It's been a rough year for Home Depot(NYSE: HD). The world's largest home improvement chain is managing through a depressed housing market that's impacting almost any business related to real estate. But it's sewing the seeds of recovery. Last week, it announced that it's acquiring a company targeting the pro community. Here's why it's a brilliant move.
This isn't Home Depot's moment
In fiscal 2023's fourth quarter (ended Jan. 28), Home Depot's sales fell 2.9% from a year ago and comparable sales fell 3.5%. Earnings per share (EPS) slipped from $3.30 to $2.82. Management is guiding for things to stay about flat in 2024.
There are several headwinds for Home Depot that are all connected to inflation. The real estate market has been under severe pressure due to high interest rates, and fewer people buying homes means fewer people remodeling. On top of that, even shoppers who are buying are holding off on large, expensive purchases right now.
Setting itself up for success
Home Depot operates more than 2,300 superstores in North America, and it's still opening new ones. It plans to open 12 new stores this year, and 80 over the next five years. However, it's also looking for new ways to generate sales. That's where SRS comes in.
Home Depot is acquiring SRS Distribution, which it describes as "a leading residential specialty trade distribution company across several verticals serving the professional roofer, landscaper, and pool contractor." This accentuates Home Depot's pro business, and management says it adds $50 billion to its addressable market for a total of $1 trillion, of which it has a 17% share.
Management has already said that it's going to lean into the pro segment in 2024. These are larger projects that could raise sales faster than focusing on individual home improvement projects. Home Depot also acquired specialty pro supplier Construction Resources in December.
But it's more than that. This is a bet on a housing surge as new homes are being constructed and existing home inventory has been depressed. Interest rates are expected to go down, and existing home inventory is already starting to rise, according to a new report by real estate company Redfin.
Warren Buffett and his team at Berkshire Hathaway have been taking a similar approach. Berkshire Hathaway purchased home building stocks DR Horton, Lennar, and NVR last year although it sold out of its position in DR Horton in the 2023 fourth quarter. All of these companies are reporting growth, but more than increases in revenue, they're all reporting fantastic growth in new sales orders of between 25% and 35%. Home Depot, especially with its pro focus and new acquisitions, is likely to benefit from these new home orders.
Keep your eye on the long term
Home Depot stock is up this year, but it fell on the news. Home Depot said it would pause share repurchases to maintain its debt ratios as it pays $18 billion for the company. Investors never like hearing things like pausing share buybacks.
That screams risk, especially for an established company that creates shareholder value through dividend payments and share buybacks. Home Depot raised its dividend 7.7% to $2.25 quarterly in the fourth quarter, and it yields 2.45% at the current price.
It's an understandable reaction, but management is thinking long term and so should investors. CFO Richard McPhail said, "We expect the acquisition to create significant shareholder value over the long term."
This isn't the first time Home Depot has made a prescient move that investors didn't like but that served it well later. It invested heavily in upgrading its omnichannel capabilities culminating in a robust model that debuted right before the pandemic started. It took longer than expected and contributed to pressured net income, but it proved to be a genius move when shoppers needed it just a few months later.
Home Depot stock has been climbing this year, and this could be an opportunity to grab some shares on the dip.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Home Depot, and Redfin. The Motley Fool recommends the following options: short May 2024 $8 calls on Redfin. The Motley Fool has a disclosure policy.
