Earlier this week, the giant retailer beat Wall Street’s expectations for its fiscal third-quarter results.
The past few months have not been particularly favourable for big-box retailers. Revenue growth is pressured by waning customer demand, high inflation, and a looming recession.
It also hurts profitability when sales promotions are intensified to clear inventory stockpiles. All of this happens at the beginning of the holiday shopping season.
Although Home Depot’s business is performing well, the market’s pessimism has not spared it. Investors should look closely at Home Depot today after it dropped 25% from its peak (as of this writing), which was set in Dec. 2021.
Let’s Remodel
The company reported revenue of $38.9 billion for its third quarter of fiscal 2022, up 5.6% year over year. Diluted earnings per share (EPS) for the quarter rose to $4.24, an increase of 8.2% over last year. Retailers closely monitor same-store sales, which increased by 4.3%. Both top-line and bottom-line growth exceeded Wall Street expectations.
The economic climate had a significant impact on operations for the quarter. CFO Richard McPhail explained on the company’s earnings call, “we’re dealing with a broad-based inflationary environment that hasn’t been seen in four decades, while managing global supply chain constraints and monetary policy shifts to reduce demand.”
A difficult environment does not seem to be affecting the company’s growth. There were year-over-year gains for both the DIY and Professional customer cohorts. Although the number of transactions decreased by 4.3%, the average ticket size increased by 8.8%. Another positive trend was the increase in sales per square foot. This increase increased by 5.3%.
There is no reason to believe Home Depot’s business won’t do well over the next five years and beyond. Due to its importance to the U.S. housing market, it is likely to be more affected by economic ups and downs. Despite this, the company has thrived over the years. There will be no change in this.
The CEO said on the call that despite near-term uncertainties, we are confident that long-term demand for home improvement remains strong and that we are well-positioned to capitalize on compelling growth opportunities in our space with our distinct competitive advantages.
Despite unchanged guidance, management expects same-store sales to rise 3.0% and diluted earnings per share to increase in the mid-single digits.
Home Depot’s competitive strengths deserve to be recognized and appreciated. The company provides significant value for its customers with a wide selection of merchandise at low prices. In contrast to Home Depot, mom-and-pop hardware stores do not offer as wide a selection or as competitive pricing as the big box stores. Ultimately, customers will perceive the business as having a powerful brand.
The company had trailing-12-month revenues of $157.3 billion, which is a tremendous advantage in scale. Due to its size, the company can negotiate better terms with its 10,000+ suppliers, reducing per-unit costs. Profitability is improved because of this situation. Home Depot’s operating margin increased from 9.6% to 15.8% between the third quarter of fiscal 2012 and fiscal 2022.
As a final benefit, Home Depot can reduce switching costs among professional customers like electricians and contractors. Home Depot’s 2,319 stores are critical partners in providing the right tools, supplies, and expertise when needed for professionals, who account for about half of the company’s revenue. An established relationship reduces the likelihood of pros switching providers.
So, What Now?
Despite Home Depot’s 25% decline in 2022, its stock trades at an 18.8 price-to-earnings (P/E) multiple times. Undoubtedly, this company is valued at a discount of 17% over Home Depot’s 10-year average P/E, but it is also priced below the S&P 500 now.
Normally, businesses that are industry leaders still deliver growth in this environment and do not offer discounts to investors. Home Depot stock is an excellent investment opportunity at the moment.