Millionaire Warren Buffett Recently Divests from Floor & Decor and Establishes a Fresh Position in This Veteran Pizza Enterprise
Millionaire Warren Buffett Recently Divests from Floor & Decor and Establishes a Fresh Position in This Veteran Pizza Enterprise
Warren Buffett, known for his exceptional investing skills, is associated with Berkshire Hathaway (BRK.A -0.31%, BRK.B -0.59%), a company renowned for its impressive long-term stock performance. This has made Berkshire's stock transactions a subject of close interest among investors.
As per law, Berkshire is required to submit its equity holdings in a 13F filing within 45 days after each quarter ends. For the third quarter of the year, this fell on November 14. Given Berkshire's significant cash accumulation during the year as well as its restraint in stock acquisitions, the report was awaited with great anticipation.
Berkshire indeed reported some notable transactions in the 13F. Most significantly, Warren Buffett parted ways with Berkshire's shares in Floor & Decor (FND -2.45%), while simultaneously investing in a well-established and renowned pizza franchise.
Troubles at Floor & Decor
Initially, Berkshire established a stake in Floor & Decor, a specialty retailer, in Q3 2021, subsequently enhancing its position in the subsequent quarters. However, Buffett's confidence in the company started to wane in the second quarter of 2024, resulting in the sale of nearly 17% of Berkshire's shares. Despite being a minor component in Berkshire's $295 billion equity portfolio (accounting for 0.1%), this move was not surprising given the challenging environment for Floor & Decor.
The company primarily deals in flooring materials like tile, wood, and stone, and has experienced substantial growth since its 2000 public listing. Despite the bull market, however, Floor & Decor's shares have seen a decline of approximately 7% this year, which is far from desirable performace. The dampened sales performance can be attributed to the stagnation of large home improvement projects in the context of high costs and fewer home sales due to the high-interest-rate environment.
Floor & Decor's financial performance in Q3 suffered a decline of nearly 22% compared to the previous year. The company is also grappling with challenges related to interest rates and labor market, which may continue to persist even if the interest rates start to decrease.
Pizza Pursuits for Buffett
Berkshire's transaction portfolio in the quarter included two significant acquisitions: a major stake in Domino's Pizza (DPZ -1.20%) and a minor stake in Pool Corp. Berkshire invested in more than 1.27 million Domino's shares, valued at over $549 million. Although the position is not as sizable as one might expect given Berkshire's overall portfolio, it is not surprising given Buffett's current cautious approach.
Domino's, with its 20,500 international outlets, is the largest pizza company globally. The majority of its outlets are franchised, and the company's stock has seen a modest increase of approximately 5.5% this year, excluding the post-disclosure surge in after-hours trading.
The pizza industry, like the quick-service restaurant sector in general, has faced challenges in the form of high food costs, intense competition, and labor market constraints. Similarly, Domino's stock, though not cheap with its 26 times forward earnings ratio, might appeal to price-sensitive consumers due to its focus on delivering value.
Buffett's interest in Domino's can be attributed to the company's unwavering commitment to value and its ability to captivate consumers in various financial scenarios. As Domino's CEO Russell Weiner stated in the recent earnings call, the company intends to maintain its promotional prices below the Consumer Price Index (CPI) in each market.
Moreover, the global expansion of the pizza segment and its perceived resilience to economic downturns could be a driving factor behind Buffett's investment decision. While Buffett may not be predicting a recession, this investment could be viewed as a safer bet in the event of increased unemployment.
As always, it is essential to remember that Buffett and Berkshire have significant financial resources and distinct investment strategies, which might not be replicable for retail investors. Careful due diligence and personal research should therefore be conducted before making investment decisions.
After selling a significant portion of Berkshire's shares in Floor & Decor due to its declining performance and challenging environment, Warren Buffett decided to invest a substantial amount of money in Domino's Pizza, a well-known pizza franchise. This move, seen as cautious, aligns with Buffett's approach of investing in companies that deliver value and are resilient to economic downturns.