Floor & Decor Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Thirteen weeks ended March 26, 2020. Unaudited results; comparison is with the thirteen weeks ended March 28, 2019. The company operates as a specialty retailer of hard-surface flooring and related products; it had 123 warehouse-format stores, one design center, four distribution centers, and an e-commerce site at quarter-end.
Financial performance
| Metric | Q1 2020 | Prior year | Change / context |
|---|---|---|---|
| Net sales | $554.9 million | $477.1 million | +16.3%; comparable-store sales +2.4% |
| Gross profit / margin | $236.0 million / 42.5% | $201.4 million / 42.2% | Gross margin +30 basis points |
| Operating income / margin | $46.7 million / 8.4% | $39.8 million / 8.3% | Operating income +17.4% |
| Net income | $37.1 million | $30.7 million | +20.6%; diluted EPS $0.35 vs. $0.29 |
| Adjusted EBITDA | $73.1 million; 13.2% margin | $60.1 million; 12.6% margin | Non-GAAP measure |
| Cash from operations | $24.7 million | $27.0 million | Lower year over year |
| Capital expenditures | $38.4 million | $31.6 million | Investing outflow; exceeded operating cash flow |
Sales growth reflected 20 stores opened since the prior-year quarter as well as comparable-store growth. Comparable average ticket increased 3.4%, while transactions decreased 1.0%. Sales trends weakened sharply late in the quarter: comparable-store sales were up 6.1% through March 20, but declined 46% during March 21–26, when stores operated with curbside pickup only.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $289.9 million at March 26, compared with $27.0 million at December 26, 2019. The increase largely reflected a $275.0 million revolver draw in mid-March as a precaution against pandemic-related uncertainty.
- Debt at par totaled $419.6 million: $275.0 million drawn on the revolving facility and approximately $144.6 million on the term loan. The company reported $85.7 million of net revolver availability after letters of credit and $375.6 million of unrestricted liquidity, including cash.
- Lease liabilities totaled approximately $956.6 million, including $67.6 million current. These are separate from reported borrowings.
- Operating cash flow less capital expenditures was negative approximately $13.7 million for the quarter.
- The company reported compliance with material debt covenants. The term loan has no financial maintenance covenants; the ABL fixed-charge coverage covenant applies if borrowings exceed 90% of availability.
Material changes and management outlook
- The company amended and repriced its credit facilities in February. The term loan maturity was extended to February 2027; the $400 million ABL facility maturity was extended to February 2025. Reported borrowing rates at quarter-end were 3.6% on the term loan and 2.0% on ABL borrowings.
- Management said COVID-19 would have a material negative effect on fiscal 2020 sales, results, financial position, and cash flows. As of April 28, Q2 comparable-store sales were down 50% year over year. The duration and full impact were not reasonably estimable, and the filing provided no earnings or sales guidance.
- In response, the company reduced inventory purchasing and other costs, cut compensation for executives and most employees, froze hiring, reduced advertising and discretionary spending, furloughed some employees, and delayed or reduced capital spending. It said available resources were expected to meet needs for at least 12 months, while warning that additional liquidity might not be readily available or favorable if disruption persisted.
- Fiscal 2020 capital expenditure plans were reduced to approximately $147–157 million from the original $255–265 million plan. Management then expected to open 11 stores and begin construction on stores planned for early 2021.
- The company expected CARES Act provisions to provide tax benefits, including substantial refunds of prior-year income taxes and reduced fiscal 2020 taxes, but had not completed its assessment or quantified the expected refunds.
Risks, contingencies, and unusual items
- COVID-19 risks included store closures or restrictions, lower customer demand, construction delays, workforce disruption, supplier and distribution interruptions, and pressure on liquidity and asset values. The company reported no material supply impact for most sourced merchandise at the filing date.
- U.S. Department of Commerce final determinations on Chinese ceramic tile set high antidumping and countervailing duty rates, subject to the International Trade Commission’s final injury determination. The company said it had shifted sourcing away from applicable Chinese products and estimated potential exposure of approximately $7 million if duties applied to inventory from the investigation period; it had not recorded a reserve.
- A securities class action alleges violations based on statements made in 2018. The company denied the allegations and moved to dismiss; it could not reasonably estimate a potential loss.
- The quarter included $1.3 million of COVID-related costs, a $0.4 million tariff-refund benefit, and $0.7 million of third-party refinancing professional fees expensed in general and administrative expense. Adjusted EBITDA excludes certain items and should not be treated as a GAAP measure or liquidity measure.
- Moody’s reaffirmed its Ba3 rating in April but changed the outlook from stable to negative. A 1 percentage-point increase in rates on variable-rate debt was estimated to increase annual interest expense by about $4.2 million.
Key facts for investors to verify
- Track comparable-store sales and customer transactions after Q1, particularly the pace and conditions of store reopening.
- Monitor cash burn, revolver availability, covenant headroom, and whether the company needs additional borrowing or external capital.
- Compare actual capital spending and store openings with the reduced fiscal 2020 plans.
- Confirm CARES Act cash-tax benefits and refunds actually received, rather than relying on preliminary expectations.
- Follow the ceramic-tile duty determination and any resulting company exposure, and developments in the securities litigation.