Over the last six months, Floor And Decor’s shares have sunk to $89.46, producing a disappointing 18.2% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Floor And Decor, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Despite the more favorable entry price, we're cautious about Floor And Decor. Here are three reasons why you should be careful with FND and a stock we'd rather own.

Why Is Floor And Decor Not Exciting?

Operating large, warehouse-style stores, Floor & Decor (NYSE: FND) is a specialty retailer that specializes in hard flooring surfaces for the home such as tiles, hardwood, stone, and laminates.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.

Floor And Decor’s demand has been shrinking over the last two years as its same-store sales have averaged 7% annual declines.

2. Fewer Distribution Channels Limit its Ceiling

With $4.46 billion in revenue over the past 12 months, Floor And Decor is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers. On the bright side, it can grow faster because it has more white space to build new stores.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Floor And Decor historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.1%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.

Final Judgment

Floor And Decor isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 44.8× forward price-to-earnings (or $89.46 per share). This valuation tells us a lot of optimism is priced in - you can find better investment opportunities elsewhere. Let us point you toward one of our all-time favorite software stocks.

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