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 March 26, 2020April 1, 2021
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
____ to
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Commission file number001-38070
Floor & Decor Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
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| 27-3730271
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Delaware | | 27-3730271 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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2500 Windy Ridge Parkway SE |
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Atlanta,, Georgia | Georgia
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| 30339 |
(Address of principal executive offices) |
| (Zip Code) |
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| (404)
| 471-1634
| | Not Applicable |
(404) 471-1634
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Not Applicable
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(Registrant’s telephone number, including area code) |
| (Former name, former address and former fiscal year, if changed since last report)
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Securities registered pursuant to Section 12(b) of the Act:
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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 daysdays.. 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.
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Large Accelerated Filer | ☒ |
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| Accelerated Filer | ☐ |
Non-Accelerated Filer | ☐ |
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| Smaller Reporting Company | ☐ |
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| 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.
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Class |
| Outstanding at April 28, 2020 May 3, 2021 |
Class A common stock, $0.001 par value per share |
| 102,311,502 104,911,805 |
Table of Contents
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
| | | | | | |
| | As of | | As of |
| | March 26, | | December 26, |
in thousands, except for share and per share data | | 2020 | | 2019 |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 289,931 | | $ | 27,037 |
Income taxes receivable | | | — | | | 2,868 |
Receivables, net | | | 50,561 | | | 69,301 |
Inventories, net | | | 588,941 | | | 581,865 |
Prepaid expenses and other current assets | | | 21,562 | | | 20,415 |
Total current assets | | | 950,995 | | | 701,486 |
Fixed assets, net | | | 473,081 | | | 456,289 |
Right-of-use assets | | | 865,515 | | | 822,256 |
Intangible assets, net | | | 109,291 | | | 109,299 |
Goodwill | | | 227,447 | | | 227,447 |
Other assets | | | 7,551 | | | 7,532 |
Total long-term assets | | | 1,682,885 | | | 1,622,823 |
Total assets | | $ | 2,633,880 | | $ | 2,324,309 |
Liabilities and stockholders’ equity | | | | | | |
Current liabilities: | | | | | | |
Current portion of term loan | | $ | 1,808 | | $ | — |
Current portion of lease liabilities | | | 67,588 | | | 74,592 |
Trade accounts payable | | | 319,815 | | | 368,459 |
Accrued expenses and other current liabilities | | | 100,423 | | | 102,807 |
Income taxes payable | | | 9,674 | | | — |
Deferred revenue | | | 7,189 | | | 6,683 |
Total current liabilities | | | 506,497 | | | 552,541 |
Term loan | | | 138,326 | | | 142,606 |
Revolving line of credit | | | 275,000 | | | — |
Lease liabilities | | | 889,021 | | | 844,269 |
Deferred income tax liabilities, net | | | 13,633 | | | 18,378 |
Other liabilities | | | 2,114 | | | 2,179 |
Total long-term liabilities | | | 1,318,094 | | | 1,007,432 |
Total liabilities | | | 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 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 | | | 378,234 | | | 370,413 |
Accumulated other comprehensive loss, net | | | (125) | | | (193) |
Retained earnings | | | 431,078 | | | 394,015 |
Total stockholders’ equity | | | 809,289 | | | 764,336 |
Total liabilities and stockholders’ equity | | $ | 2,633,880 | | $ | 2,324,309 |
| | | | | | | | | | | |
in thousands, except for share and per share data | As of April 1, 2021 | | As of December 31, 2020 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 354,051 | | | $ | 307,772 | |
| | | |
Receivables, net | 60,002 | | | 50,427 | |
Inventories, net | 607,649 | | | 654,000 | |
Prepaid expenses and other current assets | 40,173 | | | 28,257 | |
Total current assets | 1,061,875 | | | 1,040,456 | |
Fixed assets, net | 611,311 | | | 579,359 | |
Right-of-use assets | 947,451 | | | 916,325 | |
Intangible assets, net | 109,269 | | | 109,269 | |
Goodwill | 227,447 | | | 227,447 | |
Other assets | 7,370 | | | 7,569 | |
Total long-term assets | 1,902,848 | | | 1,839,969 | |
Total assets | $ | 2,964,723 | | | $ | 2,880,425 | |
Liabilities and stockholders’ equity | | | |
Current liabilities: | | | |
Current portion of term loans | $ | 2,103 | | | $ | 1,647 | |
Current portion of lease liabilities | 79,041 | | | 94,502 | |
Trade accounts payable | 402,134 | | | 417,898 | |
Accrued expenses and other current liabilities | 160,406 | | | 162,283 | |
Income taxes payable | 13,635 | | | 12,391 | |
Deferred revenue | 15,659 | | | 10,115 | |
Total current liabilities | 672,978 | | | 698,836 | |
Term loans | 195,546 | | | 207,157 | |
Lease liabilities | 975,185 | | | 941,125 | |
Deferred income tax liabilities, net | 32,449 | | | 27,990 | |
Other liabilities | 7,845 | | | 7,929 | |
Total long-term liabilities | 1,211,025 | | | 1,184,201 | |
Total liabilities | 1,884,003 | | | 1,883,037 | |
Commitments and Contingencies (Note 5) | 0 | | 0 |
Stockholders’ equity | | | |
Capital stock: | | | |
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at April 1, 2021 and December 31, 2020 | 0 | | | 0 | |
Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 104,628,761 shares issued and outstanding at April 1, 2021 and 104,368,212 issued and outstanding at December 31, 2020 | 105 | | | 104 | |
Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at April 1, 2021 and December 31, 2020 | 0 | | | 0 | |
Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and outstanding at April 1, 2021 and December 31, 2020 | 0 | | | 0 | |
Additional paid-in capital | 415,576 | | | 408,124 | |
Accumulated other comprehensive income, net | 247 | | | 164 | |
Retained earnings | 664,792 | | | 588,996 | |
Total stockholders’ equity | 1,080,720 | | | 997,388 | |
Total liabilities and stockholders’ equity | $ | 2,964,723 | | | $ | 2,880,425 | |
See accompanying notes to condensed consolidated financial statements.
Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
| | | | | | | |
| | Thirteen Weeks Ended | |
| | March 26, | | March 28, | |
in thousands, except for per share data | | 2020 | | 2019 | |
Net sales | | $ | 554,937 | | $ | 477,050 | |
Cost of sales | | | 318,905 | | | 275,676 | |
Gross profit | | | 236,032 | | | 201,374 | |
Operating expenses: | | | | | | | |
Selling and store operating | | | 153,066 | | | 127,383 | |
General and administrative | | | 30,858 | | | 30,202 | |
Pre-opening | | | 5,434 | | | 4,027 | |
Total operating expenses | | | 189,358 | | | 161,612 | |
Operating income | | | 46,674 | | | 39,762 | |
Interest expense, net | | | 1,807 | | | 2,921 | |
Income before income taxes | | | 44,867 | | | 36,841 | |
Provision for income taxes | | | 7,804 | | | 6,121 | |
Net income | | $ | 37,063 | | $ | 30,720 | |
Change in fair value of hedge instruments, net of tax | | | 68 | | | (334) | |
Total comprehensive income | | $ | 37,131 | | $ | 30,386 | |
Basic earnings per share | | $ | 0.36 | | $ | 0.31 | |
Diluted earnings per share | | $ | 0.35 | | $ | 0.29 | |
| | | | | | | | | | | |
| Thirteen Weeks Ended |
in thousands, except for per share data | April 1, 2021 | | March 26, 2020 |
Net sales | $ | 782,537 | | | $ | 554,937 | |
Cost of sales | 445,604 | | | 318,905 | |
Gross profit | 336,933 | | | 236,032 | |
Operating expenses: | | | |
Selling and store operating | 189,946 | | | 153,066 | |
General and administrative | 44,041 | | | 30,858 | |
Pre-opening | 6,997 | | | 5,434 | |
Total operating expenses | 240,984 | | | 189,358 | |
Operating income | 95,949 | | | 46,674 | |
Interest expense, net | 1,388 | | | 1,807 | |
Income before income taxes | 94,561 | | | 44,867 | |
Provision for income taxes | 18,765 | | | 7,804 | |
Net income | $ | 75,796 | | | $ | 37,063 | |
Change in fair value of hedge instruments, net of tax | 83 | | | 68 | |
Total comprehensive income | $ | 75,879 | | | $ | 37,131 | |
Basic earnings per share | $ | 0.73 | | | $ | 0.36 | |
Diluted earnings per share | $ | 0.71 | | | $ | 0.35 | |
See accompanying notes to condensed consolidated financial statements.
Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | |
| | Common Stock | | Additional | | Other | | | | | Total |
| | Class A | | Paid-in | | Comprehensive | | Retained | | Stockholders’ |
in thousands | | Shares | | Amount | | Capital | | Income (Loss) | | Earnings | | Equity |
Balance, December 27, 2019 | | 101,458 | | $ | 101 | | $ | 370,413 | | $ | (193) | | $ | 394,015 | | $ | 764,336 |
Stock based compensation expense | | — | | | — | | | 2,908 | | | — | | | — | | | 2,908 |
Exercise of stock options | | 453 | | | 1 | | | 3,782 | | | — | | | — | | | 3,783 |
Issuance of restricted stock awards | | 368 | | | — | | | — | | | — | | | — | | | — |
Shares issued under employee stock plans | | 30 | | | — | | | 1,131 | | | — | | | — | | | 1,131 |
Other comprehensive gain, net of tax | | — | | | — | | | — | | | 68 | | | — | | | 68 |
Net income | | — | | | — | | | — | | | — | | | 37,063 | | | 37,063 |
Balance, March 26, 2020 | | 102,309 | | $ | 102 | | $ | 378,234 | | $ | (125) | | $ | 431,078 | | $ | 809,289 |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | |
| | Common Stock | | Additional | | Other | | | | | Total |
| | Class A | | Paid-in | | Comprehensive | | Retained | | Stockholders’ |
in thousands | | 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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total Stockholders' Equity |
| Class A | | | | |
in thousands | Shares | | Amount | | | | |
Balance, January 1, 2021 | 104,368 | | | $ | 104 | | | $ | 408,124 | | | $ | 164 | | | $ | 588,996 | | | $ | 997,388 | |
Stock-based compensation expense | — | | | — | | | 4,734 | | | — | | | — | | | 4,734 | |
Exercise of stock options | 195 | | | 1 | | | 2,382 | | | — | | | — | | | 2,383 | |
Issuance of restricted stock awards | 27 | | | — | | | — | | | — | | | — | | | — | |
Forfeiture of restricted stock awards | (2) | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock upon vesting of restricted stock units | 25 | | | — | | | — | | | — | | | — | | | — | |
Shares issued under employee stock purchase plan | 26 | | | — | | | 1,302 | | | — | | | — | | | 1,302 | |
Common stock redeemed for tax liability | (10) | | | — | | | (966) | | | — | | | — | | | (966) | |
Other comprehensive gain, net of tax | — | | | — | | | — | | | 83 | | | — | | | 83 | |
Net income | — | | | — | | | — | | | — | | | 75,796 | | | 75,796 | |
Balance, April 1, 2021 | 104,629 | | | $ | 105 | | | $ | 415,576 | | | $ | 247 | | | $ | 664,792 | | | $ | 1,080,720 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders' Equity |
| Class A | | | | |
in thousands | Shares | | Amount | | | | |
Balance, December 27, 2019 | 101,458 | | | $ | 101 | | | $ | 370,413 | | | $ | (193) | | | $ | 394,015 | | | $ | 764,336 | |
Stock-based compensation expense | — | | | — | | | 2,908 | | | — | | | — | | | 2,908 | |
Exercise of stock options | 453 | | | 1 | | | 3,782 | | | — | | | — | | | 3,783 | |
Issuance of restricted stock awards | 368 | | | — | | | — | | | — | | | — | | | — | |
Shares issued under employee stock purchase plan | 30 | | | — | | | 1,131 | | | — | | | — | | | 1,131 | |
Other comprehensive gain, net of tax | — | | | — | | | — | | | 68 | | | — | | | 68 | |
Net income | — | | | — | | | — | | | — | | | 37,063 | | | 37,063 | |
Balance, March 26, 2020 | 102,309 | | | $ | 102 | | | $ | 378,234 | | | $ | (125) | | | $ | 431,078 | | | $ | 809,289 | |
See accompanying notes to condensed consolidated financial statements.
Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | |
| | Thirteen Weeks Ended |
| | March 26, | | March 28, |
in thousands | | 2020 | | 2019 |
Operating activities | | | | | | |
Net income | | $ | 37,063 | | $ | 30,720 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | | 22,088 | | | 17,184 |
Gain on asset impairments and disposals | | | (29) | | | — |
Deferred income taxes | | | (4,739) | | | (1,057) |
Interest cap derivative contracts | | | 83 | | | 610 |
Stock based compensation expense | | | 2,908 | | | 2,250 |
Changes in operating assets and liabilities: | | | | | | |
Receivables, net | | | 18,740 | | | 22,568 |
Inventories, net | | | (7,076) | | | 33,510 |
Trade accounts payable | | | (48,644) | | | (84,005) |
Accrued expenses and other current liabilities | | | (2,478) | | | 3,017 |
Income taxes | | | 12,542 | | | 13,143 |
Deferred revenue | | | 506 | | | 1,337 |
Other, net | | | (6,296) | | | (12,256) |
Net cash provided by operating activities | | | 24,668 | | | 27,021 |
Investing activities | | | | | | |
Purchases of fixed assets | | | (38,384) | | | (31,634) |
Net cash used in investing activities | | | (38,384) | | | (31,634) |
Financing activities | | | | | | |
Borrowings on revolving line of credit | | | 275,000 | | | 80,200 |
Payments on revolving line of credit | | | — | | | (78,100) |
Payments on term loan | | | (875) | | | (875) |
Proceeds from exercise of stock options | | | 3,783 | | | 1,776 |
Debt issuance costs | | | (2,429) | | | — |
Proceeds from employee stock purchase plan | | | 1,131 | | | 1,419 |
Net cash provided by financing activities | | | 276,610 | | | 4,420 |
Net increase (decrease) in cash and cash equivalents | | | 262,894 | | | (193) |
Cash and cash equivalents, beginning of the period | | | 27,037 | | | 644 |
Cash and cash equivalents, end of the period | | $ | 289,931 | | $ | 451 |
Supplemental disclosures of cash flow information | | | | | | |
Buildings and equipment acquired under operating leases | | $ | 63,578 | | $ | 53,049 |
Cash paid for interest, net of capitalized interest | | $ | 1,298 | | $ | 1,987 |
Fixed assets accrued at the end of the period | | $ | 19,620 | | $ | 10,836 |
| | | | | | | | | | | |
| Thirteen Weeks Ended |
in thousands | April 1, 2021 | | March 26, 2020 |
Operating activities | | | |
Net income | $ | 75,796 | | | $ | 37,063 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 26,415 | | | 22,088 | |
Gain on asset impairments and disposals, net | 0 | | | (29) | |
Deferred income taxes | 4,459 | | | (4,739) | |
Interest cap derivative contracts | 84 | | | 83 | |
Stock-based compensation expense | 4,734 | | | 2,908 | |
Changes in operating assets and liabilities: | | | |
Receivables, net | (9,575) | | | 18,740 | |
Inventories, net | 46,351 | | | (7,076) | |
Trade accounts payable | (13,376) | | | (48,644) | |
Accrued expenses and other current liabilities | (16,204) | | | (2,478) | |
Income taxes | 1,244 | | | 12,542 | |
Deferred revenue | 5,544 | | | 506 | |
Other, net | (24,476) | | | (6,296) | |
Net cash provided by operating activities | 100,996 | | | 24,668 | |
Investing activities | | | |
Purchases of fixed assets | (45,876) | | | (38,384) | |
Net cash used in investing activities | (45,876) | | | (38,384) | |
Financing activities | | | |
Borrowings on revolving line of credit | 0 | | | 275,000 | |
| | | |
Proceeds from term loans | 65,000 | | | 0 | |
Payments on term loans | (75,151) | | | (875) | |
Proceeds from exercise of stock options | 2,383 | | | 3,783 | |
Proceeds from employee stock purchase plan | 1,302 | | | 1,131 | |
Debt issuance costs | (1,409) | | | (2,429) | |
Tax payments for stock-based compensation awards | (966) | | | 0 | |
Net cash (used in) provided by financing activities | (8,841) | | | 276,610 | |
Net increase in cash and cash equivalents | 46,279 | | | 262,894 | |
Cash and cash equivalents, beginning of the period | 307,772 | | | 27,037 | |
Cash and cash equivalents, end of the period | $ | 354,051 | | | $ | 289,931 | |
Supplemental disclosures of cash flow information | | | |
Buildings and equipment acquired under operating leases | $ | 53,758 | | | $ | 63,578 | |
Cash paid for interest, net of capitalized interest | $ | 1,376 | | | $ | 1,298 | |
Cash paid for income taxes, net of refunds | $ | 13,055 | | | $ | 0 | |
Fixed assets accrued at the end of the period | $ | 46,275 | | | $ | 19,620 | |
See accompanying notes to condensed consolidated financial statements.
Floor & Decor Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation and Summary of Significant Accounting Policies
Floor & Decor Holdings, Inc., together with its subsidiaries (the “Company,” “we,”
“our”“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/ luxurylaminate, vinyl,
plank, and natural stone flooring along with decorative and installation accessories
and adjacent categories at everyday low prices. Our stores appeal to a variety of customers, including professional installers and commercial businesses (“Pro”),
Do-it-YourselfDo it Yourself customers (“DIY”)
, and customers who buy our products for professional installation (“
Buy-it-Yourself”Buy it Yourself” or “BIY”). We operate within 1 reportable segment.
As of March 26, 2020,April 1, 2021, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc.
("Outlets"), operates 123140 warehouse-format stores, which average 76,00078,000 square feet, and 12 small-format standalone design centerstudios in 3032 states, as well as 4 distribution centers and an e-commerce site, FloorandDecor.com.
The Company’s fiscal year is the 52- or 53-week period ending on the Thursday on or preceding December 31st.
Fiscal year ending December 31, 202030, 2021 (“fiscal 2020”2021”) includes 5352 weeks, and the fiscal year ended December 26, 201931, 2020 (“fiscal 2019”2020”) included 5253 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-weekthirteen-week periods in each quarter of the fiscal year.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. The Condensed Consolidated Balance Sheet as of December
26, 201931, 2020 has been derived from the audited Consolidated Balance Sheet for the fiscal year then ended. The interim condensed consolidated financial statements should be read together with the audited consolidated financial statements and related footnote disclosures included in the Company’s Annual Report on Form 10-K for fiscal
2019,2020, filed with the Securities and Exchange Commission (the “SEC”) on February
20, 202025, 2021 (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 weeks ended
April 1, 2021 and March 26, 2020
and March 28, 2019 are not necessarily indicative of the results to be expected for the full years.
Impact of the
Novel CoronavirusCOVID-19 Pandemic
On March 11, 2020, the World Health Organization announced that infections of the coronavirus (COVID-19)("COVID-19") had become a pandemic, and on March 13, 2020, the U.S. President of the United States announced a National Emergency relating to the COVID-19 pandemic. While theThe full impact that the COVID-19 pandemic could continue to have on ourthe Company's business remains a rapidly evolving situation and is 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.
uncertain. 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 2021 did not appear to be negatively impacted, the COVID-19 pandemic had a material negative impact on the Company's fiscal 2020 in whichoperations and financial results during the Company’s stores were limited to curbside operations, the Company experienced a 46% decline in comparable store sales* compared to the same periodfirst half of fiscal 2020 and could have additional negative impacts in the prior year, which is reflected in the Company’s condensed consolidated statementsfuture. The extent 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 amongCompany's business and financial results will depend on future developments, including the comparable store base. A store is included in the comparable store base on the first dayduration of the thirteenth full fiscal month following its opening.
pandemic, the success of vaccination programs, the spread of COVID-19 within the markets in which the Company operates, as well as the countries from which the Company sources inventory, fixed assets, and other supplies, the effect of the pandemic on consumer confidence and spending, and actions taken by government entities in response to the pandemic, all of which are highly uncertain.
Summary of Significant Accounting Policies
Other than as noted below, there
There have been no updates to our Significant Accounting Policies since the Annual Report. For more information regarding our Significant Accounting Policies and Estimates, see the “Summary of Significant Accounting Policies” section of “Item 8. Financial Statements and Supplementary Data” of our Annual Report.
Impairment Assessment
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 Adopted Accounting Pronouncements
Simplifying the Accounting for Income Taxes.Implementation Costs Incurred in Cloud Computing Arrangements. In August 2018,December 2019, the FASBFinancial Accounting Standards Board ("FASB") issued Accounting StandardsStandard Update (“ASU”("ASU") No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40)2019-12, “Income Taxes (Topic 740): Customer'sSimplifying the Accounting for Implementation Costs IncurredIncome Taxes.” The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in a Cloud Computing Arrangement that is a Service Contract.”Topic 740. The ASU also clarifies and amends existing guidance to improve consistent application among reporting entities. In the first quarter of fiscal 2021, the Company adopted ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in2019-12 on 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.prospective basis. The adoption of ASU No. 2018-15 in the first quarter of fiscal 20202019-12 did not have a material impact on the Company’s condensed consolidated financial statements.
Recently Issued Accounting PronouncementsCredit Losses. In June 2016,January 2021, the FASB issued ASU No. 2016-03,2021-01, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which modifies the measurement approach for credit losses on financial assets measured on an amortized cost basis from an 'incurred loss' method to an 'expected loss' method. The amended guidance requires the measurement of expected credit losses to be based on relevant information, including historical experience, current conditions, and a reasonable and supportable forecast that affects the collectability of the related financial asset. The adoption of ASU No. 2016-03 in the first quarter of fiscal 2020 did not have a material impact on the Company’s condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance to ease the potential accounting and financial reporting burden of reference rate reform, including the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The new guidance provides temporary optional expedients and exceptions for applying U.S. GAAP to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and the sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made. Unlike other topics, the provisions of this update are only available until December 31, 2022, by which time the reference rate replacement activity is expected to be completed. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures and has yet to elect an adoption date.
Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also clarifies and amends existing guidance to improve consistent application among reporting entities. The guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
Net sales consist of revenue associated with contracts with customers for the sale of goods
and services in amounts that reflect the consideration the Company is entitled to receive in exchange for those goods and services.
Deferred Revenue
& Contract Liabilities
Under Accounting Standards Codification (“ASC”) 606,Revenue from Contracts with Customers, the Company recognizes revenue when the customer obtains control of the inventory. Amounts in deferred revenue at period-end reflect orders for which the inventory iswas not currentlyyet ready for physical transfer to customers.
Contract liabilities within the
customer.
Condensed Consolidated Balance Sheets as of April 1, 2021 and December 31, 2020 primarily consisted of deferred revenue as well as amounts in accrued expenses and other current liabilities related to the Pro Premier loyalty program and unredeemed gift cards. As of April 1, 2021, contract liabilities totaled $32.4 million and included $15.7 million of deferred revenue, $13.9 million of loyalty program liabilities, and $2.8 million of unredeemed gift cards. As of December 31, 2020, contract liabilities totaled $24.8 million and included $10.1 million of deferred revenue, $12.1 million of loyalty program liabilities, and $2.6 million of unredeemed gift cards. Of the contract liabilities outstanding as of December 31, 2020, approximately $8.0 million was recognized in revenue during the thirteen weeks ended April 1, 2021. The Company has 1 operating segment and 1 reportable segment. segment. The following table presents the net sales of each major product category (in thousands): | | | | | | | | | | | | |
| Thirteen Weeks Ended | | | |
| March 26, 2020 | | March 28, 2019 | | | |
| | | | % of | | | | | % of | | | |
Product Category | Net Sales | | Net Sales | | Net Sales | | Net Sales | | | |
Tile | $ | 134,912 | | 24 | % | $ | 125,310 | | 26 | % | | |
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 | | 48,995 | | 9 | | | 49,230 | | 10 | | | |
Natural stone | | 34,877 | | 6 | | | 30,887 | | 7 | | | |
Other (1) | | 2,986 | | 1 | | | (28) | | — | | | |
Total | $ | 554,937 | | 100 | % | $ | 477,050 | | 100 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | April 1, 2021 | | March 26, 2020 (1) |
Product Category | | Net Sales | | % of Net Sales | | Net Sales | | % of Net Sales |
Tile | | $ | 189,436 | | | 24 | % | | $ | 134,912 | | | 24 | % |
Laminate / luxury vinyl plank | | 186,035 | | | 24 | | | 124,994 | | | 23 | |
Decorative accessories / wall tile (1) | | 157,374 | | | 20 | | | 111,047 | | | 20 | |
Installation materials and tools | | 130,601 | | | 17 | | | 94,576 | | | 17 | |
Wood | | 62,131 | | | 8 | | | 48,995 | | | 9 | |
Natural stone | | 49,251 | | | 6 | | | 34,877 | | | 6 | |
Adjacent categories (1) | | 12,236 | | | 2 | | | 2,550 | | | 0 | |
Other (2) | | (4,527) | | | (1) | | | 2,986 | | | 1 | |
Total | | $ | 782,537 | | | 100 | % | | $ | 554,937 | | | 100 | % |
(1) To conform to the current period presentation, the presentation of revenue by product category for the thirteen weeks ended March 26, 2020 has been updated within this table to provide disclosure of adjacent categories, which primarily includes bathroom and kitchen products and accessories, as a separate category. In prior periods, adjacent categories revenue was included as a component of the decorative accessories / wall tile product category.
(2) Other includes delivery and sample revenue lessand adjustments for deferredrevenue, sales returns reserves, customer rewards under our Pro Premier Loyalty program, and other revenue related adjustments that are not allocated on a product-level basis.
The following table summarizes ourthe Company's long-term debt as of March 26, 2020April 1, 2021 and December 26, 2019:31, 2020:
| | | | | | |
| | 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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
in thousands | Maturity Date | | Interest Rate per Annum at April 1, 2021 | | April 1, 2021 | | December 31, 2020 |
Credit Facilities: | | | | | | | | |
UBS Facility Term Loan B | February 14, 2027 | | 2.12% | Variable | | $ | 207,653 | | | $ | 143,179 | |
UBS Facility Term Loan B-1 | February 14, 2027 | | n/a | n/a | | 0 | | | 74,625 | |
Wells Facility Revolving Line of Credit | February 14, 2025 | | 3.50% | Variable | | 0 | | | 0 | |
Total secured debt at par value | | | | | | 207,653 | | | 217,804 | |
Less: current maturities | | | | | | 2,103 | | | 1,647 | |
Long-term debt maturities | | | | | | 205,550 | | | 216,157 | |
Less: unamortized discount and debt issuance costs | | | | | | 10,004 | | | 9,000 | |
Total long-term debt | | | | | | $ | 195,546 | | | $ | 207,157 | |
Total debt at fair value | | | | | | $ | 205,057 | | | $ | 215,626 | |
n/a - not applicable
Market risk associated with
ourthe Company's fixed and variable rate long-term debt relates to the potential change in fair value and negative impact to future earnings, respectively, from a change in interest rates. The aggregate fair value of debt is based primarily on
ourthe Company's estimates of interest rates, maturities, credit risk, and underlying collateral and is classified as Level 3 within the fair value hierarchy.
The following table summarizes scheduled maturities of the Company’s debt, including current maturities, as of March 26, 2020:April 1, 2021:
| | | |
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 |
| | | | | |
in thousands | Amount |
Thirty-nine weeks ending December 30, 2021 | $ | 1,577 | |
2022 | 2,103 | |
2023 | 2,103 | |
2024 | 2,103 | |
2025 | 2,103 | |
Thereafter | 197,664 | |
Total minimum debt payments | $ | 207,653 | |
Components of interest expense are as follows for the periods presented:
| | | | | | | | | | | |
in thousands | April 1, 2021 | | March 26, 2020 |
Total interest costs | $ | 1,969 | | | $ | 2,034 | |
Interest capitalized | 581 | | | 227 | |
Interest expense, net | $ | 1,388 | | | $ | 1,807 | |
(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
On February 14, 2020, the Company9, 2021 (the "Effective Date"), Outlets entered into a repricing and generalfifth amendment to the credit agreement governing its senior secured term loan facility (as amended, the “Amended Term"Term Loan Facility”Facility") that,. The fifth amendment provided for, among other things, (a) refinanced the existinga supplemental term loan facility with a new term loan facility in the same aggregate principal amount of approximately $144,625 thousand, and (b) extended$65.0 million (the "Supplemental Term Loan Facility") that increased the stated maturity date under the Amendedterm loan B facility. The Supplemental Term Loan Facility has the same maturity date (February 14, 2027) and terms as the term loan B facility, except that voluntary prepayments made within six months after the Effective Date are subject to February 14, 2027.a 1% soft call prepayment premium. The Amendedother terms of loans under the Term Loan Facility also includes an “accordion” feature that allowsremain unchanged, including 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 theapplicable margin for loans under the Amendedterm loan B facility. The proceeds of the Supplemental Term Loan Facility, uptogether with cash on hand, were used to a Consolidated First Lien Leverage Ratio (as defined(i) repay the $75.0 million term loan B-1 facility and (ii) pay fees and expenses incurred in connection with the AmendedSupplemental Term Loan Facility.
The Term Loan Facility (including loans under the Supplemental Term Loan Facility)
of 2.50:1.00, (y) if such increase is secured onprovides a
junior basis with themargin for 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 toof: (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 suchOutlets exceeds certain leverage ratio test is exceeded)tests), 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 suchOutlets exceeds certain leverage ratio test is exceeded) (subject totests and a 0.00% floor on Eurodollar Loans). The material terms of
All obligations under the
Amended Term Loan Facility
were otherwise unchanged. At March 26, 2020, the applicable interest rate for borrowings(including loans under the
AmendedSupplemental Term
Loan Facility) are secured by (1) a first-priority security interest in substantially all of the property and assets of Outlets and the other guarantors under the Term Loan Facility,
was 3.6%with certain exceptions, and (2) a second-priority security interest in the collateral securing the revolving credit facility ("ABL Facility").
The Company evaluated the amendmentsfifth amendment to the term loan facilityTerm Loan Facility in accordance with ASC 470-50, Debt, and determined that the amendmentsamendment 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$1.6 million in connection with the refinancing which were comprised of (i) $1,779 thousand$1.4 million 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$0.2 million of professional fees to other third parties that were expensed during the thirteen week period ended March 26, 2020April 1, 2021 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).
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,April 1, 2021, the AmendedCompany's ABL Facility had a maximum availability of $400,000 thousand$400.0 million with actual available borrowings limited to the sum, at the time of calculation, of (a) eligible credit card receivables multiplied by the credit card advance rate, plus (b) the cost of eligible inventory, net of inventory reserves, multiplied by the applicable appraisal percentage, plus (c) 85% of eligible net trade receivables, plus (d) all eligible cash on hand, plus (e) 100% of the amount for which the eligible letter of credit must be honored after giving effect to any draws, minus certain Availability Reserves (each component as defined in the Amended ABL Facility). The Amended ABL Facility is available for issuance of letters of credit and contains a sublimit of $50,000 thousand$50.0 million for standby letters of credit and commercial letters of credit combined. Available borrowings under the facility are reduced by the face amount of outstanding letters of credit.
All obligations under the ABL Facility are secured by (1) a first-priority security interest in the cash and cash equivalents, accounts receivable, inventory, and related assets of Outlets and the other guarantors under the ABL Facility, with certain exceptions, and (2) a second-priority security interest in substantially all of the other property and assets of Outlets and the other guarantors under the Term Loan Facility.
Net availability under the
Amended ABL Facility, as reduced by outstanding letters of credit of
$20,512 thousand,$21.3 million, was
$85,676 thousand$370.5 million based on financial data as of
March 26, 2020.April 1, 2021.
The credit agreements governing the
Amended Term Loan Facility and
Amended ABL Facility contain customary restrictive covenants,
that,which, 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:things, a requirement that if borrowings under the ABL Facility exceed 90% of availability, the Company will maintain a certain fixed charge coverage ratio (defined as Consolidated EBITDA less non-financed capital expenditures and income taxes paid to consolidated fixed charges, in each case as more fully defined in the ABL Facility).
Table of Contents | • | 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.
Effective tax rates for the thirteen weeks ended April 1, 2021 and March 26, 2020 and March 28, 2019 were based on the Company’s forecasted annualized effective tax rates and were adjusted for discrete items that occurred within each period. The Company’s effective income tax rate was 19.8% and 17.4% for the thirteen weeks ended April 1, 2021 and March 26, 2020, and 16.6% forrespectively. For each period, the thirteen weeks ended March 28, 2019. The effective income tax rate in each of these periods was lower than the statutory federal income tax rate of 21.0% primarily due to the recognition of income tax benefits for discrete items, the largest of which werefrom tax deductions in excess of book expense related to stock option exercises. For the thirteen weeks ended March 26, 2020exercises and March 28, 2019, benefits forother discrete items were partially offset by the recognition ofitems.
The Company recognizes discrete expense
totaling $2.2 million and $0.1 million, respectively, for loss contingencies related to uncertain tax positions, including estimated interest and
penaltiespenalties. The Company recognized 0 expense related to
uncertain tax positions during the thirteen weeks ended April 1, 2021 compared with $2.2 million of such
positions.expense during the thirteen weeks ended March 26, 2020.
The Company accounts for income taxes under the asset and 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 740.740, Income Taxes. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements using a two-step process for evaluating tax positions taken, or expected to be taken, on a tax return. The Company may only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. In addition, the Company recognizes a loss contingency for uncertain tax positions when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The amounts recognized for uncertain tax positions require that management make estimates and judgments based on provisions of the tax law, which may be subject to change or varying interpretations. The Company includes estimated interest and penalties related to uncertain tax position accruals within accrued expenses and other current liabilities in the condensed consolidated balance sheetsCondensed Consolidated Balance Sheets and within income tax expense in the condensed consolidated statementsCondensed Consolidated Statements of operationsOperations and comprehensive income.Comprehensive Income.
Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provides for, among other things, the temporary deferral of the employer portion of social security taxes incurred through the end of calendar 2020 and an employee retention credit for 50% of wages and health benefits paid to employees not providing services due to the COVID-19 pandemic. In December 2020, the Consolidated Appropriations Act, 2021 was signed into law and generally extended and expanded the availability of the CARES Act employee retention credit through June 30, 2021. Subsequently, the American Rescue Plan Act of 2021, enacted in March 2021, generally extended and expanded the availability of the CARES Act employee retention credit through December 31, 2021.
As of April 1, 2021, the Company has deferred $12.1 million of employer social security taxes under the CARES Act, of which 50% are required to be deposited by December 2021 and the remaining 50% by December 2022. Of the deferred employer social security taxes outstanding as of April 1, 2021, approximately $6.1 million is included in accrued expenses and other current liabilities and $6.0 million is included in other liabilities within the Condensed Consolidated Balance Sheets.
The Company recognized $0.7 million related to employee retention credits during the thirteen weeks ended April 1, 2021 as an offset to selling and store operating expenses within the Condensed Consolidated Statements of Operations and Comprehensive Income.
5. Commitments and Contingencies
The Company accounts for leases in accordance with ASC 842, Leases. The majority of ourthe Company's long-term operating lease agreements are for ourits corporate office, retail locations, and distribution centers, which expire in various years through 2040.2046. Most of these agreements are retail leases wherein both the land and building are leased. For a small number of retail locations, the Company has ground leases in which only the land is leased. The initial lease terms for the Company's corporate office, retail, and distribution center facilities range from 10-20 years. The majority of our buildingthe Company's retail and ground leases also include options to extend, which are factored into the recognition of their respective assets and liabilities when appropriate based on management’s assessment of the probability that the options will be exercised. When readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of ourthe Company's leases do not provide a readily determinable implicit rate. If the rate implicit in the lease is not readily determinable, we 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. As of April 1, 2021 and March 26, 2020, ourthe Company's weighted average discount rate was 5.3% and 5.2%, respectively, and ourthe Company's weighted average remaining lease term was approximately 11 years and 10 years.years, respectively.
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 |
| | | | | | | | | | | | | | | | | | | | |
| | | | Thirteen Weeks Ended |
in thousands | | Classification | | April 1, 2021 | | March 26, 2020 (3) |
Fixed operating lease cost: | | Selling and store operating | | $ | 28,768 | | | $ | 24,933 | |
| | Cost of sales | | 5,660 | | | 5,674 | |
| | Pre-opening | | 1,635 | | | 2,191 | |
| | General and administrative | | 1,029 | | | 1,018 | |
Total fixed operating lease cost | | | | $ | 37,092 | | | $ | 33,816 | |
| | | | | | |
Variable lease cost (1): | | Selling and store operating | | $ | 9,776 | | | $ | 7,938 | |
| | Cost of sales | | 1,408 | | | 1,084 | |
| | Pre-opening | | 68 | | | 84 | |
| | General and administrative | | 22 | | | 27 | |
Total variable lease cost | | | | $ | 11,274 | | | $ | 9,133 | |
| | | | | | |
Sublease income | | Cost of sales | | (597) | | | (597) | |
| | | | | | |
Total operating lease cost (2) | | | | $ | 47,769 | | | $ | 42,352 | |
(1) Includes variable costs for common area maintenance, property taxes, and insurance on leased real estate.
(2) Excludes short-term lease costs, which were immaterial for the thirteen weeks ended April 1, 2021 and March 26, 2020.
(3) To conform to the current period presentation, the presentation of the components of operating lease expense for the thirteen weeks ended March 26, 2020
has been updated within this table to provide disclosure of variable lease costs and
March 28, 2019.additional information related to the classification of operating leases within the Condensed Consolidated Statements of Operations and Comprehensive Income.
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of March 26, 2020April 1, 2021 were as follows: | | | |
in thousands | | Amount |
Forty weeks ended December 31, 2020 | | $ | 119,364 |
2021 | | | 133,445 |
2022 | | | 126,405 |
2023 | | | 123,690 |
2024 | | | 119,965 |
Thereafter | | | 642,961 |
Total minimum lease payments (2) | | $ | 1,265,830 |
Less: amount of lease payments representing interest | | | 309,221 |
Present value of future minimum lease payments | | | 956,609 |
Less: current obligations under leases | | | 67,588 |
Long-term lease obligations | | $ | 889,021 |
(2)
| | | | | | | | |
in thousands | | Amount |
Thirty-nine weeks ending December 30, 2021 | | $ | 136,002 | |
2022 | | 141,430 | |
2023 | | 140,051 | |
2024 | | 137,182 | |
2025 | | 128,248 | |
Thereafter | | 748,306 | |
Total minimum lease payments (1) (2) | | $ | 1,431,219 | |
Less: amount of lease payments representing interest | | 376,993 | |
Present value of future minimum lease payments | | 1,054,226 | |
Less: current obligations under leases | | 79,041 | |
Long-term lease obligations | | $ | 975,185 | |
(1) Future lease payments exclude approximately
$91.7$108.0 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
(2) Operating lease payments include $67.6 million related to options to extend lease terms that are reasonably certain of being exercised.
For the thirteen weeks ended
April 1, 2021 and March 26, 2020, cash paid for operating leases was
$50.9 million and $32.9
million.million, respectively.
On May 20, 2019,June 18, 2020, an alleged stockholder filed a putative derivative complaint, Lincolnshire Police Pension Fund v. Taylor, et al., No. 2020-0487-JTL, in the Delaware Court of Chancery, purportedly on behalf of the Company 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 ourthe Company’s officers, directors, and stockholders. On August 14, 2019,The complaint alleges breaches of fiduciary duties and unjust enrichment. The factual allegations underlying these claims are similar to the Court named a lead plaintiff, andfactual allegations made in the case was re-captioned previously dismissed In re Floor & Decor Holdings, Inc. Securities Litigation No. 1:19-cv-02270-SCJ (N.D. Ga.). described in our Annual Report on Form 10-K. The operative complaint alleges certain violations of federal securities laws based on, among other things, purported materially falseseeks unspecified damages and misleading statements and omissions allegedly made byrestitution for the Company between May 23, 2018from the individual defendants and August 1, 2018 and seeks class certification, unspecified monetary damages,the payment of costs and attorneys’ fees and equitable relief.fees. The Company deniestime for the material allegations anddefendants to respond to the complaint has moved to dismiss the lawsuit. In addition, thenot yet expired.
The Company maintains insurance that may cover any liability arising out of
thisthe above-referenced litigation up to the policy limits and subject to meeting certain deductibles and to other terms and conditions thereof. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, we 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
thisthe above-referenced litigation.
We are
The Company is also subject to various other legal actions, claims and proceedings arising in the ordinary course of business, which may include claims related to general liability, workers’ compensation, product liability, intellectual property and employment-related matters resulting from ourits business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. We establishThe Company establishes reserves for specific legal
proceedings when we determineit determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. These various other ordinary course proceedings are not expected to have a material impact on ourthe Company's consolidated financial position, cash flows, or results of operations, however regardless of the outcome, litigation can have an adverse impact on usthe Company because of defense and settlement costs, diversion of management resources, and other factors.
6.
Stock-BasedStock-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. StockStock-based compensation expense for the thirteen weeks ended April 1, 2021 and March 26, 2020 and March 28, 2019 was $2.9$4.7 million and $2.2$2.9 million, respectively, and was included in general and administrative expenses within the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income.
Stock Options
Stock options are granted with an exercise price greater than or equal to the fair market value on the date of grant, as authorized by the Company’s condensed consolidated statementboard of operationsdirectors or compensation committee. Options granted have contractual terms of ten years and comprehensive income.On February 24, 2020, the Company granted a combination of stock options, restricted stock units, and restricted stockvesting provisions ranging from one year 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
five years. 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 andthirteen weeks ended April 1, 2021 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. Stock option grants are generally subject to forfeiture if employment terminates prior to vesting.
The
Company estimates the fair value of stock option
grantsawards granted during the thirteen weeks ended April 1, 2021 was estimated using the Black-Scholes-Merton option pricing model with the following
weighted averageweighted-average assumptions:
| | | | | | | Thirteen Weeks Ended | | April 1, 2021 | Weighted average fair value per stock option | $ | 41.75 | Risk-free interest rate | 0.8% | Expected volatility | 48.1% | Expected life (in years) | 5.4 | Dividend yield | 0% |
| | | |
|
| 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. ToTo 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
The table below summarizes stock option activity
duringfor 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 |
April 1, 2021: | | | | | | | | | | | |
| Options | | Weighted Average Exercise Price |
Outstanding at January 1, 2021 | 3,740,604 | | | $ | 20.72 | |
Granted | 66,505 | | | 95.68 | |
Exercised | (195,073) | | | 12.22 | |
Forfeited or expired | (15,635) | | | 44.20 | |
Outstanding at April 1, 2021 | 3,596,401 | | | $ | 22.47 | |
Vested and exercisable at April 1, 2021 | 1,996,497 | | | $ | 15.03 | |
The
Company’s total unrecognized compensation cost related to stock options as of
March 26,April 1, 2021 and December 31, 2020, was
$22,753 thousand, which$16.4 million and $16.0 million, respectively. The unrecognized compensation cost remaining as of April 1, 2021 is expected to be recognized over a weighted average period of
2.82.4 years.
During the thirteen weeks ended March 26, 2020,April 1, 2021, 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 employeesthat 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’sfollowing table summarizes restricted stock unit activity during the thirteen weeks ended April 1, 2021:
| | | | | |
| Restricted Stock Units |
Unvested at January 1, 2021 | 128,220 | |
Granted | 100,799 | |
Vested | (25,349) | |
Forfeited | (2,556) | |
Unvested at April 1, 2021 | 201,114 | |
The total unrecognized compensation cost related to restricted stock units as of
March 26,April 1, 2021 and December 31, 2020 was
$6,096 thousand, which$15.0 million and $6.2 million, respectively. The unrecognized compensation cost remaining as of April 1, 2021 is expected to be recognized over a weighted average period of
3.93.5 years.
During the thirteen weeks ended March 26, 2020,April 1, 2021, the Company issued 367,702 shares ofservice-based restricted stock awards to certain executive officers and non-employee directors comprised of 160,315 shares of restricted stock with a payoutthat are 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-baseddate. Service-based restricted stock”).stock awards granted during the period to executive officers vest in four ratable annual installments on each of the first four anniversaries of the grant date, while such awards granted to non-employee directors during the period cliff vest on the first anniversary from the grant date.
The following table summarizes restricted stock award activity during the thirteen weeks ended April 1, 2021:
| | | | | | | | | | | | | | | | | |
| Restricted Stock Awards |
| Service-based | | Performance-based | | Total Stock Return (TSR) |
Unvested at January 1, 2021 | 131,844 | | | 160,315 | | | 104,456 | |
Granted | 27,465 | | | 0 | | | 0 | |
Vested | (10,459) | | | 0 | | | 0 | |
Forfeited | (2,508) | | | 0 | | | 0 | |
Unvested at April 1, 2021 | 146,342 | | | 160,315 | | | 104,456 | |
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,April 1, 2021 and December 31, 2020, total unrecognized compensation cost related to unvested restricted stock awards was $20,085 thousand, which$15.7 million and $15.2 million, respectively. The unrecognized compensation cost remaining as of April 1, 2021 is expected to be recognized over a weighted average period of 3.82.5 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
|
| —
| %
|
Net Income per Common Share
We calculate
The Company calculates basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effect of share-based awards.
The following table shows the computation of basic and diluted earnings per share: | | | | | | |
| | Thirteen Weeks Ended |
| | March 26, | | March 28, |
in thousands, except per share data | | 2020 | | 2019 |
Net income | | $ | 37,063 | | $ | 30,720 |
Basic weighted average shares outstanding | | | 101,629 | | | 97,785 |
Dilutive effect of share-based awards | | | 3,881 | | | 6,536 |
Diluted weighted average shares outstanding | | | 105,510 | | | 104,321 |
Basic earnings per share | | $ | 0.36 | | $ | 0.31 |
Diluted earnings per share | | $ | 0.35 | | $ | 0.29 |
| | | | | | | | | | | | | | |
| | Thirteen Weeks Ended |
in thousands, except per share data | | April 1, 2021 | | March 26, 2020 |
Net income | | $ | 75,796 | | | $ | 37,063 | |
Basic weighted average shares outstanding | | 104,073 | | | 101,629 | |
Dilutive effect of share-based awards | | 3,026 | | | 3,881 | |
Diluted weighted average shares outstanding | | 107,099 | | | 105,510 | |
Basic earnings per share | | $ | 0.73 | | | $ | 0.36 | |
Diluted earnings per share | | $ | 0.71 | | | $ | 0.35 | |
The following share-based awards have beenpotentially dilutive securities were excluded from the computation of dilutivediluted earnings per share because their effect would be anti-dilutive:
| | | | |
| | Thirteen Weeks Ended |
| | March 26, | | March 28, |
in thousands | | 2020 | | 2019 |
Stock options | | 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.
COVID-19 Update
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.
their anti-dilutive effect:
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 addition, uncertainty with respect to the 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 any related restrictions could result in a number of adverse impacts to the 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, 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 number of other ways including, but not limited to, reductions to the Company’s profitability, laws and regulations affecting the Company’s business, the availability of 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 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 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 credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the pandemic lasts.
18
| | | | | | | | | | | | | | |
| | Thirteen Weeks Ended |
in thousands | | April 1, 2021 | | March 26, 2020 |
Stock options | | 81 | | | 590 | |
Restricted stock | | 18 | | | 284 | |
Restricted stock units | | 100 | | | 108 | |
| | | | |
| | | | |
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 26, 201931, 2020 and filed with the Securities and Exchange Commission (the “SEC”) on February 20, 202025, 2021 (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, 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, 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; |
•an overall decline in the health of the economy, the hard surface flooring industry, consumer spending and the housing 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 inability to staff our stores sufficiently, including for reasons due to the COVID-19 pandemic and other impacts of the COVID-19 pandemic;
•a pandemic, such as COVID-19, or other natural disaster or unexpected event, and its impacts on our suppliers, customers, employees, lenders, operations, including our ability to operate our distribution centers and stores or on the credit markets or our future financial and operating results;
•any disruption in our supply chain, including carrier capacity constraints or higher shipping prices;
•our failure to successfully anticipate consumer preferences and demand;
•our inability to manage our growth;
•our inability to manage costs and risks relating to new store openings;
•geopolitical risks that impact our ability to import from foreign suppliers;
•our dependence on foreign imports for the products we sell, which may include the impact of tariffs and other duties;
•suppliers may sell similar or identical products to our competitors;
•competition from other stores and internet-based competition;
•any disruption in our distribution capabilities, including from difficulties operating our distribution centers;
| ● | 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; |
| ● | 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; and |
•fluctuations in commodity, material, transportation and energy costs;
| ● | restrictions imposed by our indebtedness on our current and future operations. |
•our failure to execute our business strategy effectively and deliver value to our customers;
•our inability to manage our inventory obsolescence, shrinkage and damage;
•our inability to find available locations for our stores on terms acceptable to us;
•our inability to maintain sufficient levels of cash flow or liquidity to meet growth expectations;
•violations of laws and regulations applicable to us or our suppliers;
•our inability to obtain merchandise on a timely basis at prices acceptable to us;
•our failure to adequately protect against security breaches involving our information technology systems and customer information;
•the resignation, incapacitation or death of any key personnel;
•our inability to find, train and retain key personnel;
•fluctuations in material and energy costs; 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.
Founded in 2000, Floor & Decor is a high growth, differentiated, multi-channel specialty retailer of hard surface flooring and related accessories with
123140 warehouse format stores across
3032 states as of
March 26, 2020.April 1, 2021. 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
and adjacent categories at everyday low prices positioning us as the
one stopone-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-YourselfDo it Yourself customers (“DIY”), and customers who buy the products for professional
installation.installation (“Buy it Yourself” or “BIY”).
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 thirteen weeks of fiscal
20202021 and fiscal
2019,2020, which ended on
April 1, 2021 and March 26, 2020,
and March 28, 2019, respectively.
During the thirteen weeks ended
March 26, 2020,April 1, 2021, we continued to make long-term key strategic investments, including:
| ● | opening three new warehouse-format stores ending the quarter with 123 warehouse-format stores; |
| ● | focusing on innovative new products and localized assortments, supported by inspirational in-store and online visual merchandising solutions; |
| ● | investing in our connected customer, in-store designer, and Pro customer personnel and customer relationship technology; |
| ● | investing capital to continue enhancing the 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. |
•supporting our stores and distribution centers during this heightened period of sales, with particular emphasis on increasing staffing levels and working collaboratively throughout our supply chain to increase our in-stock inventory levels;•opening seven new warehouse-format stores, ending the quarter with 140 warehouse-format stores and two design studios;
•focusing on innovative new products and localized assortments, supported by inspirational in-store and online visual merchandising solutions;
•investing in our connected customer, in-store designer, and customer relationship and store focused technology;
•adding more resources dedicated to serving our Pro customers, including hiring a professional external sales staff to drive more commercial sales;
•increasing proprietary credit offerings, including through our non-recourse Pro credit card; and
•investing capital to continue enhancing the in-store shopping experience for our customers.
COVID-19
Pandemic is Disrupting Our BusinessThe COVID-19 pandemic is disrupting our business. Update
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 havecontinues into fiscal 2021, we remain focused 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 threefive priorities while navigating through this period of volatility and uncertainty:
| ● | •First, to protect the health and safety of our employees and customers. |
| ● | Second, to keep our brand strong and support all of our customers, including the numerous small businesses that rely upon us such as 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 our employees and customers through enhanced safety and sanitation measures at our stores, distribution centers, and store support center.
•Second, keep our brand strong and support all of our customers, including the date ofnumerous small businesses that rely upon us such as general contractors and flooring installers.
•Third, invest in store and distribution center staffing to support the heightened demand.
•Fourth, work with all our supply chain partners to increase our in-stock inventory positions.
•Fifth, position Floor & Decor to emerge strong from this filing, we have implemented contingency planning, with most employees working remotely where possible. event.
We are working hard to monitorcontinue monitoring and quickly respondresponding to this situation,the ongoing impacts of the COVID-19 pandemic, 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 rapidlythis evolving situation and recommending risk mitigation actions; we have implemented travel restrictions as well as visitor protocols;actions, and we are followingencouraging social distancing practices.
We have
also assessed and are implementing
supply chain continuity
plansplans. While to
provide customers with continued supply. Theredate there has been no material impact on supply for most of our sourced merchandise and
our sales have remained strong as we
continue to maintain a broad assortment of in-stock inventory, COVID-19-related labor shortages and supply chain disruptions continue to cause logistical challenges for us and the entire hard surface flooring industry. In particular, there is significant congestion at ports of entry to the United States, which is increasing the time and cost to ship goods to our stores and has resulted in a decrease in our in-stock levels for certain products. We are
also working closely with our suppliers and transportation
partners.While wepartners to mitigate the impact of these disruptions; however, future capacity shortages or shipping cost increases could have plans for fully reopeningan adverse impact upon our stores inbusiness.
In addition, while vaccines have become more widely available and an increasing portion of the
future, these plans depend on a number of factors, including applicable regulatory restrictions, andU.S. population is being vaccinated, there
isremains substantial uncertainty regarding the
mannerpotential duration and
timing in whichseverity of the COVID-19 pandemic, including if or when “herd immunity” will be achieved and the public health restrictions imposed to slow the spread of the virus will be lifted entirely. There may also be future increases "waves" or variants of COVID-19 infections despite mass vaccination programs and other efforts to mitigate its spread. Although our stores are currently open to the public, we
can return some or all of our business to more normal operations. We may face
longer termfuture 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 stringentif federal, state, and local
authorities impose new and potentially more stringent restrictions
includingsuch as shelter-in-place orders.
Even once weWe also may face store closures due to staffing challenges, including if store and distribution center associates are
ablein quarantine due to
fully reopen our stores,the COVID-19 pandemic. In addition, changes in consumer behavior due to financial, health, or other concerns may
continue even after the COVID-19 pandemic and may reduce consumer demand for our products.
In addition, some of the countries from which we source inventory and other necessary supplies are not vaccinating their populations as quickly or effectively as the U.S., which could constrain our ability to obtain inventory and other necessary supplies. As a result of these
developments,and other uncertainties, 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 consolidatedfull 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 completedpandemic cannot be reasonably estimated at 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.
time.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 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 other key financial 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.
While our revenue and earnings forhave improved during the thirteen weeks ended March 26, 2020 were impacted duefirst quarter of fiscal 2021 compared to the COVID-19 pandemic, primarily the last weekfirst quarter of the period,fiscal 2020, the full impact that the COVID-19 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”-COVID-19 Update” 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)millions; certain numbers may not sum due to rounding):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | | | |
| | April 1, 2021 | | March 26, 2020 | | | | |
| | Actual | | % of Sales | | Actual | | % of Sales | | $ Increase/(Decrease) | | % Increase/(Decrease) |
Net sales | | $ | 782,537 | | | 100.0 | % | | $ | 554,937 | | | 100.0 | % | | $ | 227.6 | | | 41.0 | % |
Cost of sales | | 445,604 | | | 56.9 | | | 318,905 | | | 57.5 | | | 126.7 | | | 39.7 | |
Gross profit | | 336,933 | | | 43.1 | | | 236,032 | | | 42.5 | | | 100.9 | | | 42.7 | |
Operating expenses: | | | | | | | | | | | | |
Selling and store operating | | 189,946 | | | 24.3 | | | 153,066 | | | 27.6 | | | 36.9 | | | 24.1 | |
General and administrative | | 44,041 | | | 5.6 | | | 30,858 | | | 5.6 | | | 13.2 | | | 42.7 | |
Pre-opening | | 6,997 | | | 0.9 | | | 5,434 | | | 1.0 | | | 1.6 | | | 28.8 | |
Total operating expenses | | 240,984 | | | 30.8 | | | 189,358 | | | 34.1 | | | 51.6 | | | 27.3 | |
Operating income | | 95,949 | | | 12.3 | | | 46,674 | | | 8.4 | | | 49.3 | | | 105.6 | |
Interest expense, net | | 1,388 | | | 0.2 | | | 1,807 | | | 0.3 | | | (0.4) | | | (23.2) | |
| | | | | | | | | | | | |
Income before income taxes | | 94,561 | | | 12.1 | | | 44,867 | | | 8.1 | | | 49.7 | | | 110.8 | |
Provision for income taxes | | 18,765 | | | 2.4 | | | 7,804 | | | 1.4 | | | 11.0 | | | 140.5 | |
Net income | | $ | 75,796 | | | 9.7 | % | | $ | 37,063 | | | 6.7 | % | | $ | 38.7 | | | 104.5 | % |
| | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | | | | | | |
| | | March 26, 2020 | | | March 28, 2019 | | | | | | | |
| | | Actual | | % of Sales | | | Actual | | % of Sales | | | $ Increase/(Decrease) | | % Increase/(Decrease) | |
Net sales | | | $ | 554,937 | | 100.0 | % | | $ | 477,050 | | 100.0 | % | | $ | 77.9 | | 16.3 | % |
Cost of sales | | | | 318,905 | | 57.5 | | | | 275,676 | | 57.8 | | | | 43.2 | | 15.7 | |
Gross profit | | | | 236,032 | | 42.5 | | | | 201,374 | | 42.2 | | | | 34.7 | | 17.2 | |
Operating expenses: | | | | | | | | | | | | | | | | | | | |
Selling and store operating | | | | 153,066 | | 27.6 | | | | 127,383 | | 26.7 | | | | 25.7 | | 20.2 | |
General and administrative | | | | 30,858 | | 5.6 | | | | 30,202 | | 6.4 | | | | 0.7 | | 2.2 | |
Pre-opening | | | | 5,434 | | 1.0 | | | | 4,027 | | 0.8 | | | | 1.4 | | 34.9 | |
Total operating expenses | | | | 189,358 | | 34.1 | | | | 161,612 | | 33.9 | | | | 27.7 | | 17.2 | |
Operating income | | | | 46,674 | | 8.4 | | | | 39,762 | | 8.3 | | | | 6.9 | | 17.4 | |
Interest expense, net | | | | 1,807 | | 0.3 | | | | 2,921 | | 0.6 | | | | (1.1) | | (38.1) | |
Income before income taxes | | | | 44,867 | | 8.1 | | | | 36,841 | | 7.7 | | | | 8.0 | | 21.8 | |
Provision for income taxes | | | | 7,804 | | 1.4 | | | | 6,121 | | 1.3 | | | | 1.7 | | NM | |
Net income | | | $ | 37,063 | | 6.7 | % | | $ | 30,720 | | 6.4 | % | | $ | 6.3 | | 20.6 | % |
NM – Not meaningful
Selected Financial Information
| | | | | | | | |
| | Thirteen Weeks Ended | |
| | March 26, 2020 | | | March 28, 2019 | |
Comparable store sales (% change) | | | 2.4 | % | | | 3.1 | % |
Comparable average ticket (% change) | | | 3.4 | % | | | 1.1 | % |
Comparable customer transactions (% change) | | | (1.0) | % | | | 1.9 | % |
Number of warehouse-format stores | | | 123 | | | | 103 | |
Adjusted EBITDA (in thousands) | | $ | 73,126 | | | $ | 60,068 | |
Adjusted EBITDA margin | | | 13.2 | % | | | 12.6 | % |
| | | | | | | | | | | | | | |
| | Thirteen Weeks Ended |
| | April 1, 2021 | | March 26, 2020 |
Comparable store sales (% change) | | 31.1 | % | | 2.4 | % |
Comparable average ticket (% change) | | 1.5 | % | | 3.4 | % |
Comparable customer transactions (% change) | | 29.2 | % | | (1.0) | % |
Number of warehouse-format stores | | 140 | | 123 |
Adjusted EBITDA (in thousands) (1) | | $ | 127,075 | | $ | 73,126 |
Adjusted EBITDA margin | | 16.2 | % | | 13.2 | % |
(1) Adjusted EBITDA is a non-GAAP financial measure. See “Non-GAAP Financial Measures” section below for additional information and a reconciliation of Adjusted EBITDA to the most comparable GAAP measure.
net income.
Net sales during the thirteen weeks ended March 26, 2020April 1, 2021 increased $77.9$227.6 million, or 16.3%41.0%, compared to the corresponding prior year period primarily due to the opening of 20 new stores since March 28, 2019 and an increase in comparable store sales of 2.4%.31.1% and sales from the 17 new warehouse stores that we opened since March 26, 2020. The comparable store sales increase during the period of 2.4%31.1%, or $11.6$172.5 million, was primarily driven by a 3.4%29.2% increase in comparable customer transactions and a 1.5% increase in comparable average ticket, partially offset by a 1.0% decrease in comparable customer transactions. Amongticket. Comparable store sales increased among all of our six product categories three experienced comparable store sales increases including laminate/luxury vinyl plank, decorative accessories/wall tile, and installation materials and tools.during the period. Non-comparable store sales increased $66.3$55.1 million during the same period primarily due to the increase in new stores previously described. Our comparable storestores.
We believe the increase in first quarter fiscal 2021 sales increased 6.1% through March 20, 2020,is also due in part to (i) unprecedented government intervention to help mitigate the last daynegative impacts of normal operations before limitingthe COVID-19 pandemic and (ii) customers investing in home improvements while spending less on leisure activities like travel, eating out, sporting events, and hotels. We also believe that our business model, with its focus on substantial amounts of trend-right, in-stock inventory, is also contributing to the sales increase. In addition, we limited our stores to curbside services during the final week of the first quarter of fiscal 2020, which resulted in responsea decrease in sales during that period and contributed to the COVID-19 pandemic.current quarter increase in comparable store sales. Further, the addition of a 53rd-week in fiscal 2020, which was the last week in December, a historically low volume week, shifted the beginning of fiscal 2021 to January and modestly benefited first quarter fiscal 2021 comparable store sales growth.
We believe the increases in net sales and 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.
Gross Profit and Gross Margin
Gross profit during the thirteen weeks ended
March 26, 2020April 1, 2021 increased
$34.7$100.9 million, or
17.2%42.7%, compared to the corresponding prior year period.
ThisThe increase in gross profit was driven by the
16.3%41.0% increase in
net sales and
a slightan increase in gross margin to
42.5%43.1%, up approximately
3060 basis points from
42.2%42.5% in the
corresponding priorsame period a year
period. Thisago. The increase in gross margin was primarily due to
higher product gross margin driven by lower costs from the eliminationimproved leverage of
certain tariffs and improved merchandising strategies, partially offset by higherour distribution center
costs related to our new distribution center near Baltimore, Maryland that opened in the fourth quarter of fiscal 2019.and supply chain infrastructure on higher sales.
Selling and Store Operating Expenses
Selling and store operating expenses during the thirteen weeks ended
March 26, 2020April 1, 2021 increased
$25.7$36.9 million, or
20.2%24.1%, compared to the
corresponding prior year period, duethirteen weeks ended March 26, 2020. The increase was primarily
attributable to
opening twenty17 new
warehouse stores
opened since March
28, 2019.26, 2020 as well as additional staffing to satisfy sales growth. As a percentage of net sales,
our selling and store operating expenses
increaseddecreased approximately
90330 basis points to
27.6%24.3% from
26.7%27.6% in the corresponding prior year
periodperiod. This decrease was primarily driven by
new stores open less than one year.leveraging our costs across an increase in comparable store sales. Comparable store selling and store operating expenses as a percentage of comparable store sales decreased by approximately
70390 basis points as
we leveragedsales grew faster than new hiring during the current quarter and as our occupancy
incentive compensation, and advertising expenses on higher net sales. Selling and store operating expensescosts were lower as a percentage of
net revenue
were also impacted by disruptionsdue to
our store operationsthe increase in
March 2020 caused by the unfolding COVID-19 pandemic, resulting in slower sales growth, and therefore lower expense leverage, for the first quarter of fiscal 2020.sales.
General and Administrative Expenses
General and administrative expenses, which are typically expenses incurred outside of our stores, increased
$0.7$13.2 million, or
2.2%42.7%, during the thirteen weeks ended
March 26, 2020April 1, 2021 compared to the corresponding prior year period
primarily due to
our continued investments in personnel for our store support functionshigher incentive compensation expense and
increased depreciation due to technology investmentscosts to support store
growth.growth, including increased store support staff and higher depreciation related to technology and other store support center investments. Our general and administrative expenses as a percentage of net sales
decreasedremained at approximately
80 basis points to 5.6%
from 6.4% in the corresponding prior year period primarily due to lower accruals for employee incentive compensation during the thirteen weeks ended
April 1, 2021 and March 26,
2020 as a result of the COVID-19 pandemic.2020.
Pre-opening expenses during the thirteen weeks ended
March 26, 2020April 1, 2021 increased
$1.4$1.6 million, or
34.9%28.8%, compared to the corresponding prior year period. The increase is primarily the result of
higher occupancy costs due to a longer period of possession prior to store opening as well as an increase in the number of
new stores that we
areeither opened or were preparing for opening compared to the prior year period. We opened
threeseven warehouse stores during
each ofthe thirteen weeks ended April 1, 2021 as compared to opening three warehouse stores during the thirteen weeks ended March 26,
2020 and March 28, 2019.2020.
Net interest expense during the thirteen weeks ended March 26, 2020April 1, 2021 decreased $1.1$0.4 million, or 38.1%23.2%, compared to the corresponding prior year period. The decrease in interest expense was primarily due to a decrease in interest rates as well as an increase in interest capitalized during the construction period of certain capital assets during the thirteen weeks ended April 1, 2021 compared to the corresponding prior year period.
Income Taxes
The provision for income earnedtaxes was $18.8 million during the thirteen weeks ended April 1, 2021 compared to $7.8 million during the thirteen weeks ended March 26, 2020 compared to the corresponding prior year period.
Income Taxes
The provision for income taxes during the thirteen weeks ended March 26, 2020 increased $1.7 million compared to the corresponding prior year period.2020. The effective tax rate was 17.4%19.8% for the thirteen weeks ended March 26, 2020April 1, 2021 compared to 16.6%17.4% in the corresponding prior year period. The increase in the effective tax rate was primarily due to higher discrete expense for loss contingencies related to uncertainearnings without a proportionate increase in available tax positions, partially offset bycredits and the recognition of higher incomelower excess tax benefits related to stock option exercises.
exercises during the current quarter compared to the same period of the prior year.
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)ABL Facility and Term Loan Facility (together, the "Credit Facilities"), to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, and to compare our performance against that of other peer companies using similar measures. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors, and other interested parties as performance measures to evaluate companies in our industry.
EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by or presented in accordance with GAAP. We define EBITDA as net income before interest,
(gain) loss on early extinguishment of debt, taxes, depreciation and amortization. We define Adjusted EBITDA as net income before interest,
(gain) loss on early extinguishment of debt, taxes, depreciation and amortization adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. 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 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.
The following table reconciles net income to EBITDA and Adjusted EBITDA for the periods presented:
| | | | | | |
| | | | | | |
| | Thirteen Weeks Ended |
in thousands | | March 26, 2020 | | March 28, 2019 |
Net income | | $ | 37,063 | | $ | 30,720 |
Depreciation and amortization (1) | | | 21,673 | | | 16,871 |
Interest expense, net | | | 1,807 | | | 2,921 |
Income tax expense | | | 7,804 | | | 6,121 |
EBITDA | | | 68,347 | | | 56,633 |
Stock compensation expense (2) | | | 2,908 | | | 2,250 |
COVID-19 costs (3) | | | 1,310 | | | — |
Tariff refunds (4) | | | (401) | | | — |
Other (5) | | | 962 | | | 1,185 |
Adjusted EBITDA | | $ | 73,126 | | $ | 60,068 |
| | | | | | | | | | | | | | |
| | Thirteen Weeks Ended |
in thousands | | April 1, 2021 | | March 26, 2020 |
Net income | | $ | 75,796 | | | $ | 37,063 | |
Depreciation and amortization (1) | | 25,520 | | | 21,673 | |
Interest expense, net | | 1,388 | | | 1,807 | |
Income tax expense | | 18,765 | | | 7,804 | |
EBITDA | | 121,469 | | | 68,347 | |
Stock compensation expense (2) | | 4,734 | | | 2,908 | |
COVID-19 costs (3) | | 216 | | | 1,310 | |
Tariff refunds (4) | | — | | | (401) | |
Other (5) | | 656 | | | 962 | |
Adjusted EBITDA | | $ | 127,075 | | | $ | 73,126 | |
(1) Excludes amortization of deferred financing costs, which is included as
a part of interest expense, net in the table above.
(2) Non-cash charges related to stock-based compensation programs, which vary from period to period depending on
the timing of awards and forfeitures.
(3)
Represents employee payroll continuation,Amounts are comprised of sanitation,
personal protective equipment, 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
additional tariff refunds
recognized during the thirteen weeks ended March 26, 2020
forrelated to certain engineered wood products. Interest income for
the tariff refunds is included within interest expense, net in the table above.
(5) Other adjustments include amounts management does not consider indicative of our core operating performance.
Amounts for the thirteen weeks ended April 1, 2021 primarily relate to relocation expenses for our Houston distribution center and legal fees associated with the February 2021 amendment to our senior secured term loan credit facility. Amounts for the thirteen weeks ended March 26, 2020 primarily relate to legal fees associated with the February 2020 amendment to our senior secured term loan credit facility and costs associated with a potential secondary public offering of the Company’s Class A common stock by certain of our stockholders.
Amounts for the thirteen weeks ended March 28, 2019 primarily relate to costs associated with a secondary public offering of our Class A common stock by certain of our stockholders, as well as the relocation of our Store Support Center in Smyrna, Georgia, and closure of the Miami distribution center. We did not sell any shares in the offering and did not receive any proceeds from the sale of shares by the selling stockholders.Liquidity and Capital Resources
Liquidity is provided primarily by our cash flows from operations and our
$400.0$400.0 million asset-backed revolving credit facility (the “ABL Facility”).ABL Facility. Unrestricted liquidity based on our
March 26, 2020April 1, 2021 financial data was
$375.6$724.6 million, consisting of
$289.9$354.1 million in cash and cash equivalents and
$85.7$370.5 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
distribution center 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. In
a normalan 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.
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
sell or donate. As of
March 26, 2020,April 1, 2021, we had
no$1.3 million of aged discontinued inventory that we intend to
donate.
donate if unable to sell.
Impact of the COVID-19 Pandemic on Liquidity
As previously noted,
While our primary sources of funds for business activities are typically cash flows from operations and our existing credit facilities, the United Statesfull potential impact of the pandemic on our sources of funds and other countries are experiencing business and economic disruptionsliquidity cannot be reasonably estimated at this time due to uncertainty regarding the potential severity and duration of the pandemic and its future effect on our business. For additional discussion of the impact of the COVID-19 pandemic. Governmental authorities, companies, and individuals in affected regions are actingpandemic on our business, refer 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 effectsUpdate.”
We continue to monitor the impact of the COVID-19 pandemic
are negatively impactingon 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. The pandemic may continue to drive volatility and uncertainty in financial and credit markets. Our continued access to external sources of liquidity depends on multiple factors, including the condition of debt capital markets, our operating performance, and maintaining strong credit ratings. If the impacts of the pandemic continue to create severe disruptions or turmoil in the financial markets, or if rating agencies lower our credit ratings, it could adversely affect our ability to access the debt markets, our cost of funds, and other terms for new debt or other sources of external liquidity. We expect that cash generated from operations together with cash on hand, our actions to reduce expenditures, together with cash on hand, cash expected to be generated from operations, the availability of borrowings under 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 our credit facilities for at least the next twelve 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.
In response to the COVID-19 pandemic, we have lowered our plans for capital expenditures in fiscal 2020, but theThe exact scope of changes in our capital plans is evolving and will ultimately depend on a variety of factors.factors, including the impact of the COVID-19 pandemic on our business. Total capital expenditures are currently planned to be between approximately $147.0$440 million to $157.0$460 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 and borrowings under the Amended ABL facility.Facility. Our capital needs may change in the future due to changes in our business, including in response to the COVID-19 pandemic, or new opportunities that we choose to pursue; however, we currently intend to makeexpect the following for capital expenditures in fiscal 2020:
| ● | open 11 stores and start construction on stores opening in early 2021 using approximately $106.0 million to $112.0 million of cash; |
| ● | invest in existing store remodeling projects and our distribution centers using approximately $26.0 million to $28.0 million of cash; and |
| ● | invest in information technology infrastructure, e-commerce, and other store support center initiatives using approximately $15.0 million to $17.0 million of cash. |
2021:•open 27 warehouse-format stores, open two small-format design studios, and start construction on stores opening and relocating in 2022 using approximately $285 million to $295 million of cash;
•relocate our Houston, Texas distribution center and open a transload facility in Los Angeles, California using approximately $72 million to $76 million of cash;
•invest in existing store remodeling projects and our distribution centers using approximately $56 million to $59 million of cash; and
•invest in information technology infrastructure, e-commerce, and other store support center initiatives using approximately $27 million to $30 million of cash.
A summary of our operating, investing, and financing activities are shown in the following table:
| | | | | | | |
| | | Thirteen Weeks Ended |
in thousands | | | March 26, 2020 | | March 28, 2019 |
Net cash provided by operating activities | | | $ | 24,668 | | $ | 27,021 |
Net cash used in investing activities | | | | (38,384) | | | (31,634) |
Net cash provided by financing activities | | | | 276,610 | | | 4,420 |
Net increase (decrease) in cash and cash equivalents | | | $ | 262,894 | | $ | (193) |
| | | | | | | | | | | | | | |
| | Thirteen Weeks Ended |
in thousands | | April 1, 2021 | | March 26, 2020 |
Net cash provided by operating activities | | $ | 100,996 | | | $ | 24,668 | |
Net cash used in investing activities | | (45,876) | | | (38,384) | |
Net cash (used in) provided by financing activities | | (8,841) | | | 276,610 | |
Net increase in cash and cash equivalents | | $ | 46,279 | | | $ | 262,894 | |
Net Cash Provided
Byby Operating Activities
Cash provided by operating activities consists primarily of net income adjusted for changes in working capital as well as non-cash items, including depreciation and amortization, deferred income taxes, and stock-based compensation.
Net cash provided by operating activities was
$101.0 million for the thirteen weeks ended April 1, 2021 and $24.7 million for the thirteen weeks ended March 26,
2020 and $27.0 million for the thirteen weeks ended March 28, 2019.2020. The
decreaseincrease in net cash provided by operating activities was primarily the result of an increase in
net income and decrease in inventory,
andpartially offset by a net increase in other working capital
items to support
operations, partially offset by an increase in net income.our operations.
Net Cash Used
Inin 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)studios) and new infrastructure and information systems.
Capital expenditures during the thirteen weeks ended April 1, 2021 and March 26, 2020 and March 28, 2019 were $38.4$45.9 million and $31.6$38.4 million, respectively. The growthincrease is primarily related to the increasegrowth in new stores that opened or were under construction during the thirteen weeks ended March 26, 2020April 1, 2021 compared withto the samecorresponding prior year period, in fiscal 2019. We are preparing for an additional six new stores and one design center to be opened during the second and third quarters of fiscal 2020, andas we generally incur significant capital expenditures for new stores a few to several months in advance of opening. During the thirteen weeks ended March 26, 2020,April 1, 2021, approximately 75%57.3% of capital expenditures waswere for new stores 14% wasand 34.8% were for existing stores and distribution centers, while the remaining spendspending was associated with information technology, e-commerce, and store support center investments to support our growth.
Net Cash (Used in) Provided Byby 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 and our employee share purchase program.
Net
cash used in financing activities was $8.8 million for the thirteen weeks ended April 1, 2021 compared to net cash provided by financing activities
wasof $276.6 million for the thirteen weeks ended March 26,
2020 compared with $4.4 million for2020. The decrease was primarily driven by the repayment of a portion of our Term Loan Facility during the thirteen weeks ended
March 28, 2019. The net cash provided by financing activities forApril 1, 2021 compared with borrowings under our ABL facility of $275.0 million during the thirteen weeks ended March 26,
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.2020.
Credit Facility Amendments
On February
14, 2020,9, 2021 (the "Effective Date"), we entered into a
repricing and generalfifth amendment to the credit agreement governing our senior secured term loan facility (as amended, the
“Amended Term"Term Loan
Facility”Facility")
that,. The fifth amendment provided for, among other things,
(a) refinanced our existinga supplemental term loan
facility with a new term loan facility in the aggregate principal amount of
approximately $144.6$65.0 million
(b) extended(the "Supplemental Term Loan Facility") that increased the
stated maturity date under the Amendedterm loan B facility. The Supplemental Term Loan Facility
to Februaryhas the same maturity date (February 14,
2027,2027) and
(c) included an “accordion” featureterms as the term loan B facility, except 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 tovoluntary prepayments made within six months after the credit agreement governing our revolving credit facility (as amended, the “Amended ABL Facility”) that, among other things, (a) increased our revolving commitmentsEffective Date are subject to a total aggregate principal amount1% soft call prepayment premium. The other terms of $400.0 million, and (b) extended the stated maturity dateloans under the Amended ABLTerm Loan Facility to February 14, 2025.remain unchanged, including the applicable margin for loans under the term loan B facility. The Amended ABL Facility also includes an “accordion” feature that allows us under certain circumstances, to increase the sizeproceeds of the Supplemental Term Loan Facility, together with cash on hand, were used to (i) repay the $75.0 million term loan B-1 facility by an amount up to $100.0 million, or such higher amount as may be agreed to byand (ii) pay fees and expenses incurred in connection with the Required Lenders (as defined in the Amended ABL Facility).
Supplemental Term Loan Facility.
Refer to Note 3, “Debt” for additional details regarding our
Amended Term Loan Facility and
Amended ABL Facility, including applicable covenants.
Our credit ratings are periodically reviewed by rating agencies. In November 2019,2020, Moody's upgradedreaffirmed the Company's issuer corporate family rating from B1 toof Ba3 and stablechanged its outlook for the Company.Company to stable from negative. In AprilDecember 2020, Moody’s reaffirmed the Company’s Ba3 rating but changed our outlook to negative from stable. In November 2019, S&PStandard & Poor's reaffirmed the Company's corporate credit rating of BB- and revised its stable outlook for the Company.Company to positive from stable. These ratings and our current credit condition affect, among other things, our ability to access new capital. Negative changes to these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt. Our credit ratings could be lowered or rating agencies could issue adverse commentaries in the future, which could have a material adverse effect on our business, financial condition, results of operations, and liquidity. In particular, a weakening of our financial condition, including 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 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,While exclusions from tariffs were granted for certain products from China, nearly all of these exclusions have expired. In fiscal 2020, approximately half30% of the products we sellsold were importedsourced from China, the majority of which are impacted by these tariffs.and we expect that percentage to decrease moderately in fiscal 2021. As we continue to analyzemanage the impact these tariffs may have on our business, we continue taking steps to mitigate some of these cost increases through negotiating lower costs from our vendors, increasing retail pricing as we deem appropriate, and sourcing from alternative countries. While we expect our efforts will mitigatehave mitigated a substantial portion of the overall effect of increased tariffs, we expect the enacted tariffs will increasehave increased our inventory costs and associated cost of sales.sales for the remaining products still sourced from China.
Antidumping and Countervailing Duties
On May 24, 2019, the U.S. International Trade Commission (the “ITC”) announced it had completed a preliminary phase antidumping and countervailing duty investigation pursuant to the Tariff Act of 1930 with respect to the imports of ceramic tile from China and determined there is a reasonable indication that the ceramic tile production industry in the U.S. is being materially injured by imports of ceramic tile from China that have allegedly been subsidized by the Chinese government and are being sold in the U.S. at less than fair value, otherwise known as “dumping”. As a result of the ITC’s affirmative determinations, the U.S. Department of Commerce (the “DOC”) began its own related investigation. In
September 2019, the DOC reached a preliminary determination that imports from China were subsidized and imposed preliminary duties of 103.77% on most Chinese exporters. In November 2019, the DOC reached a preliminary determination that imports from China were being sold in the United States at less than fair value and imposed preliminary antidumping duty rates ranging from 114.49% to 356.02% depending on the 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
adjustedset the countervailing duty to 358.81% for all Chinese exporters and the antidumping duty to 203.71% or 330.69% depending on the exporter.
In May 2020, the ITC announced their final determination that the ceramic tile production industry in the U.S. is being materially injured by imports of ceramic tile from China, but retroactive duty deposits would not be required as the ITC made a negative critical circumstances determination. The DOC subsequently issued antidumping and countervailing orders.
The DOC has instructed the U.S. Customs and
BorderBoarder Protection
("U.S. Customs") to require cash deposits based on the announced effective rates. The
DOC’s final determination will be subject to revision or rescission in the ITC’s final determination with respect to injury, 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 period18 months of the orders
wouldwill not be determined until the
first administrative review process is completed, approximately two years after the
order is published.
While it is too early to determine what the final outcomepublished date of the DOC and ITC investigations will be and what impact, if any, they will have on the Company, weorders.
We took steps to mitigate the risk of future exposure by sourcing from alternative countries, and
believe we are no longer importing applicable products from China.
We have made duty deposits for applicable entries according to U.S. Customs entry procedures. While we do not currently believe
our inventory during the investigation period is subject to these additional
duties, if these additional duties were toduty deposits will apply,
to our inventory during the investigation period, we believe our
potential exposure could be
up to approximately
$7.0$3.0 million. The actual additional duties, if applicable,
to us, could differ from this estimate. We have not established a reserve for this matter as we currently do not believe
our inventory during the investigation period is subject to these additional
duties.duties will be applicable. Potential costs and any attendant impact on pricing arising from these tariffs or potential duties, and any further expansion in the types or levels of tariffs or duties implemented, could require us to modify our current business practices and could adversely affect our business, financial condition, and results of operations.
Tariff Refunds
In November 2019, the U.S. Trade Representative (“USTR”) made a ruling to retroactively exclude certain flooring products imported from China from the Section 301 tariffs that were implemented at 10% beginning in September 2018 and increased to 25% in June 2019. The granted exclusions apply to certain “click” vinyl and engineered products that we have sold and continue to sell. As these exclusions were granted retroactively, we are entitled to a refund from U.S. Customs for the applicable Section 301 tariffs previously paid on these goods. While tariff refund claims are subject to the approval of U.S. Customs, the Company currently expects to recover $24.4 million related to these Section 301 tariff payments, including interest, of which $13.4 million has been received as of April 1, 2021.
There were no material changes to our contractual obligations outside the ordinary course of our business during the thirteen weeks ended March April 1, 2021.
Off-Balance Sheet Arrangements
For the thirteen weeks ended
March 26, 2020,April 1, 2021, 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 disruptinghas impacted 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.affected by future developments related to the COVID-19 pandemic. 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
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 could differ materially from these estimates under different assumptions or conditions.
For a description of our critical accounting policies and estimates, refer to Part II, Item 7, “Critical Accounting Policies and Estimates” in our Annual Report. There have been no 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.
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. While our exposure to market risk has not changed materially since December
26, 2019,31, 2020, 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,including interest rates and
commodity prices. Given the evolving nature of theforeign currency exchange rates. The COVID-19 pandemic
its potentialis expected to have a continued adverse impact on
thesemarket conditions and
other market risks remains uncertain at this time.
may trigger a period of global economic slowdown for an unknown duration. See further discussion in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional details.
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, theApril 1, 2021, our senior secured term loan facility had a remaining principal balance of
$207.7 million and was our
outstanding variable rateonly variable-rate debt
aggregated approximately $419.6 million.outstanding. A 1.0% increase in the effective interest rate for this debt would cause an increase in interest expense of approximately
$4.2$2.1 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.
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 March 26, 2020April 1, 2021 and, based on their evaluation, have concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.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.
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
March 26, 2020April 1, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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.
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 filed with the SEC on February
20, 2020,25, 2021, which could materially affect our business, financial condition, and/or operating results, as well as the following:
The
During the first and second quarters of fiscal 2020, the effects of the COVID-19 pandemic
are negatively
impactingimpacted our business and
results of operations. Additional governmental restrictions on business operations, including as a result of a further resurgence of the COVID-19 pandemic, could
continue to have a negative impact on our net sales, results of operations, financial position,
store operations, new store openings and earnings.
On March 11, 2020, the World Health Organization announced that infections of the coronavirus (COVID-19)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 some authorities have 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, have had and are expected to continue to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration. The effectivenessCOVID-19 pandemic and preventative measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, or the re-introduction of business shutdowns, cancellations of events and restrictions on travel, significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions and overall economic stabilization efforts, including proposed government payments to affected citizens and industries,financial market instability both globally and in the United States. Such effects will likely continue for the duration of the pandemic, which is uncertain. Some economists are predictinguncertain, and for some period thereafter. While several countries, as well as certain states, counties and cities in the United States, have relaxed public health restrictions and partially or fully reopened their economies, such reopening measures have sometimes resulted in a surge in the reported number of cases and hospitalizations related to the COVID-19 pandemic. This increase in cases has led to the reintroduction of restrictions and business shutdowns in certain states, counties and cities in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. In December 2020, the U.S. Food and Drug Administration authorized certain vaccines for emergency use and on April 16, 2021, every person over the age of 16 in the United States was deemed eligible to receive a COVID-19 vaccine. According to the United States Center for Disease Control, over half of the adult population of the United States has received at least one dose of an approved emergency COVID-19 vaccine. However, it remains unclear how quickly the vaccines will be distributed globally or if or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. Delays in distributing the vaccines or an actual or perceived failure to achieve “herd immunity” could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. The extent of the impact of the pandemic on the Company's business and financial results will depend on future developments, including the duration of the pandemic the success of vaccination programs, the spread of COVID-19 within the markets in which the Company operates, as well as the countries from which the Company sources inventory, fixed assets, and other supplies, the effect of the pandemic on consumer confidence and spending, and actions taken by government entities in response to the pandemic, all of which are highly uncertain. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may enterexperience or continue to experience a recession, asand our business and operations could be materially adversely affected by a resultprolonged recession in the U.S. and other major markets.
In response to the COVID-19 pandemic and these changing conditions, beginning onin late March 17, 2020, and continuing through the date we filed this report, we have closed some of our stores and have shifted our remainingother stores to a curbside pickup model beginning on March 21, 2020 in the jurisdictions where government regulations permitpermitted our stores to continue to operate and where the customer demand makesmade 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. In May and June 2020, we implemented a phased approach to reopening stores for in-store shopping with enhanced safety and sanitation measures such as requiring associates to wear face masks, installing social distancing markers on floors and protective shields at cash registers, and sanitizing shopping carts, pin pads, design desks, and other high-traffic areas. Since reopening our stores for in-store shopping, we have experienced increased sales and order activity, likely due to customers spending more time at home and the continuation of school and workplace closures due to the ongoing impacts of the COVID-19 pandemic. Some of this increased demand is also likely attributable to the timing of tax refunds and COVID-19-related stimulus payments.
The COVID-19 pandemic and
theseinitial responses
have and will continue to adversely affecthad an adverse effect on our customer traffic, sales, operating costs, and profit
during the first two quarters of fiscal 2020 and
wemay have such an impact again in the future. We cannot predict how long the COVID-19 pandemic will last, whether we will be required to
close additionalre-close stores or what other government responses may occur. The COVID-19 pandemic has also adversely affected our ability to
staff our existing stores and 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 While our stores saw increased sales and order activity in the credit markets,final two quarters of fiscal 2020 and there canthe first quarter of fiscal 2021, those results, as well as those of other metrics such as net revenues, gross margins and other financial and operating data, may not be no guaranteeindicative of results for future periods. Additionally, such increased demand may increase beyond manageable levels, may fluctuate significantly, or may not continue, including the possibility that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 pandemic lasts.
demand may decrease from historical levels.
Our operations have been and could be further disrupted if
anymore of our employees
isare 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.
In addition, the COVID-19 pandemic has made it difficult to hire a sufficient number of store associates in many of our stores. If we are unable to hire a sufficient number of store associates or if there are insufficient existing store associates not subject to quarantine, we may need to reduce store hours or temporarily close stores.
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:
•additional temporary store closures due to reduced workforces or government mandates or the need to utilize a curbside pickup model or otherwise modify our operations;•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 or the inability to sufficiently staff our stores;
•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;
•increased cybersecurity risks due to the number of associates working remotely;
•increased litigation risk as a result of the pandemic; and
| ● | 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. |
•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.
We face risks related to our indebtedness.
As of April 1, 2021, the principal amount of our total indebtedness was approximately $207.7 million related to our indebtedness outstanding under the Term Loan Facility. In addition, as of April 1, 2021, we had the ability to access approximately $370.5 million of unused borrowings available under the ABL Facility without violating any covenants thereunder and had approximately $21.3 million in outstanding letters of credit thereunder.
Our indebtedness, combined with our lease and other financial obligations and contractual commitments, could adversely affect our business, financial condition and operating results by:
•making it more difficult for us to satisfy our obligations with respect to our indebtedness, including restrictive covenants and borrowing conditions, which may lead to an event of default under the agreements governing our debt;
•making us more vulnerable to adverse changes in general economic, industry and competitive conditions and government regulation;
•requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of cash flows to fund current operations and future growth;
•exposing us to the risk of increased interest rates as our borrowings under our Credit Facilities are at variable rates;
•restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
•requiring us to comply with financial and operational covenants, restricting us, among other things, from placing liens on our assets, making investments, incurring debt, making payments to our equity or debt holders and engaging in transactions with affiliates;
•limiting our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business and growth strategies or other purposes; and
•limiting our ability to obtain credit from our suppliers and other financing sources on acceptable terms or at all.
We may also incur substantial additional indebtedness in the future, subject to the restrictions contained in our Credit Facilities. If such new indebtedness is in an amount greater than our current debt levels, the related risks that we now face could intensify. However, we cannot give assurance that any such additional financing will be available to us on acceptable terms or at all. Moreover, for taxable years beginning after December 31, 2017, the deductibility of net business interest expenses on our indebtedness for each taxable year could be limited under the Tax Cuts and Jobs Act.
Additionally, in July 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), the authority that regulates London Interbank Offered Rate ("LIBOR"), announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. On March 5, 2021, the ICE Benchmark Administration Limited ("IBA"), which is regulated by the FCA confirmed that it would cease the publication of the one-week and two-month U.S. dollar LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the U.S. dollar LIBOR settings (overnight and 12 months) immediately following the LIBOR publication on June 30, 2023. Accordingly, in the near future LIBOR will cease being a widely used benchmark interest rate. The current and any future reforms and other pressures may cause LIBOR to be replaced with a new benchmark or to perform differently than in the past, including during the transition period. The Company has material debt contracts that are indexed to USD-LIBOR and is currently working on a transition plan. We believe all our material agreements have appropriate language to negotiate a transition to an alternative index rate and are continuing to monitor this activity and evaluate the related risks. However, the consequences of these market developments cannot be entirely predicted and a transition from LIBOR, even if administered consistent with the provisions of our material agreements, may require us to amend or restructure our existing LIBOR-based debt instruments and any related hedging arrangements that extend beyond 2021, which may be difficult, costly and time consuming. We cannot give assurance that our financial condition and operating results will not be adversely affected.
Both New York State and federal legislation in the U.S. is under consideration that if enacted could result, upon the unavailability of LIBOR, in the replacement of certain fallback provisions in LIBOR-based financing agreements. Under the proposed legislation, some of these existing fallback provisions would be replaced by a provision specifying that the replacement rate and related adjustments recommended by the Alternative Reference Rates Committee ("ARRC"), the committee in the United States convened to ensure a successful transition from LIBOR, would be used to establish the interest-rate on the financing. The legislation would also require the use of the benchmark replacement rate and related adjustments recommended by the AARC in the event that there are no fallback provisions in a financing. The legislation would not impact credit agreements that already include fallbacks to the changes recommended by the ARRC. Any such legislation adopted in New York State would have applicability only to agreements governed by New York law. There can be no assurance as to the final form of any such New York or federal legislation or as to whether any such legislation will be adopted.
In the event that one or more LIBOR-based interest rate derivatives are entered into to hedge variable rate indebtedness, the LIBOR rate specified therein will be determined from time to time by reference to a publication page specified in the relevant definitions of the International Swaps and Derivatives Association, Inc. ("ISDA"). However, if such rate does not appear on the relevant page, and the above-referenced legislation is not adopted that would address the replacement of LIBOR under such derivatives, LIBOR will be determined in accordance with dealer polls conducted by the calculation agent under the agreement governing the derivative. This dealer polling mechanism may not be successful in arriving at a replacement interest rate for LIBOR. Even if the dealer polling mechanism successfully arrives at a replacement interest rate for derivatives, that rate could differ significantly from the interest rates used for our variable-rate indebtedness.
Any disruption in our distribution capabilities, supply chain or our related planning and control processes may adversely affect our business, financial condition, and operating results.
Our success is highly dependent on our planning and distribution infrastructure, which includes the ordering, transportation, and distribution of products to our stores and the ability of suppliers to meet distribution requirements. We also need to ensure that we continue to identify and improve our processes and supply chain and that our distribution infrastructure and supply chain keep pace with our anticipated growth and increased number of stores. The cost of these enhanced processes could be significant and any failure to maintain, grow, or improve them could adversely affect our business, financial condition, and operating results. Due to our rapid expansion, we have had to significantly increase the size of our distribution centers, including opening a 1.5 million square foot distribution center in Maryland in the fourth quarter of fiscal 2019. Based on our growth intentions, we plan to add additional distribution centers or increase the size of our existing distribution centers in the future. Increasing the size of our distribution centers may decrease the efficiency of our distribution costs.
We manage our four distribution centers internally rather than rely on independent third-party logistics providers. If we are not able to manage our distribution centers successfully or at a lower cost than with third-party logistics providers, it could adversely affect our business, financial condition, and operating results. As we continue to add distribution centers, we may incur unexpected costs, and our ability to distribute our products may be adversely affected. Any disruption in the transition to or operation of our distribution centers could have an adverse impact on our business, financial condition, and operating results. For example, the landlord for our Maryland distribution center has identified a construction defect with that facility that we are working with the landlord to address. While we are unable to predict the impact such defect could have on our business, any necessary repairs could cause disruption in the operation of that distribution center, which could negatively impact the in-stock positions in the stores served by such distribution center and could have an adverse impact on our business, financial condition, and operating results.
Additionally, our supply chain and our suppliers could be disrupted by factors beyond our control, including from damage or destruction to our distribution centers; weather-related events; natural disasters; international trade disputes or trade policy changes or restrictions; tariffs or import-related taxes; third-party strikes, lock-outs, work stoppages or slowdowns; shortages of truck drivers; shipping capacity constraints; third-party contract disputes; supply or shipping interruptions or costs; military conflicts; acts of terrorism; public health issues, including pandemics or quarantines (such as the COVID-19 outbreak); or other factors beyond our control. Any such disruption could negatively impact our financial performance or financial condition. Accordingly, we have assessed and are implementing supply chain continuity plans. While to date there has been no material impact on supply for most of our sourced merchandise, COVID-19-related labor shortages and supply chain disruptions continue to cause logistical challenges for us and the entire hard surface flooring industry. In particular, there is significant congestion at ports of entry to the United States, which is increasing the time and cost to ship goods to our stores. Additionally, customer demand for certain products has also fluctuated as the COVID-19 pandemic has progressed and customer behaviors have changed, which has challenged our ability to anticipate and/or adjust inventory levels to meet that demand. These factors have resulted in a decrease in our in-stock levels for certain products as well as delays in delivering those products to our distribution centers, stores or customers. While we are working closely with our suppliers and transportation partners to mitigate the impact of these disruptions, future capacity shortages or shipping cost increases could have an adverse impact upon our business. Our success is also dependent on our ability to provide timely delivery to our customers. Our business could also be adversely affected if fuel prices increase or there are delays in product shipments due to freight difficulties, inclement weather, strikes by our employees or employees of third-parties involved in our supply chain, or other difficulties. If we are unable to deliver products to our customers on a timely basis, they may decide to purchase products from our competitors instead of from us, which would adversely affect our business, financial condition, and operating results.
Proposed changes in U.S. taxation of businesses could adversely affect us.
The new Democratic Presidential Administration has proposed changes to tax law that would, among other things, increase the corporate tax rate, impose a 15% minimum tax on corporate book income, and strengthen the GILTI regime imposed by the Tax Cuts and Jobs Act while eliminating related tax exemptions. Any such tax changes could materially increase the amount of taxes we would be required to pay, which could adversely affect our business, financial condition and operating results. For example, increases in the corporate tax rate may adversely impact our cash flow, which would in turn negatively impact our performance and liquidity. Other changes that may be enacted in the future, including changes to tax laws enacted by state or local governments in jurisdictions in which we operate, could result in further changes to state and local taxation and materially adversely affect our financial position and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
None.
Item 6. Exhibits
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Exhibit No. |
| Exhibit Description |
3.1 |
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3.2 |
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10.1 |
| Amendment No. 35 and Incremental Term Loan Agreement to Credit Agreement and Amendment No. 1 to Security Agreement, dated as of February 14, 2020,9, 2021, 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 and Golub Capital LLC, as Additional Initial Term Loan Arranger (2) |
10.2 31.1 |
| 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
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| 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)#
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10.4
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| 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)#
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10.5
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| 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)#
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10.6
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| 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)#
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10.7
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| 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)#
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10.8
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| Form of Performance Restricted Stock Agreement under the Floor & Decor Holdings, Inc. 2017 Stock Incentive Plan (3)
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10.9
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| Addendum to Employment Agreement, dated March 26, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and Thomas V. Taylor#
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10.10
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| Addendum to Employment Agreement, dated March 26, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and David V. Christopherson#
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10.11
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| Addendum to Employment Agreement, dated March 26, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and Brian K. Robbins#
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10.12
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| Addendum to Employment Agreement, dated March 26, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and Trevor S. Lang#
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10.13
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| Addendum to Employment Agreement, dated March 26, 2020, between Floor & Decor Holdings, Inc., Floor and Decor Outlets of America, Inc. and Lisa G. Laube#
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31.1
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| Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
| |
32.1 |
| |
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.
|
34
(1) Filed as an exhibit to Amendment No. 4 to the Registrant’s Registration Statement on Form S-1 (File No. 333-216000) filed with the SEC on April 24, 2017, and incorporated herein by reference.(2) Filed as an exhibit to Registrant’s Current Report on Form 8-K (File No. 001-38070) filed with the SEC on February 9, 2021, and incorporated herein by reference.
(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. |
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| FLOOR & DECOR HOLDINGS, INC. |
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Dated: April 30, 2020 May 6, 2021 | By: |
/s/ Thomas V. Taylor
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| Thomas V. Taylor |
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| Chief Executive Officer |
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| (Principal Executive Officer) |
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Dated: April 30, 2020 May 6, 2021 | By: | /s/ Trevor S. Lang |
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| Trevor S. Lang |
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| Executive Vice President and Chief Financial Officer |
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| (Principal Financial Officer and Principal Accounting Officer) |