Table of Contents

 

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 June 28, 2018

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

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

2233 Lake Park Drive

 

 

Smyrna, Georgia

 

30080

(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)

 


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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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 (Do not check if a smaller reporting company)

 

 

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 July 31, 2018

Class A common stock, $0.001 par value

 

97,222,147

 

 

 

 

 

 


 

Table of Contents

Table of Contents

 

 

 

 

 

 

 

Page

Part I – Financial Information 

3

 

Item 1.

Financial Statements

3

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Income

4

 

 

Condensed Consolidated Statements of Comprehensive Income

5

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

 

 

Forward-Looking Statements

16

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

 

Item 4.

Controls and Procedures

27

Part II – Other Information 

28

 

Item 1.

Legal Proceedings

28

 

Item 1A.

Risk Factors

28

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

Item 3.

Defaults Upon Senior Securities

28

 

Item 4.

Mine Safety Disclosures

28

 

Item 5.

Other Information

28

 

Item 6.

Exhibits

28

 

 

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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

 

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Data)

(Unaudited)

 

 

 

 

 

 

 

 

    

As of

    

As of

 

 

June 28,

 

December 28,

 

 

2018

 

2017

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

547

 

$

556

Income taxes receivable

 

 

15,866

 

 

12,472

Receivables, net

 

 

41,343

 

 

54,041

Inventories, net

 

 

432,446

 

 

427,950

Prepaid expenses and other current assets

 

 

12,107

 

 

8,193

Total current assets

 

 

502,309

 

 

503,212

Fixed assets, net

 

 

271,500

 

 

220,952

Intangible assets, net

 

 

109,346

 

 

109,362

Goodwill

 

 

227,447

 

 

227,447

Other assets

 

 

7,808

 

 

7,019

Total long-term assets

 

 

616,101

 

 

564,780

Total assets

 

$

1,118,410

 

$

1,067,992

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of term loans

 

$

3,500

 

$

3,500

Trade accounts payable

 

 

264,987

 

 

258,730

Accrued expenses

 

 

62,162

 

 

74,547

Deferred revenue

 

 

4,683

 

 

22,523

Total current liabilities

 

 

335,332

 

 

359,300

Term loans

 

 

143,198

 

 

144,562

Revolving line of credit

 

 

13,600

 

 

41,000

Deferred rent

 

 

30,650

 

 

25,570

Deferred income tax liabilities, net

 

 

30,702

 

 

27,218

Tenant improvement allowances

 

 

27,650

 

 

26,779

Other liabilities

 

 

2,604

 

 

703

Total long-term liabilities

 

 

248,404

 

 

265,832

Total liabilities

 

 

583,736

 

 

625,132

Commitments and contingencies (Note 7)

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Capital stock:

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at June 28, 2018 and December 28, 2017

 

 

 —

 

 

 —

Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 97,218,543 shares issued and outstanding at June 28, 2018 and 95,509,179 issued and outstanding at December 28, 2017

 

 

97

 

 

96

Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at June 28, 2018 and 0 shares issued and outstanding at December 28, 2017

 

 

 —

 

 

 —

Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and outstanding at June 28, 2018 and 0 shares issued and outstanding at December 28, 2017

 

 

 —

 

 

 —

Additional paid-in capital

 

 

335,024

 

 

323,419

Accumulated other comprehensive income (loss), net

 

 

460

 

 

(205)

Retained earnings

 

 

199,093

 

 

119,550

Total stockholders’ equity

 

 

534,674

 

 

442,860

Total liabilities and stockholders’ equity

 

$

1,118,410

 

$

1,067,992

 

See accompanying notes to condensed consolidated financial statements.

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Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(In Thousands, Except Per Share Data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Thirteen Weeks Ended

    

Twenty-six Weeks Ended

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

 

2018

    

2017

 

2018

    

2017

Net sales

 

$

434,279

 

$

344,047

 

$

837,227

 

$

651,343

Cost of sales

 

 

256,641

 

 

201,819

 

 

494,203

 

 

383,644

Gross profit

 

 

177,638

 

 

142,228

 

 

343,024

 

 

267,699

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling and store operating

 

 

108,626

 

 

85,650

 

 

211,193

 

 

166,401

General and administrative

 

 

25,179

 

 

19,518

 

 

48,518

 

 

37,399

Pre-opening

 

 

6,588

 

 

2,958

 

 

9,562

 

 

7,125

Total operating expenses

 

 

140,393

 

 

108,126

 

 

269,273

 

 

210,925

Operating income

 

 

37,245

 

 

34,102

 

 

73,751

 

 

56,774

Interest expense

 

 

2,145

 

 

3,353

 

 

3,929

 

 

8,767

Loss on early extinguishment of debt

 

 

 —

 

 

5,442

 

 

 —

 

 

5,442

Income before income taxes

 

 

35,100

 

 

25,307

 

 

69,822

 

 

42,565

Provision for income taxes

 

 

(4,746)

 

 

4,878

 

 

(1,895)

 

 

11,008

Net income

 

$

39,846

 

$

20,429

 

$

71,717

 

$

31,557

Basic earnings per share

 

$

0.41

 

$

0.22

 

$

0.75

 

$

0.36

Diluted earnings per share

 

$

0.38

 

$

0.20

 

$

0.68

 

$

0.33

 

See accompanying notes to condensed consolidated financial statements.

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Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(In Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Thirteen Weeks Ended

    

Twenty-six Weeks Ended

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

 

2018

 

2017

 

2018

 

2017

Net income

 

$

39,846

 

$

20,429

 

$

71,717

 

$

31,557

Other comprehensive income (loss) —change in fair value of hedge instruments, net of tax

 

 

235

 

 

(484)

 

 

665

 

 

(766)

Total comprehensive income

 

$

40,081

 

$

19,945

 

$

72,382

 

$

30,791

 

See accompanying notes to condensed consolidated financial statements.

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Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

    

Twenty-six Weeks Ended

 

 

June 28,

 

June 29,

 

 

2018

 

2017

Operating activities

 

 

  

 

 

  

Net income

 

$

71,717

 

$

31,557

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

23,632

 

 

18,058

Non-cash loss on early extinguishment of debt

 

 

 —

 

 

5,442

Amortization of tenant improvement allowances

 

 

(2,165)

 

 

(1,547)

Deferred income taxes

 

 

2,822

 

 

7,586

Interest cap derivative contracts

 

 

(794)

 

 

 —

Stock based compensation expense

 

 

2,952

 

 

2,135

Changes in operating assets and liabilities:

 

 

 

 

 

 

Receivables, net

 

 

12,697

 

 

(3,967)

Inventories, net

 

 

(14,989)

 

 

(73,771)

Other assets

 

 

(3,306)

 

 

(1,643)

Trade accounts payable

 

 

6,257

 

 

85,118

Accrued expenses

 

 

(21,912)

 

 

(10,901)

Income taxes

 

 

(5,320)

 

 

(7,868)

Deferred revenue

 

 

2,441

 

 

7,063

Deferred rent

 

 

4,955

 

 

5,994

Tenant improvement allowances

 

 

3,034

 

 

3,124

Other

 

 

1,902

 

 

59

Net cash provided by operating activities

 

 

83,923

 

 

66,439

Investing activities

 

 

  

 

 

  

Purchases of fixed assets

 

 

(63,438)

 

 

(45,498)

Net cash used in investing activities

 

 

(63,438)

 

 

(45,498)

Financing activities

 

 

  

 

 

  

Borrowings on revolving line of credit

 

 

129,300

 

 

111,700

Payments on revolving line of credit

 

 

(156,700)

 

 

(129,900)

Payments on term loans

 

 

(1,750)

 

 

(195,750)

Net proceeds from initial public offering

 

 

 —

 

 

192,082

Proceeds from exercise of stock options

 

 

8,656

 

 

1,855

Debt issuance costs

 

 

 —

 

 

(993)

Net cash used in financing activities

 

 

(20,494)

 

 

(21,006)

Net decrease in cash and cash equivalents

 

 

(9)

 

 

(65)

Cash and cash equivalents, beginning of the period

 

 

556

 

 

451

Cash and cash equivalents, end of the period

 

$

547

 

$

386

Supplemental disclosures of cash flow information

 

 

 

 

 

  

Cash paid for interest

 

$

3,844

 

$

11,682

Cash paid for income taxes

 

$

637

 

$

11,134

Fixed assets accrued at the end of the period

 

$

18,596

 

$

8,472

Fixed assets acquired as part of lease - paid for by lessor

 

$

 —

 

$

1,786

 

See accompanying notes to condensed consolidated financial statements.

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Floor & Decor Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 28, 2018

1. Summary of Significant Accounting Policies

Nature of Business

Floor & Decor Holdings, Inc., together with its subsidiaries (the “Company,” “we,” “our” or “us”) is a highly differentiated, rapidly growing specialty retailer of hard surface flooring and related accessories. We offer a broad in stock assortment of tile, wood, laminate and natural stone flooring along with decorative and installation accessories 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 the products for professional installation (“Buy it Yourself” or “BIY”). We operate within one reportable segment.

As of June 28, 2018, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D”), operates 88 warehouse-format stores, which average 74,000 square feet, and one small-format standalone design center in 22 states, as well as three 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. Fiscal years ended December 27, 2018 (“fiscal 2018”) and December 28, 2017 (“fiscal 2017”) 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 the first, second, third and fourth quarters of the fiscal year.

Basis of Presentation 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and our 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 28, 2017 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 2017, filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2018 (the “Annual Report”). Unless indicated otherwise, the information in this quarterly report on Form 10-Q (the “Quarterly Report”) has been adjusted to give effect to a 321.820-for-one stock split of the Company’s outstanding common stock, which was approved by the Company’s board of directors and shareholders on April 13, 2017 and effected on April 24, 2017. Certain prior year amounts have been reclassified in the consolidated financial statements to conform to the current year presentation.

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 thirteen and twenty-six weeks ended June 28, 2018 and June 29, 2017 are not necessarily indicative of the results to be expected for the full year.

Revenue Recognition

We recognize revenue and the related cost of sales when we satisfy the performance obligations in contracts with our customers. Our performance obligations for our retail store sales as well as for orders placed through our website and shipped to our customers are satisfied at the point-of-sale, which is the point at which the customer obtains control of the inventory as described under Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts

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with Customers” (Topic 606). Shipping and handling activities are performed after the customer obtains control of the goods and are accounted for as activities to fulfill the promise to transfer goods, rather than a separate performance obligation as outlined within Topic 606. Payment is due from the customer immediately at the point-of-sale for both retail store sales and website sales. The nature of the goods offered include hard surface flooring and related accessories. We do not perform installation services, and we offer free design services in-store. The transaction price recognized in revenues represents the selling price of the products offered. Sales taxes collected are not recognized as revenue as these amounts are ultimately remitted to the appropriate taxing authorities.

Our customers have the right to return the goods sold to them within a reasonable period, typically ninety days. The right of return is an element of variable consideration as defined with Topic 606. We reserve for future returns of previously sold goods based on historical experience and various other assumptions that we believe to be reasonable. This reserve reduces sales and cost of sales as well as establishes a return asset and refund liability. The return asset is included within Inventories, net and the refund liability is included within Accrued Expenses, each respectively on the Condensed Consolidated Balance Sheets. Merchandise exchanges of similar product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve.

Gift Cards and Merchandise Credits

We sell gift cards to our customers in our stores and through our website and issue merchandise credits in our stores. We account for the programs by recognizing a liability at the time the gift card is sold or the merchandise credit is issued. The liability is relieved and revenue is recognized upon redemption. Additionally, we recognize breakage income in proportion to the pattern of rights exercised by the customer when we expect to be entitled to breakage. Net sales related to the estimated breakage are included in net sales in the Condensed Consolidated Statements of Income. We have an agreement with an unrelated third-party who is the issuer of our gift cards and also assumes the liability for unredeemed gift cards. We are not subject to claims under unclaimed property statutes, as the agreement effectively transfers the ownership of such unredeemed gift cards and the related future escheatment liability, if any, to the third-party. Accordingly, in the twenty-six weeks ended June 28, 2018 and June 29, 2017, gift card breakage income of $1,172 thousand and $348 thousand, respectively was recognized in net sales in the Condensed Consolidated Statements of Income, respectively, for such unredeemed gift cards.

There have been no other additional updates to our Significant Accounting Policies since the Annual Report. For 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

There have been no updates to Recently Issued Accounting Pronouncements since the Annual Report. For information regarding Recently Issued Accounting Pronouncements, see the “Summary of Significant Accounting Policies” section of “Item 8. Financial Statements And Supplementary Data” of our Annual Report.

Recently Adopted Accounting Pronouncements

In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." This standard update requires an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. ASU No. 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments in this update should be applied using a modified retrospective approach. The adoption of ASU No. 2016-16 in the first quarter of fiscal 2018 did not have a material impact on the Company's Condensed Consolidated Financial Statements.

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In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." The standard update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments in this update should be applied using a retrospective approach. The adoption of ASU No. 2016-15 in the first quarter of fiscal 2018 did not have a material impact on the Company's Condensed Consolidated Statements of Cash Flows.

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers." ASU No. 2014-09 provided new guidance related to the core principle that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services provided. We adopted this standard using the modified retrospective approach in the first quarter of fiscal 2018, effective December 29, 2017. Under the new guidance, we recognize revenue at the time the customer obtains control of the inventory. The cumulative adjustment upon adoption primarily resulted in a reduction of deferred revenue and related inventories and an increase to retained earnings. The adoption of ASU No. 2014-09 did not have a material impact to the Company’s Condensed Consolidated Financial Statements.

 

2. Revenues

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On December 29, 2017, we adopted Topic 606 using the modified retrospective method applied to those contracts that were not completed as of December 29, 2017. Results for reporting periods beginning after December 29, 2017 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, Revenue Recognition (Topic 605).

We recorded a net increase to opening retained earnings of $7.8 million, net of tax, as of December 29, 2017 due to the cumulative impact of adopting Topic 606, with the impact primarily related to transactions for which we allow customers to store their merchandise at our retail stores for final delivery at a later date. The cumulative adjustment primarily resulted in a reduction of deferred revenue and related inventories and an increase to retained earnings. The impact to revenues as a result of applying Topic 606 was immaterial for the thirteen and twenty-six weeks ended June 28, 2018.

Deferred Revenue

Under Topic 605 we recognized revenue for certain transactions for which we allow customers to store their merchandise at our retail stores for final delivery at a later date when both collection or reasonable assurance of collection of payment and final delivery of the product had occurred. Under Topic 605, the amount of revenue for which final delivery of the product had not occurred for these transactions was reflected in the Deferred revenue caption on the Condensed Consolidated Balance Sheet as of December 28, 2017. Under Topic 606, we evaluated the bill-and-hold criteria and recognize revenue at the point-of-sale, when the customer obtains control of the inventory. Amounts in Deferred revenue at period-end reflect orders for which the inventory is not currently ready for physical transfer to the customer.

Gift Card Breakage

Under Topic 605, gift card breakage income is recognized based upon historical redemption patterns. Under Topic 606, gift card breakage income is recognized in proportion to the pattern of rights exercised by the customer when we expect to be entitled to breakage. The timing and amounts of revenue related to gift card breakage income in the cumulative transition adjustment, and for the thirteen and twenty-six weeks ended June 28, 2018 were immaterial to the Condensed Consolidated Financial Statements.

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Disaggregated Revenue

The following table presents the net sales of each major product category (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

 

March 29, 2018

 

June 28, 2018

 

June 28, 2018

 

 

    

 

 

    

% of

    

 

 

    

% of

    

 

 

    

% of

    

Product Category

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Tile

 

$

117,402

 

29

%  

$

123,408

 

28

%  

$

240,810

 

29

%  

Decorative Accessories

 

 

78,489

 

19

 

 

82,976

 

19

 

 

161,465

 

19

 

Laminate / Luxury Vinyl Plank

 

 

66,892

 

17

 

 

77,436

 

18

 

 

144,328

 

17

 

Accessories (Installation Materials and Tools)

 

 

63,581

 

16

 

 

68,201

 

16

 

 

131,782

 

16

 

Wood

 

 

46,485

 

12

 

 

48,911

 

11

 

 

95,396

 

11

 

Natural Stone

 

 

28,006

 

 7

 

 

29,533

 

 7

 

 

57,539

 

 7

 

Delivery and Other

 

 

2,093

 

 —

 

 

3,814

 

 1

 

 

5,907

 

 1

 

Total

 

$

402,948

 

100

%  

$

434,279

 

100

%  

$

837,227

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

 

March 30, 2017

 

June 29, 2017

 

June 29, 2017

 

 

    

 

 

    

% of

    

 

 

    

% of

    

 

 

    

% of

    

Product Category

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Tile

 

$

92,682

 

30

%  

$

103,794

 

30

%  

$

196,476

 

30

%  

Decorative Accessories

 

 

60,300

 

20

 

 

64,975

 

19

 

 

125,275

 

19

 

Laminate / Luxury Vinyl Plank

 

 

42,539

 

14

 

 

50,943

 

15

 

 

93,482

 

14

 

Accessories (Installation Materials and Tools)

 

 

48,552

 

16

 

 

54,167

 

16

 

 

102,719

 

16

 

Wood

 

 

36,993

 

12

 

 

41,789

 

12

 

 

78,782

 

12

 

Natural Stone

 

 

24,500

 

 8

 

 

26,927

 

 8

 

 

51,427

 

 8

 

Delivery and Other

 

 

1,730

 

 —

 

 

1,452

 

 —

 

 

3,182

 

 1

 

Total

 

$

307,296

 

100

%  

$

344,047

 

100

%  

$

651,343

 

100

%  

 

In the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 29, 2018, the product category titles Laminate / Luxury Vinyl Plank and Accessories (Installation Materials and Tools) were inadvertently transposed in the Company’s net sales by product category table for the thirteen weeks ended March 29, 2018 and March 30, 2017. The correct amounts are shown in the table above.

 

 

3. Fair Value Measurements

We estimate fair values in accordance with ASC 820, Fair Value Measurement. ASC 820 provides a framework for measuring fair value and expands disclosures required about fair value measurements. ASC 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Additionally, ASC 820 defines levels within a hierarchy based upon observable and non-observable inputs.

·

Level 1—Inputs that are quoted prices in active markets for identical assets or liabilities

·

Level 2—Inputs other than quoted prices in active markets for assets or liabilities that are either directly or indirectly observable

·

Level 3—Inputs that are non‑observable that reflect the reporting entity’s own assumptions

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Assets (Liabilities) Measured at Fair Value on a Recurring Basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

 

June 28,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2018

    

Level 1

    

Level 2

    

Level 3

Designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap (cash flow hedge)

 

$

1,541

 

$

 

$

1,541

 

$

Not designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap

 

$

1,541

 

$

 

$

1,541

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

 

December 28,

 

 

 

 

 

 

 

 

 

(in thousands)

    

2017

    

Level 1

    

Level 2

    

Level 3

Designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap (cash flow hedge)

 

$

710

 

$

 

$

710

 

$

Not designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap

 

$

710

 

$

 

$

710

 

$

 

Our derivative contracts are negotiated with counterparties without going through a public exchange. Accordingly, our fair value assessments give consideration to the risk of counterparty default (as well as our own credit risk). Our interest rate derivatives consist of interest rate cap contracts and are valued primarily based on data readily observable in public markets.

4. Derivatives and Risk Management

Changes in interest rates impact our results of operations. In an effort to manage our exposure to this risk, we enter into derivative contracts and may adjust our derivative portfolio as market conditions change.

Designated as Cash Flow Hedge

For derivative contracts designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of Accumulated Other Comprehensive Income (“AOCI”) and reclassified into earnings in the same period in which the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in earnings.

Not Designated as Accounting Hedge

For derivative contracts de-designated as accounting hedges, the change in the fair value is reflected through earnings. These changes in fair value are mark-to-market adjustments ("MTM adjustments"). MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. The AOCI related to the interest rate cap prior to the de-designation is being amortized over the remaining maturity period.

Interest Rate Risk

Our exposure to market risk from adverse changes in interest rates is primarily associated with our long‑term debt obligations, which carry variable interest rates. Market risk associated with our variable interest rate long‑term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates.

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In an effort to manage our exposure to the risk associated with our variable interest rate long‑term debt, we periodically enter into interest rate derivative contracts. We designate interest rate derivative contracts used to convert the interest rate exposure on a portion of our debt portfolio from a floating rate to a capped rate as cash flow hedges.

Hedge Position as of June 28, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

Final Maturity

 

Other

 

AOCI, Net

(in thousands)

    

Notional Balance

    

Date

    

Assets

    

of Tax

Designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap (cash flow hedge)

 

$

102,500

 

U.S. dollars

 

December 2021

 

$

1,541

 

$

479

Not designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap

 

$

102,500

 

U.S. dollars

 

December 2021

 

$

1,541

 

$

(19)

 

Hedge Position as of December 28, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

Final Maturity

 

Other

 

AOCI, Net

(in thousands)

    

Notional Balance

    

Date

    

Assets

 

of Tax

Designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap (cash flow hedge)

 

$

102,500

 

U.S. dollars

 

December 2021

 

$

710

 

$

(133)

Not designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap

 

$

102,500

 

U.S. dollars

 

December 2021

 

$

710

 

$

(72)

 

Designated Hedge Gains (Losses)

Gains (losses) related to our designated hedge contracts are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective Portion Reclassified

 

 

Effective Portion Recognized in

 

 

From AOCI to Earnings

 

 

Other Comprehensive Income (Loss)

 

 

Thirteen Weeks Ended

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

(in thousands)

    

2018

    

2017

    

2018

    

2017

Interest rate caps (cash flow hedges)

 

$

 —

 

$

 

$

235

 

$

(484)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective Portion Reclassified

 

Effective Portion Recognized in

 

 

From AOCI to Earnings

 

Other Comprehensive Income (Loss)

 

 

Twenty-six Weeks Ended

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

(in thousands)

    

2018

    

2017

    

2018

    

2017

Interest rate cap (cash flow hedge)

 

$

 —

 

$

 

$

665

 

$

(766)

 

Credit Risk

To manage credit risk associated with our interest rate hedging program, we select counterparties based on their credit ratings and limit our exposure to any one counterparty.

The counterparties to our derivative contracts are large financial institutions with investment grade credit ratings. To manage our credit risk related to our derivative financial instruments, we periodically monitor the credit risk of our counterparties, limit our exposure in the aggregate and to any single counterparty, and adjust our hedging position, as appropriate. The impact of credit risk, as well as the ability of each party to fulfill its obligations under our derivative financial instruments, is considered in determining the fair value of the contracts. Credit risk has not had a significant effect on the fair value of our derivative contracts. We do not have any credit risk‑related contingent features or collateral requirements with our derivative financial instruments.

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5. Debt

Fair Value of Debt

Market risk associated with our fixed and variable rate 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 our estimates of interest rates, maturities, credit risk, and underlying collateral and is classified as Level 3 within the fair value hierarchy. At June 28, 2018 and December 28, 2017, the fair values of our debt were as follows:

 

 

 

 

 

 

 

 

    

June 28,

    

December 28,

(in thousands)

 

2018

 

2017

Total debt at par value

 

$

164,350

 

$

193,500

Less: unamortized discount and debt issuance costs

 

 

4,052

 

 

4,438

Net carrying amount

 

$

160,298

 

$

189,062

Fair value

 

$

164,350

 

$

193,881

 

 

6. Income Taxes

Income Taxes

Our effective income tax rates were (2.7)% and 25.9% for the twenty-six weeks ended June 28, 2018 and June 29, 2017, respectively. The lower effective rate for the twenty-six weeks ended June 28, 2018 was primarily due to tax reform passed in December 2017 and the recognition of excess tax benefits related to stock options exercised.

Provisional amounts

In connection with the Tax Cuts and Jobs Act (the “Act”) passed in December 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% for federal income tax purposes and 3.6% currently estimated for state income tax purposes. We recorded a provisional amount of $17.9 million as of December 28, 2017 related to the remeasurement of certain deferred tax balances, and we have not made any adjustments to this provisional amount during the twenty-six weeks ended June 28, 2018. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.

 

The Act also subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, we are still evaluating the possible effects of the GILTI provisions and have not yet determined our accounting policy. At June 28, 2018, because we are still evaluating the GILTI provisions and our analysis of future taxable income that may be subject to GILTI, we are unable to make a reasonable estimate and have not reflected any adjustments related to GILTI in our financial statements.

 

7. Commitments and Contingencies

Lease Commitments

We lease our corporate office, retail locations and distribution centers through F&D, under long‑term operating lease agreements that expire in various years through 2038. Additionally, certain equipment is leased under short‑term operating leases.

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Certain lease agreements include escalating rents over the lease terms. We expense rent on a straight‑line basis over the life of the lease, which commences on the date we have the right to control the property. The cumulative expense recognized on a straight‑line basis in excess of the cumulative payments is included in deferred rent in the accompanying balance sheets. Future minimum lease payments under non‑cancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 28, 2018, were:

 

 

 

 

(in thousands)

    

Amount

Twenty-six weeks ended December 27, 2018

 

$

46,427

2019

 

 

106,594

2020

 

 

109,808

2021

 

 

106,013

2022

 

 

99,695

Thereafter

 

 

636,396

Total minimum lease payments

 

$

1,104,933

 

Lease expense for the twenty-six weeks ended June 28, 2018 and June 29, 2017 was approximately $44,113 thousand and $33,905 thousand, respectively.

Litigation

We are subject to other various 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 our business activities. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. These proceedings are not expected to have a material impact on our consolidated financial position, cash flows or results of operations.

8. Stock Based Compensation

At our 2018 annual meeting of stockholders held on May 17, 2018, our stockholders approved the Floor & Decor Holdings, Inc. Employee Stock Purchase Plan (“ESPP”). The ESPP will be offered to substantially all employees beginning in the third quarter of fiscal 2018. The ESPP permits eligible employees to purchase shares of our common stock through payroll deductions, subject to certain limitations. The purchase price of the shares under the ESPP in no event will be less than the lesser of 85% of the lower of the fair market value of our common stock on either the first or last trading day of each six-month offering period. There are 1,500,000 shares of the Class A common stock, par value $0.001 per share, approved for issuance under the ESPP.

9. Earnings Per Share

Net Income per Common Share

We calculate basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effect of stock options.

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The following table shows the computation of basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Thirteen Weeks Ended

    

Twenty-six Weeks Ended

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

(in thousands, except per share data)

 

2018

    

2017

 

2018

    

2017

Net income

 

$

39,846

 

$

20,429

 

$

71,717

 

$

31,557

Basic weighted average shares outstanding

 

 

96,684

 

 

90,861

 

 

96,199

 

 

87,195

Dilutive effect of share based awards

 

 

8,253

 

 

9,058

 

 

8,609

 

 

7,705

Diluted weighted average shares outstanding

 

 

104,937

 

 

99,919

 

 

104,808

 

 

94,900

Basic earnings per share

 

$

0.41

 

$

0.22

 

$

0.75

 

$

0.36

Diluted earnings per share

 

$

0.38

 

$

0.20

 

$

0.68

 

$

0.33

 

The following awards have been excluded from the computation of dilutive effect of share based awards because the effect would be anti‑dilutive:

 

 

 

 

 

 

 

 

 

 

 

    

Thirteen Weeks Ended

    

Twenty-six Weeks Ended

    

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

(in thousands)

 

2018

 

2017

 

2018

 

2017

 

Stock options

 

181

 

892

 

130

 

453

 

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Table of Contents

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Floor & Decor Holdings, Inc. and Subsidiaries included in Item 1 of this quarterly report on Form 10-Q (this “Quarterly Report”) and with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2017 and filed with the SEC on March 5, 2018 (the “Annual Report”). As used in this Quarterly Report, except where the context otherwise requires or where otherwise indicated, the terms “Company,” “we,” “our” or “us” refer to Floor & Decor Holdings, Inc. and its subsidiaries.

Forward-Looking Statements

The discussion in this Quarterly Report, including under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A, “Risk Factors” of Part II, contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact contained in this Quarterly Report, including statements regarding the Company’s future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements are based on our current expectations, assumptions, estimates and projections. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “could,” “seeks,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “budget,” “potential” or “continue” or the negative of these terms or other similar expressions.

The forward-looking statements contained in this Quarterly Report are only predictions. Although we believe that the expectations reflected in the forward-looking statements in this Quarterly Report are reasonable, we cannot guarantee future events, results, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements in this Quarterly Report, including, without limitation, those factors described in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A, “Risk Factors” of Part II. Some of the key factors that could cause actual results to differ from our expectations include the following:

·

an overall decline in the health of the economy, the hard surface flooring industry, consumer spending and the housing market;

·

any disruption in our distribution capabilities resulting from our inability to operate our distribution centers going forward;

·

competition from other stores and internet-based competition;

·

our failure to execute our business strategy effectively and deliver value to our customers;

·

our inability to manage our growth;

·

our inability to manage costs and risks relating to new store openings;

·

our dependence on foreign imports for the products we sell, which may include the impact of tariffs;

·

our inability to find, train and retain key personnel;

·

violations of laws and regulations applicable to us or our suppliers;

·

our failure to adequately protect against security breaches involving our information technology systems and customer information;

·

our failure to successfully anticipate consumer preferences and demand;

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·

our inability to find available locations for our stores or our store support center on terms acceptable to us;

·

our inability to obtain merchandise on a timely basis at prices acceptable to us;

·

suppliers may sell similar or identical products to our competitors;

·

our inability to maintain sufficient levels of cash flow to meet growth expectations;

·

our inability to manage our inventory obsolescence, shrinkage and damage;

·

fluctuations in material and energy costs;

·

our vulnerability to natural disasters and other unexpected events; and

·

restrictions imposed by our indebtedness on our current and future operations.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The forward-looking statements contained in this Quarterly Report speak only as of the date hereof. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. If a change to the events and circumstances reflected in our forward-looking statements occurs, our business, financial condition and operating results may vary materially from those expressed in our forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.

 

Overview

Founded in 2000, Floor & Decor is a high growth, differentiated, multi-channel specialty retailer of hard surface flooring and related accessories with 88 warehouse format stores across 22 states as of June 28, 2018. We believe that we offer the industry’s broadest in stock assortment of tile, wood, laminate and natural stone flooring along with decorative and installation accessories at everyday low prices positioning us as the one stop destination for our customers’ entire hard surface flooring needs. We appeal to a variety of customers, including professional installers and commercial businesses (“Pro”), Do It Yourself customers (“DIY”) and customers who buy the products for professional installation (“Buy it Yourself” or “BIY”).

We operate on a 52- or 53-week fiscal year ending on the Thursday on or preceding December 31. The following discussion contains references to the first twenty-six weeks of fiscal 2018 and fiscal 2017, which ended on June 28, 2018 and June 29, 2017, respectively.

During the twenty-six weeks ended June 28, 2018, we continued to make long-term key strategic investments, including:

·

opening five new warehouse-format stores ending with 88 warehouse-format stores;

·

focusing on innovative new products and localized assortments, supported by inspirational in-store and online visual merchandising solutions;

·

promoting key leaders in our regional staff to support our growing number of stores;

·

investing capital in our stores, information technology and our connected customer strategies to continue enhancing and integrating the online and in-store shopping experience for our customers; 

·

enhancing credit solutions, including changing our private label credit card vendor; and

·

engaging more professional customers, including signing up more customers on our Pro Premier Loyalty Program.

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Key Performance Indicators

We consider a variety of performance and financial measures in assessing the performance of our business. The key performance and financial measures we use to determine how our business is performing are comparable store sales, the number of new store openings, gross profit and gross margin, operating income and EBITDA and Adjusted EBITDA. For definitions and a discussion of how we use our key performance indicators, see the “Key Performance Indicators” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report. See “Non-GAAP Financial Measures” below for a discussion of how we define EBITDA and Adjusted EBITDA and a reconciliation of our EBITDA and Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. 

Other key financial terms we use include net sales, selling and store operating expenses, general and administrative expenses and pre-opening expenses. For definitions and a discussion of how we use our other key financial definitions, see the “Other Key Financial Definitions” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report.

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Results of Operations

 

The following table summarizes key components of our results of operations for the periods indicated, in dollars and as a percentage of net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

 

 

 

 

6/28/2018

 

 

6/29/2017

 

 

 

</