It has been a long time since the floor covering industry was driving with all cylinders working great. 2006 was the last year commercial contract, residential replacement and builder business were all doing great. This year, residential replacement slowed the industry down mainly due to flat existing home sales. While new home sales were up 8.3 percent (+45,000 additional new homes over last year) existing home sales were up a paltry 1.1 percent.

On the positive side, the value of existing homes continued to increase and more than 65 percent of the top 100 markets are now back to 2006 levels or higher. For the 100 largest metro areas tracked by Clear Capital, a provider of real estate data and analysis, home values increased by +5.4 percent over 2016 home values. The median price of all existing homes was $247,000 which was $25,000 higher than the best year before the downturn.

Strangely, the reason existing home sales weren’t stronger is that folks are staying in their homes longer even when there are buyers out there. At the end of 2017, there was a 3.9 months’ supply of inventory (houses for sale) which was the lowest amount of homes available since 1999. Simply put, there were not enough homes for sale. It was a seller’s market. One of the reasons was that many of the older home owners wanted to sell and move to a home in their same market but they knew regardless of how high they sold their house for, they would not buy a great house for a great price in their own market.

The real news for 2017 was the craziness that was retail. Retail bankruptcies (gone forever) were reported monthly: Limited, Wet Seal, Hhgregg, Radio Shack and another 300 retailers. The walking wounded that closed stores: Gymboree, Payless Shoes, JCPenney, Sears, Kmart, Toys R Us (in 2018 they gave up and closed all of their stores).

Our industry was not marked by bankruptcies; quite the opposite. Some thought Lumber Liquidators was going to vanish due to its shenanigans with laminates made in China, but it has regained its stride and is now showing a profit. They are on the move.

Floor and Décor, the quiet big box category killer went public and blew the doors off the sales chart. (That’s a messy metaphor but point is clear.) They are already bigger than Lumber Liquidators in sales volume.

The only problem for any of the major players was that Empire Today’s experiment with JC Penney did not work out. And neither did Empire Today’s experiment with real stores in three different communities. They closed all these stores last year.

Most retailers continue to worry about internet sellers. New internet sellers for flooring talk of transformation, disruption and more, as if their idea was the new new best thing. They don’t know nor do we; the fear of the future and what that would mean to flooring retailers was a constant concern for flooring retailers. Will they know when the Amazon of flooring arrives? Probably not. Our suggestion: Keep doing what you do best.

The U.S. Census has a designation (NAICS 44419) for hard surface specialty retailers. It has been a very small part of the flooring industry. With the continued growth of wood, laminate, luxury vinyl tile (LVT) and its relatives and ceramic tile, hard surface retailers have hit their stride.

As a retail component, the sales for these retailers exceeds the total sales of Internet, direct sellers, department stores, discounters and furniture stores in total. That’s right. Their sales are better than all the sales of the aforementioned categories.

Floor and Décor goes public
Today, the largest chain in that class is Floor and Décor. In 2017, according to its SEC filings its sales were $1.4 billion. Floor and Décor is the No. 1 flooring specialty chain in the U.S.

Floor and Décor has been around for 17 years. It became a public corporation in 2017 and must report all financial details in annual SEC filings. Regrettably, we underestimated its sales when it was a private company. But now that it is a public corporation, we know exactly what and how it is doing. It is an incredibly successful company.

At the end of 2017, Floor and Décor had 83 stores; average gross profit was 42 percent; average store size was 75,000 square feet. It believes it can get to 400 stores (around $6 billion in sales) within the next five years or so.

Floor and Décor believes that 90 percent of its business goes into existing homes; in other words, residential replacement. About one-half of its sales comes from ceramic tile and decorative accessories (glass, mosaic, etc.). Surprisingly, only 15 percent of its sales come from laminate and LVT and its cousins. (Clearly there is tremendous growth potential in LVT for Floor and Décor.)

Basically, its operation is marketed to contractors. It offers great prices, wide assortment, take-with goods and installation supplies for all flooring products. It is open at 7 a.m. during the week and contractors can pick up merchandise at that time also.

Floor and Décor talks about its sophisticated global buying process. However, its 42 percent gross profit is on the low side for this buying method. The Tile Shop generates a 65 percent gross profit.

Floor and Décor changed management some time back. It has paid handsome dividends. Initially, the stores were retrofitted Kmarts; they were really awful, just gobs of stuff on floor. They still buy old Kmarts but these stores are extremely professional and good-looking retail store.

It does what the Internet cannot do — stock to take with, end-use displays to show the customer what it will look like and easy to compare to other products in store. Yes, you can touch the product. Very cool.

Lumber Liquidators rights the ship
Lumber Liquidators had been the darling of the investment community for many years. The stock price certainly reflected that — highest point was $114/share about three years ago. That year, 2014, Lumber Liquidators sales came in at 1.047 billion. But a series of very serious management missteps brought the company to its knees.

In 2016, the company’s sales bottomed out at $960 million with a dismal 28 percent gross profit. That gross margin was way below its breakeven. In other words, it had to give away its product.

Finally, in 2017, it saw some daylight. Its sales were $1.028 billion with a 36 percent gross profit. It has doubled the amount of LVT business in two years and, more importantly, it has doubled the amount of installations they are now doing.

Lumber Liquidators is fully committed to selling a finished product (product, installation materials and labor); labor only represents 10 percent of its sales but the potential would seem to be at about 25 percent of its business.

At the end of 2017, Lumber Liquidators had 385 stores in U.S. and eight stores in Canada. It added 11 stores in 2017 but plan to double that in 2018. Each store sells about $2.5 million of hard surface products. Its ad to sales ratio is 7.6 percent. That is very high but reflects Lumber Liquidators’ need to convince new customers to give them a try. $76 million dollars advertising was spent on TV, direct mail and internet promotions.

It experimented with ceramic tile, but we would be surprised if it added this product category to its assortment. Like Floor and Décor, it has a new management team and it appears they get it — its future is dependent upon a clean, well run business that makes the customer first with no more shenanigans.

The last hard surface specialty chain that is a publicly held corporation is The Tile Shop with 138 stores and sales of $345 million for 2017. It had an OK year — +6 percent over 2016. There were some management changes and kerfuffle going on but we expect an improved performance for 2018 and growth to be in double digits.

Lowe’s is better than we thought
Home Depot and Lowe’s have a 16 percent share of the flooring market. For the last four years, Lowe’s has lost share compared to Home Depot. It made no sense as Lowe’s offered Stainmaster brand carpet and Home Depot did not — it had Martha Stewart; and Lowe’s department presentation was pretty fine. Guess what? Lowe’s admitted to under stating its flooring sales by almost $600 million. They “reclassified” $565 million from fans or fashion fixtures (actually we don’t know what category they overstated) to flooring. Well, its categories start with the same letter “f” so we certainly see how this one-half billion-dollar error could occur.

It appears that Home Depot has reallocated its floor space and taken away square footage from carpet and added displays and inventory on pallets right on the floor. Sadly, both continue with their diet of free installation of carpet; the customers have tired of this and hopefully so will Home Depot and Lowe’s.

Home Depot’s video library of “how to” and product information is pretty good. We suggest flooring retailers see if this isn’t something they should be doing. Remember, these videos display your superior knowledge and that is a big deal in today’s market.

Empire Today goes back to its roots
Empire Today lost a bet. It bet it knew more about retail flooring than flooring retailers knew. This is what its CEO said in 2015: “Through extensive research, Empire Today® discovered consumers are not fully satisfied with their existing flooring store shopping experiences. The studies found that some consumers have a perception that home improvement stores provide insufficient expertise, a slow process and unclear pricing. Some people were unsure they were even getting the right products for their needs.

“Empire Today is using its 55 years of shop at home experience to create a better kind of flooring store.” Empire Today was so confident of its retail expertise it sold J.C. Penney the same puffery and opened up 19 test store-within-a-store flooring operations.

As the saying goes, “Words are cheap, but deeds are dear.” It closed all of its retail stores (both its own and J.C. Penney) in 2017.

Conventional retailing is hard; Empire Today had no idea of what a better retail experience was or is. For Empire Today, it’s back to its brain numbing jingle and savings that defy gravity.

It seems odd that Empire Today’s dominance on TV in those markets it serves has quieted. It is hard to figure if in 2017 they had an increase in sales; since advertising is its single biggest cost after inventory cost it would appear that its sales are flat or down. The regional look-a-likes, (National Floors Direct, 50 Floors, etc.) seem to be doing better in their regions.

LVT, MLF, WPC and SPC yowzaa!
It is not my life’s ambition to understand every new innovation within the LVT family of greatness. It is way too hard and confusing. And it is way too great. Words like transformation and disruption are used too often in the business world and in our industry when, in fact, the change is modest at best.

But in this case, everything LVT, WPC, SPC, EVP and “?” has energized the flooring industry and created flooring customers who might have been on the sidelines. And all sorts of foreign and American companies are trying to figure out if they should jump in. Large, very successful business consulting companies have seen a big increase in clients wanting them to see is they should be part of our industry. We believe that interest comes from all the excitement and constant innovation around LVT.

Disruptor? Absolutely. LVT has found and created a whole host of new flooring customers. Customers who were kinda thinking about flooring; when they saw and heard of LVT, they became a buying customer. In that way, it has expanded the market for flooring.

But make no mistake about it, LVT has taken business from ceramic tile, wood and laminate and of course traditional vinyl sheet goods. It is our guess (that’s all it is really) that LVT has taken about $400 million away from the above-mentioned products. In other words, if LVT weren’t around those products would have sold far more in 2017.

Many customers don’t come to the store knowing full well they want to buy LVT. The retail sales person loves these products and loves to tell the story of why they are so special. They have a story to tell and very cool products to back up their spiel. Clearly, they are selling away from laminate, low-end wood and less expensive ceramic tile. Our guess is that these effected products will have new products to get back some sales lost. At first glance, the introduction of waterproof floors is just the beginning.

Good news for the future: Innovation begets more innovation and the cycle of success continues.