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Why Home Depot Should Be on Your Watchlist

Its massive scale creates a low-cost advantage that is the basis of its wide moat.

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Home Depot (HD) is the world’s largest home improvement retailer, on track to deliver more than $115 billion in revenue in 2020. It continues to benefit from a stable housing market and improvements in its merchandising and distribution network. The company earns a wide economic moat rating because of its economies of scale and brand equity. While Home Depot has produced strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets of our long-term margin expansion assumptions. Its evolving distribution network will help elevate the company’s brand intangible asset, with faster time to delivery improving the do-it-yourself experience and market delivery centers catering to the professional business. The success of ongoing initiatives should set the operating margin back on a rising trajectory in 2021.

Home Depot should continue to capture top-line growth, bolstered by macroeconomic factors including low unemployment, wage growth, and an aging housing stock. Other internal catalysts for top-line growth could come from the company’s efficient supply chain, improved merchandising technology, and penetration of adjacent customer product segments (like commercial). Expansion of both new (like textiles from the Company Store acquisition) and existing (appliances could still grow after the Sears bankruptcy) categories could also drive demand.

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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