Upcoming Warehouse Stores And Product Expansion Will Boost Market Presence

Key Takeaways

• Expansion of warehouse stores and new product categories is expected to drive revenue growth and improve net margins through diversification and increased market presence.
  
• Strategic investments in merchandise, technology, and supply chain management aim to enhance customer engagement, mitigate tariffs, and improve operational efficiencies and earnings.
  
• Geopolitical instability, increased competition, high costs, and macroeconomic challenges may collectively pressure Floor & Decor's margins, revenue growth, and overall profitability.

Catalysts

Operates as a multi-channel specialty retailer of hard surface flooring and related accessories, and commercial surfaces seller in the United States.

• Brad Paulsen's appointment as President is expected to leverage his expertise in retail, merchandising, and supply chain management, potentially enhancing operational efficiencies and driving future earnings growth.
  
• The continued expansion of warehouse format stores, with plans to open 25 new locations in fiscal 2025, is expected to drive revenue growth by increasing market presence and capitalizing on the maturity curve of existing stores.
  
• Investments in innovative merchandise and technology, coupled with strategic marketing initiatives, are anticipated to boost revenue by enhancing customer engagement and brand awareness.
  
• Expansion into adjacent product categories, such as semi-custom cabinets, is expected to drive incremental sales and improve net margins by diversifying and enhancing the product mix.
  
• Ongoing improvements in supply chain management, including reducing reliance on China and leveraging direct sourcing, aim to mitigate tariff impacts and enhance gross margins, which could positively affect earnings.

Floor & Decor Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Floor & Decor Holdings's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.6% today to 5.7% in 3 years time.
• Analysts expect earnings to reach $357.6 million (and earnings per share of $3.25) by about April 2028, up from $205.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $410.9 million in earnings, and the most bearish expecting $313 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.6x on those 2028 earnings, down from 41.7x today. This future PE is greater than the current PE for the US Specialty Retail industry at 16.2x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.93%, as per the Simply Wall St company report.

Floor & Decor Holdings Future Earnings Per Share Growth

Risks

• The geopolitical instability, such as new tariffs announced on imports from China, could significantly increase costs and impact gross margins adversely. The anticipated tariffs in 2025 and the company's historical reliance on Chinese suppliers, although decreasing, could continue posing risks to earnings if alternative sourcing strategies are not effective.
  
• The volatile macroeconomic environment, particularly mixed economic indicators and challenges in housing affordability, might lead to subdued demand for home improvement projects, impacting revenue growth and affecting comparable store sales, which have been pressured in recent quarters.
  
• The commercial business segment, particularly Spartan Surfaces, faces weaknesses due to pricing pressures in the commercial LVT market and difficulties within multifamily residential spaces, impacting overall profitability and margins despite ongoing investment strategies aimed at long-term growth.
  
• Increasing competition from international markets and the uncertainties in the U.S. housing market may hinder growth potential. Although new store openings are planned, fluctuating demands and market conditions might limit revenue and earnings if these do not perform as anticipated.
  
• The continued high costs associated with store opening, such as preopening expenses and investments in new stores, coupled with higher supply chain costs, could pressure operating margins if sales do not grow significantly, thereby affecting net margins and profit targets.

Valuation

• The analysts have a consensus price target of $104.414 for Floor & Decor Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $125.0, and the most bearish reporting a price target of just $66.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.2 billion, earnings will come to $357.6 million, and it would be trading on a PE ratio of 39.6x, assuming you use a discount rate of 7.9%.
• Given the current share price of $79.88, the analyst price target of $104.41 is 23.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.