What happened

Shares of Floor & Decor (FND 2.66%) stock fell 13% in August, according to data provided by S&P Global Market Intelligence. The flooring warehouse chain posted a mixed earnings report, but it lowered full-year guidance, sending the stock down.

So what

Floor & Decor operates warehouse-style stores with a huge selection of hardware flooring and similar products. It had been demonstrating strong growth, with increasing sales, usually driven by high comparable sales, and robust profitability. But while it maintained strong performance despite supply chain difficulties and high inflation, it's finally starting to feel the impact.

In the 2023 second quarter, reported in August, sales increased 4.2% over last year, but that was entirely from new stores, and comparable sales decreased 6% from last year. It opened nine new stores in the quarter.

There are several factors at play, although they're all connected to the macroenvironment. Inflation is causing shoppers to take a break from expensive purchases and home improvement projects, but on top of that, a down housing market sucks away a large portion of the home improvement market. Some of that is tempered because as people stop moving into new homes, they may need to take on large home improvements to stay where they are. But this isn't making up completely for declines due to home sales. 

Profits are suffering as well. Operating margin narrowed by 1.4 percentage points from last year to 8.4%, and net income decreased 12.7% to $71.5 million.

But even worse than the results for the quarter was the guidance, which was lowered from the first quarter. Previously, management was guiding for full-year sales of around $4.7 billion, and it lowered that to $4.5 billion. Comps guidance was reduced from a range of flat to negative 3% to a range of negative 5.5% to 7%.

The new stores are a bright spot in an otherwise disappointing report. They boost revenue, and management has plans for many more stores. It now operates 203 stores and sees the opportunity to reach 500 over the next eight or nine years.

Now what

These trends are temporary, and although they are ongoing, Floor & Decor has a solid model that should easily bounce back when trends change. It's still highly profitable, and there's no worry about how it will manage this challenge.

At the current price, Floor & Decor stock trades at a price-to-earnings ratio of 37, and even now it's not cheap. But it's worth a premium because it has fantastic long-term potential.

Warren Buffett took a position in the stock in 2021, and the value he sees in the company remains. Floor & Decor has a long growth runway, and investors can use this opportunity to buy on the dip.