Category killer Floor & Decor has a proven formula for sustainable business growth

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Floor & Decor just reported strong sales growth for the second quarter ended June 30. Net sales increased 26.7% to reach $1.1 billion with comparable store sales up 9.2% year over year.

CEO Tom Taylor said that second-quarter 2021 comparables were the “toughest” of the year and announced that earnings per share came in better than expected at $0.76, giving the company’s stock a boost on Friday up 13.5% to end at $92.92.

In the first half of 2022, total revenue rose 29% to more than $2.1 billion, even as net income fell 3.7%, declining from 9.7% to 7.2%.

Looking ahead to year-end, the company is forecasting revenue of $4,290 million to $4,330 million — about 25% above $3,433.5 million in 2021 and more than doubling 2019 revenue of $2 billion. Comparable in-store sales growth is estimated at 10% to 11% supply.

The company’s results are more notable when compared to current economic headwinds, particularly high inflation, rising mortgage rates, recent year-over-year declines in existing home sales, higher supply chain costs and port congestion.

Describing the company’s outlook in the current environment as “prudent,” Taylor reiterated, “We believe our competitive advantage across people, products, pricing and access to inventory is strong, which gives us added confidence in our ability to increase our market share as well.” to increase in a difficult macroeconomic environment.”

While the earnings call focused on the past quarter’s performance, Taylor began with a reminder of where the company is headed: $17 billion in sales and 500 retail stores nationwide. The company currently operates 174 department stores and will close the year with 192 department stores and six smaller Design Center shops for interior designers, architects and planners.

New businesses conquer market share

Floor & Decor still has a long way to go to achieve its long-term goal. But it’s a big country and Floor & Decor has found a proven, repeatable business strategy to get there further and faster. It all hinges on aggressively opening new stores.

To that end, 32 new stores will be added this year after 27 opened last year. It currently operates in 34 states, with its first Minnesota store breaking ground in Minneapolis in the third quarter.

Floor & Decor’s presence is concentrated in major cities along the coast and in Texas, around Atlanta and Chicago. Overall, it has a long runway for opening new businesses in virgin markets. And once it gains a foothold in a key market like Minneapolis, it’s likely to follow a hub-and-spoke model to expand locally and capture more market share.

category killer

The retail trade for floor coverings is declining nationwide. The Census Department hasn’t reported retail sales in this category since 2016, when around 9,200 retail establishments operated just over 11,000 stores.

By 2019, that number had fallen to 10,669 establishments operated by about 8,800 firms, for a net loss of 362 stores. And the number of specialist flooring shops has probably declined since then. That’s clearly not the case with Floor & Decor, which started in 2017 with 69 stores and has since added over 100.

On a national level, Floor & Decor has few direct competitors of any size. One of these is Dallas-based Artisan Design Group, formed in 2016 through the merger of Floors Inc. and Malibu Floors. Subsequently, private equity Sterling Group acquired ADG in 2018.

Since then, ADG has pursued a roll-up strategy of acquiring independent retailers that maintain their local brands. Flooring weekly reports that ADG had sales of $1.5 billion in 2021 and operated about 100 stores.

Then there is LL, formerly known as Lumber Liquidators
LL
. But with about 450 stores, LL’s nearly $1.2 billion in revenue was a fraction of Floor & Decor’s revenue last year, and its most recent quarter ended March 30, Sales down 0.8%.

Aside from Artisan Design Group and LL, independent flooring specialty stores with fewer than 20 employees make up over 90% of the nation’s flooring retail businesses. They are particularly at risk when Floor & Decor moves in.

The big home improvement chains also compete, but cannot offer home improvement or professional customers the depth and breadth of products and services that a flooring specialist like Floor & Decor can.

E-commerce expands reach and ticket

As most retailers find, once they establish a physical retail presence in a marketplace, their on-site ecommerce sales get a boost. That helped Floor & Decor. In the current quarter, its e-commerce business grew 34% year over year and accounted for nearly 18% of total sales, which is a significant percentage considering the nature of its products.

The pandemic-related closures have forced the company to rely on an omnichannel strategy, and its local stores have played a key role in this. The vast majority of e-commerce orders are fulfilled through in-store pickup.

And the rapid adoption of a connected customer strategy has improved both the company’s sales and profits, with the company reporting that tickets generated online are “much higher than tickets in-store.”

act up

Floor & Decor not only opens stores quickly, but also generates more sales at these locations. The average retail price rose 18% in the second quarter, driven by customers looking for the better and best deals, particularly laminate and luxury vinyl, which now account for 27% of sales, up about 40% year over year.

In-store design services also help drive up the average selling price, but designers’ influence goes much further. Taylor explained, “We consistently find that when a designer is brought on to the project, we see higher customer satisfaction, higher average ticket price, higher retention rates for basket sales, higher penetration rates for our adjacent categories, and higher gross margin. ”

The company currently employs around 800 designers in its stores and intends to further increase their number after they have demonstrated their long-term potential.

In addition, following successful launches in Houston, Dallas and Miami, the company introduced in-home design services to the Washington, DC market this quarter and Atlanta the next. Designer home visits should boost tickets even further.

And as it builds more Design Center stores to attract independent interior designers, it will put its influencer-the-influencer strategy on steroids.

professionals in your pocket

A final touch in its repeatable business process is attracting and mentoring flooring professionals in local markets. Described as a “holistic PRO strategy”, it offers a PRO Premier Rewards program to encourage repeat business and increase wallet share among professionals.

Taylor said PRO sales growth for the second quarter overall and at comparable stores was “well above” the company’s overall growth rate, with PRO sales accounting for nearly 40% of second-quarter sales growth.

Professionals are likely to become an even more important part of Floor & Decor’s business as consumers return to normal and have less time at home to devote to DIY projects. Taylor noted that the company didn’t quite meet its comparable sales expectations of 10% for the second quarter as homeowners began to travel again on summer weekends.

Solid basis for growth

Floor & Decor has a proven formula for gaining more or less market share $70 billion flooring market. By offering the most sought after hard floor products along with plumbing and associated furniture and fixtures for complete bathroom and kitchen projects, it has a well stocked inventory which is an added benefit as the supply chain is still delicate.

And it sees potential benefits arising from the current economic uncertainty. The company reports that existing home sales have fallen and mortgage rates have risen, and expects more homeowners to stay there. So they will turn to Floor & Decor to upgrade their current home with new hard floor coverings that will pay dividends in the long run. It should be noted that new home construction is not a significant part of his business.

“We are pleased to be on track to report our 14th consecutive year of comparable in-store sales growth,” said Taylor as he finished his prepared remarks. “We are showing that we have the right teams, strategies and an agile business model to meet the challenges of the global supply chain, inflationary pressures and a flagging housing market.”

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