We are rolling out a new post format. Most companies do not have much change quarter to quarter and so rather than make each update 2-3k words, as we have in the past, we will publish shorter updates when warranted. We will still do longer business updates for each company about twice a year, and sometimes more, but we also don’t want to waste your time.

On the other hand, we want to say something on each company each quarter, even if there isn’t a lot new, just so you know we don’t think there is anything thesis changing in the quarter. We think having some shorter updates helps us accomplish this without us wasting your time.

These shorter posts will be called Business Recaps.  

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Summary: Floor & Decor continues to execute on their march to 500 stores, but just as they started to turn the corner from a weak housing market, they are now bracing for another headwind: tariffs. While 1Q experienced slightly negative SSS comps at -1.8% y/y, in 2Q they turned positive QTD at +1.1%. However, with tariffs and the potential consumer slowdown they could bring, they have lowered their SSS guidance from flat to +3% y/y prior to -2% to +1% y/y. They also took store opens down from 25 to 20 this year.

To the positive, they have already had experience with tariffs from the initial round in 2018 and have since diversified their supply base. China today accounts for just 18% of products and they manufacture 27% in the United States now. They also have noted they can bring China down to mid-single digits by year end. They also believe that they can not just protect gross profit dollars by passing off prices, but gross margin percent as well, in contrast to the past. This is because everyone is being impacted, and they have a better ability to navigate supply chain issues with 240+ suppliers. The independents are going to be even further pressured, and Floor & Decor could take share coming out of this.

In short, this is yet another headwind for them, but they continue to sail along, despite choppy waters.

Below are some key figures and earnings call notables.

Key Take-aways

• Revenue growth +5.8% y/y
  • Comp sales -1.8% in 1Q
  • QTD in 2Q, comp sales moved positive t +1.1% y/y
• “We could not be more pleased and our first quarter results demonstrate how effectively they continue executing our growth strategies, achieving record customer satisfaction scores, managing our expenses and profitability and growing our market share even as sales in the hard surface flooring industry contract.”
• Dropping store openings to 20 for the year, from 25 prior
  • Can reduce further if macro deteriorates
• In past managed to the gross margin dollars, but think they can manage to gross margin % if universal rate sticks  

Guidance

• Assuming higher end sales stay unchanged, but lower end drops off
• Lowered SSS guidance from flat to +3% to -2% down to +1% y/y

Tariffs

• “We don’t know how this could impact consumer spending for the remainder of fiscal 2025, we have a proactive, flexible plan we are implementing and executing.”
• “As many of you know, we successfully managed an increase in tariffs back in 2018 and 2019 by pursuing strategies to grow our market share and protect our profitability. Today, we intend to employ similar strategies to achieve these goals in 2025”
  • These tariffs are more uncertain and complex, making them more challenging to manage
• Organized a Tariff Steering Committee
• Already seeing some retailers raise prices from high single digits to +50%.
• 27% of products now manufactured in the US
• China is now 18%, now from 50% in 2018
  • China will be mid to high single digits by year end
• Competition
  • “I do think the question of a competitive advantage. I do believe at the end of this, the longer this cycle lasts, the harder it is that our sourcing model will be a competitive advantage, and it will be very hard for the independent hard surface flooring companies to survive. I mean they have to buy from a middleman and it’s very difficult to source. So the way we do it has been an advantage and will remain an advantage. And I think the longer this lasts, the less competition that will exist when we come out of it.”

Ticket Growth

• “It is important to remember that when our talented designers are involved in a project, the average ticket amount more than doubles and the gross margin rate increases significantly. This underscores our designers’ vital role in driving our success with an elevated and personalized in-store and online design experience.”

Capex

• Investing to support store growth, including personnel and ERP system
  • Investing $20 to $25mn in a new distribution centers in Seattle and Baltimore, as well as $50-55mn into existing stores and distribution centers
• $40 to 45mn in IT infrastructure, e-commerce, and other store support initiatives
• $20mn of deferred SaaS ERP implantation costs not included in capex

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You can find our last Business Update on Floor and Decor 4Q24 here.

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*At the time of this writing, one or more contributors to this report has a position in FND. Furthermore, accounts one or more contributors advise on may also have a position in FND. This may change without notice.