Businesses are typically built to solve problems and meet the needs of customers. This is what drives their success and generate profits. However, it is important to note that not all businesses are primarily focused on maximizing shareholder value. There are businesses that solve problems, generate some profits, but are not worthy of investor’s attention or capital.

Investors are looking for businesses that have a tangible plan for generating profits and increasing shareholder value over time. This can be achieved through a variety of means, such as expanding into new markets, launching new products or services, or increasing efficiency and reducing costs.

Adopting a simple approach, which focuses on analyzing the underlying factors that drive the value of an asset, can often lead to better results compared to more speculative or complex strategies. With these ideas in mind, here is the outline for this writeup to analyze Floor & Decor:

1. The Problem: Industry Overview, Friction Points
2. The Business Model
3. The Growth Drivers
4. The Financials: Income and Cash Flows, Balance Sheet
5. The Return Estimates
6. The Risks

1. The Problem

Industry Overview

Starting with a wide view of the industry, the flooring industry includes products and materials such as: carpet, hardwood, ceramic tile, laminate, and vinyl. In recent years though, there has been a shift away from carpet and towards hardwood and other hard surface flooring options, as these materials are often seen as more durable and easier to maintain.

There are several different types of retailers in the flooring industry, including independent mom and pop shops, home improvement stores like Home Depot and Lowe’s, and specialty stores that focus on a particular type of flooring material or service. 

Independent mom and pop shops may have a smaller selection of products, but they often offer personalized service and expertise. Home improvement stores like Home Depot and Lowe’s offer a wide range of flooring options, including both hard surface and carpet, but they may not have as much specialized knowledge as independent retailers. Specialty stores, on the other hand, may offer a more focused selection of flooring products and services, such as high-end or specialty wood flooring.

This industry, like any others though, has some problems.

Friction Points

Home Depot and Lowe’s, as large home improvement stores, generally carry a wide range of flooring and other products and in their stores. However, it is possible that they may not always have a large enough selection of a particular type of flooring in stock to meet the needs of contractors or DIY individuals who are looking for a specific product.

Additionally, because Home Depot and Lowe’s often source their flooring products from third party distributors, they may not have as much control over the selection and pricing of these products as they do for other items in their store. This can make it more difficult for contractors to find the products they need at a competitive price, as the store may not have the same level of purchasing power as a specialty flooring retailer or a direct supplier. This friction created opportunity for a specialty store, similarly to what Sherwin Williams did in the paint industry.

Enter: Floor & Decor.