Will 2018 Be Home Depot Inc’s Best Year Yet?

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Home Depot (NYSE: HD) is poised to cross $100 billion in annual sales for the first time right before the business enters 2018. That’s an impressive achievement when you consider that the sales base sat at $70 billion just five years ago.

With the economy expanding and demand trends pushing its industry higher, the odds are good that Home Depot has more revenue and profit records to come.

Let’s look at the important operating wins that the home improvement giant is likely to post in the coming year.

Image source: Getty Images.

Market share gains

Home Depot’s business is enjoying strong — and growing — momentum heading into 2018. Comparable-store sales sped up to a 7.9% rate last quarter from 6.3% in the previous quarter. The increase, partially due to demand tied to hurricane recovery efforts, convinced management to raise its full-year comps outlook to 6.5%.

That result would mark Home Depot’s fastest growth rate since 2013. But the better news for investors is what it means for the retailer’s market share. Rival Lowe’s (NYSE: LOW) is predicting just a 3.5% comps increase in 2017, after all, even though the company boosted store investments in a bid to stem its share losses. The fact that Home Depot not only held onto its lead, but expanded it, means this business is in no risk of losing its leadership position.

And as for the home improvement industry, it’s anyone’s guess whether it keeps expanding at its current robust pace or takes a big step backwards. However, Home Depot executives point to metrics like household formation rates, home price trends, and the average age of housing stock as supportive of continued growth — perhaps into 2020 and beyond.

Profitability records

Those industry trends should support further market-thumping earnings growth in 2018. In fact, Home Depot already reached its 14.5% operating margin goal a full year ahead of schedule. That increase is helping power a 14% boost in profits in 2017 even as revenue rises at a more modest 6.2% pace.

LOW Operating Margin (TTM) Chart

LOW Operating Margin (TTM) data by YCharts .

The retailer’s success at catering to both do-it-yourself shoppers and professional contractors accounts for these wins. Its professional sales categories routinely outperform the company average and big-ticket sales, which Home Depot defines as transactions of $900 or more, have been climbing at a double-digit pace all year.

Future profitability gains will also depend on what executives call their ” product authority ” strategy. This approach seeks to differentiate the business, not through low prices, but through a high-quality (and often exclusive) product offering that tends to boost both customer loyalty and profit margins.

Cash returns

Shareholders will likely see significant cash returns from Home Depot in 2018, too. The company recently raised its dividend payout target to 55% of sales, compared to 35% for Lowe’s. Thus, if earnings rise by the double-digit rate that they’re projected to in fiscal 2017, income investors will see another hefty dividend boost early in the new year.

Home Depot executives have been even more aggressive about returning cash through stock repurchases. They are forecasting $8 billion of buyback spending in 2017, compared to $7 billion in each of last two fiscal years. Look for this strategy to continue lifting earnings on a per-share basis as the outstanding share count shrinks.

Forecasting is hard, as the saying goes, especially if it’s about the future. But Home Depot investors have many concrete reasons to expect the company to extend its multiyear market-beating growth streak into 2018.

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Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: short January 2018 $170 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe’s. The Motley Fool has a disclosure policy .


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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