This flooring retailer is due to announce earnings on August 5. Current estimates are for an EPS of $0.61 on revenues of $836.85M.
Buy: Floor & Decor Holdings, Inc. (FND)
From Cabot Stock of the Week
Floor & Décor is currently one of our favorite retail cookie-cutter stories out there, and it has all the characteristics of a stock that should do very well over time. Fundamentally, the big idea is that the company is upending the hard-flooring retail industry; at the end of Q1, Floor & Décor operated 140 warehouse-style stores that have everything professionals and DIYers need. Whereas the typical competitor might have a couple hundred different products available in-house, Floor & Décor has 1,400 or so, allowing customers to see/touch/feel/buy whatever they want right away.
About one-quarter of sales are floor tiles, a quarter-plus or so are laminates, while wall tile, wood, natural stone, and decorative accessories make up another third or so. Longer term, of course, there’s a shift away from soft flooring (read: carpet) and toward hard flooring, too, which means the firm’s potential market is growing even faster than, say, the general housing and renovation market, which is itself booming.
Not surprisingly, clients have flocked to Floor & Décor’s offerings; except for the very occasional quarter, same-store sales have been in the black, and often in double digits. Moreover, the firm’s store economics (payback of the initial investment within two to three years; EBITDA in the third year of being open generally equals 50% of the initial investment!) have allowed management to embark on an aggressive store expansion plan.
Specifically, the top brass generally aims to increase the firm’s warehouse count by 15% to 20% annually, and they see the potential for at least 400 locations in the U.S. alone. Given that Floor & Décor had just 140 warehouses open at the end of Q1, there’s obviously years of rapid store growth ahead, and that doesn’t even account for the likelihood that management’s target of 400 locations is probably conservative. Indeed, for this year, the company is aiming to open 27 new locations (just over 20% growth from year-end 2020), and seems on track, with 13 announced openings by the end of June.
Put it all together and you have a long-term growth story that has played out for years (earnings have advanced solidly every year since at least 2014, including last year’s healthy 30% jump), and there’s no reason that can’t continue for a long time to come. Granted, some of the recent numbers (sales up 41%, same-store sales up 31%, earnings up 100% in Q1) are a bit inflated due to the easy comparisons from a year ago, but given the store expansion plan and history of execution, there’s no reason the company can’t crank out 20% to 30% annual growth for many years to come.
Interestingly, while Floor & Décor was growing steadily, the stock did nothing from April 2018 through July 2020, when it broke out above 60. That run took the stock to 100 by December, but after that, shares chopped around; for six and a half months, FND made no net progress. But we think that’s changing now, with shares bouncing off their 40-week line on good volume and heading higher since. There will likely be wiggles, but we believe there’s a good chance the next up move has started. BUY.
Timothy Lutts, Cabot Stock of the Week, cabotwealth.com, 978-745-5532, July 12, 2021
Sell: Huazhu Group Limited (HTHT)
From Cabot Stock of the Week
Updated from WSBD 797, September 20, 2017
Huazhu Group Limited, originally recommended in Cabot Explorer, has been in the portfolio for more than five years, and brought a very nice profit over that time. For a long time, I’ve simply rated the stock hold, mainly as a way of illustrating the power of holding a good growth company long term. As the biggest hotel operator in China, Huazhu can take advantage of the cookie-cutter effect that Mike Cintolo described above. But today I’m going to sell it, for a combination of reasons. One, because I believe most readers know the power of holding a growth stock long term. Two, because the stock takes up space in the portfolio that I’d like to use for more current stocks. And three, because last week the stock, like many Chinese stocks, weakened as the Chinese government cracked down further on stocks that trade on U.S. exchanges, and that’s not a good trend. If you own HTHT with a big profit, I suggest you consider selling some here, but I don’t think there’s any rush. SELL.
Timothy Lutts, Cabot Stock of the Week, cabotwealth.com, 978-745-5532, July 12, 2021