The market momentum behind Floor & Decor Holdings (FND) is strong. The company’s stock has completely shrugged off the March market sell-off and has been trading at its all-time highs of approximately $70 per share.
The market strength has been shared with other home improvement retailers, with Home Depot (HD), Lowe’s (LW), and Lumber Liquidators (LL) all showing the same pattern and momentum.
We believe the strength in FND can be attributed to a strong rebound in sales and management’s commitment to growing its new store footprint by 20% in 2021 and beyond. The company is already planning the opening of 27 new stores in 21 on top of the 13 stores opened year-to-date.
The added scale is a plus to margins moving forward, as it would give them the ability to take costs out from their suppliers with the increase in volume. Also, there is leeway for margin improvement once the company stops with its store expansion plans, allowing for a higher percentage of the incremental revenues to fall to the bottom line. Management believes FND can achieve long-term EBITDA margins of 15% or higher, compared to EBITDA margins of 11.7% in 2019.
From a valuation perspective, the company is trading at a forward earnings multiple of 47x, almost double the forward P/E of HD at 25x. LL and LOW trade at 18x and 19x respectively.
While the forward PE of 47x sounds exuberant, we need to acknowledge the impressive growth rates of FND. For example, the company has managed to grow revenues and EPS at a 3-year CAGR of 19.8% and 26.6%, respectively, compared to 7% and 6.4% for HD. That said, maintaining such high growth rates would depend on the achievement of reaching 400 stores, the target set by management. Any slow down in new store growth could cause multiples to contract, as expectations deflate.
At this point, paying 47x for FND’s forward earnings doesn’t look like a good risk/reward opportunity. Besides the high expectations embedded in its share price, the company is not immune to the effects of COVID-19. Q2 results showed declining sales as the company was affected by the pandemic.
We believe the stock is too hot right now and we would rather wait on the sidelines.
Sequential improvement; quarter-to-date sales up 16%
FND reported second-quarter sales of $462M, down 11% on a year-over-year basis but beating sales expectations by $40M. The company also reported a non-GAAP EPS of $0.13 beating the consensus by $0.06.
Second-quarter sales were impacted by a decline of 20.8% in comparable-store sales due to COVID-19 and related store closures. Management transitioned to a curbside pickup model after closing their stores to help offset the decline in sales. Total comparable store transactions declined by 22.3% during the quarter compared to its prior-year period, while the average ticket increased by 2%, highlighting trip consolidation by their customers.
On a monthly basis, store sales have been improving sequentially, with comparable-store sales down 51% in April, improving to a 26% decline in May