Stock Pitch Competition

Richa Sharma Rachit Agarwal Avidipto Chakraborty

Deal on a page
Summary Trading summary
• FND is a USD 3.4 B revenue Price (10/2/2022) $70.50 Market cap ($M)1 7,450.2
multi-channel specialty retailer
and commercial flooring Dec’25 target price $147 Enterprise value ($M)1 8,807.9
distributor of hard surface Upside potential 109% (25% CAGR) LTM EV/EBITDA 16.7x
flooring
52-wk high 145.89 NTM EV/EBITDA 13.7x
• We are overweight on this asset
52-wk low 59.91 Fwd P/E 19.3x
due to following reasons:
• Unique ‘direct sourcing
model' that is difficult to
replicate and provides strong Share price ($)
moats
• Continued double-digit
growth pipeline through
multiple levers of revenue
growth and TAM expansion
• Downturn resilient business
with potential macro tailwinds
driving home improvement
demand

1. Enterprise value has been computed basis estimated net debt as of Q3'22 end, basis our financial model
Business overview
USD 3.4 B revenue and ~USD 0.5 B EBITDA multi channel hardwood flooring retailer
Overall
• Multi-channel specialty retailer and commercial flooring
distributor of hard surface flooring

Scale and Footprint

• USD 3.4 B sales in FY21 and expected to hit USD 4.3 B by
FY22 end (5Y rev CAGR: 27%)
• ~8% market share (retail + commercial) in 2021
• 162 warehouse format stores as of 2021 end across 33 states
(opened further 15 stores YTD 2022)

Portfolio
• Laminate/ vinyl is the largest segment – grown from 15% in
2017 to 26% in 2021 (segment margins higher than co.
average)
• Also present in non-flooring categories, such as bathroom
vanity and installation materials and tools
• Also broke into Commercial sales (~30M in FY21) and
expanded presence inorganically
• Acquired Spartan (~USD 93 M revenue in 2021) and 2
distributors over the last 2 years

Customers and competition

• ~60% revenue from homeowners; company highly focused on
building out PRO (professional contractors) segment – potential
growth lever due to repeat purchases and higher ticket size
• Competes with big box retailers (e.g., Home Depot and Lowe’s)
and specialty flooring retailers (e.g., LL flooring)
Source: 10-K, secondary research
Note : segment wise margins while not reported by management have been estimated basis insights from expert interviews
Competitive positioning
• FND is positioned as lowest price, high availability and widest assortment player; finds its
competitive moat in direct sourcing model
• Margin and growth profile superior compared to peers
Big box retailers Specialty flooring players
Floor and Décor
The Home Depot Lowe's LL Flooring The Tile Shop
Financial metrics
Scale (USD M Revenue) 3,434 151,157 96,250 1,152 371

# stores 179 2316 1969 437 143

5Y (LTM) Revenue growth % 26.6% 9.8% 7.0% 2.7% 3.1%

SSRG % (2021) 27.6% 11.4% 6.9% 5.2% 13.8%

Gross margins % (2021) 42% 34% 33% 38% 68%

EBITDA margins % (2021) 13.4% 17.3% 14.7% 6.5% 12.7%

Inventory days (2021) 152 70 95 128 267

Other metrics
Hard surface flooring Misc. home improvement Misc. home improvement Hard surface flooring Stone and man-made
Product focus
products products tiles
Sourcing model Direct sourcing Indirect sourcing Indirect sourcing Direct sourcing Direct sourcing

Product assortment
Lowest price player (c.
Price positioning Mid market priced player Mid market priced player Mid market priced player Premium priced player
30% lower)

Source: CapIQ, expert interviews, secondary research

Investment Thesis (1/2)
FND is disrupting the flooring category through its unique direct souring moat, sustained double-digit
growth pipeline through multiple levers, and downturn-resilient business model with macro tailwinds
1• Unique Direct Sourcing Model that is difficult to replicate and provides strong moats
FND sources directly from 240+ suppliers in 24 countries, which gives it a competitive advantage in pricing, and product range/availability. Sourcing directly from
manufacturers in flooring is complex as each SKU has c.400 specifications. Big box retailers do not have the expertise or vendor connections to set up a direct sourcing
model for flooring.
• Pricing: FND can offer lower prices than both big box retailers (c.25% lower) and specialty retail (c.30% lower) with a best-in-class gross margin (40.7% in FY21 vs
industry median1 of 38%) because it eliminates the Agent, Importer, and Distributor and has high purchasing power.

• Product Range and Availability: FND's sourcing model and warehousing infrastructure allow it to have c. 4x SKU options in comparison with big box retailers and
c.2x in comparison with other specialty retailers.

1. Includes Home Depot, Lowe’s, LL Flooring, The Tile Shop

Investment Thesis (2/2)
FND is disrupting the flooring category through its unique direct souring moat, sustained double-digit
growth pipeline through multiple levers, and downturn-resilient business model with macro tailwinds
2• Continued double-digit growth pipeline through multiple levers of revenue growth and TAM expansion
FND has 3 key pillars of revenue growth: same store revenue growth, new store additions, and commercial flooring segment. Additionally, management has highlighted
further upside opportunities through adjacent categories (such as vanities, shower doors, faucets, etc.) and international expansion (management has indicated potential
expansion to Canada).
• Same Store Revenue Growth (SSRG): FND's average comp sales growth is industry-leading at c. 12% vs. Home Depot at 6%, Lowe at 4%, LL Flooring at 3%, and
low single-digit industry average. We expect SSRG to continue at 9% in FY22-27E driven by share gain from industry fragmentation, the faster ramp-up of new
stores, and potential macro tailwinds.
• New Store Additions: FND has 177 stores and has grown its store count at c. 20% over FY14-FY21. We expect FND's store count to continue growing at 18% till
FY24 (resulting in 268 stores) driven by sufficient white space both in existing states where FND operates and in new states. As market penetration increases, new
store addition will slow down after FY24E (estimated 13% CAGR till FY27E) and FND will have c.390 stores by FY27E.
• Commercial Flooring Segment: TAM expansion opportunity by tapping into the highly fragmented commercial market
The channel is large (~USD 16 B), highly fragmented, and has numerous tailwinds exiting the pandemic. Further, this channel is a nice fit for FND given the
retailer's competitive moat (infrastructure, sourcing) and low Capex requirements (high ROIC). Despite marquee clients (Hilton, Hampton Inn & Suites), the
acquisition of Spartan Surfaces, and two new commercial segment-focused board members (Ryan Marshall, CEO Pulte Group and Charles Young, COO Invitation
Homes), this segment has historically received minimal attention from investors, and we believe current estimates bake in little-to-no credit over a medium- to long-
term horizon. We expect this segment to grow at a CAGR of 25% from FY22-27E.

3• Downturn resilient business with potential macro tailwinds driving home improvement demand
• High house prices (16% higher in Jul’22, YoY), rising mortgage rates (owners likely less inclined to put their homes on the market at the new 6% rate; the average
existing mortgage is 3.4%), combined with low availability and aged properties in the US (80% of the houses are over 20 years old) could set up for a good
renovation/repair cycle.
• FND offers the lowest prices in a recession-resistant segment. Even in recessionary scenarios, we expect FND to be resilient driven by the 'essential' nature of the
flooring industry and FND's market position as the 'Everyday Value Store' (FND gained significant market share during '08-09 financial crisis).
• Primary research indicates that customers with high purchasing power / high house value (who will continue buying during downturns) are likely to prefer FND over
big box retailers because the assortment at HD and Lowe’s is limited, and these customers prefer exclusive designs over standardized mass-market SKUs.
• PROs are the key drivers of nominal growth in downturn scenarios and FND has robust PRO relationship management systems in place (dedicated PRO desk, a
loyalty program with c. 60% PRO enrolment, credit options, and other tailored services).
Risks and Mitigation
The biggest risks for FND include supply chain disruption, inflation, and potential pricing pressure from big
box retailers; however, the severity of the risks is low, and FND is well-positioned to counter all the risks
Risk Description Mitigation Severity
• FND’s diverse base of 240+ suppliers in over 20 countries
• 70% of FND's sourcing is dependent on international protects it from sourcing disruptions (it has lowered its
vendors. Any global container shortage could dependency on China from 50% to 30% in the last 2 years).
Supply Chain significantly impact FND's operations.
• In 2021, FND passed some of the increased supply chain
Disruption • Moreover, if international freight continues to remain at costs to customers with a stable demand profile
current elevated levels, FND's gross margin could
continue to be lower than pre-2021 levels. • FND operates at a GM of 40.7% (vs. industry median of 38%),
thus giving it more room to absorb logistic cost shocks.

• FND is well positioned to cater to both value-oriented

Inflation Risk / • A decline in the broader economy, accompanied by customers (c. 30% lower price vs. peers for similar products)
slowing housing metrics could result in consumers and premium customers (c. 3x available SKUs vs. peers).
Demand delaying home purchases or reducing the desire to
• FND outperformed all peers during the '08-09 financial crisis
Slowdown spend money on home improvement projects.
and gained considerable market share

Pricing • A price war launched by Home Depot (LTM Jun’22

Pressure from • Flooring is a small segment for Home Depot (c. 7% of
Revenue of USD 155 B) or Lowe (LTM Jun’22
revenue) and Lowe (c. 5% of revenue). It is unlikely that they
Big Box Revenue of USD 95 B) could significantly compress
will launch a price war in this segment.
FND’s margin
Retailers
Historical Financials and Projections
FnD is expected to at 19% Revenue and 22% EBITDA CAGR over FY21-26e
1 Multiple Levers of Revenue Growth resulting in 19% CAGR
• Same Stores: Company is expected to show c.9% SSRG over
FY21-26E primarily driven by faster ramp-up of stores in
existing locations given higher consumer awareness and better
talent availability; Sales per Store is assumed flat (conservative)
• New Stores: Continue opening new stores at 18% CAGR over
FY21-24E (100 stores in 3 years) and then slow down to 13%
CAGR over FY24-26E (c.350 stores in FY26)
• Commercial: Company expected to increase market share from
1% in FY22 to 2% in FY26 (26% CAGR) driven by increased
1 focus, aggressive Sales RM hiring, and recent acquisition of
Spartan and two other distributors
2
• EBITDA margin expected to stay muted over FY22/23 at
2
c.12.5% driven by higher international logistics costs
• EBITDA margin expected to expand to c.14.6% by FY26 driven
by improved gross margins (logistics cost going back, better
product mix) and operating leverage (current stores scaling,
higher % of same stores)
3
3
• High growth capex of c.12% in FY22/23 as the company
continues to expand aggressively (USD 16 M per new store)

4
• Current NTM EV/ EBITDA multiple for FND is 13.7x which is in
line with other US-based, high-growth, discount retailers
(14.3x) and is significantly lower than the last 5-year median
multiples for FND and Other Discount retailers
4 • We are expecting FND to at least maintain valuation going
forward at 13.7x NTM EV/EBITDA resulting in $147 share price
end of FY25 (109% upside, 25% CAGR)
Valuation Overview
FND is trading in line with current trading levels of US-based high-growth discount retailers, and long-term
trading multiples of mature big-box retailers
Similar scale and operating
Slow-growing, smaller-scale Large, mature home- profile as FND; same target
companies that are not improvement companies with customers (price conscious
directly comparable with FND similar store formats as FND buyers / home-owners)
26.5x 25.1x
22.5x 20.4x Current
14.8x 13.2x 14.3x 13.7x L1Y Median
11.0x L5Y Median
6.9x 7.8x 8.5x
Key Comparable
(NTM EV/ EBITDA) Specialty Big Box US-Based, High Growth, Floor and Decor
Flooring Retailers Discount Retailers

LL Flooring, Builder First Source, The Home Depot, Lowe’s Rollins, Leslie, Five Below,
Tile Shop Holding Companies American Off Price, Ulta Beauty

Revenue
(USD B, 2021) 1.1 125 3.0 3.4

Revenue Growth
14% 15% 29% 42%
(%, 2021)

EBITDA Growth
(%, 2021) 23% 27% 78% 51%

Gross Margin / EBITDA

Margin (%, 2021) 38% / 12% 38% / 16% 44% / 18% 42% / 13%