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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 September 28, 2017, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. ("F&D"), operates 80 warehouse-format stores, which average 73,000 square feet, and one small-format standalone design center in 20 states, including Alabama, Arizona, California, Colorado, Florida, Georgia, Illinois, Kentucky, Louisiana, Maryland, Nevada, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Utah, and Wisconsin, 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. 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.
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.
1. Summary of Significant Accounting Policies
Nature of Business
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, Do it Yourself customers and customers who buy the products for professional installation. We operate within one reportable segment.
As of December 29, 2016, the Company, through its wholly owned subsidiary, operates 69 warehouse-format stores, which average 72,000 square feet, and one small-format standalone design center in 17 states including Arizona, California, Colorado, Florida, Georgia, Illinois, Louisiana, Maryland, Nevada, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, and Utah, 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 29, 2016 ("fiscal 2016") and December 25, 2014 ("fiscal 2014") include 52 weeks. Fiscal year ended December 31, 2015 ("fiscal 2015") includes 53 weeks.
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.
The Company has evaluated subsequent events through March 20, 2017, which represents the date on which the financial statements were available for distribution.
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 29, 2016 and December 31, 2015, was $188 thousand and $133 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 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 $2,449 thousand and $2,476 thousand as of December 29, 2016 and December 31, 2015, 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 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, loss, or inaccurate records for the receipt of inventory, 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:
|
|
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 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
In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC 350"), Intangibles—Goodwill and Other, goodwill and other intangible assets with indefinite lives resulting from business combinations are not amortized but instead are tested for impairment at least annually (more frequently if certain indicators are present) while identifiable intangible assets with finite lives are amortized over their estimated useful lives. The Company obtains independent third-party valuation studies to assist it with determining the fair value of goodwill and indefinite-lived intangible assets. The Company's goodwill and other indefinite-lived intangible assets subject to impairment testing arose primarily as a result of its acquisition of Floor and Decor Outlets of America, Inc. in November 2010.
The Company performs a two-step quantitative impairment test on goodwill. In the first step, the Company compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired, and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference.
The Company estimates the fair value of our reporting unit using a weighted combination of the income approach and the market approach. The income approach utilizes a discounted cash flow model incorporating management's expectations for future revenue, operating expenses, earnings before interest, taxes, depreciation and amortization, working capital and capital expenditures. The Company discounts the related cash flow forecasts using its estimated weighted-average cost of capital at the date of valuation. The market approach utilizes comparative market multiples derived by relating the value of guideline companies in the Company's industry and/or with similar growth prospects, based on either the market price of publicly traded shares or the prices of companies being acquired in the marketplace, to various measures of their earnings. Such multiples are then applied to the Company's historical and projected earnings to derive a valuation estimate.
Based on the 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, determined using a discounted cash flow methodology. 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 |
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 assets, 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 one or more 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 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 $5.0 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. As of December 29, 2016, per occurrence deductibles for individual workers' compensation and individual general liability claims were $250 thousand and $150 thousand, respectively.
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 1) a current adjustment to the recorded liability and related asset and 2) 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, we 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 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 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 2016 or 2015 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 fiscal 2016, fiscal 2015, and fiscal 2014 gift card breakage income of $627 thousand, $511 thousand, and $355 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 29, 2016 and December 31, 2015, was $4,887 thousand and $3,720 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 years ended December 29, 2016 and December 31, 2015, and December 25, 2014, were $33,497 thousand, $24,478 thousand and $17,359 thousand, respectively, and are included in Selling and store operating expenses and Pre-opening expenses in the 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 29, 2016, December 31, 2015, and December 25, 2014, totaled $13,732 thousand, $7,380 thousand, and $7,412 thousand, respectively.
Loss on Early Extinguishment of Debt
On September 30, 2016, the Company amended its prior asset-based revolving credit facility (the "Prior ABL Facility") and terminated its prior term loan facility (the "Prior Term Loan Facility"), each with Wells Fargo Bank, N.A, dated as of May 1, 2013, as amended. The Company also terminated its prior senior secured term loan facility with GCI Capital Markets LLC, (the "GCI Facility"). For the year ended December 29, 2016, loss on early extinguishment of debt is comprised of a (1) $179 thousand prepayment penalty paid in connection with the extinguishment of the Prior Term Loan Facility of $19,833 thousand, (2) write-off of approximately $1,319 thousand of unamortized debt issuance cost and original issue discount associated with the extinguishment of the Prior Term Loan Facility and the GCI Facility, (3) write-off of approximately $162 thousand associated with the amendment of the Prior ABL Facility and (4) $153 thousand unamortized deferred debt issuance cost related to the April 15, 2016 amendment to the Prior Term Loan Facility.
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 ASU No. 2016-09 "Improvements to Employee Share-Based Payment Accounting" in 2016 and now recognize 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.
The following table presents the Net sales of each major product category for each of the last three fiscal years (in thousands):
|
|
Fiscal Year Ended |
|
||||||||||||||||
|
|
December 25, 2014 |
|
December 31, 2015 |
|
December 29, 2016 |
|
||||||||||||
Product Category |
|
Net Sales |
|
% of |
|
Net Sales |
|
% of |
|
Net Sales |
|
% of |
|
||||||
Tile |
|
$ |
174,271 |
|
|
30 |
% |
$ |
244,902 |
|
|
31 |
% |
$ |
325,433 |
|
|
31 |
% |
Decorative Accessories |
|
|
98,991 |
|
|
16 |
|
|
138,442 |
|
|
18 |
|
|
188,371 |
|
|
18 |
|
Accessories (Installation Materials and Tools) |
|
|
91,122 |
|
|
16 |
|
|
124,162 |
|
|
16 |
|
|
165,330 |
|
|
16 |
|
Wood |
|
|
90,752 |
|
|
16 |
|
|
116,999 |
|
|
15 |
|
|
142,751 |
|
|
14 |
|
Laminate / Luxury Vinyl Plank |
|
|
61,817 |
|
|
11 |
|
|
77,586 |
|
|
10 |
|
|
131,447 |
|
|
12 |
|
Natural Stone |
|
|
65,008 |
|
|
11 |
|
|
78,294 |
|
|
10 |
|
|
90,866 |
|
|
9 |
|
Delivery and Other |
|
|
2,627 |
|
|
— |
|
|
3,627 |
|
|
— |
|
|
6,561 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
584,588 |
|
|
100 |
% |
$ |
784,012 |
|
|
100 |
% |
$ |
1,050,759 |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. 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, with early adoption permitted. The amendments in this update should be applied prospectively. The adoption of ASU No. 2015-11 is not expected to 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 could impact the timing and amounts of revenue recognized. 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 the retail store for final delivery at a later date. The Company is continuing to evaluate the impact this standard, and related amendments and interpretive guidance, will have on its consolidated financial statements. The Company plans to adopt the new standard on a modified retrospective basis beginning December 29, 2017.
|
2. Fixed Assets
Fixed assets as of December 29, 2016 and December 31, 2015, consisted of the following (in thousands):
|
|
2015 |
|
2016 |
|
||
Furniture, fixtures and equipment |
|
$ |
60,992 |
|
$ |
90,787 |
|
Leasehold improvements |
|
|
60,564 |
|
|
89,226 |
|
Computer software and hardware |
|
|
27,831 |
|
|
40,699 |
|
|
|
|
|
|
|
|
|
Fixed assets, at cost |
|
|
149,387 |
|
|
220,712 |
|
Less: accumulated depreciation and amortization |
|
|
46,404 |
|
|
70,241 |
|
|
|
|
|
|
|
|
|
Fixed assets, net |
|
$ |
102,983 |
|
$ |
150,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization on fixed assets for the years ended December 29, 2016, December 31, 2015, and December 25, 2014, was $27,459 thousand, $18,531 thousand, and $12,512 thousand, respectively.
|
3. Intangible Assets
The following summarizes the balances of intangible assets as of December 29, 2016 and December 31, 2015 (in thousands):
|
|
2015 |
|
2016 |
|
||||||||||
|
|
Estimated |
|
Gross |
|
Accumulated |
|
Gross |
|
Accumulated |
|
||||
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor relationships |
|
10 years |
|
|
319 |
|
|
(162 |
) |
|
319 |
|
|
(194 |
) |
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names |
|
|
|
|
109,269 |
|
|
— |
|
|
109,269 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
109,588 |
|
$ |
(162 |
) |
$ |
109,588 |
|
$ |
(194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to amortizable intangible assets for the years ended December 29, 2016, December 31, 2015 and December 25, 2014, was $32 thousand, $327 thousand and $356 thousand, respectively.
Estimated intangible asset amortization for the next four years is as follows (in thousands):
2017 |
|
$ |
32 |
|
2018 |
|
|
32 |
|
2019 |
|
|
32 |
|
2020 |
|
|
29 |
|
|
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.
4. Income Taxes
The components of the provision for income taxes are as follows (in thousands):
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||
Current expense: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
9,081 |
|
$ |
13,183 |
|
$ |
14,588 |
|
State |
|
|
1,979 |
|
|
2,552 |
|
|
2,422 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current expense |
|
|
11,060 |
|
|
15,735 |
|
|
17,010 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred (benefit)/expense: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(680 |
) |
|
553 |
|
|
(4,765 |
) |
State |
|
|
(746 |
) |
|
(89 |
) |
|
(771 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred (benefit)/expense |
|
|
(1,426 |
) |
|
464 |
|
|
(5,536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,634 |
|
$ |
16,199 |
|
$ |
11,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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).
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||
Computed "expected" provision at statutory rate |
|
$ |
8,656 |
|
$ |
15,052 |
|
$ |
19,080 |
|
State income taxes, net of federal income tax benefit |
|
|
801 |
|
|
1,594 |
|
|
1,073 |
|
Permanent differences: |
|
|
|
|
|
|
|
|
|
|
Non-qualified option holder dividend equivalent |
|
|
— |
|
|
— |
|
|
(7,877 |
) |
Other |
|
|
96 |
|
|
113 |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total permanent differences |
|
|
96 |
|
|
113 |
|
|
(7,881 |
) |
Other, net |
|
|
81 |
|
|
(560 |
) |
|
(798 |
) |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
9,634 |
|
$ |
16,199 |
|
$ |
11,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The permanent differences of $7,877 thousand in fiscal 2016 is the federal benefit related to a dividend equivalent payment to certain option holders. The state benefit related to this payment of $597 thousand is included in state income taxes, net of federal income tax benefit in the table above.
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):
|
|
Year Ended |
|
Year Ended |
|
||
Deferred tax assets: |
|
|
|
|
|
|
|
Accruals not currently deductible for tax purposes |
|
$ |
10,314 |
|
$ |
14,342 |
|
Tenant improvement allowances |
|
|
6,162 |
|
|
7,690 |
|
Inventories |
|
|
3,459 |
|
|
4,050 |
|
Stock based compensation |
|
|
2,997 |
|
|
4,179 |
|
Other intangibles |
|
|
761 |
|
|
693 |
|
Gift card liability |
|
|
820 |
|
|
858 |
|
Litigation accrual |
|
|
— |
|
|
5,299 |
|
Other |
|
|
89 |
|
|
47 |
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
24,602 |
|
|
37,158 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
Intangible assets |
|
|
(41,095 |
) |
|
(41,269 |
) |
Fixed assets |
|
|
(16,907 |
) |
|
(23,650 |
) |
Other |
|
|
(324 |
) |
|
(504 |
) |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(58,326 |
) |
|
(65,423 |
) |
|
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
$ |
(33,724 |
) |
$ |
(28,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment, and accordingly, has concluded that no valuation allowance is necessary as of December 29, 2016 and December 31, 2015.
The Company files income tax returns with the U.S. Federal government and various state jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities. The Internal Revenue Service has completed audits of the Company's federal income tax returns for the years through 2011. As of December 29, 2016, December 31, 2015, and December 25, 2014 the Company had unrecognized tax benefits of $0, $0, and $189 thousand, respectively. The amounts of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate were $0, $0, and $136 thousand as of December 29, 2016, December 31, 2015, and December 25, 2014, respectively. During 2014, the Company recorded an immaterial amount of interest expense related to uncertain tax positions. The Company's policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense.
|
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.
5. 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 contracts. We designate interest rate contracts used to convert the interest rate exposure on a portion of our debt portfolio from a floating rate to a fixed rate or capped rate as cash flow hedges.
Hedge Position as of December 29, 2016:
(in thousands) |
|
Notional Balance |
|
Final Maturity |
|
Other |
|
Other |
|
AOCI, Net |
|
||||||
Interest rate caps (cash flow hedges) |
|
$ |
205,000 |
|
U.S. dollars |
|
December 2021 |
|
$ |
2,473 |
|
$ |
— |
|
$ |
176 |
|
Interest rate swaps (cash flow hedges) |
|
$ |
17,500 |
|
U.S. dollars |
|
January 2017 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Hedge Position as of December 31, 2015:
(in thousands) |
|
Notional Balance |
|
Final Maturity |
|
Other |
|
Other |
|
AOCI, |
|
||||||
Interest rate swaps (cash flow hedges) |
|
$ |
35,000 |
|
U.S. dollars |
|
January 2017 |
|
$ |
— |
|
$ |
(160 |
) |
$ |
(100 |
) |
Designated Hedge Losses
Gains (losses) related to our designated hedge contracts are as follows (in thousands):
|
|
Effective Portion |
|
Effective Portion |
|
||||||||||||||
|
|
Fiscal Year Ended |
|
||||||||||||||||
(in thousands) |
|
2014 |
|
2015 |
|
2016 |
|
2014 |
|
2015 |
|
2016 |
|
||||||
Interest rate caps (cash flow hedges) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
176 |
|
Interest rate swaps (cash flow hedges) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
14 |
|
$ |
43 |
|
$ |
100 |
|
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.
|
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.
6. 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 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 29, 2016, are (in thousands):
|
|
Amount |
|
|
2017 |
|
$ |
63,340 |
|
2018 |
|
|
71,913 |
|
2019 |
|
|
73,580 |
|
2020 |
|
|
71,598 |
|
2021 |
|
|
67,875 |
|
Thereafter |
|
|
369,231 |
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
717,537 |
|
|
|
|
|
|
|
|
|
|
|
Lease expense for the years ended December 29, 2016, December 31, 2015, and December 25, 2014, was $53,899 thousand, $41,756 thousand, and $29,774 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.
On December 11, 2015, six plaintiffs filed a putative nationwide class action against the Company's subsidiary, Floor and Decor Outlets of America, Inc., ("F&D") in the United States District Court for the Northern District of Georgia, alleging that certain Chinese-manufactured laminate flooring products sold by F&D were falsely labeled as compliant with formaldehyde emissions standards established by California Air Resources Board ("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 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 the Company's losses related to this lawsuit. The Company recorded the $3.5 million receivable as an offset to litigation settlement expenses. 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. Seven members of the settlement class excluded themselves from the settlement. The settlement was granted final approval by the court on January 10, 2017 and did not involve an admission of liability by F&D. As of March 20, 2017, which represents the date on which the financial statements were available for distribution, the Company does not believe that claims by the members excluded from the settlement class or any personal injury claims are reasonably possible to result in a material loss to the Company in excess of the amounts already accrued.
|
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 |
7. Debt
The following table summarizes our long-term debt as of December 29, 2016 and December 31, 2015 (dollars in thousands):
|
|
Maturity |
|
Interest Rate Per |
|
December 31, |
|
December 29, |
|
||
Credit Facilities: |
|
|
|
|
|
|
|
|
|
|
|
Term Loan Facility |
|
September 30, 2023 |
|
5.25% Variable |
|
$ |
— |
|
$ |
350,000 |
|
ABL Facility |
|
September 30, 2021 |
|
2.08% Variable |
|
|
92,900 |
|
|
50,000 |
|
Prior Term Loan Facility |
|
July 2, 2019 |
|
3.30% Variable |
|
|
8,333 |
|
|
— |
|
GCI Facility |
|
May 1, 2019 |
|
7.75% Variable |
|
|
78,000 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total secured debt |
|
|
|
|
|
$ |
179,233 |
|
$ |
400,000 |
|
Less: current maturities |
|
|
|
|
|
|
1,267 |
|
|
3,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt maturities |
|
|
|
|
|
|
177,966 |
|
|
396,500 |
|
Less: unamortized discount and debt issuance costs |
|
|
|
|
|
|
1,643 |
|
|
9,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
|
|
|
$ |
176,323 |
|
$ |
387,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 ABL 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 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 Prior ABL 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 29, 2016, the Term Loan Facility had an outstanding balance of $350.0 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 29, 2016, the Term Loan Facility bore interest based on one of the following rates, at the Company's option:
|
|
|
|
|
i) |
Adjusted LIBOR Rate plus a margin of 4.25% |
|
|
ii) |
Base Rate plus a margin of 3.25%. 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% |
The following table summarizes scheduled maturities of our debt, including current maturities, as of December 29, 2016 (in thousands):
|
|
Amount |
|
|
2017 |
|
$ |
3,500 |
|
2018 |
|
|
3,500 |
|
2019 |
|
|
3,500 |
|
2020 |
|
|
4,375 |
|
2021 |
|
|
52,625 |
|
Thereafter |
|
|
332,500 |
|
|
|
|
|
|
Total minimum debt payments |
|
$ |
400,000 |
|
|
|
|
|
|
|
|
|
|
|
ABL Facility
As of December 29, 2016, 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 29, 2016, the borrowings bear interest at a floating rate, which is based on one of the following rates at the option of the Company:
|
|
|
|
|
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 29, 2016, the Company had net availability under the ABL Facility of $121,719 thousand, including outstanding letters of credit of $10,119 thousand.
Covenants
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 29, 2016, the Company was in compliance with its debt covenants.
Deferred Debt Issuance Cost and Original Issue Discount
Deferred debt issuance cost related to our ABL Facility and our Prior ABL Facility of $1,274 thousand and $930 thousand as of December 29, 2016 and December 31, 2015, 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 $9,257 thousand as of December 29, 2016 and Prior Term Loan Facility and GCI Facility of $1,644 thousand as of December 31, 2015 are included in Term loans on our Consolidated Balance Sheets. Amortization expense was $954 thousand, $692 thousand, and $656 thousand for the years ended December 29, 2016, December 31, 2015, and December 25, 2014.
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 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 29, 2016 and December 31, 2015, the fair values of the Company's debt are as follows (in thousands):
|
|
December 31, |
|
December 29, |
|
||
Total debt at par value |
|
$ |
179,233 |
|
$ |
400,000 |
|
Less: unamortized discount and debt issuance costs |
|
|
1,643 |
|
|
9,257 |
|
|
|
|
|
|
|
|
|
Net carry amount |
|
$ |
177,590 |
|
$ |
390,743 |
|
Fair value |
|
$ |
179,413 |
|
$ |
400,000 |
|
|
8. Stockholders' Equity
Common Stock
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
In the event of an initial public offering that yields gross proceeds of at least $75.0 million and has a public offering price per share of at least $1,000 per share, as adjusted by dividends or other distributions (which has been adjusted to $916 as a result of the dividend paid in connection with the 2013 Refinancing), all of the shares of Class B common stock will convert to the same number of Class A common stock, without any action of the holder. The shares of Class C common stock held by individuals other than FS Equity Partners VI, L. P., FS Affiliates VI, L.P. or their affiliated persons shall convert automatically to shares of Class A common stock, without any action on their part. 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.
Stock Options
The Company accounts for stock-based compensation pursuant to relevant authoritative guidance, which requires measurement of compensation cost for all stock awards at fair value on the date of grant and recognition of compensation, net of estimated forfeitures, over the requisite service period for awards expected to vest.
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, which was approved by the Company's Board of Directors, 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.
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:
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||
Risk-free interest rate |
|
|
2.09 |
% |
|
1.93 |
% |
|
1.43 |
% |
Expected volatility |
|
|
46 |
% |
|
49 |
% |
|
40 |
% |
Expected life (in years) |
|
|
6.49 |
|
|
6.92 |
|
|
6.50 |
|
Dividend yield |
|
|
0 |
% |
|
0 |
% |
|
0 |
% |
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.
The following summarizes the changes in the number of shares of common stock under option for the following periods:
|
|
Options |
|
Weighted |
|
Options |
|
Weighted |
|
Weighted |
|
|||||
Outstanding at December 26, 2013 |
|
|
10,714,356 |
|
$ |
4.09 |
|
|
3,471,150 |
|
$ |
3.64 |
|
|
— |
|
Granted |
|
|
748,553 |
|
$ |
7.69 |
|
|
— |
|
|
— |
|
$ |
3.72 |
|
Exercised |
|
|
(201,137 |
) |
$ |
3.28 |
|
|
— |
|
|
— |
|
|
— |
|
Forfeited or expired |
|
|
(1,737,506 |
) |
$ |
4.06 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 25, 2014 |
|
|
9,524,266 |
|
$ |
4.40 |
|
|
4,608,462 |
|
$ |
3.85 |
|
|
— |
|
Granted |
|
|
1,378,355 |
|
$ |
8.07 |
|
|
— |
|
|
— |
|
$ |
4.12 |
|
Exercised |
|
|
(5,149 |
) |
$ |
7.69 |
|
|
— |
|
|
— |
|
|
— |
|
Forfeited or expired |
|
|
(437,353 |
) |
$ |
7.16 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015 |
|
|
10,460,119 |
|
$ |
4.77 |
|
|
6,656,524 |
|
$ |
4.00 |
|
|
— |
|
Granted |
|
|
2,025,535 |
|
$ |
9.94 |
|
|
— |
|
|
— |
|
$ |
4.13 |
|
Exercised |
|
|
(145,140 |
) |
$ |
3.48 |
|
|
— |
|
|
— |
|
|
— |
|
Forfeited or expired |
|
|
(361,403 |
) |
$ |
6.65 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 29, 2016 |
|
|
11,979,111 |
|
$ |
5.34 |
|
|
8,151,056 |
|
$ |
4.20 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 29, 2016, was $9.99. The intrinsic value of stock options exercised was $942 thousand and $11 thousand for the years ended December 29, 2016 and December 31, 2015, respectively. The aggregate intrinsic value of stock options outstanding as of December 29, 2016, was $55,759 thousand with a weighted-average remaining contractual life of 6.2 years. The aggregate intrinsic value of stock options exercisable as of December 29, 2016, was $47,218 thousand with a weighted-average remaining contractual life of 5.1 years. The Company's total unrecognized compensation cost related to stock-based compensation as of December 29, 2016, was $12,577 thousand, which is expected to be recognized over a weighted average period of 3.9 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. Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
Year Ended |
|
Year Ended |
|
||
Accrued incentive compensation |
|
$ |
9,236 |
|
$ |
14,799 |
|
Accrued legal fees |
|
|
183 |
|
|
13,642 |
|
Other |
|
|
26,422 |
|
|
33,064 |
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
35,841 |
|
$ |
61,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Subsequent Events
On April 13, 2017, the Company filed an amendment to its certificate of incorporation changing the name of the Company from "FDO Holdings, Inc." to "Floor & Decor Holdings, Inc."
On April 24, 2017, the Company filed an amendment to its certificate of incorporation, effecting a 321.820-for-one stock split of its outstanding common stock, which was approved by the Company's board of directors and shareholders on April 13, 2017. The accompanying financial statements and notes to the financial statements give retroactive effect to the stock split for all periods presented.
|
Schedule I—Floor & Decor Holdings, Inc.
(parent company only)
Condensed Balance Sheets
(In Thousands, Except Share and Per Share Data)
|
|
As of |
|
As of |
|
||
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Accounts receivable from subsidiaries |
|
$ |
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
— |
|
|
— |
|
Long-term assets: |
|
|
|
|
|
|
|
Investment in subsidiaries |
|
|
312,365 |
|
|
134,283 |
|
|
|
|
|
|
|
|
|
Total long-term assets |
|
|
312,365 |
|
|
134,283 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
312,365 |
|
$ |
134,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Notes payable |
|
$ |
— |
|
$ |
— |
|
Accrued interest payable |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
Stockholders' equity |
|
|
|
|
|
|
|
Capital stock: |
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at December 29, 2016 and December 31, 2015 |
|
|
— |
|
|
— |
|
Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 76,847,116 shares issued and outstanding at December 29, 2016 and December 31, 2015 |
|
|
77 |
|
|
77 |
|
Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 395,742 shares issued and outstanding at December 29, 2016; 250,602 shares issued and outstanding at December 31, 2015 |
|
|
— |
|
|
— |
|
Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 6,275,489 shares issued and outstanding at December 29, 2016 and December 31, 2015 |
|
|
6 |
|
|
6 |
|
Additional paid-in capital |
|
|
264,288 |
|
|
117,270 |
|
Accumulated other comprehensive loss, net |
|
|
(100 |
) |
|
176 |
|
Retained earnings |
|
|
48,094 |
|
|
16,754 |
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
312,365 |
|
|
134,283 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
312,365 |
|
$ |
134,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule I—Floor & Decor Holdings, Inc.
(parent company only)
Condensed Statements of Income
(In Thousands)
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||
Net income of subsidiaries |
|
$ |
15,098 |
|
$ |
26,807 |
|
$ |
43,039 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
15,098 |
|
|
26,807 |
|
|
43,039 |
|
Benefit for income taxes |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,098 |
|
$ |
26,807 |
|
$ |
43,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule I—Floor & Decor Holdings, Inc.
(parent company only)
Condensed Statements of Comprehensive Income
(In Thousands)
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||
Net income |
|
$ |
15,098 |
|
$ |
26,807 |
|
$ |
43,039 |
|
Unrealized gain on fair value hedge instruments of subsidiaries, net of tax |
|
|
14 |
|
|
43 |
|
|
276 |
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
15,112 |
|
$ |
26,850 |
|
$ |
43,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule I—Floor & Decor Holdings, Inc.
(parent company only)
Consolidated Statements of Cash Flows
(In Thousands)
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||
Operating activities |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,098 |
|
$ |
26,807 |
|
$ |
43,039 |
|
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
Net income of subsidiaries |
|
|
(15,098 |
) |
|
(26,807 |
) |
|
(43,039 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
— |
|
|
— |
|
|
— |
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
Investment in subsidiary |
|
|
(954 |
) |
|
(40 |
) |
|
(284 |
) |
Distribution from subsidiary |
|
|
— |
|
|
— |
|
|
225,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(954 |
) |
|
(40 |
) |
|
224,716 |
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
954 |
|
|
40 |
|
|
284 |
|
Cash dividends |
|
|
— |
|
|
— |
|
|
(225,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
954 |
|
|
40 |
|
|
(224,716 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
— |
|
|
— |
|
|
— |
|
Cash and cash equivalents, beginning of the year |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
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Cash and cash equivalents, end of the year |
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$ |
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$ |
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$ |
— |
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Schedule I—Floor & Decor Holdings, Inc.
(parent company only)
Notes to Condensed Financial Statements
December 29, 2016
1. Basis of Presentation
In the parent-company-only financial statements, the Company's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries. The parent-company-only financial statements should be read in conjunction with the Company's consolidated financial statements.
2. Guarantees and Restrictions
As of December 29, 2016, Floor and Decor Outlets of America, Inc., a subsidiary of the Company, had $350,000 thousand of debt outstanding under the Term Loan Facility. As of December 29, 2016, Floor and Decor Outlets of America, Inc. also had $50,000 thousand outstanding under the ABL Facility, excluding outstanding letters of credit of $10,119 thousand. Under the terms of the credit agreements governing our Credit Facilities, the Company's subsidiaries have guaranteed the payment of all principal and interest. In the event of a default under our Credit Facilities, certain of the Company's subsidiaries will be directly liable to the debt holders. As of December 29, 2016, the Term Loan Facility had a maturity date of September 30, 2023, and the ABL Facility had a maturity date of September 30, 2021. The credit agreements governing our Credit Facilities also include restrictions on the ability of the Company's subsidiaries 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.
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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.
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 29, 2016 ("fiscal 2016") and December 25, 2014 ("fiscal 2014") include 52 weeks. Fiscal year ended December 31, 2015 ("fiscal 2015") includes 53 weeks.
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.
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.
The Company has evaluated subsequent events through March 20, 2017, which represents the date on which the financial statements were available for distribution.
Cash and Cash Equivalents
Cash consists of currency and demand deposits with banks.
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.
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 29, 2016 and December 31, 2015, was $188 thousand and $133 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.
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.
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 $2,449 thousand and $2,476 thousand as of December 29, 2016 and December 31, 2015, 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 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, loss, or inaccurate records for the receipt of inventory, 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:
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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.
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:
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Life |
Furniture, fixtures and equipment |
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2 - 7 years |
Leasehold improvements |
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10 - 25 years |
Computer software and hardware |
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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 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.
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:
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Useful Life |
Trade names |
Indefinite |
Vendor relationships |
10 years |
Goodwill and Other Indefinite-Lived Intangible Assets
In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC 350"), Intangibles—Goodwill and Other, goodwill and other intangible assets with indefinite lives resulting from business combinations are not amortized but instead are tested for impairment at least annually (more frequently if certain indicators are present) while identifiable intangible assets with finite lives are amortized over their estimated useful lives. The Company obtains independent third-party valuation studies to assist it with determining the fair value of goodwill and indefinite-lived intangible assets. The Company's goodwill and other indefinite-lived intangible assets subject to impairment testing arose primarily as a result of its acquisition of Floor and Decor Outlets of America, Inc. in November 2010.
The Company performs a two-step quantitative impairment test on goodwill. In the first step, the Company compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired, and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference.
The Company estimates the fair value of our reporting unit using a weighted combination of the income approach and the market approach. The income approach utilizes a discounted cash flow model incorporating management's expectations for future revenue, operating expenses, earnings before interest, taxes, depreciation and amortization, working capital and capital expenditures. The Company discounts the related cash flow forecasts using its estimated weighted-average cost of capital at the date of valuation. The market approach utilizes comparative market multiples derived by relating the value of guideline companies in the Company's industry and/or with similar growth prospects, based on either the market price of publicly traded shares or the prices of companies being acquired in the marketplace, to various measures of their earnings. Such multiples are then applied to the Company's historical and projected earnings to derive a valuation estimate.
Based on the 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, determined using a discounted cash flow methodology. 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:
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Useful Life |
Trade names |
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Indefinite |
Vendor relationships |
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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 assets, 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 one or more 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 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.
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.
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.
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 $5.0 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. As of December 29, 2016, per occurrence deductibles for individual workers' compensation and individual general liability claims were $250 thousand and $150 thousand, respectively.
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.
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.
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 1) a current adjustment to the recorded liability and related asset and 2) 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.
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Level 1: Inputs that are quoted prices in active markets for identical assets or liabilities |
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Level 2: Inputs other than quoted prices in active markets for assets or liabilities that are either directly or indirectly observable |
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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.
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.
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Level 1: Inputs that are quoted prices in active markets for identical assets or liabilities |
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Level 2: Inputs other than quoted prices in active markets for assets or liabilities that are either directly or indirectly observable |
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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.
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, we 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 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 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 2016 or 2015 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.
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.
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.
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 2016, fiscal 2015, and fiscal 2014 gift card breakage income of $627 thousand, $511 thousand, and $355 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 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.
Sales Returns and Allowances
The Company accrues for estimated sales returns based on historical sales return results. The allowance for sales returns at December 29, 2016 and December 31, 2015, was $4,887 thousand and $3,720 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.
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.
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.
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.
Advertising
The Company expenses advertising costs as the advertising takes place. Advertising costs incurred during the years ended December 29, 2016 and December 31, 2015, and December 25, 2014, were $33,497 thousand, $24,478 thousand and $17,359 thousand, respectively, and are included in Selling and store operating expenses and Pre-opening expenses in the 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.
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 29, 2016, December 31, 2015, and December 25, 2014, totaled $13,732 thousand, $7,380 thousand, and $7,412 thousand, respectively.
Loss on Early Extinguishment of Debt
On September 30, 2016, the Company amended its prior asset-based revolving credit facility (the "Prior ABL Facility") and terminated its prior term loan facility (the "Prior Term Loan Facility"), each with Wells Fargo Bank, N.A, dated as of May 1, 2013, as amended. The Company also terminated its prior senior secured term loan facility with GCI Capital Markets LLC, (the "GCI Facility"). For the year ended December 29, 2016, loss on early extinguishment of debt is comprised of a (1) $179 thousand prepayment penalty paid in connection with the extinguishment of the Prior Term Loan Facility of $19,833 thousand, (2) write-off of approximately $1,319 thousand of unamortized debt issuance cost and original issue discount associated with the extinguishment of the Prior Term Loan Facility and the GCI Facility, (3) write-off of approximately $162 thousand associated with the amendment of the Prior ABL Facility and (4) $153 thousand unamortized deferred debt issuance cost related to the April 15, 2016 amendment to the Prior Term Loan Facility.
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.
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 ASU No. 2016-09 "Improvements to Employee Share-Based Payment Accounting" in 2016 and now recognize 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.
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.
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.
The following table presents the Net sales of each major product category for each of the last three fiscal years (in thousands):
|
|
Fiscal Year Ended |
|
||||||||||||||||
|
|
December 25, 2014 |
|
December 31, 2015 |
|
December 29, 2016 |
|
||||||||||||
Product Category |
|
Net Sales |
|
% of |
|
Net Sales |
|
% of |
|
Net Sales |
|
% of |
|
||||||
Tile |
|
$ |
174,271 |
|
|
30 |
% |
$ |
244,902 |
|
|
31 |
% |
$ |
325,433 |
|
|
31 |
% |
Decorative Accessories |
|
|
98,991 |
|
|
16 |
|
|
138,442 |
|
|
18 |
|
|
188,371 |
|
|
18 |
|
Accessories (Installation Materials and Tools) |
|
|
91,122 |
|
|
16 |
|
|
124,162 |
|
|
16 |
|
|
165,330 |
|
|
16 |
|
Wood |
|
|
90,752 |
|
|
16 |
|
|
116,999 |
|
|
15 |
|
|
142,751 |
|
|
14 |
|
Laminate / Luxury Vinyl Plank |
|
|
61,817 |
|
|
11 |
|
|
77,586 |
|
|
10 |
|
|
131,447 |
|
|
12 |
|
Natural Stone |
|
|
65,008 |
|
|
11 |
|
|
78,294 |
|
|
10 |
|
|
90,866 |
|
|
9 |
|
Delivery and Other |
|
|
2,627 |
|
|
— |
|
|
3,627 |
|
|
— |
|
|
6,561 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
584,588 |
|
|
100 |
% |
$ |
784,012 |
|
|
100 |
% |
$ |
1,050,759 |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. 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, with early adoption permitted. The amendments in this update should be applied prospectively. The adoption of ASU No. 2015-11 is not expected to 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 could impact the timing and amounts of revenue recognized. 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 the retail store for final delivery at a later date. The Company is continuing to evaluate the impact this standard, and related amendments and interpretive guidance, will have on its consolidated financial statements. The Company plans to adopt the new standard on a modified retrospective basis beginning December 29, 2017.
|
|
Useful Life |
Furniture, fixtures and equipment |
2 - 7 years |
Leasehold improvements |
10 - 25 years |
Computer software and hardware |
3 - 7 years |
|
|
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 |
|
|
Useful Life |
Trade names |
|
Indefinite |
Vendor relationships |
|
10 years |
|
|
Fiscal Year Ended |
|
||||||||||||||||
|
|
December 25, 2014 |
|
December 31, 2015 |
|
December 29, 2016 |
|
||||||||||||
Product Category |
|
Net Sales |
|
% of |
|
Net Sales |
|
% of |
|
Net Sales |
|
% of |
|
||||||
Tile |
|
$ |
174,271 |
|
|
30 |
% |
$ |
244,902 |
|
|
31 |
% |
$ |
325,433 |
|
|
31 |
% |
Decorative Accessories |
|
|
98,991 |
|
|
16 |
|
|
138,442 |
|
|
18 |
|
|
188,371 |
|
|
18 |
|
Accessories (Installation Materials and Tools) |
|
|
91,122 |
|
|
16 |
|
|
124,162 |
|
|
16 |
|
|
165,330 |
|
|
16 |
|
Wood |
|
|
90,752 |
|
|
16 |
|
|
116,999 |
|
|
15 |
|
|
142,751 |
|
|
14 |
|
Laminate / Luxury Vinyl Plank |
|
|
61,817 |
|
|
11 |
|
|
77,586 |
|
|
10 |
|
|
131,447 |
|
|
12 |
|
Natural Stone |
|
|
65,008 |
|
|
11 |
|
|
78,294 |
|
|
10 |
|
|
90,866 |
|
|
9 |
|
Delivery and Other |
|
|
2,627 |
|
|
— |
|
|
3,627 |
|
|
— |
|
|
6,561 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
584,588 |
|
|
100 |
% |
$ |
784,012 |
|
|
100 |
% |
$ |
1,050,759 |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets as of December 29, 2016 and December 31, 2015, consisted of the following (in thousands):
|
|
2015 |
|
2016 |
|
||
Furniture, fixtures and equipment |
|
$ |
60,992 |
|
$ |
90,787 |
|
Leasehold improvements |
|
|
60,564 |
|
|
89,226 |
|
Computer software and hardware |
|
|
27,831 |
|
|
40,699 |
|
|
|
|
|
|
|
|
|
Fixed assets, at cost |
|
|
149,387 |
|
|
220,712 |
|
Less: accumulated depreciation and amortization |
|
|
46,404 |
|
|
70,241 |
|
|
|
|
|
|
|
|
|
Fixed assets, net |
|
$ |
102,983 |
|
$ |
150,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes the balances of intangible assets as of December 29, 2016 and December 31, 2015 (in thousands):
|
|
2015 |
|
2016 |
|
||||||||||
|
|
Estimated |
|
Gross |
|
Accumulated |
|
Gross |
|
Accumulated |
|
||||
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor relationships |
|
10 years |
|
|
319 |
|
|
(162 |
) |
|
319 |
|
|
(194 |
) |
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names |
|
|
|
|
109,269 |
|
|
— |
|
|
109,269 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
109,588 |
|
$ |
(162 |
) |
$ |
109,588 |
|
$ |
(194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated intangible asset amortization for the next four years is as follows (in thousands):
2017 |
|
$ |
32 |
|
2018 |
|
|
32 |
|
2019 |
|
|
32 |
|
2020 |
|
|
29 |
|
|
The components of the provision for income taxes are as follows (in thousands):
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||
Current expense: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
9,081 |
|
$ |
13,183 |
|
$ |
14,588 |
|
State |
|
|
1,979 |
|
|
2,552 |
|
|
2,422 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current expense |
|
|
11,060 |
|
|
15,735 |
|
|
17,010 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred (benefit)/expense: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(680 |
) |
|
553 |
|
|
(4,765 |
) |
State |
|
|
(746 |
) |
|
(89 |
) |
|
(771 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred (benefit)/expense |
|
|
(1,426 |
) |
|
464 |
|
|
(5,536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,634 |
|
$ |
16,199 |
|
$ |
11,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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).
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||
Computed "expected" provision at statutory rate |
|
$ |
8,656 |
|
$ |
15,052 |
|
$ |
19,080 |
|
State income taxes, net of federal income tax benefit |
|
|
801 |
|
|
1,594 |
|
|
1,073 |
|
Permanent differences: |
|
|
|
|
|
|
|
|
|
|
Non-qualified option holder dividend equivalent |
|
|
— |
|
|
— |
|
|
(7,877 |
) |
Other |
|
|
96 |
|
|
113 |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total permanent differences |
|
|
96 |
|
|
113 |
|
|
(7,881 |
) |
Other, net |
|
|
81 |
|
|
(560 |
) |
|
(798 |
) |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
9,634 |
|
$ |
16,199 |
|
$ |
11,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
Year Ended |
|
Year Ended |
|
||
Deferred tax assets: |
|
|
|
|
|
|
|
Accruals not currently deductible for tax purposes |
|
$ |
10,314 |
|
$ |
14,342 |
|
Tenant improvement allowances |
|
|
6,162 |
|
|
7,690 |
|
Inventories |
|
|
3,459 |
|
|
4,050 |
|
Stock based compensation |
|
|
2,997 |
|
|
4,179 |
|
Other intangibles |
|
|
761 |
|
|
693 |
|
Gift card liability |
|
|
820 |
|
|
858 |
|
Litigation accrual |
|
|
— |
|
|
5,299 |
|
Other |
|
|
89 |
|
|
47 |
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
24,602 |
|
|
37,158 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
Intangible assets |
|
|
(41,095 |
) |
|
(41,269 |
) |
Fixed assets |
|
|
(16,907 |
) |
|
(23,650 |
) |
Other |
|
|
(324 |
) |
|
(504 |
) |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(58,326 |
) |
|
(65,423 |
) |
|
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
$ |
(33,724 |
) |
$ |
(28,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
— |
Hedge Position as of December 29, 2016:
(in thousands) |
|
Notional Balance |
|
Final Maturity |
|
Other |
|
Other |
|
AOCI, Net |
|
||||||
Interest rate caps (cash flow hedges) |
|
$ |
205,000 |
|
U.S. dollars |
|
December 2021 |
|
$ |
2,473 |
|
$ |
— |
|
$ |
176 |
|
Interest rate swaps (cash flow hedges) |
|
$ |
17,500 |
|
U.S. dollars |
|
January 2017 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Hedge Position as of December 31, 2015:
(in thousands) |
|
Notional Balance |
|
Final Maturity |
|
Other |
|
Other |
|
AOCI, |
|
||||||
Interest rate swaps (cash flow hedges) |
|
$ |
35,000 |
|
U.S. dollars |
|
January 2017 |
|
$ |
— |
|
$ |
(160 |
) |
$ |
(100 |
) |
|
|
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 |
Gains (losses) related to our designated hedge contracts are as follows (in thousands):
|
|
Effective Portion |
|
Effective Portion |
|
||||||||||||||
|
|
Fiscal Year Ended |
|
||||||||||||||||
(in thousands) |
|
2014 |
|
2015 |
|
2016 |
|
2014 |
|
2015 |
|
2016 |
|
||||||
Interest rate caps (cash flow hedges) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
176 |
|
Interest rate swaps (cash flow hedges) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
14 |
|
$ |
43 |
|
$ |
100 |
|
|
(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 |
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 29, 2016, are (in thousands):
|
|
Amount |
|
|
2017 |
|
$ |
63,340 |
|
2018 |
|
|
71,913 |
|
2019 |
|
|
73,580 |
|
2020 |
|
|
71,598 |
|
2021 |
|
|
67,875 |
|
Thereafter |
|
|
369,231 |
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
717,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
The following table summarizes our long-term debt as of December 29, 2016 and December 31, 2015 (dollars in thousands):
|
|
Maturity |
|
Interest Rate Per |
|
December 31, |
|
December 29, |
|
||
Credit Facilities: |
|
|
|
|
|
|
|
|
|
|
|
Term Loan Facility |
|
September 30, 2023 |
|
5.25% Variable |
|
$ |
— |
|
$ |
350,000 |
|
ABL Facility |
|
September 30, 2021 |
|
2.08% Variable |
|
|
92,900 |
|
|
50,000 |
|
Prior Term Loan Facility |
|
July 2, 2019 |
|
3.30% Variable |
|
|
8,333 |
|
|
— |
|
GCI Facility |
|
May 1, 2019 |
|
7.75% Variable |
|
|
78,000 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total secured debt |
|
|
|
|
|
$ |
179,233 |
|
$ |
400,000 |
|
Less: current maturities |
|
|
|
|
|
|
1,267 |
|
|
3,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt maturities |
|
|
|
|
|
|
177,966 |
|
|
396,500 |
|
Less: unamortized discount and debt issuance costs |
|
|
|
|
|
|
1,643 |
|
|
9,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
|
|
|
$ |
176,323 |
|
$ |
387,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes scheduled maturities of our debt, including current maturities, as of December 29, 2016 (in thousands):
|
|
Amount |
|
|
2017 |
|
$ |
3,500 |
|
2018 |
|
|
3,500 |
|
2019 |
|
|
3,500 |
|
2020 |
|
|
4,375 |
|
2021 |
|
|
52,625 |
|
Thereafter |
|
|
332,500 |
|
|
|
|
|
|
Total minimum debt payments |
|
$ |
400,000 |
|
|
|
|
|
|
|
|
|
|
|
At December 29, 2016 and December 31, 2015, the fair values of the Company's debt are as follows (in thousands):
|
|
December 31, |
|
December 29, |
|
||
Total debt at par value |
|
$ |
179,233 |
|
$ |
400,000 |
|
Less: unamortized discount and debt issuance costs |
|
|
1,643 |
|
|
9,257 |
|
|
|
|
|
|
|
|
|
Net carry amount |
|
$ |
177,590 |
|
$ |
390,743 |
|
Fair value |
|
$ |
179,413 |
|
$ |
400,000 |
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||
Risk-free interest rate |
|
|
2.09 |
% |
|
1.93 |
% |
|
1.43 |
% |
Expected volatility |
|
|
46 |
% |
|
49 |
% |
|
40 |
% |
Expected life (in years) |
|
|
6.49 |
|
|
6.92 |
|
|
6.50 |
|
Dividend yield |
|
|
0 |
% |
|
0 |
% |
|
0 |
% |
|
|
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 |
|
|
Options |
|
Weighted |
|
Options |
|
Weighted |
|
Weighted |
|
|||||
Outstanding at December 26, 2013 |
|
|
10,714,356 |
|
$ |
4.09 |
|
|
3,471,150 |
|
$ |
3.64 |
|
|
— |
|
Granted |
|
|
748,553 |
|
$ |
7.69 |
|
|
— |
|
|
— |
|
$ |
3.72 |
|
Exercised |
|
|
(201,137 |
) |
$ |
3.28 |
|
|
— |
|
|
— |
|
|
— |
|
Forfeited or expired |
|
|
(1,737,506 |
) |
$ |
4.06 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 25, 2014 |
|
|
9,524,266 |
|
$ |
4.40 |
|
|
4,608,462 |
|
$ |
3.85 |
|
|
— |
|
Granted |
|
|
1,378,355 |
|
$ |
8.07 |
|
|
— |
|
|
— |
|
$ |
4.12 |
|
Exercised |
|
|
(5,149 |
) |
$ |
7.69 |
|
|
— |
|
|
— |
|
|
— |
|
Forfeited or expired |
|
|
(437,353 |
) |
$ |
7.16 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015 |
|
|
10,460,119 |
|
$ |
4.77 |
|
|
6,656,524 |
|
$ |
4.00 |
|
|
— |
|
Granted |
|
|
2,025,535 |
|
$ |
9.94 |
|
|
— |
|
|
— |
|
$ |
4.13 |
|
Exercised |
|
|
(145,140 |
) |
$ |
3.48 |
|
|
— |
|
|
— |
|
|
— |
|
Forfeited or expired |
|
|
(361,403 |
) |
$ |
6.65 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 29, 2016 |
|
|
11,979,111 |
|
$ |
5.34 |
|
|
8,151,056 |
|
$ |
4.20 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses consist of the following (in thousands):
|
|
Year Ended |
|
Year Ended |
|
||
Accrued incentive compensation |
|
$ |
9,236 |
|
$ |
14,799 |
|
Accrued legal fees |
|
|
183 |
|
|
13,642 |
|
Other |
|
|
26,422 |
|
|
33,064 |
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
35,841 |
|
$ |
61,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 28, 2017, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. ("F&D"), operates 80 warehouse-format stores, which average 73,000 square feet, and one small-format standalone design center in 20 states, including Alabama, Arizona, California, Colorado, Florida, Georgia, Illinois, Kentucky, Louisiana, Maryland, Nevada, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Utah, and Wisconsin, 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. 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.
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.
1. Summary of Significant Accounting Policies
Nature of Business
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, Do it Yourself customers and customers who buy the products for professional installation. We operate within one reportable segment.
As of December 29, 2016, the Company, through its wholly owned subsidiary, operates 69 warehouse-format stores, which average 72,000 square feet, and one small-format standalone design center in 17 states including Arizona, California, Colorado, Florida, Georgia, Illinois, Louisiana, Maryland, Nevada, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, and Utah, 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 29, 2016 ("fiscal 2016") and December 25, 2014 ("fiscal 2014") include 52 weeks. Fiscal year ended December 31, 2015 ("fiscal 2015") includes 53 weeks.
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.
The Company has evaluated subsequent events through March 20, 2017, which represents the date on which the financial statements were available for distribution.
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 29, 2016 and December 31, 2015, was $188 thousand and $133 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 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 $2,449 thousand and $2,476 thousand as of December 29, 2016 and December 31, 2015, 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 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, loss, or inaccurate records for the receipt of inventory, 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:
|
|
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 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
In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC 350"), Intangibles—Goodwill and Other, goodwill and other intangible assets with indefinite lives resulting from business combinations are not amortized but instead are tested for impairment at least annually (more frequently if certain indicators are present) while identifiable intangible assets with finite lives are amortized over their estimated useful lives. The Company obtains independent third-party valuation studies to assist it with determining the fair value of goodwill and indefinite-lived intangible assets. The Company's goodwill and other indefinite-lived intangible assets subject to impairment testing arose primarily as a result of its acquisition of Floor and Decor Outlets of America, Inc. in November 2010.
The Company performs a two-step quantitative impairment test on goodwill. In the first step, the Company compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired, and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference.
The Company estimates the fair value of our reporting unit using a weighted combination of the income approach and the market approach. The income approach utilizes a discounted cash flow model incorporating management's expectations for future revenue, operating expenses, earnings before interest, taxes, depreciation and amortization, working capital and capital expenditures. The Company discounts the related cash flow forecasts using its estimated weighted-average cost of capital at the date of valuation. The market approach utilizes comparative market multiples derived by relating the value of guideline companies in the Company's industry and/or with similar growth prospects, based on either the market price of publicly traded shares or the prices of companies being acquired in the marketplace, to various measures of their earnings. Such multiples are then applied to the Company's historical and projected earnings to derive a valuation estimate.
Based on the 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, determined using a discounted cash flow methodology. 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 |
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 assets, 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 one or more 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 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 $5.0 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. As of December 29, 2016, per occurrence deductibles for individual workers' compensation and individual general liability claims were $250 thousand and $150 thousand, respectively.
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 1) a current adjustment to the recorded liability and related asset and 2) 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, we 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 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 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 2016 or 2015 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 fiscal 2016, fiscal 2015, and fiscal 2014 gift card breakage income of $627 thousand, $511 thousand, and $355 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 29, 2016 and December 31, 2015, was $4,887 thousand and $3,720 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 years ended December 29, 2016 and December 31, 2015, and December 25, 2014, were $33,497 thousand, $24,478 thousand and $17,359 thousand, respectively, and are included in Selling and store operating expenses and Pre-opening expenses in the 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 29, 2016, December 31, 2015, and December 25, 2014, totaled $13,732 thousand, $7,380 thousand, and $7,412 thousand, respectively.
Loss on Early Extinguishment of Debt
On September 30, 2016, the Company amended its prior asset-based revolving credit facility (the "Prior ABL Facility") and terminated its prior term loan facility (the "Prior Term Loan Facility"), each with Wells Fargo Bank, N.A, dated as of May 1, 2013, as amended. The Company also terminated its prior senior secured term loan facility with GCI Capital Markets LLC, (the "GCI Facility"). For the year ended December 29, 2016, loss on early extinguishment of debt is comprised of a (1) $179 thousand prepayment penalty paid in connection with the extinguishment of the Prior Term Loan Facility of $19,833 thousand, (2) write-off of approximately $1,319 thousand of unamortized debt issuance cost and original issue discount associated with the extinguishment of the Prior Term Loan Facility and the GCI Facility, (3) write-off of approximately $162 thousand associated with the amendment of the Prior ABL Facility and (4) $153 thousand unamortized deferred debt issuance cost related to the April 15, 2016 amendment to the Prior Term Loan Facility.
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 ASU No. 2016-09 "Improvements to Employee Share-Based Payment Accounting" in 2016 and now recognize 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.
The following table presents the Net sales of each major product category for each of the last three fiscal years (in thousands):
|
|
Fiscal Year Ended |
|
||||||||||||||||
|
|
December 25, 2014 |
|
December 31, 2015 |
|
December 29, 2016 |
|
||||||||||||
Product Category |
|
Net Sales |
|
% of |
|
Net Sales |
|
% of |
|
Net Sales |
|
% of |
|
||||||
Tile |
|
$ |
174,271 |
|
|
30 |
% |
$ |
244,902 |
|
|
31 |
% |
$ |
325,433 |
|
|
31 |
% |
Decorative Accessories |
|
|
98,991 |
|
|
16 |
|
|
138,442 |
|
|
18 |
|
|
188,371 |
|
|
18 |
|
Accessories (Installation Materials and Tools) |
|
|
91,122 |
|
|
16 |
|
|
124,162 |
|
|
16 |
|
|
165,330 |
|
|
16 |
|
Wood |
|
|
90,752 |
|
|
16 |
|
|
116,999 |
|
|
15 |
|
|
142,751 |
|
|
14 |
|
Laminate / Luxury Vinyl Plank |
|
|
61,817 |
|
|
11 |
|
|
77,586 |
|
|
10 |
|
|
131,447 |
|
|
12 |
|
Natural Stone |
|
|
65,008 |
|
|
11 |
|
|
78,294 |
|
|
10 |
|
|
90,866 |
|
|
9 |
|
Delivery and Other |
|
|
2,627 |
|
|
— |
|
|
3,627 |
|
|
— |
|
|
6,561 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
584,588 |
|
|
100 |
% |
$ |
784,012 |
|
|
100 |
% |
$ |
1,050,759 |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. 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, with early adoption permitted. The amendments in this update should be applied prospectively. The adoption of ASU No. 2015-11 is not expected to 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 could impact the timing and amounts of revenue recognized. 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 the retail store for final delivery at a later date. The Company is continuing to evaluate the impact this standard, and related amendments and interpretive guidance, will have on its consolidated financial statements. The Company plans to adopt the new standard on a modified retrospective basis beginning December 29, 2017.
|
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.
|
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.
5. 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 contracts. We designate interest rate contracts used to convert the interest rate exposure on a portion of our debt portfolio from a floating rate to a fixed rate or capped rate as cash flow hedges.
Hedge Position as of December 29, 2016:
(in thousands) |
|
Notional Balance |
|
Final Maturity |
|
Other |
|
Other |
|
AOCI, Net |
|
||||||
Interest rate caps (cash flow hedges) |
|
$ |
205,000 |
|
U.S. dollars |
|
December 2021 |
|
$ |
2,473 |
|
$ |
— |
|
$ |
176 |
|
Interest rate swaps (cash flow hedges) |
|
$ |
17,500 |
|
U.S. dollars |
|
January 2017 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Hedge Position as of December 31, 2015:
(in thousands) |
|
Notional Balance |
|
Final Maturity |
|
Other |
|
Other |
|
AOCI, |
|
||||||
Interest rate swaps (cash flow hedges) |
|
$ |
35,000 |
|
U.S. dollars |
|
January 2017 |
|
$ |
— |
|
$ |
(160 |
) |
$ |
(100 |
) |
Designated Hedge Losses
Gains (losses) related to our designated hedge contracts are as follows (in thousands):
|
|
Effective Portion |
|
Effective Portion |
|
||||||||||||||
|
|
Fiscal Year Ended |
|
||||||||||||||||
(in thousands) |
|
2014 |
|
2015 |
|
2016 |
|
2014 |
|
2015 |
|
2016 |
|
||||||
Interest rate caps (cash flow hedges) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
176 |
|
Interest rate swaps (cash flow hedges) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
14 |
|
$ |
43 |
|
$ |
100 |
|
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.
|
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 |
7. Debt
The following table summarizes our long-term debt as of December 29, 2016 and December 31, 2015 (dollars in thousands):
|
|
Maturity |
|
Interest Rate Per |
|
December 31, |
|
December 29, |
|
||
Credit Facilities: |
|
|
|
|
|
|
|
|
|
|
|
Term Loan Facility |
|
September 30, 2023 |
|
5.25% Variable |
|
$ |
— |
|
$ |
350,000 |
|
ABL Facility |
|
September 30, 2021 |
|
2.08% Variable |
|
|
92,900 |
|
|
50,000 |
|
Prior Term Loan Facility |
|
July 2, 2019 |
|
3.30% Variable |
|
|
8,333 |
|
|
— |
|
GCI Facility |
|
May 1, 2019 |
|
7.75% Variable |
|
|
78,000 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total secured debt |
|
|
|
|
|
$ |
179,233 |
|
$ |
400,000 |
|
Less: current maturities |
|
|
|
|
|
|
1,267 |
|
|
3,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt maturities |
|
|
|
|
|
|
177,966 |
|
|
396,500 |
|
Less: unamortized discount and debt issuance costs |
|
|
|
|
|
|
1,643 |
|
|
9,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
|
|
|
$ |
176,323 |
|
$ |
387,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 ABL 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 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 Prior ABL 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 29, 2016, the Term Loan Facility had an outstanding balance of $350.0 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 29, 2016, the Term Loan Facility bore interest based on one of the following rates, at the Company's option:
|
|
|
|
|
i) |
Adjusted LIBOR Rate plus a margin of 4.25% |
|
|
ii) |
Base Rate plus a margin of 3.25%. 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% |
The following table summarizes scheduled maturities of our debt, including current maturities, as of December 29, 2016 (in thousands):
|
|
Amount |
|
|
2017 |
|
$ |
3,500 |
|
2018 |
|
|
3,500 |
|
2019 |
|
|
3,500 |
|
2020 |
|
|
4,375 |
|
2021 |
|
|
52,625 |
|
Thereafter |
|
|
332,500 |
|
|
|
|
|
|
Total minimum debt payments |
|
$ |
400,000 |
|
|
|
|
|
|
|
|
|
|
|
ABL Facility
As of December 29, 2016, 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 29, 2016, the borrowings bear interest at a floating rate, which is based on one of the following rates at the option of the Company:
|
|
|
|
|
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 29, 2016, the Company had net availability under the ABL Facility of $121,719 thousand, including outstanding letters of credit of $10,119 thousand.
Covenants
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 29, 2016, the Company was in compliance with its debt covenants.
Deferred Debt Issuance Cost and Original Issue Discount
Deferred debt issuance cost related to our ABL Facility and our Prior ABL Facility of $1,274 thousand and $930 thousand as of December 29, 2016 and December 31, 2015, 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 $9,257 thousand as of December 29, 2016 and Prior Term Loan Facility and GCI Facility of $1,644 thousand as of December 31, 2015 are included in Term loans on our Consolidated Balance Sheets. Amortization expense was $954 thousand, $692 thousand, and $656 thousand for the years ended December 29, 2016, December 31, 2015, and December 25, 2014.
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 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 29, 2016 and December 31, 2015, the fair values of the Company's debt are as follows (in thousands):
|
|
December 31, |
|
December 29, |
|
||
Total debt at par value |
|
$ |
179,233 |
|
$ |
400,000 |
|
Less: unamortized discount and debt issuance costs |
|
|
1,643 |
|
|
9,257 |
|
|
|
|
|
|
|
|
|
Net carry amount |
|
$ |
177,590 |
|
$ |
390,743 |
|
Fair value |
|
$ |
179,413 |
|
$ |
400,000 |
|
|
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.
4. Income Taxes
The components of the provision for income taxes are as follows (in thousands):
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||
Current expense: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
9,081 |
|
$ |
13,183 |
|
$ |
14,588 |
|
State |
|
|
1,979 |
|
|
2,552 |
|
|
2,422 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current expense |
|
|
11,060 |
|
|
15,735 |
|
|
17,010 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred (benefit)/expense: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(680 |
) |
|
553 |
|
|
(4,765 |
) |
State |
|
|
(746 |
) |
|
(89 |
) |
|
(771 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred (benefit)/expense |
|
|
(1,426 |
) |
|
464 |
|
|
(5,536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,634 |
|
$ |
16,199 |
|
$ |
11,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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).
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||
Computed "expected" provision at statutory rate |
|
$ |
8,656 |
|
$ |
15,052 |
|
$ |
19,080 |
|
State income taxes, net of federal income tax benefit |
|
|
801 |
|
|
1,594 |
|
|
1,073 |
|
Permanent differences: |
|
|
|
|
|
|
|
|
|
|
Non-qualified option holder dividend equivalent |
|
|
— |
|
|
— |
|
|
(7,877 |
) |
Other |
|
|
96 |
|
|
113 |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total permanent differences |
|
|
96 |
|
|
113 |
|
|
(7,881 |
) |
Other, net |
|
|
81 |
|
|
(560 |
) |
|
(798 |
) |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
9,634 |
|
$ |
16,199 |
|
$ |
11,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The permanent differences of $7,877 thousand in fiscal 2016 is the federal benefit related to a dividend equivalent payment to certain option holders. The state benefit related to this payment of $597 thousand is included in state income taxes, net of federal income tax benefit in the table above.
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):
|
|
Year Ended |
|
Year Ended |
|
||
Deferred tax assets: |
|
|
|
|
|
|
|
Accruals not currently deductible for tax purposes |
|
$ |
10,314 |
|
$ |
14,342 |
|
Tenant improvement allowances |
|
|
6,162 |
|
|
7,690 |
|
Inventories |
|
|
3,459 |
|
|
4,050 |
|
Stock based compensation |
|
|
2,997 |
|
|
4,179 |
|
Other intangibles |
|
|
761 |
|
|
693 |
|
Gift card liability |
|
|
820 |
|
|
858 |
|
Litigation accrual |
|
|
— |
|
|
5,299 |
|
Other |
|
|
89 |
|
|
47 |
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
24,602 |
|
|
37,158 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
Intangible assets |
|
|
(41,095 |
) |
|
(41,269 |
) |
Fixed assets |
|
|
(16,907 |
) |
|
(23,650 |
) |
Other |
|
|
(324 |
) |
|
(504 |
) |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(58,326 |
) |
|
(65,423 |
) |
|
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
$ |
(33,724 |
) |
$ |
(28,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment, and accordingly, has concluded that no valuation allowance is necessary as of December 29, 2016 and December 31, 2015.
The Company files income tax returns with the U.S. Federal government and various state jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities. The Internal Revenue Service has completed audits of the Company's federal income tax returns for the years through 2011. As of December 29, 2016, December 31, 2015, and December 25, 2014 the Company had unrecognized tax benefits of $0, $0, and $189 thousand, respectively. The amounts of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate were $0, $0, and $136 thousand as of December 29, 2016, December 31, 2015, and December 25, 2014, respectively. During 2014, the Company recorded an immaterial amount of interest expense related to uncertain tax positions. The Company's policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense.
|
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.
6. 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 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 29, 2016, are (in thousands):
|
|
Amount |
|
|
2017 |
|
$ |
63,340 |
|
2018 |
|
|
71,913 |
|
2019 |
|
|
73,580 |
|
2020 |
|
|
71,598 |
|
2021 |
|
|
67,875 |
|
Thereafter |
|
|
369,231 |
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
717,537 |
|
|
|
|
|
|
|
|
|
|
|
Lease expense for the years ended December 29, 2016, December 31, 2015, and December 25, 2014, was $53,899 thousand, $41,756 thousand, and $29,774 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.
On December 11, 2015, six plaintiffs filed a putative nationwide class action against the Company's subsidiary, Floor and Decor Outlets of America, Inc., ("F&D") in the United States District Court for the Northern District of Georgia, alleging that certain Chinese-manufactured laminate flooring products sold by F&D were falsely labeled as compliant with formaldehyde emissions standards established by California Air Resources Board ("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 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 the Company's losses related to this lawsuit. The Company recorded the $3.5 million receivable as an offset to litigation settlement expenses. 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. Seven members of the settlement class excluded themselves from the settlement. The settlement was granted final approval by the court on January 10, 2017 and did not involve an admission of liability by F&D. As of March 20, 2017, which represents the date on which the financial statements were available for distribution, the Company does not believe that claims by the members excluded from the settlement class or any personal injury claims are reasonably possible to result in a material loss to the Company in excess of the amounts already accrued.
|
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 |
|
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.
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 29, 2016 ("fiscal 2016") and December 25, 2014 ("fiscal 2014") include 52 weeks. Fiscal year ended December 31, 2015 ("fiscal 2015") includes 53 weeks.
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.
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.
The Company has evaluated subsequent events through March 20, 2017, which represents the date on which the financial statements were available for distribution.
Cash and Cash Equivalents
Cash consists of currency and demand deposits with banks.
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.
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 29, 2016 and December 31, 2015, was $188 thousand and $133 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.
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.
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 $2,449 thousand and $2,476 thousand as of December 29, 2016 and December 31, 2015, 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 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, loss, or inaccurate records for the receipt of inventory, 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.
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:
|
|
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 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.
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 |
Goodwill and Other Indefinite-Lived Intangible Assets
In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC 350"), Intangibles—Goodwill and Other, goodwill and other intangible assets with indefinite lives resulting from business combinations are not amortized but instead are tested for impairment at least annually (more frequently if certain indicators are present) while identifiable intangible assets with finite lives are amortized over their estimated useful lives. The Company obtains independent third-party valuation studies to assist it with determining the fair value of goodwill and indefinite-lived intangible assets. The Company's goodwill and other indefinite-lived intangible assets subject to impairment testing arose primarily as a result of its acquisition of Floor and Decor Outlets of America, Inc. in November 2010.
The Company performs a two-step quantitative impairment test on goodwill. In the first step, the Company compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired, and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference.
The Company estimates the fair value of our reporting unit using a weighted combination of the income approach and the market approach. The income approach utilizes a discounted cash flow model incorporating management's expectations for future revenue, operating expenses, earnings before interest, taxes, depreciation and amortization, working capital and capital expenditures. The Company discounts the related cash flow forecasts using its estimated weighted-average cost of capital at the date of valuation. The market approach utilizes comparative market multiples derived by relating the value of guideline companies in the Company's industry and/or with similar growth prospects, based on either the market price of publicly traded shares or the prices of companies being acquired in the marketplace, to various measures of their earnings. Such multiples are then applied to the Company's historical and projected earnings to derive a valuation estimate.
Based on the 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, determined using a discounted cash flow methodology. 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 |
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 assets, 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 one or more 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 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.
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.
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.
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 $5.0 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. As of December 29, 2016, per occurrence deductibles for individual workers' compensation and individual general liability claims were $250 thousand and $150 thousand, respectively.
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.
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.
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 1) a current adjustment to the recorded liability and related asset and 2) 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.
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Level 1: Inputs that are quoted prices in active markets for identical assets or liabilities |
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Level 2: Inputs other than quoted prices in active markets for assets or liabilities that are either directly or indirectly observable |
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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.
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.
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Level 1: Inputs that are quoted prices in active markets for identical assets or liabilities |
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Level 2: Inputs other than quoted prices in active markets for assets or liabilities that are either directly or indirectly observable |
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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.
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, we 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 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 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 2016 or 2015 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.
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.
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.
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 2016, fiscal 2015, and fiscal 2014 gift card breakage income of $627 thousand, $511 thousand, and $355 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 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.
Sales Returns and Allowances
The Company accrues for estimated sales returns based on historical sales return results. The allowance for sales returns at December 29, 2016 and December 31, 2015, was $4,887 thousand and $3,720 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.
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.
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.
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.
Advertising
The Company expenses advertising costs as the advertising takes place. Advertising costs incurred during the years ended December 29, 2016 and December 31, 2015, and December 25, 2014, were $33,497 thousand, $24,478 thousand and $17,359 thousand, respectively, and are included in Selling and store operating expenses and Pre-opening expenses in the 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.
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 29, 2016, December 31, 2015, and December 25, 2014, totaled $13,732 thousand, $7,380 thousand, and $7,412 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.
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 ASU No. 2016-09 "Improvements to Employee Share-Based Payment Accounting" in 2016 and now recognize 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.
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.
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.
The following table presents the Net sales of each major product category for each of the last three fiscal years (in thousands):
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Fiscal Year Ended |
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December 25, 2014 |
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December 31, 2015 |
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December 29, 2016 |
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Product Category |
|
Net Sales |
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% of |
|
Net Sales |
|
% of |
|
Net Sales |
|
% of |
|
||||||
Tile |
|
$ |
174,271 |
|
|
30 |
% |
$ |
244,902 |
|
|
31 |
% |
$ |
325,433 |
|
|
31 |
% |
Decorative Accessories |
|
|
98,991 |
|
|
16 |
|
|
138,442 |
|
|
18 |
|
|
188,371 |
|
|
18 |
|
Accessories (Installation Materials and Tools) |
|
|
91,122 |
|
|
16 |
|
|
124,162 |
|
|
16 |
|
|
165,330 |
|
|
16 |
|
Wood |
|
|
90,752 |
|
|
16 |
|
|
116,999 |
|
|
15 |
|
|
142,751 |
|
|
14 |
|
Laminate / Luxury Vinyl Plank |
|
|
61,817 |
|
|
11 |
|
|
77,586 |
|
|
10 |
|
|
131,447 |
|
|
12 |
|
Natural Stone |
|
|
65,008 |
|
|
11 |
|
|
78,294 |
|
|
10 |
|
|
90,866 |
|
|
9 |
|
Delivery and Other |
|
|
2,627 |
|
|
— |
|
|
3,627 |
|
|
— |
|
|
6,561 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
584,588 |
|
|
100 |
% |
$ |
784,012 |
|
|
100 |
% |
$ |
1,050,759 |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. 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, with early adoption permitted. The amendments in this update should be applied prospectively. The adoption of ASU No. 2015-11 is not expected to 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 could impact the timing and amounts of revenue recognized. 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 the retail store for final delivery at a later date. The Company is continuing to evaluate the impact this standard, and related amendments and interpretive guidance, will have on its consolidated financial statements. The Company plans to adopt the new standard on a modified retrospective basis beginning December 29, 2017.
|
|
Useful Life |
Furniture, fixtures and equipment |
2 - 7 years |
Leasehold improvements |
10 - 25 years |
Computer software and hardware |
3 - 7 years |
|
|
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 |
|
|
Useful Life |
Trade names |
|
Indefinite |
Vendor relationships |
|
10 years |
|
|
|
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 |
|
$ |
— |
|
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 |
|
$ |
— |
Hedge Position as of December 29, 2016:
(in thousands) |
|
Notional Balance |
|
Final Maturity |
|
Other |
|
Other |
|
AOCI, Net |
|
||||||
Interest rate caps (cash flow hedges) |
|
$ |
205,000 |
|
U.S. dollars |
|
December 2021 |
|
$ |
2,473 |
|
$ |
— |
|
$ |
176 |
|
Interest rate swaps (cash flow hedges) |
|
$ |
17,500 |
|
U.S. dollars |
|
January 2017 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Hedge Position as of December 31, 2015:
(in thousands) |
|
Notional Balance |
|
Final Maturity |
|
Other |
|
Other |
|
AOCI, |
|
||||||
Interest rate swaps (cash flow hedges) |
|
$ |
35,000 |
|
U.S. dollars |
|
January 2017 |
|
$ |
— |
|
$ |
(160 |
) |
$ |
(100 |
) |
|
|
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 |
Gains (losses) related to our designated hedge contracts are as follows (in thousands):
|
|
Effective Portion |
|
Effective Portion |
|
||||||||||||||
|
|
Fiscal Year Ended |
|
||||||||||||||||
(in thousands) |
|
2014 |
|
2015 |
|
2016 |
|
2014 |
|
2015 |
|
2016 |
|
||||||
Interest rate caps (cash flow hedges) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
176 |
|
Interest rate swaps (cash flow hedges) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
14 |
|
$ |
43 |
|
$ |
100 |
|
|
|
|
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 |
The following table summarizes our long-term debt as of December 29, 2016 and December 31, 2015 (dollars in thousands):
|
|
Maturity |
|
Interest Rate Per |
|
December 31, |
|
December 29, |
|
||
Credit Facilities: |
|
|
|
|
|
|
|
|
|
|
|
Term Loan Facility |
|
September 30, 2023 |
|
5.25% Variable |
|
$ |
— |
|
$ |
350,000 |
|
ABL Facility |
|
September 30, 2021 |
|
2.08% Variable |
|
|
92,900 |
|
|
50,000 |
|
Prior Term Loan Facility |
|
July 2, 2019 |
|
3.30% Variable |
|
|
8,333 |
|
|
— |
|
GCI Facility |
|
May 1, 2019 |
|
7.75% Variable |
|
|
78,000 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total secured debt |
|
|
|
|
|
$ |
179,233 |
|
$ |
400,000 |
|
Less: current maturities |
|
|
|
|
|
|
1,267 |
|
|
3,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt maturities |
|
|
|
|
|
|
177,966 |
|
|
396,500 |
|
Less: unamortized discount and debt issuance costs |
|
|
|
|
|
|
1,643 |
|
|
9,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
|
|
|
$ |
176,323 |
|
$ |
387,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 29, 2016, are (in thousands):
|
|
Amount |
|
|
2017 |
|
$ |
63,340 |
|
2018 |
|
|
71,913 |
|
2019 |
|
|
73,580 |
|
2020 |
|
|
71,598 |
|
2021 |
|
|
67,875 |
|
Thereafter |
|
|
369,231 |
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
717,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
Options |
|
Weighted |
|
Options |
|
Weighted |
|
Weighted |
|
|||||
Outstanding at December 26, 2013 |
|
|
10,714,356 |
|
$ |
4.09 |
|
|
3,471,150 |
|
$ |
3.64 |
|
|
— |
|
Granted |
|
|
748,553 |
|
$ |
7.69 |
|
|
— |
|
|
— |
|
$ |
3.72 |
|
Exercised |
|
|
(201,137 |
) |
$ |
3.28 |
|
|
— |
|
|
— |
|
|
— |
|
Forfeited or expired |
|
|
(1,737,506 |
) |
$ |
4.06 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 25, 2014 |
|
|
9,524,266 |
|
$ |
4.40 |
|
|
4,608,462 |
|
$ |
3.85 |
|
|
— |
|
Granted |
|
|
1,378,355 |
|
$ |
8.07 |
|
|
— |
|
|
— |
|
$ |
4.12 |
|
Exercised |
|
|
(5,149 |
) |
$ |
7.69 |
|
|
— |
|
|
— |
|
|
— |
|
Forfeited or expired |
|
|
(437,353 |
) |
$ |
7.16 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015 |
|
|
10,460,119 |
|
$ |
4.77 |
|
|
6,656,524 |
|
$ |
4.00 |
|
|
— |
|
Granted |
|
|
2,025,535 |
|
$ |
9.94 |
|
|
— |
|
|
— |
|
$ |
4.13 |
|
Exercised |
|
|
(145,140 |
) |
$ |
3.48 |
|
|
— |
|
|
— |
|
|
— |
|
Forfeited or expired |
|
|
(361,403 |
) |
$ |
6.65 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 29, 2016 |
|
|
11,979,111 |
|
$ |
5.34 |
|
|
8,151,056 |
|
$ |
4.20 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|