Last evening, Floor & Decor (FND) priced its 8.8 million share IPO at $21 per share, which was well above the expected range of $16-$18. The offering raised $185 million for the specialty retailer, generating nearly 19.0% more than the company had expected.
Floor & Decor (FND) is a multi-channel specialty retailer of hard surface flooring (tile, wood, laminate, stone) and accessories with 72 warehouse-format stores in 17 states. Its stores average approximately 72,000 square feet, which is typically larger than any of its competitors. Despite the size, it believes that its stores are easy to navigate and are designed intuitively, allowing for customers to easily create flooring layouts and designs.
FND caters to basically any kind of customers: professional flooring installers, do it yourself customers, and customers who buy the products for professional installation. The professional customers are vital, however, as they are typically the most loyal, shop often, and help market the brand.
The company purchases inventory directly from manufacturers through a direct sourcing model, enabling it to adapt to market demand, and, to stock its stores with unique, hard to find products.
Over the past five years, FND has heavily invested across its business and infrastructure in order to support growth and innovation. For example, it has made significant investments in product inventory, improving its assortment, and it has made investments in technology and personnel. The goal of these investments has been to drive better operational efficiency. From FY11-FY14, its general and administrative expenses and its capital expenditures grew at a faster rate than its net sales growth. With these investments, FND believes that it can generate scalable growth, illustrated by the doubling of its average net sales per store between FY11 and FY16.
The company's growth strategy is predicated on expanding of its store base, comparable store sales growth, and margin enhancement through better operating leverage.
Taking a look at its most recent fiscal year, revenue was up 34% year/year to $1.05 billion in FY16. During the period, all product categories experienced comparable store sales increases, with laminate/luxury vinyl plank, decorative accessories, and tiles leading the way. Overall comparable store sales growth was a robust +19.4%, driven by an increase in customer transactions (+14.7%) and, to a lesser extent, by average ticket growth (+3.6%). Non-comparable store sales contributed $117.6 million of the increase in sales, due to the addition of 12 new stores in 2016.
Gross margin ticked higher by 100 basis points from FY15. This increase was primarily driven by approximately 120 basis points of product margin improvement resulting from increased sales of higher quality products that carry a higher gross margin and lower capitalized freight costs, slightly offset by approximately 10 basis points of higher supply chain and global sourcing and compliance costs as well as approximately 10 basis points due to higher inventory damage and shrinkage.
With the strong topline growth and bump in gross margin, FND's operating income jumped by 32% year/year to $69.1 million. Cash flow from operations showed an even more significant boost, surging by 339% to $89.5 million