Greetings, and welcome to the Floor & Decor Holdings, Inc. First Quarter 2024 Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Wayne Hood, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's fiscal 2024 First 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, including 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 measures can be found in the earnings press release, which is available on our Investor Relations website at ir.flooranddecor.com. The 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 2024, First quarter earnings conference call. During today's call, Trevor and I will discuss some of our fiscal 2024 first quarter earnings highlights. Then Bryan will provide a more in-depth review of our first quarter financial performance and share our thoughts about some of our financial projections for the remainder of fiscal 2024. We are pleased to report fiscal 2024, first quarter diluted earnings per share of $0.46, which surpassed our expectations. We take pride in these results as they demonstrate how our teams can manage our profitability by continuing to strategically grow our gross margin rate and prudently manage expenses without sacrificing customer service amid ongoing weak demand for hard surface flooring. These results are a testament to our store associates' hard work and dedication, reflecting their tireless work to drive sales and engagement with our homeowner and Pro customers daily. We are happy to report that their efforts continue to result in high customer service scores across all our touch points, which helps set us apart from our competition. During this uncertain demand period for hard surface flooring, it's important for us to focus on what we can control. Therefore, we've taken steps to reinforce our price and value messaging at the front of our stores. We do this by offering bulk out displays of opportunity buys, deals of the weak and compelling adjacent category offerings. Our strategy also includes having well equipped salespeople and designers on the floor at the right time. We proactively agreed and assist customers who enter our stores by asking them what project are you working on? This approach helps us drive conversions and customer satisfaction. We are also diligent about following up on open quotes and are focused on closing high-value…

Thanks, Tom. We take pride in the execution of our sales-driving initiatives by all of our associates to grow our market share and manage our profitability despite the near-term challenges in the demand for hard surface flooring. In the first quarter of fiscal 2024, our sales declined by 2.2% to $1,097.3 million, with comparable store sales falling by 11.6% from the same period last year. As expected, comparable store sales sequentially improved as we cycle past easier sales comparisons and successfully execute our sales-driving initiatives. Monthly comparable store sales declined 14.7% in January, 10.7% in February and 10% in March. Our fiscal 2024, second quarter-to-date comparable store sales declined 9.3% from the same period last year. As discussed in our fiscal 2023 fourth quarter prior earnings conference call, we expect the first half of 2024 to represent our most challenging comparable sales period. From a regional standpoint, we are seeing some, albeit early positive sales trends emerging from our West division. Comparable store sales are improving sequentially and are better than the company average. The West division was the first to experience softening sales in 2022 and has been less impacted by cannibalization compared to other divisions due to fewer new store openings. Comparable store sales were similar in our East and South divisions, excluding the impact of opening new stores. Turning to our sales trends by merchandise categories. Like the fourth quarter of fiscal 2023, our fiscal 2024 first quarter comparable store sales in tile, wood, installation materials and adjacent categories were better than the overall decline of 11.6% in comparable store sales. Laminate and vinyl remains our weakest merchandise category. We are pleased that our merchandise strategies continue to resonate with our customers as they remain consistently drawn towards our better and best price point products, which offer…

Thank you, Tom, and Trevor. I want to express my gratitude to all of our associates who contributed to our fiscal 2024, first quarter results. Your hard work, dedication and commitment enabled us to remain flexible, strong and resilient which allowed us to exceed our expectations at a time when customers spending on discretionary hard surface flooring is uncertain. Although first quarter sales fell at the low end of our expectations, we delivered diluted earnings per share of $0.46 surpassing our expectations. This achievement is due to the diligent efforts of our teams in delivering on our gross margin expansion plan and prudently managing expenses and capital spending. Now let me discuss some of the changes among the significant line items in our fiscal 2024 first quarter income statement, balance sheet and statement of cash flows as well as our outlook for the remainder of the year. Our fiscal 2024 first quarter gross margin rate was better than expected, increasing 100 basis points to 42.8%. This was mainly due to favorable supply chain cost and to a lesser extent, product cost. The increase in our gross margin rate enabled us to grow our gross profit by 0.2% from the same period last year despite a 2.2% decline in sales. Our fiscal 2024 first quarter selling and store operating expenses increased by $30.7 million or 10.1% to $334.3 million from the same period last year. This growth was primarily driven by an increase of $39.6 million from operating 31 additional stores versus the same period last year and $3.5 million at Spartan, partially offset by a decrease of $12.4 million at our comparable stores. As a percentage of sales, fiscal 2024 first quarter selling and store operating expenses delevered by 340 basis points to 30.5% from the same period last year.…

[Operator Instructions] And our first question comes from the line of Chris Horvers with JPMorgan.

My first question is, can you talk about how the quarter played out relative to your expectations? I think January had some weather impact. How did it proceed from there and through April? And related to that, how reflexive is demand to mortgage rates are above -- above or below 7%?

Chris, this is Tom. I'll start, and Bryan can jump in. The quarter we -- the comp in the quarter, each month got a little bit better. We did start off January -- I think January was a negative 14% what was it? It was negative...

Negative 10%.

Negative 10% and now we're negative 9.3%. So the comps moderating were going to be up against easier comparisons to further along we get into the year. So we'll see how that plays out. We are affected interest rates are continuing to go up. But at the last report, 7.5% back to that approaching 8%. It's the highest one of the year. We don't know how that's going to affect. We've only got existing home sales reported through the month of March. They step back in the month of March. So it's hard to tell what [indiscernible] will happen. I think interest rates will have an effect on existing home sales and make it a challenge.

Maybe asked another way is, I guess, relative to how you thought about the cadence of the year, I guess how much more are you sort of implicitly back half weighting the sales relative to what you thought a few months ago?

Yes. I mean I think that's what you heard in the prepared remarks is that we're trending towards the lower end. So I mean, I think it's we're not putting more to the back half. We do expect things perhaps to get slightly better from where we are today, but that's reflected in that guide. And that's why we kind of alluded in the call that we're trending more towards the lower end.

And Chris, the only thing else I would say is, the further we get into the year, I mean, you started in June of last year, we started bumping along below $4.1 million annualized for only 1 month went above that $4.1 million. That was in the month of February that just occurred with at $4.38 million So as we start lapping those numbers, the spread year-over-year between existing home sales gets a little bit better. And as soon as they turn positive, we do think there'll be a lag, but then it gives us a better opportunity to comp positive.

Exactly. I mean, just to reiterate what we said on the last quarter, we do expect sequential improvement in both transactions and ticket with the biggest movement coming in transactions. So if you think about it, we just sit in Q1 at negative 77% we'll get towards the end of the year and being flat to slightly positive. And the same thing on ticket, it's down 42% in Q1. That will stay kind of where it is and then move towards hopefully getting flat towards the end of the year. So both of those movements are based on easier compare than slightly improvement through the year.

Got it. So if I were just going to reward it. like essentially, you're leaving the back half -- your back half view is largely unchanged and it's really just what's happened in the first half, and that's why you expect the low end of the range?

Yes. That's right.

Yes, that's right.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

It's Simeon. The comments that were made on the West I don't know if it was normalizing or improving. Can I ask if that's happening against easy compares or you're seeing some reacceleration? And then is that DIY or Pro? Are you able to decipher that?

Simeon, this is Trevor. The West started off having issues a good 6 to 8 months before the rest of the business in 2022. So they've had this now for longer -- they've been dealing with this for a longer period of time because they had some of the more strenuous -- negative existing home sales to start off with. So -- we think they're going up against easier comparisons. I think some of the housing malaise that ended up affecting everybody has come across the United States, and now we're seeing some of that more difficult in some of our bigger markets. So places like North Texas and Florida and Georgia and maybe to a lesser extent in the Midwest and the Northeast. And so I think just to call it the housing recession for lack of a better term, started out West and worked its way east. And so that's why they're doing better. And conversely, that's why some of our stores in Texas and Florida and Georgia and markets like that, the Mid-Atlantic are having a harder time because it just didn't hit them at the same time as the hit out West.

Got it. Okay. And my follow-up is, you also said in the West, maybe some stores not as cannibalized from growth. The cannibalization rate of the business, and I don't know if you've mentioned it recently, is that -- that's more controlled by the percentage opening? How much you're opening stores in the region versus the industry's health? I mean the industry's health is controlling the growth, but I was obviously in tougher environments. It would feel like that cannibalization would pick up as well? Or is it more dictated by the pace at which you're opening stores?

Yes. I think it's more of the latter. Our cannibalization last quarter was actually a little bit better than we'd seen in the previous 4 quarters, that's obviously a little bit nice to see. And that could be timing. But yes, generally speaking, our cannibalization is dictated by where we're opening stores and what kind of store we're opening against. And so if you're opening a brand-new beautiful bigger store against an older, smaller store, you're going to have -- and it's closed within, call it, 30 minutes or less, you're going to have higher cannibalization. If it's a big store going up against another new big store that's, call it, 45-minute drive time, you're not going to see as much cannibalization. And I think we said this year, I think some -- maybe 70% of our stores are in existing markets which is probably similar to last year as well. So I think we own that cannibalization more than the market factors.

The next question comes from the line of Michael Lasser with UBS.

How do you think your relative market share trended in the first quarter versus where it had been, especially in more mature markets? And what's happened quarter-to-date, especially in light of your comments that you think you'll hit the low end of the full year top line range?

Yes, Michael, this is Tom. I'll take a shot at that first. So it's hard to know in the first quarter kind of what happened from a market share perspective, not everyone's reported yet. So you have to take a minute to digest everyone's numbers to see. When you look at last year, Floor & Decor grew our revenue by 3.5% and Catalina predicted the market went down $5.2 million the big boxes comp negative and flooring was worse than them. And across the publicly traded competitors, Tile Shop, Lumber Liquidators, they're all negative. Mohawk reported North American sales negative. So we were positive. In the first quarter, only Mohawk reported out, they reported negative and we were -- while we were negative or slightly better than they were. So -- and I don't think much changed. When you look at the competition and the competitive landscape, I think the way we were competing in last year versus the way we compete in the first quarter, I haven't seen much of a change. So I would anticipate that we're continuing to take market share in a really tough market.

Okay. My follow-up is there anything you could say about what's been happening quarter-to-date, especially in light of the comments on getting to the low end of the full year guidance range?

I mean, quarter-to-date -- again, the comp is modestly getting better month-over-month. So it's -- we would have hoped it would get better quicker. March's existing sales taking a step backwards, there's a lag to what we see there. But when you look at it, I mean we just -- we've been in this since June of last year, this really low $4.1 million-ish existing home sales and with only 1 month being up at $4.3 million, which is February. So it just gives us a pause as we think about the rest of the year. We'll know more Spring is a very important selling -- it's very important for existing home sales, and we'll know more when we get the data of what happened during the month of April, what's going to happen during the month of May and what happens in June with the lag of our benefit from existing home sales, if they're good, and we should be good. If they're not, then it will be tougher, but we'll talk about that when we get to the second quarter.

Can I just dig into that, Tom, is there a case? Or what would be the case where your trends become disconnected from existing home sales, either on a positive on the negative? Would it be if there was some product category change that Floor & Decor was not well positioned for? Would it be that your prices became uncompetitive or maybe more competitive? What would be that scenario?

Chris, this is Trevor. I think just reading a lot of the other large consumer products companies that have reported here recently they had a common theme and it's just that the consumer is under pressure. Inflation is still a little bit high, savings rates have been drawn down. They don't have the same level of discretionary spending power that they had. And so that's probably the only thing that's -- one of the things that we're watching closely is just as that consumer stay under pressure. Historically for us, as you've well noted in your reporting and others have as well, we have had a very high correlation to existing home sales. I think the only question I have now is just, is that consumer in a more stretched position than they've been because of inflation and just where we're hearing other retailers at the consumer feels a little stretched.

Yes. And Michael, I would just say that the from the way we compete across every category, we saw that hasn't changed. I mean our stores are -- we still have a competitive advantage across every department that we participate in. So I don't think there's anything fundamental in the model that would affect that. It's much more the health of the consumer that would be bit a challenge.

[Operator Instructions] And our next question comes from the line of Chuck Grom with Gordon Haskett research.

I'll just -- may be I'll try 2-part part here. Can you just remind us on the store openings, just to switch gears. How many are in the smaller format locations. And bigger picture within your 500-store long-term target, can you remind us the mix of small versus large locations? And then I guess as a follow-up, if comps were to continue to trend down in the high single-digit rate, say, through the second or third quarter. I guess how do you think about store growth in '25 and '26. I'm sure you've already begun that planning process?

Do you want me to take the first part and I'll take the second part, Trevor?

On the -- yes, I was looking to see -- I don't have it off the top of my head how many of the smaller format. It's -- I think it's less than 20% of our stores maybe less than 30% of our stores are going to be in the smaller format this year relative to the larger format. And sometimes that's mostly in a smaller market. But that could also be if we're opening a store in a more tertiary market that's further out in existing markets. .

Yes. And then '25 is a long ways away. So we're not prepared to talk about what our new store growth will be in 2025. We have slowed our new store growth down since existing home sales became under pressure. We went from opening 20% new units per year to -- now this year, it will be -- we gave guidance of 30 to 35 stores still believe we'll be within that range. We'll watch as the year progresses and make a determination on next year and let you know as we get to that determination. So as of now, we've been -- we're not going -- we're not going to grow at all costs. We're going to make sure that we're thoughtful about the way we're investing in the business. We already have been thoughtful about the way we're investing in the business. If we think that this is -- if the slope or the range of recovery is continuing to slow, then we'll make the best decision we can and how we deploy our capital. We still believe -- if it doesn't affect our long-term plans of opening 500 stores, the pace of opening. It's already slowed a little bit, and that may continue. It will depend on how the back half goes.

And I just looked real quick while Tom was giving that elegant response to that, I think we have 7 of our stores roughly as they're going to be the small format stores this year.

And the next question comes from the line of Zach Fadem with Wells Fargo.

So as we look back over the years, we've seen a lot of tailwinds both internally and externally from aging housing stock, you've had shift to hard surface, house slippers, et cetera, and then some company-specific tailwinds like designers, Pro loyalty, et cetera. So just as we think about the next category upswing, could you walk us through what you think the next round of tailwinds could be both internal and external? And is it fair to say that your comps on the next upswing could be as strong as they've been over the last upswing?

I'll take -- this is Trevor. I'll take a stab at that. I mean I think we're making investments in key categories today that we think there's unique to us when you look at our stores, XL slabs that Tom talked about, that's one area. Larger type products are trending better. Our stores are big. That's a nice category. It's small today, but if you look at our adjacent categories, that category is growing. We've got ideas there where we could continue to add adjacent categories. I think on the macro front -- so those are things that, yes, I mean, we got great merchants. We've been thinking about ways to drive merchandising strategies that are unique to us, and we'll continue to do that. I think on the long term, as you guys have heard us say many times over the last 7 or 8 years is you've got 130 million housing units in the United States. 80% of them are over 20 years old. While on average, they're 40 years old. And there's just a replacement cycle that has to happen. So I do think everybody in this space, including us, should do well over the medium to long term just because we've got -- and we're not adding, as you know, we're not adding nearly as many new homes relative to the household formation that we're having as a country. And so that part of the reason house values continue to go up and up. So I think for us over the medium and long term, we're feeling good. And one last thing I would just mention [ Bryan ] that we're in the stores all the time, and we're seeing our competition all the time. And I feel like even though our business isn't great, as Tom mentioned, our performance relative to all our peers is much better. But I think when you look at the stores, the aesthetics of the stores, the in-stock levels are better, customer service scores are higher. Our turnover is down. Our supply chain is resilient. We're ready when it comes.

Zach, I was going to say even outside the 4 walls too, we're super excited about the opportunity in commercial as well. So we're in the early innings there. So when you think about your total sales growth, that's something that the next couple of years should accelerate as well.

And last thing, I think Trevor kind of mentioned, I would just say that, we haven't changed anything with our product line view strategy. We're continuing to bring in newness across every department that we have. Newness in fashion, newness in durability, across every department. So as the market turns, I mean, I feel better about our product [indiscernible] today, but I didn't [indiscernible] 20%. So it's -- we're just in a tough macro. This too shall pass. It's just a question of when.

The next question comes from the line of Steven Zaccone with Citi.

I wanted to follow up on 2 points that have already been asked. The first on the West. So what are you actually seeing that's driving the improvement? Is it more traffic? Are you actually starting to see some larger project sizes? And then on the second aspect, cannibalization, can you just remind us what is that right now as a drag to the comp? And what is the long-term goal for cannibalization?

Yes. So I'll do my best to answer those. So it's more transaction-based. I would say our size has increased slightly, but it's not the main driver. It's really around activity, so it's traffic and transactions on the West Coast. That we're starting to see that get healthier out there. And the cannibalization, we've never actually given the number, so I can't quote exactly what it is. I'm going to say exactly what Trevor just said is it was slightly favorable compared to historical trends, more recent trends in Q1, but it's relatively in line, and we expect it to stay there probably over the next couple of years as we're still opening stores. It's just a matter of where the stores are and how many stores they impact to Trevor's point, it's more planned cannibalization on our side.

Long, long term, assuming we're still opening this level of store count, it will come down just because the -- you won't have as many -- won't have as many new store openings because we're not adding 20% new stores. Somewhat offset by the fact that at some point, we'll run out of new markets right now. I think we're 70-30, 70 in existing stores and 30 new markets. At some point, it would be 100% in all markets because they just want to have a lot of new stores. But I think the other side of that is our new store productivity will get better because I've seen it here and as well as other companies I've worked at when you open the second half of stores. So in Houston, for example, the first 5 stores did good, but the second 5 stores did incredibly good same thing in Dallas, Atlanta, Phoenix. So I do think our new store productivity over time will hopefully improve as we open more stores in these existing markets where they got better brand recognition, more convenient for the pros, more people know who you are.

And the next question comes from the line of Steven Forbes with Guggenheim Securities.

Trevor, I think you mentioned installation materials. I was curious maybe if we could just focus on that with my question on, how are you sort of thinking about what the right penetration in terms of the opportunity is? And how penetration sort of varies across the store fleet today? And if there's anything in particular, right, that you sort of seen as a driver of success, right, and maybe those stores that have the highest penetration today?

Yes. I mean I think it's a lot of heavy lifting by the merchandising team and the store operations team. We made some great dedicated strategies going on 2 years ago now or so, where we brought in some of the best brands, that's the one part of our business where brands matter. So we brought in 2 of the best brands that are out there for installation and setting type products that really matter to the pros. We increased our in-stocks so that they could have confidence that we were in there. That we have the in-stock jobs when they need it. We got our pro team some really good reporting on where we were underpenetrated with pros. And so we have exceptional CRM data that is at our hands of our products, so they can see this pro is at 17% of installation, best pros are at 25% to 30% installation. So I'd say it's a lot of work that our store operations and our merchandising teams have done. I don't know that it will ever get there, but we understand the industry. It's roughly -- I mean almost 25% of the total sales are installation materials. When you put our 2 installation materials categories together, I think we're close to 20%. So our goal is to continue to grow. It was our best-performing category last year. I think it's other than adjacent categories. It's still our best-performing category again this year. And so yes, we've done a good job there, and we've got more opportunity to continue to focus on that.

Perfect answer. The only thing I would add to your answer is, I think a lot of times the purchase of the product and the purchase of the installation materials occurs at 2 different times because the end user may make one purchase and the Pro makes to the other purchase. And I think when we didn't have markets build out, you had to drive past a lot of home improvement centers to get to a Floor & Decor. And I think the more Floor & Decors we have in the market where we take that drive time out of the equation, the more convenient we are for the pros, not to drive by 5 or 6 other stores to get to our store and some more. So that penetration should continue to go up.

The next question comes from the line of Seth Sigman with Barclays.

My question is on average ticket down 42%, a little bit better than it's been. Over the last few quarters, you've talked a lot about the decline in project sizes. Can you just remind us where are we in that correction? Are we close to cycling that? And then I guess the other side of it could be, do you think this could be one of the factors that perhaps is just different for a while in the context of some of the consumer pressures you mentioned earlier, meaning that you just don't go back to where project sizes were in the last couple of years. How do you guys think about that?

I'll take the second part of the question. This is Tom. I'll take the second part of the question, and then Bryan can take the first part of the question. On the second part of the question, I think job sizes will come back to what they were historically. I think our job size today just has to do with -- as long as existing home sales, the amount of flippers that are out of the market right now. Again, there's a good correlation when someone's buying or selling a house, they tend to redo the whole house and flooring versus doing a small project, when houses aren't turning over, they'll upgrade a powder bath, they'll upgrade at backsplash. So I believe that when existing home sales come back up to that $5 million annualized that our job sizes will go back to what they've historically been, but it's going to be dependent on that improvement. So I don't think there's anything fundamentally changed with the way people buy the category. I think the square footage drop is just a product that was kind of with existing home sales. So I'll let you answer the other part.

Yes, I'll take the first part. This is Bryan. So yes, I mean, we've kind of bottomed out. Whenever we talked about it all through last year and were sequentially declining. I think from Q4 to Q1, it kind of moderated. So I think we've kind of hit the bottom to Tom's point, I think it has to do with the compilation of stay-in-place activity, which is more your small powder bathrooms and things like that, which is why we actually saw a pickup in tiles as well, if you look at our categories. If it's some of the bigger projects, it's more in laminate and vinyl and other things that we've alluded to is that put stress on that category. So I agree with Tom, as we see a pickup in size, you also should start to see that in laminate and vinyl categories, with categories that go in some of these bigger rooms as well so.

And the next question comes from the line of Justin Kleber with Robert W. Baird.

Just wanted to ask more of a hypothetical one as it relates to pricing and gross margin. If some of the mom-and-pops or even your regional competitors start to getting more aggressive with price. Would you feel the need to maintain a similar price spread? Or are your gaps so wide today that you would be comfortable not necessarily responding if pricing in the industry does get rational?

Look, I think the independents are -- I think they're aggressive, I think they've been aggressive, and I think our spreads are good against them. If they start getting more aggressive, we'll be able to deal with that. Our local managers they're responsible for price. So they've got an independent that's aggressive. They have the ability to change their price and bring their prices down to react to that competition. So our gross margin improvements have been coming from better supply chain costs, better -- the merchants are doing a better job on getting costs from the suppliers. Our mix is benefiting our gross margin. So there's a lot of other ancillary pieces that are helping that gross margin improvement. So I feel good about the spread versus the competition. if we have an independent that gets even more aggressive or irrational than our store managers, they have the authority and autonomy to deal with it, and they do.

And the next question comes from the line of David Bellinger with Mizuho Securities.

As a follow-up on gross margins and just the cadence. So should we still expect a sequential improvement through the year? And second, if total revenues and comps work to trend towards that low end of the guidance range, can gross margins continue to move higher? Or are those metrics decoupled in some way just given some of the underlying initiatives and positives you just mentioned a minute ago.

Yes, this is Bryan. I'll take a stab at it and Trevor and Tom can jump in if they need to. From where we sit today, we still feel good about the high end, which is 42.8%. Obviously, we just came off of Q1 of 42.8%. You could see slight improvement from there. The one caveat to that is we still need to sit back and think about what the impact could be to the Baltimore distribution center that we have. And so that's one of the things that we're looking at that could be a headwind to those. But we still feel good about the high end. And so you could see it steps slightly higher than what we alluded to in the 42.6%, 42.8% but I wouldn't expect meaningful improvement from there.

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

I'd love to follow up on what gets comps better through the year. I think you said that you thought both traffic and ticket would get better. So I'd love to know what if transaction counts are going to go from negative 7% to flat, what existing home sales do you think would need to be there to get that? And then on the ticket side, how much of the expansion from negative 4% to flat is that project size? Or is it a mix shift or deflation turning to a little bit of inflation? Just help us give a little more guidepost on those 2 factors.

Yes, I will -- this is Bryan. I'll take a stab at it and then again, Tom and Trevor jump in if they need to. The majority of it is actually just your compare. So the majority of the expectation of the improvement quarter-over-quarter is on an easier compare. When it comes to transactions, there is a slight improvement needed from existing home sales. So if you're asking us that without pinning down an exact number, you need it to at least maintain where it is today, coming off of Q4 and then slightly improving. If you remember the original guidance around 4 million units to 4.3 million. And so I would say to be flat to slight improvement in transactions, you'd have to see things get slightly better from where they are today as we exit the year. And again, we'd have to have that tight correlation as well. We alluded to it earlier, but one of the disconnects that could happen is if spending is harder on discretionary spending for consumers if they're pressured, you could see that lag actually kind of fan out a little bit more and take more than that 3 months. And so that's one of the things as we need the lag to stay compressed to that kind of 2 to 3 months, and we need slight improvement from there. Average ticket is really just the strategic retail reductions we took last year. we're lapping those. And so that is the biggest thing that's going to happen for us as we get throughout the year, that should help us get back to that flat. It's not going to take a lot in the project size, maybe just a little bit of improvement there, but not a lot for us to get back to kind of flat in Q4 average ticket.

Yes. Like Q1, we were down 9% or call it, 10% in transactions last year. When we -- by the time we get to Q4, we go down to 4.9%. So as Bryan mentioned, we're just -- we do -- we've got easier comparisons. And our thesis when we originally gave guidance that we didn't really change and this one, is that existing home sales will continue to improve throughout the year. So we are expecting the macro to help us some and then going up gives those easier comparisons.

And the next question comes from the line of Seth Basham with Wedbush Securities.

My first question is if you guys have any updated thoughts on price elasticity related to those retail price reductions? Any changes in your viewpoint there?

We're always testing. We're -- we'll drop prices on a product or a product category and across the flooring categories themselves. We don't see much of an improvement when we do it or a consistent enough improvement to where -- we'd say, all right, that's automatically going to be beneficial. We do see benefits in the installation materials category, when we take prices down, we have taken prices down in installation material, our penetration has gone up. That's a product that is brand recognition. It's easier for the Pro to compare and they buy it on a weekly basis. So we know that, that one is a benefit. And we'll continue to drive that category meaningful throughout the year. And we won't stop testing. We're always testing and adjusting prices and kind of seeing if we can get benefits from one direction or the other. But we just haven't seen enough benefit. Our spreads versus the competition are significant enough that lowering the price usually just transfers a customer from one SKU to another in our store versus changing the volume of the store.

The next question comes from the line of Robbie Ohmes with Bank of America.

Maybe a follow-up on that question. I think last quarter -- this quarter, you kind of talked about the opportunity buys and deals of the week and value at the front of the stores and things. Last quarter, I think you guys said you were still seeing the consumer leaning towards better and best. Is that still the case?

Yes. The same trends, customers when they're buying, they're still leaning towards the better and best products across all of our departments. So it's when they get out, when they're opting to do the project, they're getting what they want. Now look, we -- we're a company with tough comp positive it's whole life. So we're trying everything, and that's why you go in the front of the stores, we're staying aggressive at the front of the stores that are opening price points. We're doing -- trying to make deals, trying to get customers to engage and close on sales. So and we'll continue to do that. We'll continue to stay aggressive and try to drive that message. But fact is when someone is doing a flooring job, they're still stepping up to the better and best.

And the next question comes from the line of Chris Bottiglieri with BNP Paribas.

This is a cost question. Since your whole existence you've been a growth company. So imagine this downturn has been still at the [indiscernible] internally. Can you talk about the ways you've taken costs of the business or slowed investment as sales has declined. How do we think about incremental SG&A? When existing home sales does return to normal and comps go up? Like is there a rule of thumb you could think about if the comps go up 10%? What does SG&A do in that scenario?

If comps go up by 10%, we're going to flow through incredibly well. Because if we learned anything -- we have taken cost out. We have been much more aggressive across every line of our P&L, trying to execute upon a plan when sales aren't working in our favor. So and we don't plan on adding back. There's a -- you'll add back some costs as sales go up. But in general, we should flow through incremental sales pretty well.

And just as a reminder, we're -- a typical time period we're 55% fixed cost, 45% variable within the stores. That's going to drive a lot of that flow through as well.

Our cost structure has gone down, our gross margin rate has gone up. So our flow-through should be better for a positive comping.

And the next question comes from the line of Jonathan Matuszewski with Jefferies.

Just a question on your most valuable pros. I think you mentioned the top 20% of pros were increasing their order frequency year-over-year. So maybe just if you could elaborate on that. Presumably, they're more integrated into your ecosystem with Pro Premier and training classes and designer services, but maybe beyond that, what are you hearing from those pros? Do they skew to a certain region? Any more color you can give us on what's driving them to actually increase transactions with you year-over-year?

Sure. There is a significant component of that successful Pro strategy that's frankly just relationship. And making sure that pros taken care of in a way that they're not being taken care of somewhere else. . All of the other ancillary services that we have are good and sort of the flywheel approach if they add features and benefits to why they would shop with us. I just think it has a lot to do with the relationship and making sure we take care of that Pro in a way that nobody else does is probably the most important aspect that we call out for those pros. And -- but because we have good technology and just good business practices, we know who those pros are and we do an exceptional job of taking care of them.

And our last question will come from the line of Joe Feldman with Telsey Advisory Group.

It was actually somewhat similar to what Jonathan has just asked, but I wanted to take a different approach. In terms of the other 80% of the pros where -- I feel like that's a little bit of a change from the last call or two, where pros had been holding up pretty well as a broad category. Now you're kind of isolating it to the best pros that are holding up. . I'm just curious what you're seeing and hearing from those other guys, presumably, it's just more of the same, like it's just people aren't doing projects, but anything you can share on that?

We do, do that a lot. I mean there's just not as much business out there. Again, we're the best performing of all the businesses and we'll see with our reports, but historically, we've been the best performing by a long shot. And we went from having sales up in the mid- to low single digits for most of last year to actually having total sales be lower. And our pros tell us, they're just not having as many jobs. And we were -- Steve and I are Head of Store Operations -- what was we were in a store they were talking about how they were doing plumbing work and doing fences and other things just to stay busy during this period of time. There's just less flooring work to be done in this environment where existing home sales are down 40% from the peak.

Look, I appreciate the good amount of time for question and answer today. We appreciate that. We appreciate all of your interest. We look forward to giving you a more thorough update as we get to the end of this quarter. Thanks, everybody.

Thank you. This concludes today's conference. You may now disconnect your lines. Enjoy the rest of your day.