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3Q26 Update.
Floor & Decor reported 3Q26 earnings, and the stock was down -8% the next day (but has since slightly rebounded). This is a stock that still trades very dependent on existing home sale improvements, which have had several false starts in the past few years. Since existing home sales are tied to mortgage interest rates, inflation and fed funds expectations have whipsawed them around several times in a few years. Shares are down -19% YTD.
Total net sales increased +3% y/y, but SSS remained negative at -1.4%. However, this is a slight improvement q/q and marks the third consecutive improvement in SSS. On the call, CEO Brad Paulson stated that SSS remained negative for most of the quarter, but in September, they saw an increase of 0.4%, which marks the first month of positive SSS growth since January 2026. However, they also mentioned that QTD SSS have declined -3.8% so far, so the improvement didn’t stick. They updated their full year SSS guide to -3.5% to -2%, which is on the lower end of their initial 2026 guidance of 0 to -4%. Nevertheless, despite their weak SSS performance, they have been a market share gainer through the past couple years and so their position should be stronger when they do eventually get macro improvements.
In the quarter, they only opened one new warehouse store, which brings their store count to 282. If we look at store count growth since Covid, this is their slowest quarter yet. Despite anemic store openings this quarter, they are still on track for 20 new stores in 2026 with 8 more in 4Q though.
However, on the call Brad Paulson stated that they are moderating the pace of the warehouse store expansion in 2027 and are only planning to open 10-15 stores in 2027. They remain confident in their 500 store long term target, but highlighted that they are more returns focused over store unit growth. As this soft macro environment has lasted much longer than expected, they have continued to drop their store opens (from 30 a few years ago). While we have been critical of this decision in the past for not being long-term enough, it makes sense as we still don’t know when a recovery will come and their period of negative SSS has lasted much longer than we would have anticipated. New stores also cannibalize existing stores in the short-term, so balancing that in this environment makes sense to still maintain good store level profitability.
Zooming out, CEO Brad Paulson stated that both East and West regions continue to outperform to deliver positive SSS excluding cannibalization. 12 of their 16 districts report positive SSS, which is up from 8 in 2Q26. This is a good underlying sign as only their West stores were comping positive last quarter.
However, despite this improvement among their stores, they continue to be pressured by macro headwinds. They continue to note that the demand for big-ticket discretionary home improvement projects remains under pressure due to the recent rate increases and the 30-year mortgage rates now sitting above 7%, 115bps higher than last year. This has continued the trend of pressure on existing home sales, which is a key trigger event for consumers to buy new floors. Historically though a 7% mortgage rate isn’t that high and the market will eventually adjust even if rates do not drop in the foreseeable future. A further increase though could further stymie recent improvements in SSS.
Customer transactions remained the same q/q at -2.9% y/y while average ticket growth improved to 1.6% y/y. Average ticket growth was led by a mix shift towards “better” and “best” product selections, both of which increased sequentially and y/y. Breaking revenue down by category, they continue to gain share in Tile, which grew +4.8% y/y, and the trend in consumer preferences toward Wood, as we mentioned in our last update, continued this quarter, accelerating to 11.6% y/y, up from 8.2% y/y last Q. Meanwhile Installation Materials accelerated to +10% y/y as they noted that they expanded their share of wallet with pros.
Turning to pros, Pro sales continued to be a positive for them. On the call, they mentioned that Pro sales growth accelerated throughout the quarter with September having the strongest month of the year at +9%. In addition, Pro penetration has now increased 5pts to 55%, which is up from 50% a year ago, highlighting the fact they are continuing to gain share among pros. This is a positive mix-shift improvement as we view the Pro business as much stickier and recurring than DIY or “do it for me” sales. As a result of this positive trend, they announced they are piloting a Pro Digital Loyalty Membership program and plan to launch the service in 1Q27 to help attract and retain pro members.
In terms of their commercial opportunity, Spartan saw positive momentum with revenue growth of +6% y/y in the quarter. And they remain encouraged with the continued progress with their regional account managers (RAM), with managed account sales improving throughout the quarter.
Gross margin remained flat at 43.7%. Despite the rise in supply chain costs due to higher prices in diesel, it was offset by the recognition of the IEEPA tariff refunds in the quarter. Of the $22mn in IEEPA tariff refunds they had in 2Q26, they recognized $14mn of that in 3Q and plan to recognize the remaining $8mn in 4Q. However, on the call, CFO Bryan Langley mentioned that they are anticipating a 100bps headwind in gross margin due to persistent higher energy costs. If higher energy costs continue to persist, and the remaining IEEPA benefits are recognized in 4Q, that would mean that gross margins in 2027 could be pressured and face a tough comp as they lap these non-recurring benefits. It is worth remembering that given their direct sourcing model, they are better equipped to absorb cost increases than mom and pop competitors. There has been an increased focus on keeping SG&A tight to focus on their expense base, including reducing store opening costs, to manage the business for better profitability through this down cycle and COGS headwinds. For the quarter operating income grew 8% y/y, despite negative SSS and revenue growth of just 3%.
Turning to capital allocation, in the quarter, they bought back $91mn worth of shares, which brings their YTD total to $157mn so far since announcing their $400mn buyback plan back in April. As a result, they now have $243mn remaining in their share repurchase program. They noted they will not take out debt to finance buybacks, which we believe is wise, despite their share price having been depressed. (RH is a counterexample to this whereby they levered to buyback shares and now have a potential insolvency issue in a few years without the ability to refinance).
Overall, Floor & Decor continues to battle a tough macro environment. They are managing through this period by tightening up expenses. As a result, this has hurt their pace for opening up new stores, in addition to weighing on mature stores too. On the call, they cited that mature stores are currently doing $20mn in sales, which is below their ~$28mn peak. However, despite their depressed sales, they are generating a 23% EBITDA margin, which isn’t far off the 25% EBITDA margin they have seen in the past, showing how their cost cutting efforts have improved the financial profile of the business. On the call they noted compared to 4Q23 they have taken almost $100m of cost out of comparable stores. They are careful to recognize that customer service is still a key focus for them and they still have an all-time high NPS despite flexing many employees’ hours.
Valuation.
In terms of valuation, Floor & Decor currently trades at $51 per share with a market cap of ~$5.5bn. On this year’s expected revenues of $4.8bn, if we apply a 15% mature margin, that is around $575mn in NOPAT, which puts them at a mature margin multiple of ~9.5x.
Below we show various revenue per store assumptions, mature margin assumptions and then apply a multiple from 12-20x. You can even pick between a more conservative 400 store target instead of their 500. They currently have 282 warehouse stores with the anticipation to open 10-15 next year. We then assume it takes them 10 years to reach that and back into the implied return. The 10 year assumption is on the conservative side as we would expect store openings to ramp back up when they do start to see sustained SSS growth.
We also sensitize from $20m to $32mn in sales per store. $28mn was the highest they ever reported, but they alluded in the past that $30mn is well within reason. However, that was during the Covid boom and prior to the stark SSS deterioration. $25mn per store seems like a more achievable normalized assumption, with the potential for there to be some longer-term upside. An 18x multiple on the $25mn per store scenario with 15% operating margins would yield an equity value of $27bn vs. their market cap of $5.5bn today. If that takes them a decade to achieve, that is a 17% annualized return (and doesn’t count any cash flows the business throws off during that period). Investors no doubt need to be patient though as a change in cycle still could be years away (or much sooner than we expect). This uncertainty is a key reason why investors have likely shied away from this business. Of course, an investor needs to decide for themselves what assumptions they are comfortable with.
It’s important to mention that this math doesn’t explicitly value their commercial opportunity. This can show up in the financial model in terms of higher mature sales per warehouse store.
For further reading, check out our 57 page Floor & Decor in-depth research report.
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*At the time of this writing, one or more contributors to this report may have a position in stocks mentioned. Furthermore, accounts one or more contributors advise on may also have a position. This may change without notice.
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