The stock market is a fantastic tool to build long-term, life-changing wealth. And not interrupting the magic of compounding is one of the keys to becoming a successful investor. That's why even small sums of money can turn into astronomical amounts given enough time.
One stock in particular, Home Depot (HD 0.86%), really stands out. A $1,000 investment at the company's initial public offering in 1981 would be worth a remarkable $16 million today. You're probably wondering how a return like this is even possible from a brick-and-mortar retail business.
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A vital part of the U.S. economy
To say that Home Depot is important to the American economy would be an understatement. Because homeownership in this country is such a huge financial goal for most people, a business that sells housing tools and supplies unsurprisingly benefits immensely. Just last quarter, Home Depot hit a record $41.1 billion in revenue, making it the world's largest home-improvement chain. And an incredible 90% of the U.S. population lives within 10 miles of one of the company's 1,988 domestic stores, showcasing the scale this business has.
The median home price in the U.S. is up 16.2% over the past year, and it has steadily risen historically.
"In addition, the customers' mindset regarding their home is very straightforward. As long as their home is increasing in value, they see upgrades and enhancements to their home as an investment and not an expense." This is what competitor Lowe's CEO Marvin Ellison highlighted during his company's second-quarter earnings call. The same thing applies to Home Depot's customers, and it has been the case for a long time. Historically low mortgage rates today also certainly help.
More recently, the coronavirus pandemic, and its effect on the popularity of remote work, will continue to affect where people choose to live. Therefore, the economic factors I just discussed that have led to Home Depot's success thus far are sure to continue in the years ahead.
Efficiency is key
A company doesn't produce market-crushing returns without having some impressive financial characteristics. In the most recent quarter, Home Depot registered a 16.1% operating margin and an 11.7% net income margin, stellar for any retail business.
But what makes Home Depot really special is management's proven ability to boost the sales volume and productivity of each store. Over the past decade, the business only opened 53 net new locations, an expansion of just 2.4%. During that same time, however, quarterly revenue and profit soared 103% and 253%, respectively. As a result, Home Depot's return on invested capital is nearly 45% today, and sales per square foot are $663.
The main reason why these metrics are so superb is because the company focuses intensely on taking care of its professional (or Pro) customers. These small contractors, who make up 45% of overall sales, but just 5% of customers, spend significantly more than the average DIY consumer. Pros also rely on Home Depot as a mission-critical supplier partner for all of their own business needs.
And the company's robust supply chain and user-friendly omnichannel capabilities improve the shopping experience. To hammer home the point, some 55% of online orders during the most recent quarter were fulfilled at a store.
Craig Menear, Home Depot's CEO, mentioned recent trends he's observing on the earnings call: "We also see customers more comfortable taking on larger projects as evidenced by the continued strength with our Pro customer, which outpaced the DIY customer for the second quarter in a row." This bodes well for the organization.
Don't expect the future to resemble the past
Although Home Depot is one of the stock market's biggest winners over time, investors should temper their expectations going forward. This is a $350 billion business today, so you'd be mistaken to truly believe that average annual returns of 27% (what Home Depot generated over the past 40 years) can continue on.
But on a positive note, I do think the stock will keep its track record of beating the market intact. If you're considering buying shares of Home Depot today, don't think twice.
