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Floor & Decor Rips Higher as Demand Surges

Stock (Symbol)

Floor & Decor Holdings (FND)

Stock Price

$51

Sector
Retail & Travel
Data is as of
March 24, 2018
Expected to Report
May 2
Company Description
Floor & Decor Holdings, Inc., formerly FDO Holdings, Inc., is a retailer of hard surface flooring and related accessories. The Company retails its products such as tile, stone, wood, marble, glass and decoratives. The Company has 72 stores across 17 states in the United States. The Company provides its products to customers, including professional installers and commercial businesses (Pro), Do it Yourself customers (DIY) and customers who buy the products for professional installation (Buy it Yourself or BIY). The Company engages their customers both through trained store associates and designers who can assist in narrowing choices and making the process of home renovation easier. The Company also sells the products through its Website www.flooranddecor.com. Source: Thomson Financial
Sharek’s Take
David SharekFloor & Decor (FND) is probaly the next big thing in retail — and it’s doing it from old-school bricks and mortar stores. Founded in 2000, F&D offers the flooring industry’s broadest assortment of tile, wood, laminate and stone flooring in huge 70,000 sq ft warehouse formats, compared to home improvement centers which dedicate just 3000 to 5000 ft to hard surface flooring. 40% of total sales are to do-it-yourselfers and 60% are to professional contractors, with the highest pro customer mix in the industry. Here’s the category breakdown as of 2016:

  • Tile 31%
  • Decorative Accessories 18%
  • Accessories 16%
  • Wood 14%
  • Laminate/ Luxury Vinyl Plank 12%
  • Natural Stone 9%

As of fiscal year end 2016 the company had just 69 stores in operation, and expanded that into 83 warehouse stores in 2017. Management plans on having 100 stores by the end of 2018 and with a potential of 400 nationwide, there’s great growth opportunity here. Management plans on growing the store base 20% a year for the next several years. But more importantly each existing store keeps raking in the bucks. Same store sales (SSS) have been in the double-digits for nine consecutive years. And to me double-digit SSS is the key statistic super retailers possess. Last qtr’s SSS were 24%, but a lot of that was from the five Houston area locations. Excluding those out would have resulted in SSS growth of 16%. Floor & Decor has two winds at its back. First, rising home prices and people’s inclination to stay at home (and improve it) are keeping demand strong. Second, the market continues to shift towards hard surfaces. In 2002 carpets were 61% of the market, and just 49% today. FND looks fantastic. Profits just increased 73% last qtr and whipped estimates of 45%. Last qtr I wrote “with 2018 estimates at $0.88, perhaps FND can earn $1” and here we are just one qtr later and 2018 estimates are already at $1. So maybe it can make $1.25 this year? Perhaps $1.75 next year? If the stock gets a 45 P/E next year and makes $1.75 then 43 x $1.75 = $79 a share, around 50% higher than the recent quote (note this stock is rising, and just jumped from $42 to $55 today. The new Trump tax plan is expected to take FND’s rate rate from $36% in 2017 to $24% in 2018 –whew! Floor & Decor looks to be the next big thing in retail.

One Year Chart
Last qtr FND delivered 73% profit growth on 40% sales growth and 24% SSS growth. Qtrly Estimates are for 77%, 45%, 47% and 21% profit growth the next 4 qtrs. The P/E of 51 is reasonable, and there’s no risk of a trade war hurting this stock. Nice Est. LTG of 30% per year.
Fair Value
2018 profit estimates increased from $0.86 to $1.00 and 2019’s jumped from $1.05 to $1.28. Management expects their tax rate to decline from 36% to 24% due to new tax legislation. My Fair Value rises from 50x earnings to 55x, but I honestly should have made it higher. Still, even at that valuation the upside when we look out to next year is excellent. 
Bottom Line
Floor & Decor looks like the next big thing in retail, and it’s a concept Amazon can’t easily get into. Sales and profits are rising rapidly, and the stock chart looks quite healthy. FND ranks 18th in the Growth Portfolio Power Rankings. I will look to add it to the Aggressive Growth Portfolio on a dip.
Power Rankings
Growth Stock Portfolio

18 of 39

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

N/A

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