- Home Depot targets $101 billion in annual revenues by 2018.
- Home Depot models 27% improvement in ROIC in the current year.
- Home Depot’s buyback spending to reach $7 billion this year.
Home Depot Inc (NYSE:N:HD) recently revealed its financial plan covering three years – and it’s an ambitious one. Its current financial target was set in 2013 and will expire by the end of 2015. In the existing growth plan, Home Depot seeks to improve operating margin by 13% and return on invested capital (ROIC) by 27% by the end of life of the existing plan.
The new financial plan for three years will run until 2018 when the company hopes to have attained annual revenues of $101 billion. Home Depot also targets 14.5% in operating margins and 35% return on invested capital (ROIC) by the end of 2018. $88 billion in sales is targeted by the end of the year, along with $101 billion sales forecast by 2018, which implies about an 4.7% compound annual growth rate (CAGR).
The chart below shows Home Depot’s annual revenue trendline alongside the guided revenue metrics.
Reaching the target
Home Depot Inc (NYSE:HD) has outlined multiple strategies through which it hopes to achieve its ambitious sales target of $101 billion by 2018. The growth strategies are part of Home Depot’s Interconnecting Retail framework. Here is a highlight about the strategies:
Product Authority: Home Depot is committing to business in the usual sense that the company is betting on innovation in driving the best value to customers.
Customer Service: The retailer intends to offer a seamless experience for its customers regardless of how and where they interact with it. That means blurring the line between physical and online shopping experience among other implementations.
Productivity: Home Depot is committing to drive incremental benefits within its supply chain and stores as part of the efforts to reach its ambitious financial plans by 2018.
Targeted growth areas: The retailer is looking at opportunities to increase sales through channels such as professional contractors and business customers.
Shareholder Returns: Home Depot wants to deliver increasing total value to its shareholders, which will primarily be in the form of buybacks and dividends. In terms of buybacks, Home Depot intends to repurchase $2 billion worth of its stock, a move that should bring its fiscal 2015 buyback spending to about $7 billion.
Growth drivers
Outlining how to go about achieving growth targets is one thing and reaching the targets is another. Does Home Depot have what it takes to make its ambitious financial plan a reality?
Restructuring positions HD for more growth
Home Depot Inc (NYSE:HD) is a beneficially of system restructuring. The company has closed multiple non-performing stores, exited non-core operations and sought to improve productivity. Investment in frictionless sales channels has also been a priority at Home Depot.
Although some of the aforementioned restructuring measures have run their course, Home Depot can do more to drive performance improvement. For example, there exist room for continued efficiency drive, which should result in improved earnings and free cash flow for increasing return to shareholders in the coming years.
Continued investment in digital fulfillment channels should also lift overall sales and provide an avenue for performance improvement.
The bulk of home improvement trends remain unexploited
The U.S. home improvement trends are favorable. However, only a tiny fraction of the demand trend has been met, which means that there remains for sales opportunities ahead for Home Depot as the retailer enters a new year.
In addition to the prevailing demand trends, stronger than expected recovery in the home improvement space should come as a tailwind for Home Depot.
Cost curtailment
Disciplined cost structure is important in achieving Home Depot’s financial targets. Without compromising on value-laden capital expenditures, management of the home improvement retailer is likely to maintain focus on cost curtailment measures. Such measures should boost margins expansion, which is important for the various margin and ROIC targets for the next three years.
Capital program
Home Depot Inc (NYSE:HD) is likely to finish 2015 with $7 billion returned to shareholders through buybacks alone. However, the company’s shareholder capital return also includes dividend payout. With the management committing to sweeten buyback and dividend metrics going forward, there is certainly more in store for Home Depot investors.
Pressure points
It is not all smooth for Home Depot, though, and there are risks the company could miss its performance targets, primarily because of issues beyond its control.
Here are some factors that could scuttle Home Depot’s dream.
Market deterioration
The housing market is on a recovery trend and Home Depot Inc (NYSE:HD) is expected to benefit from the trend given its favorable position in the home improvement industry. However, sudden deterioration of the housing market could not only delay Home Depot’s anticipated gains, but also wreck havoc in its financial plan.
Demand for Home Depot’s products and services tracks property sales. That means that slowdown in property sales because of unfavorable market condition can have far-reaching implications on the retailers performance. Additionally, weak home prices can also impact big-ticket home renovation, thereby also putting pressure on Home Depot’s sales.
Credit availability
Big ticket home improvements are boon for Home Depot Inc (NYSE:HD) and that segment thrives on financing. As such, developments that hurt availability of credit could adversely impact big ticket renovation projects, thus cooling Home Depot product/service sales.
Property price wars
Sometimes home sales play with price to help them move more properties. However, irrational price war is a double-edged sword and Home Depot cannot be spared when such wars break out. While it might be able to sale more, its profit margins are likely to be compressed by sales are motivated by lower prices.
Unfavorable macroeconomic conditions
Home improvement business thrives in an environment of strong consumer spending. As such, factors such as high cost of fuel, rising interest rates and high unemployment levels threaten sales of home renovation products and Home Depot can feel great pressure in its business on a bad day.
Foreign exchange pressure
Home Depot Inc (NYSE:HD) generates nearly 10% of its sales abroad, especially from Canada and Mexico. Unfavorable foreign exchange rates are already impact sales of many U.S. multinationals. With a substantial amount of its sales coming from the international market, Home Depot is greatly exposed to foreign exchange pressures.
Bottom line
Home Depot Inc (NYSE:HD)’s three-year growth plans inspire. It is also important that the management continue to see growth headroom. However, there are factors beyond Home Depot’s control that can adversely impact its performance.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.