# Floor & Decor Holdings, Inc.: Form 10-Q for the period ended Sep 26, 2019

- Company: [Floor & Decor Holdings, Inc.](/companies/fnd.md) (CIK 1507079)
- Form: 10-Q
- Filed: 2019-11-01
- Accepted by EDGAR: Nov 1, 2019, 07:42 ET
- Period: 2019-09-26
- Accession: 0001558370-19-009635
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1507079/000155837019009635/fnd-20190926x10q92b6db.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1507079/000155837019009635/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-09-26.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-06-28 to 2019-09-26 | $521.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2018-12-28 to 2019-09-26 | $1.52bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-06-28 to 2019-09-26 | $307.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2018-12-28 to 2019-09-26 | $885.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-06-28 to 2019-09-26 | $213.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-12-28 to 2019-09-26 | $633.0m | us-gaap:GrossProfit |
| Operating income | 3 months, 2019-06-28 to 2019-09-26 | $31.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-12-28 to 2019-09-26 | $117.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-06-28 to 2019-09-26 | $2.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2018-12-28 to 2019-09-26 | $7.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-06-28 to 2019-09-26 | −$11.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-12-28 to 2019-09-26 | −$5.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-06-28 to 2019-09-26 | $41.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-12-28 to 2019-09-26 | $115.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-06-28 to 2019-09-26 | $0.39 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-12-28 to 2019-09-26 | $1.10 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-06-28 to 2019-09-26 | $0.41 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-12-28 to 2019-09-26 | $1.17 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-06-28 to 2019-09-26 | 105,180,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-12-28 to 2019-09-26 | 104,812,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-12-28 to 2019-09-26 | $209.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-12-28 to 2019-09-26 | $141.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Current assets | at 2019-09-26 | $643.7m | us-gaap:AssetsCurrent |
| Total assets | at 2019-09-26 | $2.16bn | us-gaap:Assets |
| Current liabilities | at 2019-09-26 | $492.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-09-26 | $1.43bn | us-gaap:Liabilities |
| Long-term debt | at 2019-09-26 | $143.3m | us-gaap:LongTermDebt |
| Current portion of debt | at 2019-09-26 | $0 | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2019-09-26 | $723.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 39,990 characters.

*The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Floor & Decor Holdings, Inc. and Subsidiaries included in Item 1 of this quarterly report on Form 10-Q (this “Quarterly Report”) and with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 27, 2018 and filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2019 (the “Annual Report”). As used in this Quarterly Report, except where the context otherwise requires or where otherwise indicated, the terms “Floor & Decor,” “Company,” “we,” “our” or “us” refer to Floor & Decor Holdings, Inc. and its subsidiaries.*

### Forward-Looking Statements

The discussion in this Quarterly Report, including under this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A, “Risk Factors” of Part II, contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact contained in this Quarterly Report, including statements regarding the Company’s future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements are based on our current expectations, assumptions, estimates and projections. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “could,” “seeks,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “budget,” “potential” or “continue” or the negative of these terms or other similar expressions.

The forward-looking statements contained in this Quarterly Report are only predictions. Although we believe that the expectations reflected in the forward-looking statements in this Quarterly Report are reasonable, we cannot guarantee future events, results, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements in this Quarterly Report, including, without limitation, those factors described in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A, “Risk Factors” of Part II. Some of the key factors that could cause actual results to differ from our expectations include the following:

- an overall decline in the health of the economy, the hard surface flooring industry, consumer spending and the housing market;
- any disruption in our distribution capabilities resulting from our inability to operate our distribution centers going forward;
- competition from other stores and internet-based competition;
- our failure to execute our business strategy effectively and deliver value to our customers;
- our inability to manage our growth;
- our inability to manage costs and risks relating to new store openings;
- our dependence on foreign imports for the products we sell, which may include the impact of tariffs and other duties;
- our inability to find, train and retain key personnel;
- violations of laws and regulations applicable to us or our suppliers;
- our failure to adequately protect against security breaches involving our information technology systems and customer information;
- our failure to successfully anticipate consumer preferences and demand;
- our inability to find available locations for our stores or our store support center on terms acceptable to us;
- our inability to obtain merchandise on a timely basis at prices acceptable to us;
- suppliers may sell similar or identical products to our competitors;
- our inability to maintain sufficient levels of cash flow to meet growth expectations;
- our inability to manage our inventory obsolescence, shrinkage and damage;
- fluctuations in material and energy costs;
- our vulnerability to natural disasters and other unexpected events; and
- restrictions imposed by our indebtedness on our current and future operations.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The forward-looking statements contained in this Quarterly Report speak only as of the date hereof. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. If a change to the events and circumstances reflected in our forward-looking statements occurs, our business, financial condition and operating results may vary materially from those expressed in our forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.

### Overview

Founded in 2000, Floor & Decor is a high growth, differentiated, multi-channel specialty retailer of hard surface flooring and related accessories with 113 warehouse format stores across 28 states as of September 26, 2019. We believe that we offer the industry’s broadest in-stock assortment of tile, wood, laminate, vinyl, and natural stone flooring along with decorative and installation accessories at everyday low prices positioning us as the one stop destination for our customers’ entire hard surface flooring needs. We appeal to a variety of customers, including professional installers and commercial businesses (“Pro”), Do-it-Yourself customers (“DIY”), and customers who buy the products for professional installation.

We operate on a 52- or 53-week fiscal year ending the Thursday on or preceding December 31. The following discussion contains references to the first thirty-nine weeks of fiscal 2019 and fiscal 2018, which ended on September 26, 2019 and September 27, 2018, respectively.

During the thirty-nine weeks ended September 26, 2019, we continued to make long-term key strategic investments, including:

- opening thirteen new warehouse-format stores ending the quarter with 113 warehouse-format stores;
- focusing on innovative new products and localized assortments, supported by inspirational in-store and online visual merchandising solutions;
- investing capital in our stores, information technology and our connected customer strategies to continue enhancing and integrating the online and in-store shopping experience for our customers; and
- engaging more professional customers, including adding regional professional sales associates to grow our commercial sales, as well as signing up more customers on our Pro Premier Loyalty Program.

### Key Performance Indicators

We consider a variety of performance and financial measures in assessing the performance of our business. The key performance and financial measures we use to determine how our business is performing are comparable store sales, the number of new store openings, gross profit and gross margin, operating income, and EBITDA and Adjusted EBITDA. For definitions and a discussion of how we use our key performance indicators, see the “Key Performance Indicators” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report. See “Non-GAAP Financial Measures” below for a discussion of how we define EBITDA and Adjusted EBITDA and a reconciliation of EBITDA and Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”).

Other key financial terms we use include net sales, selling and store operating expenses, general and administrative expenses, and pre-opening expenses. For definitions and a discussion of how we use our other key financial definitions, see the “Other Key Financial Definitions” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report.

### Results of Operations

The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of net sales (actuals in thousands; dollar changes in millions):

| ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ ​ | ​ ​ Thirteen Weeks Ended September 26, 2019 Actual | ​ | ​ ​ ​ % of Sales | ​ ​ ​ | ​ ​ September 27, 2018 Actual | ​ | ​ ​ ​ ​ % of Sales | ​ ​ ​ | ​ ​ ​ ​ ​ ​ $ Increase/(Decrease) | ​ ​ ​ | ​ ​ ​ ​ ​ ​ % Increase/(Decrease) |
| --- | --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | --- | --- | ---: |
| Net sales | ​ | ​ | $521,093 | ​ | 100.0% | ​ | $435,882 | ​ | 100.0% | ​ | $85.2 | ​ | 19.5% |
| Cost of sales | ​ | ​ | 307,305 | ​ | 59.0 | ​ | 257,656 | ​ | 59.1 ​ | ​ | ​ 49.6 | ​ | 19.3 ​ |
| Gross profit | ​ | ​ | 213,788 | ​ | 41.0 | ​ | 178,226 | ​ | 40.9 ​ | ​ | ​ 35.6 | ​ | 20.0 ​ |
| Operating expenses: | ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Selling and store operating | ​ | ​ | 136,958 | ​ | 26.3 | ​ | 109,182 | ​ | 25.0 ​ | ​ | ​ 27.8 | ​ | 25.4 ​ |
| General and administrative | ​ | ​ | 37,246 | ​ | 7.1 | ​ | 26,477 | ​ | 6.1 ​ | ​ | ​ 10.8 | ​ | 40.7 ​ |
| Pre-opening | ​ | ​ | 8,184 | ​ | 1.6 | ​ | 8,330 | ​ | 1.9 ​ | ​ | ​ (0.1) | ​ | (1.8) ​ |
| Total operating expenses | ​ | ​ | ​ 182,388 | ​ | 35.0 ​ | ​ | ​ 143,989 | ​ | 33.0 ​ | ​ | ​ 38.4 | ​ | 26.7 ​ |
| Operating income | ​ | ​ | 31,400 | ​ | 6.0 | ​ | 34,237 | ​ | 7.9 ​ | ​ | ​ (2.8) | ​ | (8.3) ​ |
| Interest expense | ​ | ​ | 1,978 | ​ | 0.4 | ​ | 2,171 | ​ | 0.5 ​ | ​ | ​ (0.2) | ​ | (8.9) ​ |
| Income before income taxes | ​ | ​ | 29,422 | ​ | 5.6 | ​ | 32,066 | ​ | 7.4 ​ | ​ | ​ (2.6) | ​ | (8.2) ​ |
| (Benefit) provision for income taxes | ​ | ​ | (11,552) | ​ | (2.3) | ​ | 5,498 | ​ | 1.2 ​ | ​ | ​ (17.1) | ​ | NM ​ |
| Net income | ​ | ​ | $40,974 | ​ | 7.9% | ​ | $26,568 | ​ | 6.1% | ​ | $14.4 | ​ | 54.2% |

| ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ ​ | ​ ​ Thirty-nine Weeks Ended September 26, 2019 Actual | ​ | ​ ​ ​ % of Sales | ​ ​ ​ | ​ ​ September 27, 2018 Actual | ​ | ​ ​ ​ ​ % of Sales | ​ ​ ​ | ​ ​ ​ ​ ​ ​ $ Increase/(Decrease) | ​ ​ ​ | ​ ​ ​ ​ ​ ​ % Increase |
| --- | --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | --- | --- | ---: |
| Net sales | ​ | ​ | $1,518,454 | ​ | 100.0% | ​ | $1,273,109 | ​ | 100.0% | ​ | $245.3 | ​ | 19.3% |
| Cost of sales | ​ | ​ | 885,469 | ​ | 58.3 | ​ | 751,859 | ​ | 59.1 ​ | ​ | ​ 133.6 | ​ | 17.8 ​ |
| Gross profit | ​ | ​ | 632,985 | ​ | 41.7 | ​ | 521,250 | ​ | 40.9 ​ | ​ | ​ 111.7 | ​ | 21.4 ​ |
| Operating expenses: | ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Selling and store operating | ​ | ​ | 398,984 | ​ | 26.3 | ​ | 320,375 | ​ | 25.2 ​ | ​ | ​ 78.6 | ​ | 24.5 ​ |
| General and administrative | ​ | ​ | 98,364 | ​ | 6.5 | ​ | 74,995 | ​ | 5.9 ​ | ​ | ​ 23.4 | ​ | 31.2 ​ |
| Pre-opening | ​ | ​ | 18,580 | ​ | 1.2 | ​ | 17,892 | ​ | 1.4 ​ | ​ | ​ 0.7 | ​ | 3.8 ​ |
| Total operating expenses | ​ | ​ | ​ 515,928 | ​ | 34.0 ​ | ​ | ​ 413,262 | ​ | 32.5 ​ | ​ | ​ 102.7 | ​ | 24.8 ​ |
| Operating income | ​ | ​ | 117,057 | ​ | 7.7 | ​ | 107,988 | ​ | 8.5 ​ | ​ | ​ 9.1 | ​ | 8.4 ​ |
| Interest expense | ​ | ​ | 7,122 | ​ | 0.5 | ​ | 6,100 | ​ | 0.5 ​ | ​ | ​ 1.0 | ​ | 16.8 ​ |
| Income before income taxes | ​ | ​ | 109,935 | ​ | 7.2 | ​ | 101,888 | ​ | 8.0 ​ | ​ | ​ 8.0 | ​ | 7.9 ​ |
| (Benefit) provision for income taxes | ​ | ​ | (5,355) | ​ | (0.4) | ​ | 3,603 | ​ | 0.3 ​ | ​ | ​ (9.0) | ​ | NM ​ |
| Net income | ​ | ​ | $115,290 | ​ | 7.6% | ​ | $98,285 | ​ | 7.7% | ​ | $17.0 | ​ | 17.3% |

#### NM – Not meaningful

### Selected Financial Information

| ​ ​ ​ | ​ ​ ​ | ​ ​ ​ ​ Thirteen Weeks Ended ​ September 26, 2019 | ​ ​ | ​ ​ ​ ​ ​ September 27, 2018 | ​ ​ ​ Thirty-nine Weeks Ended September 26, 2019 | ​ ​ | ​ ​ ​ September 27, 2018 |
| --- | --- | --- | --- | --- | --- | --- | --- |
| Comparable store sales (% change) | ​ | ​ 4.6% | ​ | ​ 11.1% | ​ 3.6% | ​ | ​ 12.6% |
| Comparable average ticket (% change) | ​ | ​ 2.8% | ​ | ​ (1.4)% | ​ 2.0% | ​ | ​ —% |
| Comparable customer transactions (% change) | ​ | ​ 1.8% | ​ | ​ 12.7% | ​ 1.6% | ​ | ​ 12.7% |
| Number of warehouse-format stores | ​ | ​ 113 | ​ | ​ 95 | ​ 113 | ​ | ​ 95 |
| Adjusted EBITDA (in thousands) (1) | ​ | $57,147 | ​ | $48,918 | $183,807 | ​ | $147,428 |
| Adjusted EBITDA margin | ​ | ​ 11.0% | ​ | ​ 11.2% | ​ 12.1% | ​ | ​ 11.6% |

*(1) Adjusted EBITDA is a non-GAAP financial measure. See “Non-GAAP Financial Measures” section below for additional information and a reconciliation to the most comparable GAAP measure.*

### Net Sales

Net sales during the thirteen weeks ended September 26, 2019 increased $85.2 million, or 19.5%, compared to the corresponding prior year period due to the opening of 18 new stores since September 27, 2018 and an increase in comparable store sales of 4.6%. The comparable store sales increase during the period of 4.6%, or $20.1 million, was driven by a 2.8% increase in comparable average ticket and a 1.8% increase in comparable customer transactions. Among our six product categories, three experienced comparable store sales increases including laminate/luxury vinyl plank, installation materials and tools, and decorative accessories. Non-comparable store sales increased $65.1 million during the same period primarily due to the increase in new stores previously described.

Net sales during the thirty-nine weeks ended September 26, 2019 increased $245.3 million, or 19.3%, compared to the corresponding prior year period due to the opening of 18 new stores since September 27, 2018 and an increase in comparable store sales of 3.6%. The comparable store sales increase during the period of 3.6%, or $45.7 million, was driven by a 2.0% increase in comparable average ticket and a 1.6% increase in comparable customer transactions. Among our six product categories, three experienced comparable store sales increases including laminate/luxury vinyl plank, installation materials and tools, and decorative accessories. Non-comparable store sales increased $199.6 million during the same period primarily due to the increase in new stores previously described.

We believe the increases in net sales and customer transactions are due to the execution of our key strategic investments. We believe our continued investments and focused merchandising, connected customer, Pro, marketing, and visual merchandising strategies, along with new innovative products, led to our sales growth during the periods presented. We have also modestly increased retail prices due to increased tariffs.

### Gross Profit and Gross Margin

Gross profit during the thirteen weeks ended September 26, 2019 increased $35.6 million, or 20.0%, compared to the corresponding prior year period. This increase in gross profit was driven by the 19.5% increase in sales and a slight increase in gross margin to 41.0%, up approximately 10 basis points from 40.9% in the corresponding prior year period. This increase in gross margin was primarily due to higher product gross margin.

Gross profit during the thirty-nine weeks ended September 26, 2019 increased $111.7 million, or 21.4%, compared to the corresponding prior year period. This increase in gross profit was driven by the 19.3% increase in sales and an increase in gross margin to 41.7%, up approximately 80 basis points from 40.9% in the corresponding prior year period. The improvement in gross margin was attributable to better product gross margins as well as leveraging our supply chain costs on higher sales. The improved product margins were due to favorable negotiations with our suppliers, improved merchandising strategies, including higher sales from higher margin categories like installation and decorative accessories, and various strategic retail increases.

### Selling and Store Operating Expenses

Selling and store operating expenses during the thirteen weeks ended September 26, 2019 increased $27.8 million, or 25.4%, compared to the corresponding prior year period, due primarily to opening 18 new stores since

September 27, 2018. As a percentage of net sales, our selling and store operating expenses increased approximately 130 basis points to 26.3% from 25.0% in the corresponding prior year period primarily driven by new stores open less than one year. Comparable store selling and store operating expenses as a percentage of comparable store sales increased by approximately 20 basis points, driven by higher advertising and other operating expenses.

Selling and store operating expenses during the thirty-nine weeks ended September 26, 2019 increased $78.6 million, or 24.5%, compared to the corresponding prior year period, due primarily to opening 18 new stores since September 27, 2018. As a percentage of net sales, our selling and store operating expenses increased approximately 110 basis points to 26.3% from 25.2% in the corresponding prior year period driven by new stores open less than one year. Comparable store selling and store operating expenses as a percentage of comparable store sales decreased by approximately 20 basis points due primarily to leveraging personnel expenses on higher net sales.

### General and Administrative Expenses

General and administrative expenses, which are typically expenses incurred outside of our stores, increased $10.8 million, or 40.7%, during the thirteen weeks ended September 26, 2019 compared to the corresponding prior year period due to our continued investments in personnel for our store support functions, increased depreciation due to technology investments to support store growth, and a $4.1 million impairment charge related to the operating lease right-of-use asset for our former Store Support Center in Smyrna, Georgia. Our general and administrative expenses as a percentage of net sales increased approximately 100 basis points to 7.1% from 6.1% in the corresponding prior year period, of which 80 basis points of the increase was due to the impairment charge.

General and administrative expenses during the thirty-nine weeks ended September 26, 2019 increased $23.4 million, or 31.2%, compared to the corresponding prior year period due to our continued investments in personnel for our store support functions, increased depreciation due to technology investments to support store growth, and a $4.1 million impairment charge related to the operating lease right-of-use asset for our former Store Support Center in Smyrna, Georgia. Our general and administrative expenses as a percentage of net sales increased approximately 60 basis points to 6.5% from 5.9% in the corresponding prior year period, of which 30 basis points of the increase was due to the impairment charge.

### Pre-Opening Expenses

Pre-opening expenses during the thirteen weeks ended September 26, 2019 decreased $0.1 million, or 1.8%, compared to the corresponding prior year period. The decrease is primarily due to an enhanced store opening process which shortens the period it takes to open new stores, thereby lessening pre-occupancy costs, as well as opening fewer stores in higher cost metropolitan markets. We opened seven stores during each of the thirteen weeks ended September 26, 2019 and September 27, 2018. Of the seven store openings during the thirteen weeks ended September 26, 2019, three were in existing markets as compared to one store opening in existing markets during the corresponding prior year period.

Pre-opening expenses during the thirty-nine weeks ended September 26, 2019 increased $0.7 million, or 3.8%, compared to the corresponding prior year period. For the first nine months of fiscal 2019, this expense grew at a slower rate than sales due to an enhanced store opening process which allows us to shorten the period it takes to open new stores, thereby lessening pre-opening occupancy costs. We opened thirteen stores during the thirty-nine weeks ended September 26, 2019 compared to opening twelve stores during the corresponding prior year period.

### Interest Expense

Interest expense during the thirteen weeks ended September 26, 2019 decreased $0.2 million, or 8.9%, compared to the corresponding prior year period. The decrease in interest expense was primarily due to lowering our average debt balance to $146.6 million during the thirteen weeks ended September 26, 2019 compared to an average debt balance of $160.6 million in the corresponding prior year period.

Interest expense during the thirty-nine weeks ended September 26, 2019 increased $1.0 million, or 16.8%, compared to the corresponding prior year period. The increase in interest expense was primarily due to the increase in our average interest rate to 5.6% for the thirty-nine weeks ended September 26, 2019 from 4.6% in the corresponding prior year period.

### Taxes

The provision for income taxes during the thirteen weeks ended September 26, 2019 decreased $17.1 million compared to the corresponding prior year period. The effective tax rate was (39.3)% for the thirteen weeks ended September 26, 2019 compared to 17.1% in the corresponding prior year period. The decrease in the effective tax rate for the current period was primarily due to the recognition of higher excess tax benefits related to stock options exercised than in the corresponding prior year period.

The provision for income taxes during the thirty-nine weeks ended September 26, 2019 decreased $9.0 million compared to the corresponding prior year period. The effective tax rate was (4.9)% for the thirty-nine weeks ended September 26, 2019 compared to 3.5% in the corresponding prior year period. The decrease in the effective tax rate was primarily due to the recognition of higher excess tax benefits related to stock options exercised than in the corresponding prior year period.

### Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are key metrics used by management and our board of directors to assess our financial performance and enterprise value. We believe that operating income, EBITDA and Adjusted EBITDA are useful measures, as they eliminate certain expenses that are not indicative of our core operating performance and facilitate a comparison of our core operating performance on a consistent basis from period to period. We also use Adjusted EBITDA as a basis to determine covenant compliance with respect to our Credit Facilities (as defined below), to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, and to compare our performance against that of other peer companies using similar measures. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors, and other interested parties as performance measures to evaluate companies in our industry.

EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by or presented in accordance with GAAP. We define EBITDA as net income before interest, loss on early extinguishment of debt, taxes, depreciation and amortization. We define Adjusted EBITDA as net income before interest, loss on early extinguishment of debt, taxes, depreciation and amortization adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. See below for a reconciliation of EBITDA and Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

EBITDA and Adjusted EBITDA are non-GAAP measures of our financial performance and should not be considered as alternatives to net income as a measure of financial performance or any other performance measure derived in accordance with GAAP, and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of liquidity or free cash flow for management's discretionary use. In addition, these non-GAAP measures exclude certain non-recurring and other charges. Each of these non-GAAP measures has its limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the items eliminated in the adjustments made to determine EBITDA and Adjusted EBITDA, such as stock compensation expense, loss (gain) on asset disposal, executive recruiting/relocation, and other adjustments. Our presentation of EBITDA and Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Definitions and calculations of EBITDA and Adjusted EBITDA differ among companies in the retail industry, and therefore EBITDA and Adjusted EBITDA disclosed by us may not be comparable to the metrics disclosed by other companies.

The following table reconciles net income to EBITDA and Adjusted EBITDA for the periods presented:

*in thousands*

| ​ ​ ​ | ​ ​ ​ | ​ ​ ​ ​ Thirteen Weeks Ended September 26, 2019 | ​ ​ | ​ ​ ​ ​ September 27, 2018 | ​ ​ ​ | ​ ​ ​ ​ Thirty-nine Weeks Ended September 26, 2019 | ​ ​ | ​ ​ ​ ​ September 27, 2018 |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Net income | ​ | $40,974 | ​ | $26,568 | ​ | $115,290 | ​ | $98,285 |
| Depreciation and amortization (1) | ​ | 18,188 | ​ | 11,987 | ​ | 52,451 | ​ | 32,898 |
| Interest expense | ​ | 1,978 | ​ | 2,171 | ​ | 7,122 | ​ | 6,100 |
| Income tax (benefit) expense | ​ | (11,552) | ​ | 5,498 | ​ | (5,355) | ​ | 3,603 |
| EBITDA | ​ | 49,588 | ​ | 46,224 | ​ | 169,508 | ​ | 140,886 |
| Stock compensation expense (2) | ​ | 2,242 | ​ | 1,659 | ​ | 6,660 | ​ | 4,611 |
| Loss on asset impairments and disposals (3) | ​ | ​ 4,133 | ​ | ​ — | ​ | ​ 4,111 | ​ | ​ — |
| Other (4) | ​ | 1,184 | ​ | 1,035 | ​ | 3,528 | ​ | 1,931 |
| Adjusted EBITDA | ​ | $57,147 | ​ | $48,918 | ​ | $183,807 | ​ | $147,428 |

*(1) Excludes amortization of deferred financing costs, which is included as part of interest expense in the table above. For the thirteen and thirty-nine weeks ended September 27, 2018, amounts are also net of amortization of tenant improvement allowances.*

*(2) Non-cash charges related to stock-based compensation programs, which vary from period to period depending on timing of awards and forfeitures.*

*(3) Amount primarily represents impairment loss for the operating lease right-of-use asset related to the Company’s former Store Support Center in Smyrna, Georgia.*

*(4) Other adjustments include amounts management does not consider indicative of our core operating performance. Amounts for the thirteen and thirty-nine weeks ended September 26, 2019 primarily relate to costs associated with the relocation of the Company’s Store Support Center as well as secondary public offering costs of our Class A common stock by certain of our stockholders. Amounts for the thirteen and thirty-nine weeks ended September 27, 2018 primarily relate to costs associated with the secondary public offerings of our Class A common stock by certain of our stockholders and the closing of our Miami distribution center, net of insurance recoveries from hurricanes Harvey and Irma.*

### Liquidity and Capital Resources

Liquidity is provided primarily by our cash flows from operations and our $300.0 million asset-backed revolving credit facility (the “ABL Facility”). As of September 26, 2019, we had $369.6 million in unrestricted liquidity, consisting of $84.1 million in cash and cash equivalents and $285.5 million immediately available for borrowing under the ABL Facility without violating any covenants thereunder.

Our primary cash needs are for merchandise inventories, payroll, store rent, and other operating expenses and capital expenditures associated with opening new stores and remodeling existing stores, as well as information technology, e-commerce, and store support center infrastructure. We also use cash for the payment of taxes and interest.

The most significant components of our operating assets and liabilities are merchandise inventories and accounts payable, and, to a lesser extent, accounts receivable, prepaid expenses and other assets, other current and non-current liabilities, taxes receivable, and taxes payable. Our liquidity is not generally seasonal, and our uses of cash are primarily tied to when we open stores and make other capital expenditures. We believe that the cash on hand expected to be generated from operations and the availability of borrowings under the ABL Facility will be sufficient to meet liquidity requirements, anticipated capital expenditures, and payments due under the ABL Facility and our $350.0 million senior secured term loan facility (the “Term Loan Facility” and together with the ABL Facility, our “Credit Facilities”) for at least the next 12 months.

The Term Loan Facility has no financial maintenance covenants. As of September 26, 2019, we were in compliance with the covenants of the Credit Facilities and no Event of Default (as defined in the credit agreements governing our Credit Facilities) had occurred.

Total capital expenditures in fiscal 2019 are planned to be between approximately $203.0 million to $213.0 million and will be funded primarily by cash generated from operations. We intend to make the following capital expenditures in fiscal 2019:

- open 20 stores and start construction on stores opening in early 2020 using approximately $131.0 million to $137.0 million of cash;
- invest in existing store remodeling projects and our distribution centers using approximately $35.0 million to $37.0 million of cash; and
- invest in information technology infrastructure, e-commerce, and other store support center initiatives using approximately $37.0 million to $39.0 million of cash.

### Cash Flow Analysis

A summary of our operating, investing, and financing activities are shown in the following table:

*in thousands*

| ​ ​ | ​ ​ ​ | ​ ​ | ​ ​ Thirty-nine Weeks Ended September 26, 2019 | ​ | ​ ​ September 27, 2018 |
| --- | --- | --- | ---: | --- | ---: |
| Net cash provided by operating activities | ​ | ​ | $209,594 | ​ | $143,699 |
| Net cash used in investing activities | ​ | ​ | (141,015) | ​ | (109,395) |
| Net cash provided by (used in) financing activities | ​ | ​ | 14,883 | ​ | (34,326) |
| Net increase (decrease) in cash and cash equivalents | ​ | ​ | $83,462 | ​ | $(22) |

### Net Cash Provided By Operating Activities

Cash provided by operating activities consists primarily of net income adjusted for non‑cash items, including depreciation and amortization, stock‑based compensation, deferred taxes, and the effects of changes in operating assets and liabilities.

Net cash provided by operating activities was $209.6 million for the thirty-nine weeks ended September 26, 2019 and $143.7 million for the thirty-nine weeks ended September 27, 2018. The net cash provided by operating activities for the thirty-nine weeks ended September 26, 2019 was primarily the result of net income, including lower taxes due to stock option exercises, and improvements in working capital. The improvements in working capital were primarily driven by the timing of inventory receipts and the associated payables as well as higher receivable collections and the timing of liability payments.

The net cash provided by operating activities for the thirty-nine weeks ended September 27, 2018 was primarily the result of net income, including lower taxes due to stock option exercises.

### Net Cash Used In Investing Activities

Investing activities consist primarily of capital expenditures for new store openings, existing store remodels (including leasehold improvements, new racking, new fixtures, new product and display vignettes, and enhanced design centers) and new infrastructure and information systems.

Capital expenditures during the thirty-nine weeks ended September 26, 2019 and September 27, 2018 were $141.0 million and $109.4 million, respectively. We continued our investment in new stores, as we opened thirteen new stores and relocated one through September 26, 2019 and are preparing for an additional thirteen new stores and one distribution center to be opened during the fourth quarter of fiscal 2019 and first quarter of fiscal 2020. We generally incur the majority of our capital expenditures six months in advance of the new store opening. During the thirty-nine weeks ended September 26, 2019, approximately 62.3% of capital expenditures related to new stores, 16.4% was for existing stores and distribution centers, while the remaining spend was associated with information technology and e-commerce investments to support our growth.

During the thirty-nine weeks ended September 27, 2018, approximately 66.0% of capital expenditures related to new stores, 21.9% was for existing stores and distribution centers, while the remaining capital expenditures were associated with information technology and e‑commerce investments to support our growth.

### Net Cash Provided By (Used In) Financing Activities

Financing activities consist primarily of borrowings and related repayments under our credit agreements as well as proceeds from the exercise of stock options.

Net cash provided by financing activities was $14.9 million for the thirty-nine weeks ended September 26, 2019 compared with net cash used in financing activities was $34.3 million for the thirty-nine weeks ended September 27, 2018. The net cash provided by financing activities for the thirty-nine weeks ended September 26, 2019 was primarily driven by proceeds from stock option exercises and the employee stock purchase plan of $15.1 million and $2.4 million, respectively.

The net cash used in financing activities for the thirty-nine weeks ended September 27, 2018 was primarily driven by a net paydown on the ABL Facility of $41.0 million, partially offset by proceeds from the exercise of stock options of $9.3 million.

### U.S. Tariffs and Global Economy

The current domestic and international political environment, including existing and potential changes to U.S. policies related to global trade and tariffs, have resulted in uncertainty surrounding the future state of the global economy. In particular, the ongoing trade dispute between the U.S. and China has resulted in the U.S. imposing tariffs of 25% on many products from China. Historically, approximately half of the products we sell were imported from China, the vast majority of which are impacted by these tariffs. As we continue to analyze the impact these tariffs may have on our business, we have begun taking steps to mitigate some of these cost increases through negotiating lower costs from our vendors, increasing retail pricing as we deem appropriate, and sourcing from alternative countries. While we expect our efforts will mitigate a substantial portion of the overall effect of increased tariffs in fiscal 2019, we expect the enacted tariffs will increase our inventory costs and associated cost of goods sold as we incur the tariffs

In addition, on May 24, 2019, the U.S. International Trade Commission (the “ITC”) announced it had completed a preliminary phase antidumping and countervailing duty investigation pursuant to the Tariff Act of 1930 with respect to the imports of ceramic tile from China and determined there is a reasonable indication that the ceramic tile production industry in the U.S. is being materially injured by imports of ceramic tile from China that have allegedly been subsidized by the Chinese government and are being sold in the U.S. at less than fair value, otherwise known as “dumping”. As a result of the ITC’s affirmative determinations, the U.S. Department of Commerce (the “DOC”) began its own related investigation. In September 2019, the DOC reached a preliminary determination that imports from China were subsidized and imposed preliminary duties of 103.77% on most Chinese exporters.

The DOC is also expected to reach its preliminary determination as to the level of dumping, if any, in early November 2019. Once the DOC has reached its preliminary determination, it will instruct the U.S. Customs and Border Protection to require cash deposits based on these preliminary rates. The DOC’s preliminary determination will be subject to revision or rescission either in the DOC’s final determinations, expected in March of 2020, or in the ITC’s final determination with respect to injury shortly thereafter. If the final determinations are affirmative, then countervailing and antidumping orders will be published. The final rates for the first 12 month period of the orders would not be determined until the administrative review process is completed, approximately 2 years after the order is published.

While it is too early to determine what the final outcome of the DOC and ITC investigations will be and what impact, if any, they will have on the Company, we have begun taking steps to mitigate the risk of future exposure by sourcing from alternative countries. While we do not currently believe our current inventory is subject to these additional duties, if these additional duties were to apply to our current inventory, we believe our exposure could be approximately $7.0 million. The actual additional duties, if applicable to us, could differ from this estimate. We have not established a reserve for this matter as we currently do not believe our current inventory is subject to these additional duties, and we note that any liability as of September 26, 2019 would not be material. Potential costs and any attendant impact on pricing arising from these tariffs or potential duties, and any further expansion in the types or levels of tariffs or duties implemented, could require us to modify our current business practices and could adversely affect our business, financial condition, and results of operations.

### Contractual Obligations

There were no material changes to our contractual obligations outside the ordinary course of our business during the thirty-nine weeks ended September 26, 2019.

### Off-Balance Sheet Arrangements

For the thirty-nine weeks ended September 26, 2019, we were not party to any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, expenses, results of operations, liquidity, capital expenditures or capital resources. We do not have any relationship with unconsolidated entities or financial partnerships for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes.

### Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and other factors management believes to be reasonable. Actual results may differ from those estimates and assumptions. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report. See Note 1 to our condensed consolidated financial statements included in this Quarterly Report, which describes recent accounting pronouncements adopted by us, if any.

## Market risk

As filed, 274 characters.

For quantitative and qualitative disclosures about market risk affecting the Company, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of the Annual Report. Our exposure to market risk has not changed materially since December 27, 2018.

## Controls and procedures

As filed, 3,218 characters.

### Evaluation of Disclosure Controls and Procedures

The Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to provide reasonable assurance that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in reports filed or submitted under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, including the chief executive officer and the chief financial officer, have reviewed the effectiveness of the Company’s disclosure controls and procedures as of September 26, 2019 and, based on their evaluation, have concluded that the Company’s disclosure controls and procedures were not effective at the reasonable assurance level at that date due to a material weakness in internal control over financial reporting that was disclosed in the Annual Report. Notwithstanding the material weakness in the Company’s internal control over financial reporting, we have concluded that the condensed consolidated financial statements included in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP. Additionally, the material weakness did not result in any restatements of our condensed consolidated financial statements or disclosures for any prior period.

### Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during the fiscal quarter ended September 26, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

### Remediation

As previously described in Part II, Item 9A of the Annual Report, the Company initiated and has continued to implement a remediation plan to address the material weakness mentioned above. However, the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Based on the steps we have taken to date and the anticipated timing of appropriate test work to ensure adequate design and operating effectiveness of such controls, the Company expects that the remediation of this material weakness will be completed prior to the end of fiscal 2019; however, we cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.

## Risk factors

As filed, 419 characters.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report and Part II, “Item 1A Risk Factors” in our Quarterly Report for the quarterly period ended June 27, 2019, filed with the SEC on August 1, 2019, which could materially affect our business, financial condition and/or operating results.

Filed Nov 1, 2019.
Source: SEC EDGAR, the filing index for accession 0001558370-19-009635. Last ingested by Listed: Nov 11, 2026, 03:34 ET. No prices; not investment advice.