Seasonal exposure – In its most recent quarter, Home Depot experienced some negative comparable sales in its gardening line of products suggesting some of Home Depot’s sales depend on the timing of seasonal temperature changes.
Opportunities
Acquisitions – You can see other examples of The Home Depot, Inc. (NYSE:HD)’s focus on the customer through acquisitions of Measurecomp, a company that specializes in making complex measurements and US Home Systems Inc (NASDAQ:USHS) a company that helps you design cabinets and storage spaces.
These will go a long way in increasing consumer convenience when you need to make measurements for that complicated project and build or redesign kitchen and storage spaces with money made in this new economic recovery.
Threats
Competition – Lowe’s recently put in a “stalking horse” bid to purchase 60 stores of the now bankrupt Orchard Supply Hardware Stores Corp (NASDAQ:OSH). If successful, this will significantly boost its presence in the state of California, making it a more affective competitor against Home Depot there.
Moreover, Lowe’s may eventually roar into first place over the next few years once it gets past its inventory resets. Lowe’s intended purchase of Orchard Supply Hardware Stores Corp (NASDAQ:OSH) shows its desire to improve its strategic positioning.
The growth and increasing popularity of Lumber Liquidators Holdings Inc (NYSE:LL) will serve as a threat to Home Depot’s own flooring department. Lumber Liquidators focus on flooring will give it a specialized expertise in that area. You may argue that Home Depot’s big box format allows it to sell a greater variety and puts the company in a different league.
Housing reversal – In the chart below you can see that the housing recovery translated into market beating returns of 43%, 41%, and 130% for Home Depot, Lowe’s, and Lumber Liquidators respectively over the past year. P/E ratios of Home Depot and Lowe’s reside around 24 and 23 respectively. Lumber Liquidators P/E Ratio resides near an excessive 39 exceeding the S&P mean of 15. If housing sentiment was to suddenly reverse then the fundamentals of these companies would suffer and subsequently their stock price.
HD Total Return Price data by YCharts
Looking ahead
The Home Depot, Inc. (NYSE:HD)’s preparedness and focus on customer service will give the company an added boost during the housing recovery and solidify its position as a leader in home improvement retailing. As part owner of a business you will want it to reside in a comfortable position versus its competition. Home Depot definitely merits your research attention.
William Bias has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Lowe’s, and Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. William is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Should You Invest in This Home Improvement Leader? originally appeared on Fool.com and is written by William Bias.
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