Table of Contents
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2019
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-38070
Floor & Decor Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
27‑3730271
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
2233 Lake Park Drive
Smyrna, Georgia
30080
(Address of principal executive offices)
(Zip Code)
(404) 471‑1634
Not Applicable
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A common stock, $0.001 par value per share
FND
New York Stock Exchange
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at April 30, 2019
Class A common stock, $0.001 par value
98,244,175
Page
Part I – Financial Information
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations and Comprehensive Income
Condensed Consolidated Statements of Stockholders’ Equity
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Part II – Other Information
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Floor & Decor Holdings, Inc. and Subsidiaries
(In Thousands, Except Share and Per Share Data)
(Unaudited)
As of
March 28,
December 27,
2019
2018
Assets
Current assets:
Cash and cash equivalents
$
451
644
Income taxes receivable
—
4,324
Receivables, net
66,101
67,527
Inventories, net
437,504
471,014
Prepaid expenses and other current assets
23,342
15,949
Total current assets
527,398
559,458
Fixed assets, net
338,888
328,366
Right of use assets
659,115
Intangible assets, net
109,322
109,330
Goodwill
227,447
Other assets
11,181
9,490
Total long-term assets
1,345,953
674,633
Total assets
1,873,351
1,234,091
Liabilities and stockholders’ equity
Current liabilities:
Current portion of term loans
3,500
Current portion of lease liabilities
73,615
Trade accounts payable
229,498
313,503
Accrued expenses and other current liabilities
76,390
82,038
Income taxes payable
8,765
Deferred revenue
6,581
5,244
Total current liabilities
398,349
404,285
Term loans
141,152
141,834
Revolving line of credit
2,100
Deferred rent
36,980
Lease liabilities
683,672
Deferred income tax liabilities, net
25,666
26,838
Tenant improvement allowances
37,295
Other liabilities
2,451
2,550
Total long-term liabilities
855,041
245,497
Total liabilities
1,253,390
649,782
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 28, 2019 and December 27, 2018
Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 97,997,529 shares issued and outstanding at March 28, 2019 and 97,588,539 issued and outstanding at December 27, 2018
98
Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at March 28, 2019 and December 27, 2018
Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and outstanding at March 28, 2019 and December 27, 2018
Additional paid-in capital
345,907
340,462
Accumulated other comprehensive income (loss), net
(148)
186
Retained earnings
274,104
243,563
Total stockholders’ equity
619,961
584,309
Total liabilities and stockholders’ equity
See accompanying notes to condensed consolidated financial statements.
3
(In Thousands, Except Per Share Data)
Thirteen Weeks Ended
March 29,
Net sales
477,050
402,948
Cost of sales
275,676
237,562
Gross profit
201,374
165,386
Operating expenses:
Selling and store operating
127,383
102,567
General and administrative
30,202
23,339
Pre-opening
4,027
2,974
Total operating expenses
161,612
128,880
Operating income
39,762
36,506
Interest expense
2,921
1,784
Income before income taxes
36,841
34,722
Provision for income taxes
6,121
2,851
Net income
30,720
31,871
Change in fair value of hedge instruments, net of tax
(334)
430
Total comprehensive income
30,386
32,301
Basic earnings per share
0.31
0.33
Diluted earnings per share
0.29
0.30
4
(In Thousands)
Accumulated
Common Stock
Additional
Other
Total
Preferred Stock
Class A
Paid-in
Comprehensive
Retained
Stockholders’
Shares
Amount
Capital
Income (Loss)
Earnings
Equity
Balance, December 28, 2018
97,588
Stock based compensation expense
2,250
Exercise of stock options
348
1,776
Cumulative effect from adoption of ASU No. 2016-02
(179)
Shares issued under employee stock plans
61
1,419
Other comprehensive gain (loss), net of tax
Balance, March 28, 2019
97,997
Balance, December 29, 2017
95,509
96
323,419
(205)
119,550
442,860
1,415
585
3,195
Cumulative effect from adoption of ASU No. 2014-09
7,826
Balance, March 29, 2018
96,094
328,029
225
159,247
487,597
5
Operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
17,184
11,534
Amortization of tenant improvement allowances
(1,045)
Deferred income taxes
(1,057)
2,111
Interest cap derivative contracts
610
(535)
Changes in operating assets and liabilities:
22,568
15,775
33,510
(9,262)
(84,005)
(3,723)
3,017
(12,926)
Income taxes
13,143
780
1,337
1,500
2,707
128
Other, net
(12,256)
282
Net cash provided by operating activities
27,021
40,612
Investing activities
Purchases of fixed assets
(31,634)
(27,841)
Net cash used in investing activities
Financing activities
Borrowings on revolving line of credit
80,200
51,900
Payments on revolving line of credit
(78,100)
(66,100)
Payments on term loans
(875)
(1,750)
Proceeds from exercise of stock options
Proceeds from employee stock purchase plan
Net cash provided by (used in) financing activities
4,420
(12,755)
Net increase (decrease) in cash and cash equivalents
(193)
16
Cash and cash equivalents, beginning of the period
556
Cash and cash equivalents, end of the period
572
Supplemental disclosures of cash flow information
Buildings and equipment acquired under operating leases
53,049
Cash paid for interest
1,987
2,368
Cash paid for income taxes
19
Fixed assets accrued at the end of the period
10,836
16,332
Fixed assets acquired as part of lease - paid for by lessor
6
March 28, 2019
1. Summary of Significant Accounting Policies
Nature of Business
Floor & Decor Holdings, Inc., together with its subsidiaries (the “Company,” “we,” “our” or “us”) is a highly differentiated, rapidly growing specialty retailer of hard surface flooring and related accessories. We offer a broad in stock assortment of tile, wood, laminate and natural stone flooring along with decorative and installation accessories at everyday low prices. Our stores appeal to a variety of customers, including professional installers and commercial businesses (“Pro”), Do It Yourself customers (“DIY”) and customers who buy the products for professional installation (“Buy it Yourself” or “BIY”). We operate within one reportable segment.
As of March 28, 2019, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D”), operates 103 warehouse-format stores, which average 75,000 square feet, and one small-format standalone design center in 28 states, as well as three distribution centers and an e-commerce site, FloorandDecor.com.
Fiscal Year
The Company’s fiscal year is the 52- or 53-week period ending on the Thursday on or preceding December 31st. Fiscal years ended December 26, 2019 (“fiscal 2019”) and December 27, 2018 (“fiscal 2018”) include 52 weeks. When a 53-week fiscal year occurs, we report the additional week at the end of the fiscal fourth quarter. 52-week fiscal years consist of thirteen-week periods in the first, second, third and fourth quarters of the fiscal year.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. The Condensed Consolidated Balance Sheet as of December 27, 2018 has been derived from the audited Consolidated Balance Sheet for the fiscal year then ended. The interim condensed consolidated financial statements should be read together with the audited consolidated financial statements and related footnote disclosures included in the Company’s Annual Report on Form 10-K for fiscal 2018, filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2019 (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 March 28, 2019 and March 29, 2018 are not necessarily indicative of the results to be expected for the full year.
There have been no updates to our Significant Accounting Policies since the Annual Report, except for the policy changes in connection with the newly adopted lease accounting standard outlined in Note 5. For 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.
Recently Issued Accounting Pronouncements
There have been no updates to Recently Issued Accounting Pronouncements that have yet to be adopted since the Annual Report. For information regarding Recently Issued Accounting Pronouncements, see the “Summary of Significant Accounting Policies” section of “Item 8. Financial Statements and Supplementary Data” of our Annual Report.
7
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, "Leases (Topic 842)." ASU No. 2016-02 requires that lessees recognize lease assets and lease liabilities on the balance sheet with an option to exclude short-term leases (leases with terms of 12 months or less). The guidance also requires disclosures about the amount, timing, and uncertainty of cash flows arising from leases. We adopted the ASU on December 28, 2018, the first day of our fiscal year 2019, using the modified retrospective approach. The cumulative effect adjustment upon adoption resulted in an immaterial opening balance sheet reduction to retained earnings. The adoption of ASU No. 2016-02 in the first quarter of fiscal 2019 had a material impact on the Company’s Condensed Consolidated Balance Sheet in respect to the right of use assets, lease liabilities, tenant improvement allowances, and deferred rent but did not have a material impact on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income or Statements of Cash Flows. Refer to Note 5 for further details.
2. Revenues
Disaggregated Revenue
The following table presents the net sales of each major product category (in thousands):
March 29, 2018
% of
Product Category
Net Sales
Tile
125,310
26
%
117,402
29
Laminate / Luxury Vinyl Plank
97,502
20
66,892
17
Decorative Accessories
94,440
78,489
Installation Materials and Tools
79,709
63,581
Wood
49,230
10
46,485
12
Natural Stone
30,887
28,006
Delivery and Other
(28)
2,093
100
.
3. Debt
Fair Value of Debt
Market risk associated with our fixed and variable rate long‑term debt relates to the potential change in fair value and negative impact to future earnings, respectively, from a change in interest rates. The aggregate fair value of debt is based primarily on our estimates of interest rates, maturities, credit risk, and underlying collateral and is classified as Level 3 within the fair value hierarchy. At March 28, 2019 and December 27, 2018, the carrying amounts and fair values of our debt were as follows:
(in thousands)
Total debt at par value
150,225
149,000
Less: unamortized discount and debt issuance costs
3,473
3,666
Net carrying amount
146,752
145,334
Fair value
148,003
147,883
4. Income Taxes
Our effective income tax rates were 16.6% and 8.2% for the thirteen weeks ended March 28, 2019 and March 29, 2018, respectively.
8
5. Commitments and Contingencies
Lease Commitments
On December 28, 2018, the first day of our fiscal year 2019, we adopted ASU No. 2016-02, "Leases (Topic 842)", which requires that lessees recognize lease assets and lease liabilities for all leases on the balance sheet with an option to exclude short-term leases (leases with terms of 12 months or less). We adopted ASU No. 2016-02 using the modified retrospective approach and elected the package of practical expedients to use in transition, which permitted us not to reassess, under the new standard, our prior conclusions about lease identification and lease classification. The cumulative effect adjustment upon adoption of ASU No. 2016-02 resulted in an immaterial adjustment to retained earnings. The adoption also resulted in the addition of $621 million right of use assets and corresponding $701 million lease liabilities to our balance sheet, while eliminating deferred rent and tenant improvement allowances. Additionally, we do not separate lease and nonlease components of contracts.
The majority of our long-term operating lease agreements through F&D are for our corporate office, retail locations, and distribution centers, which expire in various years through 2038. All of our building leases have 10-15 year lease terms, except one lease which has a 20-year term. The majority of our building leases also include options to extend, which are factored into the recognition of their respective assets and liabilities when appropriate. Additionally, one building lease contains variable lease payments, which are determined based on a percentage of retail sales over a contractual level, and we sublease real estate within one store and one distribution center to third parties. Certain lease agreements include escalating rents over the lease terms which, under the new accounting standard, results in rent being expensed on a straight‑line basis over the life of the lease that commences on the date we have the right to control the property. Our lease agreements do not contain any residual value guarantees or restrictive covenants that would reasonably be expected to have a material impact on our business.
As most of our leases do not provide a readily determinable implicit rate, we use a third party to determine our incremental borrowing rate, specifically the Bloomberg yield curve for US consumers with a BB- credit rating. The rate is adjusted for collateralization as well as inflation.
9
Lease Position
The table below presents supplemental balance sheet information related to operating leases.
(in thousands, except lease term and discount rate)
Balance Sheet Classification
Building
647,667
Equipment
6,263
Land
245
Software
4,940
Total operating lease assets
Liabilities
Current
68,927
2,784
93
1,811
Total current operating lease liabilities
Noncurrent
675,769
4,663
158
3,082
Total noncurrent operating lease liabilities
Total operating lease liabilities
757,287
Weighted-average remaining lease term
9 years
Weighted-average discount rate
Lease Costs
The table below presents components of lease expense for operating leases.
Classification
Operating lease cost (1)
26,015
Sublease income
(623)
Total lease cost
25,392
(1) Includes variable lease costs, which are immaterial.
Undiscounted Cash Flows
Future minimum lease payments under non‑cancelable operating leases (with initial or remaining lease terms in excess of one year) as of March 28, 2019, were:
Thirty-nine weeks ended December 26, 2019
82,939
2020
112,086
2021
105,317
2022
98,163
2023
93,513
Thereafter
503,402
Total minimum lease payments (2)
995,420
Less: amount of lease payments representing interest
238,133
Present value of future minimum lease payments
Less: current obligations under leases
Long-term lease obligations
(2) Future lease payments exclude $311 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
For the thirteen weeks ended March 28, 2019, cash paid for operating leases was $24.6 million.
Litigation
We are subject to other various legal actions, claims and proceedings arising in the ordinary course of business, which may include claims related to general liability, workers’ compensation, product liability, intellectual property and employment-related matters resulting from our business activities. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. These proceedings are not expected to have a material impact on our consolidated financial position, cash flows or results of operations.
6. Stock Based Compensation
At our 2018 annual meeting of stockholders held on May 17, 2018, our stockholders approved the Floor & Decor Holdings, Inc. Employee Stock Purchase Plan (the “ESPP”), which became available to substantially all of our employees beginning in the third quarter of fiscal 2018. The ESPP permits eligible employees to purchase shares of our common stock through payroll deductions, subject to certain limitations. The purchase price of the shares under the ESPP in no event will be less than the lesser of 85% of the lower of the fair market value of our common stock on either the first or last trading day of each six-month offering period. There were 1,500,000 shares of our Class A common stock, par value $0.001 per share, approved for issuance. On December 31, 2018, $1.4 million in contributions were used to purchase 60,871 shares of our Class A common stock. Additionally, during the thirteen weeks ended March 28, 2019, the Company recognized $143 thousand of stock-based compensation expense related to the ESPP.
7. Earnings Per Share
Net Income per Common Share
We calculate basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effect of stock options.
11
The following table shows the computation of basic and diluted earnings per share:
(in thousands, except per share data)
Basic weighted average shares outstanding
97,785
95,714
Dilutive effect of share based awards
6,536
8,951
Diluted weighted average shares outstanding
104,321
104,665
The following awards have been excluded from the computation of dilutive effect of share based awards because the effect would be anti‑dilutive:
Stock options
986
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Floor & Decor Holdings, Inc. and Subsidiaries included in Item 1 of this quarterly report on Form 10-Q (this “Quarterly Report”) and with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 27, 2018 and filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2019 (the “Annual Report”). As used in this Quarterly Report, except where the context otherwise requires or where otherwise indicated, the terms “Company,” “we,” “our” or “us” refer to Floor & Decor Holdings, Inc. and its subsidiaries.
The discussion in this Quarterly Report, including under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A, “Risk Factors” of Part II, contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact contained in this Quarterly Report, including statements regarding the Company’s future operating results and financial position, business strategy and plans and objectives of management for future operations, 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 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;
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;
our inability to find, train and retain key personnel;
violations of laws and regulations applicable to us or our suppliers;
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;
13
suppliers may sell similar or identical products to our competitors;
our inability to maintain sufficient levels of cash flow to meet growth expectations;
our inability to manage our inventory obsolescence, shrinkage and damage;
fluctuations in material and energy costs;
our vulnerability to natural disasters and other unexpected events; and
restrictions imposed by our indebtedness on our current and future operations.
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The forward-looking statements contained in this Quarterly Report speak only as of the date hereof. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. If a change to the events and circumstances reflected in our forward-looking statements occurs, our business, financial condition and operating results may vary materially from those expressed in our forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.
Overview
Founded in 2000, Floor & Decor is a high growth, differentiated, multi-channel specialty retailer of hard surface flooring and related accessories with 103 warehouse format stores across 28 states as of March 28, 2019. We believe that we offer the industry’s broadest in stock assortment of tile, wood, laminate, vinyl, and natural stone flooring along with decorative and installation accessories at everyday low prices positioning us as the one stop destination for our customers’ entire hard surface flooring needs. We appeal to a variety of customers, including professional installers and commercial businesses (“Pro”), Do It Yourself customers (“DIY”) and customers who buy the products for professional installation (“Buy it Yourself” or “BIY”).
We operate on a 52- or 53-week fiscal year ending on the Thursday on or preceding December 31. The following discussion contains references to the first thirteen weeks of fiscal 2019 and fiscal 2018, which ended on March 28, 2019 and March 29, 2018, respectively.
During the thirteen weeks ended March 28, 2019, we continued to make long-term key strategic investments, including:
opening three new warehouse-format stores ending the quarter with 103 warehouse-format stores;
focusing on innovative new products and localized assortments, supported by inspirational in-store and online visual merchandising solutions;
investing capital in our stores, information technology and our connected customer strategies to continue enhancing and integrating the online and in-store shopping experience for our customers; and
engaging more professional customers, including signing up more customers on our Pro Premier Loyalty Program.
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
14
EBITDA and Adjusted EBITDA and a reconciliation of our EBITDA and Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
Other key financial terms we use include net sales, selling and store operating expenses, general and administrative expenses and pre-opening expenses. For definitions and a discussion of how we use our other key financial definitions, 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.
15
Results of Operations
The following table summarizes key components of our results of operations for the periods indicated, in dollars and as a percentage of net sales:
3/28/2019
3/29/2018
Actual
% of Sales
$ Increase/(Decrease)
% Increase/(Decrease)
100.0
74.1
18.4
57.8
59.0
38.1
16.0
42.2
41.0
36.0
21.8
Selling and store operating expenses
26.7
25.4
24.8
24.2
General and administrative expenses
6.4
5.8
6.9
29.4
Pre-opening expenses
0.8
0.7
1.1
35.4
33.9
31.9
32.7
8.3
9.1
3.3
8.9
0.6
0.5
63.7
7.7
8.6
2.1
6.1
1.3
NM
7.9
(1.2)
(3.6)
NM – Not meaningful
Selected Financial Information
Comparable stores sales
3.1
15.6
Comparable average ticket
1.9
Comparable customer transactions
13.4
Number of warehouse-format stores
103
84
Adjusted EBITDA (in thousands)
60,068
47,827
Adjusted EBITDA margin
12.6
11.9
(1) Adjusted EBITDA is a non-GAAP financial measure. See “Non-GAAP Financial Measures” for additional information and a reconciliation to the most comparable GAAP measure.
Net sales during the thirteen weeks ended March 28, 2019 increased $74.1 million, or 18.4%, compared to the corresponding prior year period. Three out of six of our product categories experienced comparable store sales increases during the period, driven by increases in laminate/luxury vinyl plank, decorative accessories, and installation materials and tools that were above our average for the thirteen weeks ended March 28, 2019. Comparable store sales increased 3.1%, or $12.6 million, and our non-comparable store sales contributed $61.5 million. The increase in comparable store sales was largely driven by a 1.9% increase in comparable customer transactions and a 1.1% increase in comparable average ticket growth. We believe the increase in net sales and customer transactions are due to the execution of our key strategic investments. We believe our enhanced Pro, merchandising, connected customer, marketing and visual merchandising strategies, along with new innovative products led to our sales growth.
Gross Profit and Gross Margin
Gross profit during the thirteen weeks ended March 28, 2019 increased $36.0 million, or 21.8%, compared to the corresponding prior year period. This increase in gross profit was primarily the result of increased sales driven by
comparable store sales increase of 3.1% and the opening of 19 new stores since March 29, 2018. Gross margin for the thirteen weeks ended March 28, 2019 increased approximately 120 basis points to 42.2% from 41.0% in the corresponding prior year period. This improvement in gross margin was equally attributable to better product gross margins as well as leveraging our supply chain costs on higher sales. The improved product margins were due to favorable negotiations with our suppliers, improved merchandising strategies, including higher sales from higher margin categories like installation and decorative accessories, and some strategic retail increases.
Selling and Store Operating Expenses
Selling and store operating expenses during the thirteen weeks ended March 28, 2019 increased $24.8 million, or 24.2% compared to the corresponding prior year period, due primarily to the addition of 19 new stores since March 29, 2018. As a percentage of net sales, our selling and store operating expenses increased approximately 130 basis points to 26.7% from 25.4% in the corresponding prior year period driven entirely by new stores open less than one year. Comparable store selling and store operating expenses as a percentage of comparable store sales decreased by approximately 54 basis points, as we leveraged personnel and operating expenses on higher net sales.
General and Administrative Expenses
General and administrative expenses, which are typically expenses incurred outside of our stores, during the thirteen weeks ended March 28, 2019 increased $6.9 million, or 29.4% compared to the corresponding prior year period, due to our continued investments in personnel for our regional and store support functions in support of our store growth. Our general and administrative expenses as a percentage of net sales increased approximately 60 basis points to 6.4% from 5.8% in the corresponding prior year period.
Pre‑Opening Expenses
Pre-opening expenses during the thirteen weeks ended March 28, 2019 increased $1.1 million, or 35.4% compared to the corresponding prior year period. The increase is primarily the result of the cadence of our fiscal 2019 store openings. This resulted in a higher number of new stores opened or planned to be opened for which pre-opening expenses were incurred compared to the corresponding prior year period. During the thirteen weeks ended March 28, 2019, we opened three stores as compared to opening one store during the corresponding prior year period.
Interest Expense
Interest expense during the thirteen weeks ended March 28, 2019 increased $1.1 million, or 63.7% compared to the corresponding prior year period. The increase in interest expense was primarily due to the change in fair value of our cash flow hedge, and to a lesser extent the increase in our average interest rate to 6.0% for the thirteen weeks ended March 28, 2019 from 3.8% in the corresponding prior year period.
Taxes
The provision for income taxes during the thirteen weeks ended March 28, 2019 increased $3.3 million compared to the corresponding prior year period. The effective tax rate was 16.6% for the thirteen weeks ended March 28, 2019 compared to 8.2% in the corresponding prior year period. The increase in the effective tax rate was primarily due to the recognition of lower excess tax benefits in the current period related to stock options exercised than in the corresponding prior year period.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA are key metrics used by management and our board of directors to assess our financial performance and enterprise value. We believe that operating income, EBITDA and Adjusted EBITDA are useful measures, as they eliminate certain expenses that are not indicative of our core operating performance and facilitate a comparison of our core operating performance on a consistent basis from period to period. We also use Adjusted EBITDA as a basis to determine covenant compliance with respect to our Credit Facilities (as defined below), to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties as performance measures to evaluate companies in our industry.
EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with GAAP. We define EBITDA as net income before interest, loss on early extinguishment of debt, taxes, depreciation and amortization. We define Adjusted EBITDA as net income before interest, loss on early extinguishment of debt, taxes, depreciation and amortization, adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. See below for a reconciliation of our EBITDA and Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
EBITDA and Adjusted EBITDA are non-GAAP measures of our financial performance and should not be considered as alternatives to net income as a measure of financial performance or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of liquidity or free cash flow for management's discretionary use. In addition, these non-GAAP measures exclude certain non-recurring and other charges. Each of these non-GAAP measures has its limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the items eliminated in the adjustments made to determine EBITDA and Adjusted EBITDA, such as stock compensation expense, loss (gain) on asset disposal, executive recruiting/relocation, and other adjustments. Our presentation of EBITDA and Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Definitions and calculations of EBITDA and Adjusted EBITDA differ among companies in the retail industry, and therefore EBITDA and Adjusted EBITDA disclosed by us may not be comparable to the metrics disclosed by other companies.
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The reconciliations of net income to EBITDA and Adjusted EBITDA for the periods noted below are set forth in the table as follows:
Depreciation and amortization (1)
16,871
10,228
Income tax expense
EBITDA
56,633
46,734
Stock compensation expense (2)
Other (3)
1,185
(322)
Adjusted EBITDA
(1) Excludes deferred financing amortization, which is included as a part of interest expense in the table above. For the thirteen weeks ended March 29, 2018, amounts are net of amortization of tenant improvement allowances.
(2) Non-cash charges related to stock-based compensation programs, which vary from period to period depending on timing of awards and forfeitures.
(3) Other adjustments include amounts management does not consider indicative of our core operating performance. Amounts for the thirteen weeks ended March 28, 2019 primarily relate to costs associated with the secondary public offering of our Class A common stock by certain of our stockholders, completed in March 2019, as well as the relocation of the Company’s Store Support Center and closure of the Miami distribution center. Amounts for the thirteen weeks ended March 29, 2018 primarily relate to insurance recoveries from hurricanes Harvey and Irma.
Liquidity and Capital Resources
Liquidity is provided primarily by our cash flows from operations and our $300 million asset-backed revolving credit facility (the “ABL Facility”). As of March 28, 2019, we had $274.1 million in unrestricted liquidity, consisting of $0.5 million in cash and cash equivalents and $273.6 million immediately available for borrowing under the ABL Facility without violating any covenants thereunder.
Our primary cash needs are for merchandise inventories, payroll, store rent, and other operating expenses and capital expenditures associated with opening new stores and remodeling existing stores, as well as information technology, e-commerce and store support center infrastructure. We also use cash for the payment of taxes and interest.
The most significant components of our operating assets and liabilities are merchandise inventories and accounts payable, and to a lesser extent accounts receivable, prepaid expenses and other assets, other current and non-current liabilities, taxes receivable and taxes payable. Our liquidity is not generally seasonal, and our uses of cash are primarily tied to when we open stores and make other capital expenditures. We believe that cash expected to be generated from operations and the availability of borrowings under the ABL Facility will be sufficient to meet liquidity requirements, anticipated capital expenditures and payments due under the ABL Facility and our $350 million senior secured term loan facility (the “Term Loan Facility” and together with the ABL Facility, our “Credit Facilities”) for at least the next 12 months.
The Term Loan Facility has no financial maintenance covenants. As of March 28, 2019, we were in compliance with the covenants of the Credit Facilities and no Event of Default (as defined in the credit agreements governing our Credit Facilities) had occurred.
Total capital expenditures in fiscal 2019 are planned to be between approximately $220 million to $230 million and will be funded primarily by cash generated from operations. We intend to make the following capital expenditures in fiscal 2019:
open 20 stores and start construction on stores opening in early 2020 using approximately $146 million to $153 million of cash;
invest in existing store remodeling projects, including one relocation, and our distribution centers using approximately $39 million to $41 million of cash; and
invest in information technology infrastructure, e-commerce and other store support center initiatives using approximately $35 million to $36 million of cash.
Cash Flow Analysis
A summary of our operating, investing and financing activities are shown in the following table:
Net Cash Provided By Operating Activities
Cash from operating activities consists primarily of net income adjusted for non‑cash items, including depreciation and amortization, stock‑based compensation, deferred taxes and the effects of changes in operating assets and liabilities.
Net cash provided by operating activities was $27.0 million for the thirteen weeks ended March 28, 2019 and $40.6 million for the thirteen weeks ended March 29, 2018. The net cash provided by operating activities for the thirteen weeks ended March 28, 2019 was primarily the result of a decrease in net income and working capital mainly driven by the timing of vendor payments.
The net cash provided by operating activities for the thirteen weeks ended March 29, 2018 was primarily the result of an increase in net income and adjustments to net income driven by depreciation related to capital expenditures. This was slightly offset by reduced working capital requirements mainly associated with timing of inventory payments associated with Chinese New Year in the thirteen weeks ended March 29, 2018.
Net Cash Used In Investing Activities
Investing activities consist primarily of capital expenditures for new store openings, existing store remodels (including leasehold improvements, new racking, new fixtures, new vignettes and new design centers) and new infrastructure and information systems.
Capital expenditures during the thirteen weeks ended March 28, 2019 and March 29, 2018 were $31.6 million and $27.8 million, respectively. We continued our investment in new stores, as we opened three new stores through March 28, 2019 and are preparing for one relocation and an additional ten new stores to be opened during the second and third quarters. We generally incur the majority of our capital expenditures six months in advance of the new store opening. During the thirteen weeks ended March 28, 2019, approximately 54% of capital expenditures was for new stores, 24% was for existing stores and distribution centers, and the remainder spent was for information technology and e‑commerce investments to support our growth.
For the thirteen weeks ended March 29, 2018, approximately 63% of capital expenditures was for new stores, 27% was for existing stores and distribution centers, and the remainder was for information technology and e‑commerce investments to support our growth.
Net Cash Used In Financing Activities
Financing activities consist primarily of borrowings and related repayments under our credit agreements, as well as proceeds from the exercise of stock options.
Net cash provided by financing activities was $4.4 million for the thirteen weeks ended March 28, 2019 and net cash used in financing activities was $12.8 million for the thirteen weeks ended March 29, 2018. The net cash provided by financing activities for the thirteen weeks ended March 28, 2019 was primarily driven by proceeds from the employee share purchase plan and exercise of stock options of $1.4 million and $1.8 million, respectively, and net borrowings on the ABL Facility of $2.1 million.
The net cash used in financing activities for the thirteen weeks ended March 29, 2018 was primarily driven by a net paydown on our ABL Facility of $14.2 million, slightly offset by proceeds from the exercise of stock options of $3.2 million.
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 September 2018, the U.S. imposed tariffs of 10% on many products from China, and the U.S. administration has announced an intention to increase that amount to 25% if a trade agreement cannot be reached. Approximately half of the products we sell are imported from China, the vast majority of which are impacted by these tariffs. While we are still analyzing the impact these tariffs may have on our business, we believe we can mitigate some of these cost increases through negotiating lower costs from our vendors, increasing retail pricing as we deem appropriate, and potentially sourcing from alternative destinations. As part of these efforts, we expect the recently enacted tariffs to increase our inventory costs and associated cost of goods sold as we incur the tariffs and import more products ahead of the potentially higher tariffs. We expect our efforts to mitigate a substantial portion of the overall effect of increased tariffs, including a material increase to our inventory costs in fiscal 2019. In addition, on April 10, 2019, the U.S. International Trade Commission announced it had commenced 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. It is too early to determine what the outcome of this preliminary investigation will be and what impact, if any, it will have on the Company. 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.
Contractual Obligations
There were no material changes to our contractual obligations outside the ordinary course of our business during the thirteen weeks ended March 28, 2019.
Off‑Balance Sheet Arrangements
For the thirteen weeks ended March 28, 2019, 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 U.S. generally accepted accounting principles, which require management to make estimates and assumptions that affect reported amounts. The
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estimates and assumptions are based on historical experience and other factors management believes to be reasonable. Actual results may differ from those estimates and assumptions. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report. See Note 1 to our consolidated financial statements included in this quarterly report on Form 10-Q, which describes recently issued 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. Our exposure to market risk has not changed materially since December 27, 2018.
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 28, 2019 and, based on their evaluation, have concluded that the Company’s disclosure controls and procedures were ineffective at the reasonable assurance level at that date due to a material weakness in internal control over financial reporting that was disclosed in the Annual Report.
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) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Remediation
As previously described in Part II, Item 9A of the Annual Report, the Company began implementing a remediation plan to address the material weakness mentioned above. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. The Company expects that the remediation of this material weakness will be completed prior to the end of fiscal 2019; however, we cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are engaged in various legal actions, claims and proceedings arising in the ordinary course of business, which may include claims related to general liability, workers’ compensation, product liability, intellectual property and employment-related matters resulting from our business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report, which could materially affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
Exhibit No.
Exhibit Description
Restated Certificate of Incorporation of Floor & Decor Holdings, Inc. (1)
3.2
Second Amended and Restated Bylaws of Floor & Decor Holdings, Inc. (1)
10.1
First Amendment to Consulting Agreement with George Vincent West. #
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
## Denotes a management contract or compensatory plan or arrangement.
(1)
Filed as an exhibit to Amendment No. 4 to the Registrant’s Registration Statement on Form S-1 (File No. 333-216000) filed with the SEC on April 24, 2017, and incorporated herein by reference.
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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.
FLOOR & DECOR HOLDINGS, INC.
Dated: May 2, 2019
By:
/s/ Thomas V. Taylor
Thomas V. Taylor
Chief Executive Officer
(Principal Executive Officer)
/s/ Trevor S. Lang
Trevor S. Lang
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
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