Home Depot: A building block for the portfolio.

Home Depot is the largest home improvement retailer in the world, serving both do-it-yourself consumers and professional contractors across more than 2.000 stores in North America. Known for its unmatched scale, strong brand, and integrated shopping experience, the company offers everything from lumber and appliances to online ordering and jobsite delivery. With a growing focus on professional customers, digital innovation, and supply chain efficiency, Home Depot is aiming to capture more share in a trillion-dollar market. The question is: Does this retail giant still have room to build long-term value in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Home Depot at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Home Depot, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Home Depot was founded in Georgia in 1978 and has grown into the world’s largest home improvement retailer. The company operates 2.347 large-format stores across the United States, Canada, and Mexico. It offers a wide assortment of approximately 30.000 to 40.000 items in-store, including building materials, appliances, tools, home décor, lawn and garden supplies, and maintenance and repair products. An even broader selection is available through its e-commerce platform, which ranks among the top online retail sites in North America. The company serves two main customer groups: do-it-yourself homeowners and professional customers such as contractors, remodelers, and tradespeople. These customers rely on Home Depot for projects ranging from minor repairs to major renovations. It also supports do-it-for-me customers who hire professionals to complete installations, which Home Depot facilitates through in-house services. Tool and equipment rentals further complement the offering. Roughly 60 percent of sales involve customers engaging across both physical and digital channels, underscoring the strength of its interconnected retail model. In recent years, Home Depot has expanded into specialty trade segments through the acquisition of SRS Distribution, a distributor serving roofing, landscaping, and pool professionals. It has also bolstered its presence in the institutional maintenance and repair segment through HD Supply. These additions enhance the company’s service capabilities and deepen its relationship with high-value professional customers. Home Depot benefits from several durable competitive moats, including unmatched scale, a strong brand, and a highly integrated omnichannel approach. Its purchasing power and operational efficiencies allow it to offer competitive pricing while supporting its strategy of being the sector’s low-cost provider. The company’s supply chain enables fast and reliable delivery, with many products available for same-day or next-day service. The Home Depot brand is one of the most recognized in retail and strongly associated with home improvement. Its knowledgeable in-store staff, how-to resources, and focus on customer service foster strong loyalty among both DIYers and professionals. The omnichannel model accommodates customers however they prefer to shop online, in-store, or both, supported by services like curbside pickup, store-based delivery, and jobsite drop-offs. Exclusive product lines and strong private-label brands, such as Ryobi, give the company added pricing power and differentiation.

Management

Edward “Ted” Decker serves as the CEO of The Home Depot, a role he assumed in March 2022 after more than two decades with the company. Since joining Home Depot in 2000, he has held a variety of leadership positions across the organization, developing deep expertise in merchandising, store operations, and the interconnected retail strategy that now defines the company’s customer experience. Before becoming CEO, Ted Decker most recently served as President and Chief Operating Officer, where he played a pivotal role in shaping Home Depot’s omnichannel transformation. He led efforts to integrate the company’s physical and digital operations, enabling a seamless experience for both do-it-yourself (DIY) and professional customers. This initiative has become a core differentiator for Home Depot, with more than half of sales now involving both online and in-store touchpoints. Prior to joining Home Depot, Ted Decker held roles at Kimberly-Clark, Scott Paper Company, and PNC Bank, gaining experience in both finance and consumer products. He holds a bachelor’s degree in English from The College of William and Mary and an MBA from Carnegie Mellon University’s Tepper School of Business. Although he has only been CEO during the challenging macroeconomic backdrop of 2022 and 2023, including inflationary pressures and softer home improvement demand, Decker has demonstrated clear strategic direction and a strong operational foundation. Under his leadership, Home Depot has remained focused on enhancing its supply chain capabilities, growing share with professional customers, and maintaining its position as the sector’s low-cost provider. Ted Decker is also well-regarded internally. According to Comparably, he holds an employee approval rating of 74 out of 100, placing him in the top 25% of CEOs at similarly sized companies. His deep knowledge, built over more than two decades at Home Depot, combined with his operational track record and commitment to improving the customer experience, positions him well to continue executing the company’s long-term strategic priorities.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Home Depot has consistently achieved a high ROIC above 25% every year for the past decade, and above 30% in nine of the past ten years. There are several reasons behind this exceptional performance. First, Home Depot operates an asset-light business relative to revenue. Despite its large-format stores, each location generates extremely high sales, allowing the company to spread fixed costs, such as real estate and logistics, over a broad revenue base. Its store network is mature and optimized, reducing the need for continual reinvestment. Second, the company benefits from high store productivity. Each store generates well over $50 million in average annual revenue. Because Home Depot extracts so much value from each location, it does not need to expand its store count aggressively to drive earnings growth. This efficient use of capital contributes to consistently strong returns. Third, Home Depot’s omnichannel model provides meaningful capital efficiency. Its “interconnected retail” strategy enables the company to leverage its physical stores to fulfill online orders, reducing the need for incremental investment compared to pure-play e-commerce competitors. In fiscal year 2025, ROIC declined and reached its lowest level in the past decade. This was primarily due to macroeconomic headwinds, which led to a decline in sales, as well as the $18,25 billion acquisition of SRS Distribution. In addition, Home Depot continued investing in supply chain enhancements and digital infrastructure to support long-term growth, which increased its capital expenditures. However, the decline in ROIC is not a concern for me. The acquisition of SRS Distribution and the company’s strategic investments are expected to enhance its competitive position and improve ROIC over time.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. At first glance, the numbers look underwhelming in many years, as equity has been volatile and even negative at times. These fluctuations aren’t a sign of weakness in the business. They’re mostly the result of Home Depot’s long-standing practice of buying back large amounts of its own stock. Over the past decade, the company has returned tens of billions of dollars to shareholders through share repurchases. While this reduces the number of shares in circulation and boosts value per share, it also lowers the equity figure on the balance sheet. Home Depot has reported negative equity in some years, but this simply reflects how accounting records these buybacks. Over time, the amount spent on repurchases has exceeded the company’s retained earnings after dividends, which can push equity into negative territory. That doesn’t mean anything is wrong. The company continues to generate strong cash flows, holds solid credit ratings, and remains highly profitable. In fiscal year 2025, equity reached a record high. This was largely due to Home Depot’s acquisition of SRS Distribution.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Home Depot has achieved positive free cash flow in every year over the past decade, as the company emphasizes free cash flow as the foundation of its shareholder-friendly strategy. It has also historically delivered a high levered free cash flow margin, thanks to its strong gross and operating margins supported by scale, operational efficiency, and a balanced mix of high-margin and big-ticket products. At the same time, Home Depot’s capital requirements are relatively low. The company does not need heavy investment to sustain growth, as most capital spending is directed toward supply chain improvements, technology, and maintenance rather than store expansion. Home Depot also manages working capital efficiently, often receiving payments from customers before it pays its suppliers, which further supports free cash flow generation. With its omnichannel infrastructure already in place, the company can continue growing without major new investments. And as a mature business with stable demand, it consistently converts a large portion of its earnings into free cash flow. The small drop in free cash flow and levered free cash flow margin in fiscal year 2025 is primarily due to the acquisition of SRS Distribution and an increase in capital expenditures. However, Home Depot remains focused on rewarding shareholders through share repurchases and dividends. As free cash flow grows, investors can reasonably expect higher dividend payouts and a continued decline in the number of outstanding shares. The free cash flow yield suggests that the stock is currently trading at a premium. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of three years. We do this by dividing the total long-term debt by earnings. Upon calculating, I found that Home Depot currently has 3,14 years of earnings in debt. This is slightly above the three-year threshold. However, it’s worth noting that Home Depot typically operates with less than three years of earnings in debt and only increased its debt load in fiscal 2025 due to the acquisition of SRS Distribution. While this acquisition temporarily raised Home Depot’s debt levels, the company maintains strong credit ratings and has expressed confidence in its ability to manage and reduce this debt over time through its strong cash flow generation. Therefore, the slight increase above the three-year threshold does not concern me.

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Risks

Competition is a risk for Home Depot. The home improvement industry is highly competitive, fragmented, and constantly evolving, and Home Depot faces pressure from a wide range of players - both traditional and digital. Competitors include other home improvement retailers, regional hardware stores, building material suppliers, and specialty outlets like paint and design stores. In addition, warehouse clubs, online-only retailers, and home décor brands also compete for consumer spending. This wide field of competition creates constant pressure on Home Depot to maintain pricing power, product availability, and a high-quality customer experience. The growing influence of e-commerce only intensifies this risk. The internet has made price comparisons and product research easy, raising customer expectations for fast, affordable delivery and seamless shopping across channels. While Home Depot has built a strong omnichannel platform, it must continue investing to stay ahead. Rivals like Amazon and Wayfair, while not suited to deliver bulky items like lumber, still compete effectively on tools, lighting, and home accessories - products with lower shipping barriers. If Home Depot’s digital experience lags, it risks losing sales to online-first competitors. There’s also pressure from Lowe’s, which competes directly on price and is actively working to grow its presence with professional contractors - one of Home Depot’s most valuable customer segments. Regional chains like Menards and Ace Hardware cater to local preferences and maintain strong loyalty in certain markets. Even less traditional threats, such as tech-enabled startups targeting contractors or rental services, could disrupt part of Home Depot’s business model. Because the company competes on many fronts - price, product selection, store experience, delivery speed, and service quality - any failure to keep up in these areas could hurt demand, shrink margins, or reduce market share.

Seasonal influences are a risk for Home Depot because a significant portion of its sales depends on weather-related demand patterns and project cycles. The company typically sees stronger performance during the spring and summer months, when customers take on home improvement and landscaping projects. However, when weather conditions deviate from expectations - such as unseasonably warm winters or prolonged rain - demand for seasonal items can shift, sometimes leaving the company with excess or poorly timed inventory. In a recent earnings call, management specifically noted that January sales were negatively impacted by severe weather conditions, calling it a “particularly tough” month following an already difficult January the year before. This shows that unpredictable weather can directly influence short-term performance and sales patterns. Beyond normal seasonal variation, Home Depot is also exposed to the risks of extreme weather events, including hurricanes, floods, wildfires, and storms. These events can disrupt store operations, supply chains, and customer access. While the company may benefit from recovery-related demand in affected areas, the immediate effect can include store closures, inventory losses, or increased operating costs. Climate change adds further unpredictability by altering weather patterns and increasing the frequency or severity of such disruptions. Because so much of Home Depot’s business is tied to the rhythm of seasonal spending and the reliability of its operations across regions, unexpected shifts in weather or broader environmental disruptions remain an ongoing risk to its sales and profitability.

Brand and reputational risk is a concern for Home Depot because a strong, trusted brand is central to its ability to attract and retain customers, employees, suppliers, and business partners. If trust in the brand is eroded, it could impact everything from customer loyalty and sales to hiring and supplier relationships. While Home Depot has built a reputation over decades for reliability, service, and value, that reputation can be damaged quickly by negative incidents, whether or not they are accurate or fairly reported. Reputational risk can come from many directions. A poor customer experience, controversy involving a supplier, or even misinformation on social media could go viral and influence public opinion. Since customers increasingly share opinions online - sometimes with little context or accuracy - even a small issue can spread quickly and lead to broader brand damage. This includes the risk of impersonation by fraudulent accounts or coordinated social media campaigns that misrepresent the company. Home Depot is also exposed to criticism related to social, environmental, and political issues. Whether the company takes a public position or chooses to stay silent, it risks alienating certain groups. If it sets public sustainability or social goals but fails to deliver or communicates poorly, that too could hurt its reputation. In a highly polarized and connected world, perceived missteps can trigger consumer backlash, boycotts, or even regulatory scrutiny. In short, maintaining a strong brand is not only about delivering quality products and service, but also about navigating a highly visible and sensitive public environment. Any significant reputational damage could lead to a decline in sales and weaker customer trust.

Reasons to invest

Favorable structural and consumer trends represent a key reason to invest in Home Depot. The company’s customer base is unusually strong, with an average household income of around $110.000 and a homeownership rate of 80% - well above the national average. These customers are financially healthy, benefiting from rising incomes, low unemployment, and a significant increase in home equity. Since 2019, U.S. home values have risen approximately 50%, creating nearly $15 trillion in housing wealth. Much of this wealth is untapped, as homeowners have been reluctant to refinance or take out home equity lines of credit during a period of higher interest rates. This has created a significant backlog of deferred home improvement projects. Management estimates that there is now a $50 billion cumulative deficit in home improvement spending since 2019, as many homeowners put off large projects but still plan to complete them in the future. Importantly, this "deferral mindset" appears to be shifting. Consumers are increasingly accepting that interest rates may remain elevated for the foreseeable future and are beginning to act on postponed remodeling and repair plans. At the same time, U.S. housing stock continues to age, with more than half of homes now over 40 years old. This trend supports recurring demand for repairs, upgrades, and renovations, regardless of the macroeconomic environment. As Home Depot serves both DIY consumers and professionals, it is well positioned to capture this pent-up demand when it materializes. Combined with a vast addressable market of over 130 million households in North America, these dynamics create a powerful, long-term tailwind for Home Depot’s growth.

Professional customers, or "Pros," are a key driver of Home Depot’s long-term growth and a central part of its investment appeal. Roughly half of the home improvement market, estimated at over one trillion dollars, is driven by professionals such as contractors, remodelers, and specialty tradespeople. Home Depot already serves a significant share of this market but sees meaningful room to grow, particularly among larger Pros working on more complex projects. To support this opportunity, Home Depot has made substantial investments to better serve its professional customers. This includes stocking a deeper inventory of the core products Pros need, especially in the larger quantities required for big jobs. The company has also added dedicated in-store sales teams to provide more tailored support and introduced digital tools that help both customers and associates manage projects and place orders more efficiently. Whether Pros are shopping in-store, online, or arranging jobsite deliveries, these improvements aim to make the process faster, easier, and more dependable. As Pros increasingly rely on digital platforms and delivery services to manage large and complex orders, Home Depot has upgraded its supply chain with specialized distribution centers that enable faster and more consistent deliveries directly to job sites. These upgrades reduce in-store congestion and improve product availability. The 2024 acquisition of SRS Distribution further strengthens Home Depot’s position in this space. SRS brings extensive expertise and logistics capabilities in roofing, landscaping, and pool-related trades, segments that are largely non-cyclical and focused on repair and maintenance. With a strong track record of organic growth and acquisitions, SRS has added both scale and credibility in serving specialty trade professionals. The deal also expands Home Depot’s total addressable market by an estimated fifty billion dollars and creates cross-selling opportunities between its generalist and specialist customer bases.

Home Depot’s interconnected shopping experience is a major reason to invest in the company. By blending the physical and digital sides of its business, Home Depot has created a flexible, customer-focused model that supports stronger engagement, higher satisfaction, and ultimately more sales. Whether customers are browsing online, shopping in a store, or arranging same day delivery to a job site, they can move easily between channels with a consistent and reliable experience. This strategy goes beyond convenience and has become a competitive advantage. Home Depot has invested significantly in both technology and logistics to improve the overall shopping journey. It has enhanced its mobile app to help customers navigate stores, redesigned store layouts to speed up checkout, and expanded inventory in its direct fulfillment centers to enable faster delivery. As a result, the company now offers the fastest delivery speeds in its history, with same day and next day options available for more products than ever, ranging from small items like light bulbs to large items like lumber and appliances. These efforts are producing results. Customers who engage with both digital and physical channels are spending more and returning more frequently. Online sales grew in fiscal year 2025, and both consumer and professional customers are making greater use of Home Depot’s digital tools and delivery services. The company’s ability to fulfill orders quickly and reliably, often by using its network of more than 2.000 stores, has driven higher conversion rates online and increased sales across all channels. In a retail environment where speed, convenience, and flexibility matter more than ever, Home Depot’s interconnected model positions it well to meet changing customer expectations and support long term growth.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 14,91, which is from the fiscal year 2025. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 8,9% in the next five years. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on Home Depot's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $127,31. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Home Depot at a price of $63,65 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 19.810, and capital expenditures were 3.485. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 2.440 in our calculations. The tax provision was 4.600. We have 993,4 outstanding shares. Hence, the calculation will be as follows: (19.810 – 2.440 + 4.600) / 993,4 x 10 = $221,16 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Home Depot's free cash flow per share at $16,43 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $188,74.

Conclusion

I believe that Home Depot is an intriguing company with strong management. It has built a moat through its unmatched scale, widely recognized brand, and highly integrated omnichannel approach. The company has consistently achieved a high return on invested capital, and the decline in fiscal 2025 was primarily due to the acquisition of SRS Distribution. Similarly, its historically high levered free cash flow margin only dipped in fiscal 2025 because of the same acquisition. Competition is a risk for Home Depot because it operates in a highly competitive and fragmented industry, facing pressure from both traditional retailers and digital-first players. To protect its market share, the company must continually invest in pricing, product selection, digital capabilities, and customer service or risk losing sales to rivals. Seasonal influences also pose a risk, as Home Depot’s sales depend heavily on weather-driven demand, especially during the spring and summer months. Unpredictable or extreme weather can disrupt customer behavior, inventory planning, and store operations, which can lead to weaker sales and higher costs. Brand and reputational risk is another consideration. Negative publicity, customer backlash, or social media controversies can quickly damage trust in the brand, potentially reducing customer loyalty and impacting sales. On the positive side, favorable structural and consumer trends support long-term growth. Home Depot’s financially strong, homeowning customer base holds record levels of housing wealth and has delayed many renovation projects. With aging housing stock and a growing acceptance of higher interest rates, Home Depot is well positioned to benefit as this pent-up demand starts to materialize. Professional customers are also a key growth driver. This segment remains underpenetrated, and through targeted investments and the acquisition of SRS Distribution, Home Depot is expanding its capabilities to serve Pros more effectively, unlocking long-term revenue opportunities. Finally, Home Depot’s interconnected shopping experience is a competitive advantage. By combining its store network with strong digital capabilities, the company allows customers to shop seamlessly across channels. This model drives higher engagement and spending, and with faster delivery and greater convenience, it further strengthens Home Depot’s position in the market. In short, there are many things to like about Home Depot, and buying shares at the Ten Cap price of $221 could be a good long-term investment.

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