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Better Buy: Home Depot vs. Wayfair

The Motley Fool logo The Motley Fool 1/24/2023 Leo Sun

Between 2011 and 2021, annual sales of homes in the U.S. rose from 4.6 million to 6.9 million, representing a compound annual growth rate (CAGR) of 4.1%. That steady growth, which was supported by a stable economy and historically low interest rates, drove investors toward home-oriented stocks like Home Depot (NYSE: HD) and Wayfair (NYSE: W) -- which both reached their record highs during the feverish buying frenzy in growth stocks in 2021.

Unfortunately, sales of new homes declined throughout most of 2022 as rising interest rates made mortgages less appealing. Inflation also prompted buyers to postpone their purchases. As a result, shares of Home Depot and Wayfair now trade about 20% and 90% below their all-time highs, respectively. Should investors buy either stock as a turnaround play?

Colored arrows emerge from a person's head. © Getty Images Colored arrows emerge from a person's head.

The differences between Home Depot and Wayfair

Home Depot is the largest home improvement retailer in the United States. It's one of the few big box retailers that continues to open new stores even as other retailers downsize to cut costs. It operated 2,319 stores at the end of the third quarter of 2022, compared to 2,278 locations at the end of fiscal 2016 (which ended in January 2017).

Home Depot is resistant to competition from Amazon because most consumers won't buy large home improvement products (like floorboards and wood panels) online. It also carries a much wider range of tools, paints, and other products than superstores like Walmart or Target. Home Depot's dominance of its niche enabled it to thrive as more diversified big box retailers declined.

Wayfair sells furniture and other home goods online. It works with more than 23,000 suppliers worldwide, and it cuts out retailers by directly selling those goods from the supplier to the customer. That manufacturer-to-consumer approach enables Wayfair to sell its products at much lower prices than traditional furniture and home goods retailers.

Wayfair established an early mover's advantage with this unique approach, but it still faces intense competition from Amazon, Walmart, and other mass retailers that have since adopted similar strategies for selling furniture online.

Home Depot remains an industry stalwart

Between fiscal 2016 and fiscal 2021, Home Depot's revenue rose at a CAGR of 10% to $151.2 billion as its annual operating margin expanded from 14.2% to 15.2%. Its earnings per share (EPS) increased at a five-year CAGR of 19%.

Home Depot expects its comparable sales to only rise about 3% in fiscal 2022, compared to its 11.4% growth in fiscal 2021, as it grapples with inflation, rising interest rates, and sluggish sales of new homes. However, that growth should still outpace the decline of the broader housing market as consumers upgrade their existing homes. 

Analysts still expect Home Depot's revenue to grow at a CAGR of 9% from 2021 to 2025 and reach $164.5 billion. Its EPS is expected to grow at a CAGR of 16%.

Investors should take those estimates with a grain of salt, but Home Depot survived the housing crash and the Great Recession more than a decade ago -- so it's probably well equipped to survive another downturn.

Wayfair still can't turn a profit

Between 2016 and 2021, Wayfair's annual revenue grew at a stunning CAGR of 32% to $13.7 billion. Its annual gross margin expanded from 23.9% to 28.4% during those five years, but it turned unprofitable in 2021.

Wayfair started to bleed red ink again as inflation and supply chain disruptions caused its freight costs to soar. It also hired too many new workers to satisfy the temporary spike in orders during the pandemic, and those labor costs started to squeeze its margins as orders cooled. That's why Wayfair recently announced it would lay off about 1,750 employees.

During its third-quarter report, Wayfair admitted it still had excess supplies of furniture relative to the market's demand. The company expects that balance to be gradually restored, but analysts still expect its revenue to decline 12% to $12.1 billion in 2022 as its net loss widens from $131 million to $1.3 billion.

Over the longer term, analysts expect Wayfair's revenue to shrink, posting a CAGR of -0.7% between 2021 and 2024 to $13.4 billion as its bottom line stays underwater. That forecast might be a bit too gloomy, but Wayfair could certainly struggle as the housing market cools and more retailers emulate its manufacturer-to-consumer strategy.

The obvious winner: Home Depot

Home Depot will face some macro headwinds this year, but its stock trades at just 19 times forward earnings and pays a decent forward yield of 2.4%. Wayfair seems cheap at a forward price-to-sales ratio of less than 1, but it's stuck in the bargain bin because it's not expected to generate any near-term growth. Therefore, Home Depot is clearly the better buy right now.


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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in The Motley Fool has positions in and recommends, Home Depot, Target, and Walmart. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.



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