This is not investment advice. Do your research before taking a position in any of the securities mentioned in the post below.
Floor & Décor (FND) sparked my interest because Berkshire Hathaway purchased a small stake despite them generally being net sellers of stocks lately. Whilst this is generally a positive sign, it is worth noting that it is <1% of their US public equities portfolio so that does not really mean a great deal.
What do they do?
FND operates as a multi-channel specialty retailer of hard surface flooring (e.g. tile, wood, laminate, vinyl, and natural stone flooring ), as well as decorative and installation accessories. It serves commercial and residential.
They have 162 stores and plan to open 36 stores (32 will be the old warehouse format stores). General expectations are that these stores have a 2.5-3.5-year payback period
Part of the driver for this growth is commercial flooring; FND recently acquired Spartan Surfaces which, alongside their existing commercial operations, meant that commercial is c.35% of the total revenue mix.
Housing-based sales are still expected to be ok (even if house prices fall) because
Between 2008 to 2019 there was a material underbuild of houses in US
To some extent; building products companies do better as housing supply increases because unlike a housebuilder their margin is not linked to the value of houses
Overview of FND Financials
In terms of financials this means as follows:
Topline: FND achieves comp store growth of 10-14%, vs an industry average of 4%
Including store growth or >20% growth including store growth
Margin Historically they have achieved a 7-8% op margin factoring in the following
GM% of >40%
SG&A is 33% of sales - comprising selling & store opex (<25%), general admin (5%) and pre-opening (1%) costs
Other costs such as D&A (3%) and stock payments (<1%)
Thesis for investing
The company’s margins are currently depressed due to three factors a) Immature stores, b) pre-opening costs c) continued scale opportunities.
Currently, >40% of the stores will be <3 years old. As stores mature, they trend to EBITDA margins in the low 20% range (v. overall 13%). Of course they will never have all mature stores however it is reasonable to assume margins grow by 100bps (base case) and 300bps (bull case)
The reason for this is that as the store opens - they are fully loaded with expenses although revenues of year one stores are only ~70% of mature levels.
Finally, it is worth noting that the "sweet spot" are stores that are <7yrs old because they have paid for their expenses and are growing at above-average rates
Of course - FND will always be opening stores however I think the high % of stores which are immature and the fact the business is materially smaller than Home Depot, Lumber Liquidators etc means that there is plenty of runway for growth.
Conclusion: The investment thesis for this one is remarkably simple a) their topline growth exceeds the industry b) their core margin is understated by the fact that 'start-up' stores are dragging down margins and c) at 31x P/E their multiple is now increasingly reasonable. The two things that work against FND is that their margin overall is quite high and they do offer a dilutive level of stock incentives. Nonetheless - I think it is worth considering at c. $80 given BRK acquired a very small stake at the $120 mark.
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