Think Home Depot Is Too Big? Think Again.
Many investors don't need to be reminded of the tremendous growth that Home Depot has seen over the previous years as the company has emerged a winner following the 2008 recession. The rebound of consumer residential spending and strong housing starts are two strong reasons why shares are up over 100% in the last two years. Outside of favorable economic trends lies a well managed and well positioned company that is well positioned to continue growing over the years.
Business shouldn't slow down anytime soon
Many investors are questioning if the company's growth can continue over the coming years. From a revenue perspective, the argument can be made that the company still has several more years of above-average growth ahead. Many home owners over the past six years have put off home improvement projects which can be classified as "deferred maintenance."
Fitch Ratings released a study which concluded that homeowners are set to increase spending on home improvement projects, a trend which will continue into 2014. The study explained that over the past several years home improvement projects that were undertaken by home owners were only done out of necessity. Now there are strong indications that "homeowners are slowly warming to the idea of undertaking larger discretionary projects and purchases.'"
Appliance sales picking up
Analysts at Morgan Stanley believe in a continued strength in appliance sales. Big ticket leading indicators such as the Association of Home Appliance Manufactures 'AHAM 6' continue to show increasing trends. This indicator measures big ticket appliances such as washers & dryers, dishwashers, refrigerators, freezes, ovens, and ranges.
Many investors don't see Home Depot as a major player in the appliance market, but this is far from true. Home Depot continues to grow and take share in major appliances against competitors such as Sears, which has run into its share of problems recently. Home Depot's initiatives in this area began in the third quarter of 2012 with the company resetting its appliance offering to include brand names such as Whirlpool, Frigidaire, Electrolux, and Samsung. The company commented on appliances during its second quarter 2013 conference call.
- Goldman Sachs
My primary question and then I have quick follow-up, just if you could talk about the evolution of your expanded appliance assortment. Talk about the pace of the rollout just to put in context and compare the rollout in-store to the rollout and penetration online? How far along do you think you are in realizing the benefits of this rollout process? Thanks.
- Executive Vice President
Okay, Matt, at the end of the last year, we had rolled out about 120 stores with an extended appliance program. We added brands in the fall season. We added Samsung around the December time frame which got us to the full offering of brands that we have right now. We are in the process right now of expanding another 120 stores for, you know, an expanded showroom experience. All of those brands are available on homedepot.com and have been since last December. We are seeing very nice response from the customer.
Stacking up against the competition
Home Depot operates in a highly competitive environment with Lowe's being a formidable competitor. Lowe's offers similar, if not identical, products and has a price matching policy. Naturally, investors can do no wrong by buying shares of Lowe's but Home Depot remains a better investment choice.
Historically, Home Depot has trailed Lowe's in gross margin having only surpassed Lowe's in the third quarter of 2011. Home Depot continues to modestly outperform Lowe's on this metric, with a 2012 gross margin of 34.6%, 30 basis points higher than Lowe's.
Another metric that favors an investment in Home Depot over Lowe's is its improvement in SG&A. In 2012 Home Depot reported expenses of 21.9% of sales, down from 23.8% in 2009. At Lowe's, expenses of sales remain elevated at 24% in 2012, only slightly improving from its peak of 24.8% in 2009.
From a business point of view, Home Depot is aggressively expanding within the professional market as the pro customer represents roughly 35% of sales, ahead of 25% at Lowe's. Home Depot is investing in several initiatives that address the pro, including dedicated cashiers, designated parking spaces for the pros, and advanced delivery options to continue winning in this important market segment.
Smaller players can hold an advantage
The emergence of Lumber Liquidators has become a significant headache for both Home Depot and Lowe's given its rapid expansion in the market. Lumber Liquidators has grown rapidly over the last decade to 300 stores in 2013 compared to just 40 in 2003 and having started with a single location in 1996. This expansion will continue to provide competition to the big box retailers as the company uses a direct sourcing model to put out lower priced items while targeting budget sensitive contractors and the do-it-yourself crowd.
While wood flooring remains strong, Lumber Liquidators offers consumers an excellent alternative to big box retailers as the company offers a free estimation of project costs.
Home Depot registered an 11.8% operating margin before the economic downturn and will roughly meet that this year. Management currently has a 12% goal for 2015 which was set in 2012. As business has improved since then, it is possible that management can raise the margin goal during its next analyst day. Analysts at Goldman Sachs are confident that the company can achieve its objectives. Goldman Sachs retail analyst Matt Frasler stated "It's a company that's very much by way of our forecast on its way to achieving its 12% launch from operating margin goal early if anything."
The best aspect of the Home Depot story is that it still provides numerous areas where results can come in better than expected. Faster home renovation growth, better margins, and more cash flow generated all present shareholders with compelling reasons to invest in this retailer even if its stock is currently trading near historical all time highs.
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The article Think Home Depot Is Too Big? Think Again. originally appeared on Fool.com.Jayson Derrick has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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