The Home Depot, Inc. (HD) is among a number of companies that happened to be ideally placed for a pandemic very few people saw coming. With people stuck in their homes, unable to travel or spend on experiences outside of their properties, the urge to upgrade the living space became undeniable. This rise in do-it-yourself (DIY) projects and professional home renovations has helped power Home Depot's earnings in a rough year for the market. We'll look at how Home Depot got lucky and what lies ahead.
- Home Depot has done well in 2020, posting consecutive quarters with 20% year-over-year revenue increases.
- The pandemic has been key to Home Depot's success, as more people are taking on DIY projects and professional renovations while stuck at home.
- Home Depot is trying to position itself for post-pandemic success by reacquiring HD supply to serve industrial customers as the economy returns to normal.
Home Depot's 2020 Has Been Great
Home Depot has been posting year-over-year revenue increases of over 20% for consecutive quarters. There are a few obvious factors behind the strength Home Depot is enjoying. People spending more time at home are naturally spending more money on their homes in the form of repairs and upgrades. Home Depot and Lowe's Companies, Inc. (LOW), with their big box supply chains, have been able to keep the shelves better stocked than smaller rivals throughout this pandemic. This has translated to larger market shares for both throughout the pandemic.
This led to a beat by Home Depot in the form of a third quarter net profit of $3.18 per share – $3.43 billion overall – which exceeded consensus estimates but not by the same magnitude as the second quarter surprise. The market soured briefly on all retailers, including Home Depot, in March. Since March, however, Home Depot has been one of the pandemic darlings. Shares in the home improvement retailer are now up over 20% this year and a staggering 70% from March 2020 lows.
What's Ahead for Home Depot?
The vaccine announcements have exposed a curious assumption in the market that stocks that have performed well during the pandemic will suffer post-pandemic. We saw this in drops in tech stocks after the Pfizer Inc. (PFE) announcement, for example. So it is natural for investors to wonder whether Home Depot is in for a similar post-pandemic slump. First, it is important to remember that Home Depot is not a tech stock. Even though it is up 20% on the year, its P/E ratio is in the low 20s, not over 500 like another pandemic darling, Zoom Video Communications, Inc. (ZM).
More importantly, Home Depot is working to position itself better in a post-pandemic economy. The company announced that it was reacquiring HD Supply, a wholesaler distributor of electrical, plumbing, and janitorial supplies that it sold off in 2007. In the time the two companies have spent apart, both have refocused their businesses. HD Supply sold off its construction unit, effectively halving its size and focusing it on distribution. The hope is that the second marriage will find more synergies now that the entities are clearer on their roles. Either way, it is an $8 billion signal that Home Depot is furthering its inroads into serving industrial clients in addition to DIY-ers.
The Bottom Line
Home Depot has enjoyed the pandemic far more than investors anticipated back in March. People stuck at home and looking for a home-improvement retailer with stock on the shelves helped to drive significant revenue growth over the past two quarters.
This pandemic resilience has been rewarded by the market, but it also makes Home Depot vulnerable to a post-pandemic slump. In response, Home Depot is working to position itself for a strong 2021 by diversifying further to serve industrial clients through its acquisition of HD supply. If there is a post-pandemic boom coming, Home Depot's strong performance has a decent chance of continuing.