Floor & Decor just announced strong revenue growth for the second quarter ended June 30. Net sales increased 26.7% to $1.1 billion with comparable store sales increasing 9.2% year over year.
CEO Tom Taylor explained that the 2021 comparisons encountered in the second quarter were the “toughest” of the year, announcing that earnings per share of $0.76 were better than expected, giving the company’s stock a 13.5% rise in trading Friday to end at 92.92. dollars.
During the first half of 2022, total sales increased by 29%, exceeding $2.1 billion, although net income decreased by 3.7%, falling from 9.7% to 7.2%.
Looking at the end of the year, the company expects sales to reach $4,290 to $4,330 million — nearly 25% more than $3,433.5 million in 2021 and more than double sales of $2 billion in Year 2019. Similar store sales growth is directed at 10% to 11% range.
The company’s results are more telling when measured against current economic headwinds, notably high inflation, rising mortgage rates, recent declines in year-over-year sales of existing homes, rising supply chain costs and port congestion.
Describing the company’s view as “prudent” in the current environment, Taylor emphasized, “We believe our competitive moat of people, product, price and inventory access is robust, giving us additional confidence in our ability to increase market share even in a challenging macroeconomic environment.”
While 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 nationwide. Currently, it operates 174 warehouses and will end the year with 192 stores, as well as six small Design Center stores serving interior designers, architects and professionals.
New stores capture market share
Floor & Decor still has ways to reach its long-term goal. But it’s a big country and Floor & Decor has found a proven and repeatable business strategy to push it further and faster toward that goal. It all depends on aggressively opening new stores.
To that end, it will add 32 new stores this year after opening 27 stores last year. It currently operates in 34 states, with its first store in Minnesota to begin operations 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. In general, it has a long runway for opening new stores in the pristine markets. And once it gains traction in a key market like Minneapolis, it will likely follow the hub-and-spoke model to expand locally and capture a larger market share.
Nationwide, the specialty floor covering the retail category is declining. The Census Department has not reported retail sales in this category since 2016, when there were about 9,200 retail businesses operating just over 11,000 stores.
By 2019, this number had decreased to 10,669 establishments operated by approximately 8,800 companies, a net loss of 362 stores. And, most 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 stores since then.
Nationwide, Floor & Decor has few direct competitors at scale. One is the Dallas-based Artisan Design Group which was formed in 2016 with the merger of Floors Inc. and Malibu Floors. ADG was acquired by Stirling Private Equity Group in 2018.
Since then, ADG has pursued a strategy of consolidation by acquiring independent retailers who maintain their local brands. Floor Covering Weekly ADG reports $1.5 billion in sales in 2021 and operates nearly 100 stores.
Then there’s LL, formerly known as Lumber Liquidators
Other than Artisan Design Group and LL, independent specialty flooring stores with less than 20 employees represent more than 90% of the nation’s retail flooring companies. They are especially at risk when Floor & Decor relocates.
Large home improvement chains also compete but cannot offer the depth and breadth of products and services to DYI or professional customers that flooring professionals like Floor & Decor can.
E-commerce expands access and tickets
As most retailers discover, once they establish a physical retail presence in the market, their e-commerce sales get a local boost. This helped Floor & Decor. In the current quarter, the e-commerce business increased 34% from a year ago and reached nearly 18% of total sales, which is a significant share considering the nature of its products.
Pandemic lockdowns have forced the company to rely on a comprehensive strategy, and its local stores have played a key role in this. The vast majority of e-commodity orders are fulfilled through in-store pickup.
The rapid adoption of the connected customer strategy has boosted the company’s bottom line and bottom line, with the company reporting that sales generated online have tickets “significantly higher than in-store tickets.”
Not only do Floor & Decor stores open quickly, but they generate more sales from those locations. The average retail ticket was up 18% in the second quarter, driven by customers trading even their best and best deals, particularly laminated and premium vinyl which now account for 27% of sales, up about 40% from the previous year.
In-store design services help boost your average sales ticket as well, but the influence of designers goes much further than that. Taylor explained, “We continue to find that when a designer is involved in the project, we see higher customer satisfaction, higher ticket average, higher attachment basket selling rates, higher penetration rates for our neighbors, and higher gross margin.”
Currently, the company employs around 800 designers in its stores and intends to continue increasing their numbers after proving their long-term potential.
In addition, Interior Design Services rolled out in the Washington, D.C. market this quarter and in Atlanta the following, following successful launches in Houston, Dallas, and Miami. Designed home offices should promote tickets further.
As he builds more Design Center stores to attract independent interior designers, he will develop an influencer influence strategy.
professionals in the pocket
The final touch to a repeatable business process is to attract and serve flooring specialists in the local markets. Described as a “comprehensive PRO strategy”, it introduces the PRO Premier Rewards program to encourage repeat business and build portfolio stake among professionals.
Taylor stated that total retail and comparison 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 a more important part of the Floor & Decor 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 reach its second-quarter comparable store sales forecast of 10% due to homeowners beginning to travel again during summer weekends.
Solid foundation for growth
Floor & Decor has a proven formula to continue to gain a larger market share in the floor covering market of approximately $70 billion. Offering the most in-demand hardwood flooring products, along with fixture supplies, cabinetry and related fixtures to complete bathroom and kitchen projects, they are well stocked with inventory which is an added advantage as the supply chain goes on.
She sees potential benefits arising from the current economic uncertainty. By reporting lower existing home sales and higher mortgage rates, the company expects more homeowners to stay put. So they will turn to Floor & Decor to improve their existing homes with new hard surface floors that will pay off in the long run. It should be noted that the construction of new homes is not an important part of its business.
“We are pleased to be on track to report comparable store sales growth for the 14th consecutive year,” Taylor said, concluding his prepared remarks. “We are demonstrating that we have the right teams, strategies and a flexible business model to navigate global supply chain challenges, inflationary pressures, and a weak housing market.”