Floor & Decor Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 24, 2020; comparisons are to the corresponding periods ended September 26, 2019. Amounts below are in millions except per-share data, percentages, and store counts. The company operates as a specialty retailer of hard-surface flooring and related products; it had 128 warehouse-format stores, two design centers, four distribution centers, and an e-commerce site.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 39 weeks 2020 | 39 weeks 2019 |
|---|---|---|---|---|
| Net sales | $684.8 | $521.1 | $1,702.1 | $1,518.5 |
| Gross profit / margin | $294.6 / 43.0% | $213.8 / 41.0% | $727.4 / 42.7% | $633.0 / 41.7% |
| Operating income / margin | $78.8 / 11.5% | $31.4 / 6.0% | $146.6 / 8.6% | $117.1 / 7.7% |
| Net income | $68.8 | $41.0 | $137.8 | $115.3 |
| Diluted EPS | $0.65 | $0.39 | $1.30 | $1.10 |
| Adjusted EBITDA and margin | $106.7 / 15.6% | $57.1 / 11.0% | $225.4 / 13.2% | $183.8 / 12.1% |
Q3 sales increased 31.4%; comparable-store sales rose 18.4%, driven by 18.9% more comparable transactions, partly offset by a 0.5% lower average ticket. For the 39-week period, sales increased 12.1%, while comparable-store sales were flat: transactions declined 1.4% and average ticket increased 1.4%. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP results or liquidity.
Q3 gross margin expanded about 200 basis points, reflecting stronger product margin and improved distribution and supply-chain leverage, partly offset by wood-category markdowns. Year-to-date margin expanded about 100 basis points, helped by lower costs following elimination of certain tariffs and merchandising improvements, partly offset by higher distribution-center costs and wood markdowns. Q3 operating expenses were 31.5% of sales versus 35.0% a year earlier, principally reflecting sales leverage; year-to-date expenses were 34.1% versus 34.0%.
Cash flow, debt, and liquidity
- For the 39 weeks, operating cash flow was $269.7 million, versus $209.6 million; capital expenditures were $109.7 million, versus $141.0 million. Cash increased $244.1 million to $271.1 million.
- At September 24, cash was $271.1 million and net ABL availability was $357.4 million, for reported unrestricted liquidity of $628.5 million. The $400 million ABL facility had no borrowings outstanding; availability reflected $20.3 million of letters of credit.
- Term debt at par was $218.9 million, including a $75 million incremental term loan borrowed in May; net carrying amount was $209.5 million. The incremental loan generated $70.5 million net proceeds and carries a higher stated borrowing rate than the existing term loan. Total lease liabilities were approximately $1,007.5 million, including current and long-term amounts.
- The company reported compliance with material credit covenants. Management said available cash, operating cash generation, expenditure controls, and credit facilities were expected to meet liquidity needs for at least the next 12 months.
Material changes, outlook, and risks
- COVID-19 materially disrupted first-half operations: comparable sales fell 20.8% in the first 13 weeks and 9.6% over the first 26 weeks, according to management. All stores reopened for in-store shopping by the end of Q2; Q3 sales and earnings recovered substantially. Management attributed demand partly to home-improvement spending and noted that the full pandemic impact remained uncertain.
- Management planned fiscal 2020 capital expenditures of approximately $200–$208 million, higher than its Q2 estimate but below pre-pandemic plans. Plans included 13 warehouse-store openings and one standalone design center during fiscal 2020, plus investments in existing stores, distribution centers, technology, and e-commerce. No full-year sales or earnings guidance is stated in the provided filing text.
- The CARES Act contributed a $7.7 million tax benefit in Q2; the company expected approximately $28.4 million in cash tax refunds. It had deferred $7.1 million of employer Social Security taxes and recorded $1.4 million of employee-retention credits year to date.
- Debt amendments included extending term-loan maturity to February 2027 and ABL maturity to February 2025. A $1.0 million gain on early debt extinguishment was recorded year to date. Moody’s affirmed its Ba3 rating in April but changed the outlook to negative.
- Risks include renewed pandemic restrictions, staffing and construction delays, weaker consumer demand, supply interruptions, and market volatility. The company also cited tariff exposure: it estimated potential additional duties of up to approximately $6.0 million on Chinese ceramic tile, had not recorded a reserve, and said final rates were pending administrative review.
- A securities class action was dismissed in full in September 2020, and the plaintiff did not appeal. A related shareholder derivative action remained pending; the company said it could not reasonably estimate any possible loss. Other ordinary-course litigation was not expected to materially affect results.
Important facts for investors to verify
- Whether Q3’s strong comparable-store sales and margin gains persisted after the reporting date, particularly as pandemic conditions and consumer behavior changed.
- Actual fiscal 2020 capital spending and store openings versus the stated $200–$208 million plan, and the effect on cash and borrowing needs.
- Cash realization and timing of the estimated $28.4 million CARES Act refunds, along with the deferred payroll-tax repayment schedule.
- Debt terms, variable-rate exposure, ABL availability, covenant compliance, and total lease obligations; a 1 percentage-point interest-rate increase was estimated to add about $2.2 million of annual interest expense.
- Developments in the potential ceramic-tile duties and the pending derivative litigation, including any change in estimated exposure or reserves.