We utilize a regional merchandising strategy in order to carry products in our stores that cater to the preferences of our local customer base. This strategy is executed by our experienced merchandising team, which consists of category merchants and regional merchants, who work with our individual stores to ensure they have the appropriate product mix for their location. Our category merchants are constantly seeking new products and following trends by attending trade shows and conferences, as well as by meeting with vendors around the world. We schedule regular meetings to review information gathered and make future product decisions. This constant connectivity between our stores, regional merchants, category merchants, and our vendors allows us to quickly bring new, innovative, and compelling products to market.
Sourcing
Floor & Decor has a well-developed and geographically diverse supplier base. We source our industry leading merchandise assortment from over 225240 suppliers in over 2024 countries. Our largest supplier accounted for 15%16% of our net sales in fiscal 2019,2022, while no other individual supplier accounted for more than 7%5% of our net sales. We are focused on bypassing agents, brokers, distributors, and other middlemen in our supply chain in order to reduce costs and lead time. We believe that our direct sourcing model and the resulting relationships we have developed with our suppliers are distinct competitive advantages. The cost savings we achieve by directly sourcing our merchandise enable us to offer our customers low prices.
We have established a Global Sourcing and Compliance Department to, among other things, develop and implement policies and procedures in order to address compliance with appropriate regulatory bodies, including compliance with the requirements of the Lacey Act, CARB, and the EPA. We utilize third-party consultants for audits, testing, and surveillance to
ensureaddress product
safetyquality and compliance. We have invested in technology and personnel to collaborate throughout the entire supply chain process. Additionally, our close relationships with suppliers allow us to collaborate with them directly to develop and quickly introduce innovative and quality products that meet our customers’ evolving tastes and preferences at low prices.
Distribution and Order Fulfillment
Merchandise inventory is our most significant working capital asset and is considered “in-transit” or “available for sale”, based on whether we have physically received the products at an individual store location or in one of our four distribution centers. In-transit inventory generally varies due to contractual terms, country of origin, transit times, international holidays, weather patterns and other
factors, but approximately 15% of our inventory is in-transit, while roughly 85% is available for sale in our stores or at one of our four distribution centers.factors.
We have invested significant resources to develop and enhance our distribution network. We have four distribution centers strategically located across the United States in port cities near Savannah, Georgia; Houston, Texas; Los Angeles, California; and Baltimore, Maryland.
We closed our distribution center near Miami, Florida in the first quarter of fiscal 2018, and we opened our new distribution center near Baltimore, Maryland in the fourth quarter of fiscal 2019. Third-party brokers arrange the shipping of our international and domestic purchases to our distribution centers and stores and bill us for shipping costs according to the terms of the purchase agreements with our suppliers. We are typically able to transport inventory from our distribution centers to our stores in less than one week. This turnaround time enhances our ability to maintain project-ready quantities of the products stocked in our stores. All of our distribution centers are Company-operated facilities, and we have implemented a warehouse management and transportation management system tailored to our unique needs across all four distribution centers. We believe this system helps service levels, reduces shrinkage and damage, helps us better manage our inventory, and allows us to better implement our connected customer initiatives.
In
We completed the
first quarterrelocation of
fiscal 2018, we relocated all of the existing inventory from our
322,000 square foot leasedprevious distribution center near
Miami, FloridaHouston, Texas to
our 1.4 million square foot distribution center near Savannah, Georgia. We plan to exit our lease on the distribution center near Miami, Florida in 2021. Additionally, we began operating a
1.5 million square foot leasedlarger distribution center in
Baltimore, Marylandthe Houston area in
the fourth quarter of fiscal 2019, and weJanuary 2022. We plan to continue to seek further opportunities to enhance our distribution capabilities and align them with our strategic growth initiatives.
Management Information Systems
We believe that technology plays a crucial role in the continued growth and success of our business. We have sought to integrate technology into all facets of our business, including supply chain, merchandising, store operations, point-of-sale, e-commerce, finance, accounting and human resources. The integration of technology allows us to analyze the business in real time and react accordingly. Our sophisticated inventory management system is our primary tool for forecasting, placing orders and managing in-stock inventory. The data-driven platform includes sophisticated forecasting tools based on historical trends in sales, inventory levels and vendor lead times at the store and distribution center level by SKU, allowing us to support store managers in their regional merchandising efforts. We rely on the forecasting accuracy of our system to maintain the in-stock, project-ready quantities that our customers rely on. In addition, our employee training certifications are entirely electronic, allowing us to effectively track the competencies of our staff and manage talent across stores. We believe that our systems are sufficiently scalable to support the continued growth of the business.
Competition
Competition
The retail hard surface flooring market is highly fragmented and competitive. We face significant competition from large home improvement centers, national and regional specialty flooring chains and independent flooring retailers. Some of our competitors are organizations that are larger, are better capitalized, have existed longer, have product offerings that extend beyond hard surface flooring and related accessories, and have a more established market presence with substantially greater financial, marketing, personnel and other resources than we have. In addition, while the hard surface flooring category has a relatively low threat of new internet-only entrants due to the nature of the product, the growth opportunities presented by e-commerce could outweigh these challenges and result in increased competition in this portion of our connected customer strategy. Further, because the barriers to entry into the hard surface flooring industry are relatively low, manufacturers and suppliers of flooring and related products, including those whose products we currently sell, could enter the market and start directly competing with us.
We believe that the key competitive factors in the retail hard surface flooring industry include:
•localized product assortment;
•in-store availability of products in project-ready quantities;
We believe that we compete favorably with respect to each of these factors by providing a highly diverse selection of products to our customers, at an attractive value, in appealing and convenient retail stores.
Floor & Decor Holdings, Inc. (formerly known as FDO Holdings, Inc.) was incorporated as a Delaware corporation in October 2010 in connection with our Sponsors’ (as defined below)the acquisition of Floor & Decor Outlets of America, Inc. (“F&D”) in November 2010 which in turn converted from a Georgia corporation into a Delaware corporation in connection with this transaction.by our previous sponsor owners.
The following chart illustrates our current corporate structure:
Employees
Human Capital
We have built a strong team of employees to support our continued success. Each of our stores is led by a CEM and is supported by an operations manager, product category department managers, a design team, a Pro sales and support team, and a number of additional associates. Outside of our stores, we have employees dedicated to corporate, store support, infrastructure, e-commerce, call center and similar functions as well as support for our distribution centers and sourcing office. We dedicate significant resources to training our employees and believe they are key to our success. Our Chief Human Resources Officer, supported by the entire executive team, is responsible for developing and executing our human capital strategy. This includes the attraction, acquisition, development and engagement of talent and the design of associate compensation and benefits programs.
As of December
26, 2019,29, 2022, we had
7,31711,985 employees,
5,3559,281 of whom were full-time and none of whom were represented by a union. Of the total employees,
6,35410,437 work in our stores,
6391,086 work in corporate, store support,
infrastructure, e-commercecustomer care or similar functions,
311450 work in distribution centers, and
1312 work in our Asia sourcing office in Shanghai, China. We believe that we have good relations with our employees.
We look at a variety of measures and objectives related to the development, attraction, safety, engagement, and retention of our employees, including:
•Store Staffing. In order to provide the level of customer service that we expect, it is important that we adequately staff our stores with trained employees. As of December 29, 2022, the majority of our stores were staffed at a level that we deem appropriate.
•Diversity, Equity & Inclusion. We are mindful of the benefits of diversity, equity and inclusion in all aspects of the employment cycle and believe they are key to our culture and long-term success. We seek to build a diverse and inclusive workplace where we can leverage our collective talents, striving to ensure that all associates are treated with dignity and respect.
•Training. We believe that training associates is also important to ensuring appropriate levels of customer service. We have a Learning Department, and in 2022, associates engaged in approximately 191,700 hours of training.
•Internal AdvancementOpportunities. We believe our growth opportunities are a critical way to attract and retain employees, and we encourage a promote-from-within environment when internal resources permit. In 2022, approximately 2,000 employees were promoted to more senior positions.
•Safety. Maintaining a safe shopping environment is very important to us. Our Safety & Loss Prevention team, managed by an experienced leader, works closely with our Store Operations team on safety training and initiatives.
•Rewards. We believe in rewarding our associates for their hard work on behalf of Floor & Decor and provide a variety of incentives to allow associates to share in the Company’s success, including (i) incentive compensation plans for all associates, (ii) a 401(k) plan with Company-sponsored match, (iii) health care benefits for full-time associates, (iv) an employee stock purchase plan that facilitates purchases of Company stock at a discount by eligible associates, and (v) other benefits such as an employee assistance program.
We are subject to extensive and varied federal, state and local laws and regulations, including those relating to employment, the environment, protection of natural resources, import and export, advertising, labeling, public health and safety, product safety, zoning and fire codes. We operate our business in accordance with standards and procedures designed to comply with applicable laws and regulations. Compliance with these laws and regulations has not historically had a material effect on our financial condition or operating results; however, the effect of compliance in the future cannot be predicted.
Our operations and properties are also subject to federal, state and local laws and regulations governing the environment, environmental protection of natural resources and health and safety, including the use, storage, handling, generation, transportation, treatment, emission, release, discharge and disposal of hazardous materials, substances and wastes and relating to the investigation and clean-up of contaminated properties. Except to the extent of the
capital expenditures related to our initiatives described below, compliance with these laws and regulations has not historically had a material effect on our financial condition or operating results, but we cannot predict the effect of compliance in the future.
In particular, certain of our products are subject to laws and regulations relating to the importation, exportation, acquisition or sale of certain plants and plant products, including those illegally harvested (which is prohibited by the Lacey Act), and the emissions of hazardous materials (which in California is governed by regulations promulgated by CARB and federally by regulations promulgated by the EPA). We have established a Global Sourcing and Compliance Department to, among other things, address these requirements, and we work with third-party consultants to assist us in designing and implementing compliance programs relating to the requirements of the Lacey Act, CARB and the EPA. Further, we could incur material compliance costs or be subject to compliance
liabilities or claims in the future, especially in the event new laws or regulations are adopted or there are changes in existing laws and regulations or in their interpretation.
Our suppliers are also subject to the laws and regulations of their home countries, including in particular laws regulating forestry and the environment. We also support social and environmental responsibility among our supplier community and endeavor to enter into vendor agreements with our suppliers that contain representations and warranties concerning environmental, labor and health and safety matters.
Insurance and Risk Management
We use a combination of insurance and self-insurance to provide for potential liability for workers’ compensation, general liability, product liability, director and officers’ liability, team member healthcare benefits, and other casualty and property risks. Changes in legal trends and interpretations, variability in inflation rates, changes in workers’ compensation and general liability premiums and deductibles, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurance carriers, and changes in discount rates could all affect ultimate settlements of claims. We evaluate our insurance requirements on an ongoing basis to ensure we maintain adequate levels of coverage.
We are engaged in various legal actions, claims and proceedings arising in the ordinary course of business, including claims related to breach of contracts, products liabilities, intellectual property matters and employment related matters resulting from our business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
Trademarks and other Intellectual Property
As of February
20, 2020,23, 2023, we have
7774 registered marks and several pending trademark applications in the United States. We regard our intellectual property, including our over
6050 proprietary brands, as having significant value, and our brand is an important factor in the marketing of our products. Accordingly, we have taken, and continue to take, appropriate steps to protect our intellectual property.
We maintain a website at www.FloorandDecor.com.The information on or available through our website is not, and should not be considered, a part of this Annual Report. You may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as well as other reports relating to us that are filed with, or furnished to, the SEC free of charge on our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.
The following is a summary of the principal risks that you should carefully consider before investing in our securities. In addition, see “Risk Factors” set forth in Item 1A. of this Annual Report and other reports and documents filed by us with the SEC for a more detailed discussion of the principal risks as well as certain other risks you should carefully consider before deciding to invest in our securities.
•The hard surface flooring industry depends on the overall health of the economy, including home remodeling activity and other important factors.
•We are subject to demand fluctuations in the housing industry, and demand for our products and services may be adversely affected by unfavorable economic conditions, including rising interest rates, inflation, a decline in disposable income levels and recession fears.
•We may not be able to offset higher costs associated with inflation and other general cost increases.
•Any disruption in our distribution capabilities, supply chain or our related planning and control processes may adversely affect our business, financial condition, and operating results.
•Any failure by us to successfully anticipate trends may lead to loss of consumer acceptance of our products, resulting in reduced net sales.
•If we fail to successfully manage the challenges that our planned new store growth poses or encounter unexpected difficulties or higher costs during our expansion, our operating results and future growth opportunities could be adversely affected.
•Our future success is dependent on our ability to execute our business strategy effectively and deliver value to our customers.
•If we are unable to enter into leases for additional stores on acceptable terms or renew or replace our current store leases, or if one or more of our current leases is terminated prior to expiration of its stated term, and we cannot find suitable alternate locations, our growth and profitability could be adversely affected.
•Our success depends upon our ability to attract, hire, train, and retain highly qualified managers and staff.
•Our success depends substantially upon the continued retention of our key personnel, including our executive officers.
•The effects of weather conditions, natural disasters or other unexpected events, including global heath crises, such as the COVID-19 pandemic, may disrupt our operations and have a negative impact on our business.
•Rising geopolitical tensions and U.S. policies related to global trade and tariffs, including with respect to antidumping and countervailing duties, could adversely affect our business, financial condition, and results of operations.
•Our net sales growth could be adversely affected if comparable store sales growth is less than we expect.
•We depend on a number of suppliers, and any failure by any of them to supply us with quality products on attractive terms and prices may adversely affect our business, financial condition and operating results.
•We procure the majority of our products from suppliers located outside of the United States, and as a result, we are subject to risks associated with obtaining products from abroad that could adversely affect our business, financial condition, and results of operations.
•Our ability to offer compelling products, particularly products made of more exotic species or unique stone, depends on the continued availability of sufficient suitable natural products.
•If the use of “cookie” tracking technologies is further restricted, the amount of internet user information we collect would decrease, which could require additional marketing efforts and harm our business and operating results.
•Our business exposes us to personal injury, product liability and warranty claims and related governmental investigations, which could result in negative publicity, harm our brand and adversely affect our business, financial condition, and operating results.
•Unfavorable allegations, government investigations and legal actions surrounding our products and us could harm our reputation, impair our ability to grow or sustain our business, and adversely affect our business, financial condition, and operating results.
•Federal, state or local laws and regulations, or our failure to comply with such laws and regulations, could increase our expenses, restrict our ability to conduct our business and expose us to legal risks.
•Labor activities could cause labor relations difficulties for us.
•If our efforts to protect the privacy and security of information related to our customers, us, our associates, our suppliers and other third parties are not successful, we could become subject to litigation, investigations, liability and negative publicity that could significantly harm our reputation and relationships with our customers and adversely affect our business, financial condition, and operating results.
•We may not be able to successfully maintain effective internal controls over financial reporting, which could have an adverse effect on our business and stock price.
•Changes in tax laws, trade policies and regulations or in our operations and newly enacted laws or regulations may impact our effective tax rate or may adversely affect our business, financial condition, and operating results.
•We are subject to payments-related risks that could increase our operating costs, expose us to fraud, subject us to potential liability and potentially disrupt our business.
•Our facilities and systems, as well as those of our suppliers, are vulnerable to natural disasters and other unexpected events, and as a result we may lose merchandise and be unable to effectively deliver it to our stores.
•Our intellectual property rights are valuable, and any failure to protect them could reduce the value of our products and brand and harm our business.
•The effectiveness of our advertising strategy is a driver of our future success.
•We are a holding company with no business operations of our own and depend on cash flow from our subsidiaries to meet our obligations.
•We face risks related to our indebtedness. These risks include (1) that our variable rate debt subjects us to interest rate risk, which could cause our debt service obligations to increase significantly, and (2) that we are exposed to credit risk on certain of our receivables, including that we could be unable to collect outstanding credit from our existing customers under our commercial credit program. These risks could result in losses and adversely affect our operating results.
•We are engaged in various legal actions, claims and proceedings arising in the ordinary course of business, and while we cannot predict the outcomes of such proceedings and other contingencies with certainty, this litigation and any potential future litigation could have an adverse impact on us.
•We are subject to risks related to corporate social responsibility.
You should carefully consider the risks described below, together with all of the other information included in this Annual Report, including our consolidated financial statements and the related notes thereto, before making an investment decision. The risks and uncertainties set out below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition, and operating results. If any of the following events occur, our business, financial condition, and operating results could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to
ourOur Business
Our business, financial condition and operating results are dependent on general economic conditions and discretionary spending by our customers, which in turn are affected by a variety of factors beyond our control. If such conditions deteriorate, our business, financial condition, and operating results may be adversely affected.
Our business, financial condition, and operating results are affected by general economic conditions and discretionary spending by our customers. Such general economic conditions and discretionary spending are beyond our control and are affected by, among other things:
| ● | consumer confidence in the economy; |
| ● | trade relations and tariffs; |
| ● | consumer credit availability; |
| ● | data security and privacy concerns; |
| ● | the housing market, including housing turnover and whether home values are rising or declining; |
| ● | interest rates and inflation; |
| ● | price deflation, including due to low-cost imports; |
| ● | slower rates of growth in real disposable personal income; |
| ● | natural disasters and unpredictable weather; |
| ● | national security concerns and other geopolitical risks; |
| ● | uncertain U.S. political conditions; |
| ● | tax rates and tax policy; and |
| ● | other matters that influence consumer confidence and spending. |
If such conditions deteriorate, our business, financial condition, and operating results may be adversely affected. In addition, increasing volatility in financial and capital markets may cause some of the above factors to change with a greater degree of frequency and magnitude than in the past.
The hard surface flooring industry depends on the overall health of the economy, including home remodeling activity and other important factors.
An economic recession, depression, downturn, periods of inflation, or economic uncertainty in our key markets may adversely affect consumer discretionary spending and demand for our products. As global economic conditions continue to be volatile or economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable and subject to reductions due to credit constraints and uncertainties about the future. Unfavorable economic conditions may lead consumers to delay or reduce purchases of our products. Consumer demand for our products may not reach our targets, or may decline, when there is an economic downturn or economic uncertainty in our key markets.
The hard surface flooring industry is highly dependent on the remodeling of existing homes, businesses and, to a lesser extent, new home construction. In turn, remodeling and new home construction depend on a number of factors that are beyond our control, including interest rates,
inflation, tax policy, trade policy, employment levels, consumer confidence, credit availability, real estate prices,
home-price appreciation, existing home sales, demographic trends,
trends in response to the COVID-19 pandemic, weather conditions, natural disasters and general economic conditions. In particular:
| ● | the national economy or any regional or local economy where we operate could weaken; |
| ● | home-price appreciation could slow or turn negative; |
| ● | regions where we have stores that could be impacted by hurricane, fire, or other natural disasters (including those due to the effects of climate change such as increased storm severity, drought, wildfires, and potential flooding due to rising sea levels and storm surges); |
| ● | interest rates could rise; |
| ● | credit could become less available; |
| ● | tax rates and/or health care costs could increase; or |
| ● | fuel costs or utility expenses could increase. |
•interest rates and inflation could continue to rise, undermining consumer confidence and eroding discretionary income;
•home-price appreciation could slow or turn negative;
•regions where we have stores could be impacted by hurricane, fire, or other natural disasters (including those due to the effects of climate change such as increased storm severity, drought, wildfires, and potential flooding due to rising sea levels and storm surges);
•increased demand for home improvement products could continue to lessen as the COVID-19 pandemic subsides, causing consumers to spend discretionary income in other ways;
•credit could become less available;
•tax rates and/or health care costs could increase; or
•fuel costs or utility expenses could increase.
Any one or a combination of these factors could result in decreased demand for our products, reduce spending on homebuilding or remodeling of existing homes or cause purchases of new and existing homes to decline. While the vast majority of our net sales are derived from home remodeling activity as opposed to new home construction, a decrease in any of these areas would adversely affect our business, financial condition, and operating results.
We may not be able to offset higher costs associated with inflation and other general cost increases.
We are subject to inflationary and other general cost increases, including with regard to our labor costs and purchases of raw materials and transportation services. General economic conditions may result in higher inflation, which may increase our exposure to higher costs. If we are unable to offset these cost increases by price increases, growth, and/or cost reductions in our operations, these inflationary and other general cost increases could have a material adverse effect on our operating cash flows, profitability, and liquidity.
Our growth and profitability depend on the levels of consumer confidence and spending.
Our results of operations are sensitive to changes in overall economic and political conditions that impact consumer spending, including discretionary spending. Many economic factors outside of our control, including inflation, conditions in the housing market, interest rates, energy costs, consumer credit availability and terms, consumer debt levels, tax rates and policy, salaries and wage rates, unemployment trends, geopolitical events and uncertainty, influence consumer confidence and spending. Declines in the level of consumer confidence and spending, a general slowdown in the U.S. economy or an uncertain economic outlook have adversely affected, and could continue to adversely affect, consumer spending habits, which have resulted in, and may continue to result in, among other things, reduced demand for our products, which has had, and in the future would have, an adverse effect on our sales and operations results.
The demand for our products and services may be adversely affected by unfavorable economic conditions.
Consumer discretionary spending affects our sales and is impacted by factors outside of our control, including general economic conditions, the residential housing market, unemployment rates and wage levels, rising interest rates, inflation, disposable income levels, consumer confidence, recession fears, and access to credit. In economic downturns, the demand for home improvement products and services may decline, often corresponding with declines in discretionary consumer spending. A weak economy may also cause consumers to defer discretionary replacement and refurbishment activity. Even in generally favorable economic conditions, severe and/or prolonged downturns in the housing market could have a material adverse impact on our financial performance.
In a housing market downturn, our sales and results of operations will be adversely affected; we may have significant inventory impairments and other write-offs; our gross margins may decline significantly from historical levels, and we may incur substantial losses from operations. At any particular time, we cannot accurately predict whether housing market conditions will improve, deteriorate or continue as they exist at that time.
Additionally, we believe that homeowners’ access to consumer credit is a critical factor enabling the purchase of our products. Unfavorable economic conditions or a downturn in the housing market could result in significant tightening of credit markets, which limit the ability of consumers to access financing for home improvements or construction. Tightening consumer credit could prevent consumers from obtaining financing for home projects, which could negatively impact our sales of products and services.
Any disruption in our distribution capabilities, supply chain or our related planning and control processes may adversely affect our business, financial condition, and operating results.
Our success is highly dependent on our planning and distribution infrastructure, which includes the ordering, transportation, and distribution of products to our stores and the ability of suppliers to meet distribution requirements. We need to continue to identify and improve our processes and supply chain and that our distribution infrastructure and supply chain keep pace with our anticipated growth and increased number of stores. The cost of these enhanced processes could be significant and any failure to maintain, grow, or improve them could adversely affect our business, financial condition, and operating results. Due to our rapid expansion, we have had to significantly increase the size of our distribution centers and plan to add additional distribution centers. Increasing the size of our distribution centers may decrease the efficiency of our distribution costs.
We manage our four distribution centers internally rather than rely on independent third-party logistics providers. If we are not able to manage our distribution centers successfully, it could adversely affect our business, financial condition, and operating results. As we continue to add distribution centers, we may incur unexpected costs, and our ability to distribute our products may be adversely affected. Any disruption in the transition to and from or operation of our distribution centers could have an adverse impact on our business, financial condition, and operating results. For example, the landlord for our Maryland distribution center has identified a construction defect with that facility that we are working with the landlord to address. While we are unable to predict the impact such defect could have on our business, any necessary repairs could cause disruption in the operation of that distribution center, which could negatively impact the in-stock positions in the stores served by such distribution center and could have an adverse impact on our business, financial condition, and operating results.
A disruption within our logistics or supply chain network could adversely affect our ability to deliver inventory in a timely manner, which could impair our ability to meet customer demand for products and result in lost sales, increased supply chain costs, or damage to our reputation. Such disruptions may result from damage or destruction to our distribution centers; weather-related events; natural disasters; international trade disputes or trade policy changes or restrictions; tariffs or import-related taxes; third-party strikes, lock-outs, work stoppages or slowdowns; shortages of supply chain labor, including truck drivers; shipping capacity constraints, including shortages of related equipment; third-party contract disputes; supply or shipping interruptions or costs; military conflicts; acts of terrorism; public health issues, including pandemics or quarantines (such as the COVID-19 pandemic) and related shut-downs, re-openings, or other actions by the government; civil unrest; or other factors beyond our control. In recent years, U.S. ports have been impacted by capacity constraints, port congestion and delays, periodic labor disputes, security issues, weather-related events, and natural disasters, which have been further exacerbated by the pandemic. Disruptions to our supply chain due to any of the factors listed above could negatively impact our financial performance or financial condition.
Accordingly, we regularly work on supply chain continuity plans. While to date there has been no material impact on supply for most of our sourced merchandise, COVID-19-related labor shortages and supply chain disruptions continue to cause logistical challenges for us and the entire hard surface flooring industry. In particular, the significant congestion at ports of entry to the United States is increasing the time and cost to ship goods to our stores. Additionally, customer demand for certain products has also fluctuated as the COVID-19 pandemic has progressed and customer behaviors have changed, which has challenged our ability to anticipate and/or adjust inventory levels to meet that demand. These factors have resulted in certain of our products having in-stock levels below our goals. In certain cases, we are also experiencing delays in delivering those products to our distribution centers, stores or customers. Recently, we have seen a significant increase in supply chain costs, and we do not know how long this will last. It is our belief that we can pass along these costs. While we are working closely with our suppliers and transportation partners to mitigate the impact of these disruptions, future capacity shortages or shipping cost increases could have an adverse impact upon our business. Our success is also dependent on our ability to provide timely delivery to our customers. Our business could also be adversely affected if fuel prices increase or there are delays in product shipments due to freight difficulties, inclement weather, strikes by our associates or associates of third parties involved in our supply chain, or other difficulties. If we are unable to deliver products to our customers on a timely basis, they may decide to purchase products from our competitors instead of from us, which would adversely affect our business, financial condition, and operating results.
Any failure by us to successfully anticipate trends may lead to loss of consumer acceptance of our products, resulting in reduced net sales.
Each of our stores is stocked with a customized product mix based on consumer demands in a particular market. Our success therefore depends on our ability to anticipate and respond to changing trends and consumer demands in these markets in a timely manner.
Our ability to accurately forecast demand for our products could be affected by many factors, including an increase or decrease in customer demand for our products or for products of our competitors, our failure to accurately forecast customer acceptance of new products, product introductions by competitors, unanticipated changes in general market conditions and weakening of economic conditions or consumer confidence in future economic conditions (for example, because of inflationary pressures). If we fail to identify and respond to emerging trends, consumer acceptance of our merchandise and our image with current or potential customers may be harmed, which could reduce our net sales. Additionally, if we misjudge market trends, we may significantly overstock unpopular products, incur excess inventory costs and be forced to reduce the sales price of such products or incur inventory write-downs, which would adversely affect our operating results. Conversely, shortages of products that prove popular could also reduce our net sales through missed sales and a loss of customer loyalty.
If we fail to successfully manage the challenges that our planned new store growth poses or encounter unexpected difficulties
or higher costs during our expansion, our operating results and future growth opportunities could be adversely affected.
We have
120191 warehouse-format stores and
onesix small-format standalone design
centerstudios located throughout the United States as of December
26, 2019.29, 2022. We plan to
open 24 warehouse-format stores during fiscal 2020 and to increase the number ofcontinue opening new stores
that we open during each offor the next several
years thereafter.years. This growth strategy and the investment associated with the development of each new store may cause our operating results to fluctuate and be unpredictable or decrease our profits. We cannot ensure that store locations will be available to us, or that they will be available on terms acceptable to us. If additional retail store locations are unavailable on acceptable terms, we may not be able to carry out a significant part of our growth strategy or our new stores’ profitability may be lower.
Certain of our new store openings are expected to be smaller stores in smaller markets. We have limited experience executing this strategy, and we cannot guarantee that we will be successful in this strategy. Our future operating results and ability to grow will depend on various other factors, including our ability to:
| ● | •successfully select new markets and store locations; |
| ● | negotiate leases on acceptable terms; |
| ● | attract, train and retain highly qualified managers and staff; |
| ● | maintain our reputation of providing quality, safe and compliant products; and |
| ● | manage store opening costs. |
In addition, consumers in new markets may be less familiar withand store locations;
•attract, train and retain highly qualified managers and staff;
•maintain our brand,reputation of providing quality, safe and we may needcompliant products; and
•manage store opening costs, including rising construction costs and costs due to increase brand awarenessdelays in such markets through additional investments in advertising or high cost locations with more prominent visibility. construction.
Stores opened in new markets may have higher construction, occupancy or operating costs, or may have lower net sales, than stores opened in the past. In addition, laws or regulations in these new markets may make opening new stores more difficult or cause unexpected delays. The completion date and ultimate cost of future store openings could differ significantly due to construction-related or other reasons, including construction and other delays and cost overruns, such as shortages of materials, shortages of skilled labor or work stoppages, unforeseen construction, scheduling, engineering, environmental or geological problems, governmental or permitting delays, weather interference, fires or other casualty losses and unanticipated cost increases. We cannot guarantee that any project will be completed on time and delays in store openings could have a negative impact on our business and operating results.
In addition, consumers in new markets may be less familiar with our brand, and we may need to increase brand awareness in such markets through additional investments in advertising or high cost locations with more prominent visibility. Newly opened stores may not succeed or may reach profitability
more slowlyslower than we expect, and the ramp-up to profitability may become longer in the future as we enter more
markets and add stores to markets where we already have a presence.markets. Future markets and stores may not be successful and, even if they are successful, our comparable store sales may not increase at historical rates. To the extent that we are not able to overcome these various challenges, our operating results and future growth opportunities could be adversely affected.
Increased competition could cause price declines, decrease demand for our products and decrease our market share.
We operate in the hard surface flooring industry, which is highly fragmented and competitive. We face competition from large home improvement centers, national and regional specialty flooring chains,
Internet-basedinternet-based companies and independent flooring retailers. Among other things, we compete on the basis of breadth of product assortment, low prices,
and the in-store availability of
the products we offer in project-ready quantities, as well as the quality of our products and customer service. As we expand into new and unfamiliar markets, we may experience different competitive conditions than in the past.
Some of our competitors are organizations that are larger, are better capitalized, have existed longer, have product offerings that extend beyond hard surface flooring and related accessories and have a more established market presence with substantially greater financial, marketing,
delivery, customer loyalty, personnel and other resources than we have. In addition, while the hard surface flooring category has a relatively low threat of new internet-only entrants due to the nature of the product, the growth opportunities presented by e-commerce could outweigh these challenges and result in increased competition. Competitors may forecast market developments more accurately than we do, offer similar products at a lower cost,
have better delivery offerings, or adapt more quickly to new trends and technologies or evolving customer requirements than we do. Further, because the barriers to entry into the hard surface flooring industry are relatively low, manufacturers and suppliers of flooring and related products, including those whose products we currently sell, could enter the market and start directly competing with us. Intense competitive pressures from any of our present or future competitors could cause price declines, decrease demand for our products and decrease our market share. Also, if we continue to grow and become more well-known, other companies may change their strategies to present new competitive challenges. Moreover, in the future, changes in consumer preferences may cause hard surface flooring to become less popular than other types of floor coverings. Such a change in consumer preferences could lead to decreased demand for our products.
All of these factors may harm us and adversely affect our net sales, market share, and operating results.
U.S. policies related to global trade and tariffs, including with respect to antidumping and countervailing duties, could adversely affect our business, financial condition and results of operations.
The current domestic and international political environment, including existing and potential changes to U.S. policies related to global trade and tariffs, have resulted in uncertainty surrounding the future state of the global economy. In particular, the ongoing trade dispute between the U.S. and China has resulted in the U.S. imposing tariffs of 25% on many products from China. Even though these tariffs were reduced for certain “click” vinyl and engineered products in November 2019, they are scheduled to increase back up to 25% on August 8, 2020 if no further action is taken, and any such development could adversely affect us. Historically, approximately half of the products we sell were imported from China, the majority of which are impacted by these tariffs. In the fourth quarter of fiscal 2019, we sourced approximately 35% of our products from China. Any further expansion in the types or levels of tariffs implemented has the potential to negatively impact our business, financial condition and results of operations. Additionally, there is a risk that the U.S. tariffs on imports are met with tariffs on U.S. produced exports and that a further trade conflict could ensue, which has the potential to significantly impact global trade and economic conditions. Potential costs and any attendant impact
on pricing arising from these tariffs and any further expansion in the types or levels of tariffs implemented could require us to modify our current business practices and could adversely affect our business, financial condition, and results of operations.
Any disruption in our distribution capabilities or our related planning and control processes may adversely affect our business, financial condition, and operating results.
Our success is highly dependent on our planning and distribution infrastructure, which includes the ordering, transportation, and distribution of products to our stores and the ability of suppliers to meet distribution requirements. We also need to ensure that we continue to identify and improve our processes and supply chain and that our distribution infrastructure and supply chain keep pace with our anticipated growth and increased number of stores. The cost of these enhanced processes could be significant and any failure to maintain, grow, or improve them could adversely affect our business, financial condition, and operating results. Due to our rapid expansion, we have had to significantly increase the size of our distribution centers. Additionally, we opened a new 1.5 million square foot distribution center in Maryland in the fourth quarter of fiscal 2019. Based on our growth intentions, we plan to add additional distribution centers or increase the size of our existing distribution centers in the future. Increasing the size of our distribution centers may decrease the efficiency of our distribution costs.
We manage our four distribution centers internally rather than rely on independent third-party logistics providers. If we are not able to manage our distribution centers successfully or at a lower cost than with third-party logistics providers, it could adversely affect our business, financial condition, and operating results. We opened a new distribution center in Maryland in fiscal 2019. As we continue to add distribution centers, we may incur unexpected costs, and our ability to distribute our products may be adversely affected. Any disruption in the transition to or operation of our distribution centers could have an adverse impact on our business, financial condition, and operating results. In addition, our long-term plan contemplates the ability to sublet a portion of our previously occupied distribution centers. Any failure to do so on favorable terms could have a negative impact on our financial condition, and operating results.
Our success is also dependent on our ability to provide timely delivery to our customers. Our business could also be adversely affected if fuel prices increase or there are delays in product shipments due to freight difficulties, inclement weather, strikes by our employees or employees of third-parties involved in our supply chain, or other difficulties. If we are unable to deliver products to our customers on a timely basis, they may decide to purchase products from our competitors instead of from us, which would adversely affect our business, financial condition, and operating results.
Our operating results may be adversely affected by fluctuationsincreases in material, energy and energytransportation costs beyond our control.
control, including increases in costs due to inflation.
Our operating results may be affected by the wholesale prices of hard surface flooring products, setting and installation materials, and the related accessories that we sell. These prices may
fluctuateincrease based on a number of factors beyond our control, including the price of raw materials used in the manufacture of hard surface flooring,
transportation costs, energy costs, changes in supply and demand, concerns about inflation, general economic conditions, labor costs, competition, import duties, tariffs, currency exchange rates, government regulation, the impact of natural disasters (including those due to the effects of climate change), duty and other import costs. In particular, energy costs have
fluctuatedincreased dramatically in the past and may fluctuate in the future. These
fluctuationsincreases may result in an increase in our transportation
and supply chain costs for distribution from the manufacturer to our distribution centers and from our distribution centers to our retail stores, utility costs for our distribution centers and retail stores,
manufacturing of our products, and overall costs to purchase products from our suppliers.
A material component of the cost of our product includes transportation costs to move the product from the manufacturer to our stores, and there have been recent capacity constraints. These costs could increase and have a material impact on inventory and cost of sales. Recently, there has been a substantial rise in international container and, to a lesser extent, domestic trucking costs, and if we are not able to raise retail prices, it could have a negative impact on our cost of sales.
We may not be able to adjust the prices of our products, especially in the short-term, to recover these cost increases, and a continual rise in such costs could adversely affect consumer spending and demand for our products and increase our operating costs, both of which could adversely affect our business, financial condition, and operating results.
Our future success is dependent on our ability to execute our business strategy effectively and deliver value to our customers.
We believe our future success will depend on our ability to execute our business strategy effectively and deliver value to our customers. We believe that our breadth of product assortment across a variety of hard surface flooring categories, low prices, and in-store availability of the products we offer in project-ready quantities, as well as the quality of our products and customer service, are among the key competitive advantages and important elements of our total value proposition. If we are unsuccessful in staying competitive with our current value proposition, the demand for our products would decrease, and customers may decide to purchase
products from our competitors instead of us. If this were to occur, our net sales, market share, and operating results would be adversely affected.
Our operating results may be adversely affected if we are not successful in managing our
inventory or in implementing a new demand forecasting and inventory replenishment system.inventory.
We currently maintain a high level of inventory
consisting of on average approximately 3,800 SKUs per store and an average inventory per store of approximately $2.5 million at cost in order to have a broad assortment of products across a wide variety of hard surface flooring categories in project-ready
quantities.quantities, with inventory per warehouse-format store consisting of on average approximately 4,400 SKUs and approximately $3.3 million of inventory at cost as of December 29, 2022. We also carry an additional
$187.4$709.7 million of inventory outside our stores, primarily at our distribution centers, as of the end of fiscal
2019.2022. The investment associated with this high level of inventory is substantial, and efficient inventory management is a key component of our business success and profitability. If we fail to adequately project the amount or mix of our inventory, we may miss sales opportunities or have to take unanticipated markdowns or hold additional clearance events to dispose of excess inventory, which will adversely affect our operating results.
In the past, we have incurred costs associated with inventory markdowns and obsolescence. Due to the likelihood that we will continue to incur such costs in the future, we generally include an allowance for such costs in our projections. However, the costs that we actually incur may be substantially higher than our estimate and adversely affect our operating results.
In addition, in fiscal 2020, we expect to implement a new demand forecasting and inventory replenishment system. If we are unsuccessful in implementing it, our operating results may be adversely affected. We continue to focus on ways to reduce these risks, but we cannot assure you that we will be successful in our inventory management.
Our operating results may be adversely affected by inventory shrinkage and damage.
We are subject to the risk of inventory shrinkage and damage, including the damage or destruction of our inventory by natural disasters or other causes. We have experienced charges in the past, and we cannot assure you that the measures we are taking will effectively address the problem of inventory shrinkage and damage in the future. Although some level of inventory shrinkage and damage is an unavoidable cost of doing business, we could experience higher-than-normal rates of inventory shrinkage and damage or incur increased security and other costs to combat inventory theft and damage. If we are not successful in managing our inventory balances, our operating results may be adversely affected.
If we are unable to enter into leases for additional stores on acceptable terms or renew or replace our current store leases, or if one or more of our current leases is terminated prior to expiration of its stated term, and we cannot find suitable alternate locations, our growth and profitability could be adversely affected.
We currently lease
allthe majority of our store locations and our store support center. Our growth strategy largely depends on our ability to identify and open future store locations, which can be difficult because our
warehouse-format stores
in major metropolitan markets generally require at least
50,00060,000 square feet of floor space. Our ability to negotiate acceptable lease terms for these store locations, to re-negotiate acceptable terms on expiring leases or to negotiate acceptable terms for suitable alternate locations could depend on conditions in the real estate market, competition for desirable properties, our relationships with current and prospective landlords, or on other factors that are not within our control. We also intend to purchase the real property for
certaina small number of new locations, and such strategy may not be successful. Any or all of these factors and conditions could adversely affect our growth and profitability.
Our success depends upon our ability to attract, hire, train, and retain highly qualified managers and staff.
Our success depends in part on our ability to attract, hire, train and retain qualified managers and staff. Purchasing hard surface flooring is an infrequent event for consumers, and the typical consumer in these groups has limited knowledge of the range, characteristics and suitability of the products available before starting the purchasing process. Therefore, consumers in the hard surface flooring market expect to have sales associates serving them who are knowledgeable about the entire assortment of products offered by the retailer and the process of choosing and installing hard surface flooring.
Each of our stores is managed by a store manager who has the flexibility (with the support of regional managers) to use his or her knowledge of local market dynamics to customize each store in a way that is most likely to increase net sales and profitability. Our store managers are also expected to anticipate, gauge and quickly respond to changing consumer demands in these markets. Further, it generally takes a substantial amount of time for our store managers to develop the entrepreneurial skills that we expect them to have in order to make our stores successful.
There is an increased level of competition for qualified regional managers, store managers and sales associates among home improvement and flooring retailers in local markets, and as a result, we may not succeed in attracting and retaining the personnel we require to conduct our current operations and support our plans for expansion. In addition, we compete with other retail businesses for many of our associates in hourly positions, and we invest significant resources in training and motivating them to maintain a high level of job satisfaction. These positions have historically had high turnover rates, which can lead to increased training and retention costs, particularly in a tight labor market.
If our recruiting and retention efforts are not successful, we may have or continue to have a shortage of qualified associates in future periods. Any such shortage would decrease our ability to effectively serve our customers. Such a shortage would also likely lead to higher wages for associates and a corresponding reduction in our operating results. In addition, as we expand into new markets, we may find it more difficult to hire, develop, and retain qualified associates and may experience increased labor costs. Any failure by us to attract, hire, train, and retain highly qualified managers and staff could adversely affect our operating results and future growth opportunities, and any increased labor costs due to competition, increased minimum wage (including various federal, state, and local actions to increase minimum wages), associate benefit costs, unionization activity, or other factors would adversely impact our operating expenses.
Our success depends substantially upon the continued retention of our key personnel, including our executive officers.
We believe that our success has depended and continues to depend to a significant extent on the efforts and abilities of our key personnel, including our executive officers. Our failure to retain members of that team could impede our ability to build on the efforts they have undertaken with respect to our business.
The effects of weather conditions, natural disasters or other unexpected events, including global health crises, such as the COVID-19 pandemic, may disrupt our operations and have a negative impact on our business.
The effects of global climate change, such as extreme weather conditions and natural disasters occurring more frequently or with more intense effects, or the occurrence of unexpected events including wildfires, tornadoes, hurricanes, earthquakes, floods, tsunamis and other severe hazards could adversely affect our business, financial condition, results of operations and cash flows. Extreme weather, natural disasters, power outages or other unexpected events could disrupt our operations by impacting the availability and cost of materials needed for manufacturing, causing physical damage and partial or complete closure of our manufacturing sites or distribution centers, loss of human capital, temporary or long-term disruption in the manufacturing and supply of products and services and disruption in our ability to deliver products and services to customers. These events and disruptions could also adversely affect our customers’ and suppliers’ financial condition or ability to operate, resulting in reduced customer demand, delays in payments received or supply chain disruptions. Further, these events and disruptions could increase insurance and other operating costs, including impacting our decisions regarding construction of new facilities to select areas less prone to climate change risks and natural disasters, which could result in indirect financial risks passed through the supply chain or other price modifications to our products and services.
Additionally, as we have experienced in recent years, the COVID-19 pandemic created significant volatility, uncertainty and economic disruption, both for our business (and many of customers’ and suppliers’ businesses) and the U.S. and global economy more generally. It has also, both directly and indirectly, led to significant operating challenges, including disruptions to our and our suppliers’ global supply chain and business operations, shortages of electronic and other parts and components, freight delays, increased labor shortages and logistical challenges. In response to the challenges presented by the COVID-19 pandemic, we have modified our business practices, and may continue to be required to take further actions as required by the potential for new strains or outbreaks of the virus, additional government requirements or mandates or for any other reason that we may deem to be in the best interests of our employees, customers, suppliers or others in the communities in which we do business. Although many governments have eased or eliminated their restrictions on travel and social interactions, and lifted non-essential business closures, several jurisdictions in which we have operations, such as China, continue to impose public health and government mandates that restrict business activities. These mandates and restrictions have, and could continue to have, an impact on our business and operations, and on those of certain of our suppliers. The impact of the COVID-19 pandemic continues to evolve, and its ultimate impact on our business is highly uncertain and difficult to predict.
Global health crises, such as the COVID-19 pandemic or any other actual or threatened epidemic, pandemic, or outbreak and spread of a communicable disease or virus in the countries where we transact, operate, or sell products and provide services could adversely affect our operations and financial performance. Further, any national, state or local government mandates or other orders taken to minimize the spread of a global health crisis could restrict our ability to conduct business as usual, as well as the business activities of our key customers and suppliers, including the potential for labor shortages. In particular, the ultimate extent of the impact of any epidemic, pandemic or other global health crisis on our business, financial condition and results of operations will depend on future developments which are highly uncertain and cannot be predicted, including new information that may emerge concerning the duration and severity of such epidemic, pandemic or other global health crisis, actions taken to contain or prevent their further spread and the pace of global economic recovery following containment of the spread.
The Company continues to monitor the situation and take appropriate actions in accordance with the recommendations and requirements of relevant authorities. The extent to which the COVID-19 pandemic may impact the Company’s operational and financial performance remains uncertain and will depend on many factors outside the Company’s control, including the timing, extent, trajectory and duration of the pandemic, the emergence of new variants, the development, availability, distribution and effectiveness of vaccines and treatments, the imposition of protective public safety measures, and the impact of the pandemic on the global economy and demand for consumer products and services. Additional future impacts on the Company may include material adverse effects on demand for the Company’s products and services, the Company’s supply chain and sales and distribution channels, the Company’s ability to execute its strategic plans, and the Company’s profitability and cost structure.
To the extent the COVID-19 pandemic adversely affects the Company’s business, results of operations, financial condition and stock price, it may also have the effect of heightening many of the other risks described in this Part I, Item 1A of this Form 10-K.
Rising geopolitical tensions and U.S. policies related to global trade and tariffs, including with respect to antidumping and countervailing duties, could adversely affect our business, financial condition and results of operations.
The current domestic and international political environment, including existing and potential changes to U.S. policies related to global trade and tariffs, have resulted in uncertainty surrounding the future state of the global economy. In particular, the ongoing trade dispute between the U.S. and China has resulted in the U.S. imposing tariffs of 25% on the vast majority of the products we import from China. Approximately 29% of the products we sold in fiscal 2022 were produced in China. Any further expansion in the types or levels of tariffs implemented on China or other countries has the potential to negatively impact our business, financial condition and results of operations. Additionally, there is a risk that the U.S. tariffs on imports are met with tariffs on U.S. produced exports and that a further trade conflict could ensue, which has the potential to significantly impact global trade and economic conditions, including the imposition of new measures with little notice. Potential costs and any attendant impact on pricing arising from these tariffs and any further expansion in the types or levels of tariffs implemented could require us to modify our current business practices and could adversely affect our business, financial condition, and results of operations.
In addition, the U.S. government has imposed import restrictions under the withhold release orders for goods from the Xinjiang Uyghur Autonomous Region and under the Uyghur Forced Labor Prevention Act, which effectively prohibits imports of any goods made either wholly or in part in Xinjiang, which may induce greater supply chain compliance costs and delays to us and to our suppliers. The law prohibits “the importation of goods made with forced labor” unless U.S. Customs and Border Protection determines, based on “clear and convincing evidence”, that the goods in question were not produced “wholly or in part by forced labor” and submits a report to the U.S. Congress setting out its findings. While we do not believe that our suppliers source materials from Xinjiang for the products they sell to us, any withhold release orders or inquires, other companies’ attempts to shift suppliers in response to this law, or other policy developments could result in shortages, delays, and/or price increases that could disrupt our own supply chain or cause our suppliers to renegotiate existing arrangements with us or fail to perform on such obligations. Broader policy uncertainty could also reduce Chinese luxury vinyl plank production, affecting supplies and/or prices for luxury vinyl plank, regardless of supplier. While we have developed multiple supply sources in a variety of countries and believe our vendor compliance program reflects our commitment to a supply chain free of forced labor, we could still be adversely affected by increases in our costs, negative publicity related to the industry, or other adverse consequences to our business.
Rising geopolitical tensions also could adversely affect our business, financial condition, and results of operations. In particular, in recent years, tensions between mainland China and Taiwan have further escalated, with China accelerating the development of military capabilities in order to “reunite Taiwan by force.” In case of a military conflict between China and Taiwan, our ability to import products from China could be limited. Similarly, the ongoing war between Russia and Ukraine could escalate and impact our ability to import products from Europe, including due to further increases in energy costs.
Our net sales growth could be adversely affected if comparable store sales growth is less than we expect.
While future net sales growth will depend substantially on our plans for new store openings, our comparable store sales growth is a significant driver of our net sales, profitability, cash flow, and overall business results. Because numerous factors affect our comparable store sales growth, including, among others, economic conditions, the retail sales environment, the home improvement spending environment, housing turnover, housing appreciation, interest rates, inflation, the hard surface flooring industry and the impact of competition, the ability of our customers to obtain credit, changes in our product mix, the in-stock availability of products that are in demand, changes in staffing at our stores, cannibalization resulting from the opening of new stores in existing markets, greater cannibalization than we modeled for new stores, lower than expected ramp-up in new store net sales, changes in advertising and other operating costs, weather conditions, retail trends, and our overall ability to execute our business strategy and planned growth
effectively, it is possible that we will not achieve our targeted comparable store sales growth or that the change in comparable store sales could be negative. If this were to happen, it is likely that overall net sales growth would be adversely affected.
If we fail to identify and maintain relationships with a sufficient number of suppliers, our ability to obtain products that meet our high quality standards at attractive prices could be adversely affected.
We purchase flooring and other products directly from suppliers located around the world. We do not have long-term contractual supply agreements with our suppliers that obligate them to supply us with products exclusively or at specified quantities or prices. As a result, our current suppliers may decide to sell products to our competitors and may not continue selling products to us. In order to retain the competitive advantage that we believe results from these relationships, we need to continue to identify, develop and maintain relationships with qualified suppliers that can satisfy our high standards for quality and safety and our requirements for delivery of flooring and other products in a timely and efficient manner at attractive prices. The need to develop new relationships will be particularly important as we seek to expand our operations and enhance our product offerings in the future. The loss of one or more of our existing suppliers or our inability to develop relationships with new suppliers could reduce our competitiveness, slow our plans for further expansion and cause our net sales and operating results to be adversely affected.
We will require significant capital to fund our expanding business, which may not be available to us on satisfactory terms or at all. If we are unable to maintain sufficient levels of cash flow or if we do not have sufficient availability under the ABL Facility, we may not meet our growth expectations or we may require additional financing, which could adversely affect our financial health and impose covenants that limit our business activities.
We plan to continue investing for growth, including opening new stores, remodeling existing stores, adding staff, adding distribution center capacity and upgrading our information technology systems and other infrastructure. These investments will require significant capital, which we plan on funding with cash flow from operations and borrowings under the ABL Facility (as defined below).
If our business does not generate sufficient cash flow from operations to fund these activities or if these investments do not yield cash flows in line with past performance or our expectations, we may need additional equity or debt financing. If such financing is not available to us, or is not available on satisfactory terms, our ability to operate and expand our business or respond to competitive pressures would be curtailed, and we may need to delay, limit or eliminate planned store openings or operations or other elements of our growth strategy. If we raise additional capital by issuing equity securities or securities convertible into equity securities, our stockholders’ ownership would be diluted.
We depend on a number of suppliers, and any failure by any of them to supply us with quality products on attractive terms and prices may adversely affect our business, financial condition, and operating results.
We depend on our suppliers to deliver quality products to us on a timely basis at attractive prices. Additionally, we source the products that we sell from over
225240 domestic and international suppliers. Although we purchase from a diverse supplier base, purchases from our largest supplier, which is
locatedheadquartered in China, accounted for approximately
15%16% of our net sales in fiscal
2019.2022. No other singular vendor supplied products representing more than
7%5% of net sales in fiscal
2019.2022. If we are unable to acquire desired merchandise in sufficient quantities on terms acceptable to us, or if we experience a change in business relationship with any of our major suppliers, it could impair our relationship with our customers, impair our ability to attract new customers, reduce our competitiveness, and adversely affect our business, financial condition, and operating results.
Changes in tax laws, trade policies and regulations
Additionally, we provide certain of our suppliers access to supply chain financing arrangements with financial institutions with whom we have relationships. The terms of such supply chain financing arrangements could be modified or
incanceled by such financial institutions at any time. If such programs are modified or cancelled, our
operations and newly enacted laws or regulations may impact our effective tax rate or may adversely affect our business, financial condition and operating results.Changes in tax laws in any of the multiple jurisdictions in which we operate, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, could result in an unfavorable change in our effective tax rate, which could adversely affect our business, financial condition and operating results.
Developments in tax policy or trade relations could have a material adverse effect on our business, results of operations and liquidity. If there are any adverse changes in tax laws or trade policies that result in an increase in our costs, wesuppliers may not be able to
adjust the pricesshipments of our products especially in the short-term,or require us to recover such costs, andpay our suppliers more quickly, which would have a rise in such costs could adversely affectnegative impact on our business, financial condition and operating results.
cash balances.
The failure of our suppliers to adhere to the quality standards that we set for our products could lead to investigations, litigation, write-offs, recalls or boycotts of our products, which could damage our reputation and our brand, increase our costs, and otherwise adversely affect our business.
We do not control the operations of our suppliers. Although we conduct initial due diligence prior to engaging our suppliers and require our suppliers to certify compliance with applicable laws and regulations, we cannot guarantee that our suppliers will comply with applicable laws and regulations or operate in a legal, ethical and responsible manner. Additionally, it is possible that we may not be able to identify noncompliance by our suppliers notwithstanding these precautionary measures. Violation of applicable laws and regulations by our suppliers or their failure to operate in a legal, ethical or responsible manner, could expose us to legal risks, cause us to violate laws and regulations and reduce demand for our products if, as a result of such violation or failure, we attract negative publicity. In addition, the failure of our suppliers to adhere to the quality standards that we set for our products could lead to government investigations, litigation, write-offs and recalls, which could damage our reputation and our brand, increase our costs, and otherwise adversely affect our business.
We procure the majority of our products from suppliers located outside of the United States, and as a result, we are subject to risks associated with obtaining products from abroad that could adversely affect our business, financial condition and results of operations.
We procure the majority of our products from suppliers located outside of the United States. As a result, we are subject to risks associated with obtaining products from abroad, including:
| ● | the imposition of new or different duties (including antidumping and countervailing duties), tariffs, taxes and/or other charges on exports or imports, including as a result of errors in the classification of products upon entry or changes in the interpretation or application of rates or regulations relating to the import or export of our products; |
| ● | political unrest, acts of war, terrorism and economic instability resulting in the disruption of trade from foreign countries where our products originate; |
| ● | disruption due to the public health crises such as the coronavirus; |
| ● | currency exchange fluctuations; |
| ● | the imposition of new or more stringent laws and regulations, including those relating to environmental, health and safety matters and climate change issues, labor conditions, quality and safety standards, trade restrictions, and restrictions on funds transfers; |
| ● | the risk that one or more of our suppliers will not adhere to applicable legal requirements, including fair labor standards, the prohibition on child labor, environmental, product safety or manufacturing safety standards, anti-bribery and anti-kickback laws such as the Foreign Corrupt Practices Act (the “FCPA”) and sourcing laws such as the Lacey Act; |
| ● | disruptions or delays in production, shipments, delivery or processing through ports of entry (including those resulting from strikes, lockouts, work-stoppages or slowdowns, or other forms of labor unrest); |
| ● | changes in local economic conditions in countries where our suppliers are located; and |
| ● | differences in product standards, acceptable business practice and legal environments. |
•the imposition of new or different duties (including antidumping and countervailing duties), tariffs, taxes and/or other charges on exports or imports, including as a result of errors in the classification of products upon entry or changes in the interpretation or application of rates or regulations relating to the import or export of our products;
•political unrest, acts of war, terrorism and economic instability resulting in the disruption of trade from foreign countries where our products originate;
•disruption due to the public health crises such as the COVID-19 pandemic;
•currency exchange fluctuations;
•the imposition of new or more stringent laws and regulations, including those relating to environmental, health and safety matters and climate change issues, labor conditions, quality and safety standards, trade restrictions, and restrictions on funds transfers;
•the risk that one or more of our suppliers will not adhere to applicable legal requirements, including fair labor standards, the prohibition on child labor, environmental, product safety or manufacturing safety standards, anti-bribery and anti-kickback laws such as the Foreign Corrupt Practices Act (the “FCPA”) and sourcing laws such as the Lacey Act;
•disruptions or delays in production, shipments, delivery or processing through ports of entry (including those resulting from strikes, lockouts, work-stoppages or slowdowns, or other forms of labor unrest);
•changes in local economic conditions in countries where our suppliers are located; and
•differences in product standards, acceptable business practice and legal environments.
Additionally, we import approximately 45%29% of the products we sell fromsold in fiscal 2022 were produced in China. The Chinese government has in the past imposed restrictions on manufacturing facilities, including a shut-down of transportation of materials and power plants to reduce air pollution. If, in the future, restrictions are imposed that include our operations, our suppliers’ ability to supply current or new orders would be significantly impacted. In addition, China has been impacted by the coronavirus,COVID-19, which, along with other public health crises, could impact our ability to obtain products in a timely manner. These and other factors beyond our control could disrupt the
ability of our suppliers to ship certain products to us cost-effectively or at all, expose us to significant operational and legal risk and negatively affect our reputation, any of which could adversely affect our business, financial condition and results of operations.
Our ability to offer compelling products, particularly products made of more exotic species or unique stone, depends on the continued availability of sufficient suitable natural products.
Our business strategy depends on offering a wide assortment of compelling products to our customers. We sell, among other things, flooring made from various wood species and natural stone from quarries throughout the world. Our ability to obtain an adequate volume and quality of hard-to-find products depends on our suppliers’ ability to furnish those products, which, in turn, could be affected by many things, including events such as forest fires, insect infestation, tree diseases, prolonged drought, other adverse weather and climate conditions and the exhaustion of stone quarries. Government regulations relating to forest management practices also affect our suppliers’ ability to harvest or export timber and other products, and changes to regulations and forest management policies, or the implementation of new laws or regulations, could impede their ability to do so. If our suppliers cannot deliver sufficient products, and we cannot find replacement suppliers, our net sales and operating results may be adversely affected.
Our operating results may be adversely affected by inventory shrinkage and damage.
We are subject to the risk of inventory shrinkage and damage, including the damage or destruction of our inventory by natural disasters, organized retail theft or other causes. We have experienced charges in the past, and we cannot assure you that the measures we are taking will effectively address the problem of inventory shrinkage and damage in the future. Organized retail theft is also increasing, and our efforts to address it may not be successful. Although some level of inventory shrinkage and damage is an unavoidable cost of doing business, we could experience higher-than-normal rates of inventory shrinkage and damage or incur increased security and other costs to combat inventory theft and damage. If we are not successful in managing our inventory balances, our operating results may be adversely affected.
If the use of “cookie” tracking technologies is further restricted, the amount of internet user information we collect would decrease, which could require additional marketing efforts and harm our business and operating results.
Cookies are small data files that are sent by websites and stored locally on an internet user’s computer or mobile device. We, and third parties who work on our behalf, collect data via cookies that is used to track the behavior of visitors to our sites, to provide a more personal and interactive experience, and to increase the effectiveness of our marketing.
Privacy regulations and policies by device operating systems, such as iOS or Android, are increasingly restricting how we deploy our cookies, and this could potentially increase the number of internet users that choose to proactively disable cookies on their systems.In addition, companies such as Google have publicly disclosed their intention to move away from cookies, which would have a negative impact on our ability to find the same anonymous user across different web properties, and would require us to increase our direct customer data capture efforts.If we are not successful, our marketing efforts may be limited, and our business, results of operations, and financial condition could be adversely affected.
Our business exposes us to personal injury, product liability and warranty claims and related governmental investigations, which could result in negative publicity, harm our brand and adversely affect our business, financial condition, and operating results.
Our stores and distribution centers are warehouse environments that involve the operation of forklifts and other machinery and the storage and movement of heavy merchandise, all of which are activities that have the inherent danger of injury or death to
employeesassociates or customers despite safety precautions, training and compliance with federal, state and local health and safety regulations. While we have insurance coverage in place in addition to policies and procedures designed to minimize these risks, we may nonetheless be unable to avoid material liabilities for an injury or death arising out of these activities.
In addition, we face an inherent risk of exposure to product liability or warranty claims or governmental investigations in the event that the use of our products is alleged to have resulted in economic loss, personal injury or property damage or violated environmental or other laws. If any of our products proves to be defective or otherwise in violation of applicable law, we may be required to recall or redesign such products. Further, in such instances, we mayproducts and be subject to legal action.
We generally seek contractual indemnification from our suppliers. However, such contractual indemnification may not be enforceable against the supplier, particularly because many of our suppliers are located outside of the United States. Any personal injury, product liability or warranty claim made against us, whether or not it has merit, or governmental investigation related to our products, could be time-consuming and costly to defend or respond to, may not be covered by insurance carried by us, could result in negative publicity, could harm our brand and could adversely affect our business, financial condition, and operating results. In addition, any negative publicity involving our suppliers,
employees,associates, and other parties who are not within our control could adversely affect us.
In connection with the installation or delivery of our products, customers may engage third parties associated with us to enter their homes. In addition, we are piloting in-home design services. While we believe we have appropriate indemnification and risk management practices in place, such activities involve liability and reputational risk, which could adversely affect us.
Unfavorable allegations, government investigations and legal actions surrounding our products and us could harm our reputation, impair our ability to grow or sustain our business, and adversely affect our business, financial condition, and operating results.
We rely on our reputation for offering great value, superior service and a broad assortment of high-quality, safe products. If we become subject to unfavorable allegations, government investigations or legal actions involving our products or us, such circumstances could harm our reputation and our brand and adversely affect our business, financial condition, and operating results. If this negative impact is significant, our ability to grow or sustain our business could be jeopardized.
For instance, we have previously settled claims related to unfavorable allegations surrounding the product quality of our laminates sourced from China. Although such claims have been resolved, we cannot predict whether we will face additional lawsuits that are not covered by the settlement or the release. If additional lawsuits are filed, we could incur significant costs, be liable to damages, be subject to fines, penalties, injunctive relief, criminal charges or other legal risks, which could reduce demand for our products and adversely affect our business, financial condition, and operating results.
Negative publicity surrounding product matters, including publicity about other retailers, may harm our reputation and affect the demand for our products. In addition, if more stringent laws or regulations are adopted in the future, we may have difficulty complying with the new requirements imposed by such laws and regulations, and in turn, our business, financial condition, and operating results could be adversely affected. Moreover, regardless of whether any such changes are adopted, we may become subject to claims or governmental investigations alleging violations of applicable laws and regulations. Any such matter may subject us to
fines, penalties, injunctions, litigation and/or potential criminal violations. Any one of these results could negatively affect our business, financial condition, and operating results and impair our ability to grow or sustain our business.
If we violate or are alleged to have violated environmental, health and safety laws and regulations, we could incur significant costs and other negative effects that could reduce demand for our products and adversely affect our business, financial condition, and operating results.
Certain portions of our operations are subject to laws and regulations governing the environmental protection of natural resources and health and safety, including formaldehyde emissions and the use, storage, handling, generation, transportation, treatment, emission, release, discharge and disposal of certain hazardous materials and wastes. In addition, certain of our products are subject to laws and regulations relating to the importation, exportation, acquisition or sale of certain plants and plant products, including those that have been illegally harvested, and the emissions of hazardous materials.
We operate our business in accordance with standards and procedures designed to comply with the applicable laws and regulations in these areas and work closely with our suppliers in order to comply with such laws and regulations. If we violate or are alleged to have violated these laws, we could incur significant costs, be liable for damages, experience delays in shipments of our products, be subject to fines, penalties, criminal charges or other legal risks, or suffer reputational harm, any of which could reduce demand for our products and adversely affect our business, financial condition, and operating results. In addition, there can be no assurance that such laws or regulations will not become more stringent in the future or that we will not incur additional costs in the future in order to comply with such laws or regulations.
We are engaged in various legal actions, claims and proceedings arising in the ordinary course of business and, while we cannot predict the outcomes of such proceedings and other contingencies with certainty, this litigation and any potential future litigation could have an adverse impact on us.
We are engaged in various legal actions, claims and proceedings arising in the ordinary course of business, including claims related to breach of contract, product liabilities, intellectual property matters and employment related matters resulting from our business activities. As with most actions such as these, an estimate of any possible and/or ultimate liability cannot always be determined. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. Additionally, we cannot guarantee that we will not become engaged in additional legal actions, claims, proceedings or governmental investigations in the future. Any such action could result in negative publicity, harm to our reputation and adversely affect our business, financial condition and operating results.
We, and
some of our officers and directors and stockholders, have been
named as parties in a purported securities class action lawsuit, the material allegations of which we deny. While we intend to defend ourselves vigorously, litigation can result in substantial damages and
costs, divert management’s time and attention from our business and could adversely affect our results of operations, financial condition and stock price.In May 2019, an alleged stockholder of the Company filed a putative class action lawsuit against the Company and certain of our officers, directors, and stockholders alleging certain violations of federal securities laws based on, among other things, purported materially false and misleading statements and omissions allegedly made by the Company. See the information under the “Litigation” caption in Note 9, “Commitments and Contingencies” to our consolidated financial statements included in this Annual Report for more information. We deny the material allegations in the lawsuit and intend to defend ourselves vigorously. No assurances can be given that the results of these matters will be favorable to us. In addition, we may be the target of securities-related litigation in the future, both relatedwhich could divert our management’s attention and unrelated toresources, result in substantial costs, and have an adverse effect on our business, results of operations, financial condition and stock price.
We have been and may in the
existing class action lawsuit.future be the target of securities-related litigation in the future. Litigation can divert our management’s attention and resources, result in substantial costs, and have an adverse effect on our business, results of operations, financial condition and stock price.
We maintain director and officer insurance that we regard as reasonably adequate to protect us frommitigate the risks associated with potential claims; however, we are responsible for meeting certain deductibles under such policies, and, in any event, we cannot assure you that the insurance coverage will adequately protect us from all claims made against us. Further, as a result of the pending litigation, the costs of insurance may increase, and the availability of coverage may decrease. As a result, we may not be able to maintain our current levels of insurance at a reasonable cost, or at all, which might make it more difficult to attract qualified candidates to serve as executive officers or directors. There also may be adverse publicity associated with litigation that could negatively affect customer perception of
our business and materially damage our reputation and the value of our brand regardless of whetherdespite the materialfact that we deny the allegations are valid or whether we are ultimately found not liable.
Federal, state or local laws and regulations, or our failure to comply with such laws and regulations, could increase our expenses, restrict our ability to conduct our business and expose us to legal risks.
We are subject to a wide range of general and industry-specific laws and regulations imposed by federal, state and local authorities in the countries in which we operate including those related to customs, foreign operations (such as the FCPA), truth-in-advertising, consumer protection (such as the California Consumer Privacy Act and Telephone Consumer Protection Act), privacy, product safety (such as the Formaldehyde Standards in Composite Wood Products Act), the environment (such as the Lacey Act),
import and export controls (such as the Uyghur Forced Labor Prevention Act), intellectual property infringement, zoning and occupancy matters as well as the operation of retail stores and distribution facilities. In addition, various federal and state laws govern our relationship with, and other matters pertaining to, our
employees,associates, including wage and hour laws, laws governing independent contractor classifications, requirements to provide meal and rest periods or other benefits, family leave mandates, requirements regarding working conditions and accommodations to certain
employees,associates, citizenship or work authorization and related requirements, insurance and workers’ compensation rules and anti-discrimination laws. In recent years, we and other parties in the flooring industry have been or currently are parties to litigation involving claims that allege violations of the foregoing laws, including claims related to product safety and patent claims. In addition, there has been an increase in the number of wage and hour class action claims that allege misclassification of overtime eligible workers and/or failure to pay overtime-eligible workers for all hours worked, particularly in the retail industry, and we are currently defending one such claim. Although we believe that we have complied with these laws and regulations, there is nevertheless a risk that we will become subject to
additional claims that allege we have failed to do so. Any claim that alleges a failure by us to comply with any of the foregoing laws and regulations may subject us to fines, penalties, injunctions, litigation and/or potential criminal violations, which could adversely affect our reputation, business, financial condition, and operating results.
Certain of our products may require us to spend significant time and resources in order to comply with applicable advertising, labeling, importation, exportation, environmental, health and safety laws and regulations because if we violate these laws or regulations, we could experience delays in shipments of our goods, be subject to fines or penalties, be liable for costs and damages or suffer reputational harm, any of which could reduce demand for our merchandise and adversely affect our business, financial condition, and operating results.
Any changes to the foregoing laws or regulations or any new laws or regulations that are passed or go into effect may make it more difficult for us to operate our business and in turn adversely affect our operating results.
We may also be subject to audits by various taxing authorities. Similarly, changes in tax laws in any of the multiple jurisdictions in which we operate, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, could result in an unfavorable change in our effective tax rate, which could adversely affect our business, financial condition, and operating results. In addition, given the nature of our business, certain of our sales are exempt from state sales taxes. If we are audited and fail to maintain proper documentation, any adjustments resulting from such audits could increase our tax liability, including any interest or penalties.
Labor activities could cause labor relations difficulties for us.
Currently none of our employeesassociates are represented by a union; however, our employeesassociates have the right at any time to form or affiliate with a union. As we continue to grow, enter different regions and operate distribution centers, unions may attempt to organize all or part of our employeeassociate base at certain stores or distribution centers within certain regions. We cannot predict the adverse effects that any future organizational activities will have on our business, financial condition, and operating results. If we were to become subject to work stoppages, we could experience disruption in our operations and increases in our labor costs, either of which could adversely affect our business, financial condition, and operating results.
If our efforts to protect the privacy and security of information related to our customers, us, our employees,associates, our suppliers and other third parties are not successful, we could become subject to litigation, investigations, liability and negative publicity that could significantly harm our reputation and relationships with our customers and adversely affect our business, financial condition, and operating results.
Our business, like that of most retailers, involves the receipt, storage and transmission of customers’ personal information, consumer preferences and payment card data, as well as other confidential information related to us, our
employees,associates, our suppliers and other third parties, some of which is entrusted to third-party service providers and vendors that provide us with technology, systems and services that we use in connection with the receipt, storage and transmission of such information. Techniques used for
cyber attackscyber-attacks designed to gain unauthorized access to these types of sensitive information by breaching or sabotaging critical systems of large organizations are constantly evolving and generally are difficult to recognize and react to effectively. We may be unable to anticipate these techniques or to implement adequate preventive or reactive security measures. Notwithstanding widespread recognition of the
cyber attackcyber-attack threat and improved data protection methods, high profile electronic security breaches leading to unauthorized release of sensitive information have occurred in recent years with increasing frequency at a number of major U.S. companies, including several large retailers, notwithstanding widespread recognition of the
cyber attackcyber-attack threat and improved data protection methods.
Despite our security measures and those of third parties with whom we do business, such as our banks, merchant card processing and other technology vendors, our respective systems and facilities may be vulnerable to criminal cyber-attacks or security incidents due to malfeasance, intentional or inadvertent security breaches by
employees,associates, or other vulnerabilities such as defects in design or manufacture. Unauthorized parties may also attempt to gain access to our systems or facilities through fraud, trickery or other forms of deception targeted at our customers,
employees,associates, suppliers and service providers. Any such, incidents could compromise our networks and the information stored there could be accessed, misused, publicly disclosed, lost or stolen.
As noted above, the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often are not recognized until launched against a target; accordingly, we may be unable to anticipate these techniques or implement adequate preventative measures. In addition, advances in computer capabilities, new technological discoveries or other developments may also compromise or result in the obsolescence of the technology used to protect sensitive information. An actual or anticipated attack or security incident may cause us to incur additional costs, including costs related to diverting or deploying personnel, implementing preventative measures, training
employeesassociates and engaging third-party experts and consultants. Further, any security breach incident could expose us to risks of data loss, regulatory and law enforcement investigations, litigation and liability and could seriously disrupt our operations and any resulting negative publicity could significantly harm our reputation and relationships with our customers and adversely affect our business, financial condition, and operating results.
A material disruption in our information systems, including our website
andor call center, could adversely affect our business or operating results and lead to reduced net sales and reputational damage.
We rely on our information systems to process transactions, summarize our results of operations and manage our business. In particular, our website and our call center are important parts of our integrated connected customer strategy and customers use these systems as information sources on the range of products available to them and as a way to order our products. Therefore, the reliability and capacity of our information systems is critical to our operations and the implementation of our growth initiatives. However, our information systems are subject to damage or interruption from planned upgrades in technology interfaces, power outages, computer and telecommunications failures, computer viruses, cyber-attacks or other security breaches and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes, acts of war or terrorism and usage errors by our employees.associates. If our information systems are damaged or cease to function properly, we may have to make a significant investment to fix or replace them, and we may suffer losses of critical data and/or interruptions or delays in our operations.
In addition, to keep pace with changing technology, we must continuously implement new information technology systems as well as enhance our existing systems. Moreover, the successful execution of some of our growth strategies, in particular the expansion of our connected customer and online capabilities, is dependent on the design and implementation of new systems and technologies and/or the enhancement of existing systems. Any material disruption in our information systems, or delays or difficulties in implementing or integrating new systems or enhancing or expanding current systems, could have an adverse effect on our business (in particular our call center and online operations) and our operating results and could lead to reduced net sales and reputational damage.
We may not be able to successfully maintain effective internal controls over financial reporting, which could have an adverse effect on our business and stock price.
We previously identified a material weaknessare required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports as well as our fiscal year-end assessment of the effectiveness of our internal control over financial reporting, which has now been remediated. Any failure to maintain effective internal control over financial reporting could resultreporting. We have in material misstatements in our financial statementsthe past identified and cause investors to lose confidence in our reported financial information, which in turn could cause the trading price of our securities to decline.
We reported in our Annual Report on Form 10-K as of December 27, 2018,remediated a material weakness in our internal controls related to ineffective information technology general controls (“ITGCs”) in the areas of user access and program change-management over certain information technology systems that support the Company’s financial reporting processes. During 2019, we completed the remediation measures related to the material weakness and concluded that our internal control over financial reporting was effective as of December 26, 2019. Completion of remediation does not provide assurance that our remediation or other controls will continue to operate properly.
While the previously identified material weakness has been remediated, we may suffer from other material weaknesses in the future. To comply with the requirements of Sections 302 and 404, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal controls can divert our management’s attention from other matters that are important to the operation of our business. In addition, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Sections 302 and 404. If we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods, could be adversely affected. This could subject us to litigation or investigations requiring management resources and payment of legal and other expenses and could result in negative publicity, harm to our reputation and adversely affect our business, financial condition, and operating results or adversely affect the market price of our common stock.
We will require significant capital to fund our expanding business, which may not be available to us on satisfactory terms or at all. If we are unable to maintain sufficient levels of cash flow or if we do not have sufficient availability under our asset-based revolving credit facility (as amended, the “ABL Facility”), we may not meet our growth expectations or we may require additional financing, which could adversely affect our financial health and impose covenants that limit our business activities.
We plan to continue investing for growth, including opening new stores, remodeling existing stores, adding staff, adding distribution center capacity and upgrading our information technology systems and other infrastructure. These investments will require significant capital, which we plan on funding with cash flow from operations and borrowings under the ABL Facility.
If our business does not generate sufficient cash flow from operations to fund these activities or if these investments do not yield cash flows in line with past performance or our expectations, we may need additional equity or debt financing. If such financing is not available to us, or is not available on satisfactory terms, our ability to operate and expand our business or respond to competitive pressures would be curtailed, and we may need to delay, limit or eliminate planned store openings or operations or other elements of our growth strategy. If we raise additional capital by issuing equity securities or securities convertible into equity securities, our stockholders’ ownership would be diluted.
Changes in tax laws, trade policies and regulations or in our operations and newly enacted laws or regulations may impact our effective tax rate or may adversely affect our business, financial condition, and operating results.
Changes in tax laws in any of the multiple jurisdictions in which we operate, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, could result in an unfavorable change in our effective tax rate, which could adversely affect our business, financial condition, and operating results.
Developments in tax policy or trade relations could have a material adverse effect on our business, results of operations and liquidity. If there are any adverse changes in tax laws or trade policies that result in an increase in our costs, we may not be able to adjust the prices of our products, especially in the short-term, to recover such costs, and a rise in such costs could adversely affect our business, financial condition, and operating results.
We are subject to payments-related risks that could increase our operating costs, expose us to fraud, subject us to potential liability and potentially disrupt our business.
We accept payments using a variety of methods, including credit cards, debit cards, gift cards and physical bank checks. These payment options subject us to many compliance requirements, including, but not limited to, compliance with the Payment Card Industry Data Security Standards, which represents a common set of industry tools and measurements to help ensure the safe handling of sensitive information, and compliance with contracts with our third-party processors. These payment options also subject us to potential fraud by criminal elements seeking to discover and take advantage of security vulnerabilities that may exist in some of these payment systems. For certain payment methods, including credit cards and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards and gift cards, and it could disrupt or harm our business if these companies become unwilling or unable to provide these services to us, experience a data security incident or fail to comply with applicable rules and industry standards. We are also subject to payment card association operating rules, including data security rules, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems or payment card information of our customers are breached or compromised, there is the potential that parties could seek damages from us, we may be liable for card issuing banks’ costs, subject to fines and higher transaction fees, and lose our ability to accept credit cards and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, we could lose the confidence of customers and our business, financial condition, and operating results could be adversely affected. We may also need to expend significant management and financial resources to become or remain compliant with relevant standards and requirements, which could divert resources from other initiatives and adversely affect our business, financial condition, and operating results.
We are also in the process of transitioning our proprietary credit card program to a new third-party financial institution. Any disruption in such transition could adversely affect our business, financial condition, and operating results.
Our facilities and systems, as well as those of our suppliers, are vulnerable to natural disasters and other unexpected events, and as a result we may lose merchandise and be unable to effectively deliver it to our stores.
Our retail stores, store support center and distribution centers, as well as the operations of our suppliers from which we receive goods and services, are vulnerable to damage from earthquakes, tornadoes, hurricanes, fires, floods, and similar events. If any of these events result in damage to our facilities, systems or equipment, or those of our suppliers, they could adversely affect our ability to stock our stores and deliver products to our customers, and could adversely affect our net sales and operating results. In addition, we may incur costs in repairing any damage beyond our applicable insurance coverage. In particular, any disruption to any of our distribution centers could have a material adverse impact on our business.
Our success depends substantially upon the continued retention of our key personnel, which we consider to be our executive officers.
We believe that our success has depended and continues to depend to a significant extent on the efforts and abilities of our key personnel, which we consider to be our executive officers. We have employment agreements with each of our executive officers. Our failure to retain members of that team could impede our ability to build on the efforts they have undertaken with respect to our business.
We do not maintain “key man” life insurance policies on our key personnel.
We do not have “key man” life insurance policies for any of our key personnel. If we were to obtain “key man” insurance for our key personnel, there can be no assurance that the amounts of such policies would be sufficient to pay losses experienced by us as a result of the loss of any of those personnel.
Our success depends upon our ability to attract, train, and retain highly qualified managers and staff.
Our success depends in part on our ability to attract, hire, train and retain qualified managers and staff. Purchasing hard surface flooring is an infrequent event for BIY and DIY consumers, and the typical consumer in these groups has little knowledge of the range, characteristics and suitability of the products available before starting the purchasing process. Therefore, consumers in the hard surface flooring market expect to have sales associates serving them who are knowledgeable about the entire assortment of products offered by the retailer and the process of choosing and installing hard surface flooring.
Each of our stores is managed by a store manager who has the flexibility (with the support of regional managers) to use his or her knowledge of local market dynamics to customize each store in a way that is most likely to increase net sales and profitability. Our store managers are also expected to anticipate, gauge and quickly respond to changing consumer demands in these markets. Further, it generally takes a substantial amount of time for our store managers to develop the entrepreneurial skills that we expect them to have in order to make our stores successful.
There is a high level of competition for qualified regional managers, store managers and sales associates among home improvement and flooring retailers in local markets, and as a result, we may not succeed in attracting and retaining the personnel we require to conduct our current operations and support our plans for expansion. In addition, we compete with other retail businesses for many of our associates in hourly positions, and we invest significant resources in training and motivating them to maintain a high level of job satisfaction. These positions have historically had high turnover rates, which can lead to increased training and retention costs, particularly in a tight labor market.
If our recruiting and retention efforts are not successful, we may have a shortage of qualified employees in future periods. Any such shortage would decrease our ability to effectively serve our customers. Such a shortage would also likely lead to higher wages for employees and a corresponding reduction in our operating results. In addition, as we expand into new markets, we may find it more difficult to hire, develop, and retain qualified employees and may experience increased labor costs. Any failure by us to attract, train, and retain highly qualified managers and staff could adversely affect our operating results and future growth opportunities, and any increased labor costs due to competition, increased minimum wage, employee benefit costs (including various federal, state, and location actions to increase minimum wages), unionization activity, or other factors would adversely impact our operating expenses.
As we have a high concentration of stores in the southern region of the United States, we are subject to regional risks.
We have a high concentration of stores in the southern region of the United States. If this market suffers an economic downturn or other significant adverse event, our comparable store sales, net sales, profitability and the ability to implement our planned expansion could be adversely affected. Any natural disaster, extended adverse weather or other serious disruption in this market, whether due to fire, tornado, hurricane, or any other calamity, could damage inventory and could result in decreased net sales.
Our intellectual property rights are valuable, and any failure to protect them could reduce the value of our products and brand and harm our business.
We regard our intellectual property as having significant value, and our brand is an important factor in the marketing of our products. However, we cannot assure you that the steps we take to protect our trademarks or intellectual property will be adequate to prevent others from copying or using our trademarks or intellectual property without authorization. If our trademarks or intellectual property are copied or used without authorization, the value of our brand, its reputation, our competitive advantages and our goodwill could be harmed.
We may be involved in disputes from time to time relating to our intellectual property and the intellectual property of third parties.
We are and may continue to become parties to disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in these disputes. Third parties
have and may raise
future claims against us alleging infringement or violation of the intellectual property of such third-party. Even if we prevail in such disputes, the costs we incur in defending such dispute may be material and costly. Some third-party intellectual property rights may be extremely broad, and it may not be possible for us to conduct our operations in such a way as to avoid violating any such intellectual property rights. Any such intellectual property claim could subject us to costly litigation and impose a significant strain on our financial resources and management personnel regardless of whether such claim has merit. The liability insurance we maintain may not adequately cover potential claims of this type, and we may be required to pay monetary damages or license fees to third parties, which could have a material adverse effect on our business, financial condition, and operating results.
We may, from time to time, consider or engage in strategic transactions. Any such strategic transactions would involve risks, which could have an adverse impact on our financial condition and results of operation, and we may not realize the anticipated benefits of these transactions.
From time to time, we consider strategic transactions, including mergers, acquisitions, investments, alliances, and other growth and market expansion strategies, with the expectation that these transactions will result in increases in sales, cost savings, synergies and various other benefits. Assessing the viability and realizing the benefits of these transactions is subject to significant uncertainty. Additionally, in connection with evaluating potential strategic transactions and assets, we may incur significant expenses for the evaluation and due diligence investigation and negotiation of any potential transaction.
We have no prior experience acquiring companies and may not be successful. If we complete an acquisition, we would need to successfully integrate the target company’s
products, services, associates and systems into our business operations. On June 4, 2021, we acquired Spartan Surfaces, Inc. (“Spartan”), a commercial flooring specifier, and we may acquire additional commercial flooring companies in the future. As with any acquisition, we need to successfully integrate Spartan’s products, services, associates and systems into our business operations. Integration can be a complex and time-consuming process, and if the integration is not fully successful or is delayed for a material period of time, we may not achieve the anticipated synergies or benefits of the acquisition. Furthermore, even if a target company is successfully integrated, an acquisition may fail to further our business strategy as anticipated, expose us to increased competition or challenges with respect to our products or services, and expose us to additional liabilities. Any impairment of goodwill or other intangible assets acquired in a strategic transaction may reduce our earnings.
Our ability to control higher health care costs is limited and could adversely affect our business, financial condition and operating results.
With the passage in 2010 of the U.S. Patient Protection and Affordable Care Act (as amended, the “Affordable Care Act”), we are required to provide affordable coverage, as defined in the Affordable Care Act, to all employees, or otherwise be subject to a payment per employee based on the affordability criteria in the Affordable Care Act. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. These requirements limit our ability to control employee health care costs.
Efforts to modify, repeal or otherwise invalidate all, or certain provisions of, the Affordable Care Act and/or adopt a replacement healthcare reform law may impact our employee healthcare costs. At this time, there is uncertainty concerning whether the Affordable Care Act will be repealed or what requirements will be included in a new law, if enacted. If health care costs rise, we may experience increased operating costs, which may adversely affect our business, financial condition and operating results.
We are subject to risks related to corporate social responsibility.
Our business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our brand and reputation if we fail to act responsibly in a number of areas, such as diversity and inclusion, environmental stewardship, support for local communities, corporate governance and transparency and considering ESG factors in our business operations. Adverse incidents could impact the value of our brand, the cost of our operations and relationships with investors, all of which could adversely affect our business and results.
The effectiveness of our advertising strategy is a driver of our future success.
We believe that our growth was in part a result of our successful investment in local advertising. As we enter new markets that often have more expensive advertising rates, we may need to increase our advertising expenses to broaden the reach and frequency of our advertising to increase the recognition of our brand. If our advertisements fail to draw customers in the future, or if the cost of advertising or other marketing materials increases significantly, we could experience declines in our net sales and operating results.
We do not maintain “key person” life insurance policies on our key personnel.
We do not have “key person” life insurance policies for any of our key personnel. If we were to obtain “key person” insurance for our key personnel, there can be no assurance that the amounts of such policies would be sufficient to pay losses experienced by us as a result of the loss of any of those personnel.
We are a holding company with no business operations of our own and depend on cash flow from our subsidiaries to meet our obligations.
We are a holding company with no business operations of our own or material assets other than the equity of our subsidiaries. All of our operations are conducted by our subsidiaries. As a holding company, we will require dividends and other payments from our subsidiaries to meet cash requirements.
The terms of our
$300$800.0 million
asset-based revolving credit facility (the “ABL Facility”),ABL Facility and our
$350$204.5 million senior secured term loan facility
(the(as amended to date, the “Term Loan Facility” and together with the ABL Facility, our “Credit Facilities”), restrict our subsidiaries from paying dividends and otherwise transferring cash or other assets to us except in certain limited circumstances. If we become insolvent or there is a liquidation or other reorganization of any of our subsidiaries, our stockholders likely will have no right to proceed against their assets. Creditors of those subsidiaries will be entitled to payment in full from the sale or other disposal of the assets of those subsidiaries before we, as an equity holder, would be entitled to receive any distribution from that sale or disposal. If our subsidiaries are unable to pay dividends or make other payments to us when needed, we will be unable to satisfy our obligations.
We face risks related to our indebtedness.
As of December
26, 2019,29, 2022, the principal amount of our total indebtedness was
approximately $142.6$204.5 million related to our indebtedness outstanding under the Term Loan Facility. In addition, as of December
26, 2019,29, 2022, we had the ability to access
approximately $279.5$556.5 million of unused borrowings available under the ABL Facility without violating any covenants thereunder and had
approximately $20.5$33.3 million in outstanding letters of credit thereunder.
Our indebtedness, combined with our lease and other financial obligations and contractual commitments, could adversely affect our business, financial condition, and operating results by:
| ● | making it more difficult for us to satisfy our obligations with respect to our indebtedness, including restrictive covenants and borrowing conditions, which may lead to an event of default under the agreements governing our debt; |
| ● | making us more vulnerable to adverse changes in general economic, industry and competitive conditions and government regulation; |
| ● | requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of cash flows to fund current operations and future growth; |
| ● | exposing us to the risk of increased interest rates as our borrowings under our Credit Facilities are at variable rates; |
| ● | restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; |
•making it more difficult for us to satisfy our obligations with respect to our indebtedness, including restrictive covenants and borrowing conditions, which may lead to an event of default under the agreements governing our debt;
•making us more vulnerable to adverse changes in general economic, industry and competitive conditions and government regulation;
•requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of cash flows to fund current operations and future growth;
| ● | requiring us to comply with financial and operational covenants, restricting us, among other things, from placing liens on our assets, making investments, incurring debt, making payments to our equity or debt holders and engaging in transactions with affiliates; |
| ● | limiting our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business and growth strategies or other purposes; and |
| ● | limiting our ability to obtain credit from our suppliers and other financing sources on acceptable terms or at all. |
•restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;•requiring us to comply with financial and operational covenants, restricting us, among other things, from placing liens on our assets, making investments, incurring debt, making payments to our equity or debt holders and engaging in transactions with affiliates;
•limiting our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business and growth strategies or other purposes; and
•limiting our ability to obtain credit from our suppliers and other financing sources on acceptable terms or at all.
We may also incur substantial additional indebtedness in the future, subject to the restrictions contained in our Credit Facilities. If such new indebtedness is in an amount greater than our current debt levels, the related risks that we now face could intensify. However, we cannot give assurance that any such additional financing will be available to us on acceptable terms or at all. Moreover,
our deduction of business interest expenses for
each taxable year is limited generally to 30% of our “adjusted taxable income” for the relevant taxable year. Starting with taxable years beginning after December 31,
2017,2022, the
deductibilityaddback of
net business interest expenses on our indebtedness for eachdepreciation, depletion and amortization previously allowed in determining “adjusted taxable
year could be limited underincome” no longer applies due to an automatic change to Section 163(j) of the U.S. Internal Revenue Code of 1986, as amended, scheduled when the Tax Cuts and Jobs Act
(the “Act”).Additionally,was enacted in July 2017,2017.
Our variable rate debt subjects us to interest rate risk that could cause our debt service obligations to increase significantly.
The debt we incurred under our Credit Facilities are at variable rates of interest, which exposes us to interest rate risk. Reference rates used to determine the
Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submitapplicable interest rates for
our variable rate debt began to rise significantly in the
calculationsecond half of
LIBOR after 2021. The Alternative Reference Rates Committeefiscal 2022. If interest rates continue to increase, the debt service obligations on such indebtedness will continue to increase even if the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. In addition, as a result of our latest amendments to the Credit Facilities certain of the variable rate indebtedness extended to us uses the Secured Overnight Financing Rate (“
ARRC”SOFR”)
has proposedas a
paced market transition planbenchmark for establishing the interest rate. While we believe we will continue to
use SOFR,
from USD-LIBOR, but it is unclear whetherother factors may impact SOFR including factors causing SOFR to cease to exist, new methods of calculating
LIBOR willSOFR to be established,
such that it continues to exist after 2021, or if alternative rates or benchmarks will be adopted. Changes in the method of calculating LIBOR, or the
replacementuse of
LIBOR with an alternative
rate or benchmark, may adversely affect interest ratesreference rate(s). These consequences are not entirely predictable and
result in higher borrowing costs. The Company has material debtcould have an adverse impact on our financing costs, returns on investments, valuation of derivative contracts
that are indexed to USD-LIBOR and
is currently working on a transition plan. We believe all our material agreements have appropriate language to negotiate a transition to an alternative index rate and are continuing to monitor this activity and evaluate the related risks. However, if LIBOR ceases to exist, we may need to amend or restructure our existing LIBOR-based debt instruments and any related hedging arrangements that extend beyond 2021, which may be difficult, costly and time consuming. We cannot give assurance that our financial
condition, and operating results will not be adversely affected.results.
Significant amounts of cash are required to service our indebtedness,
and operating lease obligations, and any failure to meet our debt service obligations could adversely affect our business, financial condition, and operating results.
Our ability to pay interest on and principal of our debt obligations will primarily depend upon our future operating performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect our ability to make these payments.
If we do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our indebtedness, selling our assets, reducing or delaying capital investments, or seeking to raise additional capital. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. From time to time, capital markets may experience periods of disruption and instability. For example, between 2008 and 2009, the global capital markets were unstable as evidenced by periodic disruptions in liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major financial institutions. Despite actions of the U.S. federal government and foreign governments, these events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole. While market conditions have largely recovered from the events of 2008 and 2009, there have been continuing periods of volatility, some lasting longer than others. There can be no assurance these market conditions will not continue or worsen in the future.
Any refinancing of our debt could therefore be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on acceptable terms. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Our Credit Facilities-” for more information.
Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations at all or on acceptable terms, could have an adverse effect on our business, financial condition, and operating results.
We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in amounts sufficient to enable us to make payments on our indebtedness or to fund our operations.
Our debt agreements contain restrictions that may limit our flexibility in operating our business.
We are a holding company, and accordingly, substantially all of our operations are conducted through our subsidiaries. The credit agreements governing our Credit Facilities contain, and any future indebtedness would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in acts that may be in our best long-term interests. The credit agreements governing our Credit Facilities include covenants that, among other things, restrict our and our subsidiaries’ ability to:
| ● | incur additional indebtedness; |
| ● | make investments, loans, or advances; |
| ● | sell assets, including capital stock of subsidiaries, or make acquisitions; |
| ● | pay dividends on capital stock or redeem, repurchase or retire capital stock, or make other restricted payments; |
| ● | enter into transactions with affiliates; |
| ● | repurchase certain indebtedness; and |
| ● | exceed a certain total net leverage ratio or, in certain cases, maintain less than a certain fixed charge coverage ratio. |
•incur additional indebtedness;
•create liens;
•make investments, loans, or advances;
•merge or consolidate;
•sell or otherwise dispose assets, including capital stock of subsidiaries, or make acquisitions;
•pay dividends on capital stock or redeem, repurchase or retire capital stock, or make other restricted payments;
•enter into transactions with affiliates;
•repurchase certain indebtedness; and
•in certain cases, maintain less than a certain fixed charge coverage ratio.
Based on the foregoing factors, the operating and financial restrictions and covenants in our current debt agreements and any future financing agreements could adversely affect our ability to finance future operations or capital needs or to engage in other business activities.
In addition, a breach of any of the restrictive covenants in our Credit Facilities may constitute an event of default, permitting the lenders to declare all outstanding indebtedness under
both our Credit Facilities to be immediately due and payable or to enforce their security interest, which could adversely affect our ability to respond to changes in our business and manage our operations. Upon the occurrence of an event of default under any of the agreements governing our Credit Facilities, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in such credit agreements. If any of our indebtedness under
either of our Credit Facilities were to be accelerated, there can be no assurance that our assets would be sufficient to repay this indebtedness in full, which could adversely affect our ability to continue to operate as a going concern. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Our Credit Facilities” for more information.
The Company is
We are exposed to credit risk on certain of our receivables and the inability or failure to collect outstanding credit, specifically from our existing customers under our commercial credit program, could result in losses and adversely affect our operating results.
As an added convenience to our customers, we began offering limited credit to our commercial customers, a portion of which is not covered by collateral, third-party bank support, or credit insurance. Our exposure to credit and collectability risk makes us susceptible to potential losses, and our ability to mitigate such risks may be limited, especially if our customers are adversely affected
by a market downturn or periods of economic uncertainty. While we monitor individual customer payment capability and maintain adequate reserves to cover our exposure, there can be no assurance that such procedures will be effective in reducing our credit risks.
Our fixed lease obligations could adversely affect our operating results.
We are required to use a significant portion of cash generated by our operations to satisfy our fixed lease obligations, which could adversely affect our ability to obtain future financing to support our growth or other operational investments. We will require substantial cash flows from operations to make our payments under our operating leases, all of which provide for periodic increases in rent.
As of December 26, 2019, our minimum annual rental obligations under long-term operating leases for the fiscal years ending December 31, 2020 and December 30, 2021 are approximately $122.3 million and $127.4 million, respectively. If we are not able to make payments under our operating leases, this could trigger defaults under other leases or, in certain circumstances, under our Credit Facilities, which could cause the counterparties or lenders under those agreements to accelerate the obligations due thereunder.
Changes to accounting rules or regulations could adversely affect our operating results.
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). New accounting rules or regulations and changes to existing accounting rules or regulations have occurred and may occur in the future. Future changes to accounting rules or regulations, such as changes to revenue recognition or lease accounting guidance or a requirement to convert to international financial reporting standards, could adversely affect our operating results through increased cost of compliance.
Risks Related to the Ownership of Our Common Stock
Our stock price may
continue to be volatile, which could result in a significant loss or impairment of your investment.
On May 2, 2017, we completed our initial public offering (the “IPO”). Since the IPO, the price of our common stock as reported by The New York Stock Exchange (“NYSE”) has ranged from a low closing sales price of $24.00 on December 24, 2018 to a high closing sales price of
$57.50$143.31 on
April 5, 2018.November 4, 2021. In addition, the trading price of our common stock has been, and may continue to be, subject to wide price fluctuations in response to various factors, many of which are beyond our control, including those described above in
“—Risks“Risks Related to
ourOur Business” and the following:
| ● | actual or anticipated fluctuations in our quarterly or annual financial results; |
| ● | the financial guidance we may provide to the public, any changes in such guidance or our failure to meet such guidance; |
| ● | failure of industry or securities analysts to maintain coverage of us, changes in financial estimates by any industry or securities analysts that follow us or our failure to meet such estimates; |
| ● | downgrades in our credit ratings or the credit ratings of our competitors; |
| ● | market factors, including rumors, whether or not correct, involving us or our competitors; |
| ● | unfavorable market reactions to allegations regarding the safety of products sold by us or our competitors that are similar to products that we sell and costs or negative publicity arising out of any potential litigation and/or government investigations resulting therefrom; |
| ● | fluctuations in stock market prices and trading volumes of securities of similar companies; |
| ● | sales or anticipated sales of large blocks of our stock; |
| ● | short selling of our common stock by investors; |
| ● | limited “public float” in the hands of a small number of persons whose sales or lack of sales of our common stock could result in positive or negative pricing pressure on the market price for our common stock; |
•the financial guidance we may provide to the public, any changes in such guidance or our failure to meet such guidance;
| ● | additions or departures of key personnel; |
| ● | announcements of new store openings, commercial relationships, acquisitions, or entry into new markets by us or our competitors; |
| ● | failure of any of our initiatives, including our growth strategy, to achieve commercial success; |
| ● | regulatory or political developments; |
| ● | changes in accounting principles or methodologies; |
| ● | litigation or governmental investigations; |
| ● | negative publicity about us in the media and online; and |
| ● | general financial market conditions or events. |
•downgrades in our credit ratings or the credit ratings of our competitors;•market factors, including rumors, whether or not correct, involving us or our competitors;
•unfavorable market reactions to allegations regarding the safety of products sold by us or our competitors that are similar to products that we sell and costs or negative publicity arising out of any potential litigation and/or government investigations resulting therefrom;
•fluctuations in stock market prices and trading volumes of securities of similar companies;
•short selling of our common stock by investors;
•additions or departures of key personnel;
•announcements of new store openings, commercial relationships, acquisitions, or entry into new markets by us or our competitors;
•failure of any of our initiatives, including our growth strategy, to achieve commercial success;
•regulatory or political developments;
•changes in accounting principles or methodologies;
•litigation or governmental investigations;
•negative publicity about us in the media and online; and
•general financial market conditions or events.
Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies, including ours. These fluctuations sometimes have been unrelated or disproportionate to the operating performance of those companies. These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise adversely affect the price or liquidity of our common stock.
In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. Such litigation
including the litigation that is currently pending against us and certain of our officers, directors and stockholders and any other similar litigation that could be brought in the future, could cause us to incur substantial costs associated with defending such litigation or paying for settlements or damages. Such lawsuits could also divert the time and attention of our management from our operating business. Regardless of whether lawsuits are resolved in our favor or if we are the plaintiff or the defendant in any litigation, any lawsuits to which we are or may become a party will likely be expensive and time consuming to defend or resolve. As a result, such litigation may adversely affect our business, financial condition, and operating results.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business, our market, or our competitors, or if they change their recommendations regarding our common stock in a negative way, the price and trading volume of our common stock could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us, our business, our market, or our competitors. If any of the analysts who cover us change their recommendation regarding our common stock in a negative way, or provide more favorable relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who covers us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our common stock price or trading volume to decline.
The large number of shares eligible for public sale in the future, or the perception of the public that these sales
We may
occur, could depress the market price of our common stock.The market price of our common stock could decline as a result of (i) sales of a large number of shares of our common stock in the market, particularly sales by our directors, employees (including our executive officers) and certain other significant stockholders, and (ii) a large number of shares of our common stock being registered or offered for sale. These sales, or the perception that these sales could occur, may depress the market price of our common stock. As of February 18, 2020, there were 101,580,656 shares of common stock outstanding, all of which were freely tradeable on the NYSE, except that any shares held by our affiliates, as that term is defined in Rule 144 under the Securities Act (“Rule 144”), may only be sold in compliance with the registration requirements of the Securities Act or under an exemption under Rule 144 or otherwise.
Additionally, as of February 18, 2020, approximately 5,933,108 shares of our common stock are issuable upon exercise of stock options that vest and are exercisable at various dates through November 4, 2029, with an average weighted exercise price of $13.69
per share, and we have issued 49,847 shares of restricted stock with restrictions that lapse at various dates through May 16, 2023. Of such options, 3,628,692 are currently exercisable. We have filed a registration statement on Form S-8 under the Securities Act to register shares of our common stock issued or reserved for issuance under our stock incentive plans. The Form S-8 registration statement became effective immediately upon filing, and shares covered by that registration statement are eligible for sale in the public markets, subject to vesting restrictions and the limitations of Rule 144 applicable to affiliates.
All of our shares of common stock will be eligible for future sale, subject to the applicable volume, manner of sale, holding period and other limitations of Rule 144. In addition, our Sponsors have certain demand registration rights, and certain of our pre IPO stockholders have “piggy back” registration rights with respect to the common stock, subject to certain conditions and exceptions contained in a registration rights agreement.
In the future, we expect to issue stock options, restricted stock and/or other forms of stock-based compensation, which have the potential to dilute stockholders’ value and cause the price of our common stock to decline.
In the future, we expect to
We may offer stock options, restricted stock and/or other forms of
stock basedstock-based compensation to our eligible
employees,associates, consultants and
directors who are not executives or consultants of the Company or employees of Ares (as defined below) or Freeman Spogli (as defined below) or their respective affiliates.directors. If we grant more equity awards to attract and retain key personnel, the expenses associated with such additional equity awards could materially adversely affect our results of operations and may also result in additional dilution to our stockholders. If any options that we issue are exercised or any restrictions on restricted stock that we issue lapse and those shares are sold into the public market, the market price of our common stock may decline. In addition, the availability of shares of common stock for award under our stock incentive plans or the grant of stock options, restricted stock or other forms of
stock basedstock-based compensation may adversely affect the market price of our common stock.
Our ability to raise capital in the future may be limited.
Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to holders of our common stock to make claims on our assets and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities or securities convertible into equity securities, existing stockholders will experience dilution and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of our future offerings. Thus,
youstockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.
Our principal stockholders have substantial control over us, are able to influence corporate matters and may take actions that conflict with your interests and have the effect of delaying or preventing changes of control or changes in management, or limiting the ability of other stockholders to approve transactions they deem to be in their best interest.
Our directors, executive officers, and holders of more than 5.0% of our Class A common stock, together with their affiliates, beneficially own, in the aggregate, approximately 52.6% of our outstanding Class A common stock. Ares Corporate Opportunities Fund III, L.P. (“Ares”), a fund affiliated with Ares Management Corporation (“Ares Management”), beneficially owns, in the aggregate, approximately 12.1% of our outstanding Class A common stock, and FS Equity Partners VI, L.P. and FS Affiliates VI, L.P., funds affiliated with Freeman Spogli Management Co., L.P. (collectively “Freeman Spogli” or “Freeman Spogli & Co.” and together with Ares, our “Sponsors”) beneficially own, in the aggregate, approximately 5.8% of our outstanding Class A common stock. Additionally, Capital World Investors beneficially owns approximately 10.1% of our outstanding Class A common stock, Sands Capital Management, LLC beneficially owns approximately 7.6%, The Vanguard Group beneficially owns approximately 6.9%, and Wellington Management Group LLP beneficially owns approximately 5.3%. As a result, these stockholders acting together, or Ares or Freeman Spogli acting alone, are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of us or our assets. The investor rights agreement by and among us, Ares and Freeman Spogli also contains agreements among our Sponsors with respect to voting on the election of our directors and committee memberships on our Board of Directors (the “Board”). The interests of Ares or Freeman Spogli could conflict in material respects with yours, and this concentration of ownership could limit your ability to influence
corporate matters and may have the effect of delaying or preventing a third-party from acquiring control over us. Certain of the members of our Board also have relationships with our Sponsors. David B. Kaplan and Rachel H. Lee serve as officers and principals of certain Ares affiliated entities. In addition, NAX 18, LLC, a consulting entity controlled by Norman H. Axelrod, provides consulting services to certain Ares affiliated entities. Brad J. Brutocao and John M. Roth serve as officers and principals of certain Freeman Spogli affiliated entities. In addition, Peter Starrett Associates, a consulting entity controlled by Peter M. Starrett, provides consulting services to certain Freeman Spogli affiliated entities. Our certificate of incorporation provides that no officer or director of ours who is also an officer, director, employee, managing director or other affiliate of our Sponsors will be liable to us or our stockholders for breach of any fiduciary duty by reason of the fact that any such individual directs a corporate opportunity to our Sponsors instead of us, or does not communicate information regarding a corporate opportunity to us that the officer, director, employee, managing director, or other affiliate has directed to our Sponsors.
We do not currently expect to pay any cash dividends.
The continued operation and growth of our business will require substantial funding. Accordingly, we do not currently expect to pay any cash dividends on shares of our common stock. Any determination to pay dividends in the future will be at the discretion of our Board
or directors (the “Board”) and will depend upon our operating results, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our Board
deemdeems relevant. Additionally, under our Credit Facilities, our subsidiaries are currently restricted from paying cash dividends except in limited circumstances, and we expect these restrictions to continue in the future. Accordingly, realization of a gain on your investment in our common stock will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock. See Item 5, “Market for Registrant’s Common
Equity-Equity, Related Stockholder Matters and Issuer Purchases of Equity” for more information.
As a
result of our 2017 IPO, ourpublic company, we incur significant costs,
have increased significantly, and our management is required to devote substantial time, to
complyingcomply with public company regulations, which
willcould negatively impact our financial performance and could cause our results of operations or financial condition to suffer.
In April
Since becoming a public company in 2017, we
priced our IPO. As a result,have incurred and we will continue to incur
additional legal, accounting, insurance and other expenses,
that we did not incur as a private company, including costs associated with public company reporting
requirements. We also have incurred and will incur costs associated withrequirements, the Sarbanes-Oxley Act, Dodd-Frank Wall Street Reform and Consumer Protection Act and related rules implemented by the SEC. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. These rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and
costly, although we are currently unable to estimate these costs with any degree of certainty. In estimating these costs, we took into account expenses related to insurance, legal, accounting, and compliance activities, as well as other expenses.costly. These laws and regulations can also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations can also make it more difficult for us to attract and retain qualified persons to serve on our Board, our Board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions, and other regulatory action and potentially civil litigation.
Failure to establish and maintain effective internal controls in accordance with Sections 302 and 404 of the Sarbanes-Oxley Act could have an adverse effect on our business and stock price.
We are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting.
To comply with the requirements of Sections 302 and 404, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal controls can divert our management’s attention from other matters that are important to the operation of our business. In addition, when evaluating our internal controls over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Sections 302 and 404. If we identify material weaknesses in our internal controls over financial reporting or are unable to comply with the requirements of Sections 302 and 404 in a timely manner or assert that our internal controls over financial reporting are effective, or if our independent registered
public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the NYSE, the SEC or other regulatory authorities, which could require additional financial and management resources.
Anti-takeover provisions could impair a takeover attempt and adversely affect existing stockholders and the market value of our common stock.
Certain provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may have the effect of rendering more difficult, delaying or preventing an acquisition of the Company, even when this would be in the best interest of our stockholders. These provisions include:
•the sole power of a majority of our Board to fix the number of directors;
•the requirement that certain advance notice procedures be followed for our stockholders to submit nominations of candidates for election to our Board and to bring other proposals before a meeting of the stockholders;
•the power of our Board to amend our bylaws without stockholder approval;
limitations on the removal of directors nominated by our Sponsors;
•the sole power of the Board or our Sponsors in the case of a vacancy of one of their respective Board nominees, to fill any vacancy on the Board, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;
•the ability of a majority of our Board (even if less than a quorum) to designate one or more series of preferred stock and issue shares of preferred stock without stockholder approval;
the inability of stockholders to act by written consent if our Sponsors collectively own less than a majority of our outstanding Class A common stock;
•a requirement that, to the fullest extent permitted by law, certain proceedings against or involving us or our directors, officers, or employeesassociates be brought exclusively in the Court of Chancery in the State of Delaware;
and•the lack of cumulative voting rights for the holders of our Class A common stock with respect to the election of directors; and
directors.the inability of stockholders to call special meetings if our Sponsors collectively own less than a majority of our outstanding Class A common stock.
Further, Delaware law imposes conditions on the voting of “control shares” and on certain business combination transactions with “interested stockholders.”
Our issuance of shares of preferred stock could delay or prevent a change of control of the Company. Our Board has the authority to cause us to issue, without any further vote or action by our stockholders, shares of preferred stock, par value $0.001 per share, in one or more series, to designate the number of shares constituting any series and to fix the rights, preferences, privileges, and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices, and liquidation preferences of such series. The issuance of shares of preferred stock may have the effect of delaying, deferring, or preventing a change in control of our Company without further action by our stockholders, even where stockholders are offered a premium for their shares.
In addition, the issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of our other classes of voting stock either by diluting the voting power of our other classes of voting stock if they vote together as a single class, or by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote even if the action were approved by the holders of our other classes of voting stock.
These provisions could delay or prevent hostile takeovers and changes in control or changes in our management. Also, the issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences, or other economic terms favorable to the holders of preferred stock could adversely affect the market price for our common stock by making an investment in our common stock less attractive. For example, a conversion feature could cause the trading price of our common stock to decline to the conversion price of the preferred stock. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control or otherwise makes an investment in our common stock less attractive could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
General Risk Factors
Our business, financial condition, and operating results are dependent on general economic conditions and discretionary spending by our customers, which in turn are affected by a variety of factors beyond our control. If such conditions deteriorate, our business, financial condition, and operating results may be adversely affected.
Our business, financial condition, and operating results are affected by general economic conditions and discretionary spending by our customers. Such general economic conditions and discretionary spending are beyond our control and are affected by, among other things:
•consumer confidence in the economy;
•interest rates and inflation;
•trade relations and tariffs;
•unemployment trends;
•consumer debt levels;
•consumer credit availability;
•data security and privacy concerns;
•the housing market, including housing turnover and whether home values are rising or declining;
•energy prices;
•slower rates of growth in real disposable personal income;
•natural disasters, unpredictable weather or other unexpected events, including global health crises, such as the COVID-19 pandemic;
•national security concerns and other geopolitical risks;
•uncertain U.S. political conditions;
•protests, demonstrations, riots and other political unrest;
•tax rates and tax policy; and
•other matters that influence consumer confidence and spending.
If such conditions deteriorate, our business, financial condition, and operating results may be adversely affected. In addition, increasing volatility in financial and capital markets may cause some of the above factors to change with a greater degree of frequency and magnitude than in the past.
We are engaged in various legal actions, claims and proceedings arising in the ordinary course of business and, while we cannot predict the outcomes of such proceedings and other contingencies with certainty, this litigation and any potential future litigation could have an adverse impact on us.
We are engaged in various legal actions, claims and proceedings arising in the ordinary course of business, including claims related to breach of contract, product liabilities, intellectual property matters and employment related matters resulting from our business activities. As with most actions such as these, an estimate of any possible and/or ultimate liability cannot always be determined. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. Additionally, we cannot guarantee that we will not become engaged in additional legal actions, claims, proceedings or governmental investigations in the future. Any such action could result in negative publicity, harm to our reputation and adversely affect our business, financial condition, and operating results.
Our ability to control higher health care costs is limited and could adversely affect our business, financial condition, and operating results.
Under the U.S. Patient Protection and Affordable Care Act (as amended, the “Affordable Care Act”), we are required to provide affordable coverage, as defined in the Affordable Care Act, to all associates, or otherwise be subject to a payment per associate based on the affordability criteria in the Affordable Care Act. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. These requirements limit our ability to control associate health care costs. If health care costs rise, we may experience increased operating costs, which may adversely affect our business, financial condition, and operating results.
We are subject to risks related to corporate social responsibility.
Our business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our brand and reputation if we fail to act responsibly in a number of areas, such as diversity and inclusion, environmental stewardship, support for local communities, corporate governance and transparency and considering ESG factors in our business operations. We will incur additional and potentially significant expenses as we continue to execute our ESG framework in the coming years. Adverse incidents could impact the value of our brand, the cost of our operations and relationships with investors, all of which could adversely affect our business and results.
Changes to accounting rules or regulations could adversely affect our operating results.
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. New accounting rules or regulations and changes to existing accounting rules or regulations have occurred and may occur in the future. Future changes to accounting rules or regulations, such as changes to revenue recognition or lease accounting guidance, climate-disclosure requirements, or a requirement to convert to international financial reporting standards, could adversely affect our operating results through increased cost of compliance.
Changes in U.S. taxation of businesses could adversely affect us.
We are subject to taxes in the United States. Due to economic and political conditions, tax laws and tax rates for income taxes and other non-income taxes in various jurisdictions may be subject to significant change. Any such tax changes could materially increase the amount of taxes we would be required to pay, which could adversely affect our business, financial condition, and operating results. For example, increases in the corporate tax rate may adversely impact our cash flow, which would in turn negatively impact our performance and liquidity. Other changes that may be enacted in the future, including changes to tax laws enacted by state or local governments in jurisdictions in which we operate, could result in further changes to state and local taxation and materially adversely affect our financial position and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We have 120
As of December 29, 2022, we operated 191 U.S. warehouse-format stores located in 3036 states as shown in the charttable below:
| | | | | | | | |
State
|
| Number of
Stores |
State
Alabama |
| Stores
1 |
Alabama
Arizona |
| 1
6 |
Arizona
California | | 6
27 |
California
Colorado | | 14
5 |
Colorado
Connecticut | | 4
3 |
Florida | | 20
25 |
Georgia | | 8
9 |
Illinois | | 7
10 |
Indiana |
| 1
2 |
Kansas
Iowa |
| 2
1 |
Kentucky
Kansas |
| 1
2 |
Louisiana
Kentucky | | 1
2 |
Maryland
Louisiana | | 1
2 |
Massachusetts
Maryland |
| 2
3 |
Michigan
Massachusetts |
| 1
5 |
Missouri
Michigan |
| 2
3 |
Nevada
Minnesota | | 3
2 |
New Jersey
Missouri | | 3
2 |
New Mexico
Nebraska |
| 1 |
New York
Nevada |
| 1
4 |
North Carolina
New Hampshire | | 3
1 |
Ohio
New Jersey | | 3
5 |
Oklahoma
New Mexico |
| 1 |
Pennsylvania
New York | | 2
4 |
SouthNorth Carolina
|
| 1
5 |
Tennessee
Ohio | | 3
4 |
Texas
Oklahoma | | 18
2 |
Utah
Oregon | | 2
1 |
Virginia
Pennsylvania | | 5
2 |
Washington
South Carolina |
| 2
3 |
Wisconsin
Tennessee |
| 1
4 |
Total
Texas |
| 120
30 |
| Utah | | 3 |
| Virginia | | 6 |
| Washington | | 3 |
| Wisconsin | | 2 |
| Total | | 191 |
We opened 20 new stores during
The following table presents the percentage of our owned versus leased facilities in operation at the end of fiscal 2019. In addition to2022 and their total square footage:
| | | | | | | | | | | | | | | | | | |
| square footage in thousands | Owned | | Leased | | Total Square Footage | |
| Stores | 5 | % | | 95 | % | | 15,093 | |
| Distribution centers | 20 | % | | 80 | % | | 5,680 | |
| Offices and other | — | % | | 100 | % | | 244 | |
| Total | | | | | 21,017 | |
Stores include our
191 warehouse-format stores
we operate one separate small 5,500 square footand six small-format design
centerstudios. Distribution centers include our four distribution centers located in
New Orleans, Louisiana. Ouror near Houston, Savannah, Los Angeles, and Baltimore and our transload facility near Los Angeles. Offices and other includes our headquarters, which we refer to as our store support center,
is approximately 185,473 square feet and is located in Atlanta,
Georgia. We completed our move to this new location in the fourth quarter of fiscal 2019 from our old store support center in Smyrna, Georgia. Additionally, we operate an approximately 37,000 square footGeorgia, separate product review
centerand sample fulfillment centers located in Marietta,
GA, as well as a 20,400 square foot sample fulfillment center in Marietta, GA.We leaseGeorgia, and other administrative, sales, and warehousing facilities supporting our store support center, allcommercial flooring distribution business. The property tables above exclude locations where we have taken possession of our stores, and our distribution centers. Most of our leases provide for a minimum rent and typically include escalating rent increases. Our leases also generally require us to pay insurance, utilities, real estate taxes and repair and maintenance expenses.the premises but are not yet operating. See the information disclosed under the “Lease Commitments” caption in Note 9, “Commitments and Contingencies” of the notes to our consolidated financial statements included in this Annual Report for further detail onadditional details related to our leases.
ITEM 3. LEGAL PROCEEDINGS.
We are engaged in various legal actions, claims and proceedings arising in the ordinary course of business, including claims related to breach of contracts, product liabilities, intellectual property matters and employment related matters resulting from our business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be
determined. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. See the information disclosed under the “Litigation” caption in Note 9, “Commitments and Contingencies” to our consolidated financial statements included in this Annual Report for further detail on legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock
has been listedis publicly traded on the NYSE under the symbol
“FND” since our IPO on April 27, 2017. Prior to that date, there was no public market for our common stock. “FND.” On February 18, 2020,20, 2023, there were 3020 stockholders of record of our Class A common stock. The actual number of stockholders is greater than the number of record holders stated above, and includes stockholders who are beneficial owners, but whose shares are held in “street name” by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
No dividends have been declared or paid on our common stock. We intend to continue to retain all available funds and any future earnings for use in the operation and growth of our business, and therefore we do not currently expect to pay any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our Board and will depend on then existing conditions, including our operating results, financial condition, contractual restrictions, capital requirements, business prospects and other factors that our Board may deem relevant.
The following graph shows a comparison of cumulative total return to holders of common stock against the cumulative total return of the S&P 500 Index and the S&P 500 Home Improvement Retail Index
from April 27, 2017 (the datefor our
common stock commenced trading on the NYSE)fiscal years 2018 through
December 26, 2019.2022. The comparison of the cumulative total returns for each investment assumes that $100 was invested in our Class A common stock and the respective indices on
April 27,December 28, 2017
(the last trading day of fiscal 2017) through December
26, 2019,29, 2022, including reinvestment of any dividends. Historical share price performance should not be relied upon as an indication of future share price performance.
| | | | | | | | | | | | | | | | | | | | |
| 4/27/2017 | | 9/28/2017 | | 3/29/2018 | | 9/27/2018 | | 3/28/2019 | | 9/26/2019 | | 12/26/2019 |
FND | $ | 100.00 | | $ | 120.81 | | $ | 162.62 | | $ | 95.85 | | $ | 129.52 | | $ | 160.03 | | $ | 156.94 |
S&P 500 Index | $ | 100.00 | | $ | 105.28 | | $ | 110.77 | | $ | 122.22 | | $ | 118.09 | | $ | 124.89 | | $ | 135.89 |
S&P 500 Home Improvement Retail | $ | 100.00 | | $ | 101.10 | | $ | 111.16 | | $ | 133.16 | | $ | 123.40 | | $ | 142.54 | | $ | 141.33 |
| | | | | | | | | | | |
| Fiscal Year Ended | FND | S&P 500 Index | S&P 500 Home Improvement Retail Index |
| December 28, 2017 | $ 100.00 | $ 100.00 | $ 100.00 |
| December 27, 2018 | $ 52.45 | $ 92.61 | $ 92.12 |
| December 26, 2019 | $ 101.43 | $ 120.55 | $ 119.60 |
| December 31, 2020 | $ 187.24 | $ 139.76 | $ 148.40 |
| December 30, 2021 | $ 262.11 | $ 177.81 | $ 231.37 |
| December 29, 2022 | $ 143.15 | $ 143.23 | $ 181.50 |
Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of our Common Stock
None.
ITEM 6. RESERVED
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected historical financial and operating data of the Company as of the dates and for the periods indicated. The following selected financial data are qualified by reference to, and should be read in conjunction with, the consolidated financial statements, related notes and other financial information, as well as in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. We operate on a 52- or 53-week fiscal year ending on the Thursday on or preceding December 31. The data presented contains references to fiscal 2015, fiscal 2016, fiscal 2017, fiscal 2018, and fiscal 2019, which represent our fiscal years ended December 29, 2016, December 28, 2017, December 27, 2018 and December 26, 2019 all of which were 52-week periods, and December 31, 2015, which was a 53-week period.
| | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | |
in thousands, except per share amounts (1) | | 12/26/2019 | | 12/27/2018 | | 12/28/2017 | | 12/29/2016 | | 12/31/2015(2) | |
Net sales | | $ | 2,045,456 | | $ | 1,709,848 | | $ | 1,384,767 | | $ | 1,050,759 | | $ | 784,012 | |
Cost of sales | | | 1,182,442 | | | 1,007,580 | | | 812,203 | | | 621,497 | | | 471,390 | |
Gross profit | | | 863,014 | | | 702,268 | | | 572,564 | | | 429,262 | | | 312,622 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling and store operating | | | 546,853 | | | 439,495 | | | 353,647 | | | 271,876 | | | 202,637 | |
General and administrative | | | 132,386 | | | 105,327 | | | 84,661 | | | 64,025 | | | 49,917 | |
Pre-opening | | | 24,594 | | | 26,145 | | | 16,485 | | | 13,732 | | | 7,380 | |
Litigation settlement | | | — | | | — | | | — | | | 10,500 | | | — | |
Executive severance (3) | | | — | | | — | | | — | | | — | | | 296 | |
Total operating expenses | | | 703,833 | | | 570,967 | | | 454,793 | | | 360,133 | | | 260,230 | |
Operating income | | | 159,181 | | | 131,301 | | | 117,771 | | | 69,129 | | | 52,392 | |
Interest expense, net | | | 8,801 | | | 8,917 | | | 13,777 | | | 12,803 | | | 9,386 | |
Loss on early extinguishment of debt | | | — | | | — | | | 5,442 | | | 1,813 | | | — | |
Income before income taxes | | | 150,380 | | | 122,384 | | | 98,552 | | | 54,513 | | | 43,006 | |
(Benefit) provision for income taxes | | | (251) | | | 6,197 | | | (4,236) | | | 11,474 | | | 16,199 | |
Net income | | $ | 150,631 | | $ | 116,187 | | $ | 102,788 | | $ | 43,039 | | $ | 26,807 | |
| | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 1.51 | | $ | 1.20 | | $ | 1.13 | | $ | 0.52 | | $ | 0.32 | |
Diluted | | $ | 1.44 | | $ | 1.11 | | $ | 1.03 | | $ | 0.49 | | $ | 0.31 | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 99,435 | | | 96,770 | | | 90,951 | | | 83,432 | | | 83,365 | |
Diluted | | | 104,962 | | | 104,561 | | | 99,660 | | | 88,431 | | | 86,281 | |
| | | | | | | | | | | | | | | |
| | As of |
in thousands | | 12/26/2019 | | 12/27/2018 | | 12/28/2017 | | 12/29/2016 | | 12/31/2015 |
Consolidated balance sheet data: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 27,037 | | $ | 644 | | $ | 556 | | $ | 451 | | $ | 318 |
Net working capital | | | 121,908 | | | 158,029 | | | 146,856 | | | 95,550 | | | 109,565 |
Total assets | | | 2,324,309 | | | 1,234,091 | | | 1,067,992 | | | 831,166 | | | 748,888 |
Total debt (4) | | | 142,606 | | | 145,334 | | | 189,062 | | | 390,743 | | | 177,590 |
Total stockholders’ equity | | | 764,336 | | | 584,309 | | | 442,860 | | | 134,283 | | | 312,365 |
| | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
in thousands, except for per share amounts (1) | | 12/26/2019 | | 12/27/2018 | | 12/28/2017 | | 12/29/2016 | | 12/31/2015(2) |
Consolidated statement of cash flows data: | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | 204,658 | | $ | 185,624 | | $ | 109,207 | | $ | 89,456 | | $ | 20,380 |
Net cash used in investing activities | | | (196,008) | | | (151,397) | | | (102,253) | | | (74,648) | | | (45,021) |
Net cash provided by (used in) financing activities | | | 17,743 | | | (34,139) | | | (6,849) | | | (14,675) | | | 24,680 |
Cash dividends declared per share | | | — | | | — | | | — | | | 2.43 | | | — |
| | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | |
Other financial data: | | 12/26/2019 | | 12/27/2018 | | 12/28/2017 | | 12/29/2016 | | 12/31/2015(2) | |
Comparable store sales growth | | | 4.0 | % | | 9.2 | % | | 16.6 | % | | 19.4 | % | | 13.5 | % |
Number of stores open at the end of the period (5) | | | 121 | | | 101 | | | 84 | | | 70 | | | 58 | |
Adjusted EBITDA (in thousands) (6) | | $ | 242,623 | | $ | 191,939 | | $ | 158,781 | | $ | 108,398 | | $ | 72,868 | |
Adjusted EBITDA margin | | | 11.9 | % | | 11.2 | % | | 11.5 | % | | 10.3 | % | | 9.3 | % |
| (1) | All of the earnings per share data, share numbers, share prices, and exercise prices have been adjusted on a retroactive basis to reflect the 321.820-for-one stock split effected on April 24, 2017. |
| (2) | The 53rd week in fiscal 2015 represented $11.9 million in net sales, an estimated $2.1 million in operating income and an estimated $2.2 million in adjusted EBITDA. When presenting comparable store sales for fiscal 2015 and fiscal 2016, we have excluded the last week of fiscal 2015. |
| (3) | Represents costs incurred in connection with separation agreements with former officers. |
| (4) | Total debt consists of the current and long-term portions of our Credit Facilities, as well as debt discount and debt issuance costs. |
| (5) | Represents the number of our warehouse-format stores and our one small-format standalone design center. |
| (6) | EBITDA and Adjusted EBITDA (which are shown in the reconciliations below) have been presented in this filing as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as net income before interest, loss on early extinguishment of debt, taxes, depreciation and amortization. We define Adjusted EBITDA as net income before interest, loss on early extinguishment of debt, taxes, depreciation and amortization, adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. Reconciliations of these measures to the equivalent measures under GAAP are set forth in the table below. |
EBITDA and Adjusted EBITDA are key metrics used by management and our Board to assess our financial performance and enterprise value. We believe that EBITDA and Adjusted EBITDA are useful measures, as they eliminate certain expenses that are not indicative of our core operating performance and facilitate a comparison of our core operating performance on a consistent basis from period to period. We also use Adjusted EBITDA as a basis to determine covenant compliance with respect to our Credit Facilities, to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, and to compare our performance against that of other peer companies using similar measures. EBITDA and Adjusted EBITDA are also used by analysts, investors and other interested parties as performance measures to evaluate companies in our industry.
EBITDA and Adjusted EBITDA are non-GAAP measures of our financial performance and should not be considered as alternatives to net income as a measure of financial performance or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of liquidity or free cash flow for management's discretionary use. In addition, these non-GAAP measures exclude certain non-recurring and other charges. Each of these non-GAAP measures has its limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the items eliminated in the adjustments made to determine EBITDA and Adjusted EBITDA, such as stock compensation expense, loss on asset disposal, executive recruiting/relocation, and other adjustments. Our presentation of EBITDA and Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Definitions and calculations of
EBITDA and Adjusted EBITDA differ among companies in the retail industry, and therefore EBITDA and Adjusted EBITDA disclosed by us may not be comparable to the metrics disclosed by other companies.
The reconciliations of net income to EBITDA and Adjusted EBITDA for the periods noted below are set forth in the table as follows:
| | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
in thousands | | 12/26/2019 | | 12/27/2018 | | 12/28/2017 | | 12/29/2016 | | 12/31/2015(2) |
Net income | | $ | 150,631 | | $ | 116,187 | | $ | 102,788 | | $ | 43,039 | | $ | 26,807 |
Depreciation and amortization (a) | | | 73,019 | | | 46,346 | | | 33,546 | | | 25,089 | | | 16,794 |
Interest expense, net | | | 8,801 | | | 8,917 | | | 13,777 | | | 12,803 | | | 9,386 |
Loss on early extinguishment of debt (b) | | | — | | | — | | | 5,442 | | | 1,813 | | | — |
Income tax (benefit) expense | | | (251) | | | 6,197 | | | (4,236) | | | 11,474 | | | 16,199 |
EBITDA | | | 232,200 | | | 177,647 | | | 151,317 | | | 94,218 | | | 69,186 |
Stock compensation expense (c) | | | 8,711 | | | 6,514 | | | 4,959 | | | 3,229 | | | 3,258 |
Loss on asset impairments and disposals (d) | | | 4,111 | | | 23 | | | 128 | | | 451 | | | 128 |
Executive severance (e) | | | — | | | — | | | — | | | — | | | 296 |
Tariff refunds (f) | | | (8,148) | | | — | | | — | | | — | | | — |
Litigation settlement (g) | | | — | | | — | | | — | | | 10,500 | | | — |
Other (h) | | | 5,749 | | | 7,755 | | | 2,377 | | | — | | | — |
Adjusted EBITDA | | $ | 242,623 | | $ | 191,939 | | $ | 158,781 | | $ | 108,398 | | $ | 72,868 |
| (a) | Excludes amortization of deferred financing costs, which is included as a part of interest expense in the table above. For fiscal 2015, fiscal 2016, fiscal 2017, and fiscal 2018, amounts are also net of amortization of tenant improvement allowances. |
| (b) | Loss recorded as a result of non-cash write-off of certain deferred financing fees related to the refinancing of term and revolver borrowings in fiscal 2016. For fiscal 2017, the loss related to repaying a portion of our Term Loan Facility with our net proceeds from the IPO. |
| (c) | Non-cash charges related to stock-based compensation programs, which vary from period to period depending on timing of awards and forfeitures. |
| (d) | For fiscal 2015, fiscal 2016, fiscal 2017, and fiscal 2018, the losses related primarily to assets retired in connection with significant store remodels. For fiscal 2019, amount primarily represents impairment loss for the operating lease right-of-use asset related to the Company’s former store support center in Smyrna, Georgia. |
| (e) | Represents one-time costs incurred in connection with separation agreements with former officers. |
| (f) | Represents income recognized during the fourth quarter of fiscal 2019 for the portion of expected tariff refunds related to products sold prior to November 20, 2019, the date on which U.S. Customs issued Chapter 99 tariff exclusions for certain of our click-vinyl and engineered flooring products, net of a resulting increase to incentive compensation. Interest income for tariff refunds is included within interest expense, net in the table above. |
| (g) | Legal settlement related to classwide settlement to resolve a lawsuit. |
| (h) | Other adjustments include amounts management does not consider indicative of our core operating performance.Amounts for fiscal 2019 primarily relate to costs associated with the relocation of the Company’s store support center, including related lease termination costs, and secondary public offering costs of our Class A common stock by certain of our stockholders. Amounts for fiscal 2018 primarily relate to costs associated with two secondary public offerings of our Class A common stock by certain of our stockholders, the closing of our distribution center near Miami, Florida, and losses from hurricanes Harvey and Florence. Amounts for fiscal 2017 relate to costs in connection with the IPO, two secondary public offerings of our Class A common stock by certain of our stockholders and expenses and losses, net of recoveries, from hurricanes Harvey and Irma. The Company did not sell any shares in any of the secondary offerings and did not receive any proceeds from the sales of shares by the selling stockholders. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis of our financial condition and results of operations together with
“Selected Financial Data” and our consolidated financial statements and the related notes thereto and other financial information included elsewhere in this filing. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed in “Item 1A. Risk Factors.” See the cautionary note regarding forward-looking statements set forth at the beginning of
Part I of this Annual Report.
Founded in 2000, Floor & Decor is a high-growth, differentiated, multi-channel specialty retailer of hard surface flooring and related accessories with 120191 warehouse-format stores across 3036 states as of December 26, 2019.29, 2022. We believe that we offer the industry’s broadest assortment of tile, wood, laminate, vinyl, and natural stone flooring along with decorative and installation accessories and adjacent categories at everyday low prices.prices positioning us as the one-stop destination for our customers’ entire hard surface flooring needs. We appeal to a variety of customers, including our Pro, DIYprofessional installers and BIY customers.commercial businesses (“Pro”), Do it Yourself customers (“DIY”), and customers who buy the products for professional installation (“Buy it Yourself” or “BIY”). Our warehouse-format stores, which average approximately 76,00079,000 square feet, carry on average approximately 3,8004,400 flooring and decorative and installation accessory SKUs, 1.3approximately 1.1 million square feet of flooring products, and $2.5$3.3 million of inventory at cost.cost as of December 29, 2022. We believe that our inspiring design centers and creative and informative visual merchandising also greatly enhance our customers’ renovation experience. In addition to our stores, our website FloorandDecor.comshowcases our products. We believe our strong financial results are a reflection of a growing domestic hard surface flooring market, a unique approach to selling hard surface flooring, and our consistent and disciplined culture of innovation and reinvestment, together creating a differentiated business model in the hard surface flooring category. In fiscal
2019,2022, we experienced our
eleventhfourteenth consecutive year of comparable store sales
growth, averaging 13.8% over this time period and 9.9% over the past three years. | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | | | |
| | 12/26/2019 | | | 12/27/2018 | | | 12/28/2017 | | | CAGR | |
Comparable store sales (% change) | | | 4.0 | % | | | 9.2 | % | | | 16.6 | % | | N/A | |
Number of warehouse-format stores | | | 120 | | | | 100 | | | | 83 | | | 20.2 | % |
Net sales (in thousands) | | $ | 2,045,456 | | | $ | 1,709,848 | | | $ | 1,384,767 | | | 21.5 | % |
Net income (in thousands) | | $ | 150,631 | | | $ | 116,187 | | | $ | 102,788 | | | 21.1 | % |
Adjusted EBITDA (in thousands) | | $ | 242,623 | | | $ | 191,939 | | | $ | 158,781 | | | 23.6 | % |
growth.
| | | | | | | | | | | |
| Fiscal Year Ended |
| dollars in thousands | 12/29/2022 | | 12/30/2021 |
| Net sales | $ | 4,264,473 | | $ | 3,433,533 |
| Net income | $ | 298,195 | | $ | 283,230 |
| Adjusted EBITDA | $ | 577,050 | | $ | 485,100 |
| Comparable store sales | 9.2 | % | | 27.6 | % |
| Number of warehouse-format stores | 191 | | 160 |
During fiscal
2019,2022, we continued to make
key long-term
key strategic investments, including:
| ● | opening 20 new warehouse-format stores, including three new stores in densely populated markets in Boston, Detroit, and the San Francisco Bay area, ending the year with 120 warehouse-format stores; |
| ● | making significant investments in our distribution supply chain, including opening a new 1.5 million square foot distribution center near Baltimore, Maryland in the fourth quarter, which expanded our distribution center foot print by 50% and is expected to reduce our weeks-of-inventory-supply, improve our on-hand store level inventory, and lower our domestic transportation costs to about one-third of our store base over time; |
| ● | focusing on innovative new products and localized assortments, supported by inspirational in-store and online visual merchandising solutions; |
| ● | repositioning a significant amount of our sourced product away from China due to tariffs and antidumping and countervailing duties, while growing our sales and gross margin; |
| ● | augmenting the management team with new hires in store operations, store training, Pro and Commercial sales, e-commerce, supply chain, merchandising, real estate, information technology, and inventory management; |
| ● | investing in our connected customer, in-store designer, and Pro customer personnel and customer relationship technology; |
•opening 32 new warehouse-format stores and four design studios and closing one warehouse-format store, ending the year with 191 warehouse-format stores and six design studios;
•focusing on innovative new products and localized assortments, supported by inspirational in-store and online visual merchandising solutions;
•adding more resources dedicated to serving our Pro customers, including hiring professional external sales staff to drive more commercial sales; and
•investing capital to continue enhancing the in-store shopping experience for our customers.
During fiscal 2022, although we continued to be impacted by the availability and cost of Contents
| ● | adding more resources dedicated to serving our Pro customers, including hiring a professional external sales staff to obtain more commercial sales; |
| ● | increasing proprietary credit offerings; and |
| ● | investing capital to continue enhancing the in-store shopping experience for our customers. |
Fiscal 2020 – A Look At The Upcoming Year
labor as well as supply chain challenges, including higher freight costs and congestion at ports of entry to the United States, these pressures began to show signs of easing toward the end of the year. While we have passed our higher transportation costs on to customers, we remain focused on providing exceptional value to our customers through our broad assortment and “everyday low price” strategy. We believe that our compelling business model,strong relationships with our suppliers and transportation partners have been instrumental in additionhelping us to the projected growth of the large and highly fragmented hard surface flooring market, provides us with an opportunity to significantly expand our store basenavigate difficulties in the U.S. from 120 warehouse format stores assupply chain environment; however, the potential significance and duration of December 26, 2019these supply chain challenges is uncertain, and future capacity shortages or cost increases could have an adverse impact upon our business. In addition, while we did not experience significant COVID-19 related disruptions to approximately 400 stores nationwide within the next 10-12 years basedour business in fiscal 2022, there remains uncertainty regarding what impact COVID-19 may have on our past success as well as internal research with respect to housing density, demographic data, competitor concentration, and other variablesbusiness in both new and existing markets. In 2020, we plan to grow our store base by approximately 20%. In addition to opening new stores, our focus will be on executing our core strategies as well as continuing to make investments that we believe will support our long-term growth, as outlined in “Item 1. Business - Our Growth Strategy.” Our ability to open profitable new stores depends on many factors, including the successful selection future.
Key Performance Indicators
We consider a variety of performance and financial measures in assessing the performance of our business. The key 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.
Our comparable store sales growth is a significant driver of our net sales, profitability, cash flow, and overall business results. We believe that comparable store sales growth is generated by continued focus on providing a dynamic and expanding product assortment in addition to other merchandising initiatives, quality of customer service, enhancing sales and marketing strategies, improving visual merchandising and overall aesthetic appeal of our stores and our website, effectively serving our Pro customers, continued investment in store staff and infrastructure, growing our proprietary credit offering, and further integrating connected customer strategies and other key information technology enhancements.
Comparable store sales refer to period-over-period comparisons of our net sales among the comparable store base
which has historically been when customers obtained possession of their product. Starting in fiscal 2018, when the new revenue recognition standard was adopted, our comparable store sales refer to period-over-period comparisons of our net salesand are based on when the customer obtains control of the product, which is typically at the time of
sale and may be slightly different than our historically reported net sales due to timing of when final delivery of the product has occurred.sale. A store is included in the comparable store sales calculation on the first day of the thirteenth full fiscal month following a store’s opening, which is when we believe comparability has been achieved.
Since our e-commerce sales are fulfilled by individual stores, they are included in comparable store sales only to the extent the fulfilling store meets the above mentioned store criteria. Changes in our comparable store sales between two periods are based on net sales for stores that were in operation during both of the two periods. Any change in
the square footage of an existing comparable store, including
for remodels and relocations
within the same primary trade area of the existing store being relocated, does not eliminate that store from inclusion in the calculation of comparable store sales. Stores that are closed
temporarilyfor a full fiscal month or longer are excluded from the comparable store sales calculation for each full fiscal month that they are closed. Since our e-commerce, regional account manager, and
relocated within their primary trade areasdesign studio sales are fulfilled by individual stores, they are included in comparable store
sales. Additionally, anysales only to the extent the fulfilling store meets the above mentioned store criteria. Sales through our Spartan subsidiary do not involve our stores
that were closed during the current or prior fiscal yearand are
therefore excluded from the
definition of comparable stores.Our fiscal 2015 year, which ended December 31, 2015, included a 53rd week. When presenting comparable store sales for fiscal 2015, we have excluded the last week of fiscal 2015.
calculation.
Definitions and calculations of comparable store sales differ among companies in the retail industry; therefore, comparable store metrics disclosed by us may not be comparable to the metrics disclosed by other companies.
We believe that comparable store sales is a useful measure as it allows management, as well as analysts, investors, and other interested parties to evaluate the sales performance of our retail stores. In addition, comparable store sales highlights our sales and market share growth. Management uses comparable store sales to evaluate the effectiveness of our selling strategies, to make budgeting decisions, and to compare our performance against that of other peer companies using similar measures.
Various factors affect comparable store sales, including:
| ● | national and regional economic conditions; |
| ● | the retail sales environment and other retail trends; |
| ● | the home improvement spending environment; |
| ● | the hard surface flooring industry trends; |
| ● | the impact of competition; |
| ● | changes in our product mix; |
| ● | changes in staffing at our stores; |
| ● | cannibalization resulting from the opening of new stores in existing markets; |
| ● | changes in advertising and other operating costs; and |
•national and regional economic conditions;
•the retail sales environment and other retail trends;
•the home improvement spending environment;
•the hard surface flooring industry trends;
•the impact of competition;
•changes in our product mix;
•changes in staffing at our stores;
•cannibalization resulting from the opening of new stores in existing markets;
•changes in pricing;
•changes in advertising and other operating costs; and
•weather conditions.
The number and timing of new store openings, and the costs and fixed lease obligations associated with those openings, have had, and are expected to continue to have, a significant impact on our results of operations. The number of new stores reflects the number of stores opened during a particular reporting period. Before we open new stores, we incur pre-opening expenses, which are defined below. While net sales at new stores are generally lower than net sales at our stores that have been open for more than one year, our new stores have historically been profitable in their first year.
Generally, our newer stores have also averaged higher comparable store sales growth than our total store average. Our ability to open new, profitable stores is important to our long-term sales and profit growth goals.
Gross Profit and Gross Margin
Our gross profit is variable in nature and generally follows changes in net sales. Our gross profit and gross margin can also be impacted by changes in our prices, our merchandising assortment,
shrink,shrinkage, damage, selling of discontinued products, the cost to transport our products from the manufacturer to our stores, and our distribution center costs. With respect to our merchandising assortment, certain of our products tend to generate somewhat higher margins than other products within the same product categories or among different product categories. We have experienced
modest inflation increases in certain of our product categories but historically have been able to source from a different manufacturer or pass increases
ontoon to our
consumers with modest impact on our gross margin.consumers. Our gross profit and gross margin, which reflect our net sales and our cost of sales and any changes to the components thereof, allow us to evaluate our profitability and overall business results.
Gross profit is calculated as net sales less cost of sales. Gross profit as a percentage of net sales is referred to as gross margin. Cost of sales consists of merchandise costs, as well as freight costs to transport inventory to our distribution centers and stores, and duty and other costs that are incurred to distribute the merchandise to our stores. Cost of sales also includes shrinkage, damage,
product disposals, distribution, warehousing costs, sourcing and compliance costs. We receive cash consideration from certain vendors related to vendor allowances and volume rebates, which is recorded as a reduction of costs of sales as the inventory is sold or as a reduction of the carrying value of inventory while the inventory is still on hand. Costs associated with arranging and paying for freight to deliver products to customers is included in cost of sales. The components of our cost of sales may not be comparable to the components of cost of sales, or similar measures, of other retailers. As a result, data in this filing regarding our gross profit and gross margin may not be comparable to similar data made available by other retailers.
We believe that gross profit and gross margin are useful measures as they allow management and analysts, investors, and other interested parties to evaluate the cost and profitability of our products and overall cost of sales, which is our largest expense. Gross profit and gross margin are also important indicators of our ability to grow profits and leverage our expenses on a growing sales
base. Management uses gross profit and gross margin, among other measures, to make decisions related to product, pricing, supplier, and distribution strategies as well as other areas affecting the products we offer to our customers.
Operating Income, EBITDA, Adjusted EBITDA
Operating income, EBITDA, and Adjusted EBITDA are key metrics used by management and our Board to assess our financial performance and enterprise value. We believe that operating income, EBITDA, and Adjusted EBITDA are useful measures, as they eliminate certain expenses that are not indicative of our core operating performance and facilitate a comparison of our core operating performance on a consistent basis from period to period. We also use Adjusted EBITDA as a basis to determine covenant compliance with respect to our Credit Facilities, to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, and to compare our performance against that of other peer companies using similar measures. Operating income, EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties as performance measures to evaluate companies in our industry.
EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as net income before interest,
(gain) loss on early extinguishment of debt, taxes, depreciation and amortization. We define Adjusted EBITDA as net income before interest,
(gain) loss on early extinguishment of debt, taxes, depreciation and amortization, adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance.
EBITDA and Adjusted EBITDA are non-GAAP measures of our financial performance and should not be considered as alternatives to net income as a measure of financial performance or any other performance measure derived in accordance with GAAP, and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of liquidity or free cash flow for management's discretionary use. In addition, these non-GAAP measures exclude certain non-recurring and other charges. Each of these non-GAAP measures has its limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the items eliminated in the adjustments made to determine EBITDA and Adjusted EBITDA, such as
stockstock-based compensation expense,
loss (gain) on asset disposal, executive recruiting/distribution center relocation
expenses, fair value adjustments related to contingent-earn out liabilities, and other adjustments. Our presentation of EBITDA and Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Definitions and calculations of EBITDA and Adjusted EBITDA differ among companies in the retail industry, and therefore EBITDA and Adjusted EBITDA disclosed by us may not be comparable to the metrics disclosed by other companies.
Other Key Financial Definitions
Net sales reflect our sales of merchandise, less discounts and estimated returns and include our in-store sales and e-commerce sales. In certain cases, we arrange and pay for freight to deliver products to customers and bill the customer for the estimated freight cost, which is also included in net sales. Revenue is recognized when we satisfy the performance obligations in contracts with our customers, which is typically when the customer obtains control of the underlying inventory.
The retail
sectorand commercial sectors in which we operate
isare cyclical, and consequently our sales are affected by general economic conditions. Purchases of our products are sensitive to trends in the levels of consumer spending, which are affected by a number of factors such as consumer disposable income, housing market conditions, unemployment trends, stock market performance, consumer debt levels and consumer credit availability, interest rates and inflation, tax rates and overall consumer confidence in the economy.
Net sales reflect our sales of merchandise, less discounts and estimated returns and include our in-store sales and e-commerce sales. In certain cases, we arrange and pay for freight to deliver products to customers and bill the customer for the estimated freight cost, which is also included in net sales. Revenue is recognized when we satisfy the performance obligations in contracts with our customers. Our performance obligations for our retail store sales, as well as for orders placed through our website and shipped to our customers, are satisfied at the point at which the customer obtains control of the inventory, which is typically at the point-of-sale.
Selling and Store Operating Expenses
We expect that our selling and store operating expenses will increase in future periods with future growth.
Selling and store operating expenses consist primarily of store personnel wages, bonuses and benefits, rent and infrastructure expenses, supplies, depreciation and amortization, training expenses, and advertising costs. Credit card fees, insurance, personal property taxes, and other miscellaneous operating costs are also included.
We expect that our selling and store operating expenses will increase in future periods with future growth. The components of our selling and store operating expenses may not be comparable to the components of similar measures of other retailers.
General and Administrative Expenses
We expect that our general and administrative expenses will increase in future periods with future growth and in part due to additional legal, accounting, insurance, and other expenses that we expect to incur as a result of being a public company, including compliance with the Sarbanes-Oxley Act. General and administrative expenses include both fixed and variable components, and therefore, are not directly correlated with net sales.
General and administrative expenses consist primarily of costs incurred outside of our stores and include administrative personnel wages in our store support center and regional functions, bonuses and benefits, supplies, depreciation and amortization, and store support center expenses. Insurance, legal expenses, information technology costs, consulting, and other miscellaneous operating costs are also included.
We expect that our general and administrative expenses will increase in future periods with future growth. General and administrative expenses include both fixed and variable components, and therefore, are not directly correlated with net sales. The components of our general and administrative expenses may not be comparable to the components of similar measures of other retailers.
We account for non-capital operating expenditures incurred prior to opening a new store or relocating an existing store as “pre-opening” expenses in our
consolidated statementsConsolidated Statements of
income.Operations and Comprehensive Income. Our pre-opening expenses begin, on average, three
months to
six monthsone year in advance of a store opening or relocating due to, among other things, the amount of time it takes to prepare a store for its grand opening.
The majority of pre-opening expenses are incurred during the three months before a store opens. Pre-opening expenses primarily include the following: rent, advertising, training, staff recruiting, utilities, personnel, and equipment rental. A store is considered to be relocated if it is closed temporarily and re-opened within the same primary trade area.
We have onetwo operating segmentsegments and one reportable segment. For operating and reportingadditional segment information, refer to Note 1, “Summary of Significant Accounting Policies” of the notes to the consolidated financial statements included in this Annual Report for additional details.Report.
The comparison of the fiscal years ended December
27, 201830, 2021 and December
28, 201731, 2020 can be found in our annual report on Form 10-K for the fiscal year ended December
27, 201830, 2021 (the
“2018“2021 Annual Report”) located within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of operations for prior periods should not be considered indicative of future results. For information about the potential impacts that risks, such as global supply chain disruptions, inflation, geopolitical instability, and COVID-19, among others, may have on our results of operations and overall financial performance for future periods, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview” and Item 1A., “Risk Factors”
For the fiscal years ended December
26, 201929, 2022 and December
27, 201830, 2021
The following
table summarizestables summarize key components of our results of operations for the periods indicated
in dollars and as a percentage of net sales (actuals in thousands, dollar changes in millions; certain(certain numbers may not sum due to rounding):
| | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | | | | | | |
| | 12/26/2019 | | | 12/27/2018 | | | | | | | |
| | Actual | | % of Sales | | | Actual | | % of Sales | | | | $ Increase/(Decrease) | | % Increase/(Decrease) | |
Net sales | | $ | 2,045,456 | | 100.0 | % | | $ | 1,709,848 | | 100.0 | % | | $ | 335.6 | | 19.6 | % |
Cost of sales | | | 1,182,442 | | 57.8 | | | | 1,007,580 | | 58.9 | | | | 174.9 | | 17.4 | |
Gross profit | | | 863,014 | | 42.2 | | | | 702,268 | | 41.1 | | | | 160.7 | | 22.9 | |
Operating expenses: | | | | | | | | | | | | | | | | | | |
Selling and store operating | | | 546,853 | | 26.7 | | | | 439,495 | | 25.7 | | | | 107.4 | | 24.4 | |
General and administrative | | | 132,386 | | 6.5 | | | | 105,327 | | 6.2 | | | | 27.1 | | 25.7 | |
Pre-opening | | | 24,594 | | 1.2 | | | | 26,145 | | 1.5 | | | | (1.6) | | (5.9) | |
Total operating expenses | | | 703,833 | | 34.4 | | | | 570,967 | | 33.4 | | | | 132.9 | | 23.3 | |
Operating income | | | 159,181 | | 7.8 | | | | 131,301 | | 7.7 | | | | 27.9 | | 21.2 | |
Interest expense, net | | | 8,801 | | 0.4 | | | | 8,917 | | 0.5 | | | | (0.1) | | (1.3) | |
Income before income taxes | | | 150,380 | | 7.4 | | | | 122,384 | | 7.2 | | | | 28.0 | | 22.9 | |
(Benefit) provision for income taxes | | | (251) | | — | | | | 6,197 | | 0.4 | | | | (6.4) | | NM | |
Net income | | $ | 150,631 | | 7.4 | % | | $ | 116,187 | | 6.8 | % | | $ | 34.4 | | 29.6 | % |
NM- Not Meaningful
54
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | | | |
| | 12/29/2022 | | 12/30/2021 | | Increase (Decrease) |
dollars in thousands | | Amount | | % of Net sales | | Amount | | % of Net sales | | $ | | % |
| Net sales | | $ | 4,264,473 | | | 100.0 | % | | $ | 3,433,533 | | | 100.0 | % | | $ | 830,940 | | | 24.2 | % |
| Cost of sales | | 2,536,757 | | | 59.5 | | | 2,011,267 | | | 58.6 | | | 525,490 | | | 26.1 | % |
| Gross profit | | 1,727,716 | | | 40.5 | | | 1,422,266 | | | 41.4 | | | 305,450 | | | 21.5 | % |
| Operating expenses: | | | | | | | | | | | | |
| Selling and store operating | | 1,078,466 | | | 25.3 | | | 849,440 | | | 24.7 | | | 229,026 | | | 27.0 | % |
| General and administrative | | 213,848 | | | 5.0 | | | 199,401 | | | 5.8 | | | 14,447 | | | 7.2 | % |
| Pre-opening | | 38,642 | | | 0.9 | | | 34,433 | | | 1.0 | | | 4,209 | | | 12.2 | % |
| Total operating expenses | | 1,330,956 | | | 31.2 | | | 1,083,274 | | | 31.5 | | | 247,682 | | | 22.9 | % |
| Operating income | | 396,760 | | | 9.3 | | | 338,992 | | | 9.9 | | | 57,768 | | | 17.0 | % |
| Interest expense, net | | 11,138 | | | 0.3 | | | 4,924 | | | 0.1 | | | 6,214 | | | 126.2 | % |
| | | | | | | | | | | | |
| Income before income taxes | | 385,622 | | | 9.0 | | | 334,068 | | | 9.7 | | | 51,554 | | | 15.4 | % |
| Provision for income taxes | | 87,427 | | | 2.1 | | | 50,838 | | | 1.5 | | | 36,589 | | | 72.0 | % |
| Net income | | $ | 298,195 | | | 7.0 | % | | $ | 283,230 | | | 8.2 | % | | $ | 14,965 | | | 5.3 | % |
| | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | 12/29/2022 | | 12/30/2021 |
| Comparable store sales | | 9.2 | % | | 27.6 | % |
| Comparable average ticket | | 17.0 | % | | 7.2 | % |
| Comparable customer transactions | | (6.6) | % | | 19.1 | % |
| Number of warehouse-format stores | | 191 | | 160 |
Adjusted EBITDA (in thousands) (1) | | $ | 577,050 | | $ | 485,100 |
| Adjusted EBITDA (% of net sales) | | 13.5 | % | | 14.1 | % |
(1) Refer to “Reconciliation of Non-GAAP Measures” further below for reconciliation of Adjusted EBITDA to net income.
| | | | | | | | |
| | Fiscal Year Ended |
| | 12/26/2019 | | | 12/27/2018 | |
Comparable store sales (% change) | | | 4.0 | % | | | 9.2 | % |
Comparable average ticket (% change) | | | 2.1 | % | | | (0.6) | % |
Comparable customer transactions (% change) | | | 1.9 | % | | | 10.0 | % |
Number of warehouse-format stores | | | 120 | | | | 100 | |
Adjusted EBITDA (in thousands) | | $ | 242,623 | | | $ | 191,939 | |
Adjusted EBITDA margin | | | 11.9 | % | | | 11.2 | % |
Net Sales
Net sales during fiscal
20192022 increased
$335.6$830.9 million, or
19.6%24.2%, compared to fiscal
20182021 due to
the opening of 20 new stores since December 27, 2018 and an increase in comparable store sales of
4.0%.9.2% and sales from the net 31 new warehouse-format stores and four new design studios that we opened during the year. The comparable store sales increase during the period of
4.0%9.2%, or
$68.2$315.5 million, was driven by a
2.1%17.0% increase in comparable average ticket,
growth andpartially offset by a
1.9% increase6.6% decrease in comparable customer transactions. Among our
sixseven product categories,
threefive experienced comparable store sales increases during
the year,fiscal 2022, including
laminate/luxurylaminate and vinyl,
plank,tile, decorative accessories and
wall tile, installation
materials.materials and tools, and adjacent categories. Non-comparable store sales
increased $267.4were $515.4 million during
fiscal 2019 primarily due to the
increase insame period driven by new stores
previously described.and revenue from our Spartan subsidiary, which was acquired in the second quarter of fiscal 2021.
We believe the
decrease in comparable customer transactions for fiscal 2022 was partly driven by macroeconomic demand slowing in fiscal 2022 as interest and mortgage rates increased and existing home sales declined, an unfavorable comparison to our strong fiscal 2021 results, and a shift in consumer spending toward travel and services. We have more than offset the decrease in comparable customer transactions with an increase in
net sales and customer transactions iscomparable average ticket due to
the execution offocusing on driving higher sales through our
key strategic investments. We believeecommerce, pro, and design initiatives, which all carry a higher average ticket, as well as raising our
continued investments and focused merchandising, connected customer, enhanced Pro and commercial sales associates, designer, merchandising, marketing, credit, and visual merchandising strategies, along with new innovative products, led to our sales growth during the periods presented. We have also modestly increased retail prices due to
increased tariffs.higher supply chain and product costs. We also believe that our business model, with its focus on substantial amounts of trend-right, in-stock inventory, is also contributing to the sales increase.
Gross Profit and Gross Margin
Gross profit during fiscal
20192022 increased
$160.7$305.5 million, or
22.9%21.5%, compared to fiscal
2018. This2021. The increase in gross profit was
primarily driven by the
19.6%24.2% increase in net sales,
and an increasepartially offset by a decrease in gross margin to
42.2%40.5%,
updown approximately
11090 basis points from
41.1%41.4% in fiscal
2018.2021. The
increasedecrease in gross margin was
primarily due to
expected refunds of tariff payments associated with certain of our merchandise as well as higher
product margin driven by favorable negotiations with our suppliers, improved merchandising strategies, including higher sales from higher margin categories like installation and decorative accessories, and various strategic retail increases. Refer to Note 1 of the notes to our consolidated financial statements in this Annual Report for additional details related to tariff refunds.supply chain costs.
Selling and Store Operating Expenses
Selling and store operating expenses
during fiscal 2019 increased
$107.4$229.0 million, or
24.4%27.0%, compared to fiscal
2018 due primarily to opening 20 new stores since December 27, 2018.2021. As a percentage of net sales,
our selling and store operating expenses increased
by approximately
10060 basis points to
26.7%25.3% from
25.7%24.7% in fiscal
2018. The increase was2021. These increases were primarily attributable to
growth in new stores
open less than one year. Comparable store selling and,
store operating expenses asto a
percentagelesser extent, increased wages and higher credit card transaction processing fees across all of
comparable store sales decreased by approximately 30 basis points due to improved leveraging of personnel expenses on higher net sales.our stores.
General and Administrative Expenses
General and administrative expenses
which are typically expenses incurred outside of our stores, increased
$27.1$14.4 million, or
25.7%7.2%, during fiscal
20192022 compared to fiscal
20182021 due to
our continued investments in personnel for ourcosts to support store growth, including increased store support
functions, increasedstaff, higher depreciation
duerelated to technology
investments to support our store growth, and
a $4.1 million impairment charge related to the operating lease right-of-use asset for our formerother store support center
in Smyrna, Georgia.investments, and operating expenses related to our Spartan subsidiary. Our general and administrative expenses as a percentage of net sales
increaseddecreased by approximately
3080 basis points to
6.5%5.0% from 5.8% in
fiscal 2019 from 6.2%the prior year. The decline as a percentage of net sales was primarily driven by lower accruals for employee incentive compensation and sales growing faster than increases in
fiscal 2018, of which 20 basis points of the increase was due to the impairment charge.rent and depreciation.
Pre-opening expenses during fiscal 2019 decreased $1.62022 increased $4.2 million, or 5.9%12.2%, compared to fiscal 2018. This expense decreased due2021. The increase primarily resulted from opening or preparing to an enhanced store opening process which shortensopen more stores compared to the period it takesprior year and was modestly impacted by higher costs to open new stores, thereby lessening pre-opening occupancy costs, and the opening of fewer new stores in high cost metropolitan markets. We opened 20 stores and relocated one in fiscal 2019 compared to opening 17 stores and relocating one in fiscal 2018. Of the new store openings, 8 were in new markets and 12 were in existing markets in fiscal 2019 as compared to 12 in new markets and 5 in existing markets in fiscal 2018.stores.
Net interest expense in fiscal
2019 decreased $0.12022 increased $6.2 million, or
1.3%126.2%, compared to fiscal
2018.2021. The
decreaseincrease in
net interest expense was primarily due to
an increase in amounts borrowed under our
average totalABL Facility and interest rate increases on outstanding debt,
decreasing to $150.1 millionpartially offset by increases in
fiscal 2019 compared to $170.0 million in fiscal 2018. Interestinterest capitalized and interest income
earned during the year, a portion of which was related to expected tariff refunds, also contributed to the overall decrease. Refer to Note 1 of the notes tofrom our
consolidated financial statements in this Annual Report for additional details related to interest
on tariff refunds.cap derivative contracts.
The provision for income taxes was $87.4 million in fiscal 2019 decreased $6.42022 compared to $50.8 million fromin fiscal 2018.2021. The effective tax rate was (0.2)%22.7% for fiscal 20192022 compared to 5.1%15.2% for fiscal 2018.2021. The decreaseincrease in the effective tax rate was primarily due to the recognition of higheryear-over-year decreases in excess tax benefits related to stock options exercisedstock-based compensation awards.
Reconciliation of Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
For the periods presented, the following table reconciles EBITDA and Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP:
| | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | |
| in thousands | | 12/29/2022 | | 12/30/2021 | | |
| Net income | | $ | 298,195 | | | $ | 283,230 | | | |
Depreciation and amortization (a) | | 153,446 | | | 115,223 | | | |
| Interest expense, net | | 11,138 | | | 4,924 | | | |
| Income tax expense | | 87,427 | | | 50,838 | | | |
| EBITDA | | 550,206 | | | 454,215 | | | |
Stock-based compensation expense (b) | | 22,233 | | | 20,528 | | | |
Acquisition and integration expense (c) | | — | | | 3,392 | | | |
Tariff refund adjustments (d) | | — | | | 1,728 | | | |
COVID-19 costs (e) | | — | | | 1,154 | | | |
Other (f) | | 4,611 | | | 4,083 | | | |
| Adjusted EBITDA | | $ | 577,050 | | | $ | 485,100 | | | |
(a) Excludes amortization of deferred financing costs, which is included as part of interest expense, net in the table above.
(b) Non-cash charges related to stock-based compensation programs, which vary from period to period depending on the timing of awards and forfeitures.
(c) Represents third-party transaction, legal, and consulting costs directly related to the acquisition of Spartan that was completed in fiscal 2019 compared2021.
(d) Represents a reduction in the non-interest portion of estimated tariff refund receivables during fiscal 2021. Interest income for tariff refunds is included within interest expense, net in the table above.
(e) Amounts are comprised of sanitation, personal protective equipment, and other costs directly related to
fiscal 2018.efforts to mitigate the impact of the COVID-19 pandemic on our business.
(f) Other adjustments include amounts management does not consider indicative of our core operating performance. Amounts for both periods primarily relate to relocation expenses for our Houston distribution center and changes in the fair value of contingent earn-out liabilities.
Historically, our business has had very little seasonality. Our specialty hard surface flooring and decorative home product offering makes us less susceptible to holiday shopping seasonal patterns compared to other retailers. However, we generally conduct a
small clearance event during our third fiscal quarter followed by a smaller clearance event towards the end of the year. The timing of these clearance events is driven by operational considerations rather than customer demand and could change from year to year.
Liquidity and Capital Resources
Liquidity is provided primarily by our cash flows from operations and our
$800.0 million ABL Facility.
During fiscal 2019, we generated $204.7Unrestricted liquidity based on our December 29, 2022 financial data was $566.3 million,
in cash from operating activities. As of December 26, 2019, we had $306.5 million in unrestricted liquidity, consisting of
$27.0$9.8 million in cash and cash equivalents and
$279.5$556.5 million immediately available for borrowing under the ABL Facility without violating any covenants thereunder.
Our liquidity is not generally seasonal, and our uses of cash are primarily tied to when we open stores and make other capital expenditures.
Our primary cash needs are for merchandise inventories, payroll, store rent, and other operating expenses and capital expenditures associated with opening new stores and remodeling existing stores, as well as information technology, e-commerce, and store support center infrastructure. We also use cash for the payment of taxes and
interest.The most significant components of our operating assetsinterest and, liabilities are merchandise inventories and accounts payable, and to a lesser extent accounts receivable, prepaid expenses and other assets, other current and non-current liabilities, taxes receivable, and taxes payable. Our liquidity is not generally seasonal, and our uses of cash are primarily tied to when we open stores and make other capital expenditures.as applicable, acquisitions. We believeexpect that cash expected to be generated from operations andtogether with cash on hand, the availability of borrowings under the ABL Facilityour credit facilities, and if necessary, additional funding through other forms of external financing, will be sufficient to meet liquidity requirements, anticipated capital expenditures, and payments due under our Credit Facilitiescredit facilities for at least the next 12 months.
Merchandise inventory is our most significant working capital assettwelve months and is considered “in-transit” or “available for sale” based on whether we have physically received the products at an individual store location or in one of our four distribution centers. In-transit inventory generally varies due to contractual terms, country of origin, transit times, international holidays, weather patterns, and other factors, but for the last two years, approximately 15% of our inventory was in-transit, while roughly 85% was available for sale in our stores or at one of our four distribution centers.
We measure realizability of our inventory by monitoring sales, gross margin, inventory aging, weeks of supply or inventory turns as well as by reviewing SKUs that have been determined by our merchandising team to be discontinued. Based on our analysis of these factors, we believe our inventory is realizable.
Twice a year, we conduct a clearance event with the goal of selling through discontinued inventory, followed by donations of the aged discontinued inventory that we are unable to sell. We generally conduct a larger clearance event during our third fiscal quarter followed by a smaller clearance event towards the end of the fiscal year. We define aged discontinued inventory as inventory in discontinued status for more than 12 months that we intend to donate. As of December 26, 2019, we had $0.1 million of aged discontinued inventory.
foreseeable future.
Total capital expenditures in fiscal 20202023 are planned to be between approximately $255$620 million to $265$675 million and willare expected to be funded primarily by cash generated from operations and borrowings under the ABL Facility. Our capital needs may change in the future due to changes in our business, new opportunities that we choose to pursue, or other factors. We intend to makecurrently expect the following for capital expenditures in fiscal 2020:
| ● | Open 24 stores and start2023:•invest approximately $495 million to $525 million to open 32 to 35 warehouse-format stores, relocate stores, and begin construction on stores opening in early fiscal 2020 using approximately $188 million to $194 million of cash; |
| ● | Invest in existing store remodeling projects and our distribution centers using approximately $50 million to $52 million of cash; and |
| ● | Invest in information technology infrastructure, e-commerce and other store support center initiatives using approximately $17 million to $19 million of cash. |
During the fourth quarter of fiscal 2019, we opened a new2024;
•invest approximately $95 million to $110 million in existing store remodeling projects and our distribution centers; and
•invest approximately $30 million to $40 million in information technology infrastructure, e-commerce, and other store support center near Baltimore, Maryland. During fiscal 2019, we incurred capital expenditures of approximately $7.9 million related to this new distribution center.initiatives.
A summary of our operating, investing, and financing activities are shown in the following table:
| | | | | | |
| | Fiscal Year Ended |
in thousands | | 12/26/2019 | | 12/27/2018 |
Net cash provided by operating activities | | $ | 204,658 | | $ | 185,624 |
Net cash used in investing activities | | | (196,008) | | | (151,397) |
Net cash provided by (used in) financing activities | | | 17,743 | | | (34,139) |
Net increase in cash and cash equivalents | | $ | 26,393 | | $ | 88 |
| | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| in thousands | | 12/29/2022 | | 12/30/2021 |
| Net cash provided by operating activities | | $ | 112,450 | | | $ | 301,342 | |
| Net cash used in investing activities | | (455,637) | | | (471,238) | |
| Net cash provided by financing activities | | 213,537 | | | 1,568 | |
| Net decrease in cash and cash equivalents | | $ | (129,650) | | | $ | (168,328) | |
Net Cash Provided By Operating Activities
Cash
fromprovided by operating activities consists primarily of
(i) net income adjusted for
changes in working capital as well as non-cash items, including depreciation and amortization,
changes in the fair values of contingent earn-out liabilities, deferred income taxes, and stock-based
compensation.compensation and (ii) changes in working capital.
Net cash provided by operating activities was
$204.7$112.5 million for fiscal
20192022 and
$185.6$301.3 million for fiscal
2018.2021. The
changedecrease in net cash provided by operating activities was primarily
the result of an increasedriven by increases in
net income, partially offset by an increase in inventory
purchases and other working capital
items to support
future sales and new store openings.our operations, partially offset by higher operating income compared to the prior fiscal year.
Net Cash Used In Investing Activities
Investing activities
typically consist primarily of capital expenditures for new store openings, existing store remodels (including leasehold improvements,
new racking,
new fixtures,
newproduct and display vignettes, and
newenhanced design centers)
, and new infrastructure and information systems.
Capital expenditures were $196.0 Cash payments to acquire businesses are also included in investing activities.
Net cash used in investing activities was $455.6 million for fiscal
2019 compared to $151.42022 and $471.2 million for fiscal
2018.2021. The
decrease in net cash used in investing activities was driven by a $59.8 million decrease in cash paid for acquisitions and $4.8 million in proceeds from a land sale, offset by a $48.9 million increase in capital expenditures. The year-over-year growth
isin capital expenditures was primarily
related to thedriven by (i) an increase in new stores that opened or were under construction,
during fiscal 2019 compared with the same period in fiscal 2018. For fiscal 2019, approximately 62% ofas we generally incur significant capital expenditures
was for new stores
20% was for information technology, e-commerce investments, and store supporta few to several months in advance of opening, (ii) payment of construction costs related to the Houston distribution center relocation,
while the remainder was forand (iii) an increase in existing store
remodel and distribution center investments.remodels.
Net Cash Provided by
(Used in) Financing Activities
Financing activities consist primarily of borrowings and related repayments under our credit agreements,
as well as dividends paidproceeds from the exercise of stock options and our employee share purchase program, and payments of contingent earn-out consideration related to
common stockholders.the Spartan acquisition.
Net cash provided by financing activities was $17.7$213.5 million for fiscal 2019 compared with net cash used in financing activities of $34.12022 and $1.6 million for fiscal 2018.2021. The netincrease in cash provided by financing activities for fiscal 2019 was primarily driven by amounts borrowed under our ABL during fiscal 2022.
Our Credit Facilitiesproceeds from stock option exercises of $18.8 million and employee stock purchases of $2.4 million, partially offset by payments on theDecember 29, 2022, total Term Loan Facility of $3.5 million.
Our Credit Facilities
We have two arrangements governing our material outstanding indebtedness:debt was $204.5 million and the total amount borrowed under our ABL Facility and our Term Loan Facility.
The indebtedness outstanding under our Credit Facilities is secured by substantially all of our assets. In particular, the indebtedness outstanding under (i) the ABL Facility is secured by a first-priority security interest in all of our current assets, including inventory and accounts receivable, and a second-priority security interest in the collateral that secures the Term Loan Facility on a first-priority basis, and (ii) the Term Loan Facility is secured by a first-priority security interest in all of our fixed assets and intellectual property, and a second- priority interest in the collateral that secures the ABL Facility on a first-priority basis.
Term Loan Facility
The Term Loan Facility has no financial maintenance covenants. As of December 26, 2019,was $210.2 million.
On August 4, 2022, we
were in compliance in all material respects with the covenants of the Credit Facilities and no Event of Default (as defined in the credit agreements governing our Credit Facilities) had occurred.As of December 26, 2019, the Term Loan Facility bore interest based on one of the following rates, at our option:
| i)
| Adjusted LIBOR Rate plus a margin of 2.50%
|
| ii)
| Base Rate plus a margin of 1.50%. Base Rate defined as the greater of the following:
|
| (a)
| the base rate in effect on such day,
|
| (b)
| the federal funds rate plus 0.50%,
|
| (c)
| the adjusted LIBOR rate for the interest period of one month plus a margin of 1.00%.
|
On March 31, 2017, the Company entered into a repricing amendment to the Term Loan Facility. This amendment reduced the margins applicable to the term loan from 3.25% per annum (subject to a leverage-based step-down to 2.75%) to 2.50% per annum (subject to a leverage-based step-down to 2.00%) in the case of base rate loans, and from 4.25% per annum (subject to a leverage-based step-down to 3.75%) to 3.50% per annum (subject to a leverage-based step-down to 3.00%) in the case of LIBOR loans (subject to a 1.00% floor on LIBOR loans), provided that each of the leverage-based step-downs was contingent upon the consummation of the IPO.
In October 2017, we met the requirements to lower our interest rate on the Term Loan Facility by an additional 50 basis points (pursuant to the leverage-based step-down) to 4.00% for LIBOR loans, based on a margin of 3.00% and a 1.00% floor.
On November 22, 2017, we entered into an amendment to the Term Loan Facility. The aggregate principal amount of loans outstanding under the Term Loan Facility on the date of such amendment was approximately $152.5 million. This November 2017 amendment reduced the margins applicable to the Term Loan Facility (x) in the case of base rate loans, from 2.00% per annum (due to operation of a leverage-based step-down from 2.50%) to 1.75% per annum (subject to a ratings based step-down to 1.50%), and (y) in the case of LIBOR loans, from 3.00% per annum (due to operation of a leverage-based step-down from 3.50%) to 2.75% per annum (subject to a ratings based step-down to 2.50%) (subject to a 1.00% floor on LIBOR loans). The amount and terms of the Term Loan Facility were otherwise unchanged.
On February 14, 2020, we entered into a repricing and general amendment to the credit agreement governing our senior secured term loan facility (as amended the “Amended Term Loan Facility”) that, among other things, (a) refinanced our existing term loan facility with a new term loan facility in the aggregate principal amount of approximately $144.6 million, and (b) extended the stated maturity date under the Amended Term Loan Facility to February 14, 2027. The Amended Term Loan Facility also includes an “accordion” feature that allows us, under certain circumstances, to increase the size of the facility by an amount up to the greater of
$270.0 million or 100% of Consolidated EBITDA (as defined in the Amended Term Loan Facility), subject to certain additional adjustments.
The amendment to the Amended Term Loan Facility also amended the margin applied to loans to (x) in the case of ABR Loans (as defined in the Amended Term Loan Facility), from 1.75% or 1.50% per annum (based on credit rating tests) to 1.00% per annum (subject to a leverage-based step-up to 1.25% if certain leverage ratio tests are satisfied), and (y) in the case of Eurodollar Loans (as defined in the Amended Term Loan Facility), from 2.75% or 2.50% per annum (based on credit rating tests) to 2.00% per annum (subject to a leverage-based step-up to 2.25% if certain leverage ratio tests are satisfied) (subject to a 0.00% floor on Eurodollar Loans). The material terms of the Amended Term Loan Facility were otherwise unchanged.
ABL Facility
The ABL Facility initially accrued interest ranging from LIBOR + 1.50% to LIBOR + 2.00%, and as of December 26, 2019 was subject to a pricing grid based on average daily availability under such facility ranging from LIBOR + 1.25% to 1.50%. The ABL Facility allows us to borrow up to $300 million, subject to the borrowing base requirements as set forth in the credit agreement governing the ABL Facility.
On December 11, 2018, we exercised our right under the accordion feature of the ABL Facility to, increase our total borrowing capacity under the ABL Facility by $100.0 million, bringing the aggregate commitments thereunder to $300.0 million (the “ABL Commitment Increase”). The ABL Commitment Increase was provided by Wells Fargo Bank, National Association, Bank of America, N.A. and Regions Bank, existing lenders party to the credit agreement governing the ABL Facility immediately prior to the ABL Commitment Increase. Borrowings under the ABL Commitment Increase continue to be subject to the terms and conditions set forth in the credit agreement governing the ABL Facility, and all other terms of the ABL Facility remain unchanged. As of December 26, 2019, we had the ability to access $279.5 million of unused borrowings under the ABL Facility without violating any covenants thereunder and had $20.5 million in outstanding letters of credit thereunder.
On February 14, 2020, we entered into a repricing and general amendment to the credit agreement governing our revolving credit facility (as amended, the “Amended ABL Facility”) that, among other things, (a) increased ourincrease the Company’s revolving commitments to a total aggregate principal amount of $400.0$800 million, and (b) extendedextend the stated maturity date underof the Amended ABL Facility to February 14, 2025. The AmendedAugust 4, 2027, and transition the benchmark interest rate for borrowings from a LIBOR-based benchmark to a SOFR-based benchmark.
On November 15, 2022, we amended the Term Loan Facility to transition the benchmark interest rate for borrowings from a LIBOR-based benchmark to a SOFR-based benchmark.
For additional information regarding our Term Loan Facility and ABL Facility,
also includes an “accordion” feature that allows us 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 Amended ABL Facility).The amendment to the Amended ABL Facility also amended the margin applied to loans and letters of credit to (x) in the case of base rate loans, 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 LIBOR loans 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 LIBOR 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 Amended ABL Facility were otherwise unchanged.
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to USD-LIBOR for use in derivativesincluding recent amendments, applicable covenants, and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. Both of our debt facilities are indexed to USD-LIBOR, and we believe all our material agreements have appropriate language to negotiate a transition to an alternative index rate. While we are uncertain about the affects this transition may have on our cash flows, we are continuing to monitor this activity and evaluate the potential risks.
The credit agreements governing our Credit Facilities contain customary restrictive covenants that, among other things and with certain exceptions, limit our 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 us to certain reporting obligations and require that we satisfy certain financial covenants, including, among other things, a requirement
that if borrowings under the ABL Facility exceed 90% of availability, we 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 credit agreement governing the ABL Facility).
U.S. Tariffs and Global Economy
The current domestic and international political environment, including existing and potential changes to U.S. policies related to global trade and tariffs, have resulted in uncertainty surrounding the future state of the global economy. In particular, the ongoing trade dispute between the U.S. and China has resulted in the U.S. imposing tariffs of 25% on many products from China. Historically, approximately half of the products we sell were imported from China, the majority of which are impacted by these tariffs. As we continue to analyze the impact these tariffs may have on our business, we continue taking steps to mitigate some of these cost increases through negotiating lower costs from our vendors, increasing retail pricing as we deem appropriate, and sourcing from alternative countries. While we expect our efforts will mitigate a substantial portion of the overall effect of increased tariffs, we expect the enacted tariffs will increase our inventory costs and associated cost of sales.
Antidumping and Countervailing Duties
On May 24, 2019, the U.S. International Trade Commission (the “ITC”) announced it had completed a preliminary phase antidumping and countervailing duty investigation pursuant to the Tariff Act of 1930 with respect to the imports of ceramic tile from China and determined there is a reasonable indication that the ceramic tile production industry in the U.S. is being materially injured by imports of ceramic tile from China that have allegedly been subsidized by the Chinese government and are being sold in the U.S. at less than fair value, otherwise known as “dumping”. As a result of the ITC’s affirmative determinations, the U.S. Department of Commerce (the “DOC”) began its own related investigation. In September 2019, the DOC reached a preliminary determination that imports from China were subsidized and imposed preliminary duties of 103.77% on most Chinese exporters. In November 2019, the DOC reached a preliminary determination that imports from China were being sold in the United States at less than fair value and imposed preliminary antidumping duty rates ranging from 114.49% to 356.02% depending on the producer.
Once the DOC reached these preliminary determinations, it instructed the U.S. Customs and Border Protection to require cash deposits based on these preliminary rates. The DOC’s preliminary determination will be subject to revision or rescission either in the DOC’s final determinations, expected in March of 2020, or in the ITC’s final determination with respect to injury shortly thereafter. If the final determinations are affirmative, then countervailing and antidumping orders will be published. The final rates for the investigation period and the first 12 month period of the orders would not be determined until the administrative review process is completed, approximately two years after the order is published.
While it is too early to determine what the final outcome of the DOC and ITC investigations will be and what impact, if any, they will have on the Company, we took steps to mitigate the risk of future exposure by sourcing from alternative countries and believe we are no longer importing applicable products from China. While we do not currently believe our inventory during the investigation period is subject to these additional duties, if these additional duties were to apply to our inventory during the investigation period, we believe our exposure could be approximately $7.0 million. The actual additional duties, if applicable to us, could differ from this estimate. We have not established a reserve for this matter as we currently do not believe our inventory during the investigation period is subject to these additional duties. Potential costs and any attendant impact on pricing arising from these tariffs or potential duties, and any further expansion in the types or levels of tariffs or duties implemented, could require us to modify our current business practices and could adversely affect our business, financial condition, and results of operations.
Tariff Refunds
On November 7, 2019, the U.S. Trade Representative (“USTR”) made a ruling to retroactively exclude certain flooring products imported from China from the Section 301 tariffs that were implemented at 10% beginning in September 2018 and increased to 25% in June 2019. In addition, on November 20, 2019, U.S. Customs issued Chapter 99 exclusions for each unique article number identified under the November 7, 2019 USTR ruling. The granted exclusions apply to certain “click” vinyl and engineered products that we have sold and continue to sell. As these exclusions were granted retroactively, we are entitled to a refund from U.S. Customs and Border Protection for the applicable Section 301 tariffs previously paid on these goods. While tariff refund claims are subject to the approval of U.S. Customs, the Company currently expects to recover $19.3 million related to these Section 301 tariff payments in fiscal 2020. Referdetails, please refer to Note 110, “Debt” of the notes to the consolidated financial statements included in this Annual ReportReport.
Credit Ratings
Our credit ratings are periodically reviewed by rating agencies. In September 2022, Standard & Poor's raised the Company’s issuer credit rating to BB from BB- with a stable outlook. Moody’s issuer credit rating of Ba3 and positive outlook for additional details regarding tariff refunds.the Company remain unchanged. These ratings and our current credit condition affect, among other things, our ability to access new capital. Negative changes to these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt. Our credit ratings could be lowered or rating agencies could issue adverse commentaries in the future, which could have a material adverse effect on our business, financial condition, results of operations, and liquidity. In particular, a weakening of our financial condition, including an increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, result in a credit rating downgrade or change in outlook, or otherwise increase our cost of borrowing.
Supply Chain Finance ProgramAs part of our ongoing efforts to improve cash flow and liquidity, we facilitate a voluntary supply chain finance program (the “Finance Program”) for certain of our suppliers. Suppliers that participate in the Finance Program extend our payment terms by approximately 40 days on average. Under the Finance Program, participating suppliers may choose to sell receivables due from us to a participating financial institution at the sole discretion of both the suppliers and the financial institution. The Finance Program is administered by third-party financial institutions, and the Company's responsibility is limited to making payment on the terms originally negotiated with participating suppliers, regardless of whether such suppliers sell receivables to the financial institutions. Suppliers who choose to participate in the Finance Program may, at their sole discretion, make offers to the financial partners who administer the Finance Program to finance one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to the third-party financial institutions.
Material Cash Requirements, including Contractual Obligations
to Third Parties
We enter into long-term obligations and commitments in the normal course of business, primarily debt obligations and non-cancelable operating leases. As of December 26, 2019,The following table summarizes our contractualmaterial cash obligationsrequirements over the next several periods from known contractual or other obligations as of December 29, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
| in thousands | | Total | | 12/28/2023 | | 12/26/2024 | | 12/25/2025 | | 12/31/2026 | | 12/30/2027 | | Thereafter |
| Operating leases (1) | | $ | 1,882,381 | | | $ | 170,669 | | | $ | 189,116 | | | $ | 177,156 | | | $ | 166,350 | | | $ | 158,809 | | | $ | 1,020,281 | |
| Purchase obligations (2) | | 880,315 | | | 847,565 | | | 8,165 | | | 9,051 | | | 10,141 | | | 5,393 | | | — | |
| Long-term debt | | 414,699 | | | 2,103 | | | 2,103 | | | 2,103 | | | 2,629 | | | 405,761 | | | — | |
| Estimated interest on long-term debt (3) | | 105,123 | | | 21,651 | | | 23,241 | | | 25,025 | | | 24,897 | | | 10,309 | | | — | |
| Letters of credit | | 33,260 | | | 33,260 | | | — | | | — | | | — | | | — | | | — | |
| Total | | $ | 3,315,778 | | | $ | 1,075,248 | | | $ | 222,625 | | | $ | 213,335 | | | $ | 204,017 | | | $ | 580,272 | | | $ | 1,020,281 | |
(1)We enter into operating leases during the normal course of business. Most lease arrangements provide us with the option to renew the leases at defined terms. The future operating lease obligations set forth above would change if we were as follows: | | | | | | | | | | | | | | | | | | | | | |
| | Payments due by period | | |
(in thousands) | | Total | | 12/31/2020 | | 12/30/2021 | | 12/29/2022 | | 12/28/2023 | | 12/26/2024 | | Thereafter |
Term loans | | $ | 145,500 | | $ | — | | $ | — | | $ | — | | $ | 145,500 | | $ | — | | $ | — |
Estimated interest (1) | | | 24,262 | | | 6,868 | | | 6,671 | | | 6,504 | | | 4,219 | | | — | | | — |
Operating leases (2) | | | 1,222,321 | | | 122,303 | | | 127,449 | | | 120,091 | | | 116,505 | | | 113,019 | | | 622,954 |
Letters of credit | | | 20,512 | | | 20,512 | | | — | | | — | | | — | | | — | | | — |
Purchase obligations (3) | | | 171,748 | | | 169,885 | | | 1,235 | | | 628 | | | — | | | — | | | — |
Total | | $ | 1,584,343 | | $ | 319,568 | | $ | 135,355 | | $ | 127,223 | | $ | 266,224 | | $ | 113,019 | | $ | 622,954 |
to exercise these options or enter into additional operating leases.
(2)(1) | For purposes of this table, interest has been estimated based on interest rates in effect for our indebtedness as of December 26, 2019 and estimated borrowing levels in the future. Actual borrowing levels and interest costs may differ. |
(2) | We enter into operating leases during the normal course of business. Most lease arrangements provide us with the option to renew the leases at defined terms. The future operating lease obligations would change if we were to exercise these options or enter into additional operating leases. |
(3) | Purchase obligations include all legally binding contracts such as firm commitments for inventory purchases, container commitments, software and license commitments, and legally binding service contracts. Purchase orders that are not binding agreements are excluded from the table above. |
Purchase obligations include agreements to purchase goods or services that are enforceable or legally binding. The abovemajority of our purchase obligations are for inventory purchases, capital projects related to our stores and distribution centers, and software and license commitments. Purchase orders that are not binding agreements are excluded from the table does not reflectabove.
(3)For purposes of this table, interest has been estimated assuming our long-term liabilities associated with reservesdebt is held to maturity and based on interest rates in effect for uncertain tax positions totaling $0.4 million due toour indebtedness, adjusted for the complexityeffect of our interest rate caps, as of December 29, 2022. Actual borrowing levels and uncertainty in reasonably estimating the period in which we expect to settle these non-current liabilities. Refer to Note 6 interest costs may differ.
For fiscal
2019,2022, we were not party to any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, expenses, results of operations, liquidity, capital expenditures, or capital resources. We do not have any relationship with unconsolidated entities or financial partnerships for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes.
U.S. Tariffs and Global Economy
The current domestic and international political environment, including existing and potential changes to U.S. policies related to global trade and tariffs, have resulted in uncertainty surrounding the future state of the global economy. In particular, the ongoing trade dispute between the U.S. and China has resulted in the U.S. imposing tariffs of 25% on many products from China. While exclusions from tariffs were granted for certain products from China, nearly all of these exclusions have expired. In fiscal 2022, approximately 29% of the products we sold were produced in China. As we continue to manage the impact these tariffs may have on our business, we continue taking steps to mitigate some of these cost increases through negotiating lower costs from our vendors, increasing retail pricing as we deem appropriate, and sourcing from alternative countries. While our efforts have mitigated a substantial portion of the overall effect of increased tariffs, the enacted tariffs have increased our inventory costs and associated cost of sales for the remaining products still sourced from China.
Recently Adopted and Recently Issued Accounting Pronouncements
Refer to Note 1,
“Summary of Significant Accounting Policies” of the notes to the consolidated financial statements included in this Annual Report for information on the recently adopted and recently issued accounting pronouncements that are applicable to the Company.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates, and judgments on an ongoing basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ under different assumptions and conditions, and such differences could be material to the consolidated financial statements.
Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following accounting policies are critical as they involve a higher degree of judgment or complexity and are the most significant to reporting our results of operations and financial position. The following critical accounting policies reflect the significant estimates
and judgments used in the preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. All of our significant accounting policies are discussed in “Note 1. Summary of Significant Accounting Policies” to our audited consolidated financial statements included in this Annual Report.
Description. We recognize revenue and the related cost of sales when we satisfy the performance obligations in contracts with our customers in accordance with Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“Topic 606”). Our performance obligations for our retail store sales, as well as for orders placed through our website and shipped to our customers, are satisfied at the point-of-sale, which is typically the point at which the customer obtains control of the inventory. In some cases, merchandise is not physically ready for transfer to the customer at the point-of-sale, and revenue recognition is deferred until the customer has control of the inventory. Shipping and handling activities are accounted for as activities to fulfill the promise to transfer goods rather than as separate performance obligations as outlined within Topic 606. Payment is generally due from the customer immediately at the point-of-sale for both retail store sales and website sales.sales with the exception of a small number of commercial clients purchasing through our commercial credit program, which typically offers longer payment terms.
Judgments and uncertainties involved in the estimate. Our customers have the right to return the goods sold to them within a reasonable time period, typically 90 days. The right of return is an element of variable consideration as defined within Topic 606. We estimate a reserve for future returns of previously sold goods based on historical experience and various other assumptions that we believe to be reasonable. Merchandise exchanges of similar product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve. While we believe that our current sales returns reserves are adequate, there can be no assurances that historical data and trends will accurately predict returns or that future developments might not lead to a significant change in the reserve.
Effect if actual results differ from assumptions. A 10% change in our sales returns reservereserves and related return asset accruals at December 26, 201929, 2022 would have affectedhad a net earnings byimpact of approximately $0.7$1.5 million on operating income in fiscal 2019.Gift Cards2022. Sales returns reserves and Merchandise Credits
Description.We sell gift cards to our customers in our stores and through our website and issue merchandise credits in our stores. We account forrelated return asset accruals over the programs by recognizing a liability at the time the gift card is sold or the merchandise credit is issued. The liability is relieved and revenue is recognized upon redemption. Additionally, we recognize breakage income in proportion to the pattern of rights exercised by the customer when we expect to be entitled to breakage. Net sales related to the estimated breakage are included in net sales in the Consolidated Statement of Income. Welast few years have an agreement with an unrelated third-party who is the issuer of the Company's gift cards and also assumes the liability for unredeemed gift cards. The Company is not subject to claims under unclaimed property statutes, as the agreement effectively transfers the ownership of such unredeemed gift cards and the related future escheatment liability, if any, to the third-party.
Judgments and uncertainties involved in the estimate. Our gift card breakage assumptions require judgments in assessing the level at which we group gift cards for analysis of breakage rates, redemption patterns, and the ultimate value of gift cards which we do not expect to be redeemed.
Effect if actual results differ from assumptions A 10% change in our accrual for estimated gift card breakage at December 26, 2019 would have affected net earnings by approximately $0.7 million in fiscal 2019.
Loyalty Program
Description. Our Pro Premier loyalty program allows customers to earn points through purchases in our stores and our website. Loyalty points are typically awarded at one percent of the relative standalone selling price of the merchandise sold and are recognized at the time of sale as a liability with a corresponding reduction to net sales. Additionally, loyalty breakage is recognizedfluctuated primarily based on our estimate of the balance of loyalty points for which the likelihood of redemption by thechanges in sales levels and, to a lesser extent, changes in customer is deemed remote.return rates.
Judgments and uncertainties involved in the estimate. With assistance from the third party servicer that manages the loyalty program, we estimate and recognize loyalty breakage based on historical redemption trends, market benchmarks for the pattern of redemptions for other retail loyalty programs, and other assumptions related to the likelihood of customer redemptions.
Effect if actual results differ from assumptions. The loyalty program was rolled out to all stores in late fiscal 2018. As the program matures, we may find that actual customer redemption patterns differ significantly from our estimated breakage rates. A 10% change in our accrual for estimated loyalty breakage at December 26, 2019 would have affected net earnings by less than $0.2 million in fiscal 2019.
Inventory Valuation and Shrinkage
Description. Inventories consist of merchandise held for sale and are stated at the lower of cost or net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recorded in cost of sales in the consolidated statementConsolidated Statements of incomeOperations and Comprehensive Income as a loss in the period in which it occurs. We determine inventory costs using the moving weighted average cost method. We capitalize transportation, duties, and other costs to get product to our retail locations.
Judgments and uncertainties involved in the estimate. We provide provisions for losses related to shrinkage and other amounts that are otherwise not expected to be fully recoverable. These provisions are calculated based on historical shrinkage, selling price, margin,prices, margins, and current business trends. The estimates have calculations that require management to make assumptions based on the current rate of sales, age, salability and profitability of inventory, historical percentages that can be affected by changes in our merchandising mix, customer preferences, rates of sell through, and changes in actual shrinkage trends.
Effect if actual results differ from assumptions. A 10% change in our inventory valuation and shrinkage reserves at December 26, 201929, 2022 would have affected net earningsoperating income by approximately $0.4$0.9 million in fiscal 2019.2022. Inventory valuation and shrinkage reserves have increased approximately in proportion to our inventory growth over the last few years.
Vendor Rebates and Allowances
Description.Description. Vendor allowances consist primarily of volume rebates that are earned as a result of reaching certain inventory purchase levels and advertising allowances or incentives for the promotion of vendors' products. These vendor allowances are accrued as earned and are estimated based on annual projections. Vendor allowances earned are initially recorded as a reduction to the carrying value of inventory and a subsequent reduction in cost of sales when the related product is sold. Certain incentive allowances that are reimbursements of specific, incremental, and identifiable costs incurred to promote vendors���vendors’ products are recorded as an offset against these promotional expenses.
Judgments and uncertainties involved in the estimate.For vendor allowances, we develop accrual rates based on the provisions of the agreements in place. Due to the complexity and diversity of the individual vendor agreements, we perform analyses and review historical purchase trends and volumes throughout the year, adjust accrual rates as appropriate, and confirm actual amounts with select vendors to ensure the amounts earned are appropriately recorded. Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected purchase volumes, especially in the case of programs that provide for increased funding when graduated purchase volumes are met.
Effect if actual results differ from assumptions.We have not made any material changes in the methodology used to recognize vendor allowances during the past three fiscal years. If actual results are not consistent with the assumptions and estimates used, we could be exposed to additional adjustments that could positively or negatively impact gross margin and inventory. However, substantially all receivables associated with vendor rebates and allowances do not require subjective long-term estimates because they are collected soon after fiscal yeareach quarter end, primarily within the first two months. Adjustments to gross margin and inventory in the following fiscal year have historically not been material. Description.We recognize lease assets and corresponding lease liabilities for all operating leases on our Consolidated Balance Sheets, excluding short-term leases (leases with terms of 12 months or less) as described under ASU No. 2016-02, “Leases (Topic 842).” The majority of our long-term operating lease agreements include options to extend, which are also 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 are discounted using the rate implicit in the lease, or, if not readily determinable, a third-party secured incremental borrowing rate 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-BB credit rating and is adjusted for collateralization as well as inflation. Additionally, certain of our 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 we have the right to control the property.
Judgments and uncertainties involved in the estimate. The determination of an appropriate secured incremental borrowing rate requires judgments in selecting an appropriate yield curve and estimating adjustments for collateralization and inflation.
Effect if actual results differ from assumptions. Based on the volume of new store leases that we enter into each year, a significant increase or decrease in the incremental borrowing rates used to discount lease payments could have a significant impact on the value of operating lease liabilities and right-of-use assets subsequently reported on our Consolidated Balance Sheets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in foreign exchange rates, interest rates and commodity prices. Changes in these factors could cause fluctuations in the results of our operations and cash flows. In the ordinary course of business, we are primarily exposed to foreign currency, interest rate risks, and risks from the impact of inflation or deflation.
See further discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional details.
We contract for production with third parties primarily in Asia and Europe. While substantially all of these contracts are stated in U.S. dollars, there can be no assurance that the cost for the future production of our products will not be affected by exchange rate fluctuations between the U.S. dollar and the local currencies of these contractors. Due to the number of currencies involved, we cannot quantify the potential impact of future currency fluctuations on net income or loss in future years. To date, such exchange fluctuations have not had a material impact on our financial condition or results of operations.
Our operating results are subject to risk from interest rate fluctuations on our Credit Facilities, which carry variable interest rates. As of December
26, 2019,29, 2022, our
senior secured term loan facilityTerm Loan Facility and ABL Facility, which have variable interest rates, had
a remaining principal
balancebalances of
$145.5$204.5 million and
was our only variable-rate debt outstanding.$210.2 million, respectively. A 1.0% increase in the effective interest rate for
thisthese debt
instruments would cause an increase in interest expense of approximately
$1.5$4.1 million over the next twelve
months.months, excluding the impact of interest rate cap agreements. To lessen our exposure to
changes in interest rate risk, we entered into two
separate $102.5$75.0 million interest rate cap
agreements. The contracts effectively cap SOFR related interest payments on a portion of our Term Loan Facility to less than 1.68% through April 2024. The U.S. Federal Reserve began raising interest rates in fiscal 2022 and has signaled an intent to raise interest rates further. As a result, these agreements
are partially offsetting increases in
November 2016 with Bankinterest expense on our Term Loan Facility as rates have increased to a level above the specified SOFR caps. For additional information related to the Company’s Credit Facilities, refer to Note 10, “Debt” of
America and Wells Fargo that capped our LIBOR at 2.0% beginningthe notes to the consolidated financial statements included in
December 2016. As of December 26, 2019, only the Wells Fargo interest rate cap was still in effect as the Bank of America interest rate cap was sold during the fiscal year.this Annual Report.
Impact of Inflation/Deflation
We do not believe that inflation has had a material impact on our net sales or operating results for the past three fiscal years. However, substantial
Substantial increases in costs, including the price of raw materials, labor, energy,
transportation, and other inputs used in the production
and distribution of our merchandise, could have a significant impact on our business and the
industry in the future.industry. Additionally, while deflation could positively impact our merchandise costs, it could have an adverse effect on our average unit retail price, resulting in lower net sales and operating results.
We experience inflation and deflation related to our purchase of certain commodity products. There can be no assurance that this price volatility will not affect our financial condition and/or our results of operations. In order to mitigate price volatility, we monitor commodity price fluctuations and may adjust our selling prices accordingly; however, our ability to recover higher costs through increased pricing may be limited by the competitive environment in which we operate. To date, such fluctuations have not had a material impact on our financial condition or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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| | | | |
| 67
57 | |
| 70
60 | |
Consolidated Statements of Operations and Comprehensive Income for the fiscal years ended December 26, 2019,29, 2022, December 27, 2018,30, 2021, and December 28, 201731, 2020 | 71
61 | |
Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 26, 2019,29, 2022, December 27, 2018,30, 2021, and December 28, 201731, 2020 | 72
62 | |
Consolidated Statements of Cash Flows for the fiscal years ended December 26, 2019,29, 2022, December 27, 2018,30, 2021, and December 28, 201731, 2020 | 73
63 | |
| 74
64 | |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Floor & Decor Holdings, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Floor & Decor Holdings, Inc. and Subsidiaries (the Company) as of December
26, 201929, 2022 and December
27, 2018,30, 2021, the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December
26, 2019,29, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December
26, 201929, 2022 and December
27, 2018,30, 2021, and the results of its operations and its cash flows for each of the three years in the period ended December
26, 2019,29, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December
26, 2019,29, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February
20, 202023, 2023 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 9 to the consolidated financial statements, the Company changed its method for accounting for leases in 2019. See below for discussion of our related critical audit matter.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | | | | |
|
| Adoption ofRight-of-use assets and prospective accounting for ASC 842lease liabilities
|
| | |
| Description of the Matter |
| As discussed above and in NoteNotes 1 and Note 9 to the consolidated financial statements, the Company adopted Accounting Standards Update 2016-02, Leases (Topic 842) (“ASC 842”), as of December 28, 2018, the first day of its fiscal year 2019, which included recognizing $620.8 million ofrecognizes right-of-use assets and $683.0 million ofcorresponding lease liabilities for all leases on the consolidated balance sheet.sheet, excluding short-term leases (leases with terms of 12 months or less) as described under Accounting Standards Codification 842 (“ASC 842”). Because most of the Company’s leases do not provide a determinable implicit rate, the Company used a third party to assist in determining its incremental borrowing rate,rates, which waswere used to calculate its right-of-use assets and lease liabilities. As of December 26, 2019,29, 2022, the Company’s right-of-use assets were $822.3$1,205.6 million and lease liabilities were $918.9$1,333.2 million (of which $74.6$105.7 million was current and $844.3$1,227.5 million was long-term). Auditing the Company’s right-of-use assets and lease liabilities was challenging due to the requirement that management estimate its incremental borrowing rates used in the application of ASC 842 because the Company does not have debt financing or other instruments that have directly comparable collateral or similar terms as its leases for retail stores, distribution centers, or corporate offices.leased assets. Therefore, our procedures involved a high degree of subjective auditor judgment because of the significant judgments required for management to develop the estimates, including selection of an appropriate yield curve and estimating adjustments for collateralization and inflation.
|
| | |
How Wewe Addressed the Matter in Our Audit |
| We obtained an understanding of and tested controls that address the risks of material misstatement relating to the valuation of the Company’s right-of-use assets and lease liabilities. For example, we tested controls over management’s review of the incremental borrowing rate estimates, including selection of an appropriate yield curve and adjustments for collateralization and inflation. To test the right-of-use assets and lease liabilities recorded by the Company upon adoption of ASC 842 and for new or modified leases entered into during the year ended December 26, 2019,29, 2022, our audit procedures included, among others, evaluating the methodology, significant assumptions and underlying data used by the Company. We involved our valuation specialists to assist in evaluating the Company’s methodology to develop the incremental borrowing rates and preparing an independent calculation of the rates, which we compared to management’s estimates.
|
We have served as the Company's auditor since 2011.
February
20, 2020
23, 2023
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Floor & Decor Holdings, Inc. and Subsidiaries
Opinion on Internal Control Over Financial Reporting
We have audited Floor & Decor Holdings, Inc. and Subsidiaries’ internal control over financial reporting as of December
26, 2019,29, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Floor & Decor Holdings, Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December
26, 2019,29, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December
26, 201929, 2022 and December
27, 2018,30, 2021, the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December
26, 2019,29, 2022, and the related notes and our report dated February
20, 2020,23, 2023 expressed an unqualified opinion thereon.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
February 20, 202023, 2023
Floor & Decor Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
| | | | | | |
| | As of | | As of |
| | December 26, | | December 27, |
in thousands, except for share and per share data | | 2019 | | 2018 |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 27,037 | | $ | 644 |
Income taxes receivable | | | 2,868 | | | 4,324 |
Receivables, net | | | 69,301 | | | 67,527 |
Inventories, net | | | 581,865 | | | 471,014 |
Prepaid expenses and other current assets | | | 20,415 | | | 15,949 |
Total current assets | | | 701,486 | | | 559,458 |
Fixed assets, net | | | 456,289 | | | 328,366 |
Right-of-use assets | | | 822,256 | | | — |
Intangible assets, net | | | 109,299 | | | 109,330 |
Goodwill | | | 227,447 | | | 227,447 |
Other assets | | | 7,532 | | | 9,490 |
Total long-term assets | | | 1,622,823 | | | 674,633 |
Total assets | | $ | 2,324,309 | | $ | 1,234,091 |
Liabilities and stockholders’ equity | | | | | | |
Current liabilities: | | | | | | |
Current portion of term loan | | $ | — | | $ | 3,500 |
Current portion of lease liabilities | | | 74,592 | | | — |
Trade accounts payable | | | 368,459 | | | 313,503 |
Accrued expenses and other current liabilities | | | 102,807 | | | 82,038 |
Deferred revenue | | | 6,683 | | | 5,244 |
Total current liabilities | | | 552,541 | | | 404,285 |
Term loan | | | 142,606 | | | 141,834 |
Deferred rent | | | — | | | 36,980 |
Lease liabilities | | | 844,269 | | | — |
Deferred income tax liabilities, net | | | 18,378 | | | 26,838 |
Tenant improvement allowances | | | — | | | 37,295 |
Other liabilities | | | 2,179 | | | 2,550 |
Total long-term liabilities | | | 1,007,432 | | | 245,497 |
Total liabilities | | | 1,559,973 | | | 649,782 |
Commitments and Contingencies (Note 9) | | | | | | |
Stockholders’ equity | | | | | | |
Capital stock: | | | | | | |
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at December 26, 2019 and December 27, 2018 | | | — | | | — |
Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 101,457,858 shares issued and outstanding at December 26, 2019 and 97,588,539 issued and outstanding at December 27, 2018 | | | 101 | | | 98 |
Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at December 26, 2019 and December 27, 2018 | | | — | | | — |
Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and outstanding at December 26, 2019 and December 27, 2018 | | | — | | | — |
Additional paid-in capital | | | 370,413 | | | 340,462 |
Accumulated other comprehensive (loss) income, net | | | (193) | | | 186 |
Retained earnings | | | 394,015 | | | 243,563 |
Total stockholders’ equity | | | 764,336 | | | 584,309 |
Total liabilities and stockholders’ equity | | $ | 2,324,309 | | $ | 1,234,091 |
| | | | | | | | | | | |
| in thousands, except for share and per share data | As of December 29,
2022 | | As of December 30,
2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 9,794 | | | $ | 139,444 | |
| Income taxes receivable | 7,325 | | | 3,507 | |
| Receivables, net | 94,732 | | | 81,463 | |
| Inventories, net | 1,292,336 | | | 1,008,151 | |
| Prepaid expenses and other current assets | 53,298 | | | 40,780 | |
| Total current assets | 1,457,485 | | | 1,273,345 | |
| Fixed assets, net | 1,258,056 | | | 929,083 | |
| Right-of-use assets | 1,205,636 | | | 1,103,750 | |
| Intangible assets, net | 152,353 | | | 151,935 | |
| Goodwill | 255,473 | | | 255,473 | |
| Deferred income tax assets, net | 11,265 | | | 9,832 | |
| Other assets | 10,974 | | | 7,277 | |
| Total long-term assets | 2,893,757 | | | 2,457,350 | |
| Total assets | $ | 4,351,242 | | | $ | 3,730,695 | |
| Liabilities and stockholders’ equity | | | |
| Current liabilities: | | | |
| Current portion of term loan | $ | 2,103 | | | $ | 2,103 | |
| Current portion of lease liabilities | 105,693 | | | 104,602 | |
| Trade accounts payable | 590,883 | | | 661,883 | |
| Accrued expenses and other current liabilities | 298,019 | | | 248,935 | |
| Deferred revenue | 10,060 | | | 14,492 | |
| Total current liabilities | 1,006,758 | | | 1,032,015 | |
| Term loan | 195,351 | | | 195,762 | |
| Revolving line of credit | 210,200 | | | — | |
| Lease liabilities | 1,227,507 | | | 1,120,990 | |
| Deferred income tax liabilities, net | 41,520 | | | 40,958 | |
| Other liabilities | 12,730 | | | 17,771 | |
| Total long-term liabilities | 1,687,308 | | | 1,375,481 | |
| Total liabilities | 2,694,066 | | | 2,407,496 | |
| Commitments and Contingencies (Note 9) |
| |
|
| Stockholders’ equity | | | |
| Capital stock: | | | |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at December 29, 2022 and December 30, 2021 | — | | | — | |
| Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 106,150,661 shares issued and outstanding at December 29, 2022 and 105,760,650 issued and outstanding at December 30, 2021 | 106 | | | 106 | |
| Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at December 29, 2022 and December 30, 2021 | — | | | — | |
| Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and outstanding at December 29, 2022 and December 30, 2021 | — | | | — | |
| Additional paid-in capital | 482,312 | | | 450,332 | |
| Accumulated other comprehensive income, net | 4,337 | | | 535 | |
| Retained earnings | 1,170,421 | | | 872,226 | |
| Total stockholders’ equity | 1,657,176 | | | 1,323,199 | |
| Total liabilities and stockholders’ equity | $ | 4,351,242 | | | $ | 3,730,695 | |
See accompanying notes to consolidated financial statements.
Floor & Decor Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
| | | | | | | | |
| Fiscal Year Ended | | Fiscal Year Ended | | Fiscal Year Ended |
| December 26, | | December 27, | | December 28, |
in thousands, except for per share data | 2019 | | 2018 | | 2017 |
Net sales | $ | 2,045,456 | | $ | 1,709,848 | | $ | 1,384,767 |
Cost of sales | | 1,182,442 | | | 1,007,580 | | | 812,203 |
Gross profit | | 863,014 | | | 702,268 | | | 572,564 |
Operating expenses: | | | | | | | | |
Selling and store operating | | 546,853 | | | 439,495 | | | 353,647 |
General and administrative | | 132,386 | | | 105,327 | | | 84,661 |
Pre-opening | | 24,594 | | | 26,145 | | | 16,485 |
Total operating expenses | | 703,833 | | | 570,967 | | | 454,793 |
Operating income | | 159,181 | | | 131,301 | | | 117,771 |
Interest expense, net | | 8,801 | | | 8,917 | | | 13,777 |
Loss on early extinguishment of debt | | — | | | — | | | 5,442 |
Income before income taxes | | 150,380 | | | 122,384 | | | 98,552 |
(Benefit) provision for income taxes | | (251) | | | 6,197 | | | (4,236) |
Net income | $ | 150,631 | | $ | 116,187 | | $ | 102,788 |
Change in fair value of hedge instruments, net of tax | | (379) | | | 391 | | | (381) |
Total comprehensive income | $ | 150,252 | | $ | 116,578 | | $ | 102,407 |
Basic earnings per share | $ | 1.51 | | $ | 1.20 | | $ | 1.13 |
Diluted earnings per share | $ | 1.44 | | $ | 1.11 | | $ | 1.03 |
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| in thousands, except for per share data | December 29,
2022 | | December 30,
2021 | | December 31,
2020 |
| Net sales | $ | 4,264,473 | | | $ | 3,433,533 | | | $ | 2,425,788 | |
| Cost of sales | 2,536,757 | | | 2,011,267 | | | 1,390,896 | |
| Gross profit | 1,727,716 | | | 1,422,266 | | | 1,034,892 | |
| Operating expenses: | | | | | |
| Selling and store operating | 1,078,466 | | | 849,440 | | | 654,100 | |
| General and administrative | 213,848 | | | 199,401 | | | 144,715 | |
| Pre-opening | 38,642 | | | 34,433 | | | 21,498 | |
| Total operating expenses | 1,330,956 | | | 1,083,274 | | | 820,313 | |
| Operating income | 396,760 | | | 338,992 | | | 214,579 | |
| Interest expense, net | 11,138 | | | 4,924 | | | 8,389 | |
| Gain on early extinguishment of debt | — | | | — | | | (1,015) | |
| Income before income taxes | 385,622 | | | 334,068 | | | 207,205 | |
| Provision (benefit) for income taxes | 87,427 | | | 50,838 | | | 12,224 | |
| Net income | $ | 298,195 | | | $ | 283,230 | | | $ | 194,981 | |
| Change in fair value of hedge instruments, net of tax | 3,802 | | | 371 | | | 357 | |
| Total comprehensive income | $ | 301,997 | | | $ | 283,601 | | | $ | 195,338 | |
| Basic earnings per share | $ | 2.82 | | | $ | 2.71 | | | $ | 1.90 | |
| Diluted earnings per share | $ | 2.78 | | | $ | 2.64 | | | $ | 1.84 | |
See accompanying notes to consolidated financial statements.
Floor & Decor Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | |
| | Common Stock | | Common Stock | | Common Stock | | Additional | | Other | | | | | Total |
| | Class A | | Class B | | Class C | | Paid-in | | Comprehensive | | Retained | | Stockholders’ |
in thousands | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | Income (Loss) | | Earnings | | Equity |
Balance, December 30, 2016 | | 76,847 | | $ | 77 | | 396 | | $ | — | | 6,275 | | $ | 6 | | $ | 117,270 | | $ | 176 | | $ | 16,754 | | $ | 134,283 |
Stock based compensation expense | | — | | | — | | — | | | — | | — | | | — | | | 4,951 | | | — | | | 8 | | | 4,959 |
Conversion of Class B Common Stock | | 396 | | | — | | (396) | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Conversion of Class C Common Stock | | 6,275 | | | 6 | | — | | | — | | (6,275) | | | (6) | | | — | | | — | | | — | | | — |
Exercise of stock options | | 1,828 | | | 2 | | — | | | — | | — | | | — | | | 8,872 | | | — | | | — | | | 8,874 |
IPO proceeds | | 10,147 | | | 10 | | — | | | — | | — | | | — | | | 192,326 | | | — | | | — | | | 192,336 |
Issuance of restricted stock awards | | 15 | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Other comprehensive loss, net of tax | | — | | | — | | — | | | — | | — | | | — | | | — | | | (381) | | | — | | | (381) |
Net income | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 102,788 | | | 102,788 |
Balance, December 28, 2017 | | 95,509 | | | 96 | | — | | | — | | — | | | — | | | 323,419 | | | (205) | | | 119,550 | | | 442,860 |
Stock based compensation expense | | — | | | — | | — | | | — | | — | | | — | | | 6,514 | | | — | | | — | | | 6,514 |
Exercise of stock options | | 2,069 | | | 2 | | — | | | — | | — | | | — | | | 10,529 | | | — | | | — | | | 10,531 |
Issuance of restricted stock awards | | 10 | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Cumulative effect from adoption of ASU No. 2014-09 | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 7,826 | | | 7,826 |
Other comprehensive gain, net of tax | | — | | | — | | — | | | — | | — | | | — | | | — | | | 391 | | | — | | | 391 |
Net income | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 116,187 | | | 116,187 |
Balance, December 27, 2018 | | 97,588 | | | 98 | | — | | | — | | — | | | — | | | 340,462 | | | 186 | | | 243,563 | | | 584,309 |
Stock based compensation expense | | — | | | — | | — | | | — | | — | | | — | | | 8,711 | | | — | | | — | | | 8,711 |
Exercise of stock options | | 3,741 | | | 3 | | — | | | — | | — | | | — | | | 18,795 | | | — | | | — | | | 18,798 |
Issuance of restricted stock awards | | 24 | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Shares issued under employee stock plans | | 105 | | | — | | — | | | — | | — | | | — | | | 2,445 | | | — | | | — | | | 2,445 |
Cumulative effect from adoption of ASU No. 2016-02 | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (179) | | | (179) |
Other comprehensive loss, net of tax | | — | | | — | | — | | | — | | — | | | — | | | — | | | (379) | | | — | | | (379) |
Net income | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 150,631 | | | 150,631 |
Balance, December 26, 2019 | | 101,458 | | $ | 101 | | — | | $ | — | | — | | $ | — | | $ | 370,413 | | $ | (193) | | $ | 394,015 | | $ | 764,336 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock
Class A | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Retained
Earnings | | Total
Stockholders’
Equity |
| in thousands | Shares | | Amount | | | | |
| Balance, December 27, 2019 | 101,458 | | | $ | 101 | | | $ | 370,413 | | | $ | (193) | | | $ | 394,015 | | | $ | 764,336 | |
| Stock-based compensation expense | — | | | — | | | 16,115 | | | — | | | — | | | 16,115 | |
| Exercise of stock options | 2,485 | | | 2 | | | 19,252 | | | — | | | — | | | 19,254 | |
| Issuance of restricted stock awards | 369 | | | 1 | | | — | | | — | | | — | | | 1 | |
| Shares issued under employee stock purchase plan | 56 | | | — | | | 2,344 | | | — | | | — | | | 2,344 | |
| Other comprehensive gain, net of tax | — | | | — | | | — | | | 357 | | | — | | | 357 | |
| Net income | — | | | — | | | — | | | — | | | 194,981 | | | 194,981 | |
| Balance, December 31, 2020 | 104,368 | | | 104 | | | 408,124 | | | 164 | | | 588,996 | | | 997,388 | |
| Stock-based compensation expense | — | | | — | | | 20,528 | | | — | | | — | | | 20,528 | |
| Exercise of stock options | 1,253 | | | 2 | | | 14,734 | | | — | | | — | | | 14,736 | |
| Issuance of restricted stock awards | 29 | | | — | | | — | | | — | | | — | | | — | |
| Forfeiture of restricted stock awards | (3) | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock upon vesting of restricted stock units | 29 | | | — | | | — | | | — | | | — | | | — | |
| Shares issued under employee stock purchase plan | 46 | | | — | | | 3,063 | | | — | | | — | | | 3,063 | |
| Issuance of stock related to acquisition | 50 | | | — | | | 5,000 | | | — | | | — | | | 5,000 | |
| Common stock redeemed for tax liability | (11) | | | — | | | (1,117) | | | — | | | — | | | (1,117) | |
| Other comprehensive gain, net of tax | — | | | — | | | — | | | 371 | | | — | | | 371 | |
| Net income | — | | | — | | | — | | | — | | | 283,230 | | | 283,230 | |
| Balance, December 30, 2021 | 105,761 | | | 106 | | | 450,332 | | | 535 | | | 872,226 | | | 1,323,199 | |
| Stock-based compensation expense | — | | | — | | | 22,233 | | | — | | | — | | | 22,233 | |
| Exercise of stock options | 352 | | | — | | | 7,592 | | | — | | | — | | | 7,592 | |
| Forfeiture of restricted stock awards | (59) | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock upon vesting of restricted stock units | 59 | | | — | | | — | | | — | | | — | | | — | |
| Shares issued under employee stock purchase plan | 62 | | | — | | | 4,379 | | | — | | | — | | | 4,379 | |
| Common stock redeemed for tax liability | (24) | | | — | | | (2,224) | | | — | | | — | | | (2,224) | |
| Other comprehensive gain, net of tax | — | | | — | | | — | | | 3,802 | | | — | | | 3,802 | |
| Net income | — | | | — | | | — | | | — | | | 298,195 | | | 298,195 | |
| Balance, December 29, 2022 | 106,151 | | | $ | 106 | | | $ | 482,312 | | | $ | 4,337 | | | $ | 1,170,421 | | | $ | 1,657,176 | |
See accompanying notes to consolidated financial statements.
Floor & Decor Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| in thousands | December 29,
2022 | | December 30,
2021 | | December 31,
2020 |
| Operating activities | | | | | |
| Net income | $ | 298,195 | | | $ | 283,230 | | | $ | 194,981 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 155,023 | | | 118,196 | | | 91,640 | |
| Stock-based compensation expense | 22,233 | | | 20,528 | | | 16,115 | |
| Change in fair value of contingent earn-out liabilities | 2,529 | | | — | | | — | |
| Deferred income taxes | 2,525 | | | 3,042 | | | 9,614 | |
| Interest cap derivative contracts | 114 | | | 357 | | | 372 | |
| Loss on asset impairments and disposals, net | 20 | | | 438 | | | 14 | |
| Gain on early extinguishment of debt | — | | | — | | | (1,015) | |
| Changes in operating assets and liabilities, net of effects of acquisitions: | | | | | |
| Receivables, net | (12,150) | | | (19,768) | | | 18,874 | |
| Inventories, net | (283,438) | | | (349,678) | | | (72,135) | |
| Trade accounts payable | (84,732) | | | 232,761 | | | 49,439 | |
| Accrued expenses and other current liabilities | 38,716 | | | 36,684 | | | 59,017 | |
| Income taxes | (8,865) | | | (15,897) | | | 15,264 | |
| Deferred revenue | (4,432) | | | 3,158 | | | 3,432 | |
| Other, net | (13,288) | | | (11,709) | | | 20,552 | |
| Net cash provided by operating activities | 112,450 | | | 301,342 | | | 406,164 | |
| Investing activities | | | | | |
| Purchases of fixed assets | (456,600) | | | (407,671) | | | (212,448) | |
| Acquisitions, net of cash acquired | (3,810) | | | (63,567) | | | — | |
| Proceeds from sales of property and equipment | 4,773 | | | — | | | — | |
| Net cash used in investing activities | (455,637) | | | (471,238) | | | (212,448) | |
| Financing activities | | | | | |
| Proceeds from term loans | — | | | 65,000 | | | 75,000 | |
| Payments on term loans | (2,103) | | | (76,202) | | | (2,697) | |
| Borrowings on revolving line of credit | 1,047,100 | | | 13,466 | | | 275,000 | |
| Payments on revolving line of credit | (836,900) | | | (15,969) | | | (275,000) | |
| Payment of contingent earn-out liability | (2,571) | | | — | | | — | |
| Proceeds from exercise of stock options | 7,592 | | | 14,736 | | | 19,254 | |
| Proceeds from employee stock purchase plan | 4,379 | | | 3,063 | | | 2,344 | |
| Debt issuance costs | (1,736) | | | (1,409) | | | (6,882) | |
| Tax payments for stock-based compensation awards | (2,224) | | | (1,117) | | | — | |
| Net cash provided by financing activities | 213,537 | | | 1,568 | | | 87,019 | |
| Net (decrease) increase in cash and cash equivalents | (129,650) | | | (168,328) | | | 280,735 | |
| Cash and cash equivalents, beginning of the period | 139,444 | | | 307,772 | | | 27,037 | |
| Cash and cash equivalents, end of the period | $ | 9,794 | | | $ | 139,444 | | | $ | 307,772 | |
| Supplemental disclosures of cash flow information | | | | | |
| Buildings and equipment acquired under operating leases | $ | 225,968 | | | $ | 285,865 | | | $ | 177,932 | |
| Cash paid for interest, net of capitalized interest | $ | 7,403 | | | $ | 6,279 | | | $ | 8,043 | |
| Cash paid for income taxes, net of refunds | $ | 92,923 | | | $ | 63,684 | | | $ | 12,670 | |
| Fixed assets accrued at the end of the period | $ | 116,997 | | | $ | 87,645 | | | $ | 19,987 | |
| | | | | | | | |
| Fiscal Year Ended | | Fiscal Year Ended | | Fiscal Year Ended |
| December 26, | | December 27, | | December 28, |
in thousands | 2019 | | 2018 | | 2017 |
Operating activities | | | | | | | | |
Net income | $ | 150,631 | | $ | 116,187 | | $ | 102,788 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | 74,001 | | | 51,992 | | | 38,062 |
Non-cash loss on early extinguishment of debt | | — | | | — | | | 5,442 |
Loss on asset impairments and disposals | | 4,111 | | | 23 | | | 128 |
Amortization of tenant improvement allowances | | — | | | (4,494) | | | (3,311) |
Operating lease termination | | 1,926 | | | — | | | — |
Deferred income taxes | | (10,584) | | | (968) | | | (557) |
Interest cap derivative contracts | | 446 | | | (212) | | | — |
Stock based compensation expense | | 8,711 | | | 6,514 | | | 4,959 |
Changes in operating assets and liabilities: | | | | | | | | |
Receivables, net | | (17,850) | | | (13,486) | | | (19,508) |
Inventories, net | | (110,851) | | | (53,557) | | | (134,248) |
Trade accounts payable | | 54,956 | | | 54,773 | | | 100,264 |
Accrued expenses and other current liabilities | | 20,744 | | | (1,731) | | | 9,485 |
Income taxes | | 3,894 | | | 6,221 | | | (18,259) |
Deferred revenue | | 1,439 | | | 3,002 | | | 8,067 |
Deferred rent | | — | | | 14,455 | | | 9,243 |
Tenant improvement allowances | | — | | | 15,010 | | | 7,984 |
Other, net | | 23,084 | | | (8,105) | | | (1,332) |
Net cash provided by operating activities | | 204,658 | | | 185,624 | | | 109,207 |
Investing activities | | | | | | | | |
Purchases of fixed assets | | (196,008) | | | (151,397) | | | (102,253) |
Net cash used in investing activities | | (196,008) | | | (151,397) | | | (102,253) |
Financing activities | | | | | | | | |
Borrowings on revolving line of credit | | 100,100 | | | 217,050 | | | 236,700 |
Payments on revolving line of credit | | (100,100) | | | (258,050) | | | (245,700) |
Payments on term loans | | (3,500) | | | (3,500) | | | (197,500) |
Net proceeds from initial public offering | | — | | | — | | | 192,336 |
Proceeds from exercise of stock options | | 18,798 | | | 10,531 | | | 8,874 |
Debt issuance costs | | — | | | (170) | | | (1,559) |
Proceeds from employee stock purchase plan | | 2,445 | | | — | | | — |
Net cash provided by (used in) financing activities | | 17,743 | | | (34,139) | | | (6,849) |
Net increase in cash and cash equivalents | | 26,393 | | | 88 | | | 105 |
Cash and cash equivalents, beginning of the period | | 644 | | | 556 | | | 451 |
Cash and cash equivalents, end of the period | $ | 27,037 | | $ | 644 | | $ | 556 |
Supplemental disclosures of cash flow information | | | | | | | | |
Buildings and equipment acquired under operating leases | $ | 277,392 | | $ | — | | $ | — |
Cash paid for interest | $ | 7,388 | | $ | 7,563 | | $ | 15,748 |
Cash paid for income taxes, net of refunds | $ | 6,453 | | $ | 1,082 | | $ | 14,392 |
Fixed assets accrued at the end of the period | $ | 19,527 | | $ | 15,120 | | $ | 8,521 |
Fixed assets acquired as part of lease - paid for by lessor | $ | — | | $ | — | | $ | 1,786 |
See accompanying notes to consolidated financial statements.
Floor & Decor Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December
26, 201929, 2022
1. Summary of Significant Accounting Policies
Floor & Decor Holdings, Inc.
(f/k/a FDO Holdings, Inc.), together with its subsidiaries (the “Company,” “we,”
“our”“our,” or “us”) is a
highly differentiated, rapidly growingmulti-channel specialty retailer
of hard surfaceand commercial flooring
and related accessories. We offerdistributor. The Company offers a broad
in-stock assortment of
in-stock hard-surface flooring, including tile, wood, laminate, vinyl, and natural stone
flooring along with decorative
accessories and
wall tile, installation
accessoriesmaterials, and adjacent categories at everyday low prices. Our stores appeal to a variety of customers, including professional installers and commercial businesses (“Pro”), Do
Itit Yourself customers (“DIY”), and customers who buy
theour products for professional installation (“Buy it Yourself” or “BIY”). We operate within
1one reportable segment.
As of December 26, 2019,29, 2022, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D” or “Outlets”), operates 120191 warehouse-format stores, which average 76,00079,000 square feet, and 1six small-format standalone design centerstudios in 3036 states as well as 4four distribution centers and an e-commerce site, FloorandDecor.com.FloorandDecor.com. Substantially all of the Company’s operating assets and liabilities are held by Outlets.
The Company’s fiscal year is the 52- or 53-week period ending on the Thursday on or preceding December 31st.
FiscalThe fiscal year ended December 31, 2020 (fiscal “2020”) includes 53 weeks, while the fiscal years ended December
26, 201929, 2022 (“fiscal
2019”2022”)
, December 27, 2018 (“fiscal 2018”), and December
28, 201730, 2021 (“fiscal
2017”2021”) include 52 weeks.
52-week fiscal years consist of thirteen-week periods in each quarter of the fiscal year. 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.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Unless indicated otherwise,
Use of Estimates
The preparation of the financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the period. Actual results could differ from these estimates.
The COVID-19 pandemic negatively impacted the Company's financial and operating results during the first half of fiscal 2020 and, depending on future developments, which are uncertain, could have additional negative impacts in the future.
Business Combinations
The Company accounts for acquisitions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). The purchase price of an acquisition is measured as the aggregate fair value of the consideration transferred at the date of acquisition. The purchase price is allocated to the fair values of the tangible and intangible assets acquired and liabilities assumed, with any excess recorded as goodwill. These fair value determinations require judgment and may involve the use of significant estimates and assumptions. The purchase price allocation may be provisional during a measurement period of up to one year from the acquisition date to provide reasonable time to obtain the information in this Annual Report has been adjustednecessary to give effect to a 321.820-for-one stock splitidentify and measure the assets acquired and liabilities assumed. Only facts and circumstances that existed as of the Company’s outstanding common stock, which was approved by the Company's board of directors and shareholders on April 13, 2017 and effected on April 24, 2017.Reclassifications
Within the Consolidated Statements of Cash Flows, prior period amountsacquisition date are considered for “other assets” and “other” have been combined and reclassifiedsubsequent adjustment to the “other, net” line itempurchase price allocation, and any such adjustment will be recognized in the period in which it is determined prior to conform tocompletion of the current period presentation.measurement period. Transaction costs associated with acquisitions are expensed as incurred.
Cash and Cash Equivalents
Cash consists of currency and demand deposits with banks.
Receivables consist primarily of amounts due from credit card companies, vendor receivables, and receivables from vendors.commercial credit receivables. The Company typically collects its credit card receivables within three to five business days of the underlying sale to the customer.customer, while commercial credit receivables are typically collected within 40 days after the customer takes possession of the goods. The Company has agreements with a majority of its large merchandise vendors that allow for specified rebates based on purchasing volume. Generally, these agreements are on an annual basis, and the Company collects the majority of rebates earned each quarter subsequent to its fiscal yearquarter end. Additionally, the Company has agreements with substantially all vendors that allow for the return of certain merchandise throughout the normal course of business. When inventory is identified to return to a vendor, it is removed from inventory and recorded as a receivable on the Consolidated Balance Sheet, and any variance between capitalized inventory cost associated with the return and the expected vendor reimbursement is expensed in Cost of sales in the Consolidated StatementStatements of Operations and Comprehensive Income when the inventory is identified to be returned to the vendor. The Company reserves for estimated uncollected receivables based on historical trends, which historically have been immaterial. The allowance for doubtful accounts was $0.4 million and $0.3 million as of December 26, 201929, 2022 and December 27, 2018, was $266 thousand and $184 thousand,30, 2021, respectively.
As of December 26, 2019, receivables also include $19.3 million of expected tariff recoveries (“tariff refunds”) from U.S. Customers and Border Protection (“U.S. Customs”). These receivables relate to a U.S. Trade Representative (“USTR”) ruling on November 7, 2019 to grant exclusions from Section 301 tariffs for select types of flooring products imported from China, including certain “click” vinyl and engineered products that the Company has sold and continues to sell. The Section 301 tariffs from which these goods are now excluded were implemented at 10% beginning in September 2018 and increased to 25% in June 2019. In addition, on November 20, 2019, U.S. Customs issued Chapter 99 exclusions for each unique article number identified under the November 7, 2019 USTR ruling. For the Company, the granted exclusions apply retroactively to tariffs paid beginning in September 2018 through November 2019.
While tariff refund claims are subject to the approval of U.S. Customs, the Company currently expects to recover $19.3 million related to Section 301 tariff payments. During the fourth quarter of fiscal 2019, we recognized approximately $14.0 million of operating income (reduction to cost of sales) related to tariff refunds, including $11.0 million for products that had already been sold as of the date U.S. Customs issued Chapter 99 exclusions on November 20, 2019 as well as an additional $3.0 million related to products sold after this date through the end of fiscal 2019. Approximately $5.0 million of the estimated tariff refunds are related to merchandise on hand as of December 26, 2019 and have been recognized as reductions to the carrying cost of inventory. The remaining $0.3 million is related to interest income earned on anticipated tariff recoveries (interest accrues from the date that tariff payments were originally made through the date that such payments are refunded to the Company). All tariff refunds are expected to be received within less than 12 months from the end of fiscal 2019.
Credit Program
Credit is offered to the Company's customers through a proprietary credit card underwritten by third-party financial institutions
and, except as follows, at no recourse to the Company.
Beginning in fiscal 2018, theThe Company
began offeringalso offers limited credit to its commercial clients. The
Company’s total
credit exposure
for receivables not insured by a third party at the end of fiscal
20192022 and fiscal
20182021 was
$1,045 thousand$10.2 million and
$251 thousand,$6.0 million, respectively.
Inventory Valuation and Shrinkage
Inventories consist of merchandise held for sale and are stated at the lower of cost or net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recorded in cost of sales in the Consolidated Statements of Operations and Comprehensive Income
as a loss in the period in which it occurs. The Company determines inventory costs using the moving weighted average cost method. The Company capitalizes transportation, duties, and other costs to get product to its retail locations. The Company records reserves for estimated losses related to shrinkage and other amounts that are otherwise not expected to be fully recoverable. These reserves are calculated based on historical shrinkage, selling price, margin, and current business trends. The estimates have calculations that require management to make assumptions based on the current rate of sales, age, salability, and profitability of inventory, historical percentages that can be affected by changes in the Company's merchandising mix, customer preferences, and changes in actual shrinkage trends. These reserves totaled
$4,468 thousand$8.7 million and
$4,265 thousand$7.8 million as of December
26, 201929, 2022 and December
27, 2018,30, 2021, respectively.
Physical inventory counts and cycle counts are performed on a regular basis in each store and distribution center to ensure that amounts reflected in the accompanying Consolidated Balance Sheets are properly stated. During the period between physical inventory counts in
ourits stores, the Company accrues for estimated losses related to shrinkage on a store-by-store basis. Shrinkage is the difference between the recorded amount of inventory and the physical inventory. Shrinkage may occur due to theft or loss, among other things.
Fixed assets consist primarily of furniture, fixtures, and equipment, leasehold improvements (including those that are reimbursed by landlords as tenant improvement allowances),
buildings and building improvements, computer software and hardware, and land. Fixed assets are stated at cost less accumulated depreciation utilizing the straight-line method over the assets’ estimated useful lives.
The Company capitalizes interest on borrowings during the active construction period of certain capital projects.
Leasehold improvements are amortized using the straight-line method over the shorter of (i) the original term of the lease, (ii) renewal term of the lease if the renewal is reasonably certain or (iii) the useful life of the improvement. The Company’s fixed assets are depreciated using the following estimated useful lives:
| | | | | |
|
| Useful Life |
Furniture, fixtures and equipment | | 2 - 7 years |
Leasehold improvements | | 10 - 25 years |
Buildings and building improvements | 10 - 35 years |
| Computer software and hardware | | 3 - 7 years |
Land | Indefinite
| Indefinite
|
The cost and related accumulated depreciation of assets sold or otherwise disposed are removed from the accounts, and the related gain or loss is reported in the Consolidated Statements of Operations and Comprehensive Income.
Capitalized Software Costs
The Company capitalizes certain costs related to the acquisition and development of software and amortizes these costs using the straight-line method over the estimated useful life of the software. Certain development costs not meeting the criteria for capitalization are expensed as incurred.
Finite-lived Intangible Assets
In accordance with ASC 350, Intangibles—Goodwill and Other, Indefinite-Livedidentifiable intangible assets with finite lives are amortized over their estimated useful lives. The estimated lives of the Company’s finite-lived intangible assets are as follows:
| | | | | |
| Useful Life |
| Customer relationships | 12 years |
| Non-compete agreement | 5 years |
Goodwill and Other Indefinite-lived Intangible Assets
Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Company does not amortize goodwill and other intangible assets with indefinite lives resulting from business combinations but, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)ASC 350, Intangibles—Goodwill and Other, does assess the recoverability of goodwill 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 may not be recoverable. Such circumstances could include, but are not limited to, a significant adverse change in customer demand or business climate or an adverse action or assessment by a regulator. In accordance with ASC 350, identifiable intangible assets with finite lives are amortized over their estimated useful lives. Each year, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the single reporting unit is less than its carrying amount as a basis for determining whether it is necessary to complete quantitative impairment assessments.
Impairment Assessment of Goodwill and Other Indefinite-lived Intangible Assets
The Company
completed a qualitative assessmenttests goodwill and its trade names, which are indefinite-lived intangible assets, for impairment annually in
the fourth quarter of each fiscal
2019. Based on such goodwill impairment analysis performed qualitatively as of October 25, 2019, the Company determined that the fair value of its reporting unit is in excess of its carrying value. Noyear, or more often if events
occur or changes in circumstances
have occurred sinceindicate that the
datecarrying amount of
goodwill or indefinite-lived intangible assets may not be recoverable. The Company has the
Company's most recent annual impairment test that wouldoption to assess the value of its goodwill and other 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
reducethat the
Company’s goodwill or other 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
of the reporting unit below its carrying amount.The Company annually (or more frequently if thereas well as events and changes in circumstances that could include, but are indicators of impairment) evaluates whether its indefinite-lived asset continuesnot limited to, havea significant adverse change in customer demand or business climate, an indefinite lifeadverse action or have impaired carrying values due toassessment by a regulator, and significant adverse changes in the asset or its related risks. Theprice of the Company’s common stock. If such qualitative assessment indicates that impairment reviewmay have occurred, an additional quantitative assessment is performed by comparing the carrying value of the indefinite-lived intangible assetassets to itstheir respective estimated fair value.values. If the recorded carrying value of thegoodwill or an other indefinite-lived intangible asset exceeds its estimated fair value, an impairment charge is recorded to write the asset down to its estimated fair value.
The estimated lives
During the fourth quarter of fiscal 2022, the Company qualitatively assessed whether it was more likely than not that the goodwill and indefinite-lived intangible assets were impaired. Based on this assessment, the Company determined that its goodwill and other indefinite-lived intangible assets were not impaired as of October 28, 2022. No events or changes in circumstances have occurred since the date of the
Company’s intangible assets are as follows:
| Company's most recent annual impairment assessment that would more likely than not reduce the fair value of the reporting unit below its carrying amount. | | |
|
| Useful Life
|
Trade names
| | Indefinite
|
Vendor relationships
| | 10 years
|
The Company’s goodwill and other indefinite-lived intangible assets impairment loss calculationsassessments contain uncertainties because they require management to make significant judgments in estimating the fair value of the Company’s reporting unit and other indefinite-lived intangible asset, includingassets and, if a quantitative assessment is deemed necessary, may include the projection of future cash flows, assumptions about which market participants are the most comparable, the selection of discount rates, and the weighting of the income and market approaches. These calculations contain uncertainties because they require management to make assumptions such as estimating economic factors, including the profitability of future business operations and, if necessary, the fair value of the reporting unit’s assets and liabilities. Further, the Company’s ability to realize the future cash flows used in its fair value calculations is affected by factors such as changes in economic conditions, changes in the Company’s operating performance, and changes in the Company’s business strategies. Significant changes in any of the
assumptions involved in calculating these estimates could affect the estimated fair value of the Company’s reporting unit and indefinite-lived intangible assets and could result in impairment charges in a future period.
Long-lived assets, such as fixed assets, operating lease right-of-use assets, and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, significant changes or planned changes in
ourthe Company’s use of an asset, a product recall, or an adverse action by a regulator. In accordance with ASC 360, the evaluation is performed at the lowest level for which identifiable cash flows are available that are largely independent of the cash flows of other assets or asset groups. If the sum of the estimated undiscounted future cash flows is less than the carrying value of the related asset or asset group, an impairment loss is recognized equal to the difference between carrying value and fair value.
Since there is typically no active market for the Company’s definite-lived intangible
asset,assets, the Company estimates fair value based on expected future cash flows at the time they are identified. When events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, the Company estimates future cash flows based on store-level historical results, current trends, and operating and cash flow projections.
The definite-livedDefinite-lived intangible
asset isassets are amortized over
itstheir respective estimated useful
lifelives on a straight-line basis, which the Company believes to be the amortization methodology that best matches the pattern of economic benefit that is expected from the
asset.assets. The useful
lifelives of
the definite-lived intangible asset
isare evaluated on an annual basis.
The Company recognizes lease
right-of-use assets and corresponding lease liabilities for all operating leases on the balance sheet, excluding short-term leases (leases with terms of 12 months or less) as described under ASU No.
2016-02,2016-2, “Leases (Topic 842).” The majority of
ourthe Company’s long-term operating lease agreements include options to extend, which are also 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 are discounted using the rate implicit in the lease, or, if not readily determinable, a third-party secured incremental borrowing rate 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-BB credit rating and is adjusted for collateralization as well as inflation. Additionally, certain of
ourthe Company’s 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
we havethe Company has the right to control the property.
The Company is partially self-insured for workers’ compensation and general liability claims less than certain dollar amounts and maintains insurance coverage with individual and aggregate limits.
The Company also has a basket aggregate limit to protect against losses exceeding $10.0 million (subject to adjustment and certain exclusions) for workers' compensation claims and general liability claims. The Company’s liabilities represent estimates of the ultimate cost for claims incurred, including loss adjusting expenses, as of the balance sheet date. The estimated liabilities are not discounted and are established based upon analysis of historical data, actuarial estimates, regulatory requirements, an estimate of claims incurred but not yet reported, and other relevant factors. Management utilizes independent third-party actuarial studies to help assess the liability on a regular basis.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
Asset Retirement Obligations
An asset retirement obligation (“ARO”) represents a legal obligation associated with the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development or normal operation of that long-lived asset. The Company’s AROs are primarily associated with leasehold improvements that, at the end of a lease, the Company is contractually obligated to remove in order to comply with certain lease agreements. The ARO is recorded in Other long-term liabilities on the Consolidated
Balance Sheets and will be subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over its useful life.
Changes in (i) inflation rates and (ii) the estimated costs, timing and extent of future store closure activities each result in (a) a current adjustment to the recorded liability and related asset and (b) a change in the liability and asset amounts to be recorded prospectively. Any changes related to the assets are then recognized in accordance with ourthe Company’s depreciation policy, which would generally result in depreciation expense being recognized prospectively over the shorter of the remaining lease term or estimated useful life.
As of December 29, 2022 and December 30, 2021, net ARO assets included in property, plant and equipment were $5.2 million and $2.7 million, respectively, and net ARO liabilities included in other long-term liabilities were $6.8 million and $3.5 million, respectively.
The Company estimates fair values in accordance with ASC 820, Fair Value Measurement. ASC 820 provides a framework for measuring fair value and requires disclosures about fair value measurements. ASC 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Additionally, ASC 820 defines levels within a hierarchy based upon observable and non-observable inputs. If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the overall fair value measurement of the instrument. | ● | Level 1: Quoted prices in active markets for identical assets or liabilities as of the reporting date; |
| ● | Level 2: Inputs other than quoted prices in active markets for identical assets or liabilities that are either directly or indirectly observable as of the reporting date; and |
| ● | Level 3: Unobservable inputs that reflect the reporting entity’s own estimates about the assumptions market participants would use in pricing the asset or liability. |
•Level 1: Quoted prices in active markets for identical assets or liabilities as of the reporting date;
•Level 2: Inputs other than quoted prices in active markets for identical assets or liabilities that are either directly or indirectly observable as of the reporting date; and
•Level 3: Unobservable inputs that reflect the reporting entity’s own estimates about the assumptions market participants would use in pricing the asset or liability.
Derivative Financial Instruments
The Company uses derivative financial instruments to maintain a portion
Changes in interest rates impact the Company’s results of
its long-term debt obligations at a targeted balance of fixed and variable interest rate debtoperations. In an effort to manage
itsexposure to this risk,
associated with fluctuations in interest rates. We recognizethe Company enters into derivative contracts
and may adjust its derivative portfolio as market conditions change. Derivative contracts are recognized at fair value on the Consolidated Balance Sheets.
The fair value is calculated utilizing Level 2 inputs. Unrealized changes in the fair value of hedged derivative instruments are recorded in accumulated other comprehensive
(loss) income within the stockholders’ equity section of the Consolidated Balance Sheets.
The
effective portion of the gain or loss on the derivatives is reported as a component of comprehensive income within the Consolidated Statements of Operations and Comprehensive Income and reclassified into earnings in the same period in which the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent changes in fair values of the instruments are not highly effective, the ineffective portion of the hedge is immediately recognized in earnings.We perform an assessment of the effectiveness of our derivativeCompany has outstanding interest rate cap contracts designated as hedges, including assessing the possibility of counterparty default. If we determine that a derivative is no longer expected to be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in the fair value of the hedge in earnings. We believe our derivative contracts, which continue to be designated as cash flow hedges and which consist of interest rate cap contracts, willthat are expected to continue to be highly effective in offsetting changes in cash flow attributable to floating interest rate risk. The effective portion of the gain or loss on effective cash flow hedges is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same period in which the hedged transaction affects earnings. To the extent that hedges are not highly effective, the ineffective portion of the hedge is immediately recognized in earnings. The Company performs an assessment of the effectiveness of its derivative contracts designated as hedges, including assessing the possibility of counterparty default. If it is determined that a derivative is no longer expected to be highly effective, hedge accounting is discontinued prospectively, and subsequent changes in the fair value of the hedge are recognized in earnings. See footnote 8. DerivativesNote 8, “Derivatives and Risk ManagementManagement” for additional information.
.
Use of Estimates
The preparation of the financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amounts of fixed assets and intangibles, asset retirement obligations, allowances for accounts receivable and inventories, reserves for workers' compensation and general liability claims incurred but not reported, and deferred income tax assets and liabilities. Actual results could differ from these estimates.
Revenue Recognition
As of the beginning of fiscal 2018, we adopted
In accordance with Accounting Standards Update (“ASU”) No.
2014-09,2014-9, “Revenue from Contracts with Customers” (“Topic 606”)
using themodified retrospective transition method which requires that we recognize, revenue differently pre- and post-adoption (see “Recent Accounting Pronouncements” for additional information).We recognize revenue and the related cost of sales are recognized when we satisfy the related performance obligations in contracts with our customers in accordance with Topic 606.are settled. Performance obligations for ourthe Company’s retail store sales, as well as for orders placed through ourits website and shipped to our customers, are satisfied at the point at which the customer obtains control of the inventory, which is typically at the point-of-sale.point-of-sale. In some cases, merchandise is not physically ready for transfer to the customer at the point-of-sale, and revenue recognition is deferred until the customer has control of the inventory. Shipping and handling activities are accounted for as activities to fulfill the promise to transfer goods rather than as separate performance obligations as outlined within Topic 606. Payment is generally due from the customer immediately at the point-of-sale for both retail store sales and website sales. The nature of the goods offered primarily include hard surface flooring and related accessories. We doThe Company does not perform installation services, and we offer free design services are offered in-store. The transaction price recognized in revenuesrevenue represents the selling price of the products offered. Sales taxes collected are not recognized as revenue as these amounts are ultimately remitted to the appropriate taxing authorities.
Our
The Company provides customers have the right to return the goods sold to them within a reasonable time period, typically 90 days. The right of return is an element of variable consideration as defined within Topic 606. We reserveReserves for future returns of previously sold goods are estimated based on historical experience and various other assumptions that we believemanagement believes to be reasonable. This reserve reducesThese reserves reduce sales and cost of sales as well as establishesand establish a related return asset and refund liability as defined within Topic 606. The return asset is included within prepaid expenses and other current assets, and the refund liability is included within accrued expenses and other current liabilities, each respectively on the Consolidated Balance Sheets. Merchandise exchanges of similar product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve.
Gift Cards and Merchandise Credits
We sell
The Company sells gift cards to
our customers
in ourthrough its stores and
through our website and
issuealso issues merchandise credits in
ourits stores.
We accountGift cards and merchandise credits are accounted for
the programs by recognizing a liability at the time the gift card is sold or the merchandise credit is issued. The liability is relieved and revenue is recognized upon redemption.
Additionally, weWe recognize breakage
income in proportion to the pattern of rights exercised by the customer when we expect to be entitled to breakage. Net sales related to the estimated breakage are included in net sales in the Consolidated Statement of Income. We have an agreement with an unrelated third-party who is the issuer of the Company's gift cards and also assumes the liability for unredeemed gift cards. The Companyrevenue that is not subject to
claims under unclaimed property statutes, as the agreement effectively transfers the ownership of such unredeemed gift cards and the related future escheatment
liability, if any, to the third-party. Gift card breakage is recognized based
uponon historical redemption patterns
and representsfor the
balanceportion of gift
cards for which the Company believes the likelihood of redemption by the customer is remote.card values that are not expected to be redeemed. Accordingly, in fiscal
2019, fiscal 2018,years 2022, 2021, and
fiscal 20172020, the Company recognized gift card breakage income
related to unredeemed gift cards of
$1,197 thousand, $1,584 thousand,$3.7 million, $2.4 million, and
$757 thousand was recognized in$1.5 million, respectively, within net sales in the Consolidated Statements of Operations and Comprehensive
Income, respectively, for such unredeemed gift cards.Income.
We completed the roll out of ourOur Pro Premier loyalty program to all stores in the second half of fiscal 2018, which allows customers to earn points through purchases in our stores and our website. LoyaltyThe Company allocates the transaction price between the goods and services sold and the loyalty points earned based on their relative standalone selling prices, which takes into account the portion of loyalty points expected to be redeemed. For eligible transactions, loyalty points are typically awarded at 1one percent, but may be awarded at up to four percent for our higher volume customers, of the relative standalone selling price of the merchandise sold and are recognized at the time of sale as a liability with a corresponding reduction to net sales. liability.Additionally, Breakage for loyalty breakagepoint rewards is recognizedestimated based on the Company’s estimate of the balance of loyalty points for which the likelihood of redemption by thehistorical customer is deemed remote. This estimate is determined with assistance from the third party servicer that manages the loyalty program and is based on the Company’s historical redemption trends, market benchmarks for the pattern of redemptions for other retail loyalty programs, and other assumptions related to the likelihood of customer redemptions. We are continuously monitoring redemption patterns and will adjust this rate, as necessary,may change in the future as the program matures. In fiscal 2019years 2022, 2021, and fiscal 2018,2020, loyalty breakage of $1,051 thousand$1.9 million, $2.2 million, and $401 thousand,$1.4 million, respectively, was recognized as net sales in the Consolidated Statements of Operations and Comprehensive Income.
Sales Returns and Allowances
The Company accrues for estimated sales returns based on historical results. The allowance for sales returns at December
26, 201929, 2022 and December
27, 2018,30, 2021, was
$15,437 thousand$33.3 million and
$8,335 thousand,$36.2 million, respectively.
Cost of sales consists of merchandise costs as well as freight, duty, and other costs to transport inventory to
ourthe Company’s distribution centers and stores. Cost of sales also includes costs for shrinkage, damaged product disposals, distribution, warehousing, sourcing, compliance, and arranging and paying for freight to deliver products to customers. The Company receives cash consideration from certain vendors related to vendor allowances and volume rebates, which is recorded as a reduction to the carrying value of inventory if the inventory is on hand and a reduction to cost of sales when the inventory is sold.
Vendor Rebates and Allowances
Vendor allowances consist primarily of volume rebates that are earned as a result of attaining certain inventory purchase levels and advertising allowances or incentives for the promotion of vendors' products. These vendor allowances are accrued as earned and are estimated based on annual projections.
Vendor allowances earned are initially recorded as a reduction to the carrying value of inventory and a subsequent reduction in cost of sales when the related product is sold. Certain incentive allowances that are reimbursements of specific, incremental, and identifiable costs incurred to promote vendors’ products are recorded as an offset against these promotional expenses.
Total operating expenses consist primarily of store and administrative personnel wages and benefits, infrastructure expenses, supplies, fixed asset depreciation, store and corporate facility expenses, pre-opening costs, training costs, and advertising costs. Credit card fees, insurance, personal property taxes, legal expenses, and other miscellaneous operating costs are also included.
The Company expenses advertising costs as the advertising takes place. Advertising costs incurred during the fiscal years ended December 26, 2019,29, 2022, December 27, 2018,30, 2021, and December 28, 2017,31, 2020 were $65,690 thousand, $55,283 thousand,$104.3 million, $90.4 million, and $43,560 thousand$66.6 million, respectively, and are included in selling and store operating expenses and pre-opening expenses in the accompanying Consolidated Statements of Operations and Comprehensive Income.
The Company accounts for non-capital operating expenditures incurred prior to opening a new store as
"pre-opening"“pre-opening” expenses in its Consolidated Statements of Operations and Comprehensive Income. The Company's pre-opening expenses begin on average
three months to six monthsone year in advance of a store opening or relocating due to, among other things, the amount of time it takes to prepare a store for its grand opening. Pre-opening expenses primarily include: advertising, rent, staff training, staff recruiting, utilities, personnel, and equipment rental. A store is considered to be relocated if it is closed temporarily and re-opened within the same primary trade area. Pre-opening expenses for the years ended December 26, 2019, December 27, 2018, and December 28, 2017, totaled $24,594 thousand, $26,145 thousand, and $16,485 thousand, respectively.Loss on Early Extinguishment of Debt
On May 2, 2017, the Company completed its initial public offering (“IPO”), pursuant to which it sold an aggregate of 10,147,025 shares of Class A common stock, par value $0.001 per share. The Company received aggregate net proceeds of approximately $192.0 million after deducting underwriting discounts and commissions and other offering expenses. The Company used net proceeds from the IPO of approximately $192.0 million to repay a portion of the amounts outstanding under the Term Loan Facility, including accrued and unpaid interest. The partial paydown resulted in a loss on extinguishment of debt in the amount of approximately $5.4 million related to unamortized original issue discount and unamortized deferred debt issuance costs.
The Company accounts for stock-based compensation, including employee stock options, restricted stock, and employee stock purchase plans, in accordance with ASC 718, Compensation – Stock Compensation. The(“ASC 718”), which requires measurement of compensation cost for all stock awards at fair value on the date of grant and recognition of compensation, net of forfeitures, over the requisite service period for awards expected to vest. As necessary, the Company obtains independent third-party valuation studies to assist with determining the grant date fair value of ouremployee stock price. Stock options are granted with exercise prices equal to or greater than the fair market value on the date of grant as authorized by the board of directors or compensation committee. Options granted have vesting provisions ranging from one to five years. Stock option grants are generally subject to forfeiture if employment terminates prior to vesting. The Company has selected the Black-Scholes option pricing model for estimating the grant date fair value of stock option awards granted. The Company bases the risk-free interest rate on the yield of a zero coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant. The Company estimates the dividend yield to be 0 as the Company does not intend to pay dividends in the future. The Company estimates the volatility of the share price of its common stock by considering the historical volatility of the stock of similar public entities. The Company considers a number of factors in determining the appropriateness of the public entities included in the volatility assumption, including the entity's life cycle stage, growth profile, size, financial leverage, and products offered.awards. Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period based on the number of years for which the requisite service is expected to be rendered. Refer to Note 11, “Stockholders’ Equity” for additional details related to the Company’s stock-based compensation awards.
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 a valuation allowance must be established.
The Company includes any estimated interest and penalties on tax-related matters in income taxes payable and income tax expense. 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 percent50% likelihood of being realized upon ultimate settlement. UncertainIn 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. Amounts recognized for uncertain tax positions require determinationsthat management make estimates and estimated liabilities to be madejudgments based on provisions of the tax law, which may be subject to change or varying interpretation.interpretations. The Company does not believe it has any material risksincludes estimated interest and penalties related to uncertain tax positions.position accruals within accrued expenses and other current liabilities in the Consolidated Balance Sheets and within income tax expense in the Consolidated Statements of Operations and Comprehensive Income.
SegmentsSegments
The Company operates as a multi-channel specialty retailer ofand commercial flooring distributor. The Company primarily sells hard surface flooring and related accessories through retail stores located in the United States and through its website.
Operating segments are defined as components of an entityenterprise for which discrete financial information is available and that is evaluated regularly reviewed by the chief operating decision maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s CODM is its Chief Executive Officer. The Company has determined that it has 1 operating segment and 1 reportable segment as the CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. In addition,The Company’s CODM, its Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by information about the Company’s two operating segments, Floor & Decor Retail and Spartan Surfaces, Inc. (“Spartan”), for purposes of allocating resources and evaluating financial performance. The Spartan segment, which engages in commercial flooring distribution and is entirely comprised of the Company’s Spartan subsidiary, does not meet the materiality criteria of ASC 280, Segment Reporting (“ASC 280”), and is therefore not disclosed separately as a reportable segment.
The Company concluded that the economic and operating characteristicscharacteristics of its one reportable segment, Floor & Decor Retail, are similar across its retail operations, including the net sales, gross profit and gross margin, and operating income of its retail stores as well as the product offerings,nature of products and services offered, customer base, marketing initiatives, operating procedures, store layouts, employee incentive programs, customers, methods of distribution, competitive and operating risks, and the level of shared resources across the business.
Recently Adopted Accounting Pronouncements
Goodwill.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—GoodwillPresentation of Financial Statements, Financial Services—Depository and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This standard simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU No. 2017-04 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted after January 1, 2017. The Company elected to early adopt this standard during the fourth quarter of 2017. The amendments in this update should be applied using a prospective approach. The adoption of ASU No. 2017-04 did not have a material impact on the Company's consolidated financial statements.Lending, Financial Services—Investment Companies. Income Taxes. In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This standard update requires an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. ASU No. 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments in this update should be applied using a modified retrospective approach. The adoption of ASU No. 2016-16 did not have a material impact on the Company's consolidated financial statements.
Leases. In February 2016,August 2021, the Financial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) No. 2016-02, “Leases2021-06, “Presentation of Financial Statements (Topic 842)205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946).” The ASU No. 2016-02 requiresincludes Release No.33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses. This update amends certain SEC disclosure guidance that lessees recognize lease assetsis included in the accounting standards codification to reflect the SEC’s recent issuance of rules intended to modernize and lease liabilities onstreamline disclosure requirements, including updates to business acquisition and disposition significance tests used, the balance sheet with an option to exclude short-term leases (leases with termssignificance thresholds for pro forma statement disclosures, the number of 12 months or less).preceding years of financial statements required for disclosure, and other provisions in the SEC releases. The guidance also requires disclosures aboutis effective upon its addition to the amount, timing, and uncertainty of cash flows arising from leases. We adopted the ASU in the first quarter of fiscal 2019 using the modified retrospective approach. The cumulative effect adjustment upon adoption resulted in a $179 thousand opening balance sheet reduction to retained earnings.FASB codification. The adoption of ASU No. 2016-02 had a material impact on the Company’s Consolidated Balance Sheets but2021-06 did not have a material impact on the Company’s Consolidated Statements of Operations and Comprehensive Incomeconsolidated financial statements or Consolidated Statements of Cash Flows. See Note 9, “Commitments and Contingencies,” for additional information related to the Company’s leases.disclosures.
Revenue from Contracts with Customers.
Reference Rate Reform. In May 2014,March 2020, the FASB issued ASU No. 2014-09, 2020-04, ““RevenueReference 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 Contracts with Customers (Topic 606).”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. In January 2021, the FASB issued ASU No. 2014-09 provides new2021-01, “Reference Rate Reform (Topic 848),” which amended ASU 2020-04 to clarify the scope and application of the original guidance relatedin ASU No. 2020-04. In December 2022, the FASB issued ASU No. 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”, which amended ASU 2020-04 to extend the core principle that an entity recognizes revenueperiod of time entities can utilize the reference rate reform relief guidance under ASU 2020-04 from December 31, 2022 to depictDecember 31, 2024. In the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services provided. We adopted this standard in the firstfourth quarter of fiscal 2018 using2022, the modified retrospective approach, effective December 29, 2017. The cumulative adjustment upon adoption primarily resulted in a reduction of deferred revenueCompany adopted ASU 2020-04 and related inventories and an increase to retained earnings of $7.8 million, net of tax.its amendments. The adoption of ASU No. 2014-092020-04 and its amendments did not have a material impact on the Company’s consolidated financial statements or related disclosures.
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. In the first quarter of fiscal 2021, the Company adopted ASU No. 2019-12 on a prospective basis. The adoption of ASU No. 2019-12 did not have a material impact on the Company’s consolidated financial statements. Recently Issued Accounting Pronouncements
Implementation Costs Incurred in Cloud Computing Arrangements.In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill“Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement Thatthat is a Service Contract”.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. ThisIn the first quarter of fiscal 2020, the Company adopted ASU No. 2018-15 on a prospective basis for implementation costs for new guidance will be effective for public companies for fiscal years beginningor existing arrangements incurred on or after December 15, 2019 and interim periods within those fiscal years, and earlythe adoption is permitted. Subsequent to thedate. The adoption of ASU No. 2018-15 the Company will capitalize such costs within prepaid expenses and other current
assets or other assets on the Consolidated Balance Sheets and will recognize expense within general and administrative expenses or other operating costs on the Consolidated Statements of Operations and Comprehensive Income, consistent with where the expense associated with the hosting element of the arrangement are presented. The Company doesdid not expect the adoption of ASU No. 2018-15 to have a material impact to itson the Company’s consolidated financial statements.
Credit Losses. In June 2016, the FASB issued ASU No. 2016-03, “Financial2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”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 amended guidance will be effective for public companiesadoption of ASU No. 2016-13 in the first quarter of fiscal 2020.2020 did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
Supplier Finance Programs. In September 2022, the FASB issued ASU No. 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50).” The Company does not expectASU requires that buyers in a supplier finance program disclose sufficient information for a user of the financial statements to understand the program's nature, activity, changes from period to period, and potential magnitude. The ASU is expected to improve financial reporting by requiring new disclosures about the programs, thereby allowing financial statement users to better consider the effect of such programs on an entity’s working capital, liquidity, and cash flows. The guidance in ASU 2022-04 is effective for interim and fiscal years beginning after December 15, 2022. Once adopted, it should be applied retrospectively to each period in which a balance sheet is presented, excluding the amendment on roll forward information, which should be presented prospectively and is effective for fiscal years beginning after December 15, 2023. Early adoption of the standard is permitted. The adoption of ASU No. 2016-032022-04 is not expected to have a material impact to itson the Company’s consolidated financial statements.Simplifying the Accounting for Income Taxes.
Business Combinations.In December 2019,October 2021, the FASB issued ASU No. 2019-12, "Income Taxes2021-08, “Business Combinations (Topic 740): Simplifying the805), Accounting for Income Taxes.Contract Assets and Contract Liabilities from Contracts with Customers.” The ASU simplifies the accounting for income taxes by removing certain exceptionsaddresses diversity and inconsistency related to the general principlesrecognition and measurement of contract assets and contract liabilities acquired in a business combination and require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 740. The ASU also clarifies and amends existing guidance to improve consistent application among reporting entities. The guidance will be606, Revenue from Contracts with Customers. This standard is effective for fiscal years andbeginning after December 15, 2022, including interim periods within those fiscal years, beginningand should be applied prospectively to business combinations occurring on or after December 15, 2020, with earlythe effective date of the amendments. Early adoption permitted.of the standard is permitted, including adoption in an interim period. The Company is currently evaluating the impactadoption of adopting this standard is not expected to have a material impact on itsthe Company's consolidated financial statements.statements or related disclosures and would only be applicable to the extent that the Company has future business combinations.
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 & Contract Liabilities
In accordance with ASC 606, Under Topic 606,Revenue from Contracts with Customers, 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 iswas not currentlyyet ready for physical transfer to customers.
Contract liabilities within the
customer.Gift Card Breakage
Under Topic 606,Consolidated Balance Sheets as of December 29, 2022 and December 30, 2021 primarily consisted of deferred revenue as well as amounts in accrued expenses and other current liabilities related to the Pro Premier loyalty program and unredeemed gift card breakage income iscards. As of December 29, 2022, contract liabilities totaled $57.0 million and included $10.1 million of deferred revenue, $33.8 million of loyalty program liabilities, and $13.1 million of unredeemed gift cards. As of December 30, 2021, contract liabilities totaled $40.2 million and included $14.5 million of deferred revenue, $20.4 million of loyalty program liabilities, and $5.3 million of unredeemed gift cards. Of the contract liabilities outstanding as of December 30, 2021, approximately $17.2 million was recognized in proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage. The amount of revenue related to gift card breakage income for theduring fiscal year ended December 26, 2019 was immaterial to the consolidated financial statements.
2022.
The Company has 1 operating segment and 1one reportable segment. The following table presents the net sales of each major product category for each of the last three fiscal years (in thousands):years:
| | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | |
| | December 26, 2019 | | December 27, 2018 | | December 28, 2017 | |
| | | | | % of | | | | | % of | | | | | % of | |
Product Category | | Net Sales | | Net Sales | | Net Sales | | Net Sales | | Net Sales | | Net Sales | |
Tile | | $ | 523,076 | | 26 | % | $ | 476,337 | | 27 | % | $ | 419,745 | | 30 | % |
Laminate / luxury vinyl plank | | | 442,171 | | 22 | | | 316,109 | | 18 | | | 208,238 | | 15 | |
Decorative accessories/ wall tile | | | 393,908 | | 19 | | | 325,139 | | 19 | | | 257,684 | | 19 | |
Installation materials and tools | | | 346,356 | | 17 | | | 272,994 | | 16 | | | 217,427 | | 16 | |
Wood | | | 202,888 | | 10 | | | 192,087 | | 12 | | | 167,152 | | 12 | |
Natural stone | | | 127,975 | | 6 | | | 113,565 | | 7 | | | 104,670 | | 8 | |
Other (1) | | | 9,082 | | — | | | 13,617 | | 1 | | | 9,851 | | — | |
Total | | $ | 2,045,456 | | 100 | % | $ | 1,709,848 | | 100 | % | $ | 1,384,767 | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
in thousands | | December 29,
2022 | | December 30,
2021 | | December 31,
2020 |
| Product Category | | Net Sales | | % of Net Sales | | Net Sales | | % of Net Sales | | Net Sales | | % of
Net Sales |
| Laminate and vinyl | | $ | 1,184,636 | | | 28 | % | | $ | 876,714 | | | 26 | % | | $ | 555,963 | | | 23 | % |
| Tile | | 963,999 | | | 23 | | | 801,101 | | | 23 | | | 605,357 | | | 25 | |
| Decorative accessories and wall tile | | 744,888 | | | 17 | | | 642,697 | | | 19 | | | 464,589 | | | 19 | |
| Installation materials and tools | | 713,127 | | | 17 | | | 558,721 | | | 16 | | | 403,184 | | | 17 | |
| Wood | | 274,528 | | | 6 | | | 259,637 | | | 8 | | | 211,307 | | | 9 | |
| Natural stone | | 212,167 | | | 5 | | | 199,140 | | | 6 | | | 152,665 | | | 6 | |
| Adjacent categories | | 69,820 | | | 2 | | | 54,482 | | | 1 | | | 20,487 | | | 1 | |
Other (1) | | 101,308 | | | 2 | | | 41,041 | | | 1 | | | 12,236 | | | — | |
| Total | | $ | 4,264,473 | | | 100 | % | | $ | 3,433,533 | | | 100 | % | | $ | 2,425,788 | | | 100 | % |
(1)(1) | Other includes delivery revenue less adjustments for deferred revenue, sales return reserves, rewards under our Pro Premier Loyalty program, and other revenue related adjustments that are not allocated on a product-level basis. |
.Other includes delivery, sample, and other product revenue and adjustments for deferred revenue, sales returns reserves, and other revenue related adjustments that are not allocated on a product-level basis.
3. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consistas of December 29, 2022 and December 30, 2021 consisted of the following (in thousands):following:
| | | | | | | | | | | |
| in thousands | December 29,
2022 | | December 30,
2021 |
| Accrued construction in progress new stores | $ | 72,737 | | | $ | 59,771 | |
| Loyalty program liability | 33,818 | | | 20,404 | |
| Sales returns and allowances | 33,284 | | | 36,210 | |
| Wages and payroll tax payable | 26,415 | | | 20,147 | |
| Sales tax payable | 25,253 | | | 25,232 | |
| Accrued incentive compensation | 23,561 | | | 36,705 | |
| Insurance reserve incurred but not reported | 19,635 | | | 14,770 | |
| Unredeemed gift cards | 13,082 | | | 5,334 | |
| Other | 50,234 | | | 30,362 | |
| Accrued expenses and other current liabilities | $ | 298,019 | | | $ | 248,935 | |
Table of Contents
| | | | | | |
| | December 26, | | December 27, |
| | 2019 | | 2018 |
Accrued incentive compensation | | $ | 18,635 | | $ | 12,473 |
Sales tax payable | | | 14,304 | | | 12,046 |
Accrued construction in progress new stores | | | 10,043 | | | 9,421 |
Insurance reserve incurred but not reported | | | 9,399 | | | 8,229 |
Wages and payroll tax payable | | | 8,328 | | | 6,936 |
Loyalty program liability | | | 6,649 | | | 2,274 |
Other | | | 35,449 | | | 30,659 |
Accrued expenses and other current liabilities | | $ | 102,807 | | $ | 82,038 |
Fixed assets as of December
26, 201929, 2022 and December
27, 2018,30, 2021 consisted of the
following (in thousands):
| | | | | | |
| | December 26, | | December 27, |
| | 2019 | | 2018 |
Furniture, fixtures and equipment | | $ | 236,555 | | $ | 174,663 |
Leasehold improvements | | | 321,334 | | | 216,461 |
Computer software and hardware | | | 113,975 | | | 83,628 |
Land | | | 8,715 | | | 5,297 |
Fixed assets, at cost | | | 680,579 | | | 480,049 |
Less: accumulated depreciation and amortization | | | 224,290 | | | 151,683 |
Fixed assets, net | | $ | 456,289 | | $ | 328,366 |
following:
| | | | | | | | | | | |
| in thousands | December 29,
2022 | | December 30,
2021 |
| Leasehold improvements | $ | 653,151 | | | $ | 488,713 | |
| Furniture, fixtures, and equipment | 350,556 | | | 298,519 | |
Buildings and building improvements (1) | 315,343 | | | 133,493 | |
| Computer software and hardware | 158,519 | | | 173,249 | |
| Land | 86,927 | | | 80,509 | |
Construction in process (2) | 145,709 | | | 165,286 | |
| Fixed assets, at cost | 1,710,205 | | | 1,339,769 | |
| Less: accumulated depreciation and amortization | 452,149 | | | 410,686 | |
| Fixed assets, net | $ | 1,258,056 | | | $ | 929,083 | |
(1) Represents buildings and building improvements on land that the Company owns as well as on land that the Company is leasing through ground leases.
(2) To conform to the current period presentation, fixed assets by category for the fiscal year ended December 30, 2021 has been updated within this table to present construction in process as a separate category.
Depreciation and amortization on fixed assets for the fiscal years ended December 26, 2019,29, 2022, December 27, 2018,30, 2021, and December 28, 2017, were $69,856 thousand, $50,478 thousand,31, 2020 was $149.6 million, $113.4 million, and $36,255 thousand,$90.1 million, respectively.
Goodwill and changes in the carrying amount of goodwill are as follows for the periods presented:
| | | | | | | | | | | |
| in thousands | December 29,
2022 | | December 30,
2021 |
| Goodwill, balance at beginning of year | $ | 255,473 | | | $ | 227,447 | |
Acquisitions (1) | — | | | 28,026 | |
| Goodwill, balance at end of year | $ | 255,473 | | | $ | 255,473 | |
(1) Reflects goodwill related to the Spartan acquisition completed in fiscal 2021. See Note 14, “Acquisitions” for additional details.
The
following summarizes the balancesgross carrying amount and accumulated amortization of
identifiableother intangible assets as of December
26, 201929, 2022 and December
27, 2018 (in thousands):30, 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 29, 2022 | | December 30, 2021 |
| in thousands | Gross carrying amount (1) | | Accumulated amortization | | Net carrying value | | Gross carrying amount (1) | | Accumulated amortization | | Net carrying value |
| Amortizable intangible assets: | | | | | | | | | | | |
| Customer relationships | $ | 38,216 | | | $ | (4,728) | | | $ | 33,488 | | | $ | 34,900 | | | $ | (1,697) | | | $ | 33,203 | |
| Non-compete agreement | 300 | | | (104) | | | 196 | | | 300 | | | (37) | | | 263 | |
| Total amortizable intangible assets | 38,516 | | | (4,832) | | | 33,684 | | | 35,200 | | | (1,734) | | | 33,466 | |
| Indefinite-lived intangible assets: | | | | | | | | | | | |
| Trade names | 118,669 | | | — | | | 118,669 | | | 118,469 | | | — | | | 118,469 | |
| Total intangible assets: | $ | 157,185 | | | $ | (4,832) | | | $ | 152,353 | | | $ | 153,669 | | | $ | (1,734) | | | $ | 151,935 | |
(1) Refer to Note 14, “Acquisitions” for details related to intangible assets acquired during fiscal 2022 and fiscal 2021.
Table of Contents | | | | | | | | | | | | | | |
| | December 26, 2019 | | December 27, 2018 |
| | | | Gross | | | | | Gross | | | |
| | Estimated | | Carrying | | Accumulated | | Carrying | | Accumulated |
| | Useful Lives | | Amount | | Amortization | | Amount | | Amortization |
Amortizable intangible asset: | | | | | | | | | | | | | | |
Vendor relationships | | 10 years | | $ | 319 | | $ | (289) | | $ | 319 | | $ | (258) |
Indefinite-lived intangible asset: | | | | | | | | | | | | | | |
Trade names | | | | | 109,269 | | | — | | | 109,269 | | | — |
Total | | | | $ | 109,588 | | $ | (289) | | $ | 109,588 | | $ | (258) |
Amortization expense related to amortizable intangible assets was $3.1 million and $1.7 million for the fiscal years ended December 26, 2019, December 27, 201829, 2022 and December 28, 2017,30, 2021, respectively. Amortization expense related to amortizable intangible assets was $31 thousand, $32 thousand, and $32 thousand, respectively. Estimatedimmaterial for the fiscal year ended December 31, 2020.
As of December 29, 2022, the estimated aggregate future amortizable expense related to other intangible
asset amortization for vendor relationshipsassets is
$30 thousand for fiscal 2020, after which the asset will be fully amortized.
as follows:
| | | | | |
| in thousands | Amount |
| 2023 | $ | 3,250 | |
| 2024 | 3,250 | |
| 2025 | 3,250 | |
| 2026 | 3,185 | |
| 2027 | 3,185 | |
| Thereafter | 17,564 | |
| Total | $ | 33,684 | |
The components of the provision for income taxes are as
follows (in thousands):
| | | | | | | | | |
| | Fiscal Year Ended | | Fiscal Year Ended | | Fiscal Year Ended |
| | December 26, | | December 27, | | December 28, |
| | 2019 | | 2018 | | 2017 |
Current expense / (benefit): | | | | | | | | | |
Federal | | $ | 7,975 | | $ | 5,496 | | $ | (4,097) |
State | | | 2,358 | | | 1,669 | | | 479 |
Total current expense / benefit | | | 10,333 | | | 7,165 | | | (3,618) |
Deferred expense / (benefit): | | | | | | | | | |
Federal | | | (6,522) | | | 922 | | | (250) |
State | | | (4,062) | | | (1,890) | | | (368) |
Total deferred (benefit) / expense | | | (10,584) | | | (968) | | | (618) |
Provision for income taxes | | $ | (251) | | $ | 6,197 | | $ | (4,236) |
follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
in thousands | December 29,
2022 | | December 30,
2021 | | December 31,
2020 |
| Current expense (benefit): | | | | | |
| Federal | $ | 73,463 | | | $ | 37,869 | | | $ | (1,781) | |
| State | 16,489 | | | 9,927 | | | 4,391 | |
| Total current expense | 89,952 | | | 47,796 | | | 2,610 | |
| Deferred expense (benefit): | | | | | |
| Federal | (78) | | | 4,853 | | | 11,684 | |
| State | (2,447) | | | (1,811) | | | (2,070) | |
| Total deferred (benefit) expense | (2,525) | | | 3,042 | | | 9,614 | |
| Provision for income taxes | $ | 87,427 | | | $ | 50,838 | | | $ | 12,224 | |
The following is a summary of the differences between the total provision for income taxes as shown on the financial statements and the provision for income taxes that would result from applying the federal statutory tax rate of 21% for the
fiscal years ended December
26, 201929, 2022, December 30, 2021, and December
27, 2018 (35% for the year ended December 28, 2017)31, 2020 to income before income
taxes (in thousands).
taxes: | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
in thousands | December 29,
2022 | | December 30,
2021 | | December 31,
2020 |
| Computed “expected” provision at statutory rate | $ | 80,984 | | | $ | 70,154 | | | $ | 43,513 | |
State income taxes, net of federal income tax benefit (1) | 11,744 | | | 6,186 | | | 1,493 | |
| Permanent differences: | | | | | |
| Excess tax benefit related to stock-based compensation awards | (3,762) | | | (25,710) | | | (27,003) | |
| Other | 874 | | | 908 | | | 517 | |
| Total permanent differences | (2,888) | | | (24,802) | | | (26,486) | |
| Provision to return | 183 | | | (34) | | | (150) | |
| Federal tax credits | (1,535) | | | (1,471) | | | (920) | |
| CARES Act benefit | — | | | — | | | (7,676) | |
| Uncertain tax positions | (848) | | | 308 | | | 2,724 | |
| Other, net | (213) | | | 497 | | | (274) | |
| Provision for income taxes | $ | 87,427 | | | $ | 50,838 | | | $ | 12,224 | |
| | | | | | | | | |
| | Fiscal Year Ended | | Fiscal Year Ended | | Fiscal Year Ended |
| | December 26, | | December 27, | | December 28, |
| | 2019 | | 2018 | | 2017 |
Computed “expected” provision at statutory rate | | $ | 31,580 | | $ | 25,700 | | $ | 34,499 |
State income taxes, net of federal income tax benefit | | | (1,364) | | | (627) | | | (28) |
Permanent differences: | | | | | | | | | |
Excess tax benefit related to options exercised | | | (29,441) | | | (17,478) | | | (20,762) |
Non-qualified option holder dividend equivalent | | | — | | | — | | | — |
Other | | | 543 | | | 457 | | | 691 |
Total permanent differences | | | (28,898) | | | (17,021) | | | (20,071) |
Change in U.S. tax rate | | | — | | | (573) | | | (17,850) |
Provision to return | | | (282) | | | (739) | | | (63) |
Federal tax credits | | | (1,306) | | | (685) | | | (577) |
Other, net | | | 19 | | | 142 | | | (146) |
Provision for income taxes | | $ | (251) | | $ | 6,197 | | $ | (4,236) |
The permanent differences of $29,441 thousand, $17,478 thousand, and $20,762 thousand in fiscal 2019, fiscal 2018, and fiscal 2017, respectively, are the federal benefits due to the recognition of(1) Includes state excess tax deductions for stock options exercised. In the table above, the 2019, 2018, and 2017 state benefits related to the recognitionstock-based compensation awards for fiscal years 2022, 2021, and 2020 of excess tax benefits of $5.6$0.8 million, $3.3$4.6 million, and $1.0$5.3 million, respectively, are included in state income taxes, net of federal income tax benefit.
The Tax Cuts and Jobs Act (the “Act “), which was enacted on December 22, 2017, reduced the U.S. federal corporate income tax rate from 35% to 21% and created new taxes that may apply on certain foreign sourced earnings. In fiscal 2017 and the first nine months of fiscal 2018, we recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in Staff Accounting Bulletin No. 118 (“SAB 118”). As of December 28, 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, and recorded a provisional amount of $17.9 million. Upon further analysis of certain aspects of the Act and refinement of our calculations prior to the end of the measurement period and during the twelve months ended December 27, 2018, we completed our accounting for all the enactment-date income tax effects of the Act and adjusted our provisional amount by an additional $600 thousand, which was included as a component of income tax expense from continuous operations. The changes to 2017 enactment-date provisional amounts decreased the effective tax rate for the year ended December 27, 2018 by 0.47%.
respectively.
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and (liabilities) are presented below (in thousands):
| | | | | | |
| | Fiscal Year Ended | | Year Ended |
| | December 26, | | December 27, |
| | 2019 | | 2018 |
Deferred tax assets: | | | | | | |
Accruals not currently deductible for tax purposes | | $ | 2,820 | | $ | 13,338 |
Tenant improvement allowances | | | — | | | 9,239 |
Inventories | | | 5,283 | | | 3,948 |
Stock based compensation | | | 3,984 | | | 3,684 |
Other intangibles | | | 313 | | | 361 |
Gift card liability | | | 453 | | | 242 |
Litigation accrual | | | 139 | | | 172 |
Lease liabilities | | | 233,106 | | | — |
Other | | | 3,718 | | | 2,858 |
Total deferred tax assets | | | 249,816 | | | 33,842 |
Deferred tax liabilities: | | | | | | |
Intangible assets | | | (26,939) | | | (27,023) |
Fixed assets | | | (35,576) | | | (30,681) |
Right-of-use assets | | | (203,028) | | | — |
Other | | | (2,651) | | | (2,976) |
Total deferred tax liabilities | | | (268,194) | | | (60,680) |
Net deferred tax liabilities | | $ | (18,378) | | $ | (26,838) |
below:
| | | | | | | | | | | |
| Fiscal Year Ended |
| in thousands | December 29,
2022 | | December 30,
2021 |
| Deferred tax assets: | | | |
| Lease liabilities | $ | 339,972 | | | $ | 308,198 | |
| Accruals not currently deductible for tax purposes | 16,014 | | | 11,622 | |
| Stock-based compensation | 11,320 | | | 8,754 | |
| Inventories | 10,337 | | | 10,711 | |
| Other intangibles | 4,187 | | | 335 | |
| Gift card liability | 3,206 | | | 1,254 | |
Other (1) | 2,608 | | | 5,514 | |
| Total deferred tax assets | 387,644 | | | 346,388 | |
| Deferred tax liabilities: | | | |
| Right-of-use assets | (302,008) | | | (274,151) | |
| Fixed assets | (85,621) | | | (70,289) | |
| Intangible assets | (27,430) | | | (27,198) | |
| Other | (2,840) | | | (5,876) | |
| Total deferred tax liabilities | (417,899) | | | (377,514) | |
| Net deferred tax liabilities | $ | (30,255) | | | $ | (31,126) | |
(1) To conform to the current period presentation, the litigation accrual for December 30, 2021 is presented within other deferred tax assets.
The Company
generated $719 thousandutilized $1.3 million and
$776 thousand$0.2 million of tax-effected state net operating losses in fiscal
20192022 and fiscal
2018,2021, respectively; as of December
26, 2019,29, 2022, approximately
$2.8$0.7 million of tax-effected state net operating losses were available to reduce future income taxes. The state net operating losses expire in various amounts beginning in
fiscal 2032.
In assessing the realization of deferred tax assets, including net operating losses, management considered whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in prior carryback periods, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income exclusive of reversing temporary differences and carryforwards in making this assessment, and accordingly, has concluded that
0no valuation allowance is necessary as of December
26, 201929, 2022 or December
27, 2018.30, 2021.
The Company files income tax returns with the U.S. Federal government and various state jurisdictions. Prior tax years beginning in year 20162018 remain open to examination by the Internal Revenue Service (“IRS”). We are currently underThe Company closed a federal audit bywith the IRS for the 2015 to 2017 tax year. Unrecognizedyears. Foreign, state, and local income tax benefits were $0.4 million asreturns are generally subject to examination for a period of December 26, 2019,three to five years after filing of the respective returns.
Following is a reconciliation of the beginning and there were noending balance of unrecognized tax benefits asfor periods presented:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| in thousands | December 29,
2022 | | December 30,
2021 | | December 31,
2020 |
| Unrecognized tax benefits balance at beginning of fiscal year | $ | 1,073 | | | $ | 6,107 | | | $ | 402 | |
| Additions based on tax positions related to the current year | — | | | 390 | | | 281 | |
| Additions for tax positions of prior years | — | | | — | | | 5,424 | |
| Reductions due to settlements | — | | | (5,424) | | | — | |
| Reductions for tax positions of prior years | (1,073) | | | — | | | — | |
| Unrecognized tax benefits balance at end of fiscal year | $ | — | | | $ | 1,073 | | | $ | 6,107 | |
As of December
27, 201829, 2022 and December
28, 201730, 2021, there were no unrecognized tax benefits that, if recognized, would affect the
Company's effective tax
rate in future periods.rate. The Company's policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense.
The Company recognized $0.6 million of interest expense related to unrecognized tax benefits during fiscal 2020 and no such interest expense during fiscal years 2022 or 2021.
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.
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 was carried back to prior years during which the federal tax rate was 35%, resulting in a $7.7 million income tax benefit during the second quarter of fiscal 2020. The Company also received $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.
Inflation Reduction Act
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. The enactment of this legislation did not have a material impact on the Company’s consolidated financial statements.
7. Fair Value Measurements
We measured
As of December 29, 2022 and December 30, 2021, the Company had certain financial assets and
financial liabilities
on its Consolidated Balance Sheets that were required to be measured at fair value on a recurring
basisor non-recurring basis. The estimated fair values of financial assets and liabilities such as
follows forcash and cash equivalents, receivables, prepaid expenses and other current assets, other assets, accounts payable, and accrued expenses and other current liabilities approximate their respective carrying values as reported within the
periods presented.
| | | | | | | | | | | | |
| | As of | | | | | | | | | |
| | December 26, | | | | | | | | | |
(in thousands) | | 2019 | | Level 1 | | Level 2 | | Level 3 |
Designated as hedges: | | | | | | | | | | | | |
Interest rate cap (cash flow hedge) | | $ | 20 | | $ | — | | $ | 20 | | $ | — |
Not designated as hedges: | | | | | | | | | | | | |
Interest rate cap | | $ | — | | $ | — | | $ | — | | $ | — |
| | | | | | | | | | | | |
| | As of | | | | | | | | | |
| | December 27, | | | | | | | | | |
(in thousands) | | 2018 | | Level 1 | | Level 2 | | Level 3 |
Designated as hedges: | | | | | | | | | | | | |
Interest rate cap (cash flow hedge) | | $ | 1,076 | | $ | — | | $ | 1,076 | | $ | — |
Not designated as hedges: | | | | | | | | | | | | |
Interest rate cap | | $ | 1,075 | | $ | — | | $ | 1,075 | | $ | — |
Our derivative contracts are negotiated with counterparties without going through a public exchange. Accordingly, our fair value assessments give considerationConsolidated Balance Sheets. Refer to the risk of counterparty default (as well as our own credit risk). Our interest rate derivatives consist of interest rate cap contracts and are valued primarily based on data readily observable in public markets.
See Note 1, “Summary of Significant Accounting Policies” and Note 5, “Intangible Assets”14, “Acquisitions” for a discussion of the valuation of goodwill and intangible assets, respectively. See Note 10, “Debt” for discussion of the fair value of the Company’s debt.
The
Recurring Fair Value Measurements
As of December 29, 2022, the contingent earn-out liabilities, primarily related to the Spartan acquisition as described in Note 14, “Acquisitions,” had an aggregate estimated fair
valuesvalue of
$11.0 million, of which $5.8 million is included in other
financial assetsliabilities and
liabilities including cash and cash equivalents, receivables, prepaid expenses and other current assets, other assets, accounts payable, and$5.2 million is included in accrued expenses and other current liabilities
approximate their respective fair values as reported within the Consolidated Balance Sheets.
8. Derivatives The Company’s contingent earn-out liabilities are classified as level 3 within the fair value hierarchy due to the use of unobservable inputs that are significant to their respective valuations. For the fiscal year ended December 29, 2022, $2.5 million was recognized in general and Risk Management
Changes in interest rates impact our resultsadministrative expense within the Consolidated Statements of operations. In an effort to manage our exposure to this risk, we enter into derivative contractsOperations and may adjust our derivative portfolio as market conditions change.
Designated as Cash Flow Hedge
For derivative contracts designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of Accumulated Other Comprehensive Income (“AOCI”) and reclassified into earnings in the same period in which the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the changerelated to increases in the fair value of the hedge does not perfectly offset the changecontingent earn-out liabilities. The table below summarizes changes in contingent earn-out liabilities as of December 29, 2022.
| | | | | |
| in thousands | Contingent Earn-out Liabilities |
| Balance at December 30, 2021 | $ | 10,231 | |
| Acquisitions | 830 | |
| Fair value adjustments | 2,529 | |
| Payments | (2,571) | |
| Balance at December 29, 2022 | $ | 11,019 | |
The Company determined the fair value of the hedged item,contingent earn-out liability with assistance from a third-party valuation specialist using a Monte Carlo valuation method with significant unobservable inputs, including the ineffective portionfollowing weighted-average assumptions as of December 29, 2022, and December 30, 2021:
| | | | | | | | | | | |
| December 29,
2022 | | December 30,
2021 |
| Discount rate | 13.5% | | 11.5% |
| Revenue volatility | 18.6% | | 29.0% |
| EBITDA volatility | 35.0% | | 55.0% |
Interest Rate Cap Contracts
The Company has outstanding interest rate cap contracts that were valued primarily using level 2 inputs based on data readily observable in public markets. The Company's interest rate cap contracts were negotiated with counterparties without going through a public exchange. Accordingly, the
hedge is immediately recognized in earnings.Not Designated as Accounting Hedge
ForCompany's fair value assessments for these derivative contracts de-designatedgave consideration to the risk of counterparty default as accounting hedges,well as the change inCompany's own credit risk. As of December 29, 2022 and December 30, 2021, the total fair value is reflected through earnings. These changes in fair value are mark-to-market adjustments (“MTM adjustments”). MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. The AOCI related to theCompany's interest rate cap prior tocontracts was approximately $5.9 million and $0.5 million, respectively, which are presented as a component of accumulated other comprehensive income within stockholders’ equity on the de-designation is being amortized overConsolidated Balance Sheets net of tax of $1.4 million and less than $0.1 million, respectively.
Non-recurring Fair Value Measurements
Except for the
remaining maturity period.Derivative Positionacquisition-related fair value measurements described in Note 14, “Acquisitions,” there were no assets or liabilities as of December 26, 2019:
| | | | | | | | | | | | | |
| | | | | | | Final Maturity | | Other | | AOCI, Net |
(in thousands) | | Notional Balance | | Date | | Assets | | of Tax |
Designated as hedges: | | | | | | | | | | | | | |
Interest rate cap (cash flow hedge) | | $ | 102,500 | | U.S. dollars | | December 2021 | | $ | 20 | | $ | 236 |
Not designated as hedges: | | | | | | | | | | | | | |
Interest rate cap | | $ | 102,500 | | U.S. dollars | | December 2021 | | $ | — | | $ | (43) |
29, 2022 or December 30, 2021 that resulted from fair value measurements made on a non-recurring basis.Derivative Position as of December 27, 2018:
| | | | | | | | | | | | | |
| | | | | | | Final Maturity | | Other | | AOCI, Net |
(in thousands) | | Notional Balance | | Date | | Assets | | of Tax |
Designated as hedges: | | | | | | | | | | | | | |
Interest rate cap (cash flow hedge) | | $ | 102,500 | | U.S. dollars | | December 2021 | | $ | 1,076 | | $ | 177 |
Not designated as hedges: | | | | | | | | | | | | | |
Interest rate cap | | $ | 102,500 | | U.S. dollars | | December 2021 | | $ | 1,075 | | $ | 9 |
Designated Hedge Gain (Losses)
Gains (losses) related to our designated hedge contracts are as follows:
| | | | | | | | | | | | | | | | | | |
| | Effective Portion Reclassified | | Effective Portion Recognized in |
| | From AOCI to Earnings | | Other Comprehensive Income (Loss) |
| | Fiscal Year Ended | | Fiscal Year Ended |
| | December 26, | | December 27, | | December 28, | | December 26, | | December 27, | | December 28, |
(in thousands) | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
Interest rate cap (cash flow hedge) | | $ | — | | $ | — | | $ | — | | $ | (379) | | $ | 391 | | $ | (381) |
Interest rate swaps (cash flow hedges) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Interest Rate Risk
Our
The Company’s exposure to market risk from adverse changes in interest rates is primarily associated with
ourits long-term debt obligations, which carry variable interest rates. Market risk associated with
ourthe Company’s variable interest rate long-term debt relates to the potential
reduction in fair value and negative impact to future earnings
respectively,and cash flows from an increase in interest rates.
In an effort to manage
our exposure to the risk associated with
our variable interest rate long term debt,
wethe Company periodically
enterenters into interest rate derivative contracts.
We designateThese interest rate derivative contracts
are used to convert the interest rate exposure on a portion of
ourthe Company’s debt portfolio from a floating rate to a capped rate
and are designated as cash flow hedges.
Derivative Position as of December 29, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| in thousands | | Notional Balance | | Final Maturity
Date | | Other Current Assets | | Other
Assets | | AOCI, Net
of Tax |
| Designated as cash flow hedges: | | | | | | | | | | | |
Interest rate cap (1) | | $ | 75,000 | | U.S. dollars | | April 2024 | | $ | 2,275 | | | $ | 654 | | | $ | (2,166) | |
Interest rate cap (1) | | $ | 75,000 | | U.S. dollars | | April 2024 | | $ | 2,278 | | | $ | 656 | | | $ | (2,171) | |
(1)As discussed in Note 10, “Debt,” the Term Loan Facility was amended to transition from an interest rate benchmark based on LIBOR to an interest rate benchmark based on Secured Overnight Financing Rate (“SOFR”). To align with this amendment, the hedged interest rate benchmark index for the interest rate cap contracts was changed from one month LIBOR to one month Term SOFR, and the underlying hedge documentation was updated to reflect this change. As a result of the application of the practical expedients in accordance with ASC 848, Reference Rate Reform, the original hedge designation for the interest cap contracts remains intact, and the Company will continue to apply a qualitative effectiveness assessment method.
Derivative Position as of December 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| in thousands | | Notional Balance | | Final Maturity
Date | | Other Current Assets | | Other
Assets | | AOCI, Net
of Tax |
| Designated as cash flow hedges: | | | | | | | | | | | |
| Interest rate cap | | $ | 75,000 | | U.S. dollars | | April 2024 | | $ | 12 | | | $ | 250 | | | $ | (106) | |
| Interest rate cap | | $ | 75,000 | | U.S. dollars | | April 2024 | | $ | 12 | | | $ | 250 | | | $ | (108) | |
| Interest rate cap | | $ | 102,500 | | U.S. dollars | | December 2021 | | $ | — | | | $ | — | | | $ | (272) | |
| Not designated as hedges: | | | | | | | | | | | |
| Interest rate cap | | $ | 102,500 | | U.S. dollars | | December 2021 | | $ | — | | | $ | — | | | $ | (49) | |
Designated Hedge Gains
Gains related to designated hedge contracts are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Effective Portion Reclassified
From AOCI to Earnings | | Effective Portion Recognized in
Other Comprehensive Income |
| | Fiscal Year Ended | | Fiscal Year Ended |
| (in thousands) | | December 29,
2022 | | December 30,
2021 | | December 31,
2020 | | December 29,
2022 | | December 30,
2021 | | December 31,
2020 |
| Interest rate caps (cash flow hedges) | | $ | 914 | | | $ | — | | | $ | — | | | $ | 4,716 | | | $ | 371 | | | $ | 357 | |
To manage credit risk associated with
ourthe Company’s interest rate
hedging program, we selecthedges, the Company selects counterparties based on their credit ratings and
limit ourlimits exposure to any one counterparty.
The counterparties to
ourthe Company’s derivative contracts are financial institutions with investment grade credit ratings. To manage
our credit risk related to
ourits derivative financial instruments,
wethe Company periodically
monitormonitors the credit risk of
ourits counterparties,
limit ourlimits its exposure in the aggregate and to any single counterparty, and adjust
ourits hedging
position,positions, as appropriate. The impact of credit risk, as well as the ability of each party to fulfill its obligations under
ourthe derivative financial instruments, is considered in determining the fair value of the contracts. Credit risk has not had a significant effect on the fair value of
ourthe Company’s derivative contracts.
WeThe Company’s derivative financial instruments do not have any credit risk-related contingent features or collateral
requirements with our derivative financial instruments.requirements.
9. Commitments and Contingencies
Lease Commitments
In the first quarter of fiscal 2019, we adopted ASU No. 2016-02, “Leases (Topic 842),” which requires that lessees recognize lease assets and lease liabilities
The Company accounts for all leases on the balance sheetin accordance with an option to exclude short-term leases (leases with terms of 12 months or less), which we elected. We adopted ASU No. 2016-02 using the modified retrospective approach and elected the package of ASC 842, Leasespractical 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 $620.8 million of right-of-use assets and a corresponding $683.0 million of 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 ourthe Company’s long-term operating lease agreements are for ourits corporate office, retail locations, and distribution centers, which expire in various years through 2040.2048. 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 thesethe Company's corporate office, retail, and distribution center facilities generally range from 10-15 years, with the exception of 3 buildings which have 20-year initial lease terms. to 20 years. The majority of our buildingthe 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, 1one building lease contains variable lease payments, which are determined based on a percentage of retail sales over a contractual level, and we subleasethe Company subleases real estate within 1one of its distribution centercenters to a third party. Certain of ourthe 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 we havethe Company has the right to control the property. OurThe 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 ourthe business.
When readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of
ourthe Company’s leases do not provide a readily determinable implicit rate. If the rate implicit in the lease is not readily determinable,
we usethe 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-BB credit rating and is adjusted for collateralization as well as inflation.
The table below presents supplemental balance sheet information related to operating leases.
| | | | | |
| | | | As of |
in thousands, except lease term and discount rate | | Classification | | December 26, 2019 |
Assets | | | | | |
Building | | Right-of-use assets | | $ | 808,989 |
Equipment | | Right-of-use assets | | | 7,322 |
Land | | Right-of-use assets | | | 2,378 |
Software | | Right-of-use assets | | | 3,567 |
Total operating lease assets | | | | $ | 822,256 |
Liabilities | | | | | |
Current | | | | | |
Building | | Current portion of lease liabilities | | $ | 67,500 |
Equipment | | Current portion of lease liabilities | | | 3,758 |
Land | | Current portion of lease liabilities | | | 170 |
Software | | Current portion of lease liabilities | | | 3,164 |
Total current operating lease liabilities | | | | | 74,592 |
Noncurrent | | | | | |
Building | | Lease liabilities | | | 837,510 |
Equipment | | Lease liabilities | | | 3,902 |
Land | | Lease liabilities | | | 2,357 |
Software | | Lease liabilities | | | 500 |
Total noncurrent operating lease liabilities | | | | | 844,269 |
Total operating lease liabilities | | | | $ | 918,861 |
| | | | | |
Weighted-average remaining lease term | | | | | 10 years |
Weighted-average discount rate | | | | | 5.3% |
| | | | | | | | | | | | | | | | | | | | |
| in thousands, except lease term and discount rate | | Classification | | As of December 29, 2022 | | As of December 30, 2021 |
| Assets | | | | | | |
| 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 | |
| Liabilities | | | | | | |
| Current | | | | | | |
| 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 | |
| Noncurrent | | | | | | |
| 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% |
The table below presents components of lease expense for operating leases.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fiscal Year Ended |
| in thousands | | Classification | | December 29,
2022 | | December 30,
2021 | | December 31,
2020 |
| 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) | | | | | |
| | | | Fiscal Year Ended |
in thousands | | Classification | | December 26, 2019 |
Operating lease cost (1) | | Selling and store operating | | $ | 116,623 |
Sublease income | | Selling and store operating | | | (2,414) |
Total lease cost | | | | $ | 114,209 |
(1) | Includes variable lease costs, which are immaterial. |
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.
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December
26, 2019, were:
| | | |
in thousands | | Amount |
2020 | | $ | 122,303 |
2021 | | | 127,449 |
2022 | | | 120,091 |
2023 | | | 116,505 |
2024 | | | 113,019 |
Thereafter | | | 622,954 |
Total minimum lease payments (2) | | $ | 1,222,321 |
Less: amount of lease payments representing interest | | | 303,460 |
Present value of future minimum lease payments | | | 918,861 |
Less: current obligations under leases | | | 74,592 |
Long-term lease obligations | | $ | 844,269 |
(2) | Future lease payments exclude approximately $165.8 million of legally binding minimum lease payments for operating leases signed but not yet commenced. |
29, 2022 were as follows: | | | | | | | | |
| in thousands | | Amount |
| 2023 | | $ | 170,669 | |
| 2024 | | 189,116 | |
| 2025 | | 177,156 | |
| 2026 | | 166,350 | |
| 2027 | | 158,809 | |
| Thereafter | | 1,020,281 | |
Total minimum lease payments (1) (2) | | 1,882,381 | |
| Less: amount of lease payments representing interest | | 549,181 | |
| Present value of future minimum lease payments | | 1,333,200 | |
| Less: current obligations under leases | | 105,693 | |
| 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
yearfiscal years ended December
26, 2019,29, 2022, December 30, 2021, and December 31, 2020, cash paid for operating leases was
$112.8 million.Right-of-Use Asset Impairment$178.0 million, $157.9 million, and Write Off
$131.3 million, respectively.
Litigation
On November 15, 2021, the
third quarterCompany 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
fiscal 2019, we beganFort Bend County, Texas. Inspections Now, Inc.; Bestview International Company; and Bestview (Fuzhou) Import & Export Co. LTD are also named as defendants in the
movecase. Plaintiff’s petition alleges that “wood paneling” allegedly purchased from
our former store support centerthe Company was installed in
Smyrna, Georgiathe vicinity of plaintiff’s fireplace and caught fire while the fireplace was lit. The fire consumed plaintiff’s home and resulted in injuries to
a nearby locationplaintiff 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
Atlanta, Georgia. Prior to this period, we expected to fully cover future payments under the operating lease agreement with proceeds from a sublease. As of the end of our fiscal third quarter, we no longer expected to find a sublease tenant that would fully cover these future payments and concluded that the right-of-use asset related to the operating lease was not recoverable. Therefore, we determined the fair value of the right-of-use asset based on a discounted cash flow analysis reflective of the income expected from a sublease. Based on the excess of
the asset’s carrying value over fair value, we recognized an impairment of $4.1$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
third quarter of fiscal 2019 in general and administrative expenses onlawsuit. Intervenor alleges the
Consolidated Statements of Operations and Comprehensive Income.In addition, during the fourth quarter of fiscal 2019, we completed the move to our new location and terminated the lease for our previous store support center facility in Smyrna, Georgia. As a result, we recognized a loss of $1.9 million related to the settlement of our remaining obligations under the lease and the write off of the remaining right-of-use asset for the facility upon lease termination. This loss was recognized in general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.
Litigation
On May 20, 2019, an alleged stockholder of the Company filed a putative class action lawsuit, Taylor v. Floor & Decor Holdings, Inc., et al., No. 1:19-cv-02270-SCJ (N.D. Ga.), in the United States District Court for the Northern District of Georgiasame 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 ourthe 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 August 14, 2019,February 6, 2023, the Court namedCompany, along with the other defendants, filed a lead plaintiff,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 case was re-captionedfactual allegations made in the previously dismissed In re Floor & Decor Holdings, Inc. Securities Litigation, No. 1:19-cv-02270-SCJ (N.D. Ga.).as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The operative complaint alleges certain violations of federal securities laws based on, among other things, purported materially falseseeks unspecified damages and misleading statements and omissions allegedly made byrestitution for the Company between May 23, 2018from the individual defendants and August 1, 2018 and seeks class certification, unspecified monetary damages,the payment of costs and attorneys’ fees and equitable relief. fees.
The
Company denies the material allegations in this lawsuit, which is in the early stages and has not yet been certified as a class, and intends to defend itself vigorously. In addition, the Company maintains insurance that may cover any liability arising out of
thisthe 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,
we arethe 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
thisthe above-referenced litigation.
We are
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
ourits business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined.
We establishThe Company establishes reserves for specific legal proceedings when
we determineit 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
ourthe Company's consolidated financial position, cash flows, or results of operations, however regardless of the outcome, litigation can have an adverse impact on
usthe Company because of defense and settlement costs, diversion of management resources, and other factors.
The following table summarizes
ourthe Company's long-term debt as of December
26, 2019 (dollars in thousands):29, 2022 and December 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| in thousands | Maturity Date | | Interest Rate Per Annum at December 29,
2022 (1) | | December 29,
2022 | | December 30,
2021 |
| Credit Facilities: | | | | | | | | |
| Term Loan Facility | February 14, 2027 | | 6.09% | Variable | | $ | 204,499 | | | $ | 206,602 | |
| Asset-based Loan Facility (“ABL”) | August 4, 2027 | | 5.45% | Variable | | 210,200 | | | — | |
| Total secured debt at par value | | | | | | 414,699 | | | 206,602 | |
| Less: current maturities | | | | | | 2,103 | | | 2,103 | |
| Long-term debt maturities | | | | | | 412,596 | | | 204,499 | |
| Less: unamortized discount and debt issuance costs | | | | | | 7,045 | | | 8,737 | |
| Total long-term debt | | | | | | $ | 405,551 | | | $ | 195,762 | |
(1) | | | | | | | | | | | | |
| | | | Interest Rate Per | | | | | | |
| | | | Annum at | | | | | | |
| | Maturity | | December 26, | | December 26, | | December 27, |
| | Date | | 2019 | | 2019 | | 2018 |
Credit Facilities: | | | | | | | | | | | | |
UBS Facility Term Loan B | | September 30, 2023 | | 4.77 | % | Variable | | $ | 145,500 | | $ | 149,000 |
Wells Facility Revolving Line of Credit | | September 30, 2021 | | 4.25 | % | Variable | | | — | | | — |
Total secured debt | | | | | | | | | 145,500 | | | 149,000 |
Less: current maturities | | | | | | | | | — | | | 3,500 |
Long-term debt maturities | | | | | | | | | 145,500 | | | 145,500 |
Less: unamortized discount and debt issuance costs | | | | | | | | | 2,894 | | | 3,666 |
Total long-term debt | | | | | | | | $ | 142,606 | | $ | 141,834 |
RepaymentThe applicable interest rate for the Term Loan Facility as presented herein does not include the effect of Debt with Proceeds from Initial Public Offeringinterest rate cap agreements.
The following table summarizes scheduled maturities of the Company’s debt as of December 29, 2022:
| | | | | |
| in thousands | Amount |
| 2023 | $ | 2,103 | |
| 2024 | 2,103 | |
| 2025 | 2,103 | |
| 2026 | 2,629 | |
| 2027 | 405,761 | |
| |
| Total minimum debt payments | $ | 414,699 | |
Components of interest expense are as follows for the periods presented:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| in thousands | December 29,
2022 | | December 30,
2021 | | December 31,
2020 |
| Total interest costs, net of interest income | $ | 14,942 | | | $ | 7,657 | | | $ | 9,606 | |
| Interest capitalized | 3,804 | | | 2,733 | | | 1,217 | |
| Interest expense, net | $ | 11,138 | | | $ | 4,924 | | | $ | 8,389 | |
Term Loan Facility
On May 2, 2017,November 15, 2022, the Company completed its initial public offering (“IPO”), pursuant to which it sold an aggregate of 10,147,025 shares of Class A common stock, par value $0.001 per share (after giving effectentered into a sixth amendment to the underwriters’ exercise in full of their optioncredit agreement governing its senior secured term loan facility (as amended, the “Term Loan Facility”) to purchase additional shares)transition the benchmark interest rate for borrowings from an interest rate benchmark based on LIBOR to an interest rate benchmark based on SOFR.
The Term Loan Facility bears interest at a pricerate equal to either (a) a base rate determined by reference to the highest of $21.00 per share.(1) the “Prime Rate,” (2) the U.S. federal funds rate plus 0.5% and (3) one-month Term SOFR plus 1.0%, or (b) Adjusted Term SOFR, plus, in each case, the applicable margin (each term as defined in the Term Loan Facility credit agreement).
The applicable margin base rate loans will be between 1.00% and 1.25%, and the applicable margin for SOFR loans will be between 2.00% and 2.25% (subject to a floor of 0.00%), in each case, if the Company exceeds certain leverage ratio tests. Other than the transition of the benchmark interest rate from Adjusted LIBOR Rate to Adjusted Term SOFR, the applicable margin, maturity date, and lender affiliate base remained unchanged. The Company received aggregate net proceeds of approximately $192.0 million after deducting underwriting discountsevaluated the amendment in accordance with ASC 470-50, “Debt - Modifications and commissions and other offering expenses.Extinguishments
,” concluding the amendment represented a modification. The Company used net proceeds fromincurred immaterial administrative costs to execute the IPO of approximately $192.0 million to repay a portion of the amounts outstandingamendment which were expensed as incurred. All obligations under the Term Loan Facility
including accruedare secured by (1) a first-priority security interest in substantially all of the property and
unpaid interest. The partial paydown resulted in a loss on extinguishmentassets of
debt inOutlets and the
amount of approximately $5.4 million related to unamortized original issue discount and unamortized deferred debt issuance costs.Term Loan Facility
As of December 26, 2019,other guarantors under the Term Loan Facility, hadwith certain exceptions, and (2) a second-priority security interest in the collateral securing the ABL Facility.
Gain on Debt Extinguishment
During the second quarter of fiscal 2020, the Company evaluated an outstanding balance of $145.5 million, all due and payable at maturity. The Term Loan Facility matures on September 30, 2023.
As of December 26, 2019,amendment to the Term Loan Facility borein 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 during the second quarter of fiscal 2020, 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.
ABL Facility
On August 4, 2022, the Company entered into an amendment to the ABL Facility, which, among other things, (a) increased the Company’s revolving commitments to a total aggregate principal amount of $800 million, (b) allows for the Company, under certain circumstances, to increase the size of the facility by an additional amount of up to $200 million, (c) extended the stated maturity date of the ABL Facility to August 4, 2027, and (d) transitions the benchmark interest rate for borrowings from an interest rate benchmark based on oneLIBOR to an interest rate benchmark based on SOFR.
Table of the following rates, at the Company’s option: | i)
| Adjusted LIBOR Rate plus a margin of 2.50%
|
| ii)
| Base Rate plus a margin of 1.50%. Base Rate defined as the greater of the following:
|
| (a)
| the base rate in effect on such day,
|
| (b)
| the federal funds rate plus 0.50%,
|
| (c)
| the adjusted LIBOR rate for the interest period of one month plus a margin of 1.00%
|
ABL FacilityContents
As of December 26, 2019,29, 2022, the Company's ABL Facility had a maximum availability of $300.0$800.0 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 product of anapplicable appraisal percentage, multiplied by the appraised value of eligible inventory, 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 (as(each component as defined in the credit agreement governing the ABL Facility). The ABL Facility has a maturity date of August 4, 2027 and is available for issuance of letters of credit and contains $30.0a sublimit of $50.0 million for standby letters of credit and commercial letters of credit.credit combined. Available borrowings under the facility are reduced by the face amount of outstanding letters of credit. The
All obligations under the ABL Facility
matures on September 30, 2021. Asare secured by (1) a first-priority security interest in the cash and cash equivalents, accounts receivable, inventory, and related assets of
December 26, 2019,Outlets and the
borrowings bearother guarantors under the ABL Facility, with certain exceptions, and (2) a second-priority security interest
at a floating rate, which is based on onein substantially all of the
following rates atother property and assets of Outlets and the
option ofother guarantors under the
Company: | i)
| LIBOR Rate plus a margin percentage ranging from 1.25% to 1.50% based on the level of borrowings or
|
| ii)
| Base Rate plus a margin (ranging from 0.25% to 0.50% based on the level of borrowings). The Base Rate is defined as the highest of the following:
|
| (a)
| the federal funds rate plus 0.50%,
|
| (b)
| Adjusted LIBOR Rate plus 1.00%, or
|
| (c)
| the lender’s prime rate
|
As of December 26, 2019, the Company had netTerm Loan Facility.
Net availability under the ABL Facility,
as reduced by outstanding borrowings of
$279,488 thousand, including outstanding$210.2 million and letters of credit of
$20,512 thousand. The total minimum debt payment$33.3 million, was $556.5 million based on financial data as of
$145,500 thousand is due at maturity in 2023.December 29, 2022.
The credit agreements governing
our Credit Facilitiesthe Term Loan Facility and ABL Facility contain customary restrictive covenants,
that,which, among other things and with certain exceptions, limit the
Company’s ability
of the Company to (i) incur additional indebtedness and liens in connection with such
indebtedness;indebtedness, (ii) pay dividends and make certain other restricted
payments;payments, (iii) effect mergers or
consolidations;consolidations, (iv) enter into transactions with
affiliates;affiliates, (v) sell or dispose of property or assets, and (vi) engage in unrelated lines of business. In addition, these credit agreements subject
usthe Company to certain reporting obligations and require that
wethe Company satisfy certain financial covenants, including, among other
things:things, a requirement that if borrowings under the ABL Facility exceed 90% of availability, wethe Company will maintain a certain fixed charge coverage ratio (defined as consolidatedConsolidated EBITDA less non-financed capital expenditures and income taxes paid to consolidated fixed charges, in each case as more fully defined in the credit agreement governing the ABL Facility).
The Term Loan Facility has no financial maintenance covenants. As of December 26, 2019, we wereThe Company is currently in compliance with all covenants under the covenants of the Credit Facilities.credit agreements.
Deferred Debt Issuance CostCosts and Original Issue Discount
Discounts
Deferred debt issuance
costcosts related to
ourthe ABL Facility
and our prior asset-based revolving credit facility of $574 thousand and $902 thousandwere approximately $2.2 million as of December
26, 201929, 2022 and
$0.8 million as of December
27, 2018, respectively,30, 2021 and are included in other assets on
ourthe Consolidated Balance Sheets. Deferred debt issuance
costcosts and original issue
discountdiscounts related to
ourthe Term Loan Facility
of $2,894 thousand and $3,666 thousandwere $7.0 million as of December
26, 201929, 2022 and
$8.7 million as of December
27, 2018, respectively,30, 2021 and are included in term loans on
ourthe Consolidated Balance Sheets.
Amortization expense was $1,100 thousand, $1,045 thousand, and $1,205 thousand forFor the
fiscal years ended December
26, 2019,29, 2022, December
27, 2018,30, 2021, and December
28, 2017, respectively.31, 2020, deferred debt issuance and original issue discount amortization expense was $2.0 million, $1.9 million, and $1.4 million, respectively, and is included in interest expense, net on the Company’s Consolidated Statements of Operations and Comprehensive Income.
Fair Value of Debt
The fair values of certain of the Company’s debt instruments have been determined by utilizing Level 3 inputs, such as available market information and appropriate valuation methodologies, including the rates for similar instruments and the discounted cash flows methodology.
Market risk associated with
our fixed and variable ratethe Company’s 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
wasis based primarily on
discounted cash flows utilizing estimatedthe Company’s estimates of interest rates, maturities, credit risk, and underlying
collateral and is classified primarily as Level 3 within the fair value hierarchy.collateral. At December
26, 201929, 2022 and December
27, 2018,30, 2021, the fair values of the Company’s debt are as
follows (in thousands):follows:
| | | | | | |
| | December 26, | | December 27, |
in thousands | | 2019 | | 2018 |
Total debt at par value | | $ | 145,500 | | $ | 149,000 |
Less: unamortized discount and debt issuance costs | | | 2,894 | | | 3,666 |
Net carrying amount | | $ | 142,606 | | $ | 145,334 |
Fair value | | $ | 145,136 | | $ | 147,883 |
| | | | | | | | | | | | | | | | | |
| in thousands | Fair Value Hierarchy Classification | | December 29,
2022 | | December 30,
2021 |
| Term Loan Facility | Level 3 | | $ | 196,575 | | | $ | 202,986 | |
| ABL Facility | Level 2 | | $ | 210,200 | | | $ | — | |
| Total | | | $ | 406,775 | | | $ | 202,986 | |
Term Loan Facility fair value is classified as Level 3 within the fair value hierarchy due to the use of unobservable inputs significant to the valuation, including indicative pricing from counterparties and discounted cash flow methods. The carrying amount of the borrowings under the ABL facility approximates its fair value as its variable interest rates are based on prevailing market rates, which are a Level 2 input.
The Company has
3three classes of common stock: Class A, Class B, and Class C. The holders of Class A common stock, Class B common stock, and Class C common stock are entitled to share equally, on a per share basis, in dividends or other distributions. Class A common stockholders are entitled to
1one vote per share held. Class B and Class
C common stockholders have 0no voting rights, except as otherwise provided by law. In the event of the voluntary liquidation or dissolution of the Company, each class of stock will share equally, on a per share basis, in all the assets of the Company that are available for distribution to stockholders.Conversion Features
Secondary Offerings
On
May 2, 2017, all of the Class B common stock outstanding shares were converted to Class A common stock upon completionAugust 13, 2020, certain of the Company’s
initialstockholders completed a secondary public
offering.offering (the “August Secondary Offering”) of an aggregate of 5,686,422 shares of common stock at a price to the public of $67.60 per share. The Company did not sell any shares in the August Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.
On
July 26, 2017, allMay 22, 2020, certain of the
outstandingCompany’s stockholders completed a secondary public offering (the “May 2020 Secondary Offering”) of an aggregate of 4,972,900 shares of
Class C common stock
were convertedat a price to
Class A common stock.the public of $44.55 per share. The Company did not sell any shares in the May 2020 Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.
On January 13, 2011, the Company adopted the 2011 Stock Option Plan (as amended, restated, supplemented or otherwise modified from time to time, the “2011 Plan”) to provide for the grant of stock options to employees (including officers), consultants and non-employee directors of the Company and its subsidiaries. Pursuant to the terms of the 2011 Plan, the Company was authorized to grant options for the purchase of up to 12,520,407 shares as of December 29, 2016 and 10,780,970 shares as of December 31, 2015. As of December 29, 2016 and December 31, 2015, there were 179,575 and 104,269 shares available for grant pursuant to awards under the 2011 Plan, respectively.
We The Company ceased granting awards under the 2011 Plan upon the implementation of the 2017 Plan described below.
(as defined below).On April 13, 2017, the board of directors approved the Floor & Decor Holdings, Inc. 2017 Stock Incentive Plan (the “2017 Plan”), which was subsequently approved by the Company’s stockholders. The 2017 Plan authorizes the Company to grant options and restricted stock awards to eligible employees (including(including officers), consultants, and non-employee directors up to an aggregate of 5,000,000 shares of Class A common stock. In connection with the IPO, the Company granted options to purchase an aggregate of 1,254,465 shares of our Class A common stock to certain of our eligible employees and 15,475 shares of restricted stock to certain of our non-employee directors, in each case pursuant to the 2017 Plan and based on the public offering price of $21.00 per share. As of December 26, 201929, 2022 and December 27, 2018,30, 2021, there were 2,806,5491,745,649 and 2,850,7681,926,142 shares available for grant pursuant to awards under the 2017 Plan, respectively.
Secondary Offerings
On July 25, 2017, certain of the Company’s stockholders completed a secondary public offering (the “July Secondary Offering”) of an aggregate of 10,718,550 shares of common stock at a price to the public of $40.00 per share. The Company did not sell any shares in the July Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.
On November 20, 2017, certain of the Company’s stockholders completed a secondary public offering (the “November Secondary Offering”) of an aggregate of 7,475,000 shares of common stock at a price to the public of $36.00 per share. The Company did not sell any shares in the November Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.
On May 29, 2018, certain of the Company’s stockholders completed a secondary public offering (the “May Secondary Offering”) of an aggregate of 10,000,000 shares of common stock at a price to the public of $45.80 per share. The Company did not sell any shares in the May Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.
On September 14, 2018, certain of the Company’s stockholders completed a secondary public offering (the “September Secondary Offering”) of an aggregate of 11,500,000 shares of common stock at a price to the public of $37.25 per share. The Company did not sell any shares in the September Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.
On February 28, 2019, certain of the Company’s certain of the Company’s stockholders completed a secondary public offering (the “February Secondary Offering”) of an aggregate of 10,000,000 shares of common stock at a price to the public of $37.50 per share. The Company did not sell any shares in the February Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.
Stock Options
Stock-based Compensation
The Company accounts for stock-based compensation
pursuant toin accordance with ASC
718, Compensation – Stock Compensation, which requires measurement of718. The Company measures compensation cost for all
stockstock-based awards at fair value on the date of grant and
recognition ofrecognizes compensation
expense, net of forfeitures,
using the straight-line method over the requisite service period
forof awards expected to
vest.vest, which for each of the awards is the service vesting period.
The table below presents components of stock-based compensation expense within the Company’s Consolidated Statements of Operations and Comprehensive Income:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| in thousands | December 29,
2022 | | December 30,
2021 | | December 31,
2020 |
| General and administrative | $ | 21,665 | | | $ | 20,528 | | | $ | 16,115 | |
| Selling and store operating | 568 | | | — | | | — | |
| Total stock-based compensation expense | $ | 22,233 | | | $ | 20,528 | | | $ | 16,115 | |
Stock Options
Stock options are granted with an exercise price
greater than or equal to the
fair market valueclosing price of the Company’s Class A common stock on the date of grant, as authorized by the Company’s board of directors or compensation committee. Options granted have
contractual terms of ten years and vesting provisions ranging from
one year to five
years, and contractual terms of ten years. Stock option grants are generally subject to forfeiture if employment terminates prior to vesting.
The fair value
No stock options were granted during fiscal 2022. During fiscal years 2021 and 2020, stock option
awards granted wasaward grant date fair values were estimated using the
Black-ScholesBlack-Scholes-Merton option pricing model with the following weighted-average assumptions:
| | | | | | | |
| | Fiscal Year Ended | | Fiscal Year Ended | | Fiscal Year Ended | |
| | December 26, | | December 27, | | December 28, | |
| | 2019 | | 2018 | | 2017 | |
Risk-free interest rate | | 2.06 | % | 3.05 | % | 2.06 | % |
Expected volatility | | 45 | % | 42 | % | 39 | % |
Expected life (in years) | | 6.68 | | 6.29 | | 6.50 | |
Dividend yield | | — | % | — | % | — | % |
| | | | | | | | | | | |
| Fiscal Year Ended |
| December 30,
2021 | | December 31,
2020 |
| Weighted average fair value per stock option | $ | 41.75 | | $ | 22.27 |
| Risk-free interest rate | 0.80% | | 1.17% |
| Expected volatility | 48% | | 39% |
| Expected life (in years) | 5.40 | | 5.75 |
| Dividend yield | —% | | —% |
The Company estimatesdetermines the volatilitygrant date fair value of stock options with assistance from a third-party valuation specialist. The risk-free interest rate is based on the term structure of interest rates at the time of the share priceoption grant and is determined using the risk-free interest rate on the yield of its common stock by consideringa zero coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant. Expected volatility is estimated based on the historical volatility of the Company’s Class A common stock since its initial public offering in 2017 as well as the historical volatility of the common stock of similar public entities. InThe Company considers various factors in determining the appropriateness of the public entities includedused in thedetermining expected volatility, assumption, the Company considered a number of factors, including the entity’sentity's life cycle stage, industry, growth profile, size, financial leverage, and products offered.
To determine the expected life of the options granted, the Company relies upon a combination of the observed exercise behavior of prior grants with similar characteristics and the contractual terms and vesting schedules of the current grants. The Company estimates the dividend yield to be zero as it does not intend to pay dividends during the respective lives of the options.
The table below summarizes
the changes in stock
optionsoption activity for the
following periods:fiscal year ended December 29, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted
Average
Exercise
Price | | Weighted Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding at December 31, 2021 | 2,503,654 | | | $ | 26.81 | | | | | |
| Exercised | (352,455) | | | 21.54 | | | | | |
| Forfeited or expired | (49,640) | | | 52.00 | | | | | |
| Outstanding at December 29, 2022 | 2,101,559 | | | $ | 27.10 | | | 4.8 | | $ | 93,730 | |
| Vested and exercisable at December 29, 2022 | 1,885,661 | | | $ | 23.08 | | | 4.5 | | $ | 90,713 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | Weighted |
| | | | | | | | | Weighted | | Average Fair |
| | | | Weighted | | Options | | Average | | Value/Share of |
| | | | Average | | Exercisable | | Exercise Price | | Options |
| | | | Exercise | | at End | | of Exercisable | | Granted During |
| | Options | | Price | | of Year | | Options | | the Year |
Outstanding at December 29, 2016 | | 11,979,111 | | $ | 5.34 | | 8,151,056 | | $ | 4.20 | | $ | — |
Granted | | 1,339,668 | | | 21.68 | | — | | | — | | | 9.20 |
Exercised | | (1,828,339) | | | 4.85 | | — | | | — | | | — |
Forfeited or expired | | (236,354) | | | 9.17 | | — | | | — | | | — |
Outstanding at December 28, 2017 | | 11,254,086 | | | 7.28 | | 7,448,532 | | | 4.52 | | | — |
Granted | | 926,775 | | | 34.07 | | — | | | — | | | 15.63 |
Exercised | | (2,069,195) | | | 5.09 | | — | | | — | | | — |
Forfeited or expired | | (258,838) | | | 13.12 | | — | | | — | | | — |
Outstanding at December 27, 2018 | | 9,852,828 | | | 10.11 | | 6,409,257 | | | 5.21 | | | — |
Granted | | 157,904 | | | 42.42 | | — | | | — | | | 20.38 |
Exercised | | (3,740,749) | | | 5.03 | | — | | | — | | | — |
Forfeited or expired | | (232,904) | | | 21.97 | | — | | | — | | | — |
Outstanding at December 26, 2019 | | 6,037,079 | | $ | 13.64 | | 3,673,657 | | $ | 8.25 | | $ | — |
The intrinsic value for stock options is defined as the difference between the exercise price and the value of the Company’s common stock (on a minority, non-marketable basis). The per share value of the Company’s common stock as of December 26, 2019, was $50.30. The intrinsicfair value of stock options exercised was $146,625 thousand and $87,151 thousand forvested during the fiscal years ended December 26, 201929, 2022, December 30, 2021, and December 27, 2018,31, 2020 was $7.9 million, $8.8 million, and $7.5 million, respectively. The aggregate intrinsic value of stock options outstanding as ofexercised was $20.4 million, $126.6 million, and $135.5 million for the fiscal years ended December 26, 2019, was $221,303 thousand with a weighted-average remaining contractual life of 5.4 years. The aggregate intrinsic value of stock options exercisable as of29, 2022, December 26, 2019, was $154,483 thousand with a weighted-average remaining contractual life of 4.0 years. 30, 2021, and December 31, 2020, respectively.
The Company’s total unrecognized compensation cost related to stock options as of December
26, 2019,29, 2022 and December 30, 2021 was
$19,126 thousand, which$3.3 million and $9.7 million, respectively. The unrecognized compensation cost remaining as of December 29, 2022 is expected to be recognized over a weighted average period of
2.71.5 years.
During the fiscal 2019, weyear ended December 29, 2022, the Company granted 24,207 shares ofservice-based restricted stock units (“RSUs”) to certain employees, executive officers, and non-employee directors and performance-based restricted stock units (“PSUs”) to certain executive officers that represent an executive employee. Restrictedunfunded, unsecured right to receive a share of the Company’s Class A common stock upon vesting. The RSUs granted have vesting provisionsduring the period vest in three ratable annual installments on each of 25% on the third anniversaryfirst three anniversaries of the grant date, and 75%subject to the grantee’s continued service through the applicable vesting date. The PSUs granted during the period cliff vest after a three-year period based on the fourth anniversaryachievement of specific targets for adjusted EBIT (earnings before interest and taxes) growth and return on invested capital, subject to the grantee’s continued service through the applicable vesting date. Based on the extent to
which the performance goals are achieved, vested shares may range from 0% to 200% of the grant date,target award amount, and the aggregateCompany assesses the probability of achieving these performance goals on a quarterly basis. The fair valuevalues of the service-based and performance-based restricted stock outstanding asunits were determined based on the closing price of December 26, 2019 was $1,863 thousand. Asthe Company’s Class A common stock on the date of December 26, 2019, there were 37,032 sharesgrant.
The following table summarizes restricted stock outstanding. unit activity during the fiscal year ended December 29, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Stock Units |
| Service-based | | Performance-based |
| Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| Unvested at December 31, 2021 | 214,778 | | | $ | 82.80 | | | — | | | $ | — | |
| Granted | 283,585 | | | 91.88 | | | 36,566 | | | 95.62 | |
| Vested | (59,096) | | | 79.87 | | | — | | | — | |
| Forfeited | (30,438) | | | 91.55 | | | (449) | | | 95.62 | |
| Unvested at December 29, 2022 | 408,829 | | | $ | 88.85 | | | 36,117 | | | $ | 95.62 | |
The
Company’s total unrecognized compensation cost related to restricted stock
units as of December
26, 2019,29, 2022 and December 30, 2021 was
$1,093 thousand, which$26.0 million and $14.0 million, respectively. The unrecognized compensation cost remaining as of December 29, 2022 is expected to be recognized over a weighted average period of
2.92.2 years.
During fiscal 2018, we granted 10,165 shares of restricted stock to certain of our non-employee directors. Restricted stock granted have vesting provisions ranging from two to four years, and the aggregate
The total fair value of restricted stock outstanding asunits that vested during the fiscal years ended December 29, 2022 and December 30, 2021 was $5.3 million and $2.9 million, respectively. There were no restricted stock units that vested during the fiscal year ended December 31, 2020.
Restricted Stock Awards
The following table summarizes restricted stock award activity during the fiscal year ended December 29, 2022 (no restricted stock awards were granted during fiscal 2022):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Stock Awards |
| Service-based | | Performance-based | | Total shareholder return |
| Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| Unvested at December 31, 2021 | 144,725 | | | $ | 62.92 | | | 160,315 | | | $ | 57.70 | | | 104,456 | | | $ | 44.28 | |
| Vested | (25,204) | | | 78.50 | | | — | | | — | | | — | | | — | |
| Forfeited | (16,195) | | | 62.53 | | | (25,997) | | | 57.70 | | | (16,939) | | | 44.28 | |
| Unvested at December 29, 2022 | 103,326 | | | $ | 59.18 | | | 134,318 | | | $ | 57.70 | | | 87,517 | | | $ | 44.28 | |
The fair value of
December 27, 2018, was $566 thousand.performance-based and service-based restricted stock awards is based on the closing market price of the Company's Class A common stock on the date of grant. The fair value of the total shareholder return awards is estimated on grant date using the Monte Carlo valuation method. Compensation cost for restricted stock awards is recognized using the straight-line method over the requisite service period, which for each of the awards is the service vesting period. As of December
27, 2018, there were 21,775 shares of restricted stock outstanding. The Company’s29, 2022 and December 30, 2021, total unrecognized compensation cost related to
unvested restricted stock
awards was $3.2 million and $10.9 million, respectively. The unrecognized compensation cost remaining as of December
27, 2018, was $489 thousand, which29, 2022 is expected to be recognized over a weighted average period of
2.01.2 years.
During fiscal 2017, we granted 15,475 shares of restricted stock to certain of our non-employee directors. Restricted stock granted had vesting provisions of four years, and the aggregate
The total fair value of restricted stock outstanding as ofawards that vested during the fiscal years ended December 28, 2017,29, 2022, December 30, 2021, and December 31, 2020 was $767 thousand. As of December 28, 2017, there were 15,475 shares of restricted stock outstanding. The Company’s total unrecognized compensation cost related to restricted stock as of December 28, 2017, was $270 thousand, which is expected to be recognized over a weighted average period of 3.3 years.$2.2 million, $1.4 million, and $0.5 million, respectively.
Employee Stock Purchase Plan
At our 2018 annual meeting of stockholders held on May 17, 2018, our stockholders approved the Floor & Decor Holdings, Inc.
The 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 is a tax-qualified plan under Section 423 of the Internal Revenue Code and
it permits eligible employees to purchase shares of
ourthe Company’s common stock through payroll deductions, subject to certain limitations. The Company has designated a purchase price per share of common stock acquired under the ESPP at the lesser of 90% of the lower of the fair market value of
ourits common stock on either the first or last trading day of each
six-monthsix-month offering period. There are 1,500,000 shares of
ourthe Company’s Class A common stock, par value $0.001 per share, approved for issuance under the ESPP,
104,36362,274, 46,273, and 56,389 of which were issued during fiscal
2019.years 2022, 2021, and 2020, respectively. During fiscal
2019years 2022, 2021, and
fiscal 2018,2020, the Company recognized
$523 thousand and $333 thousand of stock-based compensation expense related to the ESPP
totaling $1.2 million, $1.0 million, and $0.7 million, respectively.
Deferred Compensation Plan
In October 2019, the Company adopted the 2019 Director Nonqualified Excess Plan (the “Plan”) to provide for certain employees or independent contractors of the employer (including directors) to elect to defer compensation, including restricted stock grants, until they separate from service. The Plan is intended to be a nonqualified deferred compensation plan that complies with the provisions of Section 409A of the Internal Revenue Code and is effective for compensation starting in fiscal 2020.
Deferrals and related compensation expense under the Plan were immaterial in fiscal years 2022, 2021, and 2020.
Net Income per Common Share
We calculate
The Company calculates 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.share-based awards.
The following table shows the computation of basic and diluted earnings per share for the periods presented:
| | | | | | | | | |
| | Fiscal Year Ended | | Fiscal Year Ended | | Fiscal Year Ended |
| | December 26, | | December 27, | | December 28, |
in thousands, except per share data | | 2019 | | 2018 | | 2017 |
Net income | | $ | 150,631 | | $ | 116,187 | | $ | 102,788 |
Basic weighted average shares outstanding | | | 99,435 | | | 96,770 | | | 90,951 |
Dilutive effect of share based awards | | | 5,527 | | | 7,791 | | | 8,709 |
Diluted weighted average shares outstanding | | | 104,962 | | | 104,561 | | | 99,660 |
Basic earnings per share | | $ | 1.51 | | $ | 1.20 | | $ | 1.13 |
Diluted earnings per share | | $ | 1.44 | | $ | 1.11 | | $ | 1.03 |
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| in thousands, except per share data | | December 29,
2022 | | December 30,
2021 | | December 31,
2020 |
| Net income | | $ | 298,195 | | | $ | 283,230 | | | $ | 194,981 | |
| Basic weighted average shares outstanding | | 105,626 | | | 104,683 | | | 102,690 | |
| Dilutive effect of share-based awards | | 1,817 | | | 2,707 | | | 3,452 | |
| Diluted weighted average shares outstanding | | 107,443 | | | 107,390 | | | 106,142 | |
| Basic earnings per share | | $ | 2.82 | | | $ | 2.71 | | | $ | 1.90 | |
| Diluted earnings per share | | $ | 2.78 | | | $ | 2.64 | | | $ | 1.84 | |
The following potentially dilutive securities were excluded from the
calculationcomputation of diluted earnings per share as a result of their anti-dilutive effect:
| | | | | |
| Fiscal Year Ended | | Fiscal Year Ended | | Fiscal Year Ended |
| December 26, | | December 27, | | December 28, |
in thousands | 2019 | | 2018 | | 2017 |
Stock options | 971 | | 298 | | 849 |
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| in thousands | | December 29,
2022 | | December 30,
2021 | | December 31,
2020 |
| Stock options | | 69 | | | 71 | | | 320 | |
| Restricted stock units | | 267 | | | — | | | — | |
13. Selected Quarterly Financial Information (unaudited)
The following tables present the Company’s unaudited quarterly results for fiscal
20192022 and fiscal
2018.
| | | | | | | | | | | | |
| | Fiscal 2019 |
(in thousands, except per share data) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
Net sales | | $ | 477,050 | | $ | 520,311 | | $ | 521,093 | | $ | 527,002 |
Gross profit | | | 201,374 | | | 217,823 | | | 213,788 | | | 230,029 |
Net income | | | 30,720 | | | 43,596 | | | 40,974 | | | 35,341 |
Basic earnings per share | | | 0.31 | | | 0.44 | | | 0.41 | | | 0.35 |
Diluted earnings per share | | | 0.29 | | | 0.42 | | | 0.39 | | | 0.34 |
| | | | | | | | | | | | |
| | Fiscal 2018 |
(in thousands, except per share data) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
Net sales | | $ | 402,948 | | $ | 434,279 | | $ | 435,882 | | $ | 436,739 |
Gross profit | | | 165,386 | | | 177,638 | | | 178,226 | | | 181,018 |
Net income | | | 31,871 | | | 39,846 | | | 26,568 | | | 17,902 |
Basic earnings per share | | | 0.33 | | | 0.41 | | | 0.27 | | | 0.18 |
Diluted earnings per share | | | 0.30 | | | 0.38 | | | 0.25 | | | 0.17 |
2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal 2022 |
| in thousands, except per share data | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Net sales | | $ | 1,028,734 | | | $ | 1,089,846 | | | $ | 1,097,824 | | | $ | 1,048,069 | |
| Gross profit | | 408,058 | | | 436,282 | | | 447,475 | | | 435,901 | |
| Net income | | 70,951 | | | 81,832 | | | 76,175 | | | 69,237 | |
| Basic earnings per share | | 0.67 | | | 0.78 | | | 0.72 | | | 0.65 | |
| Diluted earnings per share | | 0.66 | | | 0.76 | | | 0.71 | | | 0.64 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal 2021 |
| in thousands, except per share data | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Net sales | | $ | 782,537 | | | $ | 860,108 | | | $ | 876,553 | | | $ | 914,335 | |
| Gross profit | | 336,933 | | | 365,438 | | | 365,308 | | | 354,587 | |
| Net income | | 75,796 | | | 82,916 | | | 74,645 | | | 49,873 | |
| Basic earnings per share | | 0.73 | | | 0.79 | | | 0.71 | | | 0.47 | |
| Diluted earnings per share | | 0.71 | | | 0.77 | | | 0.69 | | | 0.46 | |
14.
Subsequent EventAcquisitions
The Company made acquisitions during fiscal 2022 and fiscal 2021 to expand its commercial flooring business which are accounted for in accordance with ASC 805. The results of operations, financial position, and cash flows related to these acquisitions have been included in the Company’s consolidated financial statements since their respective acquisition dates. During fiscal 2021, the Company recognized business acquisition and integration costs totaling $3.4 million in general and administrative expenses within the Consolidated Statements of Operations and Comprehensive Income. Business acquisition and integration costs incurred during fiscal 2022 and 2020 were immaterial.
Spartan
Credit Facility AmendmentsTerm Loan Facility Amendments
On February 14, 2020, we entered intoJune 4, 2021, the Company acquired 100% of Spartan, a repricingcommercial specialty hard-surface flooring distribution company for total purchase consideration of $77.7 million. Total purchase consideration was comprised of the following components at their respective acquisition date fair values: $63.6 million cash, net of cash acquired, $9.1 million of contingent consideration, and general amendment$5.0 million of the Company’s common stock.
The contingent consideration represents the estimated fair value associated with potential earn-out payments to the credit agreement governing our senior secured term loan facility (as amended,seller of up to $18.0 million subject to Spartan's achievement of certain financial performance targets in fiscal years 2021 through 2024. Of the “Amended Term Loan Facility”) that, among other things, (a) refinanced our existing term loan facility with a new term loan facility intotal earn-out consideration, $9.0 million is related to the aggregate principal amountachievement of approximately $144.6certain annual adjusted EBITDA margin targets, and $9.0 million and (b) extendedis related to the stated maturity date under the Amended Term Loan Facilityachievement of certain annual gross profit targets. A portion of these earn-out opportunities is payable each year subject to February 14, 2027. The Amended Term Loan Facility also includes an “accordion” feature that allows us, under certain circumstances, to increase the sizeachievement of the facility byapplicable performance targets for that year, with the maximum payout requiring that each of the individual annual targets are met. Refer to Note 7, “Fair Value Measurements” for additional information regarding the contingent consideration.
At the acquisition date, the acquired assets and liabilities were recorded at their estimated fair values including $44.4 million of intangible assets comprised of customer relationships, a trade name, and non-compete agreement, $28.0 million of goodwill, $16.5 million of accounts receivable, inventory, and other current assets, $4.3 million of lease right-of-use and other non-current assets, $12.4 million of accounts payable and other current liabilities, and $3.1 million of operating lease and other non-current liabilities.
The fair values of identifiable intangible assets are classified within Level 3 of the fair value hierarchy and were determined with assistance from a third-party valuation specialist using the multi-period excess earnings method for customer relationships, the relief-from-royalty method for the trade name, and an
incremental income method for the non-compete agreement. These valuation methodologies included significant assumptions such as the amount
up toand timing of projected cash flows, growth rates, customer attrition rates, discount rates, royalty rates (for use in estimating the
greaterfair value of
$270.0 million or 100% of Consolidated EBITDA (as defined in the
Amended Term Loan Facility), subject to certain additional adjustments.The amendment to the Amended Term Loan Facility also amended the margin applied to loans to (x) in the case of ABR Loans (as defined in the Amended Term Loan Facility), from 1.75% or 1.50% per annum (based on credit rating tests) to 1.00% per annum (subject to a leverage-based step-up to 1.25% if certain leverage ratio tests are satisfied)Spartan trade name), and (y) in the caseassessment of Eurodollar Loans (as defined in the Amended Term Loan Facility), from 2.75% or 2.50% per annum (based on credit rating tests) to 2.00% per annum (subject to a leverage-based step-up to 2.25% if certain leverage ratio tests are satisfied) (subject to a 0.00% floor on Eurodollar Loans). The material terms of the Amended Term Loan Facility were otherwise unchanged.
ABL Facility Amendments
On February 14, 2020, we entered into a repricing and general amendment to the credit agreement governing our revolving credit facility (as amended, the “Amended ABL Facility”) that, among other things, (a) increased our revolving commitments to a total aggregate principal amount of $400.0 million, and (b) extended the stated maturity date under the Amended ABL Facility to February 14, 2025. The Amended ABL Facility also includes an “accordion” feature that allows us 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 Amended ABL Facility).
The amendment to the Amended ABL Facility also amended the margin applied to loans and letters of credit to (x) in the case of base rate loans, 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 LIBOR loans 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 LIBOR 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 Amended ABL Facility were otherwise unchanged.
each asset’s life cycle.
ITEM 9.
| CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|
The goodwill arising from the acquisition is primarily attributable to operational synergies and acceleration of growth strategies. The goodwill and intangible assets from the Spartan acquisition are fully deductible for U.S. federal and state tax purposes.
Other Commercial Flooring Distributors
During fiscal 2022, the Company acquired three small commercial flooring sales distributors for total consideration of $4.6 million, including $3.8 million of cash and $0.8 million of contingent earn-out consideration. The acquired assets and liabilities were recorded at their estimated fair values and were primarily comprised of $3.3 million of customer relationships with useful lives of 12 years.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act has been appropriately recorded, processed, summarized and reported on a timely basis and are effective in ensuring that such information is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December
26, 2019,29, 2022, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), pursuant to Rule 13a-15(c) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
A company’s internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of December
26, 2019,29, 2022, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of December
26, 2019.29, 2022.
Ernst & Young LLP, our independent registered public accounting firm, has issued an unqualified opinion on the effectiveness of internal control over financial reporting as of December
26, 2019,29, 2022, which is included in “Part II, Item 8 - Financial Statements and Supplementary Data.”
Remediation of Material Weakness
As disclosed in “Part II, Item 9A - Controls and Procedures” in our 2018 Annual Report, management concluded that there was a material weakness in our internal control over financial reporting related to ineffective information technology general controls (“ITGCs”) in the areas of user access and program change management over certain information technology systems and in the reports generated from these systems used in the execution of controls that supported the Company’s financial reporting processes.
During fiscal 2019, we evaluated, designed, and implemented controls and procedures to address this material weakness in our internal control over financial reporting. These measures included: (i) creating and filling an information technology compliance oversight function; (ii) developing a training program addressing ITGCs and policies, including educating control owners concerning
the principles and requirements of each control, with a focus on those related to user access and change-management over information technology systems impacting financial reporting; (iii) developing and maintaining documentation underlying ITGCs to enhance control knowledge across the entire IT organization; (iv) developing enhanced risk assessment procedures and controls related to changes in information technology systems; (v) implementing an information technology management review and testing plan to monitor ITGCs with a specific focus on systems supporting our financial reporting processes; and (vi) enhanced quarterly reporting on the remediation measures to the Audit Committee of the Board. We completed testing of these controls during the fourth quarter of fiscal 2019, and we have concluded that the previously identified material weakness has been remediated as of December 26, 2019.
Changes in Internal Control over Financial Reporting
Other than the changes discussed above, there
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during the fourth quarter of our fiscal year ended December 26, 201929, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
Disclosure Pursuant to Section 219
On February 23, 2023, the Company entered into an employment agreement with Bryan Langley, Executive Vice President and Chief Financial Officer of the
Iran Threat ReductionCompany (the “Employment Agreement”). The Employment Agreement provides for a four-year term with automatic one-year extensions (unless either party gives prior written notice of non-renewal), and
Syria Human Rights ActSection 219provides for annual base salary, target bonus levels, and certain other benefits. If Mr. Langley’s employment is terminated without Cause or due to the Company’s non-renewal of the Iran Threat Reduction and Syria Human Rights ActEmployment Agreement, or if Mr. Langley resigns for Good Reason, he is entitled to receive severance equal to one times his annual base salary, payable over 12 months, subject to his execution of 2012 (“ITRA”) and Section 13(r)a valid release of claims.
The foregoing description of the
Exchange Act, require an issuer to discloseEmployment Agreement is qualified in its
annual and quarterly reports whether it or any of its affiliates have knowingly engaged in specified activities or transactions relatingentirety by reference to
Iran. We are required to include certain disclosures in our periodic reports if we or any of our "affiliates" (as defined in Rule 12b-2 under the
Exchange Act) knowingly engaged in certain specified activities, transactions or dealings relating to Iran or with certain individuals or entities targeted by United States' economic sanctions during the period covered by the report. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law. Neither we nor any of our controlled affiliates or subsidiaries knowingly engaged in anyfull text of the
specified activities relating to Iran or otherwise engaged in any activities associated with Iran during the reporting period. However, because the SEC defines the term “affiliate” broadly, it includes any person or entity thatEmployment Agreement, which is
under common control with usfiled herewith as
well as any entity that controls us or is controlled by us.One of our shareholders, Ares, beneficially owns, in the aggregate, approximately 12.1% of our outstanding Class A common stock. Ares is affiliated with Ares Management. The description that follows has been provided to us by Ares Management. Certain investment funds managed or advised by U.K.-based affiliates of Ares Management (the “Ares Entities”) own approximately 28.7% of the ordinary shares and 54.3% of the preferred shares of AgriBriefing 1364 Limited (“AgriBriefing”), a company based in London that provides price reporting data on a subscription basis to participants in the agricultural industry. Although the Ares Entities do not hold the largest voting position in AgriBriefing, their holdings of ordinary and preferred shares represent a majority of the outstanding equity interests in AgriBriefing. In addition, the Ares Entities hold certain contractual veto rights and the right to appoint a director to the board of directors of AgriBriefing. As a result, under applicable SEC definitions, the Ares Entities may be deemed to control AgriBriefing; however, this statement is not meant to be an admission that common control exists.
The disclosure below relates solely to activities conducted by AgriBriefing. The disclosure does not relate to any activities conducted by us and does not involve us, Ares, or Ares Management. Neither we nor Ares nor Ares Management had any involvement in or control over the disclosed activities of AgriBriefing, and we have not independently verified or participated in the preparationExhibit 10.27 of this disclosure. We are not representing as to the accuracy or completeness of the disclosureForm 10-K and do not undertake any obligation to correct or update it.
We understand that Ares Management intends to disclose in its next annual SEC Report that:
“Subsequent to completion of the Ares Entities’ investment in AgriBriefing, in connection with Ares Management’s routine quarterly survey of its investment funds’ portfolio companies, AgriBriefing informed the Ares Entities that it had subscription contracts with five customers whose billing addresses were based in Iran. We have not been able to verify the identity or affiliations of these customers. As a result, it appears that we are required to provide this disclosure under ITRA and Section 13(r) of the Exchange Act. These subscriptions generated annual gross revenues of less than €25,000 (less than 1% of AgriBriefing’s revenues) and de minimus net profits. AgriBriefing confirmed that each of the subscriptions commenced prior to the investment in AgriBriefingincorporated herein by the Ares Entities, and that it terminated these subscriptions in July 2019 and does not intend to engage in any further dealings or transactions with these customers. Based on currently available information, we and the Ares Entities have no reason to believe that
reference.Table of Contents
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.any of the five customers are listed on the U.S. Treasury Department Office of Foreign Assets Control list of Specially Designated Nationals or that AgriBriefing has conducted any dealings in violation ITRA.”
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item will be contained in our definitive Proxy Statement in connection with our
20192023 Annual Meeting of Stockholders, which will be filed with the SEC within 120 days after the end of our fiscal year ended December
26, 201929, 2022 (the “Proxy Statement”), and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference, under the captions “Director Compensation,” “Executive Compensation” and “Compensation Discussion and Analysis;” provided, however, that the subsection entitled “Executive Compensation—Compensation Committee Report” shall not be deemed to be incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference, under the captions “Securities Authorized for Issuance under Equity Compensation Plans” and “Certain Beneficial Owners.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference, under the captions “Certain Relationships and Related Transactions,” and “Other Board Information—Director Independence.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The Information required under this Item will be included in the Proxy Statement and is incorporated herein by reference, under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm.”
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
| | |
| | |
(a) |
| Documents filed as part of the Annual Report: |
1. | | Financial Statements filed in Part II, Item 8 of this Annual Report: |
|
| Reports of Independent Registered Public Accounting Firm |
|
| Consolidated Balance Sheets as of December 26, 201929, 2022 and December 27, 2018 30, 2021 |
|
| Consolidated Statements of Operations and Comprehensive Income for the fiscal years ended December 26, 2019,29, 2022, December 27, 201830, 2021, and December 28, 2017 31, 2020 |
|
| Consolidated Statements of Cash Flows for the fiscal years ended December 26, 2019,29, 2022, December 27, 201830, 2021, and December 28, 2017 31, 2020 |
|
| Consolidated StatementStatements of Changes in Stockholders’ Equity for the fiscal years ended December 26, 2019,29, 2022, December 27, 201830, 2021, and December 28, 2017 31, 2020 |
|
| Notes to Consolidated Financial Statements |
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|
|
2. |
| Financial Statement Schedules: |
|
| There are no Financial Statement Schedules included with this filing for the reason that they are not applicable or are not required or the information is included in the financial statements or notes thereto |
|
|
|
3. | Exhibits:
| Exhibits:
|
Exhibit No. No |
|
|
3.1 |
| Amended & Restated Certificate of Incorporation of Floor & Decor Holdings, Inc.(1) |
3.2 |
| Second Amended and Restated Bylaws of Floor & Decor Holdings, Inc.(1)(2) |
4.1 |
| Specimen Class A Common Stock Certificate(2)Certificate(3) |
4.2 |
| Registration Rights Agreement, dated May 2, 2017, by and among Floor & Decor Holdings, Inc., Ares Corporate Opportunities Fund III, L.P., FS Equity Partners VI, L.P. and the other stockholders party thereto(3)thereto(4) |
4.3 |
| Investor Rights Agreement, dated May 2, 2017, by and among Floor & Decor Holdings, Inc., Ares Corporate Opportunities Fund III, L.P., FS Equity Partners VI, L.P. and FS Affiliates VI, L.P.(3)
|
4.4
|
| Description of Securities |
10.1 |
| FDO Holdings, Inc. Amended and Restated 2011 Stock Incentive Plan(4)Plan(5)# |
10.2 |
| First Amendment to FDO Holdings, Inc. Amended and Restated 2011 Stock Incentive Plan(4)Plan(5)# |
10.3 |
| Second Amendment to FDO Holdings, Inc. Amended and Restated 2011 Stock Incentive Plan(4)Plan(5)# |
10.4 |
| Third Amendment to FDO Holdings, Inc. Amended and Restated 2011 Stock Incentive Plan(4)Plan(5)# |
10.5 |
| Fourth Amendment to FDO Holdings, Inc. Amended and Restated 2011 Stock Incentive Plan(5)Plan(6)# |
10.6 |
| Form of Stock Option Agreement under the FDO Holdings, Inc. Amended and Restated 2011 Stock Incentive Plan(4)Plan(5)# |
10.7 |
| Floor & Decor Holdings, Inc. 2017 Stock Incentive Plan(3)Plan(4)# |
10.8 |
| Form of Stock Option Agreement under the Floor & Decor Holdings, Inc. 2017 Stock Incentive Plan(2)Plan(3)# |
10.9 |
| Form of Restricted Stock Agreement under the Floor & Decor Holdings, Inc. 2017 Stock Incentive Plan(4)Plan(5)# |
10.10 | |
| 10.11 | |
| 10.12 | |
| 10.13 | |
| 10.14 | |
| 10.15 | |
10.11
10.16 |
| Second Amended and Restated Employment Agreement, dated July 29, 2015,February 3, 2020, between FDOFloor and Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and Thomas V. Taylor(4)Taylor(13)# |
10.12
10.17 |
| Consulting Agreement, dated December 3, 2012, by and between Floor and Decor Outlets of America, Inc., FDO Holdings, Inc. and George Vincent West(4)West(5)# |
10.13
10.18 |
| First Amendment, dated March 11, 2019, to Consulting Agreement by and between Floor and Decor Outlets of America, Inc., FDO Holdings, Inc., and George Vincent West (10)(11)# |
10.14
10.19 |
| Second Amended and Restated Employment Agreement, dated July 29, 2015,February 3, 2020, between FDO Holdings, Inc., Floor and Decor Outlets of America, Inc. and Lisa G. Laube(4)# |
10.15
|
| Amended and Restated Employment Agreement, dated July 29, 2015, between FDO Holdings, Inc., Floor and Decor Outlets of America, Inc. and Trevor S. Lang(4)Lang(13)#
|
| | | | | |
10.16
10.20 |
| Second Amended and Restated Employment Agreement, dated July 29, 2015,February 3, 2020, between FDOFloor and Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and David V. Christopherson(4)Christopherson(13)# |
10.17
10.21 |
| Amended and Restated Employment Agreement, dated July 29, 2015,February 3, 2020, between FDOFloor and Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and Brian K. Robbins(4)Robbins(13)# |
| 10.22 | |
| 10.23 | |
| 10.24 | |
| 10.25 | |
| 10.26 | |
10.18
10.19
10.20
10.21
10.27 | |
| 10.28 | |
| 10.29 | |
| 10.30 | |
| 10.31 | Amended and Restated Credit Agreement, dated as of September 30, 2016, by and among Floor and Decor Outlets of America, Inc., FDO Acquisition Corp., Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agentadministrative agent and Swing Line Lender, Wells Fargo Bank, National Association, as Term Loan Agent,collateral agent and swing line lender, the lenders from time to time party thereto, Bank of America, N.A., and U.S. Bank National Association, as Syndication Agent,each as syndication agent, and Wells Fargo Bank, National Association, Bank of America, N.A. and Merrill Lynch, PierceU.S. Bank National Association as joint lead arrangers and Fenner & Smith Incorporated, as Joint Lead Arrangers and Joint Bookrunners(4)joint book managers(5) |
10.22
10.32 |
| Amended and Restated Security Agreement, dated as of September 30, 2016, by and among Floor and Decor Outlets of America, Inc., the other borrowers and guarantors party thereto from time to time party thereto, Wells Fargo Bank, National Association, as Collateral Agent, and Wells Fargo Bank, National Association, as Administrative Agent(4)collateral agent(5) |
10.23
10.33 |
| Credit Agreement, dated as of September 30, 2016, by and among Floor and Decor Outlets of America, Inc., FDO Acquisition Corp., the lenders from time to time partiesparty thereto, UBS AG, Stamford Branch, as Administrative Agentadministrative agent and Collateral Agent,collateral agent, the lenders from time to time party thereto and UBS Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated Barclays Bank PLC, Goldman Sachs Bank USA and Wells Fargo Securities LLC, as Joint Lead Arrangersjoint lead arrangers and Joint Bookrunners(4)joint bookrunners(5) |
10.24
10.34 |
| Security Agreement, dated as of September 30, 2016, by and among Floor and Decor Outlets of America, Inc., FDO Acquisition Corp., the other loan parties from time to time party thereto and UBS AG, Stamford Branch, as Collateral Agent and Administrative Agent and the lenders party thereto(4)collateral agent(5) |
10.25
10.35 |
| Guaranty Agreement, dated as of September 30, 2016, by FDO Acquisition Corp. in favor of UBS AG, Stamford Branch, as Collateral Agent, and UBS AG, Stamford Branch, as Administrative Agent and the lenders party thereto(4)collateral agent(5) |
10.26
10.36 |
| Amendment No. 1 to Credit Agreement, dated as of March 31, 2017, by and among Floor and Decor Outlets of America, Inc., FDO Acquisition Corp., the other loan parties from time to time party thereto, the lenders from time to time party thereto, and UBS AG, Stamford Branch, as Administrative Agentadministrative agent and Collateral Agent(4)collateral agent(5) |
10.27
10.37 |
| Amendment No. 2 to Credit Agreement, dated as of November 22, 2017, by and among Floor and Decor Outlets of America, Inc., FDO Acquisition Corp., the other loan parties from time to time party thereto, the lenders from time to time party thereto, and UBS AG, Stamford Branch, as Administrative Agentadministrative agent and Collateral Agent(9)collateral agent(10) |
10.28
10.38 | Amendment No. 3 to Credit Agreement and Amendment No. 1 to Security Agreement, dated as of February 14, 2020, by and among Floor and Decor Outlets of America, Inc., FDO Acquisition Corp., FD Sales Company, LLC, the lenders party thereto and UBS AG, Stamford Branch, as administrative agent and collateral agent(14) |
| 10.39 | Amendment No. 4 and Incremental Term Loan Agreement to Credit Agreement, dated as of May 18, 2020, by and among Floor and Decor Outlets of America, Inc., FDO Acquisition Corp., FD Sales Company, LLC, the lenders party thereto and UBS AG, Stamford Branch, as administrative agent and collateral agent(15) |
| 10.40 | Amendment No. 5 and Incremental Term Loan Agreement to Credit Agreement, dated as of February 9, 2021, by and among Floor and Decor Outlets of America, Inc., FDO Acquisition Corp., FD Sales Company LLC, the lenders party thereto, UBS AG, Stamford Branch, as administrative agent and collateral agent and Golub Capital LLC, as additional initial term Loan arranger(16) |
| 10.41 | |
| 10.42 | |
| 10.43 | |
#
| Denotes a management contract or compensatory plan or arrangement.
|
(1)
| Filed as an exhibit to Amendment No. 4 to the Registrant’s Registration Statement on Form S-1 (File No. 333-216000) filed with the SEC on April 24, 2017, and incorporated herein by reference.
|
(2)
| Filed as an exhibit to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-216000) filed with the SEC on April 17, 2017, and incorporated herein by reference.
|
(3)
| Filed as an exhibit to the Registrant’s Form 8-K (File No. 001-38070) filed with the SEC on May 2, 2017, and incorporated herein by reference.
|
# Denotes a management contract or compensatory plan or arrangement.
(1)Filed as an exhibit to the Registrant’s Form 10-Q (File No. 001-38070) filed with the SEC on August 5, 2021, and incorporated herein by reference.
(2)Filed as an exhibit to Amendment No. 4 to the Registrant’s Registration Statement on Form S-1 (File No. 333-216000) filed with the SEC on April 24, 2017, and incorporated herein by reference.
(3)Filed as an exhibit to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-216000) filed with the SEC on April 17, 2017, and incorporated herein by reference.
(4)Filed as an exhibit to the Registrant’s Form 8-K (File No. 001-38070) filed with the SEC on May 2, 2017, and incorporated herein by reference.
(5)Filed as an exhibit to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-216000) filed with the SEC on April 7, 2017, and incorporated herein by reference.
(6)Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-221525) filed with the SEC on November 13, 2017, and incorporated herein by reference.
(7)Filed as Annex A to the Registrant’s Definitive Proxy Statement (File No. 001-38070), filed with the SEC on March 27, 2018, and incorporated herein by reference.
(8)Filed as Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (File No. 333-225092), filed with the SEC on May 22, 2018, and incorporated herein by reference.
(9)Filed as Exhibit 10.1 to the Registrant’s Form 10-Q (File No. 001-38070) filed with the SEC on November 1, 2018, and incorporated herein by reference.
(10)Filed as Exhibit 10.23 to the Registrant’s Form 10-K (File No. 001-38070) filed with the SEC on March 5, 2018, and incorporated herein by reference.
(11)Filed as Exhibit 10.1 to the Registrant’s Form 10-Q (File No. 001-38070) filed with the SEC on May 2, 2019, and incorporated herein by reference.
(12)Filed as an exhibit to the Registrant’s Current Report on Form 8-K (File No. 001-38070) filed with the SEC on May 2, 2019, and incorporated herein by reference.
(13)Filed as an exhibit to the Registrant’s Current Report on Form 8-K (File No. 001-38070) filed with the SEC on February 4, 2020, and incorporated herein by reference.
(14)Filed as an exhibit to the Registrant’s Current Report on Form 8-K (File No. 001-38070) filed with the SEC on February 19, 2020, and incorporated herein by reference.
(15)Filed as an exhibit to the Registrant’s Current Report on Form 8-K (File No. 001-38070) filed with the SEC on May 18, 2020, and incorporated herein by reference.
(16)Filed as an exhibit to the Registrant’s Current Report on Form 8-K (File No. 001-38070) filed with the SEC on February 9, 2021, and incorporated herein by reference.
(17)Filed as an exhibit to the Registrant’s Form 10-Q (File No. 001-38070) filed with the SEC on April 30, 2020, and incorporated herein by reference.
(18)Filed as an exhibit to the Registrant’s Current Report on Form 8-K (File No. 001-38070) filed with the SEC on August 4, 2022, and incorporated herein by reference.
(19)Filed as an exhibit to the Registrant’s Current Report on Form 8-K (File No. 001-38070) filed with the SEC on November 15, 2022, and incorporated herein by reference.
(20)Filed as an exhibit to the Registrant’s Form 10-K (File No. 001-38070) filed with the SEC on February 25, 2021, and incorporated herein by reference.
(4)
| Filed as an exhibit to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-216000) filed with the SEC on April 7, 2017, and incorporated herein by reference.
|
(5)
| Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-221525) filed with the SEC on November 13, 2017, and incorporated herein by reference.
|
(6)
| Filed as Annex A to the Registrant’s Definitive Proxy Statement (File No. 001-38070), filed with the SEC on March 27, 2018, and incorporated herein by reference.
|
(7)
| Filed as Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (File No. 333-225092), filed with the SEC on May 22, 2018, and incorporated herein by reference.
|
(8)
| Filed as Exhibit 10.1 to the Registrant’s Form 10-Q (File No. 001-38070) filed with the SEC on November 1, 2018, and incorporated herein by reference.
|
(9)
| Filed as Exhibit 10.23 to the Registrant’s Form 10-K (File No. 001-38070) filed with the SEC on March 5, 2018, and incorporated herein by reference.
|
(10)
| Filed as Exhibit 10.1 to the Registrant’s Form 10-Q (File No. 001-38070) filed with the SEC on May 2, 2019, and incorporated herein by reference.
|
(11)
| Filed as an exhibit to the Registrant’s Current Report on Form 8-K (File No. 001-38070) filed with the SEC on May 2, 2019, and incorporated herein by reference.
|
ITEM 16. FORM 10-K SUMMARY
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | |
| FLOOR & DECOR HOLDINGS, INC. |
|
|
Dated: February 20, 2020
By: | /s/ Thomas V. Taylor |
| Thomas V. Taylor |
|
Chief Executive Officer |
Date:
| February 23, 2023
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on February 20, 2020.23, 2023.
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Signature |
| Title |
| Date |
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| /s/ Thomas V. Taylor Thomas V. Taylor
|
| Chief Executive Officer (Principal Executive Officer) and Director |
| February 20, 2020 23, 2023 |
Thomas V. Taylor
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| | | | |
/s/ Trevor S. LangTrevor S. Lang
Bryan H. Langley |
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | February 23, 2023 |
| Bryan H. Langley | | |
| | | | |
| /s/ Luke T. Olson | | Vice President and Chief Accounting Officer (Principal Accounting Officer) |
| February 20, 2020 23, 2023 |
Luke T. Olson
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| | | | |
| /s/ Norman H. Axelrod Norman H. Axelrod
|
| Chairman of the Board |
| February 20, 2020 23, 2023 |
Norman H. Axelrod
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| | | | |
| /s/ George Vincent West George Vincent West
|
| Vice Chairman of the Board |
| February 20, 2020 23, 2023 |
George Vincent West
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|
/s/ Brad J. Brutocao
Brad J. Brutocao
|
| Director
|
| February 20, 2020
|
/s/ William T. Giles
|
| Director
|
| February 23, 2023
|
/s/ Michael Fung
Michael Fung
William T. Giles |
| Director
|
| February 20, 2020
|
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/s/ David B. Kaplan David B. Kaplan
Dwight L. James |
| Director |
| February 20, 2020 23, 2023 |
Dwight L. James
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|
/s/ Rachel H. Lee
Rachel H. Lee
|
| Director
|
| February 20, 2020
|
/s/ Ryan R. Marshall
|
| Director
|
| February 23, 2023
|
/s/ John M. Roth
John M. Roth
Ryan R. Marshall |
| Director
|
| February 20, 2020
|
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/s/ Peter M. Starrett | | Director | | February 23, 2023 |
| Peter M. Starrett |
| Director
|
| February 20, 2020
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/s/ Richard L. Sullivan | | Director | | February 23, 2023 |
| Richard L. Sullivan |
| Director
|
| February 20, 2020
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/s/ Felicia D. Thornton | | Director | | February 23, 2023 |
| Felicia D. Thornton |
| Director
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| | | |
| /s/ Charles D. Young | | Director | | February 20, 202023, 2023 |
| Charles D. Young | | |
