Even companies that have been besting inflation since it began to soar are having a tough time maintaining their lead. Buffett stock Floor & Decor (FND -1.33%), for example, has been posting excellent operational results despite the stormy climate. But it's beginning to feel more pressure, and a ho-hum first-quarter earnings report last week had investors selling the stock off. Does this present a juicy opportunity to buy on the dip?
What happened?
Floor & Decor reported 2023 first-quarter earnings last week that just about met analyst expectations. Earnings per share (EPS) of $0.66 came in flat with last year's EPS and a penny below what Wall Street was expecting. Sales increased 9.1% to $1.1 billion, just in line with Wall Street's forecast.
Other than that bland report, which wasn't exactly horrible but didn't excite investors, the company reported a 3% drop in comparable sales (comps). That means all the growth in revenue came from new stores. While it's a positive for a company to have new store opening opportunities, which we'll get to in a minute, a healthy operation also generates some growth in stores that are already open.
That means it's growing as a business and in touch with its core customers, who are happy to come back for more and recommend friends. It should also increase organically with the rise of inflation and population growth, so a decline in comps is really a step backward.
Management is guiding for sales to increase around 9.6% for the full year, maintaining its previous guidance, which is a great sign. It also reaffirmed comps growth of a 3% decline to flat, so the first-quarter slowdown wasn't a surprise, and also reaffirmed its target of full-year EPS of $2.55 to $2.85 and operating income of $605 million to $650 million.
Many retailers are having trouble growing comps in the current macroenvironment. It's more a reflection on the economy than on the company. But it tastes sour to investors anyway, even with the previous and otherwise maintained guidance.
The opportunity is still enormous
Floor & Decor has carved out a retail niche in hardwood and other types of flooring. It offers thousands of products and what management believes is the largest selection of its kind, as well as complementary products. It works through a warehouse format and is focused on offering competitive prices.
One of the reasons Floor & Decor looks like a compelling business is that it has a long growth runway in opening new stores. It opened three stores in the first quarter and is planning to open 32 to 35 in 2023. A new store opening this month will bring the company total to 200, well on its way to a target goal of 500 stores over the next eight or nine years, but with plenty of room left to run. That's likely to lead to years of sales growth, and the company is efficient at turning sales into profits, which should increase steadily.
Because it's a home improvement retailer, its sales are also likely to improve when the real estate market does. Housing sales have plummeted as interest rates have risen and high-rate mortgages have made it much more expensive to buy a home.
As a fairly young company, it also still has lots of opportunity to add services and upgrade its total experience, such as by increasing its design services and expanding its omnichannel options.
Is it time to buy Floor & Decor stock?
Floor & Decor stock is up 23% over the past year and 33% this year, even with the sell-off. Investors were disappointed with the first-quarter results and sent the stock down 7% over the past five days.
This is a very small dip that ironically demonstrates how confident investors really are in Floor & Decor. The price isn't likely to get too much lower. Even at this dip, Floor & Decor shares trade at a price-to-earnings ratio of 33, which isn't what you'd call cheap. However, it's well below the three-year average of 41.
FND PE Ratio data by YCharts
Expect some short-term pressure, but loads of long-term gains if you use this opportunity to buy Floor & Decor stock.
