The Home Depot, Inc. (HD): A Highly Profitable and Fast Growing Home Improvement Retailer

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The housing recovery is now on the way. According to S&P/Case-Shiller Home Price Indices, all three composites, including the National Index and the 10- and 20-City Composites, experienced double-digit annual growth, which were the highest annual returns since 2006. Investors might wonder what stock to buy to surf the increasing trend of the housing boom.

Recently, two Fool analysts, David Meier and John Reeves, recommended one stock that they thought would be a good candidate for the upward housing trend. It is Tile Shop Hldgs, Inc. (NASDAQ:TTS). Since the beginning of the year, Tile Shop has risen as much as 50% on the market. Is Tile Shop a good buy now? Let’s find out.

The highest comparable store sales growth

Tile Shop Hldgs, Inc. (NASDAQ:TTS) is considered a specialty retailer of more than 4,500 ceramic, porcelain and stainless steel manufactured tiles products, operating around 70 stores in 22 states in the U.S. Its typical store has around 23,000 square feet, with substantial portions of retail store space dedicating to showrooms, including samples of its products and more than 60 various bathroom, kitchens vignettes. Most of its revenue, around 53% of the total 2012 revenue, was from stone products. Ceramic products ranked second, accounting for 30% of the total sales while 17% of the total sales were setting and maintenance products.

The Home Depot, Inc. (NYSE:HD)

What makes me interested is its consistently high same stores sales growth in the past three years. In 2012, its same store sales increased by as much as 7.1% with an operating margin of 18.8%. Its same store sales growth was much higher than its peers, including The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW). The Home Depot, Inc. (NYSE:HD) experienced an around 4.6% increase in its comparable store sales while Lowe’s had the lowest comparable sales growth, at only 1.4%. However, Tile Shop Hldgs, Inc. (NASDAQ:TTS) produced a loss of more than $46.8 million in 2012 compared to the consistent positive profit in the period of 2008-2011. The loss in 2012 was due to $82 million in the change in value of warrants.

… And most profitable with high insider ownership

According to those two Fool analysts, they were excited about Tile Shop because of its potential to increase its store base significantly, the high profitability and the company’s competitive advantage. In 2012, Tile Shop generated around $50.6 million in its adjusted EBITDA with an adjusted EBITDA margin of 27.7%. Tile Shop seems to be the most profitable with the highest adjusted EBITDA margin. While The Home Depot, Inc. (NYSE:HD) delivered only 12.6% in its adjusted EBITDA margin, the adjusted EBITDA margin of Lowe’s was the lowest of the three, at only 10.4%.

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