As an investor, you will want to invest in companies that can provide the greatest return while preserving a margin of safety against competitors who threaten the bottom line of your business. Home improvement retailer The Home Depot, Inc. (NYSE:HD) commands a leadership presence in the sector and leaves competitors in the dust. Looking at the company from the perspective of strengths, weaknesses, opportunities, and threats will show you why this company belongs in your portfolio.
Preparedness – As a business owner, you want your business to be in a position to take advantage of any opportunity that may come along. For example, according to Home Depot’s latest earnings call, some investments were made to make sure that the professional customer will get taken care of by improving speed and efficiency. This served as a catalyst for growth in the professional customer segment, exceeding the growth for the individual consumer this past quarter.
Moreover, The Home Depot, Inc. (NYSE:HD) even has a name for its approach called the “three-legged stool” which means it focuses on “customer service,” “product authority,” or knowledge, and “disciplined capital allocation and productivity and efficiency.” Home Depot’s explicit desire to reach the customer through multiple channels such as in store pick up, allowing PayPal payments, and acquisitions of companies that specialize in remodeling, demonstrates this company’s commitment to those principles.
In contrast, rival retailer Lowe’s Companies, Inc. (NYSE:LOW) remains bogged down in an inventory reset process that continues to disrupt its operations and serves as a drag on the company’s ability to take full advantage of the housing recovery. You may say that Lowe’s will eventually get its inventory up to snuff; however, while Lowe’s deals with this reset, Home Depot can focus on solidifying its leadership position unabated.
Ubiquity – In addition to preparedness, The Home Depot, Inc. (NYSE:HD) possesses greater ubiquity giving it greater purchasing power. Greater purchasing power translates into lower cost per unit allowing the company to profitably undercut its competition and/or boost margins.
International presence – The Home Depot, Inc. (NYSE:HD) also possesses a greater presence outside of the United States giving it a jumpstart over Lowe’s Companies, Inc. (NYSE:LOW) in that arena. Home Depot operated 100 and 180 stores in Mexico and Canada respectively. Lowe’s, on the other hand, operated just 5 and 34 stores in Mexico and Canada respectively.
Fundamentals – Not surprisingly, all of Home Depot’s strengths add up to fundamental superiority over Lowe’s.
In its most recent quarter, The Home Depot, Inc. (NYSE:HD) experienced an increase in revenue and free cash flow of 7% a piece. Cash and investments represent 26% of Home Depot’s stockholder’s equity. It paid out 24% of its free cash flow in dividends. Home Depot currently sports a 2% dividend yield not bad for a business in a rebounding sector of the economy.
Lowe’s by contrast, experienced a revenue decline of 49 basis points. It’s free cash flow declined 17% in its most recent quarter. Cash and investments calculates to 11% of stockholder’s equity. Lowe’s only paid out 10% of its free cash flow in dividends. As of this writing, Lowe’s dividend yield calculates to 1.75%.
Lumber Liquidators Holdings Inc (NYSE:LL) a retailer specializing in hardwood flooring sported better fundamentals with revenue and free cash flow growing 23% and 18% respectively. Lumber Liquidator’s (NYSE:LL) cash to stockholder’s equity calculates to 29%. However, its 290 stores pale in comparison to Home Depot’s 2,300 stores.
China – According to The Home Depot, Inc. (NYSE:HD)’s latest shareholder meeting, its CEO Frank Blake said his lack of focus on the Chinese customer caused the company to languish in the region resulting in its pullout from the region.