Where will Home Depot stock be in 5 years?

Throughout its history as a public company, Depot House (high resolution 0.09%) was a fantastic business to own. Since its initial public offering in 1981, the stock has delivered a total return of 2,972,000%, which would turn a $10,000 investment into over $297 million today.

But the story has recently become more disappointing. The stock has returned 89% over the past five years, lagging the broader S&P500.

But where will it be? best retail stocks will it be in five years?

Don’t expect a big increase in the number of stores

Through a network of stores in the United States, Canada, and Mexico, Home Depot sells products, tools, and appliances to professionals and DIY (do-it-yourself) consumers. As with any retail business, the main trend historically has been to open new stores.

In January 1994, Home Depot operated 264 locations. Fast forward to today, there are 2,337. That represents a significant nine-fold expansion.

However, over the last 10 years, the management team has expanded the physical footprint by just 2% overall. I suspect the same strategy will continue for the next few years.

Looking at the whole picture

Just because Home Depot won’t be reopening stores at a breakneck pace doesn’t mean things are dire. In fact, there’s reason to believe the company will still be able to post healthy sales growth.

The company’s revenue has grown by 85% over the past decade. Management has focused on increasing sales volume per store. Investing in a stronger supply chain and increasing omnichannel capabilities has helped. Expect further improvements that will continue to drive sales in the same store growth in the long term.

To be clear, Home Depot is facing tough times. Revenue fell 2.9% for fiscal 2023 (ended Jan. 28), and management expects sales to grow just 1% for the current fiscal year. A difficult macroeconomic environment, with consumers grappling with inflationary pressures and fears of recession, naturally puts pressure on big-ticket purchases.

Home Depot should return to posting healthy revenue growth. As always, the economy will be a tailwind rather than a headwind, helping to boost consumer spending and demand for Home Depot.

The industry backdrop is also fairly favorable. The domestic home improvement industry is estimated to be worth $1 trillion. Based on revenues of $152 billion for the past 12 months, Home Depot, the clear leader, has just 15 percent of the market. The company’s strong brand recognition, massive inventory availability and large store base should help it continue to steal market share.

The current housing stock is also encouraging for companies exposed to the home improvement and construction industry. There is a housing shortage in this country, and the fact that the average age of a home in 2021 was 40 years old (and rising) is good for Home Depot. Consumers will have to spend money to maintain the quality of their homes.

Investor Configuration

It’s easy to be optimistic about Home Depot’s prospects five years from now. The company will return to revenue growth, which should support profit growth.

Valuation should also be taken into account. The stock is trading at price to profit ratio of 23.5, slightly above the five-year average of 21.9. Value investors may object to this, but given the quality of the company, owning shares may make sense.

What’s more, Home Depot is known for returning a huge amount of capital to shareholders. In the last fiscal year alone, it paid out $8.4 billion in dividends and bought back nearly $8 billion in shares. Add that to the potential gains in the stock price, and investors who buy Home Depot today will likely be happy five years from now.

Neil Patel and his clients have no positions in any stocks mentioned. The Motley Fool has a position in and recommends Home Depot. The Motley Fool has a disclosure policy.