Floor & Decor Holdings, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. The quarter comprised 13 weeks ended September 26, 2019; year-to-date results cover 39 weeks. Floor & Decor is a specialty retailer of hard-surface flooring and related products. At quarter-end it operated 113 warehouse-format stores in 28 states, one design center, three distribution centers and an e-commerce site. It opened 13 stores year to date.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Net sales | $521.1 million | $435.9 million | $1,518.5 million | $1,273.1 million |
| Gross profit / margin | $213.8 million / 41.0% | $178.2 million / 40.9% | $633.0 million / 41.7% | $521.3 million / 40.9% |
| Operating income / margin | $31.4 million / 6.0% | $34.2 million / 7.9% | $117.1 million / 7.7% | $108.0 million / 8.5% |
| Net income | $41.0 million | $26.6 million | $115.3 million | $98.3 million |
| Diluted EPS | $0.39 | $0.25 | $1.10 | $0.94 |
| Adjusted EBITDA (non-GAAP) | $57.1 million | $48.9 million | $183.8 million | $147.4 million |
- Q3 sales rose 19.5%; comparable-store sales increased 4.6%, driven by average ticket growth of 2.8% and transactions growth of 1.8%. Year-to-date sales increased 19.3%, with comparable-store sales up 3.6%.
- Q3 gross margin expanded about 10 basis points; year-to-date gross margin expanded about 80 basis points. Management attributed improvement to product margins, supplier negotiations, merchandising, pricing and supply-chain leverage.
- Q3 operating income declined 8.3% despite sales growth, as operating expenses rose 26.7%. Selling and store operating costs and G&A increased faster than sales; G&A included a $4.1 million lease-asset impairment.
- Net income growth benefited from income-tax benefits tied primarily to excess tax benefits on stock-option exercises. The effective tax rate was (39.3)% in Q3 and (4.9)% year to date, versus 17.1% and 3.5% in the respective 2018 periods. Pre-tax income declined 8.2% in Q3 and increased 7.9% year to date.
- Year-to-date operating cash flow was $209.6 million versus $143.7 million; capital expenditures were $141.0 million versus $109.4 million. Cash at quarter-end was $84.1 million, up from $0.6 million at fiscal year-end 2018.
- Term-loan debt had a $143.3 million carrying amount ($146.4 million at par); there were no term-loan current maturities shown. The company reported $369.6 million of unrestricted liquidity: $84.1 million cash and $285.5 million available under its $300 million ABL facility. It reported compliance with credit covenants.
- Adoption of lease accounting added $743.5 million of right-of-use assets and $829.0 million of lease liabilities at quarter-end. These lease obligations are distinct from the term-loan debt; weighted-average remaining lease term was 10 years.
Material changes and management commentary
- Revenue growth reflected new stores and comparable-store gains. Eighteen stores had opened since September 27, 2018; Q3 comparable-store growth slowed from 11.1% in the prior-year quarter.
- Adjusted EBITDA increased, but its Q3 margin declined to 11.0% from 11.2%; year-to-date margin improved to 12.1% from 11.6%.
- Management said strategic investment priorities included store expansion, product and localized assortments, technology and e-commerce, and professional-customer engagement.
- Fiscal 2019 capital expenditures were planned at approximately $203–$213 million: $131–$137 million for new stores and construction, $35–$37 million for existing stores and distribution centers, and $37–$39 million for technology, e-commerce and support functions. The company planned 20 store openings for the fiscal year. Management stated available cash, expected operating cash flow and revolver availability should meet needs for at least 12 months.
Outlook, risks, contingencies and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management cautioned that interim results are not necessarily indicative of full-year results.
- Tariffs and trade actions are material risks. Management said roughly half of products sold had historically been imported from China and most were affected by 25% tariffs; mitigation included supplier negotiations, selective retail price increases and alternative sourcing. The company estimated potential exposure of about $7.0 million if additional proposed ceramic-tile duties applied to current inventory, but said it did not believe current inventory was subject to those duties and recorded no reserve. Investigations and final duty outcomes remained pending.
- A $4.1 million impairment was recorded on the right-of-use asset for the former Smyrna, Georgia support-center lease after the company no longer expected a sublease to cover future payments. In October 2019, after the reporting date, the company terminated that lease and recognized a further $2.1 million loss for settlement and write-off.
- A putative securities class action filed in May 2019 alleges violations relating to statements made in 2018. The company denies the material allegations; the case was at an early stage, and possible losses could not be reasonably estimated.
- Disclosure controls were judged ineffective at the reasonable-assurance level due to a previously disclosed material weakness in internal control over financial reporting. Management expected remediation before fiscal year-end 2019 but gave no assurance it would succeed. The filing said the weakness had not caused restatements.
- Other risks highlighted include economic and housing-market conditions, competition, growth execution, import dependence, distribution disruption, inventory management, staffing, cybersecurity and access to store locations.
Important facts for investors to verify
- Whether comparable-store sales and margins sustain their 2019 growth, particularly as comparable growth slowed versus the prior year.
- How operating expenses, new-store ramp-up and the support-center relocation affect operating profitability and cash generation.
- The ultimate scope and cost of tariffs or antidumping/countervailing duties, and the effectiveness of alternative sourcing and pricing actions.
- Capital spending and store-opening delivery against the stated fiscal-year plan, alongside liquidity and revolver availability.
- Progress in remediating the material weakness and developments in the securities litigation.
- How substantial lease commitments, including signed leases not yet commenced, affect future cash requirements.