High inflation and the Fed’s interest rate hikes to fight it have cooled off the housing market significantly this year. However, the 30-year fixed mortgage rate has declined unexpectedly over the past week from June’s peak level of 6.28% to 5.05% yesterday.

This brings significant relief to homebuyers. The decline in mortgage rates and rising interest in DIY home improvement activities should help home improvement companies Tile Shop Holdings, Inc. (TTSH) and Floor & Decor Holdings, Inc. (FND) to stay afloat amid the volatile market conditions.

TTSH is a specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories. It sells its products through its website and offers delivery services through third-party freight providers.

On the other hand, FND operates as a multi-channel specialty retailer and commercial hard surface flooring distributor and related accessories. It serves professional installers, commercial businesses, and DIY customers. It also sells products through its FloorandDecor.com website.

While FND gained 2% over the past week, TTSH surged 2.1%. But which stock is a better buy now? Let’s find out.

Recent Financial Results

For the fiscal 2022 first quarter ended March 31, 2022, TTSH’s net sales increased 11.3% year-over-year to $102.47 million. The company’s gross profit came in at $66.85 million, indicating a 4.1% rise from the prior-year period. Its income from operations came in at $4.74 million, down 31.4% from the year-ago period.

TTSH’s net income came in at $3.51 million, representing a 33.7% decline from the prior-year period. Its EPS came in at $0.07, indicating a 30% year-over-year decline. It had $13.46 million in cash and cash equivalents as of March 31, 2022.

FND’s net sales for its fiscal 2022 first quarter ended March 31, 2022, increased 31.5% year-over-year to $1.03 billion. The company’s gross profit came in at $408.06 million, representing a 21.1% rise from the year-ago period. Its operating income came in at $93.97 million for the quarter, indicating a 2.1% decline from the prior-year period.

While its net income decreased 1.5% year-over-year to $71.63 million, its EPS fell 1.5% to $0.67. The company had cash and cash equivalents of $31.83 million as of March 31, 2022.

Past and Expected Financial Performance

Over the past three years, TTSH’s revenue, EBITDA, and EPS have increased at CAGRs of 2.6%, 7.1%, and 19.9%, respectively.

Analysts expect TTSH’s EPS to decline 41.4% in fiscal 2022, ending December 31, 2022, and rise 47.1% in fiscal 2023. The company’s revenue is expected to grow 5.2% year-over-year in fiscal 2022 and 4.8% in fiscal 2023. Its EPS is expected to grow at 20% per annum over the next five years.

Over the past three years, FND’s revenue, EBITDA, and EPS have increased at CAGRs of 27.3%, 36.1%, and 33%, respectively.

FND’s EPS is expected to rise 16% year-over-year in fiscal 2022, ending December 31, 2022, and 25.4% in fiscal 2023. The company’s revenue is expected to grow 25.7% year-over-year in fiscal 2022 and 19.3% in fiscal 2023. Its EPS is expected to grow at a 23.2% rate per annum over the next five years.

Valuation

In terms of forward EV/Sales, FND is currently trading at 2.31x, 196.2% higher than TTSH’s 0.78x. In terms of trailing-12-month Price-to-Book, TTSH’s 1.42x compares with FND’s 6.09x.

Profitability

TTSH’s trailing-12-month revenue is 9.7 times that of FND’s. Moreover, TTSH is more profitable, with a 67.1% gross profit margin versus FND’s 41.3%.

Furthermore, TTSH’s levered free cash flow of 2.8% compares with FND’s negative value.

POWR Ratings

While TTSH has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, FND has an overall D grade, equating to Sell. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

In terms of Stability, both TTSH and FND have a C grade, consistent with their higher volatility compared to the broader market. TTSH has a 1.60 beta, while FND has a beta of 1.78.

TTSH has been graded a B for Quality, consistent with its higher-than-industry profitability ratios. TTSH’s 67.1% trailing-12-month gross profit margin is 81.2% higher than the 37.1% industry average. FND’s C grade for Quality is in sync with its negative levered free cash flow margin.

Of the 62 stocks in the C-rated Home Improvement & Goods industry, TTSH is ranked #5, while FND is ranked #52.

Beyond what we have stated above, our POWR Ratings system has graded FND and TTSH for Growth, Value, Momentum, and Sentiment. Get all FND ratings here. Also, click here to see the additional POWR Ratings for TTSH.

The Winner

Although the housing market is cooling off, a recent decline in mortgage rates might offer some support. This should help TTSH and FND stay afloat. However, TTSH is a better buy based on its lower valuation and higher profitability.

Our research shows that the odds of success increase if one invests in stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Home Improvement & Goods industry.

TTSH shares were unchanged in after-hours trading Wednesday. Year-to-date, TTSH has declined -53.58%, versus a -12.09% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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