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  "documentTitle": "Floor & Decor Holdings, Inc. (FND)",
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  "authorName": "Spruce Point Capital Management",
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  "presentationDate": "2024-07-01 00:00:00",
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      "text": "We believe that some investors may be anchoring false hope and an investment bias to owning FND because Warren Buffett’s Berkshire Hathaway owns $480 million of stock. However, the investment represents just 0.2% of Berkshire’s equity holdings. We believe the investment rationale belies many of Buffett’s own investing principles and maxims.",
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      "text": "We believe FND’s share price reflects false hope that its challenges are cyclical, but we believe they are structural and cannot be easily fixed.",
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      "text": "1. Inflation of Revenue and Margins and Signs of Misstatement: In the face of vanishing disclosures about its TAM, customer profile, historical capex spend and inventory location, we believe FND uses a variety of tactics to embellish results. For example, it modified its loyalty points reward program, changed its product return policy and inventory accounting discussion. FND relies heavily on supply chain finance and vendor rebate programs to embellish gross margins but provides no disclosure about the quantitative impact. FND ceased providing a reconciliation of Adjusted EPS. Yet, what troubles us more is that we find ecommerce (20% of sales) and PROs (45% of sales) numbers don’t reconcile. The SEC recently issued comment letters to FND specifically inquiring about its PROs and revenue reporting. Also, FND is increasing its portfolio duration where other retailers are not and ceased providing supplemental lease disclosures.\n2. Understatement of Debt: FND records amounts payable to financial intermediaries from the supply chain programs in trade accounts payable but does not consider this debt. We do. In addition, we observe that FND’s legally binding contractual obligations for operating leases signed but not commenced are ballooning to $488 million but are not on the balance sheet. In our view, because the contracts are signed and legally binding, they should be considered debt. Ironically, Linens ‘N Things restated financials that revealed earnings were overstated from supply chain finance programs and to record legally binding leases within operating lease contractual obligations.",
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      "text": "downside risk: 40% - 60%",
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      "text": "We believe FND’s share price reflects false hope that its challenges are cyclical, but we believe they are structural and cannot be easily fixed. Follow the money: the CEO has enacted three 10b5-1 stock sales programs since March 2023. Sell-side analysts are generally neutral on the stock but we don’t think they have conducted a critical forensic analysis that suggests FND is under greater structural stress. We see 40%-60% intermediate downside risk to $39.75–59.65 /sh. and long-term insolvency risk from an abnormally high-cost structure, greater financial leverage than is presented to the market, and a business with a declining value proposition. In addition, we see growing downside risk from Trump’s potential re-election given his desire to raise tariffs. FND imports 25% of products from China and a majority from foreign countries.",
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      "text": "After conducting a forensic review of Floor & Decor, Inc. (NYSE: FND or “the Company”), a specialty retailer of floor tiles and accessories operating 78,000 square foot stores, we have grave concerns about the credibility of management and the Board, viability of the Company’s strategy, accuracy of its financial reporting, and sustainability of its share price momentum and valuation expansion. Investors should be on red alert that the CFO (now President) worked at Blockbuster and Carter’s in senior financial accounting roles during periods both companies had crippling financial restatements and were under SEC and DOJ scrutiny. Moreover, we are concerned that both FND’s Board Chairman and Audit Committee Chair worked together at Linens ‘N Things as CEO and CFO/CAO which had a similar retail business strategy, restated its financials, and ultimately fell into bankruptcy once new store growth rate fell below 20%. Warning: FND had a previous material weakness, recently made a variety of accounting, financial reporting, and business practice changes adverse to customers and slowed new store growth below 20%. We think the market underappreciates that FND is expanding into lower income geographic markets where building foundation issues dictate less tile usage, is experiencing capex cost per sqft. growing ~29% p.a., ballooning new store operating costs at $10.3 million per store vs. $6.3 million historical, and is obscuring ~$620 million of financial debt.",
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      "text": "Spruce Point Issues “Strong Sell” Opinion On Floor & Decor (FND) With 40% - 60% Downside Risk",
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