Floor & Decor (FND 5.74%) is a fast-growing specialty retailer. While it competes with hardware stores, including both mom-and-pop stores and industry giants like Home Depot, it really stands head and shoulders above most of its competition -- at least in its flooring niche. Here's why that could be good and bad news.
Floor & Decor's business is tied to housing
To get the bad side of the story out of the way first, the state of the housing market will have a huge impact on Floor & Decor's performance. There's really no way around that. The company sells flooring and related products, and that's basically it. As demand waxes and wanes in the housing market, so, too, will demand for flooring.
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There are, of course, two broad segments here: new home construction and renovation. They don't operate in lockstep. So it isn't like Floor & Decor's business will suddenly fall off a cliff. Still, if fewer people are buying homes and renovations slow down (redoing a floor isn't cheap), it is going to face a big business headwind.
Floor & Decor has some big advantages
The somewhat cyclical nature of the business aside, there are reasons to like the company's approach. Floor & Decor's most direct competition comes from local mom-and-pop stores that specialize in flooring. These operations are generally much smaller, with stores that range from around 5,000 square feet to 20,000 square feet. The average Floor & Decor store is around 78,000 square feet.
Meanwhile, even the giant home improvement stores only have small sections dedicated to flooring -- ranging from about 3,000 square feet to 5,000 square feet, according to Floor & Decor.
That greater square footage dedicated to flooring means more selection for customers at a Floor & Decor location. That's a big draw in and of itself, as people look to buy the products they find most desirable. But there's more to the story.
Given the vast scale of the company's stores, it has huge buying power with flooring manufacturers. Floor & Decor often cuts out the middlemen that other retailers have to work with and buys directly from manufacturers. That can lead to big cost savings and wider margins. Investors should like that story.
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Floor & Decor, however, doesn't keep all of the savings. It passes some along to its customers by keeping prices low. So not only does the retailer offer more options, it also offers lower prices. That's a win/win that is hard for smaller specialty retailers and big-box hardware stores to compete with.
Further, because of the huge stores it operates, Floor & Decor also works hard to provide customers with ideas. Its average store has 32 "vignettes" that are updated at least yearly. Thus, customers not only have more selection to choose from, but also visual assistance in seeing what can be done with those products in the store. If that's not enough, there are also free design services available. There's a reason why the company considers itself a "destination" store in the flooring space.
Floor & Decor is expanding quickly
In 2017, Floor & Decor had 87 locations. At the end of the second quarter of 2023, it had 203, more than doubling its footprint in roughly five years. It has opened a few more stores since the end of Q2 as well. With operations in 36 states, the company has more expansion opportunities ahead.
Investors need to recognize the cynical nature of the business: Same-store sales shrank year over year in the second quarter, hinting at weakness in the housing market. The speed at which the company is opening new locations also merits monitoring, since management could overreach. But its focus on being the biggest and best flooring retailer looks fairly attractive from a longer-term perspective given the many advantages it creates.
