Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

v3.22.2
Commitments and Contingencies
 6 Months Ended
Jun. 30, 2022
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
Lease Commitments
The Company accounts for leases in accordance with ASC 842, Leases. The majority of the Company’s long-term operating lease agreements are for its corporate office, retail locations, and distribution centers, which expire in various years through 2042. Most of these agreements are retail leases wherein both the land and building are leased. For a small number of retail locations, the Company has ground leases in which only the land is leased. The initial lease terms for the Company's corporate office, retail, and distribution center facilities generally range from 10-20 years. The majority of the Company’s retail and ground leases also include options to extend, which are factored into the recognition of their respective assets and liabilities when appropriate based on management’s assessment of the probability that the options will be exercised.
When readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of the Company’s leases do not provide a readily determinable implicit rate. If the rate implicit in the lease is not readily determinable, the Company uses a third party to assist in the determination of a secured incremental borrowing rate, determined on a collateralized basis, to discount lease payments based on information available at lease commencement. The secured incremental borrowing rate is estimated based on yields obtained from Bloomberg for U.S. consumers with a BB- credit rating and is adjusted for collateralization as well as inflation. As of June 30, 2022 and July 1, 2021, the Company’s weighted average discount rate was 5.2% and 5.2%, respectively. As of both June 30, 2022 and July 1, 2021, the Company’s weighted average remaining lease term was approximately 11 years.
Lease Costs
The table below presents components of lease expense for operating leases.
Thirteen Weeks Ended Twenty-six Weeks Ended
in thousands Classification June 30, 2022 July 1, 2021 June 30, 2022 July 1, 2021
Fixed operating lease cost: Selling and store operating $ 35,584  $ 30,820  $ 69,044  $ 59,588 
Cost of sales 6,323  5,656  12,824  11,316 
Pre-opening 2,631  3,020  4,984  4,655 
General and administrative 1,130  1,030  2,271  2,059 
Total fixed operating lease cost $ 45,668  $ 40,526  $ 89,123  $ 77,618 
Variable lease cost (1): Selling and store operating $ 12,703  $ 9,975  $ 24,926  $ 19,751 
Cost of sales 1,236  1,184  2,655  2,592 
Pre-opening 73  2  240  70 
General and administrative 178  (110) 404  (88)
Total variable lease cost $ 14,190  $ 11,051  $ 28,225  $ 22,325 
Sublease income Cost of sales (680) (597) (1,360) (1,194)
Total operating lease cost (2) $ 59,178  $ 50,980  $ 115,988  $ 98,749 
(1) Includes variable costs for common area maintenance, property taxes, and insurance on leased real estate.
(2) Excludes short-term lease costs, which were immaterial for the twenty-six weeks ended June 30, 2022 and July 1, 2021.
Undiscounted Cash Flows
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 2022 were as follows:
in thousands Amount
Twenty-six weeks ending December 29, 2022 $ 83,803 
2023 186,105 
2024 177,128 
2025 165,580 
2026 156,229 
Thereafter 1,013,830 
Total minimum lease payments (1) (2) 1,782,675 
Less: amount of lease payments representing interest 478,465 
Present value of future minimum lease payments 1,304,210 
Less: current obligations under leases 112,987 
Long-term lease obligations $ 1,191,223 
(1) Future lease payments exclude approximately $220.3 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
(2) Operating lease payments include $138.3 million related to options to extend lease terms that are reasonably certain of being exercised.
For the twenty-six weeks ended June 30, 2022 and July 1, 2021, cash paid for operating leases was $86.7 million and $89.6 million, respectively. Typically, cash paid for operating leases during a fiscal quarter includes only three months of lease payments. Cash paid for operating leases during the twenty-six weeks ended July 1, 2021 included approximately seven months of lease payments due to the majority of July payments being made on the final day of the fiscal quarter.
Litigation
On November 15, 2021, the Company was added as a defendant in a wrongful death lawsuit, Nguyen v. Inspections Now, Inc., No. 21-DCV-287142, pending in the 434th Judicial District Court of Fort Bend County, Texas. Inspections Now, Inc. and Jason Post Homes, LLC were also named as defendants in the case. On March 28, 2022, Plaintiff voluntarily dismissed her claims against Jason Post Homes without prejudice. Plaintiff’s petition alleges that unspecified “wood paneling” allegedly purchased from the Company was installed in the vicinity of plaintiff’s fireplace and caught fire while the fireplace was lit. The fire consumed plaintiff’s home and resulted in injuries to plaintiff and the death of plaintiff’s three children and mother. Plaintiff alleges product defect and failure to warn claims against the Company and negligent inspection claims against Inspections Now. Plaintiff’s petition seeks damages in excess of $1.0 million for property damage, personal injury, and wrongful death. The petition also seeks exemplary damages. The Company responded to Plaintiff’s petition on December 13, 2021, denying the allegations, and the case is in the early stages of discovery.
On June 18, 2020, an alleged stockholder filed a putative derivative complaint, Lincolnshire Police Pension Fund v. Taylor, et al., No. 2020-0487-JTL, in the Delaware Court of Chancery, purportedly on behalf of the Company against certain of the Company’s officers, directors, and stockholders. The complaint alleges breaches of fiduciary duties and unjust enrichment. The factual allegations underlying these claims are similar to the factual allegations made in the previously dismissed In re Floor & Decor Holdings, Inc. Securities Litigation. The complaint seeks unspecified damages and restitution for the Company from the individual defendants and the payment of costs and attorneys’ fees. The time for the defendants to respond to the complaint has not yet expired.
The Company maintains insurance that may cover any liability arising out of the above-referenced litigation up to the policy limits and subject to meeting certain deductibles and to other terms and conditions thereof. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, the Company is currently unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from the above-referenced litigation.
The Company is also subject to various other legal actions, claims and proceedings arising in the ordinary course of business, which may include claims related to general liability, workers’ compensation, product liability, intellectual property and employment-related matters resulting from its business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. The Company establishes reserves for specific legal proceedings when it determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. These various other ordinary course proceedings are not expected to have a material impact on the Company's consolidated financial position, cash flows, or results of operations, however regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.