Home Depot is doing an excellent job capturing this $900 billion market
The coronavirus pandemic has been a boon to the ‘do-it-yourself’ segment of the home improvement market as people have taken on many projects, including paint rooms, adding a home office, and adding outdoor entertaining spaces.
In fact, in 2019, the home improvement industry was estimated to be worth about $650 billion. Now, it is expected to generate $900 billion in sales annually. So, primarily due to the effects of the pandemic, the market has grown by $250 billion.
Home Depot (HD -3.30% ) Capture a meaningful share of this huge and growing market. Let’s take a closer look at how she manages to do just that.
Home Depot is the largest home improvement retailer in the world
Interestingly, Home Depot’s total sales for fiscal year 2021, which ended Jan. 30, was $151 billion. That was 14.4% higher than the previous year. Many macroeconomic factors fueled consumer spending on home improvement. Fiscal stimulus payments to families, rising home values and limited stocks of homes for sale have prompted homeowners to improve their living spaces.
If you take the sales figure of $150 billion and divide it by the market size of $900 billion, Home Depot has an estimated market share of about 17%. Home Depot is the largest home improvement retailer in the world with the largest market share. Lowe Companies ( Little -3.89% )its formidable competitor, generated $96 billion in sales in fiscal 2021. A big sum, sure, but significantly behind Home Depot.
Furthermore, Home Depot has set a new target of reaching $200 billion in sales. Of course, achieving this may take a few years, but it highlights that management sees opportunities for growth in the future. For fiscal year 2022, Home Depot expects its revenue to remain relatively flat as economies reopen and less time spent at home. Home Depot has grown its revenue at a compound annual rate of 7.9% in the past decade. The long-term growth rate is likely to be closer than it has been in the past decade rather than what has happened since the outbreak.
The market loves a winner
Home Depot’s superior market share leads to a higher operating profit margin. The company has outpaced Louise, its biggest competitor, on this measure over the past decade. This is proof that the home improvement industry has economies of scale. In other words, profit margins grow as sales increase. One reason could be that Home Depot pays lower prices for inventory because they buy in larger batch sizes.
It’s no surprise that Home Depot’s stock trades at a higher cost than Lowe’s due to its better market share and operating profit margin. No matter how the home improvement market develops as the world advances against COVID-19, Home Depot will likely do better than Lowe’s until the latter can improve operational performance.
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