Home Depot (HD)

A new year, a new stock report. Today we are going to stick with one of the main themes of last year. That being that the pandemic will eventually come to a close but some things will never be the same again. Especially the world of working from home.

As we have pointed out many times over, 2020 was an eye-opener for many employers. In the past companies had been hesitant to let their employees work from home for fears of a reduction in productivity. But after being forced to keep workers out of co-habitational offices during economic shutdowns caused by the virus they found the opposite actually occurred. Productivity levels increased. So not only did they get more from their workers but they can now also save on costs by not having to run large offices. The way we work has changed forever.

This means more people working from home. More hours available in the day thanks to no commuting. And hundreds of thousands of homes requiring upgrades and renovations. And this is where today’s stock report focus – The Home Depot – comes in. If you haven’t heard of Home Depot before think the US version of Bunnings, minus the sausage sizzle and the catchy jingle. They are the largest home improvement retailer in the world, supplying tools and construction products, building materials, and garden supplies and plants, amongst its 35,000 products sold instore. It’s online business, on top of this, sells more than one million products.

Home Depot has 90 distribution centres servicing more than 2200 stores in the US, 182 stores in Canada, and a further 120 stores in Mexico. It employs more than 400,000 people worldwide, whom they refer to as “orange-blooded associates”. It is currently ranked number 26 in the Fortune 500 rankings of the largest US companies by total revenue, which in the last quarter came in at $33.54 billion.

The home improvements industry has more than just the new “work-from-home” phenomenon going for it. After a decade of homeownership declining in the US during the subprime mortgage debacle and the resulting financial crisis, homeownership started increasing again in 2016 and hasn’t stopped since. Record low-interest rates have been a big contributor to this, and it is predicted that rates at these levels are here to stay for many years to come. Homeowners are much more likely to spend money on home repairs than are renters.

The business is also, partially at least, Amazon proof. Homebuilding products are often objects that the consumer wants to see and touch, something that requires a bricks and mortar retail experience. And once the buyer is in the store to purchase lumber or flooring, for example, they are then on-site to buy the nails, glue or whatever else they may need for the job. It’s a business that the likes of Amazon can’t compete with.

Despite this Home Depot are working hard on their online presence, investing billions of dollars into harnessing the power of artificial intelligence and data science to create the perfect selling environment for its website customers. If a potential buyer searches for a tap fitting they’ll also be offered a shower head, towel bar, towel ring and other coordinated items in the same style or brand. They describe the technique as “enabling a personalised experience”, and it’s one that is becoming prevalent amongst most online sites these days. Mobile app users can take a photo of a machine part, say from a fridge or washing machine, and the app will identify the item and advise in which aisle you can locate it in their store.

To coincide with this online service, Home Depot have added faster home delivery services by expanding their fulfilment centres, established curbside pickups, and built pick-up lockers for online orders. It was a strategy they first instigated as a multi-year investment back in 2017 and it has paid massive dividends as the pandemic played havoc in 2020. Online sales in the last year more than doubled, while 60% of online orders were picked up instore. Its home delivery service has seen triple-digit growth through 2020.

In its latest earnings period, Home Depot net income was up 24% year on year to $3.43 billion from $2.77 billion. Revenue rose by 23% from $27.22 billion to $33.54 billion. US same-store sales increased by 24.6% in the quarter. Digital sales were up by 80% year over year. Management was reluctant to offer guidance for the final quarter of the year, however, maintained that “it was continuing to benefit from the stay-at-home spending patterns through the beginning of November”. The dividend was kept at $1.50 per share which makes the dividend yield around 2.3%, not massive but better than the S&P500 average of 1.6%. It is next set to report earnings on the 23rd of February.

Home Depot was an above-average performer for the Dow in 2020, rising by just over 21%, while the index made just 7.3%. Despite heavy falls in the stock market-wide selloff in February and March, the share price fought back beautifully once investors realised the benefits such a business would get from the lockdowns. Luckily hardware providers were considered essential services. At $271.23 per share, the p/e sits around the 23 mark which is on the high side but one that I think it can cover as the year progresses. Home Depot should prove to be a strong portfolio performer in the years to come.