Floor & Decor Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Thirteen weeks ended September 30, 2021; year-to-date results cover the thirty-nine weeks ended September 30, 2021. Comparatives are the corresponding periods ended September 24, 2020. The company operates as a specialty hard-surface flooring retailer and commercial distributor in one reportable segment.
Key financial results
| Metric | Q3 2021 | Q3 2020 | 39 weeks 2021 | 39 weeks 2020 |
|---|---|---|---|---|
| Net sales | $876.6m | $684.8m | $2,519.2m | $1,702.1m |
| Gross profit / margin | $365.3m / 41.7% | $294.6m / 43.0% | $1,067.7m / 42.4% | $727.4m / 42.7% |
| Operating income / margin | $83.4m / 9.5% | $78.8m / 11.5% | $277.9m / 11.0% | $146.6m / 8.6% |
| Net income | $74.6m | $68.8m | $233.4m | $137.8m |
| Diluted EPS | $0.69 | $0.65 | $2.17 | $1.30 |
| Adjusted EBITDA (non-GAAP) | $120.2m | $106.7m | $384.3m | $225.4m |
Performance, cash flow and financial position
- Q3 sales rose 28.0%; comparable-store sales increased 10.9%, comprising a 2.4% increase in transactions and an 8.3% increase in average ticket. Year-to-date sales rose 48.0% and comparable-store sales increased 33.1%.
- Management attributed sales growth to new stores, strong demand for home improvements, the company’s in-stock assortment, and Spartan Surfaces, acquired June 4, 2021. Twenty-five warehouse stores had opened since the prior-year comparison date; six opened during Q3. The company ended the period with 153 warehouse stores and two design studios.
- Q3 gross margin fell about 130 basis points, primarily due to higher freight costs. Year-to-date gross margin declined about 30 basis points. Q3 operating margin also decreased, reflecting operating expenses growing faster than sales; year-to-date operating margin improved as sales growth leveraged store operating costs.
- Operating cash flow was $364.9m year to date, versus $269.7m. Investing cash outflow was $341.3m, including $277.7m of fixed-asset purchases and $63.6m paid for Spartan. Cash increased $22.3m to $330.1m.
- Inventory was $833.1m, up from $654.0m at December 31, 2020; trade payables were $634.3m, up from $417.9m. Management said inventory was considered realizable and reported $1.0m of aged discontinued inventory intended for donation if unsold.
- Term-loan principal was $206.6m, with a reported carrying value of $197.4m including current maturities and debt-cost adjustments. Lease liabilities totaled approximately $1,205.1m. Cash plus ABL borrowing availability was $708.9m; an additional $8.0m was available under Spartan’s line. The company reported covenant compliance.
- Q3 effective tax rate was 9.3%, compared with 10.4%; year-to-date it was 14.9%, compared with 2.5%. The company cited stock-option tax benefits and, for the prior-year comparison, CARES Act benefits.
Outlook, risks and unusual items
- No specific sales or earnings guidance is provided. Management expects cash from operations, cash on hand and available credit, with other financing if needed, to cover liquidity requirements and planned capital expenditures for at least the next twelve months.
- Fiscal 2021 capital expenditures, excluding the Spartan acquisition, were planned at approximately $455m–$475m. Plans included opening 27 warehouse stores and two design studios, distribution-center work, store remodeling and technology investments.
- Management reported strong demand but highlighted port congestion, labor shortages, product availability constraints and higher freight and supply-chain costs. It believes higher transportation costs can be passed to customers, but their duration and effect are uncertain; elevated freight was already pressuring gross margin.
- COVID-19 remains a risk to staffing, store operations, supply, consumer demand and construction. Management said the first 39 weeks of 2021 did not appear negatively affected, but future effects remain uncertain.
- Spartan’s estimated purchase consideration was $77.7m. Its preliminary purchase-price allocation included $44.4m of identifiable intangible assets and $28.0m of goodwill; the allocation may change. Potential earn-out payments are up to $18.0m, with an estimated fair value of $9.4m at quarter-end.
- Expected Section 301 tariff refunds totaled $21.9m including interest; $14.5m had been received by September 30, 2021. Separately, potential additional duties related to Chinese ceramic tile imports could be up to approximately $3.0m; no reserve was recorded because management did not then believe additional deposits would apply.
- A stockholder derivative lawsuit alleges fiduciary-duty breaches and unjust enrichment; the company could not estimate a possible loss. Other ordinary-course legal matters were not expected to materially affect results.
- The company has variable-rate debt; it estimated a 1-percentage-point rate increase would add approximately $2.1m of interest expense over twelve months. Interest-rate caps provide partial protection. Risks also include tariffs, inflation, distribution-center disruptions, and the LIBOR transition.
Most important facts for investors to verify
- Whether higher freight and supply-chain costs persist, and whether pricing can offset their impact on gross margin.
- How comparable sales perform against the unusually strong and pandemic-affected prior-year periods.
- Whether inventory availability and working-capital investment support growth without materially weakening cash generation.
- Execution and returns on the planned store and distribution-center investment, and the final Spartan purchase-price allocation and earn-out outcomes.
- Receipt of remaining tariff refunds, exposure to possible additional duties, and developments in the derivative litigation.