Floor & Décor Holdings Inc. (FND, Financial) could experience further capital growth following its 32% rise in the past year.
The flooring and tile retailer is increasing its number of stores, investing in its website and improving its loyalty program to boost its financial performance.
Growth strategy
The company opened seven new warehouse stores in the third quarter. This took its total number of stores to 113, which is a 19% increase on its 95 stores from one year ago.
It plans to open 20 new stores in fiscal 2019, which would maintain its 20% average annual growth rate in store numbers of the past seven years. It is differentiating the products sold in its stores depending on local demographics. This could help its stores to resonate with potential customers, as well as increase its appeal to consumers who have not previously been to its stores.
Floor & Décor is investing in product categories that offer cross-selling opportunities. For example, it has introduced bathroom vanities in 32 stores, and plans to offer them across all of its stores by the end of fiscal 2020. They have proved popular with existing customers, and could provide the company with long-term growth opportunities.
It is also increasing the availability of its design services, with the number of customer design appointments doubling to over 100,000 in the third quarter. This could catalyse its sales growth, since the company’s customers that use its design service spend around four times more than its average customer.
Improving customer experience
Floor & Décor is investing in new technology to enhance the shopping experience of its customers. For example, its customers can now set up design appointments on their mobile devices. It has also added new features to its website, such as measurement calculations for square footage and a room visualizer, which make the customer transaction process simpler and easier.
The company is improving its premier rewards program aimed at professional customers. For example, it added Lenovo to its list of partners in the third quarter to bring its total number of partners to 17. Partners provide cost savings to Floor & Décor’s professional customers, which has contributed to a continued increase in reward program members since it was launched in fiscal 2018. The company is generating additional valuable data from its reward program that could help it to provide more relevant products and recommendations to its customers.
Potential risks
Around 50% of the company’s products were imported from China in 2018. The introduction of tariffs on imports from China meant that its overall costs increased. Further rises in tariffs could have a negative impact on its financial performance.
In addition, the U.S. Department of Commerce decided in September 2019 that imports of products such as ceramic tiles from China benefit from state subsidies. This led to it imposing a duty rate of 103% on tile imports from China, which could raise Floor & Décor’s costs. Further negative news flow regarding duty rates on Chinese imports could hurt investor sentiment towards the stock.
In response to higher costs on its imports from China, the company is seeking to diversify the suppliers that it uses across its range of products. It expects the proportion of products it sells that are imported from China to fall to 35% in the current fiscal year, before declining to less than 20% over the medium term. It also anticipates that the recent drop in U.S. interest rates could stimulate existing home sales and boost demand for its products. This could help to mitigate the potential impact of tariffs and higher duties on some of its imported products.
Outlook
Analysts forecast that the company will report a 22% rise in its earnings per share in fiscal 2020. Its forward price-earnings ratio of 39 may not be cheap, but its growth strategy suggests it could produce improving stock price performance.
Disclosure: the author has no position in any stocks mentioned.
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