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 March 28, 2019

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No  

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock, $0.001 par value per share

FND

New York Stock Exchange

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

Class

 

Outstanding at April 30, 2019

Class A common stock, $0.001 par value

 

98,244,175

 

 

 

 

 


 

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 Operations and Comprehensive Income

4

 

 

Condensed Consolidated Statements of Stockholders’ Equity

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

13

 

 

Forward-Looking Statements

13

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

 

Item 4.

Controls and Procedures

22

Part II – Other Information 

23

 

Item 1.

Legal Proceedings

23

 

Item 1A.

Risk Factors

23

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

 

Item 3.

Defaults Upon Senior Securities

23

 

Item 4.

Mine Safety Disclosures

23

 

Item 5.

Other Information

23

 

Item 6.

Exhibits

23

 

 

2


 

Table of Contents

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

 

 

March 28,

 

December 27,

 

 

2019

 

2018

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

451

 

$

644

Income taxes receivable

 

 

 —

 

 

4,324

Receivables, net

 

 

66,101

 

 

67,527

Inventories, net

 

 

437,504

 

 

471,014

Prepaid expenses and other current assets

 

 

23,342

 

 

15,949

Total current assets

 

 

527,398

 

 

559,458

Fixed assets, net

 

 

338,888

 

 

328,366

Right of use assets

 

 

659,115

 

 

 —

Intangible assets, net

 

 

109,322

 

 

109,330

Goodwill

 

 

227,447

 

 

227,447

Other assets

 

 

11,181

 

 

9,490

Total long-term assets

 

 

1,345,953

 

 

674,633

Total assets

 

$

1,873,351

 

$

1,234,091

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of term loans

 

$

3,500

 

$

3,500

Current portion of lease liabilities

 

 

73,615

 

 

 —

Trade accounts payable

 

 

229,498

 

 

313,503

Accrued expenses and other current liabilities

 

 

76,390

 

 

82,038

Income taxes payable

 

 

8,765

 

 

 —

Deferred revenue

 

 

6,581

 

 

5,244

Total current liabilities

 

 

398,349

 

 

404,285

Term loans

 

 

141,152

 

 

141,834

Revolving line of credit

 

 

2,100

 

 

 —

Deferred rent

 

 

 —

 

 

36,980

Lease liabilities

 

 

683,672

 

 

 —

Deferred income tax liabilities, net

 

 

25,666

 

 

26,838

Tenant improvement allowances

 

 

 —

 

 

37,295

Other liabilities

 

 

2,451

 

 

2,550

Total long-term liabilities

 

 

855,041

 

 

245,497

Total liabilities

 

 

1,253,390

 

 

649,782

Commitments and Contingencies (Note 5)

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Capital stock:

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at March 28, 2019 and December 27, 2018

 

 

 —

 

 

 —

Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 97,997,529 shares issued and outstanding at March 28, 2019 and 97,588,539 issued and outstanding at December 27, 2018

 

 

98

 

 

98

Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at March 28, 2019 and December 27, 2018

 

 

 —

 

 

 —

Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and outstanding at March 28, 2019 and December 27, 2018

 

 

 —

 

 

 —

Additional paid-in capital

 

 

345,907

 

 

340,462

Accumulated other comprehensive income (loss), net

 

 

(148)

 

 

186

Retained earnings

 

 

274,104

 

 

243,563

Total stockholders’ equity

 

 

619,961

 

 

584,309

Total liabilities and stockholders’ equity

 

$

1,873,351

 

$

1,234,091

 

See accompanying notes to condensed consolidated financial statements.

3


 

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income

(In Thousands, Except Per Share Data)

(Unaudited)

 

 

 

 

 

 

 

 

    

Thirteen Weeks Ended

 

 

March 28,

 

March 29,

 

 

2019

    

2018

Net sales

 

$

477,050

 

$

402,948

Cost of sales

 

 

275,676

 

 

237,562

Gross profit

 

 

201,374

 

 

165,386

Operating expenses:

 

 

 

 

 

 

Selling and store operating

 

 

127,383

 

 

102,567

General and administrative

 

 

30,202

 

 

23,339

Pre-opening

 

 

4,027

 

 

2,974

Total operating expenses

 

 

161,612

 

 

128,880

Operating income

 

 

39,762

 

 

36,506

Interest expense

 

 

2,921

 

 

1,784

Income before income taxes

 

 

36,841

 

 

34,722

Provision for income taxes

 

 

6,121

 

 

2,851

Net income

 

$

30,720

 

$

31,871

Change in fair value of hedge instruments, net of tax

 

 

(334)

 

 

430

Total comprehensive income

 

$

30,386

 

$

32,301

Basic earnings per share

 

$

0.31

 

$

0.33

Diluted earnings per share

 

$

0.29

 

$

0.30

 

See accompanying notes to condensed consolidated financial statements.

4


 

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(In Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Other

 

 

 

 

Total

 

 

Preferred Stock

 

Class A

 

Paid-in

 

Comprehensive

 

Retained

 

Stockholders’

 

  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Income (Loss)

  

Earnings

  

Equity

Balance, December 28, 2018

 

 —

 

$

 —

 

97,588

 

$

98

 

$

340,462

 

$

186

 

$

243,563

 

$

584,309

Stock based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,250

 

 

 —

 

 

 —

 

 

2,250

Exercise of stock options

 

 —

 

 

 —

 

348

 

 

 —

 

 

1,776

 

 

 —

 

 

 —

 

 

1,776

Cumulative effect from adoption of ASU No. 2016-02

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(179)

 

 

(179)

Shares issued under employee stock plans

 

 —

 

 

 —

 

61

 

 

 —

 

 

1,419

 

 

 —

 

 

 —

 

 

1,419

Other comprehensive gain (loss), net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(334)

 

 

 —

 

 

(334)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

30,720

 

 

30,720

Balance, March 28, 2019

 

 —

 

$

 —

 

97,997

 

$

98

 

$

345,907

 

$

(148)

 

$

274,104

 

$

619,961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Other

 

 

 

 

Total

 

 

Preferred Stock

 

Class A

 

Paid-in

 

Comprehensive

 

Retained

 

Stockholders’

 

  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Income (Loss)

  

Earnings

  

Equity

Balance, December 29, 2017

 

 —

 

$

 —

 

95,509

 

$

96

 

$

323,419

 

$

(205)

 

$

119,550

 

$

442,860

Stock based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,415

 

 

 —

 

 

 —

 

 

1,415

Exercise of stock options

 

 —

 

 

 —

 

585

 

 

 —

 

 

3,195

 

 

 —

 

 

 —

 

 

3,195

Cumulative effect from adoption of ASU No. 2014-09

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,826

 

 

7,826

Other comprehensive gain (loss), net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

430

 

 

 —

 

 

430

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

31,871

 

 

31,871

Balance, March 29, 2018

 

 —

 

$

 —

 

96,094

 

$

96

 

$

328,029

 

$

225

 

$

159,247

 

$

487,597

 

See accompanying notes to condensed consolidated financial statements.

5


 

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

    

Thirteen Weeks Ended

 

 

March 28,

 

March 29,

 

 

2019

 

2018

Operating activities

 

 

  

 

 

  

Net income

 

$

30,720

 

$

31,871

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

 

 

 

 

 

 

Depreciation and amortization

 

 

17,184

 

 

11,534

Amortization of tenant improvement allowances

 

 

 —

 

 

(1,045)

Deferred income taxes

 

 

(1,057)

 

 

2,111

Interest cap derivative contracts

 

 

610

 

 

(535)

Stock based compensation expense

 

 

2,250

 

 

1,415

Changes in operating assets and liabilities:

 

 

 

 

 

 

Receivables, net

 

 

22,568

 

 

15,775

Inventories, net

 

 

33,510

 

 

(9,262)

Trade accounts payable

 

 

(84,005)

 

 

(3,723)

Accrued expenses and other current liabilities

 

 

3,017

 

 

(12,926)

Income taxes

 

 

13,143

 

 

780

Deferred revenue

 

 

1,337

 

 

1,500

Deferred rent

 

 

 —

 

 

2,707

Tenant improvement allowances

 

 

 —

 

 

128

Other, net

 

 

(12,256)

 

 

282

Net cash provided by operating activities

 

 

27,021

 

 

40,612

Investing activities

 

 

  

 

 

  

Purchases of fixed assets

 

 

(31,634)

 

 

(27,841)

Net cash used in investing activities

 

 

(31,634)

 

 

(27,841)

Financing activities

 

 

  

 

 

  

Borrowings on revolving line of credit

 

 

80,200

 

 

51,900

Payments on revolving line of credit

 

 

(78,100)

 

 

(66,100)

Payments on term loans

 

 

(875)

 

 

(1,750)

Proceeds from exercise of stock options

 

 

1,776

 

 

3,195

Proceeds from employee stock purchase plan

 

 

1,419

 

 

 —

Net cash provided by (used in) financing activities

 

 

4,420

 

 

(12,755)

Net increase (decrease) in cash and cash equivalents

 

 

(193)

 

 

16

Cash and cash equivalents, beginning of the period

 

 

644

 

 

556

Cash and cash equivalents, end of the period

 

$

451

 

$

572

Supplemental disclosures of cash flow information

 

 

 

 

 

  

Buildings and equipment acquired under operating leases

 

$

53,049

 

$

 —

Cash paid for interest

 

$

1,987

 

$

2,368

Cash paid for income taxes

 

$

 —

 

$

19

Fixed assets accrued at the end of the period

 

$

10,836

 

$

16,332

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

 

$

 —

 

$

 —

 

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)

 March 28, 2019

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 March 28, 2019, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D”), operates 103 warehouse-format stores, which average 75,000 square feet, and one small-format standalone design center in 28 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 26, 2019 (“fiscal 2019”) and December 27, 2018 (“fiscal 2018”) 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 27, 2018 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 2018, filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2019 (the “Annual Report”).

Management believes the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments considered necessary for a fair statement of results for the interim periods presented.

Results of operations for the thirteen weeks ended March 28, 2019 and March 29, 2018 are not necessarily indicative of the results to be expected for the full year.

There have been no updates to our Significant Accounting Policies since the Annual Report, except for the policy changes in connection with the newly adopted lease accounting standard outlined in Note 5. 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 that have yet to be adopted 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.

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Recently Adopted 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 on the balance sheet with an option to exclude short-term leases (leases with terms of 12 months or less). The guidance also requires disclosures about the amount, timing, and uncertainty of cash flows arising from leases. We adopted the ASU on December 28, 2018, the first day of our fiscal year 2019, using the modified retrospective approach. The cumulative effect adjustment upon adoption resulted in an  immaterial opening balance sheet reduction to retained earnings. The adoption of ASU No. 2016-02 in the first quarter of fiscal 2019 had a material impact on the Company’s Condensed Consolidated Balance Sheet in respect to the right of use assets, lease liabilities, tenant improvement allowances, and deferred rent but did not have a material impact on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income or Statements of Cash Flows. Refer to Note 5 for further details.

2. Revenues

Disaggregated Revenue

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

 

 

March 28, 2019

 

March 29, 2018

 

 

    

    

 

 

    

% of

    

 

 

    

% of

 

Product Category

 

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Tile

 

 

$

125,310

 

26

%  

$

117,402

 

29

%

Laminate / Luxury Vinyl Plank

 

 

 

97,502

 

20

 

 

66,892

 

17

 

Decorative Accessories

 

 

 

94,440

 

20

 

 

78,489

 

19

 

Installation Materials and Tools

 

 

 

79,709

 

17

 

 

63,581

 

16

 

Wood

 

 

 

49,230

 

10

 

 

46,485

 

12

 

Natural Stone

 

 

 

30,887

 

 7

 

 

28,006

 

 7

 

Delivery and Other

 

 

 

(28)

 

 —

 

 

2,093

 

 —

 

Total

 

 

$

477,050

 

100

%  

$

402,948

 

100

%

.

 

 

3. 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 March 28, 2019 and December 27, 2018, the carrying amounts and fair values of our debt were as follows:

 

 

 

 

 

 

 

 

    

March 28,

    

December 27,

(in thousands)

 

2019

 

2018

Total debt at par value

 

$

150,225

 

$

149,000

Less: unamortized discount and debt issuance costs

 

 

3,473

 

 

3,666

Net carrying amount

 

$

146,752

 

$

145,334

Fair value

 

$

148,003

 

$

147,883

 

 

 

4. Income Taxes

Our effective income tax rates were 16.6% and 8.2% for the thirteen weeks ended March 28, 2019 and March 29, 2018, respectively.

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5. Commitments and Contingencies

Lease Commitments

On December 28, 2018, the first day of our fiscal year 2019, we adopted ASU No. 2016-02, "Leases (Topic 842)", which requires that lessees recognize lease assets and lease liabilities for all leases on the balance sheet with an option to exclude short-term leases (leases with terms of 12 months or less). We adopted ASU No. 2016-02 using the modified retrospective approach and elected the package of practical expedients to use in transition, which permitted us not to reassess, under the new standard, our prior conclusions about lease identification and lease classification. The cumulative effect adjustment upon adoption of ASU No. 2016-02 resulted in an immaterial adjustment to retained earnings. The adoption also resulted in the addition of $621 million right of use assets and corresponding $701 million lease liabilities to our balance sheet, while eliminating deferred rent and tenant improvement allowances. Additionally, we do not separate lease and nonlease components of contracts.

The majority of our long-term operating lease agreements through F&D are for our corporate office, retail locations, and distribution centers, which expire in various years through 2038. All of our building leases have 10-15 year lease terms, except one lease which has a 20-year term. The majority of our building leases also include options to extend, which are factored into the recognition of their respective assets and liabilities when appropriate. Additionally, one building lease contains variable lease payments, which are determined based on a percentage of retail sales over a contractual level, and we sublease real estate within one store and one distribution center to third parties. Certain lease agreements include escalating rents over the lease terms which, under the new accounting standard, results in rent being expensed on a straight‑line basis over the life of the lease that commences on the date we have the right to control the property. Our lease agreements do not contain any residual value guarantees or restrictive covenants that would reasonably be expected to have a material impact on our business.

As most of our leases do not provide a readily determinable implicit rate, we use a third party to determine our incremental borrowing rate, specifically the Bloomberg yield curve for US consumers with a BB- credit rating. The rate is adjusted for collateralization as well as inflation.

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Lease Position

The table below presents supplemental balance sheet information related to operating leases.

 

 

 

 

 

 

 

 

 

 

As of

(in thousands, except lease term and discount rate)

 

Balance Sheet Classification

 

March 28, 2019

Assets

 

 

 

 

 

Building

 

Right of use assets

 

$

647,667

Equipment

 

Right of use assets

 

 

6,263

Land

 

Right of use assets

 

 

245

Software

 

Right of use assets

 

 

4,940

Total operating lease assets

 

 

 

$

659,115

Liabilities

 

 

 

 

 

Current

 

 

 

 

 

Building

 

Current portion of lease liabilities

 

$

68,927

Equipment

 

Current portion of lease liabilities

 

 

2,784

Land

 

Current portion of lease liabilities

 

 

93

Software

 

Current portion of lease liabilities

 

 

1,811

Total current operating lease liabilities

 

 

 

$

73,615

Noncurrent

 

 

 

 

 

Building

 

Lease liabilities

 

$

675,769

Equipment

 

Lease liabilities

 

 

4,663

Land

 

Lease liabilities

 

 

158

Software

 

Lease liabilities

 

 

3,082

Total noncurrent operating lease liabilities

 

 

 

$

683,672

Total operating lease liabilities

 

 

 

$

757,287

 

 

 

 

 

 

Weighted-average remaining lease term

 

 

 

 

9 years

Weighted-average discount rate

 

 

 

 

5.4%

 

Lease Costs

The table below presents components of lease expense for operating leases.

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

(in thousands)

 

Classification

 

March 28, 2019

Operating lease cost (1)

 

Selling and store operating

 

$

26,015

Sublease income

 

Selling and store operating

 

 

(623)

Total lease cost

 

 

 

$

25,392

(1) Includes variable lease costs, which are immaterial.

 

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Undiscounted Cash Flows

Future minimum lease payments under non‑cancelable operating leases (with initial or remaining lease terms in excess of one year) as of March 28, 2019, were:

 

 

 

 

(in thousands)

    

Amount

Thirty-nine weeks ended December 26, 2019

 

$

82,939

2020

 

 

112,086

2021

 

 

105,317

2022

 

 

98,163

2023

 

 

93,513

Thereafter

 

 

503,402

Total minimum lease payments (2)

 

$

995,420

Less: amount of lease payments representing interest

 

 

238,133

Present value of future minimum lease payments

 

 

757,287

Less: current obligations under leases

 

 

73,615

Long-term lease obligations

 

$

683,672

(2) Future lease payments exclude $311 million of legally binding minimum lease payments for operating leases signed but not yet commenced.

 

For the thirteen weeks ended March 28, 2019, cash paid for operating leases was $24.6 million.

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.

6. 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 were 1,500,000 shares of our Class A common stock, par value $0.001 per share, approved for issuance. On December 31, 2018, $1.4 million in contributions were used to purchase 60,871 shares of our Class A common stock. Additionally, during the thirteen weeks ended March 28, 2019, the Company recognized $143 thousand of stock-based compensation expense related to the ESPP.

7. 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

 

 

March 28,

 

March 29,

(in thousands, except per share data)

 

2019

    

2018

Net income

 

$

30,720

 

$

31,871

Basic weighted average shares outstanding

 

 

97,785

 

 

95,714

Dilutive effect of share based awards

 

 

6,536

 

 

8,951

Diluted weighted average shares outstanding

 

 

104,321

 

 

104,665

Basic earnings per share

 

$

0.31

 

$

0.33

Diluted earnings per share

 

$

0.29

 

$

0.30

 

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

    

 

 

March 28,

 

March 29,

 

(in thousands)

 

2019

 

2018

 

Stock options

 

986

 

98

 

 

 

 

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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 27, 2018 and filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2019 (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,” “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;

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·

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 103 warehouse format stores across 28 states as of March 28, 2019. We believe that we offer the industry’s broadest in stock assortment of tile, wood, laminate, vinyl, 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 thirteen weeks of fiscal 2019 and fiscal 2018, which ended on March 28, 2019 and March 29, 2018, respectively.

During the thirteen weeks ended March 28, 2019, we continued to make long-term key strategic investments, including:

·

opening three new warehouse-format stores ending the quarter with 103 warehouse-format stores;

·

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

·

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; 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

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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

 

 

 

 

 

 

 

 

 

 

3/28/2019

 

 

3/29/2018

 

 

 

 

 

 

 

(in thousands)

 

 

Actual

 

% of Sales

    

 

Actual

 

% of Sales

 

 

 

$ Increase/(Decrease)

 

% Increase/(Decrease)

 

Net sales

 

 

$

477,050

 

100.0

%  

 

$

402,948

 

100.0

%

 

$

74.1

 

18.4

%

Cost of sales

 

 

 

275,676

 

57.8

 

 

 

237,562

 

59.0

 

 

 

38.1

 

16.0

 

Gross profit

 

 

 

201,374

 

42.2

 

 

 

165,386

 

41.0

 

 

 

36.0

 

21.8

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and store operating expenses

 

 

 

127,383

 

26.7

 

 

 

102,567

 

25.4

 

 

 

24.8

 

24.2

 

General and administrative expenses

 

 

 

30,202

 

6.4

 

 

 

23,339

 

5.8

 

 

 

6.9

 

29.4

 

Pre-opening expenses

 

 

 

4,027

 

0.8

 

 

 

2,974

 

0.7

 

 

 

1.1

 

35.4

 

Total operating expenses

 

 

 

161,612

 

33.9

 

 

 

128,880

 

31.9

 

 

 

32.7

 

25.4

 

Operating income

 

 

 

39,762

 

8.3

 

 

 

36,506

 

9.1

 

 

 

3.3

 

8.9

 

Interest expense

 

 

 

2,921

 

0.6

 

 

 

1,784

 

0.5

 

 

 

1.1

 

63.7

 

Income before income taxes

 

 

 

36,841

 

7.7

 

 

 

34,722

 

8.6

 

 

 

2.1

 

6.1

 

Provision for income taxes

 

 

 

6,121

 

1.3

 

 

 

2,851

 

0.7

 

 

 

3.3

 

NM

 

Net income

 

 

$

30,720

 

6.4

%

 

$

31,871

 

7.9

%

 

$

(1.2)

 

(3.6)

%

 

NM – Not meaningful

 

Selected Financial Information