UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September~~March 26, ~~2019~~2020

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

For the transition period from to

Commission file number 001-38070

Floor & Decor Holdings, Inc.

(Exact name of registrant as specified in its charter)

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

2500 Windy Ridge Parkway SE
Atlanta, Georgia		30339
(Address of principal executive offices)		(Zip Code)

(404) 471-1634		~~2233 Lake Park Drive~~ ~~Smyrna~~, ~~Georgia~~~~30080~~Not Applicable
(Registrant’s telephone number, including area code)		(Former name, former address and former fiscal year, if changed since last report)

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


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

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

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

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


Large Accelerated Filer	☒	Accelerated Filer	☐
Non-Accelerated Filer	☐	Smaller Reporting Company	☐
		Emerging Growth Company	☐

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

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

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


Class		Outstanding at ~~October 30, 2019~~April 28, 2020
Class A common stock, $0.001 par value per share		~~101,057,968~~102,311,502

Table of Contents

Table of Contents


			Page
Part I – Financial Information			3
	Item 1.	Financial Statements	3
		Condensed Consolidated Balance Sheets (Unaudited)	3
		Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)	4
		Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows (Unaudited)	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1419
		Forward-Looking Statements	1419
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2431
	Item 4.	Controls and Procedures	2531
Part II – Other Information			2632
	Item 1.	Legal Proceedings	2632
	Item 1A.	Risk Factors	2632
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2633
	Item 3.	Defaults Upon Senior Securities	2633
	Item 4.	Mine Safety Disclosures	2633
	Item 5.	Other Information	2633
	Item 6.	Exhibits	2834
	Signatures		36

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)


	As of		As of		As of		As of
	September 26,		December 27,		March 26,		December 26,
in thousands, except for share and per share data	2019		2018		2020		2019
Assets
Current assets:
Cash and cash equivalents	$	84,106	$	644	$	289,931	$	27,037
Income taxes receivable		9,249		4,324		—		2,868
Receivables, net		45,284		67,527		50,561		69,301
Inventories, net		483,957		471,014		588,941		581,865
Prepaid expenses and other current assets		21,113		15,949		21,562		20,415
Total current assets		643,709		559,458		950,995		701,486
Fixed assets, net		425,498		328,366		473,081		456,289
Right-of-use assets		743,517		—		865,515		822,256
Intangible assets, net		109,307		109,330		109,291		109,299
Goodwill		227,447		227,447		227,447		227,447
Other assets		7,395		9,490		7,551		7,532
Total long-term assets		1,513,164		674,633		1,682,885		1,622,823
Total assets	$	2,156,873	$	1,234,091	$	2,633,880	$	2,324,309
Liabilities and stockholders’ equity
Current liabilities:
Current portion of term loans	$	—	$	3,500
Current portion of term loan					$	1,808	$	—
Current portion of lease liabilities		53,117		—		67,588		74,592
Trade accounts payable		318,350		313,503		319,815		368,459
Accrued expenses and other current liabilities		112,141		82,038		100,423		102,807
Income taxes payable						9,674		—
Deferred revenue		8,824		5,244		7,189		6,683
Total current liabilities		492,432		404,285		506,497		552,541
Term loans		143,288		141,834
Deferred rent		—		36,980
Term loan						138,326		142,606
Revolving line of credit						275,000		—
Lease liabilities		775,838		—		889,021		844,269
Deferred income tax liabilities, net		20,005		26,838		13,633		18,378
Tenant improvement allowances		—		37,295
Other liabilities		2,270		2,550		2,114		2,179
Total long-term liabilities		941,401		245,497		1,318,094		1,007,432
Total liabilities		1,433,833		649,782		1,824,591		1,559,973
Commitments and Contingencies (Note 5)
Stockholders’ equity
Capital stock:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at September 26, 2019 and December 27, 2018		—		—
Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 101,025,978 shares issued and outstanding at September 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 September 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 September 26, 2019 and December 27, 2018		—		—
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at March 26, 2020 and December 26, 2019						—		—
Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 102,308,612 shares issued and outstanding at March 26, 2020 and 101,457,858 issued and outstanding at December 26, 2019						102		101
Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at March 26, 2020 and December 26, 2019						—		—
Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and outstanding at March 26, 2020 and December 26, 2019						—		—
Additional paid-in capital		364,626		340,462		378,234		370,413
Accumulated other comprehensive income (loss), net		(361)		186
Accumulated other comprehensive loss, net						(125)		(193)
Retained earnings		358,674		243,563		431,078		394,015
Total stockholders’ equity		723,040		584,309		809,289		764,336
Total liabilities and stockholders’ equity	$	2,156,873	$	1,234,091	$	2,633,880	$	2,324,309

See accompanying notes to condensed consolidated financial statements.

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Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)


	Thirteen Weeks Ended				Thirty-nine Weeks Ended				Thirteen Weeks Ended
	September 26,		September 27,		September 26,		September 27,		March 26,		March 28,
in thousands, except for per share data	2019		2018		2019		2018		2020		2019
Net sales	$	521,093	$	435,882	$	1,518,454	$	1,273,109	$	554,937	$	477,050
Cost of sales		307,305		257,656		885,469		751,859		318,905		275,676
Gross profit		213,788		178,226		632,985		521,250		236,032		201,374
Operating expenses:
Selling and store operating		136,958		109,182		398,984		320,375		153,066		127,383
General and administrative		37,246		26,477		98,364		74,995		30,858		30,202
Pre-opening		8,184		8,330		18,580		17,892		5,434		4,027
Total operating expenses		182,388		143,989		515,928		413,262		189,358		161,612
Operating income		31,400		34,237		117,057		107,988		46,674		39,762
Interest expense		1,978		2,171		7,122		6,100
Interest expense, net										1,807		2,921
Income before income taxes		29,422		32,066		109,935		101,888		44,867		36,841
(Benefit) provision for income taxes		(11,552)		5,498		(5,355)		3,603
Provision for income taxes										7,804		6,121
Net income	$	40,974	$	26,568	$	115,290	$	98,285	$	37,063	$	30,720
Change in fair value of hedge instruments, net of tax		—		131		(547)		796		68		(334)
Total comprehensive income	$	40,974	$	26,699	$	114,743	$	99,081	$	37,131	$	30,386
Basic earnings per share	$	0.41	$	0.27	$	1.17	$	1.02	$	0.36	$	0.31
Diluted earnings per share	$	0.39	$	0.25	$	1.10	$	0.94	$	0.35	$	0.29

See accompanying notes to condensed consolidated financial statements.

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Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)


						Accumulated											Accumulated
	Common Stock			Additional		Other				Total		Common Stock			Additional		Other				Total
	Class A			Paid-in		Comprehensive		Retained		Stockholders’		Class A			Paid-in		Comprehensive		Retained		Stockholders’
in thousands	Shares	Amount		Capital		Income (Loss)		Earnings		Equity		Shares	Amount		Capital		Income (Loss)		Earnings		Equity
Balance, December 28, 2018	97,588	$	98	$	340,462	$	186	$	243,563	$	584,309
Stock based compensation expense	—		—		2,250		—		—		2,250
Exercise of stock options	348		—		1,776		—		—		1,776
Cumulative effect from adoption of ASU No. 2016-02	—		—		—		—		(179)		(179)
Shares issued under employee stock plans	61		—		1,419		—		—		1,419
Other comprehensive loss, net of tax	—		—		—		(334)		—		(334)
Net income	—		—		—		—		30,720		30,720
Balance, March 28, 2019	97,997	$	98	$	345,907	$	(148)	$	274,104	$	619,961
Balance, December 27, 2019												101,458	$	101	$	370,413	$	(193)	$	394,015	$	764,336
Stock based compensation expense	—		—		2,168		—		—		2,168	—		—		2,908		—		—		2,908
Exercise of stock options	1,090		1		5,375		—		—		5,376	453		1		3,782		—		—		3,783
Issuance of restricted stock awards	24		—		—		—		—		—	368		—		—		—		—		—
Other comprehensive loss, net of tax	—		—		—		(213)				(213)
Shares issued under employee stock plans												30		—		1,131		—		—		1,131
Other comprehensive gain, net of tax												—		—		—		68		—		68
Net income	—		—		—		—		43,596		43,596	—		—		—		—		37,063		37,063
Balance, June 27, 2019	99,111	$	99	$	353,450	$	(361)	$	317,700	$	670,888
Stock based compensation expense	—		—		2,242		—		—		2,242
Exercise of stock options	1,871		2		7,908		—		—		7,910
Shares issued under employee stock plans	43		—		1,026		—		—		1,026
Net income	—		—		—		—		40,974		40,974
Balance, September 26, 2019	101,025	$	101	$	364,626	$	(361)	$	358,674	$	723,040
Balance, March 26, 2020												102,309	$	102	$	378,234	$	(125)	$	431,078	$	809,289


						Accumulated											Accumulated
	Common Stock			Additional		Other				Total		Common Stock			Additional		Other				Total
	Class A			Paid-in		Comprehensive		Retained		Stockholders’		Class A			Paid-in		Comprehensive		Retained		Stockholders’
in thousands	Shares	Amount		Capital		Income (Loss)		Earnings		Equity		Shares	Amount		Capital		Income (Loss)		Earnings		Equity
Balance, December 29, 2017	95,509	$	96	$	323,419	$	(205)	$	119,550	$	442,860
Balance, December 28, 2018												97,588	$	98	$	340,462	$	186	$	243,563	$	584,309
Stock based compensation expense	—		—		1,415		—		—		1,415	—		—		2,250		—		—		2,250
Exercise of stock options	585		—		3,195		—		—		3,195	348		—		1,776		—		—		1,776
Cumulative effect from adoption of ASU No. 2014-09	—		—		—		—		7,826		7,826
Other comprehensive gain, net of tax	—		—		—		430		—		430
Cumulative effect from adoption of ASU No. 2016-02												—		—		—		—		(179)		(179)
Shares issued under employee stock plans												61		—		1,419		—		—		1,419
Other comprehensive loss, net of tax												—		—		—		(334)		—		(334)
Net income	—		—		—		—		31,871		31,871	—		—		—		—		30,720		30,720
Balance, March 29, 2018	96,094	$	96	$	328,029	$	225	$	159,247	$	487,597
Stock based compensation expense	—		—		1,536		—		—		1,536
Exercise of stock options	1,124		1		5,459		—		—		5,460
Other comprehensive gain, net of tax	—		—		—		235		—		235
Net income	—		—		—		—		39,846		39,846
Balance, June 28, 2018	97,218	$	97	$	335,024	$	460	$	199,093	$	534,674
Stock based compensation expense	—		—		1,659		—		—		1,659
Exercise of stock options	108		—		644		—		—		644
Other comprehensive gain, net of tax	—		—		—		131		—		131
Net income	—		—		—		—		26,568		26,568
Balance, September 27, 2018	97,326	$	97	$	337,327	$	591	$	225,661	$	563,676
Balance, March 28, 2019												97,997	$	98	$	345,907	$	(148)	$	274,104	$	619,961

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

						��
	Thirty-nine Weeks Ended				Thirteen Weeks Ended
	September 26,		September 27,		March 26,		March 28,
in thousands	2019		2018		2020		2019
Operating activities
Net income	$	115,290	$	98,285	$	37,063	$	30,720
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		53,297		37,043		22,088		17,184
Loss on asset impairments and disposals		4,111		—
Amortization of tenant improvement allowances		—		(3,277)
Gain on asset impairments and disposals						(29)		—
Deferred income taxes		(6,644)		2,605		(4,739)		(1,057)
Interest cap derivative contracts		323		(878)		83		610
Stock based compensation expense		6,660		4,611		2,908		2,250
Changes in operating assets and liabilities:
Receivables, net		6,166		(1,627)		18,740		22,568
Inventories, net		(12,943)		13,685		(7,076)		33,510
Trade accounts payable		4,847		(20,945)		(48,644)		(84,005)
Accrued expenses and other current liabilities		26,209		(2,352)		(2,478)		3,017
Income taxes		(4,871)		312		12,542		13,143
Deferred revenue		3,579		2,806		506		1,337
Deferred rent		—		7,340
Tenant improvement allowances		—		11,974
Other, net		13,570		(5,883)		(6,296)		(12,256)
Net cash provided by operating activities		209,594		143,699		24,668		27,021
Investing activities
Purchases of fixed assets		(141,015)		(109,395)		(38,384)		(31,634)
Net cash used in investing activities		(141,015)		(109,395)		(38,384)		(31,634)
Financing activities
Borrowings on revolving line of credit		100,100		204,050		275,000		80,200
Payments on revolving line of credit		(100,100)		(245,050)		—		(78,100)
Payments on term loans		(2,625)		(2,625)
Payments on term loan						(875)		(875)
Proceeds from exercise of stock options		15,063		9,299		3,783		1,776
Debt issuance costs						(2,429)		—
Proceeds from employee stock purchase plan		2,445		—		1,131		1,419
Net cash provided by (used in) financing activities		14,883		(34,326)
Net cash provided by financing activities						276,610		4,420
Net increase (decrease) in cash and cash equivalents		83,462		(22)		262,894		(193)
Cash and cash equivalents, beginning of the period		644		556		27,037		644
Cash and cash equivalents, end of the period	$	84,106	$	534	$	289,931	$	451
Supplemental disclosures of cash flow information
Buildings and equipment acquired under operating leases	$	177,953	$	—	$	63,578	$	53,049
Cash paid for interest	$	5,726	$	5,732
Cash paid for income taxes	$	12,125	$	722
Cash paid for interest, net of capitalized interest					$	1,298	$	1,987
Fixed assets accrued at the end of the period	$	23,394	$	14,500	$	19,620	$	10,836

See accompanying notes to condensed consolidated financial statements.

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Floor & Decor Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Nature of Business

Floor & Decor Holdings, Inc., together with its subsidiaries (the “Company,” “we,” “our” or “us”) is a highly differentiated, rapidly growing specialty retailer of hard surface flooring and related accessories. We offer a broad in-stock assortment of tile, wood, ~~laminate,~~laminate/ luxury vinyl plank, and natural stone flooring along with decorative and installation accessories at everyday low prices. Our stores appeal to a variety of customers, including professional installers and commercial businesses (“Pro”), Do-it-Yourself customers (“DIY”) and customers who buy our products for professional installation (“Buy-it-Yourself” or “BIY”). We operate within 1 reportable segment.

As of ~~September~~March 26, ~~2019,~~2020, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. ~~(“F&D”)~~, operates ~~113~~123 warehouse-format stores, which average 76,000 square feet, and 1 small-format standalone design center in 2830 states, as well as 34 distribution centers and an e-commerce site, FloorandDecor.com.

Fiscal Year

The Company’s fiscal year is the 52- or 53-week period ending on the Thursday on or preceding December 31st. Fiscal ~~years~~year ending December 31, 2020 (“fiscal 2020”) includes 53 weeks, and the fiscal year ended December 26, 2019 (“fiscal 2019”) ~~and December 27, 2018 (“fiscal 2018”) include~~included 52 weeks. When a 53-week fiscal year occurs, we report the additional week at the end of the fiscal fourth quarter. 52-week fiscal years consist of ~~thirteen-week~~thirteen-week periods in each quarter of the fiscal year.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. The Condensed Consolidated Balance Sheet as of December ~~27, 2018~~26, 2019 has been derived from the audited Consolidated Balance Sheet for the fiscal year then ended. The interim condensed consolidated financial statements should be read together with the audited consolidated financial statements and related footnote disclosures included in the Company’s Annual Report on Form 10-K for fiscal ~~2018,~~2019, filed with the Securities and Exchange Commission (the “SEC”) on February ~~25, 2019~~20, 2020 (the “Annual Report”).

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

Results of operations for the thirteen ~~and thirty-nine~~ weeks ended ~~September~~March 26, ~~2019~~2020 and ~~September 27, 2018~~March 28, 2019 are not necessarily indicative of the results to be expected for the full years.

~~There~~Impact of the Novel Coronavirus

On March 11, 2020, the World Health Organization announced that infections of the coronavirus (COVID-19) had become a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the COVID-19 pandemic. While the full impact that the COVID-19 pandemic could have on our business remains highly uncertain, the Company currently anticipates that disruptions resulting from the pandemic will have a material negative impact on its sales and results of operations, financial position, and cash flows in fiscal 2020.

Table of Contents

While these potential negative effects will not be fully reflected in the Company’s results of operations and overall financial performance until future periods, the Company has already experienced an impact to its operating results related to the COVID-19 pandemic. In particular, beginning on March 17, 2020 and continuing through the date we filed this report, the Company has closed some of its stores, and then on March 21, 2020, shifted its remaining stores to a curbside pickup model in the jurisdictions where government regulations permit such stores to continue to operate and where the customer demand makes such operations sustainable. From March 21, 2020 through March 26, 2020, the six days during the first quarter of fiscal 2020 in which the Company’s stores were limited to curbside operations, the Company experienced a 46% decline in comparable store sales* compared to the same period in the prior year, which is reflected in the Company’s condensed consolidated statements of operations and comprehensive income for the thirteen weeks ended March 26, 2020. See Note 8, “Subsequent Events” for additional information on the impact of the COVID-19 pandemic on the Company’s operations.

*Comparable store sales refer to period-over-period comparisons of our net sales among the comparable store base. A store is included in the comparable store base on the first day of the thirteenth full fiscal month following its opening.

Summary of Significant Accounting Policies

Other than as noted below, there have been no updates to our Significant Accounting Policies since the Annual Report, except for the accounting policy changes in connection with the newly adopted lease accounting standard outlined in Note 5 to our Condensed Consolidated Financial Statements included in this Quarterly Report. For more information regarding our Significant Accounting Policies and Estimates, see the “Summary of Significant Accounting Policies” section of “Item 8. Financial Statements and Supplementary Data” of our Annual Report.

Impairment Assessment of Goodwill and Other Indefinite-Lived Intangible Assets

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

Due to the impact of the COVID-19 pandemic on the Company’s operations and the markets in which it operates, the Company qualitatively assessed whether it was more likely than not that the goodwill and indefinite-lived intangible assets were impaired as of March 26, 2020. Based on this interim impairment assessment as of March 26, 2020, the Company determined that its goodwill and indefinite-lived intangible assets were not impaired.

Recently ~~Issued~~Adopted Accounting Pronouncements

~~There~~Implementation Costs Incurred in Cloud Computing Arrangements. In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new guidance will be effective for public companies for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and early adoption is permitted. The adoption of ASU No. 2018-15 in the first quarter of fiscal 2020 did not have ~~been no updates to Recently Issued Accounting Pronouncements that have yet to be adopted since~~a material impact on the Annual Report. For information regarding Recently Issued Accounting Pronouncements, see the “Summary of Significant Accounting Policies” section of “Item 8. Financial Statements and Supplementary Data” of our Annual Report.Company’s condensed consolidated financial statements.

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~~Recently Adopted Accounting Pronouncements~~

Credit Losses.In ~~February~~June 2016, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ASU No. ~~2016-02,~~2016-03, “~~Leases~~Financial Instruments - Credit Losses (Topic ~~842)~~326): Measurement of Credit Losses on Financial Instruments.,” which modifies the measurement approach for credit losses on financial assets measured on an amortized cost basis from an 'incurred loss' method to an 'expected loss' method. The amended guidance requires the measurement of expected credit losses to be based on relevant information, including historical experience, current conditions, and a reasonable and supportable forecast that affects the collectability of the related financial asset. The adoption of ASU No. 2016-02 requires that lessees recognize lease assets and lease liabilities on the balance sheet with an option to exclude short-term leases (leases with terms of 12 months or less). The guidance also requires disclosures about the amount, timing, and uncertainty of cash flows arising from leases. We adopted the ASU2016-03 in the first quarter of fiscal 2019 using the modified retrospective approach. The cumulative effect adjustment upon adoption resulted in an immaterial opening balance sheet reduction to retained earnings. The adoption of ASU No. 2016-02 had a material impact on the Company’s Condensed Consolidated Balance Sheets but2020 did not have a material impact on the Company’s ~~Condensed Consolidated Statements~~condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

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

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

2. Revenues

Net sales consist of revenue associated with contracts with customers for the sale of goods in amounts that reflect the consideration the Company is entitled to ~~Note 5~~receive in exchange for those goods and services.

Deferred Revenue

Under Accounting Standards Codification (“ASC”) 606, the Company recognizes revenue when the customer obtains control of the inventory. Amounts in deferred revenue at period-end reflect orders for which the inventory is not currently ready for physical transfer to ~~our Condensed Consolidated Financial Statements included in this Quarterly Report for further details.~~the customer.

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~~2. Revenues~~

Disaggregated Revenue

The Company has 1 operating segment and 1 reportable segment. The following table presents the net sales of each major product category (in thousands):


	Thirteen Weeks Ended				Thirteen Weeks Ended				Thirteen Weeks Ended
	September 26, 2019				September 27, 2018				March 26, 2020				March 28, 2019
			% of				% of				% of				% of
Product Category	Net Sales		Net Sales		Net Sales		Net Sales		Net Sales		Net Sales		Net Sales		Net Sales
Tile	$	133,340	26	%	$	119,988	28	%	$	134,912	24	%	$	125,310	26	%
Laminate / Luxury Vinyl Plank		116,037	22			83,667	19
Decorative Accessories		100,357	19			82,814	19
Installation Materials and Tools		88,197	17			69,412	16
Laminate / luxury vinyl plank										124,994	23			97,502	20
Decorative accessories / wall tile										113,597	20			94,440	20
Installation materials and tools										94,576	17			79,709	17
Wood		51,807	10			49,005	11			48,995	9			49,230	10
Natural Stone		31,511	6			28,025	6
Natural stone										34,877	6			30,887	7
Other (1)		(156)	—			2,971	1			2,986	1			(28)	—
Total	$	521,093	100	%	$	435,882	100	%	$	554,937	100	%	$	477,050	100	%

Thirty-nine Weeks Ended

Thirty-nine Weeks Ended

September 26, 2019

September 27, 2018





% of



% of

Product Category

Net Sales

Net Sales

Net Sales

Net Sales

Tile

$
394,969

26
%
$
360,798

28
%
Laminate / Luxury Vinyl Plank

321,757

21

227,995

18

Decorative Accessories

292,391

19

244,279

19

Installation Materials and Tools

256,498

17

201,194

16

Wood

153,799

10

144,401

11

Natural Stone

95,301

6

85,564

7

Other (1)

3,739

1

8,878

1

Total

$
1,518,454

100
%
$
1,273,109

100
%

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

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3. Debt

~~Fair Value~~The following table summarizes our long-term debt as of ~~Debt~~March 26, 2020 and December 26, 2019:


	March 26,		December 26,
in thousands	2020		2019
Credit Facilities:
UBS Facility Term Loan B	$	144,625	$	145,500
Wells Facility Revolving Line of Credit		275,000		—
Total secured debt at par value		419,625		145,500
Less: unamortized discount and debt issuance costs		4,491		2,894
Net carrying amount		415,134		142,606
Less: current maturities		1,808		—
Total long-term debt	$	413,326	$	142,606
Total debt at fair value	$	397,931	$	145,136

Market risk associated with our fixed and variable rate long-term debt relates to the potential change in fair value and negative impact to future earnings, respectively, from a change in interest rates. The aggregate fair value of debt is based primarily on our estimates of interest rates, maturities, credit risk, and underlying collateral and is classified as Level 3 within the fair value hierarchy. ~~At September~~

The following table summarizes scheduled maturities of the Company’s debt, including current maturities, as of March 26, ~~2019 and December 27, 2018, the carrying amounts and fair values of our debt were as follows:~~2020:

September 26,

December 27,
in thousands

2019

2018
Total debt at par value

$
146,375

$
149,000
Less: unamortized discount and debt issuance costs

3,087

3,666
Net carrying amount

$
143,288

$
145,334
Fair value

$
145,643

$
147,883


in thousands	Amount
Forty weeks ended December 31, 2020	$	1,446
2021		1,085
2022		1,446
2023		1,446
2024		1,446
Thereafter (1)		412,756
Total minimum debt payments	$	419,625

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(1) Thereafter maturities are comprised of $275,000 thousand due at maturity of the revolving credit facility on February 14, 2025 and $137,756 thousand due on the senior secured term loan facility through February 14, 2027.

Credit Facility Amendments

In February 2020, the Company refinanced its outstanding debt by entering into amendments to the credit and security agreements governing its senior secured term loan facility and revolving credit facility.

Amended Term Loan Facility

On February 14, 2020, the Company entered into a repricing and general amendment to the credit agreement governing its senior secured term loan facility (as amended, the “Amended Term Loan Facility”) that, among other things, (a) refinanced the existing term loan facility with a new term loan facility in the same aggregate principal amount of approximately $144,625 thousand, 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 the Company, under certain circumstances, to increase the size of the facility by an amount up to the greater of $270,000 thousand or 100.0% of Consolidated EBITDA (as defined in the Amended Term Loan Facility), plus additional amounts (x) if such increase is secured on a pari passu basis with the loans under the Amended Term Loan Facility, up to a Consolidated First Lien Leverage Ratio (as defined in the Amended Term Loan Facility) of 2.50:1.00, (y) if such increase is secured on a junior basis with the loans under the Amended Term Loan Facility, up to a Consolidated Secured Leverage Ratio (as defined in the Amended Term Loan Facility) of 3.50:1.00 and (z) if such increase is unsecured, up to a Consolidated Total Leverage Ratio (as defined in the Amended Term Loan Facility) of 3.50:1.00, subject to certain additional adjustments, which, under certain circumstances, allow for a Consolidated Total Leverage Ratio of up to 4.50:1.00.

The 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 satisfying a leverage ratio test and subject to a leverage-based step-up to 1.25% if such leverage ratio test is exceeded), and (y) in the case of Eurodollar Loans (as defined in the Amended Term Loan Facility), from 2.75% or 2.50% per annum (based on credit rating tests) to 2.00% per annum (subject to satisfying a leverage ratio test and subject to a leverage-based step-up to 2.25% if such leverage ratio test is exceeded) (subject to a 0.00% floor on Eurodollar Loans). The material terms of the Amended Term Loan Facility were otherwise unchanged. At March 26, 2020, the applicable interest rate for borrowings under the Amended Term Facility was 3.6%.

The Company evaluated the amendments to the term loan facility in accordance with ASC 470-50 and determined that the amendments resulted in a debt modification that was not an extinguishment. Therefore, 0 loss on debt extinguishment was recognized. The Company incurred costs of $2,501 thousand in connection with the refinancing which were comprised of (i) $1,779 thousand of fees to creditors that were accounted for as debt issuance costs and are amortizing to interest expense over the term of the Amended Term Loan Facility using the interest method and (ii) $722 thousand of professional fees to other third parties that were expensed during the thirteen week period ended March 26, 2020 and included in general and administrative expense on the consolidated statements of operations and comprehensive income.

Amended ABL Facility

On February 14, 2020, the Company also entered into a repricing and general amendment to the credit agreement governing its revolving credit facility (as amended, the “Amended ABL Facility”) that, among other things, (a) increased its revolving commitments to a total aggregate principal amount of $400,000 thousand, 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 the Company under certain circumstances, to increase the size of the facility by an amount up to $100,000 thousand, or such higher amount as may be agreed to by the Required Lenders (as defined in the Amended ABL Facility).

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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 (as defined in the Amended ABL Facility), from 0.25% or 0.50% per annum (based on availability) to a flat rate of 0.25% per annum, (y) in the case of LIBO Rate Loans (as defined in the Amended ABL Facility) and letter of credit fees for standby letters of credit, from 1.25% or 1.50% per annum (based on availability) to a flat rate of 1.25% per annum (subject to a 0.00% floor on LIBO Rate Loans) and (z) in the case of letter of credit fees for commercial letters of credit, from 0.75% or 1.00% per annum (based on availability) to a flat rate of 0.75% per annum. The material terms of the Amended ABL Facility were otherwise unchanged. At March 26, 2020, the applicable interest rate for borrowings under the Amended ABL Facility was 2.0%.

The Company evaluated the amendments to the ABL facility in accordance with ASC 470-50 and determined that the amendments increased the borrowing capacity of the facility. In connection with this transaction, the Company incurred $650 thousand of costs that were deferred and are amortizing to interest expense over the term of the Amended ABL Facility.

As of March 26, 2020, the Amended ABL Facility had a maximum availability of $400,000 thousand with actual available borrowings limited to the sum, at the time of calculation, of (a) eligible credit card receivables multiplied by the credit card advance rate, plus (b) the cost of eligible inventory, net of inventory reserves, multiplied by the applicable appraisal percentage, plus (c) 85% of eligible net trade receivables, plus (d) all eligible cash on hand, plus (e) 100% of the amount for which the eligible letter of credit must be honored after giving effect to any draws, minus certain Availability Reserves (each component as defined in the Amended ABL Facility). The Amended ABL Facility is available for issuance of letters of credit and contains a sublimit of $50,000 thousand for standby letters of credit and commercial letters of credit combined. Available borrowings under the facility are reduced by the face amount of outstanding letters of credit.

Net availability under the Amended ABL Facility, as reduced by outstanding letters of credit of $20,512 thousand, was $85,676 thousand based on financial data as of March 26, 2020.

Covenants

The credit agreements governing the Amended Term Loan Facility and Amended ABL Facility contain customary restrictive covenants that, among other things and with certain exceptions, limit the Company’s ability to (i) incur additional indebtedness and liens in connection with such indebtedness, (ii) pay dividends and make certain other restricted payments, (iii) effect mergers or consolidations, (iv) enter into transactions with affiliates, (v) sell or dispose of property or assets, and (vi) engage in unrelated lines of business. In addition, these credit agreements subject the Company to certain reporting obligations and require that the Company satisfy certain financial covenants, including, among other things:

•

a requirement that if borrowings under the Amended ABL Facility exceed 90% of availability, the Company will maintain a certain fixed charge coverage ratio (defined as Consolidated EBITDA less non-financed capital expenditures and income taxes paid to consolidated fixed charges, in each case as more fully defined in the credit agreement governing the Amended ABL Facility).

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

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4. Income Taxes

Effective tax rates for the thirteen ~~and thirty-nine~~ weeks ended ~~September~~March 26, ~~2019~~2020 and ~~September 27, 2018~~March 28, 2019 were based on the Company’s forecasted annualized effective tax rates and were adjusted for discrete items ~~such as stock option exercises,~~ that occurred within each period. ~~Our~~The Company’s effective income tax ~~rates were (39.3)% and 17.1%~~rate was 17.4% for the thirteen weeks ended ~~September~~March 26, ~~2019~~2020 and ~~September 27, 2018, respectively.~~16.6% for the thirteen weeks ended March 28, 2019. The ~~lower~~ effective income tax rate ~~for~~in each of these periods was lower than the ~~current period was~~statutory federal income tax rate of 21.0% primarily due to the recognition of ~~higher~~income tax benefits for discrete items, the largest of which were tax deductions in excess ~~tax benefits~~of book expense related to stock ~~options exercised than in~~option exercises. For the ~~corresponding prior year period~~

~~Our effective income tax rates were (4.9)% and 3.5% for the thirty-nine~~thirteen weeks ended ~~September~~March 26, 2020 and March 28, 2019, ~~and September 27, 2018, respectively. The lower effective tax rate~~benefits for ~~the thirty-nine weeks ended September 26, 2019 was primarily due to~~discrete items were partially offset by the recognition of ~~higher excess~~discrete expense totaling $2.2 million and $0.1 million, respectively, for loss contingencies related to uncertain tax positions, including estimated interest and penalties related to such positions.

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

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

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

5. Commitments and Contingencies

Lease Commitments

~~In the first quarter of fiscal 2019, we adopted ASU No. 2016-02,~~The Company accounts for leases in accordance with ASC 842, “Leases~~Leases (Topic 842),~~” which requires that lessees recognize lease assets and lease liabilities for all leases on the balance sheet with an option to exclude short-term leases (leases with terms of 12 months or less), which we elected. We adopted ASU No. 2016-02 using the modified retrospective approach and elected the package of practical expedients to use in transition, which permitted us not to reassess, under the new standard, our prior conclusions about lease identification and lease classification. The cumulative effect adjustment upon adoption of ASU No. 2016-02 resulted in an immaterial adjustment to retained earnings. The adoption also resulted in the addition of $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 our long-term operating lease agreements are for our corporate office, retail locations, and distribution centers, which expire in various years through 2040. ~~The initial lease terms for these facilities range from 10-15 years, with the exception of 2 buildings which have 20-year initial lease terms.~~ The majority of our building leases also include options to extend, which are factored into the recognition of their respective assets and liabilities when appropriate based on management’s assessment of the probability that the options will be exercised. Additionally, 1 building lease contains variable lease payments, which are determined based on a percentage of retail sales over a contractual level, and we sublease real estate within 1 distribution center to a third party. 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. Our lease agreements do not contain any residual value guarantees or restrictive covenants that would reasonably be expected to have a material impact on our business.

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When readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of our leases do not provide a readily determinable implicit rate. If the rate implicit in the lease is not readily determinable, we use a third party to assist in the determination of a secured incremental borrowing rate, determined on a collateralized basis, to discount lease payments based on information available at lease commencement. The secured incremental borrowing rate is estimated based on yields obtained from Bloomberg for U.S. consumers with a BB- credit rating and is adjusted for collateralization as well as inflation.

~~Lease Position~~

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

As of
in thousands, except lease term and discount rate

Classification

September 26, 2019
Assets

Building

Right-of-use assets

$
732,345
Equipment

Right-of-use assets

6,947
Land

Right-of-use assets

194
Software

Right-of-use assets

4,031
Total operating lease assets

$
743,517
Liabilities

Current

Building

Current portion of lease liabilities

$
47,747
Equipment

Current portion of lease liabilities

3,303
Land

Current portion of lease liabilities

85
Software

Current portion of lease liabilities

1,982
Total current operating lease liabilities

53,117
Noncurrent

Building

Lease liabilities

769,510
Equipment

Lease liabilities

4,066
Land

Lease liabilities

114
Software

Lease liabilities

2,148
Total noncurrent operating lease liabilities

775,838
Total operating lease liabilities

$
828,955

Weighted-average remaining lease term

10 years
Weighted-average discount rate

5.2%

~~Lease Costs~~

~~The table below presents components~~ As of March 26, 2020, our weighted average discount rate was 5.2%, and our weighted average remaining lease ~~expense for operating leases.~~

Thirteen Weeks Ended

Thirty-nine Weeks Ended
in thousands

Classification

September 26, 2019

September 26, 2019
Operating lease cost (1)

Selling and store operating

$
29,978

$
84,907
Operating lease right-of-use asset impairment

General and administrative

4,136

4,136
Sublease income

Selling and store operating

(588)

(1,817)
Total lease cost

$
33,526

$
87,226

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

term was 10 years.

1013

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Lease Costs

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


		Thirteen Weeks Ended
in thousands	Classification	March 26, 2020		March 28, 2019
Operating lease cost (1)	Selling and store operating	$	33,816	$	26,015
Sublease income	Selling and store operating		(597)		(623)
Total lease cost		$	33,219	$	25,392

(1) Includes variable lease costs, which were immaterial for the thirteen weeks ended March 26, 2020 and March 28, 2019.

Undiscounted Cash Flows

Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of ~~September~~March 26, ~~2019, were:~~2020 were as follows:


in thousands	Amount		Amount
Thirteen weeks ending December 26, 2019	$	19,609
2020		108,355
Forty weeks ended December 31, 2020			$	119,364
2021		118,784		133,445
2022		111,501		126,405
2023		108,266		123,690
2024				119,965
Thereafter		623,390		642,961
Total minimum lease payments (2)	$	1,089,905	$	1,265,830
Less: amount of lease payments representing interest		260,950		309,221
Present value of future minimum lease payments		828,955		956,609
Less: current obligations under leases		53,117		67,588
Long-term lease obligations	$	775,838	$	889,021

(2) Future lease payments exclude approximately $~~209.4~~91.7 million of legally binding minimum lease payments for operating leases signed but not yet commenced.

For the ~~thirty-nine~~thirteen weeks ended ~~September~~March 26, ~~2019,~~2020, cash paid for operating leases was ~~$80.2~~$32.9 million.

~~Right-of-use Asset Impairment~~

Long-lived assets, such as operating lease right-of-use assets, 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, 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.

During the thirteen weeks ended September 26, 2019, we began the move from our former Store Support Center in Smyrna, Georgia to a nearby location 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 the current 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 million. The operating lease right-of-use asset for the Smyrna, Georgia Store Support Center is classified within level 3 of the fair value hierarchy based on the use of unobservable inputs that were significant to the fair value measurement. The impairment had no impact on our lease liability.

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 Georgia against the Company and certain of our officers, directors and stockholders. On August 14, 2019, the Court named a lead plaintiff, and the case was re-captioned In re Floor & Decor Holdings, Inc. Securities Litigation, No. 1:19-cv-02270-SCJ (N.D. Ga.). The operative complaint alleges certain violations of federal securities laws based on, among other things, purported materially false and misleading statements and omissions allegedly made by the Company between May 23, 2018 and August 1, 2018 and seeks class certification, unspecified monetary damages, costs and attorneys’ fees and equitable relief. 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~~moved to ~~defend itself vigorously.~~dismiss the lawsuit. In addition, the Company

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maintains insurance that may cover any liability arising out of this 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 are currently unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from this litigation.

We are 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 our business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. We establish reserves for specific legal

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proceedings when we determine 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 our consolidated financial position, cash flows, or results of operations, however 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.

~~6. Stock Based Compensation~~

At our 2018 annual meeting of stockholders held on May 17, 2018, our stockholders approved the Floor & Decor Holdings, Inc. Employee Stock Purchase Plan (the “ESPP”), which became available to substantially all of our employees beginning in the third quarter of fiscal 2018. The ESPP permits eligible employees to purchase shares of our common stock through payroll deductions, subject to certain limitations. The purchase price of the shares under the ESPP will in no event be less than the lesser of 85% of the lower of the fair market value of our common stock on either the first or last trading day of each six-month offering period. There were 1,500,000 shares of our Class A common stock, par value $0.001 per share, originally approved for issuance under the ESPP. During the thirteen and thirty-nine weeks ended September 26, 2019, the Company recognized $130 and $400 thousand of stock-based compensation expense related to the ESPP, respectively.

6. Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation- Stock Compensation, 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. Stock compensation expense for the thirteen weeks ended March 26, 2020 and March 28, 2019 was $2.9 million and $2.2 million, respectively, and was included in general and administrative expenses on the Company’s condensed consolidated statement of operations and comprehensive income.

On February 24, 2020, the Company granted a combination of stock options, restricted stock units, and restricted stock to our non-employee directors and certain of our employees under the 2017 Stock Incentive Plan as part of our annual long-term incentive grants, as outlined below.

Stock Options

The stock options granted to eligible employees during the first quarter of fiscal 2020 had a weighted average grant-date fair value of $21.81 and vest in four ratable annual installments on each of the first four anniversaries of the grant date, subject to the grantee’s continued service through the applicable vesting date. The Company estimates the fair value of stock option grants using the Black-Scholes-Merton option pricing model with the following weighted average assumptions:


	Thirteen Weeks Ended
	March 26, 2020
Risk-free interest rate	1.24	%
Expected volatility	38.4	%
Expected life (in years)	5.75
Dividend yield	—	%

The Company determines the grant date fair value of stock options with assistance from a third-party valuation specialist. 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. The Company considers various factors in determining the appropriateness of the public entities used in determining expected volatility, including the entity's life cycle stage, industry, growth profile, size, financial leverage, and products offered. To determine the expected life of the options granted, the Company relied 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 risk-free interest rate is based on the term structure of interest rates at the time of the option grant.

Stock option activity during the thirteen weeks ended March 26, 2020 was as follows:




		Weighted
		Average
		Exercise
	Options	Price
Outstanding at December 26, 2019	6,037,079	$	13.64
Granted	270,531		57.70
Exercised	(453,330)		8.34
Forfeited or expired	(27,648)		23.27
Outstanding at March 26, 2020	5,826,632	$	16.05

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The Company’s total unrecognized compensation cost related to stock options as of March 26, 2020 was $22,753 thousand, which is expected to be recognized over a weighted average period of 2.8 years.

Restricted Stock Units

During the thirteen weeks ended March 26, 2020, the Company granted 108,242 restricted stock units to certain employees with a weighted average grant-date fair value of $57.70. The restricted stock units granted to eligible employees represent an unfunded, unsecured right to receive a share of the Company’s Class A common stock upon vesting. These awards vest in four ratable annual installments on each of the first four anniversaries of the grant date, subject to the grantee’s continued service through the applicable vesting date. The fair value of the restricted stock units was determined based on the closing price of the Company’s Class A common stock on the date of grant.

The Company’s total unrecognized compensation cost related to restricted stock units as of March 26, 2020 was $6,096 thousand, which is expected to be recognized over a weighted average period of 3.9 years.

Restricted Stock Awards

During the thirteen weeks ended March 26, 2020, the Company issued 367,702 shares of restricted stock to certain executive officers and non-employee directors, comprised of 160,315 shares of restricted stock with a payout subject to certain performance criteria (“performance-based restricted stock”), 104,456 shares of restricted stock with a payout subject to the Company’s total shareholder return (“TSR”) compared to a specified peer group (“TSR awards”), and 102,931 shares of restricted stock that vest based on the grantee’s continued service through the applicable vesting dates (“service-based restricted stock”).

The fair value of 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 TSR awards is estimated on grant date using the Monte Carlo valuation method. The weighted-average fair value of all restricted stock granted during the first quarter of fiscal 2020 was $53.89.

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. The service vesting period for awards granted during the first quarter of fiscal 2020 was one year for non-employee directors and ranged between three to four years for awards to executive officers. As of March 26, 2020, total unrecognized compensation cost related to unvested restricted stock awards was $20,085 thousand, which is expected to be recognized over a weighted average period of 3.8 years.

The performance-based restricted stock cliff vest based on (i) the Company's achievement of pre-determined financial metrics at the end of a three-year performance period and (ii) the grantee’s continued service through the vesting date. The TSR awards cliff vest based on (i) the Company's relative total shareholder return (“TSR”) compared to a specified peer group, with no vesting unless the Company’s TSR exceeds the median TSR of the specified peer group and (ii) the grantee’s continue service through the vesting date. In accordance with ASC 718, Stock Compensation, as the TSR awards are subject to a market condition, their fair value was estimated using a Monte Carlo valuation model with the following assumptions:


	Thirteen Weeks Ended
	March 26, 2020
Risk-free interest rate	1.21	%
Expected volatility	46.5	%
Expected term (in years)	2.84
Dividend yield	—	%

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7. Earnings Per Share

Net Income per Common Share

We calculate basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effect of ~~stock options.~~share-based awards.

The following table shows the computation of basic and diluted earnings per share:


	Thirteen Weeks Ended				Thirty-nine Weeks Ended				Thirteen Weeks Ended
	September 26,		September 27,		September 26,		September 27,		March 26,		March 28,
in thousands, except per share data	2019		2018		2019		2018		2020		2019
Net income	$	40,974	$	26,568	$	115,290	$	98,285	$	37,063	$	30,720
Basic weighted average shares outstanding		100,137		97,254		98,855		96,551		101,629		97,785
Dilutive effect of share based awards		5,043		7,311		5,957		8,185
Dilutive effect of share-based awards										3,881		6,536
Diluted weighted average shares outstanding		105,180		104,565		104,812		104,736		105,510		104,321
Basic earnings per share	$	0.41	$	0.27	$	1.17	$	1.02	$	0.36	$	0.31
Diluted earnings per share	$	0.39	$	0.25	$	1.10	$	0.94	$	0.35	$	0.29

The following share-based awards have been excluded from the computation of dilutive earnings per share because ~~the~~their effect would be anti-dilutive:

Thirteen Weeks Ended

Thirty-nine Weeks Ended

Thirteen Weeks Ended

September 26,

September 27,

September 26,

September 27,

March 26,

March 28,

in thousands

2019

2018

2019

2018

2020

2019

Stock options

281

209

997

168

590

986

Restricted stock

284

—

Restricted stock units

108

—

8. Subsequent Events

Coronavirus Aid, Relief, and Economic Security Act

On March 27, 2020, the U.S. President signed into law H.R. 748, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which includes, among other things, tax provisions such as temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary deferral of certain payments for the employer portion of social security taxes, technical corrections of prior tax legislation for tax depreciation of certain qualified improvement property, and the availability of certain refundable employee retention credits.

Due to the recent enactment of the CARES Act, the Company is currently evaluating its potential impact on the Company’s consolidated financial statements. However, the Company anticipates that it will benefit from certain of the income tax provisions of the CARES Act, including the temporary five-year net operating loss carryback allowance and the technical correction for qualified improvement property, which changes 39-year property to 15-year property eligible for 100% tax bonus depreciation. The Company estimates that these income tax provisions will result in substantial refunds of income taxes paid for fiscal 2013 through fiscal 2019 and potential reductions to fiscal 2020 income taxes. In addition, the Company expects to benefit from the temporary deferral of payments for the employer portion of social security taxes. The Company also expects to benefit from the employee retention credits and, potentially, other provisions within the CARES Act that are being assessed. Where certain income tax provisions of the CARES Act are determined to be applicable following the completion of the Company’s assessment, these may result in an income tax benefit recorded in the condensed consolidated statements of operations and comprehensive income in the second quarter of fiscal 2020, the period in which the legislation was enacted.

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COVID-19 Update

~~8. Subsequent Event~~On March 11, 2020, the World Health Organization announced that COVID-19 had become a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the COVID-19 pandemic. National, state and local authorities have recommended social distancing and imposed or are considering quarantine and isolation measures on large portions of the population, including mandatory business closures. These measures, while intended to protect human life, are expected to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration. The effectiveness of economic stabilization efforts, including proposed government payments to affected citizens and industries, is uncertain. Some economists are predicting the United States may enter a recession as a result of the pandemic.

Since the end of the first fiscal quarter of fiscal 2020, the impact of the COVID-19 pandemic and its adverse effects have become more prevalent in many of the locations where the Company and its customers and suppliers conduct business. As a result, the Company has begun to experience more pronounced disruptions to its operations, including a significant decline in sales. While the Company expects some of these disruptions and the decline in sales to be temporary, the Company anticipates that these and further adverse impacts resulting from the COVID-19 pandemic will have a material negative effect on its business, results of operations, financial position, and cash flows in 2020.

In ~~October 2018, we signed a lease to relocate our Store Support Center to a nearby location in Atlanta, Georgia. During October 2019, we completed our move~~addition, uncertainty with respect to the ~~new location~~economic effects of the pandemic has introduced significant volatility in the financial markets. To the extent that the COVID-19 pandemic continues or worsens, governments may impose additional restrictions. The continued impact of the COVID-19 pandemic and ~~terminated~~any related restrictions could result in a number of adverse impacts to the ~~lease for our previous Store Support Center facility in Smyrna, Georgia.~~Company’s business, including but not limited to additional disruption to the economy and consumers’ willingness and ability to spend, additional temporary store closures and reduced store operating hours, temporary or permanent disruption to the businesses of the professionals who rely on the Company’s products, additional work restrictions, and supply chains that are interrupted, slowed, or rendered inoperable. As a result, ~~we recognized~~it may be challenging to obtain the products and services that support the Company’s business needs, and individuals could become ill, quarantined, or otherwise unable to work or travel due to health reasons or governmental restrictions. Also, governments may impose other laws, regulations, or taxes which could adversely impact the Company’s business, financial condition, or results of operations. Further, if the businesses of the Company’s customers are similarly affected, they might delay or reduce purchases from the Company. The potential effects of the COVID-19 pandemic also could impact the Company in a ~~loss~~number of ~~$2.1 million related~~other ways including, but not limited to, reductions to the ~~settlement~~Company’s profitability, laws and regulations affecting the Company’s business, the availability of ~~our remaining obligations~~future borrowings, the cost of borrowings, credit risks of the Company’s customers and counterparties, and potential impairments of the carrying value of goodwill, other indefinite-lived intangible assets, right-of-use assets, fixed assets, and other assets. Given the evolving impact of the COVID-19 pandemic on the health, economic, social, and governmental environments in which the Company and its employees, customers, suppliers, and other business partners operate, the potential impact that the pandemic could have on the Company’s business remains uncertain, and the effects of the COVID-19 pandemic will not be fully reflected in the Company’s results of operations and overall financial performance until future periods.

In response to the impact and uncertainties caused by the COVID-19 pandemic and these changing conditions, the Company is implementing a number of measures to minimize cash outlays, including lowering inventory purchases and related supply chain costs to align with reduced sales, temporarily reducing compensation for all executive officers and most employees, freezing new hiring, reducing or eliminating non-essential spending, reducing advertising spending, furloughing certain employees, and delaying or reducing planned capital expenditures, including new store investments. The Company continues to monitor this rapidly developing situation and may, as necessary, reduce expenditures further, borrow additional amounts under its term loan and revolving line of credit facilities, or pursue other sources of capital that may include other forms of external financing in order to increase its cash position and preserve financial flexibility in response to the uncertainty in the United States and global markets resulting from COVID-19. Refer to Note 3, “Debt” for additional information regarding the Company’s outstanding credit facilities. The Company expects that its actions to reduce expenditures together with cash on hand, cash expected to be generated from operations, the availability of borrowings under the ~~lease~~Company’s 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 the ~~write off~~Company’s credit facilities for at least the next twelve months. However, the COVID-19 pandemic is adversely affecting the availability of liquidity generally in the ~~remaining right-of-use asset for~~credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the ~~facility upon lease termination.~~longer the pandemic lasts.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Floor & Decor Holdings, Inc. and Subsidiaries included in Item 1 of this quarterly report on Form 10-Q (this “Quarterly Report”) and with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December ~~27, 2018~~26, 2019 and filed with the Securities and Exchange Commission (the “SEC”) on February ~~25, 2019~~20, 2020 (the “Annual Report”). As used in this Quarterly Report, except where the context otherwise requires or where otherwise indicated, the terms “Floor & Decor,” “Company,” “we,” “our” or “us” refer to Floor & Decor Holdings, Inc. and its subsidiaries.

Forward-Looking Statements

The discussion in this Quarterly Report, including under this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A, “Risk Factors” of Part II, contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact contained in this Quarterly Report, including statements regarding the Company’s future operating results and financial position, business strategy and plans, ~~and~~ objectives of management for future operations, and the impact of the coronavirus (COVID-19) pandemic, are forward-looking statements. These statements are based on our current expectations, assumptions, estimates and projections. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “could,” “seeks,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “budget,” “potential” or “continue” or the negative of these terms or other similar expressions.

The forward-looking statements contained in this Quarterly Report are only predictions. Although we believe that the expectations reflected in the forward-looking statements in this Quarterly Report are reasonable, we cannot guarantee future events, results, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements in this Quarterly Report, including, without limitation, those factors described in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A, “Risk Factors” of Part II. Some of the key factors that could cause actual results to differ from our expectations include the following:

●

an overall decline in the health of the economy, the hard surface flooring industry, consumer spending and the housing ~~market;~~market, including as a result of the COVID-19 pandemic;

●

an economic recession or depression, including as a result of the COVID-19 pandemic;

●

the impacts of the COVID-19 pandemic or any natural disaster or unexpected event, including any impacts on the credit markets, our lenders, us, our operations, or our future financial or operational results;

●

the resignation, incapacitation or death of any key personnel;

●

any disruption in our distribution capabilities resulting from our inability to operate our distribution centers going forward;

●

competition from other stores and internet-based competition;

●

our failure to execute our business strategy effectively and deliver value to our customers;

●

our inability to manage our growth;

●

our inability to manage costs and risks relating to new store openings;

●

our dependence on foreign imports for the products we sell, which may include the impact of tariffs and other duties;

●

our inability to find, train and retain key personnel;

●

violations of laws and regulations applicable to us or our suppliers;

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●

our failure to adequately protect against security breaches involving our information technology systems and customer information;

●

our failure to successfully anticipate consumer preferences and demand;

●

our inability to find available locations for our stores or our store support center on terms acceptable to us;

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●

our inability to obtain merchandise on a timely basis at prices acceptable to us;

●

suppliers may sell similar or identical products to our competitors;

●

our inability to maintain sufficient levels of cash flow to meet growth expectations;

●

our inability to manage our inventory obsolescence, shrinkage and damage;

●

fluctuations in material and energy costs;

●

~~our vulnerability to natural disasters and other unexpected events;~~ and

●

restrictions imposed by our indebtedness on our current and future operations.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The forward-looking statements contained in this Quarterly Report speak only as of the date hereof. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. If a change to the events and circumstances reflected in our forward-looking statements occurs, our business, financial condition and operating results may vary materially from those expressed in our forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.

Overview

Founded in 2000, Floor & Decor is a high growth, differentiated, multi-channel specialty retailer of hard surface flooring and related accessories with ~~113~~123 warehouse format stores across 2830 states as of ~~September~~March 26, ~~2019.~~2020. We believe that we offer the industry’s broadest in-stock assortment of tile, wood, laminate, vinyl, and natural stone flooring along with decorative and installation accessories at everyday low prices positioning us as the one stop destination for our customers’ entire hard surface flooring needs. We appeal to a variety of customers, including professional installers and commercial businesses (“Pro”), Do-it-Yourself customers (“DIY”), and customers who buy the products for professional installation.

We operate on a 52- or 53-week fiscal year ending the Thursday on or preceding December 31. The following discussion contains references to the first ~~thirty-nine~~thirteen weeks of fiscal ~~2019~~2020 and fiscal ~~2018,~~2019, which ended on ~~September~~March 26, ~~2019~~2020 and ~~September 27, 2018,~~March 28, 2019, respectively.

During the ~~thirty-nine~~thirteen weeks ended ~~September~~March 26, ~~2019,~~2020, we continued to make long-term key strategic investments, including:

●

opening ~~thirteen~~three new warehouse-format stores ending the quarter with ~~113~~123 warehouse-format stores;

●

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

●

investing ~~capital~~ in ~~our stores, information technology and~~ our connected customer, ~~strategies~~in-store designer, and Pro customer personnel and customer relationship technology;

●

investing capital to continue enhancing ~~and integrating~~ the ~~online and~~ in-store shopping experience for our customers; and

●

temporarily adjusting operations in response to the COVID-19 pandemic to the protect the health of our employees and customers, including temporarily implementing a curbside pickup model and shortening store operating hours.

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The COVID-19 Pandemic is Disrupting Our Business

The COVID-19 pandemic is disrupting our business. As of April 28, 2020, our second quarter fiscal 2020 comparable store sales have declined 50% compared with the same period in the prior year. While we expect some of these disruptions and the decline in sales to be temporary, the current circumstances are dynamic and additional impacts of the pandemic on our business operations, including the duration and impact on overall customer demand, including potential changes in consumer behavior due to financial, health, or other concerns, cannot be reasonably estimated at this time. While the full impact that the COVID-19 pandemic could have on our business remains highly uncertain, we currently anticipate that disruptions from the pandemic will have a material negative impact on our results of operations, financial position, and cash flows in fiscal 2020. These potential negative effects will not be fully reflected in our results of operations and overall financial performance until future periods.

We have three priorities while navigating through this period of volatility and uncertainty:

●

First, to protect the health and safety of our employees and customers.

●

~~engaging more professional~~Second, to keep our brand strong and support all of our customers, including ~~adding regional professional sales associates to grow our commercial sales,~~the numerous small businesses that rely upon us such as ~~well as signing up more customers on our Pro Premier Loyalty Program.~~general contractors and flooring installers.

●

Third, to ensure that Floor & Decor emerges strong from this event. The pandemic will eventually come to an end, and we believe that we will emerge a better company by driving our long-term strategies, responding to changing consumer behavior, and capitalizing on opportunities from our relative strength.

As of the date of this filing, we have implemented contingency planning, with most employees working remotely where possible. We are working hard to monitor and quickly respond to this situation, including communicating often throughout the organization and adapting our operations to follow rapidly evolving federal, state and local ordinances as well as health guidelines on mitigating the risk of COVID-19 transmission. We believe our rapid and thoughtful approach to serving our associates and customers in a safe manner is working well; albeit at lower sales volumes than before the pandemic. We have crisis teams in place monitoring the rapidly evolving situation and recommending risk mitigation actions; we have implemented travel restrictions as well as visitor protocols; and we are following social distancing practices. We have assessed and are implementing continuity plans to provide customers with continued supply. There has been no material impact on supply for most of our sourced merchandise, and we are also working closely with our suppliers and transportation partners.

While we have plans for fully reopening our stores in the future, these plans depend on a number of factors, including applicable regulatory restrictions, and there is substantial uncertainty regarding the manner and timing in which we can return some or all of our business to more normal operations. We may face longer term closure requirements and other operational restrictions at some or all of our physical locations for prolonged periods of time due to, among other factors, evolving and increasingly stringent federal, state, and local restrictions including shelter-in-place orders. Even once we are able to fully reopen our stores, changes in consumer behavior due to financial, health, or other concerns may reduce consumer demand for our products. As a result of these developments, the Company expects an unfavorable impact on its sales, results of operations, and cash flows in fiscal 2020. See Note 8, “Subsequent Events” to our condensed consolidated financial statements and Item 1A., “Risk Factors” for additional information.

Coronavirus Aid, Relief, and Economic Security Act

As discussed in Note 8, “Subsequent Events,” on March 27, 2020, the U. S. President signed into law H.R. 748, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). We are currently evaluating the impact of the CARES Act on our business. While we have not yet completed this assessment at the time of this quarterly report on Form 10-Q, we anticipate that the CARES Act will result in substantial income tax benefits, including cash refunds in fiscal 2020 for income taxes paid in prior years, and allow us to conserve cash in fiscal 2020 by deferring employer social security tax payments. In addition, we expect that we may benefit from the employee retention credits and, potentially, other provisions of the CARES Act that have not yet been assessed.

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Key Performance Indicators

We consider a variety of performance and financial measures in assessing the performance of our business. The key performance and financial measures we use to determine how our business is performing are comparable store sales, the number of new store openings, gross profit and gross margin, operating income, and EBITDA and Adjusted EBITDA. For definitions and a discussion of how we use our key performance indicators, see the “Key Performance Indicators” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report. See “Non-GAAP Financial Measures” below for a discussion of how we define EBITDA and Adjusted EBITDA and a reconciliation of EBITDA and Adjusted EBITDA to net income, the most

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directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”).

Other key financial terms we use include net sales, selling and store operating expenses, general and administrative expenses, and pre-opening expenses. For definitions and a discussion of how we use ~~our~~ other key financial ~~definitions,~~terms, see the “Other Key Financial Definitions” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report.

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Results of Operations

While our revenue and earnings for the thirteen weeks ended March 26, 2020 were impacted due to the COVID-19 pandemic, primarily the last week of the period, the full impact that the pandemic could have on our business remains highly uncertain. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - The COVID-19 Pandemic is Disrupting Our Business” and Item 1A., “Risk Factors” for more information about the potential impacts that the COVID-19 pandemic may have on our results of operations and overall financial performance for future periods.

The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of net sales (actuals in thousands; dollar changes in millions):

Thirteen Weeks Ended

September 26, 2019

September 27, 2018


Actual

% of Sales


Actual

% of Sales


$ Increase/(Decrease)

% Increase/(Decrease)

Net sales

$
521,093

100.0
%

$
435,882

100.0
%

$
85.2

19.5
%
Cost of sales

307,305

59.0

257,656

59.1

49.6

19.3

Gross profit

213,788

41.0

178,226

40.9

35.6

20.0

Operating expenses:

Selling and store operating

136,958

26.3

109,182

25.0

27.8

25.4

General and administrative

37,246

7.1

26,477

6.1

10.8

40.7

Pre-opening

8,184

1.6

8,330

1.9

(0.1)

(1.8)

Total operating expenses

182,388

35.0

143,989

33.0

38.4

26.7

Operating income

31,400

6.0

34,237

7.9

(2.8)

(8.3)

Interest expense

1,978

0.4

2,171

0.5

(0.2)

(8.9)

Income before income taxes

29,422

5.6

32,066

7.4

(2.6)

(8.2)

(Benefit) provision for income taxes

(11,552)

(2.3)

5,498

1.2

(17.1)

NM

Net income

$
40,974

7.9
%

$
26,568

6.1
%

$
14.4

54.2
%


	Thirty-nine Weeks Ended												Thirteen Weeks Ended
	September 26, 2019				September 27, 2018								March 26, 2020				March 28, 2019
	Actual		% of Sales		Actual		% of Sales		$ Increase/(Decrease)		% Increase		Actual		% of Sales		Actual		% of Sales		$ Increase/(Decrease)		% Increase/(Decrease)
Net sales	$	1,518,454	100.0	%	$	1,273,109	100.0	%	$	245.3	19.3	%	$	554,937	100.0	%	$	477,050	100.0	%	$	77.9	16.3	%
Cost of sales		885,469	58.3			751,859	59.1			133.6	17.8			318,905	57.5			275,676	57.8			43.2	15.7
Gross profit		632,985	41.7			521,250	40.9			111.7	21.4			236,032	42.5			201,374	42.2			34.7	17.2
Operating expenses:
Selling and store operating		398,984	26.3			320,375	25.2			78.6	24.5			153,066	27.6			127,383	26.7			25.7	20.2
General and administrative		98,364	6.5			74,995	5.9			23.4	31.2			30,858	5.6			30,202	6.4			0.7	2.2
Pre-opening		18,580	1.2			17,892	1.4			0.7	3.8			5,434	1.0			4,027	0.8			1.4	34.9
Total operating expenses		515,928	34.0			413,262	32.5			102.7	24.8			189,358	34.1			161,612	33.9			27.7	17.2
Operating income		117,057	7.7			107,988	8.5			9.1	8.4			46,674	8.4			39,762	8.3			6.9	17.4
Interest expense		7,122	0.5			6,100	0.5			1.0	16.8
Interest expense, net														1,807	0.3			2,921	0.6			(1.1)	(38.1)
Income before income taxes		109,935	7.2			101,888	8.0			8.0	7.9			44,867	8.1			36,841	7.7			8.0	21.8
(Benefit) provision for income taxes		(5,355)	(0.4)			3,603	0.3			(9.0)	NM
Provision for income taxes														7,804	1.4			6,121	1.3			1.7	NM
Net income	$	115,290	7.6	%	$	98,285	7.7	%	$	17.0	17.3	%	$	37,063	6.7	%	$	30,720	6.4	%	$	6.3	20.6	%

NM – Not meaningful

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Selected Financial Information


		Thirteen Weeks Ended					Thirty-nine Weeks Ended						Thirteen Weeks Ended
		September 26, 2019			September 27, 2018		September 26, 2019			September 27, 2018			March 26, 2020			March 28, 2019
Comparable store sales (% change)		4.6	%		11.1	%		3.6	%		12.6	%		2.4	%		3.1	%
Comparable average ticket (% change)		2.8	%		(1.4)	%		2.0	%		—	%		3.4	%		1.1	%
Comparable customer transactions (% change)		1.8	%		12.7	%		1.6	%		12.7	%		(1.0)	%		1.9	%
Number of warehouse-format stores		113			95			113			95			123			103
Adjusted EBITDA (in thousands) ~~(1)~~	$	57,147		$	48,918		$	183,807		$	147,428		$	73,126		$	60,068
Adjusted EBITDA margin		11.0	%		11.2	%		12.1	%		11.6	%		13.2	%		12.6	%

(1) Adjusted EBITDA is a non-GAAP financial measure. See “Non-GAAP Financial Measures” section below for additional information and a reconciliation to the most comparable GAAP measure.

Net Sales

Net sales during the thirteen weeks ended ~~September~~March 26, ~~2019~~2020 increased ~~$85.2~~$77.9 million, or ~~19.5%~~16.3%, compared to the corresponding prior year period due to the opening of 1820 new stores since ~~September 27, 2018~~March 28, 2019 and an increase in comparable store sales of ~~4.6%~~2.4%. The comparable store sales increase during the period of ~~4.6%~~2.4%, or ~~$20.1~~$11.6 million, was primarily driven by a ~~2.8%~~3.4% increase in comparable average ticket, ~~and~~partially offset by a ~~1.8% increase~~1.0% decrease in comparable customer transactions. Among our six product categories, three experienced comparable store sales increases including laminate/luxury vinyl plank, decorative accessories/wall tile, and installation materials and ~~tools, and decorative accessories.~~tools. Non-comparable store sales increased ~~$65.1~~$66.3 million during the same period primarily due to the increase in new stores previously described.

Net sales during the thirty-nine weeks ended September 26, 2019 increased $245.3 million, or 19.3%, compared to the corresponding prior year period due to the opening of 18 new stores since September 27, 2018 and an increase in Our comparable store sales increased 6.1% through March 20, 2020, the last day of ~~3.6%. The comparable store sales increase during the period of 3.6%, or $45.7 million, was driven by a 2.0% increase~~normal operations before limiting stores to curbside services in comparable average ticket and a 1.6% increase in comparable customer transactions. Among our six product categories, three experienced comparable store sales increases including laminate/luxury vinyl plank, installation materials and tools, and decorative accessories. Non-comparable store sales increased $199.6 million during the same period primarily dueresponse to the ~~increase in new stores previously described.~~COVID-19 pandemic.

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We believe the increases in net sales and ~~customer transactions~~average ticket are due to the execution of our key strategic investments. We believe our continued investments and focused merchandising, connected customer, Pro, marketing, 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.~~

Gross Profit and Gross Margin

Gross profit during the thirteen weeks ended ~~September~~March 26, ~~2019~~2020 increased ~~$35.6~~$34.7 million, or ~~20.0%~~17.2%, compared to the corresponding prior year period. This increase in gross profit was driven by the ~~19.5%~~16.3% increase in sales and a slight increase in gross margin to ~~41.0%~~42.5%, up approximately 1030 basis points from ~~40.9%~~42.2% in the corresponding prior year period. This increase in gross margin was primarily due to higher product gross ~~margin.~~

~~Gross profit during the thirty-nine weeks ended September 26, 2019 increased $111.7 million, or 21.4%, compared to the corresponding prior year period. This increase in gross profit was~~margin driven by lower costs from the ~~19.3% increase in sales~~elimination of certain tariffs and an increase in gross margin to 41.7%, up approximately 80 basis points from 40.9% in the corresponding prior year period. The improvement in gross margin was attributable to better product gross margins as well as leveraging our supply chain costs on higher sales. The improved product margins were due to favorable negotiations with our suppliers, improved merchandising strategies, ~~including~~partially offset by higher ~~sales from higher margin categories like installation and decorative accessories, and various strategic retail increases.~~distribution center costs related to our new distribution center near Baltimore, Maryland that opened in the fourth quarter of fiscal 2019.

Selling and Store Operating Expenses

Selling and store operating expenses during the thirteen weeks ended ~~September~~March 26, ~~2019~~2020 increased ~~$27.8~~$25.7 million, or ~~25.4%~~20.2%, compared to the corresponding prior year period, due primarily to opening 18twenty new stores since

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~~September 27, 2018.~~ March 28, 2019. As a percentage of net sales, our selling and store operating expenses increased approximately ~~130~~90 basis points to ~~26.3%~~27.6% from ~~25.0%~~26.7% in the corresponding prior year period primarily driven by new stores open less than one year. Comparable store selling and store operating expenses as a percentage of comparable store sales ~~increased~~decreased by approximately 2070 basis points, ~~driven by~~as we leveraged occupancy, incentive compensation, and advertising expenses on higher ~~advertising and other operating expenses.~~

Selling and store operating expenses during the thirty-nine weeks ended September 26, 2019 increased $78.6 million, or 24.5%, compared to the corresponding prior year period, due primarily to opening 18 new stores since September 27, 2018. As a percentage of net sales, our selling and store operating expenses increased approximately 110 basis points to 26.3% from 25.2% in the corresponding prior year period driven by new stores open less than one year. Comparable store sellingsales. Selling and store operating expenses as a percentage of ~~comparable~~revenue were also impacted by disruptions to our store operations in March 2020 caused by the unfolding COVID-19 pandemic, resulting in slower sales ~~decreased by approximately 20 basis points due primarily to leveraging personnel expenses on higher net sales.~~growth, and therefore lower expense leverage, for the first quarter of fiscal 2020.

General and Administrative Expenses

General and administrative expenses, which are typically expenses incurred outside of our stores, increased ~~$10.8~~$0.7 million, or ~~40.7%~~2.2%, during the thirteen weeks ended ~~September~~March 26, ~~2019~~2020 compared to the corresponding prior year period due to our continued investments in personnel for our store support functions and increased depreciation due to technology investments to support store ~~growth, and a $4.1 million impairment charge related to the operating lease right-of-use asset for our former Store Support Center in Smyrna, Georgia.~~growth. Our general and administrative expenses as a percentage of net sales ~~increased~~decreased approximately ~~100~~80 basis points to ~~7.1%~~5.6% from ~~6.1%~~6.4% in the corresponding prior year period ~~of which 80 basis points~~primarily due to lower accruals for employee incentive compensation during the thirteen weeks ended March 26, 2020 as a result of the ~~increase was due to the impairment charge.~~

General and administrative expenses during the thirty-nine weeks ended September 26, 2019 increased $23.4 million, or 31.2%, compared to the corresponding prior year period due to our continued investments in personnel for our store support functions, increased depreciation due to technology investments to support store growth, and a $4.1 million impairment charge related to the operating lease right-of-use asset for our former Store Support Center in Smyrna, Georgia. Our general and administrative expenses as a percentage of net sales increased approximately 60 basis points to 6.5% from 5.9% in the corresponding prior year period, of which 30 basis points of the increase was due to the impairment charge.COVID-19 pandemic.

Pre-Opening Expenses

Pre-opening expenses during the thirteen weeks ended ~~September~~March 26, ~~2019 decreased $0.1~~2020 increased $1.4 million, or ~~1.8%~~34.9%, compared to the corresponding prior year period. The ~~decrease~~increase is primarily the result of higher occupancy costs due to ~~an enhanced~~a longer period of possession prior to store opening ~~process which shortens the period it takes to open new stores, thereby lessening pre-occupancy costs,~~ as well as an increase in the number of new stores that we are preparing for opening ~~fewer stores in higher cost metropolitan markets.~~compared to the prior year period. We opened ~~seven~~three stores during each of the thirteen weeks ended ~~September~~March 26, ~~2019~~2020 and September 27, 2018. Of the seven store openings during the thirteen weeks ended September 26, 2019, three were in existing markets as compared to one store opening in existing markets during the corresponding prior year period.

Pre-opening expenses during the thirty-nine weeks ended September 26, 2019 increased $0.7 million, or 3.8%, compared to the corresponding prior year period. For the first nine months of fiscal 2019, this expense grew at a slower rate than sales due to an enhanced store opening process which allows us to shorten the period it takes to open new stores, thereby lessening pre-opening occupancy costs. We opened thirteen stores during the thirty-nine weeks ended September 26, 2019 compared to opening twelve stores during the corresponding prior year period.March 28, 2019.

Interest Expense

~~Interest~~Net interest expense during the thirteen weeks ended ~~September~~March 26, ~~2019~~2020 decreased ~~$0.2~~$1.1 million, or ~~8.9%~~38.1%, compared to the corresponding prior year period. The decrease in interest expense was primarily due to ~~lowering our average debt balance to $146.6 million~~a decrease in interest rates as well as an increase in interest income earned during the thirteen weeks ended ~~September~~March 26, ~~2019 compared to an average debt balance of $160.6 million in the corresponding prior year period.~~

~~Interest expense during the thirty-nine weeks ended September 26, 2019 increased $1.0 million, or 16.8%,~~2020 compared to the corresponding prior year period. ~~The increase in interest expense was primarily due to the increase in~~

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~~our average interest rate to 5.6% for the thirty-nine weeks ended September 26, 2019 from 4.6% in the corresponding prior year period.~~

Income Taxes

The provision for income taxes during the thirteen weeks ended ~~September~~March 26, ~~2019 decreased $17.1~~2020 increased $1.7 million compared to the corresponding prior year period. The effective tax rate was ~~(39.3)%~~17.4% for the thirteen weeks ended ~~September~~March 26, ~~2019~~2020 compared to ~~17.1%~~16.6% in the corresponding prior year period. The decrease in the effective tax rate for the current period was primarily due to the recognition of higher excess tax benefits related to stock options exercised than in the corresponding prior year period.

The provision for income taxes during the thirty-nine weeks ended September 26, 2019 decreased $9.0 million compared to the corresponding prior year period. The effective tax rate was (4.9)% for the thirty-nine weeks ended September 26, 2019 compared to 3.5% in the corresponding prior year period. The decreaseincrease in the effective tax rate was primarily due to higher discrete expense for loss contingencies related to uncertain tax positions, partially offset by the recognition of higher ~~excess~~income tax benefits related to stock ~~options exercised than in the corresponding prior year period.~~option exercises.

Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are key metrics used by management and our board of directors 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 (as defined below), 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 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, 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. See below for a reconciliation of EBITDA and Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

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 (gain) on asset ~~disposal,~~impairments and disposals, 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.

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The following table reconciles net income to EBITDA and Adjusted EBITDA for the periods presented:



	Thirteen Weeks Ended				Thirty-nine Weeks Ended				Thirteen Weeks Ended
in thousands	September 26, 2019		September 27, 2018		September 26, 2019		September 27, 2018		March 26, 2020		March 28, 2019
Net income	$	40,974	$	26,568	$	115,290	$	98,285	$	37,063	$	30,720
Depreciation and amortization (1)		18,188		11,987		52,451		32,898		21,673		16,871
Interest expense		1,978		2,171		7,122		6,100
Income tax (benefit) expense		(11,552)		5,498		(5,355)		3,603
Interest expense, net										1,807		2,921
Income tax expense										7,804		6,121
EBITDA		49,588		46,224		169,508		140,886		68,347		56,633
Stock compensation expense (2)		2,242		1,659		6,660		4,611		2,908		2,250
Loss on asset impairments and disposals (3)		4,133		—		4,111		—
Other (4)		1,184		1,035		3,528		1,931
COVID-19 costs (3)										1,310		—
Tariff refunds (4)										(401)		—
Other (5)										962		1,185
Adjusted EBITDA	$	57,147	$	48,918	$	183,807	$	147,428	$	73,126	$	60,068

(1) Excludes amortization of deferred financing costs, which is included as part of interest expense, net in the table above. ~~For the thirteen and thirty-nine weeks ended September 27, 2018, amounts are also net of amortization of tenant improvement allowances.~~

(2) Non-cash charges related to stock-based compensation programs, which vary from period to period depending on timing of awards and forfeitures.

(3) ~~Amount primarily represents impairment loss~~Represents employee payroll continuation, sanitation, and other costs directly related to disruptions caused by or efforts to mitigate the impact of the COVID-19 pandemic on our business.

(4) Represents income for tariff refunds recognized during the thirteen weeks ended March 26, 2020 for engineered wood products. Interest income for the ~~operating lease right-of-use asset related to~~tariff refunds is included within interest expense, net in the ~~Company’s former Store Support Center in Smyrna, Georgia.~~table above.

~~(4)~~(5) Other adjustments include amounts management does not consider indicative of our core operating performance. Amounts for the thirteen ~~and thirty-nine~~ weeks ended ~~September~~March 26, ~~2019~~2020 primarily relate to legal fees associated with the February 2020 amendment to our senior secured term loan credit facility and costs associated with ~~the relocation~~a potential secondary public offering of the Company’s ~~Store Support Center as well as secondary public offering costs of our~~ Class A common stock by certain of our stockholders. Amounts for the thirteen ~~and thirty-nine~~ weeks ended ~~September 27, 2018~~March 28, 2019 primarily relate to costs associated with ~~the~~a secondary public ~~offerings~~offering of our Class A common stock by certain of our stockholders, ~~and~~as well as the ~~closing~~relocation of our Store Support Center in Smyrna, Georgia, and closure of the Miami distribution ~~center, net~~center. We did not sell any shares in the offering and did not receive any proceeds from the sale of ~~insurance recoveries from hurricanes Harvey and Irma.~~shares by the selling stockholders.

Liquidity and Capital Resources

Liquidity is provided primarily by our cash flows from operations and our $~~300.0~~400.0 million asset-backed revolving credit facility (the “ABL Facility”). ~~As of September~~Unrestricted liquidity based on our March 26, ~~2019, we had $369.6~~2020 financial data was $375.6 million, ~~in unrestricted liquidity,~~ consisting of ~~$84.1~~$289.9 million in cash and cash equivalents and ~~$285.5~~$85.7 million immediately available for borrowing under the ABL Facility without violating any covenants thereunder.

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 assets 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~~In a normal operating environment outside of the COVID-19 pandemic, our liquidity is not generally seasonal, and our uses of cash are primarily tied to when we open stores and make other capital expenditures.

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.

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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 March 26, 2020, we had no aged discontinued inventory that we intend to donate.

Impact of the COVID-19 Pandemic on Liquidity

As previously noted, the United States and other countries are experiencing business and economic disruptions due to the COVID-19 pandemic. Governmental authorities, companies, and individuals in affected regions are acting to attempt to slow the spread of the disease. As described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - The COVID-19 Pandemic is Disrupting Our Business” and “Risk Factors - The effects of the COVID-19 pandemic are negatively impacting our business and could continue to have a negative impact on our net sales, results of operations, new store openings and earnings,” we have taken a number of actions to respond to the ongoing COVID-19 pandemic, including closing some of our stores, and have shifted our remaining stores to a curbside pickup model. We are continuing to monitor the situation and will resume normal store operations as conditions permit; however, extended or further limitations on our store operations may be required nationally, regionally, or in specific locations. Given the uncertainty of this situation, including the unknown duration and severity of the pandemic and the overall impact on consumer demand, we are unable to forecast the full impact on our business; however, this represents a known area of uncertainty, and we now expect that impacts from the COVID-19 pandemic and the related economic disruption will have a material negative impact on our business. This uncertainty includes the potential need for additional capital resources to maintain our operations during a period of declining revenue from sales.

In more normal times and historically, our primary sources of funds for our business activities are cash flows from operations and our existing credit facilities. As a result of the COVID-19 pandemic and related uncertainty, we anticipate that we will be required to rely more heavily on our cash reserves and lines of credit than we have in recent years. As a precautionary measure in light of the uncertainty resulting from the COVID-19 pandemic, we borrowed $275.0 million under our Amended ABL Facility in mid-March 2020 to increase our cash position and preserve financial flexibility. The proceeds from this borrowing will be used for working capital, general corporate, or other purposes. In addition, to further preserve our financial liquidity, we have implemented a number of measures to minimize cash outlays, including lowering inventory purchases and related supply chain costs to align with reduced sales, temporarily reducing compensation for all executive officers and most employees, freezing new hiring, reducing or eliminating non-essential spending, reducing advertising spending, furloughing certain employees, and delaying or reducing planned capital expenditures, including new store investments. We continue to monitor this rapidly developing situation and may, as necessary, reduce expenditures further, borrow additional amounts under our term loan and revolving credit facilities, or pursue other sources of capital that may include other forms of external financing in order to increase our cash position and preserve financial flexibility. We expect that our actions to reduce expenditures together with cash on hand, cash expected to be generated from operations, ~~and~~ the availability of borrowings under ~~the ABL Facility~~our 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 ~~the ABL Facility and~~ our ~~$350.0 million senior secured term loan facility (the “Term Loan Facility” and together with the ABL Facility, our “Credit Facilities”)~~credit facilities for at least the next 12twelve months.We also continue to examine the impact the CARES Act may have on our business, including potential income tax refunds, social security tax payment deferrals, and employee retention credits.

The Term Loan Facility has no financial maintenance covenants. As of September 26, 2019, we were in compliance with the covenants of the Credit Facilities and no Event of Default (as defined in the credit agreements governing our Credit Facilities) had occurred.

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~~Total~~In response to the COVID-19 pandemic, we have lowered our plans for capital expenditures in fiscal ~~2019~~2020, but the exact scope of changes in our capital plans is evolving and will ultimately depend on a variety of factors. Total capital expenditures are currently planned to be between approximately ~~$203.0~~$147.0 million to ~~$213.0~~$157.0 million, compared to the approximately $255.0 million to $265.0 million we had originally planned, and will be funded primarily by cash generated from ~~operations. We~~operations and borrowings under the Amended ABL facility. Our capital needs may change in the future due to changes in our business or new opportunities that we choose to pursue; however, we currently intend to make the following capital expenditures in fiscal ~~2019:~~2020:

●

open 2011 stores and start construction on stores opening in early ~~2020~~2021 using approximately ~~$131.0~~$106.0 million to ~~$137.0~~$112.0 million of cash;

●

invest in existing store remodeling projects and our distribution centers using approximately ~~$35.0~~$26.0 million to ~~$37.0~~$28.0 million of cash; and

●

invest in information technology infrastructure, e-commerce, and other store support center initiatives using approximately ~~$37.0~~$15.0 million to ~~$39.0~~$17.0 million of cash.

Cash Flow Analysis

A summary of our operating, investing, and financing activities are shown in the following table:


	Thirty-nine Weeks Ended				Thirteen Weeks Ended
in thousands	September 26, 2019		September 27, 2018		March 26, 2020		March 28, 2019
Net cash provided by operating activities	$	209,594	$	143,699	$	24,668	$	27,021
Net cash used in investing activities		(141,015)		(109,395)		(38,384)		(31,634)
Net cash provided by (used in) financing activities		14,883		(34,326)
Net cash provided by financing activities						276,610		4,420
Net increase (decrease) in cash and cash equivalents	$	83,462	$	(22)	$	262,894	$	(193)

Net Cash Provided By Operating Activities

Cash provided by operating activities consists primarily of net income adjusted for ~~non~~‑~~cash~~changes in working capital as well as non-cash items, including depreciation and amortization, ~~stock~~‑~~based compensation,~~ deferred income taxes, and ~~the effects of changes in operating assets and liabilities.~~stock-based compensation.

Net cash provided by operating activities was ~~$209.6~~$24.7 million for the ~~thirty-nine~~thirteen weeks ended ~~September~~March 26, ~~2019~~2020 and ~~$143.7~~$27.0 million for the ~~thirty-nine~~thirteen weeks ended ~~September 27, 2018.~~March 28, 2019. The decrease in net cash provided by operating activities ~~for the thirty-nine weeks ended September 26, 2019~~ was primarily the result of ~~net income, including lower taxes due to stock option exercises,~~an increase in inventory and ~~improvements in working capital. The improvements in~~other working capital ~~were primarily driven~~to support operations, partially offset by ~~the timing of inventory receipts and the associated payables as well as higher receivable collections and the timing of liability payments.~~an increase in net income.

~~The net cash provided by operating activities for the thirty-nine weeks ended September 27, 2018 was primarily the result of net income, including lower taxes due to stock option exercises.~~

Net Cash Used In Investing Activities

Investing activities consist primarily of capital expenditures for new store openings, existing store remodels (including leasehold improvements, new racking, new fixtures, new product and display vignettes, and enhanced design centers) and new infrastructure and information systems.

Capital expenditures during the ~~thirty-nine~~thirteen weeks ended ~~September~~March 26, 2020 and March 28, 2019 ~~and September 27, 2018~~ were ~~$141.0~~$38.4 million and ~~$109.4~~$31.6 million, respectively. ~~We continued our investment~~The growth is primarily related to the increase in new stores ~~as we~~that opened or were under construction during the thirteen ~~new stores and relocated one through September~~weeks ended March 26, ~~2019 and~~2020 compared with the same period in fiscal 2019. We are preparing for an additional ~~thirteen~~six new stores and one ~~distribution~~design center to be opened during the ~~fourth quarter~~second and third quarters of fiscal ~~2019~~2020, and ~~first quarter of fiscal 2020. We~~we generally incur ~~the majority of our~~significant capital expenditures ~~six~~for new stores a few to several months in advance of ~~the new store~~ opening. During the ~~thirty-nine~~thirteen weeks ended ~~September~~March 26, ~~2019,~~2020, approximately ~~62.3%~~75% of capital expenditures ~~related to~~was for new stores, ~~16.4%~~14% was for existing stores and distribution centers, while the remaining spend was associated with information technology, e-commerce, and ~~e-commerce~~store support center investments to support our growth.

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During the thirty-nine weeks ended September 27, 2018, approximately 66.0% of capital expenditures related to new stores, 21.9% was for existing stores and distribution centers, while the remaining capital expenditures were associated with information technology and e‑~~commerce investments to support our growth.~~

Net Cash Provided By ~~(Used In)~~ Financing Activities

Financing activities consist primarily of borrowings and related repayments under our credit agreements as well as proceeds from the exercise of stock ~~options.~~options and our employee share purchase program.

Net cash provided by financing activities was ~~$14.9~~$276.6 million for the ~~thirty-nine~~thirteen weeks ended ~~September~~March 26, ~~2019~~2020 compared with ~~net cash used in financing activities was $34.3~~$4.4 million for the ~~thirty-nine~~thirteen weeks ended ~~September 27, 2018.~~March 28, 2019. The net cash provided by financing activities for the ~~thirty-nine~~thirteen weeks ended ~~September~~March 26, ~~2019~~2020 was primarily driven by borrowings on our revolving credit facility of $275.0 million as well as proceeds from stock option exercises of $3.8 million.

Credit Facility Amendments

On February 14, 2020, we entered into a repricing and general amendment to the ~~employee stock purchase plan~~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 ~~$15.1~~approximately $144.6 million, (b) extended the stated maturity date under the Amended Term Loan Facility to February 14, 2027, and (c) included an “accordion” feature that allows us to borrow additional amounts as described more fully in Note 3, “Debt.”

On February 14, 2020, we also 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 ~~$2.4~~(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, ~~respectively.~~or such higher amount as may be agreed to by the Required Lenders (as defined in the Amended ABL Facility).

~~The net cash used in financing activities~~Refer to Note 3, “Debt” for additional details regarding our Amended Term Loan Facility and Amended ABL Facility, including applicable covenants.

Credit Ratings

Our credit ratings are periodically reviewed by rating agencies. In November 2019, Moody's upgraded the Company's issuer corporate family rating from B1 to Ba3 and stable outlook for the ~~thirty-nine weeks ended September 27, 2018 was primarily driven by~~Company. In April 2020, Moody’s reaffirmed the Company’s Ba3 rating but changed our outlook to negative from stable. In November 2019, S&P reaffirmed the Company's corporate credit rating of BB- and its stable outlook for the Company. 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 ~~net paydown~~material adverse effect on ~~the ABL Facility~~our business, financial condition, results of ~~$41.0 million, partially offset by proceeds from the exercise~~operations, and liquidity. In particular, a weakening of ~~stock options~~our financial condition, including any further increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, could result in a credit rating downgrade or change in outlook, or could otherwise increase our cost of ~~$9.3 million.~~borrowing.

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 ~~vast~~ majority of which are impacted by these tariffs. As we continue to analyze the impact these tariffs may have on our business, we ~~have begun~~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, ~~in fiscal 2019,~~ we expect the enacted tariffs will increase our inventory costs and associated cost of ~~goods sold as we incur the tariffs~~sales.

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Antidumping and Countervailing Duties

~~In addition, on~~

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 exporter. In April 2020, the DOC reached a final determination that imports from China were subsidized and were being sold in the U.S. at less than fair value. As a result of these final determinations, the DOC adjusted the countervailing duty to 358.81% for all Chinese exporters and the antidumping duty to 203.71% or 330.69% depending on the exporter.

The DOC ~~is also expected to reach its preliminary determination as to the level of dumping, if any, in early November 2019. Once the DOC~~ has ~~reached its preliminary determination, it will instruct~~instructed the U.S. Customs and Border Protection to require cash deposits based on ~~these preliminary~~the announced effective rates. The DOC’s ~~preliminary~~final 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.~~expected in early May 2020. If the ITC’s 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 2two 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 ~~have begun taking~~took steps to mitigate the risk of future exposure by sourcing from alternative ~~countries.~~countries and believe we are no longer importing applicable products from China. While we do not currently believe our ~~current~~ inventory during the investigation period is subject to these additional duties, if these additional duties were to apply to our ~~current~~ 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 ~~current~~ inventory during the investigation period is subject to these additional ~~duties, and we note that any liability as of September 26, 2019 would not be material.~~duties. Potential costs and any attendant impact on

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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.

Contractual Obligations

There were no material changes to our contractual obligations outside the ordinary course of our business during the ~~thirty-nine~~thirteen weeks ended ~~September~~March 26, ~~2019.~~2020.

Off-Balance Sheet Arrangements

For the ~~thirty-nine~~thirteen weeks ended ~~September~~March 26, ~~2019,~~2020, 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.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and other factors management believes to be reasonable. The COVID-19 pandemic is disrupting our business as discussed in Management’s Discussion and Analysis and Note 8, “Subsequent Events”, and the estimates used for, but not limited to, our critical accounting policies could be impacted. We have assessed the impact and are not aware of any specific events or circumstances that required an update to the estimates and assumptions used for our

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critical accounting policies or that materially affected the carrying value of our assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results ~~may~~could differ materially from ~~those~~these estimates under different assumptions or conditions.

For a description of our critical accounting policies and ~~assumptions.~~estimates, refer to Part II, Item 7, “Critical Accounting Policies and Estimates” in our Annual Report. There have been no ~~significant~~material changes to our critical accounting policies and estimates as disclosed in our Annual Report. See Note 1 to our condensed consolidated financial statements included in this Quarterly Report, which describes recent accounting pronouncements adopted by ~~us, if any.~~us.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting the Company, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of the Annual Report. ~~Our~~While our exposure to market risk has not changed materially since December ~~27, 2018.~~26, 2019, uncertainty with respect to the economic effects of the COVID-19 pandemic has introduced significant volatility in the financial markets, and the effects of this volatility could materially impact our risks related to foreign currencies, interest rates, and commodity prices. Given the evolving nature of the pandemic, its potential impact on these and other market risks remains uncertain at this time.

Interest Rate Risk

Our operating results are subject to risk from interest rate fluctuations on our Credit Facilities, which carry variable interest rates. As of March 26, 2020, the remaining principal balance of our outstanding variable rate debt aggregated approximately $419.6 million. A 1.0% increase in the effective interest rate for this debt would cause an increase in interest expense of approximately $4.2 million over the next twelve months. To lessen our exposure to changes in interest rate risk, we entered into a $102.5 million interest rate cap agreement in November 2016 with Wells Fargo that capped our LIBOR at 2.0% beginning in December 2016. We do not anticipate that the interest rate cap agreement with Wells Fargo will significantly impact interest expense in the near term as the U.S. Federal Reserve and other central banks have taken recent action to lower interest rates in response to the COVID-19 pandemic, and interest rates are near historic lows.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to provide reasonable assurance that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in reports filed or submitted under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, including the chief executive officer and the chief financial officer, have reviewed the effectiveness of the Company’s disclosure controls and procedures as of ~~September~~March 26, ~~2019~~2020 and, based on their evaluation, have concluded that the Company’s disclosure controls and procedures were ~~not~~ effective at the reasonable assurance level at that date due to a material weakness in internal control over financial reporting that was disclosed in the Annual Report. Notwithstanding the material weakness in the Company’s internal control over financial reporting, we have concluded that thelevel. The condensed consolidated financial statements included in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP. ~~Additionally, the material weakness did not result in any restatements of our condensed consolidated financial statements or disclosures for any prior period.~~

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during the fiscal quarter ended ~~September~~March 26, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Remediation~~

As previously described in Part II, Item 9A of the Annual Report, the Company initiated and has continued to implement a remediation plan to address the material weakness mentioned above. However, the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Based on the steps we have taken to date and the anticipated timing of appropriate test work to ensure adequate design and operating effectiveness of such controls, the Company expects that the remediation of this material weakness will be completed prior to the end of fiscal 2019; however, we cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

See the information under the “Litigation” caption in Note 5, Commitments and Contingencies to our Condensed Consolidated Financial Statements included in this Quarterly Report and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - U.S. Tariffs and Global Economy” in this Quarterly Report, each of which we incorporate here by reference.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report ~~and Part II, “Item 1A Risk Factors” in our Quarterly Report for the quarterly period ended June 27, 2019,~~ filed with the SEC on ~~August 1, 2019,~~February 20, 2020, which could materially affect our business, financial condition and/or operating ~~results.~~results, as well as the following:

The effects of the COVID-19 pandemic are negatively impacting our business and could continue to have a negative impact on our net sales, results of operations, financial position, new store openings and earnings.

On March 11, 2020, the World Health Organization announced that infections of the coronavirus (COVID-19) had become a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the COVID-19 pandemic. National, state and local authorities have recommended social distancing and imposed or are considering quarantine and isolation measures on large portions of the population, including mandatory business closures. These measures, while intended to protect human life, are expected to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration. The effectiveness of economic stabilization efforts, including proposed government payments to affected citizens and industries, is uncertain. Some economists are predicting the United States may enter a recession as a result of the pandemic.

In response to the COVID-19 pandemic and these changing conditions, beginning on March 17, 2020 and continuing through the date we filed this report, we have closed some of our stores and have shifted our remaining stores to a curbside pickup model beginning on March 21, 2020 in the jurisdictions where government regulations permit our stores to continue to operate and where the customer demand makes such operations sustainable. We have also furloughed or modified work hours for many of our employees and identified and implemented cost savings measures throughout our operations. The COVID-19 pandemic and these responses have and will continue to adversely affect our customer traffic, sales, operating costs, and profit, and we cannot predict how long the COVID-19 pandemic will last, whether we will be required to close additional stores or what other government responses may occur. The COVID-19 pandemic has also adversely affected our ability to open new stores, and we have experienced construction delays.

If the business interruptions caused by COVID-19 last longer than we expect, we may need to seek new sources of liquidity. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.

Our operations have been and could be further disrupted if any of our employees is diagnosed with COVID-19 since this could require us to quarantine some or all of a store’s employees and disinfect the impacted stores. If a significant percentage of our workforce is unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, our operations may be negatively impacted, potentially affecting our liquidity, financial condition or results of operations.

Our suppliers have been and could also be further adversely impacted by the COVID-19 pandemic. If our suppliers’ employees are unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with the COVID-19 pandemic, we could face shortages of inventory at our stores and our operations and sales could be adversely impacted by such supply interruptions.

Our business may be further negatively impacted by the fear of exposure to or actual effects of the COVID-19 pandemic or another disease pandemic, epidemic, or similar widespread public health concern; these impacts may include but are not limited to:

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●

Additional temporary store closures due to reduced workforces or government mandates or the need to continue utilizing a curbside pickup model or otherwise modify our operations;

●

Failure of third parties on which we rely, including our suppliers, contract manufacturers, contractors, commercial banks, joint venture partners and external business partners to meet their obligations to the company, or significant disruptions in their ability to do so which may be caused by their own financial or operational difficulties and may adversely impact our operations;

●

Supply chain risks such as scrutiny or embargoing of goods produced in infected areas;

●

Construction delays or halts, preventing us from opening new stores;

●

Liquidity strains, which could slow the rate at which we open new stores;

●

Inability of our key leaders to visit our stores, which could negatively impact customer service and associate morale;

●

Reduced workforces which may be caused by, but not limited to, the temporary inability of the workforce to work due to illness, quarantine, or government mandates;

●

Increased cybersecurity risks due to the number of associates working remotely;

●

Increased litigation risk as a result of the pandemic; and

●

Reduced consumer traffic and purchasing, which may be caused by, but not limited to, the temporary inability of customers to shop with us due to illness, quarantine or other travel restrictions, or financial hardship, shifts in demand away from discretionary spending, or shifts in demand from higher priced products to lower priced products.

Any of the foregoing factors, or other cascading effects of the COVID-19 pandemic or another disease pandemic, epidemic, or similar widespread public health concern, including effects that are not currently foreseeable, could materially increase our costs, negatively impact our sales and damage our financial condition, results of operations, cash flows and our liquidity position, possibly to a significant degree. The duration of any such impacts cannot be predicted, and while it is not clear whether our current insurance policies will provide recovery for any of the impacts of the COVID-19 pandemic or any future disease pandemic, epidemic, or similar widespread public health concern, we do not anticipate that such policies will provide adequate coverage for the impacts of COVID-19 or any future disease pandemic, epidemic, or similar widespread public health concern.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act~~

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) and Section 13(r) of the Exchange Act, require an issuer to disclose in its annual and quarterly reports whether it or any of its affiliates have knowingly engaged in specified activities or transactions relating 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 any 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 that is under common control with us as well as any entity that controls us or is controlled by us.

One of our shareholders, Ares Corporate Opportunities Fund III, L.P. (“Ares”) beneficially owns, in the aggregate, approximately 19.2% of our outstanding Class A common stock. Ares is affiliated with Ares Management Corporation (“Ares Management”). The description that follows has been provided to us by Ares Management. On June 20, 2019, certain investment funds managed or advised by U.K.-based affiliates of Ares Management (the “Ares Entities”) acquired 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.

None.

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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 preparation of this disclosure. We are not representing as to the accuracy or completeness of the disclosure and do not undertake any obligation to correct or update it.

~~We understand that Ares Management intends to disclose in its next quarterly SEC Report that:~~

“Subsequent to completion of the Ares Entities’ investment in AgriBriefing, in connection with Ares’ 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 AgriBriefing 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 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.”

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Item 6. Exhibits


Exhibit No.		Exhibit Description
3.1		Restated Certificate of Incorporation of Floor & Decor Holdings, Inc. (1)
3.2		Second Amended and Restated Bylaws of Floor & Decor Holdings, Inc. (1)
10.1		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 from time to time party thereto and UBS AG, Stamford Branch, as Administrative Agent and Collateral Agent (2)
10.2		Amendment No. 1 to Amended and Restated Credit Agreement and Amendment No. 1 to Amended and Restated 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 from time to time party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and Swing Line Lender (2)
10.3		Second Amended and Restated Employment Agreement, dated February 3, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and Thomas V. Taylor (3)#
10.4		Second Amended and Restated Employment Agreement, dated February 3, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and Lisa G. Laube (3)#
10.5		Second Amended and Restated Employment Agreement, dated February 3, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and Trevor S. Lang (3)#
10.6		Amended and Restated Employment Agreement, dated February 3, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and Brian K. Robbins (3)#
10.7		Second Amended and Restated Employment Agreement, dated February 3, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and David V. Christopherson (3)#
10.8		Form of Performance Restricted Stock Agreement under the Floor & Decor Holdings, Inc. 2017 Stock Incentive Plan (3)
10.9		Addendum to Employment Agreement, dated March 26, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and Thomas V. Taylor#
10.10		Addendum to Employment Agreement, dated March 26, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and David V. Christopherson#
10.11		Addendum to Employment Agreement, dated March 26, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and Brian K. Robbins#
10.12		Addendum to Employment Agreement, dated March 26, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and Trevor S. Lang#
10.13		Addendum to Employment Agreement, dated March 26, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and Lisa G. Laube#
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

#	Denotes a management contract or compensatory plan or arrangement.

(1)

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(2)	(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.

(3)	(2) Filed as an exhibit to 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.

(4)	(3) Filed as an exhibit to 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.

(5)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the ~~Registrant~~registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	FLOOR & DECOR HOLDINGS, INC.

Dated: ~~November 1, 2019~~April 30, 2020	By:	/s/ Thomas V. Taylor
		Thomas V. Taylor
		Chief Executive Officer
		(Principal Executive Officer)

Dated: ~~November 1, 2019~~April 30, 2020	By:	/s/ Trevor S. Lang
		Trevor S. Lang
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

2836


		As of
in thousands, except lease term and discount rate	Classification	September 26, 2019
Assets
Building	Right-of-use assets	$	732,345
Equipment	Right-of-use assets		6,947
Land	Right-of-use assets		194
Software	Right-of-use assets		4,031
Total operating lease assets		$	743,517
Liabilities
Current
Building	Current portion of lease liabilities	$	47,747
Equipment	Current portion of lease liabilities		3,303
Land	Current portion of lease liabilities		85
Software	Current portion of lease liabilities		1,982
Total current operating lease liabilities			53,117
Noncurrent
Building	Lease liabilities		769,510
Equipment	Lease liabilities		4,066
Land	Lease liabilities		114
Software	Lease liabilities		2,148
Total noncurrent operating lease liabilities			775,838
Total operating lease liabilities		$	828,955

Weighted-average remaining lease term			10 years
Weighted-average discount rate			5.2%