Floor & Decor Holdings, Inc. — Q2 2023 Form 10-Q
Business and period: Specialty retailer and commercial distributor of hard-surface flooring and related products, operating one reportable segment. The quarter was the 13 weeks ended June 29, 2023; year-to-date figures cover 26 weeks. At quarter-end, the company operated 203 warehouse-format stores in 36 states, five design studios, four distribution centers, and an e-commerce site.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $1,135.9 million | $1,089.8 million | $2,258.0 million | $2,118.6 million |
| Gross profit / margin | $479.6 million / 42.2% | $436.3 million / 40.0% | $948.8 million / 42.0% | $844.3 million / 39.9% |
| Operating income / margin | $95.0 million / 8.4% | $106.4 million / 9.8% | $190.5 million / 8.4% | $200.4 million / 9.5% |
| Net income | $71.5 million | $81.8 million | $143.0 million | $152.8 million |
| Diluted EPS | $0.66 | $0.76 | $1.33 | $1.42 |
| Adjusted EBITDA | $152.8 million | $150.3 million | $302.4 million | $286.1 million |
Q2 sales rose 4.2% and first-half sales rose 6.6%, primarily on revenue from new stores; comparable store sales fell 6.0% and 4.7%, respectively. Comparable transactions declined 7.1% in Q2 and 8.5% year to date, partly offset by average-ticket increases of 1.1% and 4.1%. Management attributed weaker transactions to softer existing-home sales, higher borrowing costs, inflation, and consumer spending shifting toward travel and services. Price increases and product mix helped lift gross margin.
Operating expenses grew faster than sales: Q2 selling and store operating expenses increased 16.1%, and general and administrative expenses increased 19.2%. The company cited new-store growth, wage increases, higher credit-card processing fees, fixed-cost deleverage, growth-support costs, and Spartan-related expenses. Higher interest rates and average ABL borrowings contributed to increased interest expense: $2.9 million in Q2 versus $1.7 million, and $7.8 million in the first half versus $2.8 million.
Cash flow, debt, and liquidity
- First-half operating cash flow was $476.6 million, compared with $7.9 million in the prior-year period. Management cited lower inventory and receivables and higher accounts payable. Inventory declined to $1,172.5 million from $1,292.3 million at fiscal year-end.
- Investing cash outflow was $296.3 million, including $279.2 million of fixed-asset purchases and $17.2 million for the Salesmaster acquisition. Financing cash outflow was $185.9 million. Cash ended at $4.2 million.
- Debt at par totaled $238.4 million at quarter-end: $203.4 million under the variable-rate term loan and $35.0 million under the ABL facility, versus $414.7 million at December 29, 2022. Net ABL availability was $699.1 million, and reported unrestricted liquidity was $703.3 million. The company stated it was in compliance with debt covenants.
- Operating lease liabilities were $1,395.9 million, including $119.0 million current. Future minimum lease payments were $1,994.5 million undiscounted; a further approximately $415.3 million related to signed leases not yet commenced.
Outlook, material developments, and risks
- Capital spending and expansion: Management planned fiscal 2023 capital expenditures of approximately $590–$630 million, including $465–$480 million for 32 warehouse-format store openings, relocations, and fiscal 2024 construction; $95–$110 million for remodels and distribution centers; and $30–$40 million for technology and support initiatives. The filing provides no sales or earnings guidance.
- Acquisition: Salesmaster was acquired June 7 for estimated consideration of $21.2 million ($17.2 million cash and $4.0 million contingent consideration). Its post-acquisition sales and earnings were described as immaterial. The company continued commercial-flooring expansion and cited Spartan in its operating discussion.
- Interest-rate exposure: Both credit facilities carry variable rates. A 1 percentage-point increase in effective rates was estimated to add approximately $2.4 million of interest expense over the next 12 months, before interest-rate caps. Two $75 million caps limit SOFR-based interest on part of the term loan through April 2024.
- Other risks: Management highlighted housing and consumer demand, inflation and cost pass-through, supply-chain and import disruption, tariffs, geopolitical events, competition, staffing, store-growth execution, and variable-rate debt. Approximately 29% of products sold in fiscal 2022 were produced in China; tariffs and sourcing costs remain risks.
- Contingencies: The company is defending a Texas wrongful-death and product-liability lawsuit and a Delaware derivative action. It said it could not predict outcomes or reasonably estimate possible losses; insurance may apply subject to policy terms and limits. No material change to internal control over financial reporting was reported, and disclosure controls were deemed effective.
Most important facts for investors to verify
- Whether declining comparable transactions continue, and whether new-store growth can offset weaker existing-store demand.
- Whether gross-margin gains from pricing persist while operating expenses and interest costs rise.
- Execution and returns on the planned $590–$630 million fiscal 2023 capital program and store-opening plan.
- Cash conversion sustainability, including the extent to which the large year-over-year operating-cash-flow improvement reflects working-capital movements.
- Variable-rate debt exposure, ABL availability, lease commitments, and any developments in the disclosed litigation or Salesmaster earn-out.