Baron Real Estate Fund: $FND Investment Case
In their Q3 2025 quarterly letter, Baron Real Estate Fund introduces Floor & Decor Holdings as a new position, initiated following a sharp correction in the company’s share price during the first half of 2025. Baron Real Estate Fund, led by Portfolio Manager Jeff Kolitch and known for identifying competitively advantaged real estate companies with strong growth prospects, presents Floor & Decor as an attractively valued specialty retailer positioned for significant medium-term appreciation. The letter emphasizes the firm’s approach of investing in high-quality companies during indiscriminate sell-offs when valuations become compelling. Baron’s decision to invest in Floor & Decor reflects their conviction that the company’s competitive advantages, multiple growth drivers, and cyclically depressed valuation create an opportunity for 20-30%+ annual earnings growth as the flooring and remodel markets recover.
Investment Highlight: Floor & Decor Holdings, Inc. (FND)
Business Overview
- Specialty retailer and commercial flooring distributor
- Focus on hard-surface flooring products: tile, vinyl, wood, stone, and laminate
- Also sells related accessories
- Currently operates 257 store locations across the United States
- Plans to nearly double footprint to 500 stores by 2032
Market Position
- Customers prefer “everyday low pricing” and unmatched breadth of inventory in-stock
- Large format stores (78,000 square feet) carry 4,000 stock-keeping units (SKUs)
- Three to four times the SKU count of typical home improvement stores
- Low-cost advantage relative to peers passed through to customers
- Leader in hard-surface flooring specialty retail segment
Performance Analysis
- Competitive Advantages: Everyday Low Pricing:
- Direct overseas sourcing model creates low-cost advantage versus peers
- Pricing benefits passed through to customers, driving traffic and loyalty
- Large format stores enable carrying 4,000 SKUs
- Significantly higher product selection than typical home improvement stores (3-4x)
- In-stock availability differentiates from competitors
- Dimensional Growth Drivers: Cyclical Recovery Opportunity:
- U.S. remodel activity at cyclically depressed levels for several years
- Challenging housing market and cautious consumer have suppressed demand
- Hard surface flooring market historically grows faster than underlying flooring market
- Positioned to benefit from any pickup in remodel activity
- Historical track record of demonstrating ample pricing power
- Ability to offset cost inflation through price increases
- Opportunity to sell additional remodel products within existing store footprint
- Leverage existing customer traffic for higher basket sizes
- Plans to grow from 257 current stores to 500 stores by 2032
- Nearly doubling footprint provides significant growth runway
- Current EBITDA margins at 11%
- Management expects margins can eventually stabilize at 15-17% range
- 400-600 basis points of margin expansion opportunity
- 2021 acquisition of Spartan Surfaces serving as platform for growth
- Current commercial sales approximately $250 million
- Management believes commercial business could scale to $1.5 billion
- Both organic growth and acquisition opportunities available
- Current total company sales at $4.5 billion
Growth Runway
- Potential for 20-30%+ annual earnings per share growth over next several years
- Management believes company can revert to historical average annual EPS growth rate of 20-30% or higher
- Long-term potential to generate over $4.50 of earnings per share versus $1.80 currently
- Multiple levers for growth: store expansion, margin improvement, commercial scaling, market recovery
Market Dynamics and Opportunities
- Depressed remodel market creating pent-up demand
- Hard-surface flooring gaining share within overall flooring market
- Commercial flooring distribution remains fragmented, providing acquisition opportunities
- Large format specialty retail model difficult for competitors to replicate
- Direct sourcing advantage sustainable and scalable
Valuation and Entry Point
- Shares trading close to trough multiple on cyclically depressed earnings
- Sharp decline in first half of 2025 created attractive entry point
- Valuation attractive given medium-term growth prospects
- Significant share price appreciation potential driven by rapid growth and multiple expansion
Risks
- Near-term business conditions remain uncertain
- Continued weakness in U.S. housing and remodel markets could persist
- Consumer spending cautious, impacting discretionary remodel projects
- Execution risk on aggressive store expansion plans (doubling footprint)
- Margin expansion targets dependent on operating leverage and efficiency gains
- Commercial business scaling requires successful integration and additional acquisitions
- Competition from home improvement retailers (Home Depot, Lowe’s) and other specialty retailers
- Dependence on overseas sourcing exposes to supply chain and tariff risks
- New store productivity and return on investment execution critical
Other Key Points
- Direct overseas sourcing model provides sustainable cost advantage
- Store format and inventory breadth create differentiated customer experience
- Multiple growth vectors provide diversification and reduce single-point-of-failure risk
- Management has clear roadmap for store expansion and margin improvement
- Acquired during cyclical trough provides asymmetric risk/reward opportunity
- Baron recognizes near-term headwinds but focuses on medium-term outsized growth prospects
Baron Real Estate Fund views Floor & Decor as a competitively advantaged specialty retailer with compelling medium-term prospects, citing its everyday low pricing model from direct sourcing, unmatched inventory breadth in large format stores, multiple growth drivers including store expansion (to 500 stores by 2032), margin expansion potential (from 11% to 15-17%), commercial business scaling opportunity (to $1.5 billion from $250 million), and cyclical remodel market recovery as key factors. They believe the sharp share price decline during the first half of 2025 created an attractive entry point at a trough valuation for a company positioned to deliver 20-30%+ annual earnings growth, with long-term EPS potential of over $4.50 versus $1.80 currently, offering significant appreciation opportunity as business conditions normalize and growth initiatives materialize.
