Flooring and Decoration Collectibles (FND 4.24%) It’s one of the best growth stories out there, but stocks are down 45% from a 52-week high due to uncertainty in the housing market due to rising mortgage rates. The public sale of growth stocks over the past few months has done investors in the $9 billion home improvement retailer any favor either.
But a short-term quick bump like this could be the perfect opportunity to add massive compound growth stocks to your portfolio. Floor & Decor may be in the early roles to become this decade’s version of another Atlanta home improvement retailer, Home Depot (HD 3.39%).
Home Depot has delivered decades of compound growth for its shareholders since its IPO in 1981 on its way to growing to $324 billion in massive equity. Here’s why Floor & Decor took the early steps on the path to becoming a Home Depot in 2020 by providing years of massive returns to shareholders.
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What is the floor and decor?
Floor & Decor, based in Atlanta, Georgia, is a $9 billion specialty hardwood flooring retailer. The company carries all categories of hardwood flooring, including tile, wood, stone, laminate and other related products. The company was founded in 2000 and has grown to 160 locations.
CEO Thomas V. Taylor was formerly Executive Vice President of Operations at Home Depot, starting at 16 and moving his way up the ladder, so he knows a thing or two about building and maintaining a home improvement empire.
Floor & Decor has a different approach in that it uses its scale to cut out middlemen such as importers and wholesalers. Instead, it goes directly to sourcing, which enables it to offer favorable rates to its customers. Its buyers buy marble from Italy, tiles from Spain, and natural stone from Turkey. In fact, the company includes 240 suppliers in 24 countries.
The growth of the number of mega stores
The management has set its sights on rapidly expanding the number of its stores in the coming years with the goal of reaching 500 stores in total. The company currently has 160 stores, so it’s more than three times the current space. The company has been increasing the number of its stores by 17.8% annually, on average, over the past five years, and expects to grow at a rate of 20% in the future. While this represents a solid growth rate, there is a lot more slated for the future. At 500 stores, Floor and Decor will still be much smaller than Home Depot, which has more than 2,300 locations. Louie (Little 2.74%) It has nearly 2,200 websites.
These stores are massive showcases for Floor & Decor products with an average of 78,000 feet per location. The company claims to have more space dedicated to hard surface floors than anyone else in the industry at 18.2 million square feet. The stores also feature large, visually compelling displays (an average of 32 per store) that further highlight the company’s most attractive products.
These vignettes are updated on a yearly basis, ensuring all displays are with style and trends. As CEO Taylor stated, “If you think of a high-volume retailer, what they do in two aisles, we do on 80,000 square feet. That gives us the ability to carry each individual category within hardwood floors under one roof.”
We’ve all heard of companies growing fast, but doing it at the cost of profit and then we realize they’ve expanded themselves too much. This is not the case with Floor & Decor, where growth has been hot but not at the expense of profits.
Comparable store sales (which measures annual sales of locations open for at least a year) have been positive for 13 years, and that sales growth translates into the bottom line. The company has grown its earnings before interest, tax, depreciation, and amortization (EBITDA) adjusted compound annual rate of 32% over the past five years, and its earnings per share at a rate of 37%. So when it comes to flooring and décor, it’s not scaling for expansion – more stores means more profits.
Go with the pros
Floor & Decor has a diverse client mix, serving homeowners and DIY clients, professional flooring installers and contractors, as well as commercial clients. Like Home Depot, Floor & Decor understands the value of its professional customers and has a dedicated team for them. The company offers a lot of value to these clients, offering free design services, a loyalty program, priority payment, credit and financing solutions, and even a mobile app.
Professional contractors can be a great place to work as they can book several jobs a year and become repeat clients. So far, Floor & Decor has found that the top 10% of its professionals have used Floor & Decor on 37 projects and increased their spend by 24% year-over-year in 2021, so professional clients really are the gift that keeps on giving.
Is Floor & Decor the Next Home Depot?
Floor & Decor has a massive path to growth ahead of it. Even after the company more than triples the number of its stores and grows to 500 locations, it will still be less than a quarter of Home Depot’s size today. The fact that the company is rapidly expanding while maintaining an emphasis on profitability is encouraging. Given the vision that Floor & Decor has set and the way it’s been implemented so far, I believe it’s a long-term purchase – and starting all the way to becoming Home Depot in 2020.
