Home Upkeep and Creature Comforts, Retail Gold?
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One would think that a Friday night would be spent doing something fun, or spending time with family. Or maybe just heading home to relax after a tough week of work. That is why I was so surprised when I walked into my local Home Depot. I was there to buy something I needed right away. I was amazed to find Home Depot rather busy. It was dinner time, and people were not buying things necessary at that moment. Sure, it was a bit busier in the light bulb section, but lots of people were looking at fancy lamps, non-emergency plumbing, and interestingly—doors. It was not overly crowded, but the steady inflow and outflow was curious. The town I live in is not huge so it was impressive.
I went over The Home Depot (NYSE: HD) in a prior article about the housing recovery. I do not go to Home Depot often so I don't know if there's been a cultural shift to people repairing their own homes. All I have at my disposal are Home Depot's financials, which I will go over shortly.
When I wandered through the Home Depot appliance section, I got to thinking about all the little appliances I have bought over the years. My mini-fridge care of Wal-Mart, my electric grill care of Bed Bath & Beyond (NASDAQ: BBBY), and my television from Costco. Each store is still around, and for the most part in no danger of shutting down.
The four stores I have listed are ones that I still shop at, in addition to a specialty video game store I used to go to. It got me thinking about the mess of retail. I was so sad when I heard of Sears' difficulties and all the negative opinions about its survival. I grew up going to Sears for everything—from socks to dryers, but I have not visited in over half a decade now. Retailers are obviously cyclical stocks, but finding the good ones that can weather the storms and come out leaner are ones you buy and hold.
Home Depot's revenue has been on a steady uptrend. Revenue is in a tight range with $66B as the low and around $77B as the high for the last 5 years. The June 2012 quarter had $71B. The reason I focus so much on revenue progression is that I am looking to Home Depot to signal a positive trend in the housing market. The frugal people who do their own upgrades and repairs go to Home Depot to buy the tools and materials to do their projects. This includes the bargain seekers that use small, local contractors to do upgrades that home developers charge a high rate for. All this should start funneling revenue into Home Depot. Obviously, I am looking for signs that people are buying things other than the occasional light bulb, but there is no news alert when lots of ladders are bought. This would be a lot easier if we got a monthly washers and dryers sold report in addition to the jobs report.
All the revenue talk needs to be balanced against earnings, which have been growing nicely. The most recent quarter had over 17% yoy quarterly EPS growth. Look at the table for the history, it is quite impressive. Revenues plus earnings is good. If it was just earnings it might be just cost cutting measures, increasing revenues means that Home Depot is doing more business.
After you finish building your castle you might head over to Wal-Mart to get to furniture. However, let’s keep the focus on specialty retailers. Bed, Bath, and Beyond has some useful stuff, and a whole bunch of stuff you'd probably never need. However, it is fun to have. Humans do love their creature comforts in the home. A simple pillow won't do, it has to be some fancy stuffing clad in equally fancy textiles. Then we want our fancy spice rack with only the rarest and most exotic spices.
The fundamentals concur with my opinion that humans have a strange affinity for the needless and overly fragrant. I'm not knocking it, since I have a ton of stuff I do not need. It has $10B in revenue, positive revenue growth, positive EPS growth, and net income TTM at over $1B. I was surprised when I researched the company, because I thought it would be weaker than it is. With no debt at all, and almost a billion dollars in the bank I would say that Bed, Bath, and Beyond is a fantastic retail stock to own, though that might be jumping to conclusions.
However, with a 3-year stock return of 68% and no dividend I wonder if it is worth. I mean that is not a bad return, but with no dividend you are wholly depending upon Bed, Bath, and Beyond growing its business. In the tough retail space, I would be more comfortable getting a dividend while waiting for more reserved growth. Even a smaller dividend would be nice. With that in mind, I think it will announce a dividend soon enough. It might be worth grabbing a slightly above average position size that you can trim when there is a bump in the price when a dividend is announced. Then again it could be a problem if Bed, Bath, and Beyond generally stagnates compared other stocks. Home Depot for example rose over 100% over 3 years. Perhaps it might be prudent to pass on Bed, Bath, and Beyond. I think I'd want Home Depot over Bed, Bath, and Beyond until I know more.
The stock has been hit due to slightly weak earnings. Apparently, margins were lower and that spooked the market. Some see this only as a temporary problem, and once acquisition inefficiencies smooth out the margin will rebound and perhaps do even better. I would need to look into the what and when of acquisitions before I decide to ignite my desire to own Bed, Bath, and Beyond. I might even pop in to see how the stores are getting along.
I wanted to write about Wal-Mart and Costco here too, but I will save that for an article about Big Box retailers. This article is already lengthy. I like Home Depot in the long term, because I think the dividend will grow. The question is, will it beat the index during the economic recovery? That is a tougher call because I see Home Depot as a conservative and boring investment, but the S&P 500 has been on some serious tears and tragic slides. I thought indices were supposed to be the safe and boring investments. I still like Home Depot, and if you're going to stick money in a pillow case maybe grab a small handful for this stock. I need to know more about Bed, Bath, and Beyond and go pick up some delicious tomato sauce too.
TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of Bed Bath & Beyond. Motley Fool newsletter services recommend Bed Bath & Beyond and The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.