Floor & Decor Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 27, 2019; comparisons are to the corresponding periods ended June 28, 2018. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where noted.
Business context
Floor & Decor is a specialty retailer of hard-surface flooring and related products, operating one reportable segment. At quarter-end, it operated 106 warehouse-format stores in 28 states, one standalone design center, three distribution centers, and an e-commerce site. It opened six stores in the first half of 2019 and had opened 18 stores since June 28, 2018.
Financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $520.3 million (+19.8%) | $434.3 million | $997.4 million (+19.1%) | $837.2 million |
| Comparable-store sales | +3.0% | +11.4% | +3.1% | +13.4% |
| Gross profit / margin | $217.8 million / 41.9% | $177.6 million / 40.9% | $419.2 million / 42.0% | $343.0 million / 41.0% |
| Operating income / margin | $45.9 million / 8.8% | $37.2 million / 8.6% | $85.7 million / 8.6% | $73.8 million / 8.8% |
| Net income / margin | $43.6 million / 8.4% | $39.8 million / 9.2% | $74.3 million / 7.5% | $71.7 million / 8.6% |
| Diluted EPS | $0.42 | $0.38 | $0.71 | $0.68 |
| Adjusted EBITDA (non-GAAP) | $66.6 million; 12.8% margin | $50.7 million; 11.7% margin | $126.7 million; 12.7% margin | $98.5 million; 11.8% margin |
In Q2, comparable-store growth reflected a 1.9% increase in average ticket and 1.1% growth in transactions; non-comparable stores contributed $70.4 million of sales growth. Management attributed higher gross margin to improved product margins. First-half net income rose more slowly than sales, partly reflecting a higher tax provision: the effective tax rate was 7.7%, compared with a tax benefit and a (2.7)% effective rate in the prior-year half, primarily due to lower excess tax benefits from exercised stock options.
Cash flow, balance sheet, and liquidity
- For the first half, operating cash flow was $122.2 million, versus $83.9 million; capital expenditures were $78.2 million, versus $63.4 million. Cash and cash equivalents ended at $51.5 million, up from $0.6 million at fiscal year-end.
- At June 27, 2019, total assets were $2.01 billion and stockholders’ equity was $670.9 million. Current assets were $564.0 million and current liabilities were $424.6 million.
- Term debt had a $147.3 million par value and a $144.0 million net carrying amount; the current portion was $3.5 million. The company reported $325.7 million of unrestricted liquidity: $51.5 million of cash and $274.2 million available under its $300 million asset-backed revolver. It reported compliance with credit-facility covenants and no event of default.
- Adoption of the lease accounting standard materially increased reported assets and liabilities: right-of-use assets were $720.0 million and operating lease liabilities were $792.1 million. These lease liabilities are separate from the reported term debt. The filing reported a nine-year weighted-average remaining lease term and a 5.5% discount rate.
Material changes and management outlook
- Sales growth was strong but comparable-store growth slowed substantially from the prior year. New-store sales were a significant contributor. Gross margin increased about 100 basis points in both the quarter and first half, while first-half operating margin declined about 20 basis points as operating expenses grew faster than sales.
- Management planned fiscal 2019 capital expenditures of approximately $205–$215 million, including plans to open 20 stores and begin construction on early-2020 openings. It expected cash from operations and revolver availability to meet liquidity needs for at least the next 12 months. No specific earnings or sales guidance is provided in the filing.
- The company said U.S. tariffs, including the increase to 25% on many Chinese products in June 2019, could raise inventory and cost-of-sales costs. It was pursuing vendor negotiations, selective retail-price increases, and alternative sourcing. Potential antidumping and countervailing duties on Chinese ceramic tile were under investigation; the eventual impact was unclear.
- A putative securities class action filed in May 2019 alleges misleading statements and omissions concerning May–August 2018. The company denies the allegations, intends to defend itself, and said it could not reasonably estimate a loss or range of losses.
- Management reported that disclosure controls were not effective at the reasonable-assurance level because of a previously disclosed material weakness in internal control over financial reporting. Remediation was ongoing, with completion expected before fiscal year-end 2019, but not assured.
Important facts for investors to verify
- Whether comparable-store growth and transaction trends stabilize, and how much future growth depends on new-store openings.
- Whether gross-margin gains persist as tariffs and any ceramic-tile duties affect product costs, pricing, and sourcing.
- Execution of the store-opening and $205–$215 million capital-expenditure plans, alongside operating cash flow and revolver availability.
- Progress in remediating the material weakness and the eventual outcome, costs, and insurance coverage of the securities litigation.
- The scale and cash-flow implications of lease commitments, including approximately $200 million of minimum payments for signed leases not yet commenced.