Home Depot (NYSE: HD) currently has over 2,200 physical stores worldwide. On average, each spans 105,000 square feet and carries more than 35,000 products.
But now the home improvement retailer is accelerating its move into the world of e-commerce.
By the end of this year, that amount is expected to increase 20% to $1.5 trillion.
By 2017, it is projected to jump to almost $2.4 trillion.
Shifting consumer preferences are behind the change in shopping habits.
More people are enjoying the convenience of ordering from their computers and having their goods delivered directly to their door.
Between 2012 and 2013, Home Depot saw online sales increase 50%. However, this robust growth only accounted for a smidgen (3.5%) of the company’s $78.8 billion in annual revenue. That means HD has tremendous growth opportunities in this part of its business.
To focus more of its efforts online, the company is adding three new direct fulfillment centers to its operations. Each center could hold up to three times the product inventory of a physical store.
Similar to the model of highly successful e-retailer Amazon.com (NASDAQ: AMZN), Home Depot’s move toward centralized distribution warehouses should allow the company to trim staffing costs and maximize revenues.
A rebound in the housing market should also help propel growth. According to the National Association of Realtors, pending home sales — a leading indicator of housing activity — increased for the first time in nine months, rising 3.4% from February to March. And the National Association of Home Builders forecasts housing starts will rise 24.5% to 1.15 million this year.
That can only be good news for the home improvement chain, which has already benefitted from the existing U.S. housing rebound. In fiscal 2013, Home Depot’s net revenue increased 5.4%, while operating margins rose 11.6% to the highest level in a decade.
Comparable store sales — a key metric of retail growth — were equally solid. Since 2011, comp sales have steadily increased. This consistent growth shows the company successfully captured its share of rising consumer spending on housing.
The technical outlook is bullish.
Rising off a May 2012 low near $45, shares formed a major uptrend, characterized by steadily rising peaks and valleys. With strong momentum, the stock nearly doubled in a year, rising to the $80 level; however, shares met significant resistance here.
By June 2013, HD slid back to the low $70s, where it tested important support marked by the intersection of the major uptrend line. Support held, and the stock bounced back, retesting $80 resistance in July. This test ultimately failed, and shares broke the major downtrend line, slumping back to $71 support.
Since that time, HD has consolidated in a rectangle pattern with support at $71 and resistance just under $83. Strong first-quarter results, scheduled to be reported May 20, could be the catalyst needed to push the stock past resistance.
If resistance is broken, the measuring principle — calculated by adding the height of the rectangle to the breakout level — shows shares could reach a new high of $94.17 ($82.72-$71.27 = $11.45; $11.45+$82.72 = $94.17). At current levels, this target presents 20%-plus potential returns.
The bullish technicals are supported by strong fundamentals.
When HD reports fiscal first-quarter results on May 20, analysts expect revenue will increase 5% year over year to $20.1 billion. Earnings are projected to come in nearly 21% higher at $1 per share versus $0.83 in the comparable year-ago period.
For the company’s full fiscal year, ended in January 2015, analysts anticipate sales will rise 5% to $82.8 billion, and earnings are expected to increase 18% to $4.43 per share from $3.76 last year.
The company rewards shareholders with a $1.88 per share annual dividend, for a current yield of 2.4%. Management has consistently increased the dividend every year since 1997 (taking into account stock splits). With strong future growth expected, the dividend will likely continue to rise, putting another floor under the share price.
Risks to consider: Amazon is the undisputed champion of the e-retail world. Amazon already sells appliances, and it could potentially move into the lucrative home improvement market, providing stiff competition for HD. However, Home Depot should remain the go-to source for building products like lumber and insulation.
Upcoming positive quarterly results could provide the spark needed to jump-start the stock in the short term.
Recommended Trade Setup:
– Buy Home Depot (NYSE: HD) at the market price
– Set stop-loss at $70.89, just below important lateral support
– Set price target at $94.17 for a potential 22% gain by late 2014
– Set stop-loss at $70.89, just below important lateral support
– Set price target at $94.17 for a potential 22% gain by late 2014
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