HQ Visit: Sharpening Execution & Strategy During A Prolonged Macro Downturn

Research evidence excerpt

HQ Visit: Sharpening Execution & Strategy During A Prolonged Macro Downturn

trends at the 2026 new store cohort as these

stores are primarily in Tier 1 markets and are projected to outperform the 2023-2025 vintages

which over-indexed more to Tier 2 and 3 markets (less so for the 2025 cohort). In FY22, mgmt.

provided pro forma first year sales for an average box of $14mm to $16mm during peak

earnings. Mgmt. estimates Class of 2023 and 2024 (over-index to tier 2 and 3 cities) generated

$11.7mm in revenue on average and the Class of 2025 is slightly underperforming. Mgmt has

also significantly reduced the cost to build new boxes ($7.5mm to $8mm vs. $11mm previously

despite entering more expensive markets) as these boxes are now smaller and tend to be

second use facilities. Ahead, we expect openings to lean toward tier 1 markets but mgmt noted

that overall cannibalization has come down some (less than 500bps today). Meanwhile, stores

in Tier 3 markets will continue to generate lower volumes than stores in bigger metros, but these

stores cost less to build and operate, and should see similar profitability.

Final Takeaways

We came away with a greater appreciation for the pivots management is making during the

prolonged downturn to drive a stronger and more efficient company for the upturn. It was

evident FND is sharpening its focus and prioritizing the most impactful opportunities, is building

more efficient stores in strategically important markets and will be making structural changes

to strengthen its value prop to the Pro. That said, we maintain our Hold rating and $48 price

target as we remain cautious that the housing backdrop remains softer for longer, are unsure if

estimates may need to be reset lower, and need to get a better understanding of the Pro pricing