Floor & Decor(FND) - 2023 Q3 - Quarterly Report

Forward-Looking Statements This report contains forward-looking statements regarding future operating results, business strategy, and plans, subject to known and unknown risks and uncertainties - This report contains forward-looking statements regarding future operating results, business strategy, and plans. These statements are based on current expectations and are subject to known and unknown risks and uncertainties[9] - Key factors that could cause actual results to differ from expectations include declines in the economy and housing market, inflation, supply chain disruptions, failure to anticipate consumer demand, competition, and interest rate risks[11][14] Part I – Financial Information Item 1. Financial Statements Unaudited financial statements show total assets at $4.64 billion, with nine-month net income of $208.9 million Condensed Consolidated Balance Sheets Total assets reached $4.64 billion, with liabilities at $2.75 billion and stockholders' equity at $1.89 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 28, 2023 | Dec 29, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $61,628 | $9,794 | | Inventories, net | $1,105,450 | $1,292,336 | | Total current assets | $1,336,102 | $1,457,485 | | Fixed assets, net | $1,562,616 | $1,258,056 | | Total assets | $4,638,082 | $4,351,242 | | Liabilities & Equity | | | | Trade accounts payable | $706,325 | $590,883 | | Total current liabilities | $1,174,383 | $1,006,758 | | Revolving line of credit | $— | $210,200 | | Total liabilities | $2,752,606 | $2,694,066 | | Total stockholders' equity | $1,885,476 | $1,657,176 | | Total liabilities and stockholders' equity | $4,638,082 | $4,351,242 | Condensed Consolidated Statements of Operations and Comprehensive Income Q3 net sales reached $1.11 billion, but net income decreased to $65.9 million, with nine-month net income at $208.9 million Statement of Operations Highlights (in thousands, except per share data) | Metric | Thirteen Weeks Ended Sep 28, 2023 | Thirteen Weeks Ended Sep 29, 2022 | Thirty-nine Weeks Ended Sep 28, 2023 | Thirty-nine Weeks Ended Sep 29, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $1,107,812 | $1,097,824 | $3,365,763 | $3,216,404 | | Gross profit | $467,455 | $447,475 | $1,416,206 | $1,291,815 | | Operating income | $84,772 | $101,657 | $275,262 | $302,039 | | Net income | $65,923 | $76,175 | $208,899 | $228,958 | | Diluted EPS | $0.61 | $0.71 | $1.94 | $2.13 | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $1.89 billion, primarily driven by net income of $208.9 million - Stockholders' equity grew to $1,885,476 thousand as of September 28, 2023, up from $1,657,176 thousand at the end of 2022[21] - The increase in equity was primarily due to retained earnings growing from $1,170,421 thousand to $1,379,320 thousand, reflecting the net income for the period[21] Condensed Consolidated Statements of Cash Flows Operating cash flow significantly increased to $699.0 million, leading to a net cash increase of $51.8 million for the period Cash Flow Summary (in thousands) | Activity | Thirty-nine Weeks Ended Sep 28, 2023 | Thirty-nine Weeks Ended Sep 29, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $698,975 | $7,325 | | Net cash used in investing activities | ($431,070) | ($319,173) | | Net cash (used in) provided by financing activities | ($216,071) | $180,091 | | Net increase (decrease) in cash | $51,834 | ($131,757) | | Cash and cash equivalents, end of period | $61,628 | $7,687 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, revenue by product, debt facilities, and the recent acquisition of Salesmaster Associates, Inc - As of September 28, 2023, the company operated 207 warehouse-format stores and five design studios in 36 states[29] Disaggregated Revenue by Product Category (Thirty-nine Weeks Ended Sep 28, 2023, in thousands) | Product Category | Net Sales | % of Net Sales | | :--- | :--- | :--- | | Laminate and vinyl | $886,358 | 26% | | Tile | $793,995 | 24% | | Installation materials and tools | $622,249 | 18% | | Decorative accessories and wall tile | $573,014 | 17% | | Wood | $193,207 | 6% | | Natural stone | $160,565 | 5% | | Total | $3,365,763 | 100% | - Total long-term debt as of September 28, 2023, was $195.0 million, significantly reduced from $405.6 million at year-end 2022, primarily due to paying down the ABL Facility[41] - On June 7, 2023, the company acquired commercial flooring distributor Salesmaster Associates, Inc. for total estimated consideration of $20.1 million[82] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2023 results, with net sales up 0.9% from new stores, but comparable sales down 9.3% due to macroeconomic pressures Overview and Key Performance Indicators Strategic investments included 17 new stores, but comparable store sales declined 9.3% in Q3 2023, with Adjusted EBITDA at $140.9 million - During the first thirty-nine weeks of 2023, the company opened 17 new warehouse-format stores, ending the quarter with 207 total stores[89] Key Performance Indicators | Metric | Thirteen Weeks Ended Sep 28, 2023 | Thirteen Weeks Ended Sep 29, 2022 | | :--- | :--- | :--- | | Comparable store sales | (9.3)% | 11.6% | | Comparable average ticket | (2.8)% | 19.5% | | Comparable customer transactions | (6.8)% | (6.7)% | | Adjusted EBITDA (in thousands) | $140,939 | $147,909 | Results of Operations Q3 2023 net sales rose 0.9% to $1.11 billion, gross margin improved to 42.2%, but operating income decreased to $84.8 million - Q3 2023 net sales increased by $10.0 million (0.9%) YoY, driven by sales from 30 new stores opened since Q3 2022, offset by a comparable store sales decline of 9.3% ($102.0 million)[93] - The decline in comparable store sales was attributed to macroeconomic factors including declines in existing home sales, higher borrowing costs, and a shift in consumer spending[95] - Q3 2023 gross margin increased to 42.2% from 40.8% YoY, primarily due to retail price increases from 2022 and a decline in supply chain and product costs in 2023[96][98] - Selling and store operating expenses increased 9.9% YoY, and as a percentage of sales, rose to 27.9% from 25.6%, due to new store growth, wage increases, and deleverage from lower comparable sales[99][101] Non-GAAP Financial Measures Adjusted EBITDA for Q3 2023 was $140.9 million, a decrease, while the nine-month Adjusted EBITDA increased to $443.4 million Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | Thirteen Weeks Ended Sep 28, 2023 | Thirteen Weeks Ended Sep 29, 2022 | Thirty-nine Weeks Ended Sep 28, 2023 | Thirty-nine Weeks Ended Sep 29, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income | $65,923 | $76,175 | $208,899 | $228,958 | | EBITDA | $135,108 | $141,257 | $420,701 | $413,276 | | Adjusted EBITDA | $140,939 | $147,909 | $443,366 | $433,983 | Liquidity and Capital Resources Total unrestricted liquidity was $758.9 million, with operating cash flow at $699.0 million, and planned capital expenditures of $550-575 million - Total unrestricted liquidity was $758.9 million as of September 28, 2023, including $61.6 million in cash and $697.3 million available under its ABL Facility[118] - Planned capital expenditures for fiscal 2023 are approximately $550 million to $575 million, with $430 million to $445 million allocated for opening 32 new stores and related construction[120][121] - Net cash provided by operating activities increased significantly to $699.0 million for the thirty-nine weeks ended September 28, 2023, compared to $7.3 million in the prior year, mainly due to a decrease in inventory[124] Item 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate fluctuations, where a 1.0% increase would raise annual interest expense by $2.0 million - The company is subject to interest rate risk from its variable-rate Credit Facilities. A 1.0% increase in the effective interest rate would increase annual interest expense by about $2.0 million on the outstanding balance of $202.9 million[135] - To mitigate risk, the company has two $75.0 million interest rate cap agreements that effectively cap the SOFR-based interest rate at less than 1.68% through April 2024[135] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of September 28, 2023, with no material changes to internal controls - The company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of September 28, 2023[136] - No changes occurred in the company's internal control over financial reporting during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls[137] Part II – Other Information Item 1. Legal Proceedings The company is involved in various legal proceedings, including a wrongful death lawsuit, with outcomes and losses currently unpredictable - This section incorporates by reference the information on litigation from Note 5 to the Condensed Consolidated Financial Statements[138] Item 1A. Risk Factors No material changes occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K - The report refers to the risk factors described in the company's Annual Report on Form 10-K filed on February 23, 2023, indicating no material changes[139] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not sell or repurchase any unregistered equity securities during Q3 2023 - The company did not sell any unregistered equity securities or repurchase any of its equity securities during the thirteen weeks ended September 28, 2023[140] Item 5. Other Information The Board adopted amended bylaws on November 1, 2023, and the CEO and General Counsel adopted Rule 10b5-1 trading plans in August 2023 - On November 1, 2023, the company's board of directors adopted Third Amended and Restated Bylaws, which revised procedures for director nominations and stockholder proposals, among other administrative changes[141] - In August 2023, CEO Tom Taylor and EVP David Christopherson adopted Rule 10b5-1 trading plans for the sale of up to 100,000 and 25,565 shares of common stock, respectively[143][144] Item 6. Exhibits Exhibits filed with Form 10-Q include amended bylaws and certifications from executive and financial officers - Key exhibits filed include the Third Amended and Restated Bylaws (Exhibit 3.2) and certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[145]