SouthernSun Asset Management, LLC, an investment management firm, released its “SouthernSun SMID Cap Strategy” fourth quarter 2023 investor letter. A copy of the same can be downloaded here. In the fourth quarter, the strategy returned 8.15% on a gross basis (7.95% net) compared to a 13.35% return for the Russell 2500 Index and 13.76% for the Russell 2500 Value Index. The fund returned 19.48% on a gross basis (18.57% net) over the trailing 12 months compared to 17.42% and 15.98% returns for the indexes respectively over the same period. In addition, please check the top 5 holdings of the strategy to know its best pick in 2023.
SouthernSun SMID Cap Strategy featured stocks such as Floor & Decor Holdings, Inc. (NYSE:FND) in the Q4 2023 investor letter. Headquartered in Atlanta, Georgia, Floor & Decor Holdings, Inc. (NYSE:FND) is a retailer of hard surface flooring that provides tile, wood, laminate, vinyl, and natural stone flooring products and decorative accessories. On February 21, 2024, Floor & Decor Holdings, Inc. (NYSE:FND) stock closed at $109.29 per share. One-month return of Floor & Decor Holdings, Inc. (NYSE:FND) was 1.32%, and its shares gained 20.32% of their value over the last 52 weeks. Floor & Decor Holdings, Inc. (NYSE:FND) has a market capitalization of $11.647 billion.
SouthernSun SMID Cap Strategy stated the following regarding Floor & Decor Holdings, Inc. (NYSE:FND) in its fourth quarter 2023 investor letter:
“We added Floor & Decor Holdings, Inc. (NYSE:FND) late in the third quarter. FND is a specialty retailer of hard surface flooring operating 207 warehouse format stores across the U.S. The stores are large (avg. ~78k sq ft) and offer a variety of in-stock hard-surface flooring, including tile, wood, laminate, vinyl, and natural stone along with decorative accessories and wall tile, installation materials, and adjacent product categories. Customers include professional flooring installers (40% of sales) and homeowners (60%) primarily doing residential repair and remodel projects. FND directly sources its products from over 240 vendors in over 24 countries, enabling it to eliminate middlemen such as agent/ brokers, importers, and distributors. We believe this direct sourcing model gives the company a cost advantage over its competitors and allows it to offer customers the lowest prices in the industry. FND is also able to offer the largest selection of in-stock flooring in the industry because its stores are significantly larger than its competitors. This differentiated value proposition has enabled FND to consistently take market share from both home improvement centers (~30% of the market) and independent specialty retailers (~60% of the market).
The management team, led by Tom Taylor, CEO, has a strong track record of successfully opening more than 170 new stores over the last decade, with plans to eventually reach 500. Stores typically generate 50% cash on cash returns by year 3, meaning each new store should create significant value for shareholders. The balance sheet is strong with Net Debt/ EBITDA at 0.3x (2.7x including lease liabilities), and management has the flexibility to generate additional free cash flow if needed by slowing the pace of store count growth.
In summary, we believe FND will execute its new store strategy over the next decade, resulting in ~5x increase in earnings per share, significant free cash flow available to be distributed to shareholders, and a total shareholder return in the teens.”
An overhead view of a website displaying the multiple options of flooring products available for purchase.
Floor & Decor Holdings, Inc. (NYSE:FND) is not on our list of 30 Most Popular Stocks Among Hedge Funds. At the end of the fourth quarter, Floor & Decor Holdings, Inc. (NYSE:FND) was held by 35 hedge fund portfolios, down from 37 in the previous quarter, according to our database.
We discussed Floor & Decor Holdings, Inc. (NYSE:FND) in another article and shared TimesSquare Capital U.S. Mid Cap Growth Strategy’s views on the company. In addition, please check out our hedge fund investor letters Q4 2023 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.
