Floor & Decor Holdings, Inc. — Q2 2017 Form 10-Q
Business context and period. The 13- and 26-week periods ended June 29, 2017, compared with periods ended June 30, 2016. Floor & Decor operates a single specialty-retail segment; at quarter-end it had 73 warehouse-format stores in 17 states, one design center, four distribution centers and an e-commerce site.
Financial performance
| Metric | 13 weeks ended June 29, 2017 | Change year over year | 26 weeks ended June 29, 2017 | Change year over year |
|---|---|---|---|---|
| Net sales | $344.0 million | +29.4% | $651.3 million | +30.0% |
| Gross profit / margin | $142.2 million / 41.3% | Margin +10 bps | $267.7 million / 41.1% | Margin +50 bps |
| Operating income / margin | $34.1 million / 9.9% | +220.9% | $56.8 million / 8.7% | +130.9% |
| Net income | $20.4 million | +307.6% | $31.6 million | +160.5% |
| Diluted EPS | $0.20 | Prior year $0.06 | $0.33 | Prior year $0.14 |
| Adjusted EBITDA (non-GAAP) | $43.7 million; 12.7% margin | Prior year $32.0 million; 12.0% | $75.6 million; 11.6% margin | Prior year $52.1 million; 10.4% |
Second-quarter comparable-store sales rose 14.7% (13.8% for the half), driven mainly by customer transactions (+13.4% in Q2); average ticket increased 1.1%. Ten stores opened since June 30, 2016 contributed to non-comparable sales. Sales increased in five of six product categories. Selling and store operating expense and G&A declined as percentages of sales, reflecting leverage on higher sales.
Cash flow and liquidity. For the 26 weeks, operating cash flow was $66.4 million (prior year $43.3 million), capital expenditures were $45.5 million (prior year $30.9 million), and cash ended at $0.4 million. Inventory increased $73.8 million, partly offset by an $85.1 million increase in trade payables. At June 29, total debt at par was $186.1 million, comprising $150.0 million of term loans and $31.8 million drawn on the revolving facility, plus $3.5 million current term-loan portion. The company reported $155.7 million available under its $200 million ABL facility and $156.1 million total unrestricted liquidity. It stated cash from operations and facility availability should meet needs for at least 12 months; it was in material compliance with debt covenants.
Material changes and unusual items
- May 2017 IPO generated approximately $192.0 million net proceeds, used to repay term debt. The repayment produced a $5.4 million early-extinguishment loss; debt at par fell from $400.0 million at year-end 2016 to $186.1 million.
- Prior-year operating income and net income comparisons benefited from a $14.0 million litigation settlement charge in 2016 that did not recur. The 2017 half-year effective tax rate fell to 25.9% from 37.8%, mainly from excess tax benefits on exercised options.
- Quarter-end inventory was $367.5 million versus $293.7 million at December 29, 2016; accounts payable was $243.6 million versus $158.5 million. Total assets were $944.2 million and stockholders’ equity $361.1 million.
- Operating-lease minimum payments totaled $829.8 million, including $34.3 million for the remaining 26 weeks of 2017. The company reported no material off-balance-sheet arrangements other than ordinary-course operating leases.
Outlook, commentary and risks
Management described continued investment in stores, personnel, Pro-customer capabilities, technology, e-commerce, product assortment and marketing. It plans approximately 20% annual store-base growth over the next several years and believes it could ultimately expand from 73 stores to approximately 400 within 15 years. Fiscal 2017 capital expenditures were expected to be approximately $100–$104 million, including plans to open 14 stores and begin construction on stores opening in early 2018. These are plans and expectations, not earnings guidance; the filing provides no specific full-year sales or earnings forecast.
Key risks include economic, housing and consumer-spending weakness; competition; execution and costs of rapid store expansion; distribution disruption; reliance on foreign-sourced goods and exposure to input costs; inventory shrinkage, damage or obsolescence; access to suitable sites and merchandise; variable-rate debt; and information-security, regulatory and personnel risks. A 1 percentage-point interest-rate movement was estimated to change interest cost by about $1.9 million over 12 months at quarter-end debt levels; $205 million of interest-rate caps limit exposure. Management said the pending lease-accounting standard was expected to materially affect the balance sheet. The company was continuing to assess the revenue-recognition standard, particularly timing for stored merchandise and gift-card breakage. Ordinary-course legal matters were not expected to materially affect results; a product-labeling class settlement received final approval and payments did not materially differ from prior accruals.
Investor verification points
- Assess the durability and drivers of comparable-store growth, particularly transaction growth, alongside new-store contributions.
- Review earnings excluding the prior-year $14.0 million settlement and the current $5.4 million debt-extinguishment loss; evaluate non-GAAP Adjusted EBITDA adjustments and comparability.
- Track working-capital requirements, especially inventory growth and reliance on trade payables, against operating cash flow and planned capital spending.
- Confirm debt balances, ABL availability, interest-rate protection and lease commitments as expansion proceeds.
- Monitor store-opening execution, distribution-center investments, and the eventual financial effects of new lease and revenue-recognition standards.