Company Overview: Floor & Decor Holdings, Inc. (NYSE: FND) was founded in 2000 and is a multi-channel specialty retailers of hard surface flooring and related fittings. FND is engaged in providing in-stock assortment of wood, laminate, tile, and natural stone flooring as well as other decorative and installation accessories. As of 31 December 2020, the company had approximately 133 warehouse-format stores in 31 states across the globe.

FND Details

Geographical Diversification & Store Base Expansion Drive Growth: Floor & Decor Holdings, Inc. (NYSE: FND) is one of the top specialty retailers of hard surface flooring, which is involved in providing a wide range of in-stock selection of tile, wood, stone, and correlated tools, and accessories at a very reasonable price. The company ended FY20 with robust financial results, owing to its reliable and well-organized culture of innovation and reinvestment. This, in turn, aided the company to create an environment of the differentiated business model in the hard surface flooring category.  This can be supported by the fact that the company’s comparable sales growth in the past twelve years averaged ~13.1% per year (10.9% averaging annually from fiscal 2016 to fiscal 2020) with a 5.5% surge in FY20, against only 4% in FY19.

Further, the company also remained on track to witness store base expansion in the last four year. Notably, the store base expanded to 133 warehouse-format stores and two small-format design studios at the end of FY20 as compared to 69 warehouse-format stores at the end of FY16. This expansion demonstrated a CAGR of 17.8% from FY16-FY20. FND also added 13 warehouse-format stores in FY20, depicting a rise of 11% year over year.  The company has witnessed a CAGR of 23.3% in total net sales over the period of 2016 - 2020, wherein the total sales amounted to $1.05 billion in FY16 and $2.43 billion in FY20. Further, net income over the same time span depicted a CAGR of 45.9%.

Net Sales & Comparable Sales Growth Trend (Source: Company Reports)

The company opines to massively increase its store base in the United States to ~400 stores worldwide over the next 8-10 years from 133 warehouse-format stores in FY20, owing to its research and development activities relating to housing density, competitor awareness, demographic data, and other aspects in both new and existing markets. Going forward, the company is also targeting to open new stores in new and existing underserved markets. Also, the company plans to expand its store base by ~20% per annum for the next several years.

A Look at 4QFY20 Key Highlights: During the quarter, the company reported net sales of $723.7 million, up 37.3% year over year from $527.0 million reported in the year-ago period. Comparable store sales in 4QFY20 surged by 21.6% year over year, owing to robust transactions and broad-based regional and group expansion. During the quarter, FND launched five new warehouse-format stores and ended 4QFY20 with a total of 133 warehouse-format stores and two design studios. In 4QFY20, operating income stood at $68.0 million, depicting a rise of 61.5% year over year. Operating margin for the quarter expanded 140 basis points (bps) year over year and stood at 9.4%. The company reported an adjusted net income of $50.2 million, which went up by 86% from the prior corresponding period. Adjusted EPS for the quarter came in at $0.47, up from $0.26 per share reported in 4QFY19.

4QFY20 Key Highlights (Source: Company Reports)

Liquidity & Balance Sheet Details: The company exited the quarter with cash and cash equivalents of $307.7 million (as of December 31, 2020), up from the previous quarter of $271.2 million. Long term debt at the end of the quarter came in at $207.2 million. During the twelve months ended December 31, 2020, the company recorded net cash flow from operating activities of $406.1 million, up from the prior period’s figure of $204.6 million.

In FY20, merchandise margins came in at 42.7%, higher than the industry median of 36.4%. Same store sale stood at 5.5% in FY20, higher than the industry median of 2.4%. In FY20, Gross, EBITDA and net margins stood at 42.7%, 12.8% and 8%, higher than the industry median of 35.4%, 9.2% and 3.6%, respectively. In FY20, ROE stood at 22.1%, higher than the industry median of 14.1%. Current ratio of the company stood at 1.49x, higher than the industry median of 1.34x. Debt to equity in the same time span stood at 0.21x, lower than the industry median of 0.38x.

Profitability and Liquidity Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 57.51% of the total shareholdings, while the top 4 constitutes the maximum holding. Capital World Investors and Capital Research Global Investors are holding a maximum stake in the company at 10.87% and 8.83%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

Risk Analysis: The company’s business, financial and operating conditions highly depends on general economic conditions and purchasing power of customers. If such circumstances worsen, it may negatively impact the overall financial performance of the company. Further, the company is exposed to short-term disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak. Other risks include its foreign operations and competition from peers. FND’s long-term debt stood at $207.2 million as of 31 December 2020, which seems at comfortable levels; however, any further increase in borrowings might add to its risk profile. Notably, the stock of FND is currently trading at higher levels though it has corrected ~16% from its 52-week high of $108.54. Hence, looking at the overall scenario, any major upside in the stock price seems capped.

Outlook: The company opines to continue to drive its robust net sales and profit growth, going forward. This, in turn, is expected to improve the efficiency of the company’s operations by reducing the expense and capital requirements which would be linked with extensive service offerings to enhance the Pro customer experience. Buoyed by its ongoing offering to potential customers and maintaining strong service standards for its customers, the company expects to increase its comparable store sales, going forward. The company’s focus to maintain cash liquidity and take necessary actions to stay afloat in this difficult time will give it a competitive advantage and will drive the company to come out stronger in the long run. Further, the company’s distinguished emphasis on Pro customers has established a competitive lead over FND’s peers that is expected to be continued in the coming days, thus driving its net sales growth. Notably, the company expects to open 27 new warehouse-format stores and two small design studios, in the coming years. Capital expenditure is expected to be in the ambit of $440 million to $460 million in FY21.

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last one month, the stock went down by ~13.7%. The stock made a 52-week low and high of $24.36 and $108.54, respectively. On the technical analysis front, the stock has a support level of ~$82.9 and a resistance level of ~$112.3. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at some premium as compared to its peer’s average, considering the robust results for 4QFY20, resilient business, store base expansion, geographical diversification, and growth prospects. We have taken peers like Ollie's Bargain Outlet Holdings Inc (NASDAQ: OLLI), Sportsmans Warehouse Holdings Inc (NASDAQ: SPWH), to name a few.  Considering the company’s decent 4QFY20 performance, geographical expansion, decent outlook and liquidity position and valuation, we give a “Buy” recommendation on the stock at the closing price of $90.90, up by 1.13% on 10 March 2021.  

FND Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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