July 17, 2024


Body and Interior

Home Depot Is Doing an Excellent Job Capturing This $900 Billion Market

The coronavirus pandemic was a boon to the do-it-yourself segment of the home improvement market as folks took on a multitude of projects, including painting rooms, adding a home office, and adding outdoor entertainment spaces.

Indeed, in 2019, the home improvement industry was estimated to be worth $650 billion. Now, it is projected to generate $900 billion in sales annually. So, primarily because of the effects of the pandemic, the market grew by $250 billion. 

Home Depot (HD -3.64%) is capturing a meaningful share of this massive and growing market. Let’s take a closer look at how it’s succeeding in doing so. 

Home Depot Is Doing an Excellent Job Capturing This 0 Billion Market

Image source; Getty Images.

Home Depot is the largest home improvement retailer in the world

Interestingly, Home Depot’s total sales for its fiscal 2021, which ended on Jan. 30, were $151 billion. That was 14.4% higher than the year before. Several macroeconomic factors fueled consumer spending on home improvement. Fiscal stimulus payments to households, rising home values, and limited inventories of homes for sale spurred homeowners to improve their living spaces.

HD Revenue (Annual) Chart

HD, LOW Revenue (Annual) data by YCharts.

If you take the $150 billion sales figure and divide it by the $900 billion market size, Home Depot’s market share is an estimated 17%. Home Depot is the world’s largest home improvement retailer and boasts the most significant market share. Lowe’s Companies (LOW -3.61%), its formidable rival, achieved sales of $96 billion in fiscal 2021. A substantial sum, to be sure, but considerably behind Home Depot.

What’s more, Home Depot has set a new target of reaching $200 billion in sales. Of course, that may take some years to achieve, but it highlights that management sees growth opportunities ahead. For fiscal 2022, Home Depot forecasts its revenue will remain relatively flat as economies reopen and folks spend less time at home. Home Depot has grown revenue at a compound annual rate of 7.9% in the last decade. The long-run growth rate is likely to be closer to that of the previous decade rather than what has happened since the outbreak.

The market likes a winner 

HD Operating Margin (TTM) Chart

HD, LOW Operating Margin (TTM) data by YCharts.

Home Depot’s superior market share leads to a superior operating profit margin. The company has outperformed Lowe’s, its biggest competitor, in this metric over the last decade. That’s evidence that the home improvement industry has economies of scale. In other words, profit margins grow with sales. One reason could be that Home Depot pays lower prices for inventory because it buys in bigger batch sizes. 

HD Price to Free Cash Flow Chart

HD Price to Free Cash Flow data by YCharts.

Unsurprisingly, Home Depot’s stock is trading more expensively than Lowe’s due to the better market share and operating profit margin. Regardless of how the home improvement market evolves as the world progresses against COVID-19, Home Depot is likely to perform better than Lowe’s until the latter can improve operating performance.