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. 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 $80 billion a year in revenue via 2,300 stores in the United States, Puerto Rico, the U.S. Virgin Islands, Guam, Canada and Mexico. (For related reading, see: How We'll All Be Amazon.com Customers Eventually.)
Always Be Selling
Unlike most other corporations of its size (market capitalization of $124 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. The company is brazen about this, too:
A new initiative in fiscal 2013 called Project Simple [aims] to reduce unnecessary store reports, store-based emails and meetings that kept store management from selling.
Growing Home Depot, even beyond its current mammoth size, is thus pretty straightforward. It’s still a lot of work, but it’s straightforward. (For more, see: 18 Do-it-Yourself Projects to Boost Home Value.)
Waiting for Another Housing Boom
First, find the few remaining locales to set up shop in. And we might have reached the saturation point already, at least in North America and outlying areas. From 2008 to 2012 the company closed several dozen underperforming stores. It’s added a net 14 stores over the last year, a much slower growth rate than before. Granted, giant retailers can only grow so much larger. Home Depot also ended its brief foray into China, and it appears that cutting off the finger indeed saved the hand. Comparable-store sales rose 7.5% in the United States year-over-year, in step with an economy that’s finally showing lasting signs of recovery. If there’s one corporation in existence that has a huge incentive to see the end of any housing market slowdown, you can well understand that it’d be Home Depot. (For related reading, see: How Wal-Mart Makes Its Money.)
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¢ a pound, too. Which means that the only real room for large improvement is in creating efficiencies. Reduce unused inventory, accelerate delivery, etc. 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 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. (For some stock analysis, see: Home Depot Moves from Good to Great.)
Aisles Upon Aisles
Home Depot might not have individually reporting business segments, but it does have departments. Literal departments, as in Roofing and Shingles; 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. Of the $79 billion in merchandise that Home Depot sold last year, slightly more than one-tenth of that was in the kitchen department, making it the company’s biggest. Indoor garden was barely a percentage point behind: it 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. (For more, see: Unwrapping the Home-Improvement Big Boxes.)
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 had a predictable effect on the company’s price, sending it to pronounced all-time highs in 2014. In fact, the price has almost quadrupled over the past five years. It’s been a good time to be a Home Depot shareholder, not only through appreciation, but also through a recent 21% dividend hike. Dividends have only increased, never fallen, throughout their 14-year existence. (For more company analysis, see: Inside Intel: A Look at the Mega Chipmaker.)
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. (For more company analysis, see: Pepsico's $66B Global Drink and Snack Empire.)