After A 50% Rally Can Floor and Decor Stock See Further Gains?

Floor & Decor Holdings’ stock (NYSE: FND), a specialty retailer of hard surface flooring, is up 53% to around $78 levels year-to-date, compared to a 5% growth for the broader S&P 500. While Floor and Decor has outperformed the broader markets, we believe that the stock looks appropriately valued at the current price for the near term. Floor & Decor revenues have grown 2% to a consolidated figure of over $1 billion for the last 2 quarters from the consolidated figure of $997 million a year ago. But less competition in this business and improved profitability makes it a long-term growth stock. The company’s stock grew by around 200% since the end of 2018. Our dashboard, ‘What Factors Drove 200% Change Floor and Decor Holdings Between 2018 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

Floor and Decor’s stock grew a strong 96% during the 2018-2019 period, primarily due to a 20% growth in revenues and a 25% growth in earnings. An almost 8% growth in net income margin from 6.8% in 2018 to 7.4% in 2019, led to an increase in earnings per share.

Floor and Decor’s P/E multiple also grew from 22x at the end of 2018 to 34x by the end of 2019. It is currently at 52x, 54% higher than the 2019 levels. We believe FND’s multiple will likely decline from 52x levels, closer to the P/E levels seen historically.

How Is Coronavirus Impacting Floor and Decor’s Stock?

Floor & Decor’s stores were closed for a significant portion of Q2 (ending June), leading to a 21% drop in comparable sales. However, the company was still profitable in this period with $32 million in net income in Q2 ($50 million YTD). It should be noted that the company’s sales, which suffered due to the pandemic-related shutdowns, quickly recovered once all of its locations reopened. In addition, the Census Bureau has also been releasing encouraging data for home-improvement retail – with sales for the building material and garden category up 16%, 17%, and 19% year over year in July, August, and September, respectively. All this, is leaning toward a similar bump for FND in Q3 as well.

Floor & Decor operates huge warehouses with an average of 76,000 square feet of flooring options (tile, vinyl plank, installation materials). FND is a predominantly brick-and-mortar business as people like to see and feel flooring before making large purchases. Additionally, tile is mainly fragile which makes it unsuitable for shipping. Therefore, the company is increasing its new store opening plans for 2020 from 11 to 13 and reaffirmed its plans to expand its store base by roughly 20% in 2021. Given the coronavirus setback, Floor & Decor is still doing fairly well. That said, even before the pandemic struck, FND’s earnings growth outpaced already-rapid revenue growth in 2019, suggesting a market-beating stock performance in the long term.

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