Floor & Decor Holdings (FND -1.09%) is one of the best growth stories out there, but shares have fallen 45% from their 52-week high because of housing market uncertainty due to rising mortgage rates. The general sell-off of growth stocks over the last few months has not done investors in the $9 billion home improvement retailer any favors either.

But a short-term speed bump like this could be the perfect opportunity to add this prodigious compound growth stock to your portfolio. Floor & Decor could be in the early innings of becoming this decade's version of another Atlanta-based home improvement retailer, Home Depot (HD 0.06%).

Home Depot has generated decades of compound growth for its shareholders since its IPO in 1981 on its way to growing into a $324 billion mega-cap stock. Here's why Floor & Decor could be taking the early steps on the path of becoming the Home Depot of the 2020s by delivering shareholders years of outsized returns.

Flooring store

Image Source: Getty Images

What is Floor & Decor?    

Based in Atlanta, Georgia, Floor & Decor is a $9 billion specialty hard flooring retailer. The company carries all categories of hard flooring, including tile, wood, stone, laminate and other related products. The company was founded in 2000 and has grown to 160 locations.

CEO Thomas V. Taylor was previously the executive vice president of operations at Home Depot, where he began working at age 16 and moving his way up the ladder, so he knows a thing or two about building and maintaining a home improvement empire.

Floor & Decor has a differentiated approach in that it uses its scale to cut out middlemen like importers and wholesalers. Instead, it goes directly to the sources, which enables it to deliver favorable prices to its customers. Its buyers source marble from Italy, tile from Spain, and natural stone from Turkey. In fact, the company boasts 240 suppliers across 24 countries.

Prodigious store count growth 

Management has its sights set on expanding its store count rapidly in the years to come with a goal of 500 total stores. The company currently has 160 stores, so this is over three times the current footprint. The company has been growing its store count by 17.8% annually, on average, over the last five years, and expects to grow at a 20% rate forward. While this is an aggressive growth rate, there is plenty of runway ahead. At 500 stores, Floor and Decor would still be much smaller than Home Depot, which has over 2300 locations. Lowe's (LOW -0.59%) has approximately 2,200 locations.   

These stores are massive showcases for Floor & Decor's products, averaging 78,000 feet per location. The company claims that it has more space dedicated to hard surface flooring than anyone else in the industry at 18.2 million square feet. The stores also feature oversized, visually compelling displays and vignettes (an average of 32 per store) that further highlight the company's most attractive products.

These vignettes are refreshed on an annual basis, ensuring that all displays are in style and on trend. As CEO Taylor states, "If you think about a big box retailer, what they do in two aisles, we do in 80,000 square feet. It gives us the ability to carry every single category within hard surface flooring under one roof." 

We've all heard of companies growing rapidly, but doing so at the expense of profit and later on realizing that they have overextended themselves. That's not the case with Floor & Decor, where growth has been white-hot but not at the expense of profits.

Comparable store sales (which measure the year-over-year sales of locations open for at least a year) have been positive for 13 years, and this sales growth is translating to the bottom line. The company has grown its adjusted EBITDA at a 32% compound annual rate over the last five years, and its earnings per share at a 37% rate. So when it comes to Floor & Decor, it isn't expanding for the sake of expanding -- more stores mean more profit.

Go with the pros 

Floor & Decor has a diversified customer mix, serving homeowners and DIY customers, professional flooring installers and contractors, as well as commercial clients. Like Home Depot, Floor & Decor recognizes the value of its professional customers and has a dedicated team for them. The company offers plenty of value to these customers, offering free design services, a loyalty program, priority checkout, credit and financing solutions, and even a mobile app.

Professional contractors can be a great niche to serve as they can book many jobs in a year and become repeat customers. To this point, Floor & Decor finds that the top 10% of its pros have used Floor & Decor for 37 projects and increased their spending by 24% year-over-year in 2021, so professional customers really are the gift that keeps on giving. 

Is Floor & Decor the next Home Depot?  

Floor & Decor has a tremendous runway of growth ahead of it. Even after the company more than triples its store count and grows to 500 locations, it will still be less than a quarter of the size of Home Depot today. The fact that the company is expanding rapidly while keeping a focus on profitability is encouraging. Given the vision that Floor & Decor has outlined and the way it has executed so far, I believe it is a long-term buy -- and starting along the path of becoming the Home Depot of the 2020s.