Floor & Decor Holdings, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. The filing covers the 13 weeks ended March 30, 2017, compared with the 13 weeks ended March 31, 2016. Floor & Decor is a specialty retailer of hard-surface flooring and related accessories, operating one reportable segment. At quarter-end it had 72 warehouse-format stores in 17 states, one design center, four distribution centers and an e-commerce site. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Key financial results
| Metric | Q1 2017 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $307.3 million | $235.3 million | +30.6% |
| Gross profit / margin | $125.5 million / 40.8% | $93.9 million / 39.9% | Margin +0.9 percentage points |
| Operating income / margin | $22.7 million / 7.4% | $14.0 million / 5.9% | Operating income +62.4% |
| Interest expense | $5.4 million | $2.5 million | +117.8% |
| Net income / diluted EPS | $11.1 million / $0.13 | $7.1 million / $0.08 | Net income +56.7% |
| Adjusted EBITDA / margin | $31.9 million / 10.4% | $20.1 million / 8.5% | Adjusted EBITDA +58.7% |
Comparable-store sales grew 12.8%, versus 22.4% a year earlier. Comparable transactions rose 14.0%, while average ticket declined 0.7%. Of the $72.0 million sales increase, comparable stores contributed approximately $30.0 million and non-comparable stores approximately $42.0 million. The company opened three stores and relocated one during the quarter; it had opened 12 stores since March 31, 2016.
Gross-margin improvement reflected lower capitalized freight costs and a more favorable sales mix, partly offset by higher distribution and supply-chain costs, including costs associated with relocating and expanding the West Coast distribution center. Operating expense ratios improved overall through sales leverage. Adjusted EBITDA is a non-GAAP measure and includes $572,000 of IPO-related costs in the quarter.
Cash flow, balance sheet and liquidity
- Operating cash flow was $56.1 million, compared with $19.2 million; investing cash use was $19.8 million, compared with $13.9 million; financing cash use was $36.3 million, compared with $5.3 million. Cash ended the quarter at $445,000.
- Management attributed stronger operating cash flow partly to improved working-capital timing, including inventory payments related to Chinese New Year receipts. Accounts payable increased $47.5 million during the quarter, while inventory increased $22.8 million.
- At March 30, 2017, total assets were $868.4 million and stockholders’ equity was $146.1 million. Inventory was $316.5 million; current liabilities were $293.2 million.
- Debt at par was $363.6 million, including $350.0 million of term loans and $14.5 million drawn on the revolving facility. The net carrying amount of debt was $354.7 million. The company reported $173.4 million of unrestricted liquidity: $0.4 million cash and $173.0 million available under its $200 million ABL facility.
- Operating lease minimum payments totaled $749.8 million as of March 30, 2017. The company said it was in material compliance with credit-facility covenants and that the term loan had no financial maintenance covenants.
Outlook, developments and risks
- Management planned fiscal 2017 capital expenditures of approximately $95 million to $104 million, including opening 14 stores and beginning construction on early-2018 openings. It expects to fund these investments primarily from operating cash flow and believes available liquidity and operating cash flow will meet needs for at least 12 months.
- Management described a long-term opportunity to expand from 72 stores to approximately 400 over 15 years and plans to grow the store base by approximately 20% annually over the next several years. These are targets, not guaranteed results; store growth depends on suitable sites, leases, staffing and profitable execution.
- On March 31, 2017, the term-loan margins were reduced, subject to specified leverage-based step-downs contingent on the IPO. On May 2, the IPO closed at $21 per share, raising approximately $192 million net. The proceeds were used to repay part of the term loan; the resulting approximately $5.4 million debt-extinguishment loss was to be recognized in Q2 2017.
- Variable-rate debt exposure was approximately $363.6 million. Management estimated that a 1 percentage-point rate change would alter interest cost by approximately $3.6 million over the next 12 months, based on quarter-end debt. $205 million of interest-rate caps limit LIBOR exposure, subject to their terms.
- Key risks cited include economic, housing and consumer-spending conditions; competition; product sourcing and foreign-import dependence; supply-chain disruption; inventory shrinkage or obsolescence; execution of rapid store growth; access to cash flow; interest-rate changes; and cybersecurity. The company also noted possible future costs from inflation in materials, labor and energy.
- A class action concerning labeling of certain Chinese-made laminate flooring received final approval in January 2017. The company said final settlement payments did not materially differ from prior accruals and that excluded-member or personal-injury claims were not reasonably expected to cause a material loss beyond accrued amounts. Other ordinary-course litigation was not expected to have a material impact.
- The company expected the new lease-accounting standard to materially affect its balance sheet; it was still evaluating the impact of the new revenue standard, particularly timing for merchandise stored for later delivery.
Most important facts for investors to verify
- Whether 12.8% comparable-store growth and transaction growth are sustainable, and how new-store sales and costs develop.
- Whether operating cash flow remains strong after the effects of payable, inventory and other working-capital timing.
- The post-IPO term-loan balance, interest savings, and Q2 recognition and final amount of the debt-extinguishment loss.
- Execution and returns on the planned store openings and $95–$104 million fiscal 2017 capital program.
- Exposure to lease commitments, variable interest rates, supply-chain costs, and any changes in litigation or other contingencies.
- The eventual balance-sheet and revenue-recognition effects of the new lease and revenue accounting standards.