Floor & Decor Holdings, Inc. — Q1 2018 Form 10-Q
Business context and period. The filing covers the 13 weeks ended March 29, 2018, compared with the 13 weeks ended March 30, 2017. Floor & Decor operates as a specialty retailer of hard-surface flooring and related products. At quarter-end, it had 84 warehouse-format stores in 21 states, one design center, three distribution centers, and an e-commerce site.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Net sales | $402.9 million | $307.3 million | Up 31.1% |
| Comparable-store sales | 15.6% | 12.8% | Transactions +13.4%; average ticket +1.9% |
| Gross profit / margin | $165.4 million / 41.0% | $125.5 million / 40.8% | Margin up 20 basis points |
| Operating income / margin | $36.5 million / 9.1% | $22.7 million / 7.4% | Operating income up 61.0% |
| Net income / net margin | $31.9 million / 7.9% | $11.1 million / 3.6% | Net income up 186.4% |
| Diluted EPS | $0.30 | $0.13 | |
| Adjusted EBITDA | $47.8 million | $31.9 million | Non-GAAP; margin 11.9% vs. 10.4% |
| Operating cash flow | $40.6 million | $56.1 million | Down $15.5 million |
| Capital expenditures | $27.8 million | $19.8 million | Cash used in investing activities |
Margins and drivers. Management attributed the gross-margin improvement to lower distribution-center costs and lower inventory shrink and damage, each contributing about 10 basis points. Selling and store operating expenses fell to 25.4% of sales from 26.2%, reflecting sales leverage. General and administrative expenses were 5.8% of sales in both periods. Twelve stores had opened since March 30, 2017; one opened in the quarter. Management estimated Hurricane Harvey recovery contributed about 400 basis points to comparable-store sales growth.
Balance sheet, debt, and liquidity
- At March 29, 2018, cash was $0.6 million, current assets were $486.4 million, and current liabilities were $331.1 million.
- Debt at par was $177.6 million: $146.5 million of term loans and $26.8 million drawn on the revolving facility. Net carrying amount was $173.3 million after unamortized discount and issuance costs. Debt at par was $193.5 million at December 28, 2017.
- The company reported $160.9 million of unrestricted liquidity: $0.6 million cash and $160.3 million available under its $200 million asset-backed revolver. It said it was in covenant compliance and expected operating cash flow and revolver availability to cover needs for at least 12 months.
- Operating cash flow decreased year over year despite higher net income; management cited working-capital timing, including inventory-payment timing. The quarter’s net revolving-facility paydown was $14.2 million.
- Minimum operating-lease payments totaled $1.077 billion, including $606.5 million thereafter; leases extend through 2038.
Material changes, outlook, and notable items
- Growth and investment: Management planned fiscal 2018 capital expenditures of approximately $150–$158 million, including about $91–$93 million for opening 17 stores and beginning construction on early-2019 stores. Other planned spending covered existing stores and distribution centers, technology, and e-commerce. Four additional store openings were being prepared for Q2.
- Interest expense: It fell 67.0% to $1.8 million, reflecting lower average debt ($188.5 million versus $384.0 million) and a lower average interest rate (3.8% versus 5.6%). The debt reduction primarily followed approximately $192 million of debt repayment from 2017 IPO proceeds.
- Income taxes: The effective tax rate was 8.2%, versus 35.5%, primarily reflecting 2017 tax reform and excess tax benefits from stock-option exercises. The company had a provisional $17.9 million deferred-tax remeasurement recorded at year-end and had not yet selected an accounting policy or estimated the impact of GILTI provisions.
- Revenue accounting: The company adopted Topic 606 using the modified retrospective method. The adoption increased opening retained earnings by $7.8 million, net of tax, primarily for customer merchandise held for later delivery; the quarterly revenue impact was described as immaterial. Prior-year results were not recast. Management also noted $6.6 million of prior-year sales recognized through the opening-balance-sheet adjustment when discussing reported sales growth.
- Cash flow and non-GAAP measures: Adjusted EBITDA is a supplemental non-GAAP measure and is not a substitute for GAAP results or liquidity measures. Q1 2018’s “Other” adjustment primarily related to hurricane losses; the prior-year adjustment related to IPO costs.
- Risks and contingencies: Key risks include economic, housing, and flooring-market weakness; competition; growth and new-store execution; reliance on foreign imports and suppliers; distribution disruption; inventory risks; interest rates and debt restrictions; cybersecurity; and natural disasters. The company reported ordinary-course litigation and said such proceedings were not expected to materially affect its financial position, cash flows, or results. No material risk-factor changes were reported.
Important facts for investors to verify
- How much of the 15.6% comparable-store sales increase and reported 31.1% sales growth is sustainable, particularly given the estimated 400-basis-point hurricane-recovery benefit and the prior-year revenue-accounting adjustment.
- Whether planned store expansion and $150–$158 million of capital expenditures can be funded while maintaining the reported liquidity and reducing debt.
- Whether operating cash flow rebounds from the year-over-year decline as working-capital timing normalizes.
- The eventual tax-rate impact of tax reform, stock-option benefits, and the unresolved GILTI accounting and estimates.
- Exposure from variable-rate debt, substantial lease commitments, and the risks identified in the filing.