Floor & Decor Holdings, Inc. — Q3 2017 Form 10-Q
Business context and period. The filing covers the 13 and 39 weeks ended September 28, 2017, compared with periods ended September 29, 2016. Floor & Decor is a specialty retailer of hard-surface flooring and related products, operating 80 warehouse-format stores in 20 states, one design center, four distribution centers and an e-commerce site. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Net sales | $343.9 | $271.3 | $995.3 | $772.5 |
| Gross profit / margin | $142.5 / 41.4% | $111.0 / 40.9% | $410.2 / 41.2% | $314.5 / 40.7% |
| Operating income / margin | $28.6 / 8.3% | $24.6 / 9.1% | $85.4 / 8.6% | $49.2 / 6.4% |
| Net income | $23.3 | $14.2 | $54.8 | $26.3 |
| Diluted EPS | $0.22 | $0.16 | $0.56 | $0.30 |
| Adjusted EBITDA (non-GAAP) / margin | $39.7 / 11.5% | $28.2 / 10.4% | $115.3 / 11.6% | $80.3 / 10.4% |
- Quarterly sales rose 26.8%; comparable-store sales increased 13.5%, from 19.3% a year earlier. Comparable transactions grew 11.2% and average ticket 2.5%. Thirteen new stores opened since the prior-year comparison date.
- For the 39 weeks, sales rose 28.8% and comparable-store sales increased 13.7%, versus 21.4% in 2016. Transaction growth was 12.8%; average-ticket growth was 1.0%.
- Gross margin improved approximately 50 basis points in both comparisons, reflecting product mix, lower freight costs and lower shrink/damage; higher distribution and supply-chain costs partly offset gains.
- Quarterly operating margin declined despite higher sales, in part because the prior-year quarter included a $3.5 million litigation-settlement benefit. Year-to-date operating income also benefited from no repeat of the $10.5 million litigation expense recorded in 2016.
- The 39-week effective tax rate was 20.0%, down from 36.8%, primarily because of excess tax benefits from exercised options after adopting share-based compensation guidance. The quarterly rate was 10.5%, versus 35.9%.
Cash flow, debt and liquidity
- For the 39 weeks, operating cash flow was $82.9 million, compared with $70.9 million; investing cash outflow was $69.6 million, compared with $52.2 million, primarily for store, distribution-center and technology investment. Cash ended at $0.6 million.
- Cash used in financing was $13.1 million. The company received approximately $192.0 million of net IPO proceeds and used them to repay term debt; term-loan payments totaled $196.6 million. The IPO debt repayment generated a $5.4 million extinguishment loss.
- Debt at par was $191.5 million at September 28, 2017, down from $400.0 million at December 29, 2016. The balance sheet also showed $38.1 million outstanding on the revolver. The $200 million ABL facility had $149.4 million immediately available; total unrestricted liquidity was $150.0 million.
- Inventory increased to $395.6 million from $293.7 million at year-end. Management attributed working-capital use partly to supporting future sales and store growth.
- Variable-rate debt was approximately $191.5 million. Management estimated a 1 percentage-point rate change would alter interest cost by about $1.9 million over the next 12 months, subject to the company’s interest-rate caps.
- Operating lease minimum payments totaled $935.5 million, including $564.4 million thereafter. Management stated liquidity and borrowing availability should cover anticipated needs for at least 12 months; the company reported compliance with credit-facility covenants.
Outlook, risks and notable items
- Management planned approximately 20% annual store-base growth over the next several years and described a potential long-term opportunity to reach approximately 400 stores within 15 years. These are plans and estimates, not guaranteed outcomes.
- Fiscal 2017 capital expenditures were planned at approximately $104–107 million, with 14 store openings planned for the year. Spending includes new stores, existing-store and distribution-center investment, and technology and e-commerce.
- Management cited strategic investment in new stores, Pro customers, staffing, technology, assortment, merchandising and marketing. It attributed sales and transaction growth in part to execution of these initiatives.
- Key risks include economic, housing and consumer-spending weakness; competition; managing rapid growth and store-opening costs; foreign sourcing and product availability; inventory shrinkage and obsolescence; distribution disruption; interest rates and debt restrictions; and execution and staffing risks.
- The company is subject to ordinary-course legal claims. A class-action settlement concerning product labeling received final approval during the period; final payments did not materially differ from amounts previously accrued. Management did not expect other disclosed proceedings to materially affect results, though litigation costs and management distraction remain possible.
- Adjusted EBITDA is a non-GAAP measure and excludes items including stock compensation and certain offering and hurricane-related costs. It should not be treated as a substitute for GAAP earnings or cash flow. The company expected adoption of the new lease standard to materially affect its balance sheet and planned to adopt the new revenue standard in Q1 2018, with timing effects expected for certain stored merchandise and gift-card breakage.
- In May 2017, the company completed its IPO. A July secondary offering involved sales by existing stockholders; the company received no proceeds. Shares outstanding rose to 94.7 million at September 28, 2017, and diluted weighted-average shares were higher than in the prior-year periods.
Important facts for investors to verify
- Whether comparable-store sales growth remains strong as its year-over-year rate moderated from 2016, and how much future growth depends on new stores.
- Whether gross-margin gains can persist as distribution and supply-chain costs rise, and whether working-capital growth—especially inventory—converts into sales and cash.
- The sustainability of reported earnings growth given the lower effective tax rate, prior-year litigation comparisons, and offering, debt-extinguishment and hurricane-related adjustments.
- Debt, revolver availability, interest-rate exposure, lease commitments and planned capital spending as the store base expands.
- The effects of dilution and stock-based compensation, the implementation impacts of new revenue and lease accounting standards, and any material developments in legal matters or risk factors.