Key insights
- The analysis suggests Floor & Decor (FND) presents a potential investment opportunity based on its store expansion plans and potential for earnings growth as same-store sales recover. The author believes current analyst estimates are conservative and sees significant upside if the company achieves its growth targets. The stock is currently on a watchlist, with a more attractive entry point anticipated at a lower price.
Floor & Decor has 270 stores as of 2025 with plans to get to 500 within 8-10 years. Right there one can see a near doubling of earnings and revenue. The forward PE has been cut in half from 50x to 25x since 2024. While 25x is certainly not a low PE, I believe that is measured against what is likely to be cyclical trough earnings. If same store sales start growing again, the PE would quickly drop to under 20x at the current price.
Like many housing related businesses, things were very good during COVID. Demand was pulled forward. Combine that with the housing slump right now and same store sales have been negative starting in 2023. I believe the worst of the bad sales comps are passed us because average ticket is finally growing again - even if only at 1.5%.
This company is very well run. The company doubled stores over the last 5 years by adding only $700mm of net debt while EBITDA more than doubled from $350 to $760, meaning the balance sheet is actually healthier today than 5 years ago. Despite negative SSS, gross margin is up from 2019. It is even up from 2023.
Peak earnings were $2.80 in 2022. Analyst estimates for 2028 do not have the company getting back to that level yet. I suspect that is a pessimistic view - or at least management being conservative. Retail businesses are very sensitive to SSS growth. At 500 stores, it is not hard to get to $6 EPS when I play with the modeling. Growing the store base should boost overall corporate margins gradually through scale. This is a common observation and modeling convention for store-based businesses.
If the analysts are right, 25x $2.65 in 2028 = $66, +20%
If my bull case happens, 20x $6 in 2033 = $120, +140% (20x is HD's historical avg forward PE, +/- 3)
These forward returns are solid but not spectacular by any means. If this stock falls another $5-10, that changes quite a bit which is why it is a watchlist name for now.