FLOOR & DECOR HOLDINGS, INC., 10-Q filed on 11/2/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 28, 2017
Nov. 1, 2017
Document and Entity Information
 
 
Entity Registrant Name
Floor & Decor Holdings, Inc. 
 
Entity Central Index Key
0001507079 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 28, 2017 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-28 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Non-accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
94,685,169 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 28, 2017
Dec. 29, 2016
Current assets:
 
 
Cash and cash equivalents
$ 567 
$ 451 
Income taxes receivable
3,980 
Receivables, net
48,615 
34,533 
Inventories, net
395,620 
293,702 
Prepaid expenses and other current assets
7,525 
7,529 
Total current assets
456,307 
336,215 
Fixed assets, net
200,400 
150,471 
Intangible assets, net
109,370 
109,394 
Goodwill
227,447 
227,447 
Other assets
7,407 
7,639 
Total long-term assets
544,624 
494,951 
Total assets
1,000,931 
831,166 
Current liabilities:
 
 
Current portion of term loans
3,500 
3,500 
Trade accounts payable
249,246 
158,466 
Accrued expenses
65,878 
61,505 
Income taxes payable
5,787 
Deferred revenue
25,600 
14,456 
Total current liabilities
344,224 
243,714 
Term loans
145,819 
337,243 
Revolving line of credit
38,100 
50,000 
Deferred rent
22,022 
16,750 
Deferred income tax liabilities, net
37,300 
28,265 
Tenant improvement allowances
24,619 
20,319 
Other liabilities
676 
592 
Total long-term liabilities
268,536 
453,169 
Total liabilities
612,760 
696,883 
Commitments and contingencies
   
   
Capital stock:
 
 
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at September 28, 2017 and December 29, 2016
Additional paid-in capital
317,213 
117,270 
Accumulated other comprehensive income (loss), net
(711)
176 
Retained earnings
71,574 
16,754 
Total stockholders’ equity
388,171 
134,283 
Total liabilities and stockholders’ equity
1,000,931 
831,166 
Class A Common Stock
 
 
Capital stock:
 
 
Common Stock
95 
77 
Class B Common Stock
 
 
Capital stock:
 
 
Common Stock
Class C Common Stock
 
 
Capital stock:
 
 
Common Stock
$ 0 
$ 6 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 28, 2017
Dec. 29, 2016
Preferred Stock, Number of Shares, Par Value and Other Disclosures [Abstract]
 
 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Class A Common Stock
 
 
Common Stock, Number of Shares, Par Value and Other Disclosures [Abstract]
 
 
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
450,000,000 
450,000,000 
Common stock, shares issued
94,685,169 
76,847,116 
Common stock, shares outstanding
94,685,169 
76,847,116 
Class B Common Stock
 
 
Common Stock, Number of Shares, Par Value and Other Disclosures [Abstract]
 
 
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
10,000,000 
10,000,000 
Common stock, shares issued
395,742 
Common stock, shares outstanding
395,742 
Class C Common Stock
 
 
Common Stock, Number of Shares, Par Value and Other Disclosures [Abstract]
 
 
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
30,000,000 
30,000,000 
Common stock, shares issued
6,275,489 
Common stock, shares outstanding
6,275,489 
Condensed Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 28, 2017
Sep. 29, 2016
Sep. 28, 2017
Sep. 29, 2016
Income Statement [Abstract]
 
 
 
 
Net sales
$ 343,923 
$ 271,311 
$ 995,266 
$ 772,465 
Cost of sales
201,432 
160,344 
585,076 
457,949 
Gross profit
142,491 
110,967 
410,190 
314,516 
Operating expenses:
 
 
 
 
Selling and store operating
85,023 
68,219 
251,424 
197,055 
General and administrative
22,172 
16,633 
59,571 
46,813 
Pre-opening
6,700 
5,046 
13,825 
10,989 
Litigation settlement
(3,500)
10,500 
Total operating expenses
113,895 
86,398 
324,820 
265,357 
Operating income
28,596 
24,569 
85,370 
49,159 
Interest expense
2,610 
2,401 
11,377 
7,362 
Loss on extinguishment of debt
5,442 
153 
Income before income taxes
25,986 
22,168 
68,551 
41,644 
Provision for income taxes
2,731 
7,949 
13,739 
15,312 
Net income
$ 23,255 
$ 14,219 
$ 54,812 
$ 26,332 
Basic earnings per share
$ 0.25 
$ 0.17 
$ 0.61 
$ 0.32 
Diluted earnings per share
$ 0.22 
$ 0.16 
$ 0.56 
$ 0.30 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 28, 2017
Sep. 29, 2016
Sep. 28, 2017
Sep. 29, 2016
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net income
$ 23,255 
$ 14,219 
$ 54,812 
$ 26,332 
Other comprehensive income (loss)—change in fair value of hedge instruments, net of tax
(121)
44 
(887)
67 
Total comprehensive income
$ 23,134 
$ 14,263 
$ 53,925 
$ 26,399 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 28, 2017
Sep. 29, 2016
Operating activities
 
 
Net income
$ 54,812 
$ 26,332 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
27,637 
20,353 
Loss on extinguishment of debt
5,442 
153 
Loss on asset disposals
451 
Amortization of tenant improvement allowances
(2,366)
(1,871)
Deferred income taxes
9,575 
4,530 
Stock based compensation expense
3,553 
2,206 
Changes in operating assets and liabilities:
 
 
Receivables, net
(14,082)
(10,816)
Inventories, net
(101,918)
(29,041)
Other assets
(1,590)
(1,787)
Trade accounts payable
90,780 
18,488 
Accrued expenses
(3,097)
27,599 
Income taxes
(9,767)
2,253 
Deferred revenue
11,145 
4,890 
Deferred rent
7,778 
2,849 
Tenant improvement allowances
4,878 
4,281 
Other
83 
62 
Net cash provided by operating activities
82,863 
70,932 
Investing activities
 
 
Purchases of fixed assets
(69,639)
(52,240)
Net cash used in investing activities
(69,639)
(52,240)
Financing activities
 
 
Borrowings on revolving line of credit
175,300 
134,750 
Payments on revolving line of credit
(187,200)
(164,650)
Proceeds from term loans
12,000 
Payments on term loans
(196,625)
(900)
Debt issuance costs
(993)
(199)
Net proceeds from initial public offering
192,083 
Proceeds from exercise of stock options
4,327 
338 
Net cash used in financing activities
(13,108)
(18,661)
Net (decrease) increase in cash and cash equivalents
116 
31 
Cash and cash equivalents, beginning of the period
451 
318 
Cash and cash equivalents, end of the period
567 
349 
Supplemental disclosures of cash flow information
 
 
Cash paid for interest
13,742 
4,856 
Cash paid for income taxes
13,942 
8,688 
Fixed assets accrued at the end of the period
10,350 
7,308 
Fixed assets acquired as part of lease—paid for by lessor
$ 1,786 
$ 0 
Fair Value Measurements
Fair Value Measurements

2. 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

 

September 28,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2017

    

Level 1

    

Level 2

    

Level 3

Interest rate caps (cash flow hedges)

 

$

1,021

 

$

 

$

1,021

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

 

December 29,

 

 

 

 

 

 

 

 

 

(in thousands)

    

2016

    

Level 1

    

Level 2

    

Level 3

Interest rate caps (cash flow hedges)

 

$

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.

Derivatives and Risk Management
Derivatives and Risk Management

3. 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.

Interest Rate Risk

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.

Hedge Position as of September 28, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

Final Maturity

 

Other

(in thousands)

    

Notional Balance

    

Date

    

Assets

Interest rate caps (cash flow hedges)

 

$

205,000

 

U.S. dollars

 

December 2021

 

$

1,021

 

Hedge Position as of December 29, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

Final Maturity

 

Other

(in thousands)

    

Notional Balance

    

Date

    

Assets

Interest rate caps (cash flow hedges)

 

$

205,000

 

U.S. dollars

 

December 2021

 

$

2,473

Interest rate swaps (cash flow hedges)

 

$

17,500

 

U.S. dollars

 

January 2017

 

$

 —

 

Designated Hedge Gains (Losses)

Gains (losses) related to our designated hedge contracts are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective Portion Reclassified

 

 

Effective Portion Recognized in

 

 

From AOCI to Earnings

 

 

Other Comprehensive (Loss) Income

 

 

Thirteen Weeks Ended

 

 

September 28,

 

September 29,

 

September 28,

 

September 29,

(in thousands)

    

2017

    

2016

    

2017

    

2016

Interest rate caps (cash flow hedges)

 

$

 —

 

$

 

$

(121)

 

$

 —

Interest rate swaps (cash flow hedges)

 

$

 —

 

$

 

$

 —

 

$

44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective Portion Reclassified

 

Effective Portion Recognized in

 

 

From AOCI to Earnings

 

Other Comprehensive (Loss) Income

 

 

Thirty-nine Weeks Ended

 

 

September 28,

 

September 29,

 

September 28,

 

September 29,

(in thousands)

    

2017

    

2016

    

2017

    

2016

Interest rate caps (cash flow hedges)

 

$

 —

 

$

 

$

(887)

 

$

 —

Interest rate swaps (cash flow hedges)

 

$

 —

 

$

 —

 

$

 —

 

$

67

 

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.

Debt
Debt

4. Debt

Repricing of Term Loan Facility

On March 31, 2017, the Company entered into a repricing amendment to the credit agreement governing its $350.0 million senior secured term loan facility maturing on September 30, 2023 (the "Term Loan Facility"). The 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. The amount and terms of the Term Loan Facility were otherwise unchanged.

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.

Fair Value of Debt

Market risk associated with our fixed and variable rate long‑term debt relates to the potential change in fair value and negative impact to future earnings, respectively, from a change in interest rates. The aggregate fair value of debt is based primarily on our estimates of interest rates, maturities, credit risk, and underlying collateral and is classified as Level 3 within the fair value hierarchy. At September 28, 2017 and December 29, 2016, the fair values of the Company’s debt were as follows:

 

 

 

 

 

 

 

 

    

September 28,

    

December 29,

(in thousands)

 

2017

 

2016

Total debt at par value

 

$

191,475

 

$

400,000

Less: unamortized discount and debt issuance costs

 

 

4,056

 

 

9,257

Net carrying amount

 

$

187,419

 

$

390,743

Fair value

 

$

191,858

 

$

400,000

 

Income Taxes
Income Tax Disclosure [Text Block]

5. Income Taxes

Income Taxes

The Company’s effective income tax rates were 20.0% and 36.8% for the thirty-nine weeks ended September 28, 2017 and September 29, 2016, respectively. The lower effective rate for the thirty-nine weeks ended September 28, 2017 was primarily due to the recognition of excess tax benefits related to options exercised after the adoption of ASU 2016-09. See Note 1 to the consolidated financial statements included herein for more information regarding ASU 2016-09.

Commitments and Contingencies
Commitments and Contingencies

6. Commitments and Contingencies

Lease Commitments

The Company leases its corporate office, retail locations and distribution centers through F&D, under long‑term operating lease agreements that expire in various years through 2038. 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 balance sheets. Future minimum lease payments under non‑cancelable operating leases (with initial or remaining lease terms in excess of one year) as of September 28, 2017, were:

 

 

 

 

(in thousands)

    

Amount

Thirteen weeks ended December 28, 2017

 

$

18,100

2018

 

 

81,967

2019

 

 

92,825

2020

 

 

91,135

2021

 

 

87,128

Thereafter

 

 

564,361

Total minimum lease payments

 

$

935,516

 

Lease expense for the thirty-nine weeks ended September 28, 2017 and September 29, 2016 was approximately $51,956 thousand and $39,211 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 position, cash flows or results of operations. 

During the thirty-nine weeks ended September 28, 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.

Earnings Per Share
Earnings Per Share

7. Earnings Per Share

Net Income per Common Share

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Thirteen Weeks Ended

    

Thirty-nine Weeks Ended

 

 

September 28,

 

September 29,

 

September 28,

 

September 29,

(in thousands, except share and per share data)

 

2017

    

2016

 

2017

    

2016

Net income

 

$

23,255

 

$

14,219

 

$

54,812

 

$

26,332

Basic weighted average shares outstanding

 

 

94,439,204

 

 

83,457,037

 

 

89,613,542

 

 

83,405,904

Dilutive effect of share based awards

 

 

9,460,398

 

 

4,911,652

 

 

8,452,267

 

 

4,846,287

Diluted weighted average shares outstanding

 

 

103,899,602

 

 

88,368,689

 

 

98,065,809

 

 

88,252,191

Basic earnings per share

 

$

0.25

 

$

0.17

 

$

0.61

 

$

0.32

Diluted earnings per share

 

$

0.22

 

$

0.16

 

$

0.56

 

$

0.30

 

The following awards have been excluded from the computation of dilutive effect of share based awards because the effect would be anti‑dilutive:

 

 

 

 

 

 

 

 

 

 

    

Thirteen Weeks Ended

    

Thirty-nine Weeks Ended

 

 

September 28,

 

September 29,

 

September 28,

 

September 29,

 

 

2017

 

2016

 

2017

 

2016

Stock Options

 

11,664

 

1,903,466

 

717,685

 

2,332,976

 

Stock-Based Compensation
Stock-Based Compensation

8. Stock‑Based Compensation

Floor & Decor Holdings, Inc. 2017 Stock Incentive Plan

 

On April 13, 2017, the board of directors of the Company 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, 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.

Secondary Offering

 

On July 25, 2017, certain of the Company’s stockholders completed a secondary public offering (the “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 Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.

 

Class C Common Stock Conversion

 

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

Equity Awards

The following table summarizes share activity related to stock options during the thirty-nine weeks ended September 28, 2017.

 

 

 

 

    

Stock Options

Outstanding at December 29, 2016

 

11,979,111

Granted

 

1,272,156

Exercised

 

(1,004,322)

Forfeited or expired

 

(159,687)

Outstanding at September 28, 2017

 

12,087,258

 

Summary of Significant Accounting Policies (Policies)

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. When a 53-week fiscal year occurs, we report the additional week at the end of the fiscal fourth quarter. 52-week fiscal years consist of thirteen-week periods in the first, second, third and fourth quarters of the fiscal year.

Basis of Presentation 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. The Condensed Consolidated Balance Sheet as of December 29, 2016 has been derived from the audited Consolidated Balance Sheet for the fiscal year then ended. The interim condensed consolidated financial statements should be read together with the audited consolidated financial statements and related footnote disclosures included in the Company’s final prospectus, dated July 20, 2017 and filed with the Securities and Exchange Commission (the “SEC”) in accordance with Rule 424(b) of the Securities Act of 1933 on July 20, 2017. Unless otherwise noted, all amounts disclosed are stated before consideration of income taxes. Unless indicated otherwise, the information in this quarterly report on Form 10-Q (the “Quarterly 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. 321.820-for-one stock split of our common stock effected on April 24, 2017.

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

Results of operations for the thirteen weeks and thirty-nine weeks ended September 28, 2017 and September 29, 2016 are not necessarily indicative of the results to be expected for the full year.

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 Condensed 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 Condensed 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 September 28, 2017 and December 29, 2016, was $257 thousand and $188 thousand, respectively.

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 Condensed 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 $3,357 thousand and $2,449 thousand as of September 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 Condensed Consolidated Balance Sheet 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 a tenant improvement allowances) and computer software and hardware. 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:

 

 

 

 

Useful Life

Furniture, fixtures and equipment

2 - 7 years

Leasehold improvements

10 - 25 years

Computer software and hardware

3 - 7 years

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 Condensed 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 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 each 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 quantitative assessment in fiscal 2016.  Based on such goodwill impairment analysis performed quantitatively on October 25, 2016, 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 indefinite-lived assets continue to have an indefinite life or have impaired carrying values due to changes in the asset(s) or their 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:

 

 

 

Useful Life

Trade names

Indefinite

Vendor relationships

10 years

 

 

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 assets, the Company estimates fair values 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 these assets with finite lives over their estimated useful lives on a straight-line basis. This amortization methodology best matches the pattern of economic benefit that is expected from the definite-lived intangible assets. The Company evaluates the useful lives of its intangible assets 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.

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. The 2016 and 2013 instruments have been designated as cash flow hedges for accounting purposes, and the fair value is calculated utilizing Level 2 inputs. Unrealized changes in the fair value of these derivative instruments are recorded in Accumulated other comprehensive (loss) income within the equity section of our Condensed Consolidated Balance Sheets.

The effective portion of the gain or loss on the derivatives is reported as a component of Comprehensive income within the Condensed 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 consist of interest rate cap and swap contracts, will continue to be highly effective in offsetting changes in cash flow attributable to floating interest rate risk. We did not have any ineffectiveness in the thirty-nine weeks ended September 28, 2017 and September 29, 2016 related to these instruments.

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 the thirty-nine weeks ended September 28, 2017 and September 29, 2016, gift card breakage income of $568 thousand and $452 thousand, respectively was recognized in Net sales in the Condensed 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 September 28, 2017 and December 29, 2016, was $6,892 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.

Cost of Sales

Cost of sales consists of merchandise costs as well as capitalized 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 thirty-nine weeks ended September 28, 2017 and September 29, 2016, were $31,938 thousand and $25,404 thousand, respectively, and are included in Selling and store operating expenses and Pre-opening expenses in the Condensed 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 Condensed 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 thirty-nine weeks ended September 28, 2017 and September 29, 2016, totaled $13,825 thousand, and $10,989 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.

Stock-Based Compensation

The Company accounts for employee stock options in accordance with relevant authoritative literature. The Company obtains independent third-party valuation studies to assist it with determining the grant date fair value of our stock price at least twice a year. 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 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 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 asset and liability method, 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 conclude 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, Income Taxes. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements using a two-step process for evaluating tax positions taken, or expected to be taken, on a tax return. The Company may only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 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.

Recent 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 is not expected to 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 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 a 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 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, financial position 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 and the recognition of gift card breakage income. 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. As the Company evaluates the impact of this standard, the more significant change 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. When implemented, the standard will impact the Company’s opening balance sheet in the first comparative period presented in the Company’s Consolidated Financial Statements. The Company plans to adopt the new standard on a modified retrospective basis during the first quarter of 2018.

Summary of Significant Accounting Policies (Tables)

 

 

 

Useful Life

Furniture, fixtures and equipment

2 - 7 years

Leasehold improvements

10 - 25 years

Computer software and hardware

3 - 7 years

 

 

 

 

Useful Life

Trade names

Indefinite

Vendor relationships

10 years

 

Fair Value Measurements (Tables)
Schedule of Assets (Liabilities) Measured at Fair Value on a Recurring Basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

 

September 28,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2017

    

Level 1

    

Level 2

    

Level 3

Interest rate caps (cash flow hedges)

 

$

1,021

 

$

 

$

1,021

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

 

December 29,

 

 

 

 

 

 

 

 

 

(in thousands)

    

2016

    

Level 1

    

Level 2

    

Level 3

Interest rate caps (cash flow hedges)

 

$

2,473

 

$

 

$

2,473

 

$

 

Derivatives and Risk Management (Tables)

Hedge Position as of September 28, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

Final Maturity

 

Other

(in thousands)

    

Notional Balance

    

Date

    

Assets

Interest rate caps (cash flow hedges)

 

$

205,000

 

U.S. dollars

 

December 2021

 

$

1,021

 

Hedge Position as of December 29, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

Final Maturity

 

Other

(in thousands)

    

Notional Balance

    

Date

    

Assets

Interest rate caps (cash flow hedges)

 

$

205,000

 

U.S. dollars

 

December 2021

 

$

2,473

Interest rate swaps (cash flow hedges)

 

$

17,500

 

U.S. dollars

 

January 2017

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective Portion Reclassified

 

 

Effective Portion Recognized in

 

 

From AOCI to Earnings

 

 

Other Comprehensive (Loss) Income

 

 

Thirteen Weeks Ended

 

 

September 28,

 

September 29,

 

September 28,

 

September 29,

(in thousands)

    

2017

    

2016

    

2017

    

2016

Interest rate caps (cash flow hedges)

 

$

 —

 

$

 

$

(121)

 

$

 —

Interest rate swaps (cash flow hedges)

 

$

 —

 

$

 

$

 —

 

$

44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective Portion Reclassified

 

Effective Portion Recognized in

 

 

From AOCI to Earnings

 

Other Comprehensive (Loss) Income

 

 

Thirty-nine Weeks Ended

 

 

September 28,

 

September 29,

 

September 28,

 

September 29,

(in thousands)

    

2017

    

2016

    

2017

    

2016

Interest rate caps (cash flow hedges)

 

$

 —

 

$

 

$

(887)

 

$

 —

Interest rate swaps (cash flow hedges)

 

$

 —

 

$

 —

 

$

 —

 

$

67

 

Debt (Tables)
Schedule of fair value debt

 

 

 

 

 

 

 

 

    

September 28,

    

December 29,

(in thousands)

 

2017

 

2016

Total debt at par value

 

$

191,475

 

$

400,000

Less: unamortized discount and debt issuance costs

 

 

4,056

 

 

9,257

Net carrying amount

 

$

187,419

 

$

390,743

Fair value

 

$

191,858

 

$

400,000

 

Commitments and Contingencies (Tables)
Schedule of future minimum lease payment

 

 

 

 

(in thousands)

    

Amount

Thirteen weeks ended December 28, 2017

 

$

18,100

2018

 

 

81,967

2019

 

 

92,825

2020

 

 

91,135

2021

 

 

87,128

Thereafter

 

 

564,361

Total minimum lease payments

 

$

935,516

 

Earnings Per Share (Tables)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Thirteen Weeks Ended

    

Thirty-nine Weeks Ended

 

 

September 28,

 

September 29,

 

September 28,

 

September 29,

(in thousands, except share and per share data)

 

2017

    

2016

 

2017

    

2016

Net income

 

$

23,255

 

$

14,219

 

$

54,812

 

$

26,332

Basic weighted average shares outstanding

 

 

94,439,204

 

 

83,457,037

 

 

89,613,542

 

 

83,405,904

Dilutive effect of share based awards

 

 

9,460,398

 

 

4,911,652

 

 

8,452,267

 

 

4,846,287

Diluted weighted average shares outstanding

 

 

103,899,602

 

 

88,368,689

 

 

98,065,809

 

 

88,252,191

Basic earnings per share

 

$

0.25

 

$

0.17

 

$

0.61

 

$

0.32

Diluted earnings per share

 

$

0.22

 

$

0.16

 

$

0.56

 

$

0.30

 

 

 

 

 

 

 

 

 

 

 

    

Thirteen Weeks Ended

    

Thirty-nine Weeks Ended

 

 

September 28,

 

September 29,

 

September 28,

 

September 29,

 

 

2017

 

2016

 

2017

 

2016

Stock Options

 

11,664

 

1,903,466

 

717,685

 

2,332,976

 

Stock-Based Compensation (Tables)
Schedule of share activity related to stock options

 

 

 

 

    

Stock Options

Outstanding at December 29, 2016

 

11,979,111

Granted

 

1,272,156

Exercised

 

(1,004,322)

Forfeited or expired

 

(159,687)

Outstanding at September 28, 2017

 

12,087,258

 

Summary of Significant Accounting Policies (Details)
0 Months Ended 3 Months Ended 9 Months Ended 12 Months Ended 9 Months Ended
Apr. 24, 2017
Sep. 28, 2017
state
Sep. 28, 2017
segment
state
Dec. 29, 2016
Dec. 28, 2017
Scenario, Forecast [Member]
Sep. 28, 2017
Minimum
Sep. 28, 2017
Maximum
Sep. 28, 2017
Warehouse Format Store [Member]
sqft
facility
Sep. 28, 2017
Small Format Store [Member]
facility
Number of reportable segments
 
 
 
 
 
 
 
 
Number of stores
 
 
 
 
 
 
 
80 
Area of facility
 
 
 
 
 
 
 
73,000 
 
Number of states with facilities
 
20 
20 
 
 
 
 
 
 
Fiscal year period
 
 
 
364 days 
364 days 
364 days 
371 days 
 
 
Fiscal quarter period
 
91 days 
 
 
 
 
 
 
 
Stock split conversion ratio
321.820 
 
 
 
 
 
 
 
 
Summary of Significant Accounting Policies - Receivables and Assets (Details) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 28, 2017
Dec. 29, 2016
Sep. 28, 2017
Vendor Relationships
Sep. 28, 2017
Minimum
Furniture, fixtures and equipment
Sep. 28, 2017
Minimum
Leasehold improvements
Sep. 28, 2017
Minimum
Computer software and hardware
Sep. 28, 2017
Maximum
Furniture, fixtures and equipment
Sep. 28, 2017
Maximum
Leasehold improvements
Sep. 28, 2017
Maximum
Computer software and hardware
Receivables
 
 
 
 
 
 
 
 
 
Allowance for doubtful accounts
$ 257 
$ 188 
 
 
 
 
 
 
 
Inventory Valuation and Shrinkage
 
 
 
 
 
 
 
 
 
Inventory valuation reserves
$ 3,357 
$ 2,449 
 
 
 
 
 
 
 
Fixed Assets
 
 
 
 
 
 
 
 
 
Useful life
 
 
 
2 years 
10 years 
3 years 
7 years 
25 years 
7 years 
Goodwill and Other Indefinite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
Useful Life
 
 
10 years 
 
 
 
 
 
 
Summary of Significant Accounting Policies - Insurance and Revenues (Details) (USD $)
0 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended 1 Months Ended 12 Months Ended 9 Months Ended 0 Months Ended
May 2, 2017
Sep. 28, 2017
Sep. 29, 2016
Sep. 28, 2017
Sep. 29, 2016
May 2, 2017
Dec. 29, 2016
Sep. 28, 2017
Selling and store operating expenses and pre-opening expenses
Sep. 29, 2016
Selling and store operating expenses and pre-opening expenses
Nov. 24, 2016
Interest Rate Cap
derivative
Dec. 26, 2013
Interest Rate Swap
derivative
Sep. 28, 2017
Minimum
Sep. 28, 2017
Maximum
Jan. 1, 2016
Retained Earnings [Member]
Accounting Standards Update 2016-09 [Member]
Jan. 1, 2016
Additional Paid-in Capital [Member]
Accounting Standards Update 2016-09 [Member]
May 2, 2017
IPO
Self-Insurance Reserves
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maximum loss before additional coverage applies
 
 
 
$ 7,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of derivatives designated cash flow hedges entered into during period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedge ineffectiveness during the period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue Recognition and Gift Cards
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of days customers may store merchandise
 
 
 
 
 
 
 
 
 
 
 
 
14 days 
 
 
 
Gift card breakage income
 
 
 
568,000 
452,000 
 
 
 
 
 
 
 
 
 
 
 
Sales Returns and Allowances
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for sales returns
 
6,892,000 
 
6,892,000 
 
 
4,887,000 
 
 
 
 
 
 
 
 
 
Advertising and Pre-opening Expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising expense
 
 
 
 
 
 
 
31,938,000 
25,404,000 
 
 
 
 
 
 
 
Period prior to store opening or relocation that pre-opening expenses begin
 
 
 
 
 
 
 
 
 
 
 
3 months 
6 months 
 
 
 
Pre-opening expenses
 
6,700,000 
5,046,000 
13,825,000 
10,989,000 
 
 
 
 
 
 
 
 
 
 
 
Loss on Early Extinguishment of Debt Abstract
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares issued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10,147,025 
Common stock, par value
 
 
 
 
 
$ 0.001 
 
 
 
 
 
 
 
 
 
 
Net proceeds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
192,000,000 
Payments on term loans
192,000,000 
 
 
196,625,000 
900,000 
 
 
 
 
 
 
 
 
 
 
 
Loss on extinguishment of debt
 
(5,442,000)
(153,000)
 
 
 
 
 
 
 
 
 
 
 
Stock-Based Compensation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period of vesting provision
 
 
 
 
 
 
 
 
 
 
 
3 years 
5 years 
 
 
 
Cumulative effect of adoption
 
 
 
 
 
 
 
 
 
 
 
 
 
$ (148,000)
$ 238,000 
 
Fair Value Measurements (Details) (Recurring, USD $)
In Thousands, unless otherwise specified
Sep. 28, 2017
Dec. 29, 2016
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Interest rate caps (cash flow hedges)
$ 1,021 
$ 2,473 
Level 1
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Interest rate caps (cash flow hedges)
Level 2
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Interest rate caps (cash flow hedges)
1,021 
2,473 
Level 3
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Interest rate caps (cash flow hedges)
$ 0 
$ 0 
Derivatives and Risk Management (Details) (Cash Flow Hedging, USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 28, 2017
Sep. 29, 2016
Sep. 28, 2017
Sep. 29, 2016
Dec. 29, 2016
Interest Rate Swap
 
 
 
 
 
Derivative Instruments, Gain (Loss) [Line Items]
 
 
 
 
 
Notional amount
 
 
 
 
$ 17,500 
Derivative Instruments, Gain (Loss) Reclassified from Accumulated OCI into Income, Effective Portion, Net [Abstract]
 
 
 
 
 
Gain (loss) reclassified from AOCI to earnings, effective Portion
 
Derivative Instruments, Gain (Loss) Recognized in Other Comprehensive Income (Loss), Effective Portion, Net [Abstract]
 
 
 
 
 
Gain (loss) recognition in other comprehensive loss, effective portion
44 
67 
 
Interest Rate Swap |
Other Noncurrent Assets
 
 
 
 
 
Derivative Instruments, Gain (Loss) [Line Items]
 
 
 
 
 
Derivative Asset, Noncurrent
 
 
 
 
Interest Rate Cap
 
 
 
 
 
Derivative Instruments, Gain (Loss) [Line Items]
 
 
 
 
 
Notional amount
205,000 
 
205,000 
 
205,000 
Derivative Instruments, Gain (Loss) Reclassified from Accumulated OCI into Income, Effective Portion, Net [Abstract]
 
 
 
 
 
Gain (loss) reclassified from AOCI to earnings, effective Portion
 
Derivative Instruments, Gain (Loss) Recognized in Other Comprehensive Income (Loss), Effective Portion, Net [Abstract]
 
 
 
 
 
Gain (loss) recognition in other comprehensive loss, effective portion
(121)
(887)
 
Interest Rate Cap |
Other Noncurrent Assets
 
 
 
 
 
Derivative Instruments, Gain (Loss) [Line Items]
 
 
 
 
 
Derivative Asset, Noncurrent
$ 1,021 
 
$ 1,021 
 
$ 2,473 
Debt Other (Details) (USD $)
0 Months Ended 3 Months Ended 9 Months Ended 0 Months Ended 0 Months Ended 3 Months Ended 0 Months Ended 3 Months Ended 0 Months Ended 3 Months Ended 0 Months Ended 3 Months Ended
May 2, 2017
Sep. 28, 2017
Sep. 29, 2016
Sep. 28, 2017
Sep. 29, 2016
Jul. 25, 2017
Mar. 31, 2017
May 2, 2017
IPO
May 2, 2017
IPO
Class A Common Stock
May 2, 2017
IPO
Class A Common Stock
Mar. 31, 2017
Base Rate [Member]
Maximum
Mar. 30, 2017
Base Rate [Member]
Maximum
Mar. 31, 2017
Base Rate [Member]
Minimum
Mar. 30, 2017
Base Rate [Member]
Minimum
Mar. 31, 2017
London Interbank Offered Rate (LIBOR) [Member]
Mar. 31, 2017
London Interbank Offered Rate (LIBOR) [Member]
Maximum
Mar. 30, 2017
London Interbank Offered Rate (LIBOR) [Member]
Maximum
Mar. 31, 2017
London Interbank Offered Rate (LIBOR) [Member]
Minimum
Mar. 30, 2017
London Interbank Offered Rate (LIBOR) [Member]
Minimum
Debt Instrument, Face Amount
 
 
 
 
 
 
$ 350,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
Debt Instrument, Basis Spread on Variable Rate
 
 
 
 
 
 
 
 
 
 
2.50% 
3.25% 
2.00% 
2.75% 
 
3.50% 
4.25% 
3.00% 
3.75% 
Debt Instrument Variable Rate Floor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.00% 
 
 
 
 
Stock Issued During Period, Shares, New Issues
 
 
 
 
 
 
 
10,147,025 
10,147,025 
 
 
 
 
 
 
 
 
 
 
Share Price
 
 
 
 
 
$ 40.00 
 
 
 
$ 21.00 
 
 
 
 
 
 
 
 
 
Proceeds from Issuance Initial Public Offering
 
 
 
 
 
 
 
192,000,000 
 
 
 
 
 
 
 
 
 
 
 
Repayments of Secured Debt
192,000,000 
 
 
196,625,000 
900,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss on early extinguishment of debt
 
$ 0 
$ 0 
$ (5,442,000)
$ (153,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt (Details) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 28, 2017
Sep. 29, 2016
Sep. 28, 2017
Sep. 29, 2016
Dec. 29, 2016
Debt Instrument [Line Items]
 
 
 
 
 
Loss on extinguishment of debt
$ 0 
$ 0 
$ 5,442 
$ 153 
 
Total debt at par value
191,475 
 
191,475 
 
400,000 
Less: unamortized discount and debt issuance costs
4,056 
 
4,056 
 
9,257 
Net carrying amount
187,419 
 
187,419 
 
390,743 
Level 3
 
 
 
 
 
Debt Instrument [Line Items]
 
 
 
 
 
Fair value
$ 191,858 
 
$ 191,858 
 
$ 400,000 
Income Taxes (Details)
9 Months Ended
Sep. 28, 2017
Sep. 29, 2016
Effective Income Tax Rate Reconciliation, Percent [Abstract]
 
 
Effective Income Tax Rate Reconciliation, Percent
20.00% 
36.80% 
Commitments and Contingencies (Details) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 28, 2017
Sep. 29, 2016
Future minimum lease payments under non cancelable operating leases
 
 
Thirteen weeks ended December 28, 2017
$ 18,100 
 
2018
81,967 
 
2019
92,825 
 
2020
91,135 
 
2021
87,128 
 
Thereafter
564,361 
 
Total minimum lease payments
935,516 
 
Lease expense
$ 51,956 
$ 39,211 
Earnings Per Share (Details) (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 28, 2017
Sep. 29, 2016
Sep. 28, 2017
Sep. 29, 2016
Earnings Per Share
 
 
 
 
Net income (in thousands)
$ 23,255 
$ 14,219 
$ 54,812 
$ 26,332 
Basic weighted average shares outstanding
94,439,204 
83,457,037 
89,613,542 
83,405,904 
Dilutive effect of share based awards
9,460,398 
4,911,652 
8,452,267 
4,846,287 
Diluted weighted average shares outstanding
103,899,602 
88,368,689 
98,065,809 
88,252,191 
Basic earnings per share
$ 0.25 
$ 0.17 
$ 0.61 
$ 0.32 
Diluted earnings per share
$ 0.22 
$ 0.16 
$ 0.56 
$ 0.30 
Earnings Per Share - Dilutive effects of share based awards (Details) (Stock options)
3 Months Ended 9 Months Ended
Sep. 28, 2017
Sep. 29, 2016
Sep. 28, 2017
Sep. 29, 2016
Stock options
 
 
 
 
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
 
 
Anti-dilutive shares excluded from the computation of diluted earnings (per share)
11,664 
1,903,466 
717,685 
2,332,976 
Stock-Based Compensation Other (Details) (USD $)
0 Months Ended 9 Months Ended
Jul. 25, 2017
Apr. 13, 2017
Sep. 28, 2017
Jul. 25, 2017
Apr. 13, 2017
Stock-Based Compensation
 
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized
 
 
 
 
5,000,000 
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross
 
1,254,465 
1,272,156 
 
 
Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Granted
 
15,475 
 
 
 
Aggregate number of shares
10,718,550 
 
 
 
 
Share Price
 
 
 
$ 40.00 
 
Stock-Based Compensation (Details)
0 Months Ended 9 Months Ended
Apr. 13, 2017
Sep. 28, 2017
Share activity related to stock options
 
 
Outstanding at the beginning of period
 
11,979,111 
Granted
1,254,465 
1,272,156 
Exercised
 
(1,004,322)
Forfeited or expired
 
(159,687)
Outstanding at the end of period
 
12,087,258