In the last five years, shares of Home Depot (HD 1.35%) have climbed by 96% (as of Jan. 10), nearly doubling investor capital. This gain beat the 84% rise of the S&P 500 during the same period, proving that even some of the largest and most widely followed businesses can make for solid investment opportunities.
This performance might prompt some investors to rush and add Home Depot to their portfolios without hesitation. But before you buy this top retail stock in 2024, here are four things you need to know.
1. Dealing with macro headwinds
In fiscal 2020 and 2021, Home Depot registered 19.9% and 14.4% revenue growth, respectively, a huge acceleration from prior years. The pandemic proved to be a tailwind that boosted demand for home improvement projects.
But macro headwinds, particularly inflationary pressures and a softer housing market, have impacted the company more recently. Sales were up by just 4.1% in fiscal 2022. And for the current fiscal year, management expected revenue and same-store sales to decline by 3% to 4%. This probably helps explain why the stock has lagged the S&P 500 in the last 12 months.
It appears as though consumers are holding off on big-ticket discretionary purchases right now to conserve cash. But looking at the long term, it's clear Home Depot will keep benefiting from an aging housing stock, supporting the need for increased renovations.
2. Standing with professionals
While Home Depot caters to DIY customers, the business also serves professional contractors. This group represents about 50% of overall sales, a much higher percentage than the 25% share at smaller rival Lowe's. Home Depot has long focused on these customers with important features like a loyalty program, volume discounts, and tool rentals.
The company must continue to prioritize its pro customer base. They spend much more and visit stores far more often than DIYers. This has historically resulted in a better operating margin and return on invested capital than Lowe's has been able to register.
NYSE: HD
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3. Driving operational efficiencies
Between Q3 2013 and Q3 2023, Home Depot's revenue increased by 94%. However, its store count only expanded by 3% during the same decade stretch. Instead of aggressively opening new locations, of which there are now 2,333 in total, management has focused on boosting store-level productivity and driving operational efficiencies.
Generating more revenue from professionals has helped in this regard. However, investments made to strengthen the supply chain and bolster omnichannel capabilities have also resulted in greater store volume.
In the latest fiscal quarter, Home Depot generated $596 per square foot, much higher than it registered 10 years ago. And thanks to there being a store within 10 miles of 90% of the U.S. population, Home Depot's physical footprint likely won't be expanding by much going forward, leading to even more of these store-level gains.
4. Looking at valuation
Before buying shares, investors need to consider the valuation. Right now, Home Depot's stock trades at a price-to-earnings (P/E) ratio of 22.6. This is roughly in line with its trailing-10-year average of 22.1, as well as the S&P 500's P/E multiple of 21.6.
But this is a huge premium to Lowe's, which trades for a P/E ratio of 16.9. This sizable discount might dissuade investors from buying shares of the bigger retailer, instead opting for Lowe's, which sells relatively cheaper. Of course, other factors, like growth prospects, competitive advantages, and profitability trends also matter.
Armed with all this new information that I've outlined above, investors are now better equipped to decide what to do with Home Depot's stock.
