Home Depot Doing Well Despite a Weak Housing Market

Home Depot (NYSE:HD) is the world’s largest retailer of home improvement products, primarily competing with Lowe’s (NYSE:LOW). In its latest earnings report, the company shows some encouraging signs of growth despite the continued difficulties in the housing market. We wanted to review some of the key drivers to our Home Depot valuation that support our $35.66 price estimate for Home Depot, which is slightly below the current market price.

Plumbing, Electrical & Kitchen Market Share

Home Depot has maintained its strong market position despite staunch competition from Lowe’s in recent years. Its share in the plumbing, electrical & kKitchen products was over one-fifth of the U.S. and Canadian sales even during the peak of the recession. High penetration levels in the U.S. market enabled Home Depot to offset its losses from the hard-hit housing markets such as southern California and Florida. We estimate Home Depot’s market share in this segment to be around 22% in currently and to increase to around 23% by the end of our forecast period.

Paint & Flooring Market Share

Home Depot has maintained its strong position despite growing competition. Its share in the paint & flooring market declined from over 40% in 2005 to 30% in 2009. This is attributed to strong competition from Lowe’s and closure of HD Supply Stores which were targeted at professional customers. However, the rate of market share loss has been slowing over the last few years with Home depot taking initiatives to consolidate its position. Going forward, we expect its market share to increase to stabilize around 31%.

Fourth Quarter and Full Year Results

As mentioned, HD reported solid fourth quarter and full year results last sales improving on a quarterly and annual basis by mid to low single digits vs. the year ago period. Given the fact that U.S. home prices are still falling, Home Depot’s performance is noteworthy as its comparable store sales were up in a majority of the states, even the hard hit ones like California and Florida.

Home Depot continues to focus on cheaper items like faucets and paints to help compensate for slow stales in big ticket items. As a result, the kitchen and appliances segment also did particularly well for the company. ^[1] As spending recovers in the broader economy, we should see Home Depot benefit.

See our full analysis for Home Depot.

1. Home Depot raises outlook as customers renovate [↩]