Floor & Decor Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Thirteen weeks ended June 25, 2020; year-to-date figures cover twenty-six weeks. Dollar amounts below are in millions unless stated otherwise. The company operates as a specialty hard-surface flooring retailer and reported one segment, with 125 warehouse-format stores in 30 states and one design center.
Financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $462.4 | $520.3 | $1,017.3 | $997.4 |
| Gross profit / margin | $196.7 / 42.5% | $217.8 / 41.9% | $432.7 / 42.5% | $419.2 / 42.0% |
| Operating income / margin | $21.1 / 4.6% | $45.9 / 8.8% | $67.8 / 6.7% | $85.7 / 8.6% |
| Net income | $32.0 | $43.6 | $69.1 | $74.3 |
| Diluted EPS | $0.30 | $0.42 | $0.65 | $0.71 |
| Adjusted EBITDA (non-GAAP) / margin | $45.6 / 9.9% | $66.6 / 12.8% | $118.7 / 11.7% | $126.7 / 12.7% |
Q2 comparable-store sales declined 20.8%; first-half comparable-store sales fell 9.6%. Q2 comparable transactions fell 22.3%, partly offset by a 2.0% increase in average ticket. First-half transactions declined 11.9%, with average ticket up 2.5%.
For the first half, operating cash flow was $96.7 versus $122.2; capital expenditures were $66.0 versus $78.2; and cash increased $107.4 to $134.4. The company had $219.3 of term debt at par ($209.5 net carrying amount) and no revolver borrowings. Available ABL capacity was $362.1 after letters of credit, giving reported unrestricted liquidity of $496.5. Lease liabilities totaled $987.2, including current obligations.
Changes and drivers
- Q2 net sales fell 11.1% and net income fell 26.6% year over year; first-half sales increased 2.0%, while net income declined 7.1%.
- Temporary store closures and curbside-only operations drove a sharp Q2 sales decline. About half of Q2 selling days were curbside-only, when comparable sales were down about 49.6%; during the half with in-store shopping, comparable sales rose about 8.6%. All stores had reopened for in-store shopping by June 25, and June sales exceeded the prior-year period.
- Gross margin improved 60 basis points in Q2 and about 50 basis points for the first half, primarily from lower product costs after certain tariffs were eliminated and improved merchandising, partly offset by higher distribution-center costs. Lower sales increased operating expenses as a share of revenue.
- Q2 net income included a $12.2 tax benefit, versus a $0.1 tax expense in Q2 2019. CARES Act tax benefits and excess tax benefits from stock-option exercises materially affected the effective tax rate. The first half also included a $1.0 gain on partial debt extinguishment.
Outlook, liquidity, and risks
- Management said the pandemic’s duration and financial effects remained highly uncertain and did not provide a specific earnings or revenue forecast. It expected cash, operating cash flow, expense controls, and available credit to meet requirements for at least the next 12 months.
- Fiscal 2020 capital expenditures were planned at approximately $188–$196, below the pre-pandemic plan but above the $147–$157 estimate given at the end of Q1. Plans included 13 warehouse stores and one standalone design center, plus store, distribution, and technology investments.
- The company borrowed $75.0 under an incremental term loan in May, receiving $70.5 net proceeds; maturity is February 2027. The $400.0 ABL facility matures in February 2025. The company reported compliance with material debt covenants. Moody’s maintained its Ba3 rating but changed the outlook to negative in April 2020.
- Key risks include renewed COVID-related closures or staffing problems, weaker consumer demand, supply-chain disruption, and reduced access to financing. The filing also describes securities and derivative litigation for which possible losses could not be estimated, and potential additional ceramic-tile duties of up to approximately $6.0; no reserve was recorded for the duty matter.
- Other unusual items included $5.9 of rent payments delayed or deferred as of quarter-end and CARES Act benefits, including an estimated $28.4 of cash tax refunds expected in fiscal 2020. The refund was an estimate, not cash reported as received in the filing.
Investor verification priorities
- Track comparable sales, transactions, and store performance after reopening, and whether the Q2 recovery persisted.
- Verify actual cash tax refunds against the estimated $28.4 and assess the sustainability of the unusually low tax expense.
- Monitor operating cash generation, planned capital spending, borrowing availability, and debt costs, including the negative credit-rating outlook.
- Assess tariff and antidumping-duty exposure, including whether additional deposits or costs arise beyond the estimated potential $6.0 exposure.
- Follow developments in the securities and derivative lawsuits; the company stated it could not reasonably estimate potential losses.