We have maintained our long-term ‘Neutral’ recommendation on The Home Depot Inc. (HD) with a target price of $37.00 per share. Moreover, the company has a Zacks #3 Rank, implying a short-term ‘Hold’ rating on the stock.
Headquartered in Atlanta, Georgia,Home Depot is the leading player in the highly fragmented home improvement industry. The company has reinvigorated itself with a shift in focus from new square footage growth to maximization of productivity through its existing store base. In addition, the company has implemented significant changes to its store operations to make them simpler and more customer-friendly, thereby inducing more customer traffic.
Moreover, the company through its strategic alliances with selected suppliers across the globe offers 30,000 to 40,000 proprietary and exclusive brands annually. Home Depot follows a global sourcing merchandise program that enables it to purchase the market’s leading innovative products directly from the manufacturers, while providing an edge over its competitors in terms of pricing of products.
Furthermore, with the introduction of new warehousing and transportation system, the company has been able to improve its supply chain while minimizing the cost. This has also helped Home Depot to improve its Central Automated Replenishment System to facilitate immediate refill of stock while reducing the investment in inventory.
In addition, due to the earlier economic downturn, Home Depot has taken strategic initiatives to optimize its capital allocation and concentrate on core business activities. Consequently, the company has closed its underperforming stores, reduced its new store opening pipeline, and exited businesses, such as EXPO, THD Design Center, Yardbirds, and HD Bath.
However, heavy job losses and reduced access to credit have led to a sharp fall in consumer discretionary spending on big-ticket items. Although the economy is showing signs of revival, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes and consumer-spending rebounds.
Besides, due to its exposure to international market, Home Depot remains prone to currency fluctuation. The weakening of foreign currencies against the U.S. dollar may require the company to either raise price or contract profit margins in locations outside the U.S. An increase in product price may have a direct impact on consumer demand.
Above all, the company’s business is highly competitive, primarily based on customer services, price, store location and assortment of merchandise. Home Depot faces stiff competition from local, regional and international players, such as Lowe’s Companies Inc. (LOW) and Target Corporation (TGT). To maintain its market share, the company is making selective acquisitions and strategic alliances with third parties, which are increasing its operational risks.
HOME DEPOT (HD): Free Stock Analysis Report
LOWES COS (LOW): Free Stock Analysis Report
TARGET CORP (TGT): Free Stock Analysis Report
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