Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

v3.23.2
Commitments and Contingencies
 6 Months Ended
Jun. 29, 2023
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
Lease Commitments
The Company accounts for leases in accordance with ASC 842, Leases. The majority of the Company’s long-term operating lease agreements are for its retail locations, distribution centers, and corporate office, which expire in various years through 2048. Most of these agreements are retail leases wherein both the land and building are leased, additionally, the Company has ground leases in which only the land is leased. The initial lease terms for the Company's retail locations, distribution centers, and corporate office typically range from 10-20 years. The majority of the Company’s leases also include options to extend, which are factored into the recognition of their respective assets and liabilities when appropriate based on management’s assessment of the probability that the options will be exercised.
When readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of the Company’s leases do not provide a readily determinable implicit rate. If the rate implicit in the lease is not readily determinable, the Company uses a third party to assist in the determination of a secured incremental borrowing rate, determined on a collateralized basis, to discount lease payments based on information available at lease commencement. The secured incremental borrowing rate is estimated based on yields obtained from Bloomberg for U.S. consumers with a BB credit rating and is adjusted for collateralization as well as inflation. As of June 29, 2023 and June 30, 2022, the Company’s weighted average discount rate was 5.6% and 5.2%, respectively. As of June 29, 2023 and June 30, 2022, the Company’s weighted average remaining lease term was approximately 12 years and 11 years, respectively.
Lease Costs
The table below presents components of lease expense for operating leases.
Thirteen Weeks Ended Twenty-six Weeks Ended
in thousands Classification June 29, 2023 June 30, 2022 June 29, 2023 June 30, 2022
Fixed operating lease cost: Selling and store operating $ 38,529  $ 35,584  $ 76,673  $ 69,044 
Cost of sales 5,213  6,323  11,471  12,824 
Pre-opening 3,906  2,631  6,972  4,984 
General and administrative 1,030  1,130  2,102  2,271 
Total fixed operating lease cost $ 48,678  $ 45,668  $ 97,218  $ 89,123 
Variable lease cost (1): Selling and store operating $ 15,282  $ 12,703  $ 29,768  $ 24,926 
Cost of sales 1,039  1,236  2,158  2,655 
Pre-opening 12  73  143  240 
General and administrative 316  178  619  404 
Total variable lease cost $ 16,649  $ 14,190  $ 32,688  $ 28,225 
Sublease income Cost of sales (681) (680) (1,360) (1,360)
Total operating lease cost (2) $ 64,646  $ 59,178  $ 128,546  $ 115,988 
(1) Includes variable costs for common area maintenance, property taxes, and insurance on leased real estate.
(2) Excludes short-term lease costs, which were immaterial for the thirteen and twenty-six weeks ended June 29, 2023 and June 30, 2022.
Undiscounted Cash Flows
Future minimum lease payments under non-cancelable operating leases as of June 29, 2023 were as follows:
in thousands Amount
Twenty-six weeks ending December 28, 2023 $ 88,570 
2024 202,730 
2025 191,186 
2026 179,308 
2027 171,372 
Thereafter 1,161,317 
Total minimum lease payments (1) (2) 1,994,483 
Less: amount of lease payments representing interest 598,596 
Present value of future minimum lease payments 1,395,887 
Less: current obligations under leases 118,960 
Long-term lease obligations $ 1,276,927 
(1) Future lease payments exclude approximately $415.3 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
(2) Operating lease payments include $216.2 million related to options to extend lease terms that are reasonably certain of being exercised.
For the twenty-six weeks ended June 29, 2023 and June 30, 2022, cash paid for operating leases was $93.6 million and $86.7 million, respectively.
Litigation
On November 15, 2021, the Company was added as a defendant in a wrongful death lawsuit, Nguyen v. Inspections Now, Inc., No. 21-DCV-287142, pending in the 434th Judicial District Court of Fort Bend County, Texas. Inspections Now, Inc.; Bestview International Company; and Bestview (Fuzhou) Import & Export Co. LTD are also named as defendants in the case. Plaintiff’s petition alleges that “wood paneling” allegedly purchased from the Company was installed in the vicinity of plaintiff’s fireplace and caught fire while the fireplace was lit. The fire consumed plaintiff’s home and resulted in injuries to plaintiff and another occupant and the death of plaintiff’s three children and mother. Plaintiff alleges product defect and failure to warn claims against the Company; product defect, failure to warn, and strict liability claims against the Bestview entities; and negligent inspection claims against Inspections Now. Plaintiff’s petition seeks damages in excess of $1.0 million for property damage, personal injury, and wrongful death. The petition also seeks exemplary damages. Plaintiff’s ex-husband, brother, and the additional occupant have since intervened in the lawsuit. Intervenors allege the same claims against the Company, Inspections Now, and the Bestview entities and collectively seek damages in excess of $11.0 million for property damage, personal injury (as to the other occupant), wrongful death, and exemplary damages. The Company has answered all petitions, denying the allegations, and is seeking dismissal of the lawsuit in favor of a first-filed lawsuit against other defendants (but arising from the same fire) pending in Harris County, Texas. The trial court denied the Company’s motion seeking dismissal on February 23, 2023. On March 27, 2023, the Company filed a petition seeking mandamus relief from that ruling in the Court of Appeals for the First Judicial District of Texas, No. 01-23-00225-cv. The petition for mandamus relief remains pending.
On June 18, 2020, an alleged stockholder filed a putative derivative complaint, Lincolnshire Police Pension Fund v. Taylor, et al., No. 2020-0487-JTL, in the Delaware Court of Chancery, purportedly on behalf of the Company against certain of the Company’s officers, directors, and stockholders. An amended complaint was filed on September 14, 2022. The Company along with the other defendants filed a motion to dismiss on October 31, 2022. The plaintiffs then filed a second amended complaint on December 22, 2022. On February 6, 2023, the Company, along with the other defendants, filed a motion to dismiss the operative complaint. The complaint alleges breaches of fiduciary duties and unjust enrichment. The factual allegations underlying these claims are similar to the factual allegations made in the previously dismissed In re Floor & Decor Holdings, Inc. Securities Litigation, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The complaint seeks unspecified damages and restitution for the Company from the individual defendants and the payment of costs and attorneys’ fees.
The Company maintains insurance that may cover any liability arising out of the above-referenced litigation up to the policy limits and subject to meeting certain deductibles and to other terms and conditions thereof. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, the Company is currently unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from the above-referenced litigation.
The Company is also subject to various other legal actions, claims, and proceedings arising in the ordinary course of business, which may include claims related to general liability, workers’ compensation, product liability, intellectual property, and employment-related matters resulting from its business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. The Company establishes reserves for specific legal proceedings when it determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. These various other ordinary course proceedings are not expected to have a material impact on the Company's consolidated financial position, cash flows, or results of operations, however regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.