Led by chairman and CEO Warren Buffett, Berkshire Hathaway is the most formidable investment holdings company in the world, with an investment portfolio valued at $364 billion.
While the company's investments are heavily weighted in just a few stocks, it holds equity stakes in dozens of businesses. The specialty home improvement retailer Floor & Decor (FND 2.66%) is one of them. Berkshire Hathaway's nearly 4.8 million-share position is worth just shy of $500 million.
This raises the following question: Is Floor & Decor stock a buy for growth investors? Let's inspect the retailer's fundamentals and valuation to render a verdict.
Holding up in a tough environment
If you are particular with your hard-surface flooring preferences and have ever shopped at Home Depot or Lowe's, you may have found that their product selection didn't meet your needs. After all, they dedicate just two or three aisles to hard-surface flooring. With thousands of hard-surface flooring options for customers to choose from throughout their stores, this is where Floor & Decor derives an economic moat that attracted Berkshire Hathaway to the stock.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Total store/design studio count | 179 | 208 |
| Comparable-store sales growth rate | 9.2% | (6%) |
| Net margin | 7.5% | 6.3% |
Data source: Floor & Decor.
Floor & Decor's net sales edged 4.2% higher year over year to $1.1 billion in its fiscal second quarter concluded June 29. What was behind this more modest top-line growth rate?
Well, the federal funds rate has skyrocketed from between 1.5% and 1.75% at the end of Floor & Decor's year-ago period to between 5% and 5.25% to end the second quarter of its fiscal year 2023. Yet inflation is well above the Federal Reserve's target of 2%.
These two factors ate into the discretionary income of consumers and demand for the retailer's products. Fortunately, the company's steadily growing store footprint was able to more than offset its unfavorable comps for the quarter.
Floor & Decor's diluted earnings per share (EPS) fell by 13.2% year over year to $0.66 during the fiscal second quarter. This can be explained by operating expenses growing well ahead of net sales due to the company's much bigger store presence. That is what led to a 120-basis point contraction in Floor & Decor's net margin in the quarter. Thus, the retailer's diluted EPS declined for the quarter while its net sales grew.
The macroeconomic environment will not be favorable to Floor & Decor for at least the next few quarters, which is why analysts expect diluted EPS to dip by 4.7% in 2023 from 2022.
But because the company remains far off its long-term store target of 500 stores, analysts think that diluted EPS will rise by 12.2% annually over the next five years. For perspective, that is much better than the home improvement retail industry average annual earnings growth prediction of 3.4%.
A financial profile that can sustain growth
Floor & Decor's growth capabilities look promising. And the good news is that the company has the financial means to keep expanding.
Supporting this argument, it is projected that the retailer's net debt will come in at around $397 million in its fiscal year 2023. Measured up to the $578 million in earnings before interest, taxes, depreciation, and amortization (EBITDA), this works out to a debt-to-EBITDA ratio of 0.7-- less than its average of 0.8 in the past six years.
The stock is a compelling value
Floor & Decor has soared a staggering 50% so far in 2023. A rally of such magnitude would typically put most stocks firmly into overpriced territory. Surprisingly, the stock's forward price-to-earnings (P/E) ratio of 33.4 is not yet even double the home improvement retail industry average forward P/E ratio of 19.
Considering Floor & Decor's vastly superior growth prospects, this could lend credence to the idea that the stock is still a buy for growth investors.
