Home Depot’s Innovations Have Potential to Drive Its Top Line

Are you a big fan of Home Depot (NYSE:HD) as an investor? If the answer is yes, then you have enjoyed consistent stock appreciation and somewhat generous dividend payments. If you're not a big fan of Home Depot as an investor, then you might want to look at this story from a consumer's perspective.

Repeat visitors help drive the top line
When you visit Home Depot, you most likely know what you want prior to visiting. If you're like many homeowners out there, you end up visiting Home Depot several times throughout the weekend despite only having planned one trip. This is one often overlooked reason for Home Depot's success.

Once you begin a project and you make some progress on it, you realize you need more tools or parts. If you're like me, then you mess up the project and require new tools or parts to fix what you ruined. After working for about five to eight more hours than you planned, you can take pride in your great success, even though it was just putting up a shelf. When you visit Home Depot more often, the cash register there rings up more often, which then leads to top-line growth. 

Underrated for innovation
Home Depot also sells highly innovative products that can help homeowners save time and money.  

For instance, Home Depot recently announced its 2013 Innovation Awards. Simply having annual Innovation Awards is a great idea. Not only does it drive innovators to work harder to get their products recognized and on Home Depot shelves, but it leads to news about these innovative products throughout financial and social media. This article is one example. It's highly likely that at least one person reading this article will seek out more information on one of the products below.

By the way, while Lowe's (NYSE:LOW) is also a top-notch company, it doesn't have annual innovation awards. This is one example of how Home Depot is a bit more creative than its biggest competitor.

Getting to those innovative products, the Cree LED light bulb won first prize as the most innovative product at Home Depot in 2013. This seems justifiable, considering Cree LED bulbs last 25 times longer than traditional bulbs and save 84% more energy than incandescent bulbs. Some other innovative products receiving accolades in 2013: 

Behr Deck Over -- Revives weathered wood and concrete

Ryobi Li-Ion 18v Hybrid String Trimmer -- Only trimmer that can be operated by battery or electricity

Drummen Drop N Bloom Annuals -- Annuals that grow more beautiful with age

These innovations are right in line with Home Depot's goal, which is to offer more innovative products to help consumers save time and money. Home Depot is well aware of current macroeconomic trends, and it knows that this is the best path toward top-line growth. It's also an indication that Home Depot is more than capable of adapting to industry trends, which should put investors' minds at ease.

Home Depot has been around since 1978. Let's see how it's stacks up against one older and one younger peer.

Home Depot vs. peers
Lowe's is older than Home Depot, having been established in 1946. Despite being around longer, Lowe's is a smaller company. Its market cap of $53.08 billion is less than the market cap of $112.06 billion for Home Depot. Lowe's also has a smaller store count at 1,785 than Home Depot with 2,259 stores. However, what investors care about most is top-line growth. That being the case, let's see how these companies stack up against one another over the past year, and let's include Lumber Liquidators (NYSE:LL).

Lumber Liquidators sports a market cap of just $3.21 billion, and its primary focus is on hardwood flooring. However, with only 300 locations there's a lot of room for growth. If the company sees continued success, it might build out its product offerings as well, which would make it a closer competitor to Home Depot and Lowe's. Lumber Liquidators only came into existence in 1994, so there's still no telling what direction it might go in the future.

Top-line comparisons over the past year:

HD Revenue (TTM) data by YCharts

Since Lumber Liquidators is the smallest and youngest company, it should be showing the most growth, so no surprise there. What should be noted is that Home Depot is outperforming Lowe's. The same can be said for the bottom line:

HD EPS Diluted (TTM) data by YCharts

Home Depot and Lowe's are trading at 18 and 19 times forward earnings, respectively, both below the industry average of 25.91. Lumber Liquidators might be growing the fastest, but it's more expensive at 34 times forward earnings. Also, Lumber Liquidators doesn't offer any yield. Home Depot is the most impressive in that department, currently yielding 2%, whereas Lowe's yields 1.40%.

The bottom line
Whether it's through stock appreciation or dividends, Home Depot consistently rewards its investors. The rebounding housing market has helped a great deal. The only reason to consider exiting Home Depot is if the 30-year-fixed moves north of 6% (currently 3.95% according to Zillow), which would reduce housing demand, and in turn, the need for products from Home Depot. In the meantime, and in addition to a rebounding housing market, Home Depot continues to drive the top line via strategic locations, marketing, and innovation.