Fool.com: Home Depot: The Growth Goes On (News) August 12, 1999

Home Depot: The Growth Goes On

By Brian Graney (TMF Panic)
August 12, 1999

For long-time observers of do-it-yourself home improvement retailer The Home Depot (NYSE: HD), the company's amazing growth record over the years can only bring smiles and shakes of the head. But despite being a 26-bagger over the past 10 years, the Atlanta-based company is not showing any inkling of resting on its past performance laurels. Instead, the growth story goes on. This morning, Home Depot announced that its second quarter earnings will come in at $0.44 per share, up a whopping 42% from last year's $0.31 per share and a nickel ahead of the previous First Call mean estimate.

All of the company's major income statement accounts are going in the right direction, just at a faster pace than anyone had previously expected. The earnings jump was produced by a combination of factors, most notably a 28% increase in quarterly sales to $10.43 billion. Same-store sales for the period climbed 11%, proving that waves of consumers are still packing the aisles despite the fact that 785 of the 100,000+ square foot orange warehouses now dot the countryside. These kind of growth rates harken back to Home Depot's performance in the late 80s and early 90s, when the company first really started to step on the store roll-out accelerator and secure its place as one of the most feared category killers around.

But revenue growth is not the whole story, as improved gross margins and the leveraging of store-level operating expenses are allowing Home Depot's earnings to rise at a faster rate than sales. And if the company maintained its past track record and kept its rate of inventory growth in the period below sales growth, the balance sheet should look pretty rosy as well. Investors will get to see the entire Q2 financial picture when the company releases its results on Tuesday.

One lesson that investors can take away from the Home Depot experience is that you don't have to be one of the original stakeholders of a start-up company or get into a stock at the initial public offering level to benefit from outsized investment gains from companies with serious business advantages and superior economic models. For example, even if you had invested money in Home Depot at this time five years ago, several years after the company's major go-go growth years, here's how your returns would stack up against the market's average:

Year-over-year returns, excluding reinvested dividends
Aug. 12 - Aug. 12

Year           Home Depot (%)         S&P 500 (%)
1995                2.7                  20.2
1996               30.3                  18.9
1997               32.9                  39.2
1998               77.3                  17.0
1999               38.2                  20.3

Avg. return        36.3                  23.1
This performance reinforces the saying that sometimes its hard for long-term investors to pay too much for exceptional business quality. As Home Depot's quarterly results will no doubt show next week, the powerful one-two punch of sterling income statement and balance sheet performance puts the company in a different retailing league altogether. And with an estimated 81% of the $171 billion a-year U.S. home improvement market and the rest of the world's homebuilding market yet to be conquered, it looks like the Home Depot growth story is far from over.

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