Yet Another Value Podcast - Saber Capital Management's John Huber describes inevitable retail winners + $FND thesis

Episode Date: December 20, 2023

John Huber, Founder and Portfolio Manager at Saber Capital Management, joins the podcast today to describe the concept "Inevitable Retail Winners", characteristics of inevitability, as well as talking through many different examples that exemplify this concept. In addition, John shares his thesis on Floor & Decor (NYSE: FND). For more information about Saber Capital Management, please visit: https://sabercapitalmgt.com/home/ Article from Base Hit Investing: https://basehitinvesting.substack.com/p/munger-podcast-thoughts-retail-stocks YAV blog post on retail: https://www.yetanothervalueblog.com/p/cyber-monday-thoughts-part-1-retail Chapters: [0:00] Introduction + Episode sponsor: Alphasense [1:55] What is an "inevitable retail winner" and Charlie Munger's thoughts on this [10:19] Restaurants [12:34] Various retail companies mentioned, are they "inevitable retail winners"; characteristics of "inevitability" - using AutoZone as an example as well [22:09] Retail management and culture [27:33] Floor & Decor $FND: what is their moat? / customer experience / why inventory is a moat [38:55] Pro vs. DIY customer spend / comment on ROIC on new stores / does $FND want to own their own stores [45:14] Macro impact on $FND? [51:14] $FND valuation [58:20] $FND described as a "category killer" [1:00:21] $FND risks [1:03:36] Any difference in $FND pre vs. post IPO + mistakes management made in the past [1:07:16] Push back on $FND thesis: recent acquisitions and "category killer" [1:11:32] Any other retails that John thinks has a chance to be inevitable or he thinks that a lot of investors talk about in this "inevitable" way Today's episode is sponsored by: Alphasense This episode is brought to you by AlphaSense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. AlphaSense is the #1 rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities, like Smart Synonyms and Sentiment Analysis, provide even deeper industry and company analysis. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As a Yet Another Value Podcast listener, visit alpha-sense.com/fs today to beat FOMO and move faster than the market.

This episode is brought to you by AlphaSense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. AlphaSense is the number one rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities like smart synonyms and sentiment analysis provide even deeper industry and company analysis. Alphasense gives you the tools you need, to provide better analysis for you and your clients. As yet another value podcast listener,

visit alpha-sense.com slash FS today to beat FOMO and move faster than the market. That's alpha-dash-sense.com slash FS. All right, hello, and welcome to the Yet Another Value Podcast. If you like this podcast, it would mean a lot if you could rate, subscribe, review, wherever you're watching or listening to it. With me today, I'm happy to have on John Huber. John is, well, he needs a lot of things.

I guess we're talking to you because of the post you wrote on B-Sit investing. But anything else you want to talk about that you're involved with? Well, yeah, I run a fun called Saber Capital. Yeah, it's always fun watching your show, Andrew, and exchanging notes with you. And it's good to be on. It's, I think you and I have exchanged a bunch of emails over the years and a few calls as well. But yeah, it's a pleasure to be here. I think when you say that, you're supposed to say first time, long time is the thing.

First time, yeah, that's the podcast. Back to the old radio days, actually. but yeah. We've got a few things we want to talk about today. Just before we get to there, I want to remind everyone, nothing on this podcast is investing advice, you know, please consult a financial advisor. Always true. We're going to start off with a broad discussion of retail in general and then maybe into

a discussion of floor and decor in particular. So that probably calls for a little bit of extra disclaimer. You might talk about 100 retailers, 200 retailers, who knows, please go do your own diligence on all 100 or 200 before you consider anything. But anyway, John, the reason we're having you on is, you know, again, we really were exchanging emails during the. banking semi-crisis a few months back. We should have just added on then and Yolode it given how that's played out. But you wrote a post that inspired me to write a post

and what inspired you to write your post was a discussion Charlie Munger had on a podcast. So we just wanted to talk about retail and this concept of inevitable retail winners. And then I think we'll use that to transition into what might be the next inevitable retail winner in floor and decor. So I'll get so I'll turn it over to you. You know, just what is inevitable an inevitable retail winner and kind of, you know, what your brain turning with what munger said well yeah what got my brain turning with what munger said was um you know just how i think it was the acquired podcast where he talked about how um you know buffet has never liked investing in retail ever since the diversified retail experience with the

department store in in baltimore you know he had a bad experience with that and um you know i think that kind of soured his view on retail in general. And it's just interesting because Munger is on the board of Costco and everybody knows that. And he's long time been a huge Costco advocate as a business and as a stock. And so I think he's like tried to get Buffett to buy Costco and never could quite get him to do it. I mean, there was a small position by Berkshire standards. It was sort of a token position, I think, at one point. But, you know, Buffett just has stayed away from retail. So I always thought like that dichotomy between these two partners was always kind of interesting to me that that Munger is willing to invest in retail. And I think likes the concept of a business that produces high returns on incremental capital.

He's always kind of like these. You know, he once gave a talk in California, I think it was, where he talked about like riding a wave of momentum, like a business momentum over a multi-decade period. I'm not talking about stock. I'm just talking about like a business momentum. And so I think like he's like that. So anyways, I was listening to the podcast and I just got to thinking about. about how different they are in that regard. And then, you know, prompted me to start thinking about what made Costco a good retailer

and what makes, how do you decipher why does Buffett stay away from all retail? And can you invest in retail? I do have a retail investment with Flora and a core that I've owned for a while. And so I'm willing to do that, but I'm always like trying to reverse engineer why Buffett is not willing to do that if that makes sense because it's always good to learn from guys like that. So, yeah, in a nutshell, that's what got me prompted to think about some of these topics. No, that's correct. So I guess there's a few things I want to hold out. Just number one. So the concept of, like, Munger, he mentioned a lot of retail winners, right? And what you mentioned,

what he mentioned was, there's this inevitability point where, look, you know, Walmart in the early 70s, it was, the store economics were great, but it wasn't obvious it was going to become what it became today. But, you know, at some point, I don't know if it's in the 80s, I don't know if it's in the 90s, but at some point, it was pretty obvious that Walmart was going to be the dominant retail force in America, and you could invest then, and you would have still done really well. Amazon, in like 2008, 2010, it was obvious Amazon was going to be a winner in retail. And now, I kind of don't like the Amazon example, because it wasn't obvious Amazon was going to have AWS. It was obvious. It was obvious. Jeff Bezos was great, but, you know, AWS is a big driver

there, but, you know, Amazon, Costco, all these things. It became obvious. So, like, what is it that makes, like, where is the inflection point where something hits? inevitability. Yeah. So there's two things in my mind when you're thinking about retail. You have a differentiate. So there's two ways to win in retail over simplifying it kind of from a very broad perspective. You can have a differentiated product. So that's obvious like things like Apple or Nike or Starbucks, for example. Aren't you just a product company at that point? I guess Starbucks is retail, but that's more food retail. Yeah. I think like if you're selling something that that you cannot substitute easily elsewhere. So it doesn't have to be necessarily

like an Apple, like a product company, but I do think there's an element of retail to some of those companies that is important. But basically you have something, people come into your store, whether it's an online store or a physical store, because they want your product that they can't get elsewhere. There's no easy substitute. But those are rare, right? Like those brands are rare. I think the other way that you win in retail, which is really hard to do, is you sort of get this three-legged stool of price selection. convenience. So, you know, in a nutshell, if you can't win on differentiating your product, then by definition, you have sort of a commodity product that anyone could get elsewhere,

and you have to offer the lowest price. How do you offer the lowest price? It's sort of a chicken and the egg thing. It's tough to do because to offer the lowest price, you have to have some sort of a buying advantage, which means you typically need some sort of a scale advantage. You've got to be big enough to get leverage from your vendors and so forth. And it's hard to do. I mean, there's a good book on if you're interested in retail or your listeners are interested, a book called My Father's Business, which is about Dollar General. And, you know, the founder of Dollar General, and this was like back in the 30s during the Depression, you know, he would go around and basically like buy merchandise at a state sale, or not a state sales,

but like bankruptcy sales and things that companies were going out of business. And, you know, he'd buy, you know, 50 pairs of jeans. And he'd be able to sell him for five times he paid for him because he bought him cheap. And so that's the whole thing is you've got to find some advantage. And usually, you know, in mass market, that just means scale. And so that's why, like you mentioned, Amazon and Walmart and Costco, everybody's familiar with those. So you need, you need to get a low price advantage. And, you know, and that is how you can win, I think, in general merchandise. But that's tough to do. There were two. So just on, I guess this is taking a Stephanie, but I do want to stay broad for a second. There were two things. And to prep,

I read their Investor Day in a recent conference. And the two things that jumped out to me very much along the line of what you're saying. They said at the Investor Day, hey, we follow the founders principles here and we're going to democratize the category. And they were talking about that in terms of we're going to keep our prices low so that people can shop here and buy the most. They said, look, we want to keep our prices so low that when people come out here, yeah, maybe we could charge a little more.

They do one bathroom, but they're low enough that they can come in and do two bathrooms or a bathroom in, I guess you wouldn't do a closet, but something like that. And then they were at a, the CEO was at a conference in September and he said, I've been at floor and decor for 11 years. And he was asked on pricing. He said, I've been here for 11 years. And we never had to take price until tariffs started countervailing and the anti-dumping came along. And then he even mentioned, hey, in 2022 or 2023, when some of those got kind of rolled back, we actually dropped our prices and we thought that was really important to our customers. And I don't know. I was just kind of just to go from floor and decor to more broadly. I was kind of thinking about that principle, you know, of like, hey, returning the value to your customers, maybe that trusted partner, Walmart had the rollback. And prices, Amazon, they're very competitive price because you can check them. What do you think about that? Yeah, I mean, like, I guess, and I realize I didn't answer exactly your question on inevitability. And like I was, you know, you need to have some sort of a low cost advantage is that's how you get to the, because then you have that beautiful, like I think Nick Sleap calls it like this, you know, share, like you're sharing the economics with your customer type of thing where

growth begets more growth. And so it's hard to know. To answer your. question. Every company's different. It's hard to know exactly when you get there. But I do think you have a certain point in a retail life cycle where you can identify it. And maybe it was 1988 with Home Depot or maybe it was 1982 with Walmart. But like there's certain points where you can see the flywheel working and you can see the returns on capital working. You're witnessing it being replicated across the country. You know, Peter Lynch used to talk about that where you could see like in one region and you could extrapolate out. He used it. I think he used it with Taco Bell and La Quinta, and I used that all the time. He said, hey, look, once Taco Bell dominated California, you knew they were going to dominate, like, kind of, not dominate, but you knew they could grow nationally. Though, I would push back on that. Like, I used it in the post, something like H.E.B. in Texas, Wawa, kind of in the Northeast Philly area, like, or even in New Orleans, there are some fast food restaurants that, like, they kind of can only stay local. Like, how do you know some, it sounds good when you say, the Taco Bell model, something.

Something down in Pates California, but how do you know for sure? Yeah, that's tough. I don't, I've never had any, I mean, I've never really made an investment that I can think of in restaurants. Restaurants are tough because your customer leaves the next day. You know, you have to win your customer back every single time. So I think like there are, obviously you could look at like a business like Chipotle and say, you know, does this have a differentiated product? My kids love Chipotle. They want to go to Chip Chipole like Chick-fil-A.

We're going to Chick-fil-A once a week. Like, they have enough of a differentiated product where you win. But, like, one of the interesting tests I do when I go into retail stores because I'm always just kind of thinking about this stuff is, you know, can I get this product elsewhere easily, you know, for similar price? And nine times out of 10, the answer is yes. So once in a while, you have enough of a differentiation where you can't and that retailer has an advantage. But sometimes it's hard to know if that advantage is durable, right? because it might be a fleeting advantage. Like you said, like Taco Bell, how do you know if it's going to be successful?

It's hard to know. And I've never owned Chipotle because for that reason, it's like, well, you could go to Kudoba. And you could, like, it's not exactly the same, but there's so many different places you can go and get, you know, tax max if you wanted. And so it's, it's hard for me with those types of businesses. So that is what I think, that's why retail's hard because you can, you can get products elsewhere and it's hard to know. But, you know, I was thinking of this like turtle. I might have used it in my post. I've written about it before, but like, we go, I'm in North Carolina.

So I take my family down to the beach a lot. And every year we go to this turtle hatching on the beach and a little baby turtles hatch and they try to make their way to shit, you know. And I was talking to this like turtle expert one day. And he was like, oh, yeah, like 99.5% of these turtles aren't going to survive the first week of their life. Like they'll get eaten by another fish. That just makes it so sad, John.

Yeah, it's so sad. It's like a sad thing. And you're like trying to usher these little turtles, you know, to get in there. But what's interesting is, like, once they build out that durable shell, they can live for decades and decades. So it's kind of like that with retail where it's like, it's really hard to know at the beginning who's going to build out the durable shell.

But I do think at a certain point, you can recognize it. And usually it's a low cost advantage. That's the way I would recognize it. That was going to be my next question. Because look, when you say winner, I think the three that popped to mind, especially when you're thinking Charlie Munger are Amazon, Costco, Walmart. And all of those are basically low price. low price modes, and they've got a little bit of a flywheel, right?

Low price drives more volume, volume drives lower prices, so they've got that. But, you know, I was kind of struck, like, so there are retail winners outside of, like, Home Depot and lows. I mean, Home Depot, both of them are low price, but it's interesting. They're in the same category, and you probably would have been pretty happy with both if you had invested in them, you know, 20, 30 years ago. No, yeah, Target is large, and Target's not, like, expensive, but, you know, it's Target versus Walmart, and that's been a great stock as well.

I like that value focus is interesting is there other there are other retail models because you mentioned making Apple but like could you do this restoration hardware like does that have the same inevitability style here or are we just talking apples to oranges I don't for me I'm not comfortable with something like like RH because I just don't I don't have that you know the thing about Florida core and we know we could talk about that business or or you could look at Walmart obviously Home Depot is a great example AutoZone you know like those are businesses where you can clearly see why they're winning. I can't, I mean, I guess like with RH, you would say, well, they have great products. Like, my wife's an interior designer. And so I know all about RH. And I can see, like, why people like the products. But personally, like, when I look at it, I'm like, wow, this is a really expensive piece of furniture. And, you know, for me, it's like, as a consumer, I don't place as much value on that versus I can easily see why I would shop it on Amazon, right? That's easy, right? Why does AutoZone win? You mentioned AutoZone.

Well, AutoZone is interesting. AutoZone and O'Reilly are interesting because they are not price. I mean, they're the lowest price, but they have 50% gross margins. So they're not, they're marking their products up 100%, which is not, that is not the Costco model. Yeah. By the way, I don't think Florida Corps is running a Costco model, but we can. No, no, no, no.

We can talk about that. It's similar where we'll talk, but it's similar by scale, low pricing, all that? I mean, they're obviously not charging no gross margin. It's not a shared economy scale type of a model. And neither is AutoZone. But AutoZone, I think, was successful in part because the industry structure. So one of the things to think about with retailers is like, what does the industry look like? And when you have a very fragmented group of stores like mom and pop owners, that if you can come in and like sort of professionalize, the industry in a way where you become more efficient, you become lower cost. You centralize

your buying. You know, you get scale that way. You get scale in all these different areas of your business in the supply chain, in the distribution, all of that. Then you can get a cost advantage and still be able to, you know, price your products at a competitive level. So, so those guys are like taking market share from all the mama pops. I think they're, I think, I think the big three in auto retail has like 15,000 stores last I checked. And there's like 35,000. thousand independents? Why is, so AutoZone rough numbers, right? If you went and did AutoZone stock over the past 20 or 25 years, I mean, it's up like 10,000, right? It's one of the best performing stocks of the, you go, I'll include a link to both my post and John's Post and the

share of notes. I think my post mentioned it. AutoZone, like they bought back more shares than they had outstanding at the start of their buyback 20 years ago. So obviously they bought back 90% in the last couple of decades. It was more than they had outstanding originally, but because obviously they issue with some stock options and stuff. Oh, yeah, yeah. I see what it was. Yeah. So that stocks up 10,000 percent.

You know, if you bought it 20 years ago, you're probably retired versus something like advanced auto parts, right, which to me runs a similar model. I mean, you told me from my expert here runs a similar model. But that stock, I just looked at the chart is like, it's literally flat over the past 20 years. So like, well, it's up a little bit, but you well underperformed the indices if you bought. So like, what's the difference between they're running similar models? they're in similar, they're in a similar business.

What's the difference between those who were, like, BJs versus Costco? Now, BJs is newer to the stock market, but, you know, I mentioned, I know a lot of people who are long BJs, so a lot of people think it's got a lot of runway. But when I talked to some of my friends in the suburbs, and like, I was always knocking on them because one of my friends said, I have a BJ's card because it's five minutes for my house, but God damn it, I'm like, if a Costco would just come within 25 minutes in my house, I'd switch over to Costco in a second. Like, what's the difference between these two, the winners and losers and stuff?

Well, I think with Costco and BJs, I think it is better value. I think customers, you know, and I'm a customer. So like for me, it's easy. It's, it's, it's better value. You're getting higher quality stuff in many cases, not all cases. I mean, BJ's is probably, you know, on par with Costco in many product categories. But I do think in general, you get better value at Costco. And so I think it's, it's cheaper.

It's, it's either cheaper or it's better quality. quality stuff. Yeah. Is that the scale? Because like if Costco, I'm going to throw numbers out there. If Costco is 20 times the size of BJs, yes, they're going to get slightly better pricing from people. But, you know, like you, it is starting to get down to pennies, right?

Like Walmart, if they're a hundred times the size of Albertsons, Walmart might buy a Coke can for 59 cents versus 60 cents. So Costco might have something to, but it's not like, it's that big that it could drive a huge. Is it just the brand? Is it better management? is there something else? I think it is better management, better culture.

You know, like the Costco CEO is famous for, you know, not raising, this is sort of a silly hot talks, economically meaningless. Yeah, like $1.50 hot dogs, like you're fired if you even think about raising the price of that hot dog. And, you know, that type of low cost, not even low cost, just focus on the customer. What can I do to serve the customer? You know, like if I get a better deal on the rotisserie chicken, I'm going to pass all of that along.

It's really hard to do that as a retailer when you're incentivized as a management team to produce returns this year, right, profits this year. And so I think it's a very special thing when you can capture that. And it sort of permeates the organization. Not to push back on every example because, look, I'm just fascinated by this, right? But like, in AutoZone to go back to it, if I remember correctly reading their proxy, they're all big shareholders. they have an insider focus, but like management is paid on return on invested capital in the

current year, right? So I do hear you with that. It's different. I know it's a different business than Costco and everything, but it's just kind of interesting. You know, it's the most fascinating thing. And because we can go and like actually buy the products, it's so easy to talk about. Yeah, it's hard. Like return on capital is my, I mean, that would be like, I mean, that's like music to my ears. I want companies to focus on returns on capital. That is, A friend and I were talking about Flournacore recently, and, you know, my view on Flournacore's moat is it's inventory heavy. So the denominator, they have a lot of money invested in working capital. They have $1.1 billion in inventory.

And so I think they have over $600 million sitting in the warehouse. And so that is inventory heavy. They are also, you know, incentivized through returns on capital over a three-year period, which is nice. But still, you can always overoptimized for one variable that is to your detriment over the long run. And return on capital is no different. Like if you optimize for margin, that increases the returns. That increases your return on capital number. That might not be the best thing to do in the long run.

So there's nothing perfect other than if you have executives with skin of the game. But yeah, I mean, AutoZone and O'Reilly have both been very good, very, very, good operators. And advanced is right here in my hometown of Raleigh. And they have had issues. I'm not as familiar with like the competition between those three as much as I am with, let's say, flooring. But I know they've had some missteps with some of their sourcing and some of their products and some of their quality control and things like that. And it's just, you know, retail is a tough business. It's not even when you have these advantages, they will go away. you don't have the leadership in place. And that is one thing, like, I think Buffett looks at Costco and is like, man, it's so great right now. But 20 years from now, if you get the wrong people in

there, that could be a problem. Whereas a company like Disney, it's like, you know, you could have the worst management team in the world. Some might argue you have that. And it's still like, you know, Disney in 20 years, like, you know, my kids will be grown. But they're, you know, we go to Disney. We love it. Like, there's certain things about that business that are permanent. And retail is just not like that. It's very execution heavy. And now a quick break to remind you that this episode is brought to you exclusively by AlphaSense, the AI platform behind the world's biggest investment decisions.

AlphaSense gives you the tools you need to provide better analysis for you and your clients. As yet another value podcast listener, visit Alpha-Sense.com slash FS today to beat FOMO and move faster than the market. That's alpha-dash-sense.com slash FS. I was met because I'm, again, in my post, I mentioned Academy Sports was the company that I thought like was the most at just like pure trow. Right. And we're compared Apple's orange and we're going to go to Florida Decor in a second. We're compared like complete Apple's oranges if we talk Florida to Corr versus Academy. Academy was at like, you know, five times earnings and their starting stores as the one that could like, you know, switch investors thing. But one of the issues I brought up with Kennedy is, hey, they had this killer CEO who led the turnaround, right? And he's gone. He's retired. He's old. He's he's moving on. He's still involved in the company as like, I believe he's chair now, but he's no longer the CEO. And one of the worries is, hey, he did this turnaround over five years, but he's a rock star in this street. Now that he's gone, as you said, with retailers,

everything's in the details. It could become Models or Sports Authority, which went bankrupt in the same category in the past three to five years. Like, you know, it's just, it's so interesting where to go back to AutoZone advanced. Like, AutoZone has been the best stock in the world over the past 20 years and advances, you know, you're way behind indices. And 20 years ago, I don't know, because I wasn't there. You know, I was in a grade 20 years ago. But 20 years ago, I think if you were reading the 10Ks, if you looked at the stores, obviously some people, Eddie Lampert successfully chose it. I think business model, I think financial engineering drove some of it. But I don't know that it would have been entirely obvious that one was going to be like rock star levels better than the

other Costco versus, you know, Walmart had Sam's Club. I think Sam's Club has done okay. But 20 years ago, Charlie Munger probably could have told you this, but I probably would have been on Sam's Club, just being like, hey, they've got all the resources of Walmart behind them. Like, that's a tough, that's a tough cookie to crack. But they, yeah, it's just the, as you said, the management piece of the retail thing is something that really drives it. And yeah, I think good management, good culture, and then you have to have some sort of a clear cut advantage that you can understand.

So like with your sports, you know, merchandise example, yeah, like, how does Academy compare to Dix? Like, where are their stores located? You know, one thing about retail that's interesting is, like, tractor supply has been a really successful retail. Great one. That's on my list of companies that I've meant to mention to. Yeah.

And tractor supply. So one thing I have noticed is companies, and this would apply to AutoZone and O'Reilly as well. The other thing with those guys, one other thing I was just thinking of is I once visited a distribution center years ago for O'Reilly. and they they are maniacal about like serving their pro customers or you know the commercial the guy's fixing the cars right in the body shops and so they they have a distribution network that is just finely tuned and so that's a lot of the advantage with some of these retailers when it comes to like winning these verticals like auto parts or flooring or mass merchandise as well with Walmart and Amazon and these things is the logistical complete. of it is so valuable, and it's behind the scenes and nobody really sees it. But when you do see it and study it and go tour one of these things, you really get a sense for, wow, this is like really difficult to look at. Have you toured one where you, like, you mentioned O'Reilly,

where you're like, this is on point? I feel like every time, and I haven't, I'm guessing I haven't done as many of you particularly since COVID, but have you toured one and been like, oh, this one is just not on the same level as the competitor's distribution facility? Because when I go, I'm always like there's so many moving parts. This is so impressive. I'm so impressed. Yeah. Yeah. Yeah. Yeah. I think yeah. I'm not an expert on, you know, warehouse logistics or anything like that. But I will say, I mean, I can just speak to the ones I've had experience visiting and talking to management teams and talking to executives in supply chain and so forth. And trying to understand it is, you know, like, again, like the one I'm familiar with most is probably floor and decor. And that one is just when you compare that

to the, again, the industry structure, that's one of the big advantages. They have more inventory than everybody else, including Home Depot and Lowe's. And the small mom and pops can't compete because they don't have the resources, right? They are using a two-step model. They have a middleman and they're sourcing their products through a middleman. And they're taking just as much inventory as they can handle. And they're always in a cash crunch, right? I'm familiar with some of these businesses and they're just doing their best, but they can't offer the same breadth of product that a company like Flournacor can offer. And then the big guys, everybody always says, well, why can't Home Depot replicate it?

And there again, I mean, Home Depot has 100,000 square feet, but maybe only two or three thousand is devoted to flooring. And so you're, you know, if you look at like the product categories at Home Depot, there's I think 14 categories that they list in their 10K and flooring is around 5% of their sales. It's like number 10 on that list. And so if they want to add a third aisle or a fourth aisle to flooring, if you go to Home Depot, there's like two aisles of flooring, it's operating.

If it's opportunity cost thing as a merchandiser, you have to decide, okay, if I want to add another aisle, what aisle am I going to take from? And so it becomes a tricky thing. Home Depot has the resources to do it if they want to, but they don't really want to because, you know, it would take from something that perhaps would be more profitable, like, you know, tools and equipment or lighting or electrical stuff or lumber, plumbing, things like that. And so, yeah, those are kind of a few things that, you know, I think when you visit the distributions that are like, these guys are just running circles around the small competitors. I had one more question on general retail, but we're into Florida decor, so let's just go with floor and decor. That's the company that we're talking about. And one of the many reasons we were talking about it is because Charlie Munger kind of, you know, RIP, he kind of called his shot on the way out. He does an interview where he says, that's the most likely to be the next

winner. And there's interest for his factors. There's all sorts of other factions, but I think this stops at like 40% since he said that. So, all right, P, what a way to go out. But we mentioned that as an inevitable winner. I think people probably already know floor and decor. They're doing lots of floor and decor stuff for the home. But let's talk a little bit more about their moat. So you mentioned, look, this is a category killer in floor and decor.

You mentioned why, I guess you've already mentioned why they're better than mom and pops and why they're better at Home Depot. But let me ask you one question. Look, I live in a shoebox in New York City. So maybe it doesn't quite jive with me. I was asking my wife about it. She's like, oh, well, we live in an apartment, so maybe we don't quite get it. But why do you need so much room for floor and decor when you're doing these sales, right?

Because to me, and again, I'm a simpleton idiot who wouldn't notice the floor if it, like, hit me on the face if you change it. But why couldn't you just go to Home Depot and Home Depot? It's like, look, we've got three types of wood. We've got three types of tile. We've got three types of, I don't know, what else do people do on their floor? Marble for your company. Yeah, it's like luxury vinyl plank is a big thing now. It's just like synthetic.

like they call it innovation it's kind of funny to think of flooring is innovation but like you read these transcripts and they're all like oh we have so much innovation in the last you know five years with flooring and i'm kind of like you like i don't personally have a preference when i look at my floors although my wife is an interior design so i'm very familiar with how all this stuff works so but yeah and actually that's one of the reasons what what captivated me in in 2021 and 22 um with florida core as i was stud i've been following it since the IPO but um i invested in 2022. And so it's not a, it's a, it's a new investment for my fund, but a relatively new investment at least. But, you know, one of the things that I noticed last year was you could not

get product anywhere. And so it's, I think like part of your question is like, can you go anywhere and get it? And, you know, flooring is a commodity. So there's nothing special about Flore Cornucor products. They do have, what's special about Flores is their cost structure and their supply chain and their ability to give you everything you could ever want and all the different options at a low price. But there's nothing special about it. But I think, like I was just going to finish my thought on the supply chain thing. Like last year, some of the projects that my wife was working on were like 12 weeks out in terms of the availability of the product. And we were, I just happen to go on and look at different, we don't have a floor decor here in Raleigh,

so it's kind of interesting. Like, it shows you the white space that we have. So I went on and looked at the Greensboro store and there was like six different boxes of the product that she wanted. And so I just thought it was interesting that it just kind of, that little anecdote sort of exemplified how strong that inventory availability is and how convenient it is. because when you're a professional contractor, you know, you need to be able to have the product available.

And so that availability is a big advantage. And that's one of the ways I think they're winning so well. My internet, I heard everything you said, but my video cut out for a second, just confirming you didn't miss anything for me or anything. Great. Okay, cool. Yeah, yeah. Yeah. That all makes sense, but, you know, I guess,

again, it's just, when I look at this one, I like everything they're saying, let me try it a different way. So they're serving a few different markets, right? They say, hey, I believe it's 60% of the sales are direct to the homeowner and 40% in the part that it's like you're really most impressed by. 40% of the sales are to the pros, right? So let's start with the homeowner. So that's 60% unlike. When they go to them, if I'm looking for floor and I go to floor decor versus a low life, right? And let's say, ignore it. 2022 where there were real supply chain issues, but there's, you know, generally there should be plenty of floor. What am I going to find when I go to a floor and decor versus when I go to like

the local mom and pop who's been selling floors in my store, in my neighborhood for 50 years? Well, when you go into a floor decor, it's a huge, I mean, picture like a Home Depot style warehouse store format, right? There's, it's like any more feet. So it's massive. And there's, um, I think there's 4,200 skews on average in each store. So there's just, just everything, the selection is there for you to choose. If you, I mean, you guys, you mentioned your department, you're not homeowner yet, but when you, you know, presumably like when you guys buy a home at some point, see, you're one of the, Andrew, you're one of the, like, probably 86 million. I'm a future customer. Like, yeah, you're like, there's 86 million millennials in that generation that, in my view, like, the vast

majority of those people will move at some point in the next decade. They either already are homeowners, they'll move or they're not homeowners. They'll probably buy a home. So, you know, when that turnover helps, you know, get the creative juices of the homeowner flowing and you might want to change something out. You might want to change the tile. You might want to change the floors, things like that. So I guess like the tailwind you were asking about, like, to me, the tailwind is for flooring is like the age of the house. So the average age of a home in this country is over four decades old now. I think it's 41 years. And so you have like, you know, at 80.

That's a little different than what I was going, but that's just like, if we're talking replacement, right? Like that should be in the natural life cycle at this point, right? Like the overall market, I can't imagine is growing faster than GDP because it's not like 10 years ago. People weren't replacing their tires. Like, it should grow at kind of GDP plus household growth, which I guess is actually just GDP. But like, I just think those are normal tailwinds, right? you would have said the same thing 10 years ago. Yeah, I think you could have said the same thing 10 years ago.

I mean, part of it depends. You know, there's a, there is a dynamic of housing shortage. People debate this. But like, there's, you know, we had very few homes built after the GFC. And so there's, you know, homes are aging in the country. That's not always the case. It is, it does happen to be the case right now. But in general, I think, like, we live in a home ownership culture.

I mean, if you just like think about it from a broad perspective, there's a certain demand for, you know, all things home, right? We sit around and watch television shows that have to do with, like, watching other people fix up their homes. And we like that. And so there's like, I think there's a natural demand for homeownership and, you know, I just think that's something that's already there. It's not like an increasing tailwind for the overall, all industry.

but I certainly do. Yeah, yeah, yeah, it's just, yeah, it's not like a new thing. Yeah, it's a, the industry itself is not a fast-growing industry. I mean, part of the thing with Flore decor is it's not a, you know, it's certainly not a sexy industry. It's growing at, you know, nominal GDP type rates. So it's not a fast-growing industry. It's just the value creation that's occurring at Florenicor is coming from their ability to take a greater share of that. existing market. So it's a slow go. It's similar to where, you know, it's not a fast growing

market, but there's a potential to take a lot of market share of that market. Oh, absolutely. I think they mentioned in their investor day at the end. They're like, hey, I care of it's 8% nationwide or 8% overall of market share. Look, in Houston or somewhere where we've been a while, our market share in Florian is like in the low 20%. So you run that if they can hit, you know, low 20% nationwide, like this is a huge market that they would have future advantage. Let me just ask one more. So you mentioned earlier, and I'd love for you to build a little bit more on how their... I'd love for you to build a little bit more on how their inventory is a moat and a little on how, you know, a mom and pop will work with you, but they might only have a little inventory

and they'll have to custom order. It'll take time. It's more expensive. Home dogo is limited selection. But here's my question as, again, somebody who doesn't know the floor. Doesn't this model screen for like a Costco style? Like, A, instead of having 100 types of wood, like kind of similar to what Home Depot, it seems like, has.

We have three types of wood. But because of that, we can use all of our purchasing power to get the prices on those types of floors, tiles, whatever it is, down as far as possible. Oliver and sellers know how to install this stuff perfectly, so it's cheaper, it's faster. And you kind of get the flywheel that way where, you know, Costco, there's one type of ketchup there. For this model, they're going to have one wood, one tile. Like, why is the inventory such an advantage for these guys? It's the overarching question I'm asked. Yeah, I think, like, it's just a different business.

So with Costco, you don't need like five types of ketchup. right? You could just go with Kirkland. And actually, that's a big, there are so many differences between Costco and I know Charlie mentioned Costco. And there's some similarities for sure. But it's not a, to me, I look at it as a very different business from Costco. Florida core has all private label. So they don't have any, you know, it'd be like Costco only having Kirkland. Right. It's so it's not they, they, they, everything they do is direct sourced. I think to answer your question on inventory, like they, It's just when you think about shopping for something you're going to put in your home, you know, it's not like ketchup where you could just have like the Kirkland's ketchup is going to suffice. Like with your flooring, you want to, you want a wide selection because you're going to have different tastes and different products. There are different trends. There's different designs, all that type of stuff. And so I think it's a big advantage if, like, for example, I've talked to professional installers who, you know, have to send their client.

to three or four different flooring stores because they want to expose them to different options or the client themselves wanted to see different options or they didn't find what they wanted it was actually going to be my next question yep yeah so so that like florida core is convenient for not just the DIY person that can get everything they want in one place is really convenient for the professional installer that that can send their client to the store and say look you can choose whatever you want, and then we'll, you know, put those specs into the plan and do it. And they can, it's just very efficient. And then the flooring contract can go pick it up.

Flore and a core will deliver it to the job site or they'll store it free of charge for the pro customer. So it's just like a convenience thing for the pro. The other thing on that 60-40 breakdown, you mentioned, I think they say, and I don't know how precise they can pinpoint this, but probably through surveys and stuff, they can get reasonably accurate, but the pro might only be 45% of sales, but the pro influences like 85%, I think, is the last number I saw. So like the vast majority, because if you think about it, like if very few people are actually buying the floor and installing it themselves, they're hiring someone to do it.

So like the pro is, is involved with most of the sales. So it's very. I think they call it the B.I.I.C., they call it the B.I.Y customer, right? The buy yourself, but have someone else install it for your customer. Yeah. That's right. Yep. Do they have stats on, when they work with pros, do they have stats on kind of, I'd just be interested like, hey, you know, the pros who work with us, their sales are 20% higher because, you know, it's more convenient for their customers to come in here. Or as you mentioned, like, we've got, we've got, we've got, follow the good, better best things. People come in and because we've got, they talk about how their showroom is as big as a lot of the mom and pop's actual stores, right? So you come in, you do the showroom and the showroom are best, look like. so good, people will, like, upgrade and that means more margin and more money for the pros.

Do they have any stats on, I did not see it in the investor day, on pros getting more spend or just being more efficient when they work with them? Yeah, they have, I can't point to any specific stat off the top of my head, but they talk a lot about how, you know, like conversion rates, one stat that comes to mind is, and I don't think this is necessarily exclusive to the pro customer, but like when a customer walks into the store for the first time, that conversion rate is like north of 80%. So like the likelihood of them actually buying their product from Florida core is very high. Because once they go in, they do, you do start to see the value proposition that the store

offers. So yeah, I think there's a lot of stats that they throw out, like how productive the pros are and stuff. It's hard to know. It's such a fragmented industry and I don't have any stats off the top of my head. But I do in talking to the professionals, the people that do the flooring installs and stuff and just kind of knowing the industry a little bit, it's very clear to me why they're winning because of those things that we talked about. The inventory heavy model, the selection

and the convenience, it's actually to me less about price because, you know, if you think about flooring, the end customer that's paying for this is not doing that, you might only do that job once a decade or something. And so you're probably less price sensitive than like when you go to Costco and you're looking to buy both and you're looking to, you know, get the lowest price on, you know, whatever it is, you're more, you want low prices for sure, and the professional customer can keep some of that for himself, but I think you win on the inventory. I really think that's the moat here. It's less about price and more about the selection. Yeah, and it's just incredible because I guess maybe we can quickly talk about their returns on

capital, but they say, like, look, these new stores, I think from memory it was a five million investment into a new store. A lot of that is the inventory, but they're talking about 20, 30% returns on capital. And it's just crazy. Like, you know, again, as you said, the Home Depot can't do it because it's a small store. They came, hops don't have the money, don't have the space and everything. It's just crazy how they found this type of niche. Do you comment anything on just kind of the new stores and the RIC there? Yeah, it's great. I mean, that's, it's so nice to own a business that can reinvest capital and earn those types of returns because it's like, where can you get 30% returns, right? So there's not that many places to do it. And usually in retail, when you do see

those incremental returns, I mean, you can find companies that are doing it. But the whole question, again, is can I visualize these returns? Is this durable? Can I visualize this company still doing maybe not 30 percent, but high returns on capital in a decade? And when you look at the, again, the way this industry works, the structure of the industry, there is a long runway to see that continuing. But yeah, I think that the new stores are actually closer to 10 million. there's around, I think, three and a half million of inventory per store. They are doing things, and they're going to get more to land ownership. Home Depot owns most of their stores.

Florida Corps leases most of theirs. They want to, as capital will allow them, they're going to start investing more into real estate. Why do they want to own their stores? That's curious to me. Well, it's a greater upfront expense, but, you know, if real estate appreciating, over time. I guess you have to do a cost-benefit analysis on it. But, you know, somebody, you have more control over it. What they're, what they do now is they, they are a lot of times the anchor tenant in a, in a strip mall or something. And they get very good terms from the,

from the landlord in exchange for putting. Because you love the traffic. Yeah. They love the traffic. And, and also like part of that escalation in the upfront cost to build out a new store is just the T&I, the tenant improvements that they are, Florida Corps is paying. So Florida Corps will pay their own TI in exchange for a lower lease rate. And that is, you know, they told me that's like they're burning 20% returns on that extra TI. So they might as well, yeah, if they have the capital, they might as well do that.

So, yeah, I don't know that they're in a hurry to own stores. Yeah, they mentioned they want to own, I think it was five to 10% of their, stores going forward. And I was like, oh, okay, but, you know, they're getting 20 to 30% returns on capital. And to me, like, I do like the efficiency of separating. And if, you know, a developer is going to own it and then flip it to a triple net lease person who's going to, you know, value this at a 7% cap rate and you can do 30%. It just seems inefficient to go build out this huge store portfolio.

So I just thought that was interesting. But Home Depot does it too. So I was wondering, is there something with inevitable companies where they want to own their own stores? Well, I think, like, you know, there are examples of companies that have been really successful with just leasing, of course. Most retail has done that way. But I think about a company like Copart that owns its land. Now, Copart is totally different.

They came to mind. Yep. It actually came to mind when I was thinking of it. Yeah, right. They own their land. And, you know, they always cite like this, you know, piece of property they bought in L.A. That, you know, they bought for 500,000 bucks and it's worth 10 million now. And, you know, if they had to release that when the lease came up,

Of course, their taxes have gone up a little bit on that land, but, you know, they paid for it many times over, and it's free and clear, and they don't have a lease on it. And so, you know, it depends on the location. But real estate, if you think real estate is going to appreciate, then perhaps it's better to own rather than to rent. But, you know, it's not, I think the biggest thing for Florida core is not like, that's not like a big factor in my mind. It's making sure that they continue to press on the gas with that advantage that they have, which is, you know, offering that breadth of inventory. Nope, that makes all sense Some things from their investor day A, I thought it was funny their investor day

I don't know what city was in But it was at the Billmore Hotel And the CEO kept saying like Hey, we brought you here because the floors here are terrible We wanted to show you like all the upgrade All the upgrade possibilities Which I, you know, every investor day starts with a joke I actually kind of like that one more

And he kept coming back to it which I thought was into kick He said it like five times throughout the fall Which I thought was kind of indicative of a CEO He was like really thinking about his sales And the floors versus anything Neither here nor there But I just thought that was interesting up. Okay, so what thing I was curious on at their investor day, and again, it was interesting

because their investor day was March 22. So I read that. And then I was flipping forward to like the stuff as you and I were talking about December 2020, like today's environment. And at their investor day, they were talking about, hey, you know, we've done 10% comp sales every year if you exclude kind of hurricane impacts. And they were talking about how that was going to continue. And then today, like this year, their same sort of sales are actually down. And I was just kind of interested in that, right? They were talking about the inevitability of the model. Obviously, there's macro and everything, but that was just interesting to me on a whole host of factors. Like, hey, how much of this was driven by really strong macro and low interest rates through the

2010s? Like, if, as we're talking post-Ale press conference, it seems like rates are coming down. But if we were in an 8% world forever, would you see, like, really reduced demand for this stuff? How much of it was macro? Were they too reliant on, were they like a little too confident with this 10% same source number? Again, I'm not accusing. I'm not trying to get into Macquarie. I just, it was interesting to see the dichotomy like kind of 18 months apart. Yeah, yeah.

I think they completely overestimated, you know, in the near term, the effects of the slowdown or the potential slowdown. In 2022, it was, I remember Trevor was the, the COO now, I think he was the CFO at one point. Now he's a CEO, but he was asked like a question about, you know, what does it look like if we get to negative 5% comps? And it was almost like, that's not possible. And so I do think they underestimated the impact that the macro slowdown would have on their business. So that's definitely impacted them.

You know, existing home sales have plummeted. I mean, we've never seen anything. Like, it was we were at a pace of over 6 million home sales in 2021, I think. And I think it's, you know, it's down below 4 million now. And so that's a drop of historic proportions that is, you know, if you're in the, if your business is tied to existing home sales and housing turnover, you know, you're going to be impacted by that. So yeah, I don't worry about that as much as a long-term owner. I mean, to me, like, you know, I let you and I were talking before, you know, before we went on before we recorded. But like, I'm a long-term holder of this where I would look out like 10 years. You know, it's very important that you don't buy the stock. You don't go out and buy the stock now thinking, hey, it's going to do great this year because it might and it might not. It's hard to predict. I mean, this stock is so volatile.

The business is volatile, but the stock is way more volatile than business. I think, like you said, it's up like 40% since Charlie made those comments or something. And to me, there's not a lot, if anything, fundamentally that's different other than the perception that, okay, maybe the Fed's going to lower rates or something. But yeah, to answer your question, like 8% rates is not good for anything related to housing. I think people do adapt, though, like, you know, Home Depot dealt with 8% rates for a long time. Now, now you could argue, like, well, they started at a high interest rate and they benefited over a long period of decades where race were declining. And that's certainly true. But, yeah, I mean, I think there is a certain demand for the product that Flournecor sells.

And I don't think that demand's going away. I almost thought they had a really interesting answer where they were like, look, if you look at some of our peers, like lumber liquidators, they say, kind of when you hear lumber liquidators, I think they said kind of substitute in your head, mom and pop, lumber flooring stuff. They're like, look, their same source are down 15 or 20 percent and our same source sales. And they did, I think, Mohawk, they said 15 or 20 percent. That our same source sales are down 5 percent. So, yes, we are subject to the same macro trends that everyone else is.

But, you know, I think that I kind of agree with them, that's even more proof point that we are taking lots of share. And maybe as people get more price sensitive, like our inventory, our better value, all this sort of stuff actually starts winning. I thought that was very interesting. Let me ask. Go ahead. Yeah, well, just because on the market share real quick, that is a great point that,

so they're facing a tough headwind right now, right, with the way the macro is with housing. It's not an easy environment. But if you're in a bit, like I wrote a post last year about, you know, the three ways you benefit from lower stock prices. One is obviously excess cash. You can buy more stock. The second is if you're fully invested, you can still benefit. If your companies have excess cash, they can buy stock, buy back stock.

And then the third is, and this is what I would put like Florida core in this category, where you can take market share. And you can come out of the downturn with a greater competitive position in the market. And then, you know, you'll, you'll sort of pull forward that inevitable shift toward your business. And so the downturn is always painful when you're in it, but it can benefit you longer term. And it's pretty clear to me that they are taking share from the past. The only issue is with number two, the buyback shares, I mean, especially over the past 18 months, everybody jokes about it, but I've really seen it. You know, how many companies were happy to buy back shares aggressively at 100?

And then 10 months later, their stock was at 40 and they said, oh, the macros really, we're off. We better sit on our hands here. And like, I get it if you're a bank and you're a creature of the financial markets, but there were a lot of a lot of retailers that did that. And sometimes they were right to because they're business. business went from the COVID booms to they were almost bankrupt, but a lot of them, like, it was clear they were going to make it through the other side and their stock was 50% lower and they were just like, nah, nah, I don't want it. It is interesting there. Let me, so one of the things in a post a long time ago, I think this was a prior like trite munger post I pointed, but

I said, hey, I know a lot of people who buy, you know, I'll talk to them about their portfolio and they'll have 15 stocks in there. And it will be 10 retailers that are priced at 50 times EPS and every retailer I'll talk to them. They'll say, this is a great business. You know, 20% unit growth for the next five years, five percent same source sales growth. I'm buying it at 12 times 2007 EPS. And, you know, at that point, it'll still be able to grow units 20%. So this is, you know, I'm getting in on Walmart. And I'll say, hey, everyone would love to find the next Walmart. Everybody would love to find the next out of his end. You might be able to find one. But to say that you've got 12 them in your portfolio, you know, and it'll be something to look. So as you

are talking rough numbers, four into core trades for $100 per share. I believe their guidance is for about $2.50 per EPS, right? So that's 40. Am I doing that math? I am right? I feel like I should be better at math than this.

40 times EPS. Great unit growth. Probably 2023, probably pretty poor macro versus what we're going to have in 2024. I don't think either you and I hear it's a macro prognosticate. But if I just said it's 40 times last year's earnings, it's 40 times this year's earnings.

We've talked about why it's such a great business, but price does matter. Why is like, you know, if you're longer, it's because you think you're going to make risk-adjusted alpha, whether it's today, tomorrow, or over the next 10 years. Like, why is this an attractive price? Yeah, great question. Yeah, that it is one of the stocks in, you know, like you're right about those base rates. Like if you own 12 of them, the, the base, you know, you're better off buying a basket of low P.E. stocks. And, you know, most of the stocks I have are in that category for sure. This is the one or one of a very limited number of exceptions where I think, like,

you know, if you think about the three engines that drive a stock, you have the P.E. ratio going up or down. You have earnings growth and then you have, you know, the change in the share is outstanding. And this, you're going to have to overcome that 40 going down to 20 at some point on the P.E. Right. And inevitably. Now, a couple of things. One is like, you know, the, the margin profile. This year, the with when you have when you have de-leverage on the top line, and you have the same store sales shrinkage, that does impact your margin profile. So I don't think that's necessarily normal earning power. But even if you assume what, or you make your own assumptions on what you think normal

earning power is, the point you're making, I think, is, you know, it doesn't look cheap, right? Even if it's 30 PE, it's still very expensive. And so, you know, for me, it's like the value of the stock is not what it earned in the last 12 months. It's what it's going to earn going forward. And that's the obvious answer. But, you know, with this one, with any stock that you're paying 30 PE for, you have to be really confident.

in what the next decade looks like. And, you know, with floor decor for the reasons that we've been talking about, I'm pretty confident that it is one of those modes that it's reached the inevitable, you know, the inevitable phase. It's got the hard turtle shell. And I think they're, you know, they have 200 stores. They think they can get to 500. I think they can probably get to more than that.

If you look at the density, I mean, I was just in Austin last week. There's three there. there's none in Raleigh as I mentioned there's so much white space ahead there's also different verticals that they can get into we haven't talked about commercial but commercial are big business for them you know there's all sorts of projects that they're winning in that realm they just did the flooring for the suites at M&T up in Baltimore where the Baltimore Ravens play and you know they're winning jobs because they have the warehouse they have the inventory of availability that a lot of their other competitors don't have.

So there's a huge white space in commercial as well. And so when you think about the business, you got to think like, what is it going to earn? You know, I'm not a big fan of like trying to pay X multiple for 27 EPS or whatever it is. Like that's not usually a recipe for success. But, you know, again, what it earned last year is not going to determine the ultimate value. It's what's going to earn going forward. And, you know, I think you have another dozen years of what I would call phase one. where they're just opening new stores over and over and over again.

And then phase two is really interesting. That's where you get to be more like Home Depot is now where you're producing a lot of free cash flow and you don't have anywhere to soak it up. And then you start doing buybacks. So like Home Depot has done, I want to say it's compounded at like 15 or 16% a year over the last decade with zero store growth. It's all through a combination of same store sales growth, margin expansion, and then fewer shares outstanding, just using that free cash to buyback shares. And so that's sort of phase two.

And that's a long way off for Florida core. But I do think there's a lot of white space ahead. And given the, given the model that, like a flywheel that we were talking about, it's, it's pretty, I'm pretty confident that they're going to continue to win. I don't see any. There's no number two. That's what's interesting about flooring is like home depot had lows. O'Reilly had advance and AutoZone. There's really no close number. I mean, there's obviously a lot of competition in this space, but there's not. anyone that is directly comparable to Flore and Accord, in my opinion. So I think that's both as well for them.

If we ran this forward to, I think they would probably hit 500 stores around 2030, if I'm doing that math in my head correctly. So let's just say 2030. If we ran this forward to 500 to 500 stores, kind of assume average macro, you know, the last question I'm asked is probably going to be what breaks this? And the answer is great depression breaks this, but aside from that, what breaks this? But average macro, 23500 stores, like, what would you say they could be earning per share then? Yeah, I think they can get to over $20 a share if they succeed and they execute.

And that's a, you know, you got to, you know, restate your disclaimer there that this is like not investing advice. But, you know, I own it. So, you know, it's full disclosure. Like it's a core investment in my fund. I hope to own it for a long, long time. But, you know, the mass is pretty simple if you, I think that you got to spend like 90% of your time getting comfortable with the mode and understanding that industry structure and how that all works. And once you get comfortable with that and you believe that they're going to keep winning, then you can start to put the numbers into the spreadsheet and stuff. But I do think, you know, if they get to 500 stores and, you know, I think pre-cover, they're doing like 28 million per store.

And if you run like a simple, you know, very, very low single digit growth rate in terms of. the same store sales, you can get to low to mid 30s per store. And that is, you know, at 500 stores, that's 17.5 billion. And if the margin profile goes from 10% to 15%, that's about $2 billion in free cash, which is about $20 a share. So, you know, that is. And then at that point, you have, you know, free cash flow to use for buybacks because the company does generate a ton of cash. It just uses it all up to buy or to build new stores. It was really interesting. interesting because, and I might have been biased because I read your post, our mutual friend Alex Morris from The Science of Hitting. I believe he's got some posts on this I've read.

But it was interesting when I was reading, especially the Investor Day, I was like, oh, this is what inevitable looks like, right? Like, you've got a category killer. This is a real category killer. You know, I think I've heard people describe some other businesses that have good results. Like, I use Academy as my example as something that could auto zone. That's not a category killer. That's a winner where they can grow source. But this is like a true category with a differentiated model at, like, extremely limited Amazon risk here. I can't find a number two that is like, like we talk about like when you walk to the store, can you find this product elsewhere pretty easily?

Can you find it online, right? That's a huge thing. Amazon, you mentioned Amazon. That's one thing we didn't talk about. But like I was, like I said, I was in the Baltimore thing, the distribution center recently. And they were talking about the pallets are 2,800. Some of these tile palettes. So just a picture of pallet.

some of these pallets weigh 2,800 pounds. You know, they have their own dedicated fleet of trucks. They had to redesign the trucks. Yeah. Take, you know, take stuff out to make the loads, you know, to abide by the transport codes and stuff. But they've done all sorts of work. But it's like the physics of moving flooring is not like an easy thing to do. That's one thing I underappreciated, I think, before I really started diving into this.

So it's not easy to replicate. And there really isn't, like I say, somebody that's kind of copy. copying what Florida Corps is doing. Lowe's actually tried to copy it years ago with a couple of stores. They tried to go to an inventory heavy model in that department. And it didn't work because they couldn't find enough space in their warehouse to devote to the products. And it lowered their return on capital.

Because instead of doing a two-step process where you're getting consigned the inventory, if you're going to go pay for that inventory, then you know, you're increasing. Capital is going to build and yeah. Right. So it's these guys have the resources to do it, but it's not easy to replicate. Yeah. No. And again, just it was the first time where I read it and maybe because I was talking to you because I just listened to the money or thing, but I was like, oh, that is what inevitable

looks like. You know, it's just hard for that. If we, you know, and again, that's not to say the stock's going to do great. Like there are multiple questions, multiple in terms of the price stuff, but it's just hard to see how this business doesn't do the business, not the stock doesn't do well over the next five, 10, 15 years. But let me ask you that. It kind of closing question. If I told you five years from now, Hey, John, forget the stock, right? We're forgetting about the stock, we're forgetting about the stock price. I said the business didn't work, and it wasn't because of the Great Depression.

What do you think happened? One thing that somebody told me there, which I, on the one hand, I really liked it. On the other hand, I started thinking about it later. And I, you know, I'll tell you what he said. He said, you know, I'm a zealous for return on capital. And I, you know, they were talking about like wanting to reduce the image. level. And to me, Lisa Lobb was a big, she is no longer with the company, but she was there for a decade. And she gave her a glowing review at the investor day. She was getting ready to retire,

I think, in like 14 days or something. They gave her a glowing review. Yeah, she was great. And she was instrumental from what I understand, from what I've been told, like she was instrumental in pushing that inventory heavy model, which is sort of, it's, it's a harder business to operate, right? Because it takes more capital. It's, like I said, it's heavy to move this stuff. It's not easy. You've got to have relationships with the ocean carriers and all this stuff. But it's, you know, she was instrumental in pushing that. And one of the risks, I think, could be, and again, a friend and I were talking about

like how the risk is return, if you focus too much on return on capital, the easiest way to increase return on capital is cut working capital investment in this model. So you just don't carry as much inventory. But you run the risk then at degrading the long term. moat that you have, which is providing all of this selection. So it's kind of like everybody was on Amazon last year for not, you know, being profitable enough and stuff and they're, they overinvested and they made these mistakes. And it's a hard business to operate. But part of that moat with like Amazon and logistics and Florida core in, you know, having enough floor selection for for customers is it

takes a lot of capital. And so if you do something to optimize the short term returns, because that's how you're paid, then that could be a risk. So I'm not, by the way, I'm not like worried that's going to happen. I'm just saying that I could see like the execution changing in a way where, you know, maybe they focus too much on the gross margin, raising prices. You can do things in the short run that will benefit you, but will be to your detriment long term. And that, you know, that's one thing that I would keep an eye on if I were looking at

Florida core. And now a quick break to remind you that this episode is brought to you exclusively by Alpha Sense, the AI platform behind the world's biggest investment decisions. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As yet another value podcast listener, visit alpha dash sense.com slash FS today to beat FOMO and move faster than the market. That's alpha dash sense.com slash FS. And sorry to let two last questions. Again, I'm like really fascinated in the site. Idea really got me tickled and I don't know if I'm going to buy it or not. Probably not just because

the multiple and I'm not full as confident as you are in the best. business, but it really did get my brain turning. These guys were owned by a private equity firm before they went public. And I wonder, like, they've got this model that is kind of calling for, hey, we reduce our upfront. You know, in the short term, you're probably giving up RIC by investing in inventory. They mentioned, hey, like, we would have much better earnings and margins if we weren't investing in the store growth. And the private equity firm, I think, was behind word on this. It certainly created a lot of value over the long term. Did you see any difference, like, I just, whenever people talk about private equity ownership, it's like

burn it to the ground, improve margins, cut all the costs, and then like dump it off from the retail shareholders. Did you see any kind of difference from this company pre or post IPO or has it kind of just been the same management team like running this with an eye on long-term value? Well, I think it's the same management team. I mean, the private equity company installed Tom Taylor as a CEO in 2012. So, and he came from Home Depot. Everybody kind of knows that again like people compare it to Home Depot to me it's more like AutoZone in terms of like that category killer

as you're talking about but by like Tom Taylor has experience taking Home Depot from 16 stores to 2,000 stores and so he is replicating a lot of that same playbook here by the way they learned a lot from like some bad things that happened to Home Depot in the 80s not like exosentially bad

but they made some mistakes and they've learned from that can you have an example of mistake they made that they learned from yeah yeah so home Depot was in hypergrowth mode in the early 80s. So I think the company started in 1978, and they went, in the 80s, they were, you know, growing like a weed, taking market share, doing the same playbook, which is, you know, that industry, as we all know, was very fragmented with local hardware stores everywhere.

And, you know, Home Depot was offering better value to the customers, lower prices, more selection. And so they were taking market share and they were in an effort to grow, they were taking on some debt and they were, they made an acquisition in the 80s. That's the thing I was referring to is they made an ill-advised acquisition of another chain of home improvement stores in Texas, I believe. And that led to some, in the, make a short, long story short, it led to a lot of growing pains. It overburdened the cost structure. It led to, I think they took on some debt to do it. It got them into a little bit of a pickle. And what happened after that is Bernie Marcus went

to the board and said, hey, you know, I don't like what just happened. I want you to mandate that we can no longer grow units faster than 20% a year. I had a question about 20% in year because that's where they're growing their units. So yeah. Yeah. Yeah. And so Tom Taylor was there during all of that. And he has said like, hey, we're not going to over work.

They don't take on debt. Florina Corr is self-funded. So they don't take on debt to grow. One of the interesting things about Home Depot and Walmart, both those, those incredibly successful models took on debt to grow. So they were growing in excess of what their cash flow could support. And obviously they did it in a prudent way. They weren't like over leveraging or anything, but a lot of people don't realize this. Walmart was not free cash flow positive until 1998. And Home Depot, I don't think generated free cash flow until 2002. And the

reason why is because they were putting all of their cash and then into new stores, right? And so finally they got to a point where their store growth naturally slowed down and then their stores generated to excess cash. Flora decor is just internally using their organic cash to grow. You know, I guess I would push back in two areas, and this is a, we're towards then, so we don't have to talk to it. But the two areas that are interesting from those stories you just told were, A, Florida decor, I believe, has done two acquisitions recently to get more into the commercial

space. And obviously, every acquisition is different, but it's just interesting that the core thing you said in this Home Depot story was it sounded like a lot of the problems stem from an acquisition got wrong. And Florida decor is doing acquisitions to get into the commercial station. That's one. Number two, you know, when I think about a category killer, I do think like the business model is a little bit of a land grab, right, where you think about Walmart. Like part of what they did was you can profitably entrench an area around the distribution center in Arizona.

Well, if I had had the foresight and Target kind of did this, there were a few others. If I had had the foresight to copy the Walmart model in the Northwest, then I could have entrenched in the Northwest with my model before Walmart expanded there. So I do think there's something to you take on debt to land grab and bring your your category killer model across the country. someone else can copy it and it is interesting like floor decor they've got the problem model you and i are sitting here talking about it if we could go raise five million dollars we could try and open a florid decor competitor i don't think they're in the northwest too much so we can try and like pick some markets and beat them there with the model that they've already proven out now we wouldn't have a lot of the advantages for instance you and i bring zero operational expertise we don't have

the uh but it you know i could imagine like uh a home depot or some retired home depot exact, partnering with the private equity firm and be like, let's copy Florida decor and let's build 50 units on the West Coast before these guys can get there. So I threw a lot out to you and we've been very generous to your time. Yeah, yeah, yeah. Well, it's fun chatting about this stuff. I don't, like the issue there is, from a competitive standpoint, is Florida core has 200 stores already, right? So they have a 200 store lead on you or on you and I if we're trying to do this, which I would not advise us to do. You're a runner, you know being 200 stores down. That's a, that's a marathon to catch up to. That is. That's a marathon, right? And so, you know, and that is, it's not, you know, I think private equity has looked at this space. I've talked to people in the industry and it's, they have shied away from trying to compete with Florida decor in certain examples that I've come across because of the fact that it's hard to, you know, even if you have regional density, it's not, you're going to be behind the eight ball and you're going to have.

you're not going to have the same cost advantage. It takes a lot of time to the other thing that we didn't spend a lot of time talking about, which is like the direct sourcing, so they cut out the middleman. Everything is, everything is private label at floor and decor. So there's no talk micro merchandising too, but we didn't really have a chance to do. Yeah, well, we'll come back. We'll do a follow up on floor decor next year or something. We could, we could do a little update.

But basically, it's, it's very difficult to replicate what they have. And it's, it's, I think it would be very hard to earn. Because you've got to remember, like, this is not a high margin. I mean, the product itself is fairly high margin, but to manage the operating cost structure around a 40% gross margin is not easy. And to get to a 40% is not like, that's hard. Like, if you and I started, we would not be at 40% gross margin. You said it's high gross margin in terms of 40%, but guess what? If you and I started, we're going to have a lot of that 40% sitting in our warehouse for a while.

So yes, high gross margin, but in terms of inventory terms and getting that side of the probability scale, correct. It's a chicken and the egg thing. And that's like back to the thing. It's hard to predict who is going to win. But once you see it and then once you get to a certain level of durability, then you have that. And that's why I think nobody is really willing to compete. Never say never.

I mean, but one of the things they say is like, we'll see it coming. We'll see, you know, if somebody gets to 25 stores, we'll know about it and, you know, compete accordingly. But as of now, there's nobody really close. And I think it would be a long, long time to get, you know, take decade to get to where floor and accord is now. And it's nice, like even if you and I could do the 25 on the West Coast, that impacts maybe their 500 stores is 475 instead, but it doesn't impact their current markets because their current markets, you know, unless something really changes, their current

market should be entrenched, right? Because they've got the, they've got the supply center, they've got the distribution. They should have the best local economies of scale there. They've got the market up and running. Like, it wouldn't make sense for you and I'd go there. So it could impact future growth, but it shouldn't impact like kind of the current thing. Okay, last question and then I actually will let you go. We talked a lot about Florida and decor. At the beginning, if I was just going back to the retailer thing, we were talking about the Charlie Munger inevitable things. Is there any other retailer that you either think has the chance to be inevitable or that you think a lot of investors talk about in this insane inevitable way that

you're a little skeptical of the inevitability? You know, I always follow like the judge not unless you be judged type of philosophy. So I hate to like, I have come across examples. I'm struggling off the top of my head to come up with a specific name. But I, I do think there are a lot of companies that I would not feel comfortable with in terms of the long-term viability. Now, it's one thing if you buy something at 5PE, right? But if you're betting on a long-term trajectory, you have to be very confident in that moat because you're paying a lot for the current earning power.

You're projecting that those earnings are going to be many multiples of what they are now. And, yeah, I don't have one that's remotely close to Flore and Accord in terms of retail. Um, you know, there are, uh, the brands are always tricky for me, but yeah, I think like, um, as of right now, there, there's not a business. I mean, obviously I could point to like the big guys that we all know about Costco and Amazon and Walmart, um, but they've already won the game. And they have less growth trajectory than, um, Florida core does. So, um, I like O'Reilly auto parts as well. Um, tractor supply. One thing that I, we touched out a little bit before, but one thing that's interesting, it, it, are these retailers in rural areas that have, I think what it is with the rural thing, like I noticed it when I drive to the beach, we were talking about the beach before, like on the way there through these back roads, you know, who do you pass? Like if you're driving down the road, you pass tractor supply, you pass AutoZone. You might pass McDonald's at a Walmart, but you're passing like these.

And I, one time I was thinking like every single one of these is like a home run stock. Like this stock has just crushed it over the last two decades. And it's because they're in an area where there's not a lot of competition. They're beating whatever local competition that was there, probably like a mom and pop store. They're just, you know, Dollar General. They're winning on those. So I think those are some good retailers that I would look at. But I don't think they're, in my opinion, I don't own any of those because, again, the differentiation of the product.

I do like tractor supply, although I've never owned it. I do think that has a unique thing. I'm less enticed by the dollar generals because I don't think they're offering the same value that like a Walmart offers. On the Dollar General, you mentioned that and you mentioned the role piece. There was that Bloomberg article

that was just talking about Dollar General and there were so many great quotes in there. There were the quotes on, hey, the birds are shitting on everything and they're making us take them home to wash. And there were very sad quotes in there as well. But the overarching thing I was kind of taken away was they were talking about it.

They're like, look, in a lot of these towns that are too small for Walmart, like the dollar general is really the only place to go to do this and like you know that is a moat like they figured out a way to get into these really small towns and be kind of the only economic business to get a lot of goods that like you know are necessary to everyday life and those really small out there towns like it's you're not going to be able to you know amazon i can have just about anything to buy the length this podcast when i could order it at the start of this podcast and i could have delivered somebody by the end of this podcast can't do that role so i saw that thing and obviously

there were tons of negatives but i also saw oh, you can see the moat here if you really read into this story as well. Yeah, yeah, I think Dollar Jet, like, I would pay no stock whatsoever to that article. I read that article as well. Like, if you went around, I mean, people have done the same thing with Amazon, drivers, you know, like Walmart, if you could hear, you, if you, you know, if you're a Bloomberg reporter, you want to write a negative article on Walmart, you're going to go find lots of, lots of examples of things that would. As Bob McSaid, I've got 250,000 employees. it's inevitability, 50 of them are doing something I wouldn't have been going to find something going wrong there.

So yeah, I wouldn't put much stock in that. But yeah, there is something to that, you know, it's a supply side competition thing. It's like the old capital cycle theory where there's not a lot of capital entering those areas. And so the capital that is there, meaning the dollar generals and so forth, they have built out a nice advantage. I do question like when I go into Dollar General, they are not the low price. So like if you're near a Walmart, you're going to be. you're going to find better value of Walmart. That was always my hang up with Dollar General.

But there are obviously areas where Dollar General is the only option. And in that market, they're winning. I haven't studied enough. The one that really popped to my mind when I thought about that five below, which again, I have not studied enough. So I'm just being some random podcasters to be going here. But the way I hear people talk about five below, I feel like they're talking about it.

Like it's this next inevitability. And I just, I have not seen it when I've looked at that business model. And I think it's priced like, Again, I'm just spitballing here. If you longed F&D in short, five below, because I think they trade for kind of similar multiples, I think that would probably be like a pretty, you know, I just think that F&D's much better business model and for the same price, like, I don't think you go wrong.

But that's not financial advice. That's not anything advice. I really just spitballing. But that's the one I always hear about that comes to mind when I think about that. And I haven't said you enough. I'm just being a random dude talking. Yeah. Yeah.

Like when I think about five below, it's, again, the question that comes to my mind with any retail, not to beat a dead horse, but can you go in there? and get something differentiated. And I understand, like, there are certain, I mean, five below is doing great. The whole question, though, is with any, whether you're paying 10 times earnings or 40 times earnings, you have to understand what it's going to look like 10 years down the road, right? You're buying a stream of cash. And so.

You're right. In 2020, I bought a bunch of retailers at five times earnings. And guess what? I bought them really cheap, but it turned out the earnings were going way down and all of a sudden five became 50 real. Well, I mean, well, we all have those. But like, you're always making, I always find. it interesting when people say, well, 10 times earnings, you don't have to underwrite the future.

You're always, every business has a future, and you're always underwriting the future free cash. It doesn't matter what they earned last year. It's like buying an apartment building from some, you know, I used to do real estate for years. And it'd be like, I don't care what the last guy earned. I want to know what this building is going to do this year. And not, you know, so it doesn't really, you're always, whatever price you pay, you're making assumptions about the future of that business. And whether it's growing or declining or what. And you can find value in any of those categories. So that's sort of an obvious thing, but I think sometimes people sort of lose sight of that simple. Well, John, I've been trying to have you on for a while. I think you can tell

we had fun because I think we're almost at an hour and a half here. But look, I'll include a link to John writes too infrequently for my taste, to be honest with you on basic. I'm going to be writing more. I love writing. And I write on a blog called Basin investing. And so yeah, I'm going to be writing some more. But yeah, it's a lot of fun. We should do it again soon. We should take our DMs that we're constantly sending each other and just like, you know, instead of doing the DMs, we should just record a show. A, I'm going to hold you to that. And B, the DMs need to increase. That would be great, especially because as you know, and you feel like every time we DM six months later, but the most like, damn, that would have been a really good idea if we had just like

yellowed our way into it. We'll make a mental note of that. Yeah. John Ebert, thanks so much, man. All right. Sounds good, Andrew. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guess or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.