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74
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
FORM 10-Q
_________________________________________
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 001-38070
_________________________________________
Floor & Decor Holdings, Inc.
(Exact name of registrant as specified in its charter)
_________________________________________
| | | | | | | | |
Delaware | | 27-3730271 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | | | | | | | | | |
2500 Windy Ridge Parkway SE | | |
Atlanta, | Georgia | | 30339 |
(Address of principal executive offices) | | (Zip Code) |
| | | | | | | | | | | | | | | | | |
| (404) | 471-1634 | | Not Applicable |
(Registrant’s telephone number, including area code) | | (Former name, former address and former fiscal year, if changed since last report) |
_________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A common stock, $0.001 par value per share | FND | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | |
Large Accelerated Filer | ☒ | | | Accelerated Filer | ☐ |
Non-Accelerated Filer | ☐ | | | Smaller Reporting Company | ☐ |
| | | | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | | | | | | | |
Class | | Outstanding at October 31, 2022 |
Class A common stock, $0.001 par value per share | | 106,117,628 |
Table of Contents
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
| | | | | | | | | | | |
in thousands, except for share and per share data | As of September 29, 2022 | | As of December 30, 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 7,687 | | | $ | 139,444 | |
Income taxes receivable | 9,867 | | | 3,507 | |
Receivables, net | 102,580 | | | 81,463 | |
Inventories, net | 1,320,456 | | | 1,008,151 | |
Prepaid expenses and other current assets | 56,502 | | | 40,780 | |
Total current assets | 1,497,092 | | | 1,273,345 | |
Fixed assets, net | 1,164,119 | | | 929,083 | |
Right-of-use assets | 1,157,347 | | | 1,103,750 | |
Intangible assets, net | 150,851 | | | 151,935 | |
Goodwill | 255,473 | | | 255,473 | |
Deferred income tax assets, net | 8,024 | | | 9,832 | |
Other assets | 11,762 | | | 7,277 | |
Total long-term assets | 2,747,576 | | | 2,457,350 | |
Total assets | $ | 4,244,668 | | | $ | 3,730,695 | |
Liabilities and stockholders’ equity | | | |
Current liabilities: | | | |
Current portion of term loans | $ | 2,103 | | | $ | 2,103 | |
Current portion of lease liabilities | 107,258 | | | 104,602 | |
Trade accounts payable | 642,136 | | | 661,883 | |
Accrued expenses and other current liabilities | 294,022 | | | 248,935 | |
| | | |
Deferred revenue | 15,907 | | | 14,492 | |
Total current liabilities | 1,061,426 | | | 1,032,015 | |
Term loan | 195,454 | | | 195,762 | |
Revolving line of credit | 176,400 | | | — | |
Lease liabilities | 1,177,413 | | | 1,120,990 | |
Deferred income tax liabilities, net | 42,584 | | | 40,958 | |
Other liabilities | 8,772 | | | 17,771 | |
Total long-term liabilities | 1,600,623 | | | 1,375,481 | |
Total liabilities | 2,662,049 | | | 2,407,496 | |
Commitments and Contingencies (Note 5) | | | |
Stockholders’ equity | | | |
Capital stock: | | | |
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at September 29, 2022 and December 30, 2021 | — | | | — | |
Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 106,117,337 shares issued and outstanding at September 29, 2022 and 105,760,650 issued and outstanding at December 30, 2021 | 106 | | | 106 | |
Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at September 29, 2022 and December 30, 2021 | — | | | — | |
Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and outstanding at September 29, 2022 and December 30, 2021 | — | | | — | |
Additional paid-in capital | 476,905 | | | 450,332 | |
Accumulated other comprehensive income, net | 4,424 | | | 535 | |
Retained earnings | 1,101,184 | | | 872,226 | |
Total stockholders’ equity | 1,582,619 | | | 1,323,199 | |
Total liabilities and stockholders’ equity | $ | 4,244,668 | | | $ | 3,730,695 | |
See accompanying notes to condensed consolidated financial statements.
Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-nine Weeks Ended |
in thousands, except for per share data | September 29, 2022 | | September 30, 2021 | | September 29, 2022 | | September 30, 2021 |
Net sales | $ | 1,097,824 | | | $ | 876,553 | | | $ | 3,216,404 | | | $ | 2,519,198 | |
Cost of sales | 650,349 | | | 511,245 | | | 1,924,589 | | | 1,451,519 | |
Gross profit | 447,475 | | | 365,308 | | | 1,291,815 | | | 1,067,679 | |
Operating expenses: | | | | | | | |
Selling and store operating | 280,735 | | | 218,690 | | | 798,437 | | | 613,708 | |
General and administrative | 54,697 | | | 52,488 | | | 162,449 | | | 149,348 | |
Pre-opening | 10,386 | | | 10,733 | | | 28,890 | | | 26,720 | |
Total operating expenses | 345,818 | | | 281,911 | | | 989,776 | | | 789,776 | |
Operating income | 101,657 | | | 83,397 | | | 302,039 | | | 277,903 | |
Interest expense, net | 3,032 | | | 1,124 | | | 5,866 | | | 3,805 | |
Income before income taxes | 98,625 | | | 82,273 | | | 296,173 | | | 274,098 | |
Provision for income taxes | 22,450 | | | 7,628 | | | 67,215 | | | 40,741 | |
Net income | $ | 76,175 | | | $ | 74,645 | | | $ | 228,958 | | | $ | 233,357 | |
Change in fair value of hedge instruments, net of tax | 1,513 | | | (36) | | | 3,889 | | | 40 | |
Total comprehensive income | $ | 77,688 | | | $ | 74,609 | | | $ | 232,847 | | | $ | 233,397 | |
Basic earnings per share | $ | 0.72 | | | $ | 0.71 | | | $ | 2.17 | | | $ | 2.23 | |
Diluted earnings per share | $ | 0.71 | | | $ | 0.69 | | | $ | 2.13 | | | $ | 2.17 | |
See accompanying notes to condensed consolidated financial statements.
Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total Stockholders’ Equity |
| Class A | | | | |
in thousands | Shares | | Amount | | | | |
Balance, December 31, 2021 | 105,761 | | | $ | 106 | | | $ | 450,332 | | | $ | 535 | | | $ | 872,226 | | | $ | 1,323,199 | |
Stock-based compensation expense | — | | | — | | | 5,980 | | | — | | | — | | | 5,980 | |
Exercise of stock options | 32 | | | — | | | 577 | | | — | | | — | | | 577 | |
Issuance of common stock upon vesting of restricted stock units | 47 | | | — | | | — | | | — | | | — | | | — | |
Shares issued under employee stock purchase plan | 21 | | | — | | | 1,963 | | | — | | | — | | | 1,963 | |
Common stock redeemed for tax liability | (19) | | | — | | | (1,807) | | | — | | | — | | | (1,807) | |
Other comprehensive gain, net of tax | — | | | — | | | — | | | 1,554 | | | — | | | 1,554 | |
Net income | — | | | — | | | — | | | — | | | 70,951 | | | 70,951 | |
Balance, March 31, 2022 | 105,842 | | | $ | 106 | | | $ | 457,045 | | | $ | 2,089 | | | $ | 943,177 | | | $ | 1,402,417 | |
Stock-based compensation expense | — | | | — | | | 4,889 | | | — | | | — | | | 4,889 | |
Exercise of stock options | 209 | | | — | | | 4,599 | | | — | | | — | | | 4,599 | |
| | | | | | | | | | | |
Forfeiture of restricted stock awards | (59) | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock upon vesting of restricted stock units | 5 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Common stock redeemed for tax liability | (4) | | | — | | | (273) | | | — | | | — | | | (273) | |
Other comprehensive gain, net of tax | — | | | — | | | — | | | 822 | | | — | | | 822 | |
Net income | — | | | — | | | — | | | — | | | 81,832 | | | 81,832 | |
Balance, June 30, 2022 | 105,993 | | | $ | 106 | | | $ | 466,260 | | | $ | 2,911 | | | $ | 1,025,009 | | | $ | 1,494,286 | |
Stock-based compensation expense | — | | | — | | | 6,360 | | | — | | | — | | | 6,360 | |
Exercise of stock options | 81 | | | — | | | 1,924 | | | — | | | — | | | 1,924 | |
Issuance of common stock upon vesting of restricted stock units | 2 | | | — | | | — | | | — | | | — | | | — | |
Shares issued under employee stock purchase plan | 41 | | | — | | | 2,416 | | | — | | | — | | | 2,416 | |
Common stock redeemed for tax liability | — | | | — | | | (55) | | | — | | | — | | | (55) | |
Other comprehensive gain, net of tax | — | | | — | | | — | | | 1,513 | | | — | | | 1,513 | |
Net income | — | | | — | | | — | | | — | | | 76,175 | | | 76,175 | |
Balance, September 29, 2022 | 106,117 | | | $ | 106 | | | $ | 476,905 | | | $ | 4,424 | | | $ | 1,101,184 | | | $ | 1,582,619 | |
See accompanying notes to condensed consolidated financial statements.
Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total Stockholders' Equity |
| Class A | | | | |
in thousands | Shares | | Amount | | | | |
Balance, January 1, 2021 | 104,368 | | | $ | 104 | | | $ | 408,124 | | | $ | 164 | | | $ | 588,996 | | | $ | 997,388 | |
Stock-based compensation expense | — | | | — | | | 4,734 | | | — | | | — | | | 4,734 | |
Exercise of stock options | 195 | | | 1 | | | 2,382 | | | — | | | — | | | 2,383 | |
Issuance of restricted stock awards | 27 | | | — | | | — | | | — | | | — | | | — | |
Forfeiture of restricted stock awards | (2) | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock upon vesting of restricted stock units | 25 | | | — | | | — | | | — | | | — | | | — | |
Shares issued under employee stock purchase plan | 26 | | | — | | | 1,302 | | | — | | | — | | | 1,302 | |
Common stock redeemed for tax liability | (10) | | | — | | | (966) | | | — | | | — | | | (966) | |
Other comprehensive gain, net of tax | — | | | — | | | — | | | 83 | | | — | | | 83 | |
Net income | — | | | — | | | — | | | — | | | 75,796 | | | 75,796 | |
Balance, April 1, 2021 | 104,629 | | | $ | 105 | | | $ | 415,576 | | | $ | 247 | | | $ | 664,792 | | | $ | 1,080,720 | |
Stock-based compensation expense | — | | | — | | | 5,319 | | | — | | | — | | | 5,319 | |
Exercise of stock options | 409 | | | — | | | 3,943 | | | — | | | — | | | 3,943 | |
Issuance of restricted stock awards | 2 | | | — | | | — | | | — | | | — | | | — | |
Forfeiture of restricted stock awards | (1) | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock upon vesting of restricted stock units | 2 | | | — | | | — | | | — | | | — | | | — | |
Shares issued under employee stock purchase plan | 21 | | | — | | | 1,761 | | | — | | | — | | | 1,761 | |
Issuance of stock related to acquisition | 50 | | | — | | | 5,000 | | | — | | | — | | | 5,000 | |
Common stock redeemed for tax liability | (1) | | | — | | | (50) | | | — | | | — | | | (50) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | (7) | | | — | | | (7) | |
Net income | — | | | — | | | — | | | — | | | 82,916 | | | 82,916 | |
Balance, July 1, 2021 | 105,111 | | | $ | 105 | | | $ | 431,549 | | | $ | 240 | | | $ | 747,708 | | | $ | 1,179,602 | |
Stock-based compensation expense | — | | | — | | | 5,282 | | | — | | | — | | | 5,282 | |
Exercise of stock options | 468 | | | 1 | | | 5,428 | | | — | | | — | | | 5,429 | |
Common stock redeemed for tax liability | — | | | — | | | (12) | | | — | | | — | | | (12) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | (36) | | | — | | | (36) | |
Net income | — | | | — | | | — | | | — | | | 74,645 | | | 74,645 | |
Balance, September 30, 2021 | 105,579 | | | $ | 106 | | | $ | 442,247 | | | $ | 204 | | | $ | 822,353 | | | $ | 1,264,910 | |
See accompanying notes to condensed consolidated financial statements.
Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | |
| Thirty-nine Weeks Ended |
in thousands | September 29, 2022 | | September 30, 2021 |
Operating activities | | | |
Net income | $ | 228,958 | | | $ | 233,357 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 112,691 | | | 84,496 | |
Stock-based compensation expense | 17,229 | | | 15,335 | |
Deferred income taxes | 1,747 | | | 5,599 | |
Change in fair value of contingent earn-out liabilities | 1,530 | | | — | |
Loss on asset impairments and disposals, net | — | | | 475 | |
Interest cap derivative contracts | 85 | | | 40 | |
Changes in operating assets and liabilities, net of effects of acquisitions: | | | |
Receivables, net | (21,014) | | | (19,785) | |
Inventories, net | (312,288) | | | (174,649) | |
Trade accounts payable | (25,761) | | | 202,386 | |
Accrued expenses and other current liabilities | 27,796 | | | 38,492 | |
Income taxes | (6,360) | | | (10,838) | |
Deferred revenue | 1,415 | | | 9,840 | |
Other, net | (18,703) | | | (19,856) | |
Net cash provided by operating activities | 7,325 | | | 364,892 | |
Investing activities | | | |
Purchases of fixed assets | (322,825) | | | (277,688) | |
Acquisitions, net of cash acquired | (1,121) | | | (63,567) | |
Proceeds from sales of property | 4,773 | | | — | |
Net cash used in investing activities | (319,173) | | | (341,255) | |
Financing activities | | | |
Borrowings on revolving line of credit | 663,200 | | | 13,466 | |
Payments on revolving line of credit | (486,800) | | | (15,969) | |
Proceeds from term loans | — | | | 65,000 | |
Payments on term loans | (1,577) | | | (76,202) | |
Payments of contingent earn-out consideration | (2,571) | | | — | |
Proceeds from exercise of stock options | 7,100 | | | 11,755 | |
Proceeds from employee stock purchase plan | 4,379 | | | 3,063 | |
Debt issuance costs | (1,505) | | | (1,409) | |
Tax payments for stock-based compensation awards | (2,135) | | | (1,028) | |
Net cash provided by (used in) financing activities | 180,091 | | | (1,324) | |
Net (decrease) increase in cash and cash equivalents | (131,757) | | | 22,313 | |
Cash and cash equivalents, beginning of the period | 139,444 | | | 307,772 | |
Cash and cash equivalents, end of the period | $ | 7,687 | | | $ | 330,085 | |
Supplemental disclosures of cash flow information | | | |
Buildings and equipment acquired under operating leases | $ | 148,665 | | | $ | 238,023 | |
Cash paid for interest, net of capitalized interest | $ | 3,437 | | | $ | 1,676 | |
Cash paid for income taxes, net of refunds | $ | 71,800 | | | $ | 45,996 | |
Fixed assets accrued at the end of the period | $ | 118,453 | | | $ | 94,839 | |
See accompanying notes to condensed consolidated financial statements.
Floor & Decor Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
Nature of Business
Floor & Decor Holdings, Inc., together with its subsidiaries (the “Company,” “we,” “our,” or “us”) is a multi-channel specialty retailer and commercial flooring distributor. The Company offers a broad assortment of in-stock hard-surface flooring, including tile, wood, laminate, vinyl, and natural stone along with decorative accessories and wall tile, installation materials, and adjacent categories at everyday low prices. Our stores appeal to a variety of customers, including professional installers and commercial businesses (“Pro”), Do it Yourself customers (“DIY”), and customers who buy our products for professional installation (“Buy it Yourself” or “BIY”). We operate within one reportable segment.
As of September 29, 2022, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D” or“Outlets”), operates 178 warehouse-format stores, which average 78,000 square feet, and five small-format standalone design studios in 35 states, as well as four distribution centers and an e-commerce site, FloorandDecor.com.
Fiscal Year
The Company’s fiscal year is the 52- or 53-week period ending on the Thursday on or preceding December 31st. The fiscal year ending December 29, 2022 (“fiscal 2022”) and the fiscal year ended December 30, 2021 (“fiscal 2021”) include 52 weeks. When a 53-week fiscal year occurs, we report the additional week at the end of the fiscal fourth quarter. 52-week fiscal years consist of thirteen-week periods in each quarter of the fiscal year.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. The Condensed Consolidated Balance Sheet as of December 30, 2021 has been derived from the audited Consolidated Balance Sheet for the fiscal year then ended. The interim condensed consolidated financial statements should be read together with the audited consolidated financial statements and related footnote disclosures included in the Company’s Annual Report on Form 10-K for fiscal 2021, filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2022 (the “Annual Report”).
Management believes the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments considered necessary for a fair statement of results for the interim periods presented.
Results of operations for the thirty-nine weeks ended September 29, 2022 and September 30, 2021 are not necessarily indicative of the results to be expected for the full years.
Impact of the COVID-19 Pandemic
The ongoing presence of COVID-19 and its potential impact on the Company’s business remains an evolving situation and is highly uncertain. While the Company’s operations during the first thirty-nine weeks of fiscal 2022 did not appear to be negatively impacted, the COVID-19 pandemic could have additional negative impacts in the future. The extent of the impact of the pandemic on the Company’s business and financial results will depend on future developments, including the duration of the pandemic, the success of vaccination programs, the spread of COVID-19, including its developing variants, within the markets in which the Company operates, as well as the countries from which the Company sources inventory, fixed assets, and other supplies, the effect of the pandemic on consumer confidence and spending, and actions taken by government entities in response to the pandemic, all of which are highly uncertain.
Summary of Significant Accounting Policies
There have been no updates to our Significant Accounting Policies since the Annual Report. For more information regarding our Significant Accounting Policies and Estimates, see the “Summary of Significant Accounting Policies” section of “Item 8. Financial Statements and Supplementary Data” of our Annual Report.
Recently Issued Accounting Pronouncements
Reference Rate Reform. In January 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-01, “Reference Rate Reform (Topic 848),” which provides optional guidance to ease the potential accounting and financial reporting burden of reference rate reform, including the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The new guidance provides temporary optional expedients and exceptions for applying U.S. GAAP to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and the sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made. Unlike other topics, the provisions of this update are only available until December 31, 2022, by which time the reference rate replacement activity is expected to be completed. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures and has yet to elect an adoption date.
Business Combinations. In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” The ASU addresses diversity and inconsistency related to the recognition and measurement of contract assets and contract liabilities acquired in a business combination and requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. This standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the standard is permitted, including adoption in an interim period. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements or related disclosures.
Supplier Finance Programs. In September 2022, the FASB issued ASU No. 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50).” The ASU requires that buyers in a supplier finance program disclose sufficient information for a user of the financial statements to understand the program's nature, activity, changes since prior period, and potential magnitude. The guidance in ASU 2022-04 is effective for interim and fiscal years beginning after December 15, 2022. Once adopted, it should be applied retrospectively to each period in which a balance sheet is presented, excluding the amendment on roll forward information, which should be presented prospectively. Early adoption of the standard is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures and has yet to elect an adoption date.
2. Revenue
Net sales consist of revenue associated with contracts with customers for the sale of goods and services in amounts that reflect the consideration the Company is entitled to receive in exchange for those goods and services.
Deferred Revenue & Contract Liabilities
In accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, the Company recognizes revenue when the customer obtains control of the inventory. Amounts in deferred revenue at period-end reflect orders for which the inventory was not yet ready for physical transfer to customers.
Contract liabilities within the Condensed Consolidated Balance Sheets as of September 29, 2022 and December 30, 2021 primarily consisted of deferred revenue as well as amounts in accrued expenses and other current liabilities related to the Pro Premier loyalty program and unredeemed gift cards. As of September 29, 2022, contract liabilities totaled $58.9 million and included $15.9 million of deferred revenue, $31.7 million of loyalty program liabilities, and $11.3 million of unredeemed gift cards. As of December 30, 2021, contract liabilities totaled $40.2 million and included $14.5 million of deferred revenue, $20.4 million of loyalty program liabilities, and $5.3 million of unredeemed gift cards. Of the contract liabilities outstanding as of December 30, 2021, approximately $15.8 million was recognized in revenue during the thirty-nine weeks ended September 29, 2022.
Disaggregated Revenue
The Company has one reportable segment. The following table presents the net sales of each major product category (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | September 29, 2022 | | September 30, 2021 |
Product Category | | Net Sales | | % of Net Sales | | Net Sales | | % of Net Sales |
Laminate / luxury vinyl plank | | $ | 314,502 | | | 29 | % | | $ | 230,279 | | | 26 | % |
Tile | | 246,336 | | | 22 | | | 201,674 | | | 23 | |
Decorative accessories / wall tile | | 187,369 | | | 17 | | | 160,195 | | | 18 | |
Installation materials and tools | | 183,495 | | | 17 | | | 138,794 | | | 16 | |
Wood | | 69,691 | | | 6 | | | 64,798 | | | 7 | |
Natural stone | | 52,670 | | | 5 | | | 48,267 | | | 6 | |
Adjacent categories (1) | | 17,338 | | | 2 | | | 13,685 | | | 2 | |
Other (2) | | 26,423 | | | 2 | | | 18,861 | | | 2 | |
Total | | $ | 1,097,824 | | | 100 | % | | $ | 876,553 | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirty-nine Weeks Ended |
| | September 29, 2022 | | September 30, 2021 |
Product Category | | Net Sales | | % of Net Sales | | Net Sales | | % of Net Sales |
Laminate / luxury vinyl plank | | $ | 896,347 | | | 28 | % | | $ | 630,956 | | | 25 | % |
Tile | | 725,242 | | | 22 | | | 599,489 | | | 24 | |
Decorative accessories / wall tile | | 569,370 | | | 18 | | | 481,525 | | | 19 | |
Installation materials and tools | | 529,659 | | | 16 | | | 410,764 | | | 16 | |
Wood | | 213,126 | | | 7 | | | 193,087 | | | 8 | |
Natural stone | | 161,374 | | | 5 | | | 149,501 | | | 6 | |
Adjacent categories (1) | | 51,363 | | | 2 | | | 39,508 | | | 2 | |
Other (2) | | 69,923 | | | 2 | | | 14,368 | | | — | |
Total | | $ | 3,216,404 | | | 100 | % | | $ | 2,519,198 | | | 100 | % |
(1) Adjacent categories primarily include bathroom and kitchen products and accessories.
(2) Other includes delivery, sample, and other product revenue and adjustments for deferred revenue, sales returns reserves, customer rewards under the Company’s Pro Premier Loyalty program, and other revenue related adjustments that are not allocated on a product-level basis.
3. Debt
The following table summarizes the Company’s long-term debt as of September 29, 2022 and December 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
in thousands | Maturity Date | | Interest Rate Per Annum at 9/29/2022 (1) | | September 29, 2022 | | December 30, 2021 |
Credit Facilities: | | | | | | | | |
Term Loan Facility | February 14, 2027 | | 4.53% | Variable | | $ | 205,025 | | | $ | 206,602 | |
| | | | | | | | |
Asset-based Loan Facility (“ABL”) | August 4, 2027 | | 3.92% | Variable | | 176,400 | | | — | |
Total secured debt at par value | | | | | | 381,425 | | | 206,602 | |
Less: current maturities | | | | | | 2,103 | | | 2,103 | |
Long-term debt maturities | | | | | | 379,322 | | | 204,499 | |
Less: unamortized discount and debt issuance costs | | | | | | 7,468 | | | 8,737 | |
Total long-term debt | | | | | | $ | 371,854 | | | $ | 195,762 | |
(1) The applicable interest rate for the Term Loan Facility does not include the effect of interest rate cap agreements.
Market risk associated with the Company’s long-term debt relates to the potential change in fair value and negative impact to future earnings, respectively, from a change in interest rates. The aggregate fair value of debt is based primarily on the Company’s estimates of interest rates, maturities, credit risk, and underlying collateral.
The estimated fair values and classifications within the fair value hierarchy of the Term Loan Facility and ABL were as follows as of September 29, 2022 and December 30, 2021:
| | | | | | | | | | | | | | | | | |
in thousands | Fair Value Hierarchy Classification | | September 29, 2022 | | December 30, 2021 |
Term Loan Facility | Level 3 | | $ | 199,899 | | | $ | 202,986 | |
ABL Facility | Level 2 | | 176,400 | | | — | |
Total | | | $ | 376,299 | | | $ | 202,986 | |
The following table summarizes scheduled maturities of the Company’s debt as of September 29, 2022:
| | | | | |
in thousands | Amount |
Thirteen weeks ending December 29, 2022 | $ | 526 | |
2023 | 2,103 | |
2024 | 2,103 | |
2025 | 2,103 | |
2026 | 2,103 | |
Thereafter | 372,487 | |
Total minimum debt payments | $ | 381,425 | |
Components of interest expense are as follows for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-nine Weeks Ended |
in thousands | September 29, 2022 | | September 30, 2021 | | September 29, 2022 | | September 30, 2021 |
Total interest costs | $ | 4,092 | | | $ | 1,906 | | | $ | 8,617 | | | $ | 5,737 | |
Interest capitalized | 1,060 | | | 782 | | | 2,751 | | | 1,932 | |
Interest expense, net | $ | 3,032 | | | $ | 1,124 | | | $ | 5,866 | | | $ | 3,805 | |
Term Loan Facility
The Term Loan Facility provides a margin for loans of: (x) in the case of ABR Loans (as defined in the Term Loan Facility) 1.00% per annum (subject to a leverage-based step-up to 1.25% if Outlets exceeds certain leverage ratio tests), and (y) in the case of Eurodollar Loans (as defined in the Term Loan Facility) 2.00% per annum (subject to a leverage-based step-up to 2.25% if Outlets exceeds certain leverage ratio tests and a 0.00% floor on Eurodollar Loans).
All obligations under the Term Loan Facility are secured by (1) a first-priority security interest in substantially all of the property and assets of Outlets and the other guarantors under the Term Loan Facility, with certain exceptions, and (2) a second-priority security interest in the collateral securing the asset-based loan facility (“ABL” or “ABL Facility”).
ABL Facility
On August 4, 2022, the Company entered into a second amendment to the ABL Facility which, among other things, (a) increased the Company’s revolving commitments to a total aggregate principal amount of $800 million, (b) allows for the Company, under certain circumstances, to increase the size of the facility by an additional amount of up to $200 million, and (c) extended the stated maturity date of the ABL Facility to August 4, 2027.
As of September 29, 2022, the Company’s ABL Facility had a maximum availability of $800.0 million with actual available borrowings limited to the sum, at the time of calculation, of (a) eligible credit card receivables multiplied by the credit card advance rate, plus (b) the cost of eligible inventory, net of inventory reserves, multiplied by the applicable appraisal percentage, plus (c) 85% of eligible net trade receivables, plus (d) all eligible cash on hand, plus (e) 100% of the amount for which the eligible letter of credit must be honored after giving effect to any draws, minus certain Availability Reserves (each component as defined in the ABL Facility). The ABL Facility is available for issuance of letters of credit and contains a sublimit of $50.0 million for standby letters of credit and commercial letters of credit combined. Available borrowings under the facility are reduced by the face amount of outstanding letters of credit.
All obligations under the ABL Facility are secured by (1) a first-priority security interest in the cash and cash equivalents, accounts receivable, inventory, and related assets of Outlets and the other guarantors under the ABL Facility, with certain exceptions, and (2) a second-priority security interest in substantially all of the other property and assets of Outlets and the other guarantors under the Term Loan Facility.
Net availability under the ABL Facility, as reduced by outstanding borrowings of $176.4 million and letters of credit of $29.5 million, was $594.1 million based on financial data as of September 29, 2022.
Covenants
The credit agreements governing the Term Loan Facility and ABL Facility contain customary restrictive covenants, which, among other things and with certain exceptions, limit the Company’s ability to (i) incur additional indebtedness and liens in connection with such indebtedness, (ii) pay dividends and make certain other restricted payments, (iii) effect mergers or consolidations, (iv) enter into transactions with affiliates, (v) sell or dispose of property or assets, and (vi) engage in unrelated lines of business. In addition, these credit agreements subject the Company to certain reporting obligations and require that the Company satisfy certain financial covenants, including, among other things, a requirement that if borrowings under the ABL Facility exceed 90% of availability, the Company will maintain a certain fixed charge coverage ratio (defined as Consolidated EBITDA less non-financed capital expenditures and income taxes paid to consolidated fixed charges, in each case as more fully defined in the ABL Facility).
The Term Loan Facility has no financial maintenance covenants. The Company is currently in compliance with all material covenants under the credit agreements.
4. Income Taxes
Effective tax rates for the thirteen and thirty-nine weeks ended September 29, 2022 and September 30, 2021 were based on the Company’s forecasted annualized effective tax rates and were adjusted for discrete items that occurred within each period. The Company’s effective income tax rate was 22.8% and 9.3% for the thirteen weeks ended September 29, 2022 and September 30, 2021, respectively, and 22.7% and 14.9% for the thirty-nine weeks ended September 29, 2022 and September 30, 2021, respectively. For the thirteen and thirty-nine weeks ended September 29, 2022, the effective income tax rate was higher than the statutory federal income tax rate of 21.0% primarily due to state income taxes and other permanent differences including meals and entertainment expenses that were partially offset by tax deductions in excess of book expense related to stock option exercises. For the thirteen and thirty-nine weeks ended September 30, 2021, the effective income tax rate was lower than the statutory federal income tax rate of 21.0% primarily due to the recognition of income tax benefits from tax deductions in excess of book expense related to stock option exercises and other discrete items.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. Based on our current analysis of the provisions, we do not believe this legislation will have a material impact on our consolidated financial statements.
5. 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 corporate office, retail locations, and distribution centers, which expire in various years through 2042. Most of these agreements are retail leases wherein both the land and building are leased. For a small number of retail locations, the Company has ground leases in which only the land is leased. The initial lease terms for the Company's corporate office, retail, and distribution center facilities generally range from 10-20 years. The majority of the Company’s retail and ground 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 September 29, 2022 and September 30, 2021, the Company’s weighted average discount rate was 5.3% and 5.2%, respectively. As of both September 29, 2022 and September 30, 2021, the Company’s weighted average remaining lease term was approximately 11 years.
Lease Costs
The table below presents components of lease expense for operating leases.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Thirteen Weeks Ended | | Thirty-nine Weeks Ended |
in thousands | | Classification | | September 29, 2022 | | September 30, 2021 | | September 29, 2022 | | September 30, 2021 |
Fixed operating lease cost: | | Selling and store operating | | $ | 33,991 | | | $ | 31,940 | | | $ | 103,035 | | | $ | 91,528 | |
| | Cost of sales | | 6,354 | | | 5,668 | | | 19,178 | | | 16,984 | |
| | Pre-opening | | 2,558 | | | 3,272 | | | 7,542 | | | 7,927 | |
| | General and administrative | | 1,136 | | | 1,029 | | | 3,407 | | | 3,088 | |
Total fixed operating lease cost | | | | $ | 44,039 | | | $ | 41,909 | | | $ | 133,162 | | | $ | 119,527 | |
| | | | | | | | | | |
Variable lease cost (1): | | Selling and store operating | | $ | 13,524 | | | $ | 10,605 | | | $ | 38,450 | | | $ | 30,356 | |
| | Cost of sales | | 1,231 | | | 1,101 | | | 3,886 | | | 3,693 | |
| | Pre-opening | | 114 | | | 13 | | | 354 | | | 83 | |
| | General and administrative | | 194 | | | 78 | | | 598 | | | (10) | |
Total variable lease cost | | | | $ | 15,063 | | | $ | 11,797 | | | $ | 43,288 | | | $ | 34,122 | |
| | | | | | | | | | |
Sublease income | | Cost of sales | | (681) | | | (597) | | | (2,041) | | | (1,791) | |
| | | | | | | | | | |
Total operating lease cost (2) | | | | $ | 58,421 | | | $ | 53,109 | | | $ | 174,409 | | | $ | 151,858 | |
(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 thirty-nine weeks ended September 29, 2022 and September 30, 2021.
Undiscounted Cash Flows
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of September 29, 2022 were as follows:
| | | | | | | | |
in thousands | | Amount |
Thirteen weeks ending December 29, 2022 | | $ | 32,202 | |
2023 | | 183,545 | |
2024 | | 180,086 | |
2025 | | 167,940 | |
2026 | | 157,889 | |
Thereafter | | 1,039,871 | |
Total minimum lease payments (1) (2) | | 1,761,533 | |
Less: amount of lease payments representing interest | | 476,862 | |
Present value of future minimum lease payments | | 1,284,671 | |
Less: current obligations under leases | | 107,258 | |
Long-term lease obligations | | $ | 1,177,413 | |
(1) Future lease payments exclude approximately $237.4 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
(2) Operating lease payments include $146.8 million related to options to extend lease terms that are reasonably certain of being exercised.
For the thirty-nine weeks ended September 29, 2022 and September 30, 2021, cash paid for operating leases was $131.3 million and $115.7 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. and Jason Post Homes, LLC were also named as defendants in the case. On March 28, 2022, Plaintiff voluntarily dismissed her claims against Jason Post Homes without prejudice. Plaintiff’s petition alleges that unspecified “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 the death of plaintiff’s three children and mother. Plaintiff alleges product defect and failure to warn claims against the Company 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. On August 8, 2022, Plaintiff’s ex-husband filed a petition in intervention, intervening as a plaintiff in the lawsuit. Intervenor alleges the same claims and seeks damages in excess of $10.0 million for property damage, personal injury, wrongful death, and exemplary damages. The Company has responded to Plaintiff’s and Intervenor’s petitions, denying the allegations, and the case is in the early stages of discovery.
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 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. The complaint seeks unspecified damages and restitution for the Company from the individual defendants and the payment of costs and attorneys’ fees. On October 31, 2022, the Company, along with the other defendants, filed a motion to dismiss the operative complaint.
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.
6. Stock-based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”). In accordance with ASC 718, the Company measures compensation cost for all stock-based awards at fair value on the date of grant and recognizes compensation expense, net of forfeitures, using the straight-line method over the requisite service period of awards expected to vest, which for each of the awards is the service vesting period.
The table below presents components of stock-based compensation expense within the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income:
| | | | | | | | | | | | | | |
| | Thirty-nine Weeks Ended |
in thousands | | September 29, 2022 | | September 30, 2021 |
General and administrative | | $ | 16,911 | | | $ | 15,335 | |
Selling and store operating | | 318 | | | — | |
Total stock-based compensation expense | | $ | 17,229 | | | $ | 15,335 | |
| | | | |
| | | | |
| | | | |
| | | | |
Stock Options
The table below summarizes stock option activity for the thirty-nine weeks ended September 29, 2022.
| | | | | | | | | | | |
| Options | | Weighted Average Exercise Price |
Outstanding at December 31, 2021 | 2,503,654 | | | $ | 26.81 | |
Exercised | (321,756) | | | 22.07 | |
Forfeited or expired | (45,215) | | | 51.72 | |
Outstanding at September 29, 2022 | 2,136,683 | | | $ | 27.00 | |
Vested and exercisable at September 29, 2022 | 1,761,333 | | | $ |