Home Depot is a U.S.-listed retailer of home improvement products. In 2022, its retail operations comprised 2,322 stores, where 2,007 are located in the U.S. As for its remaining 315 stores, 182 are in Canada and 133 are in Mexico. Typically, a Home Depot store retails around 30,000-40,000 items under 3 key categories. They are:
In this article, I’ll cover its long-term financial results and valuation. Hence, here are 7 things to know about Home Depot before you invest. They are as follows:
1. Home Depot Attained a 10-Year CAGR of 7.7% in Revenue.
Home Depot has increased its retail network by opening 66 new stores over the past 10 years. Its number of stores grew from 2,256 in 2012 to 2,322 in 2022. In this period, Home Depot had recorded an increase in customer’s transactions & average ticket (sales dollar per customer). They had contributed to its growth in total revenues, up from US$ 74.8 billion in 2012 to US$ 157.4 billion in 2022.
Source: Home Depot’s Annual Reports
2. Home Depot’s Net Income Grew at a 10-Year CAGR of 14.2%.
Home Depot’s net income growth was faster than its revenue growth in the last 10 years. This is attributed to:
- Stable gross margins at 33%-35%.
- Improved operating margins as its selling, distribution & administration (SDA) costs had grown at a slower rate than its revenues.
Net profit margins (NPM) had improved from 6% in 2012 to 10% levels attained in 2018-2022. As a result, Home Depot had grown its net income from US$ 4.54 billion in 2012 to US$ 17.11 billion in 2022.
Source: Home Depot’s Annual Reports
Calculated from Home Depot’s Financial Data
3. Its Cash Conversion Cycle Averages at 40.6 Days.
In 2013-2022, Home Depot had averaged:
- Debtor Days of 7.3 days as most of its revenues are “cash-sales”.
- Inventory Days of 75.1 days. It means that Home Depot could sell off its inventories after receiving it in more or less 2½ months.
- Creditor Days of 41.8 days. It means that Home Depot would settle bills and invoices issued to them in 41.8 days upon receiving them.
Thus, its cash conversion cycle averages around 40.6 days in the 10-year period. The lower and more stable a company’s cash conversion cycle is, the more cash efficient a company is. A company that is cash efficient often has more freedom to use its cash flow / holdings to reinvest and/or benefit its shareholders.
4. Home Depot has 2x in Operating Cash Flows in 10 Years.
In the past 10 years, Home Depot has generated US$ 123.81 billion in operating cash flows and raised US$ 29.76 billion in net long-term debt. Of which, it spent as much as:
- US$ 74.01 billion in net share buybacks.
- US$ 47.31 billion in dividend payments to shareholders.
- US$ 21.12 billion in net capital expenditures (CAPEX).
Source: Home Depot’s Annual Reports
5. Home Depot Could Settle its Long-Term Debt in 3 Years.
As of 29 January 2023, Home Depot has US$ 43.19 billion in long-term debt. On average, Home Depot had generated US$ 14.80 billion in operating cash flows a year in the last 6 years (2017-2022). As such, Home Depot has the ability to pay off all of its long-term debt in around 3 years if it chooses to do so.
Years to Settle Long-Term Debt
= Long-Term Debt / Annual Operating Cash Flows
= US$ 43.19 billion / US$ 14.80 billion
= 2.92 years.
6. Initial Dividend Yields Maintained at 2% per annum.
This is despite a continuous growth in its dividends per share (DPS).
Source: Home Depot’s Annual Reports
Calculated from Microsoft’s Financial Data; Stock Price from Google Finance
On 4 May 2023, Home Depot’s stock price was US$ 293.08. Based on its latest 12 months DPS of US$ 7.60, its current dividend yield is 2.59%. Do note: such dividends are subjected to 30% withholding tax on dividends and hence, its net dividend yield would be lower than 2.59%.
Formula:
= (DPS / Stock Price) x 100%
= (US$ 7.60 / US$ 293.08) x 100%
= 2.59%
7. Home Depot’s P/E Ratio Averages 22.0 in 2013-2022.
P/E Ratio had ranged 18-25 in 2013-2022 despite a rise in its stock price. Hence, it shows that its stock price grew at a rate close to its net income growth in that 10-year period.
Calculated from Home Depot’s Financial Data; Stock Price from Google Finance
Conclusion:
Overall, Home Depot had attained growth in sales transactions & average ticket (sales dollar per customer) in the period. With stable margins, Home Depot had grown its net income and had generated US$ 10+ billion in operating cash flows on a per annum basis since 2017. As an investor, the key factor to invest lies in:
- Its current valuation.
- Its fundamentals + valuation in comparison to its competitors.
- Own investment plan.
