Business context and reporting period
Floor & Decor Holdings, Inc. is a specialty retailer and commercial distributor of hard-surface flooring and related products, operating in one reportable segment. This unaudited 10-Q covers the 13 weeks ended March 30, 2023, compared with the 13 weeks ended March 31, 2022. At quarter-end, the company operated 194 warehouse-format stores in 36 states, five design studios, four distribution centers, and an e-commerce site.
Financial results and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $1,122.1 million | $1,028.7 million | +9.1% |
| Gross profit / margin | $469.1 million / 41.8% | $408.1 million / 39.7% | +15.0%; margin +210 bps |
| Operating income / margin | $95.5 million / 8.5% | $94.0 million / 9.1% | +1.6%; margin down 60 bps |
| Net income | $71.5 million | $71.0 million | +0.8% |
| Diluted EPS | $0.66 | $0.66 | Flat |
| Adjusted EBITDA (non-GAAP) | $149.6 million / 13.3% of sales | $135.8 million / 13.2% | +10.2% |
| Operating cash flow | $250.3 million | $(3.3) million | Improved $253.6 million |
| Capital expenditures | $139.4 million | $100.9 million | Higher by $38.5 million |
Sales growth reflected 28 net new warehouse-format stores opened since the prior-year quarter and non-comparable sales of $125.8 million, including new stores and Spartan. Comparable-store sales fell 3.3%: transactions declined 9.9%, partly offset by a 7.3% increase in average ticket. Management attributed softer transactions primarily to weaker existing-home sales, higher consumer borrowing costs, and inflation. Retail price increases to offset product and supply-chain costs helped lift gross margin.
Operating expenses rose 18.9% to $373.6 million, faster than sales; selling and store operating costs increased 21.7%, and those costs rose to 27.1% of sales from 24.3%. Management cited store growth, wage increases, payment-processing fees, and fixed-cost deleverage. Net interest expense increased to $4.9 million from $1.2 million, primarily reflecting higher borrowings and interest rates. The effective tax rate was 21.1%, versus 23.6%.
Cash, debt, and liquidity
Cash was $5.0 million at March 30, 2023, down from $9.8 million at year-end. Operating cash flow benefited mainly from lower inventory purchases and other working-capital movements; inventories declined $111.2 million during the quarter. Investing cash outflow was $139.4 million, while financing cash outflow of $115.6 million included $103.7 million of net ABL repayments. Cash therefore declined $4.8 million.
Debt at par totaled $310.5 million: $204.0 million under the variable-rate term loan and $106.5 million under the ABL facility. Net ABL availability was $660.2 million after borrowings and letters of credit; reported unrestricted liquidity, including cash, was $665.2 million. The company said it was in compliance with debt covenants. A 1 percentage-point rise in effective rates was estimated to add approximately $3.1 million of interest expense over the next 12 months, before interest-rate cap effects. Lease liabilities totaled approximately $1,365.4 million, including current and long-term obligations.
Outlook, risks, and unusual items
No sales or earnings guidance was provided in the supplied filing text. Management expected operating cash flow, cash on hand, and credit-facility availability to meet requirements for the next 12 months and foreseeable future. Fiscal 2023 capital expenditures were projected at approximately $620 million to $675 million, including $495 million to $525 million for 32 to 35 warehouse-store openings, relocations, and construction; $95 million to $110 million for remodels and distribution centers; and $30 million to $40 million for technology and other initiatives.
Key exposures include economic weakness, housing-market softness, inflation and interest rates, supply-chain disruption, tariffs, foreign sourcing, competition, store-growth execution, and variable-rate debt. Approximately 29% of products sold in fiscal 2022 were produced in China; tariffs and related sourcing costs remain a risk. The company disclosed a Texas wrongful-death/product-liability suit seeking damages exceeding $12 million in aggregate, plus exemplary damages, and a separate derivative action alleging fiduciary-duty breaches. It said it could not reasonably estimate possible losses or outcomes for these matters.
Other notable items include a $1.4 million increase in contingent earn-out fair value recognized in general and administrative expense, and $5.2 million of earn-out payments. The company repurchased 83,134 shares at an average $90.95 per share to satisfy employee tax withholding; these were not purchases under a publicly announced repurchase program. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether transaction trends and comparable-store sales improve, and whether higher average tickets can continue to offset lower customer traffic.
- Whether gross-margin gains from pricing persist as product costs, tariffs, and supply-chain conditions change, and whether operating-expense growth moderates.
- Execution and funding of the planned 32 to 35 store openings and $620 million to $675 million fiscal 2023 capital-expenditure program.
- Variable-rate borrowing costs, ABL availability, and the company’s ability to maintain covenant compliance and liquidity.
- Developments in the disclosed litigation; the filing does not provide a clear estimate of potential losses.