FLOOR & DECOR HOLDINGS, INC., 10-K filed on 2/20/2020
Annual Report
v3.19.3.a.u2
Document and Entity Information - USD ($)
$ in Billions
12 Months Ended
Dec. 26, 2019
Feb. 18, 2020
Jun. 27, 2019
Cover [Abstract]      
Document Type 10-K    
Document Annual Report true    
Document Transition Report false    
Document Period End Date Dec. 26, 2019    
Entity File Number 001-38070    
Entity Registrant Name Floor & Decor Holdings, Inc.    
Entity Incorporation, State or Country Code DE    
Entity Tax Identification Number 27-3730271    
Entity Address, Address Line One 2500 Windy Ridge Parkway SE Atlanta, Georgia    
Entity Address, City or Town Atlanta    
Entity Address, Postal Zip Code 30339    
Entity Address, State or Province GA    
City Area Code 404    
Local Phone Number 471-1634    
Title of 12(b) Security Class A Common Stock, $0.001 par value per share    
Trading Symbol FND    
Security Exchange Name NYSE    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Large Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Entity Common Stock, Shares Outstanding   101,580,656  
Entity Public Float     $ 2.8
Entity Central Index Key 0001507079    
Amendment Flag false    
Current Fiscal Year End Date --12-26    
Document Fiscal Period Focus FY    
Document Fiscal Year Focus 2019    
v3.19.3.a.u2
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 26, 2019
Dec. 27, 2018
Current assets:    
Cash and cash equivalents $ 27,037 $ 644
Income taxes receivable 2,868 4,324
Receivables, net 69,301 67,527
Inventories, net 581,865 471,014
Prepaid expenses and other current assets 20,415 15,949
Total current assets 701,486 559,458
Fixed assets, net 456,289 328,366
Right-of-use assets 822,256  
Intangible assets, net 109,299 109,330
Goodwill 227,447 227,447
Other assets 7,532 9,490
Total long-term assets 1,622,823 674,633
Total assets 2,324,309 1,234,091
Current liabilities:    
Current portion of term loans   3,500
Current portion of lease liabilities 74,592  
Trade accounts payable 368,459 313,503
Accrued expenses and other current liabilities 102,807 82,038
Deferred revenue 6,683 5,244
Total current liabilities 552,541 404,285
Term loans 142,606 141,834
Deferred rent   36,980
Lease liabilities 844,269  
Deferred income tax liabilities, net 18,378 26,838
Tenant improvement allowances   37,295
Other liabilities 2,179 2,550
Total long-term liabilities 1,007,432 245,497
Total liabilities 1,559,973 649,782
Commitments and contingencies (Note 9)
Capital stock:    
Additional paid-in capital 370,413 340,462
Accumulated other comprehensive (loss) income, net (193) 186
Retained earnings 394,015 243,563
Total stockholders' equity 764,336 584,309
Total liabilities and stockholders' equity 2,324,309 1,234,091
Class A Common Stock    
Capital stock:    
Common stock $ 101 $ 98
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Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares
Dec. 26, 2019
Dec. 27, 2018
Preferred Stock, Number of Shares, Par Value and Other Disclosures [Abstract]    
Preferred stock, par value $ 0.001 $ 0.001
Preferred stock, shares authorized 10,000,000 10,000,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Class A Common Stock    
Common Stock, Number of Shares, Par Value and Other Disclosures [Abstract]    
Common stock, par value $ 0.001 $ 0.001
Common stock, shares authorized 450,000,000 450,000,000
Common stock, shares issued 101,457,858 97,588,539
Common stock, shares outstanding 101,457,858 97,588,539
Class B Common Stock    
Common Stock, Number of Shares, Par Value and Other Disclosures [Abstract]    
Common stock, par value $ 0.001 $ 0.001
Common stock, shares authorized 10,000,000 10,000,000
Common stock, shares issued 0 0
Common stock, shares outstanding 0 0
Class C Common Stock    
Common Stock, Number of Shares, Par Value and Other Disclosures [Abstract]    
Common stock, par value $ 0.001 $ 0.001
Common stock, shares authorized 30,000,000 30,000,000
Common stock, shares issued 0 0
Common stock, shares outstanding 0 0
v3.19.3.a.u2
Condensed Consolidated Statements of Operations and Comprehensive Income - USD ($)
$ in Thousands
12 Months Ended
Dec. 26, 2019
Dec. 27, 2018
Dec. 28, 2017
Income Statement [Abstract]      
Net Sales $ 2,045,456 $ 1,709,848 $ 1,384,767
Revenue, Product and Service [Extensible List] us-gaap:ProductMember    
Cost of sales $ 1,182,442 1,007,580 812,203
Cost, Product and Service [Extensible List] us-gaap:ProductMember    
Gross profit $ 863,014 702,268 572,564
Operating expenses:      
Selling and store operating 546,853 439,495 353,647
General and administrative 132,386 105,327 84,661
Pre-opening 24,594 26,145 16,485
Total operating expenses 703,833 570,967 454,793
Operating income 159,181 131,301 117,771
Interest expense, net 8,801 8,917 13,777
Loss on extinguishment of debt     5,442
Income before income taxes 150,380 122,384 98,552
(Benefit) provision for income taxes (251) 6,197 (4,236)
Net income 150,631 116,187 102,788
Change in fair value of hedge instruments, net of tax, post-adoption (379)    
Change in fair value of hedge instruments, net of tax, pre-adoption   391 (381)
Total comprehensive income $ 150,252 $ 116,578 $ 102,407
Basic earnings per share $ 1.51 $ 1.20 $ 1.13
Diluted earnings per share $ 1.44 $ 1.11 $ 1.03
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Condensed Consolidated Statements of Stockholders' Equity - USD ($)
$ in Thousands
Common stock
Class A Common Stock
Common stock
Class B Common Stock
Common stock
Class C Common Stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Class A Common Stock
Class B Common Stock
Class C Common Stock
Total
Balance at Dec. 29, 2016 $ 77   $ 6 $ 117,270 $ 176 $ 16,754       $ 134,283
Beginning balance (in shares) at Dec. 29, 2016 76,847,000 396,000 6,275,000              
Increase (Decrease) in Stockholders' Equity [Roll Forward]                    
Stock-based compensation expense       4,951   8       4,959
Conversion of Class B Common Stock (in shares) 396,000 (396,000)                
Conversion of Class C Common Stock $ 6   $ (6)              
Conversion of Class C Common Stock (in shares) 6,275,000   (6,275,000)              
Exercise of stock options $ 2     8,872           $ 8,874
Exercise of stock options (in shares) 1,828,000                 1,828,339
IPO proceeds $ 10     192,326           $ 192,336
Number of shares issued 10,147,000                  
Issuance of restricted stock award (in shares) 15,000                  
Other comprehensive gain (loss), net of tax, pre-adoption         (381)         (381)
Net income           102,788       102,788
Balance at Dec. 28, 2017 $ 96     323,419 (205) 119,550       442,860
Ending balance (in shares) at Dec. 28, 2017 95,509,000                  
Increase (Decrease) in Stockholders' Equity [Roll Forward]                    
Cumulative effect from adoption           7,826       7,826
Stock-based compensation expense       6,514           6,514
Exercise of stock options $ 2     10,529           $ 10,531
Exercise of stock options (in shares) 2,069,000                 2,069,195
Issuance of restricted stock award (in shares) 10,000                  
Other comprehensive gain (loss), net of tax, pre-adoption         391         $ 391
Net income           116,187       116,187
Balance at Dec. 27, 2018 $ 98     340,462 186 243,563       584,309
Ending balance (in shares) at Dec. 27, 2018 97,588,000           97,588,539 0 0  
Increase (Decrease) in Stockholders' Equity [Roll Forward]                    
Cumulative effect from adoption           (179)       (179)
Stock-based compensation expense       8,711           8,711
Exercise of stock options $ 3     18,795           $ 18,798
Exercise of stock options (in shares) 3,741,000                 3,740,749
Shares issued under employee stock plan       2,445           $ 2,445
Shares issued under employee stock plan (in shares) 105,000                 104,363
Issuance of restricted stock award (in shares) 24,000                  
Other comprehensive gain (loss), net of tax, post-adoption         (379)         $ (379)
Net income           150,631       150,631
Balance at Dec. 26, 2019 $ 101     $ 370,413 $ (193) $ 394,015       $ 764,336
Ending balance (in shares) at Dec. 26, 2019 101,458,000           101,457,858 0 0  
v3.19.3.a.u2
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 26, 2019
Dec. 27, 2018
Dec. 28, 2017
Operating activities      
Net income $ 150,631 $ 116,187 $ 102,788
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization 74,001 51,992 38,062
Non-cash loss on early extinguishment of debt     5,442
Loss on asset impairments and disposals 4,111 23 128
Amortization of tenant improvement allowances   (4,494) (3,311)
Operating lease termination 1,926    
Deferred income taxes (10,584) (968) (557)
Interest cap derivative contracts 446 (212)  
Stock based compensation expense 8,711 6,514 4,959
Changes in operating assets and liabilities:      
Receivables, net (17,850) (13,486) (19,508)
Inventories, net (110,851) (53,557) (134,248)
Trade accounts payable 54,956 54,773 100,264
Accrued expenses and other current liabilities 20,744 (1,731) 9,485
Income taxes 3,894 6,221 (18,259)
Deferred revenue 1,439 3,002 8,067
Deferred rent   14,455 9,243
Tenant improvement allowances   15,010 7,984
Other, net 23,084 (8,105) (1,332)
Net cash provided by operating activities 204,658 185,624 109,207
Investing activities      
Purchases of fixed assets (196,008) (151,397) (102,253)
Net cash used in investing activities (196,008) (151,397) (102,253)
Financing activities      
Borrowings on revolving line of credit 100,100 217,050 236,700
Payments on revolving line of credit (100,100) (258,050) (245,700)
Payments on term loans (3,500) (3,500) (197,500)
Net proceeds from initial public offering     192,336
Proceeds from exercise of stock options 18,798 10,531 8,874
Proceeds from employee stock purchase plan 2,445    
Debt issuance costs   (170) (1,559)
Net cash provided by (used in) financing activities 17,743 (34,139) (6,849)
Net increase in cash and cash equivalents 26,393 88 105
Cash and cash equivalents, beginning of the period 644 556 451
Cash and cash equivalents, end of the period 27,037 644 556
Supplemental disclosures of cash flow information      
Buildings and equipment acquired under operating leases 277,392    
Cash paid for interest 7,388 7,563 15,748
Cash paid for income taxes, net of refunds 6,453 1,082 14,392
Fixed assets accrued at the end of the period $ 19,527 $ 15,120 8,521
Fixed assets acquired as part of lease - paid for by lessor     $ 1,786
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Summary of Significant Accounting Policies
12 Months Ended
Dec. 26, 2019
Summary of Significant Accounting Policies  
Summary of Significant Accounting Policies

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, vinyl, and natural stone flooring along with decorative and installation accessories at everyday low prices. Our stores appeal to a variety of customers, including professional installers and commercial businesses (“Pro”), Do It Yourself customers (“DIY”), and customers who buy the products for professional installation (“Buy it Yourself” or “BIY”). We operate within one reportable segment.

As of December 26, 2019, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D”), operates 120 warehouse-format stores, which average 76,000 square feet, and one small-format standalone design center in 30 states, as well as four distribution centers and an e-commerce site, FloorandDecor.com.

Fiscal Year

The Company’s fiscal year is the 52- or 53-week period ending on the Thursday on or preceding December 31st. Fiscal years ended December 26, 2019 (“fiscal 2019”), December 27, 2018 (“fiscal 2018”), and December 28, 2017 (“fiscal 2017”) 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 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. Unless indicated otherwise, the information in this Annual Report has been adjusted to give effect to a 321.820-for-one stock split of the Company’s outstanding common stock, which was approved by the Company's board of directors and shareholders on April 13, 2017 and effected on April 24, 2017.

Reclassifications

Within the Consolidated Statements of Cash Flows, prior period amounts for “other assets” and “other” have been combined and reclassified to the “other, net” line item to conform to the current period presentation.

Cash and Cash Equivalents

Cash consists of currency and demand deposits with banks.

Receivables

Receivables consist primarily of amounts due from credit card companies and receivables from vendors. 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 26, 2019 and December 27, 2018, was $266 thousand and $184 thousand, respectively.

As of December 26, 2019, receivables also include $19.3 million of expected tariff recoveries (“tariff refunds”) from U.S. Customers and Border Protection (“U.S. Customs”). These receivables relate to a U.S. Trade Representative (“USTR”) ruling on November 7, 2019 to grant exclusions from Section 301 tariffs for select types of flooring products imported from China, including certain “click” vinyl and engineered products that the Company has sold and continues to sell. The Section 301 tariffs from which these goods are now excluded were implemented at 10% beginning in September 2018 and increased to 25% in June 2019. In addition, on November 20, 2019, U.S. Customs issued Chapter 99 exclusions for each unique article number identified under the November 7, 2019 USTR ruling. For the Company, the granted exclusions apply retroactively to tariffs paid beginning in September 2018 through November 2019.

While tariff refund claims are subject to the approval of U.S. Customs, the Company currently expects to recover $19.3 million related to Section 301 tariff payments. During the fourth quarter of fiscal 2019, we recognized approximately $14.0 million of operating income (reduction to cost of sales) related to tariff refunds, including $11.0 million for products that had already been sold as of the date U.S. Customs issued Chapter 99 exclusions on November 20, 2019 as well as an additional $3.0 million related to products sold after this date through the end of fiscal 2019. Approximately $5.0 million of the estimated tariff refunds are related to merchandise on hand as of December 26, 2019 and have been recognized as reductions to the carrying cost of inventory. The remaining $0.3 million is related to interest income earned on anticipated tariff recoveries (interest accrues from the date that tariff payments were originally made through the date that such payments are refunded to the Company). All tariff refunds are expected to be received within less than 12 months from the end of fiscal 2019.

Credit Program

Credit is offered to the Company's customers through a proprietary credit card underwritten by third-party financial institutions and, except as follows, at no recourse to the Company. Beginning in fiscal 2018, the Company began offering limited credit to its commercial clients. The total exposure at the end of fiscal 2019 and fiscal 2018 was $1,045 thousand and $251 thousand, respectively.

Inventory Valuation and Shrinkage

Inventories consist of merchandise held for sale and are stated at the lower of cost or 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 Statements of Operations and Comprehensive Income as a loss in the period in which it occurs. The Company determines inventory costs using the moving 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 $4,468 thousand and $4,265 thousand as of December 26, 2019 and December 27, 2018, respectively.

Physical inventory counts and cycle counts are performed on a regular basis in each store and distribution center to ensure that amounts reflected in the accompanying Consolidated Balance Sheets are properly stated. During the period between physical inventory counts in our stores, the Company accrues for estimated losses related to shrinkage on a store-by-store basis. Shrinkage is the difference between the recorded amount of inventory and the physical inventory. Shrinkage may occur due to theft or loss, among other things.

Fixed Assets

Fixed assets consist primarily of furniture, fixtures, and equipment, leasehold improvements (including those that are reimbursed by landlords as tenant improvement allowances), computer software and hardware, and land. Fixed assets are stated at cost less accumulated depreciation utilizing the straight-line method over the assets’ estimated useful lives.

Leasehold improvements are amortized using the straight-line method over the shorter of (i) the original term of the lease, (ii) renewal term of the lease if the renewal is reasonably certain 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

Land

Indefinite

The cost and related accumulated depreciation of assets sold or otherwise disposed are removed from the accounts, and the related gain or loss is reported in the Consolidated Statements of Operations and Comprehensive Income.

.

Capitalized Software Costs

The Company capitalizes certain costs related to the acquisition and development of software and amortizes these costs using the straight-line method over the estimated useful life of the software. Certain development costs not meeting the criteria for capitalization are expensed as incurred.

Goodwill and Other Indefinite-Lived Intangible Assets

Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Company does not amortize goodwill and other intangible assets with indefinite lives resulting from business combinations but, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other, does assess the recoverability of goodwill annually in the fourth quarter of each fiscal year, or more often if events occur or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Such circumstances could include, but are not limited to, a significant adverse change in customer demand or business climate or an adverse action or assessment by a regulator. In accordance with ASC 350, identifiable intangible assets with finite lives are amortized over their estimated useful lives. Each year, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the single reporting unit is less than its carrying amount as a basis for determining whether it is necessary to complete quantitative impairment assessments.

The Company completed a qualitative assessment in fiscal 2019. Based on such goodwill impairment analysis performed qualitatively as of October 25, 2019, the Company determined that the fair value of its reporting unit is in excess of its carrying value. No events or changes in circumstances have occurred since the date of the Company's most recent annual impairment test that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

The Company annually (or more frequently if there are indicators of impairment) evaluates whether its indefinite-lived asset continues to have an indefinite life or have impaired carrying values due to changes in the asset or its related risks. The impairment review is performed by comparing the carrying value of the indefinite-lived intangible asset to its estimated fair value. If the recorded carrying value of the indefinite-lived asset exceeds its estimated fair value, an impairment charge is recorded to write the asset down to its estimated fair value.

The estimated lives of the Company’s intangible assets are as follows:

    

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 asset, including the projection of future cash flows, assumptions about which market participants are the most comparable, the selection of discount rates, and the weighting of the income and market approaches. These calculations contain uncertainties because they require management to make assumptions such as estimating economic factors, including the profitability of future business operations and, if necessary, the fair value of the reporting unit’s assets and liabilities. Further, the Company’s ability to realize the future cash flows used in its fair value calculations is affected by factors such as changes in economic conditions, changes in the Company’s operating performance, and changes in the Company’s business strategies. Significant changes in any of the

assumptions involved in calculating these estimates could affect the estimated fair value of the Company’s reporting unit and indefinite-lived intangible assets and could result in impairment charges in a future period.

Long-Lived Assets

Long-lived assets, such as fixed assets, operating lease right-of-use 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, significant changes or planned changes in our use of an asset, a product recall, or an adverse action by a regulator. In accordance with ASC 360, the evaluation is performed at the lowest level for which identifiable cash flows are available that are largely independent of the cash flows of other assets or asset groups. If the sum of the estimated undiscounted future cash flows is less than the carrying value of the related asset or asset group, an impairment loss is recognized equal to the difference between carrying value and fair value.

Since there is typically no active market for the Company’s definite-lived intangible asset, the Company estimates fair value based on expected future cash flows at the time they are identified. When events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, the Company estimates future cash flows based on store-level historical results, current trends, and operating and cash flow projections. The definite-lived intangible asset is amortized over its estimated useful life on a straight-line basis, which the Company believes to be the amortization methodology that best matches the pattern of economic benefit that is expected from the asset. The useful life of the definite-lived intangible asset is evaluated on an annual basis.

Leases

The Company recognizes lease assets and corresponding lease liabilities for all operating leases on the balance sheet, excluding short-term leases (leases with terms of 12 months or less) as described under ASU No. 2016-02, “Leases (Topic 842).” The majority of our long-term operating lease agreements include options to extend, which are also factored into the recognition of their respective assets and liabilities when appropriate based on management’s assessment of the probability that the options will be exercised. Lease payments are discounted using the rate implicit in the lease, or, if not readily determinable, a third-party secured incremental borrowing rate based on information available at lease commencement. The secured incremental borrowing rate is estimated based on yields obtained from Bloomberg for U.S. consumers with a BB- credit rating and is adjusted for collateralization as well as inflation. Additionally, certain of our lease agreements include escalating rents over the lease terms which, under Topic 842, results in rent being expensed on a straight-line basis over the life of the lease that commences on the date we have the right to control the property.

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 $10.0 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

The Company estimates fair values in accordance with ASC 820, Fair Value Measurement. ASC 820 provides a framework for measuring fair value and requires disclosures 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. If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the overall fair value measurement of the instrument.

Level 1: Quoted prices in active markets for identical assets or liabilities as of the reporting date;
Level 2: Inputs other than quoted prices in active markets for identical assets or liabilities that are either directly or indirectly observable as of the reporting date; and
Level 3: Unobservable inputs that reflect the reporting entity’s own estimates about the assumptions market participants would use in pricing the asset or liability.

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. We recognize derivative contracts at fair value on the Consolidated Balance Sheets. The fair value is calculated utilizing Level 2 inputs. Unrealized changes in the fair value of hedged derivative instruments are recorded in accumulated other comprehensive (loss) income within the stockholders’ equity section of the 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 Operations and Comprehensive Income and reclassified into earnings in the same period in which the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent changes in fair values of the instruments are not highly effective, the ineffective portion of the hedge is immediately recognized in earnings.

We perform an assessment of the effectiveness of our derivative contracts designated as hedges, including assessing the possibility of counterparty default. If we determine that a derivative is no longer expected to be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in the fair value of the hedge in earnings. We believe our derivative contracts, which continue to be designated as cash flow hedges, and which consist of interest rate cap contracts, will continue to be highly effective in offsetting changes in cash flow attributable to floating interest rate risk. See footnote 8. Derivatives and Risk Management for additional information.

.

Use of Estimates

The preparation of the financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amounts of fixed assets and intangibles, asset retirement obligations, allowances for accounts receivable and inventories, reserves for workers' compensation and general liability claims incurred but not reported, and deferred income tax assets and liabilities. Actual results could differ from these estimates.

Revenue Recognition

As of the beginning of fiscal 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“Topic 606”) using the modified retrospective transition method which requires that we recognize revenue differently pre- and post-adoption (see “Recent Accounting Pronouncements” for additional information).

We recognize revenue and the related cost of sales when we satisfy the performance obligations in contracts with our customers in accordance with Topic 606. Performance obligations for our retail store sales, as well as for orders placed through our website and shipped to our customers, are satisfied at the point at which the customer obtains control of the inventory, which is typically at the point-of-sale. In some cases, merchandise is not physically ready for transfer to the customer at the point-of-sale, and revenue recognition is deferred until the customer has control of the inventory. Shipping and handling activities are accounted for as activities to fulfill the promise to transfer goods rather than as separate performance obligations as outlined within Topic 606. Payment is generally due from the customer immediately at the point-of-sale for both retail store sales and website sales. The nature of the goods offered include hard surface flooring and related accessories. We do not perform installation services, and we offer free design services in-store. The transaction price recognized in revenues represents the selling price of the products offered. Sales taxes collected are not recognized as revenue as these amounts are ultimately remitted to the appropriate taxing authorities.

Our customers have the right to return the goods sold to them within a reasonable time period, typically 90 days. The right of return is an element of variable consideration as defined within Topic 606. We reserve for future returns of previously sold goods based on historical experience and various other assumptions that we believe to be reasonable. This reserve reduces sales and cost of sales as well as establishes a return asset and refund liability as defined with Topic 606. The return asset is included within prepaid expenses and other current assets, and the refund liability is included within accrued expenses and other current liabilities, each respectively on the Consolidated Balance Sheets. Merchandise exchanges of similar product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve.

Gift Cards and Merchandise Credits

We sell gift cards to our customers in our stores and through our website and issue merchandise credits in our stores. We account for the programs by recognizing a liability at the time the gift card is sold or the merchandise credit is issued. The liability is relieved and revenue is recognized upon redemption. Additionally, we recognize breakage income in proportion to the pattern of rights exercised by the customer when we expect to be entitled to breakage. Net sales related to the estimated breakage are included in net sales in the Consolidated Statement of Income. We have an agreement with an unrelated third-party who is the issuer of 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 2019, fiscal 2018, and fiscal 2017 gift card breakage income of $1,197 thousand, $1,584 thousand, and $757 thousand was recognized in net sales in the Consolidated Statements of Operations and Comprehensive Income, respectively, for such unredeemed gift cards.

Loyalty Program

We completed the roll out of our Pro Premier loyalty program to all stores in the second half of fiscal 2018, which allows customers to earn points through purchases in our stores and our website. Loyalty points are typically awarded at one percent of the relative standalone selling price of the merchandise sold and are recognized at the time of sale as a liability with a corresponding reduction to net sales. Additionally, loyalty breakage is recognized based on the Company’s estimate of the balance of loyalty points for which the likelihood of redemption by the customer is deemed remote. This estimate is determined with assistance from the third party servicer that manages the loyalty program and is based on the Company’s historical redemption trends, market benchmarks for the pattern of redemptions for other retail loyalty programs, and other assumptions related to the likelihood of customer redemptions. We are continuously monitoring redemption patterns and will adjust this rate, as necessary, as the program matures. In fiscal 2019 and fiscal 2018, loyalty breakage of $1,051 thousand and $401 thousand, respectively, was recognized as net sales in the Consolidated Statements of Operations and Comprehensive Income.

Sales Returns and Allowances

The Company accrues for estimated sales returns based on historical results. The allowance for sales returns at December 26, 2019 and December 27, 2018, was $15,437 thousand and $8,335 thousand, respectively.

Cost of Sales

Cost of sales consists of merchandise costs as well as freight, duty, and other costs to transport inventory to our distribution centers and stores. Cost of sales also includes costs for shrinkage, damaged product disposals, distribution, warehousing, sourcing, compliance, 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 to the carrying value of inventory if the inventory is on hand and a reduction to cost of sales when the inventory is sold.

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 as earned and are estimated based on annual projections.

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 costs, and advertising costs. Credit card fees, insurance, personal property taxes, legal expenses, and other miscellaneous operating costs are also included.

Advertising Expenses

The Company expenses advertising costs as the advertising takes place. Advertising costs incurred during the years ended December 26, 2019, December 27, 2018, and December 28, 2017, were $65,690 thousand, $55,283 thousand, and $43,560 thousand respectively, and are included in selling and store operating expenses and pre-opening expenses in the accompanying Consolidated Statements of Operations and Comprehensive 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 Operations and Comprehensive 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 26, 2019, December 27, 2018, and December 28, 2017, totaled $24,594 thousand, $26,145 thousand, and $16,485 thousand, respectively.

Loss on Early Extinguishment of Debt

On May 2, 2017, the Company completed its initial public offering (“IPO”), pursuant to which it sold an aggregate of 10,147,025 shares of Class A common stock, par value $0.001 per share. The Company received aggregate net proceeds of approximately $192.0 million after deducting underwriting discounts and commissions and other offering expenses. The Company used net proceeds from the IPO of approximately $192.0 million to repay a portion of the amounts outstanding under the Term Loan Facility, including accrued and unpaid interest. The partial paydown resulted in a loss on extinguishment of debt in the amount of approximately $5.4 million related to unamortized original issue discount and unamortized deferred debt issuance costs.

Stock-Based Compensation

The Company accounts for employee stock options, restricted stock, and employee stock purchase plans in accordance with ASC 718, Compensation – Stock Compensation. The Company obtains independent third-party valuation studies to assist with determining the grant date fair value of our stock price. Stock options are granted with exercise prices equal to or greater than the 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 one to five years. Stock option grants are generally subject to forfeiture if employment terminates prior to vesting. The Company has selected the Black-Scholes option pricing model for estimating the grant date fair value of stock option awards granted. The Company bases the risk-free interest rate on the yield of a zero coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant. The Company estimates the dividend yield to be zero as the Company does not intend to pay dividends in the future. The Company estimates the volatility of the share price of its common stock by considering the historical volatility of the stock of similar public entities. The Company considers a number of factors in determining the appropriateness of the public entities included in the volatility assumption, including the entity's life cycle stage, growth profile, size, financial leverage, and products offered. Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period based on the number of years for which the requisite service is expected to be rendered.

Income Taxes

The Company accounts for income taxes under the liability method in accordance with ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts and tax basis of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in the period that includes the enactment date of such a change.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences became deductible. On a quarterly basis, the Company evaluates whether it is more likely than not that its deferred tax assets will be realized in the future and concludes whether a valuation allowance must be established.

The Company includes any estimated interest and penalties on tax-related matters in income taxes payable and income tax expense. The Company accounts for uncertain tax positions in accordance with ASC 740. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements using a two-step process for evaluating tax positions taken, or expected to be taken, on a tax return. The Company may only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50 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.

Segments

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. Operating segments are defined as components of an entity for which discrete financial information is available and that is regularly reviewed by the chief operating decision maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s CODM is its Chief Executive Officer. The Company has determined that it has one operating segment and one reportable segment as the CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. In addition, the Company concluded that economic and operating characteristics are similar across its retail operations, including the net sales, gross profit and gross margin, and operating income of its retail stores as well as the product offerings, marketing initiatives, operating procedures, store layouts, employee incentive programs, customers, methods of distribution, competitive and operating risks, and the level of shared resources across the business.

Recently Adopted Accounting Pronouncements

Goodwill. 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 Company elected to early adopt this standard during the fourth quarter of 2017. The amendments in this update should be applied using a prospective approach. The adoption of ASU No. 2017-04 did not have a material impact on the Company's consolidated financial statements.

Income Taxes. 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 did not have a material impact on the Company's consolidated financial statements.

Leases. In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases (Topic 842).” ASU No. 2016-02 requires that lessees recognize lease assets and lease liabilities on the balance sheet with an option to exclude short-term leases (leases with terms of 12 months or less). The guidance also requires disclosures about the amount, timing, and uncertainty of cash flows arising from leases. We adopted the ASU in the first quarter of fiscal 2019 using the modified retrospective approach. The cumulative effect adjustment upon adoption resulted in a $179 thousand opening balance sheet reduction to retained earnings. The adoption of ASU No. 2016-02 had a material impact on the Company’s Consolidated Balance Sheets but did not have a material impact on the Company’s Consolidated Statements of Operations and Comprehensive Income or Consolidated Statements of Cash Flows. See Note 9, “Commitments and Contingencies,” for additional information related to the Company’s leases.

Revenue from Contracts with Customers. 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. We adopted this standard in the first quarter of fiscal 2018 using the modified retrospective approach, effective December 29, 2017. The cumulative adjustment upon adoption primarily resulted in a reduction of deferred revenue and related inventories and an increase to retained earnings of $7.8 million, net of tax. The adoption of ASU No. 2014-09 did not have a material impact to the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

Implementation Costs Incurred in Cloud Computing Arrangements. In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new guidance will be effective for public companies for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and early adoption is permitted. Subsequent to the adoption of ASU No. 2018-15, the Company will capitalize such costs within prepaid expenses and other current

assets or other assets on the Consolidated Balance Sheets and will recognize expense within general and administrative expenses or other operating costs on the Consolidated Statements of Operations and Comprehensive Income, consistent with where the expense associated with the hosting element of the arrangement are presented. The Company does not expect the adoption of ASU No. 2018-15 to have a material impact to its consolidated financial statements.

Credit Losses. In June 2016, the FASB issued ASU No. 2016-03, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which modifies the measurement approach for credit losses on financial assets measured on an amortized cost basis from an 'incurred loss' method to an 'expected loss' method. The amended guidance requires the measurement of expected credit losses to be based on relevant information, including historical experience, current conditions, and a reasonable and supportable forecast that affects the collectability of the related financial asset. The amended guidance will be effective for public companies in the first quarter of fiscal 2020. The Company does not expect the adoption of ASU No. 2016-03 to have a material impact to its consolidated financial statements.

Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also clarifies and amends existing guidance to improve consistent application among reporting entities. The guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

.

v3.19.3.a.u2
Revenues
12 Months Ended
Dec. 26, 2019
Revenue from Contract with Customer [Abstract]  
Revenues

2. Revenues

Net sales consist of revenue associated with contracts with customers for the sale of goods in amounts that reflect the consideration the Company is entitled to receive in exchange for those goods and services.

Deferred Revenue

Under Topic 606, the Company recognizes revenue when the customer obtains control of the inventory. Amounts in deferred revenue at period-end reflect orders for which the inventory is not currently ready for physical transfer to the customer.

Gift Card Breakage

Under Topic 606, gift card breakage income is recognized in proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage. The amount of revenue related to gift card breakage income for the fiscal year ended December 26, 2019 was immaterial to the consolidated financial statements.

Disaggregated Revenue

The Company has one operating segment and 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 26, 2019

December 27, 2018

December 28, 2017

 

    

    

% of

    

    

% of

    

    

% of

 

Product Category

Net Sales

Net Sales

Net Sales

Net Sales

Net Sales

Net Sales

 

Tile

$

523,076

 

26

%  

$

476,337

 

27

%  

$

419,745

 

30

%

Laminate / luxury vinyl plank

 

442,171

 

22

 

316,109

 

18

 

208,238

 

15

Decorative accessories/ wall tile

 

393,908

 

19

 

325,139

 

19

 

257,684

 

19

Installation materials and tools

 

346,356

 

17

 

272,994

 

16

 

217,427

 

16

Wood

 

202,888

 

10

 

192,087

 

12

 

167,152

 

12

Natural stone

 

127,975

 

6

 

113,565

 

7

 

104,670

 

8

Other (1)

 

9,082

 

 

13,617

 

1

 

9,851

 

Total

$

2,045,456

 

100

%  

$

1,709,848

 

100

%  

$

1,384,767

 

100

%

(1)Other includes delivery revenue less adjustments for deferred revenue, sales return reserves, rewards under our Pro Premier Loyalty program, and other revenue related adjustments that are not allocated on a product-level basis.

.

v3.19.3.a.u2
Accrued Expenses and Other Current Liabilities
12 Months Ended
Dec. 26, 2019
Accrued Expenses  
Accrued Expenses and Other Current Liabilities

3. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

    

December 26,

    

December 27,

2019

2018

Accrued incentive compensation

$

18,635

$

12,473

Sales tax payable

14,304

12,046

Accrued construction in progress new stores

10,043

9,421

Insurance reserve incurred but not reported

9,399

8,229

Wages and payroll tax payable

8,328

6,936

Loyalty program liability

6,649

2,274

Other

35,449

30,659

Accrued expenses and other current liabilities

$

102,807

$

82,038

v3.19.3.a.u2
Fixed Assets
12 Months Ended
Dec. 26, 2019
Fixed Assets  
Fixed Assets

4. Fixed Assets

Fixed assets as of December 26, 2019 and December 27, 2018, consisted of the following (in thousands):

December 26,

    

December 27,

    

2019

2018

Furniture, fixtures and equipment

$

236,555

$

174,663

Leasehold improvements

 

321,334

 

216,461

Computer software and hardware

 

113,975

 

83,628

Land

8,715

5,297

Fixed assets, at cost

 

680,579

 

480,049

Less: accumulated depreciation and amortization

 

224,290

 

151,683

Fixed assets, net

$

456,289

$

328,366

Depreciation and amortization on fixed assets for the years ended December 26, 2019, December 27, 2018, and December 28, 2017, were $69,856 thousand, $50,478 thousand, and $36,255 thousand, respectively.

v3.19.3.a.u2
Intangible Assets
12 Months Ended
Dec. 26, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets

5. Intangible Assets

The following summarizes the balances of identifiable intangible assets as of December 26, 2019 and December 27, 2018 (in thousands):

December 26, 2019

December 27, 2018

    

    

Gross

    

    

Gross

    

Estimated

Carrying

Accumulated

Carrying

Accumulated

Useful Lives

Amount

Amortization

Amount

Amortization

Amortizable intangible asset:

 

  

 

  

 

  

 

  

 

  

Vendor relationships

 

10 years

$

319

$

(289)

$

319

$

(258)

Indefinite-lived intangible asset:

 

  

 

  

 

  

 

  

 

  

Trade names

 

  

 

109,269

 

 

109,269

 

Total

 

  

$

109,588

$

(289)

$

109,588

$

(258)

Amortization expense related to amortizable intangible assets for the years ended December 26, 2019, December 27, 2018 and December 28, 2017, was $31 thousand, $32 thousand, and $32 thousand, respectively. Estimated intangible asset amortization for vendor relationships is $30 thousand for fiscal 2020, after which the asset will be fully amortized.

v3.19.3.a.u2
Income Taxes
12 Months Ended
Dec. 26, 2019
Income Taxes  
Income Taxes

6. Income Taxes

The components of the provision for income taxes are as follows (in thousands):

    

Fiscal Year Ended

    

Fiscal Year Ended

    

Fiscal Year Ended

December 26,

December 27,

December 28,

2019

2018

2017

Current expense / (benefit):

 

  

 

  

 

  

Federal

$

7,975

$

5,496

$

(4,097)

State

 

2,358

 

1,669

 

479

Total current expense / benefit

 

10,333

 

7,165

 

(3,618)

Deferred expense / (benefit):

 

  

 

  

 

  

Federal

 

(6,522)

 

922

 

(250)

State

 

(4,062)

 

(1,890)

 

(368)

Total deferred (benefit) / expense

 

(10,584)

 

(968)

 

(618)

Provision for income taxes

$

(251)

$

6,197

$

(4,236)

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 21% for the years ended December 26, 2019 and December 27, 2018 (35% for the year ended December 28, 2017) to income before income taxes (in thousands).

    

Fiscal Year Ended

    

Fiscal Year Ended

    

Fiscal Year Ended

December 26,

December 27,

December 28,

2019

2018

2017

Computed “expected” provision at statutory rate

$

31,580

$

25,700

$

34,499

State income taxes, net of federal income tax benefit

 

(1,364)

 

(627)

 

(28)

Permanent differences:

 

Excess tax benefit related to options exercised

(29,441)

(17,478)

(20,762)

Non-qualified option holder dividend equivalent

Other

543

457

691

Total permanent differences

(28,898)

(17,021)

(20,071)

Change in U.S. tax rate

(573)

(17,850)

Provision to return

(282)

(739)

(63)

Federal tax credits

(1,306)

(685)

(577)

Other, net

 

19

 

142

 

(146)

Provision for income taxes

$

(251)

$

6,197

$

(4,236)

The permanent differences of $29,441 thousand, $17,478 thousand, and $20,762 thousand in fiscal 2019, fiscal 2018, and fiscal 2017, respectively, are the federal benefits due to the recognition of excess tax deductions for stock options exercised. In the table above, the 2019, 2018, and 2017 state benefits related to the recognition of excess tax benefits of $5.6 million, $3.3 million, and $1.0 million, respectively, are included in state income taxes, net of federal income tax benefit.

The Tax Cuts and Jobs Act (the “Act “), which was enacted on December 22, 2017, reduced the U.S. federal corporate income tax rate from 35% to 21% and created new taxes that may apply on certain foreign sourced earnings. In fiscal 2017 and the first nine months of fiscal 2018, we recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in Staff Accounting Bulletin No. 118 (“SAB 118”). As of December 28, 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, and recorded a provisional amount of $17.9 million. Upon further analysis of certain aspects of the Act and refinement of our calculations prior to the end of the measurement period and during the twelve months ended December 27, 2018, we completed our accounting for all the enactment-date income tax effects of the Act and adjusted our provisional amount by an additional $600 thousand, which was included as a component of income tax expense from continuous operations. The changes to 2017 enactment-date provisional amounts decreased the effective tax rate for the year ended December 27, 2018 by 0.47%.

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):

    

Fiscal Year Ended

    

Year Ended

December 26,

December 27,

2019

2018

Deferred tax assets:

 

  

 

  

Accruals not currently deductible for tax purposes

$

2,820

$

13,338

Tenant improvement allowances

 

 

9,239

Inventories

 

5,283

 

3,948

Stock based compensation

 

3,984

 

3,684

Other intangibles

 

313

 

361

Gift card liability

 

453

 

242

Litigation accrual

139

172

Lease liabilities

233,106

Other

 

3,718

 

2,858

Total deferred tax assets

 

249,816

 

33,842

Deferred tax liabilities:

 

  

 

  

Intangible assets

 

(26,939)

 

(27,023)

Fixed assets

 

(35,576)

 

(30,681)

Right-of-use assets

(203,028)

Other

 

(2,651)

 

(2,976)

Total deferred tax liabilities

 

(268,194)

 

(60,680)

Net deferred tax liabilities

$

(18,378)

$

(26,838)

The Company generated $719 thousand and $776 thousand of tax-effected state net operating losses in fiscal 2019 and fiscal 2018, respectively; as of December 26, 2019, approximately $2.8 million of tax-effected state net operating losses were available to reduce future income taxes. The state net operating losses expire in various amounts beginning in 2032.

In assessing the realization of deferred tax assets, including net operating losses, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in prior carryback periods, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income exclusive of reversing temporary differences and carryforwards in making this assessment, and accordingly, has concluded that no valuation allowance is necessary as of December 26, 2019 or December 27, 2018.

The Company files income tax returns with the U.S. Federal government and various state jurisdictions. Prior tax years beginning in year 2016 remain open to examination by the Internal Revenue Service (“IRS”). We are currently under federal audit by the IRS for the 2017 tax year. Unrecognized tax benefits were $0.4 million as of December 26, 2019, and there were no unrecognized tax benefits as of December 27, 2018 and December 28, 2017 that if recognized, would affect the effective tax rate in future periods. The Company's policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense.

v3.19.3.a.u2
Fair Value Measurements
12 Months Ended
Dec. 26, 2019
Fair Value Measurements  
Fair Value Measurements

7. Fair Value Measurements

We measured certain financial assets and financial liabilities at fair value on a recurring basis as follows for the periods presented.

As of

December 26,

(in thousands)

2019

    

Level 1

    

Level 2

    

Level 3

Designated as hedges:

Interest rate cap (cash flow hedge)

$

20

$

$

20

$

Not designated as hedges:

Interest rate cap

$

$

$

$

As of

December 27,

(in thousands)

    

2018

    

Level 1

    

Level 2

    

Level 3

Designated as hedges:

Interest rate cap (cash flow hedge)

$

1,076

$

$

1,076

$

Not designated as hedges:

Interest rate cap

$

1,075

$

$

1,075

$

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.

See Note 1, “Summary of Significant Accounting Policies” and Note 5, “Intangible Assets” for a discussion of the valuation of goodwill and intangible assets, respectively. See Note 10, “Debt” for discussion of the fair value of the Company’s debt.

The estimated fair values of other financial assets and liabilities including cash and cash equivalents, receivables, prepaid expenses and other current assets, other assets, accounts payable, and accrued expenses and other current liabilities approximate their respective fair values as reported within the Consolidated Balance Sheets.

v3.19.3.a.u2
Derivatives and Risk Management
12 Months Ended
Dec. 26, 2019
Derivatives and Risk Management  
Derivatives and Risk Management

8. Derivatives and Risk Management

Changes in interest rates impact our results of operations. In an effort to manage our exposure to this risk, we enter into derivative contracts and may adjust our derivative portfolio as market conditions change.

Designated as Cash Flow Hedge

For derivative contracts designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of Accumulated Other Comprehensive Income (“AOCI”) and reclassified into earnings in the same period in which the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in earnings.

Not Designated as Accounting Hedge

For derivative contracts de-designated as accounting hedges, the change in the fair value is reflected through earnings. These changes in fair value are mark-to-market adjustments (“MTM adjustments”). MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. The AOCI related to the interest rate cap prior to the de-designation is being amortized over the remaining maturity period.

Derivative Position as of December 26, 2019:

    

Final Maturity

Other

AOCI, Net

(in thousands)

    

Notional Balance

    

Date

    

Assets

    

of Tax

Designated as hedges:

Interest rate cap (cash flow hedge)

$

102,500

U.S. dollars

December 2021

$

20

$

236

Not designated as hedges:

Interest rate cap

$

102,500

U.S. dollars

December 2021

$

$

(43)

Derivative Position as of December 27, 2018:

    

Final Maturity

Other

AOCI, Net

(in thousands)

    

Notional Balance

    

Date

    

Assets

    

of Tax

Designated as hedges:

Interest rate cap (cash flow hedge)

$

102,500

U.S. dollars

December 2021

$

1,076

$

177

Not designated as hedges:

Interest rate cap

$

102,500

U.S. dollars

December 2021

$

1,075

$

9

Designated Hedge Gain (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 Income (Loss)

Fiscal Year Ended

Fiscal Year Ended

December 26,

December 27,

December 28,

December 26,

December 27,

December 28,

(in thousands)

    

2019

    

2018

    

2017

    

2019

    

2018

    

2017

Interest rate cap (cash flow hedge)

$

$

$

$

(379)

$

391

$

(381)

Interest rate swaps (cash flow hedges)

$

$

$

$

$

$

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.

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.

v3.19.3.a.u2
Commitments and Contingencies
12 Months Ended
Dec. 26, 2019
Commitments and Contingencies.  
Commitments and Contingencies

9. Commitments and Contingencies

Lease Commitments

In the first quarter of fiscal 2019, we adopted ASU No. 2016-02, “Leases (Topic 842),” which requires that lessees recognize lease assets and lease liabilities for all leases on the balance sheet with an option to exclude short-term leases (leases with terms of 12 months or less), which we elected. We adopted ASU No. 2016-02 using the modified retrospective approach and elected the package of practical expedients to use in transition, which permitted us not to reassess, under the new standard, our prior conclusions about lease identification and lease classification. The cumulative effect adjustment upon adoption of ASU No. 2016-02 resulted in an immaterial adjustment to retained earnings. The adoption also resulted in the addition of $620.8 million of right-of-use assets and a corresponding $683.0 million of lease liabilities to our balance sheet, while eliminating deferred rent and tenant improvement allowances. Additionally, we do not separate lease and nonlease components of contracts.

The majority of our long-term operating lease agreements are for our corporate office, retail locations, and distribution centers, which expire in various years through 2040. The initial lease terms for these facilities range from 10-15 years, with the exception of three buildings which have 20-year initial lease terms. The majority of our building leases also include options to extend, which are factored into the recognition of their respective assets and liabilities when appropriate based on management’s assessment of the probability that the options will be exercised. Additionally, one building lease contains variable lease payments, which are determined based on a percentage of retail sales over a contractual level, and we sublease real estate within one distribution center to a third party. Certain of our lease agreements include escalating rents over the lease terms which, under Topic 842, results in rent being expensed on a straight-line basis over the life of the lease that commences on the date we have the right to control the property. Our lease agreements do not contain any residual value guarantees or restrictive covenants that would reasonably be expected to have a material impact on our business.

When readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of our leases do not provide a readily determinable implicit rate. If the rate implicit in the lease is not readily determinable, we use a third party to assist in the determination of a secured incremental borrowing rate, determined on a collateralized basis, to discount lease payments based on information available at lease commencement. The secured incremental borrowing rate is estimated based on yields obtained from Bloomberg for U.S. consumers with a BB- credit rating and is adjusted for collateralization as well as inflation.

Lease Position

The table below presents supplemental balance sheet information related to operating leases.

As of

in thousands, except lease term and discount rate

Classification

December 26, 2019

Assets

Building

Right-of-use assets

$

808,989

Equipment

Right-of-use assets

7,322

Land

Right-of-use assets

2,378

Software

Right-of-use assets

3,567

Total operating lease assets

$

822,256

Liabilities

 

Current

 

Building

Current portion of lease liabilities

$

67,500

Equipment

Current portion of lease liabilities

3,758

Land

Current portion of lease liabilities

170

Software

Current portion of lease liabilities

3,164

Total current operating lease liabilities

74,592

Noncurrent

Building

Lease liabilities

837,510

Equipment

Lease liabilities

3,902

Land

Lease liabilities

2,357

Software

Lease liabilities

500

Total noncurrent operating lease liabilities

844,269

Total operating lease liabilities

$

918,861

Weighted-average remaining lease term

 

10 years

Weighted-average discount rate

5.3%

Lease Costs

The table below presents components of lease expense for operating leases.

    

Fiscal Year Ended

in thousands

Classification

December 26, 2019

Operating lease cost (1)

Selling and store operating

$

116,623

Sublease income

Selling and store operating

 

(2,414)

Total lease cost

$

114,209

(1)Includes variable lease costs, which are immaterial.

Undiscounted Cash Flows

Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 26, 2019, were:

in thousands

    

Amount

2020

$

122,303

2021

 

127,449

2022

 

120,091

2023

 

116,505

2024

 

113,019

Thereafter

 

622,954

Total minimum lease payments (2)

$

1,222,321

Less: amount of lease payments representing interest

303,460

Present value of future minimum lease payments

918,861

Less: current obligations under leases

74,592

Long-term lease obligations

$

844,269

(2)Future lease payments exclude approximately $165.8 million of legally binding minimum lease payments for operating leases signed but not yet commenced.

For the year ended December 26, 2019, cash paid for operating leases was $112.8 million.

Right-of-Use Asset Impairment and Write Off

During the third quarter of fiscal 2019, we began the move from our former store support center in Smyrna, Georgia to a nearby location in Atlanta, Georgia. Prior to this period, we expected to fully cover future payments under the operating lease agreement with proceeds from a sublease. As of the end of our fiscal third quarter, we no longer expected to find a sublease tenant that would fully cover these future payments and concluded that the right-of-use asset related to the operating lease was not recoverable. Therefore, we determined the fair value of the right-of-use asset based on a discounted cash flow analysis reflective of the income expected from a sublease. Based on the excess of the asset’s carrying value over fair value, we recognized an impairment of $4.1 million in the third quarter of fiscal 2019 in general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

In addition, during the fourth quarter of fiscal 2019, we completed the move to our new location and terminated the lease for our previous store support center facility in Smyrna, Georgia. As a result, we recognized a loss of $1.9 million related to the settlement of our remaining obligations under the lease and the write off of the remaining right-of-use asset for the facility upon lease termination. This loss was recognized in general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

Litigation

On May 20, 2019, an alleged stockholder of the Company filed a putative class action lawsuit, Taylor v. Floor & Decor Holdings, Inc., et al., No. 1:19-cv-02270-SCJ (N.D. Ga.), in the United States District Court for the Northern District of Georgia against the Company and certain of our officers, directors and stockholders. On August 14, 2019, the Court named a lead plaintiff, and

the case was re-captioned In re Floor & Decor Holdings, Inc. Securities Litigation, No. 1:19-cv-02270-SCJ (N.D. Ga.). The operative complaint alleges certain violations of federal securities laws based on, among other things, purported materially false and misleading statements and omissions allegedly made by the Company between May 23, 2018 and August 1, 2018 and seeks class certification, unspecified monetary damages, costs and attorneys’ fees and equitable relief. The Company denies the material allegations in this lawsuit, which is in the early stages and has not yet been certified as a class, and intends to defend itself vigorously. In addition, the Company maintains insurance that may cover any liability arising out of this litigation up to the policy limits and subject to meeting certain deductibles and to other terms and conditions thereof. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, we are currently unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from this litigation.

We are also subject to various other legal actions, claims and proceedings arising in the ordinary course of business, which may include claims related to general liability, workers’ compensation, product liability, intellectual property and employment-related matters resulting from our business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. These various other ordinary course proceedings are not expected to have a material impact on our consolidated financial position, cash flows, or results of operations, however regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

v3.19.3.a.u2
Debt
12 Months Ended
Dec. 26, 2019
Debt  
Debt

10. Debt

The following table summarizes our long-term debt as of December 26, 2019 (dollars in thousands):

Interest Rate Per

Annum at

Maturity

December 26,

December 26,

December 27,

Date

2019

2019

2018

Credit Facilities:

    

  

    

  

    

  

    

  

    

  

UBS Facility Term Loan B

 

September 30, 2023

 

4.77

%  

Variable

$

145,500

$

149,000

Wells Facility Revolving Line of Credit

 

September 30, 2021

 

4.25

%  

Variable

Total secured debt

 

  

 

  

 

  

145,500

149,000

Less: current maturities

 

  

 

  

 

  

 

 

3,500

Long-term debt maturities

 

  

 

  

 

  

 

145,500

 

145,500

Less: unamortized discount and debt issuance costs

 

  

 

  

 

  

 

2,894

 

3,666

Total long-term debt

 

  

 

  

 

  

$

142,606

$

141,834

Repayment of Debt with Proceeds from Initial Public Offering

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 (after giving effect to the underwriters’ exercise in full of their option to purchase additional shares) at a price of $21.00 per share. The Company received aggregate net proceeds of approximately $192.0 million after deducting underwriting discounts and commissions and other offering expenses.

The Company used net proceeds from the IPO of approximately $192.0 million to repay a portion of the amounts outstanding under the Term Loan Facility, including accrued and unpaid interest. The partial paydown resulted in a loss on extinguishment of debt in the amount of approximately $5.4 million related to unamortized original issue discount and unamortized deferred debt issuance costs.

Term Loan Facility

As of December 26, 2019, the Term Loan Facility had an outstanding balance of $145.5 million, all due and payable at maturity. The Term Loan Facility matures on September 30, 2023.

As of December 26, 2019, 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 2.50%

ii)

Base Rate plus a margin of 1.50%. 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%

ABL Facility

As of December 26, 2019, the ABL Facility had a maximum availability of $300.0 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 an 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. The ABL Facility matures on September 30, 2021. As of December 26, 2019, the borrowings bear interest at a floating rate, which is based on one of the following rates at the option of the Company:

i)

LIBOR 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 LIBOR Rate plus 1.00%, or

(c)

the lender’s prime rate

As of December 26, 2019, the Company had net availability under the ABL Facility of $279,488 thousand, including outstanding letters of credit of $20,512 thousand. The total minimum debt payment of $145,500 thousand is due at maturity in 2023.

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 with such indebtedness; (ii) pay dividends and make certain other restricted payments; (iii) effect mergers or consolidations; (iv) enter into transactions with affiliates; (v) sell or dispose of property or assets and (vi) engage in unrelated lines of business. In addition, these credit agreements subject 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 26, 2019, we were in compliance with the covenants of the Credit Facilities.

Deferred Debt Issuance Cost and Original Issue Discount

Deferred debt issuance cost related to our ABL Facility and our prior asset-based revolving credit facility of $574 thousand and $902 thousand as of December 26, 2019 and December 27, 2018, 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 $2,894 thousand and $3,666 thousand as of December 26, 2019 and December 27, 2018, respectively, are included in term loans on our Consolidated Balance Sheets. Amortization expense was $1,100 thousand, $1,045 thousand, and $1,205 thousand for the years ended December 26, 2019, December 27, 2018, and December 28, 2017, respectively.

Fair Value of Debt

The fair values of certain of the Company’s debt instruments have been determined by 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. 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 26, 2019 and December 27, 2018, the fair values of the Company’s debt are as follows (in thousands):

    

December 26,

    

December 27,

in thousands

2019

2018

Total debt at par value

$

145,500

$

149,000

Less: unamortized discount and debt issuance costs

 

2,894

 

3,666

Net carrying amount

$

142,606

$

145,334

Fair value

$

145,136

$

147,883

v3.19.3.a.u2
Stockholder's Equity
12 Months Ended
Dec. 26, 2019
Stockholders' Equity  
Stockholders' Equity

11. 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.

Conversion Features

On May 2, 2017, all of the Class B common stock outstanding shares were converted to Class A common stock upon completion of the Company’s initial public offering.

On July 26, 2017, all of the outstanding shares of Class C common stock were converted to Class A common stock.

Stock Incentive Plans

 On January 13, 2011, the Company adopted the 2011 Stock Option Plan (as amended, restated, supplemented or otherwise modified from time to time, the “2011 Plan”) to provide for the grant of stock options to employees (including officers), consultants and non-employee directors of the Company and its subsidiaries. Pursuant to the terms of the 2011 Plan, the Company was authorized to grant options for the purchase of up to 12,520,407 shares as of December 29, 2016 and 10,780,970 shares as of December 31, 2015. As of December 29, 2016 and December 31, 2015, there were 179,575 and 104,269 shares available for grant pursuant to awards under the 2011 Plan, respectively.

We ceased granting awards under the 2011 Plan upon the implementation of the 2017 Plan, described below.

On April 13, 2017, the board of directors approved the Floor & Decor Holdings, Inc. 2017 Stock Incentive Plan (the “2017 Plan”), which was subsequently approved by the Company’s stockholders. The 2017 Plan authorizes the Company to grant options and restricted stock awards to eligible employees (including officers), consultants, and non-employee directors up to an aggregate of 5,000,000 shares of Class A common stock. In connection with the IPO, the Company granted options to purchase an aggregate of 1,254,465 shares of our Class A common stock to certain of our eligible employees and 15,475 shares of restricted stock to certain of our non-employee directors, in each case pursuant to the 2017 Plan and based on the public offering price of $21.00 per share. As of December 26, 2019 and December 27, 2018, there were 2,806,549 and 2,850,768 shares available for grant pursuant to awards under the 2017 Plan, respectively.

Secondary Offerings

On July 25, 2017, certain of the Company’s stockholders completed a secondary public offering (the “July Secondary Offering”) of an aggregate of 10,718,550 shares of common stock at a price to the public of $40.00 per share. The Company did not sell any shares in the July Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.

On November 20, 2017, certain of the Company’s stockholders completed a secondary public offering (the “November Secondary Offering”) of an aggregate of 7,475,000 shares of common stock at a price to the public of $36.00 per share. The Company did not sell any shares in the November Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.

On May 29, 2018, certain of the Company’s stockholders completed a secondary public offering (the “May Secondary Offering”) of an aggregate of 10,000,000 shares of common stock at a price to the public of $45.80 per share. The Company did not sell any shares in the May Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.

On September 14, 2018, certain of the Company’s stockholders completed a secondary public offering (the “September Secondary Offering”) of an aggregate of 11,500,000 shares of common stock at a price to the public of $37.25 per share. The Company did not sell any shares in the September Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.

On February 28, 2019, certain of the Company’s certain of the Company’s stockholders completed a secondary public offering (the “February Secondary Offering”) of an aggregate of 10,000,000 shares of common stock at a price to the public of $37.50 per share. The Company did not sell any shares in the February Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.

Stock Options

The Company accounts for stock-based compensation pursuant to ASC 718, Compensation – Stock Compensation, which requires measurement of compensation cost for all stock awards at fair value on the date of grant and recognition of compensation, net of forfeitures, over the requisite service period for awards expected to vest.

Stock options are granted with an exercise price greater than or equal to the fair market value on the date of grant, as authorized by the Company’s board of directors or compensation committee. Options granted have vesting provisions ranging from one to five years, and contractual terms of ten years. Stock option grants are generally subject to forfeiture if employment terminates prior to vesting.

The fair value of stock option awards granted was estimated using the Black-Scholes pricing model with the following weighted-average assumptions:

    

Fiscal Year Ended

    

Fiscal Year Ended

    

Fiscal Year Ended

 

December 26,

December 27,

December 28,

 

2019

2018

2017

 

Risk-free interest rate

 

2.06

%  

3.05

%  

2.06

%

Expected volatility

 

45

%  

42

%