3 Facts You Need to Know About Home Depot Before You Buy the Stock
Since its initial public offering in 1981, Home Depot (NYSE: HD) has done a fantastic job of growing shareholders' capital. It has helped that the business has paid a dividend for a jaw-dropping 148 straight quarters, a mark of consistent success over many decades.
Investors who want to add a dominant blue chip enterprise to their portfolios might be considering Home Depot. But before you buy the retail stock, here are three must-know facts.
Customer Cohorts
With its brick-and-mortar footprint of 2,337 warehouse-sized stores, Home Depot sells various products to help people tackle renovation projects. The business serves DIY customers, as well as professionals like plumbers, roofers, landscapers, and electricians. Pros are likely to handle more complex tasks.
Home Depot's sales are divided about evenly between DIY and pro customers. Lowe's, Home Depot's smaller rival in the industry, generates about 25% of its overall revenue from professionals. Because these customers spend much more than DIYers, they have helped Home Depot usually report a higher operating margin and return on invested capital (ROIC) historically.
With the recently announced acquisition of SRS Distribution for $18.25 billion, Home Depot will only bolster its ability to better serve professional customers. SRS is a distributor of building products. This is a clear indication that the executive team wants to focus more on this part of the market. And if it's successful, margins and ROIC could improve over time.
Macro headwinds
In the fiscal 2024 first quarter (ended April 28), Home Depot reported revenue of $36.4 billion, down 2.3% year over year. Same-store sales, a key performance indicator for any retailer, fell 3.2% in the U.S. Management reiterated its guidance, expecting same-store sales to dip 1% for the full fiscal year.
Home Depot is being negatively impacted by the uncertain economic environment. Higher interest rates and inflationary pressures don't necessarily make people want to go out and spend big on a home renovation. When budgets are tight, and there are still worries about the possibility of a recession, these projects can be delayed.
That's exactly the situation playing out at Home Depot. "The majority of the demand pressure is in those larger projects," CFO Richard McPhail said on the Q1 2024 earnings call.
The recent financials are in stark contrast to the company's performance throughout the pandemic. Home Depot's revenue jumped 19.9% and 14.4%, respectively, in fiscal 2020 and fiscal 2021. These figures exceeded historical trends, because demand was robust thanks to consumers spending more time at home and willingness to spend on home upgrades.
Industry tailwinds
Management wants shareholders to remain focused on Home Depot's long-term opportunity despite the ongoing struggles to boost sales in the current economic climate. Once the purchase of SRS closes, it's estimated that Home Depot's total addressable market will be worth a whopping $1 trillion.
Given its revenue of $153 billion last fiscal year, the business has a relatively small 15% share of the industry. And that's a figure for the largest player in the space. This indicates Home Depot has a long expansionary runway to tackle in the years ahead.
The executive team agrees. That's because the industry remains extremely fragmented. With its unrivaled inventory availability, broad reach, and strong brand name, Home Depot is set to steal market share from the many independent hardware stores out there.
It also helps that the median age of a home in the U.S. -- now at 40 -- continues to climb over time. This aging housing stock encourages renovations because homes need more upkeep as wear and tear happens.
Investors looking to buy Home Depot shares now have a better understanding of the business.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.
3 Facts You Need to Know About Home Depot Before You Buy the Stock was originally published by The Motley Fool