By Neil Saunders
The devastation caused by hurricanes and wildfires has been anything but a disaster for Home Depot, with the rebuilding efforts pushing already strong sales growth even higher. This quarter’s 8.1% lift in net revenue and the 7.9% rise in comparables are both well above the long-run average. The good news is that this elevated demand is likely to continue for at least a couple more quarters, which is one of the reasons Home Depot has raised its full-year guidance.
A shortage of housing in many U.S. markets will fuel both the need and willingness of consumers to make home improvement related purchases. Home Depot will be the primary beneficiary of this growth. A good seasonal holiday offer, gathering momentum with pros, and strong traction online also bode well for Home Depot.
Although natural disasters have had a positive impact on sales, their effect on margins has been less satisfactory. A lower margin rate on rebuilding products as well as higher hurricane-related expenses from disruption to stores and supply chains has damaged the bottom line. In the event, thanks to the underlying strength of the business, Home Depot’s operating profit rose by 10.8% over the prior year. However, it would have risen by 12.4% without the expense from the disasters.
The revenue benefits from rebuilding activity are helpful but, for Home Depot, they are the icing on the cake of an already strong business, which has been on an upward trajectory for many years. Fortunately, we see few signs that this direction of travel will change over the next fiscal and beyond.
Favorable economic tailwinds, especially from the housing market, look set to continue in 2018. A shortage of housing in many U.S. markets is keeping prices inflated and activity levels high. This will fuel both the need and willingness of consumers to make home improvement related purchases. In our view, Home Depot will be the primary beneficiary of this growth.
Less intense tailwinds will also help performance. This includes the difficulties of Sears, which we believe continues to cede market share in categories like appliances, tools, and outdoor products. While gains from Sears’ demise will be spread among many retailers, it looks likely that Home Depot will take the biggest chunk of share in 2018.
While external conditions are helpful, Home Depot has also engineered its success with a number of smart investments. Foremost among these is the development of the omnichannel offer. As much as online currently plays a relatively small role in home improvement purchasing, its influence is rising, and it is now becoming a more significant engine of growth across many categories. Home Depot has created a proposition that ensures it is the go-to destination online and is successfully defending its business from the rise of Amazon and other internet players.
Alongside consumer market, Home Depot has also made excellent inroads with the professional consumer. The integration of Interline — the commercially focused repair and maintenance products business Home Depot acquired in 2015 – continues to be beneficial. In the near-term, we believe that there is much more share to gained from this market.
The short-term uplift from disaster-related spending, robust underlying demand, a good seasonal holiday offer, gathering momentum with pros, and strong traction online, all bode well for Home Depot. Looking ahead, we expect the business to end this fiscal year on a high.
Neil Saunders is managing director of GlobalData Retail.