Has Home Depot Inc.'s Growth Just Begun?

By Markets Fool.com

Home Depot's (NYSE: HD) business has been on an epic run lately. Annual revenue shot up to an $89 billion pace last year, up from $75 billion in 2012. And net earnings clocked another double-digit increase to pass $7 billion -- almost double 2012's result.

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If you believe management, though, the retailer is just getting started. In fact, Home Depot targets passing $100 billion of annual revenue in just a few years. Let's look at why the home improvement giant is so bullish on its outlook despite weak overall economic growth.

Building a bigger market

Market share gains have been the big story for Home Depot investors lately, as comparable-store sales consistently trounced rival Lowe's (NYSE: LOW). The comps outperformance has been big enough that Home Depot grew faster than its key competitor despite holding its U.S. store base steady while Lowe's opens dozens of new locations per year.

LOW Revenue (TTM) data by YCharts.

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CEO Craig Menear and his team see comps of about 4% this year -- just a small slowdown from 2015's 6% surge. And so market-beating comps will play a role in growth going forward. But the bigger factor will be a significant expansion of Home Depot's addressable market.

Image source: Home Depot investor presentation.

The company is pushing deeper into the professional side of the industry. You can see evidence of that move in the fact that big-ticket purchases are growing faster than Home Depot's overall sales. For example, transactions over $900 improved by 8% in the second quarter, compared to an overall 5% comps increase.

Its acquisition of Interline Brands also gives Home Depot access to the $50 billion maintenance, repair, and operations segment. "We have outlined a path to truly realize the value of the Interline acquisition and the total pro opportunity over the next 18 to 24 months," Menear said in a recent conference call. Including that niche, Home Depot believes its total addressable market in the U.S. is now $550 billion, giving it plenty of room to grow with just minor improvements over its current 16% market share.

Winning online business

The company is aiming to make major gains in its online business over the next few years. Unlike many retailing peers that seem to be playing defense when it comes to e-commerce, Home Depot is treating it like the critical sales segment that it is.

Image source: Getty Images.

Executives have poured cash into building out a network of fulfillment centers while retrofitting existing locations to act as pickup points. Meanwhile, technology inside stores, including handheld and internet kiosks, pushes sales online even from shoppers that are browsing its brick-and-mortar locations.

Rather than stealing revenue from those stores, though, these initiatives have kept both Home Depot's online business and traditional retailing segment rising. Last quarter, comps were 5% at existing shops even as e-commerce sales spiked higher by 19% to reach 6% of sales.

Two major offering expansions should keep this positive momentum going. Home Depot is rolling out the final plank of its delivery options right now, which is the ability for customers to buy online and have the product shipped to their home directly from their local store. Second, Home Depot is adding next-day delivery for many bulk products in order to strengthen its appeal to its pro customers.

Management has targeted breaking the $100 billion sales mark sometime in the 2018 fiscal year, and that seems achievable given that it translates to just 5% compound annual growth over the next three years. Operating margin is forecast to rise to nearly 15% in that time, and return on invested capital should also hit 35%.

A slump in the housing market would threaten all of those targets. However, it's also possible that industry growth speeds up and pushes the retailer into an even stronger expansion pace.

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Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.