Piper Jaffray Reverses Upgrade Of Floor & Decor

Floor & Decor Holdings Inc FND, a specialty retailer of hard surface flooring and related accessories, reported Thursday its second-quarter results, which prompted Piper Jaffray to reverse its upgrade from two months ago.

The Analyst

Piper Jaffray's Peter Keith downgraded Floor & Decorfrom Overweight to Neutral with a price target lowered from $58 to $39.

The Thesis

Floor & Decor's quarter was highlighted by a comp miss and management's revision of its full year earnings per share to the downside, Keith said in a note. The earnings report is seen as an indicator the research firm's upgrade of the stock in early June is a mistake for two primary reasons.

First, the impact of Luxury Vinyl Tile on Floor & Decor's business is likely to get worse over time as the average price per Luxury Vinyl Tile is $1.00 per square foot which is lower than most categories the retailer sells. In addition, the disruptive impact from LVT has been evident only in wood over the past 12 to 18 months but is now showing signs of spreading to higher margin categories like Tile.

Second, a prior belief that the competitive environment remains favorable for Floor & Decor needs to be changed, the analyst wrote. Specifically, do-it-yourself home improvement retail giant Home Depot Inc HD capitalized on the trend of Luxury Vinyl Tile and is ramping its offering of Vinyl Plank Flooring. A new trend also emerged during the 2018 Spring and Summer selling season, with waterproof flooring emerging as a strong consumer value proposition and multiple retailers are focusing their marketing efforts around this category.

Price Action

Shares of Floor & Decor Holdings were trading lower by nearly 7 percent Friday at $36.78.

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