With 2,345 stores in total and trailing-12-month sales of $155 billion, Home Depot (HD 1.05%) is the clear leader in the home improvement industry. Its shares have been a huge winner, producing an unbelievable total return of 211,200% in the past four decades.
The business has been dealing with a recent slowdown, though, despite its position in the market. So, should you invest $1,000 in this top retail stock right now and hold for 10 years? Here's what investors need to know before making a decision.
Latest challenges
In fiscal 2020 and fiscal 2021, Home Depot was able to report strong double-digit revenue growth, which was substantially above its long-term trend. Credit can be given to the COVID-19 pandemic, which brought low interest rates and saw households flush with cash that put more emphasis on renovation projects. Home Depot was a beneficiary.
Things calmed down quite a bit since that demand surge. Consumers have been dealing with higher interest rates and inflationary pressures, so they haven't been inclined to tackle expensive home upgrades as much. This explains the 3.2% same-store sales decline Home Depot posted in fiscal 2023, with executives expecting a 2.5% drop for fiscal 2024.
This can certainly cause investors to worry about Home Depot and its sensitivity to macro factors. However, the company is still in a favorable position, something that's evident in the bigger picture.
Industry winner
The home improvement industry is absolutely massive, with management putting an annual sales figure for the market at about $1 trillion. Even though Home Depot is the largest player, it only commands about 15% share. This gives it tremendous runway to keep taking share from smaller rivals.
Home Depot has durable competitive advantages that should allow it to keep winning over the long term. The brand recognition in the industry is second to none. And there are definitely scale-related benefits, like being able to invest heavily in supply chain capabilities to ensure wide product assortment, as well as improving the omnichannel setup so that customers can order items in ways most convenient for them.
Positive industry factors also play to Home Depot's benefit. The aging housing supply, coupled with an ongoing housing inventory shortage, both provide a favorable backdrop for renovation demand over the long term. Also add in the fact that housing prices in the U.S. have climbed at a rapid clip over the past five years, and it's clear there's a lot of untapped home equity that can be utilized to tackle projects.
Valuation and capital returns
Investors can't ignore the price the market is asking them to pay. As of this writing, Home Depot shares trade at a price-to-earnings (P/E) ratio of 27.9. The stock has rarely been more expensive in the past decade, indicating improving market sentiment toward the business. The current P/E multiple represents a premium to the overall S&P 500.
This valuation isn't cheap. However, I can certainly understand why long-term investors might still consider buying the industry leader. Despite the latest headwinds, Home Depot's revenue and net income should be higher five or 10 years from now. Competitive strengths and industry tailwinds are also positive factors to keep in mind.
Investors will also appreciate Home Depot's capital returns. Through the first three quarters of fiscal 2024, the company paid $6.7 billion in dividends. And over the last three years, it has repurchased enough outstanding stock to reduce the diluted share count by 6%.
Returning lots of cash back to shareholders might be enough to overcome the rich valuation, which might make Home Depot a smart purchase for your portfolio today.
