Many of us, though the number is forever declining, can still vaguely remember when the concept of a home improvement warehouse didn’t exist. Hardware stores, lumberyards, and paint dealers were as small, independent, and local as craft shops. Buy a drill here, pick up some 2x4s across town, rent a pressure washer in the next county, and you’ve just burned most of a Saturday. “Changing the paradigm” is a phrase so overused it’s lost much of its meaning, but Home Depot Inc. (HD) did exactly that.
A Small Start
Founded in 1978, Home Depot (or as pedants refer to it, THE Home Depot) started with a couple of vacant superstores in Atlanta, each large enough to contain every conceivable home improvement item. No one else was doing that at the time, at least not on such a scale. Home Depot’s only real competitor Lowe’s Companies Inc. (LOW) was founded earlier, but didn’t start building big box stores until the 1990s.
- Home Depot is the world's largest home improvement retailer.
- The company's "always be selling" message is unambiguous.
- Home Depot creates efficiencies due to its ability to buy large qualities of home improvement products at a low cost.
- While Home Depot does not have business segments like many corporations, it sells its products in categories like kitchen, paint, and indoor garden.
- Thanks to an aggressive stock buybacks and steady dividend increases, patient shareholders have been rewarded nicely over the past 10 years.
By 1986, Home Depot had cleared $1 billion in annual sales. From there, sustainable growth continued until the company’s crowning achievement, its 1999 enshrinement among the 30 components of the Dow Jones Industrial Average. Today, Home Depot takes in more than $100 billion a year in revenue via roughly 2,300 stores in the United States, Puerto Rico, the U.S. Virgin Islands, Guam, Canada, and Mexico.
Always Be Selling
Unlike most other corporations of its size (market capitalization of $250 billion), Home Depot doesn’t have discernible business segments. There’s no IT/Mobile division, no Upstream Exploration & Production sector. There’s just retail selling of as much home improvement merchandise to as many people as possible. A Home Depot location isn’t quite the high-pressure sales environment that, say, a car dealership is, but the message is unambiguous.
Second, offer the latest products. But in this respect Home Depot is largely at its suppliers’ mercy. Besides, how much do most building materials change from year to year, anyway? Ready-to-use concrete mix is as advanced as it’s ever going to get: it costs 5 cents a pound, too. Which means that the only real room for large improvement is in creating efficiencies. Reduce unused inventory, buy new inventory at low cost, and accelerate delivery.
And shore up the website to make it easier to buy online and pick up in store. Home Depot has done this to an extraordinary degree. Its mobile apps are things of beauty: easily navigable, with an intuitive search feature, and results so detailed they tell you which store your item is in real-time, and even which aisle.
Home Depot doesn’t worry about building lifelong relationships, or making its customers part of the family, or whatever phrases are popular among brand marketers right now. For Home Depot, everything is sales. Increasing market share, reducing long-term debt, all of it is secondary to sales.
Aisles Upon Aisles
Home Depot might not have individually reporting business segments, but it does have departments—literal departments, as in Roofing and Shingles on aisle 12. For accounting purposes, the company divides its merchandise into 15 segments. In alphabetical order, those are bath, building materials, décor, electrical, flooring, garden (indoor and outdoor), hardware, kitchen, lighting, lumber, millwork, paint, plumbing, and tools.
In a typical year, the kitchen department generates 10% to 15% of Home Depot's sales, making it the company’s biggest. Indoor garden is not far behind and traditionally runs neck-and-neck with paint. To give you an idea of Home Depot’s size, it sells more paint than Sherwin-Williams Co. (SHW) does, a company that does almost nothing but.
A Healthy Balance Sheet, Too
Among the attributes that make Home Depot an attractive investment is an uncommon amount of treasury stock on its balance sheet. A large stock buyback program adopted in 2013 (and expanded in 2019) had a predictable effect on the company’s price, sending it to pronounced all-time highs through 2018. In fact, although the stock is off record levels, it appreciated more than 500% from Feb. 2010 to Feb. 2020.
The amount of Home Depot's announced stock buyback plan in 2019, which is expected to reduce shares outstanding by 7% and comes after a 35% reduction in shares outstanding since 2010.
It’s been a good time to be a Home Depot shareholder, not only through appreciation but also through increasing dividends. Dividends have only increased, never fallen, over the years and reached $5.44 per share in 2019, up from less than 25 cents per share 10 years earlier.
The Bottom Line
A company that sells tangible products that make a legitimate positive difference in people’s lives? And turns huge profits while doing it? Home Depot is capitalism at its most effective, moving assets from lower-valued to higher-valued uses and employing hundreds of thousands of people along the way. As long as people want to maintain and beautify their surroundings, Home Depot will continue to accommodate them.