Home Depot (HD -1.03%) gave an investor presentation (link opens a PDF) on March 8 at the Raymond James analyst conference that outlined what executives see as the key long-term growth opportunities for the retailer as it comes off of a record year for the business.
Here are a few slides from the chat that investors won't want to miss.
1. Large market opportunity
MRO = maintenance and repair and operations.
Vice President Kevin Hofmann set the broad context with this slide that illustrates Home Depot's small share of a huge and growing home-improvement market. The gray section represents the retailer's 15% piece of a $550 billion industry that's split between spending by consumers and professional contractors on both products and services.
Home Depot's professional customers have been kicking in a disproportionate amount of growth lately, and executives see them as the key to market-thumping gains as the population ages and more people opt for help rather than tackling large projects completely on their own.
2. Winning online
Home Depot is one of the few bricks-and-mortar retailers that's found a way to thrive as shopping moves online. Visits to its website touched 1.5 billion in 2015 as the company added another $1 billion of sales to its e-commerce base.
It's accomplished that rare feat through what management calls an "interconnected retailing" focus that drives store traffic through digital channels, and vice versa. For example, over 40% of its online orders involve customers picking products up at one of Home Depot's 2,200 store locations, which is a convenience that e-commerce specialists just can't match.
The company aims to keep investing heavily in this area through initiatives like dedicating more cash to digital marketing in 2016 than on advertising through traditional media. Home Depot also plans to add the capability for next-day delivery on bulky items like concrete, mulch, and cinder blocks.
3. Healthy outlook for the current year
For the current fiscal year, Home Depot expects to boost sales at existing locations by 4.1% at the midpoint of guidance, which isn't far from the 4% that rival Lowe's (LOW -0.81%) has forecast. But the gap between the two companies becomes more pronounced when you compare profitability: Home Depot is on track to expand operating margin to 14% this year, verses Lowe's 9% figure.
HD Operating Margin (TTM) data by YCharts
The resulting cash flow growth should easily fund $5 billion of share repurchases along with hefty investments into the business -- and a growing divided payout.
4. Achieving higher profitability
Longer term, executives see operating margin climbing to near 15% by fiscal 2018 while return on invested capital -- which has surged to 28% from a low of 7% in the depths of the housing market crisis -- improves to a stellar 35% (the metric again trounces Lowe's, whose ROIC is in the low double digits).
This uptick would spell particularly good news for income investors, since Home Depot targets returning 50% of its earnings in dividends, compared to Lowe's 35% goal. As a result, shareholders can expect a bigger, faster-growing payout from the market leader.
5. Getting to $100 billion of sales
CAGR = compound annual growth rate.
Putting it all together, Home Depot believes it can grow at roughly 5% annually, which would push it across $100 billion of sales by 2018. Its 2015 acquisition of Interline Brands gives it access to the $50 billion maintenance market, and will help in that goal. So will market share gains in the pro market, and a tightly connected online selling-strategy.
Broader economic growth trends will have a big say in whether Home Depot meets these ambitious targets. Yet, as Lowe's executives pointed out in December, key pillars of the home improvement industry, including job gains, home price appreciation, and household formations, all point to a rising market at least through next year.
