In this segment from theMarket Foolerypodcast, host Chris Hill and Bill Barker from Motley Fool Funds discuss the leading home improvement retailer, and there's practically nothing to find fault with in its first-quarter report: It beat on profit, its average tickets are up, and it's not trying to expand wildly beyond its current store footprint. Those gains are partly powered by factors beyond its control, of course. But it's capitalizing on the trends well. So is it still a buy at current levels? And what could slow it down?
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A full transcript follows the video.
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This video was recorded on May 16, 2017.
Chris Hill: We have to start with Home Depot(NYSE: HD),which is the No. 1 home improvement chain in America,and they proved why once again with their first-quarter report. Theirprofits were higher than expected, their same-store sales were up 5.5%. Theiraverage ticket order was up. Are theybulletproof right now? Is there anything that this company is -- if you're a bear, if god forbid, you'reone of those poor souls out there who says, "I thinkI'm going to short Home Depot," doyou have anything you can point to? Because this is one of those quarters thatmakes you understand why the stock is hitting an all-time high today.
Bill Barker:Yeah,I don't know what you have if you're a bear and youwant to find fault here. The valuation isn't that high, and housing hasa lot of room to go, probably,unless you have specific numbers thatyou're relying on that no one else is seeing,I don't know what you're seeing. Thecompany is doing a very good job of simplygrowing what it has. It's not reallygrowing stores at all. It has about the same number of stores -- depots, I suppose, rather than stores -- open that it had five or six years ago. So its guidance for comps and total sales growth are the same, right now around the 5% area. Then, it's buying back some shares,and it's improvingmargins, and it's all wound up with a low-teens to mid-teens growth rate.
Hill:Youmentioned the share count, it's come downpretty substantially.I think it's almost been cut in half over the last 13 years or so. There's about 1.3 billion sharesoutstanding right now, in 2004, the stat I saw this morning, it was up around 2.7 billion. So it's reallyimpressive that they are, on the one hand,methodically bringing down the share count, but they are also bringing that same day-in and day-outoperational excellence to their storesthemselves. And as you said, they're not growing their store count, whichmakes me think that this is an incrediblydisciplined management team.
Barker:Right,the capital allocation equation here is, let's keep what we have, I'm sure they'reclosing down the store or two here or there,opening up one here or there. But they aren't in the "let's build another 100 storesacross the country this year" model that a lot of other places are, whether it'sMcDonald'sorAutoZoneorplenty of other things. And they are really about the only game in retail right now that's working,Home Depot andLowe's. So,it is the housing market. Let's not givemanagement all the credit. We'll give them plenty of credit, but housing is a goodplace to be, and it is not getting disrupted on the retail side the way everything else is, including automotive parts. Automotive parts is a little bit better than clothing and books,things that have really been disrupted and are never coming back. But when you'regoing out on Sunday and fixing up your home, and you'regoing up to Home Depot or Lowe's,a local place, whatever --
Barker:You're not waiting forAmazonfor 48 hours to get you the stuff,because you're getting it right now. Actually, a lot of, 40% I think, of Home Depot's sales are to the professional contractor. That's also not being disrupted.
Hill:Yeah. AndI think there's also something to the customer experience,in the same way that online shopping,regardless of what the online shopping destination is, they'rehopefully providing greater convenience, I think that is, for a lot of people,part of the experience with Home Depot and Lowe's. Theyactually like it,it's an excuse to get out of the house, Iactually want to go and compare the paint samples, that sort of thing, andkill a little time doing things that way.
Barker:I think it is, you're doing something. It feels like --
Barker:It feels like, I'm on a mission,I'm going to make my house better,I'm not just buying stuff. Maybe this is revealing something about me, but it's not that, you buy stuffand then it sits around the house. At Home Depot, you're buying something and then you're implementing it.
Hill:Putting it to use.
Barker:Andthen you're going to claim, later in the day, "I did a lot of stuff today,so I deserve some credit. I went to the store, andnot only did I buy something, butI actually put those light bulbs in."
Hill:Speaking of light bulbs, whatpercentage of trips to any sort of home improvement store --
Hill:Wait for it. Wouldyou say involve youbringing something to the store that you need to replace? That,you haven't written something down, youhaven't memorized it, butyou're actually bringing in the light bulb, you'rebringing in the screw, andyou walk in and you're basically looking for an employee, saying, "Seethis thing I'm holding in my hand? Wherecan I find another one just like this?" What percentage?
Barker:Of me, or everybody?
Barker:Close to 0%.
Hill:Oh,for me, it's at least,somewhere in the neighborhood of 50%.
Barker:No,I'm in the category of stereotypical men who go in and I'mnot asking for directions on anything, itdoes not matter how long it takes me. Itdoesn't matter how many times I'm asked, "Can I help you?" No,I'm just looking, I'll find the specific screw thatI'm looking for. I'm not saying that's a good thing. For you, it's much higher than zero?
Hill:It'smuch higher than zero. But that's also part of the Home Depot store, that'spart of the turnaround for them, after Nardelli left,part of what management decided to do was, "Let'sactually be helpful, let's train staff, let's,maybe not overstaff, but let'smake sure our stores are properly staffed, so that whenpeople come in, we have people who can help them,who can find exactly what they're looking for,and then they're going to come back." AndI think that's a big part of the turnaround for Home Depot.
Barker:It is working, for them to be gettingpretty consistent 5% comp improvements year to year, I think the two-year stack, the comp from a year ago plus the comp this year, it's more like 12% to 13% forHome Depot. That's really impressive,in a time of very little inflation to be getting 12% more sales out ofthe same square footageover the last two years,adjusting for inflation, you'retalking about 8% or something like that. They have got everything going very well right now, and the bear case isdependent on the housing market currently being overheated, whichit does not yet appear to be.
Bill Barkeris an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such. Billowns shares of Home Depot. Chris Hill owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends AutoZone, Home Depot, and Lowe's. The Motley Fool has a disclosure policy.