Floor & DéCor Stock: New Store Opening Target, TAM Make An Interesting Bet (FND)

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Floor and decoration (FND) recently reported a mixed fourth-quarter result of $ 914.3 million in revenue, surpassing the consensus estimate of $ 908 million, an increase of 26.4% year-on-year. Same-store sales increased by approximately 14%, but adjusted diluted earnings per share decreased by approximately 6.4% to $ 0.44, below the consensus estimate of $ 0.45. Due to cost inflation, especially rising fares, the gross margin shrank by about 377 basis points to about 38.8%. Adjusted net income for the fourth quarter was $ 50.16 million, down approximately 6.1% from $ 47.11 million in the previous quarter. The main reason for the decline in revenue this quarter was the low gross margin. Management is taking steps to raise prices to combat inflation and improve profitability. I believe this should help the company’s profit margin in the coming quarters.

Stocks are trading at about 34.24 times the 2022 EPS, which is a discount of about 49.13 times the historical average P / E for 5 years. While some investors are worried about the cyclical slowdown in the housing market due to expectations of rising interest rates and lower renovation spending, the company’s long-term growth story remains fascinating, with investors in the past. I think you can consider buying stock at a discounted price rather than the valuation of.

Store growth

Floor & Décor closed at 162 stores last year, and the number of stores is increasing rapidly. Management plans to open 36 stores in 2010, 32 of which are old warehouse-style stores and 4 of which are new design centers in densely populated markets.

Opening a new store for floors and decoration

Opening a new store for floors and decoration (Company data, GS Analytics Research)

More importantly, last quarter’s call management raised the long-term store opening target to 500 stores (from the previous target of 400 stores) over the next eight to ten years. This is more than three times the current number of stores. One of the reasons for being optimistic about this growth potential is the very attractive economics of new stores. The new store is financially strong, with payback periods of 2.5 to 3.5 years, average net sales of $ 14 million to $ 16 million, and pre-opening EBITDA of at least $ 2.5 million.

There is another advantage the company sees from its rapid store expansion. Given the new store opening rate, the company currently owns about 60% of stores under the age of five and should make a significant contribution to existing store sales until these stores mature.

Increase in TAM

In addition to increasing its geographical presence, the company is also increasing its total address.Competent market (TAM).. The company started by focusing on the housing market, but entered the commercial flooring market in 2016, expanding the addressable market to a total of $ 41 billion, $ 25 billion for home remodeling and commercial spending. Spent $ 16 billion. Not only that, but in recent years it has included adjacent categories such as vanities, shower doors, bath accessories, faucets, sinks, custom countertops, bathroom mirrors and bathroom lighting. This adds an additional $ 8 to $ 13 billion to TAM.

The company is still in the early stages of gaining market share in these markets and expects growth in the next few years if it can replicate its success in these markets. In the commercial market, management believes it has the same competitive advantage as the housing market. In addition, last year, the company targeted construction and design companies with Spartan Surfaces, Inc., a commercial rigid surface flooring distribution company. Was acquired. Building and design companies make up 60% of commercial purchases, with the remaining 40% coming from owners, builders, developers, general contractors, and commercial flooring installers. The company was already in 40% of the commercial market. With this acquisition, you can target the full commercial market. Management is optimistic about the company’s outlook for the commercial business. In a recent earnings announcement, the company’s CFO said:

So it’s a big industry. It is 60% of the size of the housing remodeling industry. It has had a lot of commercial success on both the RAM side and the Spartan side. And one day, will 300, 400, and 500 people be able to create $ 3 million and even $ 4 million in work? That is a long-term goal. “

Floor & Décor, Chief Financial Officer, Trevor Lang

Macroeconomic background

Currently, investors in housing, building products, remodeling, and related stocks are worried about two things. The first is the impact of potential rate hikes on home sales. The Fed has become more hawkish in recent months thanks to the surge in inflation, and investors are expecting multiple rate hikes this year. Second, it is uncertain whether large demand for remodeling will continue as the economy resumes. These concerns are currently reflected in Floor & Décor and other housing-related stocks that are currently trading at discounted prices for multiples in the past.

We understand investor concerns, but industry data shows that the housing industry has fallen sharply in the decade following the big housing recession. This creates a supply-demand mismatch, and I think it is highly likely that housing demand will remain strong even if interest rates rise. I covered this in a previous article, but here’s a quick summary. From 1959 to 2007, the average number of total housing starts in the United States was about 1,546,900, and the average number of single-family homes started was about 1,101,800. However, from 2008 to 2019, the average number of total housing starts per year was about 949,400, and the average number of single-family homes was about 656,500, causing considerable underbuilding.

Therefore, from 2008 to 2019, the average annual deficit was about 597,500. [ =1,546,900 – 949,400 ] Total number of houses and about 445,300 [ =1,101,800 – 656,500] Single-family homes and long-term average. In other words, total housing starts should average around 2,144,400 to return to the long-term average for the next 10 years. [ =1,546,900 + 597,500] The start of a single-family home should average around 1,547,100 [ =1,101,800 + 445,300] From 2020 to 2031.

A significant amount of demand is stagnant in the markets unleashed after the pandemic. There is no doubt that there will be a slowdown due to rising interest rates, but I don’t think we can see anything similar to what happened during the Great Recession. After inflation has subsided, the cyclical rise in housing may resume. Benefit Both new and existing home sales.

Similarly, while the economy is reopening, consumers are unlikely to forget what they have seen in the last two years, and a hybrid work culture is likely to continue. Therefore, investing in home remodeling remains a priority for consumers. Interestingly, as the economy resumes, DIY demand has declined, but DIY or professional demand remains very strong. Last year, the company’s Pro sales increased by about 44%, easily offsetting the slowdown in DIY projects. This gives me the confidence that we will continue to see healthy fundamentals there.

Floor & Décor is not only a cyclical inventory, but also a long-term growth story, constantly gaining market share from others and entering adjacent categories. I don’t think investors need to worry too much about short-term or medium-term headwinds, as management expects the number of stores to more than triple in the next eight to ten years.

Conclusion

I think Floor & Décor is a good buy transaction with less than 35 times the revenue in 2022. We are optimistic about the company’s long-term potential due to its past execution history, plans to more than triple the number of stores over the next 10 years, recent steps to increase TAM, and the economics of new stores. .. The company will hold Analyst Day on March 16th, and management will elaborate on its long-term store growth plan. We believe this will help investors and analysts better understand the updated long-term growth goals and act as a positive catalyst for equities. Therefore, despite macroeconomic concerns, investors should consider taking a stock position.

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