Floor & Decor: FY2022 Results Review, Valuation Update

Hard aboveground flooring shopping - DTF's Sleep Well Investments

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Introduction

Floor & Decor (NYSE:FND) reported coagulated FY2022 results. Investors pinch shorter holding horizons mightiness beryllium disappointed pinch nan shop counts guided down. However, I americium satisfied and see nary alteration successful nan semipermanent thesis.

I americium astir impressed that Floor & Decor continued to return marketplace stock from nan large boys, Home Depot (HD) and Lowe's (LOW), not to mention nan independent mom-and-pop shops.

I americium sharing my updated valuation pinch nan caller numbers and guidance guidance.

Additionally, I stress-tested nan business nether my Sleep-well Investment's stringent checklist and recovered that FND is investable astatine nan existent price.

Before reviewing nan net report, let's person a speedy recap.

Floor & Decor's primer

Floor & Decor is simply a hard-flooring storage retailer pinch a 9% marketplace stock operating 191 stores across nan US. It has a compelling description scheme that destines to triumph much marketplace share. At maturity (450 stores successful 10 years), I estimate that FND could bid 25-30% of nan marketplace astatine nan disbursal of nan manufacture leaders, Home Depot, Lowe's, and moreover much so, nan independent and 'mom-and-pop' shops.

Solid FY2022 results

Revenue came successful astatine $4.2B, up 24% YoY, and operating income was astir $400M, up 17% YoY. Growth was driven by some coagulated shop description and increasing comparable sales.

It expanded shop count quickly to 191 total, up 32 units YoY, 1 portion little than targeted.

More importantly, organically, full-year comparable income accrued 9.2% YoY, and Q4's comparable income accrued 2.5% YoY. It shows that successful FY2022, FND continued to return stock from Home Depot and Lowe's rapidly, contempt being smaller and trading only difficult flooring merchandise.

Notably, Home Depot's comparable income for flooring materials person been unspeakable since Q2'22. In Q4'22, it was 'soft,' contempt HD's different big-ticket items performing well.

While we saw big-ticket spot crossed Pro-heavy categories for illustration portable power, hype and fitting, and gypsum, we did acquisition softness successful different categories for illustration laundry, soft flooring, and roofing.

Home Depot Q4'22 net call

What I for illustration moreover much is nan comparable income wrong nan Pros. They are nan industry's astir knowledgeable, frequent, and high-ticket buyers segment. Thus, their affinity for FND's products speaks volumes.

Q4'22 pro comparable shop income accrued by 18.8% and transactions by 3.9% from nan 4th fourth of 2021. Their gross spending accounted for 42.2% of nan Q4'22 income and 40.6% of FY22 sales. By comparison, Pros accounted for 35% of FY21 sales. Pro's rank besides grew to 30K successful Q4'22, from 29K successful Q3'22, and accrued by 24% YoY from 23K members.

Next, FND's bottommost statement remains strong, contempt nan accelerated description . Full-year 2022 adjusted diluted net per stock accrued by 13.1% to $2.76 from $2.44 successful 2021. This is somewhat supra nan debased extremity of nan guidance guidance scope of $2.75 to $3 per stock they provided astatine nan opening of fiscal 2022, which did not relationship for nan unknowable economical and geopolitical headwinds that happened during nan year.

Expansion plans are slower than expected

Management expects a tougher environment. Thus, they scheme to unfastened caller stores successful nan scope of 32 to 35 successful fiscal 2023 and to beryllium chiefly successful existing markets and weighted towards nan year's 2nd half.

Investors pinch shorter investing horizons mightiness beryllium disappointed here. Considering nan deteriorating system and tighter in installments market, I spot pragmatic and agile management.

Valuation

With much accusation connected nan FY2023 stores number, same-store sales, and better-than-expected income performance, I revise my valuation and spot FND arsenic conscionable arsenic charismatic arsenic before.

CEO Thomas Taylor's ten-year target is to build 500 stores. As a reminder, he revised nan target 2 times successful nan past, from 400 shop target astatine IPO and 315 backmost successful 2012.

So my original valuation (below) was that FND would build caller stores aggressively astatine a 20% CAGR for nan adjacent 2 years (39 stores successful FY2023 and 45 stores successful FY2024) and past slow down to a 7% CAGR until FY2032 to scope 450 stores (base case). Considering nan worst-case scenario, I besides projected a important income diminution of 20% and 5% successful FY2023-2024.

DTF's Sleep Well Investments

With nan caller numbers from nan FY2022 results study and amended FY2023 guidance, beneath is my revised shop description scheme to 450 stores successful 10 years.

DTF's Sleep Well Investments

And I americium utilizing nan caller shop portion economics per guidance guidance,

DTF's Sleep Well Investments

We get to a gross projection of $16B successful twelvemonth 10, FY2032, assuming an 8% SSS and 5% & 2% income simplification successful 2023 and 2024 to see nan effect of nan lodging marketplace downturn.

With a 9% WACC and 3% terminal growth, that brings america to $1.4B successful FCF by FY2032 and astir $12B successful Market Cap, aliases $111/share, implying a 26% upside from today's price.

DTF's Sleep Well Investments - FND's Valuation (DTF's Sleep Well Investments)

This is $5/share little than my original valuation, driven by less shop openings successful nan adjacent 5 years, pushing free rate travel procreation further to nan later stage. With a precocious WACC of 9%.

Having said that, my DCF valuation still shows an charismatic finance today.

In position of multiples, we tin activity retired nan intrinsic worth by applying 5x, 10x, and 15x to nan terminal FCF, $1.4B, successful nan guidelines case. You get a ~$7B, ~$15B, and ~$22.5B business successful 10 years, respectively.

Below are nan various multiples from 2017 to 2032 astatine nan guidelines case.

DTF's Sleep Well Investments Valuation Multiples (DTF's Sleep Well Investments)

Floor & Decor's EV/E has ranged from 21x to 52x since IPO. Thus, nan banal appears inexpensive astatine nan FY2023 27x. By 2032, FND could beryllium weighted astatine 5x E and 7x FCF.

Together some valuation methods constituent to an charismatic price. As my guidelines lawsuit allows for a 30% separator of information from today's price, $88/share, I americium happy to accumulate my Floor & Decor position to 3% successful size.

Sleep Well Investments Scorecard

Let's put Floor & Decor nether my Sleep Well Investment accent test.

This last measurement intends to select retired only businesses that tin execute complete aggregate economical cycles and support winning marketplace share. Inspired by Nassim Taleb's anti-fragile conception and studies from various reputable investors, it divides finance criteria into 3 groups successful bid of importance:

• Business value [13 points]

• Competitive position and risks [4 points]

• Valuation [3 points]

Points are deducted for an unconvincing firm mission, commoditized products, aggravated competition, and business risks.

The pursuing array shows really I measure these categories and nan corresponding Floor & Decor score.

DTF's Sleep Well Investments checklist (DTF's Sleep Well Investments)

No business gets afloat points, but from 13 points, I complaint a business arsenic robust and investable. A people supra 15 intends nan business is anti-fragile, thus, time-tested. A people supra 16 points intends nan business is anti-fragile and durable, which apt keeps it winning against title and early outer shocks. Below is really overmuch superior I americium comfortable allocating to my portfolio accordingly.

13 = robust business - 1%-3% of nan portfolio astatine cost-basis

15 = antifragile business - 3%+

16+ = slumber good business - 5%+

Additionally, scoring precocious doesn't automatically mean an investment. A value plus that everyone knows astir would often mean a precocious price. Thus, each banal would request to person a value adjacent nan carnivore lawsuit script and supply a basal separator of information (depending connected nan type of nan business and scope of outcomes) - to represent a sleep-well investment. All methods person trade-offs. No finance aliases checklist is perfect.

Floor & Decor scores 13/20. This is not nan highest-quality business successful my banal universe, but it has nan astir evident and biggest reinvestment imaginable arsenic a trade-off. It's besides disposable astatine an charismatic value (currently). There are immoderate uncertainties successful nan expertise to successfully expands to 500 stores, but it is winning marketplace stock and has favorable underlying secular trends.

At nan existent value of ~$88/share, it offers a 30% separator of safety, astatine which constituent I americium happy to accumulate shares to a 3% position sizing.

I run Sleep Well Investments to find high-quality businesses astatine a reasonable price, helping you to slumber soundly astatine night.I besides constitute for aggregate SA marketplace services to get a different position from different disciplines.I purpose to beryllium nan champion investor I tin be; thus, I americium eager to study from your feedback and americium unfastened to mentorship/collaborations/internships/analyst positions successful a quality-focused finance fund.The articles are my ain opinion. Your feedback is appreciated.Track record:Dec 2017-Nov 2021: +171% (28% CAGR) - pre-tech crash Dec 2017-Jul 2022: +78% (12% CAGR) - post-tech crashSleep Well investing!