The market is having a year of reckoning, and few stocks are unscathed. While investors bemoan lost portfolio value, the reality is that many prices were inflated before, and the down market is creating more realistic and reasonable valuations.
That's why a mild down market is called a correction. It doesn't feel good, but it does create compelling entry points for great stocks that have loads of potential.
Floor and Decor Holdings (FND -3.21%) is a recent Warren Buffett stock that's down 47% this year, and it looks like an excellent buying opportunity.
High growth through rough times
Floor and Decor, which operates flooring superstores, demonstrated phenomenal growth over several years. That has continued straight through 2022 despite the gloomy economy.
Sales increased at a compound annual growth rate of more than 25% from 2017 to 2021, and it's likely to post a similar increase this year. So far, sales growth was strong over the past three quarters.
| Metric | Q1 | Q2 | Q3 |
|---|---|---|---|
| Sales growth, YOY | 31.5% | 26.7% | 25.2% |
Data source: Floor and Decor quarterly reports. YOY=year over year.
It's profitable as well, and adjusted earnings per share increased from $0.60 last year to $0.70 this year, beating analyst expectations of $0.66.
Management lowered its full-quarter outlook despite the earnings beat, anticipating more pressure coming into the fourth quarter.
Tons of room for growth
There might be substantial reasons to invest in companies that are already built up, but getting into a stock that is still in its infancy, is growing quickly, and is already profitable is a real opportunity. That's where Floor and Decor finds itself right now, and it's not surprising that Warren Buffett recognized this opportunity and added shares to his holding company.
The company operated 178 stores as of the end of the third quarter, with plans to open 13 more in the fourth quarter. It identifies a market for 500 stores over the next eight to 10 years, and it's capturing that market.
But it's not just new stores. A business that engenders all of its sales growth from new stores wouldn't look viable for the long term.
Retailers often provide metrics such as average revenue per unit and comparable store sales so shareholders can get a sense of how well stores can grow as a single unit. This is why investors often consider comparable sales growth, or comps growth, as a more important measurement than revenue growth.
Comps remained healthy in the third quarter, growing 11.6%, and the outlook for the full year was lowered from 10% to 11% to 9% to 10%. Comps growth has been choppy over the past few years but positive with a strong average.
Floor and Decor comps average. Image source: Floor and Decor.
Why be confident about maintaining growth?
Part of how Floor and Decor managed to stay profitable and keep sales moving is its large and direct supply chain. It works with more than 240 suppliers in 24 countries, eliminating importers and allowing it to circumvent many supply chain logjams.
Beyond opening stores, the company plans to expand its services and increase customer engagement. These include a focus on improving omnichannel networks and developing its commercial business, and including all of its segments, it sees a total addressable market of up to $54 billion.
The company increased its brand awareness among homeowners from 62% in 2020 to 70% in 2021, and that's even higher among the pro segment, growing from 71% in 2020 to 75% in 2021. More brand awareness results in engagement and sales: 80% of its shoppers ultimately purchase at one of its stores, and that goes up to 90% for pros.
A more competitive valuation
At the new, lower price, Floor and Decor stock trades at a price-to-earnings multiple of 27, whereas a year ago, it was hitting near 50. In today's market, that's not even cheap. But it looks reasonable for a company posting double-digit growth with so much future potential. Buffett is known for investing in undervalued stocks, and at this price, the stock looks like it may be undervalued.
