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WIKI ANALYSIS
Home Depot (NYSE: HD) is the largest retailer of home improvement goods in the world. Home Depot sells everything you would need to build a home -- from tools to paint. It operates 2,200+ stores throughout the U.S., Mexico, Canada, and China, offering products and services to end consumers as well as to professional builders, tradesmen, and repairmen.
Like all home improvement retailers, Home Depot is very vulnerable to interest rates and the continued housing market slowdown. The subprime mortgage crisis in the financial industry has also been a major factor behind Home Depot's struggles. Growing international operations in Canada, Mexico and China also buffer Home Depot's exposure to the domestic US market.
Company Overview
Home Depot started in 1978 and has since grown rapidly into one of the largest retailer in the U.S. reaching $1 billion in sales by 1986,[1] and a record $77 billion in net sales in mid 2000s. Today, Home Depot operates in the US, Canada, Mexico and China.
Business Segments
Home Depot operates under four different business segments:
- Plumbing, Electrical and Kitchen (29.8% of net sales)
- Hardware and Seasonal (29.1% of net sales)
- Building Materials, Lumber and Millwork (21.9% of net sales)
- Paint and Flooring (19.2% of net sales)
News Updates
- HD has invested $1.1 billion to enhance its online presence.[2] The firm expects the investment to add 4-7% in annual revenue.[2]
- 3.5% more new houses were built in May 2011 compared to April 2011.[3] More houses being built causes a greater demand for Home Depot products.
Customers
The company caters to three main types of retail customers:
- Do It Yourself Customers (DIY): Home Depot markets many of its products to home owners who tackle their own home improvement projects as non-professionals. In order to meet these customers' needs, the company employs staff with specific expertise (e.g., former plumbers in the bathroom remodel section, for instance). Home Depot also offers clinics and "how-to" workshops in order to attract DIY customers.
- Do It for Me Customers (DIFM): DIFM customers--often ones in the process of remodeling homes--purchase materials and then hire professionals to install them (e.g., home owner buys a new sink at Home Depot and then hires a professional plumber to install it). Home Depot matches DIFM customers with qualified professionals and arranges installation services for its products.
- Professional Customers: Home Depot targets professional contractors and repairmen through delivery services and extended credit programs. This category is the largest, with almost double the sales of the DIY customers.
Business Growth
FY 2010 (ended January 31, 2011)[4]
- Net sales increased 2.8% to $68 billion.
- Net income increased 27% to $3.3 billion.
Trends and Forces
Changes in Housing/Interest Rates Affect Homebuilders which Home Depot Relies On
- To read a more detailed discussion of how interest rates affect housing, see also Interest Rates.
In the past, a high correlation has existed between the rate of home purchases and buildings and interest rates. As interest rates fall, prospective home owners and builders can borrow money less expensively and therefore will be more likely to do so. When more homes are built and purchased, Home Depot's sales to homebuilders and re-modelers increase. On the flip side, when interest rates rise, borrowing becomes more expensive and the number of building and home improvement projects decline, resulting in fewer sales for Home Depot. In addition, higher interest rates make home refinancing, a major source of funds for home improvement projects, more expensive.
The collapse of the housing market, which was caused by subprime lending, has caused national home foreclosure rates have to go up dramatically, with the hardest hit places being the Southeast and Southwest. The more foreclosures there are, the more homes are on the market, which results in a decrease in demand for building new homes.
It should be noted that housing booms do not always occur when interest rates are low. This is especially true in the case of a geographic area housing boom. There are many reasons for such booms (e.g., a company may move to an area, providing a boon through new jobs creation). Because Home Depot has widespread locations throughout the U.S., they are in position to take advantage of such booms.
Competition
Home Depot vs. Lowe's
Home Depot's only significant competition in the home improvement retail industry is Lowe's Companies (LOW). Lowe's and Home Depot are by far the leaders of the home improvement retail industry, but together they comprise only 18% of the estimated $348 billion home improvement market (this includes pure product demand as well as installation labor demand). The rest is distributed between other "big-box" retailers such as Wal-Mart Stores (WMT), smaller hardware store chains, construction firms, and other small businesses.
Smaller Competitors
Home Depot also faces competition from smaller independent mom & pop stores. Although these stores usually cannot match the prices of the industry giants Home Depot or Lowe's, they make up for higher prices with customer care, tradition, and perhaps convenience. In addition, the presence of Home Depot in some areas has even caused customers to boycott the giant firm and to shop at local businesses. The advantage that Home Depot has against these smaller competitors is that they stand a better chance at outlasting the economic downturn and in the mean time attracting old customers of fallen businesses.
One example of a small competitor is Builders FirstSource (BLDR), a company that makes and sells structural and related building products for residential new construction. The company is based in the United States and operates in the United States.
References
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