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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2017
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
(State or Other Jurisdiction of Incorporation or Organization)
27-3730271
(I.R.S. Employer Identification No.)
2233 Lake Park Drive Smyrna, Georgia
(Address of Principal Executive Offices)
30080
(Zip Code)
Registrant’s telephone number, including area code (404) 471-1634
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Class A Common Stock $0.001 par value per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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 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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and
posted 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
and post such files).
Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§299.405 of this chapter) is not contained herein, and will not be contained, to
the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-
K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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
Non-accelerated filer (Do not check if a smaller reporting company)
☐
☒
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 ☒
The aggregate market value of the Registrant’s Common Stock held by non-affiliates as of June 29, 2017 was $ 765 million. There were 95,663,245 shares of Common Stock
outstanding as of March 1, 2018.
Documents Incorporated by Reference:
Portions of the Registrant’s proxy statement for the Annual Meeting of Shareholders to be filed pursuant to Regulation 14A of the Exchange Act on or before April 27, 2018,
are incorporated by reference into Part III of this Form 10-K.
Table of Contents
Forward-Looking Statements
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
TABLE OF CONTENTS
PART I
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity
Securities
Selected Financial Data
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Quantitative And Qualitative Disclosures About Market Risk
Financial Statements And Supplementary Data
Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
Controls And Procedures
Other Information
PART III
Directors, Executive Officers And Corporate Governance
Executive Compensation
Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters
Certain Relationships And Related Transactions, And Director Independence
Principal Accounting Fees And Services
Item 15
Item 16
Signatures
Exhibits, Financial Statement Schedules
Form 10-K Summary
PART IV
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FORWARD LOOKING STATEMENTS .
PART I
The discussion in this Annual Report on Form 10-K (this “Annual Report”), including under Item 1A, “Risk Factors” of Part I and
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II, contains forward-looking
statements. All statements other than statements of historical fact contained in this Annual Report, including statements regarding our future
operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking
statements. 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. Forward-looking statements are based on management’s current expectations and assumptions regarding the
Company’s business, the economy and other future conditions, including the impact of recent natural disasters on sales. In some cases, you can
identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “seeks,” “intends,”
“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 Annual Report are only predictions. Although we believe that the expectations
reflected in the forward-looking statements in this Annual 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 Annual Report, including, without limitation, those factors described in Item 1A, “Risk Factors” of Part I and Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II. Some of the key factors that could cause
actual results to differ from our expectations include the following:
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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 ina bility 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;
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;
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;
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an overall decline in the health of the economy, the hard surface flooring industry, consumer spending, and the housing market;
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
Annual 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 .
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ITEM 1. BUSINESS .
Except where the context suggests otherwise, the terms “Floor & Decor Holdings, Inc.,” “Floor & Decor,” the “Company,” “we,” “us,”
and “our” refer to Floor & Decor Holdings, Inc., a Delaware corporation, together with its consolidated subsidiaries.
Our fiscal year is the 52 or 53 week period ending on the Thursday preceding December 31. The following discussion contains
references to fiscal 2013, fiscal 2014, fiscal 2015, fiscal 2016, fiscal 2017 and fiscal 2018, which represent our fiscal years ended December 26,
2013, December 25, 2014, December 29, 2016, December 28, 2017 and December 27, 2018, all of which are 52 week periods, and our fiscal
year ended December 31, 2015, which was a 53 week period.
Our Company
Founded in 2000, Floor & Decor is a high‑growth, differentiated, multi‑channel specialty retailer of hard surface flooring and related
accessories with 83 warehouse‑format stores across 21 states. We believe that we offer the industry’s broadest in‑stock assortment of tile,
wood, laminate 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”). Our Pro customers are loyal, shop often and help promote our brand. The combination of our category and product
breadth, low prices, in‑stock inventory in project‑ready quantities, proprietary credit offerings, free storage options and dedicated customer
service positions us to gain share in the attractive Pro customer segment. We believe our DIY customers spend significant time planning their
projects while conducting extensive research in advance. We provide our customers with the education and inspiration they need before making
a purchase through our differentiated online and in‑store experience.
Our warehouse‑format stores, which average approximately 73,000 square feet, are typically larger than any of our specialty retail
flooring competitors’ stores. Other large format home improvement retailers only allocate a small percentage of their floor space to hard surface
flooring and accessories. When our customers walk into a Floor & Decor store for the first time, we believe they are amazed by our visual
presentation, our store size, our everyday low prices and the breadth and depth of our merchandise. We believe that our inspiring design centers,
creative and informative visual merchandising, and accessible price points greatly enhance our customers’ experience. Our stores are easy to
navigate and designed to interactively showcase the wide array of designs and product styles a customer can create with our flooring and
decorative accessories. We engage our customers both through our trained store associates and designers who can assist in narrowing choices
and making the process of home renovation easier, as well as our staff dedicated to serving Pro customers. By carrying a deep level of hard
surface flooring inventory and wide range of tools and accessories, we seek to offer our customers immediate availability on everything they
need to complete their entire flooring or remodeling project. In addition to our stores, our website FloorandDecor.com showcases our products,
offers informational training and design ideas and has our products available for sale, which a customer can pick up in‑store or have delivered.
Our ability to purchase directly from manufacturers through our direct sourcing model enables us to be fast to market with a balanced
assortment of bestseller and unique, hard to find items that are the latest trend‑right products. We believe these factors create a differentiated
value proposition for Floor & Decor and drive customer loyalty with our Pro, DIY and BIY hard surface flooring customers in our markets, as
evidenced by our track record of consistent double digit comparable store sales growth, which has averaged 17.5% over the last five years.
Based on these characteristics, we believe Floor & Decor is redefining and expanding the addressable market size of the hard surface flooring
category and that we have an opportunity to significantly expand our store base to approximately 400 stores nationwide within the next
15 years, as described in more detail below.
Our Company was founded in 2000 by our Vice Chairman Vincent West, who opened the first Floor & Decor store in Atlanta,
Georgia, with the vision of being the low‑price leader for hard surface flooring. As we have grown, we have implemented a customer‑focused
and decentralized approach to managing our business. We provide our store leadership and regional operating teams with regular training and
sophisticated information technology systems. We also train and incentivize our store associates to deliver a superior experience to our
customers. Taken together, these elements create a customer‑centric culture that helps us achieve our operational and financial goals.
Over the last several years, we have invested significant resources across our business and infrastructure to support innovation and
growth. We believe that these investments will continue to strengthen our customer value proposition and further differentiate Floor & Decor
from our competition, positioning us for continued market share gains. We have made significant investments in product innovation across all
categories, improving our assortment and seeking to provide more value to our Pro, DIY
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and BIY customers. We have also invested in technology and personnel to support our stores. We believe that our investment in our business
will continue to improve our customer value proposition, differentiating us and strengthening our competitive advantage.
We believe our strong financial results are a reflection of our consistent and disciplined culture of innovation and reinvestment,
creating a differentiated business model in the hard surface flooring category, as evidenced by the following:
• nine consecutive years of double digit comparable store sales growth averaging 15.4% per year (and averaging 17.5% per year for
fiscal 2013 to fiscal 2017), with a 16.6% increase in fiscal 2017 compared to 19.4% for fiscal 2016;
• store base expansion from 38 warehouse‑format stores at the end of fiscal 2013 to 83 at the end of fiscal 2017, representing a
compound annual growth rate (“CAGR”) of 21.6%; we added 14 warehouse‑format stores during fiscal 2017, which was a 20.3%
growth in units compared to fiscal 2016;
• total net sales growth from $444.0 million to $1,384.8 million from fiscal 2013 to fiscal 2017, representing a CAGR of 32.9%;
• net income growth from $11.1 million to $101.3 million from fiscal 2013 to fiscal 2017, representing a CAGR of 73.9%;
• Adjusted EBITDA growth from $36.5 million to $158.8 million from fiscal 2013 to fiscal 2017, representing a CAGR of 44.4%,
which includes significant investments in our sourcing and distribution network, integrated IT systems and corporate overhead to
support our future growth. Adjusted EBITDA was $158.8 million for fiscal 2017, an increase of 46.5% over fiscal 2016. Adjusted
EBITDA is a non‑GAAP (as defined below) financial measure. For a reconciliation of net income to Adjusted EBITDA, see Item
6 “Selected Financial Data.”
Net Sales (in millions)
Comparable Store Sales Growth
Our Competitive Strengths
We believe our strengths, described below, set us apart from our competitors and are the key drivers of our success.
Unparalleled Customer Value Proposition. Our customer value proposition is a critical driver of our business. The key components
include:
Differentiated Assortment Across a Wide Variety of Hard Surface Flooring Categories. Our stores are generally larger than those
of our specialty retail flooring competitors, and we allocate substantially more square footage to hard surface flooring and
accessories than large home improvement retailers. We believe we have the most comprehensive in‑stock, trend‑right product
assortment in the industry within our categories with on average approximately 3,600 SKUs in each store, which based on our
market experience is a far greater in‑stock offering than any other flooring retailer. Additionally, we customize our product
assortment at the store level for the regional preferences of each market. We have an ongoing product line review process across
all categories that allows us to identify and interpret emerging trends in hard surface flooring. We work with our suppliers to
quickly introduce new products and styles in our stores. We
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appeal to a wide range of customers through our “good/better/best” merchandise selection, as well as through our broad range of
product styles from classic to modern, as well as new trend‑right products. We consistently innovate with proprietary brands and
products that appeal to certain customers with over 50 proprietary brands, including AquaGuard and NuCore
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Low Prices. We provide everyday low prices in the retail hard surface flooring market. Our merchandising and individual store
teams competitively shop each market so that we can offer our flooring products and related accessories at low prices. We also
work with our vendors to identify and create new, affordable products in categories traditionally considered high‑end to further
democratize hard surface flooring by providing a greater number of options to a larger customer base. We believe we are unique
in our industry in employing an “everyday low price” strategy, where we strive to offer our products at consistently everyday low
prices throughout the year instead of engaging in frequent promotional activities. Our ability to provide these low prices is
supported by our direct‑sourcing model, which strives to eliminate third‑party intermediaries and shortens time to market. We
believe this strategy creates trust with our Pro, DIY and BIY customers because they consistently receive low prices at Floor &
Decor without having to wait for a sale or negotiate to obtain the lowest price.
One‑Stop Project Destination with Immediate Availability . We carry an extensive range of products, including flooring and
decorative accessories, as well as installation accessories such as thin set, underlayment, grout and tools, to fulfill a customer’s
entire flooring project. Our large in‑stock assortment, including decorative and installation accessories, differentiates us from our
competitors. Our stores stock job‑size quantities to immediately fulfill a customer’s entire flooring project. In the instance where
product is not available in the store, our four regional distribution centers and neighboring stores can quickly ship a product to
meet a customer’s needs. On average, each warehouse‑format store carries approximately 3,600 SKUs, which equates to
1.3 million square feet of flooring products or $2.5 million of inventory at cost. Customers also have access to all of our inventory
for in‑store pick up or delivery through FloorandDecor.com .
Unique and Inspiring Shopping Environment. Our stores average approximately 73,000 square feet and are typically designed with
warehouse features including high ceilings, clear signage, bright lighting and industrial racking and are staffed with knowledgeable store
associates. We offer an easy‑to‑navigate store layout with clear lines of sight and departments organized by our major product categories of tile,
wood, laminate, natural stone, decorative accessories and installation accessories. We believe our unique signage, which clearly displays
individual product features and benefits, improves the ease of shopping and facilitates customer decision making. We use merchandise displays
and point of sale marketing throughout our stores to highlight product features, benefits and design elements. These features educate and enable
customers to visualize how the product would look in their homes or businesses. Furthermore, we encourage customers to interact with our
merchandise, to experiment with potential designs and to see the actual product they will purchase, an experience that is not possible in flooring
stores that do not carry in‑stock inventory in project‑ready quantities. The majority of our stores have design centers that showcase project ideas
to further inspire our customers, and we employ experienced designers in all of our stores to provide free design consulting. Additionally, we
provide a robust online experience for potential customers on FloorandDecor.com . For our DIY customers, we also offer weekly “how‑to”
installation classes on Saturdays. We believe inspiring and educating customers within our stores and on our website provides us with a
significant competitive advantage in serving our customers.
Extensive Service Offering to Enhance the Pro Customer Experience. Our focus on meeting the unique needs of the Pro customer, and
by extension the BIY customer, drives our estimated sales mix of approximately 60% Pro and BIY customers, which we believe represents a
higher percentage than our competitors. We provide an efficient one‑stop shopping experience for our Pro customers, offering low prices on a
broad selection of high‑quality flooring products, deep inventory levels to support immediate availability of our products, modest financial
credit, free storage for purchased inventory, the convenience of early store hours and, in most stores, separate entrances for merchandise
pick‑up. Additionally, each store has a dedicated Pro sales force with technology to service our Pro customer more efficiently, and we have
rolled out Pro Zones, which are areas offering a variety of services to Pro customers, in a majority of our stores. We believe by serving the
needs of Pro customers, we drive repeat and high‑ticket purchases, customer referrals and brand awareness from this attractive and loyal
customer segment.
Decentralized Culture with an Experienced Store‑Level Team and Emphasis on Training. We have a decentralized culture that
empowers managers at the store and regional levels to make key decisions to maximize the customer experience. Our store managers, who carry
the title Chief Executive Merchant, have significant flexibility to customize product mix, pricing, marketing,
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merchandising, visual displays and other elements in consultation with their regional leaders. We tailor the merchandising assortment for each
of our stores for local market preferences, which we believe differentiates us from our national competitors that tend to have standard
assortments across markets. Throughout the year, we train all of our employees on a variety of topics, including product knowledge, leadership
and store operations. Our store managers and store department managers are an integral part of our company, and many have over 15 years of
relevant industry experience in retail. We have made important investments in the training and development of our people, including the
creation of a full time training department. Approximately 70% of our new store management positions are filled through internal promotions.
We also have incentive compensation programs for all employees, regardless of position or title. We train prospective store managers at our
Floor & Decor University, which is part of an extensive training program. Once a year, we hold a four day training session with our senior
management, regional directors and store managers, where we focus on the upcoming year’s strategic priorities to keep our entire business
aligned. We believe our decentralized culture and coordinated training foster an organization aligned around providing a superior customer
experience, ultimately contributing to higher net sales and profitability.
Sophisticated, Global Supply Chain. Our merchandising team has developed direct sourcing relationships with manufacturers and
quarries in over 18 countries. Through these relationships, we believe we understand the best places to procure our various product categories.
We currently source our products from more than 180 vendors worldwide and have developed long‑term relationships with many of them. We
often collaborate with our vendors to design and manufacture products for us to address emerging customer preferences that we observe in our
stores and markets. We procure the majority of our products directly from the manufacturers, which eliminates additional costs from exporters,
importers, wholesalers and distributors. We believe direct sourcing is a key competitive advantage, as many of our specialty retail flooring
competitors are too small to have the scale or the resources to work directly with suppliers. Over the past several years, we have established a
Global Sourcing and Compliance Department to, among other things, enhance our policies and procedures to address compliance with
appropriate regulatory bodies, including compliance with the requirements of the Lacey Act of 1900 (as amended, the “Lacey Act”), the
California Air Resources Board (“CARB”) and the Environmental Protection Agency (“EPA”). We also utilize third ‑party consultants for
audits, testing and surveillance to ensure product safety and compliance. Additionally, we have invested in technology and personnel to
collaborate throughout the entire supply chain process to support our direct sourcing model, which has improved our ability to find, manage and
source trend‑right merchandise quickly and at lower costs, allowing us to offer products at low prices while maintaining attractive gross
margins.
Highly Experienced Management Team with Proven Track Record. Led by our Chief Executive Officer, Tom Taylor, our
management team brings substantial expertise from leading retailers and other companies across core functions, including store operations,
merchandising, marketing, real estate, e‑commerce, supply chain management, finance, legal and information technology. Tom Taylor, who
joined us in 2012, spent 23 years at The Home Depot, where he most recently served as Executive Vice President of Merchandising and
Marketing with responsibility for all stores in the United States and Mexico. Over the course of his career at The Home Depot, Tom Taylor
helped expand the store base from fewer than 15 stores to over 2,000 stores. Our Executive Vice President and Chief Merchandising Officer,
Lisa Laube, has over 30 years of merchandising and leadership experience with leading specialty retailers, including most recently as President
of Party City. Our Executive Vice President and Chief Financial Officer, Trevor Lang, brings more than 20 years of accounting and finance
experience, including 17 years of Chief Financial Officer and Vice President of Finance experience at public companies, including most
recently as the Chief Financial Officer and Chief Administrative Officer of Zumiez Inc. Our entire management team drives our organization
with a focus on strong merchandising, superior customer experience, expanding our store footprint, and fostering a strong, decentralized culture.
We believe our management team is an integral component of our achieving strong financial results.
Our Growth Strategy
We expect to continue to drive our strong net sales and profit growth through the following strategies:
Open Stores in New and Existing Markets. We believe there is an opportunity to significantly expand our store base in the United
States from 83 warehouse‑format stores currently to approximately 400 stores nationwide over the next 15 years based on our internal research
with respect to housing density, demographic data, competitor concentration and other variables in both new and existing markets. We plan to
target new store openings in both existing and new, adjacent and underserved markets. We have a disciplined approach to new store
development, based on an analytical, research‑driven site selection method and a rigorous real estate approval process. We believe our new
store model delivers strong financial results and returns on investment, targeting net sales on average of $10 million to $13 million and positive
four‑wall Adjusted EBITDA in the first year, pre‑tax payback in two to three years and cash‑on‑cash returns of greater than 50% in the third
year. On average, our stores opened after 2011 have exceeded this model.
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Over the past several years, we have made significant investments in personnel, information technology, warehouse infrastructure and
connected customer strategies to support our current growth and the expansion of our stores. We intend to grow our store base by approximately
20% annually over the next several years. The performance of our new stores opened over the last three years, the performance of our older
stores over that same time frame, our disciplined real estate strategy and the track record of our management team in successfully opening retail
stores support our belief in the significant store expansion opportunity.
Increase Comparable Store Sales. We expect to grow our comparable store sales by continuing to offer our customers a dynamic and
expanding selection of compelling, value‑priced hard surface flooring and accessories while maintaining strong service standards for our
customers. We regularly introduce new products into our assortment through our category product line review process, including collaboration
with our vendors to bring to market innovative products such as water‑resistant laminates. Because almost half of our stores have been opened
for less than three years, we believe they will continue to drive comparable store sales growth as they ramp to maturity. We believe that we can
continue to enhance our customer experience by focusing on service, optimizing sales and marketing strategies, investing in store staff and
infrastructure, remodeling existing stores and improving visual merchandising and the overall aesthetic appeal of our stores. We also believe
that growing our proprietary credit offering, further integrating connected customer strategies and enhancing other key information technology,
will contribute to increased comparable store sales. As we increase awareness of Floor & Decor’s brand, we believe there is a significant
opportunity to gain additional market share, especially from independent flooring retailers and large format home improvement retailers. We are
also adding adjacent categories that align with flooring projects like frameless glass in the bathroom and customized countertops for the kitchen.
We believe the combination of these initiatives plus the expected growth of the hard surface flooring category described in more detail under
“Our Industry” below will continue to drive strong comparable store sales growth.
Continue to Invest in the Pro Customer. We believe our differentiated focus on Pro customers has created a competitive advantage for
us and will continue to drive our net sales growth. We will invest in gaining and retaining Pro customers due to their frequent and high‑ticket
purchases, loyalty and propensity to refer other potential customers. We have made important investments in the Pro services regional team to
better recruit and train the Pro services team in each store, new technology such as integrated CRM software to help us further penetrate and
grow our Pro business, dedicated phone lines for our Pro customers to call and text, commercial credit and open account terms, jobsite delivery,
a dedicated website for Pro customers, training on technical flooring installation solutions, and tools to facilitate large commercial jobs sourced
throughout the store. We plan to further invest in initiatives to increase speed of service, improve financing solutions, leverage technology,
elevate our Pro branding, dedicate additional store and regional staffing to support Pro customers and enhance the in‑store experience for our
Pro customers. We have implemented a “Pro Zone” in a majority of our stores that focuses on the specific needs of the Pro customer.
Additionally, we communicate our value proposition and various Pro‑focused offerings by hosting a number of Pro networking events. Building
on our success in serving the Pro customer, in 2016 we entered the adjacent commercial sales channel, thus increasing the size of the
addressable market we serve. Our commercial effort, which we have branded F&D Commercial, initially targets corporate customers with large
flooring needs across the hospitality, multi‑family and retail sectors. We believe Pro customers will continue to be an integral part of our sales
growth, and the commercial channel will provide incremental revenue and profit opportunities in the future.
Expand Our “Connected Customer” Experience. Floor & Decor’s online experience allows our Pro, BIY and DIY customers to
explore our product selection and design ideas before and after visiting our stores and offers the convenience of making online purchases for
delivery or pick up in‑store. We believe our online platform reflects our brand attributes and provides a powerful tool to educate, inspire and
engage our consumers, and we view our website and multi‑channel strategies as leading our brand. Our research indicates that 67% of our
shoppers have visited our website. We continuously invest in our connected customer strategies to improve how our customers experience our
brand. For example, we regularly update our website, which provides our customers with inspirational vignettes, videos, products and
education. Additional initiatives include: (i) implementing our new CRM to obtain a single view of our customers, (ii) developing personalized
content based on location, purchase and browsing history, (iii) developing more relevant content and improved search and purchasing tools to
help customers add decorative and installation accessories, (iv) creating frequently asked questions to help customers choose the best product
for their jobs and (v) implementing online scheduling tools to access our designers. We believe this reinforces our unique customer value
proposition and ultimately drives sales. Currently, e‑commerce sales represent less than 6% of our total net sales. While the hard surface
flooring category has a relatively low penetration of e‑commerce sales due to the nature of the product, we believe our connected customer
presence represents an attractive growth opportunity to drive consumers to Floor & Decor.
Enhance Margins Through Increased Operating Leverage Since 2011, we have invested significantly in our sourcing and distribution
network, integrated IT systems and corporate overhead to support our growth. We expect to leverage these investments as
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we grow our net sales. Additionally, we believe operating margin improvement opportunities will include enhanced product sourcing processes
and overall leveraging of our store‑level fixed costs, existing infrastructure, supply chain, corporate overhead and other fixed costs resulting
from increased sales productivity. We anticipate that the planned expansion of our store base and growth in comparable store sales will also
support increasing economies of scale.
Our Industry
Floor & Decor operates in the large, growing and highly fragmented $11.5 billion hard surface flooring market (in manufacturers’
dollars), which is part of the larger $22 billion U.S. floor coverings market (in manufacturers’ dollars) based on a 2017 research report by
Catalina Research, Inc., a leading provider of market research for the floor coverings industry (the “Catalina Floor Coverings Report”). We
estimate that after the retail markup, we represent only approximately 7% of an estimated $20 billion market. The competitive landscape of the
hard surface flooring market includes big‑box home improvement centers, national and regional specialty flooring retailers, and independent
flooring retailers. We believe we benefit from growth in the overall hard surface flooring market, which, based on the Catalina Floor Coverings
Report, grew on average 9% per year from 2012 to 2017 and is estimated to grow on average 3%‑5% per year from 2018 through 2022,
assuming no negative economic cycle, housing downturn or recession. We believe that growth in the hard surface flooring market has been and
will continue to be driven by home remodeling demand drivers such as the aging household inventory, millennials forming households, existing
home sales, rising home equity values and the secular shift from carpet to hard surface flooring. In addition, we believe we have an opportunity
to increase our market share as our competitors are unable to compete on our combination of price, service and in‑stock assortment.
Based on our internal market research, key long‑term industry trends include increasing spend on home renovations, aging of the
existing housing stock, rising level of home ownership, growing average size of homes and favorable demographic trends. Based on the
National Association of Home Builders Remodeling Market Index, current market conditions and future market indicators suggest that
remodeling demand is accelerating in a strengthening home remodel cycle. For more than a decade, hard surface flooring has consistently taken
share from carpet as a percentage of the total floor coverings market, increasing from 39% of the market in 2002 to 52% in 2017 based on the
Catalina Floor Coverings Report. Historically, mix shift towards hard surface flooring has been driven by product innovation, changing
consumer preferences, better hygiene qualities, increasing ease of installation and higher durability. Product innovation, which has been aided
by the increasing use of technology such as inkjet tile printing, waterproof wood‑look flooring and water‑resistant laminates, and
non‑traditional uses of hard surface flooring including walls, fireplaces and patios have increased the size of the hard surface flooring market
and has allowed us to better serve customer needs.
We believe we have an opportunity to continue to gain share in the hard surface flooring market with the largest selection of tile,
wood, laminate, natural stone, decorative accessories and installation accessories. Our strong focus on the customer experience
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drives us to remain innovative and locally relevant while maintaining low prices and in‑stock merchandise in a one‑stop shopping destination.
Our Products
We offer an assortment of tile, wood, laminate and natural stone flooring, along with decorative and installation accessories at
everyday low prices. Our objective is to carry a broad and deep product offering in order to be the one‑stop destination for our customer’s entire
project needs. We seek to showcase products in our stores and online to provide multiple avenues for inspiration throughout a customer’s
decision‑making process.
Our strategy is to fulfill the product needs of our Pro, DIY and BIY customers with our extensive assortment, in‑stock inventory and
merchandise selection across a broad range of price points. We offer bestseller products in addition to the more unique, hard to find items that
we believe our customers have come to expect from us. We source our products from around the world, constantly seeking new and exciting
merchandise to offer our customers. Our goal is to be at the forefront of hard surface flooring trends in the market, while offering low prices
given our ability to source directly from manufacturers and quarries.
We utilize a regional merchandising strategy in order to carry products in our stores that cater to the preferences of our local customer
base. This strategy is executed by our experienced merchandising team, which consists of store support center merchants and regional
merchants, who work with our individual stores to ensure they have the appropriate product mix for their location. Our store support center
merchants are constantly seeking new products and following trends by attending trade shows and conferences, as well as by shopping the
competition, while our store associates are in touch with customers in the store. We schedule regular meetings to review information gathered
and make future product development decisions. This constant connectivity between our stores, regional merchants, store support center
merchants and our vendors allows us to quickly bring new and compelling products to market.
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Our fiscal 2017 net sales by key product categories are set forth below:
Category
Tile
Products Offered
Porcelain, White Body, Ceramic
Wood
Solid Prefinished Hardwood, Solid
Unfinished Hardwood, Engineered
Hardwood, Bamboo, Cork, Wood
Wall
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Select Product Highlights
We offer a wide selection of Porcelain, White Body
and Ceramic tiles from 4”x4” all the way up to
24”x72”. We source many products directly from
Italy, where many design trends in tile originate.
We offer traditional stone looks as well as
wood‑looking planks and contemporary products
like cement‑look and vein cut styles. We work with
many factories in the United States, China, Italy,
Mexico, Brazil and other countries to bring the
most in‑demand styles at low prices.
We sell common species such as Oak, Walnut,
Birch, Hickory and Maple but also exotics such as
Bamboo, Brazilian Cherry, and Acacia, all in
multiple colors. Our wood flooring comes in
multiple widths from 2 / 4 ” up to 9 / 4 ” wide
planks. Customers have the option of buying
prefinished or unfinished flooring in many of our
stores.
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Category
Natural Stone
Marble, Travertine, Limestone,
Products Offered
Slate, Granite
Laminate/Luxury Vinyl Plank (“LVP”)
Laminate Flooring, Luxury Vinyl,
Engineered/Composite Vinyl
Select Product Highlights
Natural stone is quarried around the world, and we
typically buy directly from the source. For
example, we buy marble from Italy, Spain, Turkey,
Portugal and China, travertine from Turkey and
Mexico, and slate from India. We work with
factories in these countries and others to cut stone
tiles in many sizes, finishes and colors.
Laminate, AquaGuard® water-resistant laminate,
NuCore®, DuraLux® Rigid and Luxury Vinyl
plank flooring is offered in styles that mimic our
bestselling tile and wood species, colors and
finishes. Our product offers a full range of
installation methods, many are water‑resistant to
waterproof, and all are great for customers who
want the beauty of real hardwood and stone but the
ease of maintenance and durability that laminate
and luxury vinyl offer.
Decorative Accessories
Accessories (Installation Materials and
Tools)
Stores
Glass, Natural Stone, Porcelain and
Ceramic Mosaics and Decorative
Tiles, Decorative Trims,
Prefabricated Countertops,
Medallions, Wall Tile
Grout, Underlayment, Adhesives,
Mortar, Backer Board, Power and
Hand Tools, Wood Moldings, Wood
Glues, Blades
With over 700 choices in glass, stone mosaics and
decoratives, we can customize nearly any look or
style a customer desires. This high margin,
trend‑forward, distinctive category is a favorite of
our designers and offers customers an inexpensive
way to quickly update a backsplash or shower.
This category offers everything a customer needs to
complete his or her project, including backer board,
mortar, grout, underlayment, adhesives, wood
glues, molding and tools. We sell top brands, which
we believe are highly valued by our customers.
We operate 83 warehouse‑format stores across 21 states and one small 5,500 square foot design center. Most of our stores are situated
in highly visible retail and industrial locations. Our warehouse‑format stores average approximately 73,000 square feet and carry on average
approximately 3,600 flooring, decorative and installation accessory SKUs, which equates to approximately 1.3 million square feet of flooring
products or $2.5 million of inventory at cost.
Each of our stores is led by a store manager who holds the title Chief Executive Merchant and is supported by an operations manager,
department managers and a Pro sales manager. Our store managers focus on providing superior customer service and creating customized store
offerings that are tailored to meet the specific needs of their stores. Beyond the store managers, each store is staffed with associates, the number
of whom vary depending on sales volume and size of the store. We dedicate significant resources to training all of our new store managers
through Floor & Decor University and in the field across all product areas, with store‑level associates receiving certification on specific product
areas. Ongoing training and continuing education is provided for all employees throughout the year.
We believe there is an opportunity to significantly expand our store base in the United States from our 83 warehouse‑format stores
currently to approximately 400 stores nationwide within the next 15 years based on our internal research with respect to housing density,
demographic data, competitor concentration and other variables in both new and existing markets. Over the next several years, we plan to grow
our store base by approximately 20% per year, with approximately half being opened in existing geographies
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and approximately half being opened in new markets. We have developed a disciplined approach to new store development, based on an
analytical, research‑driven method to site selection and a rigorous real estate review and approval process. By focusing on key demographic
characteristics for new site selection, such as aging of homes, length of home ownership and median income, we expect to open stores with
attractive returns.
When opening new stores, inventory orders are placed several months prior to a new store opening. Significant investment is made in
building out or constructing the site, hiring and training employees in advance, and advertising and marketing the new store through
pre‑opening events to draw the flooring industry community together. Each new store is thoughtfully designed with store interiors that include
interchangeable displays on wheels, racking to access products and stand‑up visual displays to allow ease of shopping and an exterior
highlighted by a large, bold Floor & Decor sign. The majority of our stores have design centers that showcase project ideas to further inspire our
customers, and in all of our stores, we employ experienced designers to provide design consulting to our customers free of charge. We have
rolled out “Pro Zones”, which are dedicated areas offering a variety of services to Pro customers, in a majority of our stores.
Our new store model targets a store size of 60,000‑80,000 square feet, total initial net cash investment of approximately $4 million to
$5 million, targeting net sales on average of $10 million to $13 million and positive four‑wall Adjusted EBITDA in the first year, pre‑tax
payback in two to three years and cash‑on‑cash returns of greater than 50% in the third year. On average, our stores opened after 2011 have
exceeded this model. We believe the success of our stores across geographies and vintages supports the portability of Floor & Decor into a wide
range of markets. The performance of our new stores is inherently uncertain and is subject to numerous factors that are outside of our control.
As a result, we cannot assure you that our new stores will achieve our target results.
Connected Customer
Our website and our call center are important parts of our integrated connected customer strategy. We aim to elevate the customer
experience through our website FloorandDecor.com . Growing our e‑commerce sales provides us with additional opportunity to enhance our
connected customer experience for our customers. Home renovation and remodeling projects typically require significant investments of time
and money from our DIY customers, and they consequently plan their projects carefully and conduct extensive research online.
FloorandDecor.com is an important tool for engaging them throughout this process, educating them on our product offerings and providing
them with design ideas. Our Pro customers use the website to browse our broad product assortment, to continually educate themselves on new
techniques and trends and to share our virtual catalogue and design ideas with their customers. In addition, sales associates at our call center are
available to assist our customers with their projects and questions. We designed the website to be a reflection of our stores and to promote our
wide selection of high quality products and low prices. To this end, we believe the website provides the same region‑specific product selection
that customers can expect in our stores, but also the opportunity to extend our assortment by offering the entire portfolio of products.
In addition to highlighting our broad product selection, we believe FloorandDecor.com offers a convenient opportunity for customers
to purchase products online and pick them up in our stores. Approximately 85% of our e‑commerce sales are picked up in‑store. As we continue
to grow, we believe connected customer will become an increasingly important part of our strategy.
Marketing and Advertising
We use a multi‑platform approach to increasing Floor & Decor’s brand awareness, while historically maintaining a low average
advertising to net sales ratio of approximately 3%. We use traditional advertising media, combined with social media and online marketing, to
share the Floor & Decor story with a growing audience. We take the same customized approach with our marketing as we do with our product
selection; each region has a varied media mix based on local trends and what we believe will most efficiently drive sales. To further enhance
our targeting efforts, our store managers have significant input into the store’s marketing spend.
A key objective of our messaging is to make people aware of our stores, products and services. Based on internal research, we estimate
the conversion rate from a customer visiting one of our stores to purchasing our products is 81%.
As part of our focus on local markets, our stores have events that promote Floor & Decor as a hub for the local home improvement
community. We feature networking events for Pro customers, giving them a chance to meet our sales teams, interact with others in the home
improvement industry and learn about our newest products. For DIY customers, we regularly offer how‑to
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classes on product installation. We believe these events serve to raise the profile of the Floor & Decor stores in our communities while
showcasing our tremendous selection of products and services.
We want our customers to have a great experience at their local Floor & Decor store. With our TV and radio commercials, print and
outdoor ads, in‑store flyers, online messaging and community events, we show our customers that we are a trusted resource with a vast
selection, all at a low price.
Sourcing
Floor & Decor has a well‑developed and geographically diverse supplier base. We source our industry leading merchandise assortment
from over 180 suppliers in over 18 countries, and maintain good relationships with our vendors. No supplier accounts for more than 10% of our
net sales, other than one supplier that accounts for approximately 10% of our net sales. We continue to increase our sourcing from suppliers
outside of the United States, and where appropriate, we are focused on bypassing agents, brokers, distributors and other middlemen in our
supply chain in order to reduce costs and lead time. Over the past several years, we have established a Global Sourcing and Compliance
Department to, among other things, develop and implement policies and procedures to address compliance with appropriate regulatory bodies,
including compliance with the requirements of the Lacey Act, CARB and the EPA. In addition we utilize third ‑party consultants for audits,
testing and surveillance to ensure product safety and compliance. Additionally, we have invested in technology and personnel to collaborate
throughout the entire supply chain process. We believe that our direct sourcing model and the resulting relationships we have developed with
our suppliers are distinct competitive advantages. The cost savings we achieve by directly sourcing our merchandise enable us to offer our
customers low prices. Additionally, our close relationships with suppliers allow us to collaborate with them directly to develop and quickly
introduce innovative and quality products that meet our customers’ evolving tastes and preferences at low prices. We plan to continue
increasing the percentage of merchandise that we directly source from suppliers.
Distribution and Order Fulfillment
We have invested significant resources to develop and enhance our distribution network. We have four distribution centers
strategically located across the United States in port cities near Savannah, Georgia; Houston, Texas; Los Angeles, California; and Miami,
Florida. We expect to close our distribution center near Miami, Florida in the first quarter of 2018. Third‑party brokers arrange the shipping of
our international and domestic purchases to our distribution centers and stores and bill us for shipping costs according to the terms of the
purchase agreements with our suppliers. We are typically able to transport inventory from our distribution centers to our stores in less than one
week. This quick turnaround time enhances our ability to maintain project‑ready quantities of the products stocked in our stores. To further
strengthen our distribution capabilities, we have converted all of our distribution centers to Company‑operated facilities. In conjunction with the
change in responsibility, we have implemented a new warehouse management and transportation management system tailored to our unique
needs across all four distribution centers. We believe the system will increase service levels, reduce shrinkage and damage, help us better
manage our inventory and allow us to better implement our connected customer initiatives.
We recently moved our West Coast distribution center from Carson, California to Moreno Valley, California. We exited the previously
occupied 220,000 square foot leased distribution center located in Carson, California in the first quarter of 2017. In the fourth quarter of 2017,
we began operating in a newly constructed, leased 1.4 million square foot distribution center near Savannah, Georgia. In December 2017, we
relocated all of the existing inventory from our prior leased 378,000 square foot distribution center located near Savannah, Georgia to this new
distribution center, and in the first quarter of 2018, we are relocating all of the existing inventory from our 322,000 square foot leased
distribution center near Miami, Florida to this new distribution center. We exited our lease on the 378,000 square foot distribution center near
Savannah, Georgia in the first quarter of 2018 and plan to exit our lease on the 322,000 square foot leased distribution center near Miami,
Florida in 2018.
We believe that our current distribution network, along with these recent changes, is sufficient to support our growth over the next
year. However, we continue to seek opportunities to enhance our distribution capabilities and align them with our strategic growth initiatives,
including distribution center capacity, which we plan to expand in early 2019.
Management Information Systems
We believe that technology plays a crucial role in the continued growth and success of our business. We have sought to integrate
technology into all facets of our business, including supply chain, merchandising, store operations, point‑of‑sale, e‑commerce, finance,
accounting and human resources. The integration of technology allows us to analyze the business in real time and react accordingly. Our
sophisticated inventory management system is our primary tool for forecasting, placing orders and
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managing in‑stock inventory. The data‑driven platform includes sophisticated forecasting tools based on historical trends in sales, inventory
levels and vendor lead times at the store and distribution center level by SKU, allowing us to support store managers in their regional
merchandising efforts. We rely on the forecasting accuracy of our system to maintain the in‑stock, project‑ready quantities that our customers
rely on. In addition, our employee training certifications are entirely electronic, allowing us to effectively track the competencies of our staff
and manage talent across stores. We believe that our systems are sufficiently scalable to support the continued growth of the business.
Competition
The retail hard surface flooring market is highly fragmented and competitive. We face significant competition from large home
improvement centers, national and regional specialty flooring chains and independent flooring retailers. Some of our competitors are
organizations that are larger, are better capitalized, have existed longer, have product offerings that extend beyond hard surface flooring and
related accessories, and have a more established market presence with substantially greater financial, marketing, personnel and other resources
than we have. In addition, while the hard surface flooring category has a relatively low threat of new internet‑only entrants due to the nature of
the product, the growth opportunities presented by e‑commerce could outweigh these challenges and result in increased competition in this
portion of our connected customer strategy. Further, because the barriers to entry into the hard surface flooring industry are relatively low,
manufacturers and suppliers of flooring and related products, including those whose products we currently sell, could enter the market and start
directly competing with us.
We believe that the key competitive factors in the retail hard surface flooring industry include:
• product assortment;
• product innovation;
• in‑store availability of products in project‑ready quantities;
• product sourcing;
• product presentation;
• customer service;
• store management;
• store location; and
• low prices.
We believe that we compete favorably with respect to each of these factors by providing a highly diverse selection of products to our
customers, at an attractive value, in appealing and convenient retail stores.
Our Structure
Floor & Decor Holdings, Inc. (formerly known as FDO Holdings, Inc.) was incorporated as a Delaware corporation in October 2010 in
connection with our Sponsors’ (as defined below) acquisition of Floor & Decor Outlets of America, Inc. (“F&D”) in November 2010, which in
turn converted from a Georgia corporation into a Delaware corporation in connection therewith.
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The following chart illustrates our current corporate structure:
Employees
As of December 28, 2017, we had 5,534 employees, 3,680 of whom were full‑time and none of whom were represented by a union. Of
these employees, 4,881 work in our stores, 477 work in corporate, store support, infrastructure, e‑commerce or similar functions, 176 work in
distribution centers, and 12 work in our Asia sourcing office in Shanghai, China. We believe that we have good relations with our employees.
Government Regulation
We are subject to extensive and varied federal, state and local laws and regulations, including those relating to employment, the
environment, protection of natural resources, import and export, advertising, labeling, public health and safety, product safety, zoning and fire
codes. We operate our business in accordance with standards and procedures designed to comply with applicable laws and regulations.
Compliance with these laws and regulations has not historically had a material effect on our financial condition or operating results; however,
the effect of compliance in the future cannot be predicted.
Our operations and properties are also subject to federal, state and local laws and regulations governing the environment,
environmental protection of natural resources and health and safety, including the use, storage, handling, generation, transportation, treatment,
emission, release, discharge and disposal of hazardous materials, substances and wastes and relating to the investigation and clean‑up of
contaminated properties. Except to the extent of the capital expenditures related to our initiatives described below, compliance with these laws
and regulations has not historically had a material effect on our financial condition or operating results, but we cannot predict the effect of
compliance in the future.
In particular, certain of our products are subject to laws and regulations relating to the importation, exportation, acquisition or sale of
certain plants and plant products, including those illegally harvested (which is prohibited by the Lacey Act), and the emissions of hazardous
materials (which in California is governed by regulations promulgated by CARB and federally by regulations promulgated by the EPA). We
have established a Global Sourcing and Compliance Department to, among other things, address these requirements, and we work with
third‑party consultants to assist us in designing and implementing compliance programs relating to the requirements of the Lacey Act, CARB
and the EPA. Further, we could incur material compliance costs or be subject to compliance
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liabilities or claims in the future, especially in the event new laws or regulations are adopted or there are changes in existing laws and
regulations or in their interpretation.
Our suppliers are also subject to the laws and regulations of their home countries, including in particular laws regulating forestry and
the environment. We also support social and environmental responsibility among our supplier community and endeavor to enter into vendor
agreements with our suppliers that contain representations and warranties concerning environmental, labor and health and safety matters.
Insurance and Risk Management
We use a combination of insurance and self‑insurance to provide for potential liability for workers’ compensation, general liability,
product liability, director and officers’ liability, team member healthcare benefits, and other casualty and property risks. Changes in legal trends
and interpretations, variability in inflation rates, changes in workers’ compensation and general liability premiums and deductibles, changes in
the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurance carriers, and
changes in discount rates could all affect ultimate settlements of claims. We evaluate our insurance requirements on an ongoing basis to ensure
we maintain adequate levels of coverage.
Legal Proceedings
We are engaged in various legal actions, claims and proceedings arising in the ordinary course of business, including claims related to
breach of contracts, products liabilities, intellectual property matters and employment related matters resulting from our business activities. As
with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. Regardless of the outcome,
litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
Trademarks and other Intellectual Property
As of March 1, 2018, we have 67 registered marks and several pending trademark applications in the United States. We regard our
intellectual property, including our over 50 proprietary brands, as having significant value, and our brand is an important factor in the marketing
of our products. Accordingly, we have taken, and continue to take, appropriate steps to protect our intellectual property.
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ITEM 1A. RISK FACTORS .
You should carefully consider the risks described below, together with all of the other information included in this Annual Report,
including our consolidated financial statements and the related notes thereto, before making an investment decision. The risks and uncertainties
set out below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially and adversely affect our business, financial condition and operating results. If any of the following events
occur, our business, financial condition and operating results could be materially and adversely affected. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
Our business, financial condition and operating results are dependent on general economic conditions and discretionary spending by our
customers, which in turn are affected by a variety of factors beyond our control. If such conditions deteriorate, our business, financial
condition and operating results may be adversely affected.
Our business, financial condition and operating results are affected by general economic conditions and discretionary spending by our
customers. Such general economic conditions and discretionary spending are beyond our control and are affected by, among other things:
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
consumer confidence in the economy;
unemployment trends;
consumer debt levels;
consumer credit availability;
data security and privacy concerns;
the housing market, including housing turnover and whether home values are rising or declining;
energy prices;
interest rates and inflation;
price deflation, including due to low‑cost imports;
slower rates of growth in real disposable personal income;
natural disasters and unpredictable weather;
national security concerns and other geopolitical risks;
trade relations and tariffs;
tax rates and tax policy; and
other matters that influence consumer confidence and spending.
If such conditions deteriorate, our business, financial condition and operating results may be adversely affected. In addition, increasing
volatility in financial and capital markets may cause some of the above factors to change with a greater degree of frequency and magnitude than
in the past.
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The hard surface flooring industry depends on home remodeling activity and other important factors.
The hard surface flooring industry is highly dependent on the remodeling of existing homes, businesses and, to a lesser extent, new
home construction. In turn, remodeling and new home construction depend on a number of factors that are beyond our control, including
interest rates, tax policy, trade policy, employment levels, consumer confidence, credit availability, real estate prices, existing home sales,
demographic trends, weather conditions, natural disasters and general economic conditions. In particular:
·
·
·
·
·
·
·
the national economy or any regional or local economy where we operate could weaken;
home‑price appreciation could slow or turn negative;
regions where we have stores could experience unfavorable demographic trends;
interest rates could rise;
credit could become less available;
tax rates and/or health care costs could increase; or
fuel costs or utility expenses could increase.
Any one or a combination of these factors could result in decreased demand for our products, reduce spending on homebuilding or
remodeling of existing homes or cause purchases of new and existing homes to decline. While the vast majority of our net sales are derived
from home remodeling activity as opposed to new home construction, a decrease in any of these areas would adversely affect our business,
financial condition and operating results.
Any failure by us to successfully anticipate trends may lead to loss of consumer acceptance of our products, resulting in reduced net sales.
Each of our stores is stocked with a customized product mix based on consumer demands in a particular market. Our success therefore
depends on our ability to anticipate and respond to changing trends and consumer demands in these markets in a timely manner. If we fail to
identify and respond to emerging trends, consumer acceptance of our merchandise and our image with current or potential customers may be
harmed, which could reduce our net sales. Additionally, if we misjudge market trends, we may significantly overstock unpopular products,
incur excess inventory costs and be forced to reduce the sales price of such products or incur inventory write‑downs, which would adversely
affect our operating results. Conversely, shortages of products that prove popular could also reduce our net sales through missed sales and a loss
of customer loyalty.
If we fail to successfully manage the challenges that our planned new store growth poses or encounter unexpected difficulties during our
expansion, our operating results and future growth opportunities could be adversely affected.
We have 83 warehouse‑format stores and one small‑format standalone design center located throughout the United States as of
December 28, 2017. We plan to open 17 stores during fiscal 2018 and to increase the number of new stores that we open during each of the next
several years thereafter. This growth strategy and the investment associated with the development of each new store may cause our operating
results to fluctuate and be unpredictable or decrease our profits. We cannot ensure that store locations will be available to us, or that they will be
available on terms acceptable to us. If additional retail store locations are unavailable on acceptable terms, we may not be able to carry out a
significant part of our growth strategy or our new stores’ profitability may be lower. Our future operating results and ability to grow will depend
on various other factors, including our ability to:
·
·
·
successfully select of new markets and store locations;
negotiate leases on acceptable terms;
attract, train and retain highly qualified managers and staff;
· maintain our reputation of providing quality, safe and compliant products; and
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· manage store opening costs.
In addition, consumers in new markets may be less familiar with our brand, and we may need to increase brand awareness in such
markets through additional investments in advertising or high cost locations with more prominent visibility. Stores opened in new markets may
have higher construction, occupancy or operating costs, or may have lower net sales, than stores opened in the past. In addition, laws or
regulations in these new markets may make opening new stores more difficult or cause unexpected delays. Newly opened stores may not
succeed or may reach profitability more slowly than we expect, and the ramp‑up to profitability may become longer in the future as we enter
more markets and add stores to markets where we already have a presence. Future markets and stores may not be successful and, even if they
are successful, our comparable store sales may not increase at historical rates. To the extent that we are not able to overcome these various
challenges, our operating results and future growth opportunities could be adversely affected.
Increased competition could cause price declines, decrease demand for our products and decrease our market share.
We operate in the hard surface flooring industry, which is highly fragmented and competitive. We face competition from large home
improvement centers, national and regional specialty flooring chains, Internet‑based companies and independent flooring retailers. Among other
things, we compete on the basis of breadth of product assortment, low prices, and the in‑store availability of the products we offer in
project‑ready quantities, as well as the quality of our products and customer service. As we expand into new and unfamiliar markets, we may
experience different competitive conditions than in the past.
Some of our competitors are organizations that are larger, are better capitalized, have existed longer, have product offerings that extend
beyond hard surface flooring and related accessories and have a more established market presence with substantially greater financial,
marketing, personnel and other resources than we have. In addition, while the hard surface flooring category has a relatively low threat of new
internet‑only entrants due to the nature of the product, the growth opportunities presented by e‑commerce could outweigh these challenges and
result in increased competition. Competitors may forecast market developments more accurately than we do, offer similar products at a lower
cost or adapt more quickly to new trends and technologies or evolving customer requirements than we do. Further, because the barriers to entry
into the hard surface flooring industry are relatively low, manufacturers and suppliers of flooring and related products, including those whose
products we currently sell, could enter the market and start directly competing with us. Intense competitive pressures from any of our present or
future competitors could cause price declines, decrease demand for our products and decrease our market share. Also, if we continue to grow
and become more well‑known, other companies may change their strategies to present new competitive challenges. Moreover, in the future,
changes in consumer preferences may cause hard surface flooring to become less popular than other types of floor coverings. Such a change in
consumer preferences could lead to decreased demand for our products.
All of these factors may harm us and adversely affect our net sales, market share and operating results.
Any disruption in our distribution capabilities or our related planning and control processes may adversely affect our business, financial
condition and operating results.
Our success is highly dependent on our planning and distribution infrastructure, which includes the ordering, transportation and
distribution of products to our stores and the ability of suppliers to meet distribution requirements. We also need to ensure that we continue to
identify and improve our processes and supply chain and that our distribution infrastructure and supply chain keep pace with our anticipated
growth and increased number of stores. The cost of these enhanced processes could be significant and any failure to maintain, grow, or improve
them could adversely affect our business, financial condition and operating results. Due to our rapid expansion, we have had to significantly
increase the size of our distribution centers. 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 took over management of our four distribution centers in 2014 from independent third‑party logistics providers. We have limited
experience managing our distribution centers and cannot assure you that we will be successful in doing so.
In addition, we recently constructed a new 1.4 million square foot distribution center near Savannah, Georgia. We recently closed our
distribution center near Savannah, Georgia, are in the process of closing our distribution center in Miami, Florida and are moving those
operations to our new facility near Savannah. While we complete this transition, we may incur unexpected costs, and
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our ability to distribute our products may be adversely affected. Any disruption in the transition to or operation of our distribution centers could
have an adverse impact on our business, financial condition and operating results. In addition, our long‑term plan expects that we will be able to
sublet a portion of our previously occupied distribution centers. Any failure to do so on favorable terms could have a negative impact on our
financial condition and operating results.
Our success is also dependent on our ability to provide timely delivery to our customers. Our business could also be adversely affected
if fuel prices increase or there are delays in product shipments due to freight difficulties, inclement weather, strikes by our employees or
employees of third‑parties involved in our supply chain, or other difficulties. If we are unable to deliver products to our customers on a timely
basis, they may decide to purchase products from our competitors instead of from us, which would adversely affect our business, financial
condition and operating results.
Our operating results may be adversely affected by fluctuations in material and energy costs beyond our control.
Our operating results may be affected by the wholesale prices of hard surface flooring products, setting and installation materials and
the related accessories that we sell. These prices may fluctuate based on a number of factors beyond our control, including the price of raw
materials used in the manufacture of hard surface flooring, energy costs, changes in supply and demand, concerns about inflation, general
economic conditions, labor costs, competition, import duties, tariffs, currency exchange rates, government regulation, duty and other import
costs. In particular, energy costs have fluctuated dramatically in the past and may fluctuate in the future. These fluctuations may result in an
increase in our transportation costs for distribution from the manufacturer to our distribution centers and from our distribution centers to our
retail stores, utility costs for our distribution centers and retail stores and overall costs to purchase products from our suppliers.
We may not be able to adjust the prices of our products, especially in the short‑term, to recover these cost increases, and a continual
rise in such costs could adversely affect consumer spending and demand for our products and increase our operating costs, both of which could
adversely affect our business, financial condition and operating results.
The ongoing impact of recent hurricanes and related flooding on our business is currently unknown.
In September 2017, hurricanes Harvey and Irma caused damage to thousands of homes in, as well as disruption and delays to the local
economies of, the greater Houston area and throughout the state of Florida. The hurricanes and associated flooding negatively impacted our
results during the third quarter of fiscal 2017, resulting in over 150 total days of store closures including both full and partial store closures at 24
impacted stores.
As home and business owners rebuild from the hurricanes and the associated flooding, we have seen an increase in sales in the
Houston market beginning in September of fiscal 2017. While it is uncertain how long the elevated demand will last, we do not expect it to
continue beyond the third quarter of fiscal 2018. We do not believe such increase is indicative of our business, financial condition and future
operating results. Additionally, it is uncertain what impact the hurricanes will have on longer term trends in home remodeling and new
construction in the impacted markets and how any such changes would impact our business, financial condition and operating results.
Our future success is dependent on our ability to execute our business strategy effectively and deliver value to our customers.
We believe our future success will depend on our ability to execute our business strategy effectively and deliver value to our
customers. We believe that our breadth of product assortment across a variety of hard surface flooring categories, low prices, and in‑store
availability of the products we offer in project‑ready quantities, as well as the quality of our products and customer service, are among the key
competitive advantages and important elements of our total value proposition. If we are unsuccessful in staying competitive with our current
value proposition, the demand for our products would decrease, and customers may decide to purchase products from our competitors instead of
us. If this were to occur, our net sales, market share and operating results would be adversely affected.
Our operating results may be adversely affected if we are not successful in managing our inventory.
We currently maintain a high level of inventory consisting of on average approximately 3,600 SKUs per store and an average
inventory per store of approximately $2.5 million at cost in order to have a broad assortment of products across a wide variety of hard surface
flooring categories in project‑ready quantities. We also carry an additional $143.3 million of inventory outside our stores,
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primarily at our distribution centers, as of the end of fiscal 2017. The investment associated with this high level of inventory is substantial, and
efficient inventory management is a key component of our business success and profitability. If we fail to adequately project the amount or mix
of our inventory, we may miss sales opportunities or have to take unanticipated markdowns or hold additional clearance events to dispose of
excess inventory, which will adversely affect our operating results.
In the past, we have incurred costs associated with inventory markdowns and obsolescence. Due to the likelihood that we will continue
to incur such costs in the future, we generally include an allowance for such costs in our projections. However, the costs that we actually incur
may be substantially higher than our estimate and adversely affect our operating results.
We continue to focus on ways to reduce these risks, but we cannot assure you that we will be successful in our inventory management.
Our operating results may be adversely affected by inventory shrinkage and damage.
We are subject to the risk of inventory shrinkage and damage, including the damage or destruction of our inventory by natural disasters
or other causes. We have experienced charges in the past, and we cannot assure you that the measures we are taking will effectively address the
problem of inventory shrinkage and damage in the future. Although some level of inventory shrinkage and damage is an unavoidable cost of
doing business, we could experience higher‑than‑normal rates of inventory shrinkage and damage or incur increased security and other costs to
combat inventory theft and damage. If we are not successful in managing our inventory balances, our operating results may be adversely
affected.
If we are unable to enter into leases for additional stores on acceptable terms or renew or replace our current store leases, or if one or more
of our current leases is terminated prior to expiration of its stated term, and we cannot find suitable alternate locations, our growth and
profitability could be adversely affected.
We currently lease all of our store locations and our store support center. Our growth strategy largely depends on our ability to identify
and open future store locations, which can be difficult because our stores generally require at least 50,000 square feet of floor space. Our ability
to negotiate acceptable lease terms for these store locations, to re‑negotiate acceptable terms on expiring leases or to negotiate acceptable terms
for suitable alternate locations could depend on conditions in the real estate market, competition for desirable properties, our relationships with
current and prospective landlords, or on other factors that are not within our control. Any or all of these factors and conditions could adversely
affect our growth and profitability.
If we are unable to enter into leases to expand our existing store support center and we cannot find suitable alternate locations at an
acceptable cost, our financial results could be adversely affected.
The lease for our current store support center in Smyrna, Georgia, which serves as our corporate headquarters, only provides sufficient
space to support our projected growth through 2019. We are exploring various alternatives, but if we cannot find an acceptable solution, our
financial results could be adversely effected.
Our net sales growth could be adversely affected if comparable store sales growth is less than we expect.
While future net sales growth will depend substantially on our plans for new store openings, our comparable store sales growth is a
significant driver of our net sales, profitability and overall business results. Because numerous factors affect our comparable store sales growth,
including, among others, economic conditions, the retail sales environment, the home improvement spending environment, housing turnover,
housing appreciation, interest rates, the hard surface flooring industry and the impact of competition, the ability of our customers to obtain
credit, changes in our product mix, the in‑stock availability of products that are in demand, changes in staffing at our stores, cannibalization
resulting from the opening of new stores in existing markets, greater cannibalization than we modeled for new stores, lower than expected
ramp‑up in new store net sales, changes in advertising and other operating costs, weather conditions, retail trends and our overall ability to
execute our business strategy and planned growth effectively, it is possible that we will not achieve our targeted comparable store sales growth
or that the change in comparable store sales could be negative. If this were to happen, it is likely that overall net sales growth would be
adversely affected.
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If we fail to identify and maintain relationships with a sufficient number of suppliers, our ability to obtain products that meet our high
quality standards at attractive prices could be adversely affected.
We purchase flooring and other products directly from suppliers located around the world. We do not have long‑term contractual
supply agreements with our suppliers that obligate them to supply us with products exclusively or at specified quantities or prices. As a result,
our current suppliers may decide to sell products to our competitors and may not continue selling products to us. In order to retain the
competitive advantage that we believe results from these relationships, we need to continue to identify, develop and maintain relationships with
qualified suppliers that can satisfy our high standards for quality and safety and our requirements for delivery of flooring and other products in a
timely and efficient manner at attractive prices. The need to develop new relationships will be particularly important as we seek to expand our
operations and enhance our product offerings in the future. The loss of one or more of our existing suppliers or our inability to develop
relationships with new suppliers could reduce our competitiveness, slow our plans for further expansion and cause our net sales and operating
results to be adversely affected.
We will require significant capital to fund our expanding business, which may not be available to us on satisfactory terms or at all. If we are
unable to maintain sufficient levels of cash flow or if we do not have sufficient availability under the ABL Facility, we may not meet our
growth expectations or we may require additional financing, which could adversely affect our financial health and impose covenants that
limit our business activities.
We plan to continue investing for growth, including opening new stores, remodeling existing stores, adding staff, adding distribution
center capacity and upgrading our information technology systems and other infrastructure. These investments will require significant capital,
which we plan on funding with cash flow from operations and borrowings under the ABL Facility (as defined below).
If our business does not generate sufficient cash flow from operations to fund these activities or if these investments do not yield cash
flows in line with past performance or our expectations, we may need additional equity or debt financing. If such financing is not available to
us, or is not available on satisfactory terms, our ability to operate and expand our business or respond to competitive pressures would be
curtailed, and we may need to delay, limit or eliminate planned store openings or operations or other elements of our growth strategy. If we
raise additional capital by issuing equity securities or securities convertible into equity securities, your ownership would be diluted.
We depend on a number of suppliers, and any failure by any of them to supply us with quality products on attractive terms and prices may
adversely affect our business, financial condition and operating results.
We depend on our suppliers to deliver quality products to us on a timely basis at attractive prices. Additionally, we source the products
that we sell from over 180 domestic and international suppliers. However, in the future, we may not be able to acquire desired merchandise in
sufficient quantities on terms acceptable to us, which may impair our relationship with our customers, impair our ability to attract new
customers, reduce our competitiveness and adversely affect our business, financial condition and operating results.
Changes in tax laws, trade policies and regulations or in our operations and newly enacted laws or regulations, such as Public Law No. 115-
97 (the “Tax Cuts and Jobs Act”), may impact our effective tax rate or may adversely affect our business, financial condition and operating
results.
Changes in tax laws in any of the multiple jurisdictions in which we operate, or adverse outcomes from tax audits that we may be
subject to in any of the jurisdictions in which we operate, could result in an unfavorable change in our effective tax rate, which could adversely
affect our business, financial condition and operating results.
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act, which significantly changed the Internal Revenue
Code, including a reduction in the corporate income tax rate, new limitations on the deductibility of interest expense and executive
compensation, and dramatic changes to the taxation of income earned from foreign sources and foreign subsidiaries. The Tax Cuts and Jobs Act
also authorizes the Treasury Department to issue regulations with respect to the new provisions. We cannot predict how the changes in the Tax
Cuts and Jobs Act, or regulations or other guidance issued under it, might affect us or our business.
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Moreover, subsequent developments in tax policy or trade relations could have a material adverse effect on our business, results of
operations and liquidity. If there are any adverse changes in tax laws or trade policies that result in an increase in our costs, we may not be able
to adjust the prices of our products, especially in the short-term, to recover such costs, and a rise in such costs could adversely affect our
business, financial condition and operating results.
The failure of our suppliers to adhere to the quality standards that we set for our products could lead to investigations, litigation, write‑‑offs,
recalls or boycotts of our products, which could damage our reputation and our brand, increase our costs, and otherwise adversely affect
our business.
We do not control the operations of our suppliers. Although we conduct initial due diligence prior to engaging our suppliers and
require our suppliers to certify compliance with applicable laws and regulations, we cannot guarantee that our suppliers will comply with
applicable laws and regulations or operate in a legal, ethical and responsible manner. Additionally, it is possible that we may not be able to
identify noncompliance by our suppliers notwithstanding these precautionary measures. Violation of applicable laws and regulations by our
suppliers or their failure to operate in a legal, ethical or responsible manner, could expose us to legal risks, cause us to violate laws and
regulations and reduce demand for our products if, as a result of such violation or failure, we attract negative publicity. In addition, the failure of
our suppliers to adhere to the quality standards that we set for our products could lead to government investigations, litigation, write‑offs and
recalls, which could damage our reputation and our brand, increase our costs, and otherwise adversely affect our business.
We procure the majority of our products from suppliers located outside of the United States, and as a result, we are subject to risks
associated with obtaining products from abroad that could adversely affect our business, financial condition and results of operations.
We procure the majority of our products from suppliers located outside of the United States. As a result, we are subject to risks
associated with obtaining products from abroad, including:
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political unrest, acts of war, terrorism and economic instability resulting in the disruption of trade from foreign countries where
our products originate;
currency exchange fluctuations;
the imposition of new or more stringent laws and regulations, including those relating to environmental, health and safety matters
and climate change issues, labor conditions, quality and safety standards, trade restrictions and restrictions on funds transfers;
the imposition of new or different duties (including antidumping and countervailing duties), tariffs, taxes and/or other charges on
exports or imports, including as a result of errors in the classification of products upon entry or changes in the interpretation or
application of rates or regulations relating to the import or export of our products;
the risk that one or more of our suppliers will not adhere to applicable legal requirements, including fair labor standards, the
prohibition on child labor, environmental, product safety or manufacturing safety standards, anti‑bribery and anti‑kickback laws
such as the Foreign Corrupt Practices Act (the “FCPA”) and sourcing laws such as the Lacey Act;
disruptions or delays in production, shipments, delivery or processing through ports of entry (including those resulting from
strikes, lockouts, work‑stoppages or slowdowns, or other forms of labor unrest);
changes in local economic conditions in countries where our suppliers are located; and
differences in product standards, acceptable business practice and legal environments.
Additionally, we import approximately 45% of the products we sell from China. The Chinese government has in the past imposed
restrictions on manufacturing facilities, including a shut‑down of transportation of materials and power plants to reduce air pollution. If, in the
future, restrictions are imposed that include our operations, our suppliers’ ability to supply current or new orders would be significantly
impacted. These and other factors beyond our control could disrupt the ability of our suppliers to ship certain
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products to us cost‑effectively or at all, expose us to significant operational and legal risk and negatively affect our reputation, any of which
could adversely affect our business, financial condition and results of operations.
Our ability to offer compelling products, particularly products made of more exotic species or unique stone, depends on the continued
availability of sufficient suitable natural products.
Our business strategy depends on offering a wide assortment of compelling products to our customers. We sell, among other things,
flooring made from various wood species and natural stone from quarries throughout the world. Our ability to obtain an adequate volume and
quality of hard‑to‑find products depends on our suppliers’ ability to furnish those products, which, in turn, could be affected by many things,
including events such as forest fires, insect infestation, tree diseases, prolonged drought, other adverse weather and climate conditions and the
exhaustion of stone quarries. Government regulations relating to forest management practices also affect our suppliers’ ability to harvest or
export timber and other products, and changes to regulations and forest management policies, or the implementation of new laws or regulations,
could impede their ability to do so. If our suppliers cannot deliver sufficient products, and we cannot find replacement suppliers, our net sales
and operating results may be adversely affected.
Our business exposes us to personal injury, product liability and warranty claims and related governmental investigations, which could
result in negative publicity, harm our brand and adversely affect our business, financial condition and operating results.
Our stores and distribution centers are warehouse environments that involve the operation of forklifts and other machinery and the
storage and movement of heavy merchandise, all of which are activities that have the inherent danger of injury or death to employees or
customers despite safety precautions, training and compliance with federal, state and local health and safety regulations. While we have
insurance coverage in place in addition to policies and procedures designed to minimize these risks, we may nonetheless be unable to avoid
material liabilities for an injury or death arising out of these activities.
In addition, we face an inherent risk of exposure to product liability or warranty claims or governmental investigations in the event that
the use of our products is alleged to have resulted in economic loss, personal injury or property damage or violated environmental or other laws.
If any of our products proves to be defective or otherwise in violation of applicable law, we may be required to recall or redesign such products.
Further, in such instances, we may be subject to legal action. We generally seek contractual indemnification from our suppliers. However, such
contractual indemnification may not be enforceable against the supplier, particularly because many of our suppliers are located outside of the
United States. Any personal injury, product liability or warranty claim made against us, whether or not it has merit, or governmental
investigation related to our products, could be time‑consuming and costly to defend or respond to, may not be covered by insurance carried by
us, could result in negative publicity, could harm our brand and could adversely affect our business, financial condition and operating results. In
addition, any negative publicity involving our suppliers, employees, and other parties who are not within our control could adversely affect us.
Unfavorable allegations, government investigations and legal actions surrounding our products and us could harm our reputation, impair
our ability to grow or sustain our business, and adversely affect our business, financial condition and operating results.
We rely on our reputation for offering great value, superior service and a broad assortment of high‑quality, safe products. If we
become subject to unfavorable allegations, government investigations or legal actions involving our products or us, such circumstances could
harm our reputation and our brand and adversely affect our business, financial condition and operating results. If this negative impact is
significant, our ability to grow or sustain our business could be jeopardized.
For example, a 60 Minutes segment that aired on March 1, 2015 alleged that another retailer of home flooring products sold flooring
containing unsafe levels of formaldehyde. Flooring products that use formaldehyde resins, including laminate and engineered flooring, are
subject to applicable laws and regulations governing formaldehyde emissions. The 60 Minutes segment alleged that the retailer’s products were
falsely labeled as being compliant with the emissions standards of CARB. The report also suggested that the flooring could cause adverse health
effects. The retailer became subject to numerous lawsuits and government investigations, including by the Consumer Products Safety
Commission.
In December 2015, a similar lawsuit was filed as a putative nationwide class action against our subsidiary F&D. The lawsuit alleged
that certain Chinese‑manufactured laminate flooring products sold by F&D were falsely labeled as compliant with formaldehyde emissions
standards established by CARB. In June 2016, management believed a settlement of the case was both probable and estimable and accrued
$14 million with respect to such case in the second quarter of fiscal 2016. During the third quarter
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of fiscal 2016, F&D reached an agreement with one of the manufacturers whose products were involved in the case to cover $3.5 million of our
losses related to this lawsuit. We recorded the $3.5 million receivable as an offset to litigation settlement expenses. Legal expenses incurred in
connection with the case were recorded in general & administrative expenses during the period in which they were incurred. In September 2016,
F&D entered into a classwide settlement to resolve the lawsuit. The settlement class was defined as all end users of Chinese‑manufactured
laminate flooring sold by F&D nationwide between January 1, 2012 and August 1, 2015. As part of the settlement, all settlement class members
who did not exclude themselves from the settlement granted F&D a release of all claims arising out of or relating to their purchase of
Chinese‑manufactured laminate flooring from F&D, with the exception of personal injury claims. The settlement did not involve an admission
of liability by F&D. Seven members of the settlement class excluded themselves from the settlement. The settlement was granted final approval
by the court on January 10, 2017.
Although the claims asserted against F&D in the December 2015 lawsuit have been resolved, we cannot predict whether we will face
additional lawsuits that are not covered by the settlement or the release. If additional lawsuits are filed, we could incur significant costs, be
liable for damages, be subject to fines, penalties, injunctive relief, criminal charges or other legal risks, which could reduce demand for our
products and adversely affect our business, financial condition and operating results.
Negative publicity surrounding such matters, including publicity about other retailers, may harm our reputation and affect the demand
for our products. In addition, if more stringent laws or regulations are adopted in the future, we may have difficulty complying with the new
requirements imposed by such laws and regulations, and in turn, our business, financial condition and operating results could be adversely
affected. Moreover, regardless of whether any such changes are adopted, we may become subject to claims or governmental investigations
alleging violations of applicable laws and regulations. Any such matter may subject us to fines, penalties, injunctions, litigation and/or potential
criminal violations. Any one of these results could negatively affect our business, financial condition and operating results and impair our
ability to grow or sustain our business.
If we violate or are alleged to have violated environmental, health and safety laws and regulations, we could incur significant costs and
other negative effects that could reduce demand for our products and adversely affect our business, financial condition and operating
results.
In addition to the applicable laws and regulations discussed above, certain portions of our operations are subject to laws and
regulations governing the environmental protection of natural resources and health and safety, including the use, storage, handling, generation,
transportation, treatment, emission, release, discharge and disposal of certain hazardous materials and wastes. In addition, certain of our
products are subject to laws and regulations relating to the importation, exportation, acquisition or sale of certain plants and plant products,
including those illegally harvested, and the emissions of hazardous materials.
We operate our business in accordance with standards and procedures designed to comply with the applicable laws and regulations in
these areas and work closely with our suppliers in order to comply with such laws and regulations. If we violate or are alleged to have violated
these laws, we could incur significant costs, be liable for damages, experience delays in shipments of our products, be subject to fines, penalties,
criminal charges or other legal risks, or suffer reputational harm, any of which could reduce demand for our products and adversely affect our
business, financial condition and operating results. In addition, there can be no assurance that such laws or regulations will not become more
stringent in the future or that we will not incur additional costs in the future in order to comply with such laws or regulations.
We are engaged in various legal actions, claims and proceedings arising in the ordinary course of business and, while we cannot predict the
outcomes of such proceedings and other contingencies with certainty, this litigation and any potential future litigation could have an
adverse impact on us.
We are engaged in various legal actions, claims and proceedings arising in the ordinary course of business, including claims related to
breach of contract, product liabilities, intellectual property matters and employment related matters resulting from our business activities. As
with most actions such as these, an estimate of any possible and/or ultimate liability cannot always be determined. Regardless of the outcome,
litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
Additionally, we cannot guarantee that we will not become engaged in additional legal actions, claims, proceedings or governmental
investigations in the future. Any such action could result in negative publicity, harm to our reputation and adversely affect our business,
financial condition and operating results.
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Labor activities could cause labor relations difficulties for us.
Currently none of our employees are represented by a union; however, our employees have the right at any time to form or affiliate
with a union. As we continue to grow, enter different regions and operate distribution centers, unions may attempt to organize all or part of our
employee base at certain stores or distribution centers within certain regions. We cannot predict the adverse effects that any future
organizational activities will have on our business, financial condition and operating results. If we were to become subject to work stoppages,
we could experience disruption in our operations and increases in our labor costs, either of which could adversely affect our business, financial
condition and operating results.
Federal, state or local laws and regulations, or our failure to comply with such laws and regulations, could increase our expenses, restrict
our ability to conduct our business and expose us to legal risks.
We are subject to a wide range of general and industry‑specific laws and regulations imposed by federal, state and local authorities in
the countries in which we operate including those related to customs, foreign operations (such as the FCPA), truth‑in‑advertising, consumer
protection (such as the Telephone Consumer Protection Act), privacy, product safety, the environment (such as the Lacey Act), intellectual
property infringement, zoning and occupancy matters as well as the operation of retail stores and distribution facilities. In addition, various
federal and state laws govern our relationship with, and other matters pertaining to, our employees, including wage and hour laws, laws
governing independent contractor classifications, requirements to provide meal and rest periods or other benefits, family leave mandates,
requirements regarding working conditions and accommodations to certain employees, citizenship or work authorization and related
requirements, insurance and workers’ compensation rules and anti‑discrimination laws. In recent years, we and other parties in the flooring
industry have been or currently are parties to litigation involving claims that allege violations of the foregoing laws, including claims related to
product safety and patent claims. See “—Unfavorable allegations, government investigations and legal actions surrounding our products and us
could harm our reputation and impair our ability to grow or sustain our business.” In addition, there has been an increase in the number of wage
and hour class action claims that allege misclassification of overtime eligible workers and/or failure to pay overtime‑eligible workers for all
hours worked, particularly in the retail industry. Although we believe that we have complied with these laws and regulations, there is
nevertheless a risk that we will become subject to claims that allege we have failed to do so. Any claim that alleges a failure by us to comply
with any of the foregoing laws and regulations may subject us to fines, penalties, injunctions, litigation and/or potential criminal violations,
which could adversely affect our reputation, business, financial condition and operating results.
Certain of our products may require us to spend significant time and resources in order to comply with applicable advertising, labeling,
importation, exportation, environmental, health and safety laws and regulations because if we violate these laws or regulations, we could
experience delays in shipments of our goods, be subject to fines or penalties, be liable for costs and damages or suffer reputational harm, any of
which could reduce demand for our merchandise and adversely affect our business, financial condition and operating results.
In particular, we will be subject to new formaldehyde emission standards under the Formaldehyde Standards in Composite Wood
Products Act (the “CWP Act”), previously scheduled to go into effect in the fourth quarter of fiscal 2018. As a result of litigation between the
EPA and certain nongovernmental groups, the implementation of certain provisions of the CWP Act may be accelerated. If the implementation
of such provisions is accelerated earlier than the third quarter of fiscal 2018, it may adversely affect our business, financial condition and
operating results.
Any changes to the foregoing laws or regulations or any new laws or regulations that are passed or go into effect may make it more
difficult for us to operate our business and in turn adversely affect our operating results.
We may also be subject to audits by various taxing authorities. Similarly, changes in tax laws in any of the multiple jurisdictions in
which we operate, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, could result in
an unfavorable change in our effective tax rate, which could adversely affect our business, financial condition and operating results. In addition,
given the nature of our business, certain of our sales are exempt from state sales taxes. If we are audited and fail to maintain proper
documentation, any adjustments resulting from such audits could increase our tax liability, including any interest or penalties.
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If our efforts to protect the privacy and security of information related to our customers, us, our employees, our suppliers and other third
parties are not successful, we could become subject to litigation, investigations, liability and negative publicity that could significantly harm
our reputation and relationships with our customers and adversely affect our business, financial condition and operating results.
Our business, like that of most retailers, involves the receipt, storage and transmission of customers’ personal information, consumer
preferences and payment card data, as well as other confidential information related to us, our employees, our suppliers and other third parties,
some of which is entrusted to third‑party service providers and vendors that provide us with technology, systems and services that we use in
connection with the receipt, storage and transmission of such information. Techniques used for cyber attacks designed to gain unauthorized
access to these types of sensitive information by breaching or sabotaging critical systems of large organizations are constantly evolving and
generally are difficult to recognize and react to effectively. We may be unable to anticipate these techniques or to implement adequate
preventive or reactive security measures. Notwithstanding widespread recognition of the cyber attack threat and improved data protection
methods, high profile electronic security breaches leading to unauthorized release of sensitive information have occurred in recent years with
increasing frequency at a number of major U.S. companies, including several large retailers, notwithstanding widespread recognition of the
cyber attack threat and improved data protection methods.
Despite our security measures and those of third parties with whom we do business, such as our banks, merchant card processing and
other technology vendors, our respective systems and facilities may be vulnerable to criminal cyber‑attacks or security incidents due to
malfeasance, intentional or inadvertent security breaches by employees, or other vulnerabilities such as defects in design or manufacture.
Unauthorized parties may also attempt to gain access to our systems or facilities through fraud, trickery or other forms of deception targeted at
our customers, employees, suppliers and service providers. Any such incidents could compromise our networks and the information stored there
could be accessed, misused, publicly disclosed, lost or stolen.
As noted above, the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often are not
recognized until launched against a target; accordingly, we may be unable to anticipate these techniques or implement adequate preventative
measures. In addition, advances in computer capabilities, new technological discoveries or other developments may also compromise or result
in the obsolescence of the technology used to protect sensitive information. An actual or anticipated attack security incident may cause us to
incur additional costs, including costs related to diverting or deploying personnel, implementing preventative measures, training employees and
engaging third‑party experts and consultants. Further, any security breach incident could expose us to risks of data loss, regulatory and law
enforcement investigations, litigation and liability and could seriously disrupt our operations and any resulting negative publicity could
significantly harm our reputation and relationships with our customers and adversely affect our business, financial condition and operating
results.
A material disruption in our information systems, including our website and call center, could adversely affect our business or operating
results and lead to reduced net sales and reputational damage.
We rely on our information systems to process transactions, summarize our results of operations and manage our business. In
particular, our website and our call center are important parts of our integrated connected customer strategy and customers use these systems as
information sources on the range of products available to them and as a way to order our products. Therefore, the reliability and capacity of our
information systems is critical to our operations and the implementation of our growth initiatives. However, our information systems are subject
to damage or interruption from planned upgrades in technology interfaces, power outages, computer and telecommunications failures, computer
viruses, cyber‑attacks or other security breaches and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes, acts of war or
terrorism and usage errors by our employees. If our information systems are damaged or cease to function properly, we may have to make a
significant investment to fix or replace them, and we may suffer losses of critical data and/or interruptions or delays in our operations. In
addition, to keep pace with changing technology, we must continuously implement new information technology systems as well as enhance our
existing systems. In particular, in late 2017, we began to implement a new human resources information system, and any disruption in
completing this implementation could negatively impact the operation of our business. Moreover, the successful execution of some of our
growth strategies, in particular the expansion of our connected customer and online capabilities, is dependent on the design and implementation
of new systems and technologies and/or the enhancement of existing systems. Any material disruption in our information systems, or delays or
difficulties in implementing or integrating new systems or enhancing or expanding current systems, could have an adverse effect on our
business, in particular our call center and online operations, and our operating results and could lead to reduced net sales and reputational
damage.
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We are subject to payments‑‑related risks that could increase our operating costs, expose us to fraud, subject us to potential liability and
potentially disrupt our business.
We accept payments using a variety of methods, including credit cards, debit cards, gift cards and physical bank checks. These
payment options subject us to many compliance requirements, including, but not limited to, compliance with the Payment Card Industry Data
Security Standards, which represents a common set of industry tools and measurements to help ensure the safe handling of sensitive
information, and compliance with contracts with our third party processors. These payment options also subject us to potential fraud by criminal
elements seeking to discover and take advantage of security vulnerabilities that may exist in some of these payment systems. For certain
payment methods, including credit cards and debit cards, we pay interchange and other fees, which may increase over time and raise our
operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards,
debit cards and gift cards, and it could disrupt or harm our business if these companies become unwilling or unable to provide these services to
us, experience a data security incident or fail to comply with applicable rules and industry standards. We are also subject to payment card
association operating rules, including data security rules, certification requirements, and rules governing electronic funds transfers, which could
change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our
data security systems or payment card information of our customers are breached or compromised, there is the potential that parties could seek
damages from us, we may be liable for card issuing banks’ costs, subject to fines and higher transaction fees, and lose our ability to accept
credit cards and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, we
could lose the confidence of customers and our business, financial condition and operating results could be adversely affected. We may also
need to expend significant management and financial resources to become or remain compliant with relevant standards and requirements, which
could divert resources from other initiatives and adversely affect our business, financial condition and operating results.
Our facilities and systems, as well as those of our suppliers, are vulnerable to natural disasters and other unexpected events, and as a result
we may lose merchandise and be unable to effectively deliver it to our stores.
Our retail stores, store support center and distribution centers, as well as the operations of our suppliers from which we receive goods
and services, are vulnerable to damage from earthquakes, tornadoes, hurricanes, fires, floods and similar events. If any of these events result in
damage to our facilities, systems or equipment, or those of our suppliers, they could adversely affect our ability to stock our stores and deliver
products to our customers, and could adversely affect our net sales and operating results. In addition, we may incur costs in repairing any
damage beyond our applicable insurance coverage. In particular, any disruption to any of our distribution centers could have a material impact
on our business.
Material damage to, or interruptions in, our information systems as a result of external factors, staffing shortages and difficulties in
updating our existing software or developing or implementing new software could adversely affect our business, financial condition and
operating results.
We depend largely upon our information technology systems in the conduct of all aspects of our operations. Such systems are subject
to damage or interruption from power outages, computer and telecommunications failures, computer viruses and security breaches. Damage or
interruption to our information systems may require a significant investment to fix or replace them, and we may suffer interruptions in our
operations in the interim including issues operating our distribution centers and/or managing our inventory. In addition, costs and potential
problems and interruptions associated with the implementation of new or upgraded systems and technology, or with maintenance or adequate
support of existing systems, could also disrupt or reduce the efficiency of our operations. Further, the software programs supporting many of
our systems were licensed to us by independent software developers. The inability of these developers or us to continue to maintain and upgrade
these information systems and software programs would disrupt or reduce the efficiency of our operations if we were unable to convert to
alternate systems in an efficient and timely manner and could adversely affect our business, financial condition and operating results. Any
material interruptions or failures in our information systems may adversely affect our business, financial condition and operating results.
As we have a high concentration of stores in the southern region of the United States, we are subject to regional risks.
We have a high concentration of stores in the southern region of the United States. If this market suffers an economic downturn or
other significant adverse event, our comparable store sales, net sales, profitability and the ability to implement our planned expansion could be
adversely affected. Any natural disaster, extended adverse weather or other serious disruption in this market due to fire, tornado, hurricane, or
any other calamity could damage inventory and could result in decreased net sales.
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Our success depends substantially upon the continued retention of our key personnel, which we consider to be our executive officers.
We believe that our success has depended and continues to depend to a significant extent on the efforts and abilities of our key
personnel, which we consider to be our executive officers. We have employment agreements with each of our executive officers. Our failure to
retain members of that team could impede our ability to build on the efforts they have undertaken with respect to our business.
We do not maintain “key man” life insurance policies on our key personnel.
We do not have “key man” life insurance policies for any of our key personnel. If we were to obtain “key man” insurance for our key
personnel, there can be no assurance that the amounts of such policies would be sufficient to pay losses experienced by us as a result of the loss
of any of those personnel.
Our success depends upon our ability to attract, train and retain highly qualified managers and staff.
Our success depends in part on our ability to attract, hire, train and retain qualified managers and staff. Purchasing hard surface
flooring is an infrequent event for BIY and DIY consumers, and the typical consumer in these groups has little knowledge of the range,
characteristics and suitability of the products available before starting the purchasing process. Therefore, consumers in the hard surface flooring
market expect to have sales associates serving them who are knowledgeable about the entire assortment of products offered by the retailer and
the process of choosing and installing hard surface flooring.
Each of our stores is managed by a store manager who has the flexibility (with the support of regional managers) to use his or her
knowledge of local market dynamics to customize each store in a way that is most likely to increase net sales and profitability. Our store
managers are also expected to anticipate, gauge and quickly respond to changing consumer demands in these markets. Further, it generally takes
a substantial amount of time for our store managers to develop the entrepreneurial skills that we expect them to have in order to make our stores
successful.
There is a high level of competition for qualified regional managers, store managers and sales associates among home improvement
and flooring retailers in local markets, and as a result, we may not succeed in attracting and retaining the personnel we require to conduct our
current operations and support our plans for expansion. In addition, we compete with other retail businesses for many of our associates in
hourly positions, and we invest significant resources in training and motivating them to maintain a high level of job satisfaction. These positions
have historically had high turnover rates, which can lead to increased training and retention costs, particularly as the economy continues to
improve and the labor market tightens. If our recruiting and retention efforts are not successful, we may have a shortage of qualified employees
in future periods. Any such shortage would decrease our ability to effectively serve our customers. Such a shortage would also likely lead to
higher wages for employees and a corresponding reduction in our operating results. In addition, as we expand into new markets, we may find it
more difficult to hire, develop and retain qualified employees and may experience increased labor costs. Any failure by us to attract, train and
retain highly qualified managers and staff could adversely affect our operating results and future growth opportunities.
The effectiveness of our advertising strategy is a driver of our future success.
We believe that our growth was in part a result of our successful investment in local advertising. As we enter new markets that often
have more expensive advertising rates, we may need to increase our advertising expenses to broaden the reach and frequency of our advertising
to increase the recognition of our brand. If our advertisements fail to draw customers in the future, or if the cost of advertising or other
marketing materials increases significantly, we could experience declines in our net sales and operating results.
Our intellectual property rights are valuable, and any failure to protect them could reduce the value of our products and brand and harm
our business.
We regard our intellectual property as having significant value, and our brand is an important factor in the marketing of our products.
However, we cannot assure you that the steps we take to protect our trademarks or intellectual property will be adequate to prevent others from
copying or using our trademarks or intellectual property without authorization. If our trademarks or intellectual
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property are copied or used without authorization, the value of our brand, its reputation, our competitive advantages and our goodwill could be
harmed.
We may be involved in disputes from time to time relating to our intellectual property and the intellectual property of third parties.
We may become parties to disputes from time to time over rights and obligations concerning intellectual property, and we may not
prevail in these disputes. Third parties may raise claims against us alleging infringement or violation of the intellectual property of that
third‑party. Even if we prevail in such disputes, the costs we incur in defending such dispute may be material and costly. Some third‑party
intellectual property rights may be extremely broad, and it may not be possible for us to conduct our operations in such a way as to avoid
violating those intellectual property rights. Any such intellectual property claim could subject us to costly litigation and impose a significant
strain on our financial resources and management personnel regardless of whether such claim has merit. The liability insurance we maintain
may not adequately cover potential claims of this type, and we may be required to pay monetary damages or license fees to third parties, which
could have a material adverse effect on our business, financial condition and operating results.
Our ability to control higher health care costs is limited and could adversely affect our business, financial condition and operating results.
With the passage in 2010 of the U.S. Patient Protection and Affordable Care Act (as amended, the “Affordable Care Act”), we are
required to provide affordable coverage, as defined in the Affordable Care Act, to all employees, or otherwise be subject to a payment per
employee based on the affordability criteria in the Affordable Care Act. Additionally, some states and localities have passed state and local laws
mandating the provision of certain levels of health benefits by some employers. These requirements limit our ability to control employee health
care costs.
Efforts to modify, repeal or otherwise invalidate all, or certain provisions of, the Affordable Care Act and/or adopt a replacement
healthcare reform law may impact our employee healthcare costs. At this time, there is uncertainty concerning whether the Affordable Care Act
will be repealed or what requirements will be included in a new law, if enacted. If health care costs rise, we may experience increased operating
costs, which may adversely affect our business, financial condition and operating results.
We are a holding company with no business operations of our own and depend on cash flow from our subsidiaries to meet our obligations.
We are a holding company with no business operations of our own or material assets other than the equity of our subsidiaries. All of
our operations are conducted by our subsidiaries. As a holding company, we will require dividends and other payments from our subsidiaries to
meet cash requirements.
The terms of our $200 million asset‑based revolving credit facility (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”), restrict our subsidiaries from paying
dividends and otherwise transferring cash or other assets to us except in certain limited circumstances. If we become insolvent or there is a
liquidation or other reorganization of any of our subsidiaries, our stockholders likely will have no right to proceed against their assets. Creditors
of those subsidiaries will be entitled to payment in full from the sale or other disposal of the assets of those subsidiaries before we, as an equity
holder, would be entitled to receive any distribution from that sale or disposal. If our subsidiaries are unable to pay dividends or make other
payments to us when needed, we will be unable to satisfy our obligations.
We face risks related to our indebtedness.
As of December 28, 2017, the principal amount of our total indebtedness was approximately $189.1 million (including $148.1 million
of indebtedness outstanding under the Term Loan Facility). In addition, as of December 28, 2017, we had the ability to access approximately
$146.1 million of unused borrowings available under the ABL Facility without violating any covenants thereunder and had approximately
$12.8 million in outstanding letters of credit.
Our indebtedness, combined with our lease and other financial obligations and contractual commitments, could adversely affect our
business, financial condition and operating results by:
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· 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 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
assure you 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.
Significant amounts of cash are required to service our indebtedness and operating lease obligations, and any failure to meet our debt
service obligations could adversely affect our business, financial condition and operating results.
Our ability to pay interest on and principal of our debt obligations will primarily depend upon our future operating performance. As a
result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect our ability to
make these payments.
If we do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may have to undertake alternative
financing plans, such as refinancing or restructuring our indebtedness, selling our assets, reducing or delaying capital investments or seeking to
raise additional capital. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial
condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants,
which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of
these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would
likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on acceptable terms. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Our Credit
Facilities.”
Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations at all or on acceptable
terms, could have an adverse effect on our business, financial condition and operating results.
We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to
us in amounts sufficient to enable us to make payments on our indebtedness or to fund our operations.
Our debt agreements contain restrictions that may limit our flexibility in operating our business.
We are a holding company, and accordingly, substantially all of our operations are conducted through our subsidiaries. The credit
agreements governing our Credit Facilities contain, and any future indebtedness would likely contain, a number of restrictive
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covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in acts that may be in our
best long‑term interests. The credit agreements governing our Credit Facilities include covenants that, among other things, restrict our and our
subsidiaries’ ability to:
·
·
incur additional indebtedness;
create liens;
· make investments, loans or advances;
· merge or consolidate;
·
·
·
·
·
sell assets, including capital stock of subsidiaries or make acquisitions;
pay dividends on capital stock or redeem, repurchase or retire capital stock or make other restricted payments;
enter into transactions with affiliates;
repurchase certain indebtedness; and
exceed a certain total net leverage ratio or, in certain cases, maintain less than a certain fixed charge coverage ratio.
Based on the foregoing factors, the operating and financial restrictions and covenants in our current debt agreements and any future
financing agreements could adversely affect our ability to finance future operations or capital needs or to engage in other business activities.
In addition, a breach of any of the restrictive covenants in our Credit Facilities may constitute an event of default, permitting the
lenders to declare all outstanding indebtedness under both our Credit Facilities to be immediately due and payable or to enforce their security
interest, which could adversely affect our ability to respond to changes in our business and manage our operations. Upon the occurrence of an
event of default under any of the agreements governing our Credit Facilities, the lenders could elect to declare all amounts outstanding to be due
and payable and exercise other remedies as set forth in the credit agreements. If any of our indebtedness under either of our Credit Facilities
were to be accelerated, there can be no assurance that our assets would be sufficient to repay this indebtedness in full, which could adversely
affect our ability to continue to operate as a going concern. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources—Our Credit Facilities” for more information.
Our fixed lease obligations could adversely affect our operating results.
We are required to use a significant portion of cash generated by our operations to satisfy our fixed lease obligations, which could
adversely affect our ability to obtain future financing to support our growth or other operational investments. We will require substantial cash
flows from operations to make our payments under our operating leases, all of which provide for periodic increases in rent. As of December 28,
2017, our minimum annual rental obligations under long‑term operating leases for the fiscal years ending December 27, 2018 and December 26,
2019 are approximately $79.9 million and $85.3 million, respectively. If we are not able to make payments under our operating leases, this
could trigger defaults under other leases or, in certain circumstances, under our Credit Facilities, which could cause the counterparties or lenders
under those agreements to accelerate the obligations due thereunder.
Changes to accounting rules or regulations could adversely affect our operating results.
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States
(“GAAP”). New accounting rules or regulations and changes to existing accounting rules or regulations have occurred and may occur in the
future. Future changes to accounting rules or regulations, such as changes to revenue recognition or lease accounting guidance or a requirement
to convert to international financial reporting standards, could adversely affect our operating results through increased cost of compliance.
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Risks Related to the Ownership of Our Common Stock
You may not be able to resell your shares at or above the offering price or at all, and our stock price may be volatile, which could result in a
significant loss or impairment of your investment.
On May 2, 2017, we completed our initial public offering (the “IPO”). Since the IPO, the price of our common stock as reported by
The New York Stock Exchange (“NYSE”) has ranged from a low closing sales price of $32.05 on April 27, 2017 to a high closing sales price of
$51.00 on January 19, 2018. In addition, the trading price of our common stock may be subject to wide price fluctuations in response to various
factors, many of which are beyond our control, including those described above in “—Risks Related to Our Business” and the following:
·
·
·
·
actual or anticipated fluctuations in our quarterly or annual financial results;
the financial guidance we may provide to the public, any changes in such guidance or our failure to meet such guidance;
failure of industry or securities analysts to maintain coverage of us, changes in financial estimates by any industry or securities
analysts that follow us or our failure to meet such estimates;
downgrades in our credit ratings or the credit ratings of our competitors;
· market factors, including rumors, whether or not correct, involving us or our competitors;
·
·
·
·
·
·
·
·
·
·
·
·
·
unfavorable market reactions to allegations regarding the safety of products sold by us or our competitors that are similar to
products that we sell and costs or negative publicity arising out of any potential litigation and/or government investigations
resulting therefrom;
fluctuations in stock market prices and trading volumes of securities of similar companies;
sales or anticipated sales of large blocks of our stock;
short selling of our common stock by investors;
limited “public float” in the hands of a small number of persons whose sales or lack of sales of our common stock could result in
positive or negative pricing pressure on the market price for our common stock;
additions or departures of key personnel;
announcements of new store openings, commercial relationships, acquisitions or entry into new markets by us or our competitors;
failure of any of our initiatives, including our growth strategy, to achieve commercial success;
regulatory or political developments;
changes in accounting principles or methodologies;
litigation or governmental investigations;
negative publicity about us in the media and online; and
general financial market conditions or events.
Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the
market prices of equity securities of many companies. These fluctuations sometimes have been unrelated or disproportionate to the operating
performance of those companies. These and other factors may cause the market price and demand for our common
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stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise
adversely affect the price or liquidity of our common stock.
In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities
class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, we could incur
substantial costs defending it or paying for settlements or damages. Such a lawsuit could also divert the time and attention of our management
from our operating business. As a result, such litigation may adversely affect our business, financial condition and operating results.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business, our market, or our
competitors, or if they change their recommendations regarding our common stock in a negative way, the price and trading volume of our
common stock could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us,
our business, our market, or our competitors. If any of the analysts who cover us change their recommendation regarding our common stock in a
negative way, or provide more favorable relative recommendations about our competitors, the price of our common stock would likely decline.
If any analyst who covers us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial
markets, which in turn could cause our common stock price or trading volume to decline.
The large number of shares eligible for public sale in the future, or the perception of the public that these sales may occur, could depress the
market price of our common stock.
The market price of our common stock could decline as a result of (i) sales of a large number of shares of our common stock in the
market, particularly sales by our directors, employees (including our executive officers) and certain other significant stockholders, and (ii) a
large number of shares of our common stock being registered or offered for sale. These sales, or the perception that these sales could occur, may
depress the market price of our common stock. As of March 1, 2018, there were 95,663,245 shares of common stock outstanding, of which
32,234,101 were freely tradeable on the NYSE, except that any shares held by our affiliates, as that term is defined in Rule 144 under the
Securities Act (“Rule 144”), may only be sold in compliance with the applicable volume, manner of sale, holding period and other limitations of
Rule 144.
Additionally, as of March 1, 2018, approximately 11,056,855 shares of our common stock are issuable upon exercise of stock options that
vest and are exercisable at various dates through November 13, 2027, with an average weighted exercise price of $7.32 per share, and we have
issued 15,475 shares of restricted stock with restrictions that lapse at various dates through April 26, 2021. Of such options, 7,393,085 are
currently exercisable. We have filed a registration statement on Form S-8 under the Securities Act to register shares of our common stock issued
or reserved for issuance under our stock incentive plans. The Form S-8 registration statement became effective immediately upon filing, and
shares covered by that registration statement are eligible for sale in the public markets, subject to vesting restrictions and the limitations of Rule
144 applicable to affiliates.
All of our shares of common stock will be eligible for future sale, subject to the applicable volume, manner of sale, holding period and
other limitations of Rule 144. In addition, our Sponsors have certain demand registration rights, and certain of our pre IPO stockholders have
“piggy back” registration rights with respect to the common stock, subject to certain conditions and exceptions contained in a registration rights
agreement.
In the future, we expect to issue stock options, restricted stock and/or other forms of stock‑‑based compensation, which have the potential to
dilute stockholders’ value and cause the price of our common stock to decline.
In the future, we expect to offer stock options, restricted stock and/or other forms of stock based compensation to our eligible
employees, consultants and directors who are not executives or consultants of the Company or employees of Ares (as defined below) or
Freeman Spogli (as defined below) or their respective affiliates. If we grant more equity awards to attract and retain key personnel, the expenses
associated with such additional equity awards could materially adversely affect our results of operations and may also result in additional
dilution to our stockholders. If any options that we issue are exercised or any restrictions on restricted stock that we issue lapse and those shares
are sold into the public market, the market price of our common stock may decline. In addition, the availability of shares of common stock for
award under our stock incentive plans or the grant of stock options, restricted stock or other forms of stock based compensation may adversely
affect the market price of our common stock.
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Our ability to raise capital in the future may be limited.
Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds
through the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms or at
all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities,
the debt holders would have rights senior to holders of our common stock to make claims on our assets and the terms of any debt could restrict
our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities or securities convertible into
equity securities, existing stockholders will experience dilution and the new equity securities could have rights senior to those of our common
stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we
cannot predict or estimate the amount, timing or nature of our future offerings. Thus, you bear the risk of our future securities offerings reducing
the market price of our common stock and diluting their interest.
Our principal stockholders have substantial control over us, are able to influence corporate matters and may take actions that conflict with
your interests and have the effect of delaying or preventing changes of control or changes in management, or limiting the ability of other
stockholders to approve transactions they deem to be in their best interest.
Our directors, executive officers and holders of more than 5% of our Class A common stock, together with their affiliates, beneficially
own, in the aggregate, approximately 71.4% of our outstanding Class A common stock. Ares beneficially owns, in the aggregate, approximately
42.5% of our outstanding Class A common stock and Corporate Opportunities Fund III, L.P. (“Ares”), a fund affiliated with Ares Management,
L.P. (“Ares Management”), FS Equity Partners VI, L.P. and FS Affiliates VI, L.P., funds affiliated with Freeman Spogli Management Co., L.P.
(collectively “Freeman Spogli” or “Freeman Spogli & Co.” and together with Ares, our “Sponsors”) will beneficially own, in the aggregate,
approximately 20.6% of our outstanding Class A common. As a result, these stockholders acting together, or Ares or Freeman Spogli acting
alone, are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval
of significant corporate transactions, such as a merger or other sale of us or our assets. The investor rights agreement by and among us, Ares and
Freeman Spogli also contains agreements among our Sponsors with respect to voting on the election of directors and Board committee
membership. The interests of Ares or Freeman Spogli could conflict in material respects with yours, and this concentration of ownership could
limit your ability to influence corporate matters and may have the effect of delaying or preventing a third-party from acquiring control over us.
Certain of the members of our board of directors (the “Board”) also have relationships with our Sponsors. David B. Kaplan and Rachel H. Lee
serve as officers and principals of certain Ares affiliated entities. In addition, NAX 18, LLC, a consulting entity controlled by Norman
H. Axelrod, provides consulting services to certain Ares affiliated entities. Brad J. Brutocao and John M. Roth serve as officers and principals of
certain Freeman Spogli affiliated entities. In addition, Peter Starrett Associates, a consulting entity controlled by Peter M. Starrett, provides
consulting services to certain Freeman Spogli affiliated entities. Our certificate of incorporation provides that no officer or director of ours who
is also an officer, director, employee, managing director or other affiliate of our Sponsors will be liable to us or our stockholders for breach of
any fiduciary duty by reason of the fact that any such individual directs a corporate opportunity to our Sponsors instead of us, or does not
communicate information regarding a corporate opportunity to us that the officer, director, employee, managing director or other affiliate has
directed to our Sponsors.
Although we do not expect to rely on the “controlled company” exemption, since we will continue to qualify as a “controlled company”
within the meaning of the rules of The New York Stock Exchange, we qualify for exemptions from certain corporate governance
requirements.
Under the rules of the NYSE, a company of which more than 50% of the voting power is held by another person or group of persons
acting together is a “controlled company” and may elect not to comply with certain rules of the NYSE regarding corporate governance,
including:
• the requirement that a majority of our Board consist of independent directors;
• the requirement that our nominating and corporate governance committee be composed entirely of independent directors with a
written charter addressing the committee’s purpose and responsibilities;
• the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing
the committee’s purpose and responsibilities; and
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• the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.
These requirements will not apply to us as long as we remain a “controlled company.” Although we will continue to qualify as a
“controlled company,” we do not expect to rely on this exemption, and we intend to fully comply with all corporate governance requirements
under the rules of the NYSE. However, if we were to utilize some or all of these exemptions, you may not have the same protections afforded to
stockholders of companies that are subject to all of the rules of the NYSE regarding corporate governance.
We do not currently expect to pay any cash dividends.
The continued operation and growth of our business will require substantial funding. Accordingly, we do not currently expect to pay
any cash dividends on shares of our common stock. Any determination to pay dividends in the future will be at the discretion of our Board and
will depend upon our operating results, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our
Board deem relevant. Additionally, under our Credit Facilities, our subsidiaries are currently restricted from paying cash dividends except in
limited circumstances, and we expect these restrictions to continue in the future. Accordingly, realization of a gain on your investment in our
common stock will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in
the foreseeable future should not purchase our common stock. See Item 5, “Market for Registrant’s Common Equity.”
As a result of our recent IPO, our costs have increased significantly, and our management is required to devote substantial time to
complying with public company regulations, which will negatively impact our financial performance and could cause our results of
operations or financial condition to suffer.
In April 2017, we priced our IPO. As a result, we will continue to incur additional legal, accounting, insurance and other expenses that
we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will
incur costs associated with the Sarbanes‑Oxley Act, Dodd‑Frank Wall Street Reform and Consumer Protection Act and related rules
implemented by the Securities and Exchange Commission (“SEC”). The expenses incurred by public companies generally for reporting and
corporate governance purposes have been increasing. These rules and regulations increase our legal and financial compliance costs and make
some activities more time‑consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. In
estimating these costs, we took into account expenses related to insurance, legal, accounting, and compliance activities, as well as other
expenses. These laws and regulations can also make it more difficult or costly for us to obtain certain types of insurance, including director and
officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the
same or similar coverage. These laws and regulations can also make it more difficult for us to attract and retain qualified persons to serve on our
Board, our Board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we
could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action and potentially civil litigation.
Failure to establish and maintain effective internal controls in accordance with Sections 302 and 404 of the Sarbanes‑‑Oxley Act could have
an adverse effect on our business and stock price.
We are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes‑Oxley Act, which require
management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the
effectiveness of controls over financial reporting. Though we are required to disclose changes made in our internal controls and procedures on a
quarterly basis, we are not required to make our first annual assessment of our internal controls over financial reporting pursuant to Section 404
until the year following our first annual report required to be filed with the SEC.
To comply with the requirements of Sections 302 and 404, we may need to undertake various actions, such as implementing new
internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal controls can divert our
management’s attention from other matters that are important to the operation of our business. In addition, when evaluating our internal controls
over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline
imposed upon us for compliance with the requirements of Sections 302 and 404. If we identify material weaknesses in our internal controls over
financial reporting or are unable to comply with the requirements of Sections 302 and 404 in a timely manner or assert that our internal controls
over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the
effectiveness of our internal controls over financial reporting,
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investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be
negatively affected, and we could become subject to investigations by the NYSE, the SEC or other regulatory authorities, which could require
additional financial and management resources.
Anti‑‑takeover provisions could impair a takeover attempt and adversely affect existing stockholders and the market value of our common
stock.
Certain provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may have the effect of
rendering more difficult, delaying or preventing an acquisition of the Company, even when this would be in the best interest of our
stockholders. These provisions include:
• a classified Board;
• the sole power of a majority of our Board to fix the number of directors;
• the requirement that certain advance notice procedures be followed for our stockholders to submit nominations of candidates for
election to our Board and to bring other proposals before a meeting of the stockholders;
• the power of our Board to amend our bylaws without stockholder approval;
• limitations on the removal of directors nominated by our Sponsors;
• the sole power of the Board, or our Sponsors in the case of a vacancy of one of their respective Board nominees, to fill any
vacancy on the Board, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;
• the ability of a majority of our Board (even if less than a quorum) to designate one or more series of preferred stock and issue
shares of preferred stock without stockholder approval;
• the inability of stockholders to act by written consent if our Sponsors collectively own less than a majority of our outstanding
Class A common stock;
• a requirement that, to the fullest extent permitted by law, certain proceedings against or involving us or our directors, officers or
employees be brought exclusively in the Court of Chancery in the State of Delaware;
• the lack of cumulative voting rights for the holders of our Class A common stock with respect to the election of directors; and
• the inability of stockholders to call special meetings if our Sponsors collectively own less than a majority of our outstanding
Class A common stock.
Further, Delaware law imposes conditions on the voting of “control shares” and on certain business combination transactions with
“interested stockholders.”
Our issuance of shares of preferred stock could delay or prevent a change of control of the Company. Our Board has the authority to
cause us to issue, without any further vote or action by our stockholders, up to shares of preferred stock, par value $0.001 per share, in one or
more series, to designate the number of shares constituting any series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series.
The issuance of shares of preferred stock may have the effect of delaying, deferring or preventing a change in control of our Company without
further action by our stockholders, even where stockholders are offered a premium for their shares.
In addition, the issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of our
other classes of voting stock either by diluting the voting power of our other classes of voting stock if they vote together as a
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single class, or by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote even if the
action were approved by the holders of our other classes of voting stock.
These provisions could delay or prevent hostile takeovers and changes in control or changes in our management. Also, the issuance of
shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of
preferred stock could adversely affect the market price for our common stock by making an investment in our common stock less attractive. For
example, a conversion feature could cause the trading price of our common stock to decline to the conversion price of the preferred stock. Any
provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control or
otherwise makes an investment in our common stock less attractive could limit the opportunity for our stockholders to receive a premium for
their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock. See “Description
of Capital Stock.”
ITEM 1B. UNRESOLVED STAFF COMMENTS .
None.
ITEM 2. PROPERTIES .
We have 83 U.S. warehouse‑format stores located in 21 states, as shown in the chart below:
State
Alabama
Arizona
California
Colorado
Florida
Georgia
Illinois
Kansas
Kentucky
Louisiana
Maryland
Nevada
New Jersey
North Carolina
Ohio
Pennsylvania
Tennessee
Texas
Utah
Virginia
Wisconsin
Total
Number of
Stores
1
5
8
2
16
7
6
1
1
1
1
2
3
2
2
2
3
15
1
3
1
83
We opened 14 new stores during fiscal 2017. In addition to our warehouse-format stores, we operate one separate small 5,500 square
foot design center located in New Orleans, Louisiana. Our headquarters, which we refer to as our store support center, is approximately 106,600
square feet and is located in Smyrna, Georgia. Additionally, we operate an approximately 37,000 square foot product review center in Smyrna,
Georgia.
We lease our store support center, all of our stores and our distribution centers. Our leases generally have a term of ten to fifteen years,
and generally have at least two renewal options for five years. Most of our leases provide for a minimum rent and typically include escalating
rent increases. Our leases also generally require us to pay insurance, utilities, real estate taxes and repair and maintenance expenses.
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In December of 2017, we purchased 58 acres of land near Savannah, GA at a cost of approximately $5.4 million to facilitate future
growth of our supply chain capabilities.
ITEM 3. LEGAL PROCEEDINGS .
We are engaged in various legal actions, claims and proceedings arising in the ordinary course of business, including claims related to
breach of contracts, products liabilities, intellectual property matters and employment related matters resulting from our business activities. As
with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. Regardless of the outcome,
litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
ITEM 4. MINE SAFETY DISCLOSURES .
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES .
Market Information
Our common stock has been listed on the NYSE under the symbol “FND” since our IPO on April 27, 2017. Prior to that date, there was no
public market for our common stock. On March 1, 2018, the closing price of our common stock on the NYSE was $44.16, and there were 36
stockholders of record of our Class A common stock. The actual number of stockholders is greater than the number of record holders stated
above, and includes stockholders who are beneficial owners, but whose shares are held in "street name" by brokers and other nominees. This
number of holders of record also does not include stockholders whose shares may be held in trust by other entities. The following table sets
forth, for the periods indicated, the high and low sales price of our common stock as reported by the NYSE:
Year Ended December 28, 2017
Second Quarter
Third Quarter
Fourth Quarter
Dividend Policy
High
Low
$
$
$
46.95
42.44
49.85
$
$
$
29.37
32.72
36.25
No dividends have been declared or paid on our common stock. We intend to continue to retain all available funds and any future
earnings for use in the operation and growth of our business, and therefore we do not currently expect to pay any cash dividends on our
common stock. Any future determination to pay dividends will be at the discretion of our Board and will depend on then existing conditions,
including our operating results, financial condition, contractual restrictions, capital requirements, business prospects and other factors that our
Board may deem relevant. In addition, our Credit Facilities contain covenants that restrict our ability to pay cash dividends.
In September 2016, in connection with the 2016 Refinancing, we paid our common stockholders a special cash dividend of
$202.5 million in the aggregate (the "Special Dividend"). Other than the Special Dividend, we did not declare or pay any cash dividends on our
common stock in fiscal 2016 or fiscal 2017.
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Performance Graph
The following graph shows a comparison of cumulative total return to holders of common stock against the cumulative total return of
the S&P 500 Index and the S&P 500 Home Improvement Retail Index from April 27, 2017 (the date our common stock commenced trading on
the NYSE) through December 28, 2017. The comparison of the cumulative total returns for each investment assumes that $100 was invested in
our Class A common stock and the respective indices on April 27, 2017 through December 28, 2017, including reinvestment of any dividends.
Historical share price performance should not be relied upon as an indication of future share price performance.
FND
S&P 500 Index
S&P 500 Home Improvement Retail
Unregistered Sales of Equity Securities
$
$
$
4/28/2017
9/28/2017
6/29/2017
12/28/2017
100.00 $ 126.99 $ 120.81 $ 154.73
100.00 $ 101.49 $ 105.28 $ 112.72
95.46 $ 101.10 $ 118.17
100.00 $
The following sets forth information regarding all unregistered securities sold during fiscal 2017 and gives effect to the conversion of
each share of Floor & Decor Holdings, Inc. into shares of the corresponding class of common stock of Floor & Decor Holdings, Inc. upon the
effectiveness of the 321.820-for-one stock split of our common stock effected on April 24, 2017:
· On January 27, 2017, Christopher Lesch exercised options to purchase (i) 8,045 shares of Class A common stock at an exercise price
of $4.33 per share for an aggregate purchase price of $34,775, (ii) 2,574 shares of Class A common stock at an exercise price of $6.22
per share for an aggregate purchase price of $16,000 and (iii) 2,252 shares of Class A common stock at an exercise price of $9.33 per
share for an aggregate purchase price of $21,000; and
· On February 10, 2017, Michael P. Duchaine exercised options to purchase 3,861 shares of Class A common stock at an exercise price
of $6.22 per share for an aggregate purchase price of $24,000.
Unless otherwise stated and except for the 321.820-for-one stock split of our common stock effected on April 24, 2017, the sales of the
above securities were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act (or
Regulation D promulgated thereunder) or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not
involving any public offering or pursuant to benefit plans and contracts relating to compensation as provided under Rule 701. We did not pay or
give, directly or indirectly, any commission or other remuneration, including underwriting discounts or commissions, in connection with any of
the issuances of securities listed above. The recipients of the
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securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions. All
recipients had adequate access, through their employment or other relationship with us or through other access to information provided by us, to
information about us. The sales of these securities were made without any general solicitation or advertising.
Use of Proceeds
None.
Repurchase of our Common Stock
None.
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ITEM 6. SELECTED FINANCIAL DATA .
The following table sets forth certain selected historical financial and operating data of the Company as of the dates and for the periods
indicated. The following selected financial data are qualified by reference to, and should be read in conjunction with, the consolidated financial
statements, related notes and other financial information, as well as in “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations” of this report. We operate on a 52- or 53-week fiscal year ending on the Thursday on or preceding December 31.
The data presented contains references to fiscal 2013, fiscal 2014, fiscal 2015, fiscal 2016, and fiscal 2017, which represent our fiscal years
ended December 26, 2013, December 25, 2014, December 29, 2016 and December 28, 2017 all of which were 52-week periods, and
December 31, 2015, which was a 53-week period.
(in thousands, except per share amounts)(1)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling & store operating expenses
General & administrative expenses
Pre-opening expenses
Litigation settlement
Executive severance(3)
Total operating expenses
Operating income
Interest expense
Loss on early extinguishment of debt
Income before income taxes
Provision for income taxes
Net income
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
(in thousands)
Consolidated balance sheet data:
Cash and cash equivalents
Net working capital
Total assets
Total debt(4)
Total stockholders’ equity
Fiscal Year Ended
12/28/2017 12/29/2016 12/31/2015(2) 12/25/2014 12/26/2013
$ 1,384,767 $ 1,050,759 $ 784,012 $ 584,588 $ 443,995
274,172
169,823
355,051
229,537
471,390
312,622
812,203
572,564
621,497
429,262
353,647
84,661
16,485
—
—
454,793
117,771
13,777
5,442
98,552
(4,236)
$ 102,788 $
271,876
64,025
13,732
10,500
—
360,133
69,129
12,803
1,813
54,513
11,474
43,039 $
202,637
49,917
7,380
—
296
260,230
52,392
9,386
—
43,006
16,199
26,807 $ 15,098 $
146,485
38,984
7,412
—
2,975
195,856
33,681
8,949
—
24,732
9,634
106,835
30,530
5,196
—
—
142,561
27,262
7,684
1,638
17,940
6,857
11,083
$
$
1.13 $
1.03 $
0.52 $
0.49 $
0.32 $
0.31 $
0.18 $
0.18 $
0.13
0.13
90,951
99,660
83,432
88,431
83,365
86,281
83,222
85,652
83,104
83,818
12/28/2017 12/29/2016 12/31/2015 12/25/2014 12/26/2013
As of
$
556 $
451 $
318 $
279 $
146,856
1,067,992
189,062
442,860
95,550
831,166
390,743
134,283
109,565
748,888
177,590
312,365
78,577
635,498
152,420
282,236
45
175
89,311
555,093
157,172
264,132
Table of Contents
(in thousands, except per share amounts)(1)
Consolidated statement of cash flows data:
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Cash dividends declared per share
Other financial data:
Comparable store sales growth
Number of stores open at the end of the period(5)
Adjusted EBITDA (in thousands)(6)
Adjusted EBITDA margin
12/28/2017 12/29/2016 12/31/2015(2) 12/25/2014 12/26/2013
Fiscal Year Ended
$ 109,207 $ 89,456 $
(102,253)
(6,849)
—
(74,648)
(14,675)
2.43
20,380 $ 43,594 $ (15,428)
(45,021)
(25,056)
24,680
40,487
—
0.31
(39,069)
(4,421)
—
Fiscal Year Ended
12/28/2017 12/29/2016 12/31/2015(2) 12/25/2014 12/26/2013
22.1 %
39
36,537
8.2 %
72,868 $ 51,208 $
8.8 %
$ 158,781 $ 108,398 $
10.3 %
13.5 %
58
19.4 %
70
15.8 %
48
16.6 %
84
11.5 %
9.3 %
(1) All of the earnings per share data, share numbers, share prices, and exercise prices have been adjusted on a retroactive basis to reflect
the 321.820-for-one stock split effected on April 24, 2017.
(2) The 53
rd
week in fiscal 2015 represented $11.9 million in net sales, an estimated $2.1 million in operating income and an estimated
$2.2 million in adjusted EBITDA. When presenting comparable store sales for fiscal 2015 and fiscal 2016, we have excluded the last
week of fiscal 2015.
(3) Represents costs incurred in connection with separation agreements with former officers.
(4) Total debt consists of the current and long-term portions of our Credit Facilities, as well as debt discount and debt issuance costs.
(5) Represents the number of our warehouse-format stores and our one small-format standalone design center.
(6) EBITDA and Adjusted EBITDA (which are shown in the reconciliations below) have been presented in this filing as supplemental
measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as net
income before interest, loss on early extinguishment of debt, taxes, depreciation and amortization. We define Adjusted EBITDA as net
income before interest, loss on early extinguishment of debt, taxes, depreciation and amortization, adjusted to eliminate the impact of
certain items that we do not consider indicative of our core operating performance. Reconciliations of these measures to the equivalent
measures under GAAP are set forth in the table below.
EBITDA and Adjusted EBITDA are key metrics used by management and our Board to assess our financial performance and
enterprise value. We believe that EBITDA and Adjusted EBITDA are useful measures, as they eliminate certain expenses that are not
indicative of our core operating performance and facilitate a comparison of our core operating performance on a consistent basis from
period to period. We also use Adjusted EBITDA as a basis to determine covenant compliance with respect to our Credit Facilities, to
supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, and
to compare our performance against that of other peer companies using similar measures. EBITDA and Adjusted EBITDA are also
used by analysts, investors and other interested parties as performance measures to evaluate companies in our industry.
EBITDA and Adjusted EBITDA are non-GAAP measures of our financial performance and should not be considered as alternatives to
net income as a measure of financial performance or any other performance measure derived in accordance with GAAP and they
should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally,
EBITDA and Adjusted EBITDA are not intended to be measures of liquidity or free cash flow for management's discretionary use. In
addition, these non-GAAP measures exclude certain non-recurring and other charges. Each of these non-GAAP measures has its
limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our results as reported
under GAAP. In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the
same as or similar to some of the items eliminated in the adjustments made to determine EBITDA and Adjusted EBITDA, such as
stock compensation expense, loss on asset disposal, executive recruiting/relocation, and other adjustments. Our presentation of
EBITDA and Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments.
Definitions and calculations of
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EBITDA and Adjusted EBITDA differ among companies in the retail industry, and therefore EBITDA and Adjusted EBITDA
disclosed by us may not be comparable to the metrics disclosed by other companies.
The reconciliations of net income to EBITDA and Adjusted EBITDA for the periods noted below are set forth in the table as follows:
(in thousands)
Net income
Depreciation and amortization(a)
Interest expense
Loss on early extinguishment of debt(b)
Income tax expense (benefit)
EBITDA
Stock compensation expense(c)
Loss on asset disposal(d)
Executive severance(e)
Executive recruiting/relocation(f)
Litigation settlement(g)
Other(h)
Adjusted EBITDA
$ 102,788 $ 43,039 $
Fiscal Year Ended
12/28/2017 12/29/2016 12/31/2015(2) 12/25/2014 12/26/2013
11,083
6,362
7,684
1,638
6,857
33,624
1,869
656
—
54
—
334
36,537
26,807 $ 15,098 $
16,794
9,386
—
16,199
69,186
3,258
128
296
—
—
—
25,089
12,803
1,813
11,474
94,218
3,229
451
—
—
10,500
—
11,073
8,949
—
9,634
44,754
2,323
148
2,975
—
—
1,008
33,546
13,777
5,442
(4,236)
151,317
4,959
128
—
—
—
2,377
72,868 $ 51,208 $
$ 158,781 $ 108,398 $
(a) Net of amortization of tenant improvement allowances and excludes deferred financing amortization, which is included as a part
of interest expense in the table above.
(b) Loss recorded as a result of the prepayment of our Subordinated Notes in 2013, as well as the non-cash write-off of certain
deferred financing fees related to the refinancing of term and revolver borrowings in 2013 and 2016. For 2017, the loss related to
repaying a portion of our Term Loan Facility with our net proceeds from the IPO.
(c) Non-cash charges related to stock-based compensation programs, which vary from period to period depending on timing of
awards and forfeitures.
(d) For fiscal 2014, fiscal 2015, fiscal 2016, and fiscal 2017, the losses related primarily to assets retired in connection with
significant store remodels. For fiscal 2013, the loss was primarily related to the write-off of certain software previously acquired.
(e) Represents one-time costs incurred in connection with separation agreements with former officers.
(f) Represents costs incurred to recruit and relocate members of executive management.
(g) Legal settlement related to classwide settlement to resolve a lawsuit.
(h) Other adjustments include amounts management does not consider indicative of our core operating performance. Amounts for
fiscal 2017 relate to costs in connection with the IPO, two secondary public offerings of our Class A common stock by certain of
our stockholders and expenses and losses, net of recoveries, from hurricanes Harvey and Irma. The Company did not sell any
shares in either secondary offering and did not receive any proceeds from the sales of shares by the selling stockholders. Amounts
for fiscal 2014 relate to costs in connection with the IPO.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .
You should read the following discussion and analysis of our financial condition and results of operations together with “Selected
Financial Data” and our consolidated financial statements and the related notes thereto and other financial information included elsewhere in
this filing. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed in “Item 1A Risk
Factors.” See the cautionary note regarding forward-looking statements set forth at the beginning of Part I of this Annual Report.
Overview
Founded in 2000, Floor & Decor is a high‑growth, differentiated, multi‑channel specialty retailer of hard surface flooring and related
accessories with 83 warehouse‑format stores across 21 states as of December 28, 2017. We believe that we offer the industry’s broadest
assortment of tile, wood, laminate and natural stone flooring along with decorative and installation accessories at everyday low prices. We
appeal to a variety of customers, including our Pro, DIY and BIY customers. Our warehouse‑format stores, which average approximately
73,000 square feet, carry on average approximately 3,600 flooring and decorative and installation accessory SKUs, 1.3 million square feet of
flooring products and $2.5 million of inventory at cost. We believe that our inspiring design centers and creative and informative visual
merchandising also greatly enhance our customers’ renovation experience. In addition to our stores, our website FloorandDecor.com showcases
our products.
We believe our strong financial results are a reflection of a growing domestic hard surface flooring market, a unique approach to
selling hard surface flooring and our consistent and disciplined culture of innovation and reinvestment, together creating a differentiated
business model in the hard surface flooring category. In fiscal 2017 we saw our highest sales, net income and adjusted EBITDA in our history.
In addition, we experienced our ninth year of double digit comparable store sales growth, averaging 15.4% and for the past three years
averaging 16.5%.
Year Ended
Comparable stores sales
Number of warehouse-format stores
Net sales (in thousands)
Net income (in thousands)
Adjusted EBITDA (in thousands)
12/28/2017 12/29/2016
19.4 %
69
$ 1,050,759
43,039
$
$ 108,398
16.6 %
83
$ 1,384,767
$ 102,788
$ 158,781
$
$
$
12/31/2015
13.5 %
57
784,012
26,807
72,868
CAGR
N/A
20.7 %
32.9 %
95.8 %
47.6 %
During fiscal 2017, we continued to make long‑term key strategic investments, including:
·
·
·
·
·
·
·
opening 14 new warehouse-format stores ending with 83 warehouse-format stores;
focusing on innovative new products and localized assortments, supported by inspirational in-store and online visual
merchandising solutions;
augmenting the management team with new hires in store operations, store training, Pro and Commercial sales, e-commerce,
supply chain, merchandising, real estate, information technology and inventory management;
investing in our connected customer and Pro customer personnel and technology;
increasing proprietary credit offerings;
adding more resources dedicated to serving our Pro customers;
investing capital to continue enhancing the in-store shopping experience for our customers; and
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·
increasing and expanding marketing campaigns to articulate our unique features and benefits in the hard surface flooring market.
Fiscal 2018 – A Look At The Upcoming Year
We believe that our compelling business model, plus the projected growth of the large and highly fragmented $11.5 billion hard
surface flooring market (in manufacturers’ dollars, an estimated $20 billion after the retail markup), provides us with an opportunity to
significantly expand our store base in the U.S. from 83 warehouse format stores as of December 28, 2017 to approximately 400 stores
nationwide within the next 15 years based on our internal research with respect to housing density, demographic data, competitor concentration
and other variables in both new and existing markets. Over the next several years, we plan to grow our store base by approximately 20% per
year. In addition to opening new stores, our focus will be on executing our core strategies as well as continuing to make investments that we
believe will support our long-term growth, as outlined in “Item 1. Business - Our Growth Strategy”. Due to the expected growth in the macro-
economy and the strength of our core business, we intend to use the benefits from tax reform to fund our current investment strategies, which
we believe will help improve our competitive advantages and achieve our planned net income growth for 2018. Our ability to open profitable
new stores depends on many factors, including the successful selection of new markets and store locations, our ability to negotiate leases on
acceptable terms and our ability to attract highly qualified managers and staff. For further information see “Risk Factors—Risks Related to Our
Business.”
Key Performance Indicators
We consider a variety of performance and financial measures in assessing the performance of our business. The key measures we use
to determine how our business is performing are comparable store sales, the number of new store openings, gross profit and gross margin,
operating income and EBITDA and Adjusted EBITDA.
Comparable Store Sales
Our comparable store sales growth is a significant driver of our net sales, profitability, cash flow and overall business results. We
believe that comparable store sales growth is generated by continued focus on providing a dynamic and expanding product assortment in
addition to other merchandising initiatives, quality of customer service, enhancing sales and marketing strategies, improving visual
merchandising and overall aesthetic appeal of our stores and our website, effectively serving our Pro customers, continued investment in store
staff and infrastructure, growing our proprietary credit offering, and further integrating connected customer strategies and other key information
technology enhancements.
Comparable store sales refer to period‑over‑period comparisons of our net sales among the comparable store base, which has
historically been when customers obtained possession of their product. Starting in 2018, when the new revenue recognition standard is adopted,
our comparable store sales will refer to period-over-period comparisons of our net sales based on when the customer obtains control of their
product, which is typically at the time of sale and may be slightly different than our historically reported net sales due to timing of when final
delivery of the product has occurred. A store is included in the comparable store sales calculation on the first day of the thirteenth full
fiscal month following a store’s opening, which is when we believe comparability has been achieved. Since our e‑commerce sales are fulfilled
by individual stores, they are included in comparable store sales only to the extent the fulfilling store meets the above mentioned store criteria.
Changes in our comparable store sales between two periods are based on net sales for stores that were in operation during both of the two
periods. Any change in square footage of an existing comparable store, including remodels and relocations, does not eliminate that store from
inclusion in the calculation of comparable store sales. Stores that are closed temporarily and relocated within their primary trade areas are
included in same store sales. Additionally, any stores that were closed during the current or prior fiscal year are excluded from the definition of
comparable stores.
Our fiscal 2015 year, which ended December 31, 2015, included a 53rd week. When presenting comparable store sales for fiscal 2015,
we have excluded the last week of fiscal 2015.
Definitions and calculations of comparable store sales differ among companies in the retail industry, and therefore comparable store
metrics disclosed by us may not be comparable to the metrics disclosed by other companies.
Comparable store sales allow us to evaluate how our retail stores are performing by measuring the change in period‑over‑period net
sales. Various factors affect comparable store sales, including:
·
national and regional economic conditions;
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·
·
·
·
·
·
·
·
·
the retail sales environment and other retail trends;
the home improvement spending environment;
the hard surface flooring industry trends;
the impact of competition;
changes in our product mix;
changes in staffing at our stores;
cannibalization resulting from the opening of new stores in existing markets;
changes in pricing;
changes in advertising and other operating costs; and
· weather conditions.
Number of New Stores
The number and timing of new store openings, and the costs and fixed lease obligations associated therewith, have had, and are
expected to continue to have, a significant impact on our results of operations. The number of new stores reflects the number of stores opened
during a particular reporting period. Before we open new stores, we incur pre‑opening expenses, which are defined below. While net sales at
new stores are generally lower than net sales at our stores that have been open for more than one year, our new stores have historically been
profitable in their first year. Generally, our newer stores have also averaged higher comparable store sales growth than our total store average.
Gross Profit and Gross Margin
Our gross profit is variable in nature and generally follows changes in net sales. Our gross profit and gross margin can also be
impacted by changes in our prices, our merchandising assortment, shrink, damage, selling of discontinued products, the cost to transport our
products from the manufacturer to our stores and our distribution center costs. With respect to our merchandising assortment, certain of our
products tend to generate somewhat higher margins than other products within the same product categories or among different product
categories. We have experienced modest inflation increases in certain of our product categories, but historically have been able to source from a
different manufacturer or pass increases onto our consumers with modest impact on our gross margin. Our gross profit and gross margin, which
reflect our net sales and our cost of sales and any changes to the components thereof, allow us to evaluate our profitability and overall business
results.
Gross profit is calculated as net sales less cost of sales. Gross profit as a percentage of net sales is referred to as gross margin. Cost of
sales consists of merchandise costs, as well as freight costs to transport inventory to our distribution centers and stores, and duty and other costs
that are incurred to distribute the merchandise to our stores. Cost of sales also includes shrinkage, damage product disposals, distribution,
warehousing costs, sourcing and compliance costs. We receive cash consideration from certain vendors related to vendor allowances and
volume rebates, which is recorded as a reduction of costs of sales as the inventory is sold or as a reduction of the carrying value of inventory
while the inventory is still on hand. Costs associated with arranging and paying for freight to deliver products to customers is included in cost of
sales. The components of our cost of sales may not be comparable to the components of cost of sales, or similar measures, of other retailers. As
a result, data in this filing regarding our gross profit and gross margin may not be comparable to similar data made available by other retailers.
Operating Income, EBITDA, Adjusted EBITDA
Operating income, EBITDA and Adjusted EBITDA are key metrics used by management and our Board to assess our financial
performance and enterprise value. We believe that operating income, EBITDA and Adjusted EBITDA are useful measures, as they eliminate
certain expenses that are not indicative of our core operating performance and facilitate a comparison of our core operating performance on a
consistent basis from period to period. We also use Adjusted EBITDA as a basis to determine covenant compliance with respect to our Credit
Facilities, to supplement GAAP measures of performance to evaluate the effectiveness of our
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business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures.
Operating income, EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties as performance
measures to evaluate companies in our industry.
EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in
accordance with, GAAP. We define EBITDA as net income before interest, 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.
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.
Other Key Financial Definitions
Net Sales
The retail sector in which we operate is cyclical, and consequently our sales are affected by general economic conditions. Purchases of
our products are sensitive to trends in the levels of consumer spending, which are affected by a number of factors such as consumer disposable
income, housing market conditions, unemployment trends, stock market performance, consumer debt levels and consumer credit availability,
interest rates and inflation, tax rates and overall consumer confidence in the economy.
Net sales reflect our sales of merchandise, less discounts and estimated returns and include our in-store sales and e-commerce sales. In
certain cases, we arrange and pay for freight to deliver products to customers and bill the customer for the estimated freight cost, which is also
included in net sales. Revenue is recognized when both collection or reasonable assurance of collection of payment and final delivery of the
product have occurred. For orders placed through our website and shipped to our customers, revenue is recognized at the time we estimate the
customer receives the merchandise, which is typically within a few days of shipment.
Selling and Store Operating Expenses
We expect that our selling and store operating expenses will increase in future periods with future growth. Selling and store operating
expenses consist primarily of store personnel wages, bonuses and benefits, rent and infrastructure expenses, supplies, depreciation and
amortization, training expenses and advertising costs. Credit card fees, insurance, personal property taxes and other miscellaneous operating
costs are also included.
The components of our selling and store operating expenses may not be comparable to the components of similar measures of other
retailers.
General and Administrative Expenses
We expect that our general and administrative expenses will increase in future periods with future growth and in part due to additional
legal, accounting, insurance and other expenses that we expect to incur as a result of being a public company, including compliance with the
Sarbanes-Oxley Act. General and administrative expenses include both fixed and variable components, and therefore, are not directly correlated
with net sales.
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General and administrative expenses consist primarily of costs incurred outside of our stores and include administrative personnel
wages in our store support center and regional functions, bonuses and benefits, supplies, depreciation and amortization, and store support center
expenses. Insurance, legal expenses, information technology costs, consulting and other miscellaneous operating costs are also included.
The components of our general and administrative expenses may not be comparable to the components of similar measures of other
retailers.
Pre‑opening Expenses
We account for non-capital operating expenditures incurred prior to opening a new store or relocating an existing store as "pre-
opening" expenses in our consolidated statements of income. Our pre-opening expenses begin, on average, three to six months in advance of a
store opening or relocating due to, among other things, the amount of time it takes to prepare a store for its grand opening. Pre-opening
expenses primarily include the following: rent, advertising, training, staff recruiting, utilities, personnel, and equipment rental. A store is
considered to be relocated if it is closed temporarily and re-opened within the same primary trade area.
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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:
Year Ended
12/28/2017
12/29/2016
(in thousands)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling & store operating expenses
General & administrative expenses
Pre-opening expenses
Litigation settlement
Total operating expenses
Operating income
Interest expense
Loss on early extinguishment of debt
Income before income taxes
Provision for income taxes
Net income
(in thousands)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling & store operating expenses
General & administrative expenses
Pre-opening expenses
Litigation settlement
Executive severance
Total operating expenses
Operating income
Interest expense
Loss on early extinguishment of debt
Income before income taxes
Provision for income taxes
Net income
$
Actual
1,384,767
812,203
572,564
% of Sales
100.0 % $
58.7
41.3
Actual
1,050,759
621,497
429,262
353,647
84,661
16,485
—
454,793
117,771
13,777
5,442
98,552
(4,236)
102,788
25.5
6.1
1.2
—
32.8
8.5
1.0
0.4
7.1
(0.3)
7.4 % $
271,876
64,025
13,732
10,500
360,133
69,129
12,803
1,813
54,513
11,474
43,039
% of Sales
%
Increase/(Decrease)
100.0 %
59.1
40.9
25.9
6.1
1.3
1.0
34.3
6.6
1.2
0.2
5.2
1.1
4.1 %
31.8 %
30.7
33.4
30.1
32.2
20.0
(100.0)
26.3
70.4
7.6
200.2
80.8
(136.9)
138.8 %
$
$
$
Year Ended
12/29/2016
12/31/2015
Actual
1,050,759
621,497
429,262
271,876
64,025
13,732
10,500
—
360,133
69,129
12,803
1,813
54,513
11,474
43,039
% of Sales
Actual
% of Sales
100.0 % $
59.1
40.9
25.9
6.1
1.3
1.0
—
34.3
6.6
1.2
0.2
5.2
1.1
4.1 % $
784,012
471,390
312,622
202,637
49,917
7,380
—
296
260,230
52,392
9,386
—
43,006
16,199
26,807
100.0 %
60.1
39.9
25.8
6.5
0.9
—
—
33.2
6.7
1.2
—
5.5
2.1
3.4 %
%
Increase/(Decrease)
34.0 %
31.8
37.3
34.2
28.3
86.1
100.0
(100.0)
38.4
31.9
36.4
100.0
26.8
(29.2)
60.6 %
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Comparable stores sales
Comparable average ticket
Comparable customer transactions
Number of warehouse-format stores
Adjusted EBITDA (in thousands)
Adjusted EBITDA margin
Net Sales
$
12/28/2017
Year Ended
12/29/2016
12/31/2015
16.6 %
1.7 %
14.8 %
83
158,781
19.4 %
3.6 %
14.7 %
69
$ 108,398
$
10.3 %
11.5 %
13.5 %
1.4 %
11.7 %
57
72,868
9.3 %
Net sales during fiscal 2017 increased $334.0 million, or 31.8%, compared to fiscal 2016. All of our product categories experienced
comparable store sales increases during the period, driven by increases in laminate/luxury vinyl plank and decorative accessories that were
above our average for fiscal 2017. Our comparable store sales increased 16.6%, or $173.1 million, while our non‑comparable store sales
contributed $160.9 million. The increase in comparable store sales was largely driven by a 14.8% increase in comparable customer transactions
and to a lesser extent a 1.7% increase in comparable average ticket growth. Comparable customer transactions and average ticket are measured
at the time of sale, which may be slightly different than our reported sales due to timing of when final delivery of the product has occurred. We
believe the increase in net sales, customer transactions and average ticket are due to the execution of our key strategic investments and an
improved U.S. flooring market. As described in the "Overview" section above, we believe our enhanced Pro, merchandising, connected
customer, marketing and visual merchandising strategies, along with new innovative products led to our sales growth. In addition, comparable
stores sales benefited by approximately 200 basis points from the continued recovery in the areas impacted by Hurricane Harvey. Non-
comparable store sales were driven by the opening of 14 new stores during fiscal 2017.
Net sales during fiscal 2016 increased $266.7 million, or 34.0%, compared to fiscal 2015. All of our product categories experienced
comparable store sales increases during the period, driven by increases in laminate/luxury vinyl plank, decorative accessories and tile that were
above our Company average for fiscal 2016. Our comparable store sales increased 19.4%, or $149.1 million, while our non-comparable store
sales contributed $117.6 million. The increase in comparable store sales was driven primarily by an increase in comparable customer
transactions of 14.7% and to a lesser extent by comparable average ticket growth of 3.6%. Comparable customer transactions and average ticket
are measured at the time of sale, which may be slightly different than our reported sales due to timing of when final delivery of the product has
occurred. We believe the increase in net sales, customer transactions and average ticket are due to the execution of our key strategic investments
and an improved U.S. flooring market. As described in the "Overview" section above, we have hired key personnel in all departments,
implemented connected customer strategies, including an improved website, and made key process and technology investments in
merchandising and supply chain leading to better in-stock selection and higher quality products. We have invested in value added strategies
targeting Pro customers, including dedicated sales teams. Non-comparable store sales were driven by the opening of 12 new stores during fiscal
2016. The 53rd week in fiscal 2015 added approximately $11.9 million in net sales.
Gross Profit and Gross Margin
Gross profit for fiscal 2017 increased $143.3 million, or 33.4%, compared to fiscal 2016. This increase in gross profit was primarily
the result of increased sales and to a lesser extent higher product margins. Gross margin for fiscal 2017 increased approximately 40 basis points
to 41.3% from 40.9% in fiscal 2016. This increase in gross margin was primarily attributable to higher product margin of approximately 75
basis points and approximately 10 basis points due to lower inventory shrinkage and damage, partially offset by approximately 30 basis points
of higher distribution center costs due to expanding approximately 2.4x to 2.9 million square feet.
Gross profit for fiscal 2016 increased $116.6 million, or 37.3%, compared to fiscal 2015. This increase in gross profit was primarily
the result of increased sales volume. Gross margin for fiscal 2016 increased approximately 100 basis points compared to fiscal 2015. This
increase was primarily driven by approximately 120 basis points of product margin improvement resulting from increased sales of higher
quality products that carry a higher gross margin and lower freight costs, slightly offset by approximately 10 basis points of higher supply chain
and global sourcing and compliance costs as well as approximately 10 basis points due to higher inventory damage and shrinkage.
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Selling and Store Operating Expenses
Selling and store operating expenses in fiscal 2017 increased by $81.8 million, or 30.1% from fiscal 2016, due primarily to the
addition of 14 new stores in fiscal 2017, and to a lesser extent increased personnel and occupancy expenses at our mature stores to support a
16.6% same store sales increase. As a percentage of net sales, our selling and store operating expenses decreased approximately 40 basis points
to 25.5%. Comparable store selling and store operating expenses as a percentage of comparable store sales decreased by approximately 140
basis points, as we leveraged occupancy and personnel expenses on higher net sales.
Selling and store operating expenses increased $69.2 million, or 34.2%, due primarily to the addition of 12 new stores during fiscal
2016, and increased expenses in our comparable stores, which drove an increase in comparable store sales of 19.4%. As a percentage of net
sales, our selling and store operating expenses increased approximately 10 basis points to 25.9%. Our comparable store selling and store
operating expenses decreased by approximately 130 basis points as a percentage of comparable store sales as we leveraged occupancy,
personnel and advertising expenses on higher net sales. Our new stores have lower net sales and higher store operating expenses as a percentage
of net sales than do our mature stores.
General and Administrative Expenses
General and administrative expenses, which are typically expenses incurred outside of our stores, increased $20.6 million in fiscal
2017, or 32.2% from fiscal 2016, due to our continued investments in personnel for our regional and store support functions in support of our
store growth and higher legal and consulting costs as a result of indirect costs associated with our IPO and Secondary Offerings. Our general
and administrative expenses as a percentage of net sales remained flat year over year.
General and administrative expenses, which are typically expenses incurred outside of our stores, increased $14.1 million in fiscal
2016, or 28.3% from fiscal 2015, due to investments we made in personnel for our regional and store support functions to support our store
growth, higher incentive compensation accruals and higher consulting costs. Our general and administrative expenses as a percentage of net
sales decreased by approximately 40 basis points primarily due to leveraging our expenses over increasing net sales.
Pre-Opening Expenses
Pre‑opening expenses in fiscal 2017 increased $2.8 million, or 20.0% from fiscal 2016. The increase is primarily due to a greater
number of new stores opened or planned to be opened for which pre-opening expenses were incurred, as well as higher average occupancy costs
due to targeted locations being in higher cost metropolitan locations during fiscal 2017 compared to fiscal 2016. During fiscal 2017, we opened
14 stores, as well as one relocation, and incurred costs for four additional stores planned to open in 2018, as compared to opening 12 stores, and
incurring costs for three additional stores planned to open as well as one relocation in 2017 during fiscal 2016.
Pre-opening expenses in fiscal 2016 increased $6.4 million, or 86.1% from fiscal 2015. The increase is primarily due to a greater
number of new stores opened or planned to be opened for which pre-opening expenses were incurred and to a lesser extent higher average
occupancy and advertising costs per store during fiscal 2016 compared to fiscal 2015. During fiscal 2016, we opened 12 stores and incurred
costs for three additional stores planned to open as well as one relocation in 2017 compared to opening ten stores and incurring costs for two
additional stores that opened in 2016 during fiscal 2015.
Interest Expense
Interest expense in fiscal 2017 increased $1.0 million, or 7.6% compared to fiscal 2016. The increase in interest expense was primarily
due to our average total debt increasing to $261.5 million in fiscal 2017 compared to $225.4 million in fiscal 2016. The increase in average total
debt was due to paying a special dividend of $202.5 million, making related cash payments of $22.5 million in respect of certain options to
purchase our common stock and refinancing our debt in the fiscal fourth quarter of 2016, partially offset by paying down approximately $192.0
million of our debt with our net IPO proceeds during the fiscal second quarter of 2017. The increase in interest expense was partially offset by a
lower effective interest rate of 5.3% for fiscal 2017 from 5.7% for fiscal 2016.
Interest expense for fiscal 2016 increased $3.4 million compared to fiscal 2015. The increase in interest expense was entirely due to
our average total debt increasing $64.4 million to $225.4 million for fiscal 2016 compared to $161.0 million in fiscal 2015. The effective
interest rate was 5.7% in fiscal 2016 compared to 5.8% in fiscal 2015.
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Taxes
The provision for income taxes in fiscal 2017 decreased $15.7 million, or 136.9% from fiscal 2016. The effective tax rate was (4.3)%
compared to 21.0% for fiscal 2017 compared to fiscal 2016, respectively. The decrease in the effective tax rate was primarily due to the
combination of the excess tax benefit related to stock options exercised and the tax benefit related to adjusting our deferred tax rate to our
anticipated future rate due to new tax reform legislation enacted in December 2017.
The provision for income taxes in fiscal 2016 decreased $4.7 million, or 29.2% from fiscal 2015. The decrease in the provision for
income taxes for fiscal 2016 compared to fiscal 2015 is attributable to the decrease in the effective tax rate, partially offset by an increase in
income before income taxes. The decrease in the fiscal 2016 effective tax rate was due to an $8.5 million state and federal tax benefit related to
a dividend equivalent payment to certain option holders.
Seasonality
Historically, our business has had very little seasonality. Our specialty hard surface flooring and decorative home product offering
makes us less susceptible to holiday shopping seasonal patterns compared to other retailers. However, we generally conduct a clearance event
during our third fiscal quarter followed by a smaller clearance event towards the end of the year. The timing of these clearance events is driven
by operational considerations rather than customer demand and could change from year to year.
Liquidity and Capital Resources
Liquidity is provided primarily by our cash flows from operations and our ABL Facility. During fiscal 2017, we generated $109.2
million in cash from operating activities. As of December 28, 2017, we had $146.7 million in unrestricted liquidity, consisting of $0.6 million in
cash and cash equivalents and $146.1 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 our Credit Facilities for at least the next 12 months.
Merchandise inventory is our most significant working capital asset and is considered “in-transit” or “available for sale”, based on
whether we have physically received the products at an individual store location or in one of our four distribution centers. In-transit inventory
generally varies due to contractual terms, country of origin, transit times, international holidays, weather patterns and other factors, but for the
last two years, approximately 15% of our inventory was in-transit, while over 80% was available for sale in our stores or at one of our four
distribution centers.
We measure realizability of our inventory by monitoring sales, gross margin, inventory aging, weeks of supply or inventory turns as
well as by reviewing SKUs that have been determined by our merchandising team to be discontinued. Based on our analysis of these factors, we
believe our inventory is realizable.
Twice a year, we conduct a clearance event with the goal of selling through discontinued inventory, followed by donations of the aged
discontinued inventory that we are unable to sell. We generally conduct a larger clearance event during our third fiscal quarter followed by a
smaller clearance event towards the end of the fiscal year. We define aged discontinued inventory as inventory in discontinued status for more
than 12 months that we intend to donate. As of December 28, 2017 we had less than $0.1 million of aged discontinued inventory.
Total capital expenditures in fiscal 2018 are planned to be between approximately $140 million to $150 million and will be funded
primarily by cash generated from operations and borrowings under the ABL Facility. We intend to make the following capital expenditures in
fiscal 2018:
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· Open 17 stores and start construction on stores opening in early 2019 using approximately $89 million to $93 million of cash;
·
·
Invest in existing store remodeling projects and our distribution centers using approximately $28 million to $32 million of
cash; and
Invest in information technology infrastructure, e-commerce and other store support center initiatives using approximately
$23 million to $25 million of cash.
During the first quarter of fiscal 2018, we are relocating all the existing inventory from our currently leased distribution center near
Miami, Florida to the newly leased distribution center near Savannah, Georgia and expect to incur related costs of less than $1 million.
Cash Flow Analysis
A summary of our operating, investing and financing activities are shown in the following table:
(in thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Increase in cash and cash equivalents
Net Cash Provided By Operating Activities
12/28/2017
Fiscal Year Ended
12/29/2016
12/31/2015
$
$
109,207
(102,253)
(6,849)
105
$
$
89,456
(74,648)
(14,675)
133
$
$
20,380
(45,021)
24,680
39
Cash from operating activities consists primarily of net income adjusted for non‑cash items, including depreciation and amortization,
write-off of deferred issuance costs on extinguishment of debt, stock‑based compensation, deferred taxes and the effects of changes in operating
assets and liabilities.
Net cash provided by operating activities was $109.2 million for fiscal 2017 and $89.5 million for fiscal 2016. The change in net cash
provided by operating activities 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 increased working capital to support future sales and new store openings. At the end
of 2017, we increased our inventory to prepare for our Savannah and Miami area distribution centers’ relocations, and to improve our in-stock
inventory in anticipation of factory closures for Chinese New Year.
Net cash provided by operating activities was $89.5 million for fiscal 2016 and $20.4 million for fiscal 2015. The change in net cash
provided by operating activities was primarily the result of an increase in net income and improved working capital management with better
inventory management in anticipation of factory closures for Chinese New Year in fiscal 2016 as well as timing of tax payments.
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 were $102.3 million compared to $74.6 million for fiscal 2017 and fiscal 2016, respectively. The growth is
primarily related to opening more new stores in fiscal 2017 as well as capital expenditures for stores opening in early fiscal 2018 compared to
the same period in 2016. For fiscal 2017, approximately 50% of capital expenditures was for new stores, 35% was for existing store remodel
and distribution center investments, and the remainder was for information technology and e‑commerce investments.
Capital expenditures were $74.6 million compared to $45.0 million for fiscal 2016 and fiscal 2015, respectively. The growth is
primarily related to opening more new stores in fiscal 2016 as well as capital expenditures for stores opening in early fiscal 2017 compared to
the same period in fiscal 2015. For fiscal 2016, approximately 46% of capital expenditures was for new stores, 33% was
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for existing store remodel and distribution center investments, and the remainder was for information technology and e-commerce investments.
Net Cash (Used In) Provided by Financing Activities
Financing activities consist primarily of borrowings and related repayments under our credit agreements, as well as dividends paid to
common stockholders.
Net cash used in financing activities was $6.8 million for fiscal 2017 and $14.7 million for fiscal 2016. The net cash used in financing
activities for fiscal 2017 was driven by a net paydown on the ABL Facility of $9.0 million and proceeds received from stock options exercised
of $8.9 million. We also received aggregate net proceeds of approximately $192.3 million in connection with the IPO, after deducting
underwriting discounts and commissions and other offering expenses, and used the net proceeds of approximately $192.0 million to repay a
portion of the amounts outstanding under the Term Loan Facility. Additionally, we utilized $2.0 million of cash from operations to repay a
portion of the amounts outstanding under the Term Loan Facility.
Net cash used in financing activities was $14.7 million for fiscal 2016 and net cash provided by financing activities was $24.7 million
for fiscal 2015. The net cash used in financing activities for fiscal 2016 was primarily due to (i) the Special Dividend, (ii) the Option Payments,
(iii) $20.3 million to repay and terminate the prior senior secured term loan facility with GCI Capital Markets LLC, (iv) $78.0 million to repay
and terminate the prior term loan facility and (v) $42.9 million to pay down a portion of the ABL Facility, mostly offset by borrowing
$350.0 million on the Term Loan Facility.
Our Credit Facilities
We have two arrangements governing our material outstanding indebtedness: our ABL Facility and our Term Loan Facility.
The indebtedness outstanding under our Credit Facilities is secured by substantially all of our assets. In particular, the indebtedness
outstanding under (i) the ABL Facility is secured by a first‑priority security interest in all of our current assets, including inventory and
accounts receivable, and a second‑priority security interest in the collateral that secures the Term Loan Facility on a first‑priority basis, and
(ii) the Term Loan Facility is secured by a first‑priority security interest in all of our fixed assets and intellectual property, and a second‑
priority interest in the collateral that secures the ABL Facility on a first‑priority basis.
The Term Loan Facility requires quarterly repayments of approximately $875 thousand, which commenced on December 31, 2016,
with the remainder due and payable at maturity.
The Term Loan Facility has no financial maintenance covenants. As of December 28, 2017, we were in compliance in all material
respects with the covenants of the Credit Facilities and no Event of Default (as defined in the credit agreements governing our Credit Facilities)
had occurred.
As of December 28, 2017, the Term Loan Facility bore interest based on one of the following rates, at our option:
i) Adjusted LIBOR Rate plus a margin of 2.75%
ii) Base Rate plus a margin of 1.75%. Base Rate defined as the greater of the following:
(a) the base rate in effect on such day,
(b) the federal funds rate plus 0.50%,
(c) the adjusted LIBOR rate for the interest period of one month plus a margin of 1.00%.
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On March 31, 2017, the Company entered into a repricing amendment to the Term Loan Facility. This amendment reduced the
margins applicable to the term loan from 3.25% per annum (subject to a leverage-based step-down to 2.75%) to 2.50% per annum (subject to a
leverage-based step-down to 2.00%) in the case of base rate loans, and from 4.25% per annum (subject to a leverage-based step-down to 3.75%)
to 3.50% per annum (subject to a leverage-based step-down to 3.00%) in the case of LIBOR loans (subject to a 1.00% floor on LIBOR loans),
provided that each of the leverage-based step-downs was contingent upon the consummation of the IPO.
In October 2017, we met the requirements to lower our interest rate on the Term Loan Facility by an additional 50 basis points
(pursuant to the leverage-based step-down) to 4.00% for LIBOR loans, based on a margin of 3.00% and a 1.00% floor.
On November 22, 2017, we entered into an amendment to the Term Loan Facility. The aggregate principal amount of loans
outstanding under the Term Loan Facility on the date of the November 2017 amendment was approximately $152.5 million. This November
2017 amendment reduced the margins applicable to the Term Loan Facility (x) in the case of base rate loans, from 2.00% per annum (due to
operation of a leverage-based step-down from 2.50%) to 1.75% per annum (subject to a ratings based step-down to 1.50%), and (y) in the case
of LIBOR loans, from 3.00% per annum (due to operation of a leverage-based step-down from 3.50%) to 2.75% per annum (subject to a ratings
based step-down to 2.50%) (subject to a 1.00% floor on LIBOR loans). The amount and terms of the Term Loan Facility were otherwise
unchanged.
The ABL Facility initially accrued interest ranging from LIBOR + 1.50% to LIBOR + 2.00%, and as of December 28, 2017 was subject to a
pricing grid based on average daily availability under such facility ranging from LIBOR + 1.25% to 1.50%. The ABL Facility allows us to
borrow up to $200 million, subject to the borrowing base requirements, set forth in the credit agreement governing the ABL Facility. As of
December 28, 2017, we had the ability to access $146.1 million of unused borrowings under the ABL Facility without violating any covenants
thereunder and had $12.8 million in outstanding letters of credit.
The credit agreements governing our Credit Facilities contain customary restrictive covenants that, among other things and with
certain exceptions, limit our ability to (i) incur additional indebtedness and liens in connection therewith; (ii) pay dividends and make certain
other restricted payments; (iii) effect mergers or consolidations; (iv) enter into transactions with affiliates; (v) sell or dispose of property or
assets; and (vi) engage in unrelated lines of business. In addition, these credit agreements subject us to certain reporting obligations and require
that we satisfy certain financial covenants, including, among other things, a requirement that if borrowings under the ABL Facility exceed 90%
of availability, we will maintain a certain fixed charge coverage ratio (defined as consolidated EBITDA less non‑financed capital expenditures
and income taxes paid to consolidated fixed charges, in each case as more fully defined in the credit agreement governing the ABL Facility).
For more information on our Credit Facilities, see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources.”
Contractual Obligations
We enter into long‑term obligations and commitments in the normal course of business, primarily debt obligations and non‑cancelable
operating leases. As of December 28, 2017, our contractual cash obligations over the next several periods were as follows:
Payments due by period
(in thousands)
Term loans
Revolving loan
Estimated interest(1)
Operating leases(2)
Letters of credit
Purchase obligations(3)
Total
Total
$ 152,500 $
12/27/2018 12/26/2019 12/31/2020 12/30/2021 12/29/2022 Thereafter
3,500 $ 135,000
4,375 $
—
—
4,896
7,868
389,344
83,048
—
—
—
—
$ 1,286,960 $ 349,760 $ 97,245 $ 95,291 $ 130,350 $ 85,074 $ 529,240
3,500 $
—
8,171
79,872
12,846
245,371
2,625 $
41,000
7,684
79,041
—
—
3,500 $
—
8,009
85,279
—
457
41,000
44,150
790,636
12,846
245,828
—
7,522
74,052
—
—
(1)
For purposes of this table, interest has been estimated based on interest rates in effect for our indebtedness as of December 28, 2017,
and estimated borrowing levels in the future. Actual borrowing levels and interest costs may differ.
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(2)
(3)
We enter into operating leases during the normal course of business. Most lease arrangements provide us with the option to renew the
leases at defined terms. The future operating lease obligations would change if we were to exercise these options, or if we were to
enter into additional operating leases.
Purchase obligations include all legally binding contracts such as firm commitments for inventory purchases, container commitments,
software and license commitments and legally binding service contracts. Purchase orders that are not binding agreements are excluded
from the table above.
Off‑‑Balance Sheet Arrangements
For fiscal 2017, except for operating leases entered into in the normal course of business, 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
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires
management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and
related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates
its accounting policies, estimates and judgments on an ongoing basis. Management bases its estimates and judgments on historical experience
and various other factors that are believed to be reasonable under the circumstances. Actual results may differ under different assumptions and
conditions, and such differences could be material to the consolidated financial statements.
Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following
involve a higher degree of judgment or complexity and are the most significant to reporting our results of operations and financial position, and
are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the
preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between
actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. More
information on all of our significant account policies can be found in Note 1— Summary of Significant Accounting Policies to our audited
consolidated financial statements included elsewhere in this filing.
Revenue Recognition
Retail sales at our stores are recorded at the point of sale and are net of sales discounts and estimated returns. We recognize revenue
and the related cost of sales when both collection or reasonable assurance of collection of payment and final delivery of the product have
occurred. For orders placed through our website and shipped to our customers, we recognize revenue and the related cost of sales at the time we
estimate the customer receives the merchandise, which is typically within a few days of shipment. In certain cases, we arrange and pay for
freight to deliver products to our customers, and bill the customer for the estimated freight cost, which is included in net sales. Sales taxes
collected are not recognized as revenue as these amounts are ultimately remitted to the appropriate taxing authorities.
We reserve for future returns of previously sold merchandise based on historical experience and various other assumptions that we
believe to be reasonable. This reserve reduces sales and cost of sales, accordingly. Merchandise exchanges of similar product and price are not
considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve.
Gift Cards and Merchandise Credits
We sell gift cards to our customers in our stores and through our website and issue merchandise credits in our stores. We account for
the programs by recognizing a liability at the time the gift card is sold or the merchandise credit is issued. The liability is relieved and revenue is
recognized upon redemption. Net sales related to the estimated breakage are included in net sales in the consolidated statement of income. We
have an agreement with an unrelated third-party who is the issuer of our gift cards and also assumes the liability for unredeemed gift cards. We
are not subject to claims under unclaimed property statutes, as the agreement effectively transfers the ownership of such unredeemed gift cards
and the related future escheatment liability, if any, to the third-party.
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Accordingly, gift card breakage income of $757 thousand, $627 thousand, and $511 thousand was recognized in fiscal 2017, fiscal 2016, and
fiscal 2015, respectively, for such unredeemed gift cards.
Inventory Valuation and Shrinkage
Inventories consist of merchandise held for sale and are stated at the lower of cost and net realizable value. When evidence exists that
the net realizable value of inventory is lower than its cost, the difference is recorded in cost of sales in the consolidated statement of income as a
loss in the period in which it occurs. We determine inventory costs using the weighted average cost method. We capitalize transportation, duties
and other costs to get product to our retail locations. We provide provisions for losses related to shrinkage and other amounts that are otherwise
not expected to be fully recoverable. These provisions are calculated based on historical shrinkage, selling price, margin and current business
trends. The estimates have calculations that require management to make assumptions based on the current rate of sales, age, salability and
profitability of inventory, historical percentages that can be affected by changes in our merchandising mix, customer preferences, rates of sell
through and changes in actual shrinkage trends. We do not believe there is a reasonable likelihood that there will be a material change in the
assumptions we use to calculate our inventory provisions. However, if actual results are not consistent with our estimates and assumptions, we
may be exposed to losses or gains that could be material.
Derivative Financial Instruments
We use derivative financial instruments to maintain a portion of our long-term debt obligations at a targeted balance of fixed and
variable interest rate debt to manage our risk associated with fluctuations in interest rates. In November 2016, we entered into two interest rate
caps. In 2013, we entered into two interest rate swap contracts. We recognize derivative contracts at fair value on our Consolidated Balance
Sheets. The fair value is calculated utilizing Level 2 inputs. Unrealized changes in the fair value of hedged derivative instruments are recorded
in Accumulated other comprehensive (loss) income within the equity section of our Consolidated Balance Sheets.
The effective portion of the gain or loss on the derivatives is reported as a component of Comprehensive income within the
Consolidated Statements of Comprehensive Income and reclassified into earnings in the same period in which the hedged transaction affects
earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the
hedged item. To the extent changes in fair values of the instruments are not highly effective, the ineffective portion of the hedge is immediately
recognized in earnings.
We perform an assessment of the effectiveness of our derivative contracts designated as hedges, including assessing the possibility of
counterparty default. If we determine that a derivative is no longer expected to be highly effective, we discontinue hedge accounting
prospectively and recognize subsequent changes in the fair value of the hedge in earnings. We believe our derivative contracts, which continue
to be designated as cash flow hedges, and which consist of interest rate cap contracts, will continue to be highly effective in offsetting changes
in cash flow attributable to floating interest rate risk. In the current year, one of our interest rate caps was de-designated as a result of a debt
amendment entered into. More information can be found in Note 7. Derivatives
and
Risk
Management
to our audited consolidated financial
statements included elsewhere in this filing.
Income Taxes
We account for income taxes under the liability method in accordance with ASC 740 , 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 bases
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, we evaluate whether it is more likely than not that our deferred
tax assets will be realized in the future and conclude whether a valuation allowance must be established.
We include any estimated interest and penalties on tax‑related matters in income taxes payable and income tax expense. Current
guidance clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes
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threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under the
relevant authoritative literature, the impact of an uncertain income tax position on the income tax return must be recognized at the largest
amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be
recognized if it has less than a fifty percent likelihood of being sustained.
Goodwill and Other Indefinite‑‑Lived Intangible Assets
We have identified each of the six geographic regions (the East, Northeast, Southeast, Central, West and Midwest) of our operating
segment as separate components and have determined that these components have similar economic characteristics and therefore should be
aggregated into one reporting unit. We reached this conclusion based on the level of similarity of a number of quantitative and qualitative
factors, including net sales, gross profit margin, the manner in which we operate our business, the similarity of hard surface flooring products,
operating procedures, marketing initiatives, store layout, employees, customers and methods of distribution, as well as the level of shared
resources between the components.
Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Company does not amortize goodwill
and other intangible assets with indefinite lives resulting from business combinations but, in accordance with the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, Intangibles–Goodwill and Other , does assess the recoverability
of goodwill annually in the fourth quarter of each fiscal year, or more often if indicators warrant, by determining whether the fair value of each
reporting unit supports its carrying value. In accordance with ASC 350, identifiable intangible assets with finite lives are amortized over their
estimated useful lives. Each year the Company may assess qualitative factors to determine whether it is more likely than not that the fair value
of the single reporting unit is less than its carrying amount as a basis for determining whether it is necessary to complete quantitative
impairment assessments.
The Company completed a qualitative assessment in fiscal 2017. Based on such goodwill impairment analysis performed qualitatively
as of October 27, 2017, the Company determined that the fair value of its reporting unit is in excess of the carrying value. No events or changes
in circumstances have occurred since the date of the Company’s most recent impairment test that would more likely than not reduce the fair
value of the reporting unit below its carrying amount.
The Company annually (or more frequently if there are indicators of impairment) evaluates whether its indefinite-lived asset continues
to have an indefinite life or has impaired carrying values due to changes in the asset or its related risks. The impairment review is performed by
comparing the carrying value of the indefinite-lived intangible asset to its estimated fair value. If the recorded carrying value of the indefinite-
lived asset exceeds its estimated fair value, an impairment charge is recorded to write the asset down to its estimated fair value.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use in
our goodwill or other tests of impairment. Based on the results of our annual impairment tests for goodwill and other indefinite‑lived intangible
assets, no impairment was recorded. Based on this assessment, we believe that our goodwill and other indefinite‑lived intangible assets are not
at risk of impairment. However, if actual results are not consistent with our estimates or assumptions or there are significant changes in any of
these estimates, projections or assumptions, it could have a material effect on the fair value of these assets in future measurement periods and
result in an impairment, which could materially affect our results of operations.
Long‑‑Lived Assets
Long-lived assets, such as fixed assets and intangible assets with finite lives, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that may indicate impairment include, but are
not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall or an
adverse action by a regulator. If the sum of the estimated undiscounted future cash flows related to the asset is less than the asset's carrying
value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by the estimated discounted
cash flow analysis of the asset.
Since there is typically no active market for our definite‑lived intangible asset, we estimate fair values based on expected future cash
flows at the time they are identified. We estimate future cash flows based on store‑level historical results, current trends and operating and cash
flow projections. We amortize the asset with a finite life over its estimated useful life on a straight‑line basis.
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This amortization methodology best matches the pattern of economic benefit that is expected from the definite‑lived intangible asset. We
evaluate the useful life of our intangible asset on an annual basis.
Stock‑‑Based Compensation
We account for employee stock options in accordance with ASC 718, Compensation
–
Stock
Compensation
. Given the absence of a
public trading market for our common stock prior to the IPO, the fair value of the common stock underlying our share-based awards was
determined by our compensation committee, with input from management as well as valuation reports prepared by an unrelated nationally
recognized third-party valuation specialist, in each case using the income and market valuation approach. We believe that our compensation
committee has the relevant experience and expertise to determine the fair value of our common stock. In accordance with the American Institute
of Certified Public Accountants Accounting and Valuation Guide: Valuation of Privately-Held-Company Equity Securities Issued as
Compensation, our compensation committee exercised reasonable judgment and considered numerous objective and subjective factors to
determine the best estimate of the fair value of our common stock including:
·
·
·
·
·
·
·
·
·
·
valuations of our common stock performed by an unrelated nationally recognized third-party valuation specialist;
our historical and projected operating and financial results, including capital expenditures;
current business conditions and performance, including dispositions and discontinued operations;
present value of estimated future cash flows;
the market performance and financial results of comparable publicly-traded companies;
amounts of indebtedness;
industry or company-specific considerations;
likelihood of achieving a liquidity event, such as an initial public offering or a sale of the company;
lack of marketability of our common stock; and
the U.S. and global capital market conditions.
These estimates are not necessary to determine the fair value of new awards now that the underlying shares are trading publicly.
Following our IPO, the fair value of our common stock is determined based on the quoted market price of our common stock.
Stock options are granted with exercise prices equal to or greater than the estimated fair market value on the date of grant as authorized
by our Board or compensation committee. Options granted have vesting provisions ranging from three to five years. Stock option grants are
generally subject to forfeiture if employment terminates prior to vesting. We have selected the Black-Scholes option pricing model for
estimating the grant date fair value of stock option awards granted. We have considered the retirement and forfeiture provisions of the options
and utilized our historical experience to estimate the expected life of the options. We base the risk-free interest rate on the yield of a zero
coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant. We estimate the dividend yield
to be zero as we do not intend to pay dividends in the future. We estimate the volatility of the share price of our common stock by considering
the historical volatility of the stock of similar public entities. In determining the appropriateness of the public entities included in the volatility
assumption we considered a number of factors, including the entity's life cycle stage, growth profile, size, financial leverage and products
offered. Stock-based compensation cost is measured at the grant date based on the value of the award, net of estimated forfeitures, and is
recognized as expense over the requisite service period based on the number of years for which the requisite service is expected to be rendered.
Self‑‑Insurance Reserves
We are partially self‑insured for workers’ compensation and general liability claims less than certain dollar amounts and maintain
insurance coverage with individual and aggregate limits. We also have a basket aggregate limit to protect against losses exceeding $7.0 million
(subject to adjustment and certain exclusions) for workers’ compensation claims and general liability claims. Our liabilities represent estimates
of the ultimate cost for claims incurred, including loss adjusting expenses, as of the balance sheet date. The estimated liabilities are not
discounted and are established based upon analysis of historical data, actuarial estimates, regulatory requirements, an estimate of claims
incurred but not yet reported and other relevant factors. The liabilities are reviewed by
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management utilizing third‑party actuarial studies on a regular basis to ensure that they are appropriate. While we believe these estimates are
reasonable based on the information currently available, if actual trends, including the severity or frequency of claims, medical cost inflation or
fluctuations in premiums, differ from our estimates, our results of operations could be impacted.
Recently Issued Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill
and
Other
(Topic
350):
Simplifying
the
Test
for
Goodwill
Impairment."
This standard simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the
goodwill impairment test. ASU No. 2017-04 is effective for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years, with early adoption permitted after January 1, 2017. The amendments in this update should be applied using a prospective
approach. The adoption of ASU No. 2017-04 did not have a material impact on our Consolidated Financial Statements.
In October 2016, the FASB issued ASU No. 2016-16, "Income
Taxes
(Topic
740):
Intra-Entity
Transfers
of
Assets
Other
Than
Inventory."
This standard update requires an entity to recognize the income tax consequences of intra-entity transfers of assets other than
inventory when the transfer occurs. ASU No. 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years, with early adoption permitted. The amendments in this update should be applied using a modified retrospective
approach. The adoption of ASU No. 2016-16 is not expected to have a material impact on our Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement
of
Cash
Flows
(Topic
230):
Classification
of
Certain
Cash
Receipts
and
Cash
Payments."
The standard update addresses eight specific cash flow issues with the objective of reducing the existing diversity in
practice. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with
early adoption permitted. The amendments in this update should be applied using a retrospective approach. The adoption of ASU No. 2016-15
is not expected to have a material impact on our Consolidated Statements of Cash Flows.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation—Stock
Compensation
(Topic
718):
Improvements
to
Employees
Share-Based
Payment
Accounting."
The update is intended to simplify several areas of accounting for share-based compensation arrangements,
including the income tax impact, classification on the statement of cash flows and forfeitures. The amendments in this update are effective for
fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. Depending on the
amendment, methods used to apply the requirements of the update include modified retrospective, retrospective, and prospective. We elected to
early adopt this standard during the second quarter of 2016. The net cumulative effect of this change was recognized as a $148 thousand
reduction to retained earnings and the recognition of $238 thousand of additional paid-in capital. The adoption of this standard resulted in a
modified retrospective adjustment on our Consolidated Balance Sheet as of January 1, 2016, the beginning of the annual period that includes the
interim period of adoption.
In February 2016, the FASB issued ASU No. 2016-02, "Leases
(Topic
842)."
ASU No. 2016-02 requires that lessees recognize lease
assets and lease liabilities for all leases with greater than 12 month terms on the balance sheet. The guidance also requires disclosures about the
amount, timing and uncertainty of cash flows arising from leases. This new guidance is effective for fiscal years beginning after December 15,
2018, and interim periods within those years, with early adoption permitted. The standard must be applied using a modified retrospective
approach. We are currently evaluating the impact that ASU No. 2016-02 will have on our Consolidated Financial Statements. When
implemented, we believe the new standard will have a material impact on its Consolidated Balance Sheet. We are currently evaluating the effect
that implementation of this standard will have on our consolidated statements of income, cash flows and related disclosures.
In July 2015, the FASB issued ASU No. 2015-11, "Inventory
(Topic
330):
Simplifying
the
Measurement
of
Inventory."
ASU No. 2015-
11 provides new guidance for entities using first-in, first-out or average cost to simplify the subsequent measurement of inventory, which
proposes that inventory should be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance eliminates
the option to subsequently measure inventory at replacement cost or net realizable value less an approximately normal profit margin. This new
guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those years. The amendments in this update
should be applied prospectively. The adoption of ASU No. 2015-11 did not have a material impact on our Consolidated Financial Statements.
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In May 2014, the FASB issued ASU No. 2014-09, "Revenue
from
Contracts
with
Customers
(Topic
606)."
ASU No. 2014-09 provides
new guidance related to the core principle that an entity recognizes revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services provided.
In July 2015, the FASB issued ASU No. 2015-14, "Revenue
from
Contracts
with
Customers
(Topic
606):
Deferral
of
the
Effective
Date,"
to
defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date, and permitted early
adoption of the standard, but not before the original effective date of December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08
"Revenue
from
Contracts
with
Customers
(Topic
606):
Principal
versus
Agent
Considerations
(Reporting
Revenue
Gross
versus
Net),"
which
clarifies the guidance in ASU No. 2014-09 and has the same effective date as the original standard. In April 2016, the FASB issued ASU No.
2016-10, "Revenue
from
Contracts
with
Customers
(Topic
606):
Identifying
Performance
Obligations
and
Licensing."
In May 2016, the FASB
issued ASU No. 2016-12, "Revenue
from
Contracts
with
Customers
(Topic
606):
Narrow-Scope
Improvements
and
Practical
Expedients.”
The
2016 updates to the revenue recognition guidance relate to principal versus agent assessments, identifying performance obligations, the
accounting for licenses, and certain narrow scope improvements and practical expedients. This new standard will impact the timing and
amounts of revenue recognized for (i) gift card breakage income and (ii) certain transactions for which we allow customers to store their
merchandise at our retail stores for final delivery at a later date. Gift card breakage income is currently recognized based upon historical
redemption patterns. ASU No. 2014-09 requires gift card breakage income to be recognized in proportion to the pattern of rights exercised by
the customer when we expect to be entitled to breakage. The more significant change of this standard relates to the timing of revenue
recognized for certain transactions for which we allow customers to store their merchandise at our retail stores for final delivery at a later date.
Currently, we recognize revenue when both collection or reasonable assurance of collection of payment and final delivery of the product have
occurred. Under the new guidance, we will recognize revenue at the time the customer obtains control of the inventory. We are adopting this
standard in the first quarter of fiscal 2018 and will use the modified retrospective approach. The cumulative adjustment upon adoption will
primarily result in a reduction of deferred revenue and related inventories and an increase to retained earnings. We do not believe the adoption
of the standard will have a material impact to our Consolidated Financial Statements going forward.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .
Foreign Currency Risk
We contract for production with third parties primarily in Asia and Europe. While substantially all of these contracts are stated in U.S.
dollars, there can be no assurance that the cost for the future production of our products will not be affected by exchange rate fluctuations
between the U.S. dollar and the local currencies of these contractors. Due to the number of currencies involved, we cannot quantify the potential
impact of future currency fluctuations on net income (loss) in future years. To date, such exchange fluctuations have not had a material impact
on our financial condition or results of operations.
Interest Rate Risk
Our operating results are subject to risk from interest rate fluctuations on our Credit Facilities, which carry variable interest rates. As of
December 28, 2017, our outstanding variable rate debt aggregated approximately $193.5 million. Based on December 28, 2017 debt levels, an
increase or decrease of 1% in the effective interest rate would cause an increase or decrease in interest cost of approximately $1.9 million over
the next twelve months. To lessen our exposure to changes in interest rate risk, we entered into two separate $102.5 million interest rate cap
agreements in November 2016 with Bank of America and Wells Fargo that cap our LIBOR at 2.0% beginning in December 2016.
Impact of Inflation/Deflation
We do not believe that inflation has had a material impact on our net sales or operating results for the past three fiscal years. However,
substantial increases in costs, including the price of raw materials, labor, energy and other inputs used in the production of our merchandise,
could have a significant impact on our business and the industry in the future. Additionally, while deflation could positively impact our
merchandise costs, it could have an adverse effect on our average unit retail price, resulting in lower net sales and operating results.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 28, 2017 and December 29, 2016
Consolidated Statements of Income for the fiscal years ended December 28, 2017, December 29, 2016 and December 31, 2015
Consolidated Statements of Comprehensive Income for the fiscal years ended December 28, 2017, December 29, 2016 and December
31, 2015
Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 28, 2017, December 29, 2016 and December 31,
2015
Consolidated Statements of Cash Flows for the fiscal years ended December 28, 2017, December 29, 2016 and December 31, 2015
Notes to Consolidated Financial Statements
68
69
70
71
72
73
74
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Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Floor & Decor Holdings, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Floor & Decor Holdings, Inc. and Subsidiaries (the Company)
as of December 28, 2017 and December 29, 2016, the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period ended December 28, 2017, and the related notes
(collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company at December 28, 2017 and December 29, 2016, and the
results of its operations and its cash flows for each of the three years in the period ended December 28, 2017, in conformity with
U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for
the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2011.
Atlanta, Georgia
March 5, 2018
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Assets
Current assets:
Cash and cash equivalents
Income taxes receivable
Receivables, net
Inventories, net
Prepaid expenses and other current assets
Total current assets
Fixed assets, net
Intangible assets, net
Goodwill
Other assets
Total long-term assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Current portion of term loans
Trade accounts payable
Accrued expenses
Income taxes payable
Deferred revenue
Total current liabilities
Term loans
Revolving line of credit
Deferred rent
Deferred income tax liabilities, net
Tenant improvement allowances
Other liabilities
Total long-term liabilities
Total liabilities
Commitments and contingencies (Note 8)
Stockholders’ equity
Capital stock:
Floor & Decor Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
As of
December 28,
2017
As of
December 29,
2016
$
$
$
$
$
$
$
556
12,472
54,041
427,950
8,193
503,212
220,952
109,362
227,447
7,019
564,780
1,067,992
3,500
258,730
74,547
—
22,523
359,300
144,562
41,000
25,570
27,218
26,779
703
265,832
625,132
—
96
—
—
323,419
(205)
119,550
442,860
1,067,992
$
451
—
34,533
293,702
7,529
336,215
150,471
109,394
227,447
7,639
494,951
831,166
3,500
158,466
61,505
5,787
14,456
243,714
337,243
50,000
16,750
28,265
20,319
592
453,169
696,883
—
77
—
6
117,270
176
16,754
134,283
831,166
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at
December 28, 2017 and December 29, 2016
Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 95,509,179 shares issued
and outstanding at December 28, 2017 and 76,847,116 issued and outstanding at December 29,
2016
Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and
outstanding at December 28, 2017 and 395,742 shares issued and outstanding at December 29,
2016
Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and
outstanding at December 28, 2017 and 6,275,489 shares issued and outstanding at December 29,
2016
Additional paid-in capital
Accumulated other comprehensive income (loss), net
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
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Table of Contents
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling and store operating
General and administrative
Pre-opening
Litigation settlement
Executive severance
Total operating expenses
Operating income
Interest expense
Loss on early extinguishment of debt
Income before income taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
Floor & Decor Holdings, Inc. and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
Year Ended Year Ended Year Ended
December 28, December 29, December 31,
2017
2016
$ 1,384,767 $ 1,050,759 $
812,203
572,564
621,497
429,262
353,647
84,661
16,485
—
—
454,793
117,771
13,777
5,442
98,552
(4,236)
102,788 $
1.13 $
1.03 $
271,876
64,025
13,732
10,500
—
360,133
69,129
12,803
1,813
54,513
11,474
43,039 $
0.52 $
0.49 $
$
$
$
2015(1)
784,012
471,390
312,622
202,637
49,917
7,380
—
296
260,230
52,392
9,386
—
43,006
16,199
26,807
0.32
0.31
(1)
Year Ended December 31, 2015 includes 53 weeks. Years ended December 28, 2017 and December 29, 2016 include
52 weeks.
See accompanying notes to consolidated financial statements.
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Table of Contents
Floor & Decor Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In Thousands)
Net income
Other comprehensive (loss) income—change in fair value of hedge instruments, net
$
2017
102,788 $
2016
43,039 $
2015(1)
26,807
of tax
Total comprehensive income
(381)
102,407 $
276
43,315 $
43
26,850
$
Year Ended Year Ended Year Ended
December 28, December 29, December 31,
(1)
Year Ended December 31, 2015 includes 53 weeks. Years ended December 28, 2017 and December 29, 2016 include
52 weeks.
See accompanying notes to consolidated financial statements.
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Table of Contents
Floor & Decor Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In Thousands)
Common Stock Common Stock Common Stock Additional
Accumulated
Other
Total
Preferred Stock
Shares Amount Shares Amount Shares Amount Shares Amount Capital
Class A
Class C
Class B
Paid-in Comprehensive Retained Stockholders’
Income (Loss) Earnings
Equity
Balance,
December 25,
2014
Stock based
compensation
expense
Exercise of
stock options
Tax deficiency
from
employee
stock options
Other
comprehensive
gain, net of tax
Net income
Balance,
December 31,
2015
Stock based
compensation
expense
Exercise of
stock options
Other
comprehensive
gain, net of tax
Dividend
declared
Cumulative
effect from
adoption of
ASU
No. 2016-09
Net income
Balance,
December 29,
2016
Stock based
compensation
expense
Conversion of
Class B
Common
Stock
Conversion of
Class C
Common
Stock
Exercise of
stock options
IPO Proceeds
Issuance of
restricted
stock awards
Other
comprehensive
loss, net of tax
— $ — 76,847 $
77 211 $ — 6,275 $
6 $ 261,009 $
(143) $ 21,287 $ 282,236
—
—
—
—
34
—
—
—
3,258
—
—
3,258
—
—
—
—
5
—
—
—
40
—
—
40
—
—
—
—
—
—
—
—
(19)
—
—
(19)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
43
—
— 26,807
43
26,807
—
— 76,847
77 251
— 6,275
6 264,288
(100) 48,094
312,365
—
—
—
—
—
—
—
—
3,182
—
47
3,229
—
—
—
— 145
—
—
—
284
—
—
284
—
—
—
—
—
—
—
—
—
276
—
276
—
—
—
—
—
—
—
— (150,722)
— (74,278)
(225,000)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
238
—
—
(148)
— 43,039
90
43,039
—
— 76,847
77 396
— 6,275
6 117,270
176 16,754
134,283
—
—
—
—
—
—
—
—
4,951
—
8
4,959
—
—
396
— (396)
—
—
—
—
—
—
—
—
— 6,275
6
—
— (6,275)
(6)
—
—
—
—
—
—
— 1,828
— 10,147
2
10
—
—
—
—
—
—
8,872
—
— 192,326
—
—
—
—
8,874
192,336
—
—
15
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(381)
—
(381)
Net Income
—
—
—
—
—
—
—
—
—
— 102,788
102,788
Balance,
December 28,
2017
— $ — 95,509 $
96
— $ —
— $ — $ 323,419 $
(205) $119,550 $ 442,860
See accompanying notes to consolidated financial statements.
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Table of Contents
Floor & Decor Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Loss on early extinguishment of debt
Loss on asset disposals
Amortization of tenant improvement allowances
Deferred income taxes
Stock based compensation expense
Changes in operating assets and liabilities:
Receivables, net
Inventories, net
Other assets
Trade accounts payable
Accrued expenses
Income taxes
Deferred revenue
Deferred rent
Tenant improvement allowances
Other
Net cash provided by operating activities
Investing activities
Purchases of fixed assets
Other
Net cash used in investing activities
Financing activities
Borrowings on revolving line of credit
Payments on revolving line of credit
Proceeds from term loans
Payments on term loans
Prepayment penalty on term loan extinguishment
Debt issuance costs
Cash dividends
Net proceeds from initial public offering
Proceeds from exercise of stock options
Net cash (used in) provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of the period
Cash and cash equivalents, end of the period
Supplemental disclosures of cash flow information
Cash paid for interest
Cash paid for income taxes
Fixed assets accrued at the end of the period
Fixed assets acquired as part of lease - paid for by lessor
Year Ended Year Ended Year Ended
December 28, December 29, December 31,
2017
2016
2015(1)
$
102,788
$
43,039
$
26,807
38,062
5,442
128
(3,311)
(557)
4,959
(19,508)
(134,248)
(1,591)
100,264
9,485
(18,259)
8,067
9,243
7,984
259
109,207
(102,253)
—
(102,253)
236,700
(245,700)
—
(197,500)
—
(1,559)
—
192,336
8,874
(6,849)
105
451
556
15,748
14,392
8,521
1,786
$
$
$
$
$
28,604
1,813
451
(2,561)
(5,536)
3,229
(10,793)
(21,133)
(4,817)
11,145
27,244
8,271
2,311
3,870
4,244
75
89,456
(74,648)
—
(74,648)
171,850
(214,750)
362,000
(98,334)
(179)
(10,546)
(225,000)
—
284
(14,675)
133
318
451
6,922
8,929
5,387
2,290
$
$
$
$
$
19,684
—
144
(2,197)
464
3,258
(7,997)
(70,988)
(2,520)
40,454
4,908
(4,805)
4,997
3,327
4,816
28
20,380
(45,037)
16
(45,021)
204,300
(177,900)
—
(1,667)
—
(93)
—
—
40
24,680
39
279
318
8,898
20,182
7,002
—
$
$
$
$
$
(1)
Year Ended December 31, 2015 includes 53 weeks. Years ended December 28, 2017 and December 29, 2016
include 52 weeks.
See accompanying notes to consolidated financial statements.
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Table of Contents
Floor & Decor Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 28, 2017
1. Summary of Significant Accounting Policies
Nature of Business
Floor & Decor Holdings, Inc. (f/k/a FDO 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 December 28, 2017, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D”),
operates 83 warehouse-format stores, which average 73,000 square feet, and one small-format standalone design center in 21 states, as well as
four 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 28, 2017 (“fiscal 2017”) and December 29, 2016 (“fiscal 2016”) include 52 weeks. Fiscal year ended December 31, 2015 (“fiscal
2015”) includes 53 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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
Certain prior year amounts have been reclassified in the consolidated financial statements to conform to the current year presentation. Unless
indicated otherwise, the information in this Annual Report has been adjusted to give effect to a 321.820-for-one stock split of the Company’s
outstanding common stock, which was approved by the Company's board of directors and shareholders on April 13, 2017 and effected on April
24, 2017.
Cash and Cash Equivalents
Cash consists of currency and demand deposits with banks.
Receivables
Receivables consist primarily of amounts due from credit card companies, receivables from vendors and tenant improvement
allowances owed by landlords. The Company typically collects its credit card receivables within three to five business days of the underlying
sale to the customer. The Company has agreements with a majority of its large merchandise vendors that allow for specified rebates based on
purchasing volume. Generally, these agreements are on an annual basis, and the Company collects the rebates subsequent to its fiscal year end.
Additionally, the Company has agreements with substantially all vendors that allow for the return of certain merchandise throughout the normal
course of business. When inventory is identified to return to a vendor, it is removed from inventory and recorded as a receivable on the
Consolidated Balance Sheet, and any variance between capitalized inventory cost associated with the return and the expected vendor
reimbursement is expensed in Cost of sales in the Consolidated Statement of Income when the inventory is identified to be returned to the
vendor. The Company reserves for estimated uncollected receivables based on historical trends, which historically have been immaterial. The
allowance for doubtful accounts as of December 28, 2017 and December 29, 2016, was $349 thousand and $188 thousand, respectively.
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Credit Program
Credit is offered to the Company's customers through a proprietary credit card underwritten by third-party financial institutions and at
no recourse to the Company.
Inventory Valuation and Shrinkage
Inventories consist of merchandise held for sale and are stated at the lower of cost and net realizable value. When evidence exists that
the net realizable value of inventory is lower than its cost, the difference is recorded in Cost of sales in the Consolidated Statement of Income as
a loss in the period in which it occurs. The Company determines inventory costs using the weighted average cost method. The Company
capitalizes transportation, duties and other costs to get product to its retail locations. The Company records reserves for estimated losses related
to shrinkage and other amounts that are otherwise not expected to be fully recoverable. These reserves are calculated based on historical
shrinkage, selling price, margin and current business trends. The estimates have calculations that require management to make assumptions
based on the current rate of sales, age, salability and profitability of inventory, historical percentages that can be affected by changes in the
Company's merchandising mix, customer preferences and changes in actual shrinkage trends. These reserves totaled $2,936 thousand and
$2,449 thousand as of December 28, 2017 and December 29, 2016, respectively.
Physical inventory counts and cycle counts are performed on a regular basis in each store and distribution center to ensure that
amounts reflected in the accompanying Consolidated Balance Sheets are properly stated. During the period between physical inventory counts
in our stores, the Company accrues for estimated losses related to shrinkage on a store-by-store basis. Shrinkage is the difference between the
recorded amount of inventory and the physical inventory. Shrinkage may occur due to theft or loss, among other things.
Fixed Assets
Fixed assets consist primarily of furniture, fixtures and equipment, leasehold improvements (including those that are reimbursed by
landlords as tenant improvement allowances), computer software and hardware and land. Fixed assets are stated at cost less accumulated
depreciation utilizing the straight-line method over the assets' estimated useful lives.
Leasehold improvements are amortized using the straight-line method over the shorter of (i) the original term of the lease, (ii) renewal
term of the lease if the renewal is reasonably expected or (iii) the useful life of the improvement. The Company's fixed assets are depreciated
using the following estimated useful lives:
Furniture, fixtures and equipment
Leasehold improvements
Computer software and hardware
Land
Useful Life
2 - 7 years
10 - 25 years
3 - 7 years
Indefinite
The cost and related accumulated depreciation of assets sold or otherwise disposed are removed from the accounts, and the related gain
or loss is reported in the Consolidated Statements of Income.
.
Capitalized Software Costs
The Company capitalizes certain costs related to the acquisition and development of software and amortizes these costs using the
straight-line method over the estimated useful life of the software. Certain development costs not meeting the criteria for capitalization are
expensed as incurred.
Goodwill and Other Indefinite‑‑Lived Intangible Assets
Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Company does not amortize goodwill
and other intangible assets with indefinite lives resulting from business combinations but, in accordance with the Financial Accounting
Standards Board ("FASB") Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill
and
Other
, does assess the recoverability
of goodwill annually in the fourth quarter of each fiscal year, or more often if indicators warrant, by
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determining whether the fair value of each reporting unit supports its carrying value. In accordance with ASC 350, identifiable intangible assets
with finite lives are amortized over their estimated useful lives. Each year the Company may assess qualitative factors to determine whether it is
more likely than not that the fair value of the single reporting unit is less than its carrying amount as a basis for determining whether it is
necessary to complete quantitative impairment assessments.
The Company completed a qualitative assessment in fiscal 2017. Based on such goodwill impairment analysis performed qualitatively
as of October 27, 2017, the Company determined that the fair value of its reporting unit is in excess of the carrying value. No events or changes
in circumstances have occurred since the date of the Company's most recent annual impairment test that would more likely than not reduce the
fair value of the reporting unit below its carrying amount.
The Company annually (or more frequently if there are indicators of impairment) evaluates whether its indefinite-lived asset continues
to have an indefinite life or have impaired carrying values due to changes in the asset or its related risks. The impairment review is performed
by comparing the carrying value of the indefinite-lived intangible asset to its estimated fair value. If the recorded carrying value of the
indefinite-lived asset exceeds its estimated fair value, an impairment charge is recorded to write the asset down to its estimated fair value.
The estimated lives of the Company’s intangible assets are as follows:
Trade names
Vendor relationships
Useful Life
Indefinite
10 years
The Company’s goodwill and other indefinite‑lived intangible assets impairment loss calculations contain uncertainties because they
require management to make significant judgments in estimating the fair value of the Company’s reporting unit and indefinite‑lived intangible
asset, including the projection of future cash flows, assumptions about which market participants are the most comparable, the selection of
discount rates and the weighting of the income and market approaches. These calculations contain uncertainties because they require
management to make assumptions such as estimating economic factors and the profitability of future business operations and, if necessary, the
fair value of the reporting unit’s assets and liabilities among others. Further, the Company’s ability to realize the future cash flows used in its
fair value calculations is affected by factors such as changes in economic conditions, changes in the Company’s operating performance and
changes in the Company’s business strategies. Significant changes in any of the assumptions involved in calculating these estimates could affect
the estimated fair value of the Company’s reporting unit and indefinite‑lived intangible assets and could result in impairment charges in a future
period.
Long‑‑Lived Assets
Long-lived assets, such as fixed assets and intangible assets with finite lives, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that may indicate impairment include, but are
not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall or an
adverse action by a regulator. If the sum of the estimated undiscounted future cash flows related to the asset is less than the asset's carrying
value, the Company recognizes a loss equal to the difference between the carrying value and the fair value, usually determined by the estimated
discounted cash flow analysis of the asset.
Since there is typically no active market for the Company's definite-lived intangible asset, the Company estimates fair value based on
expected future cash flows at the time they are identified. The Company estimates future cash flows based on store-level historical results,
current trends and operating and cash flow projections. The Company amortizes the asset with a finite life over its estimated useful life on a
straight-line basis. This amortization methodology best matches the pattern of economic benefit that is expected from the definite-lived
intangible asset. The Company evaluates the useful life of its intangible asset on an annual basis.
Tenant Improvement Allowances and Deferred Rent
The Company accounts for tenant improvement allowances and deferred rent as liabilities or assets on the balance sheet. Tenant
improvement allowances are amounts received from a lessor for improvements to leased properties and are amortized against rent expense over
the life of the respective leases. Fixed rents are recognized ratably over the initial non-cancellable lease term. Deferred rent represents
differences between the actual cash paid for rent and the amount of straight-line rent over the initial non-cancellable term.
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Self‑‑Insurance Reserves
The Company is partially self-insured for workers' compensation and general liability claims less than certain dollar amounts and
maintains insurance coverage with individual and aggregate limits. The Company also has a basket aggregate limit to protect against losses
exceeding $7.0 million (subject to adjustment and certain exclusions) for workers' compensation claims and general liability claims. The
Company's liabilities represent estimates of the ultimate cost for claims incurred, including loss adjusting expenses, as of the balance sheet date.
The estimated liabilities are not discounted and are established based upon analysis of historical data, actuarial estimates, regulatory
requirements, an estimate of claims incurred but not yet reported and other relevant factors. Management utilizes independent third-party
actuarial studies to help assess the liability on a regular basis.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
Asset Retirement Obligations
An asset retirement obligation (“ARO”) represents a legal obligation associated with the retirement of a tangible long-lived asset that
is incurred upon the acquisition, construction, development or normal operation of that long-lived asset. The Company’s AROs are primarily
associated with leasehold improvements that, at the end of a lease, the Company is contractually obligated to remove in order to comply with
certain lease agreements. The ARO is recorded in Other long-term liabilities on the Consolidated Balance Sheets and will be subsequently
adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying amount of the long-lived
asset and depreciated over its useful life.
Changes in (i) inflation rates and (ii) the estimated costs, timing and extent of future store closure activities each result in (a) a current
adjustment to the recorded liability and related asset and (b) a change in the liability and asset amounts to be recorded prospectively. Any
changes related to the assets are then recognized in accordance with our depreciation policy, which would generally result in depreciation
expense being recognized prospectively over the shorter of the remaining lease term or estimated useful life.
Fair Value Measurements—Debt
The Company estimates fair values in accordance with ASC 820, Fair
Value
Measurement
. ASC 820 provides a framework for
measuring fair value and expands disclosures required about fair value measurements. ASC 820 defines fair value as the price that would be
received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants. Additionally, ASC 820 defines levels within a hierarchy based upon observable and non-
observable inputs.
·
·
·
Level 1: Inputs that are quoted prices in active markets for identical assets or liabilities
Level 2: Inputs other than quoted prices in active markets for assets or liabilities that are either directly or indirectly observable
Level 3: Inputs that are non‑observable that reflect the reporting entity’s own assumptions
The fair values of certain of the Company's debt instruments have been determined by the Company utilizing Level 3 inputs, such as
available market information and appropriate valuation methodologies, including the rates for similar instruments and the discounted cash flows
methodology.
Derivative Financial Instruments
The Company uses derivative financial instruments to maintain a portion of its long-term debt obligations at a targeted balance of fixed
and variable interest rate debt to manage its risk associated with fluctuations in interest rates. In November 2016, the Company entered into two
interest rate caps. In 2013, the Company entered into two interest rate swap contracts. We recognize derivative contracts at fair value on our
Consolidated Balance Sheets. The fair value is calculated utilizing Level 2 inputs. Unrealized
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changes in the fair value of hedged derivative instruments are recorded in Accumulated other comprehensive (loss) income within the equity
section of our Consolidated Balance Sheets.
The effective portion of the gain or loss on the derivatives is reported as a component of Comprehensive income within the
Consolidated Statements of Comprehensive Income and reclassified into earnings in the same period in which the hedged transaction affects
earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the
hedged item. To the extent changes in fair values of the instruments are not highly effective, the ineffective portion of the hedge is immediately
recognized in earnings.
We perform an assessment of the effectiveness of our derivative contracts designated as hedges, including assessing the possibility of
counterparty default. If we determine that a derivative is no longer expected to be highly effective, we discontinue hedge accounting
prospectively and recognize subsequent changes in the fair value of the hedge in earnings. We believe our derivative contracts, which continue
to be designated as cash flow hedges, and which consist of interest rate cap contracts, will continue to be highly effective in offsetting changes
in cash flow attributable to floating interest rate risk. In the current year, one of our interest rate caps was de-designated as a result of a debt
amendment. See footnote 7. Derivatives
and
Risk
Management
for additional information.
.
Use of Estimates
The preparation of the financial statements requires management of the Company to make a number of estimates and assumptions
relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the period. Significant items subject to such estimates and assumptions
include the carrying amounts of fixed assets and intangibles, asset retirement obligations, allowances for accounts receivable and inventories,
reserves for workers' compensation and general liability claims incurred but not reported and deferred income tax assets and liabilities. Actual
results could differ from these estimates.
Revenue Recognition
Retail sales at the Company's stores are recorded at the point of sale and are net of sales discounts and estimated returns. In some
instances, the Company will allow customers to store their merchandise, generally up to 14 days. In this instance, the Company recognizes
revenue and the related cost of sales when both collection or reasonable assurance of collection of payment and final delivery of the product
have occurred. For orders placed through our website and shipped to our customers, we recognize revenue and the related cost of sales at the
time we estimate the customer receives the merchandise, which is typically within a few days of shipment. The Company arranges and pays for
freight to deliver products to customers, and bills the customer for the estimated freight cost, which is included in net sales. Sales taxes collected
are not recognized as revenue as these amounts are ultimately remitted to the appropriate taxing authorities.
Gift Cards and Merchandise Credits
We sell gift cards to our customers in our stores and through our website and issue merchandise credits in our stores. We account for
the programs by recognizing a liability at the time the gift card is sold or the merchandise credit is issued. The liability is relieved and revenue is
recognized when the cards are redeemed. We have an agreement with an unrelated third-party who is the issuer of the Company's gift cards and
also assumes the liability for unredeemed gift cards. The Company is not subject to claims under unclaimed property statutes, as the agreement
effectively transfers the ownership of such unredeemed gift cards and the related future escheatment liability, if any, to the third-party. Gift card
breakage is recognized based upon historical redemption patterns and represents the balance of gift cards for which the Company believes the
likelihood of redemption by the customer is remote. Accordingly, in fiscal 2017, fiscal 2016, and fiscal 2015 gift card breakage income of
$757 thousand, $627 thousand, and $511 thousand was recognized in net sales in the Consolidated Statements of Income, respectively, for such
unredeemed gift cards.
Sales Returns and Allowances
The Company accrues for estimated sales returns based on historical sales return results. The allowance for sales returns at
December 28, 2017 and December 29, 2016, was $7,189 thousand and $4,887 thousand, respectively.
Merchandise exchanges of similar product and price are not considered merchandise returns and, therefore, are excluded when
calculating the sales returns reserve.
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Cost of Sales
Cost of sales consists of merchandise costs as well as freight to transport inventory to our distribution centers and stores, and duty and
other costs that are incurred to distribute the merchandise to our stores. Cost of sales also includes shrinkage, damaged product disposals,
distribution, warehousing, sourcing and compliance cost and arranging and paying for freight to deliver products to customers. The Company
receives cash consideration from certain vendors related to vendor allowances and volume rebates, which is recorded as a reduction of costs of
sales when the inventory is sold or as a reduction of the carrying value of inventory if the inventory is still on hand.
Vendor Rebates and Allowances
Vendor allowances consist primarily of volume rebates that are earned as a result of attaining certain inventory purchase levels and
advertising allowances or incentives for the promotion of vendors' products. These vendor allowances are accrued, based on annual projections,
as earned.
Vendor allowances earned are initially recorded as a reduction to the carrying value of inventory and a subsequent reduction in cost of
sales when the related product is sold. Certain incentive allowances that are reimbursements of specific, incremental and identifiable costs
incurred to promote vendors' products are recorded as an offset against these promotional expenses.
Total Operating Expenses
Total operating expenses consist primarily of store and administrative personnel wages and benefits, infrastructure expenses, supplies,
fixed asset depreciation, store and corporate facility expenses, pre-opening costs, training and advertising costs. Credit card fees, insurance,
personal property taxes, legal expenses and other miscellaneous operating costs are also included.
Advertising
The Company expenses advertising costs as the advertising takes place. Advertising costs incurred during the years ended
December 28, 2017, December 29, 2016, and December 31, 2015, were $43,560 thousand, $33,497 thousand, and $24,478 thousand
respectively, and are included in Selling and store operating expenses and Pre‑opening expenses in the accompanying Consolidated Statements
of Income.
Pre‑‑Opening Expenses
The Company accounts for non-capital operating expenditures incurred prior to opening a new store as "pre-opening" expenses in its
Consolidated Statements of Income. The Company's pre-opening expenses begin on average three to six months in advance of a store opening
or relocating due to, among other things, the amount of time it takes to prepare a store for its grand opening. Pre-opening expenses primarily
include: advertising, rent, staff training, staff recruiting, utilities, personnel and equipment rental. A store is considered to be relocated if it is
closed temporarily and re-opened within the same primary trade area. Pre‑opening expenses for the years ended December 28, 2017,
December 29, 2016, and December 31, 2015, totaled $16,485 thousand, $13,732 thousand, and $7,380 thousand, respectively.
Loss on Early Extinguishment of Debt
On May 2, 2017, the Company completed its initial public offering (“IPO”), pursuant to which it sold an aggregate of 10,147,025
shares of Class A common stock, par value $0.001 per share. The Company received aggregate net proceeds of approximately $192.0 million
after deducting underwriting discounts and commissions and other offering expenses. The Company used net proceeds from the IPO of
approximately $192.0 million to repay a portion of the amounts outstanding under the Term Loan Facility, including accrued and unpaid
interest. The partial paydown resulted in a loss on extinguishment of debt in the amount of approximately $5.4 million related to unamortized
original issue discount and unamortized deferred debt issuance costs.
Stock‑‑Based Compensation
The Company accounts for employee stock options in accordance with ASC 718, Compensation
–
Stock
Compensation
. The
Company obtains independent third-party valuation studies to assist it with determining the grant date fair value of our stock price. Stock
options are granted with exercise prices equal to or greater than the estimated fair market value on the date of grant as
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Table of Contents
authorized by the board of directors or compensation committee. Options granted have vesting provisions ranging from three to five years.
Stock option grants are generally subject to forfeiture if employment terminates prior to vesting. The Company has selected the Black-Scholes
option pricing model for estimating the grant date fair value of stock option awards granted. The Company bases the risk-free interest rate on
the yield of a zero coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant. The
Company estimates the dividend yield to be zero as the Company does not intend to pay dividends in the future. The Company estimates the
volatility of the share price of its common stock by considering the historical volatility of the stock of similar public entities. The Company
considers a number of factors in determining the appropriateness of the public entities included in the volatility assumption, including the
entity's life cycle stage, growth profile, size, financial leverage and products offered. Stock-based compensation cost is measured at the grant
date based on the value of the award and is recognized as expense over the requisite service period based on the number of years for which the
requisite service is expected to be rendered. The Company elected to early adopt Accounting Standards Update (“ASU”) No. 2016-09
“Improvements
to
Employee
Share-Based
Payment
Accounting”
in 2016 and now recognizes forfeitures in earnings as they occur; prior to the
adoption, the Company had considered the retirement and forfeiture provisions of the options and utilized its historical experience to estimate
the expected life of the options.
Income Taxes
The Company accounts for income taxes under the liability method in accordance with ASC 740, Income
Taxes
, which requires the
recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement
carrying amounts and tax basis of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Changes in tax laws and
rates could affect recorded deferred tax assets and liabilities in the future. The effect on deferred tax assets and liabilities of a change in tax laws
or rates is recognized in the period that includes the enactment date of such a change.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which
the associated temporary differences became deductible. On a quarterly basis, the Company evaluates whether it is more likely than not that its
deferred tax assets will be realized in the future and concludes whether a valuation allowance must be established.
The Company includes any estimated interest and penalties on tax-related matters in income taxes payable and income tax expense.
The Company accounts for uncertain tax positions in accordance with ASC 740. ASC 740-10 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements using a two-step process for evaluating tax positions taken, or expected to be taken, on a
tax return. The Company may only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will
be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized
upon ultimate settlement. Uncertain tax positions require determinations and estimated liabilities to be made based on provisions of the tax law,
which may be subject to change or varying interpretation. The Company does not believe it has any material risks related to uncertain tax
positions.
Segment Information
The Company operates as a specialty retailer of hard surface flooring and related accessories through retail stores located in the United
States and through its website. The Company's chief operating decision maker is its Chief Executive Officer who reviews the Company's
consolidated financial information for purposes of allocating resources and evaluating the Company's financial performance. Accordingly, the
Company concluded it has one reportable segment.
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Table of Contents
The following table presents the net sales of each major product category for each of the last three fiscal years (in thousands):
Product Category
Tile
Decorative Accessories
Accessories (Installation Materials and Tools)
Laminate / Luxury Vinyl Plank
Wood
Natural Stone
Delivery and Other
Total
Recent Accounting Pronouncements
December 28, 2017
Fiscal Year Ended
December 29, 2016
Net Sales
% of
Net Sales
Net Sales
% of
Net Sales
December 31, 2015
% of
Net Sales Net Sales
$
419,745
257,684
217,427
208,238
167,152
104,670
9,851
$ 1,384,767
325,433
30 % $
188,371
19
165,330
16
131,447
15
142,751
12
90,866
8
6,561
—
100 % $ 1,050,759
31 % $ 244,902
138,442
18
124,162
16
77,586
12
116,999
14
78,294
9
—
3,627
100 % $ 784,012
31 %
18
16
10
15
10
—
100 %
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill
and
Other
(Topic
350):
Simplifying
the
Test
for
Goodwill
Impairment."
This standard simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the
goodwill impairment test. ASU No. 2017-04 is effective for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years, with early adoption permitted after January 1, 2017. The amendments in this update should be applied using a prospective
approach. The adoption of ASU No. 2017-04 did not have a material impact on the Company's Consolidated Financial Statements.
In October 2016, the FASB issued ASU No. 2016-16, "Income
Taxes
(Topic
740):
Intra-Entity
Transfers
of
Assets
Other
Than
Inventory."
This standard update requires an entity to recognize the income tax consequences of intra-entity transfers of assets other than
inventory when the transfer occurs. ASU No. 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years, with early adoption permitted. The amendments in this update should be applied using a modified retrospective
approach. The adoption of ASU No. 2016-16 is not expected to have a material impact on the Company's Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement
of
Cash
Flows
(Topic
230):
Classification
of
Certain
Cash
Receipts
and
Cash
Payments."
The standard update addresses eight specific cash flow issues with the objective of reducing the existing diversity in
practice. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with
early adoption permitted. The amendments in this update should be applied using a retrospective approach. The adoption of ASU No. 2016-15
is not expected to have a material impact on the Company's consolidated statements of cash flows.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation—Stock
Compensation
(Topic
718):
Improvements
to
Employees
Share-Based
Payment
Accounting."
The update is intended to simplify several areas of accounting for share-based compensation arrangements,
including the income tax impact, classification on the statement of cash flows and forfeitures. The amendments in this update are effective for
fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. Depending on the
amendment, methods used to apply the requirements of the update include modified retrospective, retrospective, and prospective. The Company
elected to early adopt this standard during the second quarter of 2016. The net cumulative effect of this change was recognized as a
$148 thousand reduction to retained earnings and the recognition of $238 thousand of additional paid-in capital. The adoption of this standard
resulted in a modified retrospective adjustment on the Company’s consolidated balance sheet as of January 1, 2016, the beginning of the annual
period that includes the interim period of adoption.
In February 2016, the FASB issued ASU No. 2016-02, "Leases
(Topic
842)."
ASU No. 2016-02 requires that lessees recognize lease
assets and lease liabilities for all leases with greater than 12 month terms on the balance sheet. The guidance also requires disclosures about the
amount, timing and uncertainty of cash flows arising from leases. This new guidance is effective for fiscal years beginning after December 15,
2018, and interim periods within those years, with early adoption permitted. The standard must be applied using a modified retrospective
approach. The Company is currently evaluating the impact that ASU No. 2016-02 will have on our Consolidated Financial Statements. When
implemented, the Company believes the new standard will have a material
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Table of Contents
impact on its consolidated balance sheet. The Company is currently evaluating the effect that implementation of this standard will have on the
Company's consolidated statements of income, cash flows and related disclosures.
In July 2015, the FASB issued ASU No. 2015-11, "Inventory
(Topic
330):
Simplifying
the
Measurement
of
Inventory."
ASU No. 2015-
11 provides new guidance for entities using first-in, first-out or average cost to simplify the subsequent measurement of inventory, which
proposes that inventory should be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance eliminates
the option to subsequently measure inventory at replacement cost or net realizable value less an approximately normal profit margin. This new
guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those years. The amendments in this update
should be applied prospectively. The adoption of ASU No. 2015-11 did not have a material impact on the Company's Consolidated Financial
Statements.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue
from
Contracts
with
Customers
(Topic
606)."
ASU No. 2014-09 provides
new guidance related to the core principle that an entity recognizes revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services provided.
In July 2015, the FASB issued ASU No. 2015-14, "Revenue
from
Contracts
with
Customers
(Topic
606):
Deferral
of
the
Effective
Date,"
to
defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date, and permitted early
adoption of the standard, but not before the original effective date of December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08
"Revenue
from
Contracts
with
Customers
(Topic
606):
Principal
versus
Agent
Considerations
(Reporting
Revenue
Gross
versus
Net),"
which
clarifies the guidance in ASU No. 2014-09 and has the same effective date as the original standard. In April 2016, the FASB issued ASU No.
2016-10, "Revenue
from
Contracts
with
Customers
(Topic
606):
Identifying
Performance
Obligations
and
Licensing."
In May 2016, the FASB
issued ASU No. 2016-12, "Revenue
from
Contracts
with
Customers
(Topic
606):
Narrow-Scope
Improvements
and
Practical
Expedients."
The
2016 updates to the revenue recognition guidance relate to principal versus agent assessments, identifying performance obligations, the
accounting for licenses, and certain narrow scope improvements and practical expedients. This new standard will impact the timing and
amounts of revenue recognized for (i) gift card breakage income and (ii) certain transactions for which the Company allows customers to store
their merchandise at our retail stores for final delivery at a later date. Gift card breakage income is currently recognized based upon historical
redemption patterns. ASU No. 2014-09 requires gift card breakage income to be recognized in proportion to the pattern of rights exercised by
the customer when the Company expects to be entitled to breakage. The more significant change of this standard relates to the timing of revenue
recognized for certain transactions for which the Company allows customers to store their merchandise at our retail stores for final delivery at a
later date. Currently, the Company recognizes revenue when both collection or reasonable assurance of collection of payment and final delivery
of the product have occurred. Under the new guidance, the Company will recognize revenue at the time the customer obtains control of the
inventory. The Company is adopting this standard in the first quarter of fiscal 2018 and will use the modified retrospective approach. The
cumulative adjustment upon adoption will primarily result in a reduction of deferred revenue and related inventories and an increase to retained
earnings. The Company does not believe the adoption of the standard will have a material impact to its Consolidated Financial Statements going
forward.
.
2. Accrued Expenses
Accrued expenses consist of the following (in thousands):
Accrued incentive compensation
Accrued legal fees
Other
Accrued Expenses
82
December 28, December 29,
2017
17,218
178
57,151
74,547
$
$
2016
14,799
13,642
33,064
61,505
$
$
Table of Contents
3. Fixed Assets
Fixed assets as of December 28, 2017 and December 29, 2016, consisted of the following (in thousands):
Furniture, fixtures and equipment
Leasehold improvements
Computer software and hardware
Land
Fixed assets, at cost
Less: accumulated depreciation and amortization
Fixed assets, net
December 28, December 29,
2017
126,821
141,174
52,687
4,976
325,658
104,706
220,952
$
$
2016
90,787
89,226
40,699
—
220,712
70,241
150,471
$
$
Depreciation and amortization on fixed assets for the years ended December 28, 2017, December 29, 2016, and December 31, 2015,
was $36,255 thousand, $27,459 thousand, and $18,531 thousand, respectively.
4. Intangible Assets
The following summarizes the balances of identifiable intangible assets as of December 28, 2017 and December 29, 2016 (in
thousands):
Amortizable intangible asset:
Vendor relationships
Indefinite-lived intangible asset:
Trade names
Estimated
Useful Lives
December 28, 2017
Gross
Carrying
Amount
Accumulated
Amortization
December 29, 2016
Gross
Carrying
Amount
Accumulated
Amortization
10 years
319
(226)
319
109,269
109,588 $
$
—
(226) $
109,269
109,588 $
(194)
—
(194)
Amortization expense related to amortizable intangible assets for the years ended December 28, 2017, December 29, 2016 and
December 31, 2015, was $32 thousand, $32 thousand and $327 thousand, respectively.
Estimated intangible asset amortization for the next five years is as follows (in thousands):
2018
2019
2020
2021
2022
$
32
32
29
—
—
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Table of Contents
5. Income Taxes
The components of the provision for income taxes are as follows (in thousands) :
Current (benefit) / expense:
Federal
State
Total current (benefit) / expense
Deferred (benefit) / expense:
Federal
State
Total deferred (benefit) / expense
Provision for income taxes
Year Ended
December 28,
2017
Year Ended
December 29,
2016
Year Ended
December 31,
2015
$
$
(4,097) $
479
(3,618)
(250)
(368)
(618)
(4,236) $
14,588 $
2,422
17,010
(4,765)
(771)
(5,536)
11,474 $
13,183
2,552
15,735
553
(89)
464
16,199
The following is a summary of the differences between the total provision for income taxes as shown on the financial statements and
the provision for income taxes that would result from applying the federal statutory tax rate of 35% to income before income taxes (in
thousands) .
Computed “expected” provision at statutory rate
State income taxes, net of federal income tax benefit
Permanent differences:
Excess tax benefit related to options exercised
Non-qualified option holder dividend equivalent
Other
Total permanent differences
Change in U.S. tax rate
Other, net
Provision for income taxes
Year Ended
December 28,
2017
Year Ended
December 29,
2016
Year Ended
December 31,
2015
$
$
34,499 $
(28)
(20,762)
—
691
(20,071)
(17,850)
(786)
(4,236) $
19,080 $
1,073
—
(7,877)
(4)
(7,881)
—
(798)
11,474 $
15,052
1,594
—
—
113
113
—
(560)
16,199
The permanent difference of $20,762 thousand in fiscal 2017 is the federal benefit due to the recognition of excess tax deductions for
stock options exercised. The state benefit related to the recognition of excess tax benefit of $1.0 million is included in state income taxes, net of
federal income tax benefit in the table above. The permanent difference of $7,877 thousand in fiscal 2016 is the federal benefit related to a
dividend equivalent payment to certain option holders.
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. As it relates to the Company, the Act reduces the US
federal corporate tax rate from 35% to 21%, and creates new taxes that may apply on certain foreign sourced earnings. At December 28, 2017,
we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made
a reasonable estimate of the effects on our existing deferred tax balances. In other cases, we have not been able to make a reasonable estimate
and continue to account for those items based on our existing accounting under ASC 740, Income Taxes , and the provisions of the tax laws that
were in effect immediately prior to enactment. For the items for which we were able to determine a reasonable estimate, we recognized a
provisional amount of $17.9 million, which is included as a component of income tax expense from continuing operations. In all cases, we will
continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we continue
to analyze the Act.
Provisional amounts
We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is
generally 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could
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potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded
related to the remeasurement of our deferred tax balance was $17.9 million.
The Act also subjects a US shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries.
The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting
policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the
tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, we are still evaluating the possible
effects of the GILTI provisions and have not yet determined our accounting policy. At December 28, 2017, because we are still evaluating the
GILTI provisions and our analysis of future taxable income that may be subject to GILTI, we are unable to make a reasonable estimate and have
not reflected any adjustments related to GILTI in our financial statements.
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and (liabilities) are
presented below (in thousands):
Deferred tax assets:
Accruals not currently deductible for tax purposes
Tenant improvement allowances
Inventories
Stock based compensation
Other intangibles
Gift card liability
Litigation accrual
Other
Total deferred tax assets
Deferred tax liabilities:
Intangible assets
Fixed assets
Other
Total deferred tax liabilities
Net deferred tax liabilities
Year Ended
December 28,
2017
Year Ended
December 29,
2016
$
$
8,993 $
6,597
4,111
3,108
405
648
583
846
25,291
(26,868)
(24,225)
(1,416)
(52,509)
(27,218) $
14,342
7,690
4,050
4,179
693
858
5,299
47
37,158
(41,269)
(23,650)
(504)
(65,423)
(28,265)
The Company generated $1,066 thousand of state net operating losses available to reduce future income taxes. The state net operating
losses expire in various amounts from 2032 to 2037.
In assessing the realization of deferred tax assets, including net operating losses, management considered whether it is more likely than
not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable
income in prior carryback periods, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income
exclusive of reversing temporary differences and carryforwards in making this assessment, and accordingly, has concluded that no valuation
allowance is necessary as of December 28, 2017 and December 29, 2016
The Company files income tax returns with the U.S. Federal government and various state jurisdictions. Prior tax years beginning in
year 2013 remain open to examination by the Internal Revenue Service. The Internal Revenue Service has completed audits of the Company's
federal income tax returns for the years through 2011. As of December 28, 2017, December 29, 2016, and December 31, 2015 the Company had
unrecognized tax benefits of $0, $0, and $0 thousand, respectively. The amounts of unrecognized tax benefits that, if recognized, would
favorably impact the effective tax rate were $0, $0, and $0 thousand as of December 28, 2017, December 29, 2016, and December 31, 2015,
respectively. The Company's policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense .
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6. Fair Value Measurements
The Company estimates fair values in accordance with ASC 820, Fair
Value
Measurement
. ASC 820 provides a framework for
measuring fair value and expands disclosures required about fair value measurements. ASC 820 defines fair value as the price that would be
received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants. Additionally, ASC 820 defines levels within a hierarchy based upon observable and non-
observable inputs .
·
·
·
Level 1—Inputs that are quoted prices in active markets for identical assets or liabilities
Level 2—Inputs other than quoted prices in active markets for assets or liabilities that are either directly or indirectly observable
Level 3—Inputs that are non‑observable that reflect the reporting entity’s own assumptions
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
(in thousands)
Designated as hedges:
Interest rate cap (cash flow hedge)
Not designated as hedges:
Interest rate cap
(in thousands)
Interest rate caps (cash flow hedges)
As of
December 28,
2017
Level 1
Level 2
Level 3
$
$
710 $
— $
710 $
710 $
— $
710 $
—
—
As of
December 29,
2016
Level 1
Level 2
Level 3
$
2,473 $
— $
2,473 $
—
Our derivative contracts are negotiated with counterparties without going through a public exchange. Accordingly, our fair value
assessments give consideration to the risk of counterparty default (as well as our own credit risk). Our interest rate derivatives consist of interest
rate cap contracts and are valued primarily based on data readily observable in public markets.
7. Derivatives and Risk Management
Changes in interest rates impact our results of operations. In an effort to manage our exposure to this risk, we enter into derivative
contracts and may adjust our derivative portfolio as market conditions change.
Designated as Cash Flow Hedge
For derivative contracts designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a
component of Accumulated Other Comprehensive Income (“AOCI”) and reclassified into earnings in the same period in which the hedged
transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair
value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the
hedged item, the ineffective portion of the hedge is immediately recognized in earnings.
Not Designated as Accounting Hedge
During fiscal 2017, we de-designated one of our interest rate cap derivative contracts as an accounting hedge, as such, the change in
the fair value is reflected through earnings. These changes in fair value are mark-to-market adjustments ("MTM adjustments"). MTM
adjustments are defined as fair value changes recorded in periods other than the settlement period. The change in fair value of our derivative not
designated as a hedge resulted in $154 thousand recorded directly as an increase to interest expense.
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Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period.
The AOCI related to the interest rate cap prior to the de-designation is being amortized over the remaining maturity period.
Derivative Position as of December 28, 2017:
(in thousands)
Designated as hedges:
Notional Balance
Final Maturity
Date
Other AOCI, Net
Assets
of Tax
Interest rate cap (cash flow hedge)
$
102,500 U.S. dollars
December 2021 $ 710 $
(133)
Not designated as hedges:
Interest rate cap
Derivative Position as of December 29, 2016:
(in thousands)
Interest rate caps (cash flow hedges)
Interest rate swaps (cash flow hedges)
Designated Hedge Gain (Losses)
$
102,500 U.S. dollars
December 2021 $ 710 $
(72)
Final Maturity
Other AOCI, Net
Notional Balance
Date
Assets
$ 205,000 U.S. dollars December 2021 $ 2,473 $
$
— $
17,500 U.S. dollars
January 2017 $
of Tax
176
—
Gains (losses) related to our designated hedge contracts are as follows:
(in thousands)
Interest rate cap (cash flow hedge)
Interest rate swaps (cash flow hedges)
Interest Rate Risk
Effective Portion Reclassified
From AOCI to Earnings
Effective Portion Recognized in
Other Comprehensive Income (Loss)
Year Ended
December 28,
2017
December 29,
2016
December 31,
2015
December 28,
2017
December 29,
2016
December 31,
2015
$
$
— $
— $
— $
— $
— $
— $
(381) $
— $
176 $
100 $
—
43
Our exposure to market risk from adverse changes in interest rates is primarily associated with our long term debt obligations, which
carry variable interest rates. Market risk associated with our variable interest rate long term debt relates to the potential reduction in fair value
and negative impact to future earnings, respectively, from an increase in interest rates.
In an effort to manage our exposure to the risk associated with our variable interest rate long term debt, we periodically enter into
interest rate derivative contracts. We designate interest rate derivative contracts used to convert the interest rate exposure on a portion of our
debt portfolio from a floating rate to a capped rate as cash flow hedges.
Credit Risk
To manage credit risk associated with our interest rate hedging program, we select counterparties based on their credit ratings and limit
our exposure to any one counterparty.
The counterparties to our derivative contracts are financial institutions with investment grade credit ratings. To manage our credit risk
related to our derivative financial instruments, we periodically monitor the credit risk of our counterparties, limit our exposure in the aggregate
and to any single counterparty, and adjust our hedging position, as appropriate. The impact of credit risk, as well as the ability of each party to
fulfill its obligations under our derivative financial instruments, is considered in determining the fair value of the contracts. Credit risk has not
had a significant effect on the fair value of our derivative contracts. We do not have any credit risk‑related contingent features or collateral
requirements with our derivative financial instruments.
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8. Commitments and Contingencies
Lease Commitments
The Company leases its corporate office, retail locations and distribution centers under long‑term operating lease agreements that
expire in various years through 2032. Additionally, certain equipment is leased under short‑term operating leases.
Certain lease agreements include escalating rents over the lease terms. The Company expenses rent on a straight‑line basis over the life
of the lease, which commences on the date the Company has the right to control the property. The cumulative expense recognized on a
straight‑line basis in excess of the cumulative payments is included in deferred rent in the accompanying Consolidated Balance Sheets. Future
minimum lease payments under non‑cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 28,
2017, are:
(in thousands)
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
Amount
79,872
85,279
83,048
79,041
74,052
389,344
790,636
$
$
Lease expense for the years ended December 28, 2017, December 29, 2016, and December 31, 2015, was approximately
$71,524 thousand, $53,899 thousand, and $41,756 thousand, respectively.
Litigation
The Company is subject to other various legal actions, claims and proceedings arising in the ordinary course of business, including
claims related to breach of contracts, products liabilities, intellectual property matters and employment related matters resulting from its
business activities. The Company establishes reserves for specific legal proceedings when it determines that the likelihood of an unfavorable
outcome is probable and the amount of loss can be reasonably estimated. These proceedings are not expected to have a material impact on the
Company’s Consolidated Financial Statements.
During fiscal 2017, F&D received final approval for a classwide settlement to resolve a class action lawsuit related to certain labeling
of F&D’s products. The final amounts paid did not materially differ from our estimated losses previously accrued.
9. Debt
The following table summarizes our long‑term debt as of December 28, 2017 and December 29, 2016 (dollars in thousands):
Credit Facilities:
Wells Facility Term Loan A
Wells Facility Revolving Line of Credit
Total secured debt
Less: current maturities
Long-term debt maturities
Less: unamortized discount and debt issuance costs
Total long-term debt
Maturity
Date
Interest Rate Per
Annum at
December 28,
2017
September 30, 2023
September 30, 2021
4.64 % Variable
2.92 % Variable
December 28,
2017
December 29,
2016
$
$
152,500
41,000
193,500
3,500
190,000
4,438
185,562
$
$
350,000
50,000
400,000
3,500
396,500
9,257
387,243
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Repayment of Debt with Proceeds from Initial Public Offering
On May 2, 2017, the Company completed its IPO, pursuant to which it sold an aggregate of 10,147,025 shares of Class A common
stock, par value $0.001 per share (after giving effect to the underwriters’ exercise in full of their option to purchase additional shares) at a price
of $21.00 per share. The Company received aggregate net proceeds of approximately $192.0 million after deducting underwriting discounts and
commissions and other offering expenses.
The Company used net proceeds from the IPO of approximately $192.0 million to repay a portion of the amounts outstanding under
the Term Loan Facility, including accrued and unpaid interest. The partial paydown resulted in a loss on extinguishment of debt in the amount
of approximately $5.4 million related to unamortized original issue discount and unamortized deferred debt issuance costs.
Dividend
On September 30, 2016, the board of directors declared the Special Dividend and authorized the Option Payments. Payment of the
Special Dividend and the Option Payments was made on September 30, 2016 to all shareholders and option holders of record at the close of
business on September 30, 2016. In connection with the dividend, the Company refinanced its existing indebtedness by amending the prior
asset-based revolving credit facility with an amended and restated $200.0 million asset-based revolving credit facility maturing on
September 30, 2021 (the “ABL Facility”), entering into a $350.0 million senior secured term loan facility maturing on September 30, 2023 (the
“Term Loan Facility” and together with the ABL Facility, our “Credit Facilities”) and repaying and terminating the prior term loan facility and
the prior senior secured term loan facility with GCI Capital Markets LLC (the “GCI Facility”). As a result of the refinancing, the Company
recorded $162 thousand of loss on extinguishment of debt related to unamortized deferred debt issuance cost for the Company’s prior asset-
based revolving credit facility, as well as recorded $1,319 thousand of loss on extinguishment of debt related to unamortized original issue
discount and unamortized deferred debt issuance cost for the prior term loan facility and GCI Facility. In addition, the Company recorded
$10,347 thousand of original issue discount and deferred debt issuance cost related to new third‑party fees associated with the refinancing.
Term Loan Facility
As of December 28, 2017, the Term Loan Facility had an outstanding balance of $152.5 million and requires quarterly repayments of
$875 thousand, which commenced on December 31, 2016, with the remainder due and payable at maturity.
As of December 28, 2017, the Term Loan Facility bore interest based on one of the following rates, at the Company’s option:
i) Adjusted LIBO Rate plus a margin of 2.75%
ii) Base Rate plus a margin of 1.75%. Base Rate defined as the greater of the following:
(a) the base rate in effect on such day,
(b) the federal funds rate plus 0.50%,
(c) the adjusted LIBO rate for the interest period of one month plus a margin of 1.00%
ABL Facility
As of December 28, 2017, the ABL Facility had a maximum availability of $200.0 million with actual available borrowings limited to
the sum, at the time of calculation, of eligible credit card receivables, plus the cost of eligible inventory, net of inventory reserves, multiplied by
the product of appraisal percentage multiplied by the appraised value of eligible inventory, plus 85% of eligible net trade receivables, plus all
eligible cash on hand minus certain Availability Reserves as defined in the credit agreement governing the ABL Facility. The ABL Facility is
available for issuance of letters of credit and contains $30.0 million for standby letters of credit and commercial letters of credit. Available
borrowings under the facility are reduced by the face amount of outstanding letters of credit. As of December 28, 2017, the borrowings bear
interest at a floating rate, which is based on one of the following rates at the option of the Company:
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i) LIBO Rate plus a margin percentage ranging from 1.25% to 1.50% based on the level of borrowings or
ii) Base Rate plus a margin (ranging from 0.25% to 0.50% based on the level of borrowings). The Base Rate is defined as the
highest of the following:
(a) the federal funds rate plus 0.50%,
(b) Adjusted LIBO Rate plus 1.00%, or
(c) the lender’s prime rate
As of December 28, 2017, the Company had net availability under the ABL Facility of $146,154 thousand, including outstanding
letters of credit of $12,846 thousand.
The following table summarizes scheduled maturities of our debt, including current maturities, as of December 28, 2017 (in
thousands):
2018
2019
2020
2021
2022
Thereafter
Total minimum debt payments
Covenants
Amount
3,500
3,500
4,375
43,625
3,500
135,000
193,500
$
$
The credit agreements governing our Credit Facilities contain customary restrictive covenants that, among other things and with
certain exceptions, limit the ability of the Company to (i) incur additional indebtedness and liens in connection therewith; (ii) pay dividends and
make certain other restricted payments; (iii) effect mergers or consolidations; (iv) enter into transactions with affiliates; (v) sell or dispose of
property or assets and (vi) engage in unrelated lines of business. In addition, these credit agreements subject us to certain reporting obligations
and require that we satisfy certain financial covenants, including, among other things:
• a requirement that if borrowings under the ABL Facility exceed 90% of availability, we will maintain a certain fixed charge
coverage ratio (defined as consolidated EBITDA less non‑financed capital expenditures and income taxes paid to consolidated
fixed charges, in each case as more fully defined in the credit agreement governing the ABL Facility).
The Term Loan Facility has no financial maintenance covenants. As of December 28, 2017, we were in compliance with the covenants
of the Credit Facilities.
Deferred Debt Issuance Cost and Original Issue Discount
Deferred debt issuance cost related to our ABL Facility and our prior asset-based revolving credit facility of $1,005 thousand and
$1,274 thousand as of December 28, 2017 and December 29, 2016, respectively, are included in Other assets on our Consolidated Balance
Sheets. Deferred debt issuance cost and original issue discount related to our Term Loan Facility of $4,438 thousand as of December 28, 2017
and $9,257 thousand as of December 29, 2016 are included in Term loans on our Consolidated Balance Sheets. Amortization expense was
$1,205 thousand, $954 thousand, and $692 thousand for the years ended December 28, 2017, December 29, 2016, and December 31, 2015.
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 was based primarily
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on discounted cash flows utilizing estimated interest rates, maturities, credit risk, and underlying collateral and is classified primarily as Level 3
within the fair value hierarchy. At December 28, 2017 and December 29, 2016, the fair values of the Company’s debt are as follows (in
thousands):
(in thousands)
Total debt at par value
Less: unamortized discount and debt issuance costs
Net carrying amount
Fair value
10. Stockholder’s Equity
Common Stock
December 28,
December 29,
$
$
$
2017
193,500 $
4,438
189,062 $
193,881 $
2016
400,000
9,257
390,743
400,000
The Company has three classes of common stock: Class A, Class B and Class C. The holders of Class A common stock, Class B
common stock and Class C common stock are entitled to share equally, on a per share basis, in dividends or other distributions. Class A
common stockholders are entitled to one vote per share held. Class B and Class C common stockholders have no voting rights, except as
otherwise provided by law. In the event of the voluntary liquidation or dissolution of the Company, each class of stock will share equally, on a
per share basis, in all the assets of the Company that are available for distribution to stockholders. A shareholders agreement restricts the terms
and conditions under which the shares held by the parties to the shareholders agreement may be sold or transferred.
Conversion Features
On May 2, 2017, all of the Class B common stock outstanding shares, upon completion of our initial public offering, were converted to
Class A common stock.
Shares of Class C common stock may be converted, upon the election of holders of such shares of Class C common stock, into the
same number of shares of Class A common stock under certain circumstances as provided in the Company’s certificate of incorporation.
On July 26, 2017, all of the Class C common stock outstanding shares, upon the election of holders of such shares of Class C common
stock, were converted to Class A common stock.
Stock Incentive Plans
On January 13, 2011, the Company adopted the 2011 Stock Option Plan (as amended, restated, supplemented or otherwise modified
from time to time, the “2011 Plan”) to provide for the grant of stock options to employees (including officers), consultants and non‑employee
directors of the Company and its subsidiaries. Pursuant to the terms of the 2011 Plan, the Company was authorized to grant options for the
purchase of up to 12,520,407 shares as of December 29, 2016 and 10,780,970 shares as of December 31, 2015. As of December 29, 2016 and
December 31, 2015, there were 179,575 and 104,269 options available for grant under the 2011 Plan, respectively.
We ceased granting awards under the 2011 Plan upon the implementation of the 2017 Plan, described below.
On April 13, 2017, the board of directors approved the Floor & Decor Holdings, Inc. 2017 Stock Incentive Plan (the “2017 Plan”),
which was subsequently approved by the Company’s stockholders. The 2017 Plan authorizes the Company to grant options and restricted stock
awards to eligible employees (including officers) , consultants and non-employee directors up to an aggregate of 5,000,000 shares of Class A
common stock. In connection with the IPO, the Company granted options to purchase an aggregate of 1,254,465 shares of our Class A common
stock to certain of our eligible employees and 15,475 shares of restricted stock to certain of our non-employee directors, in each case pursuant to
the 2017 Plan and based on the public offering price of $21.00 per share. As of December 28, 2017 there were 3,690,255 options available for
grant under the 2017 Plan.
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Secondary Offerings
On July 25, 2017 , certain of the Company’s stockholders completed a secondary public offering (the “July Secondary Offering”) of an
aggregate of 10,718,550 shares of common stock at a price to the public of $40.00 per share. The Company did not sell any shares in the July
Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.
On November 16, 2017, certain of the Company’s stockholders completed a secondary public offering (the “November Secondary
Offering”) of an aggregate of 7,475,000 shares of common stock at a price to the public of $36.00 per share. The Company did not sell any
shares in the November Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.
Stock Options
The Company accounts for stock‑based compensation pursuant to ASC 718, Compensation – Stock Compensation , which requires
measurement of compensation cost for all stock awards at fair value on the date of grant and recognition of compensation, net of forfeitures,
over the requisite service period for awards expected to vest.
Stock options are granted with an exercise price estimated to be greater than or equal to the fair market value on the date of grant.
Options granted have vesting provisions ranging from three to five years, and contractual terms of ten years. Stock option grants are generally
subject to forfeiture if employment terminates prior to vesting. All options were granted at or above estimated fair market value as authorized by
the Company’s board of directors.
The fair value of stock option awards granted was estimated using the Black‑Scholes pricing model with the following
weighted‑average assumptions:
Risk-free interest rate
Expected volatility
Expected life (in years)
Dividend yield
Year Ended
December 28,
2017
Year Ended
December 29,
2016
Year Ended
December 31,
2015
2.06 %
39 %
6.50
— %
1.43 %
40 %
6.50
— %
1.93 %
49 %
6.92
— %
The Company estimates the volatility of the share price of its common stock by considering the historical volatility of the stock of
similar public entities. In determining the appropriateness of the public entities included in the volatility assumption the Company considered a
number of factors, including the entity’s life cycle stage, growth profile, size, financial leverage and products offered.
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The table below summarizes the changes in all stock options for the following periods:
Outstanding at, December 27, 2014
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2015
Granted
Exercised
Forfeited or expired
Outstanding at December 29, 2016
Granted
Exercised
Forfeited or expired
Outstanding at December 28, 2017
Weighted
Average
Exercise
Price
Options
9,524,266 $
1,378,355
(5,149)
(437,353)
10,460,119
2,025,535
(145,140)
(361,403)
11,979,111
1,339,668
(1,828,339)
(236,354)
11,254,086
4.40
8.07
7.69
7.16
4.77
9.94
3.48
6.65
5.34
21.68
4.85
9.17
7.28
Options
Exercisable
at End
of Year
4,608,462 $
—
—
—
6,656,524
—
—
—
8,151,056
—
—
—
7,448,532
Weighted
Average
Exercise Price
of Exercisable
Options
Weighted
Average Fair
Value/Share of
Options
Granted During
the Year
3.85 $
—
—
—
4.00
—
—
—
4.20
—
—
—
4.52
—
4.12
—
—
—
4.13
—
—
—
9.20
—
—
—
The intrinsic value for stock options is defined as the difference between the exercise price and the value of the Company’s common
stock (on a minority, non‑marketable basis). The per share value of the Company’s common stock as of December 28, 2017, was $49.59. The
intrinsic value of stock options exercised was $62,508 thousand and $942 thousand for the years ended December 28, 2017 and
December 29, 2016, respectively. The aggregate intrinsic value of stock options outstanding as of December 28, 2017, was $476,162 thousand
with a weighted‑average remaining contractual life of 5.7 years. The aggregate intrinsic value of stock options exercisable as of December 28,
2017, was $335,737 thousand with a weighted‑average remaining contractual life of 4.3 years. The Company’s total unrecognized
compensation cost related to stock options as of December 28, 2017, was $19,105 thousand, which is expected to be recognized over a weighted
average period of 3.8 years.
Restricted Stock
During fiscal 2017, we granted 15,475 shares of restricted stock to certain of our non-employee directors. The aggregate fair value of
restricted stock outstanding as of December 28, 2017, was $767 thousand. As of December 28, 2017, there were 15,475 shares of restricted
stock outstanding. The Company’s total unrecognized compensation cost related to restricted stock as of December 28, 2017, was $270
thousand, which is expected to be recognized over a weighted average period of 3.3 years.
On September 30, 2016, in connection with the Special Dividend, the Company declared the Option Payments for certain option
holders. A portion of the Option Payments were for unvested options, and option holders are required to repay any amounts related to options
that do not vest prior to such option holder’s termination of employment. In the event an option holder defaults on such repayment, we will
record the amount as additional stock based compensation expense in that reporting period.
11. 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.
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The following table shows the computation of basic and diluted earnings per share:
(in thousands, except per share data)
Net income
Basic weighted average shares outstanding
Dilutive effect of share based awards
Diluted weighted average shares outstanding
Basic earnings per share
Diluted earnings per share
Year Ended
December 28,
2017
102,788
90,951
8,709
99,660
1.13
1.03
$
$
$
Year Ended
December 29,
2016
Year Ended
December 31,
2015
$
$
$
43,039
83,432
4,999
88,431
0.52
0.49
$
$
$
26,807
83,365
2,916
86,281
0.32
0.31
The following have been excluded from the computation of dilutive effect of share based awards because the effect would be
anti‑dilutive:
(in thousands)
Stock Options
Year Ended
December 28,
2017
Year Ended
December 29,
2016
Year Ended
December 31,
2015
849
2,004
1,857
12. Selected Quarterly Financial Information (unaudited)
The following tables present the Company’s unaudited quarterly results for fiscal 2017 and fiscal 2016.
Fiscal 2017
(in thousands, except per share data)
Net Sales
Gross Profit
Net Income
Basic Earnings Per Share
Diluted Earnings Per Share
(in thousands, except per share data)
Net Sales
Gross Profit
Net Income
Basic Earnings Per Share
Diluted Earnings Per Share
First Quarter
Second
Quarter
$
307,296 $
125,471
11,128
0.13
0.13
344,047 $
142,228
20,429
0.22
0.20
Third Quarter Fourth Quarter
389,501
162,374
47,976
0.51
0.46
343,923 $
142,491
23,255
0.25
0.22
First Quarter
Second
Quarter
Fiscal 2016
265,853 $
109,652
5,012
0.06
0.06
Third Quarter Fourth Quarter
278,294
114,746
16,707
0.20
0.19
271,311 $
110,967
14,219
0.17
0.16
$
235,301 $
93,897
7,101
0.09
0.08
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE .
None.
ITEM 9A. CONTROLS AND PROCEDURES .
The process of improving our internal controls has required and will continue to require us to expend significant resources to design,
implement and maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. There can be no
assurance that any actions we take will be completely successful. We will continue to evaluate the effectiveness of our disclosure controls and
procedures and internal control over financial reporting on an ongoing basis. As part of this process, we may identify specific internal controls
as being deficient.
We have begun documenting and testing internal control procedures in order to comply with the requirements of Section 404(a) of the
Sarbanes‑Oxley Act. Section 404 requires annual management assessments of the effectiveness of our internal controls over financial reporting
and a report by our independent auditors addressing these assessments. Management’s and the independent auditor’s reports on internal controls
over financial reporting are not provided in this Annual Report in accordance with the exemption to this rule for newly public companies. We
must comply with Section 404 no later than the time we file our annual report for fiscal 2018 with the SEC.
ITEM 9B. OTHER INFORMATION .
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE .
The information required by this Item will be contained in our definitive Proxy Statement in connection with our 2017 Annual Meeting
of Stockholders, which will be filed with the SEC within 120 days after the end of our fiscal year ended December 28, 2017 (the “Proxy
Statement”), and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION .
The information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference, under the
captions “Director Compensation,” “Executive Compensation” and “Compensation Discussion and Analysis;” provided, however, that the
subsection entitled “Executive Compensation—Compensation Committee Report” shall not be deemed to be incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS .
The information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference, under the
captions “Certain Beneficial Owners”.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE .
The information required by this Item will be set forth in the Proxy Statement and is incorporated herein by reference, under the
captions “Certain Relationships and Related Transactions,” and “Other Board Information—Director Independence.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES .
The Information required under this Item will be included in the Proxy Statement and is incorporated herein by reference, under the
caption “Ratification of Appointment of Independent Registered Public Accounting Firm.”
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES .
PART IV
(a)
1.
Documents filed as part of the Annual Report:
Financial Statements filed in Part II, Item 8 of this Annual Report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 28, 2017 and December 29, 2016
Consolidated Statements of Operations for the years ended December 28, 2017, December 29, 2016 and December 31, 2015
Consolidated Statements of Comprehensive Income for the years ended December 28, 2017, December 29, 2016 and December
31, 2015
Consolidated Statements of Cash Flows for the years ended December 28, 2017, December 29, 2016 and December 31, 2015
Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 28, 2017, December 29, 2016 and
December 31, 2015
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules:
There are no Financial Statement Schedules included with this filing for the reason that they are not applicable or are not
required or the information is included in the financial statements or notes thereto
Exhibits:
3.
Exhibit No.
3.1
3.2
4.1
4.2
Restated Certificate of Incorporation of Floor & Decor Holdings, Inc.(1)
Second Amended and Restated Bylaws of Floor & Decor Holdings, Inc.(1)
Specimen Class A Common Stock Certificate(2)
Registration Rights Agreement, dated May 2, 2017, by and among Floor & Decor Holdings, Inc., Ares Corporate Opportunities
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Fund III, L.P., FS Equity Partners VI, L.P. and the other stockholders party thereto(3)
Investor Rights Agreement, dated May 2, 2017, by and among Floor & Decor Holdings, Inc., Ares Corporate Opportunities
Fund III, L.P., FS Equity Partners VI, L.P. and FS Affiliates VI, L.P.(3)
FDO Holdings, Inc. Amended and Restated 2011 Stock Incentive Plan(4)#
First Amendment to FDO Holdings, Inc. Amended and Restated 2011 Stock Incentive Plan(4)#
Second Amendment to FDO Holdings, Inc. Amended and Restated 2011 Stock Incentive Plan(4)#
Third Amendment to FDO Holdings, Inc. Amended and Restated 2011 Stock Incentive Plan(4)#
Fourth Amendment to FDO Holdings, Inc. Amended and Restated 2011 Stock Incentive Plan(5)#
Form of Stock Option Agreement under the FDO Holdings, Inc. Amended and Restated 2011 Stock Incentive Plan(4)
Floor & Decor Holdings, Inc. 2017 Stock Incentive Plan(3)#
Form of Stock Option Agreement under the Floor & Decor Holdings, Inc. 2017 Stock Incentive Plan(2)
Form of Restricted Stock Agreement under the Floor & Decor Holdings, Inc. 2017 Stock Incentive Plan(4)
Form of Indemnification Agreement by and between Floor & Decor Holdings, Inc. and its directors and officers(4)
Amended and Restated Employment Agreement, dated July 29, 2015, between FDO Holdings, Inc., Floor and Decor Outlets of
America, Inc. and Thomas V. Taylor(4)#
Consulting Agreement, dated December 3, 2012, by and between Floor and Decor Outlets of America, Inc., FDO Holdings, Inc.
and George Vincent West(4)#
Amended and Restated Employment Agreement, dated July 29, 2015, between FDO Holdings, Inc., Floor and Decor Outlets of
America, Inc. and Lisa G. Laube(4)#
Amended and Restated Employment Agreement, dated July 29, 2015, between FDO Holdings, Inc., Floor and Decor Outlets of
America, Inc. and Trevor S. Lang(4)#
Amended and Restated Employment Agreement, dated July 29, 2015, between FDO Holdings, Inc., Floor and Decor Outlets of
America, Inc. and David V. Christopherson(4)#
Amended and Restated Employment Agreement, dated July 29, 2015, between FDO Holdings, Inc., Floor and Decor Outlets of
America, Inc. and Brian K. Robbins(4)#
Amended and Restated Credit Agreement, dated as of September 30, 2016, by and among Floor and Decor Outlets of
America, Inc., FDO Acquisition Corp., Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and
Swing Line Lender, Wells Fargo Bank, National Association, as Term Loan Agent, the lenders from time to time party thereto,
Bank of America, N.A., as Syndication Agent, and Wells Fargo Bank, National Association and Merrill Lynch, Pierce and
Fenner & Smith Incorporated, as Joint Lead Arrangers and Joint Bookrunners(4)
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10.18
Amended and Restated Security Agreement, dated as of September 30, 2016, by and among Floor and Decor Outlets of
10.19
10.20
America, Inc., the other borrowers and guarantors party thereto from time to time, Wells Fargo Bank, National Association, as
Collateral Agent, and Wells Fargo Bank, National Association, as Administrative Agent(4)
Credit Agreement, dated as of September 30, 2016, by and among Floor and Decor Outlets of America, Inc., FDO Acquisition
Corp., the lenders from time to time parties thereto, UBS AG, Stamford Branch, as Administrative Agent and Collateral Agent,
and UBS Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Bank PLC, Goldman Sachs Bank USA
and Wells Fargo Securities LLC, as Joint Lead Arrangers and Joint Bookrunners(4)
Security Agreement, dated as of September 30, 2016, by and among Floor and Decor Outlets of America, Inc., FDO Acquisition
Corp., the other loan parties from time to time party thereto and UBS AG, Stamford Branch, as Collateral Agent and
Administrative Agent and the lenders party thereto(4)
10.21
Guaranty Agreement, dated as of September 30, 2016, by FDO Acquisition Corp. in favor of UBS AG, Stamford Branch, as
Collateral Agent, and UBS AG, Stamford Branch, as Administrative Agent and the lenders party thereto(4)
10.22
Amendment No. 1 to Credit Agreement, dated as of March 31, 2017, by and among Floor and Decor Outlets of America, Inc.,
FDO Acquisition Corp., the other loan parties from time to time party thereto, the lenders from time to time party thereto, and
UBS AG, Stamford Branch, as Administrative Agent and Collateral Agent(4)
10.23
Amendment No. 2 to Credit Agreement, dated as of November 22, 2017, by and among Floor and Decor Outlets of
America, Inc., FDO Acquisition Corp., the other loan parties from time to time party thereto, the lenders from time to time party
thereto, and UBS AG, Stamford Branch, as Administrative Agent and Collateral Agent
21.1
23.1
31.1
31.2
32.1
List of subsidiaries(4)
Consent of Ernst & Young LLP, independent registered public accounting firm
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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
XBRL Instance Document
101.INS
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.
(2) Filed as an exhibit to Amendment No. 3 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑216000) filed with the
SEC on April 17, 2017, and incorporated herein by reference.
(3) Filed as an exhibit to Registrant’s Form 8‑K (File No. 001‑38070) filed with the SEC on May 2, 2017, and incorporated herein by
reference.
(4) Filed as an exhibit to Amendment No. 2 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑216000) filed with the
SEC on April 7, 2017, and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑221525) filed with the SEC on November
13, 2017, and incorporated herein by reference.
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ITEM 16. FORM 10-K SUMMARY
None.
99
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: March 5, 2018
FLOOR & DECOR HOLDINGS, INC.
/s/ Thomas V. Taylor
Thomas V. Taylor
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Company and in the capacities indicated on the fifth of March 2018.
Signature
/s/ Thomas V. Taylor
Thomas V. Taylor
/s/ Trevor S. Lang
Trevor S. Lang
/s/ Norman H. Axelrod
Norman H. Axelrod
/s/ George Vincent West
George Vincent West
/s/ Brad J. Brutocao
Brad J. Brutocao
/s/ Michael Fung
Michael Fung
/s/ David B. Kaplan
David B. Kaplan
/s/ Rachel H. Lee
Rachel H. Lee
/s/ John M. Roth
John M. Roth
/s/ Peter M. Starrett
Peter M. Starrett
/s/ Richard L. Sullivan
Richard L. Sullivan
/s/ Felicia D. Thornton
Felicia D. Thornton
Title
Chief Executive Officer (Principal Executive Officer) and
Director
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Chairman of the Board
Vice Chairman of the Board
Director
Director
Director
Director
Director
Director
Director
Director
100
Date
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
March 5, 2018
AMENDMENT NO. 2 TO CREDIT AGREEMENT
EXHIBIT 10.23
AMENDMENT NO. 2 TO CREDIT AGREEMENT, dated as of November 22, 2017
(this “ Amendment ”), is entered into by and among FDO ACQUISITION CORP., a Delaware
corporation (“ Holdings ”), FLOOR AND DECOR OUTLETS OF AMERICA, INC., a Delaware
corporation (the “ Borrower ”), the other Loan Parties listed on the signature pages hereto, UBS AG,
STAMFORD BRANCH, as administrative agent for the lenders under the Credit Agreement (defined
below), each person set forth on Schedule 2.01(a) hereto (each a Replacement Term B-2 Lender as
provided herein, a “ Replacement Term B-2 Lender ”) and each of the undersigned banks and other
financial institutions and the other Lenders party hereto.
PRELIMINARY STATEMENTS :
WHEREAS, Holdings, the Borrower, the Administrative Agent, the Lenders and the
other parties thereto entered into that certain Credit Agreement, dated as of September 30, 2016 (as
amended, supplemented or otherwise modified prior to the date hereof including the Amendment No.
1 to Credit Agreement dated as of March 31, 2017, the “ Existing Credit Agreement ” and as
amended pursuant to this Amendment the “ Amended Credit Agreement ” ; capitalized terms not
otherwise defined in this Amendment have the same meanings as specified in the Existing Credit
Agreement or Amended Credit Agreement, as the context may require);
WHEREAS, pursuant to Section 2.11 of the Existing Credit Agreement, the Borrower
has requested a new term loan facility in an aggregate amount sufficient to refinance all of its
outstanding Initial Term Loans upon the terms and subject to the conditions set forth therein;
WHEREAS, each Replacement Term B-2 Lender has agreed, upon the terms and subject to the
conditions set forth herein, to make its Replacement Term B-2 Loans (as defined below) in an
aggregate principal amount not to exceed the amount set forth opposite such Replacement Term B-2
Lender’s name under the heading “Replacement Term B-2 Loan Commitment” on Schedule 2.01(a)
hereto (as to each such Replacement Term B-2 Lender, its “ Replacement Term B-2 Commitment ”,
and the term loans made by each Replacement Term B-2 Lender in respect thereof, “ Replacement
Term B-2 Loans ”);
WHEREAS, the proceeds of the Replacement Term B-2 Loans will be used by the
Borrower, to repay in full the outstanding principal amount of the Initial Term Loans, together with a
portion of the accrued but unpaid interest, fees and expenses in connection therewith;
WHEREAS, upon the Second Amendment Effective Date (as defined below), each existing Lender
of Initial Term Loans under the Existing Credit Agreement that executes and delivers a signature
page to this Amendment in the form of the Lender Consent attached to the Election Notice
Memorandum posted on LendAmend.com on November 16, 2017 (a “ Consent ”) electing the
“Consent and Cashless Settlement Option” or the “Consent and Assignment Settlement Option” (such
consenting Lender, an “ Exchanging Term Lender ”) shall be deemed to have consented to the
Replacement Amendments (as defined below) and, on the Second Amendment Effective Date, shall
be deemed to have exchanged all (or such lesser amount as UBS Securities LLC shall allocate) of
such Initial Term Loans (which Initial Term Loans shall thereafter no longer be deemed to be
outstanding) for Replacement Term B-2 Loans in the same aggregate
US-DOCS\96349882.9
principal amount as such Lender’s Initial Term Loans as in effect immediately prior to the Second
Amendment Effective Date (or such lesser amount as UBS Securities LLC shall allocate), and such
Lender shall thereafter be a Replacement Term B-2 Lender under the Amended Credit Agreement;
WHEREAS, upon the Second Amendment Effective Date, (i) each existing Lender of
Initial Term Loans under the Existing Credit Agreement that is not an Exchanging Term Lender shall
have its Initial Term Loans prepaid in full in accordance with the terms of the Existing Credit
Agreement with the proceeds of Replacement Term B-2 Loans, (ii) each Exchanging Term Lender
that is allocated an aggregate principal amount of Replacement Term B-2 Loans that is less than the
aggregate principal amount of its Initial Term Loans under the Existing Credit Agreement shall have
its remaining Initial Term Loans (after giving effect to its acquisition of Replacement Term B-2
Loans in exchange for Initial Term Loans) prepaid in full in accordance with the terms of the Existing
Credit Agreement with the proceeds of Replacement Term B-2 Loans, and (iii) all Initial Term Loans
under the Existing Credit Agreement so prepaid shall thereafter be deemed to be no longer
outstanding; and
WHEREAS, the Borrower, Holdings, the other Loan Parties party hereto, the Lenders
party hereto and the Administrative Agent have agreed to amend the Existing Credit Agreement as
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties
hereto hereby agree as follows:
SECTION 1. Replacement Term B-2 Loans.
(a)
Subject to the terms and conditions set forth herein, each of the Replacement
Term B-2 Lenders hereby (i) commits to provide Replacement Term B-2 Loans to the Borrower in
the amount of its Replacement Term B-2 Commitment and (ii) agrees, on the Second Amendment
Effective Date, to fund Replacement Term B-2 Loans to the Borrower in the amount of its
Replacement Term B-2 Commitment, after which such commitment shall terminate immediately and
without further action.
(b)
The amendments set forth in this Section 1 (the “ Replacement Amendments
”) constitute a “Specified Refinancing Amendment” with respect to the establishment of the
Replacement Term B-2 Commitments and the Replacement Term B-2 Loans as “Specified
Refinancing Term Loans.” Each Replacement Term B-2 Loan constitutes a “Specified Refinancing
Term Loan” incurred in accordance with Subsection 2.11 of the Existing Credit Agreement.
(c)
With effect from the Second Amendment Effective Date, the Replacement
Term B-2 Loans shall be “Term Loans” and “Initial Term Loans” and each Replacement Term B-2
Lender shall be a Lender with outstanding Initial Term Loans.
(d)
The Replacement Term B-2 Loans shall be subject to the provisions, including
any provisions restricting the rights, or regarding the obligations, of the Loan Parties or
any provisions regarding the rights of the Lenders, of the Amended Credit Agreement and the other
Loan Documents and shall have an initial Interest Period as set forth in the notice of borrowing
relating thereto.
(e)
The Borrower shall use the proceeds of the Replacement Term B-2 Loans as
set forth in the recitals to this Amendment.
SECTION 2. Amendments to Existing Credit Agreement . The Existing Credit
Agreement is, effective as of the date hereof and subject to the satisfaction of the conditions
precedent set forth in Section 4, hereby amended as follows:
(a)
Subsection 1.1 of the Existing Credit Agreement shall be amended by adding
the following new definitions thereto in proper alphabetical order:
“ Second Amendment ” means that certain Amendment No. 2 to Credit Agreement,
dated as of November 22, 2017, among Holdings, the Borrower, the other Loan Parties party thereto,
the Administrative Agent and the Lenders party thereto.
“ Second Amendment Effective Date ” means the date on which all of the conditions
contained in Section 4 of the Second Amendment have been satisfied or waived.
(b)
The following definitions are hereby amended and restated in its entirety to
read as follows:
“ Applicable Margin ”: in respect of Initial Term Loans, from and after the Second
Amendment Effective Date (a) if the Borrower has a public corporate family rating by
Moody’s of “B1” (with a negative outlook) or lower or if the Borrower has no public
corporate family rating by Moody’s (i) with respect to ABR Loans, 1.75% per annum
and (ii) with respect to Eurodollar Loans, 2.75% per annum and (b) if the Borrower
has a public corporate family rating by Moody’s of at least “B1” (with a stable or
better outlook), (i) with respect to ABR Loans, 1.50% per annum and (ii) with respect
to Eurodollar Loans, 2.50% per annum. Changes in the Applicable Margin for the
Initial Term Loans resulting from changes in the rating by Moody's shall become
effective either three Business Days after the public announcement of such change in
rating, in the case of the Applicable Margin for ABR Loans, or, in the case of
the Applicable Margin for Eurodollar Loans, on the first day of the next Interest
Period commencing at least three Business Days after the public announcement of
such change in rating and based upon the most recent change in rating occurring prior
to the commencement of such Interest Period, and shall remain in effect until the
next change to be effected pursuant to this paragraph. The Applicable Margin on the
Second Amendment Effective Date is (i) with respect to ABR Loans, 1.75% per
annum and (ii) with respect to Eurodollar Loans, 2.75% per annum.
“ Initial Term Loan Commitment ”: (a) from the Closing Date to the First
Amendment Effective Date, as to any Lender, its obligation to make Initial Term
Loans to the Borrower pursuant to Subsection 2.1(a) in an aggregate amount not to
exceed at any one time outstanding the amount set forth opposite such Lender’s
name in Schedule A under the heading “Initial Term Loan Commitment”; collectively,
as to all the Lenders for such period, the “ Initial Term Loan Commitments ”; the
original aggregate amount of the Initial Term Loan Commitments on the Closing Date
is $350,000,000; (b) from and after the First Amendment Effective Date to the Second
Amendment Effective Date, as to any Lender, its obligation to make Initial Term
Loans to the Borrower pursuant to Section 1(a) of the First Amendment in an
aggregate amount not to exceed at any one time outstanding the amount set forth
opposite such Lender’s name in Schedule 2.01(a) to the First Amendment under the
heading “Initial Term Loan Commitment”; collectively, as to all the Lenders for such
period, the “Initial Term Loan Commitments”; the original aggregate amount of the
Initial Term Loan Commitments on the First Amendment Effective Date is
$348,250,000; and (c) from and after the Second Amendment Effective Date, as to any
Lender, its obligation to make Initial Term Loans to the Borrower pursuant to Section
1(a) of the Second Amendment in an aggregate amount not to exceed at any one time
outstanding the amount set forth opposite such Lender’s name in Schedule 2.01(a) to
the Second Amendment under the heading “Initial Term Loan Commitment”;
collectively, as to all the Lenders, the “Initial Term Loan Commitments”. The
aggregate amount of the Initial Term Loan Commitments on the Second Amendment
Effective Date is $152,499,999.99.
“ Initial Term Loan ”: (a) from the Closing Date to the First Amendment Effective
Date, as defined in Subsection 2.1 ; (b) from and after the First Amendment Effective
Date to the Second Amendment Effective Date, as defined in the First Amendment
and (c) from and after the Second Amendment Effective Date, as defined in the
Second Amendment.
(c)
Subsection 4.5(b) of the Existing Credit Agreement is hereby amended by
deleting each reference to “six months after the First Amendment Effective Date” appearing therein
and substituting in lieu therefor “six months after the Second Amendment Effective Date”.
SECTION 3. Reference to and Effect on the Loan Documents .
(a)
This Amendment shall constitute a Loan Document for purposes of the
Amended Credit Agreement and the other Loan Documents, and on and after the Second Amendment
Effective Date, each reference in the Amended Credit Agreement to “this Agreement”, “hereunder”,
“hereof”, “herein” or words of like import referring to the Existing Credit Agreement, and each
reference in the other Loan Documents to “the Credit Agreement”, “thereunder”, “thereof” or words
of like import referring to the Existing Credit Agreement, shall mean and be a reference to the
Amended Credit Agreement.
(b)
The Existing Credit Agreement, as specifically amended by this Amendment,
and the other Loan Documents are, and shall continue to be, in full force and effect, and are hereby in
all respects ratified and confirmed. The parties hereto hereby acknowledge and confirm that the
Replacement Term B-2 Loans and all obligations related thereto are, and continue to be, subject to
the ABL/Term Loan Intercreditor Agreement.
(c)
Except as expressly provided herein, the execution, delivery and effectiveness
of this Amendment shall not operate as a waiver of any right, power or remedy of any Lender or the
Administrative Agent under the Existing Credit Agreement, Amended Credit Agreement or any other
Loan Document, nor shall it constitute a waiver of any provision of the Credit Agreement, Amended
Credit Agreement or any Loan Document.
(d)
Agreement
acknowledges
and hereby confirms,
Each of the Guarantors hereby consents to the amendments to the Existing
Credit
and agrees
effected hereby,
that, notwithstanding the effectiveness of this Amendment, the obligations of such Guarantor
contained in any of the Loan Documents to which it is a party are, and shall remain, in full force and
effect and are hereby ratified and confirmed in all respects. Nothing in this Amendment is intended,
or shall be construed, to constitute a novation or an accord and satisfaction of any of the Obligations
or to modify, affect or impair the perfection, priority or continuation of the security interests in,
security titles to or other Liens on any Collateral for the Obligations. Each of the Borrower, Holdings
and the other Loan Parties party hereto hereby confirms, acknowledges and agrees that (i) the pledge
and security interest in the Collateral granted by it pursuant to the Security Documents to which it is
a party shall continue in full force and effect and (ii) such pledge and security interest in the
Collateral granted by it pursuant to such Security Documents shall continue to secure the Obligations
purported to be secured thereby, as amended or otherwise affected hereby.
(e)
The parties hereto hereby consent to the incurrence of the Replacement Term
B-2 Loans upon the terms and subject to the conditions set forth herein. Upon the Second
Amendment Effective Date, (i) all conditions and requirements set forth in the Existing Credit
Agreement, Amended Credit Agreement or the other Loan Documents relating to the effectiveness of
this Amendment shall be deemed satisfied, (ii) all conditions and requirements set forth in the
Existing Credit Agreement, Amended Credit Agreement or the other Loan Documents relating to the
incurrence of the Replacement Term B-2 Loans shall be deemed satisfied and (iii) the incurrence of
the Replacement Term B-2 Loans shall be deemed arranged and consummated in accordance with the
terms of the Existing Credit Agreement, Amended Credit Agreement and the other Loan Documents.
SECTION 4. Conditions to Effectiveness . This Amendment shall become effective
as of the date (the “ Second Amendment Effective Date ”) on which the following conditions shall
have been satisfied (or waived):
(a)
the Administrative Agent shall have received counterparts of this Amendment
executed by Holdings, the Borrower, the other Loan Parties party hereto, the Lenders and the
Replacement Term B-2 Lenders prior to 5:00 p.m., New York City time on November 22, 2017;
(b)
the Borrower shall have paid all reasonable, documented and invoiced out-of-
pocket expenses of the Lead Arranger (including the reasonable fees, disbursements and other
charges of Latham & Watkins LLP, counsel to the Lead Arranger) incurred in connection with the
preparation and negotiation of this Amendment;
(c)
the Borrower shall have paid all accrued and unpaid interest on the Initial
Term Loans through the Second Amendment Effective Date;
(d)
the Administrative Agent shall have received any required notice of
borrowing of Replacement Term B-2 Loans pursuant to Subsection 6.2(a) of the Existing Credit
Agreement; and
(e)
the Administrative Agent shall have received a certificate, dated the Second
Amendment Effective Date and signed by a Responsible Officer of the Borrower, certifying on
behalf of the Borrower that (i) the representations and warranties made by the Loan Parties in Section
5 are true and correct on the Second Amendment Effective Date and (ii) as of the Second
Amendment Effective Date and immediately after giving effect to the transactions contemplated by
this Amendment, no Default or Event of Default shall have occurred and be continuing.
SECTION 5. Representations and Warranties . Each of the Borrower, Holdings and
the other Loan Parties party hereto hereby represents and warrants to the Administrative Agent that:
(a)
on and as of the Second Amendment Effective Date (i) it has all requisite
corporate power and authority and all requisite governmental licenses, authorizations, consents and
approvals to enter into and perform its obligations under this Amendment and the Amended Credit
Agreement, and (ii) this Amendment has been duly authorized, executed and delivered by it; and
(b)
this Amendment, and the Amended Credit Agreement, constitute legal, valid
and binding obligations of such entity, enforceable against it in accordance with their respective
terms, in each case except as enforceability may be limited by applicable domestic or foreign
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of
creditors’ rights generally and by general equitable principles (whether enforcement is sought by
proceedings in equity or at law).
(c)
each of the representations and warranties made by any Loan Party set forth in
Section 5 of the Amended Credit Agreement or in any other Loan Document shall be true and correct
in all material respects (except to the extent any such representation and warranty itself is qualified
by “materiality”, “Material Adverse Effect” or similar qualifier, in which case, it shall be true and
correct in all respects) on and as of the Second Amendment Effective Date with the same effect as
though made on and as of such date, except to the extent such representations and warranties
expressly relate to an earlier date (in which case such representations and warranties shall be true and
correct in all material respects (except to the extent any such representation and warranty itself is
qualified by “materiality,” “Material Adverse Effect” or similar qualifier, in which case, it was true
and correct (after giving effect to any such qualifier) in all respects) on and as of such earlier date).
SECTION 6. Execution in Counterparts . This Amendment may be executed by one
or more of the parties to this Amendment in any number of separate counterparts (including by
telecopy and other electronic transmission), and all of such counterparts taken together shall be
deemed to constitute one and the same instrument. A copy of this Amendment signed by all the
parties shall be delivered to the Borrower and the Administrative Agent. The words “execution,”
“signed,” “signature,” and words of like import in this Amendment, any Assignment and Acceptance
or in any amendment or other modification hereof (including waivers and consents) shall be deemed
to include electronic signatures or the keeping of records in electronic form, each of which shall be of
the same legal effect, validity or enforceability as a manually executed signature or the use of a
paper-based recordkeeping system, as the case may be, to the extent and as provided for in any
applicable law, including the Federal Electronic Signatures in Global and National Commerce Act,
the New York State Electronic Signatures and Records Act, or any other similar state laws based on
the Uniform Electronic Transactions Act.
SECTION 7. GOVERNING LAW . THIS AMENDMENT AND THE RIGHTS
AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE
GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE
LAW OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ITS PRINCIPLES OR
RULES OF CONFLICT OF LAWS TO THE EXTENT SUCH PRINCIPLES OR RULES ARE
NOT MANDATORILY APPLICABLE BY STATUTE AND WOULD REQUIRE OR PERMIT
THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.
SECTION 8. WAIVER OF RIGHT OF TRIAL BY JURY . EACH PARTY TO
THIS AMENDMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL
BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AMENDMENT
AND FOR ANY COUNTERCLAIM THEREIN.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of
the date first written above.
FLOOR AND DECOR OUTLETS OF AMERICA, INC.
By: /s/ Trevor S. Lang
Name: Trevor Lang
Title: Executive Vice President and Chief Financial Officer
FDO ACQUISITION CORP.
By: /s/ Trevor S. Lang
Name: Trevor Lang
Title: Executive Vice President and Chief Financial Officer
FD SALES COMPANY, LLC
By: /s/ Trevor S. Lang
Name: Trevor Lang
Title: Executive Vice President and Chief Financial Officer
AGENT:
UBS AG, STAMFORD BRANCH, as Administrative Agent
By: /s/ Kenneth Chin
Name: Kenneth Chin
Title: Director
By: /s/ Darlene Arias
Name: Darlene Arias
Title: Director
UBS AG, STAMFORD BRANCH, as Replacement Term B-2 Lender
By: /s/ Kenneth Chin
Name: Kenneth Chin
Title: Director
By: /s/ Darlene Arias
Name: Darlene Arias
Title: Director
Schedule 2.01(a)
Replacement Term B-2 Loan Commitments
Lender
UBS AG, Stamford Branch
Total:
Replacement Term B-2 Loan Commitments
$ 152,499,999.99
$ 152,499,999.99
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-217474) pertaining to the
FDO Holdings, Inc. Amended and Restated 2011 Stock Incentive Plan and the Floor & Decor Holdings, Inc. 2017 Stock
Incentive Plan of our report dated March 5, 2018, with respect to the consolidated financial statements of Floor & Decor
Holdings, Inc. included in this Annual Report (Form 10-K) for the year ended December 28, 2017.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 5, 2018
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Thomas V. Taylor, certify that:
1.
I have reviewed this annual report on Form 10-K of Floor and Decor Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
at
Date: March 5, 2018
/s/ Thomas V. Taylor
Thomas V. Taylor
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Trevor S. Lang, certify that:
1.
I have reviewed this annual report on Form 10-K of Floor and Decor Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 5, 2018
/s/ Trevor S. Lang
Trevor S. Lang
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
EXHIBIT 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report on Form 10-K of Floor and Decor Holdings, Inc. (the “Company”), for the fiscal year ended ending December
28, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Periodic Report”), Thomas V. Taylor, as Chief Executive
Officer of the Company and Trevor S. Lang, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
1. The Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
§78m or 78o(d)); and
2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Dated: March 5, 2018
/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)
A signed original of this written statement as required by Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”) or other document
authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.