Floor & Decor Holdings 2026 Q2 Earnings Call

Please go ahead. Thank you, operator, good afternoon, everyone.

Welcome to Floor & Decor's fiscal 2026 second quarter earnings conference call. Joining me today are Brad Paulsen, Chief Executive Officer, and Bryan Langley, Executive Vice President and Chief Financial Officer. Before we begin, I want to remind everyone of the company's safe harbor language. Comments made during this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. These statements are subject to risk and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements for any reason, including those listed at the end of the earnings release and in the company's 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 certain non-GAAP financial measures. We believe these measures 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 measures 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 Brad.

Thank you, Wayne, thanks to everyone for joining us on our fiscal 2026 second quarter earnings call. I'll start by reviewing our second quarter performance and the key drivers behind our results. After that, Brian will share our perspective on the remainder of 2026, including how we're navigating the current environment while continuing to invest in our strategic priorities and long-term growth opportunities. Turning to our fiscal 2026 second quarter results, we are pleased to have delivered adjusted diluted earnings per share of $0.58, unchanged from the prior year period, despite a 2.1% decline in comparable store sales driven by continued softness in large discretionary flooring projects. I was pleased with how our team stayed focused on the factors within our control, delivering compelling value to our pros and homeowners, providing an exceptional customer experience, executing our merchandising and operational initiatives, and maintaining disciplined expense management.

Those efforts enabled us to maintain earnings per share in line with the prior year, while generating strong free cash flow, which provided the flexibility to repurchase $65.7 million in common stock during the quarter. I want to thank our approximately 14,000 associates for their commitment and hard work throughout the quarter. Their focus and disciplined execution demonstrated the resilience of our operating model and position us to continue creating long-term value for our shareholders. Now, let's take a deeper look at our second quarter results. Total sales increased 3% to $1,250.3 million, compared to $1,214.2 million in the prior year period. Sales to pros continued to outperform the company and grew approximately 4% from the same period last year, accounting for about 55% of sales. Comparable store sales declined 2.1%, an improvement from the 3.7% decline reported in the first quarter, reflecting steady sequential improvement throughout the quarter.

Comparable store sales declined 5.1% in April, declined 1.3% in May, and declined 0.3% in June. The improvement in comparable store sales reflected improving trends across several key metrics. First, our net promoter scores remained high, driving a sequential improvement in customer conversion. This is one proof point in how our store associates are highly engaged in this environment to win every sale. Second, comparable transactions also improved, declining 2.9%, compared with a 5.5% decline in the first quarter. Lastly, average ticket grew 0.8% year-over-year, despite lapping last year's strongest quarterly growth rate of 3.8%. Both ticket and transactions were aided by a sequential improvement in comparable square footage sales from the first quarter. Demand softened around the Fourth of July holiday period while the housing market remained constrained by subdued existing home sales activity.

Third quarter to date comparable store sales declined 2.2%. Encouragingly, sales trends improved in late fiscal July and early fiscal August. Geographically, our comparable store sales improvement broadened during the second quarter. Our west region continued to outperform the company and delivered positive comparable store sales, excluding cannibalization, and encouragingly, our east region also turned positive on that basis. Furthermore, among our 16 districts, eight reported positive comparable store sales excluding cannibalization. From a merchandising category perspective, three departments outperformed the company's comparable store sales performance during the quarter: installation materials, tile, and wood. Installation materials continue to deliver strong year-over-year growth as we expanded our share of wallet with pros and further strengthened our position in the market.

We continue to execute our supply house strategies and expand our store base, we believe we are becoming an increasingly convenient and reliable destination for pros to purchase installation materials. Tile remained a standout performer, supported by the continued success of key initiatives, including the Vetta Elements Collection, which continues to resonate with both pro and homeowner customers. Growth in the wood category was driven by market share gains in engineered and unfinished wood, acoustic wall panels, and the success of our bulk out strategies. We expect to build on this momentum in the second half of 2026 with new SKUs and opportunity buys. In the vinyl flooring category, comparable store sales and comparable square footage sales sequentially improved during the quarter, supported by a combination of merchandising, pricing, and value-focused initiatives that we will continue to build on in the second half of 2026.

The combination of slowing demand for vinyl and excess industry supply continues to put pressure on the category, which could continue into 2027. Importantly, sales penetration of our better and best offerings increased both sequentially and year-over-year, reflecting sustained customer adoption of our higher-value offerings and reinforcing the effectiveness and resilience of our strategy despite ongoing macroeconomic pressures. In June, we are excited to launch NatureMatch, a new private label collection that brings the authentic look and feel of natural wood and stone to consumers at a more accessible price point. Spanning nearly 100 SKUs across porcelain tile, luxury vinyl plank, and waterproof laminate, NatureMatch reflects our ongoing commitment to technology, product innovation, and value. In a challenging home improvement market, differentiated collections such as NatureMatch continue to drive customer engagement, support conversion, and create incremental cross-category selling opportunities.

By combining premium design, strong performance, and a compelling value proposition, we are expanding our appeal across customer segments while continuing to gain market share. As we look to drive sales in what we expect will remain a challenging demand environment through the second half of 2026, our marketing strategy is focused on reaching high-intent customers at key decision points in their purchase journey through more targeted, higher return tactics. We are aligning our marketing efforts across stores and digital channels. Let me turn to our new warehouse store expansion. Through the first half of fiscal 2026, we opened 11 new warehouse format stores, including five in the second quarter. Syracuse, New York, Portland, Oregon, Mount Vernon, New York, Houston, Texas, and Schererville, Indiana.

With approximately 55% of our planned 2026 locations now open, compared with 35% in the prior year period, the front-loaded cadence we outlined at the start of the year is progressing in line with our expectations. These locations extend our presence in tier 1 and tier 2 markets, where household units, population density, and home improvement activity support the long-term demand profile we target in site selection. We continue to expect the class of 2026 new stores to average approximately 55,000 sq ft, a format that, while smaller than our legacy footprint, allows us to enter higher density markets without sacrificing sales productivity. We expect the balance of our 2026 store openings to be weighted through the fourth quarter. Let me spend a moment on our omnichannel strategy and the digital capabilities we are building to support it.

In the second quarter, online sales penetration reached 20.3% of total sales, up from 18.6% in the prior year period and up 110 basis points from the first quarter. This continued improvement reflects the progress we are making to enhance the customer experience across both digital and store channels. We believe delivering a best-in-class omnichannel experience represents one of our largest opportunities to accelerate growth, gain market share, and achieve our long-term sales objectives. As customer expectations have evolved, particularly around digital engagement and convenience, we have recognized the need to strengthen our capabilities and are taking action. We have launched a comprehensive 18 to 24-month transformation to enhance the customer experience, modernize our digital capabilities, and create a more seamless connection between our online and in-store experiences. Through targeted investments in talent, technology, and operating capabilities, we are building a stronger foundation for long-term growth.

Importantly, our strategy is centered on the distinct needs of our two core customer segments, pros and homeowners. For homeowners, flooring is a highly researched and project-driven purchase. Our research shows that about 70%-80% of customers search online before visiting stores. Customers seek inspiration, education, project guidance, and confidence before making a buying decision. Our objective is to support them throughout that journey from initial project discovery to final installation. For pros, the priorities are different. They value speed, convenience, pricing, transparency, inventory visibility, and tools that help them manage their businesses more efficiently. Our focus is on creating a seamless experience across every touch point, making it easier for pros to do business with us, whether they are planning a project, purchasing materials, managing rewards, or picking up an order.