Floor & Decor Holdings, Inc. (FND) is a high-growth, differentiated, multi-channel specialty retailer of hard surface flooring and related accessories. The company operates 225 warehouse-format stores across 36 states, as well as an e-commerce platform and a commercial surfaces business. Despite the challenging macroeconomic environment, Floor & Decor has demonstrated its ability to manage profitability and continue strategic investments for long-term growth.

Financials

In fiscal 2023, the company reported annual net income of $245.98 million, annual revenue of $4.41 billion, annual operating cash flow of $803.59 million, and annual free cash flow of $255.98 million. These strong financial results highlight Floor & Decor's resilience and ability to navigate the current market conditions.

During the first quarter of fiscal 2024, the company reported net sales of $1.10 billion, a 2.2% decrease compared to the prior-year period. This decline was primarily driven by an 11.6% decrease in comparable store sales, which the company attributes to a 7.7% decrease in comparable transactions and a 4.2% decrease in comparable average ticket. The company's gross profit during the quarter increased by 0.2% to $470.03 million, with the gross margin expanding by approximately 100 basis points to 42.8%.

The company's selling and store operating expenses increased by 10.1% to $334.35 million, primarily due to the addition of 31 new stores compared to the prior-year period and increased expenses at the company's Spartan Surfaces commercial business. General and administrative expenses also increased by 7.9% to $66.78 million, reflecting investments in personnel and infrastructure to support the company's growth.

Despite the top-line challenges, Floor & Decor's management team has remained focused on managing profitability. The company's adjusted EBITDA for the first quarter of fiscal 2024 was $123.00 million, a decrease of 17.8% compared to the prior-year period. The company's diluted earnings per share for the quarter was $0.46, surpassing its expectations.

Outlook

Looking ahead, Floor & Decor expects fiscal 2024 full-year sales to be at the low end of its previously provided guidance range of $4.60 billion to $4.77 billion. The company believes the timing and slope of improvement in existing home sales and consumer spending on hard surface flooring could be more elongated than previously anticipated. However, the company remains confident in its ability to manage profitability through its gross margin expansion initiatives and prudent expense management.

Recent Developments

In terms of geographic performance, the company noted that its West division has been showing some early positive sales trends, with comparable store sales improving sequentially and outperforming the company average. The company attributes this to the West division being the first to experience softening sales in 2022 and being less impacted by cannibalization due to fewer new store openings.

Regarding product categories, the company's tile, wood, installation materials, and adjacent categories performed better than the overall 11.6% decline in comparable store sales. Laminate and vinyl remained the weakest merchandise category. The company's successful execution of its merchandising strategies has led to a sales mix shift towards higher-margin products.

Floor & Decor's connected customer initiatives continue to resonate with both homeowner and Pro customers. The company's customers can engage with the company through 10 different touch points during their purchase journey, and the company has observed that customers who visit its stores and engage with its website spend substantially more than single-channel customers. The company is focused on driving organic traffic growth to its website and further optimizing the customer search experience.

The company's new warehouse store format pillar of growth remains a key focus, with the opening of 4 new warehouse-format stores in the first quarter of fiscal 2024, ending the quarter with 225 stores. The company plans to open 30 to 35 new warehouse-format stores in fiscal 2024, with most of the openings expected to be in the second half of the year and the majority in the fourth quarter.

The company's Pro business continues to be an important part of its strategy, accounting for approximately 45% of sales in the first quarter of fiscal 2024. The company is focused on growing its market share with Pros by leveraging its Pro dashboards and CRM tools to drive engagement with new, inactive, and active Pros. The company's commercial business, Spartan Surfaces, also exceeded expectations in the first quarter, with sales growth driven by the acquisition of Salesmaster in June 2023.

Liquidity

In terms of liquidity, Floor & Decor maintains a strong balance sheet, ending the first quarter of fiscal 2024 with $698.2 million of unrestricted liquidity, consisting of $57.4 million in cash and cash equivalents and $640.8 million available for borrowing under the company's ABL facility. The company's inventory decreased 6.7% from the end of fiscal 2023 and 12.6% from the first quarter of fiscal 2023, reflecting the company's efforts to manage its inventory levels.

Conclusion

Overall, Floor & Decor has demonstrated its ability to navigate the challenging macroeconomic environment through strategic investments, prudent expense management, and a focus on managing profitability. The company remains committed to its long-term growth strategy, including the expansion of its warehouse-format store footprint and the continued development of its connected customer and Pro initiatives. While the near-term outlook remains uncertain, Floor & Decor's strong financial position and resilient business model position the company well for long-term success.