By Neil Saunders
Although Home Depot’s overall sales and profit growth looks weak, this is primarily due to a shift in the fiscal calendar base, as this is a 52-week year compared to last year’s 53-week trading period. So the comparable sales figures provide a more meaningful guide to trading. Here, Home Depot put in a robust performance of +3.1%, with this growth coming off the back of a tough prior-year number.
Comparable sales growth has accelerated slightly since the first quarter, partly due to a bit of spending being transferred into the period after a wet start to the year delayed outdoor projects. Even though the pace of uplift is modest, we take this as an encouraging sign that the consumer economy continues to motor along nicely. Home improvement is an early indicator of economic distress and, from Home Depot’s numbers, there is no sign that the consumer is in a tailspin.
Home Depot’s good set of comparable figures is also encouraging, given that a couple of trends were against it. The first of these came from a significant fall in the cost of lumber. While this is good for the consumer as it reduces prices, it also helps deflate Home Depot’s sales and reduces average ticket value. The second came from a more aggressive competitor in the form of Lowe’s. While we believe that Lowe’s still has much work to do before it even starts to match Home Depot on authority, brand visibility, and convenience, it is gradually putting its house in order, so the competitive environment is strengthening.
Home Depot remains the go-to destination for home improvement by some margin. This is partly due to the company’s strong brand, but it is also the result of the investments it continues to make in both its online and store propositions. All of these are focused on making life easier for the shopper, whether they be a professional tradesperson or a novice home improver.
One area of particular success is the seamless shopping experience across all channels. Functions like checking stock availability online before coming into the store, using the app and website to navigate shops, and collecting online orders in stores work extremely well. While this is as it should be, Home Depot deserves credit for the significant investment it has made in connecting its various routes to market. The convenience that this affords is important in any part of retail; in home improvement where consumers want to quickly get products so they can get on with their jobs, it is vital. In our view, Home Depot is not just a long way ahead of its direct rivals on this front, it is also in the vanguard of the whole retail sector.
While Home Depot excels on the basics of shop-keeping and in getting the functional and executional aspects of its proposition right, it does not always succeed in delivering inspiration. It sometimes misses out on those looking for the softer side of home improvement in categories like decorative DIY, home accents and accessories, and lighting. However, the company now sees this as an area of potential growth and has invested in the Home Decorators Collection group of products, especially online. It is now much easier for those decorating homes to navigate across all relevant categories in the app and on the website, which should help lift basket size and conversion.
Looking ahead, the main threat is a downswing in the consumer economy. However, we do not believe that this is on the near-term horizon. As such, we remain optimistic.
Neil Saunders is managing director of research firm GlobalData Retail.