Home Depot (HD 0.74%) has historically been a wildly successful investment. Shares have produced a total return, including dividends, of 6,680% in the last 30 years. This gain crushes the broader S&P 500 index.
The bulls are hoping the good times will keep rolling. Before you buy this retail stock, which currently sits 11% below its peak, there are three facts you need to know.
1. Standing with pros
Through its network of 2,335 stores, Home Depot sells home improvement products to DIY and professional customers. The former is someone who wants to do renovations or repairs on their own, while the latter are trade experts, like contractors or plumbers, who are hired by people to complete projects on their behalf. Home Depot gets about half its revenue from each of these customer groups.
This is in stark contrast to smaller rival Lowe's, which brings in about 25% of its sales from professionals. The company's CEO, Marvin Ellison, has focused on boosting the pro business to catch up with its larger competitor.
It's critical to cater to professionals to grow this part of the business. It's not surprising that professionals spend significantly more money than DIYers, and they visit far more frequently. Home Depot claims that pros make up just 10% of the total customer base, despite the outsized impact on sales generation. The result is better financial metrics, like sales per square foot and return on invested capital, for Home Depot, compared to Lowe's.
NYSE: HD
Key Data Points
2. The finances
As a scaled enterprise in a mature stage of its life cycle, investors will be pleased to know that Home Depot is consistently profitable. In the last 20 fiscal years, the company's operating margin has averaged 11.9%. And it has shown an ability to expand as the business increases its scale, due to ongoing investments to bolster the supply chain and improve omnichannel capabilities to drive greater sales per store.
Last fiscal year, Home Depot brought in $17.9 billion of free cash flow, which is the money left over after investing in growth opportunities and other capital expenditures. This allowed the management team to pay $8.4 billion in dividends and repurchase $8 billion of outstanding shares, favorable capital allocation policies that boost investor returns.
From a balance sheet perspective, Home Depot carries long-term debt of $44.1 billion. But with Q4 interest expense representing just 12% of operating income, there's no reason to worry about the company running into financial trouble, even if a severe recession occurred.
3. Growth challenges
During the depths of the pandemic, Home Depot was a surprising winner, as consumers were willing and able to take on more complex renovation projects. Revenue rose 19.9% and 14.4%, respectively, in fiscal 2020 and fiscal 2021 -- gains that were out of the ordinary for this business.
As interest rates started climbing, inflationary pressures remained stubborn, and general economic uncertainty took over, Home Depot saw growth decelerate. Revenue increased 4.1% in fiscal 2022 and fell 3% in the latest fiscal year (ended Jan. 28). CEO Ted Decker called this the "year of moderation."
We're seeing other retailers struggle in this type of macro environment. With fears still prevalent about the possibility of a recession, it makes sense that consumers are hesitant to spend big dollars on costly renovation projects that they could simply just delay until the situation improves.
The positive spin is that Home Depot is a much larger company than it was a few years ago, despite the lumpiness in business results in recent quarters. And management remains optimistic about the long-term outlook for the home improvement industry.
Investors looking to buy Home Depot stock are now armed with more information related to these three topics.
