Throughout its history as a public limited company Home Depot (NYSE: HD) has been a fantastic company. Since its IPO in 1981, the stock has delivered a total return of 2,972,000%, which would turn a $10,000 investment into over $297 million today.
However, recent performance has been more disappointing, with shares returning 89% over the past five years, lagging behind the broader S&P500.
But where is the Top retail inventory in five years?
Don’t expect major branch growth
Home Depot sells products, tools and appliances to professionals and do-it-yourselfers through its network of stores in the United States, Canada and Mexico. As with any retail company, opening new stores has been a top trend in the past.
In January 1994, Home Depot had 264 stores. Today, there are already 2,337. That represents a remarkable ninefold expansion.
However, over the last 10 years, the leadership team has only expanded the physical presence by 2% overall, and I suspect that will continue to be the case over the next few years.
Keeping an eye on the big picture
Just because Home Depot won’t be opening new stores at a groundbreaking pace doesn’t mean things are dire. In fact, there are reasons to believe the company can still post healthy sales growth.
Over the last decade, the company’s revenue grew 85%. Management has focused on increasing sales volume per store. Investments in strengthening the supply chain and increasing omnichannel capabilities have helped. Expect further improvements here to continue to drive revenue forward comparable sales Long-term growth.
To be clear, Home Depot is in tough times. Sales fell 2.9% in fiscal 2023 (which ended Jan. 28), and executives expect sales growth of just 1% for the current fiscal year. The challenging macroeconomic environment, with consumers grappling with inflationary pressures and recession fears, is naturally putting pressure on expensive purchases.
Home Depot should return to healthy sales growth. As always, the economy will provide a tailwind rather than a headwind, which will drive consumer spending and demand for Home Depot.
The industry situation is also quite favorable. The domestic home improvement industry is valued at a trillion dollars. Based on sales of $152 billion over the last 12 months, Home Depot, the clear market leader, has only a 15 percent market share. The company’s strong brand name, enormous inventory availability and large store base should help it continue to gain market share.
The current housing inventory is also encouraging for companies involved in the home improvement industry. There is a housing shortage in this country, and the fact that the average age of a home was 40 years old in 2021 (and continues to rise) works in Home Depot’s favor. Consumers will have to spend money to maintain the quality of their homes.
Investor setup
It’s easy to be optimistic about Home Depot’s prospects five years from now. The company will return to revenue growth, which should lead to higher profits.
The valuation must also be taken into account. The share is valued at Price-earnings ratio Ratio of 23.5, slightly above the five-year average of 21.9. Value-conscious investors might shy away from this, but given the quality of the company, it could still make sense to own shares.
In addition, Home Depot is known for returning huge amounts of capital to its shareholders. In the last fiscal year alone, it spent $8.4 billion on dividends and repurchased nearly $8 billion worth of stock. Add that to the potential for share price gains, and investors who buy Home Depot today will likely be happy in five years.
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Neil Patel and his clients do not own any stocks mentioned. The Motley Fool owns a position in and recommends Home Depot. The Motley Fool has a disclosure policy.
Where will Home Depot stock be in 5 years? was originally published by The Motley Fool
