Morningstar | Strong Demand Offset by Ongoing Spending on Business Improvement at Home Depot, Pressuring Profit
Home Depot is the world's largest home improvement retailer, eclipsing $108 billion in revenue in 2018. It continues to benefit from a healthy housing market and improvements in its merchandising and distribution network. The firm earns a wide economic moat rating because of its economies of scale and brand equity. While Home Depot has produced strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets of our long-term margin expansion assumptions. Its distribution network will help the company achieve these goals and allow all channels of the organization, including vendors, corporate, and distribution centers, to communicate with each other. The success of ongoing initiatives should offer structurally higher margins than prior peak levels.Home Depot should capture rising top-line growth, thanks to its focus on profitability of its core business, while diving deeper into the pro business cross-selling offerings from Interline Brands. Other catalysts for top-line growth could come from the firm’s efficient supply chain, improved merchandising technology, and penetration of adjacent customer product segments (like commercial). Expansion of both new (like textiles from the Company Store acquisition) and existing (appliances could grow as peers like Sears continue to close doors) categories could also drive demand. Operational changes could strengthen the firm's competitive position, even if existing-home sales and turnover decelerate modestly. Home Depot has made its distribution channel very efficient in recent years, helped by its rapid distribution centers, which it is committed to further improving (focusing on flatbed and direct fulfillment center expansion ahead). The commitment to better merchandising and cost controls has led the firm to achieve operating margins and adjusted returns on invested capital of 15% and 36%, respectively. Additionally, Home Depot's focus on improving the customer experience and cross-selling products in its maintenance, repair, and operations channel should support stable pricing and volatility in the sales base, helping achieve further operating margin lift.The Home Depot is a home improvement retailer. The company provides its customers an assortment of building materials, home improvement products, lawn and garden products, and decor products and provides a number of services, including home improvement installation services and tool and equipment rental. The company also maintains a network of distribution and fulfillment centers, as well as a number of e-commerce websites. The company provides a number of programs for its Professional Customers to meet their particular needs, and for its Do-It-Yourself and Do-It-For-Me customers, the company provides a number of installation services. The company also provides tool and equipment rentals for its customers.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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