Analysis: Home Depot is a company ‘that does not stand still’

Worries that the consumer economy is running out of steam have been put to rest by today’s results from Home Depot. Sales have continued to grow at a very healthy pace with comparables in the U.S. up by 5.3%. Admittedly, this is not reflected in the total net sales number, which was down by 2.7%, but this is a function of a shorter trading period this year; when this is accounted for, total revenue rose by a respectable 3.7%.
Home Depot’s numbers are important as they, perhaps more than those of other retailers, reflect underlying consumer confidence: the housing market and big-ticket spending are leading indicators of the broader economy. On this front, Home Depot was helped by the continued rise in house prices which provides consumers with the confidence and impetus to invest in large-scale improvement projects. While housing transactions are somewhat choppy, they remain at solid levels meaning there are plenty of consumers looking to invest in their new homes.
It would be unfair to credit all of Home Depot’s success to market conditions. Our data continue to show that consumers are thinking more carefully about expensive purchases, including on home improvement projects. However, in our view, Home Depot has excelled at making life easy for the customer by removing roadblocks on the purchase journey – something that helps it to gain market share and to stimulate spend. A lot of this is about multichannel execution, which is attractive to both trade and regular shoppers as it saves them time. However, greater investment in digital – including functions like visual search, which allows people using the app to take a picture of a product which Home Depot then matches with products it stocks – are helping to further improve engagement.
Such investments are critical at a time when competition is increasing, especially from Lowe’s. Home Depot seems determined to rise to this challenge and to maintain the distance it has put between it and its nearest rival. This was partly evident in the holiday assortment where execution in categories like holiday décor, winter home preparation and other festive assortments was far stronger at Home Depot than Lowe’s. In our opinion this underlines the executional prowess of Home Depot and its ability to take advantage of seasonal events – both things that ultimately drive footfall into stores. That said, we still maintain our view that a nimbler Lowe’s poses a medium-term risk which could moderate Home Depot’s growth rate.
Looking ahead, the near-term prospects look solid. For the upcoming fiscal year, Home Depot expects underlying sales to grow in the range of 3.5% to 4.0%. Given the current state of the housing market we believe that such an uplift is attainable. However, we caution that conditions could still soften, especially if consumers continue to become more cautious and if the upcoming presidential election proves to be distracting and disruptive. In such circumstances, the forecast could be downgraded, albeit only to a modest degree.
Other retailers will no doubt look at Home Depot’s current results and its forecast with some envy. However, they should also note that Home Depot’s achievements have been earned. This is a company that does not stand still: it invests, changes and progresses on all fronts and, as such, it is an example of how to succeed and engineer success in a difficult retail environment. We have confidence that management will continue to evolve in the year ahead.

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