Class killer floor and decorations will use supply chain disruption to boost its growth

Retailers serving the home improvement sector have gotten a huge boost during the pandemic. Consumers who have been confined to the home for most of 2020 have become acutely aware of the shortcomings of their homes. With more time and money that would have otherwise been spent on dining out, entertainment, and vacations, they plowed into home improvements.

Last year, Americans spent $339 billion on home improvement and maintenance, according to the Harvard Joint Center for Housing Studies (JCHS). High on the list of post-paint home improvement projects – completed by 36% of households – were bathroom remodels (31% completed) and new floors (26%).

Building materials retailers benefited from the boom, as home improvement and building supplies retailers sales grew 14.3% from 2019 to 2020, to $426 billion from $372 billion in 2019. Many of these retailers, such as Home DepotHD
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They also benefited from being designated “essential” retailers during the pandemic’s closure of stores.

However, Floor and Decor didn’t gain that advantage, even though it barely got past anything by pivoting quickly to picking up the curb for e-commerce orders. Year-end sales increased 18.6% in 2020 to $2.4 billion, up from $2 billion in 2019.

This year, a supply chain crisis clouds the prospects for home improvement retailers. Even if there are enough materials to meet the demand, which is a big deal, it will surely cost more.

While some retailers will see the gains reflected in their initial returns, it will dampen their bottom line. And for independent retailers who don’t have large purchasing and logistics departments to alleviate product availability issues, this could be the final nail in their coffin after the blow they received during store closures.

Floor and Decor Holdings (NYSE: FND) is sitting in the catbird’s seat as it assesses the impact of the supply chain crisis on its primary competitor: the nation’s 13,000 independent flooring dealers.

Overall, the company estimates that 60% of the $22-23 billion solid surface market is sold through retailers specializing in solid surfaces, such as itself and LL Flooring (officially Lumber Liquidators) and independent, solid surface distributors.

Today, Floor and Decor reports that it has a 9% market share in its instructable market, and it intends to grow it further.

“We are uniquely well positioned to increase our market share during supply and demand chain disruption from flooring retailers who cannot effectively manage the increasing complexity and costs,” CEO Tom Taylor said on the company’s third-quarter earnings call.

The supply chain crisis provides a wind of the tail

So far, Floor and Decor is doing a huge job of stealing market share. It has only a third as many stores as LL Flooring (153 stores in 33 states compared to LL’s 422) but more than tripled product sales in the first three quarters of 2021, $2.5 billion for FND compared to $750.4 million in net LP merchandise sales. . Unlike Floor and Decor, LL Flooring also provides installation services which added another $117 million in revenue.

With sales growing 46% from January through September 2021 and comparable store sales up 33.1%, Floor and Decor is surveying the floor in this category. For example, LL Flooring has experienced merchandise value growth of just 5.7% in the same time period.

Now it is preparing to take out more faltering competitors as the supply chain crisis continues to disrupt imports of the most sought-after flooring products.

“You have to keep your foot on the gas no matter what and keep growing,” Taylor told me in an interview after the earnings announcement.

Independent hardwood flooring dealers are particularly vulnerable in a supply chain crisis due to the structural changes that have taken place in the sector.

“A lot of freelancers don’t have stock, so they have to special order,” he explains. “This means that lead times to get the product today are much longer than they were just a year ago. And along with the difficulty in accessing inventory, their costs have risen dramatically.”

Taylor does not argue that the supply chain crisis has affected his operations, but not to the extent of others. “We have added dedicated fleets of carriers and we have long-term contracts with our carriers that give us greater flexibility,” he adds.

Large-scale stores generate large-volume sales

Besides being a retailer, Floor and Decor credits the super-sized warehouse stores, averaging 80,000 square feet, as a unique feature. “Each store has an average of 250 tile SKUs, so if we had 20 SKUs, there would still be 230 more options for people to choose from.”

Plus, the stores carry everything a DIY customer or professional needs when it comes to hard surface flooring. “If there’s anything to do with hard surface flooring, it’s under flooring and décor, including every installation accessory, every decorative component and every type of hardwood flooring you can think of,” Taylor boasts.

With such a wide range of flooring on offer, the company has also seen customers gravitate towards its better and better offerings and move away from lower price ranges.

“There have been a lot of innovations in our category, like tiles that look like exotic stone or wood and vinyl is completely waterproof. When a customer walks in and sees things they didn’t know were there, that moves them up,” he explains.

More stores, more sharing

After a brief pause caused by Covid, the company is back at its dynamic pace of store opening. YTD has opened 20 stores and plans to open seven more before the end of the year.

“We’ve been opening units at a rate of 20% per year since 2013 and haven’t looked back,” Taylor emphasizes and adds when he opens a store in the market, it takes a share not only from freelancers but from big-box competitors as well.

Small-scale Design Studios are also scheduled to open in Miami and Houston in early 2022, which will join the two companies already operating in New Orleans and Dallas.

“The Design Studio concept caters to discerning clients and professionals who want to bring their clients with them and show them options in a smaller, quieter area,” explains Taylor.

With floor design front and center, every store has long offered free design services, which also tend to increase the average ticket and gross margin for a sale. Additionally, she is currently experimenting with a home design service in her Dallas and Houston markets.

“By going into the client’s home, we think we can sell a better project and get access to more rooms,” he says.

It not only draws consumers to Floor and Decor but to the professional class as well. Taylor notes that during the year, comparable store sales growth in the Pro business has outpaced the growth of the homeowner’s business.

The same things that draw consumers to Floor and Decor also attracts the extensive professional assortment and availability of stock and mounting accessories. “When a professional walks into our store and sees what we offer, they end up staying with us. It’s very sticky.”

On a final note, Taylor explained that the company is strategically expanding its product offerings into contiguous categories, such as cabinetry, countertops, and kitchen and bathroom fixtures, to help customers complete their rooms.

“In customer surveys, they kept saying they wanted Floor and Decor to be a one-stop shop, which made us scratch our heads about what was missing,” he reflects. “Our approach was to add things to make it convenient for the client to complement the room he was working on, like the bathroom or the kitchen.

“We have no desire to be a home improvement center, but our stores are large and we can showcase the space. It has been so beneficial to our customers and our business that our $400 vanity is gradually becoming a sale giving a good boost to our store sales growth,” he continues.

The house will stay hot

Looking ahead, Taylor anticipates that the same home improvement needs that have benefited Floor and Decor during the pandemic will drive it forward.

“Once the world returns to normal, people will likely continue to work more than at home and will continue to invest in their homes,” Taylor says. “Interest rates are still low and housing turnover is good, so the macro factors are positive over the next year.”

Regardless of whether the housing market moves sideways, he says it will remain in the Floor and Decor business’s favour.

“We win anyway, because if consumers decide to stay in their home, they will invest in improvements, which is good for us. Or if they decide to sell, they will fix it in advance. And if they buy a house, they will fix it afterwards. All of these things work for us. A good place you should definitely be.”

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