The brick and mortar industry has struggled mightily in the
recent past, due to worries about online competition from Amazon and others.
Some pockets of the vast brick and mortar industry continue to perform very
well, though, which includes the home improvement segment.
The market leader in this industry, Home
Depot (HD), is a wide-moat company with excellent fundamentals. The
company has performed solidly operationally during early 2019, and the expected
returns for Home Depot stock are compelling over the next several years. For
these reasons, Home Depot stock is one of our favorite long-term
retail plays.
Business Overview
Home Depot, which operates more than 2000 stores across
North America, has been generating solid growth rates in the past. One key
factor for its rising revenues are growing comparable store sales. These do not
only provide the majority of Home Depot’s revenue growth, they also allow the
company to continually expand its margins, thanks to the positive impact of
operating leverage – fixed costs per store remain unchanged, while the rising
revenue generation at its locations allows for growing gross profits, which
results in growing operating margins.
Home Depot’s first quarter earnings results were announced
in May 2019. The company generated revenues of $26 billion, which was 6% more than
the revenues that Home Depot generated during the previous year’s first
quarter. This revenue growth was positively impacted by comparable store sales
improvements, as comps sales rose by 2.5% year over year. The company managed
to grow its earnings-per-share to $2.27, up by 9% year over year, with share
repurchases playing a major role for rising profits on a per-share level.
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