Floor & Decor Holdings, Inc. — FY 2018 Form 10-K
Business context and reporting period. Floor & Decor is a specialty retailer of hard-surface flooring and related products, serving professional (Pro), DIY and buy-it-yourself customers through stores and e-commerce. This filing covers the 52-week fiscal year ended December 27, 2018; quarterly figures below are unaudited. At year-end, the company operated 100 warehouse-format stores in 28 states and one standalone design center.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $1.710 billion | $1.385 billion |
| Comparable-store sales growth | 9.2% | 16.6% |
| Gross profit / margin | $702.3 million / 41.1% | $572.6 million / 41.3% |
| Operating income / margin | $131.3 million / 7.7% | $117.8 million / 8.5% |
| Net income / margin | $116.2 million / 6.8% | $102.8 million / 7.4% |
| Diluted EPS | $1.11 | $1.03 |
| Adjusted EBITDA / margin | $191.9 million / 11.2% | $158.8 million / 11.5% |
| Cash from operating activities | $185.6 million | $109.2 million |
| Cash used in investing activities | $151.4 million | $102.3 million |
| Cash used in financing activities | $34.1 million | $6.8 million |
Revenue increased 23.5%; management attributed the increase to 17 store openings and 9.2% comparable-store growth. Comparable transactions rose 10.0%, while average ticket declined 0.6%. Four of six product categories had comparable-sales increases; laminate/luxury vinyl plank, installation materials and decorative accessories were among the stronger categories.
FY 2018 fourth-quarter net sales were $436.7 million and net income was $17.9 million, compared with $389.5 million and $48.0 million, respectively, in the prior-year quarter. The filing’s quarterly table does not explain the substantial year-over-year difference in fourth-quarter net income; investors should review quarterly tax and other items.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $0.6 million; net working capital was $158.0 million at December 27, 2018.
- Inventory was $471.0 million, up from $428.0 million. Merchandise is the company’s principal working-capital asset.
- Term-loan principal was $149.0 million; the balance-sheet carrying amount of total debt was $145.3 million after debt discount and issuance costs. The company had no revolving borrowings outstanding.
- Unused ABL borrowing availability was $289.2 million, with $10.9 million of letters of credit outstanding. Management reported compliance with debt covenants.
- Operating cash flow rose to $185.6 million, supported by higher earnings and working-capital movements. Capital expenditures were $151.4 million. Year-end cash increased by just $88,000.
- Minimum operating-lease payments totaled $1.309 billion, including $114.1 million due in fiscal 2019. The company expected adoption of the new lease-accounting standard in FY 2019 to substantially increase reported lease assets and liabilities, without a material income-statement or cash-flow impact.
Changes, outlook and material risks
- Sales growth remained strong, but comparable-store growth slowed from 16.6% to 9.2%. Gross margin declined 20 basis points and operating margin declined about 80 basis points. Higher transportation costs and lower landed margin pressured gross margin; pre-opening expense rose to $26.1 million as expansion accelerated.
- Management planned approximately 20 new stores in FY 2019, targeting roughly 20% annual store-base growth for the next several years and approximately 400 stores nationally over 10–15 years. FY 2019 capital expenditures were forecast at $220–$230 million, including $146–$153 million for stores and related construction. These are plans, not guaranteed results.
- The company expected tariffs to raise inventory and cost of goods sold in the first quarter of 2019. About half of its products were imported from China, and most of those imports were affected by the 10% tariffs imposed in September 2018. Management cited vendor negotiations, selective price increases and alternative sourcing as mitigations, while warning that tariffs could materially affect costs and results.
- A material weakness in IT general controls—user access and program change management over certain systems supporting financial reporting—led management and the auditor to conclude that internal control over financial reporting was ineffective as of year-end. No financial-statement misstatements were identified; the financial statements received an unqualified audit opinion, while the auditor issued an adverse opinion on internal control. Remediation was underway, with completion expected before FY 2019 year-end.
- Other key exposures include economic and housing-market weakness, intense competition, execution of rapid store and distribution expansion, inventory obsolescence/shrinkage, foreign sourcing and supply-chain disruption, variable-rate debt, and natural disasters. The company planned a new Maryland distribution center in late FY 2019 and a headquarters move; exiting its current headquarters lease could cost up to $9 million.
- The company reported ordinary-course legal claims and proceedings; it said these were not expected to have a material impact on the consolidated financial statements. It also disclosed prior claims concerning the quality of certain China-sourced laminate products, which it said had been settled.
Most important facts for investors to verify
- Whether the IT-control remediation was completed and tested effectively, and whether any later filings identify control or reporting issues.
- Actual tariff-related cost increases, pricing actions, sourcing changes and resulting gross-margin performance.
- Whether planned store openings, distribution-center investments and $220–$230 million of FY 2019 capital expenditures were delivered within budget and generated expected returns.
- The drivers of the sharp decline in fourth-quarter net income versus the prior-year quarter, including tax effects and any unusual items.
- Cash generation and liquidity after planned investment, alongside the company’s substantial lease commitments and debt maturities.