2022 Flooring Market and M&A Update and Industry Outlook
2021 was a big year in flooring, both in terms of financial performance and transaction activity. Many signs point to a strong 2022, although current economic and geopolitical issues are driving some uncertainty.
NOTABLE DEALS AND 2021 PERFORMANCE
In December of 2020, 50 Floor announced its sale to private equity firm AEA, and in February of 2021 Blackstone announced the purchase of interior finishings installation company Interior Logic Group (ILG) for $1.6 billion.
The remainder of 2021 saw a flurry of deals with both strategic acquirers and institutional capital chasing assets in market. Direct-to-consumer bamboo flooring company CALI sold to UK-based Victoria PLC. Paramount Global Surfaces, formerly known as Happy Floors, sold to financial sponsor Platinum Equity. Select Interior Concepts split its business in two, selling the Residential Design Services business to ILG and the Architectural Surfaces Group to Sun Capital. Retail behemoth Floor & Décor made a large bet on commercial flooring, a subsector that saw considerable market headwinds from the pandemic, with its purchase of Spartan Surfaces.
Public flooring retailers Floor and Décor, Lumber Liquidators, Home Depot and Lowes all reported strong 2021 results last month, with same-store sales growth driven by strength in resilient flooring, largely LVP/LVT.
OUTLOOK FOR 2022
2022 is off to an interesting start. Let’s take the tough news first. Just as the pandemic inched closer to our rearview mirror, hopes for more stability were dashed by war in Europe among other factors. This geopolitical uncertainty may impact consumer confidence, which has fallen slowly since mid-2021 and currently sits below pre-pandemic levels. Inflation continues to be a concern, particularly with oil, a key input in vinyl flooring products. Finally, interest rates are on the rise, which will drive mortgage and home improvement financing rates up from their near-historic lows.
However, there are plenty of reasons to remain optimistic about flooring this year.
Harvard’s Joint Center for Housing Studies Leading Indicator of Remodeling Activity suggests home remodeling will continue to grow and may peak in 2022. Work from home is likely to become a permanent option for many workers, which will drive remodel work and spend.
Building permits in February were up 7.7% year over year. The massive underbuild coming off the Great Recession has still not fully corrected, and new home construction will have to continue at a steady pace as millennials form households they had previously waited on.
Supply chain woes also appear to be waning, albeit slowly. Fortunately, many market participants have preemptively added inventory in anticipation of meeting 2022 demand they could not meet in 2021.
M&A LANDSCAPE: CONSOLIDATION IN FLOORING WILL CONTINUE
Major players in the industry are bullish and looking to make acquisitions. Large strategic buyers are cash rich after the last two years of record performance. Private equity backed platform companies are looking to grow both organically and by acquisition. The net? There is still a lot of money chasing deals in the market.
In our opinion, the secular tailwinds to flooring outweigh the event-driven and cyclical headwinds facing the industry, but scale is essential for managing the uncertainty and volatility of the industry. With inventory on allocation, large purchasers are getting favorable treatment relative to small dealers. Manufacturers with networks of facilities can more quickly respond to geopolitical shifts, whether from Asia or Europe. Retailers with larger footprints can diversify local market volatility and serve a broader customer base.
All the above is a recipe for more consolidation and more M&A.
We expect consolidation (in distribution particularly) to continue at a rapid pace, with an emphasis on serving the pro customer as a one-stop-flooring-shop across multiple regions. In manufacturing we expect further investment in on-shore LVT/LVP capacity, with some larger manufacturers exploring downstream distribution and services integration. On the retail front, existing large format/big box stores are forecasting continued greenfield growth, which will put pressure on smaller local dealers. Buying groups, industry associations, and mergers and acquisitions all have a place in response to this continued competitive dynamic, and we expect to see growing use of all three by local and regional companies.
NEXT STEPS: WHAT OPERATORS SHOULD BE CONSIDERING
So, what is a flooring company worth in today’s environment? There is no one clear answer to that question. We have seen valuation multiples of EBITDA from 4x to 13x, and it’s not always about size. In today’s market, capturing top value for your flooring business means articulating your story inside the larger context of the industry, including what the major buyers are doing and why.
Potential sellers should consider timing carefully. This year looks to be shaping up similarly to the last two (and likely better) with strong demand buoying top lines and supply chains beginning to ease. We expect the industry to post excellent 2022 results given today’s backlog and the strength of the economy. 2023, however is a giant blinking question mark. Could a combination of rising rates, inflation, and the specter of an election on the horizon dip the economy into recession? It’s certainly possible. As they say, make hay while the sun shines.
Anchor Peabody serves the middle market building products market, and no one is more plugged in than we are. If you have any interest in discussing any of the above in further detail, have ever thought about selling, or simply want to talk about the market in general – please reach out to Aaron Toomey at [email protected] for a confidential discussion at any time.