Takeaway: Business slowing, EPS keeps going lower, stock/multiple doesn’t seems to care. We think it will when demand gets worse.

A good quarter for FND though with clearly slowing demand trends.  The company is navigating the environment well, this is after all a good business and good management team. But we think the outlook remains overly bullish as we’re coming in just under the low end of guidance with the risk around continued demand slowdowns.  Management sounds too bullish on trade down risk, expecting the status quo to continue. It also appeared to think we are in the thick of it as it relates to demand risk, whereas we’d argue we are at the early stages of higher income consumers starting to tighten discretionary spending. There wasn’t a lot of specificity in the US macro/housing outlook related to the guide, except to say that existing home sales declines are expected for most of 2023, i.e. recovery YY at some point.  It acknowledged that if home sales get worse, there is downside risk to the numbers.  We would flag that the January existing home sales number slowed YY earlier this week.  The analysis we outlined last week in our industry scenarios calls suggests that there is a drawn out ~2yr impact of housing turnover.  So we are arguably still working through some peaky pandemic demand, and we are not yet at the bottom of home improvement demand.  Transaction volume is likely to get worse.  Details of our analysis are in the Home Retail Scenario Call Video Replay - Link CLICK HERE

The 4Q EPS headline beat by 12%.  Comps up 2.5% missed consensus expectations, transactions were down 10.4% and ticket up 13%.  The Pro side is driving the comp up 18.8% with transactions up 3.9%.  We think there is still some project backlog from the pandemic being worked through. Comps quarter to date are down 2.3%, with comps expected to decline YY in all of the first 3 quarters of the year.   Gross margin performed well, up 280bps yy with lower freight, shrink/damage, and lower distribution costs.  The company expects to invest in price as costs continue to moderate, particularly freight, as the year goes on.  EBIT/EPS growth accelerated on the strong gross margin and SG&A expense leverage.  As for the guide, even ahead of this print numbers have now come down a lot… the stock hasn’t, in fact it has gone up.  Since we went short in October the 2023 EPS estimate has gone from $3.40 to now a mid point on the guide to $2.70.  The market appears to be okay with a stock at a 35x PE multiple in a slowing demand and negative comp environment.  We get that this is a good long term growth model, but that multiple is excessive given the business trends we see.  We’re coming out just below the low end of the guide driven by weaker than expected comps as we think industry demand trends will continue to weaken over the next few quarters. 

FND | Numbers Still Too High - fnd table