Quoc An Capital

Floor and decor investment thesis

Sep 04, 2023

Risk Factors

  • High interest rates
  • Low existing home sales (down to 4-5 million, average: 5-6 million)

FY2023 Estimates

  • Number of stores: 230
  • New stores: 32
  • Pre-opening expenses (3 months before store opening): $10 million
  • Revenue: $4.5 billion
  • EPS: $2.30-$2.50
  • EBITDA: $600 million
  • Target: 500 stores in the next 5-7 years, Expected EBIT: $1 billion

Company Brief

  • Founded in 2000 in Fort Worth, Texas.
  • Opened its 100th store in 2018 in Burlingame, California.
  • Became a publicly traded company in 2013.
  • Reported $4.26 billion in revenue in 2022.
  • Employs over 20,000 people.
  • 200 stores as of May 10, 2023.

Industry Size

  • Total addressable market (TAM): $40 billion for hard surface products
  • Current company run rate: $4.5 billion, 10% market share
  • Market growing at 4-5% annually

Management

  • Key executives have extensive experience in the home improvement industry, including at Home Depot, the largest home improvement retailer in the world.
  • CEO Thomas V. Taylor started his career at Home Depot and Lowe's at the age of 18, and held various positions in the company, including Vice President of Marketing and Merchandising. He joined FND in 2012.
  • During his tenure at Home Depot, Taylor helped to expand the company from 15 stores to over 2,000 stores.

Capital Allocation

  • The company uses its free cash flow (FCF) to open new stores, reduce debt, and make opportunistic acquisitions.
  • In 2022, the company acquired Spartan Surfaces, Inc., a commercial distributor and floor design company.

Management Incentives

  • Management compensation is based on adjusted EBITDA and return on invested capital (ROIC). The company has a minimum ROIC target of 17%. If ROIC falls below 17%, management does not receive any incentive compensation.
  • The company's NEOs and directors own 2.5% of the company's outstanding shares. Their net worth is closely tied to the company's performance.
  • The company's management team has a tenure of over 10 years. Most of the NEOs have been with the company since 2012.

Economics of FND

  • Each FND store is 100,000 square feet and sells flooring, wall laminate, bathtubs, and kitchen products.
  • It takes 3 months to open a new FND store.
  • The company expects to break even after 1 year and achieve a pretax payback period of 1-2 years.
  • From year 3 onwards, the company expects to generate a cash on cash return (COCR) of 50%.
  • Each FND store generates $15 million in revenue and has a gross margin of 40%.
  • The company's operating margin is 20% and its net margin is 10%.
  • The EBITDA of each FND store is $2-3 million.

Company Product Sales Mix

  • Laminate and vinyl: 28%
  • Tile: 32%
  • Decor and wall tile: 17%
  • Installation tools and materials: 17%
  • Others: 10%

Customer Mix

  • Homeowners: 60%
  • Pro customers: 40%

Supply Chain

  • FND has direct relationships with manufacturers in 24 countries.

Competitive Advantages

  • FND has a unique store layout that creates a great shopping experience for customers.
  • The company sources its products directly from manufacturers, which allows it to offer low prices.
  • FND is a one-stop project destination for homeowners and pro customers.
  • The company has a decentralized culture with experienced store-level teams.
  • FND offers free design services at its design studio.

Valuation

  • The EBITDA multiple of FND is 20x.
  • This means that the company is valued at Enterprise value 10b