Note: Home Depot FY'22 ended on January 29, 2023.
Home Depot EBITDA Margin: The retailer saw a decline in margins to close to 17% in 2020 from 18% in 2019, due to higher costs accrued due to the pandemic. However, it was able to improve this figure back to 18% in 2021, on the back of streamlining its operations and supply chain and cutting down heavily on its SG&A expenses. Margins were also aided due to the substantial growth in same-store sales. However, the margins remained flat in FY'22. Going forward, we expect the margins to decline modestly in FY'23, due to declining home prices and slowing comparable sales growth. Thereafter the margins are expected to grow slightly and reach FY'22 levels by the end of our forecast period. However, if the housing market and home improvement industry continues to strengthen, and outpace previously forecast growth estimates, and comps improve better than expected, resulting in the margins reaching 20%, there could be an over 8% upside to our current price estimate.
Home Depot is the world’s largest retailer of home improvement products. Home Depot has grown to 2,322 stores spanning across the U.S., Canada, and Mexico. It offers a wide range of home improvement products and installation services to individual homeowners as well as professional builders. In addition to the physical stores, consumers can buy these products through the company’s dedicated website. Home Depot has deep penetration in the U.S., Canada, and Mexico.
Home Depot and Lowe's are the number one and two home improvement retailers in the U.S. Since 2013, Home Depot outpaced Lowe's in terms of same-store sales growth with better pricing except for 2020. Lowe's comparable sales of 26.1% managed to surpass Home Depot's comp sales of 19.7% in fiscal 2020. However, Lowe's comparable sales growth came in at 6.9% whereas Home Depot recorded 11.4% growth in comparable sales in fiscal 2021. Continuing its growth trend, HD's comparable sales of 3.1% outpaced Lowe's -0.4% in FY 2022.
Still, Lowe's continues to reduce the gap with its largest competitor and gain market share in the fragmented home improvement industry, by improving sales through merchandising initiatives, enhancing profitability by improving store and operating capabilities, improving its digital penetration, and using its new loyalty program to attract more Pro customers.
Online retail has been an emerging threat to the market share of brick-and-mortar home improvements retailers like Home Depot and Lowe's. For this reason, both companies have made significant investments in online strategies, including small acquisitions and improvements in the web experience for their customers.
Home Depot has been focusing on supply-chain improvements through its central distribution system. We expect overall margins to further improve as the company continues its supply-chain improvements. Rapid Deployment Centers (RDC) aim to aggregate product needs for multiple stores to a single purchase order, and then rapidly allocate and deploy inventory to individual stores upon arrival at the RDC. This move aims to simplify the ordering process and improve inventory management. Home Depot has 18 fully mechanized RDCs in the U.S.
The pro segment is estimated at $120 billion a year, nearly as large as the do-it-yourself segment. A breakdown of Home Depot's comparable sales growth in the last few quarters shows a broader increase in the average ticket size as compared to a customer traffic increase. Transactions of $1000 or more have grown by high single-digit or double-digit percentages in the last few quarters. Pro sales continue to grow disproportionately faster than Home Depot's average, boosting its top line and leading to market-beating growth in categories such as plywood, fencing, and industrial lighting.
A survey from NRHA suggests a change in the buying patterns among U.S. home improvement consumers. People are no longer only loyal to products made in the U.S. Consumer demand is driven more by price and quality. Consumers may find foreign products, which may be better suited to their needs, and more appealing than products made in the U.S. Another observable trend is the shift in consumers toward buying green or eco-friendly products, such as water-saving flushes and electricity-saving appliances.