Among sales-boosting measures were improvements to in-store signage and elevated in-store merchandising. BOPIS was credited with improving conversion rates and fulfillment cost-effectiveness.
By Neil Saunders
Home Depot has turned in another excellent set of numbers with strong top-line growth and accelerated earnings growth of 32.4% on the bottom line. Despite already being the market leader by some margin, Home Depot is now putting even more distance between itself and rivals as it gains both market and customer share.
Home Depot’s numbers are particularly impressive given that the housing market did not play ball over the period, with a slump in sales of both new and existing homes. Over the longer term, we remain concerned that this trend will dampen underlying demand for home improvement. However, a number of other factors will elevate spending.
Destination of choice
Foremost among these is the strong economy. From our data, this has stimulated more households into undertaking home improvement projects— either completed by themselves or by professionals that they hire. Among these consumers, Home Depot is more often than not the destination of choice, with rival Lowe’s coming in a distant second. There is no sign of elevated levels of home improvement activity waning, which bodes well for Home Depot as it enters its final quarter.
Another rather unfortunate trend is the spate of natural disasters, including the wildfires in California and Hurricane Florence, which affected the Carolinas. The amount of rebuilding work required in affected communities is extensive, and Home Depot is a major beneficiary of this spending. From past disasters, it is evident that the financial benefit accrues over a few quarters rather than immediately, so this will provide uplift to Home Depot for some time to come.
Focus on professional customers
The focus on professional customers continues to pay dividends, and Home Depot is now attracting a greater share of these high-spending shoppers than ever before. This is extremely helpful to the top line, as this group tends to buy in bulk and their purchases are skewed to big-ticket items. This is one reason average transaction values continue to rise. Luckily for Home Depot, we do not see much churn in the professional customer base—loyalty tends to be strong, and switching to rivals is low.
While professional customers are a key target market for Home Depot, the company has not neglected its regular customer base. Initiatives like improvements to in-store signage, investments in online and omnichannel, and elevated in-store merchandising have all helped to generate better sales. We are particularly encouraged by initiatives like “order online, collect in store,” which have helped to improve conversion rates and average order values online and have made fulfillment more cost-effective.
Looking ahead, Home Depot will be a beneficiary of the ongoing demise of Sears, especially in categories like appliances. From our data, 62% of current Sears customers say they would consider Home Depot as an alternative for appliances, which is far higher than the consideration for other home improvement retailers. This, along with improvements to ranges—including the introduction of Bosch branded products—will provide a nice upside to growth over the next couple of quarters.
Overall, we remain very encouraged by Home Depot. The economy and housing market may tighten as we move into 2019, but the company is well positioned to engineer growth with a raft of initiatives.
Neil Saunders is managing director of research firm GlobalData Retail.