Has Fast-Growing Floor & Decor Holdings Hit the Wall?
Floor & Decor (NYSE: FND) is a specialty retailer of exactly what its name implies. It has been growing very quickly by providing a huge variety of offerings in a highly focused niche segment. But there's retail history that investors looking at Floor & Decor need to think about as they watch the company expand.
Floor & Decor is focused on being big
One of Floor & Decor's biggest selling points for customers is its giant stores, which have just about everything they might want with regard to flooring. The variety compares very favorably to a small store and to the more limited selection that someone would find at a giant hardware store chain, like Home Depot. In other words, unlike these other stores, Floor & Decor could very easily be your one-stop shop for flooring and similar products.
Image source: Getty Images.
There are other benefits of scale here, too. For example, with huge stores and a growing store footprint, Floor & Decor has massive buying power with suppliers. In many cases, it goes directly to the source, cutting out layers of middlemen. This helps it to keep its costs low, offering savings that it can pass on to consumers.
That helps explain part of the logic for the company's rapid expansion. The retailer opened nine new locations in the second quarter alone. The goal for the year is 32 new stores. That follows along with the longer-term trend. To put a number on that, between 2017 and 2021 the company grew its store count by nearly 18% per year, increasing it from 83 stores to 160. The company added another 32 locations in 2022. This is clearly a fast-growing retailer.
There's a risk in growing too quickly
Wall Street loves a retailer that's growing quickly. But investors need to understand the dynamics here. Each new store adds to the top line, so revenue growth can be extremely fast while a company like Floor & Decor builds out its footprint. But the top line isn't the only number to watch, because such rapid growth isn't easy.
There's a risk that management will fail to execute at a high level. That can lead to poor store-level performance even as the top line continues to move higher. Companies can also open locations too close together and end up cannibalizing older stores. Yes, the top line will grow, but the business will suffer for it in the end. Unfortunately, these aren't odd things to see happen. In fact, investors pushing for growth often end up with management teams that take a "growth at any cost" mindset. It probably wouldn't be shocking to hear that it can end badly for investors if that happens.
This isn't to suggest that Floor & Decor is at that point. But same-store sales, which tracks sales at stores that have been open for at least a year, were up 9.2% in 2022. That figure fell 4.7% in Q2. This is not a good outcome since it suggests some underlying weakness, even though the top line still grew 6.6%.
To be fair, Floor & Decor serves the housing market. Home sales are in a state of flux right now, so it is very possible that the weak same-store sales figure is related to the company's hyper-focus on one product segment. But investors should probably pay increasing attention to the same-store sales results here, just in case. If the specialty retailer is pushing too hard on growth, it could be hurting its business, and its shareholders, in the long term by not slowing down.
Plenty of retailers flame out
The story of Icarus is one that repeats itself with chilling regularity in the retail sector. A company has a great concept, gets caught up in the growth potential (usually thanks to Wall Street's focus on growth), and it expands too fast. Given the very rapid pace of store openings at Floor & Decor, investors should be paying extra attention to management's expansion plans. That's especially true with the weak same-store sales figure, which can sometimes be an early sign of trouble on the expansion front. It may be time for a little extra caution.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.
