Floor & Decor: There Are Better Ways To Play Home Improvement

seekingalpha11-21

I initially rated Floor & Decor a BUY in August 2022, but now downgraded to SELL due to underperformance and Berkshire Hathaway's exit.FND failed to meet its ambitious 2022-2024 growth targets, with ...

Source Link

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap

Leave a comment

{"i18n":{"language":"en_US"},"isChannel":false,"data":{"share":"https://ttm.financial/m/news/2485451347?lang=en_US&edition=fundamental","thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1955023562/image_1955023562.jpg","is_english":true,"pubTime":"2024-11-21 16:30","share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","id":"2485451347","market":"hk","top_or_hot":-1,"title":"Floor & Decor: There Are Better Ways To Play Home Improvement","media":"seekingalpha","content":"<div>\n<p>I initially rated Floor & Decor a BUY in August 2022, but now downgraded to SELL due to underperformance and Berkshire Hathaway's exit.FND failed to meet its ambitious 2022-2024 growth targets, with ...</p>\n\n<a href=\"https://seekingalpha.com/article/4739215-floor-and-decor-fnd-stock-sell-better-ways-to-play-home-improvement\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Floor & Decor: There Are Better Ways To Play Home Improvement</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nFloor & Decor: There Are Better Ways To Play Home Improvement\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-21 16:30 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4739215-floor-and-decor-fnd-stock-sell-better-ways-to-play-home-improvement><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>I initially rated Floor & Decor a BUY in August 2022, but now downgraded to SELL due to underperformance and Berkshire Hathaway's exit.FND failed to meet its ambitious 2022-2024 growth targets, with ...</p>\n\n<a href=\"https://seekingalpha.com/article/4739215-floor-and-decor-fnd-stock-sell-better-ways-to-play-home-improvement\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"FND","symbol_name":"Floor & Decor Holdings Inc.","start_time":0,"source_url":"https://seekingalpha.com/article/4739215-floor-and-decor-fnd-stock-sell-better-ways-to-play-home-improvement","article_id":"2485451347","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1955023562/image_1955023562.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2485451347","pubTimestamp":1732177800,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"I initially rated Floor & Decor a BUY in August 2022, but now downgraded to SELL due to underperformance and Berkshire Hathaway's exit.FND failed to meet its ambitious 2022-2024 growth targets, with s","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"FND":"Floor & Decor Holdings Inc.","BK4083":"家庭装潢零售"},"translate_title":"地板与装饰：家装有更好的玩法","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"FND":0.9},"content_text":"I initially rated Floor & Decor a BUY in August 2022, but now downgraded to SELL due to underperformance and Berkshire Hathaway's exit.FND failed to meet its ambitious 2022-2024 growth targets, with significant misses in sales growth, store expansion, and profitability metrics.Despite heavy investments, FND's revenue growth has lagged while operating expenses surged, offering neither growth nor profitability in the current market.FND's store operating model is inefficient compared to Lowe's and Home Depot, raising concerns about its ability to achieve profitability even in a better environment.LOW, HD, and TREX offer better ways to play in home improvement.   asbe/E+ via Getty Images  I last covered Floor & Decor (NYSE:FND) in August 2022, rating shares a BUY and explaining why Warren Buffett wasn't the only reason I liked it. If you recall, Buffett's Berkshire Hathaway Inc. (NYSE:BRK.B) took up a stake in FND in Q3 2021, then added to the position in Q4 2021. Obviously, the market loved it, and so did I. Since my initial BUY rating, shares have gone nowhere, up 8% compared to the S&P 500's gain of 43%. That's stark underperformance. It's been quite the rollercoaster for shareholders as evidenced by the chart below. Data by YCharts This month, Berkshire released its latest 13F filing which showed the company exited FND completely, liquidating all shares. Much like Buffett, I too am reversing course on FND, double downgrading my opinion from BUY to SELL.  Here's why. Failed to deliver on long-term targets In my original thesis, I made the mistake many made post Covid. I extrapolated FND's Covid-induced growth forward much too optimistically. I did this in good faith, using FND's own long-term guidance for 2022-2024, which it released in March 2022, as a basis: Total net sales growth of at least 20% as measured over a three-year compounded annual growth period; Missed: actual growth of +9%  New warehouse format store growth of 20% through 2024; Missed: actual growth of +16%  Adjusted operating income approximately doubling from 2021 to 2024, representing approximately 25% growth when measured over a three-year compounded annual growth period; Certain to miss with operating profit likely to be less than it was in 2021  Adjusted EBITDA margins (as a % of sales) in the mid-teen range; Missed: EBITDA margin for trailing twelve months is 11%  Maintain low balance sheet leverage and prioritize operating cash flow back into the business to support 20% new warehouse-format store growth while continuing to improve return on invested capital. Return on capital has decreased 5% since 2021  I concede the home improvement market has had a rough go of it the past couple years. Existing home sales have been on a steady slide since peaking in 2021.  Still, I'm not encouraged by FND's performance over this time.  Existing U.S. Home Sales (Trading Economics) Growth or profitability In 2022, I was bullish on FND because it offered growth. After all, its 10-year revenue CAGR is an impressive 26%. The company has invested heavily in growth the past three years, expanding its store count from 160 in 2021 to 252 by the end of this year. But FND's revenue has only compounded at 9% while its operating expenses have compounded at 16%. As an investor, I demand one or the other - growth or market-leading profitability. Currently, FND is offering neither. In today's home improvement environment, it's a lose-lose for FND. The market believes FND is a growth company with a target of 500 stores in the U.S. (double from today). To meet the market's expectations, it's investing to grow the top line, but the top line isn't moving much. At the same time, it's effort to grow is cannibalizing sales and profitability.  FND Revenue vs EBITDA Margin (Seeking Alpha) Both Lowe's (LOW) and Home Depot (HD) have superior profitability compared to FND, as evidenced by their EBITDA margins. But FND's gross margins beat both LOW and HD by +10%. This indicates to me there's something wrong with FND's store operating model. It's too expensive.   Profitability FND-LOW-HD (Seeking Alpha) Yes, FND operates a fleet of young, less mature stores. Still, the economics seem off. Even in an improved environment which should revive FND's revenue, I'm not convinced it will be able to wring out enough costs to drive profitability in line with its peers. This article by Dominick D'Angelo explains the economics a lot better than I could.  Valuation As of this writing, FND is trading at $100 per share with an $11 billion market cap. Most of its valuation multiples are nearly double that of its peers in LOW and HD. And we've already established FND is stagnating in growth and profitability.    Valuation Multiples (Seeking Alpha) For 2025 and 2026, analysts are calling for topline growth of 10% and 14%, respectively. This would land 2026 revenue at $5.51 billion. If I assume an EBITDA margin of 12%, which represents pre-Covid levels and is above current margins, it equates to EBITDA of $661 million in 2026. Currently, EV/EBITDA multiples for LOW and HD are 15x and 19x, respectively. I'll use these for a low-end and high end for FND, which equates to a forward FY2 valuation between $91 and $115 per share (assuming 109 million shares outstanding).  Essentially, this indicates FND needs to do a lot of things right for the share price to go nowhere. Which implies if it does any one of these wrong, its current share price is likely too high. There are better ways to play home improvement In my opinion, there are better ways than FND to play the home improvement sector. Even with somewhat bloated valuations, I think LOW and HD are likely to outperform FND over the next 5 years or so. But I'd recommend Trex Company, Inc. (NYSE:TREX) above all three home improvement retailers. I've covered TREX multiple times, the most recent being here.  TREX differs from FND in numerous ways, but it's also very similar. For example, both are specialists within the niche of home improvement. FND specializes in flooring and flooring accessories whereas TREX specializes in composite decking and railing.  Probably the biggest difference between the two is that FND is a retailer, whereas TREX is a manufacturer and wholesaler. But both are subject to the ebb and flow of housing and the home improvement market. I'm bullish on TREX because it's doing all the things FND isn't. TREX's revenue has stagnated the past three years just like FND, but its profitability has improved.  Data by YCharts TREX has shown an ability to throttle its business in relation to the market, all while improving margins. When demand for its products resurges with a change in tide in home improvement, its ability to ramp up to meet demand should drive profitability even higher. TREX is down 19% YTD and I think shares represent a great opportunity. Bull Case The bull case for FND hinges on a return to growth in the home improvement market and improved profit margins. The company is sure to benefit from a rebound in the housing market, though I don't know to what extent.  To improve profit margins, I think FND needs to evaluate the cost structure at its stores. Specifically, the company needs to evaluate operating margins. FND's gross margins are quite strong, greater than 40%. But its operating expenses are cutting strongly into profits.  If FND can optimize the cost structure at its stores, and hit its long-term EBITDA target of 15% consistently, then my opinion may change. Time will tell. Conclusion FND is a growth company whose growth is eroding its own profitability. It reminds me of a \"The Office\" episode. The Michael Scott Paper Company has the lowest prices in town and is seeking the advice of an accountant to determine if they can afford to hire a delivery driver.  Michael (the boss) asks, \"What can we afford to pay a delivery driver?\". The accountant responds, \"You can't afford to pay him anything. Your prices are too low.\"  Michael retorts, \"Our prices are the only thing keeping us in business.\" The account replies, \"They're actually putting you out of business.\" It's a similar story with FND. Growth for the sake of growth is eroding the bottom line.  To me, there are better ways to play the home improvement market. I'd rotate out of FND and into LOW, HD, or my personal favorite, TREX.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485451347"}