Home Depot Inc. Is About to Pass a Major Business Milestone

By Demitrios Kalogeropoulos Markets Fool.com

They say the first $100 billion is always the hardest, right? With an impressive first quarter in the books, Home Depot (NYSE: HD) is now on track to reach $99 billion of annual revenue this year before it cracks 12 digits in 2018. That would mark a great run for a business that generated just $66 billion of revenue as recently as 2010.

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I did it my way

Home Depot hasn't relied on a fast-expanding store footprint to reach this milestone. In fact, while rival Lowe's (NYSE: LOW)has built 300 new warehouse locations in the U.S. since 2013, Home Depot has added none. That's right -- no net new stores in three years. Yet its revenue growth has edged Lowe's since 2012:

HD Revenue (TTM) data by YCharts.

The difference has been small, but steady, market-share gains. Home Depot's comparable-store sales growth was 5.6% in each of the last two years, while its smaller rival logged 4.2% gains in 2016 and a 4.8% expansion in 2015. Home Depot also benefited from an early investment into e-commerce that's helped push the sales channel up to 6% of sales, beating Costco (NASDAQ: COST), one of just a few retailers already sitting in the $100 billion annual-revenue club.

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Home Depot isn't a value-based retailer like Costco, which prides itself on achieving pricing authority. Instead, it prioritizes what management calls "product authority," or offering the best selection of innovative products for its mix of home remodelers and professional customers.

As a result, its 34% gross profit margin is more than double Costco's. This also helps explain how the home-improvement retailer could generate $13.4 billion of operating income last year -- compared to Costco's $3.6 billion -- despite a far lower sales base.

The next $100 billion

Growth at this size can be hard to achieve, especially without the benefit of major new geographic markets to conquer. Home Depot isn't currently planning such an expensive push, but it has recently made headway into new niches within its industry that are lifting its addressable market.

Image source: Getty Images.

These include the pro segment, which management estimates at over $120 billion of annual sales. Pro customers have made outsized contributions to growth, lately. Customer-traffic growth slowed last year, for example, but overall comps still rose as these shoppers raised the company's average spending. The happy trend carried on into 2017, too. Big-ticket transactions that measured over $900 spiked 16% higher last quarter.

Home Depot's acquisition of Interline Brands makes it a major player in the maintenance, repair, and operations segment that's worth over $50 billion a year. Combined with the pro division and installation services, that's a total addressable market of more than $550 billion that the company can attack in the next decade.

Investors stand to be rewarded by growth into these businesses. Operating margin is on track to hit a record 15% of sales by next year, and Home Depot is targeting big gains in its return on invested capital that already blows the competition away.

Of course, a downturn in the housing market is always possible. And the last one took a huge bite out of Home Depot's business.But long-term metrics, including household-formation rates, home prices, and the average age of a housing stock, imply plenty of room for the industry to continue expanding nicely. That boost will likely benefit the market-share leader to a greater extent than its rivals.

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Demitrios Kalogeropoulos owns shares of Costco Wholesale and Home Depot. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.