So far in 2022, the S&P 500 has lost 17% of its value. Investors, spooked by record inflation and the Federal Reserve’s plan to aggressively hike interest rates, have taken a more risk-off approach when it comes to the market. As a result, some otherwise great businesses are selling off amid the turmoil.
Leading home-improvement chain Home Depot (NYSE: HD) is down 26% this year. And the top dog in sportswear, Nike (NYSE: NKE), has seen its shares fall 35% in 2022. Despite this weak showing, I’m not worried. Here’s why.
From fiscal 2011 through fiscal 2021, Home Depot’s sales increased 115%, while net income jumped 323%. Even more remarkable is that the company’s store count only went from 2,254 (as of April 29, 2012) to 2,316 locations today. Home Depot has thrived from a financial perspective despite a footprint that has grown less than 3% during the last 10 years. That’s a clear sign of operational efficiency.
Instead of opening new stores aggressively, management has focused intensely on raising the sales volume at each location. A key initiative to make this happen, called the One Home Depot strategy, had the goal of creating a seamless omnichannel experience, as well as bolstering the company’s supply chain capabilities. In the most recent quarter (ended May 1), more than 50% of online sales were actually fulfilled at a store. And 90% of the U.S. population lives within 10 miles of a Home Depot location.
The business caters to both DIY and professional customers, the latter of which includes specialists like contractors, plumbers, and electricians. At the beginning of the coronavirus pandemic, when people were spending more time than ever at home and hesitant to let outsiders in, the DIY segment saw a surge in demand. But as the economy reopened, homeowners are taking on bigger projects. As a result, pro sales have outpaced DIY sales.
Because roughly 45% of Home Depot’s revenue comes from pros, who spend more, visit stores frequently, and are stickier customers, the company’s financials get a boost. In the latest quarter, Home Depot’s operating margin of 15.2% and return on invested capital of 45.3% were both better than rival Lowe’s.
Looking at the current environment, some are worried that rising mortgage rates will pressure the housing market, and in turn hurt demand for Home Depot products. I think this is a shortsighted view. The home is a consumer’s most important financial decisions, and therefore renovations will always be prioritized. Home Depot, penetrating a massive $900 billion industry, will be there to deliver.
Home Depot’s stock now sells for a more attractive price-to-earnings (P/E) ratio of 19, which is lower than the S&P 500’s multiple of 21. Now might be an opportune time to buy shares in this winning company.
Nike, with a current market capitalization of $172 billion, has long been the leader in the athletic apparel industry. The business generated trailing 12-month revenue of $46.7 billion and profit of $6 billion. Nike truly has a global presence as 58% of sales come from outside North America.
But this geographic diversity has had a negative impact recently because of a slow pandemic recovery, particularly in one of Nike’s most important markets. In the Greater China region, usually Nike’s fastest-growing market, revenue dropped 19% in the latest quarter. Strict COVID-related restrictions are to blame. This is a key development that investors should pay attention to.
Perhaps Nike’s greatest attribute is its incredibly powerful brand. Consumers all over the world can easily recognize the company’s famous Swoosh logo, an icon associated with style and a winning mentality. Bringing on top athletes like LeBron James and Cristiano Ronaldo with endorsement deals certainly helps Nike’s aura.
Supporting the brand’s strength in recent years has been the company’s investments in its digital ecosystem. Nike has hundreds of millions of members across its four digital apps, an accomplishment that allows the business to drive deeper connections with its most loyal fans, while at the same time creating a smooth experience that bridges the physical and digital worlds. Nike’s digital sales accounted for 24% of the overall business in the most recent quarter, but CEO John Donahoe wants this figure to approach 50% in the next few years.
Over a year ago, management released a five-year outlook with important financial targets to be achieved by fiscal 2025. Nike is expected to grow sales in high-single-digit to low-double-digit percentages, and earnings per share in the mid-to-high teens, on an annualized basis. If these goals are met, the stock could rise.
As of this writing, Nike shares are trading hands at a P/E multiple of 29, still somewhat expensive but significantly lower than the trailing five-year average of 47. Shrewd investors would be wise to consider adding this quality business to their portfolios.
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot and Nike. The Motley Fool recommends Lowe’s. The Motley Fool has a disclosure policy.