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

Floor & Decor just reported strong revenue growth for the second quarter ending June 30. Net sales increased 26.7% to $1.1 billion as same-store sales increased 9.2% year-over-year.

Explaining that the 2021 comparables encountered in the second quarter were the “toughest” of the year, CEO Tom Taylor announced that earnings per share of $0.76 were better than expected, giving the company’s shares a rise up 13.5% in Friday trading to end at $92.92.

During the first half of 2022, total sales increased by 29%, exceeding $2.1 billion, although net profit decreased by 3.7%, from 9.7% to 7.2%.

Looking to the end of the year, the company expects sales to reach $4,290-4,330 million, about 25% of more than $3,433.5 million in 2021 and more than double the sales of $2 billion in 2019. Same-store sales growth is driven by the 10% to 11% range.

The company’s results are most notable when measured against the current economic headwinds, including high inflation, rising mortgage rates, the recent year-over-year decline in existing home sales, the rising supply chain costs and port congestion.

Describing the company’s outlook as “cautious” in the current environment, Taylor said, “We believe our competitive moat in people, product, price and access to inventory is strong, which gives increased confidence in our ability to increase our market share even in a difficult macroeconomic environment.

As the earnings call focused on last quarter performance, Taylor began with a reminder of where the company is headed: $17 billion in sales and 500 retail stores nationwide. Currently, it operates 174 outlet stores and will end the year with 192 outlet stores, as well as six smaller Design Center stores catering to interior designers, architects and specifiers.

New stores are gaining market share

Floor & Decor still has a long way to go to reach its long-term goal. But it’s a big country and Floor & Decor has found a proven and repeatable business strategy to propel it further and faster towards that goal. It all depends on the aggressive opening of new stores.

To that end, it will add 32 new stores this year after opening 27 last year. It currently operates in 34 states, with its first store in Minnesota opening in Minneapolis in the third quarter.

Floor & Decor’s footprint is concentrated in major cities along the coasts and in Texas around Atlanta and Chicago. Overall, it has a long track to open new stores in virgin markets. And once it gains traction in a major market like Minneapolis, it will likely follow a hub-and-spoke model to expand locally and capture more market share.

Category killer

Nationally, the specialty flooring category is in decline. The Census Department has not reported retail sales in this category since 2016, when some 9,200 retail businesses operated just over 11,000 stores.

In 2019, that number fell to 10,669 establishments operated by approximately 8,800 businesses, a net loss of 362 stores. And probably the number of specialty flooring stores has decreased since then. This is clearly not the case for Floor & Decor which started 2017 with 69 stores and has since added over 100.

Nationally, Floor & Decor has few direct large-scale competitors. One of them is Dallas-based Artisan Design Group, which was formed in 2016 with the merger of Floors Inc. and Malibu Floors. Private equity firm Sterling Group then acquired ADG in 2018.

Since then, ADG has followed a roll-out strategy by acquiring independent retailers who maintain their local brands. Weekly flooring ADG reports generated $1.5 billion in sales in 2021 and operated about 100 stores.

Then there is LL Flooring, formerly known as Lumber Liquidators
LL
. Yet with some 450 stores, LL’s revenue of nearly $1.2 billion last year was only a fraction of that of Floor & Decor and, in its most recent quarter ending June 30, sales fell 0.8%.

In addition to Artisan Design Group and LL, independent specialty flooring stores with fewer than 20 employees account for more than 90% of retail flooring businesses nationwide. They are particularly vulnerable when Floor & Decor moves in.

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

E-commerce expands reach and ticket

As most retailers discover, once they establish a physical presence in a marketplace, their online sales are boosted locally. It helped Floor & Decor. In the current quarter, its e-commerce business grew 34% from a year ago and reached almost 18% of total sales, a significant share given the nature of its products.

The pandemic shutdowns have forced the company to look at an omnichannel strategy and its local stores have played a vital role in this. The vast majority of e-commerce orders are fulfilled by in-store pickup.

And the rapid adoption of a connected customer strategy has boosted both revenue and the company’s bottom line, with the company saying sales generated online have tickets “a lot higher than the ticket in store”.

Speculate

Not only is Floor & Decor opening stores quickly, but it’s generating more sales from those locations. The average retail ticket increased 18% in the second quarter, driven by customers opting for its best and best deals, including laminate and luxury vinyl which now account for 27% of sales, up around 40% compared to the previous year.

In-store design services also help increase the average sales ticket, but the influence of designers goes much further. Taylor explained, “We continue to see that when a designer engages with the project, we see a higher customer satisfaction score, higher average ticket, higher basket sale attach rates, higher penetration rates for our adjacent categories and higher gross margin. ”

Currently, the company employs some 800 designers in its stores and intends to continue to increase their number after proving their long-term potential.

Additionally, it rolled out home design services in the Washington, DC market this quarter and in Atlanta next, following successful launches in Houston, Dallas and Miami. The creators’ home visits should further strengthen the tickets.

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

Professionals in hand

A final touch to its repeatable business process is to attract and serve flooring professionals in local markets. Described as a “holistic PRO strategy”, it offers a PRO Premier rewards program to encourage customer retention and create wallet share among professionals.

Taylor said PRO store total and comparable sales growth in the second quarter was “significantly higher” than the company’s overall growth rate, with PRO sales accounting for nearly 40% of sales growth in the second quarter.

Professionals are likely to become an even bigger part of Floor & Decor’s business as consumers get back to normal and have less time at home to spend on DIY projects. Taylor noted that the company didn’t quite meet its 10% second-quarter same-store sales expectation as owners resumed traveling on summer weekends.

A solid foundation for growth

Floor & Decor has a proven formula to continue to capture more market share in a $70 billion flooring market. Offering the most requested hard flooring products, as well as installation supplies and related cabinetry and accessories to complete bathroom and kitchen projects, it is well stocked in inventory which is a plus further with the still risky supply chain.

And he sees potential benefits emerging from the current economic uncertainty. Noting that existing home sales have fallen and mortgage rates have risen, the company expects more homeowners to stay put. So they will turn to Floor & Decor to upgrade their current homes with new hard surface flooring that will pay off in the long run. It should be noted that the construction of new houses does not represent a significant part of its activities.

“We are thrilled to be on track to report our 14th consecutive year of same-store sales growth,” Taylor said as he concluded his prepared remarks. “We are demonstrating that we have the right teams, the right strategies and the right agile business model to weather global supply chain challenges, inflationary pressures and a weakening housing market.”