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Proprietary Data Insights Financial Pros Home Improvement Retail Searches in the Last Month
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Consumer Cyclical |
The Retailer Immune to Amazon |
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People love Amazon because it makes it so simple, easy, and fast to get goods delivered to their homes. But when it comes to buying lumber, kitchen countertops, and cabinets, Amazon just doesn’t cut it. Most of us are more likely to go to The Home Depot (HD). The world’s largest home improvement retailer has recently gotten a lot of attention from financial pros. It’s their third-most searched home improvement retailer over the last month. They’ve searched it twice as much as they’ve searched its closest competitor, Lowe’s Companies (LOW). But that’s not necessarily good news. As housing sales slump, consumers are pulling back on remodels and general spending. Although events like Hurricane Ian can help, a prolonged decline in the housing market would crush Home Depot’s stock. Shares are down more than 33% this year. Yet the company pays a handsome dividend and generates cash like crazy. Here’s where we stand. The Home Depot’s Business The Home Depot has stores in all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, all 10 Canadian provinces, and Mexico. The company fulfills more than half its online orders through a store. Its top five revenue sources are indoor gardens, appliances, electrical/lighting, lumber, and tools, all of which make up 45% of the company’s sales. 
The U.S. accounts for over 90% of the firm’s sales. Home Depot splits its customer base into pros and consumers, or DIYers. As huge as Home Depot is, it garners only 17% of the potential market share. 
Financials 
HD has been growing its revenues year after year. From 2016 to 2021, it grew its revenues from $94.5 billion to $151 billion. Its three-year average growth rate hit 12.16%. In 2020, the company had double-digit revenue growth. This was largely because more Americans weren’t traveling and were working from home. But revenue growth is slowing down as the economy has been weak. HD is still on pace for its best year yet, with its 12-month trailing revenues at $155 billion. HD had $1.2 billion total cash and $47.9 billion total debt at the end of last quarter. While that might look concerning, its current ratio of 1.1x indicates it’s liquid enough to handle its short-term liabilities. Further, the company announced a $15 billion share repurchase authorization in August. It pays an annual dividend of $7.60 per share and has a proven track record of delivering for shareholders. Valuation 
HD has one true publicly traded competitor, Lowe’s. It does compete with other businesses within niches in the home improvement sector. For example, Target (TGT), Floor & Decor Holdings (FND), and Walmart (WMT). HD has a P/E GAAP ratio of 16.9x, slightly higher than LOW at 14.4x but notably lower than WMT, TGT, and FND. At a price-to-sales ratio of 1.8x, HD isn’t as competitive as LOW at 1.2x, WMT at 0.6x, or TGT at 0.8x. Profitability 
HD boasts a gross profit margin of 33.5%. That’s on par with LOW but notably higher than WMT at 24.6% and TGT at 26.2%, both of which run more diversified businesses. Plus, HD is the only company with a double-digit net income margin, 10.8%. HD has $13.8 billion in cash from operations and an impressive 32.4% return on total capital. And the company has an EBITDA margin of 17.36%, which is significantly higher than its competitors’. Growth 
In 2020, when people were stuck at home with more time to work on their houses, HD saw a massive spike in revenue growth. The firm has been able to keep the momentum going. It’s had 7.5% revenue growth year over year, significantly better than LOW at 0.82% and WMT at 3.8%. HD’s YoY EBITDA growth of 8.4% is notably better than LOW’s 1.1%, TGT’s -24.2%, and WMT’s -14.4%. Our Opinion 6/10 Shares of HD are down 33% year to date. While the housing market and economy may weaken from here, HD is a leader in its space. In other words, investors should buy HD on dips, but cautiously. We think buying anywhere between $250 to $265 should pay off over the next few years. |
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