1. The Home Depot, Inc. (NYSE: HD)
Number of Hedge Fund Holders: 68
Topping the list of 10 best furniture stocks to buy now is the Atlanta-based home improvement giant The Home Depot, Inc. (NYSE: HD). The company sells everything from furniture, lighting, small kitchen appliances, and gardening tools.
The Home Depot, Inc. (NYSE: HD) announced in June 2021 that it will roll out new “Rent Online, Pick-up In Store” technology to around 1,300 equipment rental facilities across the US. Shares of The Home Depot, Inc. (NYSE: HD) climbed 4% in the past month.
On August 6, Credit Suisse analyst Lavesh Hemnani maintained an Overweight rating on The Home Depot, Inc. (NYSE: HD) and increased the firm’s target to $330 per share from the previous $319, following solid Q1 results.
The company has a market cap of $349.56 billion. In the first quarter of 2021, The Home Depot, Inc. (NYSE: HD) reported an EPS of $3.86, beating estimates by $0.81. The company’s first-quarter revenue was $37.5 billion, an increase of 32.7% year over year and beating revenue estimates by $2.87 billion. The stock has gained 31% year to date, and shares increased 19% in the last twelve months.
By the end of the first quarter of 2021, 68 hedge funds followed by Insider Monkey held stakes in The Home Depot, Inc. (NYSE: HD) with a total value of $4.35 billion.
In its Q1 2021 investor letter, Ensemble Capital mentioned The Home Depot, Inc. (NYSE: HD) and shared insights about the company. Here is what the fund said:
“Notable contributors to the Fund’s returns this quarter (included) Home Depot. Home Depot (8.9% weight in the Fund) continued to benefit from a red-hot housing and home improvement market, delivering record financial performance in 2020. As a high return on invested capital business, any step-up in growth results in considerable shareholder value creation. While 2021 comparable sales may not yield impressive headline results, we believe several secular tailwinds are supporting continued housing investment, including millennials entering prime household formation/peak earnings years, relatively low-interest rates, and government policies.
Home Depot (8.9% weight in the Fund): The big orange sign of Home Depot is a familiar sight for homeowners across the country. Despite the rise of Amazon, Home Depot has generated outstanding results for shareholders during the rise of eCommerce, even as Home Depot’s end market in housing suffered the worst collapse in a century. Over the last fifteen years, a period which began at the peak of the housing bubble, Home Depot’s stock has generated annual returns of 17% a year, outperforming the S&P 500 by approximately 7% a year.
But while homeowners can attest to their continued shopping at Home Depot, they may not be aware that only about half the company is dedicated to serving to Do It Yourself, homeowners, with the other half acting as a key supplier to small contractors – which the company calls Pros – who depend on Home Depot as a mission-critical business partner.
While the company does not report on their contractor business separately from their homeowner business, they have regularly offered comments indicating that contractors make up just 4% of their customer base, but about 45% of revenue. Basic math implies that this means the average contractor customer spends about twenty times the amount that the average homeowner customer spends. In an industry where you want to drive high levels of sales per store, the contractor customer profile is super attractive. It is Home Depot’s focus on and success in serving contractors that have led to them generating about 30% more revenue per store than competitor Lowe’s which has far fewer professional contractor customers.
Therefore, we think about Home Depot as two different businesses built on top of a single operational platform that allows them to better leverage their cost structure. This has led the company to generate returns on invested capital of about 45%, putting their top tier of a high return on capital retailers.
Everyone likes growth, but one way to think about companies like Home Depot that generate high returns on invested capital is that these businesses can grow without needing to invest as much in their business to generate any given level of growth compared to companies with lower returns on capital. In the case of Home Depot, their success in growing the business without needing to invest that much to do so is well illustrated by the fact that over the last decade, the number of stores they operate has only increased by 2%, even while revenue has nearly doubled.
On the Pro side of their business, Home Depot is the first choice for small contractors who are not large enough to buy directly from distributors at the scale required to get discounted pricing. If you own a house and have had a contractor do some sort of work, you are familiar with the way that almost every job ends up needing some part or tool that the contractor does not have on hand. In this circumstance, the contractor wants to make as time-efficient of a trip as possible to go pick up the part and complete the job. Since the contractor passes along the cost of parts to the homeowner, it is the efficiency with which Home Depot can get them back to the job site and working, rather than the lowest possible price for the part, that drives the contractor’s shopping behavior. In fact, a number of contractors we’ve talked to describe driving past a Lowe’s to get to a further away Home Depot store because it is their preferred supplier.
Home Depot has also invested heavily in their online capabilities. Truly an “omnichannel” retailer that strives to be able to serve both Pro and Do It Yourself customers via in store shopping, online delivery, or curbside pickup, the company has been held up by Google’s Cloud services group as A CASE STUDY of a data driven retailer using modern data and analytics to drive results.
Of course, when competing with Amazon, having a strong eCommerce or Omnichannel strategy is just table stakes. But due to the nature of home improvement spending, where parts are often needed the same day and in many cases are heavy, bulky objects, the fact that well over 50% of Home Depot’s online orders are picked up in store, despite offering 2-day delivery to 90% of US households, speaks to the unique nature of this category and why we do not view Amazon as a meaningful threat.
While the company has been able to drive growth without building many new stores, they have indeed invested aggressively into three core areas. They’ve invested into their existing stores to keep them up to date and efficiently run. They’ve invested in technology, such as a mobile app that can locate a part in a given store and guide you directly to the aisle it is on. And importantly, they’ve invested in their supply chain, warehouses, and delivery capabilities to allow them to thrive in an omnichannel world. Unlike many retailers who still manage their online offering as a separate division, Home Depot operates as a single company, with a single supply chain, and simply offers different means for customers to shop their single set of inventory.
Their Pro Online investments have been of particular note, given it is with their Pro customers that their offering is most differentiated. The company talks about Pro Online as a “platform for Pros to build their business.” While Amazon, like most consumer facing online retailers, offers the same user interface for consumers and business customers, Home Depot recognizes that the needs of their Pro customers are fundamentally distinct from homeowners.
For instance, their Pro Online interface allows for the exporting of order history to Quickbooks, the accounting software used by most small contractors, and makes it easy to manage delivery options to a large number of active job sites. If you go into a typical consumer online shopping site and try to ship items to multiple addresses other than your own, you’ll quickly trigger a fraud alert. But while this behavior is atypical for consumers, it is standard behavior for Pro contractors who appreciate that Home Depot understands how they operate.
While Pro customers have gone from making up 30% of revenue a decade ago to 45% today, there is meaningful opportunity still ahead. According to the company, 70% of Pro customers never visit the dedicated Pro desk at the store. But when Home Depot is able to identify these contractor customers and engage with them at the Pro Desk or other Pro services, their annual spending quickly doubles on average.
While Home Depot has executed extremely well over the last decade, it did so in the context of a weak overall economy, the worst housing crash in a century, an existing base of homes that had more new homes (needing less home improvement work) than the historical average, and low or even negative equity restricting homeowners’ ability to finance home improvement projects. But we believe the housing end market is in the midst of a Great Reshuffling.
While Home Depot generated solid 5% annual revenue growth during the decade between the end of the housing crash and the beginning of the COVID pandemic, it is important to note that the Do It Yourself homeowner segment grew at about 3% a year, while the Pro segment serving contractors grew at 9% a year. We believe that the low growth of Do It Yourself sales was related to the depressed housing activity that characterized the last decade, but is now in the midst of reverting to more normalized activity levels. The faster growth in the contractor segment on the other hand was due to them taking material market share and building a better set of services for Pro customers. Thus, this segment grew nicely despite the low levels of housing activity and will benefit further from a reversion to more normalized home improvement activity.
As Americans emerge from the pandemic, they will be reevaluating their housing needs. Remote work options may cause more homeowners to consider moving, with home improvement projects being common in preparation for sale as well as when a new family first moves into a house. Many people who do not move will still plan to work from home with some regularity, driving demand to create office space in their house with associated remodeling expenditures.
Home Depot is firing on all cylinders. They did right by their employees during the pandemic, remaining open as an essential business, spending $2 billion in increased pay and bonuses, half of which they have decided to make permanent. While 2021 will face difficult comparisons to last year’s off the charts home improvement spending due to homeowners being stuck in their homes during a shelter in place, we think Home Depot has an extremely promising decade ahead.”
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