This Home-Improvement Retailer Stock Is Quietly Crushing the Market

Since the company went public nearly five years ago, shares of Floor and Decor Holdings (FND 1.06%) are up almost 4 times in value, and yet few investors are even aware that it exists. However, not only has Motley Fool contributor Jon Quast noticed it, but the company also fulfills three of his criteria for interesting retail stocks. In this video from Motley Fool Live, recorded on Aug. 26, he explains to fellow Fool contributor Brian Feroldi what he likes about this company's potential over the next 10 years.

Jon Quast: But the one that I want to show you right now that I own, I think you should too, is called Floor & Decor Holdings stock. This trades on the New York Stock Exchange under the symbol FND. This company had its [initial public offering] IPO in 2017 and has been crushing the market ever since. As of this morning, it was up about 275% from IPO against the S&P 500's 89%. Almost 200 points of alpha there since IPO. That is a really strong start.

This is a company that I've actually bought twice, once in December of 2019 and again in October of last year, because it was a big winner in my portfolio, and I believe in adding to your winners over time. This is a company I've bought twice.

What does Floor & Decor Holdings do? They are a specialty retailer for home improvement in the flooring space and decor. The name is pretty self-explanatory, right? What they do differently, if you've ever been to a Lumber Liquidators [LL Flooring], for example, they have a very small showroom of flooring options. They have a lot of options but a very small showroom where they're showing you their merchandise. If you go to a big-box retailer like Home Depot or Lowe's, they only have a very small section dedicated to flooring.

By contrast, Floor & Decor averages about 78,000-square-feet warehouses and they're basically showrooms. You can walk in there and see extensive flooring options, and you're also seeing them staged out in a little room setting so you get a really good idea of what this flooring looks like and how it might look in your home. People love that option of being able to feel it, see it, and have that interaction with it.

What I like about Floor & Decor is, because of this, I think it's insulated from disruption for two reasons. One, this is a size that few retailers can match. Your mom-and-pop's flooring specialists in your hometown, they're not going to be able to have, at least not able to house, as much merchandise options as Floor & Decor can. Secondly, really, I'm not worried about it being disrupted by e-commerce, either, because flooring is such a heavy products to ship. They're also, many times, fragile so this really isn't conducive to shipping for e-commerce, so really, I think that they are insulated from competition.

Another thing that I like about Floor & Decor: their CEO Thomas Taylor. He was an executive at Home Depot for a lot of years, vice president of operations, inventory, so he has a lot of experience with a big company. When he came to Floor & Decor, they only had around 30 locations back in 2012. At the end of 2013, they had only 39 locations. Since then, they've been trying to grow their store count at an average of 20% a year, and they've been doing that up until the most recent year. In 2020, they weren't sure how things are going to pan out. They paused their store openings for a little bit. Their store count growth was down a little bit in 2020, but all the other years, been growing at least 20% a year.

Because of this, over the last seven years, their store count is up 3.5 times, so they are already up to almost 150 locations. Their net sales have 5Xed over the last seven years. Their net income has 18Xed over that time period. They're very profitable already at a store level, and they're growing their top line quickly through new stores and comparable sales growth.

Over the past 12 years, they have averaged a double-digit comp-sales improvement at all of their stores. Including 2020, they grew comp sales.

That's really the three things that I look for in a retail company like Floor & Decor. I want to know, can they grow their store count? For Floor & Decor, they are targeting 400 locations, so they should reach their target within the next 10 years.

I'm also wondering, can they grow their comparable sales? This is going to help them gain operating leverage at a store level. They do, they've consistently done that, and I believe it's every year as a company, they've done this.

Then also, are they profitable? That is a resounding yes as well for Floor & Decor.

As I look about their growth trajectory, I really like it. Sometimes, we talk about some of your best dividend stocks aren't paying a dividend yet. When you look at Home Depot and Lowe's, these are big dividend payers. I really foresee Floor & Decor becoming that once it exits high-growth mode. I really think it's going to be a good dividend payer as well. That's what I'm looking for over the next 10 years for Floor & Decor.

Brian Feroldi: Cool. Never heard about this company before. I'm guessing that's because they don't have any stores near me. Their closest store is 43 miles away. I'm not going that far for flooring.

My immediate thought is, the last time I invested in a flooring company was The Tile Shop Holdings, and that did not work out. Any idea what this company does differently? They seem to do wood, stone. It's more than just tile, it's like anything related to flooring essentially?

Quast: Yeah, anything related to flooring. I'll tell you how I discovered Floor & Decor personally. I was doing a flooring project in my home, and I decided last minute I wanted to put down an underlayment under the tile. I went to my local Lowe's. They did not have it, could not get it. Went to a Home Depot. They did not have it. Could get it, but not anytime soon. Had to drive down to Floor & Decor, which is about an hour drive for me, but they had it in stock.

They have everything related to your flooring projects. Whether that is the cement, the grout, the spacers. They have all the flooring options, whether it's vinyl, tile, anything that has to do with that, and the decor as well. If they see a product category doing well, say, bathroom vanities, they will start leaning into that a little bit more and providing more options as they see consumers like it.

Feroldi: Cool. If I had one of these near me and I needed flooring, I could probably become a customer. Thank you. That was Floor & Decor, FND.