Annual report pursuant to Section 13 and 15(d)

Commitments and Contingencies

Commitments and Contingencies
12 Months Ended
Dec. 29, 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 2048. 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 to 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. Lease payments used in measurement of the lease liability typically do not include executory costs, such as taxes, insurance, and maintenance, unless those costs can be reasonably estimated at lease commencement. Additionally, one building lease contains variable lease payments, which are determined based on a percentage of retail sales over a contractual level, and the Company subleases real estate within one of its distribution centers to a third party. Certain of the lease agreements include escalating rents over the lease terms, which, under Topic 842, results in rent being expensed on a straight-line basis over the life of the lease that commences on the date the Company has the right to control the property. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants that would reasonably be expected to have a material impact on the business.
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.
Lease Position
The table below presents supplemental balance sheet information related to operating leases.
in thousands, except lease term and discount rate
As of December 29, 2022 As of December 30, 2021
Building Right-of-use assets $ 989,955  $ 972,962 
Land Right-of-use assets 199,035  107,764 
Equipment Right-of-use assets 16,646  14,127 
Software Right-of-use assets —  8,897 
Total operating lease assets $ 1,205,636  $ 1,103,750 
Building Current portion of lease liabilities 95,216  92,909 
Land Current portion of lease liabilities 1,922  1,385 
Equipment Current portion of lease liabilities 8,555  6,842 
Software Current portion of lease liabilities —  3,466 
Total current operating lease liabilities 105,693  104,602 
Building Lease liabilities 998,883  989,712 
Land Lease liabilities 220,570  120,174 
Equipment Lease liabilities 8,054  7,285 
Software Lease liabilities —  3,819 
Total noncurrent operating lease liabilities 1,227,507  1,120,990 
Total operating lease liabilities $ 1,333,200  $ 1,225,592 
Weighted-average remaining lease term 12 years 11 years
Weighted-average discount rate 5.4% 5.1%
Lease Costs
The table below presents components of lease expense for operating leases.
Fiscal Year Ended
in thousands Classification December 29,
December 30,
December 31,
Fixed operating lease cost: Selling and store operating $ 139,603  $ 123,882  $ 105,207 
Cost of sales 25,465  24,170  22,672 
Pre-opening 9,971  10,127  7,886 
General and administrative 4,622  4,359  4,118 
Total fixed operating lease cost $ 179,661  $ 162,538  $ 139,883 
Variable lease cost (1):
Selling and store operating $ 49,605  $ 42,093  $ 34,499 
Cost of sales 3,894  5,506  4,860 
Pre-opening 666  274  657 
General and administrative 787  310  151 
Total variable lease cost $ 54,952  $ 48,183  $ 40,167 
Sublease income Cost of sales (2,722) (2,694) (2,713)
Total operating lease cost (2)
$ 231,891  $ 208,027  $ 177,337 
(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 fiscal years ended December 29, 2022, December 30, 2021, and December 31, 2020.
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 December 29, 2022 were as follows:
in thousands
2023 $ 170,669 
2024 189,116 
2025 177,156 
2026 166,350 
2027 158,809 
Total minimum lease payments (1) (2)
Less: amount of lease payments representing interest
Present value of future minimum lease payments
Less: current obligations under leases
Long-term lease obligations
$ 1,227,507 
(1)Future lease payments exclude approximately $262.7 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
(2)Operating lease payments include $184.2 million related to options to extend lease terms that are reasonably certain of being exercised.
For the fiscal years ended December 29, 2022, December 30, 2021, and December 31, 2020, cash paid for operating leases was $178.0 million, $157.9 million, and $131.3 million, respectively.
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.; Bestview International Company; and Bestview (Fuzhou) Import & Export Co. LTD are also named as defendants in the case. Plaintiff’s petition alleges that “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; product defect, failure to warn, and strict liability claims against the Bestview entities; 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. On August 8, 2022, Plaintiff’s ex-husband filed a petition in intervention, intervening as a plaintiff in the lawsuit. Intervenor alleges the same claims against the Company and Inspections Now and seeks damages in excess of $10.0 million for property damage, personal injury, wrongful death, and exemplary damages. The Company has responded to Plaintiff’s and Intervenor’s petitions, 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. An amended complaint was filed on September 14, 2022. Defendants filed a motion to dismiss on October 31, 2022. The plaintiffs then filed a second amended complaint on December 22, 2022. On February 6, 2023, the Company, along with the other defendants, filed a motion to dismiss the operative complaint. 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, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The complaint seeks unspecified damages and restitution for the Company from the individual defendants and the payment of costs and attorneys’ fees.
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.