{ "docId": "019dd923-622c-750b-8b99-8a089025bb07", "docSlug": "75aa3b2bd0fb", "documentTitle": "Floor & Decor Holdings, Inc. (FND)", "authorId": "54_Spruce_Point_Capital", "authorName": "Spruce Point Capital Management", "documentKindSlug": "activist-deck", "documentKindLabel": "Activist deck", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2024-07-01 00:00:00", "orientation": "landscape", "aspectRatio": 1.3333334, "pageNumber": 11, "pageCount": 125, "prevPage": 10, "nextPage": 12, "slideType": "thesis_headline", "function": "summarize", "density": "overcrowded", "nDataPoints": 12, "notes": "The slide uses a narrative-heavy format to build a case for short-selling based on governance, accounting, and valuation concerns.", "elementsJson": [ "headline_text", "subtitle_text", "paragraph" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b99-8a089025bb07/11", "deckHref": "/decks/019dd923-622c-750b-8b99-8a089025bb07", "deckJsonHref": "/decks/019dd923-622c-750b-8b99-8a089025bb07.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b99-8a089025bb07#slide-11", "components": [ { "bbox": null, "kind": "callout", "text": "Valuation Is Stretched Beyond Explanation As Insider Misalignment Intensifies", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-0f1d-76e6-870f-503074f8b05f", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "metric", "text": "downside risk: 40% - 60%", "attrs": null, "subkind": "primary", "toolName": "Quantification", "toolSlug": "quantification", "confidence": null, "componentId": "019dd953-0f1d-76e6-870f-563988eeedca", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.28, "w": 0.96, "x": 0.02, "y": 0.72 }, "kind": "paragraph", "text": "We believe expectations for a recovery of FND's sales and earnings prospects are way too high, especially as 2025 comes into focus. The market fails to include ~$620 million of supply chain finance debts, legally binding lease commitments and asset retirement obligations in the valuation. These factors alone account for ~$5.75 per share in downside. Adjusted for these debts, FND trades at an industry leading 2.9x and 36x 2024E revenue and EBITDA, respectively. By ascribing a generous 1.5x - 1.9x revenue multiple, more aligned with a range of home improvement and building product peers, and using our base case estimates we see 40% - 60% downside risk in the intermediate term to $39.75-59.65 /sh. If our research proves right that FND's problems are more structural than cyclical, and that the Company's increased opacity and revenue misstatements are a harbinger of financial restatement, we fear the Company could be headed down the path of permanent equity impairment faced by peers such as Lumber Liquidators and Tile Shop. There is also a growing risk from Trump's re-election and rising tariffs given 25% of sales are tied to Chinese imports and a majority are from foreign sources. We expect FND's share price to underperform both the retail sector and the broader equity market.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "73aa6d55-2ebe-465a-b3da-a63fdacc7665", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.3, "w": 0.96, "x": 0.02, "y": 0.2 }, "kind": "paragraph", "text": "Investors should be on red alert that FND was a private-equity sponsored stock promotion where insiders rapidly cashed out. In fact, FND's two private equity sponsors completely exited before the Company even reached 160 stores or ~30% of the 500 stores that the Company currently claims it can reach. Founder George West also sold 60% of his holdings by March 2020 and has retained a small residual stake that is diluted by stock issuance. CEO Taylor has reduced his beneficial ownership by 64% since the IPO but has been a particularly aggressive seller recently. In fact, CEO Taylor has enacted three different 10b-1 sale programs since March 2023 while the General Counsel and Chairman of the Board have also entered stock sale programs. The insider selling programs are eye-opening because, 1) FND received an SEC comment letter in late 2023 questioning its revenue and cost of revenue disclosures, and 2) In 2023, the Company amended its Clawback Policy to cover Executive Vice Presidents and Senior Vice Presidents of the Company, and to allow for recovery of compensation if a covered person engages in certain types of misconduct.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "837f54ed-41d0-4e5f-b4fa-7d94ff14e271", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.25, "w": 0.96, "x": 0.02, "y": 0.48 }, "kind": "paragraph", "text": "Investors shouldn't just listen to Spruce Point or follow insider activity to gauge the level of frothiness in FND's valuation. A majority of sell-side promoters have a neutral/hold/market perform rating and are waiting to see improvement in the business but believe the issues are temporary. We believe they have failed to conduct a rigorous forensic review of FND and give limited consideration to diminishing financial disclosures, changes to accounting policy language and business practices along with sales reporting anomalies which should raise skepticism about earnings quality. We see limited justification for FND's valuation premium as its customer profile has changed, competitive intensity has increased, and new store opening and operating costs have ballooned. We believe investors also fail to understand that the Company's earnings will not be nearly as levered to the upside given diminished technology and proprietary product advantages, weakened marketing effectiveness, and long cycles for tile and floor replacement among other factors.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "b561ae48-c332-4711-94ff-ef6e0e2946be", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.04, "w": 1, "x": 0, "y": 0.15 }, "kind": "title", "text": "Valuation Is Stretched Beyond Explanation As Insider Misalignment Intensifies", "attrs": null, "subkind": "action-title", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "53f96b45-a956-4c49-a1ee-22b71c22b073", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.65, "x": 0.32, "y": 0.02 }, "kind": "title", "text": "Follow Insider Selling: 40% - 60% Intermediate Term Downside Risk", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "f8c63fda-aec9-4ee6-a6d1-88c3717d37ed", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [ { "name": "Authority citation", "slug": "authority-citation", "agent": null, "layer": "slide", "matchId": "7c3e36e4-6d7b-40c7-8abd-a14b947fda7d", "evidence": " Investors should be on red alert that FND was a private-equity sponsored stock promotion where insiders rapidly cashed out.", "confidence": 0.5 }, { "name": "Thesis archetype", "slug": "thesis-archetype", "agent": null, "layer": "slide", "matchId": "abdb5cc7-8645-47ce-a380-757c4f5e6d00", "evidence": "Valuation Is Stretched Beyond Explanation As Insider Misalignment Intensifies", "confidence": 0.8 } ], "frameworks": [], "arcBeats": [ { "to": 50, "from": 11, "beatId": "76a4e412-fb9a-444b-a02d-2e883401f4a8", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "The Struggle", "beatSlug": "overcoming-monster-the-struggle", "evidence": "The document presents a detailed analysis of FND's struggles and challenges", "position": 1, "confidence": 0.8, "parentBeatName": "Development", "parentBeatSlug": "development" } ], "loops": [], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }