"The Pace Of Getting There"
An update on Floor & Decor
From “In A Transitional Period”: “This seems to me like an example where Mr. Market is willing to look longer term than he’s sometimes given credit for. I think it reflects an appreciation among investors generally that HD and FND both appear well positioned to maintain their competitive advantages in an industry with structural tailwinds over the long run… I think it’s rational for Mr. Market to give these companies a pass if he’s convinced this pressure will subside over the coming quarters (able to weather the combination of a COVID hangover and macro headwinds). We will see if that assumption proves correct; for now, my view is simply that it doesn’t seem outlandish to believe there’s a decent possibility of further pressures in the short-term.”
The ensuing six months have provided an early answer: further pressure has materialized. Ongoing revisions to Floor & Decor’s FY23 guidance provide a clear example. When the company reported Q4 FY22 results in February, management’s expectation was that sales would climb by ~10% this year to $4.68 billion (midpoint), with comparable store sales flat to down 3%. Those numbers have moved significantly lower; the company now expects revenues of $4.37 billion (+2% YoY), with comps down ~8%. In addition, as shown below, this is being driven by sharply weakened results to close out FY23.
As CEO Tom Taylor explained earlier this year, Floor & Decor’s business is materially impacted by the pace of U.S. existing home sales: “When they’re positive, we have the wind to our backs - and when they’re negative, it's wind in our face… I have been here 12 years; we have had three downturns in existing home sales, and every time we have seen our comps slow.”
Data from the National Association of Realtors (NAR) shows that strong headwinds remain. In September, existing home sales in the U.S. fell to a seasonally adjusted annual rate of 3.96 million – down ~15% from the year ago period despite lapping a ~24% YoY decline in September 2022.
As management noted on the Q3 call, this pressure has proven to be stronger than the once assumed it would be: “Our industry and company have been affected by the Federal Reserve's current interest rate policies… The lagged effect of these policies is exerting greater-than-expected pressure on existing home sales, and in turn, our sales than we previously expected. We were expecting existing home sales would approximate 4.1 - 4.3 million annualized as we moved into 2H 2023; this has not materialized.”
In addition, they provided early FY24 commentary that points to sustained headwinds: “We believe the ongoing impact of these monetary policies will continue to suppress home remodeling into 2024, which could lead to a decline in our comparable store sales for the year. Therefore, we believe it is prudent to approach FY24 with more rigor in our expense management and added discipline in our growth investments and capital spending.”
As we think about the financial impact of these developments, let’s zoom in on unit growth. As noted on the Q3 FY23 call, management expects to open 30 – 35 stores in FY24, compared to a prior expectation of at least 35 stores. In total, the new guidance suggests that they’ll end next year at 255 stores (midpoint), or roughly 10% lower than what they were targeting at the March 2022 Investor Day (slide 76). In summary, short-term pressures are starting to snowball; in addition to invalidating prior FY24 financial targets, they are also forcing a rethink on Floor & Decor’s realistic path to 500 U.S. stores.