Down more than 50%, is it time to buy this Buffett stock?

Warren Buffett said he likes to buy high-quality products, but only when they’re on sale. Due to the massive market sell-off in the first half of 2022, investors now have the opportunity to act like Buffett and buy stocks in a wide variety of high-quality companies selling at discounted prices.

Floor & Decor Holdings, Inc. (NDF 1.90%) is a fast growing specialty retailer selling a wide range of tile, stone, wood and laminate flooring products. The company caters to both do-it-yourselfers (do-it-yourselfers) and professional flooring installers.

Currently trading around 45% below its November 2021 high, Floor & Decor is exactly the kind of opportunity Buffett is talking about.

Investor uncertainty creates opportunity

Floor & Decor shares were cut nearly in half due in large part to investor concerns about inflation, an economic slowdown and their potential effects on consumer spending. Additionally, investors are concerned that the slow housing turnover will affect the company’s sales, with management citing growth in sales of existing homes as one of the drivers of demand for the flooring market. .

While these are legitimate concerns, the palpable investor uncertainty could create an attractive profit opportunity for investors with long-term time horizons.

Is Wall Street underestimating the company’s competitive advantage?

Floor & Decor operates a network of warehouse-sized stores averaging 78,000 square feet and typically carrying 4,200 Stocking Units (SKUs), offering a far wider selection of in-store products than any other homeware retailer. flooring. Management believes that its wide variety of value-priced flooring products provides the company with both a significant and lasting competitive advantage – and this advantage is clearly seen in the company’s sales growth trends.

Over the past few years, Floor & Decor has grown its sales at rates well above the industry average. While the industry grew at an average annual rate of 4% from 2016 to 2021, the company grew its revenue at an annual rate of 22% over the same period. The company achieved a particularly notable sales outperformance in 2020, when it grew sales by 19% amid a 2% sales contraction in the flooring market. Additionally, management estimates that the company increased its market share from 6% in 2020 to 8% in 2021.

Chart by author

Floor & Decor achieved this robust sales growth through a combination of new store openings and comparable store sales. The company nearly doubled its number of stores in the five-year period ending December 31, 2021, and the company operated 166 stores in 33 states as of March 31, 2022. Management believes it will continue to gain share of $30 billion flooring market in the United States. market, and he sees a broad avenue for future growth with the potential to operate 500 stores in total over the long term.

Graph showing the number of Floor and Decor stores since 2021

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In addition to expanding its store network, Floor & Decor is building a solid track record of same-store sales growth. Same-store unit sales grew 8% per year on average from 2017 to 2021. Same-store sales surged in 2021, up 28% from 2020, constrained by lockdown. Although this jump in sales will make comparable sales gains difficult to achieve in 2022, management has demonstrated the operational expertise to increase sales in a wide range of economic conditions.

Graph illustrating same-store sales growth for flooring and décor since 2016

Chart by author

Expected continued growth

Floor & Decor is not expecting a rebound in consumer spending or real estate transactions. The company plans to open 32 new warehouse-format stores in 2022. Management believes the increased scale expands the company’s competitive moat as customers are increasingly drawn to product selection, prices and knowledgeable Floor & Decor customer service associates. The company has historically realized a return on investment in new stores in 2.5 to 3 years, and management expects to see returns on investment twice the cost of capital, even if the business slow down in the short term.

Warren Buffett racked up Floor & Decor stock

At Warren Buffett’s Berkshire Hathaway, Inc. (BRK.A 2.19%) (BRK.B 2.28%) began buying Floor & Decor shares in Q3 2021, and as of March 30, 2022, Berkshire had amassed a position of 4.8 million shares. Some Wall Street analysts are waiting for consumer spending and housing demand to improve before raising their price targets for Floor & Decor, but the stock will likely trade at much higher levels by then. the investment community obtains such confirmation. Warren Buffett did not wait for Wall Street to become more optimistic to buy the action. Investors with long-term horizons might want to emulate Buffett’s stock and buy shares of Floor & Decor before the half-price sale ends.

John McHugh has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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