“We believe our competitive edge in people, product, price and access to inventory is strong, … [+]
Floor & Decor just reported strong revenue growth for the second quarter ending June 30. Net sales increased 26.7% to $1.1 billion with comparable store sales up 9.2% year over year.
Explaining that the 2021 comparables faced in the second quarter were the “toughest” for the year, CEO Tom Taylor announced that earnings per share of $0.76 were better than expected, giving The company’s shares rose 13.5% in Friday trading to end at $92.92.
Through the first half of 2022, total sales increased by 29%, passing $2.1 billion, although net income fell by 3.7%, falling from 9.7% to 7.2%.
Looking to the end of the year, the company expects sales to reach $4,290 million to $4,330 million – roughly 25% over the $3,433.5 million in 2021 and more than double the $2 billion in sales in 2019. Comparable store sales growth is driven by from 10% to 11 % range.
The company’s results are most notable when measured against 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 as “cautious” in the current environment, Taylor asserted: “We believe our competitive edge across people, product, price and access to inventory is strong, giving us greater confidence in our ability to increase our market share even in a difficult macroeconomic environment”.
As the earnings call focused on last quarter’s performance, Taylor began with a reminder of where the company is headed: $17 billion in sales and 500 retail stores across the country. It currently operates 174 warehouse stores and will end the year with 192 warehouse stores, plus six smaller Design Center stores serving interior designers, architects and specifiers.
New stores capture market share
Floor & Decor still has a way to go to achieve its long-term goal. But it’s a big place, and Floor & Decor has found a proven and repeatable business strategy to take 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 Minnesota store 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 runway to open new stores in virgin markets. And once it gains traction in a large market like Minneapolis, it will likely follow a hub-and-spoke model to expand locally and capture more market share.
Category killer
Nationwide, the specialty retail floor covering category is in decline. The Census Department has not reported retail sales in this category since 2016, when about 9,200 retail firms operated just over 11,000 stores.
By 2019, that number had fallen to 10,669 establishments operated by about 8,800 firms, a net loss of 362 stores. And likely, the number of specialty floor covering stores has declined since then. This is clearly not the case for Floor & Decor which started 2017 with 69 stores and has added over 100 since then.
Nationally, Floor & Decor has few direct ladder 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 bought ADG in 2018.
Since then, ADG has pursued an aggregation strategy by acquiring independent retailers that retain their local brands. Floor covering weekly reports that ADG generated $1.5 billion in sales in 2021 and operated approximately 100 stores.
Then there is LL Flooring, formerly known as Lumber Liquidators
LL
In addition to Artisan Design Group and LL, independent specialty flooring stores with fewer than 20 employees make up over 90% of retail firms in the country. They are especially vulnerable when Floor & Decor steps in.
Big-box home improvement chains also compete, but can’t offer the depth and breadth of products and services for DYI or professional customers 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 market, their e-commerce sales take a local boost. Floor and decor. In the current quarter, its e-commerce business grew 34% from last year and accounted for nearly 18% of total sales, a significant weight considering the nature of its products.
Pandemic closures forced the company to shift to an omnichannel strategy, and its local stores have played an integral role in this. The vast majority of e-commerce orders are fulfilled through in-store pickup.
And the rapid adoption of a customer-facing strategy has given a boost to both the company’s top line and bottom line, with the company reporting that sales generated online are “far higher than in-store tickets” .
Trading up
Not only is Floor & Decor rapidly opening stores, but it is generating more sales from those locations. The average retail ticket rose 18% in the second quarter, driven by customers trading up to its better and better offerings, particularly laminate and luxury vinyl that now represent 27% of sales, about 40 % more than a year ago.
In-store design services also help increase the average sales ticket, but the influence of designers goes much further. Taylor explained, “We continue to find that when a designer is involved in the project, we see a higher customer satisfaction score, a higher average ticket, higher basket sale rates, higher penetration rates for our adjacent categories and a higher gross margin. “
Currently, the company employs about 800 designers in its stores and intends to continue to increase their number after proving their long-term potential.
Additionally, it rolled out in-house design services to the Washington, DC market this quarter and Atlanta next, following successful launches in Houston, Dallas and Miami. Designer calls at home should boost the ticket even further.
And as it builds more Design Center stores to attract independent interior designers, it will put its influencer strategy on steroids.
Professionals in your pocket
A final touch to its repeatable business process is attracting and servicing flooring professionals in local markets. Described as a “holistic PRO strategy,” it offers a PRO Premier Rewards program to encourage repeat business and create portfolio sharing among professionals.
Taylor stated that total second-quarter growth and comparable PRO store sales growth were “significantly 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 normalcy and have less time at home to devote to DIY projects. Taylor noted that the company missed its second-quarter comparable-store sales expectations of 10% due to homeowners starting to travel again during summer weekends.
Strong basis for growth
Floor & Decor has a proven formula to continue to capture more market share in an approximately $70 billion market for floor coverings. Offering the most sought-after hardwood flooring products, along with installation supplies and related cabinets and fixtures to complete bathroom and kitchen projects, it is well stocked with inventory, which is an added advantage with the supply chain. which is still difficult.
And he sees potential benefits emerging from the current economic uncertainty. Reporting that existing home sales have fallen and mortgage rates have risen, the company expects more homeowners to stay put. So they’ll turn to Floor & Decor to upgrade their current homes with new hard surface flooring that will pay off in the long run. It is worth noting that the construction of new houses is not an important part of its business.
“We are excited to be on track to report our 14th consecutive year of comparable store sales growth,” Taylor said as he concluded his prepared remarks. “We are demonstrating that we have the right teams, strategies and agile business model to navigate global supply chain challenges, inflationary pressures and a weak housing market.”
