Floor & Decor Holdings, Inc. Class A Stock

Greetings, and welcome to the Floor & Decor Holdings Second Quarter 2026 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Wayne Hood, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator, and 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 risks 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, and 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 foreign 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 provides 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 billion compared to $1,214.2 billion 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. We exited the second quarter with encouraging momentum, but demand softened around the 4th of July holiday period, while the housing market remained constrained by subdued existing home sales activity.

As a result, 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, 8 reported positive comparable store sales, excluding cannibalization.

From a merchandising category perspective, 3 departments outperformed the company's comparable store sales performance during the quarter, installation materials, tile and wood. Installation materials continued to deliver strong year-over-year growth as we expanded our share of wallet with Pros and further strengthened our position in the market. As 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. Furthermore, 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 5 in the second quarter. Syracuse, New York; Portland, Oregon; Mount Vernon, New York; Houston, Texas; and Sherville, 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 square feet, 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 to the fourth quarter.

Let me spend a moment on our omnichannel strategy and the digital capabilities we're 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're 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've 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 2 core customer segments, Pros and homeowners.

For homeowners, flooring is a highly research and project-driven purchase. Our research shows that about 70% to 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 omnichannel 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 nonspecified 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. Second quarter sales increased 2% year-over-year, driven by strong shipment activity from the conversion of backlog into revenue. June was one of the strongest months for written sales in the company's history. While commercial end markets remain mixed, particularly in multifamily housing, customer backlogs are beginning to recover from the lows experienced in the second half of 2025. Encouragingly, sampling activity improved late in the quarter, average quoted project value increased, leading to a very strong project backlog at the end of the second quarter. Taken together, these indicators provide visibility and support our expectation for continued improvement through the second half of the year.

As we turn the page on the first half of 2026, we remain focused on driving sales, managing expenses and delivering value to our customers. We believe these actions are resonating with customers and position us well when demand conditions improve. I continue to believe that this environment creates an opportunity for us to accelerate our market share gains through world-class leadership and disciplined execution.

With that, I'll turn the call over to Bryan.

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 returned $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 2 items affecting comparability during the second quarter. First, we recognized a $45.2 million net pretax benefit related to the IEEPA tariff refunds, which affected gross margin, SG&A and interest income. Second, we recognized a $1.3 million pretax 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 onetime benefit from IEEPA tariff refunds related to inventory we have previously sold through. The remaining amount of tariff refunds was recognized as a reduction in 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 noncomparable 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 onetime 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 onetime benefit of approximately $2.8 million in statutory interest on our IEEPA 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 25, 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 25, 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 4 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 billion to $4.990 billion or increase by 1.8% to 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% to 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 onetime costs associated with IEEPA tariff refunds in the second quarter. Interest income expense net is expected to be approximately 0. 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 to $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 to $2.45. Adjusted diluted earnings per share is estimated to be approximately $1.88 to $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 to $2.05. Diluted weighted average shares outstanding are estimated to be approximately 107 million shares. CapEx is estimated to be approximately $240 million to $275 million.

Operator, we would like to now take questions.

[Operator Instructions] Our first question is from Seth Sigman with Barclays.

Nice progress in the quarter. I wanted to start with the tariff refunds. So you had this $45 million net benefit this quarter. What's that number on a full year basis? What's embedded here? And then can you talk a little bit about how you've started to deploy those dollars, I guess, either in Q2 or in Q3? And to what extent do you think that has contributed to the improvement that you saw in June?

Seth, thanks for the question. We assumed that was going to be the first question. I want to just start off and say, really from the onset of tariffs last year through the refund, our team has executed at a really high level. Obviously, we've got multiple years of experience with this. And I would consider it an established capability at this point. What Bryan and I thought we would do, we're going to hand it over to him. He can unpack all things tariff for the folks on the call, and then I'll have a comment or 2 at the end to wrap it up. So Bryan, why don't you walk them through it?

Yes. Thanks, Brad. So from the mechanics of it, you'll see in the 10-Q today, you've got a little bit more detail there as well if you want to refer to that. But we filed for $87 million in total IEEPA tariff refunds, and we've received substantially all of it subsequent to the end of the quarter. So we've got all of the cash in at this point. We recorded a $56 million onetime benefit in gross profit related to inventory that we have previously sold through. We recorded a $28 million reduction in inventory for product that was still on hand at that point in time. We'll recognize the benefit of that $28 million as we sell through the inventory, which I would anticipate the majority of that will be recognized in the back half given that we turn slightly over 2x per year.

In Q2, the benefit that we recorded from that $28 million was approximately $6 million that we saw in Q2 in the gross profit from the sell-through of that reduced inventory.

So I think it's important for us to point out for that $6 million that Bryan just referenced for the second quarter, we obviously assumed some inflationary headwinds coming into the business. We had a set of actions that we were prepared to deploy. Once we knew that we were getting the tariff refund, we elected not to deploy those actions instead use the tariff refunds to offset that inflation. As we pivot into the second half of the year, obviously, a number of different things that we can do with the refund money.

I think there are 3 big buckets that I would share with all of you. The first one, I just talked about it with the second quarter, we'll continue to use those funds to offset the inflationary impacts from both oil and supply chain. Number two, where it makes sense and making sense means where we see elasticity, we'll selectively invest in price to drive market share gains. And then number three, we're going to execute our capital allocation framework. Big buckets on that are invest in stores, other growth initiatives, I think commercial and other things like that. And third would be any type of excess cash that we would have, we would send back to our owner -- or excuse me, our investors through a share repurchase program.

Just to clarify, the difference in the $56 million and the $45 million that you see in the adjusted EBITDA add-back or the net income add-back is we had $2.7 million of statutory interest that we also received. You'll see that, that's part of the add-back. And the rest of it really is just costs associated with the IEEPA tariffs as it rolls through kind of SG&A through incentive comp and other things.

Okay. Got it. And then I was just going to follow up and ask about the comp guidance for the rest of the year in that context. So it implies a pretty wide range, down 5% to up 3%. You're running better than that at the low end right now. comparisons get easier. So can you maybe talk about some of the scenarios to consider here? And then in that context, you also mentioned the broadening of performance that you've seen across regions and so maybe tie that in.

So Bryan, I'll tag team this question as well. I'll start out with the second quarter. Definitely pleased with the sequential improvement that we saw through the quarter. A couple of key drivers there are 3 drivers that I'll talk about. First was in the script. Service continues to be really, really high. Every month, we set record levels. And I think that's a reflection of one of the culture that we have and the team that we have in the field. Second, just all things Pro. Pro continues to outpace the performance of the rest of the business. A lot of inputs into that Pro performance. We talked about installation materials. We talked about the performance in tile and certainly getting some improvement in laminate and vinyl, which is something that we talked about on our first quarter call.

And the other piece is we're starting to see some nice traction from our digital business, still very much early in that process, but starting to see some real, real benefit from that team. We talked about July. July was a really interesting month. The start of the month was really, really choppy around the 4th of July, had some pretty ugly days that we haven't seen in a while. But as we said in the prepared remarks, really, really pleased with how we ended the month and certainly how that has continued into August.

And I'd say more in line with the run rate that we saw in both May and June, which is certainly encouraging.

The one piece that I'll say and underlying and Bryan will probably do the same when I turn over to him, still feel really good about our guidance. In the first quarter, we said, hey, we're going to go a little bit wider than normal given the uncertainty that's in the market. So we went flat to minus 4% on the sales guidance. Had some conversations about changing that coming into this call, but still feel like there's too much uncertainty out there. So feel good with the flat to minus 4%, but do have a level of confidence, high level of confidence that we're on track to hit the midpoint of that sales guidance.

Yes. I think that's spot on, Brad. We would have liked to have tightened the range, but we intentionally left it a little wider just because of the uncertainty. But I think when you're thinking about just the cadence in the back half, a 2-year stack gets noisy because of all of the Hurricane Helene and Milton benefits and everything associated with the storms. So if you just look at it on a 3-year stack comp, just to help you guys model, we would expect the high end and the midpoint to increase sequentially from Q2.

And then at the low end, there would be a slight decrease sequentially from Q2 just to kind of get those. So it is a little bit wider of a range than we would typically do at the end of Q2. But to Brad's point, there's still a lot of uncertainty in the macro environment that we see today. But we feel really good about the midpoint, and that is our guidance philosophy, too. And you guys will always see that with us is if things continue on the path that they are right now and the macro environment stays where it is today, we have great visibility to kind of achieving at the midpoint.

Our next question is from Simeon Gutman with Morgan Stanley.

One quick follow-up on the tariff. So the $28 million, I think I got that number right, that's like unrecognized that will happen as you sell the inventory. I guess it's not huge on a basis point basis. I haven't done the math, but you held or you're basically not changing your gross margin guide. So -- and sorry for naivety, does this mean that when you sell through that product, there should be a higher gross margin on it going forward? And is that in the guidance, did that help you keep the gross margin guide? Or does that provide an upside lever, if I understood it right?

Yes. So we put $28 million back into inventory for items that we still have on hand. Of that $28 million, $6 million flowed through in Q2 to help offset some of the inflationary measures that we were seeing with higher oil costs. We're now starting to see higher domestic supply chain costs due to trucking capacity issues that we see across the industry. We're fine from a capacity standpoint, but we're starting to see some rate changes as well as reinvesting into select pricing changes as well. And what Brad talked about with laminate vinyl and a couple of other select pricing changes that we may try to go after and be more aggressive in market share.

So all of that said, our adjusted gross margin guidance of 43.6% to 43.8% incorporates the back half being benefited. Like I said, the majority of the residual $22 million within that $28 million will flow through, but it allows us, again, in this environment to be a little more aggressive and not have to take further actions. But as we exit -- exit '26 into 2027, we've got a lot of things that we can do as a company. So again, we have a lot more to talk about whenever we think about 2027, we're not going to give you guys any clarity on that today. But we've got a ton that we can do as a company when these tariff benefits do subside. So again, it just gives us a lot of flexibility and optionality in '26 to be able to take more market share.

Okay. And then one follow-up on the sales environment, more to Brad and related to the last comment. So we've had a couple of -- I don't want to say false starts, but early reads of industry bottoming, especially your business. It sounds like we're going through another one, and it felt a little more emphatic and I thought the language this time. So anything you can point to that this is demand stabilizing, turning more from replacement demand outside of your initiatives? Or how do you assess like could this be another false start?

Yes, I'm going to be really careful here because I don't want to be the initiator of a false start, but I'll give you my perspective. Like I said certainly pleased with the sequential improvement through the quarter. One of the things that we called out in the script is if you look at our business ex cannibalization, we had 2 regions, 2 of our 3 regions deliver positive comp, which to me is a really, really strong story. We saw some improved traction on our commercial business.

All that being said, where you sense the more emphatic approach from us is we've said that we came into 2026 saying that we need to assume the environment is going to look a lot like 2025 and that we are going to build a stack of initiatives that felt like -- that we felt like could deliver accelerated market share gains. So we do have a level of confidence around the execution of our initiatives and feel like that's paying off. Probably at least from my perspective, amateur perspective, too early to tell if things are truly bottoming. We're going to assume that's going to continue to be the case and do everything we can to deliver a great customer experience and take as much share as possible.

Our next question is from Steven Zaccone with Citigroup.

Can we talk a little bit about the laminate vinyl category? It sounds like you're expecting that weakness to continue into '27. That sounds like a new comment. Maybe what are you seeing there? And then elaborate a little bit more on the pricing environment in that category as well.

Sure. And I'll rewind the tape a little bit with my answer. So laminate and vinyls is our second largest category. It's the only category that we sell where we're seeing any type of downward pressure. And we believe that downward pressure is a result of excess supply in the market. And the term that Ersan and I have used is the category has been devalued. And what we mean by that is a SKU that used to be considered a better and a good, better, best lineup is now considered and priced as a good SKU. So that obviously puts pressure on all parts of that category. And it is the vinyl part of laminate and vinyl.

We are really clear in our first quarter call to say we're going to play offense. We're going to be thoughtful around pricing. We're going to have aggressive opportunity buys, and we're going to add new SKUs to our assortment to make sure we're hitting the mark with the customers that are interested in that category. We did see improvement, and we're going to continue to push for more improvement for the remainder of the year. But when we say, hey, we think that pressure is going to bleed over into 2027, that's consistent with what we talked about at the first quarter. We're just trying to get a sense of how quickly this excess inventory will dissipate. Tough thing to tell. I trust Ersan, he's been in the business a long time. And our sense is it's going to run through at least the first half of next year. But again, our perspective is it's an opportunity for us to take share and make that comp performance better, certainly than it was in the first quarter.

Okay. Understood. And then the follow-up I had, bearing in mind some of the tariff commentary and then in this category in particular, how do you think about the pricing environment and expectations and comps for the second half of the year? Has that changed versus your original thinking?

I'll go first, Bryan, if you want to add anything, feel free. But the term that I have used pretty consistently since the start of tariff is the market has been rational. I'll add a few more words on that is I'm not seeing anything disruptive from a pricing perspective outside of what I just explained on laminate and vinyl. We've got 2 sets of -- really kind of 2 sets of competitors. You have independents who do a terrific job around service, really thoughtful pricing approach and have a sticky relationship with that Pro customer.

And then you've got big box. And for us, as a reminder, big box, we compete on opening price point in good and a good, better, best in installation materials. And we haven't seen anything that would say that the environment is becoming overly aggressive or overly promotional. We've been really consistent in saying that we will continue to take modest increases. But the nature of our business is we do have a really unique pricing model. There's always a little bit of up and a little bit of down, but it will net out to a modest increase across our categories.

And this is Bryan. Our guidance from last quarter to this quarter is the same with average ticket expected to be kind of flat to up low single digits. The pressure in laminate vinyl does put pressure on our average ticket because it's a much bigger project when somebody decides to take that on. So just overall, it's putting pressure on average ticket. But no change from last quarter and what we think is going to be embedded for the guide or assumed in the guide.

Our next question is from Michael Lasser with UBS.

Do you think the industry saw the same inflection that Floor & Decor has seen over the last few months? Or has your initiatives kicked in such that your market share has accelerated? And just as a part of that, why is there such a divergence between your Pro performance in the quarter versus your DIY performance in the quarter?

So the second 2 questions are a lot easier to answer than the first. I think we're going to know more as some of our public competitors and manufacturers report their results. Obviously, it's a tough question to answer just because by our measure, 60% of our space is still independents, all private, really hard to get a gauge on how they're performing. Ersan does a nice job of kind of triangulating through conversations with both manufacturers and our supplier partners.

Our sense is, and I'll get into your second question, is our initiatives are paying off. We feel like we're focused on the right things. Some initiatives are a little bit further down the path and make more sense in this environment, and that is the Pro piece. Again, going back to this idea that as a team, we said '26 is going to look a lot like '25. In order for us to deliver positive comp sales we knew we had to do that through increased share of wallet gains through the Pro customer. Why is that important? That customer is in our store every single day. We reported in the second quarter, 55 -- that customer is 55% of our sales. We think they influence up to 20% of the remaining 45% of sales. So a really, really important customer.

And the thing, Michael, that I would point out, really pleased with installation materials. That is a driver of footsteps. So the opportunity that we have and why we're excited about the Pro initiative is we are clearly -- we clearly have a hook when it comes to installation materials. Now we have a great opportunity to sell the rest of the categories that we sell.

And one other thing that's really important as we continue to open new stores and become even more convenient for our Pro customers, I think we're going to drive traffic there. So really excited, again, and feel good about our initiatives, still somewhat early in the process, but already seeing some dividends from them.

My follow-up question is, can you help calibrate the relationship between Floor & Decor same-store sales growth and an eventual inflection in existing home sales? It's hard to necessarily use the historic relationship because Floor & Decor throughout much of the 2018 was seeing a benefit from the new stores ramping the maturity, the increase in vinyl as well as less cannibalization. It seems like those are going to be no longer benefits to your same-store sales as the market recovers. So is it best to think instead of maybe a high single-digit comp in a good case scenario as the market recovers, a mid-single-digit comp is the most realistic outcome in light of some of those factors?

Listen, it's a great question, and we are bouncing versions of that around the hallways here on what our business looks like at different points in the cycle. We still think existing home sales is the metric for us, strongly correlated to our performance. Historically, we have said as existing home sales improve, that it's generally a 2- to 3-month flash to bang before you see it in our business.

In an environment, though, I'll say this kind of current cycle, where you're just flirting with 4 million homes kind of a little bit above it, a little bit below it, you do see outsized impact on our initiatives in different parts of the country. So if you think about the West, we've consistently said, hey, the West is outperforming the rest of the country. One, that's a part of the business that is generally dealing with less cannibalization and has less density than other parts of the United States. So you're naturally going to get more traction and more benefit from some of the things that we're focused on.

But as far as how we're forecasting what the business looks like from an organic growth perspective in the kind of mid-trough or kind of a more normal environment, not going to get into that level of detail on this call.

[Operator Instructions] Our next question is from Kate McShane with Goldman Sachs.

We wanted to speak a little bit more about the competitive environment, just in terms of what behavior you're seeing more from the home improvement competitors versus the independents and how they acted throughout the quarter. I do know that it seems like at least one of the larger-scale home improvement retailers seems to be partnering more with Mohawk, and there's a lot more initiatives there, it seems even more recently. So can you just talk about that piece of the competitive set? And again, just maybe tie it back to how you're thinking about the tariff refunds and how it can play a role in pricing relative to that?

For me, big box retailers, amazing companies, like I said, have incredible locations. And for our customer hard surface flooring, that provides a level of convenience. They're always investing in their assortment. But generally speaking, where we compete with them is on opening price point, good and installation materials. And if you think about where we sell, it's primarily in the better and best.

And I think that's a really important distinction when you think about our model versus the big box retailers and where we overlap and absolutely overlap, and we watch them very, very closely.

But as I said earlier, I don't see anything at this point that would be disruptive that would lead me to think that there is accelerated share gains from either one of them, and that's speculation because I haven't obviously heard the results. And we generally feel really good about the model that we have and how it competes against big box retail.

Our next question is from Steve Forbes with Guggenheim Securities.

Brad, maybe just following up on laminate and vinyl, I think was the con's question before. Revisiting the improvement, I think you guys talked about some merchandising initiatives within that department that you were sort of rolling out regionally and nationally. So curious maybe you could just remind us where those initiatives are in terms of breadth and scope. And if there's sort of any other merchandising initiatives in the pipeline, particularly for laminate and vinyl, that could maybe be a self-help story as it relates to getting that category back to growth.

Yes. Great question. And 3 areas that we really leaned into. The quickest reaction, as you would expect, was rethinking our pricing strategy. And credit to Ersan and team, we moved really quickly. We put more aggressive pricing in the market where we saw elasticity. We watched it. We refined it, and we're in a spot now where we feel really comfortable about the investment that we've made from a price perspective to drive more market share into that business. So that's step one.

Step 2, and this is kind of an order of how they hit the stores were opportunity buys. We knew we had a gap as far as our everyday current assortment relative to where customers were shopping. So we quickly leveraged the supplier partnerships we had across the U.S. and across the world to get really aggressive opportunity buys into our stores at the right inventory levels. Those were a huge win, huge win. And that's a matter of weeks from when we identified the opportunity.

And then the third piece is we really rethought our everyday assortment and plugged those holes that the opportunity buys served as a Band-Aid on. So feel really good about how we operated. We use the term micro merchandising a lot with all of you and certainly inside of our business. And I think this is a great example on how nimble we can be when we find a situation where the market has shifted a little bit, where some of our other competitors may struggle to have that type of speed to market. As far as where it's at, 2 and 3 opportunity buys in the reset in the assortment, that's national.

And then from a pricing perspective, like I said, we're a little bit more surgical there. So that's not national. That's in the markets where we really need to win in laminate and vinyl.

Our next question is from Christopher Horvers with JPMorgan.

So a 2-parter. I guess taking the other side of it and trying to think about what drove the slowdown on July 4. Obviously, July 4 happens every year. Is there something that you point to and you say, well, that was just an anomaly and that wasn't the improvement in the later part of July, really like the past 2 to 3 weeks isn't just a normalization of demand relative to earlier in July?

And then a follow-up question on the pricing side that most of your independents don't buy directly. What is your impression of what the wholesalers are doing? Are they lowering prices as tariff refunds come in and such that the independent market could see prices come down? And is that already happening?

Chris, great question on July. And as you can imagine, a lot of discussion here trying to dissect what actually happened in the first couple of weeks. We have 3 or 4 thoughts, but nothing that we're willing to share publicly. Now the great news, again, back half of July, we returned more to that kind of May, June performance and comp run rate, which is really encouraging. So right now, I'm going to say those 2 weeks were anomaly. If for whatever reason we see a return to that 2-week performance, then certainly, we're going to have more concrete answers, but it didn't continue, which, again, for us is really, really encouraging.

From an independent perspective, you're right, for the most part, their sourcing model is a 2-step sourcing model. So one, when you think about tariff refunds because they're not the importer of record, unlikely that they're going to get those tariff refunds and be able to reinvest into their business, which because of that, I think, would prevent them from getting too aggressive around price or promotion in the second half of the year. And everything that we have seen, generally speaking, has been prices going up and certainly not going down.

Our next question is from Keith Hughes with Truist Securities.

We talked a good bit about your laminate and LVP product on the call, it has been underperforming the group average. But you have other products overperforming. Is this just the consumer changing its preference for one product over the other versus real category issues?

Yes. Again, great questions. I had made some notes on the laminate and vinyl question. And my last bullet point that I continue to ignore is there is category shift, we believe, happening, both into wood and tile. So certainly, that's an element of the conversation off all the reasons why we're seeing pressure there, Keith, is probably the least impactful, but it's certainly a part of the conversation.

And is the tile sell a better sell for Floor & Decor, i.e., it uses more accessories than LVT?

Well, we like all of our categories. Tile is our largest category. It's in the center of the store. As we take both kind of customer feedback and associate feedback, that's the one that there's kind of universal confidence around having the right products, having the right inventory, always being trend right. So we love our tile category, and we believe that's a category that we're going to -- one, we will continue to lean into and will continue to grow for us.

Keith, it's tile also, you're right, has more attachments when that happens. We still get attachment when laminate vinyl is sold, but there tends to be more when tile is sold, and IM is actually one of our best-performing categories, and that's just winning more with the Pro. So I know there was an earlier question on the outperformance within Pro, and you see that within IM, just our supply house strategies are working.

Our next question is from Peter Keith with Piper Sandler.

Nice to see the sequential improvement. Brad, you did speak in the prepared remarks around your own sequential improvement in conversion. And I guess I was curious, is there something you're doing at the store level that you could speak to that is driving better execution? Is the consumer behaving differently? Just hoping you could unpack that comment a bit.

So this is a play that the team continues to execute. I mean, if you go back 3 years ago, one of the things that we pointed to is just really strong service. And the thing that's amazed all of us, it's continued to improve. The one area that I think we continue to dial in is making sure there's a consistency around what plays we're calling and the level of execution on the play, particularly with our Pro customers. And we have a level of confidence that we could go into every one of our stores at this point and ask that team, hey, how are you growing Pro share wallet? And all of our stores would have the same answer. And they would have the data to support those efforts to understand the customer where the opportunity is.

And then like I hinted at around service, we've got great teams. We've got great teams that are passionate about taking care of our customers, love helping them navigate the journey of selecting a hard surface floor. So we are well positioned around service and really refining that conversion or the inputs to driving that conversion improvement that we talked about.

Our next question is from Max Rakhlenko with TD Cowen.

So can you provide more color on the work that your new pricing team is doing? What's ahead? And how can we see your portfolio approach to pricing evolve in the medium term?

Yes. So when we talk about evolving our business, we talk a lot about digital. We talk about supply chain and pricing is certainly an element that is front and center. Ersan has built a world-class merchandising team that has always been top notch when it comes to pricing.

The other piece that's unique about our business is we have a bottom-up kind of feedback process where there are decision rights at our stores to ensure that we're appropriately positioned from a pricing perspective in every geography in which we operate. At the same time, massive improvement around technology and tools that you can use to get really scientific around pricing. We've invested in team and talent and process. We're on the cusp of a technology investment. So I only expect that capability to get better and better and stronger and stronger for Floor & Decor.

As far as the portfolio approach, there isn't meaningful changes ahead. I think we've got that pretty locked in. As we introduce different categories down the road, certainly, that might be a different conversation, but we feel pretty locked in when it comes to our portfolio approach.

Our last question is from Jonathan Matuszewski with Jefferies.

Brad, can you update us on what you're hearing from your Pros during roundtable sessions, maybe just regarding project backlogs. Some of the data out there is talking to kind of rising cancellation rates or postponement rates among homeowners for remodeling projects. Are your Pro roundtables revealing anything in that regard regarding project deferrals or anything along those lines?

We have not heard anything that would signal a change to that behavior versus what we experienced in the first quarter. We did talk on the commercial side a little bit about delays in the first quarter driving some of the challenges they saw there. That obviously improved in the second quarter, and we don't expect any type of project delays unless the macro changes meaningfully in the second half of the year.

So short answer is no, we haven't heard any change to that from what's previously been discussed with our Pros.

Thank you. We have reached the end of our question-and-answer session. This does conclude today's conference. We thank you again for your participation. You may now disconnect your lines.

Greetings, and welcome to the Floor & Decor Holdings, Inc. First Quarter 2026 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Wayne Hood, Senior Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's Fiscal 2026 First 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 risks and uncertainties that could cause actual future 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 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 GAAP financial measures. We believe these measures enable investors to understand better 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 Brad.

Thank you, Wayne, and thanks to everyone for joining us on our 2026 first quarter earnings conference call. During today's call, I will walk through the key drivers of our performance this quarter, including the operational progress that continues to reinforce our long-term strategy. After that, Brian will discuss our updated outlook for the remainder of 2026 and how we are positioning the company to advance our strategic priorities, remain resilient in a dynamic environment and deliver sustained long-term shareholder value.

Before I turn to our first quarter earnings, I'd like to discuss our capital allocation framework and the actions we announced today. Consistent with our disciplined capital allocation framework, we announced that our Board of Directors has authorized a share repurchase program for up to $400 million of the company's outstanding common stock. This action reflects the continued strength of our operating model, the durability of our cash flows and the increasing efficiency of our new store investment.

As we continue to expand our store base, we are optimizing our capital spend per location, which should drive strong returns, enabling us to both fund growth and generate meaningful excess cash flow. This positions us to flex our pace of openings over time while returning capital to shareholders, all while supporting our long-term opportunity to operate 500 warehouse format stores across the United States.

The repurchase program is a natural extension of our capital allocation philosophy, which prioritizes capital allocation based on returns that exceed our weighted average cost of capital. First, we prioritize opening new stores and investing in our existing stores with initiatives that are expected to grow and support our core business. Second, we continue to invest in our commercial flooring platforms and new growth concepts, including our outdoor and unfinished flooring offerings. Once these priorities are met, we intend to return excess capital to shareholders in ways that are designed to enhance long-term value while maintaining a strong balance sheet.

We do not expect to use incremental debt to support the share repurchase program, and there is no defined time line for the share repurchase program's completion. Guided by this disciplined framework, we believe the current uncertainty across the broader economic and capital markets landscape, particularly within home improvement, has created a clear disconnect between our long-term intrinsic value and our share price. This dislocation provides us with an attractive opportunity to repurchase our shares at valuations we view as compelling. That opportunity is underscored by the strength of our business model as we are uniquely positioned in the marketplace as the only national pure-play hard surface flooring retailer with a warehouse format model that delivers the broadest in-stock job lot assortment, everyday low prices through direct global sourcing and industry-leading customer service.

Our differentiated business model resonates with both Pros and homeowners, driving consistent market share gains in a highly fragmented category. With just over 55% of our U.S. store opportunity built out and a large underpenetrated opportunity in commercial flooring, we believe we have a substantial runway for growth ahead.

As we scale, we believe our model becomes more efficient, our value proposition strengthens and our competitive advantages deepen, creating what we believe is a durable foundation for long-term value creation and making us an attractive investment for shareholders with a multiyear horizon.

Turning to our fiscal 2026 first quarter results. I want to begin by thanking our more than 14,000 associates across the company. We are proud of how our teams executed our strategy in a challenging demand environment for big-ticket discretionary purchases amid adverse weather mid-quarter, elevated 30-year mortgage rates, geopolitical tensions in the Middle East that contributed to higher gas prices and a further decline in consumer sentiment. These dynamics resulted in first quarter earnings coming in weaker than we anticipated.

For the quarter, we delivered diluted earnings per share of $0.37 compared to $0.45 in the same period last year.

Total sales decreased 0.7% to $1.152 billion from $1.161 billion last year, and comparable store sales declined 3.7%. On a monthly basis, comparable store sales increased 0.4% in January, declined 6.9% in February and declined 4% in March. Our second quarter-to-date comparable store sales declined 4.5%.

The decline in our first quarter comparable store sales was driven by a 5.5% decrease in transactions due in part to adverse weather, which accounted for 150 to 200 basis points of pressure, partially offset by a 1.9% increase in average ticket. Our average ticket was negatively impacted by the decline in the laminate and vinyl sales mix as well as customers taking on smaller projects, resulting in meaningfully lower square footage purchases. We continue to see strong sales growth when the designer was involved, which reinforces the value of this free design service and its ability to drive higher quality customer engagements and average ticket growth.

From a geographic standpoint, our West region continued to outperform the company and delivered positive comparable store sales, excluding the impact of new store cannibalization. Our East region, followed closely by the South region was the weakest, reflecting adverse weather and broader softening demand. As a reminder, the South region is comparing against Hurricanes Helene and Milton, which benefited sales by approximately 100 basis points in the first quarter of last year.

From a merchandise category standpoint, 4 departments outperformed the company's comparable store sales, including installation materials, tile, decorative accessories and wood. Insulation materials continued to generate year-over-year growth as we expand our share of wallet and market share with Pros. That momentum translated into a 1.4% increase in first quarter Pro sales, supported by our supply house merchandising strategies.

Tile also remained a consistently strong performer, supported by the continued success of our new Vetta collection.

In the vinyl flooring category, we introduced a series of straightforward value-driven offers, including special buys and enhanced in-store displays that group more than 20 in-stock styles priced under $2 per square foot. These additions, coupled with refinements to our price bands are designed to meet Pros where the demand is shifting and to position us to capture market share in a category that continues to contract.

Although still early, results from our price band refinements are encouraging with positive elasticity and improving square footage purchase trends. We have plans to expand this to additional stores in the second quarter. That said, we do expect the category to be under pressure for the remainder of 2026.

Turning to our connected customer performance. First quarter sales grew 5.4% year-over-year, representing approximately 19% of total sales. Connected customer remains one of our highest priority strategic growth initiatives, and we are investing accordingly in talent, technology and process enhancements.

With a defined road map in place and a new digital leader who has successfully executed similar transformations, we are laying the groundwork for a differentiated and more personalized online experience. Our goal is to build a platform that complements our store experience and drive stronger customer engagement and conversion.

Let me now turn to our new warehouse store expansion. In the first quarter, we opened 6 new warehouse format stores compared with 4 stores last year, including Staten Island, New York; Dallas, Texas; Detroit, Michigan; Pittsburgh, Pennsylvania; Vacaville, California; and Fayetteville, North Carolina. These locations strengthen our presence in several large Tier 1 markets where household formation, population growth and home improvement activity remain attractive over the long term.

We are encouraged by the early sales performance of these new stores, which reflects both our focus on opening in Tier 1 and Tier 2 markets and the benefits of our improved new store operating processes and consistent execution.

We remain on track to open 20 new stores in fiscal 2026, with development primarily concentrated in Tier 1 and Tier 2 markets where we already have a presence. We expect approximately 50% of 2026 openings to occur in the first half of the year compared with 35% last year, providing more operating weeks and further supporting stronger first year productivity.

We expect the class of 2026 new stores to average approximately 55,000 square feet. And while smaller in size, we believe this format allows us to enter more dense markets without sacrificing sales productivity.

Looking ahead, our teams are aligned around the opportunities with the greatest potential to drive growth. We are focused on improving new store productivity and investing in initiatives that strengthen customer loyalty and expand wallet share with our Pro customers. Our team continues to be excited about the development work being done on our new Pro loyalty program and remain on track to launch this new program in the first quarter of 2027.

We are also building a scalable, strategic account-driven B2B platform that supports the phased expansion of our regional commercial account managers. We were pleased with the first quarter sales performance of our regional account managers, which number 76 today, and we are continuing to expand our presence in large strategic markets with additional hires. These multiyear asset-light investments are delivering early results and position us to win in this segment of the commercial market.

Turning to Spartan Services. Spartan's first quarter sales and earnings performance reflect the ongoing difficult conditions in the commercial market. And while we anticipated a soft start to the year, results were weaker than expected. That said, customer engagement remains solid, supported by rising quoting activity and stable sample volume. As these opportunities convert and the solid backlog begins to be released, the business is positioned for gradual improvement over the coming quarters.

As Brian will discuss, we are committed to maintaining disciplined cost management while continuing to invest in the highest return growth opportunities. This includes aligning store labor hours with sales trends, managing distribution and call center expenses with greater precision and tightening discretionary spending across the organization. Together, these actions are designed to ensure we remain agile, protect profitability and position the company to drive stronger performance.

Even in a challenging hard surface flooring market, we do believe we continue to take market share based on all publicly available data, third-party industry sources and feedback from our vendor partners. We remain confident in the resilience of our business model and firmly focus on our core business. That focus is reflected in the commitment we see across our stores where morale remains strong and our culture continues to differentiate us. I'm confident this environment creates an opportunity for us to accelerate market share gains through world-class leadership and disciplined execution.

With that, I'll turn the call over to Brian.

Thanks, Brad. Before we discuss the first quarter results, I want to begin by thanking each and every one of our associates across the company. Their commitment to serving our customers, focusing on execution and staying resilient in this dynamic environment continues to be the foundation of our performance. We continue to achieve all-time high service scores, thanks to what they do every day in our stores to better serve our customers.

Now let me discuss our first quarter income statement, balance sheet and statement of cash flows as well as our outlook for the remainder of 2026.

We continue to effectively manage our gross margin with our first quarter performance exceeding our expectations. Gross profit decreased $0.7 million or 0.1% compared to the same period last year. The decline was driven by the 0.7% decrease in sales, partially offset by 20 basis points improvement in gross margin, which increased to 44.0% from 43.8% in the prior year period.

Our gross margin expansion primarily reflects the timing benefit of our strategic pricing initiatives, partially offset by higher supply chain costs that continue to work their way through our system. The growth in our distribution center network in Seattle and Baltimore was a headwind to gross margin of approximately 60 basis points year-over-year, in line with our expectations.

SG&A expenses for the first quarter increased $11.1 million or 2.5% compared to the same period last year. The primary driver of the increase was the 22 new stores we've opened since the first quarter of 2025, which increased personnel and occupancy costs.

SG&A for noncomparable stores increased $21.4 million, while SG&A for comparable stores decreased $9.0 million as we continue to tightly manage expenses. As a percentage of sales, SG&A delevered by approximately 120 basis points to 39.5% from 38.3% in the same period last year. This was mainly due to the impact of new store openings and the decline in comparable store sales.

I am pleased to share that we successfully completed portions of our ERP implementation and are now live with financial systems and certain merchandising portions in the first quarter, which is a clear example of the investments we are making to enhance productivity and build a more scalable platform to support future growth. We will still incur implementation costs throughout 2026 as we continue to implement other merchandising portions that will go live later this year or early next year.

Our first quarter operating income declined 18.4% to $52.4 million from the same period last year, reflecting the impact of new stores and expense deleverage driven by the 3.7% decline in comp sales.

Adjusted EBITDA declined 6.4% to $121.5 million from the same period last year. Our first quarter adjusted EBITDA margin was 10.5% compared with 11.2% in the prior year period.

Our first quarter net interest expense decreased $0.4 million or 26.8% to $1.1 million compared to the same period last year, primarily due to higher interest income as a result of higher cash balances.

Our first quarter income tax expense was $11.6 million compared to $13.8 million during the same period last year. The effective tax rate was 22.5% for the first quarter compared to 22.0% in the same period last year. The year-over-year effective tax rate increase was primarily due to a decrease in excess tax benefits related to stock-based compensation awards.

Turning to the balance sheet. Our financial position remains a core strength of the company. In the first quarter, we generated $109.2 million in cash from operating activities compared with $71.2 million in the same period last year, primarily driven by $293.6 million in cash and cash equivalents and $713.6 million available under our ABL facility.

This level of liquidity provides meaningful flexibility to navigate the current environment, support working capital needs, invest in other growth initiatives. And as we announced today, our Board of Directors has authorized a share repurchase program for up to $400 million.

As Brad mentioned, our capital allocation framework priorities remain intact. First, we will continue to invest in new stores and reinvest in our existing stores. Second, we will continue to invest in commercial flooring platforms and new growth concepts. And lastly, we will utilize excess free cash flows to repurchase common shares while maintaining sufficient liquidity and a healthy lease-adjusted leverage ratio. Our repurchase program is discretionary and how we execute will be dependent upon the environment through both programmatic and opportunistic purchases.

As of March 26, 2026, inventory increased 1.4% to $1.1 billion compared to December 25, 2025. This increase reflects store growth and our proactive efforts to stay ahead of demand and ensure we're well stocked to serve our customers. We closed the quarter with $198 million in debt associated with our term loan.

Before I walk through our fiscal 2026 earnings guidance, I want to frame the dynamic macro environment our teams continue to navigate and how it informs our updated earnings guidance. Consumers remain cautious about big ticket discretionary purchases, a trend reinforced by an increase in 30-year mortgage rates, higher gas prices, persistent housing affordability challenges and unexpected geopolitical tensions in the Middle East that have all further weighed on consumer sentiment. The University of Michigan's Consumer Sentiment Index declined sharply to 53.3 in March 2026, near all-time lows.

In Housing, the National Association of Realtors reported March existing home sales were $3.98 million, down 3.6% sequentially and 1% year-over-year, which continues to pressure demand for hard surface flooring. Against this backdrop, our teams remain agile and are proactively mitigating portions of both direct and indirect cost pressures stemming from the recent tensions in the Middle East while continuing to strengthen our ability to gain market share.

We are seeing rising energy costs and domestic logistics expenses. However, we believe we can effectively mitigate some of the increases and manage the residual through our disciplined approach. This positions us to navigate the uncertainty with confidence while continuing to deliver value to our customers and shareholders.

Given the unexpected events that emerged following our fourth quarter earnings release, we believe it is prudent to reflect a wider range of potential outcomes in our fiscal 2026 guidance. If existing home sales further deteriorate and consumer reluctance towards big-ticket discretionary purchases persist longer than previously expected, we would expect to be at the low end of our updated guidance range. At the same time, we remain focused on the elements within our control, executing with discipline, managing expenses thoughtfully and prioritizing investments that will support profitable growth while maintaining the agility needed as conditions evolve. We are confident in our ability to continue gaining market share, effectively managing expenses and generating strong cash flows.

I want to remind everyone that 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 part of our guidance.

Sales are expected to be in the range of $4.770 billion to $4.990 billion or increase by 1.8% to 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.

Gross margin is expected to be approximately 43.6% to 43.8%. The first quarter gross margin of 44.0% is likely to represent a high point for the year. From there, we anticipate slight to modest sequential pressure as we move through the remainder of the year, driven by tariff-related costs, the approximately 25 basis points incremental wraparound effect from our distribution center openings and reinvesting into value-driven pricing strategies.

SG&A as a percentage of sales is estimated to be approximately 38.0% with the first and fourth quarters being the most pressured from new stores.

Interest expense net is expected to be approximately $4 million.

Tax rate is expected to be approximately 22.5% to 23.0%.

Depreciation and amortization is expected to be approximately $250 million.

Adjusted EBITDA is expected to be approximately $545 million to $580 million. The 53rd week is expected to contribute approximately $11 million to adjusted EBITDA.

Diluted earnings per share is estimated to be approximately $1.83 to $2.08. The 53rd week is expected to contribute approximately $0.08 to diluted EPS, which implies our 52-week diluted EPS to be approximately $1.75 to $2.

Diluted weighted average shares outstanding are estimated to be approximately 109 million shares.

CapEx is estimated to be approximately $250 million to $300 million, unchanged from our prior guidance.

Operator, we would like to now take questions.

[Operator Instructions] Our first question comes from the line of Seth Sigman with Barclays.

When you look at the category trends, it's been fairly mixed, but it does seem like laminate and vinyl, it's probably been the biggest problem and continues to underperform the rest of the store. This was one of the best categories for many years, although obviously, in a very different housing backdrop. So I'm just wondering, do you think the issue is still housing? Is there something else going on with the product? Is it innovation? Is it sourcing? Just any more perspective on that because that does seem like it's still one of the biggest holes.

Thanks for the question. And you're right. I mean that category for us is our second largest category. When we look at the opportunity, it's really the vinyl part of laminate and vinyl. And we've seen pressure in this category really since the second half of last year.

And the dynamics that we see, we talked a little bit about this in the last call, we saw a shift in consumer preference. A portion of our consumers started to trend down to a lower quality spec and a lower price point. And that price point is sub-$2. So we've taken really, really quick action. I think it's a reflection of how nimble we are.

And we've been really open in saying that we're going to respond to those needs or those customer preferences, but we do expect that category to be under pressure. And the reason the category is going to be under pressure at some point, it becomes a math problem. Average selling price is going to be down. We don't see a meaningful lift in square footage coming. But our mindset is we're going to take share. We need that Pro in our store, and we're going to make sure as that shift continues to happen that we've got the product and price points they want.

The flip side is we are pleased with performance in our other categories when you think about the other big categories inside of our business, tile, insulation materials, decorative accessories. Really pleased with how they're doing. Obviously, we want to see acceleration in the short term to offset the pressure that we're seeing in laminate and vinyl. But we are squarely focused on getting laminate and vinyl to a level that's much better than what we saw certainly in the first quarter.

Okay. Great. And then my follow-up is for Bryan. Just thinking about the EPS sensitivity to the sales shortfall, you're lowering your EPS by $0.10 to $0.15, but I think there's about $0.05 below the line. So probably lowering more like $0.05 to $0.10. That's actually in line to a little bit better than the prior rule of thumb, which was $0.10 per comp point. So can you just discuss the extent that this includes the higher energy and logistic costs? And then where are you still finding some of the offsets?

Thank you for the question. Yes. Look, it's something I'm most proud of with the company is just how we've reacted in this environment. We continue to pressure test the company and do the things, but we're not going to cut to the bone either. I mean you heard me say that our service scores are still the highest they've ever been.

So when you think about it, I'll try to unbundle it multiple ways. So the higher energy costs are embedded in there. We do think that, that is going to have a modest impact to the gross margin rate. If the current elevated environment continues longer, we would trend towards the lower end of our guidance. But as you noticed in the call, we were able to actually raise the lower end of our gross margin guidance that I gave on the original call. So we're at 43.6% to 43.8% versus originally, we were 43.5% to 43.8%. That allows us to take the low end up a little bit to offset some of the sales pressure.

You're right. Historically, we've always said it's $0.10 per comp point. In this environment, again, we've taken a lot of actions. We continue to flex our labor hours to the transactions. 70% of our stores are able to move with the model and even above that a little bit, 30%. We always talk about those as being not able to move those, but we've been able to actually tweak a little bit in our lower volume stores just at a reduced kind of lower rate than we can move the other 70% of our fleet.

We continue to push on discretionary spend within the 4-walls. We're managing our distribution center cost in this environment. And we've continued to align our general and administrative expenses to the current environment, and we'll continue to do that as we move along.

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

I wanted to ask about store opening. Can you talk about decision maybe not to slow down a little further? I realize the demand environment is a little weaker. I feel like the build-out environment is a little more costly even though you are making tweaks. So talk about that decision and relative to buying stock back or buying a higher percentage back even.

Sure. So I might give you a little bit longer answer through that piece about capital allocation in there at the end. But you're right. In our prepared remarks, we said we remain committed to 20 stores. We've also been open, I think, for at least the last year saying that we view that kind of new store openings as an opportunity and something that we treat as a priority coming into the -- excuse me, 2026.

And I would say it's still very early, but we're encouraged by the initial results that we're seeing in those 6 stores that we've opened, even in a really, really tough environment. In the script, we said we're very much focused on opening stores in Tier 1 and Tier 2 markets. I think the team has done a really nice job of refreshing our grand opening process.

Ersan and team serve a lot of credit for optimizing kind of a smaller store layout. You heard us say the average in '26 is going to be 55,000 square feet, which is a much smaller footprint than we've done in years past. Question I get a lot there is, are we sacrificing the experience? Are we sacrificing the assortment in a store that's 60,000 square foot or less? And we feel like the answer is no. So really pleased with what we're seeing.

When we think about capital allocation, for us, we still feel like opening new stores is absolutely the best use of capital that we have. It's critical to our long-term strategy. So we're going to continue to lean into that. And that really has been our capital allocation strategy for quite some time. We are fortunate and we're fortunate that we're at a point in our company's history where as we look at forward projections, we see that we're going to generate enough cash to still fund those new store openings and the reinvestment into existing stores.

We can also fund any type of new growth concepts inside or outside the store that would include M&A. And then any excess cash that we have -- I shouldn't say it that way. And then we have the opportunity with excess cash to return that to shareholders in the form of a share repurchase. So we feel really good about our balance sheet, feel good about the priorities that we have in our framework. And as a management team, we are laser-focused on growing the core business.

Just as a follow-up, just to put in context on the amount of spend because what's helped us continue to open stores in this environment and have better returns is our average store cost is going to be this year approximately $7.5 million to $8 million. If you rewind the clock just a couple of years, we were as high as $11.7 million in 2023. So for all the reasons Brad talked about and what we've done within the box, that just kind of contextualizes it within the numbers for you.

The follow-up on the value proposition. I think we talked about it a quarter ago. And can you focus especially on the lower end of the value segment, some of the lower-tier product? And I know you've been trying to reassort there, but can you assess how you sit versus the market?

Well, one of the things that's been most surprising to me, and I think the rest of the team has been how resilient the better, best part of our business has held up. I think that's a testament again to the assortment that we have, the jobs that our team do in our stores and really explain the features and benefits of the product that we have.

And we've always had a nice presence in the lower end of the spectrum. It hasn't been a high percentage of our sales. But when we do see customer preference shift, like I explained in laminate and vinyl, we can react quickly and get the share that's available in that space. So I don't think it's a huge opportunity for us to reinvent our assortment to push down to the lower end because we're really not seeing that type of preference with laminate and vinyl being the only exception.

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

Brad, maybe expanding on Simeon's question around the new stores averaging 55,000 square feet. I'd be curious if you can maybe take us to the box here and talk about some of the newer in-store merchandising initiatives. I know maybe early, right, extended aisle, F&D Express, what Inspiration Center. What are you sort of seeing around these new initiatives that gives you conviction that you're not going to sort of give up productivity or return sort of profiles with this migration. I'd love to hear just conviction behind those.

Yes. So I'll try to hit the headlines. One of the things that I've shared pretty consistently is the team has done a nice job of optimizing the layout of the store. And for those of you that have been in our store, our store really has kind of 2 sections, if you will. We've got the selling floor and then we have the warehouse.

So I'll start with the warehouse. I think we continue to get better and better in minimizing the amount of space that we need for warehouse so we can maximize the amount of sales floor that we have in a smaller box. And then when you come into the front of our stores, the first thing you're going to see is cash registers and you're going to see a design center.

And when you think about optimizing that experience where it's a benefit to the customers and it's a benefit to our associates, I think we've hit a home run there. The example that I use, I know a lot of you are based in New York. If you get a chance to go out to Staten Island, I think it's the example of what we're talking about.

And then from a design center perspective, which is really important to who we are and what we do every day. I think we've shrunk the experience without minimizing the experience, if that makes sense. Our designers still have the ability to drive inspiration with our customers out of the design center. As we said in the script, we've had a lot of effectiveness with our designers no matter the size of the store. So we feel good about that.

And when we think about our core categories, and the emphasis that we have on Pro, our Pro desk and our installation assortment is not sacrificed at all. I mean it's, in some cases, as big, if not bigger than you'd see in the larger store. And then our core categories like tile, laminate and vinyl and decorative accessories, really no kind of sacrifice in those categories either.

On the tile, tile does take a lot of space in our stores. We've got to be creative, and you'll see different fixtures in smaller volume stores that allow us to display more SKUs than we normally would on the floor. And again, we're really excited about what we're seeing. And we don't believe that we're going to sacrifice any type of top line productivity. And that's because -- and I should have said this originally, one of the reasons we're pushing into smaller volume stores is we've got to densify urban markets. That's where a lot of the demand is. And the reality is the 75,000 to 80,000 square foot box isn't available in those markets. And if it is available, it's very, very expensive. So we've done this strategic pivot as an organization. And again, you can tell by my comments, we're optimistic on how it's playing out thus far.

Our next question comes from the line of Steven Zaccone with Citigroup.

I wanted to follow up on the guidance change. I was hoping you could just elaborate a little bit more on why the decision to lower guidance at this point in the year. It seems a bit early, right? Because March and April sound pretty similar, and you actually saw somewhat of a 2-year stack acceleration in April. So help us understand what's changed from a cadence of the year? Is this more a function of weaker second half expectations just given some step down in the existing home sales backdrop?

No, I certainly appreciate the question. And if you rewind the tape to our last call, what we communicated is that we came in from a planning perspective, assuming that 2026 was going to look a lot like 2025. We said if there's any level of stability when it comes to existing home sales or improvement, we felt like we had a path to delivering positive comp sales for the first time in a few years.

Since that time, obviously, a number of things have occurred that we would consider unexpected. And I think that's how we described it in our script. I'm not going to list them because we listed them more than once in our prepared comments. But obviously, that's changed the demand environment for our business. And really, I assume any kind of high big ticket discretionary item. So we thought it's prudent and responsible at this point in time to recalibrate given what we know now.

When you think about the range that we provided, we'll be the first admit wider than we normally would give. But the reality is there's just uncertainty in how our demand drivers are going to play out for the rest of the year. If you look at our current run rate and assume no improvement, then we have a level of confidence that we can hit the midpoint of the guidance. If we see any type of improvement when it comes to those demand drivers, then we feel like we can get closer to the high end of the range. But as you would expect, this is a question that we wrestled with. And we felt like, again, it was just prudent and responsible for us to reset and recalibrate at this point in time.

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

As outsiders, it is very difficult for us to have an accurate assessment of market share. We tend to look at the performance of the big box retailers, some of the vendors in this space. And it does seem on those metrics that Floor & Decor on a same-store basis is lagging behind the industry. It's hard to explain that given the value proposition, the customer experience and all the other facets of the model. So a, as you look either category by category, geography by geography, are you seeing evidence of market share gain? And b, how would you explain that market share loss and what is being done to address it? And then I have a quick follow-up.

So -- and probably worth a more in-depth conversation at some point in time, but we don't see that. We don't see that we're losing share. Even on a category like laminate and vinyl, where we admittedly say our performance has been below expectations, that market is under a lot of pressure. So I'm certainly not going to sign up and say that we're taking share in laminate and vinyl in a meaningful way. But I also don't think we're losing share in a meaningful way.

And when I look at the other categories, insulation materials, tile, wood, deco, I feel really good about our position. And like we said, and this was part of my close in the comments, when we look at publicly available data, and that would be big box retail, when we look at other third-party data that all of you look at and then certainly, the feedback from our vendor partners, we are not getting that same interpretation of the data.

So we feel good about market share in a really tough environment. Do we want to have better sales performance? Absolutely, absolutely. And I would say our focus is on accelerating share gains. And as I've said kind of time and time again, if we can get any level of stability in our space, we're really, really committed to delivering positive comp sales in our business.

Understood. My follow-up question is on some of the pricing actions that the corporation has tested, and it sounds like we'll deploy a bit further as the year progresses. Can you quantify what the impact has been from those actions? How have you embedded those in the guidance? And why wouldn't Floor & Decor take up prices more aggressively given that folks who are probably coming in at this point with a low level of overall traffic probably are just going to be inherently less price sensitive?

Yes. The first thing that I would say is I can't compliment Ersan and his team enough and how they've executed through this environment, really performing at a high level and have kept us incredibly well positioned to take share in all of our categories. My general observations around the market and pricing, and I will answer your questions, just bear with me. I continue to see rational behavior, and I describe rational behavior from pricing, kind of low to mid-single-digit increases. We have shared that we've taken modest increases.

And the good news is we've been able to pass that price on to customers. I mentioned that better and best penetration has held up, which has been a nice surprise. And for us, we continue to test our pricing strategy. One of the areas of investment that we've made is in our pricing team. We've hired new leadership there or a new pricing leader for our business. We're investing in tools. And even though we're pleased with the execution on our pricing, we know there's always more opportunity there.

We're going to continue to test our price bands. For the first time in a long time as we've taken price down in the laminate and vinyl, we have seen that positive reaction to square footage. And we're going to run test to see if that takes place in other categories. And on the same token, take prices up to see what that impact is. We are very, very focused on taking market share and our pricing strategy is going to be reflective of that.

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

Could you remind us how your freight contracts renew and how we should think about how higher ocean and domestic freight flows through? And then for other input cost inflation like PVC, et cetera, any thoughts on exposure or impact there and what's embedded in the guide?

Zach, this is Bryan. I'll take a stab at it and then Brad can jump in. Our ocean contracts, we typically renegotiate those through the spring and early summer. So we're going through that right now. Again, we typically are on multiyear contracts. I think this go around, we're on more interim contracts, 1-year kind of 2-year basis versus 3 historically that we've kind of blended in. So a lot of those will be renegotiated now. It will take a little bit of time. It will be probably the back half before we start seeing those price changes. And then it takes anywhere from 6 to 8 months depending on those international contracts to really kind of bleed fully through into the P&L just from a flow-through perspective.

On the domestic side, it's a lot quicker than that. And so that's why we are starting to see some of the higher energy costs today. That's why I mentioned we are starting to see a modest impact today, and that will continue just depending on how long this environment continues. But for us, on that side, that's just a lot quicker because it's basically our domestic side post distribution center to our stores. So that flows through a lot quicker into what you see into our results.

And on the PVC, how that input cost inflation could impact the category?

Yes. It's still early right now. I mean, look, Ersan's team, again, getting a lot of kudos today. They've done a great job of working with our vendor partners, long-term vendor partners that we've had there. So today, where we see just minimal exposure today, I think we'll always do what we do best, which is negotiate first and foremost, with our current vendor base. If we do see any big sort of pushes or anything else, we can always diversify out. And then whatever is left, we'll push through to our consumers to the extent that we can.

Got it. And then on the Pro loyalty revamp, any thoughts on new features you're exploring there? I know we've talked about Pro pricing. On that note, like any updated thoughts on options in terms of discounts versus rebates and how you would plan to balance gross margin versus volume improvement potential?

I'd love to be able to share the details of that program. Unfortunately, I can't do it at this point. But as we said in the prepared remarks, really excited about the progress we're making there. That is an effort that is led by Krysta Zell, our new Chief Customer Officer. She's got deep, deep expertise in building loyalty programs. She's done that at more than one stop along her career.

And what I would say is our aim here is to have a differentiated program that is really a comprehensive solution for our Pro customers. And I talk a lot about service assortment and price. It's going to touch on all those components, and it's going to be supported by the right technology. And for me, I think that's going to be a real -- a key piece to how we accelerate share gains from independents. We're really excited about the potential that it has and can't wait to roll it out in the first quarter of next year.

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

How aggressive could you be -- do you plan to be in the market immediately if shares are currently trading [indiscernible] could you be now and through the balance of the year?

So I think the question was how aggressive do we plan to be with the share repurchase. Bryan, do you want to walk through the mechanics of how we're thinking about that program?

Yes. David, I think this is you. But obviously, we said it on the call, but this will be a discretionary repurchase program, right? We'll purchase both through programmatic and opportunistic given the current dislocation within our stock.

We have a healthy balance sheet, and we'll use the excess cash to fund this program as we see fit. So more to come on it. I don't want to commit to anything in the near term or long term. But just know that we'll do both programmatic and opportunistic. We're not trying to be stock pickers, right? So I mean we're going to use our advisers and go through it that way. So we do plan to start executing in the second quarter, but more to come on that kind of as we move forward.

[Operator Instructions] Our next question comes from the line of Chuck Grom from Gordon Haskett.

Curious what you're seeing from independents recently. I would imagine they're under considerable pressure and how you're attacking that opportunity. And then, Bryan, how should we be thinking about the phasing of both comps and earnings over the balance of the year?

Independents, as all of you know, we believe more than half of the market and very, very strong competitor in our local markets. I think I've been on record more than one saying, and I think they've done a really nice job in this environment of taking care of their Pro customers, which reinforces the importance of us having a new Pro loyalty and Pro pricing program.

I think the independents that cater to the more affluent customer are doing fine in this market. I'm certainly a believer in the K-shaped economy, and there's certainly a portion of that independent. I would say a small portion of the independents that cater to that audience and the higher-end designers, I think they're doing fine. I think everyone else is struggling. That is consistent with kind of the bottom-up feedback that we hear from our store partners and also our vendor partners.

Our whole perspective, and you've heard me say it throughout the call is we want to play offense in this environment. We're going to make sure that we're positioned to take market share and really exceed our customers' expectations every single day. And we think that's going to be our path to success.

And from a comp sequential nature, the biggest variation in the range is our transactions. I think as I alluded to on the prepared remarks, those would expect to be down low single digits to down mid-single digits, where our ticket will be somewhat consistent. but flat to up low single digits is how we would get there.

And then from a cadence perspective, on the low end of guidance, Q3 is modeled to be kind of the high quarter for the year. And on the high end, it assumes sequential improvement as we move throughout the year.

And then just as a point of reference for you guys, as we talked about quarter-to-date being down 4.5%, I think it is important to call out that last year, we are lapping a 1.7% increase in April, which had acceleration from the Liberation Day last year as we think about that. And then May was also 0.6%. Those are the 2 highest points of all of 2025, just to call that out as well.

Our next question comes from the line of Peter Keith with Piper Sandler.

On the competitive front, to follow up on an earlier question, I want to focus on the big box stores. There is a narrative out there that some of your big box competitors are leaning in and investing more in the flooring category. And I guess maybe the weakness that you're seeing in laminate and vinyl could sort of feed into that narrative. So I'll just ask you directly, what are you seeing from the big box stores? Are you seeing any more competition or more investment on pricing?

Yes. So I would say, just as a reminder for the folks on the call, where we compete with big box retail is an opening price point and the good part of our assortment plus installation materials. And big box retail, terrific companies. And I would say when we think about market share, it's a little bit of a street fight. When we think about our ability to take meaningful share, it's going to be from the independents. And the primary reason for that is a small -- a very, very small percentage of our sales comes from opening price point and good.

That being said, I've heard a comment like this numerous times over the last 12 months. And actually, we don't see that. We don't see them leaning into the category. We see, in some cases, them leaning out of the category, and that's more recently than anything else. I don't see anything disruptive from any of the big box retail. But again, great companies, great competitors and companies that we watch very, very closely. But we don't feel like they are, again, having any disruptive impact on our business today.

Our next question comes from the line of Kate McShane with Goldman Sachs.

We wanted to ask about Spartan. You did mention that the results were weaker than expected, but also seem to indicate that there is an opportunity for better results in the coming quarters. I wondered if you could maybe contextualize the timing a little bit more and what would be driving that.

Yes. So for Spartan, we came into the year, we knew that the first quarter was going to be a little bit softer, ended up being even softer than we expected. As we said, when we look at the leading indicators in that business, we've got a level of confidence that it's just a matter of time. So it's not an if, it's a when.

When you think about their core customers, it's multifamily, hospitality, health care, education and senior living, the softness that we're seeing is coming out of multifamily. In some cases, it's timing. In some cases, it's projects getting delayed for an extended period of time.

The great news is we've made investment, consistent investment in that business around new sales headcount. So when you talk about taking market share, we feel really good about our ability to rebound from the first quarter, have the gradual progress that we talked about in the script and deliver a nice year from that business.

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

Brad, I had a strategy question. You're evaluating Pro-specific pricing potentially, which maybe you haven't offered in the past. And you're also looking to some smaller format stores than historical standards. I guess in the past, Floor & Decor has chose to not offer installation services to avoid conflict with Pro customers. I'm curious if your stance is any different there. Any comment would be helpful.

No, no. And I would say -- so no deviation from the previous strategy when it comes to how we think about installation. And even from a kind of smaller footprint store, I would say I'm building on a strategy that's already in place. One of the reasons we had confidence in our ability to deliver on a 60,000 square foot store in an urban market is because we have stores out there doing that today. Again, I think the team continues to refine that and optimize our experience. But short answer to your question is no, we're not going to deviate from the current strategy around installation services.

Our next question comes from the line of Phillip Blee with William Blair.

So you've spoken about revamping the Pro loyalty program next year. And I know you have your own internal design program, but same thing kind of a larger scale strategy question. Would you ever consider expanding a loyalty program to the external interior design trade to try and build a relationship with that end of the market and maybe expand your customer base to a little bit of a higher income?

Wow, you're putting me in a tough spot to answer that question. Listen, I think when we look at our business today, I think we have a certain level of success with designer and that customer that really requires a trade discount. We view that as an opportunity. I'll position it that way. We view that as an opportunity that we can lean into more.

Now what does that mean from our loyalty program? We're going to have to wait and see as we share that later in the year, what that framework looks like. But I think you're spot on with your observation as far as an opportunity for us to, like I said, lean into that customer segment a little bit more.

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

I wanted to follow up on the pricing actions and how it influences the ticket through the year that I think it was the flat to low single-digit ticket comp. Does that have 400 or 500 bps of same SKU inflation in it before? And is that still the same kind of number? And how do we think of that flowing through over the course of the year?

Yes. I don't know if I'm going to quantify that for you on that perspective. But again, the low end of our ticket being flat, we assume continued pressure in laminate vinyl kind of as Brad has mentioned, leading to smaller basket sizes and also some of the pricing pressures that we're talking about with value-driven options. Those are really kind of what's leading to the lower end of it versus the higher end. It's just the impact that those will have on the ticket itself.

Our final question comes from the line of Peter Benedict with Baird.

Just one more, I guess, on the buyback. Just a clarification. First, it doesn't look like any is assumed in the outlook, the share count forecast didn't change. I just want to confirm that.

And then just, Bryan, maybe just can you help us think about the minimum amount of cash kind of the business needs to operate on as we start to think about how aggressive you could potentially be in any given quarter with the buyback?

Yes. I mean, look, it's -- from where we sit today, given where we are in the year, the impact of this year isn't going to be very material. So it's incorporated within the guidance range itself within the outcomes would be the share repurchase. We do think longer term, obviously, this is going to add value to shareholders and continue to grow as we move along and do the program consistently.

So as far as -- yes. As far as minimum cash balances, yes, I mean, we think about it from cash, but it's really liquidity. I mean, for us, we've got an ABL out there that's $800 million accordion feature, we can get up to $1 billion. We've got sufficient liquidity over $1 billion today in combination with the two. I always think about it as a minimum cash or minimum liquidity that we need to make sure that the company is healthy and in a good position. For me, that's usually around $500 million, just minimum in liquidity, and that will be a balance of both cash and ABL. That's an absolute minimum. I don't think we'll get anywhere near that. But for me, that's just kind of a floor.

And then on the flip side, you heard it in my prepared remarks, but we want to make sure also, Brad said it, we will not be using debt to fund this. And so for us, we'll maintain a very healthy lease-adjusted leverage ratio. Those are kind of the 2 financial guardrails that I look at as well as what we would do to our ROIC. And so we think about all 3 of those as a management team, just making sure that we don't overstretch or do those as we get into this.

Okay. Thanks, Bryan. And thank you, everyone, for your time tonight and support. Have a great night.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.

Greetings, and welcome to the Floor & Decor Holdings Fourth Quarter 2025 Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the conference over to our host, Wayne Hood, Senior Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's Fiscal 2025 Fourth Quarter and Full Year Earnings Conference Call. Joining me today are Tom Taylor, Executive Chair; 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 risks and uncertainties that could cause actual future results to differ materially from those expressed in these forward-looking statements for any reason, including those listed at the ending 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 call, the company will discuss certain non-GAAP financial measures. We believe these measures enable investors to understand better 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 thanks to everyone joining us today for our fiscal 2025 Fourth Quarter and Full Year Earnings Conference Call. During today's conference call, Brad, Bryan and I will be walking through the key highlights from the quarter and the full year. Then Bryan will share how we're approaching fiscal 2026 and the priorities that are shaping our outlook. We're pleased to deliver fiscal 2025 fourth quarter diluted earnings per share of $0.36, which was in line with the midpoint of our earnings guidance provided on our third quarter earnings conference call. For the full fiscal year, diluted earnings per share was $1.92 compared with $1.90 in the prior year. As a reminder, last year's results include $6.8 million or $0.05 per share of net benefit related to the derivative litigation settlement in the fourth quarter of 2024.

Our fourth quarter sales increased 2% and to $1.130 billion, while comparable store sales declined 4.8%. For the full fiscal year, sales grew 5.1% to $4.684 billion and comparable store sales declined 1.8%, which was near the low end of our expectations. I'm incredibly proud of what our teams accomplished in 2025. Despite pressure on comparable store sales driven by softness in existing home sales activities and shift to smaller flooring projects, we expanded our market share, navigated tariff complexities, increase our gross margin rate, opened 20 new stores and delivered year-over-year earnings growth. This performance reflects our unwavering commitment to disciplined execution and strategic investment in our future. It also reinforces our confidence in our long-term strategy and in the opportunities ahead for our customers, our associates and our shareholders. With that said, let me now turn the call over to Brad.

Thanks, Tom. I want to begin by also recognizing our more than 13,500 associates across the company. Their customer-focused commitment throughout 2025 enabled us to execute effectively in a complex and challenging environment and delivering exceptional customer experience. We are proud to have achieved record Net Promoter Scores in 2025 and which underscore and validate our associates' efforts. The progress we made by expanding our footprint, strengthening our capabilities, controlling expenses and gaining market share demonstrates the strength of our operating model and the discipline of our teams.

As we enter 2026, we have a clear set of initiatives designed to further grow our market share and drive sales and profitability in any economic environment. Our priorities are aligned with the areas where we see the greatest opportunity. New store productivity will remain a major focus. We opened 20 new warehouse-format stores in 2025 and plan to open 20 more in 2026. Ensuring these locations ramp efficiently and deliver stronger early results is a top priority, and I'll speak more about the actions driving that performance in a moment. We are investing in initiatives that deepen customer loyalty and translate directly into greater wallet share with our Pro customers. The key priority is accelerating our Pro market share by advancing our supply house capabilities in key categories such as installation materials, and by relaunching an enhanced Pro loyalty offering. In fiscal 2026, we will focus on the design, development and testing required for a Pro Loyalty 2.0 relaunch in early 2027, which is expected to introduce a differentiated Pro experience with expanded personalization capabilities. To further strengthen our supply house value proposition, we are piloting enhancements to Pro pricing supported by an improved delivery offering for this customer segment. Together, these and other initiatives build long-term capabilities that are expected to significantly increase switching costs and deepen our strategic advantage with Pro customers.

Maintaining strong gross margin performance will continue to be a priority in fiscal 2026. We are prepared to take modest retail pricing actions to help offset the expected impact of tariffs and to manage both margin rate and dollars. As a reminder, we have made meaningful progress in diversifying our product sourcing.

China represented 3% of our fourth quarter receipts, down from 12.5% in the prior year. Our teams have consistently executed well in navigating difficult environments, and we remain confident in our ability to manage through these dynamics with discipline and success. We are building a scalable, strategic account-driven B2B foundation that supports the phase expansion of our regional commercial account managers. This team, which totaled 67 at the end of 2025 and operates outside our stores, enhances our ability to capture additional commercial market share through our stores in key markets. Collectively, we believe these asset-light growth investments will increase engagement, improve retention and expand lifetime value among our highest value commercial customers. Driving annual supply chain productivity improvement is a top priority over the next few years. We are piloting an initiative over the next several months that is designed to deliver a meaningful reduction in distribution center to store lead times by improving network responsiveness, inventory flow and store service levels. This work is expected to strengthen our ability to move product through the network more efficiently, support better in-stock performance for our customers and increase inventory turns. These are just some of the initiatives that give us confidence that we can continue to grow ahead of the market even in a year when industry demand may face ongoing headwinds. Our priorities remain clear: stay disciplined; invest where we have structural advantages; and execute with even more operational rigor.

Let me turn to our new warehouse store expansion. In the fourth quarter of fiscal 2025, we opened 8 new warehouse stores. For the full year, we added 20 new locations and closed 1, ending the period with 270 stores, an 8% increase from 251 a year ago. We remain on track to open 20 new stores in fiscal 2026 with development primarily concentrated in markets where we already have a presence. Our pipeline reflects a strategic mix of store sizes and market type based on market potential thresholds. In fiscal 2026, we expect the vast majority of openings to be in Tier 1 and Tier 2 markets, which positions the class for a meaningfully stronger first year volume. For example, we plan to open a store on Staten Island, New York in 2026, which we consider a Tier 1 market, whereas our Fayetteville, North Carolina opening in 2026 would be an example of a Tier 3 market. Additionally, we expect more than half of 2026 openings to occur in the first half of the year, compared with 35% last year, providing more operating weeks and further supporting stronger first year productivity. Looking ahead, we expect to have a footprint in every major U.S. market by the end of the first quarter of fiscal 2027, positioning us for continued share gains and improved operating leverage. We're steadily advancing toward our long-term goal of operating 500 warehouse-format stores across the United States and retain the flexibility to adjust our store opening cadence as market conditions change. Relatedly, we are pleased to have made meaningful progress in reducing our overall new store construction costs. Capital spending per store for our 2025 class of new stores was $10.2 million, which is $1.2 million or 11% lower than our fiscal 2023 class. Our 2026 class of new stores will benefit from our efforts over the past year to reduce costs and optimize the store size and achieve noncustomer-facing cost reductions as well as from a greater number of second-use sites in the pipeline. We are managing these costs diligently while continuing to invest in our stores, store experience and associates to drive returns as industry conditions improve.

Turning to our fiscal 2025 fourth quarter full year and early fiscal 2026 sales performance. Comparable store sales declined 4.8% in the fourth quarter. For the full year, comparable store sales declined 1.8%, which was at the low end of our guidance of down 2% to down 1%. As a reminder, our fiscal 2024 fourth quarter benefited by approximately 110 basis points from Hurricanes Helene and Milton, creating a tougher comparison for fiscal 2025. This dynamic was a key driver of the expected decline in fourth quarter comparable store sales. We are pleased to see our better and best categories continue to outperform, reflecting customers' strong appetite for quality, technology, innovation and trend forward design. On a monthly basis, comparable store sales decreased 1.5% in October, 6.1% in November and 6.7% in December. On a 2-year stack basis, the decline in comparable store sales sequentially improved each quarter in 2025, providing some context to the underlying momentum in the business. From a geographic standpoint, our West region continued to outperform the company average for both the quarter and the year, highlighting the continued relative strength and resilience of that region.

Turning to early fiscal 2026. We were pleased with the broad-based improvement we saw in January. Comparable store sales increased 0.4%, marking our first January increase since 2022 and reflecting a meaningful step forward in underlying demand, consistent with the gradual improvement we saw in existing home sales in December. That said, early fiscal February sales have been meaningfully impacted by the severity of winter storm fern that disrupted operations across more than half of our stores and our Baltimore distribution center. In the markets where weather was not a factor, we continue to see sustained momentum, particularly in the West, underscoring the strength of underlying demand where operating conditions remain stable. We are pleased to now be working our way out of the disruption through the remainder of the first quarter and the pace of recovery is improving as conditions normalize across the network. That said, the improvement will take time. January existing home sales declined 8.4% sequentially and 4.4% year-over-year to 3.91 million units, and we do not expect to fully recover the sales lost during the storms within the first quarter. Our fiscal 2026 first quarter-to-date comparable store sales declined 3.5%.

Turning back to our fourth quarter performance. Comparable store sales reflected a 4.2% decline in transactions and a 0.6% decline in average ticket. Transactions were at the lower end of our expectations, while average ticket finished below our expected range. For the full year, transactions declined 3.5% and average ticket increased 1.8%. By comparison, fiscal 2024 transactions declined 4.7%, while average ticket declined 2.5% from the previous year. In the fourth quarter and full year, connected customer sales rose approximately 2% from last year and represented about 18.5% of total sales. Connected customer average ticket continued to grow, while transactions remained under pressure. Fourth quarter sales to Pro customers grew slightly year-over-year and 9% for the full year, continuing to represent approximately 50% of total sales. We are pleased to see further evidence that our focus on understanding Pro needs is paying off as total and comparable store sales in installation materials, a critical Pro category, grew in the fourth quarter and for the full year. This performance reflects the success we are having in expanding Pro wallet share in an important category and demonstrates the strength of our supply house strategy with Pros.

Turning to Tile, where both Pros and homeowners look to us for industry-leading elevated aesthetics. We continue to invest in trend forward designs in more realistic visuals that differentiate our assortment in the market. The successful launch of our USA-made Vetta Elements Luxe collection in 2025 is a strong example of this strategy. Vetta is a mix and match porcelain system that enables cohesive, high-end design across floors, walls and outdoor areas. This line is designed to serve homeowners, designers, builders and commercial customers. We will continue to build on the success of Vetta in 2026 with an expanded assortment, which expands the collection with additional color options, 2 new stone inspired series, limestone and linear travertine and new paper options. These innovations enhance finished spaces and help Pros deliver more premium outcomes for their customers. Growing our market share with Pros remains a top priority in understanding their evolving needs across categories is essential. While smaller and fewer project types have been the norm for some time, contribute to broader pressure across the vinyl industry, we are seeing a subtle shift toward greater value in the category, even when that means choosing products with lower specifications. We believe this shift towards value reflects rising wages, higher operating costs, and tighter project pipelines that are putting more pressure on certain job level profitability. Not surprisingly, some Pros are looking for ways to stretch budgets without compromising project outcomes. We see this as an opportunity to accelerate our market share gains, particularly among independent flooring retailers by staying ahead where demand is moving and proactively implementing strategic actions that meet Pros needs. To that end, we are introducing a set of compelling offers, including new SKUs and targeted special buys designed to deliver immediate meaningful value to our Pro customers. By placing these offers in high-visibility off-shelf locations, we are making it easier for Pros to quickly find cost-effective solutions that support the economic pressures they are managing. These initiatives strengthen our ability to deliver the right products at the right price points, ensuring we remain an essential partner as they navigate tighter economics in evolving project requirements.

Finally, let me discuss Spartan Surfaces. Despite a volatile operating environment, including significant tariff pressures and continued softness in commercial multifamily housing, Spartan Services delivered strong performance. Fiscal 2025 sales increased approximately 13% to $243 million, surpassing our expectations and reinforcing the strength of the platform and the value it brings to our commercial business. We continue to strengthen our commercial footprint outside our stores through Spartan services, expanding our presence across health care, education, hospitality and senior living commercial segments. These market segments demand highly specialized products and deep partnerships with A&D firms, capabilities that extend well beyond what our stores alone can provide. In these segments, product specification and trusted A&D relationships are essential and Spartan Services positions us exceptionally well on both fronts. Our strategy is to accelerate growth by expanding our representative headcount, both organically and through targeted acquisitions to deepen these relationships and broaden our reach nationwide with a particular focus on the Western United States.

Let me now turn the call over to Bryan.

Thank you, Brad. As we wrap up fiscal 2025, our financial performance underscores the resilience of our business model and the effectiveness of our financial discipline despite ongoing pressure in the hard surface flooring category. I'm extremely proud of how the entire company continued to effectively manage our profitability, inventory, cash flow and balance sheet, playing a key role in supporting our financial performance in 2025. Importantly, we were able to maintain this discipline while continuing to invest in expanding our capabilities to support long-term growth.

Now let me discuss some of the changes among the significant line items in our fourth quarter and full year financial statements as well as our outlook for 2026. We continue to be pleased with our gross margin performance, our fourth quarter gross profit increased by $9.8 million or 2.0% compared to the same period last year.

Our gross margin of 43.5% was flat year-over-year and up 10 basis points sequentially, landing within our expected range. Gross margin benefited from favorable product margin, inclusive of higher duties and tariffs starting to impact us offset by the expansion of our distribution center network in Seattle and Baltimore, which as anticipated, at a gross margin pressure of approximately 90 basis points year-over-year. These distribution center investments position us to support the next phase of growth with greater speed, efficiency and reliability. While they create some near-term gross margin pressure, they meaningfully strengthen our long-term operating capabilities and enhance the value we deliver to customers.

For the full year, gross profit increased $115.7 million or 6.0%, driven by 5.1% sales growth and a 30 basis point improvement in gross margin to 43.6% from the same period last year. Our gross margin expansion was driven by favorable product margin due to lower supply chain costs partially offset by higher distribution center costs. Our distribution center investments impacted gross margin by approximately 70 basis points, consistent with our expectations.

Turning to operating expenses. You'll notice in today's press release and 10-K that we've consolidated operating expenses into a single selling, general and administrative line for the quarter and the year. This allows us to conform to industry peers and reflects the way our business is evolving and the way our leadership team manages performance day-to-day. As we transition to this new presentation, I will provide both our new and historical breakouts, so you can compare our results to prior periods. This bridge is designed to support year-over-year analysis during the changeover and ensure continuity as we move to a consolidated SG&A line going forward.

With that context, let me walk you through the fourth quarter and full year SG&A performance. Our fourth quarter selling, general and administrative expenses increased by 4.0% to $439.2 million from the same period last year. The increase in SG&A expenses was primarily driven by the 8 new stores that we opened during the quarter. SG&A expenses for noncomparable stores increased $24.4 million and for comparable stores decreased $14.2 million. As a percentage of sales, SG&A deleveraged by approximately 80 basis points to 38.9%, primarily due to the addition of new stores and a decline in comparable store sales, partially offset by a decrease in preopening expenses. SG&A expenses also included approximately $3 million of expenses related to our ERP implementation. For the full year, selling, general and administrative expenses increased by 6.1% to $1.7738 billion from the same period last year. The increase in SG&A expenses was primarily driven by the 20 new stores that we opened during the year, which increased compensation costs, occupancy costs and depreciation and amortization expense.

SG&A expenses for noncomparable stores increased $126.8 million and for comparable stores decreased $24.8 million. As a percentage of sales, SG&A deleveraged by approximately 30 basis points to 37.8%, primarily due to the addition of new stores and a decline in comparable store sales, partially offset by a decrease in preopening expenses.

SG&A expenses included approximately $9 million of expenses related to our ERP implementation in line with our expectations. For comparability, here are the historical breakout of operating expenses. Our fourth quarter selling and store operating expenses increased by 3.8% to $360.7 million from the same period last year. As a percentage of sales, selling and store operating expenses increased by approximately 50 basis points to 31.9% from the same period last year. For the full year, selling and store operating expenses increased by $107.1 million or 7.9% to $1.4695 billion compared to last year. As a percentage of sales, selling and store operating expenses deleveraged by approximately 80 basis points to 31.4% from last year. The deleverage of these expenses in the fourth quarter and the full year period is primarily due to the addition of new stores and a decline in comparable store sales.

Our fourth quarter general and administrative expenses increased by 10.7% to $70.9 million from the same period last year. As a reminder, 2024 fourth quarter benefited from $6.8 million or $0.05 per share related to the derivative litigation settlement.

2025's results include onetime costs associated with our efforts to streamline the organization and enhance long-term operating efficiency. As a percentage of sales, general and administrative expenses deleveraged by approximately 50 basis points to 6.3% compared to the same period last year.

For the full year, general and administrative expenses increased by $10.9 million or 4.1% to $277.0 million compared to last year, driven primarily by higher personnel expenses and the comparison to the $6.8 million benefit from the derivative litigation settlement in 2024. As a percentage of sales, general and administrative expenses leveraged by approximately 10 basis points to 5.9% from the same period last year. Our fourth quarter preopening expenses decreased by 28.6% to $7.6 million from the same period last year. As a percentage of sales, preopening expenses leveraged approximately 20 basis points to 0.7% compared to the same period last year.

For the full year, preopening expenses decreased by $16.3 million or 37.3% to $27.3 million compared to last year. As a percentage of sales, preopening expenses leveraged by approximately 40 basis points to 0.5% from the same period last year.

The decrease for the fourth quarter and full year is the result of a decline in the number of new stores that we opened compared to the same period last year. Those expense breakouts reflect the historical presentation are intended to support year-over-year comparisons during the transition.

Let me now touch on our effective tax rate. Our fourth quarter effective tax rate increased to 24.0% from 19.9% in the same period last year. Our fiscal 2025 full year effective tax rate increased to 21.8% from 18.8% in the same period last year. The increase for the fourth quarter and full year was primarily due to a decrease in excess tax benefits related to stock-based compensation awards. The year-over-year effective tax rate change impacted 2025 by $0.08 per share.

Turning to the balance sheet and liquidity. Our financial position remains a core strength of the company. Net cash provided by operating activities was $381.8 million in 2025 compared with $603.2 million in 2024. The year-over-year decline was driven primarily by changes in trade accounts payable due to the timing of inventory receipts.

As of December 25, 2025, inventory totaled $1.1 billion, essentially unchanged from the same period last year. 2025 capital expenditures, including amounts accrued at the end of the period were $300.4 million, down from $376.3 million in 2024, which was at the high end of our guidance. The decrease from last year reflects fewer new store openings and fewer future construction projects underway. We ended the year with $249.3 million in cash and cash equivalents and $198.2 million in debt associated with our term loan facility.

Unrestricted liquidity at year-end was $909.8 million consisting of $249.3 million in cash and cash equivalents and $660.5 million available under our ABL facility. This level of liquidity provides meaningful flexibility to navigate the current environment, support working capital needs and invest in our growth initiatives.

As we look ahead to 2026, we expect the U.S. housing and hard surface flooring markets to continue to be shaped by the same macroeconomic forces that have influenced the industry since late 2022. We are encouraged by the trend towards lower mortgage rates, but housing affordability and economic uncertainty remain key constraints on large discretionary purchases. Compounding this the severe winter weather in the early first quarter makes it difficult to clearly assess the underlying demand until we are further into spring. As conditions normalize, we expect visibility to improve.

Before we discuss our fiscal 2026 guidance, I want to remind everyone, fiscal 2026 includes a 53rd week, which will be reported at the end of the fiscal fourth quarter. I will highlight the 53rd-week contribution we have incorporated into our guidance. Sales are expected to be in the range of $4.880 billion to $5.03 billion or increased by 4% to 7% from fiscal 2025. The 53rd week is expected to contribute approximately $65 million to sales.

Comps are estimated to be down 2% to up 1%. Comp average ticket is expected to increase low single digits and comp transactions is expected to decline mid-single digits to low single digits. Gross margin is expected to be approximately 43.5% to 43.8%. SG&A as a percentage of sales is estimated to be approximately 37.7% to 37.8% with the first and fourth quarters being the most pressured from new stores.

Interest expense net is expected to be approximately $5 million. Tax rate is expected to be approximately 21.5% to 22.0%. Depreciation and amortization expense is expected to be approximately $245 million. Adjusted EBITDA is expected to be approximately $560 million to $590 million. The 53rd week is expected to contribute approximately $11 million to adjusted EBITDA.

Diluted earnings per share is estimated to be approximately $1.98 to $2.18. The 53rd week is expected to contribute approximately $0.08 to diluted EPS. Diluted weighted average shares outstanding are estimated to be approximately 109 million shares. Our fiscal 2025 capital expenditures are planned to be in the range of $250 million to $300 million, including capital expenditures accrued. We intend to open 20 warehouse format stores and begin construction on stores opening in fiscal 2027. Collectively, these investments are expected to require $160 million to $190 million. We expect our new store CapEx to be approximately $7 million to $8 million for the class of 2026 compared to $10.2 million for the class of 2025 due to optimizing the size of the stores and utilizing more second-use facilities.

We intend to invest approximately $60 million to $70 million in existing stores and existing and new distribution centers. And finally, we plan to continue to invest in information technology infrastructure, e-commerce and other store support center initiatives using approximately $30 million to $40 million. I'd like to thank our associates for their continued focus and execution. Our 2025 performance is a direct result of their attention to operational detail, productivity and customer service. That consistency and discipline remain critical to supporting our confidence in the durability of our model and driving our long-term growth.

I will now turn the call back to Tom.

Thanks, Bryan. Let me offer a few closing remarks before we take your questions. With Brad stepping into the CEO role, he'll now be leading these calls going forward. and I'm excited for you to hear from him in that capacity. As I transition into the executive chair role, I will remain closely involved in the business focusing on the long-term strategic initiatives Brad and I have been developing to support our growth. I'm energized by the opportunity to concentrate even more on these long-range priorities and the work that will drive our next chapter. Brad and I are fully aligned on our long-term vision, our culture and the associates who make this company exceptional. Floor & Decor has been a meaningful part of my life, and I look forward to continuing to contribute to the work that will shape its future. Operator, we'll now take questions.

[Operator Instructions] And your first question comes from Peter Keith with Piper Sandler.

All right. Thank you very much. Well, Tom, good luck to you in your new role. You've done a nice job of building a category killer in the space. I did want to pivot the first question over to Brad. So Brad, as you're moving into the CEO role now and you're in the chair, you mentioned a couple of initiatives around Pro loyalty and supply chain, but I'm curious what you think of some of the biggest areas of opportunity perhaps to drive some acceleration or operational improvement?

Thanks for the question. I would say I've been really over the course of the last 11 months or so, really, really impressed with the operational capabilities and discipline of the team. I think there's no better example of that when you look at the service scores that we were able to deliver in 2025 despite 30% of our stores being on minimum hours. And that's kind of a 1 team effort to make that happen. But you're right, we certainly see opportunities for us as an organization. We are laser-focused on getting the core of our business growing again. And a key component to that is improved new store performance. And I know we had a pretty detailed description in our prepared remarks on how we're going to do that. But again, the organization is fully focused on delivering meaningful improvement over what we've seen from a kind of first year sales performance relative to our last 3 years. I'd say that would be number one. Number two, and I've talked about this in past calls, I think digital experience for us is a real opportunity. At the highest level, we want our customers to have the same great experience on our digital platforms that they have in our stores. And today, that in some cases, just doesn't happen. The good news is we've hired a new leader over that part of our business. She's got a compelling vision and a very practical plan on how we're going to make that happen. And you'll certainly hear more about that on future calls. And then supply chain. Yes, supply chain is certainly an opportunity. And the way that I frame that as an organization, we're at a maturity level now where that's got to be a priority. And the priority is delivering improved productivity across our entire supply chain every year. And the way that I would frame that is it's very much a singles and doubles approach at this point. And I say that, because it doesn't require transformational investment, it's really process and people and just saying that's going to be a priority for our business.

Your next question comes from Zach Fadem with Wells Fargo.

So let's start with the comp guide. Any thoughts on cadence of the year? You mentioned low visibility in terms of demand right now. I'm just curious what you're embedding in terms of the shape of the year of comps and particularly if there's a Q1 guide that we should anchor to? And then separately, any thoughts on the impact of some of those key markets like Texas and Florida versus other markets? And any change in spread between those 2.

Sure. I'll start first and then hand it off to Bryan, so he can give a little bit more detailed answer. But at the highest level, when we think about our guidance, as you all know, we need to cover a range of outcomes. When we think about our recent performance, Q4, a little bit softer demand environment than we expected. We knew it was going to be a tough quarter for us, but a little bit softer, especially in November and December. Really, really pleased with the performance that we saw in January on the heels of a nice December existing home sales report. I'd say our January performance was really the last 3 weeks of the month, because the first week of the month was wrapped around the holiday. So those 3 months were really, really solid. Unfortunately, we had a buzzsaw with what I consider a 2-week weather event in February. And when we kind of dig our way out of a weather event like that, unfortunately, you don't see that demand come back immediately. It takes time. And I know we shared that in the prepared remarks, it's going to take this quarter and more to get that demand to come back into our business. So when we think about the last 3 years and how we've guided, what we know today -- and 1 piece I left out, obviously, January's existing home sales was a step back from December. February probably looked very similar to that. So as I was saying, with the information that we know now, it was best to be very prudent and thoughtful and coming up with the guidance that we did.

Bryan, why don't you go ahead and just kind of walk them through some of the details that he asked for.

Yes, good question, Zach. So 2026, we expect second half comps to be better than the first half, with Q3 being the high mark for the year. on a 3-year stack. That's the way I look at it because it removes the noise from the hurricanes. We expect sequential improvement each quarter on both the low and high end of guide. And then to give a little bit of clarity, as Brad was talking about the February storms, those storms impacted approximately 55% of our stores and contributed almost 200 to 300 basis points of quarter-to-date pressure on comps or $12 million to $18 million. So going into the year, our initial model assumed Q1 comp will be slightly negative prior to those storms happening just because we are lapping the 100 basis points benefit from hurricanes, Milton and Helene coming into this year. So all of the pressure we've seen early on has really been transaction-based. We feel really good about what's happening with quarter-to-date average ticket.

Got it. And then on the Pro strategy, curious to what extent you think the EDLP strategy has been a headwind for your Pro business, considering no incremental discounts. And as you think through the next iteration of Pro loyalty, curious to what extent you'd consider tweaking the pricing architecture to perhaps better incentivize the Pro?

Great question. Maybe I start on why the Pro is so important for our business. We've shared that Pro sales are right around 50% of our overall sales. When you think about the remaining 50% of our sales, we think the Pro influence is up to 20 points of that 50 points. So there's no customer that we serve that's more influential than the Pro customer. We really, really like the Pro experience that we have. And I generally divide that into 3 components: service; assortment; and price. When we think about what we do in-store to support the Pro from a Pro desk dedicated pickup location. We'll store their product for up to 7 days, I feel like we've got a very differentiated offering for that individual. From an assortment perspective, we're very proud of our assortment, particularly when you think about our supply house strategy that we have in installation materials and the ability when a Pro comes to our stores, they have a level of confidence that they're going to have the job lot quantities they need to walk out of the store to be able to do the job that they're headed to.

The price piece, I think EDLP has been obviously very successful for us. We built a multibillion-dollar Pro business based on it. But when we look at the competitive landscape on both sides, on big box and independents, they've got a different pricing strategy where our Pros are able to get some form of rebates and discounts. And why that is important is because certain Pros, not all Pros, but certain Pros use that gap between what we call shelf price in the kind of net price as profit for their business. So when you factor in, there's a financial switching costs and generally a long-standing personal relationship with independents, it's certainly something that we've looked at for a period of time and said, "Hey, we need to figure that out at some point in time. We were really intentional on the script saying that we're going to take all of 2026 to develop a plan because it does touch all parts of our business. And the way we view that opportunity is a chance for us to develop a deep relationship with that Pro across all 3 of those aspects that I mentioned. So we're excited. We think this is going to be a a meaningful step forward for our business, but it's going to require a lot of work, a lot of thought and a lot of testing before we're ready to go national with it.

Your next question comes from Chris Horvers with JPMorgan.

So my first question is a follow-up to the prior question, which is that improvement that you saw in January, was that sort of equally spread across regions. So for example, did California hold serve? Or did that actually accelerate? And then importantly, in those southern markets where home prices are under pressure currently. Did you see relief in those markets and to what extent?

Yes. The good news is we saw really broad-based improvement in January. And what I like to say all geographies in all categories. The only merchandising category that had a little bit of pressure was laminate and vinyl, and we touched on that in the script. But we were really pleased outside of a market or 2 where we had pretty heavy cannibalization, we saw a nice kind of year-over-year improvement.

And then, I guess, 2 quick follow-ups. One is, I mean, to be up 0.4% in all in the past 3 weeks, it would seem like those last 3 weeks were maybe up low single digit, not trying to parse it too closely, but I think that's interesting. And then on the SG&A side, if you look at your expenses per average store, that number has been coming down for a few years and it stepped down again in the fourth quarter. What is driving that? Is it where the opens are? Is it optimizing the labor model? And then as we think about an environment where you start comping positively, again, what does SG&A growth or SG&A per average store look like?

Yes. I'll do my best to kind of answer all of those questions. You're right. Look, over the last 3 years, we've taken almost $67 million out of our comp stores. I think this past year, we took out about $24.8 million. You're right. The majority of that is flexing trans -- labor with transactions. So it's just simple modeling when it comes to that. We have also put pressure on some of the discretionary spend that we have within the stores. Just trying to spend wisely in this environment. So when you think about longer term, when sales start to come back and we see comps start to improve, we don't need to layer in. There's not a significant amount of cost that we have to put back in. They should flow in with the model that we've always said, which in this environment should flow through in the high 30s. So any sort of beat to our model should flow through in the high 30s, just given where our margin rate is and just standard cost increases. So there's not a deferred cost that we've been pushing along and kicking the can. For us, it truly is just optimizing the spend that we have today. And you're right. Look, Brad mentioned it, we were really pleased with January's comps at positive 0.4%. When you think about February, we have improved every single week since we stepped away from the storms a little bit. So when you're trying to think about those in the impact, it has gotten better as we progress, and you'll continue to hopefully see that as we move throughout the quarter and exit Q1.

And I know I've said this once already, but I'm going to say it again. I mean, despite all the actions that we've taken, really, really proud of the service scores that the teams have been able to deliver.

Your next question comes from Michael Lasser with UBS.

Tom, if we asked you 3 years ago, whether you saw a 3-year downturn would have led to significant market share gains for Floor & Decor, both because of the strategies that have been deployed as well as the prospect of independents and regional players going out of business. You probably would have said, your market share gains would accelerate meaningfully over that time period, yet as we look at the same-store sales performance in the fourth quarter, it's probably similar, maybe a little bit lower than the performance of the flooring market overall. So how have your share gains not accelerated? And how does that inform, how you think about the go-forward as the recovery unfolds, especially as you might experience more cannibalization with more of your stores in infill markets. Sorry, that was a long-winded question.

I thought I was done with this, Michael. This is -- let me try to parse that question out just a little bit. So yes, we have -- I believe we have taken share during the last 3 years. I think we can debate how much share that we've taken, how you want to measure that on total growth versus same-store sales. We've continued to grow throughout the downturn through new stores. And so I believe that we've taken it -- should we have taken more -- certainly a good question. I believe that we've executed pretty well, the innovations within the store, the innovations within the product the pricing spreads as we watch them from shelf to shelf have been good. I think a key for us to continue to take share and maybe take it at a faster rate as we look forward at some of the initiatives that Brad has taken on with kind of rethinking about our loyalty program, rethinking about kind of our tier system for our Pros and the way that we make them a little bit more sticky. I think the new or the new addition to our team and between Brad and her, I think they're looking at it in a very good way, and I think that benefits over the next few years. So I'm hoping this long term I thought you were going to ask me if I thought 3 years ago that this downturn would last this long. And my answer has quickly been, absolutely not. I don't think we'd be still kind of hovering around this $4 million and less annualized home sales. So hopefully, that what we saw in December, we see as the weather clears and what we saw in January, and our business continues to go, and that's a good indication that we are taking share.

Michael, 1 point of clarification. I just want to let you guys know, we do anticipate cannibalization to meaningfully decrease as we get into 2026. When we were opening 31 -- 32 stores a couple of years ago, 30 stores. Last year, we opened 20 and it's really the cannibalization effect of those 20 stores. So even though we're opening more infills as we get into 2026 and beyond, the amount of cannibalization should actually decrease just because of the amount of stores that we're opening. So again, that should help benefit as we move forward.

Okay. Very helpful. My follow-up question is there's a lot of moving pieces between your gross margin and your ticket. There was a 90 basis point headwind from the DC, so your gross margin was flat. So presumably, product margins were up around 90 basis points. Perhaps price was a lever that you used to offset some of the cost increases yet ticket was negative. And then you're also commenting that there is a bit of a price sensitivity that's prevailing in the market you're trying to appeal to that. How do all of those pieces come together and inform how you're thinking about what's going to happen over the next couple of quarters, not only on ticket, but also within product margin?

Yes, Michael, I'll do my best to answer that. So when you think about 2025, the tariff impact was actually minimal. So when you think about what actually came in just because we're on moving weighted-average cost and our [ churns ] are a little bit slower just over 2x, the tariff impact was minimal. And so we think about it from a gross margin perspective, there was just a little bit of pressure as we were in Q3 and just a little bit in Q4. As we get into 2026, it assumes modest cost increases due to tariffs. Again, it's -- we laid it out last year, but because of our merchandising team's efforts to, one, to negotiate with our current vendors and then two, to further diversify, it's only a modest amount that it's going to increase. We were able to kind of mitigate a lot of that exposure. That's going to build as we get throughout the first half, and it should be fully embedded as we get into the second half. So again, I'm just -- I'm going to talk about it a couple of ways. So when you think about the second half, our gross margin rate will be under a little bit more pressure than the first half. Since you've got that piece of it. But when you think about average ticket, when you step into Q4, if you remember when we talked about it last year, average ticket benefited the most because of the hurricane impacts of Helene and Milton. So a lot of the pressure that you saw in average ticket in Q4 had to actually do with lapping the hurricane benefit, not necessarily pressuring gross margin. And so those 2 get decoupled in Q4 because of that a little bit. So again, as we exit this year and we get into next year, we do think that the first half should outperform a little bit compared to the second half when it comes to gross margin rate. And so again, just modest price increases, and that's how we think about it from a retail perspective as well embedded in that average ticket guidance of up low single digits, and that should be kind of consistent as we think about all 4 quarters, just up low single digits as we move throughout the year in average ticket.

And maybe just a quick thought for me on the pricing sensitivity piece. We said pretty consistently, we feel really good about how we've navigated through the tariff environment. The team has done a nice job of running pricing tests over the year. So we have a pretty good sense of how the structure -- line structure works together. We did have a specific call out in the script around some sensitivity in laminate and vinyl. And what you're seeing there is a portion of that customer base moving down to a certain quality spec and generally a price point below $2. So when we think about our ability to take square footage share, we're very focused on that. But we do expect that category to be sensitive and pressured in 2026. That being said, when we think about pricing action that we've taken to start the year, we're encouraged because as Bryan said, we've had to take some modest price increases in certain categories. We've been really surgical. And up to this point, we've had success in passing our price on to customers in those categories.

[Operator Instructions] Your next question comes from Steven Forbes with Guggenheim Securities.

Brad, just a quick one on commercial. So nice to see the growth at Spartan Surface is -- I'd be curious if you could just expand on what are the drivers there? And I guess, how the performance of that business has informed your plan to build out the commercial [ RAM ]? Because correct me if I'm wrong here, the number of [ RAMs ] has sort of been stable for quite some time now. So curious on just sort of how you're thinking about the build-out?

Yes. We're -- I should say, we continue to be excited about the long-term potential to grow in the commercial space. Our relative share there is pretty small relative to what we've done in the retail side of things. Our strategy has been really consistent. We've got 2 prongs. One is Spartan. The second is the [ RAMs ]. When I think about Spartan, we've been really, really consistent in saying, we love the platform. We really like the leadership team, and we feel like we've got the structure there to consistently grow faster than market. At the same time, it's a very fragmented space. So when we think about future M&A, there's certainly an opportunity for that at the right time. On the [ RAM ] side, what I shared in really the second half of 2025 is, the first step there was to bring in new leaders. So we brought in 2 new leaders with really deep commercial selling background. Those 2 focus on people, process and technology. And now we're at the point we're investing in talent. As part of that, people, process and technology, we also scope the market to identify where the biggest opportunities are. So you're going to see investment in additional [ RAMs ] through the course of 2026, focused on the big metro areas. And the reason for that, that is where most of the demand sits and our first 2 markets will be New York City and Dallas. And we're well underway with our efforts there.

Your next question comes from Simeon Gutman with Morgan Stanley.

Tom so long, it's been good working with you. Question. First 1 on -- well, it will be 2 parts since I only get one. Mature stores, can you talk about the change in their comp as collective versus the spread to immature? And then, Brad, you asked this earlier around pricing. I want to just ask it a different way. The business is running at a peak gross margin. I take it that if you would get more volume at a lower gross margin, that's a trade-off you might be interested, but it just doesn't make sense. Is that a way to think about it?

It's good question. And when you think about some of the initiatives that we've talked about, certainly around Pro pricing, some of the commercial efforts that we have. When we think about the opportunity to grow volume especially through our stores, if it's a slight headwind to gross margin, but accretive from an EBIT perspective, that's certainly a trade-off that we'd be willing to take.

Yes. And look, on the comp waterfall, obviously, our newer stores are still continuing to meaningfully outperform our mature stores from a comp base. So we still see the comp waterfall intact. As I've said over the last kind of 12 to 18 months, it's compressed a little bit just in the environment that we're in. Just as a heads up for you guys, I know I've given on some calls, but our stores greater than 5 years are still doing approximately $21 million in sales. Last time I quoted that, they were doing about $22 million, but they're still extremely profitable, generating 23% of EBITDA.

Your next question comes from Max Rakhlenko with Cowen & Company.

Can you speak to the competitive environment and how your price gaps are trending today versus prior to tariffs taking in? Just curious if you're seeing any notable changes?

I have described the competitive environment as rational. I would say pricing and promotional activity is in line with expectations. Again, the only exception would be the laminate and vinyl discussion that we've had. And on that, it's really the vinyl part of laminate and vinyl where we're seeing that. Our gaps continue to be I'd say, in line with historical trends. We've got a range that we like to be in. Every category is a little bit different. But pricing is an area that Erson leads for us. We'll continue to invest in people and process there and try to leverage the science of pricing as best we can.

And next question comes from Chuck Grom with Gordon Haskett.

New store productivity has been a nice bright spot the past couple of quarters. Is that largely just from opening up more stores in existing markets? Or can we just talk about that? I mean, the prior 6 quarter average is in the low 50s. So moving from the low 50s to the high 80s is a nice step-up. So curious what's driving it and the sustainability?

Chuck, I think, one, it's -- the stores we're opening, we have more conviction in today. But I think it's also the amount of stores that we're opening to, there's been a disproportionate amount of stores that we've opened each quarter. So when you step in and you look at it, I think we opened 8 stores in Q4, 5 in Q3. Before that, it was only 3 stores in Q2 and 4 in Q1. So I think it also is just the cadence of store openings, that's going to drive that new store productivity, if you look at it from a sales contribution perspective.

And the last question comes from the line of Seth Sigman with Barclays.

I wanted to ask about the earnings outlook. So to your credit, you are able to hit your numbers, at least the earnings in 2025 and grow earnings year-over-year even as sales came in lower than expected throughout the year. I guess just given that the environment is still pretty uncertain, I'm wondering if you have the same flexibility to manage earnings this year if sales were to come in lower, what would the leverage be.

Yes. Look, it's -- you're absolutely right, there were a ton of levers and we were trying to optimize the business all the way throughout 2025. We're not done. There's still a lot left in 2026, that we can attack. And as an executive team, we can -- we only have 30% of our fleet that are on minimum hours. There's 70% that can still flex with transactions. We'll continue to put pressure on G&A, the way that we have. And we talked about it, we've made a lot of moves kind of later into this year. We'll start to annualize those as we get into 2026, you'll start to see more of the benefits. So there are plenty of levers that we have to achieve the earning earnings guidance that we put out there. But again, we -- we've done a lot throughout this year.

All right. I know script was a little bit long today. I appreciate the patience with that. Thanks for joining the call, and we appreciate your support. Operator, I'll turn it back to you.

Thank you. And that concludes today's call. All parties may now disconnect. Have a good day.

Greetings, and welcome to the Floor & Decor Holdings, Inc. Third Quarter 2025 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Wayne Hood, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's Fiscal 2025 Third Quarter Earnings Conference Call. Joining me on our call today are Tom Taylor, Chief Executive Officer; Brad Paulsen, 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 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 risks and uncertainties that could cause actual future results to differ materially from those expressed in these forward-looking statements for any reason, including those listed at the end of our 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 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 2025 third quarter earnings conference call. During today's conference call, Brad, Bryan and I will discuss our third quarter earnings highlights, then Bryan will share our thoughts about the remainder of fiscal 2025.

Before we get started, I want to share some exciting news that was announced this afternoon alongside our earnings release. I am thrilled to announce that our Board of Directors has appointed Brad Paulsen, currently serving as President, to succeed me as Chief Executive Officer and become a member of the Board of Directors effective at the start of our fiscal 2026 year. I am looking forward to transitioning into the role of Executive Chair of the Board, where I will focus on shaping our long-term strategic vision and unlocking new avenues for growth.

I am incredibly proud of what we accomplished over the past 13 years, but we have even greater opportunities ahead, and Brad is an excellent partner for that journey. From day 1, his deep experience across retail, commercial and services has been evident. He brings strengths and perspectives that complement mine and more importantly, align with the needs of our future. He's a trusted partner, a proven leader and someone I'm confident will lead our exceptional teams and guide our company forward with clarity and purpose.

Let me now pass the call over to Brad.

Thanks, Tom. Over the past 8 months, I've had the privilege of working closely with Tom and our incredible team and gaining a deep understanding of Floor & Decor's unique culture and business model. I'm excited and honored to step into this role and lead our next phase of growth, scaling towards 500 warehouse stores and accelerating our commercial flooring expansion.

Our associates are at the heart of this company, and together, we'll continue delivering exceptional value and service to homeowners and pros across the country. I'm excited about what's ahead and grateful to the Board and Tom for the opportunity to help shape our future.

Let me now turn the call back to Tom.

Thanks, Brad. Let's now turn to our third quarter earnings results. We are pleased to report fiscal 2025 third quarter diluted earnings per share of $0.53, a 10.4% increase over the prior year's $0.48. This result exceeded the high end of our guidance range and marks our second consecutive quarter of double-digit earnings per share growth, underscoring our operational discipline amid persistently soft demand in the hard surface flooring industry.

Total sales grew 5.5% to $1.180 billion, while comparable store sales declined 1.2% from the same period last year, approaching the low end of our expectations.

We're proud of our disciplined expense management and gross margin performance, which reflect the successful execution of our tariff mitigation strategies. We believe these efforts enable us to maintain healthy merchandising price gaps on like items compared with our competition, protect our profitability and position ourselves strategically for accelerated growth when the hard surface flooring market rebounds.

I want to acknowledge the focus, agility and operational excellence our teams have demonstrated throughout this quarter and year. We are especially pleased to share that in September, our stores achieved their highest Net Promoter Scores ever, a clear reflection of the outstanding service they continue to deliver every day. Their ability to execute our strategies in an uncertain and complex environment has been a key driver of our performance and continues to reinforce the strength of our operating model. We remain confident that existing home sales and demand for hard surface flooring will recover over time. When that happens, we believe we'll be well positioned with more stores, lower cost, greater market share, superior customer experience and a leaner operating model. We're playing the long game with discipline and intention as we build long-term earnings power.

Let me now discuss our new warehouse format store growth. During the third quarter of fiscal 2025, we opened 5 new stores with most opening later in the quarter. This expansion included reentering the Charlotte market with our first store opening there in over 2 years and establishing our presence in Myrtle Beach, South Carolina, our first entry into this market.

Year-to-date, through the third quarter, we opened 12 new locations and closed 1, ending the period with 262 stores, a 9% increase from 241 stores in the same period last year. We're on track to open 20 new stores in fiscal 2025, primarily across markets where we already have a presence and plan to maintain this pace with another 20 openings in fiscal 2026.

To support our growth in the Western region, we opened our fifth distribution center during the third quarter, a 1.1 million square-foot facility in the Seattle-Tacoma metropolitan area. This addition enhances our supply chain capacity, further diversifies our ports of entry and enables faster, more efficient service to our stores. These openings, along with our expanded distribution capabilities, reflect our broader store growth strategy. We are deliberately maintaining flexibility to adjust the pace and location of new store openings in response to any near-term shifts in the economic and housing landscape while capitalizing on emerging site opportunities.

This agile, responsive approach enables us to optimize capital deployment amid the decline in the hard surface flooring category and reinforces our commitment to delivering sustainable long-term value for shareholders.

We're steadily advancing towards our long-term goal of operating 500 warehouse format stores across the United States. Our development pipeline reflects a strategic mix of store sizes and market types, including Tier 1 locations such as North Scottsdale, Arizona, which opened in September and Staten Island, New York scheduled to open next year. We're also expanding into smaller volume markets like Winston-Salem, North Carolina and Boise, Idaho, where we've successfully tailored store footprints and assortments to meet expected local demand. Capital spending and operating expenses in these smaller volume markets are calibrated to meet our return thresholds.

While these smaller volume locations have always been a deliberate part of our growth strategy, they are not expected to represent most of our store footprint as we scale towards 500 locations. Most of our locations are expected to be in large and midsized markets.

We are pleased to have made meaningful progress in reducing our overall new store construction costs. The initial investment for our fiscal 2025 class of new stores is estimated to be about $1.5 million lower than our fiscal 2023 class, with further meaningful improvement expected for the class of 2026. The class of 2026 will benefit from our efforts to reduce cost and optimize the store size over the past year as well as more second-use sites in the pipeline. We are managing these costs diligently while continuing to invest in our stores, store experience and associates to drive returns as industry conditions improve.

Our disciplined approach to expansion and capital allocation is validated by the performance of recent store classes. Despite persistent macroeconomic pressures and a prolonged downturn in the hard surface flooring industry, our 2021 through 2024 store classes have achieved comparable store sales growth even when accounting for cannibalization. This performance highlights the resilience of our business model and our ability to grow our market share in a declining market.

It's important to contextualize our results with the broader industry backdrop. We've been operating in an environment marked by sustained softness in consumer demand and limited category growth over the past few years. In addition to these macroeconomic pressures, we encountered construction and permitting delays in some large and midsized markets. As a result, we elected to open more stores in small markets to mitigate these headwinds.

Taken together, these factors have reshaped short-term performance benchmarks for first year store openings, and we recognize that we are not immune to their effects. While our new store classes are achieving comparable store sales and market share growth, average first year sales among classes of 2023, 2024 and 2025 are approximately $11 million, which is below our long-term target of $14 million to $16 million. Nonetheless, this performance aligns with what we would anticipate in a contracting industry and what we believe could be trough level performance.

As a relatively young company, we're gaining experience with the full spectrum of flooring cycles. While we've seen what peak performance can look like coming out of COVID-19 period with first year store sales exceeding our long-term target range of $14 million to $16 million. This is our first time operating through a sustained downturn in the category.

We know what trough level ROI metrics look like and importantly, how they continue to exceed our weighted average cost of capital. The actions we have taken strengthen our strategic edge and position us to accelerate growth and return metrics as the industry recovers.

Let me now turn the call over to Brad.

Thanks, Tom. I want to echo your appreciation for the incredible work our teams have delivered this quarter and year-to-date. In an environment marked by persistent housing market pressures and evolving consumer preferences, their ability to stay focused, agile and customer-centric has been nothing short of exceptional. Achieving our highest ever Net Promoter Scores in September is a clear signal that our focus on experience and engagement is resonating. It's also a reminder that even in a tough macro backdrop, excellence in execution drives loyalty, trust and long-term growth.

Let me now discuss our fiscal 2025 third quarter and early fourth quarter-to-date sales. Comparable store sales declined by 1.2% in the third quarter compared to the same period last year. On a monthly basis, comparable store sales decreased by 0.6% in July, 0.4% in August and 2.2% in September, reflecting sustained pressure on discretionary spending from elevated 30-year mortgage rates, which remained stubbornly above 6% and stretched housing affordability.

Existing home sales continue to hover around an annualized pace of 4 million units, showing little meaningful improvement. These persistent housing market challenges, combined with a modestly tougher year-over-year October sales comparison and continued consumer preference for smaller projects contributed to a 2% decline in our comparable store sales for the fourth quarter to date.

As a reminder, the fiscal 2024 fourth quarter benefit to our comparable store sales from Hurricanes Helene and Milton was approximately 110 basis points, which makes for a more difficult fourth quarter sales comparison in 2025. This is expected to contribute to a fiscal 2025 fourth quarter decline in comparable store sales.

From a performance driver perspective, the third quarter decline in comparable store sales was driven by a 3% decrease in transaction, partially offset by a 1.8% increase in average ticket. The decline in transactions aligned with the midpoint of our expectations, while average ticket was at the low end of our guidance. The sequential decline in average ticket is primarily due to changes in our product mix.

Regionally, third quarter comparable store sales in the West division continued to outperform the company average for both the quarter and year-to-date, underscoring the relative strength of that division.

Looking ahead, we remain committed to delivering a strong value proposition through our low prices and differentiated high-quality range of flooring solutions and services that inspire our customers and drive sustainable long-term growth.

Throughout the year, we've continued to launch innovative products and programs tailored to meet the evolving needs of our diverse customer base. These offerings feature fresh designs, expanded color pallets, enhanced textures and heightened realism, authentically capturing the look and feel of natural materials.

Some of our core strategic priorities for the year remain unchanged and include rolling out kitchen cabinets to approximately 200 stores by the end of 2025, expanding our outdoor and pool product assortments to around 80 stores and growing our XL slabs program to nearly 200 locations.

Turning to our design services and connected customer pillars of growth. Design services continued to deliver robust year-over-year sales growth fueled by sustained increases in customer transactions.

Both total and comparable store sales for design services significantly outperformed the company for the quarter and year-to-date. We view design services as a competitive moat, a differentiated capability anchored in deep customer engagement, project-based selling and operational excellence. Our top-performing stores consistently demonstrate strong leadership involvement, collaborative team culture and disciplined execution across staffing, training and task management. Some of the biggest wins come from following up on open quotes where our sales teams actively connect customers with designers to drive conversion and attachment. Looking ahead, we expect continued momentum by prioritizing quote follow-up and enhancing our sales mix across adjacent categories and installation materials.

In the third quarter, connected customer sales rose 2% year-over-year, representing 18.8% of total sales. Connected customer average ticket continued to grow from last year, while transactions remain under pressure.

Turning my comments to Pro and homeowner sales. Sales to Pro customers rose year-over-year in the third quarter, modestly outpacing overall company growth and representing approximately 50% of total sales.

Comparable store sales for Pros were essentially flat versus the same period last year, driven by a slight decline in transactions and a small increase in average ticket. These results align with direct feedback from our Pro customer base who cite economic headwinds and reduced activity in remodels.

Reflecting these dynamics, we continue to see a shift towards smaller projects such as tile-focused bathroom projects, kitchens and restoration work. Pro satisfaction remains high, with strong engagement across tile, insulation materials and wood categories, underscoring their loyalty beyond a single category. Our product quality, service and in-stock reliability remains strong with Pros.

Meanwhile, comparable store sales among homeowners, though still negative, showed meaningful sequential improvement in the third quarter. This was fueled by improvement in new and returning customers, supported by targeted campaigns and data-informed meet-up planning.

Finally, let me discuss our commercial business. Amid ongoing softness in commercial multifamily housing projects, Spartan Surfaces delivered 13.3% year-over-year sales growth in the third quarter. Many multifamily developers have sequentially paused or delayed purchase orders due to tighter financing, elevated construction costs and cautious capital markets. This slowdown has contributed to elevated promotional activity in luxury vinyl tile, a category heavily used in multifamily applications. Spartan's growing presence in high-specification sectors such as health care, education, hospitality and senior living helps mitigate some of these headwinds.

Let me now turn the call over to Bryan.

Thank you, Tom, and Brad. Our third quarter results underscore the strength of our operating model and our disciplined approach to growth and expense management. Our balance sheet remains a source of strength. We ended the quarter with $893.5 million in unrestricted liquidity, including $204.5 million in cash and cash equivalents, reinforcing our financial flexibility and capacity to invest in growth, capture market share and deliver long-term value for shareholders even amid a challenging demand environment.

Now let's walk through the key changes in our third quarter income statement, balance sheet and statement of cash flows. Our fiscal 2025 third quarter gross margin rate decreased by approximately 10 basis points to 43.4% from 43.5% in the same period last year, in line with our expectations. The year-over-year decrease is primarily due to an increase in distribution center costs from the opening of our Seattle distribution center and costs related to the future opening of our second Baltimore distribution center. These costs impacted the third quarter by approximately 90 basis points, partially offset by favorable product margin. The sequential decrease in our gross margin rate from 43.9% in the second quarter was primarily due to the increase in our distribution center cost.

Our fiscal 2025 third quarter selling and store operating expenses increased by 7.3% to $363.8 million from the same period last year, better than our expectations. The growth in selling and store operating expenses is primarily driven by an increase of $30.1 million from noncomparable stores. As a percentage of sales, these expenses rose approximately 50 basis points to 30.8%, a modest increase that came in better than expected. This deleverage was mainly due to new store openings and a decline in comparable store sales. We were pleased with how we diligently managed expenses among our mature stores compared to the same period last year.

Our fiscal 2025 third quarter general and administrative expenses of $67.6 million were flat compared to the same period last year, slightly better than our expectations. As a percentage of sales, general and administrative expenses decreased by approximately 40 basis points to 5.7%, primarily driven by the leverage of our general and administrative costs on higher net sales. We are pleased that our expenses were flat to last year while we continue to open stores and see sales growth.

Our fiscal 2025 third quarter preopening expenses decreased by 32.2% to $8.6 million from the same period last year, in line with our expectations. The decrease was primarily due to a decrease in the number of stores that we opened, and lower relocation expenses compared to the corresponding prior year period.

Our fiscal 2025 third quarter net interest expense increased by $0.4 million to $0.6 million from the same period last year, better than our expectations. The increase in interest expense is due to a decrease in interest capitalized, partially offset by lower average interest rates and lower average outstanding borrowings.

Our fiscal 2025 third quarter effective tax rate decreased to 19.8% from 21.8% in the same period last year, better than our expectations. The decrease is primarily due to lower state income taxes and higher federal tax credits.

The favorability to our expectations in interest expense and tax expense contributed approximately $0.02 of benefit to diluted earnings per share below operating income.

Our fiscal 2025 third quarter adjusted EBITDA increased 4.4% to $138.8 million. Our third quarter adjusted EBITDA margin rate was 11.8%, a decline of approximately 10 basis points, primarily due to expense deleverage from the decline in our comparable store sales.

Moving on to our balance sheet and cash flow. At the end of the third quarter, inventory increased by approximately 2.8% to $1.2 billion compared to December 26, 2024, and was up 11.3% year-over-year. The year-over-year increase was primarily driven by new stores and the need to support the opening of our new Seattle distribution center. Despite the inventory build and the decline in trade accounts payable, we generated $257.8 million of net cash from operating activities year-to-date.

Turning to our fiscal 2025 outlook. With 2 months left in fiscal 2025, we anticipate little divergence from the prevailing housing sector trends. Consumer spending is likely to remain restrained, particularly on big-ticket discretionary durable goods with a preference for smaller scale projects. Recent indicators suggest that the existing home sales market may be stabilizing as mortgage rates have moved lower and may continue to ease.

September existing home sales rose 1.5% month-over-month and 4.1% year-over-year, holding steady at approximately 4.06 million units. This consistency may signal an inflection point as we head into 2026.

While signs of stabilization are emerging, we believe the strength and slope of any recovery remain uncertain, reflecting broader macroeconomic cross currents and evolving customer sentiment.

Let me now discuss our updated fiscal 2025 earnings guidance. Total sales are expected to be in the range of $4.660 billion to $4.710 billion or increase by 5% to 6% from fiscal 2024. We are planning to open 20 new warehouse format stores.

Comparable store sales are estimated to be down 2% to down 1%. Average ticket comp is estimated to be up low single digits. Transaction comp is estimated to be down low to mid-single digits. The gross margin rate is expected to be approximately 43.6% to 43.7%. As a reminder, our gross margin rate is expected to be adversely impacted by approximately 70 basis points for fiscal 2025 from the 2 new distribution centers, which is incorporated into our guidance. The impact was approximately 30 basis points in Q1, 60 basis points in Q2 and 90 basis points in Q3 and estimated to be approximately 100 basis points in Q4.

Selling and store operating expenses as a percentage of sales are estimated to be approximately 31.5%. The guidance assumes our first and fourth quarters are the most pressured from a rate perspective due to the timing of new stores.

General and administrative expenses as a percentage of sales are estimated to be approximately 6%. General and administrative expenses include approximately $9 million related to our finance and merchandising ERP implementation.

As a reminder, the fourth quarter of fiscal 2024 included a benefit of $6.8 million or $0.05 of earnings per share related to a derivative litigation settlement.

Preopening expenses as a percentage of sales are estimated to be approximately 0.6%. Interest expense net is expected to be approximately $4 million. Tax rate is expected to be approximately 21%. Depreciation and amortization expense is expected to be approximately $240 million. Adjusted EBITDA is expected to be approximately $530 million to $545 million. Diluted earnings per share is estimated to be in the range of $1.87 to $1.97. Diluted weighted average shares outstanding is estimated to be approximately 108.5 million shares.

Moving on to our capital expenditures. Our fiscal 2025 capital expenditures are planned to be in the range of $280 million to $300 million, including capital expenditures accrued.

We intend to open 20 warehouse format stores and begin construction on stores opening in fiscal 2026. Collectively, these investments are expected to require approximately $180 million to $200 million.

We plan to invest approximately $20 million in new distribution centers in Seattle and Baltimore. We intend to invest approximately $45 million in existing stores and existing distribution centers. And finally, we plan to continue to invest in information technology infrastructure, e-commerce and other store support center initiatives using approximately $35 million.

Additionally, we anticipate incurring approximately $30 million in deferred SaaS ERP implementation costs, which are included in other long-term assets and not in capital expenditures.

Before we turn it over for questions, I'd like to take a moment to recognize and thank our associates across the organization. The results we've discussed reflect their continued commitment to operational excellence and to delivering outstanding service to our customers. Their efforts remain pivotal to our success and are fundamental to the strength of our current performance and in driving our long-term growth.

Operator, we would now like to take questions.

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

Tom, you're rightly viewed by investors as a Founder, CEO for Floor & Decor. The business model and culture really took off when you got involved and it got better as you built. Whether valid or not, the extended period of subdued sales and the impact on lower new store productivity that you talked about is also coincident with the timing of you stepping back to the Executive Chair role, while there's a bigger emphasis on growing commercial as a company growth driver. So how do you respond to investors that might perceive the timing is something more concerning regarding the timing of a potential recovery or the core store growth opportunity?

Chris, I would say, look, I appreciate your opening comments. It's been -- yes, that Floor & Decor is certainly near and dear to my heart, but I'm not going anywhere. We were fortunate to find Brad. Brad has come in and hit the ground running. He's got a proven track record. He's been accepted by our team. We've got an excellent team in place. And I felt like now is the right -- you can't thread the needle on when the market is going to recover perfectly, but I'm not going anywhere. Brad and I are a partnership, and we're going to work side by side to continue to grow the business.

I explained my thoughts on the new store productivity. We tried to outlay it the best that we could. We know what a trough period looks like. We've got a good group of stores for next year. We've taken more cost out. We think the class of next year will even -- the cost will be less than they are even this year, which is significantly down since 2023. And I said a couple of calls ago that we were going to start to make sure that we're pivoting into more mid-tier and top-tier markets and our class of '26 represents that.

So we're a young company, as I said in the script. We're learning what a peak period looks like, what a trough period looks like. And so I am comfortable at the time of the transition. Brad is the right guy to lead the next chapter of our company. And this gives me plenty of opportunity to work on what's next, and there's a lot to do on the growth side, and I'm excited to roll my sleeves up and spend more time on that side of the business.

I appreciate that response. As you think about -- if you just take mortgage rates now and think about what that might do to existing home sales in '26 versus where we are year-to-date, to your point on maybe we are at trough, it looks like maybe existing home sales could be up 3% to 4% even if we hold around a low 6% mortgage rate. How do you think about what does the comp look like? What does the business look like in that environment?

On one hand, does the new store waterfall make that a bigger number than the 3% to 4%. But on the other hand, there are some big markets of yours like Texas and Florida, where there's actually -- home prices are going down, affordability, maybe overbuilding, and that could be a headwind. So how do you wrap that all in, in a hypothetical 3% to 4% existing home sales environment next year?

Yes. I mean I think it's -- first, I'll preface my comments but it's too early to talk about next year. I've said over the last couple of quarters or at least that I believe that if existing home sales are comping positive, that gives the company a good shot to comp positive. I mean we're modestly up, and we're modestly up for 1 month. Let's see how sustained that is.

We do feel good that existing home sales are starting to show a little signs of life. We'd like them to show more signs of life. But I believe if they -- in the country, across the country of existing home sales are comping positively, then we have a good ability to comp. And we still are opening new stores, and that does have a little bit of a benefit on the waterfall. It's not what it was 4 years ago, 5 years ago, but it's still a benefit.

As I said in my comment, too, the class of -- all the stores we've opened in the last 3 classes, even with us opening stores around some of them, they're all still comping as a class. Each class is comping positive. So the fact that almost 50% of our stores are less than 5 years old, if we can get a little bit of benefit of existing home sales and the newness of those stores, I believe we can post a good comp. But we're not ready to talk about '26. We're still in the planning process, but that's my early read.

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

This is Zach on for Simeon. Home equity lines of credit are starting to rise. So are there any signs the funds are being used or deployed towards flooring or may be able to do so in the near term?

Well, when home equity lines -- this is Tom. When home equity lines increase, that's usually good for home improvement. I'd say it's too early to say. We are seeing -- when you look across the country, we are seeing good green shoots in lots of our regions where we're seeing positive same-store sales growth. So that could be some benefit of it, but it's really early to tell. Historically, that would say if home equity lines are increasing and people are taking money out of their homes, they're going to reinvest in home improvement. That should be good for us over the long term.

That's helpful. And just as a quick follow-up, I appreciate the color you've given on the new store performance by vintage. Can you speak to how you're able to attribute this slowdown to a contracting industry versus something else like potentially greater competition or something like that?

I would say it's much more a contracting issue. When you look across the competitive landscape of publicly reported flooring retailers to the manufacturers of hard surface flooring, everyone has been in a negative environment, and our total growth has been positive. So it's just -- we're opening stores in small -- over the last few years, we've opened stores in smaller markets, the declining market and where the competitors seem to be doing worse than Floor & Decor. So that's why I feel confident that as the market turns, our new store performance will improve from where it is today.

And that's a portfolio number. We still have new stores in the past 3 classes that have performed very well in their first year sales in highly competitive markets. So we know that we still see that even today. And so we do believe it's the market backdrop.

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

So the narrative for a long time is the longer the downturn that goes on, the more likely it is that F&B was going to gain share from the independents and regional chains closing. There has been some store closings like LL Flooring. You now have Tile Shop delisting. You're attributing the weakness just to malaise across the flooring category, but it does seem like your same-store sales are getting worse. Why in light of all of that, are you seeing a degradation in the trend?

Yes. I don't believe, Michael, they're getting that much worse. I mean we're kind of bouncing along the bottom. Last quarter, we posted a positive comp. This quarter, slightly down at 1.2%. So I mean it's -- every -- all the data points that we look at from the standpoint of how hard surface flooring is doing, we seem to be doing better to be able to grow last quarter as a total company over 5%. And when hard surface flooring continues to be like in a recessionary period, I think we're doing better than the people we're competing with.

And Michael, when you look at it on a 2-year stack, every quarter is sequentially improving. So that's something to keep in mind, too, is that as we continue to go through this and things start to stabilize, we've been on a downward trajectory. So the comps become a much harder compare as we move throughout this process. So I think Q1 was a negative 13.3% on a 2-year stack. Q2 was a negative 8.6%. Q3 was a negative 7.6%. Even at the low end of guide, it's implied that, that will improve into Q4.

It does -- your guidance does imply quite a significant improvement in the 2-year stack. What is driving your optimism? And are you seeing any signs that the big boxes are becoming more aggressive in the flooring and related categories that would necessitate you responding and sacrificing some gross margin in the process?

I mean, look, it's -- we pay attention to how the big boxes compete with us all the time. They're worthy competitors. I don't believe they're any more irrational than they were a quarter ago or a quarter before that. And we adjust prices across the country for different competitors every single week. So our stores are fanatic on who they compete with, whether it's an independent or a big box and prices fluctuate across the country.

So I don't feel like we're giving up gross margin because of that. I think we've done -- in fact, I've done just the opposite, living through the tariff environment, mitigating that, transitioning SKUs from around the world in a continuing tough environment and to be able to grow gross margin in that environment, I feel pretty good about what we've been able to do. And from a -- like I said, from a competition standpoint, yes, it's a desperate market out there, but we feel good about our pricing spreads, and we feel like we're able to handle who we're competing with.

When you look at our gross margin, we were down 10 basis points year-over-year with 90 basis points pressure from our distribution centers. That tells you that our product margin was up 80 basis points year-over-year. So the teams are doing an incredible job to actually push that even in this environment.

And from a comp perspective, Michael, I'll actually -- just the very first kind of part of your question, whenever we build it, we don't build it to a comp. We're looking at sales trends, we're building it that way. So at the midpoint of our guide, sales would kind of continue the way they were through Q3 kind of through that exit rate. So even though the comp on a 2-year stack is implying it's improving on a 3-year, it's kind of in line. So for us, it really is just looking at the sales trends, continuing those trends, and we're expecting things to basically be steady kind of through Q4 from the exit rate of Q3.

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

Tom, Brad, congrats to both of you guys. I wanted to follow up on the distribution of your store performance. You alluded to some green shoots that you're seeing across the store base. I guess with comps still down overall across the company, I'm curious how concentrated are the declines perhaps among a small subset of problem stores? Obviously, I'm adjusting or excluding for the hurricanes here, but just trying to figure out the concentration of the declines. And is there a small group of stores that are dragging down the rest of the base?

It's -- I wouldn't say, yes, it is more isolated today than it's been over the last 3 years. And I think Chris mentioned it when -- in the first question about the kind of the pressure in housing in Texas and in Florida. We've got high volume, large concentration of stores there, and they're under a lot of pressure because of what's going on with existing home sales.

When you look across the rest of the country, the West has been pretty good for a while now, and we've seen the northern markets get better and other markets across the country get better. But some of our oldest, most mature markets are the ones where existing home sales are under the most pressure, and we have to try to offset that. So hopefully, as we see some benefit in lowering interest rates, we see some improvement of existing home sales. Hopefully, that transfers to those states in due time.

Okay. And then just thinking about pricing for a second here. There have been some growing concerns across retail about elasticity as other retailers have taken price up, not just in your category, but broader. Can you quantify the price changes that you've made to date and the consumer response?

We've taken modest price increases as the year has gone on. Our better and best products continue to outperform our good products. So I think when customers are electing to do the job, they still continue, and they buy what they want. If that's in the better end of the spectrum, that's better value for them, they still get it.

I've said for a couple of quarters now that I don't know how inflation is going to affect -- as consumers have to stomach tariff pricing going up in other retailers and other categories, how that's going to affect their consumer confidence and how that's going to affect the category. I think that's been a bit of an unknown. But within our store and when I see what's selling in our store when customers are coming to buy, they're buying the more expensive products and the better products. They're just doing less square footage and less projects.

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

Congrats, Tom and Brad as well. Tom, this transition to sort of bigger picture shaping the long-term strategic vision, love to maybe hear you share some words with us on where you're sort of going to prioritize your time as you think about the greatest opportunities for Floor & Decor and for Brad to take over. Is there anything you're sort of willing to share with us on how you sort of think about customer mix opportunities, product mix, service opportunities? Would love to just hear high-level thinking here.

Sure. I plan on torturing Ersan. No. So I would say, first off, I've kind of got 3 segments of growth objectives that I really think are worthy of mentioning and that we're paying attention to.

In the short term, we've got an outdoor department that we're rolling out across the country. We've got a kitchen cabinet opportunity that we're rolling out across the country. We've got slab opportunity that we're rolling out across the country. And we're in the middle of kind of rethinking about our loyalty program and how that works.

And so those are short-term objectives that I look forward to leaning in on and really working side-by-side with Ersan and Steve and the team and helping them get off and running. They're all a little bit different businesses, but they all can give us the benefit in our existing stores to irregardless of what's going on with hard surface flooring, it gives us an opportunity. Those categories can grow and be incremental and help grow same-store sales next year.

In the midterm, like the initial focus is for those in the midterm, we can go faster in commercial, and Brad's brought some tremendous expertise and he's got some good ideas, but he'll need help in thinking about that with Kevin Jablon, and I plan on trying to help us go a little bit faster in the commercial space. We've got some larger ideas in our outdoor, even though we're rolling out a department within the store. We've got some bigger ideas on that.

And then adjacent categories seem to be an incredible opportunity. We can increase our TAM. And if we do them better, get more out of the stores. So I plan on leaning into that.

And then finally, over the long term, we've got a design studio concept, which we haven't really been paying much attention to. Has been trying to keep our head above water. We're going to get back focusing on that. We've got international opportunities. We know that we can go outside of the United States. And we -- again, that's something that just takes time and commitment. And then we've got opportunities outside the Lower 48 that we're looking into that will also take some extra work. So I'm energized by that kind of stuff. I look forward to rolling up my sleeves with the team.

And I think my goal -- I'm not the founder here, but I came in really early when there was a small store base. And we've got an identified plan to get us to 500 stores. We've got a commercial starting, but I'm really hoping to get us to be much larger than that and to create the second chapter of growth for Floor & Decor that's outside of just the 500 stores.

I appreciate that. Maybe just a quick follow-up on one of the short-term initiatives, kitchen cabinets in particular. Would love to hear sort of how we should think about this rollout, right? The current vignette we're displaying in the stores. Is there a plan in place to sort of maybe expand that, create a bigger showroom or experience for the customer? And even thinking about like is 2026 a period of time where maybe there's some remodel capital or existing store capital as well?

Yes. Certainly, because the cost of our new stores are coming down, we can put some investment behind certainly our outdoor strategy and our kitchen strategy. We do have things that we're working on. We'll talk more about them as they get up and running. But certainly, a broader display of kitchen cabinets and more space within the design center in the kitchen cabinets. We're in early stages of getting a pilot up and running so that we can monitor that. It's a tremendous opportunity in the store.

We don't even have the vignette, the initial display. It's supposed to go one in the Pro area and in the kitchen -- one in the -- decor department. That's not even up in all of our stores yet. So we've got to finish getting that rolled out. And then we've got some larger ideas that we'll be working on and sharing as we get into next year.

[Operator Instructions] And the next question comes from the line of Zach Fadem with Wells Fargo.

I guess I just missed the cutoff here for two. But Brad and Tom, congrats to you both. Actually, I got a question for Bryan. You talked about the 80 basis points of core margin improvement when you exclude the DC impact. Maybe you could walk us through expectations on that line for 2026?

Zach, it's probably a little too early for us to talk about 2026 at this point. Whenever we look at it, I guess the guidance I would give you is I don't really see a reason why that would go backwards. We're still in the planning process to figure out what next year is going to look like. We've got a lot of things in the hopper, as Tom just talked about, a lot of things to kind of figure out.

And so as we model those and get those incorporated, we'll have more to communicate. But from where we sit today, we feel really good about where our gross margin rate is running from a product perspective. There'll be a little bit of DC headwind still to come as we fully operate our second Baltimore distribution center. So when you're thinking about modeling from a product margin perspective, where we sit today, we feel comfortable with, there may be slight movements within that.

But what you will see a movement in is when we start to fully operate our second Baltimore distribution center because in Q3, we started to operate Seattle. So that's fully embedded within our numbers. But as you step into next year, there is a slight step investment, but that really is just for the people to operate the building. We're already getting hit with a lot of the rent and other kind of fixed costs that you see within that. So as you think about gross margin and stepping into next year, still a lot of planning to do. As Tom mentioned, we're not ready to talk about '26, but hopefully, that can help, give a little bit of guardrails.

Your next question comes from the line of Chuck Grom with Gordon Haskett.

Congrats to both you guys. Question is on commercial. You've talked about moving faster. Curious if you could discuss how you're evaluating the build versus buy decision while also taking advantage of the retail opportunity as well.

Yes. I'll start on Spartan, and then you can talk a little bit about the commercial opportunity within stores. So this is Tom. I would say we challenged Kevin, our CEO of Spartan, as we ended last year and we're going into this year. We wanted this year to be a year of investment in that business. We know him being a little bit more aggressive in incurring some cost in the beginning to add more sales folks will turn into a greater return as we get towards the end of the year and into next year. We saw that in the initial stages of our investment, and we're going to see it again, we believe, going forward.

So we pushed him on the internal side. After Brad got here, and I would say probably 90 days into Brad's tenure and spending a little bit more time up there, we told him bring us more opportunities and bring them quicker. So when we're ready to share more, we will share more. But we think that Kevin can do both. We think that we have the ability to grow Spartan by doing some acquisition like we did when we initially bought the company and added a couple of bolt-ons and growing internally with our sales force.

So this year, it's been much more about the salespeople being added to the organization. But as we get towards the end of this year and into next year, our hopes are that we'll be bringing a little bit more acquisitive -- an acquisitive environment. We know we've got the right team in there to handle both. Yes.

And when we think about the kind of total commercial umbrella, we always talk about 3 segments. Tom just talked about Spartan, and that customer, again, is high complexity, high specification. That is going to be a combination of build and buy like he just described. We then have our Pro desk in the store that serves a professional customer that's generally lower complexity, low specification. That's going to be built.

We feel really good about our experience there. We're at the right maturity level. But we're also excited about the share of wallet gains that we think we're going to get over time with some of the initiatives that we've talked about externally over the last -- past few months. And then all the space in between Spartan and our Pro desk is what we've targeted for our RAM team, regional account managers. That also will be a build. We brought new leadership into the organization over the last 90 days.

As I shared with many of you, right now, the focus is building the right foundation, kind of the go slow to go fast, ensuring that we have the right people, process and technology in place. But we're really excited. We're really excited. We think that's a big opportunity. It's a huge market for us where we have currently really small share.

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

Congrats to everybody. I want to ask about design services. So that seems to be performing well. What do you need to do in order to get that more top of mind for customers? Do you need installation capabilities? Is it a higher advertising intensity? Just what do you need to do? And what are the plans to sort of unlock a higher level of design services?

Okay. So this is Tom. I will start. I think we can tell our story better. And I think we can do that through better marketing and communicating with our customers directly on how our design services work.

I do not think it has to do with installation. We do not install today. We don't have any plans to get into the installation business. We think the relationship with our professional customers is important, and we want our professional customers sending their customers into our store and be comfortable that we're not going to lose a sale to because Floor & Decor installs something. So we won't see that change. But we can do a better job of telling them the story, we've got -- we have lots of efforts where we're getting our designers out of the design center, where they're roaming around the store, looking for customers and engaging and explaining our design services to them.

So we think it is a big part of the moat around our castle, the service that those designers provide. When we look at our service scores when a designer is with them, it's better. The ticket is higher, the margin blends better, and we just got to continue to tell the story. So we have hired -- that announcement has gone out.

No.

Okay. So we're excited about the design business.

Yes. The only thing that I would say, and Tom hit the nail on the head when we talk about design, just tell them the story, driving awareness. But also Steve Denny, who's responsible for that organization, really focused and I'd say being thoughtful around how we can increase the frequency of interactions between designer and customers that come into the store, and that's both homeowner and Pro.

I agree with Tom's point. We think it's a differentiator from a service perspective. If you look at other competitors like us, they don't offer that service, especially free service. So you're going to hear more about that in the future, but we're certainly encouraged by what we're seeing right now.

The next question comes from the line of Peter Keith with Piper Sandler.

Tom, congrats. You've done a great job during your tenure there. Brad, look forward to working with you more closely. Maybe to follow up on the last question. I'm curious what you guys are doing from a brand awareness and advertising standpoint.

We're seeing a number of other companies in home-related areas that have advertised consistently start to bounce off the bottom. So are you guys increasing, decreasing ad spend? And then looking to raise awareness, are you looking at other channels like social media? And what are you doing to lean in there?

Peter, great question. And that's a part of our business that we're always looking at. We're blessed with a very good team here. And I think our capabilities continue to get better and better.

When we think about how we allocate our spend across our total budget, that's changed over the last couple of years. And as a brand that's not well known like other competitors in the space, a big part of where we spend our money is tell them the story, who is Floor & Decor. And that's going to be an area that we continue to invest in because we think we've got a great story to tell.

At the same time, in this environment where we know there's limited demand, we've got to be really tactical and technical about getting as much of that demand as possible. So I think we've executed well, always room for progress. The other piece is that's a space where technology feels like it's changing every day on how you talk to customers, and we're doing our best to stay in front of that.

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

It was on labor inflation. Curious what you're seeing there in terms of wages for industry trades people. Anything you've been hearing from IME in the second half that may be different from the first half, again, on the labor side versus the product side?

I'll start, and I guess, Bryan, you can weigh in. This is Tom. I have not heard of labor inflation or the cost of the install going up because of the lack of labor. That could be the case in some markets. But overall, I would say that, that's not something that we're dealing with.

In fact, I think because of the pressure in the category that on the installation side, I think the contractors are being very aggressive themselves to kind of keep a book of business. So they're probably a little less expensive than they've been. But there may be pockets in the country where there's been some impact where they've lost some professional flooring installers, and that may be caused an issue. But I think in general, for the company, that's not the case.

And the last question will come from the line of Steven Zaccone with Citi.

Congrats, Tom and Brad, on the changes there. My question on average ticket. So you said it was at the low end of your expectations. You cited mix. Can you elaborate a bit more what that means? Are you seeing any signs of trade down out of the better and best? And then what's embedded in your outlook for fourth quarter comps transactions versus ticket?

I'll take the first half and then hand it over to Bryan for the second. So we -- as a reminder, ticket came in at plus 1.8%, low end of our guidance and really kind of 2 primary drivers of that. One was a mix in product or a shift in product mix, excuse me. And the primary headwind that we saw there was in laminate and vinyl. We saw a slower growth in that category, and that is a higher ticket category inside of our stores.

The second, and Tom talked about this in his answer, we have seen a slight tick down in job size, which puts pressure on average square footage for each job. So those 2 together put a little bit of pressure on the average ticket. Bryan, do you want to take the second half of that?

Steve, the implied guide for ticket is essentially flat for Q4. And so when you take that implied in transactions is kind of low to mid-single digits, so for Q4. That will wrap up for the full year in the guide that I gave earlier.

So that concludes the questions. I want to thank you all for joining.

And in closing, I just want to take a minute for a couple of words. I want to underscore our unwavering commitment to playing the long game with discipline, focus and a clear strategy to build long-term earnings power.

Over the past 2 years, we reduced operating expenses in our comparable stores by approximately $50 million and continue to identify new opportunities to scale with greater efficiency. We've meaningfully lowered new store construction costs, created a more leverageable growth model that allows us to expand faster and more profitable as the market strengthens.

With nearly 50% of our locations less than 5 years old, the fleet is modern, requiring no major reinvestment to support growth. These efficiencies are not temporary, they're foundational, allowing future revenue to scale. As industry conditions improve, we'll be growing with a larger fleet of stores, lower operating expenses, stronger market share and a superior customer service experience, all powered by a leaner, more agile operating model. We're not just preparing for the future, we're actively shaping it.

Thank you for your interest in the call, and we look forward to talking to you next quarter.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.