In a recent divergence of retail giants, Walmart (NYSE:WMT) has significantly outperformed Home Depot (NYSE:HD) over the past five years, with its shares observing a 70% surge compared to Home Depot's 48% rise. As of Friday, Walmart's shares continue to trade near their highest levels, while Home Depot is currently trading 25% below its December 2021 peak.
Walmart reported strong growth in the fiscal second quarter ending July 28, 2024, with a revenue increase of 5.7% and adjusted diluted earnings per share rising by 4%, both surpassing analyst predictions. U.S. same-store sales grew by 6.4%, and e-commerce sales jumped by 24%, demonstrating resilience against macroeconomic challenges such as high-interest rates and persistent inflation. The company's large presence in the grocery sector – being the largest grocer in the U.S. – provides some protection from economic downturns and digital competition.
Wall Street consensus estimates predict a 3.8% compound annual revenue growth for Walmart between fiscal years 2023 and 2028, nearly double Home Depot's projected 2% annual growth. Walmart's CEO, Doug McMillon, anticipates that earnings will grow even faster than revenue in the future.
On the other hand, Home Depot has recently experienced a business slowdown following a demand surge during the pandemic's peak. The company attributes this slowdown to decreased consumer spending and a shift from goods to services, resulting in a 2% revenue decline in the second quarter that ended on July 30. Furthermore, the management predicts a 3.5% sales drop for the entire year.
Despite this slowdown, Home Depot's history of robust revenue and earnings growth should reassure investors. As the economy recovers, it is expected to resume normal growth rates. Half of Home Depot's sales are from professional customers, such as contractors and electricians, which is double that of Lowe's (NYSE:LOW), its primary competitor. This clientele tends to spend more per visit, contributing to Home Depot's superior margins and return on invested capital.
Home Depot's stock currently trades at a price-to-earnings (P/E) ratio of 19.6, below its five-year trailing average and less than Lowe's current P/E ratio. Additionally, Home Depot has returned over $9 billion to shareholders through dividends and buybacks in the first half of fiscal 2023 alone.
While both Home Depot and Walmart are mature businesses with limited potential for double-digit revenue growth, they remain leaders in their respective sectors. Home Depot offers an attractive valuation, while Walmart shows more promising growth potential if Wall Street forecasts are accurate.
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