Floor & Decor Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: The 13 weeks and 26 weeks ended June 30, 2022, compared with periods ended July 1, 2021. Floor & Decor is a specialty retailer and commercial distributor of hard-surface flooring, operating one reportable segment. At quarter-end it had 174 warehouse-format stores, five design studios, four distribution centers, and an e-commerce site.
Financial results
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $1,089.8m | $860.1m | $2,118.6m | $1,642.6m |
| Gross margin | 40.0% | 42.5% | 39.9% | 42.8% |
| Operating income | $106.4m | $98.6m | $200.4m | $194.5m |
| Net income | $81.8m | $82.9m | $152.8m | $158.7m |
| Diluted EPS | $0.76 | $0.77 | $1.42 | $1.48 |
| Adjusted EBITDA (non-GAAP) | $150.3m | $137.0m | $286.1m | $264.1m |
| Adjusted EBITDA margin (non-GAAP) | 13.8% | 15.9% | 13.5% | 16.1% |
Q2 sales rose 26.7%; first-half sales rose 29.0%. Comparable sales increased 9.2% in Q2 and 11.7% in the first half. Higher comparable average tickets (+17.9% in Q2; +17.2% first half) more than offset fewer transactions (−7.3%; −4.7%). Net new stores and design studios opened since the prior-year comparison and Spartan acquisition revenue also contributed to growth.
Gross profit increased, but gross margin contracted as higher supply-chain costs pressured results. Selling and store operating expenses grew faster than sales in Q2, primarily from new stores and staffing. Net income declined despite sales growth, with margin pressure and higher tax expense contributing; the effective tax rate was 21.9% in Q2 and 22.7% for the first half, versus 14.8% and 17.3% a year earlier.
Cash flow, debt, and liquidity
- First-half operating cash flow was $7.9m, versus $256.6m in the prior-year period, primarily reflecting inventory and other working-capital investment. Inventory increased to $1,344.1m from $1,008.2m at fiscal year-end.
- First-half capital expenditures were $214.3m; investing cash outflow was $210.6m. Cash declined by $133.3m to $6.2m.
- At June 30, debt at par was $273.6m: $205.0m under the variable-rate term loan and $68.6m under the ABL. ABL net availability was $308.9m after borrowings and letters of credit. Reported unrestricted liquidity was $315.1m, including cash.
- Lease liabilities totaled $1,304.2m, including $113.0m current and $1,191.2m long-term. The filing also reports approximately $220.3m of legally binding minimum lease payments for signed leases not yet commenced.
- The company said it was compliant with material credit covenants. On August 4, 2022, after quarter-end, it amended the ABL to raise commitments from $400m to $800m, permit a potential additional $200m under certain conditions, and extend maturity to August 2027.
Outlook, commentary, and risks
- No specific sales or earnings guidance is provided. Fiscal 2022 capital expenditures were planned at approximately $480m–$500m, including investment to open 32 warehouse-format stores and four design studios, relocate stores, and begin fiscal 2023 store construction.
- Management cited higher supply-chain, freight, and product costs; port congestion; labor shortages; and reduced in-stock levels for certain products. It said price increases and supplier relationships helped offset some costs, but the extent and duration of disruptions remained uncertain.
- Management pointed to slowing macroeconomic demand, higher interest and mortgage rates, declining existing-home sales, and consumer spending shifting toward travel and services as factors affecting transaction trends. It said higher tickets—partly from pricing and Pro, e-commerce, and design initiatives—had offset lower transactions.
- Other risks discussed include inflation, recession and housing-market weakness, dependence on imports and tariffs, geopolitical uncertainty including the conflict in Ukraine, COVID-19 effects, competition, staffing, inventory management, and access to liquidity. A 1% increase in effective rates on variable-rate debt was estimated to add about $2.7m of interest expense over the next 12 months, excluding interest-rate caps.
- Tariff refunds: the company expected to recover $21.9m, including interest, and had received $15.6m as of June 30, 2022.
- Contingencies include a wrongful-death/product-liability lawsuit seeking more than $1.0m plus exemplary damages and a stockholder derivative action. The company said it could not reasonably estimate potential losses or predict outcomes; insurance may apply subject to policy terms and limits.
Most important facts for investors to verify
- Whether sales and comparable-sales growth can continue as transaction counts weaken and housing and consumer demand slow.
- Whether pricing, sourcing, and supply-chain improvements can recover gross margin lost to higher costs.
- Inventory levels, working-capital needs, and operating cash generation relative to the store-opening and capital-expenditure plans.
- Variable-rate debt exposure, ABL availability and covenant headroom, and the effect of the amended facility terms.
- Progress on tariff refunds and developments or potential exposure in the disclosed litigation.
- Execution and returns from planned store expansion and investments in distribution, technology, and customer initiatives.