Retail Flooring Winners And Losers

Summary

• Floor & Decor has the category-killer business model not seen in retail since Home Depot.
• Lumber Liquidators has potential, but continued uncertainty with leadership keeps me on the sidelines.
• Tile Shop is a broken business with little hope of a turnaround without new ownership.
• The rest of the industry just needs to focus on a niche that differentiates itself from Floor & Decor and pray.

Now that 2019 is in the books, I'd like to do a strategic survey of the home improvement flooring market and how I believe things will play out going forward.

The housing market is seeing significant tailwinds, thanks to strong existing home sales and historically low interest rates, which should improve the results of many companies in the home improvement industry.

This article focuses on the three publicly traded companies exclusively in the retail flooring industry: Floor & Decor (NYSE:FND), Lumber Liquidators (LL) and The Tile Shop (TTSH.) I will also make some minor comments about Mohawk (MHK), Armstrong Flooring (AFI), Home Depot (HD) and Lowe's (LOW).

Floor & Decor

FND is one of the most impressive stories, not only in home improvement but all of retail. The company continues to execute on its pillars of long-term success: 1) opening new stores, 2) growing comp store sales, 3) expanding the connected customer experience, 4) investing in relationships with pro customers, and now 5) free design services. In each of these self-described objectives, FND has exceeded most investors' expectations.

Instead of crunching numbers (although valuation matters, and I will briefly touch on that in my conclusion), I'd prefer to look at a broader, more strategic picture of why FND is a great long-term position for most portfolios.

I have my own pillars by which to evaluate FND in the near term that I call the four C's:

1. Continuity of Management. Each member of the executive team recently received new multi-year employment agreements that align long-term shareholder interests with management compensation. This included the elevation of Chief Merchant, Lisa Laube, to President and heir apparent to CEO Tom Taylor. Given the success this team has achieved over the previous 7-8 years, each deserves his (and her) due.

2. Cannibalization. Many investors focus on how

Analyst’s Disclosure:I am/we are short FND PUTS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.