Floor & Decor Plan

Are We Wrong About Brick-and-Mortar Retail?

The home-improvement retailer's IPO may not be a win for new investors.
At Closing, April 20st
177.01 USD

Behold the rare retailing IPO: Private-equity-backed home-improvement retailer Floor & Decor Holdings Inc. is expected to go public this week.

It touts double-digit sales gains and a growth strategy centered around building hundreds of big-box, brick-and-mortar stores across the U.S. At a time when other retailers have halted openings or are shuttering stores to keep up with a shift to online sales, the IPO almost seems plucked from a different era. 

Take Floor & Decor's much bigger competitor, The Home Depot Inc. After decades of aggressive new-store growth, Home Depot responded to the housing crisis by halting building plans, years before other retailers realized the potential liability of a larger footprint. Home Depot's strategy of investing in e-commerce, supply chain and store improvements instead of new stores has worked well. 

Coming Home

Home Depot's shares have outperformed the S&P 500 in recent years as it focused on e-commerce and its supply chain, rather than building more stores

Source: Bloomberg

Even now, after a housing recovery and low interest rates have helped Home Depot achieve seven straight years of sales gains -- suggesting it could probably get away with building some more stores -- the company line is clear: Make the most out of the current store base. 

Building Bust

After growing steadily for decades, the number of Home Depot's brick-and-mortar stores flatlined after the 2008 housing crisis

Source: Bloomberg

Perhaps that's why the whole concept of the Floor & Decor IPO is nagging at me. Are brick-and-mortar naysayers who belittle the future of physical retail missing something? Could Home Depot, in fact, be building more stores? 

Sales per square foot and other profitability metrics among retailers point to an over-stored America. But if Home Depot really had nothing to gain by opening new stores over the past decade, then how can you explain Floor & Decor's ability to grow into a 72-store retailer with $1 billion in annual sales? 1 Why didn't those sales go to Home Depot, Lowe's Cos. Inc., or a bevy of smaller chains instead? 

Building Blocks

Floor & Decor has surpassed $1 billion in sales as it builds more brick-and-mortar retail stores

Source: Floor & Decor

If consumers don't need even more big-box warehouses selling stuff readily available at Amazon.com Inc. or big home-improvement chains, then how did Floor & Decor double average net sales per store between 2011 and 2016? 

Decorated Retailer

Floor & Decor has posted double-digit same-store-sales growth for at least the last five years

Source: Floor & Decor

The answer isn't entirely clear. 

In offering documents, Floor & Decor boasts everyday low prices and trendy products customized by region of the country.  It says its stores are easy to navigate, with good customer service and experienced management. Okay, all those things sound good, but they hardly differ from promises made by every other retailer. 

More than likely, a massive spending shift toward American homes, thanks to a steady housing recovery and historically low interest rates, has helped fuel Floor & Decor's growth. It has also helped Home Depot, which could probably benefit in the short term by opening more stores. But Home Depot says it's figured out a way to get those additional sales through its website and current store base. 

Build Over Buy

U.S. sales growth in building materials, supplies and garden have far outpaced sales of clothing and accessories

U.S. Census Bureau

Floor & Decor was bought back in 2010 by private-equity firms including Ares Management (the firm behind struggling Neiman Marcus, Guitar Stores and 99 Cents Only). Ares is smart to try and recoup its investment now, pouncing on buoyant home-improvement sales. But there's no assurance those growth levels will persist. 

Even though Floor & Decor aims to boost digital sales, e-commerce makes up a tiny part of its business.  2  Its growth strategy focuses instead on expanding to 400 stores nationwide in the next 15 years. As the way people shop for everything from clothes to tile changes, this is probably a misstep. 

Just like other PE-backed retailers that went public on the misguided assumption ever-expanding stores would yield ever-growing returns -- including The Container Store Group Inc. and Whole Foods Market Inc. -- what might be a win for Floor & Decor's PE backers won't necessarily be a triumph for stock-market investors. Instead of a lesson for the future, perhaps this IPO is just a reminder of mistakes from the past.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. It's also profitable. It brought in $43 million in net income in 2016, up from $13 million in 2012.

  2. 90% of items ordered online are picked up in its stores

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net

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