Wells Fargo Turns Bullish On Floor & Decor After Meeting With Retailer

Floor & Decor Holdings Inc FND disappointed investors with its second quarter-results, but the stock's corresponding decline creates a compelling opportunity to buy one of the best growth stories in the retail sector, according to Wells Fargo.

The Analyst

Wells Fargo's Zachary Fadem upgraded Floor & Decor from Market Perform to Outperform with a price target lifted from $42 to $45.

The Thesis

Wells Fargo's conversations with Floor & Decor support a bullish stance for four reasons, Fadem said in the upgrade note. (See the analyst's track record here.) 

They are: 

• The retailer remains well-positioned in the floor and tiling group, especially on the professional side of the business.
• Mitigating factors against potential tariffs are not appreciated by investors.
• The competitive threat from luxury vinyl tile flooring is "overblown and likely transitory."
• Long-term growth initiatives are underappreciated.

Floor & Decor's near-term setup is "tricky," as management needs to address investor concerns after a disappointing earnings report highlighted by signs of decelerating comps and margins, the analyst said. Visibility should improve into fiscal 2019, when comps could rise by more than 8 percent from multiple tailwinds, Fadem said:

• New store openings.
• Lower cannibalization headwinds.
• Easier year-over-year comparisons.
• An expansion of loyalty programs which is showing signs of success in three test markets.
• The company is still young and fast-growing.

Floor & Decor's stock is trading at a 10-percent discount to high-growth peers on a 2019 EV/EBITDA multiple and the firm's $45 price target is based on a 20 times multiple on EV/EBITDA.

Price Action

Floor & Decor Holdings shares were down 2.13 percent at $38.09 at the time of publication Friday. 

Related Links:

Piper Jaffray Reverses Upgrade Of Floor & Decor

Stifel Downgrades Floor & Decor After 14% Year-To-Date Run