Hello fellow regards! I am posting an update from my previous short thesis I posted on FND last week with a summary of their Q1 2025 earnings call and how it translates into my thesis. As an intro, I would like to mention that I added another put position this morning (despite the hefty premium) with a strike price of 62.5 and an expiry in January 2026. I am also holding all my previous puts, despite a regarded stock price increase of 5% the morning after earnings, which in my opinion is, just \*noise\*.
As I recommended last time, this is a long term play and if you are taking the risk, make sure you do your own due diligence, get long dated puts, prepare to roll them over, and make sure you have a high risk tolerance. I am more than willing to lose the entire value of these options, so only tag along if you can afford it. It might also be prudent to hedge yourself, though I'm planning on remaining naked on this one for now.
After listening carefully to their Q1 2025 earnings call twice (May 1st), I firmly hold my bearish outlook of the company. A quick summary of my key observations from the call:
**Overall opinion on the call:**
Highly vague, many inconsistencies, negative analyst sentiment in Q&A session which proves wall street is also finally seeing the cracks, management taking reactive vs. proactive approach to difficulties, avoiding providing clear answers, guidance does not even include the China tariffs and is highly inconsistent with reality. Many key topics were not discussed, such as leases and their critical audit matters. Trevor Lang (the ex- president) was replaced with a new president, Bradley Paulson, that just joined in March and that was previously at Rentokil, a pest control company, managing their North American platform that reportedly underperformed its North American peers prior to his departure.
Management tried to hype things up and use some very creative lines (which worked wonders on algos and those that did not do a deeper dive)
>***"The first quarter results are a testament to how we are focused on what we can control during this uncertain period."***
Yes, It does seem like you are controlling the narrative. In my opinion, the only thing you proved over and over is that we cannot rely on any of your estimates for your key KPIs.
>***"We could not be more pleased (with the store associates), than our first quarter results demonstrate how effectively they continue executing our growth strategies, achieving record customer satisfaction scores, managing our expenses and profitability, and growing our market share even as sales and the hard surface flooring industry contract."***
Personally it concerns me that management is pleased with these results. If these results are impressive to them... that's a red flag. Furthermore, how are you growing market share when your same store sales is down again? that's losing market share, not gaining.
>***"As we discussed in our fiscal 2024 fourth quarter earnings call, we are proud to report that the United States is now our largest country of manufacture, accounting for approximately 27% of the products we sold in fiscal 2024, up from approximately 20% in fiscal 2018."***
Wow! a whole 7% in 7 years? that's very impressive! clap clap! that's definitely gonna save you from the tariffs. Both of your peers have significantly higher proportions of domestic sourcing.
>***"That said, unlike in 2018 and 2019, we believe managing today's tariffs, uncertainty and complexity at scale and speed could be more challenging for some competitors in the hard surface flooring industry."***
Ahhhh this is just pure comedy. You've had almost 10 years to outperform your peers and you haven't even come close to doing so on any metric, and NOW, out of all times, is when you think you will beat them? Also, you did not mitigate the tariffs in 2018 and 2019, your margins effectively declined in 2018 despite you eventually passing on some of the costs to the consumer, and your gross margins rebounded temporarily in 2019 and that's only due to receiving tariff refunds and concessions. You delayed price increases, and pushed out the true costs to later quarters (see below comparison to peers) Also let's not forget the tariffs back then are a literal joke compared to the triple digit tariffs imposed this time around. I guess the Q1 earnings for Home depot and Lowes scheduled for later this month as well as future quarters will tell.
>***"...For instance, following the US announcement of a 90 day pause on all reciprocal tariffs, excluding China, we expedited purchase orders to maximize the likelihood they arrive before the end of the pause on July 9, 2025. This exemplifies how we are executing and will continue to execute at speed and scale. Second, we are actively negotiating and collaborating with our vendors to mitigate the higher incremental tariffs on the products we sell."***
This is their exemplary genius Billion dollar strategy. They are looking to maximize the likelihood their orders will arrive before the end of the 90 day pause to avoid the tariffs.
# Let's go over the main takeaways:
**1)** Same store sales **declined 1.8% YoY**, meaning that again, they did **not** meet the estimates they had given just 2 months prior in February. **They also went ahead and lowered same store sales growth guidance for 2025:**
|Old 2025 Estimate (Feb 2025)|New 2025 Estimate (May 2025)|
|:-|:-|
|0% to +3.0%|\-2.0% to +1.0%|
* This is huge. They had said we are seeing things pick up in Q4 but instead, it's continuing it's declining trend again. By month, their comparable store sales declined by 1.4% in January, 1.5% in February, and 2.2% in March. This progressive deterioration within the quarter suggests worsening conditions. Furthermore, this negative revision early in the fiscal year suggests potential for further reductions.
* Their comparable transactions **decreased by 3.8%**, which management attributes to lower existing home sales. This significant decline in customer traffic is particularly concerning for a retail business.
* Hurricane Benefit Masking Underlying Performance: Management disclosed that hurricanes Helene and Milton contributed approximately 100-110 basis points to their comparable store sales, suggesting that without this temporary benefit, their core business performance would have been even worse.
* While noting that quarter-to-date comparable store sales increased by 1.1%, management attributed part of the previous decline to *"winter storms"* impacting comparable store sales by approximately 50 basis points. **This reliance on weather explanations may mask underlying weakness.**
**2) Management’s Q1 2025 claim that they can “repeat 2018–2019 tariff mitigation” is highly misleading:**
* Management discusses reducing receipts from China to "mid to low single digits" from approx. 16% by the end of fiscal 2025, but this rapid shift could create supply chain disruptions and inventory challenges.
* When asked by analysts whether they have been reducing their reliance on imports from other countries, they answered *"actually, we are importing more from other countries"* while trying to reduce our reliance on China. This isn't a good strategy given the current administration is pressuring companies to move sourcing to within the US.
* Management initially said during the call: *"we believe we will outperform our peers since they have already announced some pricing hikes in some products, but we haven't and won't be doing this"* But by the end of the call when they got challenged by analysts, they went on to say: *"we will raise prices if needed"* Their claim to outperform peers despite worse sourcing, weaker supplier leverage, and no pricing power = **delusional confidence**.
* Management also said: *"we have experience in dealing with tariffs before in 2018 and 2019"* however, that is **misleading**. In 2018, despite the small tariffs imposed compared to the current imposed tariffs, they did raise their prices eventually on certain categories, and they took a big L from absorbing the costs compared to peers.
**FND’s historical tariff “mitigation” was more smoke than fire:**
* **2018 was a margin dip year**, despite strong sales, as the first wave of tariffs drove freight and landed costs up. **Margins dropped 20bps,** directly attributed to this.
* **2019’s margin recovery** (+110bps) was ***not*** from operational strength, but from **refunds on retroactively exempted flooring SKUs** and one-time **supplier concessions**—which they themselves disclosed.
* **They didn’t eliminate the tariff burden—they got lucky**: refunds came later and only for certain products. No evidence they passed costs to suppliers at scale—quite the opposite, **they** ***raised retail prices*** **in 2019 despite claiming otherwise .**
* **China dependency** remained high (up to 50%) throughout, and although they claimed to source from alternative countries, disclosures show China was still a major supplier.
In summary;
**Gross margins only improved** in 2019 because of **tariff refunds** on previously taxed imports — not because of a repeatable strategy.
Their stated playbook — negotiating with vendors and minor price hikes — **cannot offset** the new **145%+ Trump-era China tariffs** or future retaliatory duties.
As of Q1 2025, **16% of FND’s products** still come from China . There’s no evidence that they’ve found low-cost alternative sources at the scale needed.
So when management says they’re ***“ready for tariffs,”*** **remind yourself:**
In 2019 they survived with a refund parachute and with significant gross and operating margin pressures vs peers. In 2025, **the plane is flying without one.**
*Processing img b75g9ott4eye1...*
|**Fiscal Year**|**Net Sales ($M)**|**Gross Margin (%)**|**Gross Profit ($M)**|**% Imported from China**|**Tariff Mitigation Commentary**|
|:-|:-|:-|:-|:-|:-|
|2017|$1,053|41.3%|$435|\~45%|No material tariffs in place yet|
|2018|$1,378|41.1% ↓|$565|\~50%|Margins compressed from higher freight + landed costs|
|2019|$1,713|42.2% ↑|$723|“Historically \~50%”|Claimed success due to **vendor negotiations** \+ **tariff refunds**|
**Latest Sourcing vs Peers**
|**Company**|**% Sourced Domestically (U.S.)**|**% Sourced Internationally**|**Notes**|
|:-|:-|:-|:-|
|**Home Depot**|\>50%|<50%|Over half of products are sourced from North America, including the U.S., Mexico, and Canada.|
|**Lowe’s**|\~60%|\~40%|Approximately 60% of products are sourced domestically; the remaining 40% are sourced internationally.|
|**Floor & Decor**|27%|73%|27% of products are sourced domestically; the remaining 73% are sourced internationally.|
*As you can see, HD and Lowes both have a much higher portion of domestic sourcing vs FND.*
**Tariff-Era Financial Performance Comparison (2018–2019)**
[As you can see, FND underperformed its peers in 2018 in terms of margins, so what will make them outperform them this year when they have much more margin pressure from leases and store traffic decline? ](https://preview.redd.it/v7fzxjpq60ze1.png?width=939&format=png&auto=webp&s=13871ffca44ea64022e4e50e8a57dd4b85e2d11c)
**3) Opened another 4 stores and reduced expected store openings from 25 to 20 for FY25E (did the same in FY24 guidance)**
Though they still somehow thought it was prudent to open 4 more stores in a single quarter, they reduced their planned store openings for the year to 20 from 25 due to *"macro uncertainties and economic slow down"* **They did they same in 2024**, so don't be impressed! they aren't mitigating anything, they just can't afford to put a complete stop on their *"growth strategy through store openings"* because that would ring the alarm bells. But don't be fooled, the fact that they are still opening ANY new stores is extremely irresponsible and just keep mounting risk on top of risk. In fact, I would have liked to see some store closures, but they can't do that as they would probably have to pay penalties on the long term leases. We don't know this, since there's no disclosure in their reports.
**During the call, Simeon Gutman from Morgan Stanley asked:** *Why reduce to exactly 20 stores and what would trigger further reductions?*
**Response Summary:** CFO reveals they ***"debated going down further"*** but haven't seen evidence they need to yet. They'd reduce further if business deteriorates below the low end of guidance.
**Analysis:** The admission they considered deeper cuts suggests more concern about the business outlook than officially communicated. Their wait-and-see approach indicates low conviction in their growth strategy and their reactive rather than proactive approach to managing downturns.
**4) Margins pressure is loud and clear, contradicting what management claims... and they haven't even been impacted by tariffs yet. See below the changes in key line items.**
* Net income actually **decreased 2.3% year-over-year** **despite the increase in total sales**, showing **margin pressure**. This resulted in earnings per share of $0.45 compared to $0.46 in the same period last year.
* Selling and store operating expenses **increased by 10.3% while sales only grew 5.8%**, causing **expense deleverage** of approximately **130 basis points** to **31.8% of net sales.** This indicates **deteriorating operational efficiency**.
* Inventories **increased 5%** from December 26, 2024, potentially indicating slowing sales relative to purchasing or preparing for tariff impacts.
* The Q1 2025 effective tax rate **increased to 22.0% from 12.8%** in Q1 2024, which will continue to pressure bottom-line results.
* Cash Flow from Operations in Q1 2025 was **$71.2 million**, **down significantly** **from $147.5 million** in Q1 2024. **This substantial reduction in operating cash flow is particularly concerning.**
* Management stated that **Q2** will represent the ***"high water mark"*** **for gross margin,** with the **back half of the year expected to have lower gross margins.** This forecasts deteriorating profitability as the year progresses. When asked if tariffs were included in this gross margin guidance, management said only a *"universal tariff"* has been included. So this means that they **have not taken into account 145% china tariffs or any other reciprocal tariffs into consideration when coming up with this estimate.**
https://preview.redd.it/y04p6ovgf0ze1.png?width=1123&format=png&auto=webp&s=47bbdfd7f00eed8fb097b172ad8a3951a6dc9912
[As you can see, there was a drastic drop in CFO ](https://preview.redd.it/ew7drci9n0ze1.png?width=979&format=png&auto=webp&s=0a788cac986b1c7444fdbcadc8631a5fb3d8b13f)
[Net Change in cash negative \(net outflow\) for the first time since Q4 of FY2023A. ](https://preview.redd.it/ht62xxajn0ze1.png?width=945&format=png&auto=webp&s=6cd7ab9785637a5d471f1275fce098d2a0060cb6)
**5) Clear shift of sentiment from Analysts during Q&A and no clear responses from management - Striking difference compared to last call**
As the analyst Q&A happened, I just could not stop smiling. I was so giddy and happy to see analysts putting management on the spot. It just confirmed to me that more and more analysts are waking up to the cracks in the business. I would have liked to hear some questioning on leases, but hey, that will come eventually. Shout out to the analysts for pressuring them to provide answers and boo hoo to management for giggling nervously and just providing a bunch of carefully curated word vomit to avoid giving clear numbers and answers.
# Q4 2024 Call – Analysts: Still Giving Benefit of the Doubt
**Overall Tone:** Cautiously optimistic, but polite. Analysts were largely accepting of management’s explanations and didn’t challenge the comps weakness or margin details aggressively. The mood was: *“things are rough, but maybe you’re actually turning a corner.”*
* **Mild concern on Spartan:** Analysts asked for a breakdown of Spartan’s EBIT for the first time, prompting FND to finally admit its margin fell despite revenue growth . This was the most direct pressure FND received, and management sounded defensive but complied.
* **Focus on macro:** Several questions related to how macro pressures and housing softness were affecting traffic — analysts appeared to accept these external excuses for underperformance.
* **Store productivity:** Softly raised — no one directly questioned new store ROI or store-level margin drag. The idea of growth through footprint expansion went largely unchallenged.
**Read:** Analysts gave them rope, asked for some transparency, but didn’t go for the jugular. No one pressed on inflated margins or SCF/debt tactics and leases. The sentiment leaned neutral-to-cautiously-bullish.
# Q1 2025 Call – Analysts Are Clearly Skeptical
**Overall Tone:** Noticeably more defensive questions. Analysts questioned the feasibility of tariff mitigation, guidance cutbacks, and new store productivity. Tone shifted from curiosity to quiet concern.
* **Tariffs skepticism was clear:**
* *Peter Keith (Piper Sandler)* directly asked how confident they were in not raising prices when competitors were increasing them 10–50% .
* Management answered with vague claims about “negotiating with vendors” and “long-term sourcing changes” — but offered **no numbers** or examples. The silence said a lot.
* **Productivity of new stores questioned:**
* Analysts subtly raised concerns about sales volume and performance of new stores.
* Management tried to deflect by saying they’re “pleased” and pushing that Q2 is better than Q1 — but the specifics were thin. They didn’t break out new vs. mature store comps. That omission felt intentional.
* **Why cut store openings now?**
* *Simeon Gutman (Morgan Stanley)* asked why FND is slowing store openings after years of pushing 20–30 a year.
* The CFO framed it as a way to “preserve optionality,” but it’s clearly a reaction to poor ROI, over leverage on existing leases and soft macro demand — and analysts seemed to know it.
* **Gross margin sustainability raised with doubt:**
* One question pressed on how gross margins could stay flat in 2025 despite tariff pressures and no price hikes.
* FND answered with “we’re focused on mix and vendor negotiations.” Again, no clarity, no numbers — and clearly, not everyone bought it.
**Read:** Analysts are smelling smoke. They’re borderline throwing punches, but the questions are sharper, and the tone more skeptical — especially around **tariffs**, **store expansion**, and **margin realism**. They’re no longer assuming *“this is temporary.”* They’re beginning to wonder *“is this structural?”*
*Here are some of my favourite moments of the call:*
**Question 1 - Seth Sigman (Barclays):**
>***"I wanted to just follow-up on the guidance and confirm the tariff impact and how you're thinking about it here. Sounds like it includes the 145% in China. And then universal tariffs outside of that. Can you talk more specifically about how you've embedded the impact in here, how you're thinking about pricing and the margin impact, because you're lowering EPS slightly? Seems like mostly for sales. So is the message that you can basically offset the tariff impact. Thanks so much."***
**Response Summary:** Management claims past experience with tariffs will help them offset impacts through vendor negotiations and modest price increases.
**My analysis:** Judging on the way they managed tariffs in 2018-2019, they seem too optimistic about tariff impacts. They took an L on those small tariffs during 2018 and 2019 and the only reason they rebounded slightly in 2019 was was due to refunds. Their claim that they will be able to maintain margins despite the significance of current tariffs is **delulu**.
**Question 3 - Michael Lasser (UBS):**
>***"So there's a perception out there that the business has gotten weaker. You've taken down your guidance even before the impact of the tariffs both occurs to your business as well as the broader economy, which is going to usher in the potential for further downside risk and the guidance reduction may not fully take that into account. So why is that wrong? -- minimum earnings number that you're thinking about for this year if indeed a recession occurs and that has a further impact on the flooring category?"***
**Response Summary:** CEO admits "unprecedented times" and difficulty predicting consumer demand. CFO notes their guidance assumes deterioration at the low end with Q4 facing tough comparisons from lapping hurricane benefits. They also said that while industry prices have been increasing, they plan to implement them in the *"past the next couple of months"*
**Analysis:** Management effectively admits uncertainty rather than defending their guidance, reinforcing concerns about their ability to forecast performance in the current environment. Why give a guidance when your guidance assumes tariffs won't happen? Also, they initially said during the call that they won't increase prices, but now they say they will later in the year. Delaying price increases while competitors move forward suggests potential near-term margin pressure or an unsustainable attempt to gain market share at the expense of profitability (similar to 2018-2019)
**Summary comparison of Q4 vs Q1 calls:**
|**Topic**|**Q4 2024 Analyst Tone**|**Q1 2025 Analyst Tone**|
|:-|:-|:-|
|**Comps weakness**|Tolerant|Concerned|
|**Tariff impact**|Not raised|Directly questioned|
|**Store expansion**|Supported|Challenged|
|**Spartan performance**|Probed lightly|Ignored (but likely assumed weak)|
|**Gross margin outlook**|Accepted guidance|Skeptical of claims|
**6) According to Management, they want to continue making investments in the commercial segment going forward as this is the "growth segment" but their commercial segment is immaterial, they have said EBIT will remain flat in 2025, and still don't provide details on the segment's performance.**
They have been saying this for ages. They acquired Spartan in 2020 and they are still flat on EBIT *(unchanged guidance)* So how exactly do you plan on doing this, what would happen to your residential heavy business model including your leased stores that serve residential customers and how come you still haven't seen any material growth in the commercial segment despite your continuous efforts over the years to grow into this segment? The answer is, its just noise. if they were able to do that, they would have done so already and they wouldn't be saying that they expect Spartan to be flat again this year. Furthermore, with no visibility into this subsidiary, we have no way of telling how they are really performing.
Management admits that *"economic uncertainty continues to pressure the commercial market, particularly the multifamily segment"* and mentions *"a more cautious industry outlook around starting new projects."* this is a direct contradiction to their claim earlier in the call saying that they want to shift towards commercial.
**7) New president, Bradley Paulson, joins in March 2025.**
Trevor Lang has officially retired from Floor & Decor and replaced with Bradley Paulson.
Though I would have loved to see an independent and forensic audit done for the period Lang was at the company, that might not happen for some time or unless the company changes its auditors.
The new president, interestingly enough, used to work at Rentokil, where he was the CEO of their North American platform from December 2023 to February 2025. Quite a short stay for a CEO. He was responsible for all operations for the North American region and was a member of the executive leadership team.
Brad Paulsen’s tenure as CEO of Rentokil North America from December 2023 to February 2025 coincided with a challenging period for the company. During this time, Rentokil’s North American operations experienced underwhelming organic growth of 1.5% in 2024, significantly lagging behind competitors like Rollins, which reported over 10% growth. Profitability also declined, with adjusted operating margins falling from 18.6% in the first half of 2024 to 15.6% in the second half. These challenges were attributed to integration difficulties following the Terminix acquisition, a weaker termite season, and cost overruns from overstaffing. Paulsen’s short lived tenure and departure in early 2025 was part of a broader leadership change aimed at addressing these issues.
[https:\/\/www.investorschronicle.co.uk\/content\/f4c1f966-dcae-5c3c-84a7-149d13f1a468](https://preview.redd.it/pewp7zuaq0ze1.png?width=612&format=png&auto=webp&s=33001514892b8c03eba49dc3de4069eb158c6d05)
During his tenure at Rentokin, there was also a class action lawsuit alleging that the company made false or misleading statements about its business operations and integration efforts.
https://preview.redd.it/2x9mgeher0ze1.png?width=2680&format=png&auto=webp&s=071265e9c7b8de6514ba2bda2e49ad3b9e52e64a
[https://zlk.com/pslra-1/rentokil-initial-plc-lawsuit-submission-form?prid=111125&wire=1](https://zlk.com/pslra-1/rentokil-initial-plc-lawsuit-submission-form?prid=111125&wire=1)
These parallels may raise concerns about the due diligence processes in executive appointments at FND, especially considering the importance of leadership experience in navigating complex operational landscapes...
Take this with a grain of salt but I couldn't help but provide an update on who is taking over Trevor Lang as it was a key part of my thesis. Not sure what it is with Floor & Decor and their inability to hire people that had a track record of success in their past roles, but at this point, it seems like they either unable to hire good talent, or their HR needs some serious lessons. Talk about being attracted to red flags, lol.
**My Holdings:**
I am still holding my positions and have added a new position. I am looking forward to seeing the Q1 2025 performance of Home Depot and Lowes later this month to draw comparisons and cannot wait for Q2.
As I mentioned earlier, I am holding these for the long run and will continue rolling them further no matter how long it can take unless a serious regime change and macro turnaround. I will provide key updates as we go forward with new findings and developments.
Link to initial post: [Initial Post](https://www.reddit.com/r/wallstreetbets/comments/1ka2wbw/short_thesis_floor_decor_fnd_a_house_of_cards/?utm_source=share&utm_medium=web3x&utm_name=web3xcss&utm_term=1&utm_content=share_button)
***DISCLAIMER: THIS IS NOT FINANCIAL ADVICE. DO YOUR OWN DUE DILIGENCE. THERE'S SIGNIFICANT RISK WITH THIS THESIS AND I AM ONLY PLAYING WITH MONEY I AM WILLING TO LOSE.***
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