We recently compiled a list of the 8 High Growth Retail Stocks That Are Profitable in 2024. In this article, we are going to take a look at where Floor & Decor Holdings, Inc. (NYSE:FND) stands against the other high growth retail stocks.

Lift in US Retail Sales due to Discretionary Spending

US retail sales increased solidly in September, supporting the view that the US economy possibly maintained a strong growth pace in Q3. Sales growth surpassed forecasts with an increase of 0.4%. A so-called control group of core sales jumped 0.7%. On October 18, James Knightley, chief international economist at ING, appeared on Reuters to talk about the retail sales growth. He said that a number of things are happening in the sector, with the key story being the remarkable resilience showed by the US consumer despite concerns about the job market cooling, high borrowing costs, and savings being exhausted. It looks as if the economy is on track to record a second consecutive 3% growth rate in this current quarter.

However, concerns that disproportionately high spending by higher-income groups is offsetting weaker spending by lower-income households are rising. The top 20% of the American households spend more in dollar terms as compared to the bottom 60% of the households by income. For the people in the top 20%, everything that could go right is going right. However, lower-income households have several pressures weighing them down, with inflation being a constraint.

This divergence in the household performance is a key story in the sector, with experts looking at how long high-income households can continue to offset the intensifying weakness in the lower-income sector. Knightley says that hiring does appear to be slowing in the job market, with jobless claims apparently being on the rise. These factors point to an intensification in the job market slowdown. If that is the case, it is expected to put more and more pressure on the bottom 60% of the households. If these households begin to fear the risk of rising joblessness, then that can be more of a headwind for economic activity felt more broadly.

All in all, it appears to be a mixed picture for the Fed. Being in the middle of the Q3 earnings season, Knightley gives an outlook on future earnings growth and says that it appears that the economy is performing pretty robustly despite headwinds. However, he also says that it is important to note that the equity market looks towards the future at all times, and that the Fed cuts rates for a reason. He feels as if a cooling is coming through, and that the earning estimates in the coming quarters might be even softer than what we are seeing in Q3. He thus think that the pressure is going to be much more telling for US corporate moving through Q4 and through next year.

A Concentrated Consumer or Slowing Consumer?

On August 21, Matt Boss, JPMorgan retail analyst, appeared on ‘Closing Bell’ to discuss the retail sector and the state of the consumer. He said that seeing from the backdrop of the consumer, we are witnessing a concentrated consumer instead of a slowing consumer across the spending front. Consumers are concentrating on events, such as the Back to School season experiencing accelerated traffic in consumers in that segment. Boss also said that the consumer is concentrating on value, highlighting the need for value in brick-and-mortar to offset convenience.

With consumer concentration directed towards key catalysts or holiday shopping periods, trends may show higher “peaks” and greater “lulls” of spending in between catalysts. Consumer shopping is coming up in several different ways, which he considers a by-product of COVID-19. However, Boss says that the reality is that consumer spending remains stable.

He believes that retail stocks that deliver value and have brands that consumers want in convenient settings are likely to experience higher consumer engagement and exhibit signs of consumer stability. Boss’ playbook for growth in the retail segment for the back half of 2024 thus includes innovation, differentiated product, value, and convenience in the e-commerce front.

In his optimism across the sector, Boss sees more winners than losers within the department store and specialty segment. He also believes that the consumer has been in a selective recession, with the low-income consumer being under immense pressure. The high-income and middle-income consumers remain plentiful on the spending side.

Our Methodology

To compile the list of 8 high growth retail stocks that are profitable in 2024, we used the Finviz stock screener, Yahoo Finance, and Seeking Alpha. Using the screener, we compiled an initial list of 40 retail stocks with 5 years of positive sales growth (at least high single digits). Next, using Yahoo Finance and Seeking Alpha, we sourced the 5-year net income and revenue growth rates along with the TTM net income (at least $100 million) to ensure profitability in 2024. Lastly, we ranked our stocks based on the number of hedge fund holders in Q2 2024 as per Insider Monkey’s database. The list is ranked in ascending order of the number of hedge fund holders.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Floor & Decor Holdings, Inc. (NYSE:FND)

5-Year Net Income Growth: 12.04%

5-Year Revenue Growth: 18.59%

TTM Net Income: $209.7 million 

Number of Hedge Funds as of Q2 2024: 34

Floor & Decor Holdings, Inc. (NYSE:FND) is a multi-channel specialty retailer that sells hard surface flooring, related accessories, and commercial surfaces. It operates five design studios and around 230 warehouse-format stores across 36 states. Its offerings are for commercial businesses, professional installers, as well as do-it-yourself (DIY) and buy-it-yoursef (BIY) homeowners.

With housing affordability remaining a hurdle for most buyers due to record-high home prices and increased mortgage rates, the company is not seeing the resurgence in hard surface flooring demand that it had expected. However, it realizes the short-term challenges posed by the current market conditions and is thus adapting its strategies accordingly. It is committed to executing strategies to grow its market share, and is working to maintain a strong balance sheet and improve its profitability.

The company opened five new warehouse-format stores in Q2 2024, ending with five design studios and 230 warehouse stores, compared to five design studios and 203 warehouse stores in the same period last year. It plans to open 30 new warehouse stores for the full fiscal year 2024, compared to its prior expectation of opening 30-35 stores.

Floor & Decor Holdings, Inc. (NYSE:FND) believes that slowing its new store opening pace to around 25 new warehouse stores by fiscal 2025 is prudent, considering current market conditions. It is pivoting most of its store expansion to larger existing markets with higher brand awareness.

Its fiscal 2025 plans include focusing on opening warehouse stores with the highest potential for success in this weak environment, thereby maximizing its return on capital. It is using this period as an opportunity to align capital spending growth and sales projections with the current environment. These initiatives have allowed the company to slash its fiscal 2025 capital investment per new store and increase the expected return for this store class by more than 200 basis points.

Madison Mid Cap Fund stated the following regarding Floor & Decor Holdings, Inc. (NYSE:FND) in its Q3 2024 investor letter:

“The top five contributors for the quarter were Liberty Broadband, Floor & Decor Holdings, Inc. (NYSE:FND), Moelis, Brown & Brown, and Waters. Floor & Décor continues to face a challenged sales environment, given a weakening consumer and housing market. However, potentially positive implications from lower interest rates and market share gains from a large competitor closing stores has investors more optimistic that results will improve.”

Overall FND ranks 6th on our list of the high growth retail stocks that are profitable in 2024. While we acknowledge the potential of FND as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than FND but trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland.’

Disclosure: None. This article is originally published at Insider Monkey.