Floor & Decor Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Thirteen weeks ended March 28, 2019; comparisons are with the thirteen weeks ended March 29, 2018. Dollar amounts are in U.S. dollars.
Business context
Floor & Decor is a specialty retailer of hard-surface flooring and related products, serving professional, DIY and BIY customers. At quarter-end, it operated 103 warehouse-format stores in 28 states, one standalone design center, three distribution centers and an e-commerce site. It opened three stores during the quarter.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $477.1 million | $402.9 million | +18.4% |
| Comparable-store sales | +3.1% | +15.6% | Deceleration |
| Gross profit / margin | $201.4 million / 42.2% | $165.4 million / 41.0% | +21.8%; margin +120 bps |
| Operating income / margin | $39.8 million / 8.3% | $36.5 million / 9.1% | +8.9%; margin down 80 bps |
| Net income / diluted EPS | $30.7 million / $0.29 | $31.9 million / $0.30 | Net income down 3.6% |
| Adjusted EBITDA / margin | $60.1 million / 12.6% | $47.8 million / 11.9% | +25.6%; margin +70 bps |
| Cash from operations | $27.0 million | $40.6 million | Down $13.6 million |
| Capital expenditures | $31.6 million | $27.8 million | Up $3.8 million |
Sales grew $74.1 million: comparable-store sales contributed $12.6 million and non-comparable stores $61.5 million. Comparable transactions rose 1.9% and average ticket rose 1.1%. Laminate/luxury vinyl plank, decorative accessories, and installation materials and tools outperformed the company’s average comparable-store growth.
Gross-margin improvement reflected stronger product margins and supply-chain cost leverage, supported by supplier negotiations, merchandising, product mix and selective price increases. Operating expenses increased faster than sales: selling and store operating expense rose 24.2%, and G&A rose 29.4%, reflecting store growth and support-function investment. Operating cash flow was lower mainly due to working-capital movements, including vendor-payment timing. Cash less capital expenditures was approximately negative $4.6 million.
Balance sheet, debt and liquidity
- Cash was $0.5 million at March 28, 2019, versus $0.6 million at December 27, 2018. The company reported $274.1 million of unrestricted liquidity, including $273.6 million available under its $300 million ABL revolving facility.
- Debt at par was $150.2 million; net carrying amount was $146.8 million. The balance sheet showed $141.2 million of term loans and $2.1 million drawn on the revolving facility. The average interest rate was 6.0%, versus 3.8% a year earlier.
- The company adopted the new lease accounting standard in Q1. At quarter-end, operating lease right-of-use assets were $659.1 million and lease liabilities were $757.3 million; the standard materially increased reported assets and liabilities but did not materially affect reported operating results or cash flows.
- Management said operating cash generation and ABL availability should be sufficient for liquidity needs, planned capital spending and debt payments for at least the next 12 months. The company reported compliance with credit-facility covenants and no event of default.
Outlook, risks and notable items
- Capital and store plans: Fiscal 2019 capital expenditures were projected at approximately $220–$230 million, primarily funded by operating cash. Plans included opening 20 stores, spending approximately $146–$153 million on new stores and early-2020 construction, $39–$41 million on existing stores and distribution centers, and $35–$36 million on technology, e-commerce and support infrastructure.
- Tariffs: Approximately half of products sold are imported from China, and the filing says the vast majority of those imports were affected by U.S. tariffs of 10%; the administration had announced a potential increase to 25%. Management expected tariffs to materially increase fiscal 2019 inventory costs, but expected mitigation through vendor negotiations, pricing and alternative sourcing. The ultimate impact remained uncertain.
- Trade investigation: The U.S. International Trade Commission began a preliminary antidumping and countervailing-duty investigation of ceramic tile imports from China in April 2019. The outcome and potential company impact were undetermined.
- Other risks: The filing highlights economic, housing and consumer-spending conditions; competition; growth and new-store execution; foreign sourcing and tariffs; inventory management; distribution continuity; and access to personnel, merchandise and suitable store locations.
- Unusual and non-GAAP items: Q1 Adjusted EBITDA included $1.2 million of “other” adjustments, primarily costs related to a secondary stockholder offering, relocation of the Store Support Center and closure of the Miami distribution center. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP results or cash flow.
- Legal matters: The company described ordinary-course claims and proceedings and said they were not expected to materially affect consolidated financial position, cash flows or results.
- Internal controls: Management concluded disclosure controls were ineffective at the reasonable-assurance level due to a previously disclosed material weakness in internal control over financial reporting. Remediation was underway; management expected completion before fiscal year-end but could not assure success.
Most important facts for investors to verify
- Whether comparable-store sales can sustain or improve on Q1’s 3.1%, given the sharp slowdown from 15.6% a year earlier.
- Whether gross-margin gains persist as tariffs raise inventory and cost-of-goods-sold expenses, and whether planned mitigation is effective.
- Execution and funding of the 20-store plan and $220–$230 million fiscal 2019 capital-spending outlook.
- Working-capital and operating-cash-flow trends, alongside ABL borrowing and covenant headroom.
- Progress in remediating the material weakness and restoring effective controls.
- Any material developments in the China ceramic-tile trade investigation and the company’s lease commitments, including $311 million of legally binding minimum payments for leases not yet commenced.