Led by Warren Buffett and his business partner Charlie Munger, the world's largest holding company, Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%), has a knack for picking proven businesses.
One of the positions within Berkshire Hathaway's portfolio is a hard-surface floor retailer known as Floor & Decor (FND -1.46%). The $417 million valuation of the position is a fraction of the holding company's $325 billion investment portfolio. But it raises the question: Should growth investors consider the stock for their portfolios? Let's delve into Floor & Decor's fundamentals and valuation to arrive at an answer.
Rapid sales and profit growth
Berkshire Hathaway tends to look for businesses that enjoy competitive advantages over their peers. Companies with competitive advantages tend to be more profitable and have better growth prospects than competitors. And Floor & Decor fits these requirements perfectly.
Floor & Decor's warehouse-format stores are the largest in its industry at an average of roughly 79,000 square feet. Thanks to this massive store size, the company can offer an industry-leading selection of around 4,100 products. Whether customers are searching for tile, wood, laminate, vinyl, or natural stone flooring, this makes Floor & Decor's stores a one-stop shop for all hard-surface flooring needs. The company's well-established direct relationships with quarries and manufacturers also help it get the best deals on products. This translates into savings for customers and higher gross margins for Floor & Decor versus big-box store companies.
The specialty retailer recorded just over $1 billion in net sales during the fiscal fourth quarter ended Dec. 29, 2022, which was up 14.6% over the year-ago period. Comparable store sales grew by 2.5% for the quarter. Price increases to combat cost pressures and more sales to higher-ticket professional contractors contributed to a 14.4% growth rate in Floor & Decor's average ticket in the quarter. These tailwinds were mostly counteracted by soaring mortgage interest rates and declines in existing home sales, which resulted in a 10.4% comparable store sales transaction decline during the quarter. Along with the opening of 13 new warehouse stores for the quarter to end at 191 stores, this explains the robust net sales growth.
Floor & Decor's non-GAAP (adjusted) diluted earnings per share (EPS) soared 45.5% year over year to $0.64 in the fourth quarter. Slower growth in cost of sales (9.4%) than in net sales led to a 140-basis-point expansion in non-GAAP net margin to 6.6% during the quarter. Paired with a 0.2% reduction in the company's weighted average diluted share count, this is how its adjusted diluted EPS growth outpaced net sales growth for the quarter.
As Floor & Decor continues to open new stores and become more profitable, this should bode well for future growth. That's why analysts believe the company's adjusted diluted EPS will compound at 13.8% annually over the next five years. Putting this into perspective, that is triple the home improvement retail industry average earnings growth forecast of 4.4% for the period.
Image source: Getty Images.
Strong financial health
Floor & Decor should also have no difficulty in opening hundreds more stores in the years ahead. Analysts are predicting the company's net debt position will be $373 million in 2023. Compared to the $617 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) that is projected for this year, this is a net debt to EBITDA ratio of just 0.6. This means that if Floor & Decor wanted to completely repay its debt, it would have no issues in doing so because the debt load is manageable.
A sensible valuation for a quality business
Shares of Floor & Decor have surged 25% higher so far in 2023. But because they were deeply undervalued at the start of the year, the valuation remains attractive.
Floor & Decor's forward price-to-earnings (P/E) ratio of 25.1 is significantly above the home improvement retail industry average forward P/E ratio of 16.1. However, this premium arguably isn't as high as it should be for a business with vastly superior growth prospects relative to its industry counterparts. That's why the stock is a no-brainer Buffett buy for growth investors in my opinion.
