Floor & Decor Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: 13 weeks ended June 28, 2018; year-to-date (YTD) period is 26 weeks. Figures below are in USD millions, except per-share data. Financial statements are unaudited.
Business context
Floor & Decor is a specialty retailer of hard-surface flooring and related products, operating one reportable segment. At quarter-end, it operated 88 warehouse-format stores in 22 states, one standalone design center, three distribution centers, and an e-commerce site. Management reported opening five stores in the first half; 15 stores had opened since June 29, 2017.
Financial performance
| Metric | Q2 2018 | Q2 2017 | YTD 2018 | YTD 2017 |
|---|---|---|---|---|
| Net sales | $434.3 (+26.2%) | $344.0 | $837.2 (+28.5%) | $651.3 |
| Comparable-store sales | +11.4% | +14.7% | +13.4% | +13.8% |
| Gross profit | $177.6 | $142.2 | $343.0 | $267.7 |
| Gross margin | 40.9% | 41.3% | 41.0% | 41.1% |
| Operating income | $37.2 | $34.1 | $73.8 | $56.8 |
| Net income | $39.8 | $20.4 | $71.7 | $31.6 |
| Diluted EPS | $0.38 | $0.20 | $0.68 | $0.33 |
| Adjusted EBITDA | $50.7 | $43.7 | $98.5 | $75.6 |
| Adjusted EBITDA margin | 11.7% | 12.7% | 11.8% | 11.6% |
Q2 comparable-store sales growth reflected a 12.0% increase in transactions, partly offset by a 0.5% decline in average ticket. YTD, transactions rose 12.7% and average ticket increased 0.6%. Management estimated Hurricane Harvey recovery added approximately 280 basis points to Q2 comparable sales and 350 basis points YTD.
Q2 gross margin fell 40 basis points, mainly due to higher domestic freight costs and product mix. YTD margin declined 10 basis points; lower shrink and damage partly offset the freight and mix headwinds. Q2 operating margin was 8.6%, down from 9.9%; YTD it was 8.8%, up from 8.7%.
Interest expense declined to $2.1 million in Q2 and $3.9 million YTD, primarily reflecting lower average debt following the 2017 IPO debt repayment. The 2017 comparison also included a $5.4 million early debt-extinguishment loss, absent in 2018. The 2018 tax benefit contributed to reported earnings: the effective tax rate was (13.5)% in Q2 and (2.7)% YTD, versus 19.3% and 25.9%, respectively, in 2017. Management attributed the lower rates mainly to tax reform and excess tax benefits from stock-option exercises.
Cash flow, debt, and liquidity
- YTD operating cash flow was $83.9 million, versus $66.4 million. Investing cash outflow was $63.4 million, versus $45.5 million, primarily for capital expenditures. Financing cash outflow was $20.5 million; the company paid down $27.4 million net on its revolving facility and received $8.7 million from stock-option exercises.
- Cash and cash equivalents were $0.5 million at June 28, 2018. Total debt at par was $164.4 million; net carrying amount was $160.3 million, including $13.6 million drawn on the revolver.
- Reported unrestricted liquidity was $176.5 million: $0.5 million cash plus $176.0 million available under the $200 million asset-backed revolving credit facility. The company said it was compliant with credit-facility covenants and expected operating cash flow and available borrowings to meet needs for at least 12 months. The term loan facility has no financial maintenance covenants.
Outlook, risks, and notable items
- Fiscal 2018 capital expenditures were planned at approximately $160–$167 million, including 17 store openings and construction for early-2019 openings. Planned spending also covered existing stores, distribution centers, IT, and e-commerce. Management said cash generated from operations would primarily fund the plan; no earnings or sales guidance was provided in the filing.
- Management cited economic, housing-market and consumer-spending conditions; competition; store-growth execution and costs; foreign sourcing and potential tariffs; freight and other input costs; inventory risks; distribution continuity; staffing; and debt restrictions among risks to results.
- The company was negotiating a new headquarters lease and said a possible 2019 relocation could create costs and business disruption. It had approximately $1.105 billion of future minimum operating-lease payments, including $636.4 million thereafter.
- Adoption of the new revenue standard increased opening retained earnings by $7.8 million, net of tax; the effect on 2018-period revenue was described as immaterial. Prior-year periods were not adjusted. YTD gift-card breakage income recognized in sales was $1.2 million, versus $0.3 million.
- Adjusted EBITDA is a non-GAAP measure. 2018 adjustments included costs related to a May secondary offering by certain stockholders, closure of the Miami-area distribution center, and hurricane insurance recoveries; the company cautioned that this measure has limitations and may not be comparable across companies.
Important facts for investors to verify
- Whether comparable-sales momentum and transaction growth continue as the estimated Harvey-recovery contribution fades, and how average ticket trends develop.
- Whether freight, product mix, and store-opening costs continue to pressure margins as the company expands.
- Whether planned capital spending and store openings remain on schedule and are funded as expected, given the very low cash balance and reliance on revolving-credit availability.
- The sustainability of reported earnings growth after separating operating performance from the unusually low tax rate and prior-year debt-extinguishment charge.
- Potential effects of tariffs, lease commitments, headquarters relocation, tax-law implementation, and any developments in ordinary-course legal proceedings.