From “In A Transitional Period”: “This seems to me like an example where Mr. Market is willing to look longer term than he’s sometimes given credit for. I think it reflects an appreciation among investors generally that HD and FND both appear well positioned to maintain their competitive advantages in an industry with structural tailwinds over the long run… I think it’s rational for Mr. Market to give these companies a pass if he’s convinced this pressure will subside over the coming quarters (able to weather the combination of a COVID hangover and macro headwinds). We will see if that assumption proves correct; for now, my view is simply that it doesn’t seem outlandish to believe there’s a decent possibility of further pressures in the short-term.”

The ensuing six months have provided an early answer: further pressure has materialized. Ongoing revisions to Floor & Decor’s FY23 guidance provide a clear example. When the company reported Q4 FY22 results in February, management’s expectation was that sales would climb by ~10% this year to $4.68 billion (midpoint), with comparable store sales flat to down 3%. Those numbers have moved significantly lower; the company now expects revenues of $4.37 billion (+2% YoY), with comps down ~8%. In addition, as shown below, this is being driven by sharply weakened results to close out FY23.

As CEO Tom Taylor explained earlier this year, Floor & Decor’s business is materially impacted by the pace of U.S. existing home sales: “When they’re positive, we have the wind to our backs - and when they’re negative, it's wind in our face… I have been here 12 years; we have had three downturns in existing home sales, and every time we have seen our comps slow.”

Data from the National Association of Realtors (NAR) shows that strong headwinds remain. In September, existing home sales in the U.S. fell to a seasonally adjusted annual rate of 3.96 million – down ~15% from the year ago period despite lapping a ~24% YoY decline in September 2022.