With people stuck inside for more time than ever during the pandemic, spending on renovation projects surged. It’s not a surprise that Home Depot (NYSE:HD) was a primary beneficiary of this consumer behavior, generating trailing-12-month revenue of $144.4 billion. While this is an astounding figure, it doesn’t do justice in explaining how great of a business this really is.
For Home Depot, I think the most important number investors should pay attention to is $663. It underscores how successful and efficient the home-improvement chain is, particularly when compared to its competition.
All about the pros
During the most recent quarter, Home Depot’s annualized sales per square foot came in at $663. For any retail business, growing this metric should be the overarching goal because it demonstrates the improving productivity of each physical location. Over the past decade, Home Depot expanded its store footprint by just 2%. But during this same time, revenue and profit skyrocketed 103% and 243%, respectively. Credit goes to boosting sales per square foot, which was $343 in Q2 2011.
How has Home Depot been able to grow its volume per store? It’s all about professional customers. These are contractors who rely on Home Depot as an essential partner to provide the right tools, supplies, and tech support to run their small businesses and complete projects. In the most recent quarter, 45% of sales were derived from pros, but they made up only 5% of customers. It’s not hard to see that professionals spend significantly more than do-it-yourself (DIY) customers.
The company already has to pay rent, salaries, and other fixed costs to operate on a daily basis, so when a customer walks through the door, having a sizable chunk of business come from higher-spending pros is an immediate boon for Home Depot’s retail metrics. In addition to superb sales per square foot, the company’s return on invested capital (44.7%) and operating margin (16.1%) are both outstanding for any business, let alone a retailer.
While DIYers showed strong demand during the depths of the pandemic, the pros are bouncing back. “We also see customers more comfortable taking on larger projects as evidenced by the continued strength with our pro customer, which outpaced the DIY customer for the second quarter in a row,” CEO Craig Menear mentioned on the recent earnings call. This bodes well for Home Depot’s near-term prospects.
This burgeoning efficiency, thanks in large part to pro customers, has resulted in Home Depot’s stock price rising almost 900% over the past 10 years.
The advantage over Lowe’s
Home Depot’s largest competitor, Lowe’s (NYSE:LOW), generates 25% of revenue from professionals. And unsurprisingly, its retail numbers lag behind the Atlanta-based home-improvement leader. During its 2021 fiscal second quarter, Lowe’s produced a return on invested capital of 29.1%, an operating margin of 15.3%, and annualized sales per square foot of $530.
Lowe’s management is focused on growing the pro business, so those metrics should steadily march higher if it can execute. “Every day, we are striving to demonstrate that Lowe’s is the new home for pros,” Joe McFarland, Lowe’s EVP of stores, boldly claimed on the conference call with analysts. I admire the confidence, but his company still has a lot of catching up to do. Lowe’s pro sales of $6.9 billion substantially trails the $18.5 billion Home Depot raked in from these customers in Q2.
Sales per square foot is a critical data point for retail businesses, and for Home Depot, it explains why the company has been so successful. I’m sure most investors don’t dig this deep in order to gain a better understanding of a business, which gives you an edge. Now you know exactly what makes Home Depot special. Keep this in mind as you advance in your investing journey.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.