The Home Depot, Inc. (HD), which is based in Atlanta, Ga., operates as a home improvement retailer, selling various building materials, home improvement products, lawn and garden products, and décor products. It is the biggest home improvement company in the world. In comparison, Tile Shop Holdings, Inc. (TTSH) operates as a specialty retailer of natural stone and synthetic tiles, setting and maintenance materials, and related accessories. TTSH is based in Plymouth, Minn.

Last year, the home improvement industry achieved robust  growth driven primarily by DIY projects. The Home Improvement Research Institute expects the industry’s growth to continue as contractor-led projects and projects once on hold resume. The total building products market is projected to grow by 13% in 2021, with the consumer market growing by 10.8% and the professional market growing by 18.2%. Moreover, the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University projects annual improvement and repair spending to register  9% growth in the current quarter, maintaining that pace into 2022. Both HD and TTSH should benefit from the increased spending on home improvement and remodeling trends.

TTSH’s stock has gained 23.7% in price over the past six months, while HD has returned 8.7%. In terms of the past year’s performance, TTSH is the winner with 117.4% gains versus HD’s 29.7%. Also, TTSH’s 98.2% gains year-to-date compare with HD’s 38.8% returns.

But which stock is a better buy now? Let’s find out.

Latest Developments

On October 06, HD partnered with Walmart to expand same-day and next-day delivery. This partnership ensures a convenient shopping experience in home improvement and fast and reliable delivery options to its customers. “This partnership brings us even closer to our goal of offering same-day or next-day delivery to 90% of the U.S. population,” said Stephanie Smith, senior vice president of the supply chain for The Home Depot.

On November 04, TTSH declared a $0.65 special dividend per share, payable on December 3, 2021, to the company’s shareholders of record at the close of business on November 19, 2021.

Recent Financial Results

HD’s net sales increased 8.1% year-over-year to $41.12 billion in its  fiscal second quarter, ended August 1. Its operating income stood at $6.64 billion, up 9.4% from the same period last year, and its net earnings grew 11% from its  year-ago value to $4.81 billion. The company’s EPS increased 12.7% year-over-year to $4.53.

For the third quarter ended September 30, TTSH’s net sales increased 13.2% year-over-year to $92.24 million. Its income from operations grew 8.9% from its year-ago value to $3.16 million. Its net income improved 13.6% from the same period last year to $2.18 million. The company’s EPS came in at $0.04.

Past and Expected Financial Performance

HD’s net income and EPS have grown at CAGRs of 15.7% and 18.7%, respectively, over the past three years. Its EPS is expected to grow 10.6% per annum over the next five years.

In comparison,  TTSH’s net income and EPS have grown at CAGRs of 50.9% and 51.8%, respectively, over the past three years. Analysts expect TTSH’s EPS to grow 20% per annum over the next five years.

Profitability

TTSH is more profitable, with gross profit  and levered FCF margins of 68.88% and 10.98%, respectively, compared to HD’s 33.72% and 6.80%

On the other hand,  HD’s ROE, ROA, and ROTC of 1,841.81%, 20.86%, and 33.08%, respectively,  compare with TTSH’s 9.88%, 3.62%, and 3.88%.

Valuation

In terms of trailing-12-months EV/Sales, HD is currently trading at 2.95x, which is 49.8% higher than TTSH’s 1.48x. Also, HD’s 17.00 trailing-12-months EV/EBITDA ratio is 30.8% higher than TTSH’s 11.77.

Thus, TTSH is relatively affordable here.

POWR Ratings

TTSH has an overall A rating, which equates to Strong Buy in our proprietary POWR Ratings system. In contrast , HD has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

TTSH has an A grade  for Quality. TTSH’s 10.98% levered FCF margin is 66.5% higher than the 6.60% industry average. On the other hand, HD has a B grade  for Quality. This is justified because  HD’s 6.80% levered FCF margin  is 3.2% higher than the industry average.

Both the stocks have a C grade for Momentum. This is justified because  both are trading above their respective 50-day moving averages.

Of the 43 stocks in the Specialty Retailers industry, TTSH is ranked #1. Alternatively, among the 60 stocks in the Home Improvement & Goods industry, HD is ranked #27.

Beyond what we have stated above, we have also rated the stocks for Value, Stability, Growth, and Sentiments. Click here to view TTSH ratings. Also, get all HD ratings here.

Note that TTSH is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Stocks Under $10 portfolio. Learn more here.

The Winner

As analysts expect the home improvement market to keep growing, driven by increasing spending on remodeling and increasing housing projects, HD and TTSH should benefit. However, its lower valuation makes TTSH the better Buy here.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Specialty Retailers industry here. Also, click here to view the top-rated stocks in the Home Improvement & Goods industry.

Click here to checkout our Retail Industry Report for 2021

HD shares were trading at $369.32 per share on Tuesday afternoon, up $0.73 (+0.20%). Year-to-date, HD has gained 41.36%, versus a 26.02% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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