Floor & Decor Holdings Inc – April 06, 2023

As the home improvement sector experiences a renaissance, more and more consumers are seeking stylish, durable, and high-quality materials to elevate their living spaces. This trend has fueled the growth of specialty retailers, particularly those focused on providing a wide range of affordable options to meet the diverse needs of their customer base.

Floor & Decor Holdings has carved a niche in this market as a leading provider of hard surface flooring. Their extensive product line includes everything from tile, wood, and laminate to natural stone flooring, as well as a variety of decorative accents and installation accessories. Their commitment to offering top-quality materials at competitive prices has made them a popular choice among homeowners looking to enhance the aesthetic appeal and value of their properties.

Floor & Decor’s diverse customer base spans professional contractors and DIY enthusiasts alike. Their expansive network of over 191 warehouse-format stores and six small design studios in 36 states across the United States, coupled with a robust online platform, ensures that they can cater to the needs of various market segments and geographic regions. By providing exceptional service and support, they are building a solid reputation in the home improvement industry.

In order to sustain its growth and capitalize on the burgeoning market, Floor & Decor is focusing heavily on expanding its physical presence by opening new stores in both existing and untapped markets. While also investing in digital platforms to offer a seamless omnichannel experience, that can better cater to the changing preferences and expectations of consumers. They are also taking steps to optimize their supply chain for increased efficiency and cost-effectiveness by forging strong relationships with suppliers to ensure the continued availability of high-quality products at competitive prices.

By pursuing these strategic initiatives, Floor & Decor aims to cement its position as a leading provider of flooring solutions in the home improvement market.

Floor & Decor was founded in 2000 by George West, whose family ran West Building Materials. With the aim of providing a one-stop solution for hard surface flooring needs, the first store, launched in Atlanta, Georgia, offered a wide variety of tile, wood, laminate, and natural stone flooring products, as well as decorative and installation accessories.

The company experienced steady growth in its early years, driven by a commitment to quality, variety, and affordability. By 2012, Floor & Decor had expanded to 25 locations across the United States, establishing a strong presence in various regions and catering to diverse customer preferences.

In 2014, Ares Management and Freeman Spogli & Co. acquired a majority stake in Floor & Decor, providing the company with the resources and expertise needed to scale up its operations. This partnership paved the way for rapid expansion, with the company surging its store count to over 70 locations by 2017.

Floor & Decor went public in 2017, raising $194 million in its IPO, which further fueled the company’s growth trajectory. Since then, it has continued to expand its footprint, invested in digital platforms, refining its website, mobile app, and e-commerce capabilities to better serve its customers and adapt to the changing retail landscape.

Throughout its growth, Floor & Decor has continually enhanced its product offerings, introducing new materials, styles, and designs to cater to evolving consumer tastes and preferences. In particular, it has committed to sourcing sustainable and eco-friendly products in line with the growing demand for environmental responsibility.

Floor & Decor’s current chief executive officer and board member since 2012, Thomas V. Taylor, began his career in the industry at age 16 in 1983 at a Miami Home Depot store. Advancing through managerial to executive roles, Taylor eventually served as Home Depot’s executive VP of operations, merchandising, and marketing divisions with responsibility for all of the chain’s 2,200 stores. Under Taylor’s leadership, Floor & Decor has experienced rapid expansion, both in terms of store count and revenue growth. He has led the company’s efforts in digital transformation, investing in e-commerce and other technology initiatives to support the business, enhance the customer experience, and drive this growth.

Floor & Decor specializes in providing a comprehensive range of hard surface flooring products, catering to homeowners and professionals alike. Its extensive range of flooring materials, accents, and accessories ensures that customers can find everything from unique items for a single room to supplies for a large-scale renovation. The company’s product line covers a wide array of styles, colors, and finishes, allowing customers to create customized looks that match their unique vision and preferences. From modern designs to classic aesthetics, Floor & Decor has options to suit every taste.

Serving a diverse customer base, including professional contractors, interior designers, architects, and do-it-yourself homeowners, their products cater to various project types, such as residential renovations, commercial developments, and large-scale construction projects. From affordable, budget-friendly options to premium and high-end materials, the company ensures that all customers can find suitable solutions.

One of the key advantages of Floor & Decor’s offerings is the ease of installation. Many of their products are designed for simple, straightforward installation, making them an attractive option for DIY enthusiasts looking to save on labor costs. Additionally, the company provides a wide range of installation accessories and tools to ensure that customers have everything they need to complete their projects successfully.

In addition to the wide selection of products, Floor & Decor offers guidance and advice through in-store design consultants and online resources to support their customers. The company also hosts workshops and training sessions for both professionals and homeowners, covering topics such as installation techniques, product selection, and design trends.

Floor & Decor’s products are also compatible with various third-party systems and applications, such as underfloor heating and smart home technology, which allows customers to seamlessly integrate their new flooring with other components of their home or workspace.

Floor & Decor has positioned itself as the leading player in the specialty flooring market by offering an extensive range of products that cater to a diverse customer base. The company’s product development strategy is centered around continuously expanding its offerings to meet changing customer preferences. By sourcing materials globally, it ensures access to a wide variety of styles, colors, and finishes, enabling them to stay ahead of industry trends and cater to its diverse clientele.

Floor & Decor’s growth strategy is focusing on several key initiatives. The company is aiming to expand its unique warehouse-format stores to reach at least 500 stores in the U.S. within 8-9 years, targeting new store openings in both new and existing, adjacent, and underserved markets. Their online platform will be continually improved, as they seek to enhance the “Connected Customer” experience, with a focus on personalized content, better search and purchasing tools, and enhanced customer support.

Investing in professional customers due to their frequent and high-ticket purchases, as well as design services, given customer satisfaction is greater and the average ticket value is materially higher compared with customers who do not use a designer, is a priority. To support its “Pro” customers, the company is looking to bolster recruiting and training, technology, financing solutions, and in-store experience enhancements. Their Design Services will be improved by recruiting top design talent, and providing better training, tools, and technology.

Floor & Decor plans to expand its presence in the commercial flooring market, targeting various customer segments, including architectural and design firms, owners, builders, developers, general contractors, and commercial flooring installers.

The company also expects to enhance margins through increased operating leverage, optimizing product sourcing processes, leveraging store-level fixed costs, existing infrastructure, supply chain, corporate overhead, and other fixed costs resulting from increased sales productivity.

Furthermore, with housing inventory extremely low in many U.S. metro areas, coupled with increased consumer interest in home renovations, and growing demand for high-quality, affordable flooring options, Floor & Decor is well-positioned to capitalize on a favorable market environment.

Floor & Decor has experienced a solid trajectory of revenue growth over the years. Despite facing macroeconomic challenges, it has managed to achieve 14 consecutive years of comparable store sales growth by staying agile and focusing on key growth strategies. In FY22, sales increased 24.2% year-over-year to reach $4.26 billion. This growth was mainly driven by the opening of 32 new warehouse stores and four design studios, as well as a 9.2% increase in comparable store sales.

Gross profits increased $305.5 million, or 21.5%, throughout the year compared to 2021, primarily driven by the increase in net sales, yet partially offset by a decrease in gross margin to 40.5%, due to higher supply chain costs. Selling and store operating expenses also increased 27.0% on the prior year due to the growth in new stores and, to a lesser extent, increased wages and higher credit card transaction processing fees. However, due to general and administrative expenses decreasing as a percentage of net sales, the company delivered a net income that increased by 5.3% to $298.2 million.

Looking ahead, management is forecasting net sales of approximately $4.61 billion to $4.75 billion for FY23, which is in line with consensus expectations of $4.67 billion, representing growth of just below 10% year-over-year. While analysts have non-GAAP earnings per share tempering marginally in FY23 at $2.69. The historically positive growth trajectory is expected to continue in FY24 and FY25 at $3.39 and $4.20 per share, respectively, for average growth of 25% annually.

The market for home improvement and flooring products is fragmented, highly competitive, and influenced by shifting consumer preferences and economic conditions. Floor & Decor faces competition from a variety of businesses, ranging from large national chains with extensive resources, such as Home Depot, Lowe’s, and Lumber Liquidators, to smaller regional or local players with specialized product offerings. Furthermore, there is an increasing popularity of online retail channels, coupled with the integration of digital technologies for an enhanced customer experience.

While it operates in a highly competitive landscape, Floor & Decor differentiates itself from competitors through its unique warehouse-style store format, which allows the company to showcase an extensive range of products in an organized, easy-to-navigate environment. This layout, combined with the company’s focus on affordability and quality, sets Floor & Decor apart from traditional home improvement retailers. Additionally, its design studios and commitment to providing exceptional customer service create an engaging shopping experience that fosters customer loyalty.

With an agile approach to addressing market challenges which have enabled it to achieve over a decade of consecutive sales growth, along with plans to open more than 30 new warehouse-format stores in FY23, Floor & Decor looks well-placed to continuing strengthening its market presence and solidify its competitive position in the industry.