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Floor & Decor(FND) - 2019 Q1 - Quarterly Report

Part I – Financial Information Item 1. Financial Statements The unaudited financial statements reflect the significant impact of adopting the new lease accounting standard, which added substantial right-of-use assets and lease liabilities Condensed Consolidated Balance Sheets Total assets and liabilities increased significantly due to the adoption of a new lease accounting standard, which added right-of-use assets and corresponding lease liabilities Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 28, 2019 | December 27, 2018 | | :--- | :--- | :--- | | Total Assets | $1,873,351 | $1,234,091 | | Right of use assets | $659,115 | $— | | Inventories, net | $437,504 | $471,014 | | Total Liabilities | $1,253,390 | $649,782 | | Lease liabilities (Current + Long-term) | $757,287 | $— | | Trade accounts payable | $229,498 | $313,503 | | Total Stockholders' Equity | $619,961 | $584,309 | Condensed Consolidated Statements of Operations and Comprehensive Income Net sales grew 18.4% year-over-year, but higher operating expenses led to a slight decrease in net income to $30.7 million Q1 2019 vs Q1 2018 Statement of Operations (in thousands, except EPS) | Metric | Thirteen Weeks Ended March 28, 2019 | Thirteen Weeks Ended March 29, 2018 | | :--- | :--- | :--- | | Net sales | $477,050 | $402,948 | | Gross profit | $201,374 | $165,386 | | Operating income | $39,762 | $36,506 | | Net income | $30,720 | $31,871 | | Diluted earnings per share | $0.29 | $0.30 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities decreased to $27.0 million due to working capital changes, while investing cash outflows increased Summary of Cash Flows (in thousands) | Activity | Thirteen Weeks Ended March 28, 2019 | Thirteen Weeks Ended March 29, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $27,021 | $40,612 | | Net cash used in investing activities | ($31,634) | ($27,841) | | Net cash provided by (used in) financing activities | $4,420 | ($12,755) | | Net (decrease) increase in cash | ($193) | $16 | Notes to Condensed Consolidated Financial Statements Key disclosures include the material impact of the new lease accounting standard, revenue breakdown by product, and details on tax rates and debt - The company operates 103 warehouse-format stores and one design center across 28 states as of March 28, 201920 - Adopted new lease accounting standard ASU No. 2016-02, adding $621 million in right-of-use assets and $701 million in lease liabilities2630 - The effective income tax rate increased to 16.6% for Q1 2019, compared to 8.2% for Q1 201829 Net Sales by Product Category (in thousands) | Product Category | Q1 2019 Net Sales | % of Net Sales | Q1 2018 Net Sales | % of Net Sales | | :--- | :--- | :--- | :--- | :--- | | Tile | $125,310 | 26% | $117,402 | 29% | | Laminate / Luxury Vinyl Plank | $97,502 | 20% | $66,892 | 17% | | Decorative Accessories | $94,440 | 20% | $78,489 | 19% | | Installation Materials and Tools | $79,709 | 17% | $63,581 | 16% | | Wood | $49,230 | 10% | $46,485 | 12% | | Natural Stone | $30,887 | 7% | $28,006 | 7% | Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales grew 18.4% driven by new stores and comparable sales, while gross margin improved, but higher expenses slightly reduced net income Results of Operations Sales rose 18.4% and gross margin expanded to 42.2%, but expense growth outpaced sales, limiting operating income growth to 8.9% - Net sales growth of $74.1 million was composed of a $12.6 million (3.1%) increase from comparable stores and $61.5 million from non-comparable stores59 - Gross margin improved by 120 basis points, attributed equally to better product gross margins and leveraging supply chain costs on higher sales61 - Selling and store operating expenses increased as a percentage of sales by 130 basis points, driven entirely by new stores open less than one year62 Key Performance Indicators | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Comparable store sales | 3.1% | 15.6% | | Number of warehouse-format stores | 103 | 84 | | Adjusted EBITDA (in thousands) | $60,068 | $47,827 | | Adjusted EBITDA margin | 12.6% | 11.9% | Non-GAAP Financial Measures Adjusted EBITDA, a key non-GAAP metric, increased to $60.1 million in Q1 2019 from $47.8 million in Q1 2018 Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Line Item | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net income | $30,720 | $31,871 | | Depreciation and amortization | $16,871 | $10,228 | | Interest expense | $2,921 | $1,784 | | Income tax expense | $6,121 | $2,851 | | EBITDA | $56,633 | $46,734 | | Stock compensation expense | $2,250 | $1,415 | | Other | $1,185 | ($322) | | Adjusted EBITDA | $60,068 | $47,827 | Liquidity and Capital Resources The company maintains $274.1 million in liquidity and plans capital expenditures of $220-$230 million for fiscal 2019, primarily for new stores - Total unrestricted liquidity was $274.1 million as of March 28, 2019, consisting of $0.5 million in cash and $273.6 million available for borrowing74 - Planned capital expenditures for fiscal 2019 are approximately $220 million to $230 million77 - 2019 Capital Expenditure Allocation7785: - New Stores: $146M - $153M for 20 new stores - Existing Stores/Distribution Centers: $39M - $41M - IT & Infrastructure: $35M - $36M U.S. Tariffs and Global Economy The company is mitigating risks from U.S. tariffs on Chinese imports, which affect about half its products, through various strategies - Approximately half of the products sold are imported from China and are impacted by U.S. tariffs90 - Mitigation strategies for tariffs include90: - Negotiating lower costs from vendors - Increasing retail pricing where appropriate - Sourcing from alternative destinations Quantitative and Qualitative Disclosures About Market Risk The company's exposure to market risk has not materially changed since the end of the prior fiscal year - There have been no material changes in the company's exposure to market risk since December 27, 201895 Controls and Procedures Disclosure controls and procedures were deemed ineffective due to a previously disclosed material weakness, with a remediation plan underway - The company's disclosure controls and procedures were deemed ineffective as of March 28, 2019, due to a previously disclosed material weakness96 - A remediation plan is underway and is expected to be completed prior to the end of fiscal 201998 Part II – Other Information Legal Proceedings Ongoing legal actions from the ordinary course of business are not expected to have a material adverse impact - The company is engaged in various legal actions arising in the ordinary course of business, which are not expected to have a material impact100 Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K - Investors are advised to consider the risk factors described in the company's Annual Report on Form 10-K, as they could materially affect the business101 Other Items (Items 2, 3, 4, 5) No unregistered sales of equity, defaults on senior securities, mine safety disclosures, or other material information were reported - No information was reported for Item 2 (Unregistered Sales of Equity Securities), Item 3 (Defaults Upon Senior Securities), Item 4 (Mine Safety Disclosures), or Item 5 (Other Information)102103104105 Exhibits This section lists filed exhibits, including officer certifications under the Sarbanes-Oxley Act and XBRL data files - Exhibits filed include officer certifications (31.1, 31.2, 32.1) and XBRL interactive data files106