Floor & Decor (FND) is under some pressure today (-8%) after it had a bit of a stumble with its Q1 results/guidance last night. Adjusted EPS rose 12% yr/yr to $0.29, which was slightly above prior guidance of $0.26-0.28. Revenue rose 18.4% year/year to $477.1 mln, which was within prior guidance of $474-482 mln. However, it was slightly below market expectations. Same store comps were in-line at +3.1% (+7.1% excluding Hurricane Harvey impact) vs prior guidance of +2-4%.
The Q1 results were decent, the bigger problem was with the guidance for Q2 and the full year. For Q2, FND expects adjusted EPS of $0.29-0.31, which was modestly below market expectations. Revenue guidance of $505-515 mln was well below market expectations, so that is a concern. The comp guidance was disappointing as well at +1-3%, which would be below the Q1 comp number.
The full year guidance was not much better. The good news is that adjusted EPS was reaffirmed at $1.07-1.12 while revenue guidance ticked lower to $2.020-2.055 bln from prior guidance of $2.060-2.094 bln. The more alarming part of the guidance was the large drop in comps: FND reduced full year comp guidance to +3-5% from +6-8%. That's a pretty significant drop, especially when you consider that Q1 comps were in-line.
FND provided some good color on the call that helps explain the lowered comp guidance. CFO Trevor Lang said that the company's outlook was impacted by the 25% tariffs on imported flooring products from China that were expected to go into effect in March. These tariffs have apparently been put on hold until further notice. Lang noted that its prior 2019 guidance had assumed the full tariff impact.
To provide a little context on the tariffs as FND explains in its 10-K filing, "in September 2018, the US imposed tariffs of 10% on many products from China, and the US" had said it would increase those tariffs to 25% in March 2019 if a trade agreement cannot be reached. This is a big deal for FND as "approximately 50% of the products we sell come from China, the vast majority of which are impacted by these tariffs." The good news is that the 25% tariffs are being put on hold for now.
The prior guidance, according to Lang, "had assumed 2019 sales would benefit by an undisclosed amount from the implementation of tariffs and the related price adjustments and gross margin would be pressured." Without the tariff increase, FND now expects lower comps, gross margin rate modestly above 2018 and similar earnings levels.
Overall, it's good to hear that tariffs seem to be the main reason why comp guidance was lowered. It does not sound like an overall demand problem, but it's possible some general weakness is also getting built into the new guidance. With the stock having nearly doubled from $25 in December to $48 heading into this report, it's understandable that this guidance would cause some investors to lock in some profits.