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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 27, 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 |
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27‑3730271 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
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2233 Lake Park Drive |
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Smyrna, Georgia |
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30080 |
(Address of principal executive offices) |
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(Zip Code) |
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(404) 471‑1634 |
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Not Applicable |
(Registrant’s telephone number, including area code) |
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(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 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 |
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Non-accelerated filer |
☒ |
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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 |
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Outstanding at October 30, 2018 |
Class A common stock, $0.001 par value |
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97,328,165 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I – FINANCIAL INFORMATION
Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
(Unaudited)
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As of |
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As of |
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September 27, |
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December 28, |
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2018 |
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2017 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
534 |
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$ |
556 |
Income taxes receivable |
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10,233 |
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12,472 |
Receivables, net |
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55,668 |
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54,041 |
Inventories, net |
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403,772 |
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427,950 |
Prepaid expenses and other current assets |
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16,553 |
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8,193 |
Total current assets |
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486,760 |
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503,212 |
Fixed assets, net |
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300,279 |
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220,952 |
Intangible assets, net |
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109,338 |
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109,362 |
Goodwill |
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227,447 |
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227,447 |
Other assets |
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8,043 |
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7,019 |
Total long-term assets |
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645,107 |
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564,780 |
Total assets |
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$ |
1,131,867 |
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$ |
1,067,992 |
Liabilities and stockholders’ equity |
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Current liabilities: |
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Current portion of term loans |
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$ |
3,500 |
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$ |
3,500 |
Trade accounts payable |
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237,785 |
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258,730 |
Accrued expenses and other current liabilities |
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77,826 |
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74,547 |
Deferred revenue |
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5,047 |
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22,523 |
Total current liabilities |
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324,158 |
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359,300 |
Term loans |
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142,516 |
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144,562 |
Revolving line of credit |
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— |
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41,000 |
Deferred rent |
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32,835 |
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25,570 |
Deferred income tax liabilities, net |
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30,528 |
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27,218 |
Tenant improvement allowances |
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35,476 |
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26,779 |
Other liabilities |
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2,678 |
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703 |
Total long-term liabilities |
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244,033 |
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265,832 |
Total liabilities |
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568,191 |
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625,132 |
Commitments and contingencies (Note 7) |
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Stockholders’ equity |
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Capital stock: |
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Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at September 27, 2018 and December 28, 2017 |
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— |
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— |
Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 97,326,534 shares issued and outstanding at September 27, 2018 and 95,509,179 issued and outstanding at December 28, 2017 |
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97 |
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96 |
Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at September 27, 2018 and 0 shares issued and outstanding at December 28, 2017 |
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— |
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— |
Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and outstanding at September 27, 2018 and 0 shares issued and outstanding at December 28, 2017 |
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— |
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— |
Additional paid-in capital |
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337,327 |
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323,419 |
Accumulated other comprehensive income (loss), net |
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591 |
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(205) |
Retained earnings |
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225,661 |
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119,550 |
Total stockholders’ equity |
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563,676 |
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442,860 |
Total liabilities and stockholders’ equity |
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$ |
1,131,867 |
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$ |
1,067,992 |
See accompanying notes to condensed consolidated financial statements.
3
Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)
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Thirteen Weeks Ended |
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Thirty-nine Weeks Ended |
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September 27, |
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September 28, |
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September 27, |
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September 28, |
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2018 |
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2017 |
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2018 |
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2017 |
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Net sales |
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$ |
435,882 |
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$ |
343,923 |
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$ |
1,273,109 |
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$ |
995,266 |
Cost of sales |
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257,656 |
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201,432 |
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751,859 |
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585,076 |
Gross profit |
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178,226 |
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142,491 |
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521,250 |
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410,190 |
Operating expenses: |
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Selling and store operating |
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109,182 |
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85,023 |
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320,375 |
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251,424 |
General and administrative |
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26,477 |
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22,172 |
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74,995 |
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59,571 |
Pre-opening |
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8,330 |
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6,700 |
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17,892 |
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13,825 |
Total operating expenses |
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143,989 |
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113,895 |
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413,262 |
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324,820 |
Operating income |
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34,237 |
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28,596 |
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107,988 |
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85,370 |
Interest expense |
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2,171 |
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2,610 |
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6,100 |
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11,377 |
Loss on early extinguishment of debt |
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— |
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— |
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— |
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5,442 |
Income before income taxes |
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32,066 |
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25,986 |
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101,888 |
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68,551 |
Provision for income taxes |
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5,498 |
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2,731 |
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3,603 |
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13,739 |
Net income |
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$ |
26,568 |
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$ |
23,255 |
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$ |
98,285 |
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$ |
54,812 |
Basic earnings per share |
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$ |
0.27 |
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$ |
0.25 |
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$ |
1.02 |
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$ |
0.61 |
Diluted earnings per share |
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$ |
0.25 |
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$ |
0.22 |
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$ |
0.94 |
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$ |
0.56 |
See accompanying notes to condensed consolidated financial statements.
4
Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(In Thousands)
(Unaudited)
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Thirteen Weeks Ended |
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Thirty-nine Weeks Ended |
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September 27, |
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September 28, |
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September 27, |
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September 28, |
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2018 |
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2017 |
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2018 |
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2017 |
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Net income |
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$ |
26,568 |
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$ |
23,255 |
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$ |
98,285 |
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$ |
54,812 |
Other comprehensive income (loss) —change in fair value of hedge instruments, net of tax |
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131 |
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(121) |
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796 |
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(887) |
Total comprehensive income |
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$ |
26,699 |
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$ |
23,134 |
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$ |
99,081 |
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$ |
53,925 |
See accompanying notes to condensed consolidated financial statements.
5
Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
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Thirty-nine Weeks Ended |
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September 27, |
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September 28, |
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2018 |
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2017 |
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Operating activities |
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Net income |
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$ |
98,285 |
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$ |
54,812 |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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37,043 |
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27,637 |
Non-cash loss on early extinguishment of debt |
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— |
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5,442 |
Amortization of tenant improvement allowances |
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(3,277) |
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(2,366) |
Deferred income taxes |
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2,605 |
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9,575 |
Interest cap derivative contracts |
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(878) |
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— |
Stock based compensation expense |
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4,611 |
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3,553 |
Changes in operating assets and liabilities: |
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Receivables, net |
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(1,627) |
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(14,082) |
Inventories, net |
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13,685 |
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(101,918) |
Other assets |
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(7,848) |
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(1,590) |
Trade accounts payable |
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(20,945) |
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90,780 |
Accrued expenses |
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(2,352) |
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(3,097) |
Income taxes |
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312 |
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(9,767) |
Deferred revenue |
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2,806 |
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11,145 |
Deferred rent |
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7,340 |
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7,778 |
Tenant improvement allowances |
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11,974 |
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4,878 |
Other |
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1,965 |
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|
83 |
Net cash provided by operating activities |
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143,699 |
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82,863 |
Investing activities |
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Purchases of fixed assets |
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(109,395) |
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(69,639) |
Net cash used in investing activities |
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(109,395) |
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(69,639) |
Financing activities |
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Borrowings on revolving line of credit |
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204,050 |
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175,300 |
Payments on revolving line of credit |
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(245,050) |
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(187,200) |
Payments on term loans |
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(2,625) |
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(196,625) |
Net proceeds from initial public offering |
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— |
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192,083 |
Proceeds from exercise of stock options |
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9,299 |
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4,327 |
Debt issuance costs |
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— |
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(993) |
Net cash used in financing activities |
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(34,326) |
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(13,108) |
Net (decrease) increase in cash and cash equivalents |
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(22) |
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|
116 |
Cash and cash equivalents, beginning of the period |
|
|
556 |
|
|
451 |
Cash and cash equivalents, end of the period |
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$ |
534 |
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$ |
567 |
Supplemental disclosures of cash flow information |
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Cash paid for interest |
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$ |
5,732 |
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$ |
13,742 |
Cash paid for income taxes |
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$ |
722 |
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$ |
13,942 |
Fixed assets accrued at the end of the period |
|
$ |
14,500 |
|
$ |
10,350 |
Fixed assets acquired as part of lease - paid for by lessor |
|
$ |
— |
|
$ |
1,786 |
See accompanying notes to condensed consolidated financial statements.
6
Floor & Decor Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 27, 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 September 27, 2018, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D”), operates 95 warehouse-format stores, which average 75,000 square feet, and one small-format standalone design center in 26 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 thirty-nine weeks ended September 27, 2018 and September 28, 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 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
7
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 within 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 as defined with ASC 606. For the period ended September 27, 2018, the return asset is included within Prepaid expenses and other current assets and the refund liability is included within Accrued expenses and other current liabilities, each respectively on the Condensed Consolidated Balance Sheets. We adopted the standard using the modified retrospective transition method within ASC 606; therefore, we accounted for the return asset and all provisions of ASC 606 prospectively. The return asset is included in Inventories, net on the December 28, 2017 Condensed Consolidated Balance Sheets. The refund liability under ASC 605 and ASC 606 is included within Accrued expenses and other current liabilities. 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 thirty-nine weeks ended September 27, 2018 and September 28, 2017, gift card breakage income of $1,340 thousand and $568 thousand, respectively was recognized in net sales in the Condensed Consolidated Statements of Income for such unredeemed gift cards.
Accounting for Income Taxes on GILTI
The Tax Cuts and Jobs Act 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. We have elected to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred. However, we do not expect to incur tax for the period ending December 27, 2018.
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
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, "Leases (Topic 842)." ASU No. 2016-02 requires that lessees recognize lease assets and lease liabilities for all leases with greater than 12 month terms on the balance sheet. The guidance also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. This new guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We will adopt the ASU on December 28, 2018, the first day of our fiscal year 2019, using the modified retrospective approach We will utilize a new lease accounting software to facilitate implementation. We are currently testing the software and are in the process of identifying any changes to our business processes and controls to support adoption of the new standard. We plan to elect
8
the package of practical expedients upon transition that will retain the lease classification and initial direct costs for any leases that exist prior to adoption of the standard. Management is progressing with the implementation, but we are still evaluating the impact that ASU No. 2016-02 will have on our Consolidated Financial Statements. We currently believe that when implemented, the new standard will have a material impact on our Consolidated Balance Sheet, but we do not believe adoption of this standard will have a material impact on our Consolidated Statements of Income or Statements of Cash Flows.
There have been no other 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 Consolidated Financial Statements.
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 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 provides 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 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 thirty-nine weeks ended September 27, 2018.
9
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 Consolidated Balance Sheet as of December 28, 2017. Under Topic 606, we evaluated the bill-and-hold criteria, and now 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 was 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 thirty-nine weeks ended September 27, 2018 were immaterial to the Consolidated Financial Statements.
Disaggregated Revenue
The following table presents the net sales of each major product category (in thousands):
|
|
Thirteen Weeks Ended |
|
Thirteen Weeks Ended |
|
||||||
|
|
September 27, 2018 |
|
September 28, 2017 |
|
||||||
|
|
|
|
|
% of |
|
|
|
|
% of |
|
Product Category |
|
Net Sales |
|
Net Sales |
|
Net Sales |
|
Net Sales |
|
||
Tile |
|
$ |
119,988 |
|
28 |
% |
$ |
103,209 |
|
30 |
% |
Decorative Accessories |
|
|
82,814 |
|
19 |
|
|
57,729 |
|
17 |
|
Laminate / Luxury Vinyl Plank |
|
|
83,667 |
|
19 |
|
|
52,758 |
|
15 |
|
Accessories (Installation Materials and Tools) |
|
|
69,412 |
|
16 |
|
|
59,314 |
|
17 |
|
Wood |
|
|
49,005 |
|
11 |
|
|
42,488 |
|
12 |
|
Natural Stone |
|
|
28,025 |
|
6 |
|
|
25,327 |
|
8 |
|
Delivery and Other |
|
|
2,971 |
|
1 |
|
|
3,098 |
|
1 |
|
Total |
|
$ |
435,882 |
|
100 |
% |
$ |
343,923 |
|
100 |
% |
|
|
Thirty-nine Weeks Ended |
|
Thirty-nine Weeks Ended |
|
||||||
|
|
September 27, 2018 |
|
September 28, 2017 |
|
||||||
|
|
|
|
|
% of |
|
|
|
|
% of |
|
Product Category |
|
Net Sales |
|
Net Sales |
|
Net Sales |
|
Net Sales |
|
||
Tile |
|
$ |
360,798 |
|
28 |
% |
$ |
299,685 |
|
30 |
% |
Decorative Accessories |
|
|
244,279 |
|
19 |
|
|
183,004 |
|
18 |
|
Laminate / Luxury Vinyl Plank |
|
|
227,995 |
|
18 |
|
|
146,240 |
|
15 |
|
Accessories (Installation Materials and Tools) |
|
|
201,194 |
|
16 |
|
|
162,033 |
|
16 |
|
Wood |
|
|
144,401 |
|
11 |
|
|
121,270 |
|
12 |
|
Natural Stone |
|
|
85,564 |
|
7 |
|
|
76,754 |
|
8 |
|
Delivery and Other |
|
|
8,878 |
|
1 |
|
|
6,280 |
|
1 |
|
Total |
|
$ |
1,273,109 |
|
100 |
% |
$ |
995,266 |
|
100 |
% |
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 |
10
· |
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 |
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
|
|
As of |
|
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2018 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
||||
Designated as hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap (cash flow hedge) |
|
$ |
1,670 |
|
$ |
— |
|
$ |
1,670 |
|
$ |
— |
Not designated as hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap |
|
$ |
1,670 |
|
$ |
— |
|
$ |
1,670 |
|
$ |
— |
|
|
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.
11
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 September 27, 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 |
|
$ |
1,670 |
|
$ |
599 |
Not designated as hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap |
|
$ |
102,500 |
|
U.S. dollars |
|
December 2021 |
|
$ |
1,670 |
|
$ |
(8) |
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 |
||||||||||
|
|
September 27, |
|
September 28, |
|
September 27, |
|
September 28, |
||||
(in thousands) |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
||||
Interest rate cap (cash flow hedge) |
|
$ |
— |
|
$ |
— |
|
$ |
131 |
|
$ |
(121) |
|
|
Effective Portion Reclassified |
|
Effective Portion Recognized in |
||||||||
|
|
From AOCI to Earnings |
|
Other Comprehensive Income (Loss) |
||||||||
|
|
Thirty-nine Weeks Ended |
||||||||||
|
|
September 27, |
|
September 28, |
|
September 27, |
|
September 28, |
||||
(in thousands) |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
||||
Interest rate cap (cash flow hedge) |
|
$ |
— |
|
$ |
— |
|
$ |
796 |
|
$ |
(887) |
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.
12
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 September 27, 2018 and December 28, 2017, the carrying amounts and fair values of our debt were as follows:
|
|
September 27, |
|
December 28, |
||
(in thousands) |
|
2018 |
|
2017 |
||
Total debt at par value |
|
$ |
149,875 |
|
$ |
193,500 |
Less: unamortized discount and debt issuance costs |
|
|
3,859 |
|
|
4,438 |
Net carrying amount |
|
$ |
146,016 |
|
$ |
189,062 |
Fair value |
|
$ |
149,875 |
|
$ |
193,881 |
6. Income Taxes
Income Taxes
Our effective income tax rates were 3.5% and 20.0% for the thirty-nine weeks ended September 27, 2018 and September 28, 2017, respectively. The lower effective rate for the thirty-nine weeks ended September 27, 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 tax benefit of $17.9 million as of December 28, 2017 related to the remeasurement of certain deferred tax balances, and we have increased this provisional tax benefit by an additional $0.6 million during the thirty-nine weeks ended September 27, 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.
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.
13
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 September 27, 2018, were:
(in thousands) |
|
Amount |
|
Thirteen weeks ended December 27, 2018 |
|
$ |
24,439 |
2019 |
|
|
108,061 |
2020 |
|
|
112,264 |
2021 |
|
|
108,499 |
2022 |
|
|
102,196 |
Thereafter |
|
|
653,461 |
Total minimum lease payments |
|
$ |
1,108,920 |
Lease expense for the thirty-nine weeks ended September 27, 2018 and September 28, 2017 was approximately $67,990 thousand and $51,956 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 (the “ESPP”), which became available to substantially all of our 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 our 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.
14
The following table shows the computation of basic and diluted earnings per share:
|
|
Thirteen Weeks Ended |
|
Thirty-nine Weeks Ended |
||||||||
|
|
September 27, |
|
September 28, |
|
September 27, |
|
September 28, |
||||
(in thousands, except per share data) |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
||||
Net income |
|
$ |
26,568 |
|
$ |
23,255 |
|
$ |
98,285 |
|
$ |
54,812 |
Basic weighted average shares outstanding |
|
|
97,254 |
|
|
94,439 |
|
|
96,551 |
|
|
89,614 |
Dilutive effect of share based awards |
|
|
7,311 |
|
|
9,461 |
|
|
8,185 |
|
|
8,452 |
Diluted weighted average shares outstanding |
|
|
104,565 |
|
|
103,900 |
|
|
104,736 |
|
|
98,066 |
Basic earnings per share |
|
$ |
0.27 |
|
$ |
0.25 |
|
$ |
1.02 |
|
$ |
0.61 |
Diluted earnings per share |
|
$ |
0.25 |
|
$ |
0.22 |
|
$ |
0.94 |
|
$ |
0.56 |
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 |
|
Thirty-nine Weeks Ended |
||||
|
|
September 27, |
|
September 28, |
|
September 27, |
|
September 28, |
(in thousands) |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
Stock options |
|
209 |
|
12 |
|
168 |
|
718 |
10. Subsequent Event
In October 2018, we signed a lease to relocate our Store Support Center. The new location has approximately 185,473 square feet of office space with room for expansion. The lease has a twelve year term with rent expense of approximately $469 thousand per month and is expected to commence July 2019. We are still evaluating our options related to our current Store Support Center. If we decide to exit the current lease, we could incur lease exit costs of up to $10 million.
15
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.
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,” “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; |
· |
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; |
16
· |
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 95 warehouse format stores across 26 states as of September 27, 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 thirty-nine weeks of fiscal 2018 and fiscal 2017, which ended on September 27, 2018 and September 28, 2017, respectively.
During the thirty-nine weeks ended September 27, 2018, we continued to make long-term key strategic investments, including:
· |
opening twelve new warehouse-format stores ending with 95 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. |
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
17
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.
18
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 |
|
|
|
|
|||||||||
|
|
9/27/2018 |
|
|
9/28/2017 |
|
|
|
|
||||||
(in thousands) |
|
Actual |
|
% of Sales |
|
|
Actual |
|
% of Sales |
|
|
% Increase/(Decrease) |
|
||
Net sales |
|
$ |
435,882 |
|
100.0 |
% |
|
$ |
343,923 |
|
100.0 |
% |
|
26.7 |
% |
Cost of sales |
|
|
257,656 |
|
59.1 |
|
|
|
201,432 |
|
58.6 |
|
|
27.9 |
|
Gross profit |
|
|
178,226 |
|
40.9 |
|
|
|
142,491 |
|
41.4 |
|
|
25.1 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling & store operating expenses |
|
|
109,182 |
|
25.0 |
|
|
|
85,023 |
|
24.7 |
|
|
28.4 |
|
General & administrative expenses |
|
|
26,477 |
|
6.1 |
|
|
|
22,172 |
|
6.5 |
|
|
19.4 |
|
Pre-opening expenses |
|