Investors in retail stocks have often looked for the small retailer that could someday become one of the top retailers in the world. One example was Home Depot (HD 0.22%), an Atlanta-area home improvement retailer that went on to saturate the U.S. market and expand to Canada and Mexico.
While no analyst can guarantee that they have discovered the next Home Depot, Warren Buffett and his team at Berkshire Hathaway may have found it in Floor & Decor (FND 0.38%). The hard flooring retailer, also based in Atlanta, operates 191 locations stores in 36 states. And the retail stock could make investors much wealthier as it expands and deepens its presence in the U.S. and possibly elsewhere.
Why Floor & Decor stands out
At first glance, its offering of hard flooring may not seem unusual. Both Home Depot and Lowe's sell such flooring, and numerous other retailers and independents also compete in this segment.
Moreover, Grand View Research estimates a compound annual growth rate (CAGR) for the North American hard flooring industry of just 2% by 2030. Such increases will typically not draw growth investors into home improvement stocks.
However, they might make an exception for Floor & Décor as it has thrived in this space through specialization. Since the company sells hard flooring exclusively, it can offer a wider variety of flooring choices than a competitor like Home Depot or Lowe's. Also, due to its size, it can cut out intermediaries and buy flooring in larger quantities, which gives the company pricing power not available to most of its peers.
Financials
The financials indicate that consumers continue to take to its approach. Despite the aforementioned 2% CAGR, revenue of $4.3 billion in fiscal 2022 (which ended Dec. 29, 2022) represents a 24% increase from year-ago levels. This includes a 9% increase in comparable-store sales and the addition of 32 locations during the fiscal year.
But despite that improvement, Floor & Decor was not immune to rising costs. Cost of sales rose to 60% versus 59% in 2021, while income taxes surged to 2.1% of sales, up from 1.5% in the prior year. This meant the company's 2022 net income of $298 million increased by only 5% year over year, a fraction of the 45% surge in net income in 2021.
Additionally, Floor & Decor stock did not escape the bear market, losing almost 60% of its value at one point. Although it has increased more than 50% since its low in May, shares sell for well below its pandemic high.
However, it trades at a P/E ratio of 33. While that is significantly higher than Home Depot or Lowe's, Floor & Decor grows its revenue considerably faster than those companies. It also sells at a relative discount to pandemic levels when the P/E ratio often exceeded 50. Given these levels, one can see why some investors consider it ridiculously cheap.
FND PE Ratio data by YCharts
Buying Floor & Decor
Considering Floor & Decor's transformational impact on the hard flooring industry, investors should consider following Buffett's team into this stock. With the company's approach to the market and rapid expansion across the U.S., it should continue to surge higher.
Indeed, the industry is competitive, and profit growth in 2022 was weak compared to its revenue increases. But as the economy improves and it adds more stores, long-term investors like Buffett should profit from this stock over the next few years.
