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Here's Why Floor & Decor Stock Plunged 16.5% in June

What happened

Shares of home-improvement retailer Floor & Decor Holdings (NYSE: FND) fell 16.5% in June, according to data provided by S&P Global Market Intelligence. Not only was this a large monthly decline but it was also worse than the 8% decline of the S&P 500. And it seems that fears over the state of the housing market have something to do with the stock's underperformance.

So what

According to The Fly, MKM Partners analyst David Bellinger and Goldman Sachs analyst Kate McShane both gave Floor & Decor stock a neutral rating in the month of June, with price targets of $65 per share and $64 per share, respectively. That's basically where the stock trades right now, indicating neither analyst expects much from this company in 2022.

Consider that Floor & Decor has performed very well since the start of the COVID-19 pandemic. The company's annual net sales growth was 18.6% and 41.5% for 2020 and 2021, respectively. And this red-hot sales growth coincided with a strong U.S. housing market. According to the S&P CoreLogic Case-Shiller US National Home Price Index, home values increased 10.4% in 2020 and 18.8% in 2021.

Investors are starting to believe that the real estate market has peaked, leading to bearishness for all home-improvement retailers, including Floor & Decor. And it makes sense. According to data from Freddie Mac, the average rate for a 30-year mortgage was about 5% at the beginning of June. By the end of June, it was about 5.7% -- a significant jump in a single month.

According to real estate company Redfin, the increase to mortgage rates may be already slowing down the housing market. The average asking price for a home is down from its all-time high a few weeks ago, suggesting the higher mortgage rates are curbing homebuyers' appetites.

A slowdown in housing could theoretically cause a slowdown in business for home-improvement retailers like Floor & Decor. And that's why this retail stock was down in June.

Now what

The only news that Floor & Decor reported in June was the opening of new stores. And to me, this is the main component in a bullish investment thesis for the stock. With the opening of its store in West Hartford, Connecticut, on July 7, Floor & Decor will have a total of 171 locations. However, it believes it has potential for 500 locations and management aims to expand to about this many stores by the end of this decade. Considering its consistent profits, this expansion should greatly increase its earnings potential in spite of ebbs and flows in the real estate market.

Furthermore, I wouldn't be so quick to count out Floor & Decor. In 2021, the company had its 13th consecutive year of same-store sales growth, which would include poor years for housing like 2008 and 2009. Therefore, I think it's premature to assume the company is in for a tough time in the near future. Indeed, management's guidance reflects this as it's calling for 10.5% to 13% same-store sales growth for full-year 2022.

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Jon Quast has positions in Floor & Decor Holdings, Inc. The Motley Fool has positions in and recommends Goldman Sachs and Redfin. The Motley Fool recommends the following options: short August 2022 $13 calls on Redfin. The Motley Fool has a disclosure policy.


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