This lesser-known Home Improvement company's shares have surpassed Home Depot's stock performance for the past 5 years. I argue that this upward trajectory will persist for the subsequent 5 years.
If I had a time machine and could go back 40 years, Home Depot (HD, experiencing a decrease of 0.97%) would be on my list of stocks to purchase. The company revolutionized what a home improvement store could be by offering extensive product choices in its huge facilities, paving the way for rapid expansion to over 2,300 locations currently.
An initial investment of $10,000 in Home Depot stock 40 years ago would be worth almost $15 million today. Reinvesting dividends would have resulted in an investment worth over $25 million.
As of now, Home Depot shares trade close to their all-time high, exceeding $415. Despite its impressive long-term returns, its growth in recent years has slowed down. Home Depot stock has delivered a total return of 112% in the past five years.
However, a new stock to watch in the home improvement sector is Floor & Decor (FND, experiencing a growth of 0.10%). Shares of this lesser-known flooring specialist have seen an increase of 147% in the last five years and may outperform Home Depot in the following five years. Here's why.
Why Floor & Decor is and will continue to be the better investment
An investment strategy is a clear explanation of why a stock is likely to increase (or decrease) in value. For Home Depot, it has only opened 55 net new stores in the last five years, showing growth of just 2%. This isn't surprising given its size, but it does limit its growth potential.
The investment strategy for Home Depot stock mainly focuses on its profit margins and returns to shareholders. The company already has exceptional profit margins between 9% and 10%, leaving little room for improvement.
Home Depot creates value for shareholders primarily by distributing cash through dividends and share buybacks. This can be powerful in the long run, and Home Depot is an excellent business with a solid following among investors. However, Floor & Decor offers greater potential for growth, which is why I believe it offers higher returns.
This isn't just conjecture: Floor & Decor stock has outperformed Home Depot stock in the last five years due to faster revenue and operating profit growth, as the chart below shows.
Floor & Decor's growth strategy is straightforward. It currently has 241 locations and plans to finish the year with about 250. In the next year, it aims to open 25 more stores - a 10% increase in units. Long-term, it intends to have 500 stores nationwide.
Same-store sales for Floor & Decor have decreased recently, with management predicting a drop of about 8% for the entire year. However, this is unusual and presumably due to a weak housing market rather than anything else. In 2022, the company recorded its 14th consecutive year of gains.
Lower same-store sales have also negatively impacted Floor & Decor's profit margin. Currently, it's below 5%, whereas it was previously in the 7% to 8% range.
Housing sales in September declined to their lowest levels since 2010, according to the National Association of Realtors. It's reasonable to assume that this is the reason for Floor & Decor's sluggish sales. This issue should improve within the next five years. With the improvement, same-store sales should recover, boosting the company's margins as well.
Between the new store openings, same-store-sales growth, and profit margin expansion, I predict that Floor & Decor will not only outperform Home Depot in the next five years but exceed the S&P 500 as well.
Given the analysis, an investor considering the finance and money aspect might consider investing in Floor & Decor (FND) due to its growth potential, as opposed to Home Depot (HD). The investment strategy for FND focuses on expansion, with plans to open more stores and increase its unit count. This growth strategy, combined with the potential recovery of same-store sales and profit margins, could lead to higher returns for investors in the future.
