Be it ever so humble, there's no place like home -- and when people have the kind of money that's flashing around the economy these days, a lot of homes are finding that humble doesn't exactly cut it anymore. So homes are being upgraded, homes are being bought, homes are being fixed, homes are being built, and by far the biggest beneficiary of all this has been, and will continue to be, Home Depot.
Home Depot is the world's largest home improvement retailer, with about 900 stores in the United States, Canada, Puerto Rico, and Chile and a new one going up every other day. If for some reason you aren't already familiar with the big-box company, start with this -- it has made for one of the best performing stocks over the last decade. One way of quickly seeing just how dominant Home Depot is as a company is to compare its stock performance over the last ten years to the three other retailers in the Now 50, Costco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COST)") else Response.Write("(Nasdaq: COST)") end if %>, Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> and Gap Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>. There's not much comparison actually, Home Depot blows them all away. In fact, I'm not sure if there's any major non-tech stock that has outperformed Home Depot over the last 10 years. Or 20 years. Since first going public in 1981, shares of Home Depot have moved up 250-fold.
The reason for that wonderful stock performance is that the obsession with customer service at Home Depot has translated into stellar and consistent sales and earnings growth. Check out these numbers for the last seven years. (Fiscal year ends in January.)
Year Sales Net Income Return on Equity
(billions) (millions) (percent)
1992 5.1 249 14.7
1993 7.1 362 15.8
1994 9.2 457 16.3
1995 12.5 604 17.6
1996 15.5 731 14.7
1997 19.5 937 15.7
1998 24.1 1160 16.3
1999 30.2 1614 18.5
TTM 36.5 2159 18.3
Phenomenal -- and it shows no signs of slowing: Analysts expect long-term annual growth of 23.25%, which actually would be a little bit of a slowdown from what has been achieved of late. Importantly this sales and earnings growth has been funded fairly conservatively. There were 1.90 billion shares outstanding at the end of FY92, and there were 2.30 billion shares outstanding at the beginning of this year; this company isn't casually tossing out options or annually tossing another secondary stock offering at the market. Debt has also been conservative, and moving towards non-existent which is stunning for a company growing this fast. Whereas the debt/equity ratio was 0.37 in January of 1993, it was down to 0.18 by January of 1998, and stands at approximately 0.06 today. Plenty of companies can grow sales and earnings for a while, and do so in a way that makes it seem like they are exciting "growth" companies. But when they are really achieving this growth by taking on a lot of debt, or issuing a lot of additional shares, that's the kind of growth that almost always ends up being a value destroyer. (See Rick's and my Duel over Dave & Buster's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAB)") else Response.Write("(NYSE: DAB)") end if %>, and what has happened to the share price of DAB since.)
The efficiency of Home Depot is improving, and margins, after many years of remarkable stability, have noticeably ticked up. Between FY1992 and FY1998, Home Depot's gross margins were never lower than 28.5%, nor higher than 29.2%. Over the last 12 months, however, gross margins have moved up to 30.4%. That seemingly little 1.2% to 1.9%, multiplied by over $36 billion in annual sales, makes for a lot more income dropping down to the bottom line. That is precisely the kind of company that an investor will be most pleased with -- one improving on the top, middle, and bottom lines of both the income statement and the balance sheet.
And the future's looking very orange. So many of Home Depot's rivals have crumpled over the past couple of years that competition is beginning to become a lip-service concept more than a reality. Consider the following information, taken from the January 24, 2000 Forbes cover article on Home Depot:
Ernst Home Centers -- peak sales of $572 million in 1995; liquidated in 1996
Handy Andy -- peak sales of $625 million in 1994: liquidated in 1996
Grossman's -- peak sales of $850 million in 1993; filed for bankruptcy in 1997
Rickel Home Centers -- peak sales of $670 million in 1994; liquidated in 1998
Hechinger's -- peak sales of $5.4 billion in 1994; liquidating today
And there are several other major chains which are in the process of failing or moving out of competition with Home Depot, including Homebase and Payless Cashways. All of which means Home Depot will be seeing more business than ever, and that's saying something -- same-store sales were up 11% in the most recent quarter. Not only is Home Depot planning to double the number of its stores in the United States and Canada within four years (currently, Home Depot only has 9% of the $400 billion North American market), but the company has yet to take on most of the world, which it's planning to do.
Also, Home Depot is soon to get seriously onto the Web. The company plans to offer any product through its website for either in-store pick up, same-day or next-day delivery, or home delivery. This is a major undertaking, set to be fully integrated with its stores by the middle of this year. While the early going could be bumpy, if any company can pull it off, it's Home Depot, which is no slacker when it comes to computer technology -- the company invests $200 million a year in technology.
I believe that debating over Home Depot as an investment at this moment comes down to exactly one thing -- do you buy into Rule Maker Step 7: Quality vs. Valuation, which states, "Seek quality first, quality second, quality third, fourth, and fifth... then somewhere down around your 85th, or 90th, or 103rd place should sit your concern about the present price of those shares of stock." I just know Rick is going to be arguing valuation in his half -- he has to. (Or will he -- oh please, oh please -- go with the interest rate bugaboo?) Once I see what he has to say, I'll address why he's got the valuation argument backwards.
This Week's Duel
Related Links