Source: PaxForex Premium Analytics Portal, Fundamental Insight
As people stayed home longer than ever during the pandemic, repair costs soared. Not surprisingly, Home Depot was a major winner of this consumer behavior, generating $144.4 billion in revenue in 12 months. While this figure is astounding, it doesn't give a sense of just how great this business is.
As for Home Depot itself, the most crucial figure investors should pay attention to is $663. It emphasizes how prosperous and effective the home improvement store chain is, especially when compared to its competitors.
In the last quarter, Home Depot's annual sales per square foot were $663. For any retail business, growth in this metric should be a primary goal, as it demonstrates the improved performance of each physical location. Over the past decade, Home Depot has extended its store space by only 2%. But during that same time, revenues and profits have grown 103% and 243%, respectively. This was due to an increase in sales per square foot, which was $343 in the second quarter of 2011.
How did Home Depot manage to increase sales per store? It's all about the professional buyers. These are contractors who count on Home Depot as a critical partner to provide the tools, supplies, and technical support they need to run their small business and complete projects. Last quarter 45% of sales came from professionals, but they only accounted for 5% of customers. It's not hard to see that professionals spend significantly more than do-it-yourself (DIY) customers.
The company already has to pay the rent, salaries, and other fixed costs necessary to run the day-to-day operations, so when a customer walks through the door, a significant portion of the business generated from professionals with high spending immediately improves Home Depot's retail performance. In addition to superior sales per square foot, the company's return on invested capital (44.7%) and operating margin (16.1%) are outstanding metrics for any business, let alone retail.
While the do-it-yourself segment experienced strong demand during the pandemic, professionals are making a comeback. "We're also seeing buyers taking on larger projects more easily, as evidenced by the continued strength of our professional customers, who outperformed DIY customers for the second quarter in a row," CEO Craig Menear said in a recent earnings call. This bodes well for Home Depot in the near future."
Growing performance, thanks in large part to professional customers, has driven Home Depot's stock price up nearly 900% over the past 10 years."
Home Depot's largest competitor, Lowe's, gets 25% of its revenue from professionals. And unsurprisingly, its retail performance lags that of the leader in home goods, Home Depot. During the second quarter of fiscal 2021, Lowe's achieved a return on invested capital of 29.1%, an operating margin of 15.3%, and annual sales per square foot of $530.
Lowe's management is concentrated on expanding its professional business, so these metrics should grow steadily if the company can meet them. "Every day we strive to demonstrate that Lowe's is the new home for professionals," Joe McFarland, Lowe's executive vice president of stores, said boldly during a conference call with analysts. His confidence is admirable, but his company still has a lot of catching up to do. Lowe's $6.9 billion in sales is far behind the $18.5 billion that Home Depot got from those customers in the second quarter.
Sales per square foot is a critical metric for a retail business, and for Home Depot, it explains why the company has been so successful. Of course, most investors don't delve as thoroughly to better understand the business, which provides an added advantage. Now you know exactly what makes Home Depot special. Keep that in mind as you move forward with your investment.
As long as the price is above the 330.00 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 338.00
- Take Profit 1: 352.00
- Take Profit 2: 357.00
Alternative scenario:
If the level of 330.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 330.00
- Take Profit 1: 321.00
- Take Profit 2: 316.00
