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Floor & Decor(FND) - 2019 Q2 - Quarterly Report

Part I – Financial Information Financial Statements The company's financial statements for the period ended June 27, 2019, show significant changes from adopting the new lease accounting standard, recognizing substantial right-of-use assets and lease liabilities, while achieving strong growth in net sales, net income, and operating cash flow Condensed Consolidated Balance Sheets As of June 27, 2019, total assets increased to $2.01 billion from $1.23 billion at year-end 2018, largely due to $720 million in Right of Use assets from a new lease standard, while total liabilities rose to $1.34 billion from $650 million primarily from $792 million in lease liabilities, and cash increased to $51.5 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 27, 2019 | December 27, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $51,450 | $644 | | Inventories, net | $446,397 | $471,014 | | Right of use assets | $720,009 | $— | | Total assets | $2,011,124 | $1,234,091 | | Liabilities | | | | Current portion of lease liabilities | $44,461 | $— | | Lease liabilities (non-current) | $747,595 | $— | | Total liabilities | $1,340,236 | $649,782 | | Total stockholders' equity | $670,888 | $584,309 | - The adoption of the new lease accounting standard (ASU No. 2016-02) in Q1 2019 materially impacted the balance sheet, resulting in the addition of $621 million of right-of-use assets and a corresponding $683 million of lease liabilities29 Condensed Consolidated Statements of Operations and Comprehensive Income For the thirteen weeks ended June 27, 2019, net sales grew 19.8% to $520.3 million and net income increased 9.4% to $43.6 million, while for the twenty-six week period, net sales grew 19.1% to $997.4 million and net income rose 3.6% to $74.3 million, with diluted EPS at $0.42 for the quarter Statement of Operations Summary (in thousands, except per share data) | Metric | Thirteen Weeks Ended June 27, 2019 | Thirteen Weeks Ended June 28, 2018 | Twenty-six Weeks Ended June 27, 2019 | Twenty-six Weeks Ended June 28, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $520,311 | $434,279 | $997,361 | $837,227 | | Gross profit | $217,823 | $177,638 | $419,197 | $343,024 | | Operating income | $45,895 | $37,245 | $85,657 | $73,751 | | Net income | $43,596 | $39,846 | $74,316 | $71,717 | | Diluted EPS | $0.42 | $0.38 | $0.71 | $0.68 | Condensed Consolidated Statements of Cash Flows For the twenty-six weeks ended June 27, 2019, net cash provided by operating activities increased to $122.2 million from $83.9 million, driven by higher net income and improved working capital, funding $78.2 million in investing activities primarily for new stores, resulting in a $50.8 million net increase in cash Cash Flow Summary (in thousands) | Activity | Twenty-six Weeks Ended June 27, 2019 | Twenty-six Weeks Ended June 28, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $122,157 | $83,923 | | Net cash used in investing activities | ($78,172) | ($63,438) | | Net cash provided by (used in) financing activities | $6,821 | ($20,494) | | Net increase (decrease) in cash | $50,806 | ($9) | Notes to Condensed Consolidated Financial Statements Key notes detail the company's business as a specialty hard surface flooring retailer operating 106 stores, highlight Laminate/Luxury Vinyl Plank as a key sales driver, explain the material balance sheet impact from adopting the new lease accounting standard, and disclose a putative class action lawsuit filed in May 2019 - The company is a specialty retailer of hard surface flooring, operating 106 warehouse-format stores and one design center as of June 27, 20191617 Disaggregated Revenue by Product Category (Twenty-six Weeks Ended June 27, 2019) | Product Category | Net Sales (in thousands) | % of Net Sales | | :--- | :--- | :--- | | Tile | $261,629 | 26% | | Laminate / Luxury Vinyl Plank | $205,720 | 21% | | Decorative Accessories | $192,034 | 19% | | Installation Materials and Tools | $168,301 | 17% | | Wood | $101,992 | 10% | | Natural Stone | $63,790 | 6% | | Delivery and Other | $3,895 | 1% | | Total | $997,361 | 100% | - A putative class action lawsuit was filed against the company and certain officers and directors in May 2019, alleging violations of federal securities laws. The company denies the allegations and intends to defend itself vigorously39 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes strong first-half 2019 performance to strategic investments, product innovation, and customer engagement, with net sales growing 19.1% to $997.4 million driven by comparable store sales and new openings, gross margin improving by 100 basis points to 42.0%, and active management of U.S. tariffs on Chinese goods, with planned capital expenditures of $205 million to $215 million for store expansion Results of Operations For the twenty-six weeks ended June 27, 2019, net sales increased 19.1% to $997.4 million due to comparable store sales and new openings, gross margin expanded by 100 basis points to 42.0% from better product margins and supply chain efficiencies, and operating income rose 16.1% to $85.7 million despite increased operating expenses Key Performance Indicators | Metric | Thirteen Weeks Ended June 27, 2019 | Thirteen Weeks Ended June 28, 2018 | Twenty-six Weeks Ended June 27, 2019 | Twenty-six Weeks Ended June 28, 2018 | | :--- | :--- | :--- | :--- | :--- | | Comparable store sales | 3.0% | 11.4% | 3.1% | 13.4% | | Comparable average ticket | 1.9% | (0.5)% | 1.5% | 0.6% | | Comparable customer transactions | 1.1% | 12.0% | 1.5% | 12.7% | | Number of warehouse-format stores | 106 | 88 | 106 | 88 | - Net sales for the twenty-six weeks ended June 27, 2019 increased by $160.1 million (19.1%), with $25.6 million from a 3.1% comparable store sales increase and $134.5 million from non-comparable stores63 - Gross margin for the first half of 2019 improved by 100 basis points to 42.0% from 41.0% in the prior year, driven by better product margins and leveraging supply chain costs on higher sales65 Non-GAAP Financial Measures The company uses EBITDA and Adjusted EBITDA to assess financial performance, with Adjusted EBITDA for the twenty-six weeks ended June 27, 2019, increasing to $126.7 million from $98.5 million in the prior-year period, and the Adjusted EBITDA margin expanding to 12.7% from 11.8% Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | Twenty-six Weeks Ended June 27, 2019 | Twenty-six Weeks Ended June 28, 2018 | | :--- | :--- | :--- | | Net income | $74,316 | $71,717 | | Depreciation and amortization | $34,263 | $20,911 | | Interest expense | $5,144 | $3,929 | | Income tax expense (benefit) | $6,197 | ($1,895) | | EBITDA | $119,920 | $94,662 | | Stock compensation expense | $4,418 | $2,952 | | Other adjustments | $2,322 | $896 | | Adjusted EBITDA | $126,660 | $98,510 | Liquidity and Capital Resources As of June 27, 2019, the company had $325.7 million in total liquidity, comprising $51.5 million in cash and $274.2 million available under its ABL Facility, with planned fiscal 2019 capital expenditures of $205 million to $215 million primarily for new store openings, remodels, and IT investments - Total liquidity as of June 27, 2019 was $325.7 million, consisting of $51.5 million in cash and $274.2 million available for borrowing under the ABL Facility87 - Planned capital expenditures for fiscal 2019 are approximately $205 million to $215 million, with $125 million to $132 million allocated for opening 20 new stores9196 U.S. Tariffs and Global Economy The company is addressing the impact of U.S. tariffs on Chinese goods, which affect a significant portion of its products, through mitigation strategies including vendor negotiations, selective price increases, and alternative country sourcing, while monitoring a U.S. International Trade Commission investigation into ceramic tile imports from China - The U.S. has increased tariffs to 25% on many products from China, which historically supplied about half of the company's products101 - Mitigation efforts include negotiating lower costs from vendors, increasing retail prices where appropriate, and sourcing from alternative countries101 - The company is also exposed to a preliminary antidumping and countervailing duty investigation on ceramic tile from China, with preliminary determinations expected in September 2019102 Quantitative and Qualitative Disclosures About Market Risk The company's exposure to market risk has not materially changed since the fiscal year-end of December 27, 2018 - There have been no material changes in the company's market risk exposure since December 27, 2018108 Controls and Procedures Management concluded that as of June 27, 2019, the company's disclosure controls and procedures were not effective due to a previously disclosed material weakness in internal control over financial reporting, for which a remediation plan is underway and expected to be completed before the end of fiscal 2019 - The company's disclosure controls and procedures were deemed not effective as of June 27, 2019, due to a previously disclosed material weakness in internal control over financial reporting110 - A remediation plan is in progress, and the company expects the material weakness to be remediated prior to the end of fiscal 2019112 Part II – Other Information Legal Proceedings The company is involved in a putative class action lawsuit filed in May 2019, with further details provided in Note 5 of the Condensed Consolidated Financial Statements - Refers to the 'Litigation' section in Note 5 of the financial statements for details on legal proceedings114 Risk Factors A key risk factor highlighted is the ongoing securities class action lawsuit filed in May 2019 against the company, certain officers, directors, and stockholders, which can be costly, divert management attention, and adversely affect financial condition and stock price regardless of outcome - A putative securities class action lawsuit has been filed against the company, which could result in substantial damages, costs, and diversion of management's time116117 Other Information The company provides a disclosure pursuant to the Iran Threat Reduction and Syria Human Rights Act (ITRA), detailing that while Floor & Decor has no dealings with Iran, an affiliate of a significant shareholder (Ares Management) had a portfolio company (AgriBriefing) with five terminated subscription contracts with customers in Iran generating less than €25,000 annually - Disclosure is required under ITRA because a major shareholder, Ares Management, has an affiliate that may be deemed to control a company (AgriBriefing) with minor business activities related to Iran124125 - AgriBriefing had five subscription contracts with customers in Iran, generating less than €25,000 in annual revenue. These subscriptions have been terminated127128 Exhibits This section lists the exhibits filed with the 10-Q report, including the company's Restated Certificate of Incorporation, Bylaws, a consulting agreement amendment, and certifications by the CEO and CFO as required by the Sarbanes-Oxley Act - Filed exhibits include corporate governance documents, a management contract amendment, Sarbanes-Oxley certifications (302 and 906), and XBRL data files130