The Home Depot, Inc. (NYSE:HD), the largest home improvement retailer in the country, has been a favorite with the investors. Its stock price has grown by over 197% since July 2010, defying the plunge in residential housing construction and the overall economic weakness. Presently, The Home Depot, Inc. (NYSE:HD)’s strong presence in key housing markets like California and Florida and its growth strategies positions it very well for the housing recovery that is underway.
House building recovery
Americans have finally started buying homes. It is true that interest rates are rising but they have not yet increased enough to deter home buyers. In fact, the increase is encouraging home buyers to lock in current interest rates before they climb further.
The inventory of homes up for resale is also below the median line. The Home Depot, Inc. (NYSE:HD) estimated the national inventory to be around four to four-and-a-half months compared to the six months that’s considered normal. This is pushing up property prices and again urging potential buyers to buy their homes before prices increase further.
Both new construction and re-sales are revenue drivers for The Home Depot, Inc. (NYSE:HD). The former triggers the sale of goods like paint, lumber, furniture, and appliances, while the latter fuels the demand for home improvement products. People often repair their houses before offering them for sale, and buyers typically customize houses once they have moved in. The Home Depot, Inc. (NYSE:HD) estimates that each sale of used home creates a revenue opportunity of approximately $3,500.
Presence in strong markets
The Home Depot, Inc. (NYSE:HD)’s presence in markets such as California and Florida is proving to be advantageous for the company. In the first quarter, it was able to avoid some of the weather woes that dented sales of most retailers due to its presence in these markets where the weather was better.
California and Florida are also the hub of current construction activities. California has one of the lowest inventories of houses up for sale in the country with an estimated three-and-a-half months of supply. Meritage Homes Corp (NYSE:MTH), a single family home builder that is active in this market, saw a 68% uptick in new orders during the first quarter and a 27% increase in average selling price. In Florida, it saw a 58% increase in new orders and a 30% increase in average selling price.
Meritage Homes Corp (NYSE:MTH), which builds in the West and Southwest, saw an 89% increase in its order backlog at the end of the first quarter. The company expects these trends to continue and is looking at an average home closing revenue increase of 40%-45% throughout the remaining quarters of the fiscal year. Home Depot has around 232 stores in California and about 153 in Florida and this high density is a big advantage in current times.
Home Depot has improved its supply-side equations and increased its product assortment in key categories like appliances and paint. It is showcasing a complete product range in appliances which was earlier not there due to lack of big vendors and the effect is already visible in sales numbers. Meanwhile, in the core paint business, Home Depot’s innovations are opening up new opportunities, especially with its professional customers.