Floor & Decor Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: The 13 and 26 weeks ended July 1, 2021, compared with the periods ended June 25, 2020. Dollar amounts below are in millions unless noted.
Business context
Floor & Decor is a specialty retailer and commercial distributor of hard-surface flooring and related products. At quarter-end it operated 147 warehouse-format stores in 33 states, two design studios, four distribution centers, and an e-commerce site. It acquired commercial flooring distributor Spartan Surfaces on June 4, 2021, for estimated consideration of $77.7 million; Spartan’s post-acquisition sales and earnings were immaterial to the period.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $860.1 | $462.4 | $1,642.6 | $1,017.3 |
| Net sales growth | 86.0% | — | 61.5% | — |
| Gross profit / margin | $365.4 / 42.5% | $196.7 / 42.5% | $702.4 / 42.8% | $432.7 / 42.5% |
| Operating income / margin | $98.6 / 11.5% | $21.1 / 4.6% | $194.5 / 11.8% | $67.8 / 6.7% |
| Net income | $82.9 | $32.0 | $158.7 | $69.1 |
| Diluted EPS | $0.77 | $0.30 | $1.48 | $0.65 |
| Adjusted EBITDA / margin | $137.0 / 15.9% | $45.6 / 9.9% | $264.1 / 16.1% | $118.7 / 11.7% |
Q2 comparable-store sales increased 68.4% (transactions +62.1%; average ticket +3.9%); first-half comparable-store sales rose 48.1% (transactions +43.9%; average ticket +2.9%). The company opened 14 warehouse stores in the first half, including seven in Q2. For the first half, operating cash flow was $256.6 million, investing cash flow was negative $195.4 million, and financing cash flow was negative $2.9 million. Capital expenditures were $132.1 million; cash paid for the Spartan acquisition was $63.4 million. The filing does not present free cash flow as a defined metric.
Financial position, debt, and liquidity
At July 1, 2021, cash was $366.1 million, inventory $683.8 million, total assets $3.364 billion, and total liabilities $2.185 billion. Term loans were $207.1 million at par and the assumed Spartan revolving line had $3.4 million outstanding; total secured debt at par was $210.5 million. The term loan’s stated interest rate was 2.10% variable. Lease liabilities totaled approximately $1.164 billion.
Unrestricted liquidity was $736.6 million, comprising cash of $366.1 million and $370.5 million of net availability under the $400 million ABL facility; the Spartan line had a further $4.6 million available. The company reported compliance with material debt covenants. First-half cash increased $58.3 million to $366.1 million.
Changes versus the prior comparable period
- Sales, income, and operating margins rose sharply, supported by comparable-store growth and 22 warehouse stores opened since June 25, 2020. Management also cited home-improvement demand and the company’s in-stock assortment.
- Comparisons were unusually favorable: stores had been closed to in-store shopping or limited to curbside service during much of the second quarter of 2020. Government support and customers shifting spending toward home projects also contributed to demand; management cautioned that these factors may not persist.
- First-half gross margin improved about 30 basis points, primarily from better distribution and supply-chain cost leverage, partly offset by a $2.5 million reduction in estimated tariff refund receivables. Q2 gross margin was unchanged.
- Selling and store operating expenses declined as a percentage of sales, reflecting strong sales leverage, while absolute expenses increased with new stores and staffing. Net interest expense declined, while the prior-year periods included CARES Act tax benefits and a debt-extinguishment gain.
Outlook, risks, and unusual items
- No earnings or sales guidance was provided. Fiscal 2021 capital expenditures, excluding the Spartan acquisition, were planned at approximately $455–$475 million, primarily funded by operating cash and ABL borrowings. The plan included 27 warehouse openings, two design studios, distribution-center projects, remodels, and technology investments.
- Management said cash, operating cash flow, and available credit were expected to meet liquidity needs, anticipated capital expenditures, and debt payments for at least the next 12 months.
- COVID-19 remained an uncertain risk. Labor shortages, port congestion, higher freight costs, supply interruptions, possible store restrictions, and changing consumer demand could affect inventory, sales, costs, and store openings. In-stock levels for some products had declined; the duration and scale of elevated shipping costs were uncertain.
- Tariff refund claims were subject to U.S. Customs approval. The company expected $20.9 million, including interest, and had received $13.8 million by quarter-end. Separately, potential additional ceramic-tile duties were estimated at up to approximately $3.0 million; no reserve was recorded because management did not then expect additional deposits to apply.
- A stockholder derivative lawsuit alleging fiduciary-duty breaches and unjust enrichment remained pending; the company could not reasonably estimate potential loss. Spartan’s purchase-price allocation was preliminary and included $9.1 million of estimated contingent consideration, with earn-outs of up to $18.0 million dependent on performance targets.
- Other risks include dependence on foreign sourcing and tariffs, variable-rate debt and LIBOR transition, distribution-center disruption, and execution of rapid store growth. Two $75 million interest-rate caps capped LIBOR at 1.75%; management estimated a 1 percentage-point increase in the term-loan rate would add about $2.1 million of interest expense over 12 months.
Important facts for investors to verify
- How much of the exceptional sales growth reflects durable demand versus pandemic-era comparisons, stimulus effects, and home-improvement spending shifts.
- Whether freight, labor, and sourcing pressures persist, and whether price increases can offset related costs without weakening demand or margins.
- Progress against the $455–$475 million capital plan, planned store openings, and distribution-center projects, alongside operating cash flow and available borrowing capacity.
- Final Spartan acquisition valuation, earn-out exposure, integration performance, and whether the acquisition contributes materially beyond the reported period.
- Resolution and timing of tariff refunds, potential duties, and the pending derivative litigation; outcomes and losses were not established in the filing.