Flooring retailer Floor and Decor (NYSE:FND) has been on a roller coaster ride since it’s IPO  back in April 2017. The firm’s latest nosedive saw Floor and Decor stock lose more than 30% of its value as investors questioned whether its premium valuation was really warranted.

The stock also hurt by the company’s second quarter results, which didn’t live up to the kind of expectations traders had placed on the stock.

Second Quarter Miss

Investors were disappointed to see Floor and Decor’s second quarter sales come in softer than expected at $434.3 million. Although the figure represented a 26% increase from the year-ago quarter, the lower sales figure prompted management to lower its full year guidance to between $1.696 billion and $1.710 billion.

While those figures certainly aren’t shabby, they failed to live up to the hype that the firm’s Q1 results produced, with net sales up 31.1% and guidance for full year sales between $1.705 billion and $1.735 billion. 

While the firm’s sales miss is certainly not to be ignored, it’s important to note that the firm isn’t exactly heading to zero anytime soon. Floor and Decor reported a same-same store sales increase of 11.4% during the second quarter, something the majority of its retail peers would kill for.

Plus, CEO Tom Taylor highlighted the fact that the company’s new stores’ sales and profitability during their first year of operation have exceeded expectations. That success, Taylor said, suggests that the firm’s plans to eventually expand its footprint to 400 stores is on track to produce results.

Floor and Decor opened four new stores in the second quarter bringing the grand total up to 88 so far this year. 

Business Model That Works

Part of the reason that Floor and Decor stock trades at a premium is the fact that the company is using a business model that looks relatively protected from the “Amazon effect.”

Floor and Decor’s warehouse-format stores offer shoppers a selection of wood, laminate and tile flooring options in addition to a selection of home-decor items. The company maintains low prices as well as in-stock inventory which has made it a popular choice for both consumers and professional customers. 

The firm’s business model and projected growth has led to ultra-high expectations and an expensive valuation to go along with them. Even after it’s massive decline over the past weeks, Floor and Decor stock is still pretty pricy. Its P/E of 31.33% is comes in above peers and higher than the S&P 500’s average of 21.48%.

Floor and Decor is also trading at 38.99 times its forecasted earnings, a far cry from the market average of 18. 

If the company is able to deliver on its growth and expansion plans, those valuations are more than fair, but the trouble is that such new company with only 88 out of 400 new stores under its belt carries a lot of risk.

Not only would Floor and Decor be susceptible to economic headwinds and a housing market down-turn, but there is plenty that could go wrong with the firm’s expansion plans themselves, especially if its business model doesn’t continue to resonate with customers.

On the bright side, if Floor and Decor stock is able to continue doing what it’s doing and open 400 stores by 2030, investors would reap the benefits. If the new store openings continue to be successful and the firm is able to up its sales growth by 3% per year, Floor and Decor might become a $10 billion business in a decade. 

The Bottom Line

There’s no question that Floor and Decor stock has a lot of potential and a long growth runway ahead.

I like the fact that the business offers customers an experience that online-shopping doesn’t and its low prices and in-stock inventory means its unlikely that digital retailers will be able to disrupt Floor and Decor’s business. The mix of individual and professional customers and the fact that the firm offers both services is also encouraging.

However, I think even with the most recent slide, optimism regarding Floor and Decor has been largely priced in and the firm has further to fall before I’d be willing to become a buyer.

If it loses a further $10 per share I’d say it’s getting into undervalued territory, but at the current levels Floor and Decor is fairly priced and carries a bit too much risk to be considered a buy. 

As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.