Floor & Decor Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 28, 2019
1. Summary of Significant Accounting Policies
Nature of Business
Floor & Decor 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 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 March 28, 2019, the Company, through its wholly owned subsidiary,
Floor and Decor Outlets of America, Inc. (“F&D”)
, operates 103 warehouse-format stores, which average 75,000 square feet, and one small-format standalone design center in 28 states, as well as three distribution centers and an e-commerce site,
FloorandDecor.com.
Fiscal Year
The Company’s fiscal year is the 52- or 53-week period ending on the Thursday on or preceding December 31st.
Fiscal years ended December 26, 2019 (“fiscal 2019”) 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.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. The Condensed Consolidated Balance Sheet as of December 27, 2018 has been derived from the audited Consolidated Balance Sheet for the fiscal year then ended. The interim condensed consolidated financial statements should be read together with the audited consolidated financial statements and related footnote disclosures included in the Company’s
Annual Report on Form 10-K for fiscal 2018, filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2019 (the “Annual Report”).
Management believes the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments considered necessary for a fair statement of results for the interim periods presented.
Results of operations for the thirteen weeks ended March 28, 2019 and March 29, 2018 are not necessarily indicative of the results to be expected for the full year.
There have been no updates to our Significant Accounting Policies since the Annual Report, except for the policy changes in connection with the newly adopted lease accounting standard outlined in Note 5. For information regarding our Significant Accounting Policies and Estimates, see the “Summary of Significant Accounting Policies” section of “Item 8. Financial Statements and Supplementary Data” of our Annual Report.
Recently Issued Accounting Pronouncements
There have been no updates to Recently Issued Accounting Pronouncements that have yet to be adopted since the Annual Report. For information regarding Recently Issued Accounting Pronouncements, see the “Summary of Significant Accounting Policies” section of “Item 8. Financial Statements and Supplementary Data” of our Annual Report.
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 March 28, 2019, were:
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(in thousands)
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Amount
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Thirty-nine weeks ended December 26, 2019
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$
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82,939
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2020
|
|
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112,086
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2021
|
|
|
105,317
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2022
|
|
|
98,163
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2023
|
|
|
93,513
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Thereafter
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503,402
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Total minimum lease payments (2)
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$
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995,420
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Less: amount of lease payments representing interest
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|
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238,133
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Present value of future minimum lease payments
|
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757,287
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Less: current obligations under leases
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73,615
|
Long-term lease obligations
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$
|
683,672
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(2) Future lease payments exclude $311 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
For the thirteen weeks ended March 28, 2019, cash paid for operating leases was $24.6 million.
Litigation
We are subject to other various 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. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. These proceedings are not expected to have a material impact on our consolidated financial position, cash flows or results of operations.
6. Stock Based Compensation
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 permits eligible employees to purchase shares of our common stock through payroll deductions, subject to certain limitations. The purchase price of the shares under the ESPP in no event will be less than the lesser of 85% 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 were 1,500,000 shares of our Class A common stock, par value $0.001 per share, approved for issuance. On December 31, 2018, $1.4 million in contributions were used to purchase 60,871 shares of our Class A common stock. Additionally, during the thirteen weeks ended March 28, 2019, the Company recognized $143 thousand of stock-based compensation expense related to the ESPP.
7. Earnings Per Share
Net Income per Common Share
We calculate 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 stock options.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
“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 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 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
:
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·
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an overall decline in the health of the economy, the hard surface flooring industry, consumer spending and the housing market;
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·
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any disruption in our distribution capabilities resulting from our inability to operate our distribution centers going forward;
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·
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competition from other stores and internet-based competition;
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·
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our failure to execute our business strategy effectively and deliver value to our customers;
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·
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our inability to manage our growth;
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·
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our inability to manage costs and risks relating to new store openings;
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·
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our dependence on foreign imports for the products we sell, which may include the impact of tariffs;
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·
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our inability to find, train and retain key personnel;
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·
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violations of laws and regulations applicable to us or our suppliers;
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·
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our failure to adequately protect against security breaches involving our information technology systems and customer information;
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·
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our failure to successfully anticipate consumer preferences and demand;
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·
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our inability to find available locations for our stores or our store support center on terms acceptable to us;
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·
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our inability to obtain merchandise on a timely basis at prices acceptable to us;
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·
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suppliers may sell similar or identical products to our competitors;
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·
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our inability to maintain sufficient levels of cash flow to meet growth expectations;
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·
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our inability to manage our inventory obsolescence, shrinkage and damage;
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·
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fluctuations in material and energy costs;
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·
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our vulnerability to natural disasters and other unexpected events; and
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·
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restrictions imposed by our indebtedness on our current and future operations.
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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 103 warehouse format stores across 28 states as of March 28, 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 (“Buy it Yourself” or “BIY”).
We operate on a 52- or 53-week fiscal year ending on the Thursday on or preceding December 31. The following discussion contains references to the first thirteen weeks of fiscal 2019 and fiscal 2018, which ended on March 28, 2019 and March 29, 2018, respectively.
During
the thirteen weeks
ended March 28, 2019, we continued to make long-term key strategic investments, including:
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·
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opening three new warehouse-format stores ending the quarter with 103 warehouse-format stores;
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·
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focusing on innovative new products and localized assortments, supported by inspirational in-store and online visual merchandising solutions;
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·
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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
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·
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engaging more professional customers, including signing up more customers on our Pro Premier Loyalty Program.
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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 our EBITDA and Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with 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, in dollars and as a percentage of net sales:
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Thirteen Weeks Ended
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3/28/2019
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3/29/2018
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(in thousands)
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Actual
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% of Sales
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Actual
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% of Sales
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$ Increase/(Decrease)
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% Increase/(Decrease)
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Net sales
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$
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477,050
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100.0
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%
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$
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402,948
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100.0
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%
|
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$
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74.1
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|
18.4
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%
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Cost of sales
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|
|
|
275,676
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|
57.8
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|
|
|
237,562
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|
59.0
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38.1
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|
16.0
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Gross profit
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201,374
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|
42.2
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165,386
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41.0
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36.0
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21.8
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Operating expenses:
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Selling and store operating expenses
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127,383
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26.7
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102,567
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25.4
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|
|
|
24.8
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24.2
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General and administrative expenses
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30,202
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|
6.4
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23,339
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5.8
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|
|
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6.9
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29.4
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Pre-opening expenses
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4,027
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|
0.8
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|
|
|
2,974
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|
0.7
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|
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1.1
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|
35.4
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Total operating expenses
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161,612
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|
33.9
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|
|
|
128,880
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|
31.9
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|
|
32.7
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|
25.4
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Operating income
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39,762
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|
8.3
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|
|
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36,506
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|
9.1
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|
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3.3
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|
8.9
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Interest expense
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|
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2,921
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|
0.6
|
|
|
|
1,784
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0.5
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|
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1.1
|
|
63.7
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Income before income taxes
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|
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36,841
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7.7
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|
|
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34,722
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|
8.6
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2.1
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6.1
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Provision for income taxes
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6,121
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1.3
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2,851
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0.7
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|
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3.3
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NM
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Net income
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$
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30,720
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6.4
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%
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$
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31,871
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7.9
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%
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|
$
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(1.2)
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(3.6)
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%
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NM – Not meaningful
Selected Financial Information
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Thirteen Weeks Ended
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3/28/2019
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3/29/2018
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Comparable stores sales
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3.1
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%
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15.6
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%
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Comparable average ticket
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1.1
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%
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|
|
1.9
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%
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Comparable customer transactions
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1.9
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%
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13.4
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%
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Number of warehouse-format stores
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103
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|
84
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Adjusted EBITDA (in thousands)
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$
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60,068
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$
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47,827
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Adjusted EBITDA margin
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12.6
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%
|
|
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11.9
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%
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(1) Adjusted EBITDA is a non-GAAP financial measure. See “Non-GAAP Financial Measures” for additional information and a reconciliation to the most comparable GAAP measure.
Net Sales
Net sales during the thirteen weeks ended March 28, 2019 increased $74.1 million, or 18.4%, compared to the corresponding prior year period. Three out of six of our product categories experienced comparable store sales increases during the period, driven by increases in laminate/luxury vinyl plank, decorative accessories, and installation materials and tools that were above our average for the thirteen weeks ended March 28, 2019. Comparable store sales increased 3.1%, or $12.6 million, and our non-comparable store sales contributed $61.5 million. The increase in comparable store sales was largely driven by a 1.9% increase in comparable customer transactions and a 1.1% increase in comparable average ticket growth. We believe the increase in net sales and customer transactions are due to the execution of our key strategic investments. We believe our enhanced Pro, merchandising, connected customer, marketing and visual merchandising strategies, along with new innovative products led to our sales growth.
Gross Profit and Gross Margin
Gross profit during the thirteen weeks ended March 28, 2019 increased $36.0 million, or 21.8%, compared to the corresponding prior year period. This increase in gross profit was primarily the result of increased sales driven by
comparable store sales increase of 3.1% and the opening of 19 new stores since March 29, 2018. Gross margin for the thirteen weeks ended March 28, 2019 increased approximately 120 basis points to 42.2% from 41.0% in the corresponding prior year period. This improvement in gross margin was equally 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 some strategic retail increases.
Selling and Store Operating Expenses
Selling and store operating expenses during the thirteen weeks ended March 28, 2019 increased $24.8 million, or 24.2% compared to the corresponding prior year period, due primarily to the addition of 19 new stores since March 29, 2018. As a percentage of net sales, our selling and store operating expenses increased approximately 130 basis points to 26.7%
from 25.4% in the corresponding prior year period driven entirely 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 54 basis points, as we leveraged personnel and operating expenses on higher net sales.
General and Administrative Expenses
General and administrative expenses, which are typically expenses incurred outside of our stores, during the thirteen weeks ended March 28, 2019 increased $6.9 million, or 29.4% compared to the
corresponding prior year period
, due to our continued investments in personnel for our regional and store support functions in support of our store growth. Our general and administrative expenses as a percentage of net sales increased approximately 60 basis points to 6.4% from 5.8% in the corresponding prior year period.
Pre‑Opening Expenses
Pre-opening expenses during
the thirteen weeks
ended March 28, 2019 increased $1.1 million, or 35.4% compared to the corresponding prior year period. The increase is primarily the result of the cadence of our fiscal 2019 store openings. This resulted in a higher number of new stores opened or planned to be opened for which pre-opening expenses were incurred compared to the corresponding prior year period. During the
thirteen weeks
ended March 28, 2019, we opened three stores as compared to opening one store during the corresponding prior year period.
Interest Expense
Interest expense during the thirteen weeks ended March 28, 2019 increased $1.1 million, or 63.7% compared to the corresponding prior year period. The increase in interest expense was primarily due to the change in fair value of our cash flow hedge, and to a lesser extent the increase in our average interest rate to 6.0% for the thirteen weeks ended March 28, 2019 from 3.8% in the corresponding prior year period.
Taxes
The provision for income taxes during the thirteen weeks ended March 28, 2019 increased $3.3 million compared to the
corresponding prior year period
. The effective tax rate was 16.6% for the thirteen weeks ended March 28, 2019 compared to 8.2% in the
corresponding prior year period
. The increase in the effective tax rate was primarily due to the recognition of lower excess tax benefits in the current period 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 our 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 reconciliations of net income to EBITDA and Adjusted EBITDA for the periods noted below are set forth in the table as follows:
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Thirteen Weeks Ended
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(in thousands)
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3/28/2019
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3/29/2018
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Net income
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$
|
30,720
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$
|
31,871
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Depreciation and amortization (1)
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16,871
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|
10,228
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Interest expense
|
|
|
|
2,921
|
|
|
1,784
|
Income tax expense
|
|
|
|
6,121
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|
|
2,851
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EBITDA
|
|
|
|
56,633
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|
|
46,734
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Stock compensation expense (2)
|
|
|
|
2,250
|
|
|
1,415
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Other (3)
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|
1,185
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(322)
|
Adjusted EBITDA
|
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$
|
60,068
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$
|
47,827
|
(1) Excludes deferred financing amortization, which is included as a part of interest expense in the table above. For the thirteen weeks ended March 29, 2018, amounts are 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) Other adjustments include amounts management does not consider indicative of our core operating performance. Amounts for the thirteen weeks ended March 28, 2019 primarily relate to costs associated with the secondary public offering of our Class A common stock by certain of our stockholders, completed in March 2019, as well as the relocation of the Company’s Store Support Center and closure of the Miami distribution center. Amounts for the thirteen weeks ended March 29, 2018 primarily relate to insurance recoveries from hurricanes Harvey and Irma.
Liquidity and Capital Resources
Liquidity is provided primarily by our cash flows from operations and our
$300 million asset-backed revolving credit facility (
the “ABL Facility”). As of March 28, 2019, we had $274.1 million in unrestricted liquidity, consisting of $0.5 million in cash and cash equivalents and $273.6 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 cash 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 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 March 28, 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 $220 million to $230 million and will be funded primarily by cash generated from operations. We intend to make the following capital expenditures in fiscal 2019:
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·
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open 20 stores and start construction on stores opening in early 2020 using approximately $146 million to $153 million of cash;
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invest in existing store remodeling projects, including one relocation, and our distribution centers using approximately $39 million to $41 million of cash; and
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·
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invest in information technology infrastructure, e-commerce and other store support center initiatives using approximately $35 million to $36 million of cash.
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Cash Flow Analysis
A summary of our operating, investing and financing activities are shown in the following table:
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Thirteen Weeks Ended
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(in thousands)
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3/28/2019
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3/29/2018
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Net cash provided by operating activities
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$
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27,021
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$
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40,612
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Net cash used in investing activities
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(31,634)
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(27,841)
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Net cash provided by (used in) financing activities
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4,420
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(12,755)
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Net increase (decrease) in cash and cash equivalents
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$
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(193)
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$
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16
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Net Cash Provided By Operating Activities
Cash from 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 $27.0 million for the thirteen weeks ended March 28, 2019 and $40.6 million for the thirteen weeks ended March 29, 2018. The net cash provided by operating activities for the thirteen weeks ended March 28, 2019
was primarily the result of a decrease in net income and working capital mainly driven by the timing of vendor payments.
The net cash provided by operating activities for the thirteen weeks ended March 29, 2018
was primarily the result of an increase in net income and adjustments to net income driven by depreciation related to capital expenditures. This was slightly offset by reduced working capital requirements mainly associated with timing of inventory payments associated with Chinese New Year in the thirteen weeks ended March 29, 2018.
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 vignettes and new design centers) and new infrastructure and information systems.
Capital expenditures during the thirteen weeks ended March 28, 2019 and March 29, 2018 were $31.6 million and $27.8 million, respectively. We continued our investment in new stores, as we opened three new stores through March 28, 2019 and are preparing for one relocation and an additional ten new stores to be opened during the second and third quarters. We generally incur the majority of our capital expenditures six months in advance of the new store opening. During the thirteen weeks ended March 28, 2019, approximately 54% of capital expenditures was for new stores, 24% was for existing stores and distribution centers, and the remainder spent was for information technology and e‑commerce investments to support our growth.
For the thirteen weeks ended March 29, 2018, approximately 63% of capital expenditures was for new stores, 27% was for existing stores and distribution centers, and the remainder was for information technology and e
‑
commerce investments to support our growth.
Net Cash 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 $4.4 million for the thirteen weeks ended March 28, 2019 and net cash used in financing activities was $12.8 million for the thirteen weeks ended March 29, 2018. The net cash provided by financing activities for the thirteen weeks ended March 28, 2019 was primarily driven by proceeds from the employee share purchase plan and exercise of stock options of $1.4 million and $1.8 million, respectively, and net borrowings on the ABL Facility of $2.1 million.
The net cash used in financing activities for the thirteen weeks ended March 29, 2018 was primarily driven by a net paydown on our ABL Facility of $14.2 million, slightly offset by proceeds from the exercise of stock options of $3.2 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 September 2018, the U.S. imposed tariffs of 10% on many products from China, and the U.S. administration has announced an intention to increase that amount to 25% if a trade agreement cannot be reached. Approximately half of the products we sell are imported from China, the vast majority of which are impacted by these tariffs. While we are still analyzing the impact these tariffs may have on our business, we believe we can mitigate some of these cost increases through negotiating lower costs from our vendors, increasing retail pricing as we deem appropriate, and potentially sourcing from alternative destinations. As part of these efforts, we expect the recently enacted tariffs to increase our inventory costs and associated cost of goods sold as we incur the tariffs and import more products ahead of the potentially higher tariffs. We expect our efforts to mitigate a substantial portion of the overall effect of increased tariffs, including a material increase to our inventory costs in fiscal 2019. In addition, on April 10, 2019, the U.S. International Trade Commission announced it had commenced 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. It is too early to determine what the outcome of this preliminary investigation will be and what impact, if any, it will have on the Company. 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
T
here were no material changes to our contractual obligations outside the ordinary course of our business during the thirteen weeks ended March 28, 2019.
Off‑Balance Sheet Arrangements
For
the thirteen
weeks ended March 28, 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 U.S. generally accepted accounting principles, which require 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 consolidated financial statements included in this quarterly report on Form 10-Q, which describes recently issued accounting pronouncements adopted by us.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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
.
Item 4. Controls and Procedures
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 March 28, 2019 and, based on their evaluation, have concluded that the Company’s disclosure controls and procedures were ineffective 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.
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) 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 began implementing a remediation plan to address the material weakness mentioned above. 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. 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.