fnd-20200625

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________

FORM 10-Q

_________________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 25, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission file number 001-38070

_________________________________________

Floor & Decor Holdings, Inc.

(Exact name of registrant as specified in its charter)

_________________________________________


Delaware						27-3730271
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

2500 Windy Ridge Parkway SE

Atlanta,

Georgia

30339

(Address of principal executive offices)

(Zip Code)


	(404)	471-1634	Not Applicable
(Registrant’s telephone number, including area code)				(Former name, former address and former fiscal year, if changed since last report)

_________________________________________

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, $0.001 par value per share	FND	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

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

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

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


Class						Outstanding at July 28, 2020
Class A common stock, $0.001 par value per share						103,460,984

Table of Contents

Page

Part I – Financial Information

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

Condensed Consolidated Statements of Cash Flows (Unaudited)

Notes to Condensed Consolidated Financial Statements

Item 2.

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

Forward-Looking Statements

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Part II – Other Information

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)


in thousands, except for share and per share data	As of June 25, 2020		As of December 26, 2019
Assets
Current assets:
Cash and cash equivalents	$	134,420	$	27,037
Income taxes receivable	27,971		2,868
Receivables, net	54,118		69,301
Inventories, net	594,269		581,865
Prepaid expenses and other current assets	19,203		20,415
Total current assets	829,981		701,486
Fixed assets, net	481,770		456,289
Right-of-use assets	873,115		822,256
Intangible assets, net	109,283		109,299
Goodwill	227,447		227,447
Other assets	7,134		7,532
Total long-term assets	1,698,749		1,622,823
Total assets	$	2,528,730	$	2,324,309
Liabilities and stockholders’ equity
Current liabilities:
Current portion of term loan	$	2,558	$	—
Current portion of lease liabilities	90,543		74,592
Trade accounts payable	326,032		368,459
Accrued expenses and other current liabilities	106,170		102,807

Deferred revenue	8,387		6,683
Total current liabilities	533,690		552,541
Term loan	206,977		142,606

Lease liabilities	896,626		844,269
Deferred income tax liabilities, net	38,930		18,378
Other liabilities	2,011		2,179
Total long-term liabilities	1,144,544		1,007,432
Total liabilities	1,678,234		1,559,973
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 June 25, 2020 and December 26, 2019	—		—
Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 103,146,537 shares issued and outstanding at June 25, 2020 and 101,457,858 issued and outstanding at December 26, 2019	103		101
Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at June 25, 2020 and December 26, 2019	—		—
Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and outstanding at June 25, 2020 and December 26, 2019	—		—
Additional paid-in capital	387,344		370,413
Accumulated other comprehensive loss, net	(33)		(193)
Retained earnings	463,082		394,015
Total stockholders’ equity	850,496		764,336
Total liabilities and stockholders’ equity	$	2,528,730	$	2,324,309

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)


	Thirteen Weeks Ended						Twenty-six Weeks Ended
in thousands, except for per share data	June 25, 2020		June 27, 2019		June 25, 2020		June 27, 2019
Net sales	$	462,352	$	520,311	$	1,017,289	$	997,361
Cost of sales	265,660		302,488		584,565		578,164
Gross profit	196,692		217,823		432,724		419,197
Operating expenses:
Selling and store operating	138,457		134,643		291,523		262,026
General and administrative	33,713		30,916		64,571		61,118
Pre-opening	3,433		6,369		8,867		10,396
Total operating expenses	175,603		171,928		364,961		333,540
Operating income	21,089		45,895		67,763		85,657
Interest expense, net	2,303		2,223		4,110		5,144
Gain on early extinguishment of debt	(1,015)		—		(1,015)		—
Income before income taxes	19,801		43,672		64,668		80,513
(Benefit) provision for income taxes	(12,203)		76		(4,399)		6,197
Net income	$	32,004	$	43,596	$	69,067	$	74,316
Change in fair value of hedge instruments, net of tax	92		(213)		160		(547)
Total comprehensive income	$	32,096	$	43,383	$	69,227	$	73,769
Basic earnings per share	$	0.31	$	0.44	$	0.68	$	0.76
Diluted earnings per share	$	0.30	$	0.42	$	0.65	$	0.71

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)


	Common Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total Stockholders' Equity
	Class A
in thousands	Shares	Amount
Balance, December 27, 2019	101,458	$	101	$	370,413	$	(193)	$	394,015	$	764,336
Stock-based compensation expense	—	—		2,908		—		—		2,908
Exercise of stock options	453	1		3,782		—		—		3,783
Issuance of restricted stock awards	368	—		—		—		—		—
Shares issued under employee stock plans	30	—		1,131		—		—		1,131
Other comprehensive gain, net of tax	—	—		—		68		—		68
Net income	—	—		—		—		37,063		37,063
Balance, March 26, 2020	102,309	$	102	$	378,234	$	(125)	$	431,078	$	809,289
Stock-based compensation expense	—	—		4,234		—		—		4,234
Exercise of stock options	838	1		4,876		—		—		4,877
Other comprehensive gain, net of tax	—	—		—		92		—		92
Net income	—	—		—		—		32,004		32,004
Balance, June 25, 2020	103,147	$	103	$	387,344	$	(33)	$	463,082	$	850,496


	Common Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total Stockholders' Equity
	Class A
in thousands	Shares	Amount
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 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
Stock-based compensation expense	—	—		2,168		—		—		2,168
Exercise of stock options	1,090	1		5,375		—		—		5,376
Issuance of restricted stock awards	24	—		—		—		—		—
Other comprehensive loss, net of tax	—	—		—		(213)		—		(213)
Net income	—	—		—		—		43,596		43,596
Balance, June 27, 2019	99,111	$	99	$	353,450	$	(361)	$	317,700	$	670,888

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Twenty-six Weeks Ended
in thousands	June 25, 2020		June 27, 2019
Operating activities
Net income	$	69,067	$	74,316
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	44,389		34,910
Gain on early extinguishment of debt	(1,015)		—
(Gain) loss on asset impairments and disposals	(29)		22
Deferred income taxes	20,552		(1,478)
Interest cap derivative contracts	170		1,250
Stock-based compensation expense	7,142		4,418
Changes in operating assets and liabilities:
Receivables, net	15,183		15,809
Inventories, net	(12,404)		24,618
Trade accounts payable	(42,427)		(40,808)
Accrued expenses and other current liabilities	258		9,058
Income taxes	(25,100)		1,541
Deferred revenue	1,704		1,723
Other, net	19,215		(3,222)
Net cash provided by operating activities	96,705		122,157
Investing activities
Purchases of fixed assets	(65,994)		(78,172)
Net cash used in investing activities	(65,994)		(78,172)
Financing activities
Borrowings on revolving line of credit	275,000		95,300
Payments on revolving line of credit	(275,000)		(95,300)
Proceeds from term loans	75,000		—
Payments on term loans	(1,237)		(1,750)
Proceeds from exercise of stock options	8,660		7,152
Debt issuance costs	(6,882)		—
Proceeds from employee stock purchase plan	1,131		1,419
Net cash provided by financing activities	76,672		6,821
Net increase in cash and cash equivalents	107,383		50,806
Cash and cash equivalents, beginning of the period	27,037		644
Cash and cash equivalents, end of the period	$	134,420	$	51,450
Supplemental disclosures of cash flow information
Buildings and equipment acquired under operating leases	$	91,670	$	132,213
Cash paid for interest, net of capitalized interest	$	3,486	$	3,912
Cash paid for income taxes, net of refunds	$	147	$	12,099
Fixed assets accrued at the end of the period	$	22,631	$	25,420

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Nature of Business

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

As of June 25, 2020, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. ("Outlets"), operates 125 warehouse-format stores, which average 76,000 square feet, and one small-format standalone design center in 30 states, as well as four distribution centers and an e-commerce site, FloorandDecor.com.

Fiscal Year

The Company’s fiscal year is the 52- or 53-week period ending on the Thursday on or preceding December 31st. Fiscal year ending December 31, 2020 (“fiscal 2020”) includes 53 weeks, and the fiscal year ended December 26, 2019 (“fiscal 2019”) included 52 weeks. When a 53-week fiscal year occurs, we report the additional week at the end of the fiscal fourth quarter. 52-week fiscal years consist of thirteen-week periods in each quarter of the fiscal year.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. The Condensed Consolidated Balance Sheet as of December 26, 2019 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 2019, filed with the Securities and Exchange Commission (the “SEC”) on February 20, 2020 (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 and twenty-six weeks ended June 25, 2020 and June 27, 2019 are not necessarily indicative of the results to be expected for the full years.

Impact of the COVID-19 Pandemic

On March 11, 2020, the World Health Organization announced that infections of the coronavirus (COVID-19) had become a pandemic, and on March 13, 2020, the President of the United States announced a National Emergency relating to the COVID-19 pandemic. While the full impact that the COVID-19 pandemic could have on the Company's business remains highly uncertain, it has had a material negative impact on the Company's fiscal 2020 operations and financial results to date. The following summarizes certain actions taken and impacts from the COVID-19 pandemic during and subsequent to the thirteen and twenty-six weeks ended June 25, 2020:

•Beginning in late March 2020, for the health and safety of its customers and employees, the Company temporarily closed some of its stores and shifted its remaining stores to a curbside pickup model. Under this model, customers were not allowed to enter the Company's stores, resulting in a significant decline in sales compared to the same period of the prior year.

•In May, the Company began a phased approach to reopening its stores for in-store shopping with enhanced safety and sanitation measures such as requiring associates to wear face masks, installing social distancing markers on floors and protective shields at cash registers, and regularly sanitizing shopping carts, pin pads, design desks, and other high-traffic areas. As of June 25, 2020, all of the Company's stores are open for in-store shopping, with June sales higher than the same period of the prior year.

Table of Contents

•To provide additional liquidity in response to the business uncertainties resulting from the evolving COVID-19 pandemic, the Company entered into a $75.0 million incremental term loan on May 18, 2020. See Note 3, "Debt" for additional information.

•In response to the impact and uncertainties caused by the COVID-19 pandemic, the Company initially implemented a number of measures to minimize cash outlays, including lowering inventory purchases and related supply chain costs to align with reduced sales, temporarily reducing compensation for all executive officers and most employees, temporarily freezing new hiring, reducing or eliminating non-essential spending, reducing advertising spending, furloughing certain employees, and delaying or reducing rent payments and planned capital expenditures, including new store investments. Since the Company began to reopen stores for in-store shopping starting in May, many of these cost saving measures have been eliminated or relaxed as the Company's financial results have improved.

•On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted, which includes provisions related to income taxes, the temporary deferral of the employer portion of social security taxes, and retention credits for 50% of eligible wages and health benefits paid to employees not providing services due to the COVID-19 pandemic. Refer to Note 4, "Income Taxes" for additional information.

The COVID-19 pandemic remains a rapidly evolving situation. The extent of the impact of the pandemic on the Company's business and financial results will depend on future developments, including the duration of the pandemic and the spread of COVID-19 within the markets in which the Company operates as well as the related impact on consumer confidence and spending, all of which are highly uncertain.

Summary of Significant Accounting Policies

Other than as noted below, there have been no updates to our Significant Accounting Policies since the Annual Report. For more information regarding our Significant Accounting Policies and Estimates, see the “Summary of Significant Accounting Policies” section of “Item 8. Financial Statements and Supplementary Data” of our Annual Report.

Impairment Assessment of Goodwill and Other Indefinite-Lived Intangible Assets

The Company tests goodwill and indefinite-lived intangible assets for impairment annually in the fourth quarter of each fiscal year, or more often if events occur or changes in circumstances indicate that the carrying amount of goodwill or indefinite-lived intangible assets may not be recoverable. We assess the value of our goodwill and indefinite-lived intangible assets under either a qualitative or quantitative approach. Under a qualitative approach, the Company evaluates various market and other factors to determine whether it is more likely than not that the Company’s goodwill or indefinite-lived intangible assets have been impaired. In performing the qualitative assessment, the Company considers the carrying value of its single reporting unit compared to its fair value as well as events and changes in circumstances that could include, but are not limited to, a significant adverse change in customer demand or business climate, an adverse action or assessment by a regulator, and significant adverse changes in the price of the Company’s common stock. If such qualitative assessment indicates that impairment may have occurred, an additional quantitative assessment is performed by comparing the carrying value of the assets to their respective estimated fair values. If the recorded carrying value of goodwill or an indefinite-lived intangible asset exceeds its estimated fair value, an impairment charge is recorded to write the asset down to its estimated fair value.

Due to the impact of the COVID-19 pandemic on the Company’s business, the Company qualitatively assessed whether it was more likely than not that the goodwill and indefinite-lived intangible assets were impaired as of March 26, 2020. As part of this assessment, the Company considered information available as of the April 30, 2020 filing date of its first quarter fiscal 2020 10-Q related to the negative financial impact that resulted from temporary store closures and limited curbside operations beginning in late March. Based on this interim impairment assessment, the Company determined that its goodwill and indefinite-lived intangible assets were not impaired as of March 26, 2020. Further, the Company considered events and changes in circumstances subsequent to April 30, 2020, including the improvement in sales since reopening stores to customers for in-store shopping, and did not identify an indication of impairment of its goodwill or indefinite-lived intangible assets as of June 25, 2020.

Leases

During the second quarter of fiscal 2020, Company negotiated rent deferrals or abatements for a significant number of its stores. The Company has also delayed rent payments for some stores as negotiations are in process with landlords. Total payments delayed or deferred as of June 25, 2020 were approximately $5.9 million, of which $4.9 million is included in the current portion of lease liabilities and $1.0 million is included in lease liabilities on the condensed consolidated balance sheets.

Table of Contents

In accordance with Financial Accounting Standards Board ("FASB") Staff Q&A - Topic 842: "Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic" issued in April 2020, the Company has elected to account for lease concessions that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee as though enforceable rights and obligations for those concessions existed in the original lease agreements. For qualified rent deferrals, the Company has recognized a non-interest bearing accrued liability, which will be reduced when the deferred payment is made in the future. For qualifying rent abatement concessions, which are immaterial in aggregate, the Company is recognizing negative lease expense for the amount of the abatement on a straight-line basis over the term of the lease. During the thirteen and twenty-six weeks ended June 25, 2020, the Company recognized less than $0.1 million of negative lease expense related to rent abatement concessions.

Recently Adopted Accounting Pronouncements

Implementation Costs Incurred in Cloud Computing Arrangements. In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. In the first quarter of fiscal 2020, the Company adopted ASU No. 2018-15 on a prospective basis for implementation costs for new or existing arrangements incurred on or after the adoption date. The adoption of ASU No. 2018-15 did not have a material impact on the Company’s condensed consolidated financial statements.

Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which modifies the measurement approach for credit losses on financial assets measured on an amortized cost basis from an 'incurred loss' method to an 'expected loss' method. The amended guidance requires the measurement of expected credit losses to be based on relevant information, including historical experience, current conditions, and a reasonable and supportable forecast that affects the collectability of the related financial asset. The adoption of ASU No. 2016-13 in the first quarter of fiscal 2020 did not have a material impact on the Company’s condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance to ease the potential accounting and financial reporting burden of reference rate reform, including the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The new guidance provides temporary optional expedients and exceptions for applying U.S. GAAP to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and the sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made. Unlike other topics, the provisions of this update are only available until December 31, 2022, by which time the reference rate replacement activity is expected to be completed. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures and has yet to elect an adoption date.

Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also clarifies and amends existing guidance to improve consistent application among reporting entities. The guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

2. Revenues

Net sales consist of revenue associated with contracts with customers for the sale of goods and services in amounts that reflect the consideration the Company is entitled to receive in exchange for those goods and services.

Deferred Revenue

Under Accounting Standards Codification (“ASC”) 606, the Company recognizes revenue when the customer obtains control of the inventory. Amounts in deferred revenue at period-end reflect orders for which the inventory is not currently ready for physical transfer to the customer.

Table of Contents

Disaggregated Revenue

The Company has one operating segment and one reportable segment. The following table presents the net sales of each major product category (in thousands):


	Thirteen Weeks Ended
	June 25, 2020						June 27, 2019
Product Category	Net Sales		% of Net Sales		Net Sales		% of Net Sales
Tile	$	118,981	26	%	$	136,319	26	%
Laminate / luxury vinyl plank	105,427		23		108,218		21
Decorative accessories / wall tile	87,547		19		97,594		19
Installation materials and tools	73,213		16		88,592		17
Wood	41,901		9		52,762		10
Natural stone	30,319		6		32,903		6
Other (1)	4,964		1		3,923		1
Total	$	462,352	100	%	$	520,311	100	%


	Twenty-six Weeks Ended
	June 25, 2020						June 27, 2019
Product Category	Net Sales		% of Net Sales		Net Sales		% of Net Sales
Tile	$	253,893	25	%	$	261,629	26	%
Laminate / luxury vinyl plank	230,421		23		205,720		21
Decorative accessories / wall tile	201,144		20		192,034		19
Installation materials and tools	167,789		16		168,301		17
Wood	90,896		9		101,992		10
Natural stone	65,196		6		63,790		6
Other (1)	7,950		1		3,895		1
Total	$	1,017,289	100	%	$	997,361	100	%

(1) Other includes delivery revenue less adjustments for deferred revenue, sales returns reserves, rewards under our Pro Premier Loyalty program, and other revenue related adjustments that are not allocated on a product-level basis.

Table of Contents

3. Debt

The following table summarizes the Company's long-term debt as of June 25, 2020 and December 26, 2019:


in thousands	June 25, 2020		December 26, 2019
Credit Facilities:
UBS Facility Term Loan B	$	144,263	$	145,500
UBS Facility Term Loan B-1	75,000		—
Wells Facility Revolving Line of Credit	—		—
Total secured debt at par value	219,263		145,500
Less: unamortized discount and debt issuance costs	9,728		2,894
Net carrying amount	209,535		142,606
Less: current maturities	2,558		—
Total long-term debt	$	206,977	$	142,606
Total debt at fair value	$	203,915	$	145,136

Market risk associated with the Company's 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 the Company's estimates of interest rates, maturities, credit risk, and underlying collateral and is classified as Level 3 within the fair value hierarchy.

The following table summarizes scheduled maturities of the Company’s debt, including current maturities, as of June 25, 2020:


in thousands	Amount
Twenty-seven weeks ending December 31, 2020	$	1,460
2021	1,647
2022	2,196
2023	2,196
2024	2,196
Thereafter (1)	209,568
Total minimum debt payments	$	219,263

(1)Thereafter maturities are comprised of $137.8 million due under the term loan B facility and $71.8 million due under the term loan B-1 facility through February 14, 2027.

Table of Contents

Credit Facility Amendments

Term Loan Facility

On February 14, 2020, the Company entered into a repricing and third amendment to the credit agreement governing its senior secured term loan facility (the "Term Loan Facility") which, among other things, (a) refinanced the existing term loan B facility with a new term loan B facility in the same aggregate principal amount of approximately $144.6 million, and (b) extended the stated maturity date under the Term Loan Facility to February 14, 2027. The Term Loan Facility also includes an “accordion” feature that allows the Company, under certain circumstances, to increase the size of the Term Loan Facility by an amount up to the greater of $270.0 million or 100.0% of Consolidated EBITDA (as defined in the Term Loan Facility), plus additional amounts (x) if such increase is secured on a pari passu basis with the loans under the Term Loan Facility, up to a Consolidated First Lien Leverage Ratio (as defined in the Term Loan Facility) of 2.50:1.00, (y) if such increase is secured on a junior basis with the loans under the Term Loan Facility, up to a Consolidated Secured Leverage Ratio (as defined in the Term Loan Facility) of 3.50:1.00 and (z) if such increase is unsecured, up to a Consolidated Total Leverage Ratio (as defined in the Term Loan Facility) of 3.50:1.00, subject to certain additional adjustments, which, under certain circumstances, allow for a Consolidated Total Leverage Ratio of up to 4.50:1.00.

The third amendment to the Term Loan Facility also amended the margin applied to loans under the term loan B facility to (x) in the case of ABR Loans (as defined in the Term Loan Facility), from 1.75% or 1.50% per annum (based on credit rating tests) to 1.00% per annum (subject to satisfying a leverage ratio test and subject to a leverage-based step-up to 1.25% if such leverage ratio test is exceeded), and (y) in the case of Eurodollar Loans (as defined in the Term Loan Facility), from 2.75% or 2.50% per annum (based on credit rating tests) to 2.00% per annum (subject to satisfying a leverage ratio test and subject to a leverage-based step-up to 2.25% if such leverage ratio test is exceeded) (subject to a 0.00% floor on Eurodollar Loans). The material terms of the Term Loan Facility were otherwise unchanged.

On May 18, 2020, to provide additional liquidity in response to the business uncertainties resulting from the evolving COVID-19 pandemic, the Company entered into a fourth amendment to the Term Loan Facility that, among other things, (a) provides for a new incremental term loan facility in an aggregate principal amount of $75.0 million with a maturity date of February 14, 2027 (the “term loan B-1 facility”). The Company received net proceeds of $70.5 million from the term loan B-1 facility after deducting a $4.1 million original issuance discount and $0.3 million of debt issuance costs to third parties. The Company intends to use the net proceeds to support its growth plans and for general corporate purposes. The term loan B-1 facility is a separate tranche from the Company's existing term loan B facility. The terms of loans under the term loan B facility remain unchanged.

The Term Loan Facility provides a margin for loans under the term loan B-1 facility of (x) in the case of ABR Loans (as defined in the Term Loan Facility), 3.00% per annum, and (y) in the case of Eurodollar Loans (as defined in the Term Loan Facility), 4.00% per annum (subject to a 1.00% floor on Eurodollar Loans). At June 25, 2020, the applicable interest rate for borrowings was 2.2% for the term loan B facility and 5.0% for the term loan B-1 facility.

All obligations under the Term Loan Facility are secured by (1) a first-priority security interest in substantially all of the property and assets of Outlets and the other guarantors under the Term Loan Facility, with certain exceptions, and (2) a second-priority security interest in the collateral securing the revolving credit facility.

Gain on Debt Extinguishment

During the second quarter of fiscal 2020, the Company evaluated the fourth amendment to the Term Loan Facility in accordance with ASC 470-50, "Debt - Modifications and Extinguishments," on a lender-by-lender basis and determined that the incremental term loan borrowing was provided entirely by one lender and its affiliates. As this lender held a portion of the existing Term Loan Facility debt, the Company performed the 10% cash flow test pursuant to ASC 470-50-40-10 and concluded that the results exceeded the 10% threshold. As a result, the Company accounted for this transaction as a partial extinguishment and derecognized the existing debt held by this lender and recorded the new debt at fair value. Based on the difference between the reacquisition price and carrying amount of debt, the Company recognized a $1.0 million gain on early extinguishment of debt, which included the original issuance discount of $4.1 million and $0.5 million of unamortized debt issuance costs related to the extinguished debt as part of the calculation.

Table of Contents

ABL Facility

On February 14, 2020, the Company also entered into a repricing and general amendment to the credit agreement governing its revolving credit facility (as amended, the “ABL Facility”) that, among other things, (a) increased its revolving commitments to a total aggregate principal amount of $400.0 million, and (b) extended the stated maturity date under the ABL Facility to February 14, 2025. The ABL Facility also includes an “accordion” feature that allows the Company under certain circumstances, to increase the size of the facility by an amount up to $100.0 million, or such higher amount as may be agreed to by the Required Lenders (as defined in the ABL Facility).

The amendment to the ABL Facility also amended the margin applied to loans and letters of credit to (x) in the case of Base Rate Loans (as defined in the ABL Facility), from 0.25% or 0.50% per annum (based on availability) to a flat rate of 0.25% per annum, (y) in the case of LIBO Rate Loans (as defined in the ABL Facility) and letter of credit fees for standby letters of credit, from 1.25% or 1.50% per annum (based on availability) to a flat rate of 1.25% per annum (subject to a 0.00% floor on LIBO Rate Loans) and (z) in the case of letter of credit fees for commercial letters of credit, from 0.75% or 1.00% per annum (based on availability) to a flat rate of 0.75% per annum. The material terms of the ABL Facility were otherwise unchanged.

As of June 25, 2020, the Company's ABL Facility had a maximum availability of $400.0 million with actual available borrowings limited to the sum, at the time of calculation, of (a) eligible credit card receivables multiplied by the credit card advance rate, plus (b) the cost of eligible inventory, net of inventory reserves, multiplied by the applicable appraisal percentage, plus (c) 85% of eligible net trade receivables, plus (d) all eligible cash on hand, plus (e) 100% of the amount for which the eligible letter of credit must be honored after giving effect to any draws, minus certain Availability Reserves (each component as defined in the ABL Facility). The ABL Facility is available for issuance of letters of credit and contains a sublimit of $50.0 million for standby letters of credit and commercial letters of credit combined. Available borrowings under the facility are reduced by the face amount of outstanding letters of credit.

All obligations under the ABL Facility are secured by (1) a first-priority security interest in the cash and cash equivalents, accounts receivable, inventory, and related assets of Outlets and the other guarantors under the ABL Facility, with certain exceptions, and (2) a second-priority security interest in substantially all of the other property and assets of Outlets and the other guarantors under the Term Loan Facility.

Net availability under the ABL Facility, as reduced by outstanding letters of credit of $20.3 million, was $362.1 million based on financial data as of June 25, 2020.

Covenants

The credit agreements governing the Term Loan Facility and ABL Facility contain customary restrictive covenants that, among other things and with certain exceptions, limit the Company’s ability to (i) incur additional indebtedness and liens in connection with such indebtedness, (ii) pay dividends and make certain other restricted payments, (iii) effect mergers or consolidations, (iv) enter into transactions with affiliates, (v) sell or dispose of property or assets, and (vi) engage in unrelated lines of business. In addition, these credit agreements subject the Company to certain reporting obligations and require that the Company satisfy certain financial covenants, including, among other things, a requirement that if borrowings under the ABL Facility exceed 90% of availability, the Company will maintain a certain fixed charge coverage ratio (defined as Consolidated EBITDA less non-financed capital expenditures and income taxes paid to consolidated fixed charges, in each case as more fully defined in the ABL Facility).

The Term Loan Facility has no financial maintenance covenants. The Company is currently in compliance with all material covenants under the credit agreements.

4. Income Taxes

Effective tax rates for the thirteen and twenty-six weeks ended June 25, 2020 and June 27, 2019 were based on the Company’s forecasted annualized effective tax rates and were adjusted for discrete items that occurred within each period. The Company’s effective income tax rate was (61.6)% for the thirteen weeks ended June 25, 2020 and 0.2% for the thirteen weeks ended June 27, 2019. The Company’s effective income tax rate was (6.8)% for the twenty-six weeks ended June 25, 2020 and 7.7% for the twenty-six weeks ended June 27, 2019. For each period, the effective income tax rate was lower than the statutory federal income tax rate of 21.0% primarily due to the recognition of income tax benefits from tax deductions in excess of book expense related to stock option exercises and other discrete items. Additionally, the thirteen and twenty-six weeks ended June 25, 2020 included income tax benefits resulting from the enactment of the CARES Act.

Table of Contents

The Company recognizes discrete expense for loss contingencies related to uncertain tax positions, including estimated interest and penalties. The Company recognized no expense related to uncertain tax positions during the thirteen weeks ended June 25, 2020 and $0.1 million during the thirteen weeks ended June 27, 2019. The Company recognized $2.6 million and $0.1 million of such expense during the twenty-six weeks ended June 25, 2020 and June 27, 2019, respectively.

The Company accounts for income taxes under the liability method in accordance with ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts and tax basis of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in the period that includes the enactment date of such a change.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences became deductible. On a quarterly basis, the Company evaluates whether it is more likely than not that its deferred tax assets will be realized in the future and concludes whether or not a valuation allowance must be established.

The Company accounts for uncertain tax positions in accordance with ASC 740. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements using a two-step process for evaluating tax positions taken, or expected to be taken, on a tax return. The Company may only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. In addition, the Company recognizes a loss contingency for uncertain tax positions when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The amounts recognized for uncertain tax positions require that management make estimates and judgments based on provisions of the tax law, which may be subject to change or varying interpretations. The Company includes estimated interest and penalties related to uncertain tax position accruals within accrued expenses and other current liabilities in the condensed consolidated balance sheets and within income tax expense in the condensed consolidated statements of operations and comprehensive income.

Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

The CARES Act includes, among other things, income tax provisions allowing for the temporary five-year carryback of net operating losses generated in 2018, 2019, and 2020, temporary modifications to the limitations placed on interest deductions, and technical corrections of tax depreciation methods for qualified improvement property ("QIP"), which changes 39-year property to 15-year property eligible for 100% tax bonus depreciation. In addition, the CARES Act includes provisions such as the temporary deferral of the employer portion of social security taxes incurred through the end of calendar 2020 and an employee retention credit for 50% of wages and health benefits paid to employees not providing services due to the COVID-19 pandemic. The Company has made estimates of the effect of the CARES Act and will adjust estimates, if needed, as new legislation or guidance becomes available.

As a result of the faster tax depreciation methods allowed under the CARES Act for QIP and the retroactive application of those methods for QIP placed in service during fiscal 2018 and 2019, the Company incurred a fiscal 2019 net operating loss for federal income tax purposes that it expects to carry back to prior years during which the federal tax rate was 35%, resulting in a $7.7 million income tax benefit during the thirteen and twenty-six weeks ended June 25, 2020. The Company expects to receive an estimated $28.4 million of cash refunds in fiscal 2020 related to the accelerated QIP depreciation and the carry back of the fiscal 2019 net operating loss. Furthermore, the Company expects the changes to QIP depreciation to result in reductions to estimated income tax payments for fiscal 2020.

As of June 25, 2020, the Company has deferred $3.1 million of employer social security taxes, of which 50% are required to be deposited by December 2021 and the remaining 50% by December 2022.

In addition, the Company recorded a credit of $