Floor & Decor Holdings, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 28, 2017 (52 weeks). The filing also reports unaudited fourth-quarter results. Amounts below are in U.S. dollars; financial figures are rounded to millions unless otherwise noted.
Business context and reporting period
Floor & Decor is a specialty retailer of hard-surface flooring and related products, serving professional (Pro), do-it-yourself (DIY), and buy-it-yourself (BIY) customers through stores and e-commerce. At year-end it operated 83 warehouse-format stores in 21 states and one small design center. It opened 14 warehouse stores during FY2017.
Financial and operating performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $1,384.8 million | $1,050.8 million |
| Gross profit / gross margin | $572.6 million / 41.3% | $429.3 million / 40.9% |
| Operating income / margin | $117.8 million / 8.5% | $69.1 million / 6.6% |
| Net income | $102.8 million | $43.0 million |
| Diluted EPS | $1.03 | $0.49 |
| Adjusted EBITDA / margin | $158.8 million / 11.5% | $108.4 million / 10.3% |
| Cash from operating activities | $109.2 million | $89.5 million |
| Cash used in investing activities | $102.3 million | $74.6 million |
FY2017 comparable-store sales rose 16.6%, versus 19.4% in FY2016, reflecting 14.8% more comparable transactions and 1.7% higher average ticket. Total sales increased 31.8%; new-store sales contributed $160.9 million and comparable stores contributed $173.1 million. Gross margin improved 40 basis points, primarily from better product margins and lower shrinkage and damage, partly offset by higher distribution costs.
Fourth-quarter FY2017 net sales were $389.5 million, gross profit was $162.4 million, and net income was $48.0 million, compared with $278.3 million, $114.7 million, and $16.7 million, respectively, in Q4 FY2016. The filing does not provide a clear fourth-quarter margin comparison in the supplied text.
Debt and liquidity
Cash and cash equivalents were $0.6 million at year-end. The company reported $146.7 million of unrestricted liquidity, comprising cash and $146.1 million of available ABL borrowing capacity. Debt principal was $193.5 million: $152.5 million under the term loan and $41.0 million under the revolving facility. Reported total debt of $189.1 million is net of unamortized discount and debt issuance costs. The company reported compliance with its credit-facility covenants.
Operating cash flow increased to $109.2 million, while capital expenditures were $102.3 million. Inventory increased by $134.2 million, partly to support distribution-center moves and anticipated supplier closures. FY2017 net IPO proceeds of approximately $192.0 million were used to repay term debt; the repayment generated a $5.4 million debt-extinguishment loss.
Material changes, outlook, risks, and unusual items
- Growth plans: Management expected to open 17 stores in FY2018 and grow the store base by approximately 20% annually over the next several years, with a long-term opportunity of approximately 400 stores. Planned FY2018 capital expenditures were $140–$150 million. Management said it intended to use tax-reform benefits to fund investment strategies and support planned net income growth; no specific earnings guidance was provided.
- Tax and earnings: FY2017 recorded an income tax benefit of $4.2 million, versus tax expense of $11.5 million in FY2016. The benefit reflected excess tax deductions from exercised stock options and a provisional $17.9 million benefit from remeasuring deferred taxes after U.S. federal corporate tax-rate changes. The company said its tax accounting remained subject to further analysis.
- Hurricanes and distribution: Hurricanes Harvey and Irma caused more than 150 total store-closure days at 24 affected locations and hurt third-quarter results. Management observed increased Houston-area sales during rebuilding but did not expect the uplift to continue beyond Q3 FY2018. The company was consolidating distribution operations around a new 1.4-million-square-foot Savannah facility and planned further capacity expansion in early 2019.
- Legal matter: A class action alleging misleading formaldehyde-compliance labeling on certain Chinese-made laminate products received final settlement approval in January 2017. The company had accrued $14 million in FY2016; a manufacturer agreed to cover $3.5 million of losses. The filing says the final amounts paid did not materially differ from prior estimates. Other ordinary-course legal matters were not expected to have a material financial-statement impact.
- Principal risks: Results depend on consumer spending, housing and remodeling activity, comparable-store sales, successful store expansion, inventory management, and reliable distribution. Additional exposures include foreign sourcing and China concentration, freight and input costs, tariffs and regulation, competition, variable-rate debt, lease commitments, cybersecurity, and natural disasters. The company disclosed $790.6 million of future minimum operating-lease payments.
- Accounting and controls: The company planned to adopt the new revenue-recognition standard in Q1 FY2018; it expected a transition adjustment, principally reducing deferred revenue and related inventory and increasing retained earnings, but did not expect a material ongoing financial-statement impact. The company was exempt from providing management and auditor reports on internal-control effectiveness as a newly public company and was required to comply with the management assessment requirement by its FY2018 annual report.
Important facts for investors to verify
- Whether comparable-store sales growth and new-store returns remain strong as the store base expands.
- Whether FY2017 earnings growth is sustainable apart from the substantial tax benefit and other unusual items.
- Progress, costs, and service levels associated with the Savannah distribution transition and planned capacity expansion.
- Actual cash needs for the $140–$150 million FY2018 capital-spending plan and continued availability under the ABL facility.
- Potential effects of tax-law implementation, import exposure, tariffs, and product-compliance requirements.
- Impact of operating leases and variable-rate debt; management estimated that a 1% rate change would affect annual interest cost by approximately $1.9 million at year-end debt levels.