Business context and reporting period
Floor & Decor Holdings, Inc. is a specialty retailer of hard-surface flooring and related products, operating one reportable segment. As of September 27, 2018, it operated 95 warehouse-format stores in 26 states, one design center, three distribution centers and an e-commerce site. This Form 10-Q covers the 13 weeks and 39 weeks ended September 27, 2018; comparisons are with the periods ended September 28, 2017. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $435.9 | $343.9 | $1,273.1 | $995.3 |
| Gross profit / margin | $178.2 / 40.9% | $142.5 / 41.4% | $521.3 / 40.9% | $410.2 / 41.2% |
| Operating income / margin | $34.2 / 7.9% | $28.6 / 8.3% | $108.0 / 8.5% | $85.4 / 8.6% |
| Net income / net margin | $26.6 / 6.1% | $23.3 / 6.8% | $98.3 / 7.7% | $54.8 / 5.5% |
| Diluted EPS | $0.25 | $0.22 | $0.94 | $0.56 |
| Adjusted EBITDA / margin | $48.9 / 11.2% | $39.7 / 11.5% | $147.4 / 11.6% | $115.3 / 11.6% |
Q3 sales grew 26.7%; comparable-store sales rose 11.1%, driven by 12.7% more transactions, partly offset by a 1.4% lower average ticket. For the 39 weeks, sales grew 27.9% and comparable-store sales rose 12.6%. The company opened 12 stores year to date and had 15 more stores than a year earlier. Gross margin fell 50 basis points in Q3 and 30 basis points year to date, primarily from lower product margin, higher domestic freight costs and, in Q3, higher shrink and damage.
Operating cash flow was $143.7 versus $82.9 for the 39 weeks; capital expenditures were $109.4 versus $69.6, and net financing cash outflow was $34.3 versus $13.1. Cash ended at $0.5. Total debt was $149.9 at par ($146.0 carrying value), with no revolver borrowings; term loans were $146.0 at carrying value. The company reported $190.1 of unrestricted liquidity, including $189.6 available under its $200 million asset-backed revolver. It said cash from operations and revolver availability should cover expected needs for at least 12 months and reported compliance with credit-facility covenants.
Effective tax rate was 17.1% in Q3 versus 10.5%; year to date it was 3.5% versus 20.0%, reflecting tax reform and excess tax benefits from exercised stock options. The year-to-date comparison also benefited from the absence of the prior-year $5.4 million debt-extinguishment loss and lower interest expense following debt repayment with IPO proceeds in 2017.
Outlook, risks and unusual items
- No specific sales or earnings guidance is provided. Fiscal 2018 capital expenditures were planned at approximately $161–$167 million, including 17 store openings; six additional openings were anticipated in Q4. Management expects cash from operations and available credit to fund planned needs.
- Tariffs are a major near-term risk: approximately half of products sold are imported from China, most affected by the 10% tariffs imposed in September 2018. The filing notes a possible increase to 25% on January 1, 2019 absent a trade agreement. Management expected higher inventory costs and cost of sales in Q4 2018 and a material increase in inventory costs in fiscal 2019, while seeking mitigation through vendor negotiations, pricing and alternative sourcing.
- In October 2018, the company signed a 12-year lease for a new 185,473-square-foot headquarters, expected to commence in July 2019, at approximately $469,000 monthly rent. Potential exit costs on the existing location could reach $10 million; relocation may also cause disruption and additional costs.
- Operating lease minimum payments totaled $1.109 billion as of September 27, 2018. The company expected adoption of the new lease-accounting standard in fiscal 2019 to materially affect the balance sheet, but not materially affect income or cash flows.
- Revenue-standard adoption increased opening retained earnings by $7.8 million, net of tax; its impact on current-period revenue was immaterial. Management did not expect the ordinary-course legal proceedings to materially affect financial position, cash flows or results.
- Other disclosed risks include economic, housing and consumer-spending weakness; competition; store and distribution execution; sourcing and inventory risks; labor and technology/security matters; and variable-rate debt exposure. Interest-rate caps had $102.5 million notional value and December 2021 maturity.
Important facts for investors to verify
- Whether tariff costs are passed through or mitigated, and the resulting effects on product margins, pricing and demand.
- Whether comparable-store growth and transaction gains persist as average ticket trends and hurricane-related comparisons change.
- Execution and returns on planned store openings and $161–$167 million of fiscal 2018 capital spending, alongside cash generation and liquidity.
- Final headquarters relocation costs, any exit charge on the current lease, and the balance-sheet effect of lease-standard adoption.
- The sustainability of unusually low year-to-date tax expense and its impact on reported earnings.