Floor & Decor Holdings, Inc. Q2 2026 earnings call

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, Bryan 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 July 4th 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 one and tier two 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.

A key component of that strategy will be the launch of our new pro app next year, which will serve as the connective tissue across our pro ecosystem. By bringing together purchasing, loyalty rewards, pricing, and project management capabilities in one place, we are building a differentiated pro value proposition, particularly when compared with independent flooring retailers. While there is meaningful work ahead, we are encouraged by the progress we are seeing. We believe a stronger digital foundation and a more seamless omni-channel experience will increasingly drive customer acquisition, engagement, conversion, market share gains, and ultimately, long-term shareholder value creation. Let me spend a moment on our regional commercial account managers, or RAMs, who operate in partnership with our warehouse stores.

We continue to see meaningful opportunities to drive growth and have expanded our team of RAMs to 80 associates, significantly increasing our ability to serve customers, develop relationships, and pursue non-specified commercial product growth opportunities. As we look at the remainder of the year, our focus will now shift from adding RAMs to increasing productivity. We plan to further strengthen the infrastructure, training, analytics, and operating processes needed to support long-term scalable growth. Our objective is to build a commercial organization that is increasingly productive, repeatable, and scalable. While we remain early in these initiatives, we are encouraged by the progress we are seeing. Turning to Spartan Surfaces, the second quarter represented an early inflection point for the business, with results improving sequentially from the first quarter and momentum building throughout the period.

Thanks, Brad. Before turning to our financial results, I'd like to add my thanks to our associates across the organization. As I reflect on the second quarter, what stands out most is our ability to stay focused on the factors within our control. The quarter reinforced one of the strengths of our company, our ability to execute consistently across a range of operating environments. We managed expenses prudently, advanced key merchandising and operational initiatives, and maintained a strong focus on free cash flow and capital allocation. These efforts enabled us to deliver adjusted diluted earnings per share of $0.58, which was above our expectations, generate strong free cash flow, and return $65.7 million to our shareholders through the repurchase of common stock during the quarter. Before moving to our underlying operating performance, let me discuss two items affecting comparability during the second quarter.

First, we recognized a $45.2 million net pre-tax benefit related to the IEEPA tariff refunds, which affected gross margin, SG&A, and interest income. Second, we recognized a $1.3 million pre-tax loss on debt extinguishment associated with the refinancing of our credit facilities. Collectively, these items resulted in a net after-tax benefit of $32.9 million, contributing $0.31 to diluted earnings per share. Our second quarter GAAP diluted earnings per share was $0.89, and excluding these items, adjusted diluted earnings per share was $0.58, flat to the prior year period. A reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measures is included in today's earnings release, and additional information regarding these items is provided in our Form 10-Q.

Turning to our underlying operating performance, our gross profit increased $70.4 million, or 13.2%, compared to the same period last year, driven primarily by a $56 million one-time benefit from IEEPA tariff refunds related to inventory we have previously sold through. The remaining amount of tariff refunds was recognized as a reduction to inventories net related to previously capitalized amounts and will be recognized as we sell through the inventory. Excluding the IEEPA tariff refunds benefit, adjusted gross profit increased $14.3 million, or 2.7%, compared to the same period last year. Adjusted gross margin for the quarter was 43.7%, a decrease of 20 basis points year-over-year, which was within our range of expected outcomes. SG&A expenses increased $28.3 million, or 6.3%, in the second quarter compared with the prior year period.

The increase was driven primarily by the 24 stores opened since the second quarter of fiscal 2025, as well as higher incentive compensation related to the recognition of IEEPA tariff refunds. SG&A for non-comparable stores increased $26.7 million, while SG&A for comparable stores declined $13.7 million, reflecting our ongoing focus on expense management and productivity initiatives. As a percentage of sales, SG&A deleveraged 120 basis points to 38.3% from 37.1% in the prior year period. The one-time expenses related to IEEPA tariff refunds contributed approximately 110 basis points of the deleverage in the second quarter. Adjusted EBITDA increased 1.2% to $152.0 million from the same period last year. Our second quarter adjusted EBITDA margin was 12.2%, compared with 12.4% in the prior year period. Our second quarter net interest income was $2.3 million, compared to net interest expense of $1.1 million in the same period last year.

The year-over-year change was primarily driven by a one-time benefit of approximately $2.8 million in statutory interest on our IEEPA tariff refunds, along with higher interest income from larger cash balances. Additionally, we incurred $1.3 million of debt extinguishment costs associated with the refinancing of our credit facilities. Our second quarter income tax expense was $29.1 million compared to $17.6 million during the same period last year. The effective tax rate was 23.3%, up from 21.8% in the same period last year, primarily due to a decrease in federal tax credits. Excluding the tax impacts related to the IEEPA tariff refunds and the loss on extinguishment of debt, our effective tax rate was 22.3% for the second quarter of 2026. Let me turn to our balance sheet and free cash flow, both of which remain strong.

During the second quarter, we completed a comprehensive refinancing of our credit facilities that further strengthened our balance sheet and enhanced our financial flexibility. We entered into a new $200 million term loan facility maturing June 2033 and used the proceeds to repay the remaining $197.1 million outstanding under our prior facility that was scheduled to mature February 2027. In addition, we entered into a new $800 million ABL facility maturing June 2031, replacing the current facility that was scheduled to mature August 2027. Collectively, these transactions extend our debt maturity profile, preserve ample borrowing base capacity, and further enhance the flexibility of our capital structure. We ended the quarter with $942.4 million of unrestricted liquidity, consisting of $320.6 million in cash and cash equivalents and $621.8 million of available capacity under our ABL facility.

During the 26 weeks ended June 25th, 2026, we generated $278.4 million of cash provided by operating activities, compared with $155.3 million in the prior year period. We continue to make progress on our working capital and inventory productivity initiatives, as evidenced by total inventory increasing only 0.7% to $1.1 billion compared with December 25th, 2025. Our net cash used in investing activities was $136.7 million, leading to significant excess free cash flow. Supported by our free cash flow and financial position, we began executing against the $400 million share repurchase authorization announced on our first quarter earnings call. During the second quarter, we repurchased 1.3 million shares of common stock and returned $65.7 million to our shareholders and ended the quarter with $334.3 million remaining under the share repurchase authorization. Let me now turn to the macroeconomic considerations informing our outlook for the remainder of fiscal 2026.

The demand environment for large discretionary home improvement flooring projects remains choppy, consistent with what we're seeing in housing market activity and broader macroeconomic conditions. Although existing home sales improved modestly during the spring selling season, the recovery has yet to gain meaningful traction, with June activity remaining near historically low levels of approximately four million annualized units. In addition, housing affordability continues to be challenged, and persistent inflationary pressures, as well as potential changes in tariffs, continue to influence consumer behavior. As a result, our outlook assumes that consumers will remain cautious and project demand will continue to be influenced by the pace and sustainability of any improvement in housing market activity. Following our better-than-expected second quarter earnings and the anticipated greater impact from the repurchase of common stock, we have increased our fiscal 2026 earnings per share outlook.

As a reminder, fiscal 2026 includes a 53rd week, which will be reported in the fourth quarter. I will highlight the expected contribution from the 53rd week as a part of our guidance. Sales are expected to be in the range of $4,770 million-$4,990 million, or increase by 1.8%-6.5% from fiscal 2025. The 53rd week is expected to contribute approximately $65 million to sales. Comparable store sales are estimated to be flat to down 4%. Comp average ticket is estimated to be flat to up low single digits, and comp transactions is estimated to be down low to mid-single digits. Adjusted gross margin is expected to be approximately 43.6%-43.8%. The first quarter gross margin of 44.0% is likely to represent the high point for the year. SG&A, as a percentage of sales, is estimated to be approximately 38%.

From a quarterly perspective, the first and fourth quarters will be the most pressured from new stores if you exclude the one-time cost associated with IEEPA tariff refunds in the second quarter. Interest income expense net is expected to be approximately zero. This includes approximately $2.8 million of statutory interest benefit from tariff refunds. Tax rate is expected to be approximately 23%. Depreciation and amortization expense is expected to be approximately $250 million. Adjusted EBITDA is expected to be approximately $550 million-$585 million. The 53rd week is expected to contribute approximately $11 million to adjusted EBITDA. Diluted earnings per share is estimated to be approximately $2.20-$2.45. Adjusted diluted earnings per share is estimated to be approximately $1.88-$2.13. The 53rd week is expected to contribute approximately $0.08 to adjusted diluted EPS, which implies our 52-week adjusted diluted EPS to be $1.80-$2.05.

Diluted weighted average shares outstanding are estimated to be approximately 107 million shares. CapEx is estimated to be approximately $240 million-$275 million. Operator, we would like to now take questions.