Greetings. Welcome to Floor & Decor Holdings, Inc. Fiscal 2023 Third Quarter Conference Call. [Operator Instructions]. At this time, I'll now turn the conference over to Wayne Hood, Vice President of Investor Relations. Mr. Hood, you may begin..

Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's fiscal 2023 Third Quarter Earnings Conference Call. Joining me on our call today are Tom Taylor, Chief Executive Officer; Trevor Lang, President; and Bryan Langley, Executive Vice President and Chief Financial Officer.

Before we start, I want to remind everyone 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, projections or other characterizations of 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 statements for any reason, included in those listed in its SEC filings. Floor & Decor 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 will discuss non-GAAP financial measures as defined by SEC Regulation G. We believe non-GAAP disclosures enable investors to better understand our core operating performance on a comparable basis between periods.

A 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 at ir.flooranddecor.com. A recorded replay of this call and related materials will be available on our Investor Relations website.

Let me now turn the call over to Tom..

Thank you, Wayne, and everyone, for joining us on our fiscal 2023 third quarter earnings conference call. During today's call, Trevor and I will discuss some of our fiscal 2023 third quarter earnings highlights.

Then Bryan will provide a more in-depth review of our third quarter financial performance and share our thoughts about some of our financial projections for the remainder of fiscal 2023.

We are proud to deliver third quarter diluted earnings per share of $0.61, especially amidst the continuing economic challenges posed by 30-year mortgage interest rates that are now at about 8%, near record low existing home sales of 3.96 million units annualized in September, the ongoing pressures on housing affordability and the slowing sales of large ticket discretionary products.

Our fiscal 2023 third quarter financial results are a testament to our company's agility and commitment to executing our key growth and customer engagement strategies, which we believe will continue to widen our competitive moat.

As many of you know, our industry and company have been affected by the Federal Reserve's current interest rate policies aimed at curbing economic growth and moderating inflation to 2% over time. The lagged effect of these policies is exerting greater-than-expected pressure on existing home sales, and in turn, our sales than we previously expected.

We were expecting that existing home sales would approximate 4.1 million to 4.3 million units annualized as we move into the second half of 2023. But regrettably, this has not materialized to date.

As Bryan will discuss in more detail, we have experienced an unexpected accelerated decline in comparable store sales from the lagged effect of these policies in the early part of the fourth quarter of 2023 and have begun to tighten expenses further in November to align with the recent accelerated decline.

We believe the ongoing impact of these monetary policies will continue to suppress home remodeling into fiscal 2024, which could lead to a decline in our comparable store sales for the year.

Therefore, we believe it is prudent to approach fiscal 2024 with more rigor in our expense management and added discipline in our growth investments and capital spending. Additionally, we think it is important to add a level of flexibility and optionality to our operating and store opening plans in 2024, given the current macroeconomic environment.

I am proud of how our teams have stepped up to this short-term challenge. We are not standing still and see evidence that our strategies to grow our market share in this challenging period are working even when industry sales are contracting.

We are fortunate that the strength of our business model, balance sheet and cash flow allow us to continue in investing in the new stores and merchandising growth initiatives in the face of these near-term headwinds.

For example, we intend to test an outdoor department within our stone department in 10 to 12 stores early next year, including full outdoor-focused vignettes in select design centers to better show our assortment.

I believe that our demonstrated history of strong and agile execution, coupled with the investments we continue to make in new warehouse stores and merchandising, will position us for accelerating sales, market share and strong earnings growth when the industry growth returns. Let me now turn the call over to Trevor..

Thanks, Tom. I also want to express my appreciation to all of our associates for their dedication to serving our customers and executing our key growth initiatives towards operating at least 500 stores in the U.S. It is important to note that we view ourselves as a young disruptive growth company with only 207 warehouse stores in the U.S.

at the end of the third quarter of fiscal 2023.

We continue to make important long-term investments as we have conviction that over the long term, we can achieve returns above our weighted average cost of capital just a similar investments have allowed us to be approximately 20x the size we were just over a decade ago when Tom and I arrived at Floor & Decor.

We have demonstrated that we can manage a growth business focused on long-term profitability and return on capital during difficult periods such as in 2018, when existing home sales declined; in 2019, when the U.S.

government imposed tariffs as well as antidumping and countervailing duties on many of our products from China; and in 2020 and '21 during the COVID-19 shutdown and the related supply chain disruptions. As Tom mentioned, we are not standing still as we navigate this challenging period of contracting industry sales.

Our growth and profit have never been a straight line, but when measured over the long term, we believe we are well positioned.

We intend to continue growing through this cyclical housing downturn by capitalizing on our everyday low prices, value-driven options, trend-right product assortments, insight job lot quantities and exceptional customer service provided by our store associates. Turning to our fiscal 2023 third quarter sales.

Total sales increased by 0.9% to $1.100 billion from the same period last year. Our fiscal 2023 third quarter comparable store sales fell 9.3% from last year. Comparable store sales declined 8.2% in July, 10.1% in August, and 9.7% in September.

As a reminder, our fiscal 20,223rd quarter comparable store sales increased 11.6% due to a 19.5% growth in our average ticket. Our fiscal 2023 third quarter comparable transactions declined 6.8% and our comparable store average ticket declined by 2.8%.

While we are encouraged that the sequential decline in transactions improved from the peak decline of 10.4% in the fourth quarter of fiscal 2022 and 9.9% in the first quarter of fiscal 2023, our average ticket remains under pressure.

The pressure reflects cycling past retail increases last year, customers continuing to purchase less square footage and the impact of strategic decisions to lower retail pricing selectively on specific SKUs.

We continue to see homeowners and Pros engaging in fewer and smaller scale flooring projects, and they are very intentional in their purchase decisions. For example, they are choosing a single bathroom project rather than a bathroom and a kitchen project or a 2-room project rather than a 3-room project.

Additionally, the cost of financing projects has risen due to increased interest rates, fewer subsidized financing programs and living standards. Collectively, we believe these factors are contributing to us selling less square footage when compared to last year.

That said, when consumers are considering a flooring purchase, we continue to see ongoing customer preferences towards our better and best product price point products where we offer industry-leading innovation trends and styles at everyday low prices.

From a regional perspective, comparable store sales in our Western and Southern divisions were the weakest in the third quarter of fiscal 2023. From a merchandising perspective, our initiatives in tile, installation materials and adjacent categories led to comparable store sales that were meaningfully above the company average.

We are pleased that our total sales to our e-commerce store increased 8.3% year-over-year. As a result, the sales penetration rate increased 160 basis points to 18.9% from 17.3% last year, further reaffirming that our connected customer strategies to drive engagement are working.

We are also continuing to invest in design services to drive engagement with homeowners and Pros by further expanding our design test in the third quarter. We have found that when our designers engage with homeowners in their homes, we increase our ability to become involved with larger projects.

Turning to our early fiscal 2023 fourth quarter sales trends. Our fourth quarter to-date comparable store sales were down 11.9% below what we expected coming into the quarter and greater than the third quarter's decline of 9.3%.

Consequently, we upgraded our fiscal 2023 earnings guidance in today's press release to take into consideration the slowing sales trends. I will now discuss our new store pillar of growth.

In the third quarter of fiscal 2023, we opened 5 new warehouse stores, including 2 new warehouse store openings in Upstate New York and Buffalo and Rochester, both new markets for us. We ended the third quarter by operating 207 warehouse stores and 5 design studios across 36 states.

Since the beginning of this year through today, we have opened 22 new warehouse stores, including 5 new warehouse stores in October, moving us closer towards achieving our 32 new store opening plan for fiscal 2023. In early October, we continued our upstate New York store building -- build-out by opening a newer House store in Albany.

We are excited to continue building our presence and brand awareness in New York and New Jersey in the fourth quarter of fiscal 2023 with planned openings in 5 new warehouse stores in these states. These planned openings will include new warehouse stores in Ocean Township, Avana, Princeton and Springfield, New Jersey and Portchester New York.

We plan to continue building our New York expansion in 2024 with a new warehouse store in Brooklyn. As we continue our growth, we also decided to close an older warehouse store in Houston due to strategic replacing stores in the market surrounding the store in the third quarter as the lease expired.

Due to ongoing industry-wide construction delays in the third quarter, we had to push some of our late September 2023 warehouse store openings into the fourth quarter.

These construction delays are due to general contractors struggling to secure qualified subcontractors and local government municipalities remaining understaffed, particularly in the Northeast. In some cases, the municipal government staffing levels are below pre-pandemic levels.

Consequently, obtaining all the necessary building inspections and approvals sometimes takes as much as 3x longer. Moreover, we have recently begun experiencing delays with utility companies missing dates and delaying work due to the constrained capacity of their workforces.

As a result, these delays have been outside of our control in connecting power, water and sewer and gas services to our new stores. Turning my comments to our PROs, which accounted for approximately 44% of our third quarter tendered sales compared with 43% in the same period last year and 44% in the second quarter of fiscal 2023.

We are leveraging our Pro dashboard and CRM tools and celebrating Pros with events like our annual Pro appreciation month in September. This annual event, which generated 68,000 Pro registrations, including gear giveaways, in-store prices, nationwide sweep stakes, free installation materials and educational webinars.

We were pleased with the incremental new Pro business generated from this event and its impact on our insulation material sales, where we have seen a significant -- where we see a significant market share opportunity with our Pros.

While our overall fiscal 2023 third quarter comparable store sales declined 9.3% from last year, our Pro comparable store sales continue to outperform our homeowner sales and our insulation materials grew modestly as we focused on increasing our market share in a contracting market.

Additionally, we continue developing our other strategies to deepen our relationship with our Pros. For example, we are participating in the National Tile Contractors Association, or the NTCA, with educational events enabling our pros to use their Pro premier points for NTCA membership.

The membership includes a range of benefits, including training and vouchers to be used in our stores. Similarly, we partnered with the national wood print association in the third quarter to build on our brand awareness as a destination store for Wood.

This allows with our plan to have all of floors with updated wood inspiration centers by the end of 2023. Providing educational events is increasingly important to close as the installation in certain large-format categories is new and more complex to install.

Year-to-date, we have trained over 2,000 Pros by working with the NTCA and we're on track to hold 128 educational events in 2023 compared with 71 in 2022. Our CRM data affirms that our Pro wallet share growth initiatives are working in the third quarter.

We saw growth in our returning Pro customers and spending growth among our top Pros engage in foreign projects. From an operational standpoint, we have process improvements underway that will make it easier for our top Pros to interact with us and build quotes on large projects.

on profitability, we continue aligning our store payroll hours with the decline in sales and are rigorously managing our corporate G&A spend. Importantly, we believe we are doing this in a way that does not compromise customer-facing service. In fact, we are very pleased that our customer service flows remain high.

Moreover, we continue to manage our total inventory effectively and are glad that our merchandise in-stock level is better than they have been in years.

Finally, we are continuing to fortify our strong pricing move by strategically adjusting retail prices on specific SKUs using a portfolio approach, while at the same time, improving our gross margin rate year-over-year. Turning to our commercial business.

Our subsidiary, Spartan Services reported another strong quarter with fiscal 2023 third quarter total sales increasing by 47.5% from last year. Additionally, the company announced an exciting new line of flooring and wall tiles under the [indiscernible] brand name in October.

The [indiscernible] line exemplifies how Spartan can work with Floor & Decor merchants and supply chain teams to design and curate exclusive flooring and wall top products for commercial specifiers that are supported by a deep inventory that is available nationally.

Tile is a higher-margin business that we believe is mostly incremental business for Spartan as historically, they have not sold much tile. We are continuing to build out our regional account measures where our third quarter sales increased 32% from the same period last year.

Looking forward, we see growth in new quote projects in sample requests as remaining healthy but moderated. The moderating growth is consistent with the September ABI index, which saw a 44.8% reading down from 48.1% last month, moving below the positive territory of above 50%.

In response, we are rigorously managing our administrative expenses and investment plans in commercial. As discussed in our earnings calls, we remain excited about the long-term commercial market opportunity and our strategies.

We are confident that we have the right people, strategies, business model to continue to successfully navigate this challenging macroeconomic environment. I will now turn the call over to Bryan to discuss our fiscal 2023 third quarter financial results in more detail and share our outlook for the remainder of the year..

Thanks, Trevor. As Tom mentioned, we are proud to report fiscal 2023 third quarter diluted earnings per share of $0.61, which was at the high end of our expectations, despite third quarter sales that were modestly below our expectations.

Like the previous quarters in 2023, we achieved these results by delivering on our commitment to growing our gross margin rate year-over-year while managing our competitive price gaps and growing our market share. .

As CFO, I'm equally pleased with how we are managing our inventory and merchandise and stock levels, which enabled us to report a $691.7 million positive swing in year-over-year operating cash flow and a significant increase in free cash flow.

Now let me turn my discussion to some of the changes among the significant line items in our third quarter income statement, balance sheet and statement of cash flows in each case compared to the same period last year unless otherwise stated.

Then I will discuss our outlook for the remainder of the year and provide a framework for how we are thinking about fiscal 2024. Third quarter total sales increased 0.9% from last year. However, gross profit grew 4.5% due to a 140 basis point increase in our gross margin rate to 42.2% from 40.8% last year.

The increase in gross margin rate is primarily due to retail price increases we took last year coupled with a decrease in supply chain costs starting in late 2022 that continued into the third quarter of 2023.

As a reminder, we are on the weighted average cost method of accounting and as such, the supply chain cost reductions we started to experience late last year and into this year are still working their way through our income statement through the remainder of 2023. Third quarter selling and store operating expenses increased 9.9% to $308.6 million.

The growth is primarily attributable to higher occupancy costs related to an increase in the number of warehouse stores operating since September 29, 2022.

Wage rate increases and higher credit card transaction prices [indiscernible] As a percentage of sales, selling and store operating expenses increased approximately 230 basis points to 27.9% from last year. The increase was primarily due to the deleverage in occupancy and other fixed costs from a decrease in comparable store sales.

Third quarter general and administrative expenses increased 9.5% to $59.9 million from last year. The growth is due to investments to support our store growth, including increased store support staff, higher depreciation related to technology and other store Sports Center investments and operating expenses related to our Spartan subsidiary.

As a percentage of sales, general and administrative expenses deleveraged 30 basis points to 5.3% from 5.0% last year, but the expense rate improved from the second and first quarters of 2023. The year-over-year increase in expense rate is primarily due to the decrease in comparable store sales, partially offset by lower incentive compensation pools.

Third quarter preopening expenses increased by 37.0% to $14.2 million from last year. The increase primarily resulted from an increase in the number of future stores that we were preparing to open compared to the same period a year ago as well as cost related to delays in new store openings.

Third quarter net interest expense decreased to $1.2 million from $3.0 million last year. The $1.8 million decrease in interest expense is better than planned and primarily due to a decrease in average borrowings outstanding under our ABL facility and an increase in interest capitalized partially offset by interest rate increases on outstanding debt.

Third quarter income tax expense was $17.6 million compared to $22.5 million from last year. The effective tax rate decreased by 170 basis points to 21.1% from 22.8% the previous year, primarily due to increased tax benefits related to stock-based compensation.

Excluding the impact of excess tax benefits, our third quarter tax rate was approximately 23.7% compared to 23.9% last year. Third quarter adjusted EBITDA decreased by 4.7% to $140.9 million from last year, primarily from expense deleverage from the 9.3% decline in our comparable store sales.

However, EBIT declined by a larger 16.6% from last year due to a 27.1% increase in depreciation and amortization expense. Third quarter net income declined by a more moderate 13.5% from [indiscernible] due to a lower effective income tax rate and lower interest expense than the previous year.

Diluted earnings per share fell 14.1% to $0.61 from $0.71 last year. You can find a complete reconciliation of our GAAP to non-GAAP earnings in today's earnings press release. Moving on to our balance sheet and cash flow. We are continuing to maintain a strong balance sheet during this uncertain period.

Our total inventory as of the end of the third quarter decreased by 16.3% to $1.1 billion from the end of the third quarter last year and decreased by 14.5% from the end of fiscal 2022.

The decline in inventory, coupled with an increase in trade accounts payable and other working capital initiatives, enabled us to report a $691.7 million favorable swing in year-over-year operating cash flow and a significant year-over-year increase in free cash flow.

The improvement in our cash flow allowed us to reduce borrowings under our ABL facility to 0 at the end of the third quarter, which enabled us to reduce our debt by $178.5 million to $202.9 million from last year.

The strength of our balance sheet will benefit us as we remain committed to making investments that we believe will drive further market share gains during a period of industry contraction.

We the third quarter with $758.9 million of unrestricted liquidity, consisting of $61.6 million in cash and cash equivalents and $697.3 million available for borrowing under our ABL facility. Let me now turn my comments to how we are thinking about the remainder of the year and how it compares with our previous expectations.

During the third quarter of 2023, 30-year mortgage interest rates continue to rise and are touching 8% up from the prior peak of 7.34% in July.

At the same time, the July Federal Reserve Senior Loan Officer Survey reported that lending standards across all categories of residential real estate tightened, and we expect further tightening of loan standards in the second half of 2023. Meanwhile, demand weakened for all residential real estate loan categories.

Home prices have moderated, but they remain elevated from previous years. According to the National Association of Realtors, the median price of an existing single-family home in September increased 2.8% to $394,000 from last year, which still represents a 26.3% increase from $312,000 in September of 2020.

These increased costs, coupled with increases in property taxes and insurance and following savings buffers, continue to erode housing affordability for many homeowners, leaving all but the highest income cohorts able to afford homeownership.

Consequently, existing home sales reached a near record low of $3.96 million annualized in September, which was below our expectations of $4.1 million to $4.3 million annualized units that supported our prior outlook for the second half of 2023. We are prudently expecting these trends to continue to create headwinds for our sales in the short term.

Taking this into consideration, let me reframe how we are thinking about the fourth quarter of 2023 and provide some preliminary guard rails to take into consideration for 2024.

As Tom mentioned, we have experienced an unexpected accelerated decline in our comparable store sales from the lagged effect of these policies in the early part of the fourth quarter of 2023.

To take this into account, we have updated our 2023 sales and earnings guidance, which now reflects the potential that the accelerated decline in our comparable store sales could be sustained for the remainder of the fourth quarter.

We hope we're wrong, but we now expect 2023 fourth quarter comparable store sales could decline in a range of 12% to 15% from last year. In response, we have already initiated expense tightening measures in November and will further tighten them in December with an eye towards not adversely impacting our customer patience.

Let me now provide some details. We now expect fiscal 2023 total sales to approximate $4.345 billion to $4.385 billion compared with our prior guidance of $4.460 billion to $4.530 billion. Comparable store sales are expected to decline 7.8% to 8.5% compared with our prior guidance of 5.5% to 7.0% decline.

We expect our 2023 fourth quarter gross margin to be flat or modestly improve sequentially, leading to an annual and fourth quarter improvement year-over-year. We expect fiscal 2023 diluted earnings per share to be in the range of $2.14 to $2.24, which implies fourth quarter diluted earnings per share of $0.20 to $0.30.

The updated 2023 annual earnings guidance compares with our prior guidance of $2.30 to $2.50.

Fiscal 2023 adjusted EBITDA is expected to be in the range of $535 million to $550 million compared with our prior guidance of $570 million to $595 million; depreciation and amortization expense of approximately $200 million, unchanged from our prior guidance.

Net interest expense of approximately $11.5 million compared with our prior guidance of $16 million to $17 million; tax rate of approximately 21.5%. Diluted weighted average shares outstanding of approximately $108 million, unchanged from our prior guidance, opened 32 new warehouse stores, unchanged from our prior guidance.

And we reduced our 2023 planned capital expenditures to $550 million to $575 million from our prior guidance of $590 million to $630 million.

At this juncture, we believe it is prudent to moderate and add optionality to our 2024 new warehouse store openings with a revised opening plan of 30 to 35 warehouse stores compared with our prior expectations of at least 35 stores. It is important to recognize that this still would represent mid-teens store growth.

We are still developing our detailed sales plan for 2024 but we expect that if existing home sales remain at the current levels, our comparable store sales could decline next year. In particular, we anticipate our comparable store sales could decline more in the first half versus the second half of the year given our sales comparisons from 2023.

As such, we have action plans to align our expense structure with this potential near-term decline. We continue to expect modest improvement in our gross margin rate next year from our fiscal fourth quarter exit rate. Let me turn the call back to Tom for some closing remarks..

Thanks, Bryan. In the short term, we see opportunity amid the uncertainty. We believe that we have demonstrated that we can manage through uncertainty and seek to use this opportunity to seize more market share as the industry contracts.

While the timing of a sustained recovery in existing home sales and growth in our industry continues to be elusive and pushed out by most of the economists, we believe the longer-term outlook for home improvement spending remains bright.

That said, we believe we should be prudent when approaching 2024 with more rigor towards managing our controllable expenses and discretionary capital spending. That does not mean we are not making growth investments.

We expect to continue to invest in 2024 by opening new warehouse stores, which we believe will further widen our competitive moat and leave us in an even stronger position for significant earnings power when the industry fundamentals improve. Our longer target of operating at least 500 warehouse stores in the U.S.

and achieving a mid- to high-teen EBITDA margin is unchanged. Operator, we would now like to take questions..

[Operator Instructions]. And our first question comes from the line of Simeon Gutman with Morgan Stanley..

My question is in the fourth quarter, some of the expense rationalization that's happening, is that the run rate that we run into '24? Or does it get better? Meaning if you annualize the earnings from the fourth quarter and, I guess, the decremental margin, it paints a pretty tough picture, and I want to why that's wrong..

Simeon, this is Trevor. That's a good question. So we're not done with our planning process for 2024.

Given the current economic headwinds and comparable store sales are likely to be negative next year based on current sales trends, and as Bryan mentioned, probably have larger negative comps in the first part of the year versus the second part of the year. .

We are focused on continuing to resize our expense structure based on the slower sales trends, and we believe we can have a moderate increase in gross margin next year. But we don't believe that you take the Q4 run rate and extrapolate that to fiscal 2024 annualized EPS. We think we will do better than that, and we're working through that as we speak.

Obviously, a lot of unknowns out there with mortgage rates and where the consumer is and how they're going to invest in renovation today. But we are creating optionality and scenario planning that if things get better or worse, and we'll give you a more detailed update in 2024..

Is there anything on the vendor side that's changing? Are they getting more aggressive meaning, are they lowering price or getting more aggressive in some of the deals that you're seeing?.

This is Tom. So I'll take that. So part of our improvement in gross margin that we're seeing now and that we -- or we'll continue to see next year is in our merchants doing a good job of working with our suppliers and getting first cost reductions. So it's when we're moving suppliers, we're getting better buys.

With our existing suppliers, businesses is tougher for them, so they're making concessions and our merchants do a good job of negotiating. So yes, we should see some benefit from that. We're seeing it now, and it should continue into next year..

The next question is from the line of Chris Horvers with JPMorgan..

Thinking about what just happened in the past month in terms of the deceleration in the business, can you deconstruct that a little bit? Is it traffic and ticket breaking sort of the stacks? You're implying that the monthly is really deteriorate if you're looking on a monthly -- on a multiyear basis.

So what changed in terms of traffic versus ticket? You also mentioned the Southern region also was in the worst category, which was not true in the same quarter.

So is there a change in Texas and Florida that you're seeing? And I guess, the last part of that question is, as you think about the cadence of the month, was there anything observable around, let's say, the war or any sort of shock that you saw on a sort of weekly basis?.

So I'll take the first part. This is Bryan and Tom will kind of take the second and the third part. So just I think it's easier if I talk about what was in the prior guidance versus what we're seeing today kind of to unbundle Q4 a little bit and the trends we're seeing. So our comp was obviously negative.

Mid-single digits is what we were thinking, now that's at a negative 12% to negative 15%. To talk about transaction and ticket. We had transactions in Q4. In the prior guidance, we're going to be about flat. Now we're expecting that to be mid-single digits to high single-digit decline.

So you're seeing a bigger drop in transactions from the expectation that we were at. And the ticket was a low single-digit decline that we had previously guided to. Now that's more like a mid-single-digit decline. So you can see the biggest, I guess, deviation from our expectation in Q4 is really around transactions.

And so when you think about that 2-year stack or anything else, transactions are really going to see the bigger deviation from Q3 to Q4 on some of that..

And the other thing I'd say, Chris, that's probably a bit different than when we were, what it was, 3 months ago is mortgage rates have now tipped up and -- closer to 8%. And existing home sales are now below $4 million, which hasn't happened that often in the last 40-plus years.

And so just it's been a bit of a deteriorating environment since we talked last. ..

I was going to say just on the average ticket, our square foot Pro project is continuing to go down, so that's what's driving down a lot of that average ticket to go from the low single digit to kind of mid-single-digit declines. So a lot of it is around that project size..

Yes. So -- and Chris, I'll try to hit the last 2 parts of the question. It's -- we're going up against easier compares. So you would think that things would have been better. But as Trevor mentioned, with interest rates being higher than we thought, existing home sales deteriorating worse than we thought.

And then what's happening with the world, with the conflicts around the globe, they're all probably having an effect on the consumer and hurting their ability to shop. So I don't know exactly, like I can't pinpoint our deterioration has been -- it's been all through since the quarter started.

So I'm not sure which one of those is affected at the mode, so I'm sure it's a little bit of each. And as far as the comment on the South.

South was performing pretty well, and we started seeing a deterioration in the West first, and the South is just kind of getting to where the West -- the challenges that the West was facing, we think we're seeing that a little bit more now than we were at the beginning part of the year..

Got it. And then my follow-up is, Tom, you had mentioned earlier this year that if existing home sales were flat, you could see a positive outcome on the comp side. You're leaning towards less negative in the back half of the year. So presumably you'll get to a point of flat existing home sales in the back half.

So is the difference now? Is it that you have to annualize through the project size headwind?.

I mean you have a little bit of the project size headwinds. I think that's a fair point. We're still not getting to existing home sales. When we look out, existing home sales, what we're up against is still -- we're going to be below that by all anticipation at $3.9 million annualized in September. .

We don't think -- we're not planning for that to get much better, which would still be -- we'd still be in a declining home sales environment. I do believe that if we can get to flat existing home sales year-over-year or where we can comp -- or existing home sales are comping positive, that's good for our business, maybe not immediately, but in time.

But as we look forward, you look to next -- if you look to next year, you got -- in the first half of the year, February, there was 4.6 million homes annualized. March 4.4 million annualized. April, 4.3 billion, May 4.3 million with what we saw in September.

And even though interest rates aren't coming -- not going up as of right now, and people are excited about that. We're not anticipating them to go down. And so we think that, that's going to put a challenge on to the business..

Next question comes from the line of Michael Lasser with UBS..

Tom, in your remarks, you noted how you have optionality to change your store growth.

So under what conditions would Floor & Decor choose to slow down store growth in 2024 and 2025? And then what would you need to see in order to reaccelerate it? And does this have any bearing on the ability to have 500 stores over the long term?.

I'll take the last part. That's the easy one. No, there's no change in our outlook, as I said in the script. There's no change in our 500 store plans. No change in our mid-teen EBITDA margins -- EBIT margins. I mean, we don't see much change over the long term. It's just the pace of getting there.

What would make me change or reconsider store growth, as we said historically, and Trevor and Bryan can weigh in, is if the store -- if our liquidity became a challenge, and we had to push back capital expenditures, we certainly -- that would give us a moment of pause or the returns on the stores.

Right now to be in this macro environment and still have our new store class at the low end of the pro forma, that's not horrible and considering this macro environment. So if that deteriorates further, then that would give us pause.

But as we sit here today and as we see the world, we're comfortable giving a range of 30 to 35, if things deteriorate from here to the next quarter, then we'll let you know..

Yes, Michael. The only thing I was just going to add to that is if you look at our mature class of stores, our stores doing 5 -- our stores are 5 years or older, they're still doing $26 million in sales and making $6.1 million in 4-wall EBITDA.

And if you look at our stores that are 10 years older, some of our best class of stores, they're doing almost $28.6 million in sales and $7 million or 4-wall EBITDA. So this is a point in time. It's a rough point in time, arguably other than the housing recession in 2007 through '10, and this is one of the worst ones.

And so we're very confident that we're going to get well above a 25% cost of capital -- return on cost of capital long term as you think about -- because these are obviously 15-, 20-year investments. So as Tom said, we're going to watch it. We'll be close, but we feel good about where these returns will be long term..

My follow-up question is, it's really anyone's guess right now, what the comps might be next year? But you have given us a rule of thumb that decremental margins are around 35%. So if you lost $100 million of sales, you lose $35 million of profit.

Are there any locations or close to any locations where you're running into minimum staffing levels or other constraints such that if you cut down next year at the same rate that you are this year, the decremental margins would be worse than your rule of thumb.

And does it change at all if more of your comp decline next year is ticket driven rather than traffic driven?.

Yes. About 20 -- this is Trevor. About 20% of our stores, maybe just a nudge above that are on minimum hours today, and our gross margin rate is higher now than it was then, too. So yes, I think if things are not in our expectations or if things are worse, I think it's likely you'd see that flow-through rate be a little bit higher.

I don't know if it gets to 40%, but I think that is a reasonable expectation..

Michael, this is Bryan. So that $0.10 per comp point, 35% flow-through rate. That's usually against the plan, not necessarily year-over-year to Trevor's point, we do expect modest improvement in gross margin, which will help offset some of that.

So when you guys are thinking about your model and you're thinking about the comp, it's really a change in comp against the plan, not necessarily year-over-year because you always have step investments where you have changes that we can go in and do. But that gross margin is the lever that will help kind of offset some of that..

I just want to make one comment on the store labor. We pay very close attention to our customer service scores and how they feel about their experience within our stores.

And as we adjust ours, we're trying to do it where we can take tasks away from the store or where we can change the way we operate, bring things in during the day, do tasking during the day that we've historically done it, so that we've got good presence on the floor.

So as we adjust those hours, we're going to do -- we certainly pay attention to customer experience because we know this, as Trevor said, this is a moment in time, we'll get through this. And then when we come out on the other side, we don't want our brand damaged anyway..

Our next question is from the line of Chuck Grom with Gordon Haskett..

I'm curious what you're seeing from the competition over the past few months and maybe even in October, particularly independents.

Is pricing still rational? Or have things started to change?.

I'll start, and I'll let Ersan weigh in. I think from the big box perspective, the big boxes, they're always trying to improve, always trying to compete. I wouldn't say that it's much different than it's historically been. So it's just some of the people -- they're certainly -- we have to pay attention to them.

It's just difficult with the square footage that they dedicate for them to compete with us. On the independents, yes, I think they're being more aggressive. They're desperate. This is a tough market. And by all indications, if we're struggling on the top line, they're struggling worse. So yes, I think they're being a little bit more aggressive.

But them being aggressive doesn't really bother us because our spread against them is so significant that we still feel like we compete with them very well. I don't know, Ersan, if you're seeing anything different in the market..

No, that's absolutely right. I think the changes that we see are not irrational at all. And then also, in some cases, when there is a promotional activity that we see, there's definitely an inferior quality of the product, not in comparison to what we do. But we're paying close attention to it. Nothing irrational..

Okay. Great. And then just holistically, Tom, you talked about holding the 42% gross margin rate.

But at what point would you sacrifice that to invest in price and try to induce activity? Or do you feel like the price actions and price reduction efforts that you've made over the past year would tell you that, that's not -- that potentially wouldn't be successful? I guess how are you thinking about that longer term?.

Yes. I would say we certainly have played around with price in multiple tests and multiple markets. And we tend to price against ourselves. So a customer comes within the store and they're trading down to something that we adjust price on. So the only place where we see good traction is in installation materials, which is what the Pro buys often.

We have been more aggressive on the pricing side on that. We'll continue to be aggressive there because we know that Pros in the store every other week, and we want to make sure that we're getting them taken care of. So in our ability to grow gross margin, we can still be aggressive within installation materials to be aggressive with price.

But because we're getting gross margin from first cost reduction, we're getting it from lower freight expense. Our better and best penetration has really remained unchanged. It's still driving business. That's growing gross margin and innovation and newness.

So this isn't a category where this is -- there's a lack of traffic in the marketplace behind the category versus this is a pricing issue. So I feel very comfortable with where our pricing is at. We'll continue to be aggressive with installation materials. But we'll drive gross margin improvement through our other levers..

Our next question is from the line of Seth Sigman with Barclays..

I wanted to follow up on the slowing performance that you saw in the third quarter and then again into the fourth quarter. What are you seeing in terms of mature stores versus newer stores? And part of that is just context around how you have a lot of new stores that are supposed to come into the comp base here in the fourth quarter.

I think they were expected to contribute positively. So I'm curious whether that is part of what's changed here as well..

This is Bryan. So I'll kind of start and let Tom or Trevor jump in if you need to. Yes. I mean, look, it was kind of broad-based across. We still have positive comps to the class of '22. So the new stores coming in the base were positive in Q3. Albeit kind of low single digits where they were.

So when you think about it, we comp to 9 3, still keep that same kind of waterfall that's always there in that 3 to 4-point range. And so if you think about our most mature stores, they were comping down in that low double-digit range. And so that's kind of held true across the board. So again, just we've seen it across.

It's not that our most mature stores are deviating from that trend at all..

Got it. Okay. And then just one follow-up question around the fourth quarter, thinking about the margins here. Just trying to go through the math. I mean you said gross margin should be similar, maybe up sequentially.

I mean does that imply more deleverage you typically would see? I mean, is there any other reason why you would see that impact? Is that just weighted store openings in the fourth quarter or anything else that you would highlight there?.

Yes, this is Bryan again on I'll jump in. So yes, I mean, look, it's all around the sales decline. So when comps go from 9.3 to down 12, your most mature stores are going to see a little bit more deleverage. That's really what's driving it. So you're right, we should be at, if not modestly above sequentially in gross margin.

So we will delever a little bit more. That's kind of where Tom and Trevor alluded to is there are things we're going to action. It's just hard to change your business over 30 days. So we're taking a hard look at it. We're taking those actions today in November and into December. . But again, we're halfway through the quarter.

So that's going to cause a little bit more deleverage. But again, we feel confident that not's the proxy for next year in each quarter..

The other -- just one other thing I would call out is we're opening 15 of our 30-plus stores and our new store's SG&A is materially higher than our mature stores. So we're opening almost not quite half of our stores in 1 quarter and Q4 is a little bit lower volume on a relative basis because of the holidays of Thanksgiving and Christmas.

And so it's both what Bryan is saying, plus we have a disproportionate amount of new stores opening in Q4 this year, even relative to last year..

Our next question is from the line of Steve Forbes with Guggenheim..

Tom, maybe just a follow-up on a comment you made about the new class of stores performing at the low end of pro forma or maybe for Bryan as well.

Can you guys just reframe the cost to build year 1 sales and EBITDA for us and then comment on how the 2024 class of stores is currently being planned relative to those metrics given the 4Q-to-date earnings?.

Yes. This is Trevor. I'll jump in and Bryan and Tom may as well. I mean we said for years that we think new stores do somewhere between $14 million to $16 million in sales and around $3 million in 4 wall EBITDA. We're probably going to be slightly below that $14 million in sales. So there's obviously a little bit of profitability.

But fortunately, our gross margin rate has gone up. And so our profitability is not going to be down that much because our gross margin rate is performing nicely. And so overall profitability is not going to be that far.

I think today, we're spending -- it depends on whether it's a build-to-suit or a second use facility, but call it $10 million in CapEx. We don't have to spend much on working capital because of our base payable. We put inventory in the stores, but we have a pretty long base payable. So it's not much above that $10 million.

And our pro formas, we feel very confident, again, after opening 200-plus stores over the last 12 years we've been here, we're going to get above a 12% return on invested capital when you measure it over a 20-year period of time.

And we've done much better than that in most of our history, but there's been inflation, sales are a little bit lower right now. So I hope that answers your question, but I think the sales will be lower than that $14 million for a year or so. but the profitability will not be that much off the $3 million because our gross margin rate is higher..

And what we've seen historically for the stores that opened a little bit below that pro forma, for them to get to that $28 million to $30 million, obviously, that's going to a comp tailwind. Kind of, it's going to put wind in our sales throughout the next couple of years. You guys think about that, too..

And then just a quick follow-up on the Pro. You mentioned comps for Pro above DIY where the company averaged.

Any specificity there on how the Pro comp is trending in the quarter?.

It was slightly negative -- it's closer to a mid-single-digit negative. I apologize, I was looking at the wrong number..

Yes. Q3 from Q2, we did see a little bit more deceleration in our Pro because it was down about -- I think we quoted it was down 1% in Q2. And in Q3, it's down roughly about 5.5%. ..

[Operator Instructions]. Our next question is from the line of Jonathan Matuszewski with Jefferies..

Great. One question with 2 parts. The first part is on 2024 units. So 2023 has been an odd year in terms of warehouse opening cadence. I think we have around half of them opening in 4Q.

And I know it's early, but could you give us a ballpark view of the cadence for 2024 and how you're thinking about the split between new and existing? That's the first part..

This is Trevor. Our cadence will be moderately better. We'll do more in the first half of the year. But we're still probably going to have a decent amount of stores to open in September and December. So the cadence will be better. We'll give you more details on that in the February call as we finalize those.

But we still have -- we'll have a little bit more in the back half of the year.

What was the second part of the question?.

Yes. Second part was on the comments about 2024 gross margin being up, and it sounds like supplier concessions may be a primary driver. Just curious whether we need to see flat behavior from the consumer in terms of mix. Basically, is gross margin expansion possible if we do see a potential trade down from better and best products..

I still think so. We haven't seen that yet, and we're in -- I feel like we're in the worst of it, and we still haven't seen the customer shift down to buying -- they're doing smaller projects, but they're not stepping into the opening price point, the good products. They're still buying more on better and best. Those continues to lead the way.

So with all of the strategic things that we're doing ourselves between innovation within a category, we'll bring that into a better margin rate between designer influence on sales. We've got 935 designers in 200 stores, and they're getting better and better.

So their influence on gross margin, selling more additional items to the project that come with higher margin, whether it's trims or drains or whatever. I think those things, along with supplier concessions, give us the ability, even if the consumer were to trade, which I don't think would happen, to still grow gross margin..

This is Bryan. So just don't forget, too, as I mentioned in the pre-remarks, we're on the weighted average cost. All the savings that still continued into this year from supply chain and product costs are going to work their way through into early next year as well.

So it's not necessarily you need additional concessions next year to even see that kind of sequential step a little bit..

Our next question is from the line of Stephen Zaccone with Citi..

I wanted to follow up on that last point.

So the fact that we've seen this better, best side of the business still holding up well, are you concerned that flows into next year? I mean, do you think that will likely see trade down? And I guess, in that environment, how do you think about your competitive positioning?.

So as I've said for this call, a few calls, I don't see it changing. I think that when a consumer -- when the end user elects to do a project in our category, I think the difference in buying to better invest isn't all that significant.

If you think about if they're buying for a bathroom to step up to the better and best product isn't all that significant. So I think the difference is within the looks of the product, the size of the product, I just think -- I see consumers that elect to do that job to continue to buy the better and best stuff.

It just look that much better within the store.

Before Trevor goes, sorry, just the other thing I was just going to say is that from a competitive standpoint, that's the good thing for us because on the real better and better stuff, we're competing against the independence and no matter how rational, if they get aggressive in their price, we're still going to be so much better for them.

The moat against them is just so wide. So I just -- I think the projects may -- the size of projects may continue to be a challenge until this passes, but I don't think better and best is going to change significantly. So far, it hasn't..

Our next question is from the line of Seth Basham with Wedbush Securities..

This is Nathan Friedman on for Seth. I just wanted to ask about 2024. You mentioned the risk for potentially negative comps based on the broader environment.

But can you help us understand how operating margins would look on low single-digit comps even after all the cost cuts that you are going to take?.

Yes, this is Trevor. I think we're just too early to talk about that yet. We're still in the planning process. We kind of gave some of the comments around sales and gross margin and stuff. But I mean if comps are negative, I would expect our operating margins to be under pressure. ..

Our next question is from the line of Keith Hughes with Truist Securities..

There's been a lot of talk in the industry LVT and issues with importing. I just -- was that an issue for you in the quarter? And I noticed that the laminate LVT category well underperformed the average sales, just generally where that product is going..

It has nothing to do with in-stock. I mean our in-stock within the store and in that category is at all-time high, so our in-stock is great.

So do you want to talk about the category?.

I mean on the laminate and vinyl side, I think it could be related to the sort of the job sizes as well. Mainly go to a bigger room. The special -- job sizes get smaller and laminate would be the immediate impact category compared to the others..

Yes, that's exactly why you see tile increasing as a percentage as well, more bathrooms and other things like..

Just to put a bow on it. Yes, we're doing a lot more smaller projects. We know that's going into a bathroom. And in a bathroom, you usually do the tiles.

So that's why the tile business -- one reason the tile business is performing so much better than the laminate is you're much more likely to put tile in a base than laminate, even though some of our laminates you could put in the bathroom..

Our next question is from the line of Andrew Carter with Stifel..

Building upon that, you're not worried about out of stocks right now. I think your purchases were down 8%.

How much more could you continue with kind of negative purchases? And then kind of building on that for cash flow, are you still committed to the kind of 3-year CapEx targets you laid out at the Investor Day, therefore big step-up next year? Or does next year look kind of similar to this year in terms of CapEx?.

Yes. The vast majority of our inventory is replenishment based. So we buy based on what we sell. And so I don't think there'll be any big changes. As we mentioned earlier, we made some aggressive moves late last year that are benefiting us on the inventory line.

As we get to the end of the year, I would expect our inventory levels to be down kind of in the mid-single digit range is what we're thinking about for that.

And the second part of the question again?.

CapEx, yes. So for next year, as we talk about it, just think about our -- the only thing that's going to cause a step-up. And if you remember from the Analyst Day is the 2 distribution centers that will have to come online. Right now, those are -- one's going to be late '24, early '25 and the other one is going to be kind of more middle of 2025.

Those are the only 2 reasons that you would see a step investment. Next year, so you'll see a little bit towards the back half in capital expenditures just for that..

Our next question comes from the line of Greg Melich with Evercore ISI..

I want to follow up on the store openings in the next year. You said that giving yourself some optionalities makes a lot of sense, but they're still more front-end loaded.

Is that because there's a natural cadence of where you're already fragment with a store and you're going to have to do it? And what is that lead time, as you think about flexibility into the back half of next year and beyond?.

Yes. So repeat the question again. I want to make sure I understand it..

Well, just you were going to do 35 plus stores next year. Now it's 30 to 35 so I'm wondering how -- well if you decide to not open a store, how much in advance do you have to make that decision before the balls are rolling and....

Yes, like 9 months. And so we have the ability to still -- we're not -- we're working on all of our sites for next year. We have optionality to do up to 35 sites, we could push those sites into the following year if we had to, towards the back. So we have optionality on a good majority of the sites, but it takes 9 months to make that decision..

Yes. So the ones that are opening earlier, obviously, they're under construction. We feel good about them. They're in great locations. And so those are the ones that you want to try to pull in as fast as you can because again, some sales are better no sales to push out. ..

Our last question comes from Justin Kleber with Baird..

Just wanted to follow up on the new store performance question. My math would suggest your recent stores are annualizing at maybe $10 million or so in year one. It sounds like you pushed back against that given your comments about the stores being at the low end of your pro forma.

So I just want to clarify where you think year 1 sales are going to land for recent stores.

And then what type of AAV do you need in order to break even on a 4-wall basis in year one?.

Yes. So I'll take the first part of that, and then Tom and Trevor can jump in if they want to add any clarity. Right now, we're looking at -- this year's class is probably going to average about 13% to 14%. So whenever we say kind of at or below that pro forma range.

So I would say that this year's class is looking at 13% to 14%, which again, we're still happy with and pleased with given the macro environment that they're opening. And then I would say from a breakeven standpoint, it really depends on location. It depends on everything. So -- because the cost structure among the class can be significantly different.

So from a breakeven standpoint, we haven't really seen that. But most of the time, it's around $8 million to $10 million, depending on where the location is from a breakeven standpoint, just given the cost structure..

Okay. Well, we appreciate the questions and appreciate your interest. We look forward to updating you throughout the quarter, and we'll talk to you in the next call. Thank you, everybody..

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation..