Home improvement retailer Home Depot (HD) has come a long way since 2009. In five short years the Atlanta-based company has managed to almost double its operating margins to 11.6% while gross margins have essentially remained the same around 34-35%.
To do that, it’s had to become far more productive and efficient. In the past five years the number of retail employees has grown by 43,000 to 365,000 in Mexico, Canada and the US. That’s a 2.5% increase on an annualized basis. At the same time it actually saw its sales-per-employee decline by 0.5% annually. Yet its stock price managed to gain 26.1% per year between 2009 and 2013.
How did do it?
Like I said — by watching costs. The average employee is now worth $25,000 in operating income each year to Home Depot, 82% more than the average in 2009 of $13,700. On an annualized basis, Home Depot increased its operating profit-per-employee by 13% annually over the last five years. Earnings drive stock prices. HD stock is proof positive.
While Eddie Lampert’s investment in Sears Holdings (SHLD) has been nothing short of a disaster, the same can’t be said for his 22.4% ownership interest in the world’s largest automotive retailer, AutoNation (AN). Lambert originally bought into the company all the way back in early 2000 when he paid approximately $200 million for 25 million of its shares. Today that’s been whittled down to about 27 million shares (from a high of about 77 million) worth $1.4 billion as of April 15. Needless to say it’s this investment that’s kept him in the game.
AN stock has achieved an annualized total return of 27.6% over the past five years. Like I said, Lampert’s done well by AutoNation. Over those five years it managed to grow sales-per-employee by 2.4% annually meaning a 1% increase was worth an 11.5% bump. That seems a little high. What really pushed the stock was the turnaround in operating income. In fiscal 2009 it had an operating loss of $1.3 billion thanks to car sales falling off a cliff. By 2013 it had boosted operating profits to $687 million; a two-billion dollar turnaround with just 2,000 additional employees.
While department stores in general have underperformed the S&P 500 over the past five years, Terry Lundgren has delivered a total annual return of 39.1%, more than double the index with leading retail stock Macy’s (M). That’s impressive to be sure. Especially when you consider that department stores have seen a loss of 225,000 retail jobs since 2000.
Macy’s was hurt like most retailers by the recession. In fiscal 2009 its operating loss was a whopping $4.4 billion on $24.9 billion in revenue. Fast forward to this past year and things have certainly changed. In 2013 its operating profit was $2.7 billion on $27.9 billion in revenue. On a sales-per-employee basis that works out to 1.6% annualized growth which isn’t much but when combined with a $7 billion turnaround in operating profits it’s easy to see why the stock has done as well as it has.
These five companies added a total of 91,500 jobs over the past five years. That’s not a whole lot when you consider the revenue and profit growth for each of them.
How much are workers worth more to big retail? Clearly a whole lot… at least to retail stocks and their investors.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.