With a market capitalization of $345 billion and trailing-12-month revenue of $154 billion, Home Depot (HD -0.23%) is a business that just about every investor is familiar with these days. Through its network of more than 2,000 stores in the U.S., the company sells various home improvement products and supplies.
Yet, for all of Home Depot’s growth, many investors may not appreciate a specific trait that might just be the key to this top retail stock and its success. Let’s take a closer look at what makes Home Depot stand out and whether investors should scoop up shares right now.
Serving a valuable customer group
Home Depot sells to two different types of customers. One of these groups is the do-it-yourself (DIY) person who likely handles small projects around the house. The other, more valuable group is professional customers. This cohort includes contractors, plumbers, electricians, and the like, who tackle much more complex jobs.
According to Home Depot’s management team, pros represent about half of all sales for the business. This is a critical fact to gaining a better understanding of the company’s operations.
Why are pros so important? Compared to a DIY customer, a professional spends much more money and visits stores far more frequently. In Home Depot’s case, pros make up just 10% of the customer base, but as I noted, they account for about 50% of revenue. This has implications for the company’s financial success.
Look at Lowe’s Companies, Home Depot’s chief rival in the home improvement industry. It generates 25% of sales from pros, a far lower percentage than its bigger foe. This could be the most important factor as to why Home Depot has generally reported a higher operating margin, greater sales per square foot, and a better return on invested capital than Lowe’s.
Instead of handling numerous small-value transactions from lots of DIY customers, a single transaction from a pro could be of a higher dollar amount and require less labor. The result is operating leverage and improved financial metrics for Home Depot.
To be fair, Lowe’s isn’t resting on its laurels. CEO Marvin Ellison was a former executive at Home Depot. And he is fully focused on bolstering the company’s offering for professionals. But it will be an uphill battle to catch up to Home Depot, which clearly has the expertise and competency to cater to this valuable customer group.
Is it time to buy Home Depot stock?
Investors now have a better grasp of what makes this business superior to its key competitor in the industry. But does this alone make the stock a smart buy right now?
It’s clear that macro uncertainty has been dealing a blow to Home Depot. Consumers are holding off on big-ticket purchases in the inflationary and high-rate environment. For fiscal 2023, which will end in a few weeks, revenue and same-store sales are expected to decline by 3% to 4% on a year-over-year basis. This is difficult for shareholders to fathom after years of consistent top-line gains.
And although the central bank intends to cut interest rates in 2024, there is still a reason to temper expectations. “The Fed stance of higher for longer has had and could have increasing pressure on the outlook for durables and housing-related spend,” CFO Richard McPhail said on the Q3 2023 earnings call.
But by zooming out, investors have something to be encouraged about now. The home improvement industry is estimated to be worth $950 billion, giving Home Depot less than 20% share of a fragmented industry. As the leader, this positions the company well to capture more growth.
And with shares trading roughly in line with their trailing-10-year price-to-earnings average, investors aren’t being asked to pay a steep valuation. For long-term-minded folks, this stock should be on the investing radar.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Lowe’s Companies. The Motley Fool has a disclosure policy.
