended the quarter with $173.4 million in cash and available liquidity under our revolving credit facility and $363.6 million in outstanding borrowings.

Our inventory balance was $316.5 million up $31.6 million or 11% from the first quarter of fiscal 2016. In the first quarter of 2017, we improved the timing of our Chinese New Year proceeds compared to those in 16 inventory growth which was which was much lower which increased our image turns.

At the beginning of the second quarter, we concluded a reprising of our term loan facility which we refer to as the term only pricing. The term loan pricing reduced the applicable margin of our term loan facility by 75 basis points to LIBOR plus 350 basis points subject to 1% floor. Are you are aware subsequent to our first quarter.

We completed our initial public offering and closed it on May 2017. Net proceeds of the company after underwriting discounts and fees and IT related costs were approximately $192 million which we used to repay approximately 55% of the indebtedness under our term loan facility.

We expect our leverage ratio to be under 1.5 times by the end of the second quarter. The repayment resulted in a loss on extinguishment of debt an amount of $5.4 million which will be recognized in the second quarter of fiscal 2017.

Given this debt reduction, we were able to reduce our applicable margin on our term loan by another 50 basis points for LIBOR plus 300 subject to the same 1% floor beginning in the fourth quarter of fiscal 2017. Now turning to our second quarter and full year fiscal 2017 guidance.

For those of you, who don't know us well, we operate in a large market approximately $17 billion of which we estimate we are about 5% of the market today. This market is fragmented and growing and we have built a highly differentiated specialty hard surface flooring business that we believe is difficult to replicate.

From a macro perspective product picked residential investment as the percentage of [indiscernible] is still below historic norms. Home price appreciation continues to grow; housing turnover and household formation continue to be strong.

Our houses are aging and are exceeding market share the hard surface flooring all the support continued growth in our sector. Comparably we believe our cultured reinvestment and differentiation that allows to grow properly for a long period of time.

In March, we completed our 97th month of same store sales growth with positive comparable same-store sales growth since March 2009. We plan to continue that trend for the rest of fiscal 2017 and for the foreseeable future.

For the second quarter fiscal 2017 net sales are expected to be in the $329 million to $336 million or an increase of 24% to 26 versus the second quarter of fiscal 2016. Remainder of our new stores openings are planned for the back half of fiscal 2017.

Currently, we are planning on six new store openings in the third quarter of fiscal 2017 and five new store openings in the fourth quarter of fiscal 2017. Net sales growth outlook is based on an assumed comparable store sales increase of 10% to 12%.

We're planning for a modest increase in operating margin driven by double-digit comparable store sales growth, modest gross margin improvement and leveraging our operating expenses and no new stores opening in the second quarter.

GAAP diluted EPS is expected to be in the range of $0.13 to $0.15 with adjusted diluted EPS to be in the range of $0.17 to $0.18 based on the same adjusted diluted weighted average shares outstanding of $103 million.

We expected adjusted EBITDA to be in the range of $39 million to $42 million an increase of 23% to 30% over the second quarter of fiscal 2016. For the full year 2017, net sales expected to be $1.285 million to $1.304 million an increase of increase of 22% to 24% versus fiscal 2016.

Net sales growth outlook is based on 14 new store openings and assume comparable store sales increased 8% to 10%. For the year, we are planning on a slight improvement in gross margin even while expanding our DC capacity over 90% with large DC moves in Los Angeles and Savannah.

We're planning modest leverage of our operating expenses and therefore modest improvement in our operating margin and EBITDA margin. Diluted EPS is expected to be $0.49 to $0.52 with adjusted diluted EPS to be in the range of $0.54 to $0.57 based on an adjusted diluted weighted average shares outstanding of $102.9 million.

We expect adjusted EBITDA to be in the range of $138 million to $142 million an increase of 27% to 31% over fiscal 2016. We expect our tax rate to be approximately 37% for the remainder of fiscal 2017.

Our tax guidance for both the quarter and year does not consider the potential positive impact of the new stock based compensation accounting standard became effective this year ASU No.

2016-09 which requires excess income tax benefits for stock option exercises to be reported to the income statement as a reduction of tax expense instead of additional paving capital on the balance sheet. We will report on the impact if any in the future for the release results.

With respect to capital expenditures in fiscal 2017, we plan to spend about $95 million to $104 million. We expected about $50 million to $54 million of our capital budget for the 14 planned 2017 store openings as well as for construction of stores that will open in early 2018.

$32 million to $35 million is earmarked for the six to eight store models and other store investments including approximately $10 million related to relocation of two of our four distribution centers. The remainder of our CapEx will be directed towards IT, our connected customer strategies and store support center investments.

I would also like to mention that our year-end 2017 inventory plan to grow somewhere between 30% to 35% over fiscal 2016. We're making a strategic investment to prepare for a large Savannah and Miami distribution center relocation at the end of this year and improve key in-stock inventory positions.

Follow all other details related to our results and guidance please refer to our earnings release. And with that, I'd like to turn the call back over to the operator and start our Q&A session.

Operator?.

Thank you. [Operator Instructions] And we do have our first question from Matt McClintock from Barclay's. Please go ahead sir..

Hi, yes. Good afternoon everyone. Congrats on the successful IPO and welcome to the public markets..

Thanks..

Thanks Matt..

So, my first question Trevor you talked about the longer term shift away from carpet and more towards hard surface flooring. A couple of weeks ago, one of your larger competitors actually call out strength in their carpet business.

I think it will be helpful if you may be one go into some of the factors that's driving that shift towards hard surface flooring and then maybe near term Tom just address that comment are you seeing anything different?.

Yes. Until recently [indiscernible] so it's been over a 15-year trend where carpet exceeded market share than the hard surface flooring. And it's really a result of the phenomenal product that's available, the technology that's available.

Waterproof technology, inkjet technology, water jet cutting technology, the newest with which we can introduce new products into the assortment. So I really do think it has a lot to do with the innovation than exist in the category and the pricing is more comparable or closer I should say than it was in carpet 10 years or 15 years ago as well.

So yes, look we talked about it a lot but carpet is still a big business and something that well the trends have certainly worked in hard surface flooring benefit. And we think that continues for some of the reasons that Trevor mentioned.

I just think when you look at the, when you go across any category within our store if you just take the time to look at what's happened on the innovation of the product everything from the durability of it to the look of it, to the feel of it there's just been over the last few years, just a ton of innovation within this category and that's getting customers to shift relatively quick.

So I believe that continues I think when you walk and you look at what you can buy a porcelain tile today that has a stone look or a wood look for what you are going to pay for carpet, I think these customers are likely to continue to shift over at a pretty decent clip for us..

Thanks a lot for that and if I could ask a follow up. Just in terms of new store openings, no new stores planned for the second quarter.

That's in line with our expectations, but looking forward, how should we think about store openings and the cadence of store openings throughout the year?.

We'll get better. I mean this year we have a little lumpiness that we don't like. Certainly it's nice to spread that balance across the year so that the workload for us or teams or rest gets better.

So you should think about it on a more consistent basis and as we look after next year stores it's still pretty good about the cadence we'll be able to deliver those stores and they won't be so lumpy..

Matt, the only thing I'd add to that is we have stores right on the bubble it could open a day earlier or day later which literally could flip it between Q2 and Q3. And we have the same issue in Q3.

Now the expenses shouldn't be that meaningful because those kind of fall over a number of months, but it's possible that one store could open earlier in Q2, it's possible that the six stores we talked about for Q3 some of those could and five for Q4 those can move in quarters.

It shouldn't affect the financials because it's not all that material, but we saw a little bit of movement in those times. We feel good about the 14 for the year..

Thanks a lot. Congratulations again and best of luck..

Thank you..

Thank you..

And moving on to our next question, we have Michael Lasser from UBS. Please go ahead sir..

Good evening and thanks a lot for taking my question.

As you look in the first quarter, did your Pro business - how is your Pro business compared to your DIY business? And then within your Pro business how did it break down between new Pro's and the increasing business that you are doing with?.

Yes, this is Tom. It's difficult for us to measure today. As we said, we are investing in CRM we'll have better information as we look forward out to them into next year and beyond. When I look at a 12.8% comp, I'd say it's a little bit above, right.

I think our existing Pro's are buying a little bit more than they historically have and I think we're getting lots of new people into our stores. If you just look at the composition of the comp, in the first quarter it was entirely driven by transaction and lot more customers into experience our brand.

So here we can't give you specifics on exactly which one is growing at which rate. But with that type of comp and that type of transaction growth both segments are doing better..

Tom do you have a sense for how concentrated your Pro customer base is and how deep are you reaching into their wallets and what the opportunity is to expand or reach the new customers?.

Yes, this is Trevor Michael. We've done some analysis around that. We think we still don't have the majority of their business and it obviously changes depending on the maturity of the relationship and the maturity of the store, but our current analysis suggest that we don't have the majority of the business.

We're obviously working to continue to take more of that. But as Tom said, we're still in the early innings of continuing to grow that business and take that business and get them to spend more with us..

Yes, if you think about it. We have improved the experience of that customer a great deal in the last four years, but we still have ways to go and a lot of it just happened in the Pro customer. They take time. They got to give you several bets to make sure that you are going to pitch them the right way. So we still think we'll in our early innings.

We like the traction that we're getting. We think we're going to continue to get more and more of their wallet as we continue to improve the service levels at the back end of the store. So we feel good about the trajectory of where we are going..

And then my follow-up question is on the inventory position. It looks like it was up according to -but we have about 11% percent year-over-year.

Is that right, did you feel like you had appropriate stock levels given the demand that you saw which was triple the growth in the inventory? And did that play into some of the margin dynamics where you mentioned I think unit cap is one of the drivers of your margin expansion during periods?.

Yes, it was a planned decrease in inventory relatively to this year. Lisa and Lisa's team and the supply chain team got together and really came up with a more thoughtful strategy on how we'd receive our Chinese New Year product this year.

Way back we received a lot of that at the end of fiscal 15 and we just we received that kind of later as we talk about that and when compared to fiscal 16 received and fiscal 17's received and it just, it was a more thoughtful timing for us. So that's kind of a one-time benefit. We won't have that same benefit next year.

We feel great about where we are from a position perspective. We don't believe there are any major holes, we've only got a few opportunities with some in-stock but for most part we feel really good about our inventory position. It's very clean. We did a very diligent job of making sure we move through all the inventory.

We're in one of the best position we've been in the last six years here. So is it a planned inventory decrease. And as I mentioned, we get to the end of the year we are going to see the opposite of that where the increase in inventory is going to be closer to the sales growth..

So I would just add a couple of points. I think that one of the ways to think about it is we have 80% of the products replenished. We've got a terrific replenishment system that our owners were thoughtful and get us investing early in the game.

So our product comes in well when we chase the benefit of having the broadest in-stock assortment is that you carry 250 positions a tile in the store. If you are out of one, you usually have something that looks close to it, you will be able to benefit and not lose the sale. So we feel really good about our position today..

And then just Trevor on the unit cap did that, the lower inventory play a role in the margin dynamic for the quarter?.

Not really for us. We are planning on our margins being pretty good for the rest of the year. If you back out the 90% expansion in our distribution center and some of those one-time cost I mentioned in my prepared comments. That's about 50 basis points for the year of margin deleveraging we're having.

And so we are planning on our overall product margins increasing for the back half of the year. So we're kept our inventory clean under Lisa's leadership and we plan to continue to do so.

So we are planning on having nice product margin expansion this year just somewhat masked by the fact that we're having a very large increase in our distribution center capacity..

Awesome. Thank you so much and good luck..

Thank you..

Thank you..

I think our next question is from Denise Chai from Bank of America. Go ahead ma'am..

Thank you.

So most of your new stores this year opening in the back half, so could you shed some light on how much cannibalization is implied in your comp guidance? And at the same time could you talk about what you've actually seen when you have intentionally planted another store near a high volume store, just to take some of the pressure off in terms of that cannibalization?.

Yes. Part of the benefit of our strategy Denise is since we've been opening a lot of stores here again in my six years here, we've been fairly diligent about opening half of those stores in existing markets and half of those stores in new markets.

And so the cannibalization is baked into our numbers, right we've been doing it that way for a long period of time.

So we're seeing a little bit of hard cannibalization this year, because the other side of some of those new store has been the best new stores in our company's history is they've taken some market share from some of our highly successful, that was very intentional. So our cannibalization is known for, we planned for it.

I mean it is up a little bit this year but we feel really good about where we are and you don't see a lot of cannibalization change as we look to the rest of the year..

Yes, I would just say Denise to that at the - we're still growing and we're still trying to understand exactly how close our stores can be to each other. We're in a lot of reopened stores in denser markets, but the good news is the overall blend, we may be slightly off in our cannibalization estimates but our new stores are doing better.

So the blend of the two has been better forever and it got really strong in the last year. So we are going to continue to cannibalize stores.

We want the customer experience to be really good in our stores and sometimes if they creep up too high volumes, we can get choked so we're purposely trying to go through and make sure we're thoughtful about where we're opening our new stores in the existing markets..

Okay. Thanks, just a follow-up in Pro credit.

Where does that offering stand now?.

So Pro credit for us is pretty small, our overall credit sales are right around 10% of our total sales. The majority, the vast majority of that is in commercial sorry, is in the consumer the DIY. Our Pro credit is pretty nascent today we're testing a couple of things in Chicago in Texas and evaluating other alternatives for us.

We think that's an opportunity. As Tom said, again we're kind of in early innings, so more to come on that hopefully in the next year or so as those tests in Texas in Chicago teach us something..

Okay. Thank you..

Our next question comes from Matt Fassler from Goldman Sachs. Please go ahead sir..

Hi, thanks very much. This is Katie Price on for Matt. I wanted to ask you guys about the implied back half comp which would be a pretty steep deceleration from the levels that you're putting up in the first half.

What do you think is going to slow down the comp that you guys have got it that way?.

Hi Katie, this is Trevor. If you just do the math on that. We're assuming kind of a high single-digit comp for the back half of the year. And we've been fairly consistent; I know we haven't been public all that long. But we've been fairly consistent, as we just don't plan our business at the double-digit basis.

We want to make sure we keep our cost structure in line it allows us to prioritize our biggest investment for the rest of the year.

What we've told people though, and I think we'll be able to consistently say this at least for the foreseeable future is if we're fortune enough to be on the top-line that people should think about that flow-through coming in above 20%, but it's just the discipline that we've stayed with where we just don't like to plan our comp's that way.

As far as the business itself, it was obviously performing well, the macro backdrop is extremely good, our competitors are doing pretty good, and so we feel good about that back half of the business. But we just don't like to plan the business that way..

I'll add to what Trevor said. We want to be thoughtful in how we think about our business. We're doing all we can to continue double-digit same store sales growth, but hard to plan for. So we'll be thoughtful and do the best what we can..

Great. Thanks very much guys..

Thank you..

Our next question comes from Seth Sigman from Credit Suisse. Please go ahead..

Thanks a lot and good afternoon guys. You've talked a little bit about just the consistency in comp trends across regions and vintages in the past which has been a great story.

Can you just update us on that and whether you are seeing any major differences over the last quarter or so?.

No. No differences. We're seeing strength across all age groups of stores. We're seeing strengths across all regions. The regions that didn't have double-digit same store sales growth where we purposely -- those are the regions we filled in a meaningful way. So that strength has been consistent..

Okay.

And as you think about growth opportunities you outlined a few but beyond store growth what are you most excited about from a merchandising perspective maybe new category opportunities and what could be most incremental as you look out over the next year or so?.

We're excited about a lot. I'll now let, Lisa is here, so I'll now let Lisa chime in. I would just say that the first thing I would say is innovation within hard surface flooring continues to have me excited.

We have a product review center here in Atlanta and we change all our products often from the standpoint where our merchants are always bringing in new things for our stores the select.

I was there yesterday and saw the next wave of new generation stuff that's coming across multiple departments it's not, it's not one single thing that I could point to and say alright there is going to be innovation in water resistant laminate it's going to be very exciting or innovation in inkjet technology or innovation within water jet mosaics.

There is innovation in them all and it has us pretty excited. The vendors and our merchants continue to do a great job in evolving this category. So that excites me.

I would say that water resistant across multiple -- we just introduce water resistant bamboo, so now we have water resistant laminate, we have waterproof new core and then we have a water resistant bamboo in the store. The customers' reaction to all of this has been terrific. We've got more on the horizon coming there. I think that excited me as well.

And the last thing I'd say and then I'll hand it to Lisa, while I probably said everything that she was going to say. So the last thing I would say is we are - we're tackling some adjacent categories.

We're very pleased with the development of those adjacent categories and how they're doing again those are categories that are difficult to buy but that are customers' need. So we got two tests that we got like they're going to help contribute in the future.

Do you think you want to add any other?.

No, I think you've not covered I think the most important point there is that you said our vendors are -- all of their time looking for the next best thing and that's really what was the encourage sought be discouraging people thought that you know you do that you well yeah..

Okay. Our next question comes from Alan Ruskin from BTIG. Please go ahead..

Thank you. My first question with respect to the gross margin increasing 90 best points it was mentioned that increased product margins actually rose 160, I was wondering if maybe you can talk about the scalability of that number and then what was the reason for the relocation and I do have a follow-up..

Yes, this is Trevor. I'll take a quick stats of that. So the 160 just remember as I said in my prepared comments, we had a fairly large benefit for the quarter because of the timing of rebate. For the year we feel good about our rebate.

We're really just aligning that rebate so that the percentage is fairly consistent across the year and it's little more of an accounting thing is the reason we had to do that.

For the year, as I mentioned we think our margins will be kind of flattish maybe up just a tick and that's taking on an additional 50 basis points for the big expansion of the distribution center. So the math of that would tell you that our overall product margin is going to be up 50 to 60 basis points.

A lot of that has to do with great efforts on our supply chains certainly our merchants are taking cost out of the business as well, but with the supply chain team has done a fantastic job over the last 18 months and putting a new technology and infrastructure contracts to take supply chain cost out and because that takes all skews, we're seeing all of our product margin go up.

And the last thing I will probably say is again Lisa's team has done a fantastic job on good, better and best and as we execute that and put the assortment together well and sell the entire project better, we're seeing a lift in our margins this year.

And I do want to point out Lisa reminded me earlier that we do a good job of making sure we also invest back in price and quality. Making sure we have the best quality possible and making sure that we are going to be the price leader in the market we serve. And the second question, why did we relocate San Antonio, I'll break it down in few reasons.

So one, a lot of our buildings were under lease, when the lease term comes up.

We look at buildings, is it alright, is this -- we have been talking about during the [indiscernible] but San Antonio, we happen to have a store that needed a full remodel so it would have taken a major investment to get it up to the standard that we're seeking to the - out of the store was difficult for our professional customers.

So we like the stores easy to get in and get out of. And then we just had a great building that popped up in the market that within a very comparable rent rate. So we're going to have to do the remodel to be able get a slightly better location for our Pro's to get in and get out of and be able to deliver a brand new experience for our customers.

And just one last thing just to add to that, it's like everything in the business. We're just tuning the business making a little sharper. We've got a handful of stores they don't have many, maybe two to four that over time will want to do those things. And we kind of have the same metrics for as well.

As I mentioned in my opening comments we want to get our cash back in two to three years for new stores. When we make those major remodels, we want to get our cash back, sorry those major relocations like that. We want to get our cash back in two to three years. As Tom mentioned, we're fortunate that stores need to be performing well above plans.

So our ROI is going to probably be little higher than that. We don't have a lot of stores we need to relocate. We only have a handful that will do. We kind of think currently thinking about one per year and we've only done one but so far so good. It's look really well..

Thank you, Trevor. My second question is for Tom. Tom what we've seen in our years of following retail is that sometimes most limiting factor for fast hyper growth retailers such as yourself is this human capital.

Can you maybe talk about just a little bit what training is going on the average tenure of the store manager and how you're going to control the human capital aspect going forward as you continue to grow store base by 20% annually?.

Sure. Thanks. While apprentice, I learned a lot at a terrific retailer that I spent some time with. I was in my previous role in home improvement -- you know, I was there when we opened the store every 42 hours for multiple years; so I learned the good things and bad things about that.

When I joined Floor & Décor, we started investing in scalability, so we invested in -- we're a small company; when I joined we're only $300 million but we invested in the learning department, a significant learning department. So our managers go through Floor & Décor University.

They get trained, they have to bring people in and put them in training capacity, we book the budget around PEMIT, so we hire in people and get them -- they have to spend significant time in the field, we have lots of those folks in the organization that budgeted for -- so they are ready to take our stores as we grow.

Additionally, you know, like I said, we have -- last year we were able to promote 75% of our promotions internally and that's what our goal is, it's to come out 75% internally.

So by reinforcing the training that we invested in here in the store support center, we have field trainers as well, we've been able to hire in at the right pace, not too much, when we want to promote and let people grow their careers here at Floor & Décor and see them achieve things that they didn't think was possible.

So I just think significant investment and budgeting are the resources to make sure that we've got enough people in the pipeline to support the growth..

The only thing I would add to Alan is, if you look at our store manager, we have a single-digit store manager turnover and so very low; and if you go one level above that, talking about our department manager, an average store have anywhere from 5 to 10 department managers, you know, that's in the mid-teen range.

And so that's very low from my experience in retail. So we've just got great leaders, we teach them, we treat them well, we pay them well and they generally stick around. As last time said, we're [indiscernible] really terrific owners that allowed us, in a private company to give equity down to our store manager level.

So everyone of our managers have skin in the game, they are owner of the business and we know as an owner they are going to run that business better..

Okay, thank you. Congratulations..

Thank you, Alan..

We'll take our next question from Dan Binder from Jefferies..

Thanks and my congratulations on a fantastic IPO. Just a couple of questions for you today; first on your second quarter guidance; I know you guys tend to -- want to be conservative, especially out of the gate.

Just curious on the competitive guidance, can you give us some hints as to how you're tracking relative to that so far in the quarter and within the range or above it? And then my second question was around the regional performance; I think you mentioned that two of the regions were below double-digit -- I'm sure they were great but I'm just curious if there was anything unique about those regions and how they were tracked?.

Dan, thanks. We've got wonderful advisors and our advisors have said we should not get inter-quarter guidance. So we're going to follow that guidance. But we put a lot of thought and time and effort into our guidance that we put together; we obviously are -- we have great systems in ourselves, every three hours including every metric you want to know.

So we took all that into consideration when we put our guidance together. And as I mentioned before, we just -- we don't like to plan the business in a double-digit comp range and that has served us well over my six years here.

So we're going to continue to plan the business at a fairly high single-digit comp level; and if we -- again, hopefully you guys will be able to report that we'll pull that through at an operating margin much heavy or higher than our current 7.5% operating margin level. And then as far as the region performance, I have no concerns.

I can look at our comp performance, I can look at it by store and see where it is affected by us. And you know, with the gross strategy of 50% of our stores going into existing markets and 50% into new market; we're purposely putting stores near higher volume stores to make the customer experience better in those stores.

So I don't have any concerns, we're seeing strength across all the country, we don't have any pockets of where we think something different is going on competitively or something different is going on from an economy standpoint..

And if I could, since you didn't answer my first question but I will also tell you one more.

The flow-through, you talked about 20% flow through -- you talked about 20% flow-through from upside and sales in terms of the margin; is that conservative just leaving yourself room to invest in something more discretionary or is it something structural about the model that keeps it at that level?.

Yes. No, we obviously pulled through better there in Q1. We do have a very healthy appetite for investment; we've got a long vision for how do we continue to differentiate ourselves and make this new comp, lead to mention to CRM omni-channel initiatives, supply chain -- you know, 90% increase in supply chain.

We've got a few things about the customer we want to learn more, so made use of some customer segmentation study. So yes, long answer to simple question which is we have been flowing through better than that but we're going to leave ourselves room to continue to invest in the business..

Yes, I mean -- I think I just would say we've got -- we have a track record of full investments in.

Over the last full years we've made decisions as the year has gone on to do things that were -- that need to be done that maybe we're figuring to do long in the longer term, we've pulled them ahead, we want to reinvest in our business and we're trying to be thoughtful, we look at what we're guiding, what we're telling people and if we can pull investments in that are going to make our business better in the out years, then we'll do that..

Great, congrats and good luck in Q2. Thanks..

Our next question comes from Peter Keith from Piper Jaffray. Please go ahead..

Hi, thanks for taking my question and also congrats from me for very successful IPO. I want to follow-up on Alan's question around product margins.

I know you've got -- I think it was 50 basis points one-time benefit but I wasn't quite clear on the drivers to product margin; I felt it was mixed or was in the categories; if you could provide a little more color there it would be helpful..

So the majority of the increase was -- most of our product margins are increasing because of the supply chain benefits we're getting. So those supply chain benefits obviously affect every SKU, not just one individual department.

We actually don't measure it as to say exactly how much of its basis points for supply chain versus margin but it's safe to say the majority of it is due to better supply chain.

We also -- as Tom mentioned in his prepared comments, that our accessories and our decorative accessories comp is above company average; those are higher margin departments so there was some mixed benefit to it.

And again the final piece of it as I will, as again, at least the team has done a great job put together the assortment well and within that you're selling higher penetration of your better and best projects..

That's right to say, I think that across all the department if you go through [indiscernible] and you can see in every department we've done -- the merchants have done a terrific job of offering the stores the ability to credit their better stuff.

And at the department we've got better stuff and it's something that better stuff sells at a better -- at a higher rate than an opening price point at a higher margin rate. So maybe we've done a good job there.

The other thing that Trevor did mention is you know, the same thing we've done in PRO [ph] we're beginning to do in the design side of our business and the better our designers to be coming the store, the more they engage with our customers, the better project they sell and the more things they can add-on to a sale, they maybe able to add stuff in at higher margin rate.

So the improvement in our designer experience is also referring that margin line across all the departments..

Okay. Maybe I'll ask another follow-up question and maybe you can at least answer.

When you look at the better and best products that you're bringing in across the store, are you fully positioned there to invest or do you still feel like there is opportunity to bring in even higher price point items at this point?.

No, we don't think we're done at all. Every time we think that we've hit the top, the customer tells us that they have a huge appetite and so -- no, we will continue to prompt all of the categories to offer more better and best products.

We also own these products at the same time value that we offer at same price point and the customers recognize that. And so they're willing to spend more to get great products because it's still at an unbelievable value for them..

Okay, great.

One other separate question I want to ask, so when your large box competitors last week had managed some significant strength in their luxury buying plank [ph]; could you give us an indication of how that category is performing for you?.

Yes, it has done extremely well for us. Also, I think Tom mentioned in his comments that laminate has trends of the average and part of the laminate category that we look at that laminate luxury plank [ph], the product is all in there and yes, those products are doing very well.

You know, a lot back to what Tom mentioned about innovation, the durability, the water resistant feat, our customers are really responding very well to that..

Alright, thank you very much. And good luck this quarter..

Thank you..

Our next question is from Zack [ph] from Wells Fargo. Please go ahead..

Thanks for taking my question. You mentioned transaction was the major component of the comps rather than ticket in the quarter and I believe this has been an ongoing trend, correct.

So in terms of what's driving the lower ticket growth; can you talk about the contributing factors here and then as you model out your business going forward, how should we think about the transaction versus ticket split over the next couple of years?.

This is Trevor, I'll take a start at that and Tom may way in as well. So there are generally three things on the lower ticket this quarter; first, our samples were very strong.

The feedback of our samples -- our ticket was almost flat and so we've had just a nice lift in samples, that's a great leading indicator for us because obviously when people buy samples, we hopefully can convince them to come back in and buy the flooring.

The second thing that really drove it was that Tom mentioned our wood business and our natural stone businesses -- those businesses were below the company average and because those are generally higher ticket and higher square footage sales, it brought down our ticket. Those are the three things I'd point out for the average ticket.

You know, I do think it's just a blip, I think the average ticket for the year will be fine and will go back up but it just so happened that we just had a lot of phenomenal claims in other departments that gets better than those.

And Tom kind of mentioned this but just to be clear for some people who don't know this, we're fairly agnostic as to what departments take off in this business and because we have everything in the hard surface warrant [ph]; so if it's [indiscernible] this year, that's great; if it's wood next year, that's great; if it's stone year after that, that's fine too.

We've got a great group of merchandizing people who generally see those trends, can influence those trends and make sure we have inventory to run through those trends..

And I think the other thing I would say to Trevor is that, we want to put what the customers need into their hands; and if it depends -- it bets on whatever price is right for the customers; so we're not going to be driven to try to push them into the higher price stuff, whatever is the right value for them, we want to marketize the category so that we do that.

The other thing I'd say is this, as we are continuing to improve in our business those are coming in more frequently and they are not buying everything on one trip, they're coming in, they're buying ground or buying -- some of the decent suppliers are using us a little bit more like [indiscernible] just making us -- just a food stop; so some of that is going to take direct account but at the end of the day I think that's okay..

Okay, that's helpful.

And can you talk a little bit about how your pro-customer penetration transferring new store, particularly in a new market? And then as store reaches maturity, how long does it typically take for the pros to come along and ultimately get to that overall 60% of sales levels that you guys have talked about?.

Yes, I think in a newer market -- look, we do a lot of grassroots marketing, a lot of efforts into -- before we -- way before we get into the store, we're belly to belly in a market and try to talk [indiscernible] and tell them about our concept because they just don't get it like everyone that haven't been in the floor and of course they're not going to understand kind of the total value proposition that we provide.

So at a new store and again, the pro-customers, they don't always switch right away, so it takes a little time. So certainly that split in the new store is different than an existing store but it grows rapidly.

You know, if you look at maturity at the curve of our stores and how they comp in the second and third year, it takes a little bit of time to get pros to experience the brand but as they do, they tell more pros about it, they get more deal and surfers in there and then it takes off by year two or year three we're in that 60-40 split within our stores.

So -- and I -- you know, that -- that's at a few time, but even our best stores are at that similar rate, there is just more bulk, there is more pros and there is more do our lot, DIYs, and they are going to invest in our stores..

That makes sense, that's helpful. Thanks a lot guys, best of luck..

Okay, thank you..

And that is all the time we have for questions. Mr. Tom Taylor, I'd like to turn the conference back to you for any additional or closing remarks..

Okay. Well, look I appreciate everyone taking the time to join us on our first earnings call. So we're excited to be able to engage with you and to be able to answer your questions. We look forward to spending more time with you in the future. Thanks everybody..

This concludes today's call. Thank you for your participation. You may now disconnect..