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1Q26 Update.
Floor & Decor reported 1Q26 and had yet another quarter of rough results, which can largely be attributed to poor macro. SSS (same store sales) were -3.7% for 1Q and further deteriorated QTD to -4.5%.
Their stores in the West experienced positive SSS vs. the East and South, which they partly attributed to bad weather.
They lowered their guidance for the year to 0 to -4% SSS and now expected total sales of $4.77bn to $4.99bn, which implies total growth of 1.8-6.5% (with 20 new warehouse store openings).
Their weakness largely stems from high mortgage rates, but also includes weaker consumer sentiment on rising gas prices and geopolitical tensions, as well to a smaller extent bad weather which they estimated weighed on SSS by 150-200bps.
In response to the very tough housing market, they have continued to optimize their model as best they can. They continue to cut costs, noting that SG&A for comparable stores decreased $9mn (the increase in SG&A observed is because they opened more stores).
They also have shrunk the size of their new cohort of stores from the typical 75,000 SQFT warehouse to 55,000 SQFT. The messaging on this is that it is largely because of the new geographies they are pushing into in the East Coast do not support a larger store format, but it also seems that they have found the ROI of that size store is stronger. (The sales loss isn’t much worse relative to the new store opening costs of $7.5-8mn vs $11.7mn in 2023).
They also noted that they will continue to gain share from independents, but in this environment, it is still tough. It is worth emphasizing that large retailers like Home Depot are not immune from this flooring sales softness: Home Depot 2026 (fiscal year ending February) was -5.3%.
It was interesting to hear new CEO Bradley Paulsen on the call talk about “the connected customer”. This is a customer who they reach online in addition to in-store. They disclosed that “connected customers” represent 19% of sales and are growing 5.4% y/y, so they will continue to focus on that.
They also announced their first ever large stock repurchase authorization for $400mn, which represents about 7.5% of the company at todays prices. They noted that they will not use debt to fund buybacks. CEO Bradley Paulson was careful to note that this isn’t a blanket stock repurchase to buy at any prices, but will be targeted. Presumably current stock price levels are attractive for them to repurchase, but they won’t be purchasers of their stock at any price. (This is what an investor wants to hear).
While they continue to face a longer than expected (at least than I would have expected) headwind from soft existing home sales, they are making a lot of the right moves. They are cutting costs, opening up stores with a lower cost outlay, and are improving the parts of the business they can—including B2B sales. Many of the changes they have made, like with in-store designers and a focus on Pro’s, have worked, but the full impact is hidden by the soft macro. They have no doubt been struggling for a long time, but they are very well positioned to reap the benefits when the housing market turns.
While I don’t love to see business model changes like the smaller format stores and adding more categories (they spoke about this a few quarters ago), I think the underlying business changes largely make sense given this macro backdrop. At the end of the day when you are in the business of selling a large ticket discretionary item, it is very easy for consumers’ to defer that purchase. However, eventually floors will need to be replaced, and Floor & Decor still offers the best prices across the widest selection of in-stock inventory. That value prop is still intact, it is just that fewer consumers are in the flooring market than we would historically expect. But this can’t continue indefinitely as floors have a lifetime of about 10-20 years. When homeowners do eventually sell their homes, that is a trigger event to replace floors to get a higher price or for the new homer owner to spruce up their purchase. This is a behavior we have seen for a long period of time and would expect it to continue when existing home sales do eventually increase. They are in a net cash position, so they can be patient. The question really is how patient investors are willing to be and whether they still believe in the Floor & Decor model.
Valuation.
At the after-hours price of $45, they Reverse DCF shows >20% returns if an investor still believes they can reach their 500 store target with $25mn per store. It seems the $30mn per store is a more of a blue skies scenario now after many quarters of weak SSS, but the math still shows around a 20% return even on average store revenues of $20mn. This of course is still a very long time horizon valuation.
On this years expected revenues of about $4.8bn, if we apply a 15% mature margin, that is about $575mn in NOPAT, which yields us a mature margin multiple of 9x. If an investor was pessimistic on their mature margins and wanted to assume 10%, that yields a 13.5x NOPAT multiple.
*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.