FLOOR & DECOR HOLDINGS, INC., 10-K filed on 2/25/2021
Annual Report
v3.20.4
Cover Page - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2020
Feb. 22, 2021
Jun. 25, 2020
Cover [Abstract]      
Document Type 10-K    
Document Annual Report true    
Document Period End Date Dec. 31, 2020    
Current Fiscal Year End Date --12-31    
Document Transition Report false    
Entity File Number 001-38070    
Entity Registrant Name Floor & Decor Holdings, Inc.    
Entity Incorporation, State or Country Code DE    
Entity Address, Address Line One 2500 Windy Ridge Parkway SE    
Entity Address, City or Town Atlanta    
Entity Address, State or Province GA    
Entity Tax Identification Number 27-3730271    
Entity Address, Postal Zip Code 30339    
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    
ICFR Auditor Attestation Flag true    
Entity Shell Company false    
Entity Public Float     $ 5.0
Entity Common Stock, Shares Outstanding   104,396,523  
Documents Incorporated by Reference Portions of the Registrant’s proxy statement for the Annual Meeting of Shareholders to be filed pursuant to Regulation 14A of the Exchange Act on or before April 30, 2021, are incorporated by reference into Part III of this Form 10-K. Except as expressly incorporated by reference, the Registrant’s proxy statement shall not be deemed to be part of this report.    
Entity Central Index Key 0001507079    
Amendment Flag false    
Document Fiscal Period Focus FY    
Document Fiscal Year Focus 2020    
v3.20.4
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2020
Dec. 26, 2019
Current assets:    
Cash and cash equivalents $ 307,772 $ 27,037
Income taxes receivable 0 2,868
Receivables, net 50,427 69,301
Inventories, net 654,000 581,865
Prepaid expenses and other current assets 28,257 20,415
Total current assets 1,040,456 701,486
Fixed assets, net 579,359 456,289
Right-of-use assets 916,325 822,256
Intangible assets, net 109,269 109,299
Goodwill 227,447 227,447
Other assets 7,569 7,532
Total long-term assets 1,839,969 1,622,823
Total assets 2,880,425 2,324,309
Current liabilities:    
Current portion of term loan 1,647 0
Current portion of lease liabilities 94,502 74,592
Trade accounts payable 417,898 368,459
Accrued expenses and other current liabilities 162,283 102,807
Income taxes payable 12,391 0
Deferred revenue 10,115 6,683
Total current liabilities 698,836 552,541
Term loans 207,157 142,606
Lease liabilities 941,125 844,269
Deferred income tax liabilities, net 27,990 18,378
Other liabilities 7,929 2,179
Total long-term liabilities 1,184,201 1,007,432
Total liabilities 1,883,037 1,559,973
Commitments and Contingencies (Note 9)
Capital stock:    
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at December 31, 2020 and December 26, 2019 0 0
Additional paid-in capital 408,124 370,413
Accumulated other comprehensive income (loss), net 164 (193)
Retained earnings 588,996 394,015
Total stockholders’ equity 997,388 764,336
Total liabilities and stockholders’ equity 2,880,425 2,324,309
Common Class A    
Capital stock:    
Common stock 104 101
Common Class B    
Capital stock:    
Common stock 0 0
Common Class C    
Capital stock:    
Common stock $ 0 $ 0
v3.20.4
Consolidated Balance Sheets (Parenthetical) - $ / shares
Dec. 31, 2020
Dec. 26, 2019
Preferred Stock    
Preferred stock, par value (in dollars per share) $ 0.001 $ 0.001
Preferred stock, shares authorized (in shares) 10,000,000 10,000,000
Preferred stock, shares issued (in shares) 0 0
Preferred stock, shares outstanding (in shares) 0 0
Common Class A    
Common Stock    
Common stock, par value (in dollars per share) $ 0.001 $ 0.001
Common stock, shares authorized (in shares) 450,000,000 450,000,000
Common stock, shares issued (in shares) 104,368,212 101,457,858
Common stock, shares outstanding (in shares) 104,368,212 101,457,858
Common Class B    
Common Stock    
Common stock, par value (in dollars per share) $ 0.001 $ 0.001
Common stock, shares authorized (in shares) 10,000,000 10,000,000
Common stock, shares issued (in shares) 0 0
Common stock, shares outstanding (in shares) 0 0
Common Class C    
Common Stock    
Common stock, par value (in dollars per share) $ 0.001 $ 0.001
Common stock, shares authorized (in shares) 30,000,000 30,000,000
Common stock, shares issued (in shares) 0 0
Common stock, shares outstanding (in shares) 0 0
v3.20.4
Consolidated Statements of Operations and Comprehensive Income - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2020
Dec. 26, 2019
Dec. 27, 2018
Income Statement [Abstract]      
Net sales $ 2,425,788 $ 2,045,456 $ 1,709,848
Cost of sales 1,390,896 1,182,442 1,007,580
Gross profit 1,034,892 863,014 702,268
Operating expenses:      
Selling and store operating 654,100 546,853 439,495
General and administrative 144,715 132,386 105,327
Pre-opening 21,498 24,594 26,145
Total operating expenses 820,313 703,833 570,967
Operating income 214,579 159,181 131,301
Interest expense, net 8,389 8,801 8,917
Gain on early extinguishment of debt (1,015) 0 0
Income before income taxes 207,205 150,380 122,384
Provision (benefit) for income taxes 12,224 (251) 6,197
Net income 194,981 150,631 116,187
Change in fair value of hedge instruments, net of tax 357 (379) 391
Total comprehensive income $ 195,338 $ 150,252 $ 116,578
Basic earnings per share (in dollars per share) $ 1.90 $ 1.51 $ 1.20
Diluted earnings per share (in dollars per share) $ 1.84 $ 1.44 $ 1.11
v3.20.4
Consolidated Statements of Stockholders' Equity - USD ($)
$ in Thousands
Total
Cumulative Effect, Period of Adoption, Adjustment
Common Class A
Common Class B
Common Class C
Common stock
Common Class A
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Retained earnings
Cumulative Effect, Period of Adoption, Adjustment
Beginning balance (in shares) at Dec. 28, 2017           95,509,000        
Beginning balance at Dec. 28, 2017 $ 442,860 $ 7,826       $ 96 $ 323,419 $ (205) $ 119,550 $ 7,826
Increase (Decrease) in Stockholders' Equity [Roll Forward]                    
Stock-based compensation expense 6,514           6,514      
Exercise of stock options (in shares)           2,069,000        
Exercise of stock options 10,531         $ 2 10,529      
Issuance of restricted stock award (in shares)           10,000        
Other comprehensive income gain (loss), net of tax 391             391    
Net income 116,187               116,187  
Ending balance (in shares) at Dec. 27, 2018           97,588,000        
Ending balance at Dec. 27, 2018 $ 584,309 $ (179)       $ 98 340,462 186 243,563 $ (179)
Increase (Decrease) in Stockholders' Equity [Roll Forward]                    
Accounting Standards Update [Extensible List] us-gaap:AccountingStandardsUpdate201602Member                  
Stock-based compensation expense $ 8,711           8,711      
Exercise of stock options (in shares)           3,741,000        
Exercise of stock options $ 18,798         $ 3 18,795      
Issuance of restricted stock award (in shares)           24,000        
Shares issued under employee stock plan (in shares) 104,363         105,000        
Shares issued under employee stock plans $ 2,445           2,445      
Other comprehensive income gain (loss), net of tax (379)             (379)    
Net income 150,631               150,631  
Ending balance (in shares) at Dec. 26, 2019     101,457,858 0 0 101,458,000        
Ending balance at Dec. 26, 2019 764,336         $ 101 370,413 (193) 394,015  
Increase (Decrease) in Stockholders' Equity [Roll Forward]                    
Stock-based compensation expense $ 16,115           16,115      
Exercise of stock options (in shares) 2,485,427         2,485,000        
Exercise of stock options $ 19,254         $ 2 19,252      
Issuance of restricted stock award (in shares)           369,000        
Issuance of restricted stock awards $ 1         $ 1        
Shares issued under employee stock plan (in shares) 56,389         56,000        
Shares issued under employee stock plans $ 2,344           2,344      
Other comprehensive income gain (loss), net of tax 357             357    
Net income 194,981               194,981  
Ending balance (in shares) at Dec. 31, 2020     104,368,212 0 0 104,368,000        
Ending balance at Dec. 31, 2020 $ 997,388         $ 104 $ 408,124 $ 164 $ 588,996  
v3.20.4
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2020
Dec. 26, 2019
Dec. 27, 2018
Operating activities      
Net income $ 194,981 $ 150,631 $ 116,187
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization 91,640 74,001 51,992
Gain on early extinguishment of debt (1,015) 0 0
Loss on asset impairments and disposals, net 14 4,111 23
Amortization of tenant improvement allowances 0 0 (4,494)
Operating lease termination 0 1,926 0
Deferred income taxes 9,614 (10,584) (968)
Interest cap derivative contracts 372 446 (212)
Stock-based compensation expense 16,115 8,711 6,514
Changes in operating assets and liabilities:      
Receivables, net 18,874 (17,850) (13,486)
Inventories, net (72,135) (110,851) (53,557)
Trade accounts payable 49,439 54,956 54,773
Accrued expenses and other current liabilities 59,017 20,744 (1,731)
Income taxes 15,264 3,894 6,221
Deferred revenue 3,432 1,439 3,002
Deferred rent 0 0 14,455
Tenant improvement allowances 0 0 15,010
Other, net 20,552 23,084 (8,105)
Net cash provided by operating activities 406,164 204,658 185,624
Investing activities      
Purchases of fixed assets (212,448) (196,008) (151,397)
Net cash used in investing activities (212,448) (196,008) (151,397)
Financing activities      
Borrowings on revolving line of credit 275,000 100,100 217,050
Payments on revolving line of credit (275,000) (100,100) (258,050)
Proceeds from term loans 75,000 0 0
Payments on term loans (2,697) (3,500) (3,500)
Proceeds from exercise of stock options 19,254 18,798 10,531
Debt issuance costs (6,882) 0 (170)
Proceeds from employee stock purchase plan 2,344 2,445 0
Net cash provided by (used in) financing activities 87,019 17,743 (34,139)
Net increase in cash and cash equivalents 280,735 26,393 88
Cash and cash equivalents, beginning of the period 27,037 644 556
Cash and cash equivalents, end of the period 307,772 27,037 644
Supplemental disclosures of cash flow information      
Buildings and equipment acquired under operating leases 177,932 277,392 0
Cash paid for interest, net of capitalized interest 8,043 7,388 7,563
Cash paid for income taxes, net of refunds 12,670 6,453 1,082
Fixed assets accrued at the end of the period $ 19,987 $ 19,527 $ 15,120
v3.20.4
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Summary of Significant Accounting Policies . 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 31, 2020, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D”), operates 133 warehouse-format stores, which average 78,000 square feet, and two small-format standalone design studios in 31 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. The fiscal year ended December 31, 2020 (fiscal "2020") includes 53 weeks, while the fiscal years ended December 26, 2019 (“fiscal 2019”) and December 27, 2018 (“fiscal 2018”) include 52 weeks. When a 53-week fiscal year occurs, we report the additional week at the end of the fiscal fourth quarter. 52-week fiscal years consist of thirteen-week periods in the first, second, third, and fourth quarters of the fiscal year. The 53-week fiscal year consists of thirteen-week periods in the first, second, and third quarters of the fiscal year and a fourteen-week period in the fourth quarter 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.
Impact of the COVID-19 Pandemic
On March 11, 2020, the World Health Organization announced that infections of the coronavirus (COVID-19) had become a pandemic, and on March 13, 2020, the President of the United States announced a National Emergency relating to the COVID-19 pandemic. While the full impact that the COVID-19 pandemic could have on the Company's business remains highly uncertain, it had a material negative impact on the Company's operations and financial results during the first half of fiscal 2020. The following summarizes certain actions taken and impacts from the COVID-19 pandemic during and subsequent to the fiscal year ended December 31, 2020:
Beginning in late March 2020, for the health and safety of its customers and employees, the Company temporarily closed some of its stores and shifted its remaining stores to a curbside pickup model. Under this model, customers were not allowed to enter the Company's stores, resulting in a significant decline in sales compared to the same period of the prior year.
In May 2020, the Company began a phased approach to reopening its stores for in-store shopping with enhanced safety and sanitation measures such as requiring associates to wear face masks, installing social distancing markers on floors and protective shields at cash registers, and regularly sanitizing shopping carts, pin pads, design desks, and other high-traffic areas. By the end of the second quarter of fiscal 2020, all of the Company's stores were reopened for in-store shopping and have remained open other than for temporary cleaning or in response to certain weather events. Sales have recovered since reopening stores, with third and fourth quarter fiscal 2020 sales higher than in the same periods of the prior year.
To provide additional liquidity in response to the business uncertainties resulting from the evolving COVID-19 pandemic, the Company entered into a $75.0 million incremental term loan on May 18, 2020. See Note 10, "Debt" for additional information.
In response to the impact and uncertainties caused by the COVID-19 pandemic, the Company initially implemented a number of measures to minimize cash outlays, including lowering inventory purchases and related supply chain costs to align with reduced sales, temporarily reducing compensation for all executive officers and most employees, temporarily freezing new hiring, reducing or eliminating non-essential spending, reducing advertising spending, furloughing certain employees, and delaying or reducing rent payments and planned capital expenditures, including new store investments. Since the Company began to reopen stores for in-store shopping starting in May, many of these cost saving measures have been eliminated or relaxed as the Company's financial results have improved.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted, which includes provisions related to income taxes, the temporary deferral of the employer portion of social security taxes, and retention credits for 50% of eligible wages and health benefits paid to employees not providing services due to the COVID-19 pandemic. Refer to Note 6, "Income Taxes" for additional information.
The COVID-19 pandemic remains a rapidly evolving situation. The extent of the impact of the pandemic on the Company's business and financial results will depend on future developments, including the duration of the pandemic and the spread of COVID-19 within the markets in which the Company operates as well as the related impact on consumer confidence and spending, all of which are highly uncertain.
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 beginning in fiscal 2020, the Company collects the majority rebates earned each quarter subsequent to quarter end. In prior years, rebates earned during the fiscal year were primarily collected annually after the Company's 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 was $0.3 million as of December 31, 2020 and December 26, 2019, respectively.
On November 7, 2019, the U.S. Trade Representative (“USTR”) made a ruling 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 and Border Protection (“U.S. Customs”) issued Chapter 99 exclusions for each unique article number identified under the November 7, 2019 USTR ruling. During fiscal 2020, additional Chapter 99 exclusions were issued for certain Bamboo and other flooring products imported from China. For the Company, some of the granted exclusions apply retroactively to tariffs paid as early as September 2018.
While tariff refund claims are subject to the approval of U.S. Customs, the Company currently expects to recover a total of $24.3 million related to Section 301 tariff payments, of which $12.9 million was received in fiscal 2020. As of December 31, 2020 and December 26, 2019, receivables included $11.4 million and 19.3 million of expected tariff refunds from U.S. Customs. The tariff refund receivables outstanding as of December 31, 2020 are expected to be received during fiscal 2021.
During fiscal 2020, the Company recognized a $4.5 million reduction to cost of sales and $0.6 million of interest income related to tariff refunds. Interest accrues from the date that tariff payments were originally made through the date that such payments are refunded to the Company.
Of the $19.3 million of expected tariff recoveries expected as of December 26, 2019, the Company recognized a $14.0 million reduction to cost of sales related to tariff refunds during the fourth quarter of fiscal 2019. This reduction to cost of sales included $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 and $3.0 million related to products sold after November 20, 2019 through the end of fiscal 2019. In addition, the Company recognized a $5.0 million reduction to the carrying cost of inventory as of December 26, 2019 for tariff refunds related to merchandise on hand. Approximately $0.3 million of interest income was also recognized in fiscal 2019 related to anticipated tariff recoveries.
Credit Program
Credit is offered to the Company's customers through a proprietary credit card underwritten by third-party financial institutions 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 2020 and fiscal 2019 was $1.2 million and $1.0 million, 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 $5,434 thousand and $4,468 thousand as of December 31, 2020 and December 26, 2019, 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), buildings and building improvements, 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. The Company capitalizes interest on borrowings during the active construction period of certain capital projects.
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
Buildings and building improvements
10 - 40 years
Computer software and hardware
3 - 7 years
LandIndefinite
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.
Impairment Assessment of Goodwill and Other Indefinite-Lived Intangible Assets
The Company tests goodwill and indefinite-lived intangible assets for impairment 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 or indefinite-lived intangible assets may not be recoverable. We assess the value of our goodwill and indefinite-lived intangible assets under either a qualitative or quantitative approach. Under a qualitative approach, the Company evaluates various market and other factors to determine whether it is more likely than not that the Company’s goodwill or indefinite-lived intangible assets have been impaired. In performing the qualitative assessment, the Company considers the carrying value of its single reporting unit compared to its fair value as well as events and changes in circumstances that could include, but are not limited to, a significant adverse change in customer demand or business climate, an adverse action or assessment by a regulator, and significant adverse changes in the price of the Company’s common stock. If such qualitative assessment indicates that impairment may have occurred, an additional quantitative assessment is performed by comparing the carrying value of the assets to their respective estimated fair values. If the recorded carrying value of goodwill or an indefinite-lived intangible asset exceeds its estimated fair value, an impairment charge is recorded to write the asset down to its estimated fair value.
During the fourth quarter of fiscal 2020, the Company qualitatively assessed whether it was more likely than not that the goodwill and indefinite-lived intangible assets were impaired. Based on this assessment, the Company determined that its goodwill and indefinite-lived intangible assets were not impaired as of October 22, 2020. 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 estimated lives of the Company’s intangible assets are as follows:
Useful Life
Trade namesIndefinite
Vendor relationships10 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. 2016-2, “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.
During fiscal 2020, the Company negotiated rent deferrals or abatements for a significant number of its stores due to the impact of the COVID-19 pandemic. The Company has also delayed rent payments for some stores as negotiations are in process with landlords. Total payments delayed or deferred as of December 31, 2020 were approximately $5.5 million, of which $4.5 million was included in the current portion of lease liabilities and $1.0 million was included in lease liabilities on the Consolidated Balance Sheets.
In accordance with FASB Staff Q&A - Topic 842: "Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic" issued in April 2020, the Company has elected to account for lease concessions that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee as though enforceable rights and obligations for those concessions existed in the original lease agreements. For qualified rent deferrals, the Company has recognized a non-interest bearing accrued liability, which will be reduced when the deferred payment is made in the future. For qualifying rent abatement concessions, which are immaterial in aggregate, the Company is recognizing negative lease expense for the amount of the abatement on a straight-line basis over the term of the lease. During fiscal 2020, the Company recognized approximately $0.1 million of negative lease expense related to rent abatement concessions.
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 $11.0 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 Note 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, the Company adopted Accounting Standards Update (“ASU”) No. 2014-9, “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 Statements of Operations and Comprehensive 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 2020, fiscal 2019, and fiscal 2018 gift card breakage income of $1.5 million, $1.2 million, and $1.6 million 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 2019, 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 years 2020, 2019, and 2018 loyalty breakage of $1.4 million, $1.1 million, and $0.4 million 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 31, 2020 and December 26, 2019, was $22.3 million and $15.4 million, 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 fiscal years ended December 31, 2020, December 26, 2019, and December 27, 2018 were $66.6 million, $65.7 million, and $55.3 million, 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 months to one year 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 fiscal years ended December 31, 2020, December 26, 2019, and December 27, 2018, totaled $21.5 million, $24.6 million, and $26.1 million, respectively.
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 year to five years. Stock option grants are generally subject to forfeiture if employment terminates prior to vesting. The Company has selected the Black-Scholes-Merton 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% likelihood of being realized upon ultimate settlement. In addition, the Company recognizes a loss contingency for uncertain tax positions when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Amounts recognized for uncertain tax positions require that management make estimates and judgments based on provisions of the tax law, which may be subject to change or varying interpretations. The Company includes estimated interest and penalties related to uncertain tax position accruals within accrued expenses and other current liabilities in the condensed Consolidated Balance Sheets and within income tax expense in the condensed Consolidated Statements of Operations and Comprehensive Income.
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
Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, “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 adoption of ASU No. 2016-13 in the first quarter of fiscal 2020 did not have a material impact on the Company’s consolidated financial statements.
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. In the first quarter of fiscal 2020, the Company adopted ASU No. 2018-15 on a prospective basis for implementation costs for new or existing arrangements incurred on or after the adoption date. The adoption of ASU No. 2018-15 did not have a material impact on the Company’s consolidated financial statements.
Leases. In February 2016, the FASB issued ASU No. 2016-2, “Leases (Topic 842).” ASU No. 2016-2 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 ASU No. 2016-2 in the first quarter of fiscal 2019 using the modified retrospective approach. The cumulative effect adjustment upon adoption resulted in a $0.2 million opening balance sheet reduction to retained earnings. The adoption of ASU No. 2016-2 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. 2014-9, “Revenue from Contracts with Customers (Topic 606).” ASU No. 2014-9 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. 2014-9 did not have a material impact to the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance to ease the potential accounting and financial reporting burden of reference rate reform, including the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The new guidance provides temporary optional expedients and exceptions for applying U.S. GAAP to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and the sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made. Unlike other topics, the provisions of this update are only available until December 31, 2022, by which time the reference rate replacement activity is expected to be completed. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures and has yet to elect an adoption date.
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 adoption of ASU No. 2019-12 is not expected to have a material impact to the Company’s consolidated financial statements.
v3.20.4
Revenues
12 Months Ended
Dec. 31, 2020
Revenue from Contract with Customer [Abstract]  
Revenues . 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 & Contract Liabilities
Under ASC 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 was not yet ready for physical transfer to customers.
Contract liabilities within the Consolidated Balance Sheets as of December 31, 2020 and December 26, 2019 primarily consisted of deferred revenue as well as amounts in accrued expenses and other current liabilities related to the Pro Premier loyalty program and unredeemed gift cards. As of December 31, 2020, contract liabilities totaled $24.8 million and included $10.1 million of deferred revenue, $12.1 million of loyalty program liabilities, and $2.6 million of unredeemed gift cards. As of December 26, 2019, contract liabilities totaled $15.5 million and included $6.7 million of deferred revenue, $6.6 million of loyalty program liabilities, and $2.2 million of unredeemed gift cards. Of the contract liabilities outstanding as of December 26, 2019, $8.2 million was recognized in revenue during fiscal 2020.
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 was immaterial to the consolidated financial statements for the fiscal years ended December 31, 2020, December 26, 2019, and December 27, 2018.
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 31,
2020
December 26,
2019
December 27,
2018
Product Category
Net Sales
% of
Net Sales
Net Sales
% of
Net Sales
Net Sales
% of
Net Sales
Tile
$605,357 25 %$523,076 26 %$476,337 27 %
Laminate/luxury vinyl plank555,963 23 442,171 22 316,109 18 
Decorative accessories/wall tile (1)485,076 19 393,908 19 325,139 19 
Installation materials and tools
403,184 17 346,356 17 272,994 16 
Wood
211,307 202,888 10 192,087 12 
Natural stone
152,665 127,975 113,565 
Other (2)12,236 9,082 — 13,617 
Total
$2,425,788 100 %$2,045,456 100 %$1,709,848 100 %
(1)Decorative accessories/wall tile includes adjacent categories revenue totaling $20.5 million and $7.3 million for the fiscal years ended December 31, 2020 and December 26, 2019, respectively.
(2)Other includes delivery and sample 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.
v3.20.4
Accrued Expenses and Other Current Liabilities
12 Months Ended
Dec. 31, 2020
Accrued Liabilities, Current [Abstract]  
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 31,
2020
December 26,
2019
Accrued incentive compensation$24,591 $18,635 
Sales returns and allowances (1)22,266 15,437 
Sales tax payable21,824 14,304 
Accrued construction in progress new stores20,818 10,043 
Insurance reserve incurred but not reported13,511 9,399 
Wages and payroll tax payable22,349 8,328 
Loyalty program liability12,073 6,649 
Other (1)24,851 20,012 
Accrued expenses and other current liabilities$162,283 $102,807 
(1) The liability for sales returns and allowances as of December 26, 2019 has been reclassified within this table from Other to Sales returns and allowances to conform to the current period presentation.
v3.20.4
Fixed Assets
12 Months Ended
Dec. 31, 2020
Property, Plant and Equipment [Abstract]  
Fixed Assets . Fixed Assets
Fixed assets as of December 31, 2020 and December 26, 2019, consisted of the following (in thousands):
December 31,
2020
December 26,
2019
Furniture, fixtures and equipment$259,696 $236,555 
Leasehold improvements (1)380,671 309,720 
Computer software and hardware138,321 113,975 
Buildings and building improvements (1)65,552 11,614 
Land30,731 8,715 
Fixed assets, at cost874,971 680,579 
Less: accumulated depreciation and amortization295,612 224,290 
Fixed assets, net$579,359 $456,289 
(1) Represents buildings and building improvements on land that the Company owns as well as on land that the Company is leasing through ground leases. Prior period fixed asset balances related to buildings and building improvements on ground leases have been reclassified from leasehold improvements to building and building improvements to conform to the current period presentation.
Depreciation and amortization on fixed assets for the fiscal years ended December 31, 2020, December 26, 2019, and December 27, 2018, were $90.1 million, $69.9 million, and $50.5 million, respectively.
v3.20.4
Intangible Assets
12 Months Ended
Dec. 31, 2020
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets . Intangible Assets
The following summarizes the balances of identifiable intangible assets as of December 31, 2020 and December 26, 2019 (in thousands):
December 31,
2020
December 26,
2019
Estimated
Useful Lives
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Amortizable intangible asset:
Vendor relationships10 years$319 $(319)$319 $(289)
Indefinite-lived intangible asset:
Trade names109,269 — 109,269 — 
Total$109,588 $(319)$109,588 $(289)
Amortization expense related to amortizable intangible assets for the fiscal years ended December 31, 2020, December 26, 2019 and December 27, 2018, was $30 thousand, $31 thousand, and $32 thousand, respectively.
v3.20.4
Income Taxes
12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes . Income Taxes
The components of the provision for income taxes are as follows (in thousands):
Fiscal Year Ended December 31,
2020
Fiscal Year Ended December 26,
2019
Fiscal Year Ended December 27,
2018
Current (benefit) / expense:
Federal
$(1,781)$7,975 $5,496 
State
4,391 2,358 1,669 
Total current expense2,610 10,333 7,165 
Deferred expense / (benefit):
Federal
11,684 (6,522)922 
State
(2,070)(4,062)(1,890)
Total deferred expense / (benefit)9,614 (10,584)(968)
Provision (benefit) for income taxes$12,224 $(251)$6,197 
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 fiscal years ended December 31, 2020, December 26, 2019, and December 27, 2018 to income before income taxes (in thousands).
Fiscal Year Ended December 31,
2020
Fiscal Year Ended December 26,
2019
Fiscal Year Ended December 27,
2018
Computed “expected” provision at statutory rate$43,513 $31,580 $25,700 
State income taxes, net of federal income tax benefit1,493 (1,364)(627)
Permanent differences:
Excess tax benefit related to options exercised(27,003)(29,441)(17,478)
Other517 543 457 
Total permanent differences(26,486)(28,898)(17,021)
Change in U.S. tax rate— (573)
Provision to return(150)(282)(739)
Federal tax credits(920)(1,306)(685)
CARES Act benefit(7,676)— — 
Uncertain Tax Positions2,724 — — 
Other, net(274)19 142 
Provision (benefit) for income taxes$12,224 $(251)$6,197 
The permanent differences of $27.0 million, $29.4 million, and $17.5 million in fiscal 2020, fiscal 2019, and fiscal 2018, respectively, are the federal benefits due to the recognition of excess tax deductions for stock options exercised. In the table above, the 2020, 2019, and 2018 state benefits related to the recognition of excess tax benefits of $5.3 million, $5.6 million, and $3.3 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. Staff Accounting Bulletin No. 118 ("SAB 118") allows for a measurement period that should not extend beyond one year from the Act enactment date of December 22, 2017. In accordance with SAB 118, the Company completed its accounting for the impact of the 2017 Act during the fourth quarter of fiscal 2018, before the end of the measurement period, and recorded a tax benefit of $18.5 million as a result of the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. As of December 31, 2020, the measurement period is closed and any amounts that were provisional at December 26, 2019 were finalized with little to no impact to the consolidated financial statement.
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 December 31,
2020
Fiscal Year Ended December 26,
2019
Deferred tax assets:
Accruals not currently deductible for tax purposes$8,293 $2,820 
Inventories6,941 5,283 
Stock-based compensation5,979 3,984 
Other intangibles268 313 
Gift card liability557 453 
Litigation accrual120 139 
Lease liabilities259,273 233,106 
Other10,732 3,718 
Total deferred tax assets292,163 249,816 
Deferred tax liabilities:
Intangible assets(27,053)(26,939)
Fixed assets(62,374)(35,576)
Right-of-use assets(227,166)(203,028)
Other(3,560)(2,651)
Total deferred tax liabilities(320,153)(268,194)
Net deferred tax liabilities$(27,990)$(18,378)
The Company generated $0.1 million and $0.7 million of tax-effected state net operating losses in fiscal 2020 and fiscal 2019, respectively; as of December 31, 2020, approximately $3.0 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 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 31, 2020 or December 26, 2019.
The Company files income tax returns with the U.S. Federal government and various state jurisdictions. Prior tax years beginning in year 2018 remain open to examination by the Internal Revenue Service (“IRS”). We closed a federal audit by the IRS for the 2015 to 2017 tax years.
Following is a reconciliation of the beginning and ending balance of unrecognized tax benefits for periods presented:
Fiscal Year Ended December 31,
2020
Fiscal Year Ended December 26,
2019
Fiscal Year Ended December 27,
2018
Unrecognized tax benefits balance at beginning of fiscal year$402 $— $— 
Additions based on tax positions related to the current year281 282 — 
Additions for tax positions of prior years5,424 120 — 
Unrecognized tax benefits balance at end of fiscal year$6,107 $402 $— 
There were $1.9 million of unrecognized tax benefits as of December 31, 2020 that, if recognized, would affect the Company's effective tax rate, while there were no such unrecognized tax benefits as of December 26, 2019 and December 27, 2018 that would affect the Company's effective tax rate in future periods. Over the next twelve months, it is reasonably possible that our unrecognized tax benefits could be reduced by $5.4 million due to audit settlements, expiration of statute of limitations, or other resolution of uncertainties. The Company's policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense. The Company recognized $0.6 million of interest expense related to unrecognized tax benefits during fiscal 2020 and no such interest expense during fiscal 2019 and fiscal 2018.
Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
The CARES Act includes, among other things, income tax provisions allowing for the temporary five-year carryback of net operating losses generated in 2018, 2019, and 2020, temporary modifications to the limitations placed on interest deductions, and technical corrections of tax depreciation methods for qualified improvement property ("QIP"), which changes 39-year property to 15-year property eligible for 100% tax bonus depreciation. In addition, the CARES Act includes provisions such as the temporary deferral of the employer portion of social security taxes incurred through the end of calendar 2020 and an employee retention credit for 50% of wages and health benefits paid to employees not providing services due to the COVID-19 pandemic. The Company has made estimates of the effect of the CARES Act and will adjust estimates, if needed, as new legislation or guidance becomes available.
As a result of the faster tax depreciation methods allowed under the CARES Act for QIP and the retroactive application of those methods for QIP placed in service during fiscal 2018 and 2019, the Company incurred a fiscal 2019 net operating loss for federal income tax purposes that was carried back to prior years during which the federal tax rate was 35%, resulting in a $7.7 million income tax benefit during the second quarter of fiscal 2020. The Company received $28.4 million of cash refunds related to the accelerated QIP depreciation and the carry back of the fiscal 2019 net operating loss as of December 31, 2020.
As of December 31, 2020, the Company has deferred $12.1 million of employer social security taxes, of which 50% are required to be deposited by December 2021 and the remaining 50% by December 2022. Of the deferred employer social security taxes outstanding as of December 31, 2020, approximately $6.1 million is included in accrued expenses and other current liabilities and $6.0 million is included in other liabilities within the Condensed Consolidated Balance Sheets.
The Company recorded $1.7 million of employee retention credits during the fiscal year ended December 31, 2020, of which $1.5 million was recognized as an offset to selling and store operating expenses and $0.2 million was recognized as an offset to general and administrative expenses within the condensed Consolidated Statements of Operations and Comprehensive Income.
v3.20.4
Fair Value Measurements
12 Months Ended
Dec. 31, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements . Fair Value Measurements
As of December 31, 2020 and December 26, 2019, the Company had certain financial assets and liabilities on its Consolidated Balance Sheets that were required to be measured at fair value on a recurring or non-recurring basis. The estimated fair values of financial assets and liabilities such as 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. Refer to 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 Company also has outstanding interest rate cap contracts that were valued primarily using level 2 inputs based on data readily observable in public markets. The Company's interest rate cap contracts were negotiated with counterparties without going through a public exchange. Accordingly, the Company's fair value assessments for these derivative contracts gave consideration to the risk of counterparty default (as well as the Company's own credit risk). As of December 31, 2020 and December 26, 2019, the fair value of the Company's interest rate cap contract was less than $0.1 million.
v3.20.4
Derivatives and Risk Management
12 Months Ended
Dec. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives and Risk Management . 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 31, 2020:
(in thousands)
Notional Balance
Final Maturity
Date
Other
Assets
AOCI, Net
of Tax
Designated as hedges:
Interest rate cap (cash flow hedge)
$102,500 U.S. dollarsDecember 2021$— $(89)
Not designated as hedges:
Interest rate cap
$102,500 U.S. dollarsDecember 2021$— $(75)
Derivative Position as of December 26, 2019:
(in thousands)
Notional Balance
Final Maturity
Date
Other
Assets
AOCI, Net
of Tax
Designated as hedges:
Interest rate cap (cash flow hedge)
$102,500 U.S. dollarsDecember 2021$20 $236 
Not designated as hedges:
Interest rate cap
$102,500 U.S. dollarsDecember 2021$— $(43)
Designated Hedge Gain (Losses)
Gains (losses) related to our designated hedge contracts are as follows:
Effective Portion Reclassified
From AOCI to Earnings
Effective Portion Recognized in
Other Comprehensive Income (Loss)
Fiscal Year EndedFiscal Year Ended
(in thousands)December 31,
2020
December 26,
2019
December 27,
2018
December 31,
2020
December 26,
2019
December 27,
2018
Interest rate cap (cash flow hedge)$— $— $— $357 $(379)$391 
Interest rate swaps (cash flow hedges)$— $— $— $— $— $— 
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.
v3.20.4
Commitments and Contingencies
12 Months Ended
Dec. 31, 2020
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies 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 2041. Most of these agreements are retail leases where both the land and building are leased. For a small number of retail locations, the Company has ground leases where only the land is leased. The initial lease terms for the Company's corporate office, retail, and distribution center facilities range from 10-20 years. The majority of these 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. Lease payments used in measurement of the lease liability typically do not include executory costs, such as taxes, insurance, and maintenance, unless those costs can be reasonably estimated at lease commencement. 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. As of December 31, 2020 and December 26, 2019, the Company's weighted average discount rate was 5.3% and 5.3%, respectively. As of December 31, 2020 and December 26, 2019, the Company's weighted average remaining lease term was approximately 11 years and 10 years, respectively.
Lease Position
The table below presents supplemental balance sheet information related to operating leases.
in thousands, except lease term and discount rate
Classification
As of December 31, 2020As of December 26, 2019
Assets
Building
Right-of-use assets
$851,092 $808,989 
Equipment
Right-of-use assets
6,865 7,322 
Land
Right-of-use assets
56,708 2,378 
Software
Right-of-use assets
1,660 3,567 
Total operating lease assets
916,325 822,256 
Liabilities
Current
Building
Current portion of lease liabilities
88,287 67,500 
Equipment
Current portion of lease liabilities
3,941 3,758 
Land
Current portion of lease liabilities
440 170 
Software
Current portion of lease liabilities
1,834 3,164 
Total current operating lease liabilities
94,502 74,592 
Noncurrent
Building
Lease liabilities
873,098 837,510 
Equipment
Lease liabilities
2,924 3,902 
Land
Lease liabilities
65,103 2,357 
Software
Lease liabilities
— 500 
Total noncurrent operating lease liabilities
941,125 844,269 
Total operating lease liabilities
$1,035,627 $918,861 
Weighted-average remaining lease term
11 years10 years
Weighted-average discount rate
5.3%5.3%
Lease Costs
The table below presents components of lease expense for operating leases.
Fiscal Year Ended
in thousandsClassificationDecember 31, 2020December 26, 2019 (3)
Fixed operating lease cost:Selling and store operating$105,207 $87,124 
Cost of sales22,672 17,132 
Pre-opening7,886 5,959 
General and administrative4,118 2,272 
Total fixed operating lease cost$139,883 $112,487 
Variable lease cost (1):Selling and store operating$34,499 $28,894 
Cost of sales4,860 3,570 
Pre-opening657 151 
General and administrative151 
Total variable lease cost$40,167 $32,620 
Sublease incomeCost of sales(2,713)(2,414)
Operating lease right-of-use asset impairmentGeneral and administrative— 4,136 
Total operating lease cost (2)$177,337 $146,829 
(1)Includes variable costs for common area maintenance, property taxes, and insurance on leased real estate.
(2)Excludes short-term lease costs, which were immaterial for the fiscal years ended December 31, 2020 and December 26, 2019.
(3)To conform to the current period presentation, the presentation of the components of operating lease expense for the fiscal year ended December 26, 2019 has been updated within this table to provide disclosure of variable lease costs and additional information related to the classification of operating lease costs within the Consolidated Statements of Operations and Comprehensive Income.
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 31, 2020, were:
in thousands
Amount
2021$145,813 
2022141,815 
2023136,289 
2024133,866 
2025125,790 
Thereafter
713,557 
Total minimum lease payments (1) (2)1,397,130 
Less: amount of lease payments representing interest
361,503 
Present value of future minimum lease payments
1,035,627 
Less: current obligations under leases
94,502 
Long-term lease obligations
$941,125 
(1)Future lease payments exclude approximately $132.9 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
(2)Operating lease payments include $59.3 million related to options to extend lease terms that are reasonably certain of being exercised.
For the fiscal years ended December 31, 2020 and December 26, 2019, cash paid for operating leases was $131.3 million and $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 alleged 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 sought class certification, unspecified monetary damages, costs and attorneys’ fees and equitable relief. The Company denied the material allegations and moved to dismiss the lawsuit. On September 21, 2020, the District Court granted the Company’s motion to dismiss in its entirety. The plaintiff did not appeal that decision, meaning the dismissal is final.
On June 18, 2020, an alleged stockholder filed a putative derivative complaint, Lincolnshire Police Pension Fund v. Taylor, et al., No. 2020-0487-JTL, in the Delaware Court of Chancery, purportedly on behalf of the Company against certain of the Company’s officers, directors, and stockholders. The complaint alleges breaches of fiduciary duties and unjust enrichment. The factual allegations underlying these claims are similar to the factual allegations made in the In re Floor & Decor Holdings, Inc. Securities Litigation described above. The complaint seeks unspecified damages and restitution for the Company from the individual defendants and the payment of costs and attorneys’ fees. The time for the defendants to respond to the complaint has not yet expired.
The Company maintains insurance that may cover any liability arising out of the above-referenced 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 the above-referenced litigation.
The Company is 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. The Company establishes reserves for specific legal proceedings when it determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. These various other ordinary course proceedings are not expected to have a material impact on the Company's consolidated financial position, cash flows, or results of operations, however regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.
v3.20.4
Debt
12 Months Ended
Dec. 31, 2020
Debt Disclosure [Abstract]  
Debt . Debt
The following table summarizes the Company's long-term debt as of December 31, 2020 and December 26, 2019 (dollars in thousands):
Maturity DateInterest Rate Per Annum at December 31,
2020
December 31,
2020
December 26,
2019
Credit Facilities:
UBS Facility Term Loan BFebruary 14, 20272.15%Variable$143,179 $145,500 
UBS Facility Term Loan B-1February 14, 20275.00%Variable74,625 — 
Wells Facility Revolving Line of CreditFebruary 14, 20253.50%Variable— — 
Total secured debt at par value217,804 145,500 
Less: current maturities1,647 — 
Long-term debt maturities216,157 145,500 
Less: unamortized discount and debt issuance costs9,000 2,894 
Total long-term debt$207,157 $142,606 
Market risk associated with the Company's fixed and variable rate long-term debt relates to the potential change in fair value and negative impact to future earnings, respectively, from a change in interest rates. The aggregate fair value of debt is based primarily on the Company's estimates of interest rates, maturities, credit risk, and underlying collateral and is classified as Level 3 within the fair value hierarchy.
The following table summarizes scheduled maturities of the Company’s debt, including current maturities, as of December 31, 2020:
in thousandsAmount
2021$1,647 
20222,196 
20232,196 
20242,196 
20252,384 
Thereafter (1)207,185 
Total minimum debt payments$217,804 
(1)Thereafter maturities are comprised of $136.3 million due under the term loan B facility and $70.9 million due under the term loan B-1 facility through February 14, 2027.
Components of interest expense are as follows for the periods presented:
Fiscal Year Ended
in thousands
December 31,
2020
December 26,
2019
December 27,
2018
Total interest costs$9,606 $8,801 $8,917 
Interest capitalized1,217 — — 
Interest expense, net$8,389 $8,801 $8,917 
Term Loan Facility
On February 14, 2020, the Company entered into a repricing and third amendment to the credit agreement governing its senior secured term loan facility (the "Term Loan B Facility") which, among other things, (a) refinanced the existing term loan B facility with a new term loan B facility in the same aggregate principal amount of approximately $144.6 million, and (b) extended the stated maturity date under the Term Loan Facility to February 14, 2027. The Term Loan Facility also includes an “accordion” feature that allows the Company, under certain circumstances, to increase the size of the Term Loan Facility by an amount up to the greater of $270.0 million and 100.0% of Consolidated EBITDA (as defined in the Term Loan Facility), plus additional amounts (x) if such increase is secured on a pari passu basis with the loans under the Term Loan Facility, up to a Consolidated First Lien Leverage Ratio (as defined in the Term Loan Facility) of 2.50:1.00, (y) if such increase is secured on a junior basis with the loans under the Term Loan Facility, up to a Consolidated Secured Leverage Ratio (as defined in the Term Loan Facility) of 3.50:1.00 and (z) if such increase is unsecured, up to a Consolidated Total Leverage Ratio (as defined in the Term Loan Facility) of 3.50:1.00, subject to certain additional adjustments, which, under certain circumstances, allow for a Consolidated Total Leverage Ratio of up to 4.50:1.00.
The third amendment to the Term Loan Facility also amended the margin applied to loans under the term loan B facility to (x) in the case of ABR Loans (as defined in the Term Loan Facility), from 1.75% or 1.50% per annum (based on credit rating tests) to 1.00% per annum (subject to satisfying a leverage ratio test and subject to a leverage-based step-up to 1.25% if such leverage ratio test is exceeded), and (y) in the case of Eurodollar Loans (as defined in the Term Loan Facility), from 2.75% or 2.50% per annum (based on credit rating tests) to 2.00% per annum (subject to satisfying a leverage ratio test and subject to a leverage-based step-up to 2.25% if such leverage ratio test is exceeded) (subject to a 0.00% floor on Eurodollar Loans). The material terms of the Term Loan Facility were otherwise unchanged.
On May 18, 2020, to provide additional liquidity in response to the business uncertainties resulting from the evolving COVID-19 pandemic, the Company entered into a fourth amendment to the Term Loan Facility, which, among other things, provides for a new incremental term loan facility in an aggregate principal amount of $75.0 million with a maturity date of February 14, 2027 (the “Term Loan B-1 Facility”). The Company received net proceeds of $70.5 million from the term loan B-1 facility after deducting a $4.1 million original issuance discount and $0.3 million of debt issuance costs to third parties. The Company intends to use the net proceeds to support its growth plans and for general corporate purposes. The term loan B-1 facility is a separate tranche from the Company's existing term loan B facility. The terms of loans under the term loan B facility remained unchanged as a result of the fourth amendment to the Term Loan Facility.
The Term Loan Facility provides a margin for loans under the term loan B-1 facility of (x) in the case of ABR Loans (as defined in the Term Loan Facility), 3.00% per annum, and (y) in the case of Eurodollar Loans (as defined in the Term Loan Facility), 4.00% per annum (subject to a 1.00% floor on Eurodollar Loans). At December 31, 2020, the applicable interest rate for borrowings was 2.15% for the term loan B facility and 5.00% for the term loan B-1 facility.
The Company entered into a fifth amendment to the Term Loan Facility on February 9, 2021 as discussed in Note 14, "Subsequent Event."
All obligations under the Term Loan Facility are secured by (1) a first-priority security interest in substantially all of the property and assets of Outlets and the other guarantors under the Term Loan Facility, with certain exceptions, and (2) a second-priority security interest in the collateral securing the revolving credit facility.
Gain on Debt Extinguishment
During the second quarter of fiscal 2020, the Company evaluated the fourth amendment to the Term Loan Facility in accordance with ASC 470-50, "Debt - Modifications and Extinguishments," on a lender-by-lender basis and determined that the incremental term loan borrowing was provided entirely by one lender and its affiliates. As this lender held a portion of the existing Term Loan Facility debt, the Company performed the 10% cash flow test pursuant to ASC 470-50-40-10 and concluded that the results exceeded the 10% threshold. As a result, the Company accounted for this transaction as a partial extinguishment and derecognized the existing debt held by this lender and recorded the new debt at fair value. Based on the difference between the reacquisition price and carrying amount of debt, the Company recognized a $1.0 million gain on early extinguishment of debt during the second quarter of fiscal 2020, which included the original issuance discount of $4.1 million and $0.5 million of unamortized debt issuance costs related to the extinguished debt as part of the calculation.
ABL Facility
On February 14, 2020, the Company also entered into a repricing and general amendment to the credit agreement governing its revolving credit facility (as amended, the “ABL Facility” and together with the Term Loan Facility, the "Credit Facilities"), which, among other things, (a) increased its revolving commitments to a total aggregate principal amount of $400.0 million, and (b) extended the stated maturity date under the ABL Facility to February 14, 2025. The ABL Facility also includes an “accordion” feature that allows the Company under certain circumstances, to increase the size of the facility by an amount up to $100.0 million, or such higher amount as may be agreed to by the Required Lenders (as defined in the ABL Facility).
The amendment to the ABL Facility also amended the margin applied to loans and letters of credit to (x) in the case of Base Rate Loans (as defined in the ABL Facility), from 0.25% or 0.50% per annum (based on availability) to a flat rate of 0.25% per annum, (y) in the case of LIBO Rate Loans (as defined in the ABL Facility) and letter of credit fees for standby letters of credit, from 1.25% or 1.50% per annum (based on availability) to a flat rate of 1.25% per annum (subject to a 0.00% floor on LIBO Rate Loans) and (z) in the case of letter of credit fees for commercial letters of credit, from 0.75% or 1.00% per annum (based on availability) to a flat rate of 0.75% per annum. The material terms of the ABL Facility were otherwise unchanged.
As of December 31, 2020, the Company's ABL Facility had a maximum availability of $400.0 million with actual available borrowings limited to the sum, at the time of calculation, of (a) eligible credit card receivables multiplied by the credit card advance rate, plus (b) the cost of eligible inventory, net of inventory reserves, multiplied by the applicable appraisal percentage, plus (c) 85% of eligible net trade receivables, plus (d) all eligible cash on hand, plus (e) 100% of the amount for which the eligible letter of credit must be honored after giving effect to any draws, minus certain Availability Reserves (each component as defined in the ABL Facility). The ABL Facility is available for issuance of letters of credit and contains a sublimit of $50.0 million for standby letters of credit and commercial letters of credit combined. Available borrowings under the facility are reduced by the face amount of outstanding letters of credit.
All obligations under the ABL Facility are secured by (1) a first-priority security interest in the cash and cash equivalents, accounts receivable, inventory, and related assets of Outlets and the other guarantors under the ABL Facility, with certain exceptions, and (2) a second-priority security interest in substantially all of the other property and assets of Outlets and the other guarantors under the Term Loan Facility.
Net availability under the ABL Facility, as reduced by outstanding letters of credit of $21.3 million, was $378.7 million based on financial data as of December 31, 2020.
Covenants
The credit agreements governing the Term Loan Facility and ABL Facility contain customary restrictive covenants, which, among other things and with certain exceptions, limit the Company’s ability 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 the Company to certain reporting obligations and require that the Company satisfy certain financial covenants, including, among other things, a requirement that if borrowings under the ABL Facility exceed 90% of availability, the Company 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 ABL Facility).
The Term Loan Facility has no financial maintenance covenants. The Company is currently in compliance with all material covenants under the credit agreements.
Deferred Debt Issuance Cost and Original Issue Discount
Deferred debt issuance cost related to our ABL Facility of $975 thousand and $574 thousand as of December 31, 2020 and December 26, 2019, respectively, are included in other assets on our Consolidated Balance Sheets. Deferred debt issuance cost and original issue discount related to our Term Loan Facility of $9.0 million and $2.9 million as of December 31, 2020 and December 26, 2019, respectively, are included in term loans on our Consolidated Balance Sheets. For the fiscal years ended December 31, 2020, December 26, 2019, and December 27, 2018, deferred debt issuance and original issue discount amortization expense was $1.4 million, $1.1 million, and $1.0 million, 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 31, 2020 and December 26, 2019, the fair values of the Company’s debt are as follows (in thousands):
in thousands
December 31,
2020
December 26,
2019
Total debt at par value
$217,804 $145,500 
Less: unamortized discount and debt issuance costs
9,000 2,894 
Net carrying amount
208,804 142,606 
Fair value
$215,626 $145,136 
v3.20.4
Stockholders' Equity
12 Months Ended
Dec. 31, 2020
Equity [Abstract]  
Stockholders' Equity 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.
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 (as defined 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. As of December 31, 2020 and December 26, 2019, there were 2,120,839 and 2,806,549 shares available for grant pursuant to awards under the 2017 Plan, respectively.
Secondary Offerings
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.
On May 22, 2020, certain of the Company’s certain of the Company’s stockholders completed a secondary public offering (the “May 2020 Secondary Offering”) of an aggregate of 4,972,900 shares of common stock at a price to the public of $44.55 per share. The Company did not sell any shares in the May 2020 Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.
On August 13, 2020, certain of the Company’s certain of the Company’s stockholders completed a secondary public offering (the “August Secondary Offering”) of an aggregate of 5,686,422 shares of common stock at a price to the public of $67.60 per share. The Company did not sell any shares in the August Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with 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-based compensation expense for the fiscal years ended December 31, 2020, December 26, 2019, and December 27, 2018 was $16.1 million, $8.7 million, and $6.5 million, respectively, and was included in general and administrative expenses on the Company’s Consolidated Statements of Operations and Comprehensive Income.
Stock Options
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 contractual terms of ten years and vesting provisions ranging from one year to five years. Stock options granted during fiscal 2020 vest in four ratable annual installments on each of the first four anniversaries of the grant date, subject to the grantee’s continued service through the applicable vesting date. 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-Merton option pricing model with the following weighted-average assumptions:
Fiscal Year Ended December 31,
2020
Fiscal Year Ended December 26,
2019
Fiscal Year Ended December 27,
2018
Weighted average fair value per stock option$22.27$20.38$15.63
Risk-free interest rate1.17%2.06%3.05%
Expected volatility39%45%45%
Expected life (in years)5.756.686.29
Dividend yield—%—%—%
The Company determines the grant date fair value of stock options with assistance from a third-party valuation specialist. Expected volatility is estimated based on the historical volatility of the Company’s Class A common stock since its initial public offering in 2017 as well as the historical volatility of the common stock of similar public entities. The Company considers various factors in determining the appropriateness of the public entities used in determining expected volatility, including the entity's life cycle stage, industry, growth profile, size, financial leverage, and products offered. To determine the expected life of the options granted, the Company relied upon a combination of the observed exercise behavior of prior grants with similar characteristics and the contractual terms and vesting schedules of the current grants. The risk-free interest rate is based on the term structure of interest rates at the time of the option grant.
The table below summarizes stock option activity for the fiscal year ended December 31, 2020:
OptionsWeighted
Average
Exercise
Price
Weighted Average Remaining Contractual Life (Years)Aggregate Intrinsic Value (in thousands)
Outstanding at December 26, 20196,037,079 $13.64 
Granted294,563 58.15 
Exercised(2,485,427)7.75 
Forfeited or expired(105,611)25.71 
Outstanding at December 31, 20203,740,604 $20.72 5.9$269,794 
Vested and exercisable at December 31, 20202,071,137 $13.22 4.8$164,918 
The fair value of stock options vested during the fiscal years ended December 31, 2020, December 26, 2019, and December 27, 2018 was $7.5 million, $7.5 million, and $4.9 million, respectively. The aggregate intrinsic value of stock options exercised was $135.5 million, $146.6 million, and $87.2 million for the fiscal years ended December 31, 2020, December 26, 2019, and December 27, 2018, respectively.
The Company’s total unrecognized compensation cost related to stock options as of December 31, 2020 was $16.0 million and is expected to be recognized over a weighted average period of 2.2 years.
Restricted Stock Units
During the fiscal year ended December 31, 2020, the Company granted restricted stock units to certain employees that represent an unfunded, unsecured right to receive a share of the Company’s Class A common stock upon vesting. These awards vest in four ratable annual installments on each of the first four anniversaries of the grant date, subject to the grantee’s continued service through the applicable vesting date. The fair value of the restricted stock units was determined based on the closing price of the Company’s Class A common stock on the date of grant.
The following table summarizes restricted stock unit activity during the fiscal year ended December 31, 2020:
Restricted Stock UnitsWeighted Average Grant Date Fair Value
Unvested at December 27, 2019— $— 
Granted133,256 59.24 
Vested— — 
Forfeited(5,036)55.08 
Unvested at December 31, 2020128,220 $59.40 
The total unrecognized compensation cost related to restricted stock units as of December 31, 2020 was $6.2 million and is expected to be recognized over a weighted average period of 3.2 years.
Restricted Stock Awards
During the fiscal year ended December 31, 2020, the Company issued restricted stock awards to certain executive officers and non-employee directors comprised of performance-based restricted stock, total shareholder return (“TSR”) awards, and service-based restricted stock. The performance-based restricted stock cliff vest based on (i) the Company's achievement of predetermined financial metrics at the end of a three-year performance period and (ii) the grantee’s continued service through the vesting date, which varies by grantee and ranges between approximately three to four years from the grant date. The TSR awards cliff vest based on (i) the Company's relative TSR compared to a specified peer group, with no vesting unless the Company’s TSR exceeds the median of the specified peer group and (ii) the grantee's continued service through the vesting date, which varies by grantee and ranges between approximately three to four years from the grant date.
The following table summarizes restricted stock award activity during the fiscal year ended December 31, 2020:
Restricted Stock Awards
Service-basedPerformance-basedTSR
SharesWeighted Average Grant Date Fair ValueSharesWeighted Average Grant Date Fair ValueSharesWeighted Average Grant Date Fair Value
Unvested at December 27, 201937,032 $35.78 — $— — $— 
Granted103,767 57.84 160,315 57.70 104,456 44.28 
Vested(8,955)27.23 — — — — 
Forfeited— — — — — — 
Unvested at December 31, 2020131,844 $53.72 160,315 $57.70 104,456 $44.28 
The fair value of performance-based and service-based restricted stock awards is based on the closing market price of the Company's Class A common stock on the date of grant. The fair value of the TSR awards is estimated on grant date using the Monte Carlo valuation method. Compensation cost for restricted stock awards is recognized using the straight-line method over the requisite service period, which for each of the awards is the service vesting period. As of December 31, 2020 and December 26, 2019, total unrecognized compensation cost related to unvested restricted stock awards was $15.2 million and $1.1 million, respectively. The unrecognized compensation cost remaining as of December 31, 2020 is expected to be recognized over a weighted average period of 2.6 years.
The total fair value of restricted stock awards that vested during the fiscal years ended December 31, 2020 and December 26, 2019 was $0.5 million and $0.5 million, respectively. No restricted stock awards vested during fiscal 2018.
Employee Stock Purchase Plan
At our 2018 annual meeting of stockholders held on May 17, 2018, our stockholders approved the Floor & Decor Holdings, Inc. Employee Stock Purchase Plan (the “ESPP”), which became available to substantially all of our employees beginning in the third quarter of fiscal 2018. The ESPP is a tax-qualified plan under Section 423 of the Internal Revenue Code, and it permits eligible employees to purchase shares of our common stock through payroll deductions, subject to certain limitations. The Company has designated a purchase price per share of common stock acquired under the ESPP at the lesser of 90% of the lower of the fair market value of our common stock on either the first or last trading day of each six-month offering period. There are 1,500,000 shares of our Class A common stock, par value $0.001 per share, approved for issuance under the ESPP, 56,389 and 104,363 of which were issued during fiscal 2020 and fiscal 2019, respectively. During fiscal 2020, fiscal 2019, and fiscal 2018, the Company recognized $0.7 million, $0.5 million, and $0.3 million, respectively, of stock-based compensation expense related to the ESPP.
Deferred Compensation Plan
In October 2019, the Company adopted the 2019 Director Nonqualified Excess Plan (the “Plan”) to provide for certain employees or independent contractors of the employer (including directors) to elect to defer compensation, including restricted stock grants, until they separate from service. The Plan is intended to be a nonqualified deferred compensation plan that complies with the provisions of Section 409A of the Internal Revenue Code and is effective for compensation starting in fiscal 2020. Deferrals and related compensation expense under the Plan were immaterial in fiscal 2020.
v3.20.4
Earnings Per Share
12 Months Ended
Dec. 31, 2020
Earnings Per Share [Abstract]  
Earnings Per Share Earnings Per Share
Net Income per Common Share
The Company calculates basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effect of share-based awards.
The following table shows the computation of basic and diluted earnings per share for the periods presented:
in thousands, except per share dataFiscal Year Ended December 31,
2020
Fiscal Year Ended December 26,
2019
Fiscal Year Ended December 27,
2018
Net income$194,981 $150,631 $116,187 
Basic weighted average shares outstanding102,690 99,435 96,770 
Dilutive effect of share-based awards3,452 5,527 7,791 
Diluted weighted average shares outstanding106,142 104,962 104,561 
Basic earnings per share$1.90 $1.51 $1.20 
Diluted earnings per share$1.84 $1.44 $1.11 
The following potentially dilutive securities were excluded from the calculation of diluted earnings per share as a result of their anti-dilutive effect:
in thousandsFiscal Year Ended December 31,
2020
Fiscal Year Ended December 26,
2019
Fiscal Year Ended December 27,
2018
Stock options320 971 298 
v3.20.4
Selected Quarterly Financial Information (unaudited)
12 Months Ended
Dec. 31, 2020
Quarterly Financial Information Disclosure [Abstract]  
Selected Quarterly Financial Information (unaudited) Selected Quarterly Financial Information (unaudited)
The following tables present the Company’s unaudited quarterly results for fiscal 2020 and fiscal 2019.
Fiscal 2020
(in thousands, except per share data)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Net sales
$554,937 $462,352 $684,847 $723,652 
Gross profit
236,032 196,692 294,628 307,540 
Net income
37,063 32,004 68,774 57,140 
Basic earnings per share
0.36 0.31 0.67 0.55 
Diluted earnings per share
0.35 0.30 0.65 0.54 
Fiscal 2019
(in thousands, except per share data)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Net sales
$477,050 $520,311 $521,093 $527,002 
Gross profit
201,374 217,823 213,788 230,029 
Net income
30,720 43,596 40,974 35,341 
Basic earnings per share
0.31 0.44 0.41 0.35 
Diluted earnings per share
0.29 0.42 0.39 0.34 
v3.20.4
Subsequent Event
12 Months Ended
Dec. 31, 2020
Subsequent Events [Abstract]  
Subsequent Event Subsequent Event
Fifth Amendment to Term Loan Facility
On February 9, 2021, (the “Fifth Amendment Effective Date”), the Company entered into a fifth amendment to the Term Loan Facility which among other things, (a) refinanced the existing term loan B-1 facility with a new term facility in an aggregate principal amount of $65.0 million with a maturity date of February 14, 2027 (the “Supplemental Term Loan Facility”), and has the same terms as the Term Loan B Facility and (b) provides that voluntary prepayments of the Term Loan Facility made within six (6) months after the Fifth Amendment Effective Date are subject to a 1% soft call prepayment premium.
The margin applicable to the Supplemental Term Loans Facility is the same as the margin applicable to the Term Loan B Facility, which is: (x) in the case of ABR Loans (as defined in the Term Loan Facility), 1.00% per annum (subject to satisfying a leverage ratio test and subject to a leverage-based step-up to 1.25% if such leverage ratio test is exceeded), and (y) in the case of Eurodollar Loans (as defined in the Term Loan Facility), 2.00% per annum (subject to satisfying a leverage ratio test and subject to a leverage-based step-up to 2.25% if such leverage ratio test is exceeded) (subject to a 0.00% floor on Eurodollar Loans).
v3.20.4
Summary of Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Fiscal Year Fiscal YearThe Company’s fiscal year is the 52- or 53-week period ending on the Thursday on or preceding December 31st. The fiscal year ended December 31, 2020 (fiscal "2020") includes 53 weeks, while the fiscal years ended December 26, 2019 (“fiscal 2019”) and December 27, 2018 (“fiscal 2018”) include 52 weeks. When a 53-week fiscal year occurs, we report the additional week at the end of the fiscal fourth quarter. 52-week fiscal years consist of thirteen-week periods in the first, second, third, and fourth quarters of the fiscal year. The 53-week fiscal year consists of thirteen-week periods in the first, second, and third quarters of the fiscal year and a fourteen-week period in the fourth quarter of the fiscal year.
Basis of Presentation
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.
Reclassifications
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 and Cash Equivalents
Cash consists of currency and demand deposits with banks.
Receivables
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 beginning in fiscal 2020, the Company collects the majority rebates earned each quarter subsequent to quarter end. In prior years, rebates earned during the fiscal year were primarily collected annually after the Company's 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 was $0.3 million as of December 31, 2020 and December 26, 2019, respectively.
On November 7, 2019, the U.S. Trade Representative (“USTR”) made a ruling 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 and Border Protection (“U.S. Customs”) issued Chapter 99 exclusions for each unique article number identified under the November 7, 2019 USTR ruling. During fiscal 2020, additional Chapter 99 exclusions were issued for certain Bamboo and other flooring products imported from China. For the Company, some of the granted exclusions apply retroactively to tariffs paid as early as September 2018.
While tariff refund claims are subject to the approval of U.S. Customs, the Company currently expects to recover a total of $24.3 million related to Section 301 tariff payments, of which $12.9 million was received in fiscal 2020. As of December 31, 2020 and December 26, 2019, receivables included $11.4 million and 19.3 million of expected tariff refunds from U.S. Customs. The tariff refund receivables outstanding as of December 31, 2020 are expected to be received during fiscal 2021.
During fiscal 2020, the Company recognized a $4.5 million reduction to cost of sales and $0.6 million of interest income related to tariff refunds. Interest accrues from the date that tariff payments were originally made through the date that such payments are refunded to the Company.
Of the $19.3 million of expected tariff recoveries expected as of December 26, 2019, the Company recognized a $14.0 million reduction to cost of sales related to tariff refunds during the fourth quarter of fiscal 2019. This reduction to cost of sales included $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 and $3.0 million related to products sold after November 20, 2019 through the end of fiscal 2019. In addition, the Company recognized a $5.0 million reduction to the carrying cost of inventory as of December 26, 2019 for tariff refunds related to merchandise on hand. Approximately $0.3 million of interest income was also recognized in fiscal 2019 related to anticipated tariff recoveries.
Credit Program
Credit Program
Credit is offered to the Company's customers through a proprietary credit card underwritten by third-party financial institutions 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 2020 and fiscal 2019 was $1.2 million and $1.0 million, respectively.
Inventory Valuation and Shrinkage
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