Where will Home Depot stock be in 5 years?

Throughout its history as a public company, Home Depot (HD 0.09%) it was a fantastic business to own. Since its initial public offering in 1981, the stock has generated a total return of 2,972,000%, which would have turned a $10,000 investment into over $297 million today.

However, the story has been more disappointing recently. Shares have returned 89% over the past five years, lagging the broadest S&P 500.

But where will that be? top retail stock be in five years?

Don’t expect much store growth

Through its network of stores in the US, Canada and Mexico, Home Depot sells products, tools and appliances to professionals and do-it-yourself customers. As with any retail business, a top trend historically has been the opening of new stores.

As of January 1994, Home Depot operated 264 locations. Fast forward to today and there are 2,337 locations. This translates into a considerable ninefold expansion.

However, over the past 10 years, the management team has expanded the physical footprint by only 2% overall. I suspect the same playbook will hold for the next few years.

Looking at the big picture

Just because Home Depot won’t be opening stores at an innovative pace doesn’t mean the situation is dire. In fact, there’s reason to believe that the company will still be able to post healthy sales growth.

Over the past decade, the company’s revenue has grown by 85%. Management focused on increasing sales volume per store. Investments in strengthening the supply chain and increasing omnichannel capabilities have helped. Expect more improvements here to keep driving same store sales long term growth.

To be clear, however, Home Depot has fallen on hard times. In fiscal 2023 (ended Jan. 28), revenue fell 2.9 percent, and executives expect sales growth of just 1 percent in the current fiscal year. The challenging macro environment, where consumers are dealing with inflationary pressures and fears of recession, naturally puts pressure on large purchases.

Home Depot should return to healthy growth. As always, the economy will become a headwind rather than a headwind, helping to boost consumer spending and demand for Home Depot.

The industry context is also quite favorable. The domestic home improvement industry is estimated to be worth $1 trillion. Based on its trailing 12-month revenue of $152 billion, Home Depot, the clear leader, has just a 15 percent share. The company’s strong brand recognition, extensive inventory availability, and large store base should help it continue to steal market share.

The current housing stock is also encouraging for companies exposed to the home improvement industry. There is a housing shortage in this country, and the fact that the average age of a home was 40 (and rising) in 2021 benefits Home Depot. Consumers will have to spend money to maintain the quality of their homes.

Investor setup

It’s easy to be optimistic about Home Depot’s prospects five years from now. The company will return to revenue growth, which should support earnings.

Valuation must also be considered. Shares are traded at a price-earnings ratio ratio of 23.5, slightly above the last five-year average of 21.9. Value-conscious investors might balk at this, but given the quality of the company, it might still make sense to own shares.

Additionally, Home Depot is known for returning massive amounts of capital to shareholders. Just in the last fiscal year, $8.4 billion was spent on dividends and nearly $8 billion worth of stock was repurchased. Add that to the potential for stock price gains, and investors who buy Home Depot today will likely be happy in five years.