Federal Reserve Easing Will Spark Flooring Demand In Next 12 Months

Key Takeaways

• Market disruptions and competitor shutdowns offer opportunities for expanded market share through strategic new store growth.
  
• Enhanced services and strategic investments may boost customer engagement and profitability in higher-margin sectors, contributing to increased revenue and net margins.
  
• Continued high mortgage rates and low home sales could suppress consumer demand for home improvements, affecting Floor & Decor's sales growth and profitability.

Catalysts

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

• The anticipated easing cycle by the Federal Reserve could lead to higher existing home sales and increased hard surface flooring spending over the next 12 to 18 months, potentially enhancing revenue growth.
  
• New store growth strategy aims to capitalize on market disruption, including competitors shutting down, which could lead to increased market share and revenue expansion.
  
• The rebuilding efforts following Hurricanes could provide a sustained lift in demand over multiple quarters in 2025, supporting revenue growth.
  
• Strategic investments in connected customer experiences and design services aim to enhance customer engagement and sales, potentially increasing future revenue and profitability.
  
• Enhanced Pro services and growth in commercial business through Spartan Surfaces could drive gains in higher-margin sectors, positively impacting net margins and earnings.

Floor & Decor Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Floor & Decor Holdings's revenue will grow by 11.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 5.9% in 3 years time.
• Analysts expect earnings to reach $361.1 million (and earnings per share of $3.12) by about December 2027, up from $195.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.6x on those 2027 earnings, down from 62.0x today. This future PE is greater than the current PE for the US Specialty Retail industry at 16.7x.
• Analysts expect the number of shares outstanding to grow by 2.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.04%, as per the Simply Wall St company report.

Floor & Decor Holdings Future Earnings Per Share Growth

Risks

• The decline in comparable store sales, particularly a 6.4% decrease in the third quarter, suggests ongoing challenges that could further impact future revenues and earnings.
  
• The hurricanes in 2024 significantly disrupted operations, with closures affecting around 19% of the store base, which might lead to revenue fluctuations and possibly increased short-term costs, affecting net margins.
  
• Continued high 30-year mortgage rates and a decline in home sales could suppress consumer demand for large project home improvements, affecting overall sales growth and profitability.
  
• The industry headwinds and ongoing challenges in consumer discretionary spending could lead to pressure on Floor & Decor's earnings and margin expansion, making it difficult to achieve projected financial targets.
  
• Investment in new stores is proceeding amidst challenging economic conditions, which brings execution risks that might not yield the anticipated return on investment, potentially impacting future earnings and capital efficiency.

Valuation

• The analysts have a consensus price target of $104.04 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 $135.0, and the most bearish reporting a price target of just $64.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.1 billion, earnings will come to $361.1 million, and it would be trading on a PE ratio of 40.6x, assuming you use a discount rate of 7.0%.
• Given the current share price of $112.96, the analyst's price target of $104.04 is 8.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.