Analysis: Home Depot remains destination of choice
An extra week of trading inflated Home Depot’s sales this quarter, propelling the company to a hefty 10.9% uplift over the prior year. The comparable sales numbers, which strip out the impact of the longer trading period, provide a more meaningful indication of performance. These show that while growth has slowed, the company is still posting respectable increases – especially as it was up against tough comparatives from last year.
That said, we also believe a material slowdown in the housing market – where both sales and prices have been under pressure for some time – has stymied demand for home improvement products. In our view, this has likely affected the momentum of growth at Home Depot. However, we also believe that, in light of this, Home Depot’s comparable sales increases actually look even more respectable – in essence, they show the company is able to pull other levers to secure growth, even as economic fundamentals weaken.
Over this quarter, one of those levers was Christmas. Once again, Home Depot pulled out all the stops to create destination status for sundries like decorations, trees and various home accessories. Our data show that the company was rewarded with an increase in the number of customers shopping for festive goods; something that produced a small bump in trade. Notably, the number of people buying holiday gifts at Home Depot also increased, largely thanks to the company’s various special offers and deals in categories like tools and DIY accessories.
Another helpful lever was the cold, snowy start to the year across much of the country. While the weather is outside of Home Depot’s control, the company’s ability to quickly capitalize on the demand for winter goods such as ice melt and snow shovels remains impressive and it is, in our view, far quicker off the mark than many of its rivals. This means it is more successful at securing consumer spending on cold weather purchases.
Outside of seasonal factors, the turmoil at Sears over the quarter was beneficial to Home Depot’s sales of appliances. It, along with Best Buy, remains one of the main beneficiaries of Sears’ ceding of share and despite the resolution of Sears’ woes, the shrinking of the business is likely to yield further gains over the remainder of this year.
Looking ahead, it would be logical to take a more negative stance on Home Depot’s fortunes mainly because it is up against some tough prior year numbers and a somewhat slower economy. However, Home Depot itself has put out fairly optimistic guidance which forecasts a 5% increase in comparable sales for the new fiscal year. On balance we are supportive of the guidance for a number of reasons.
First, although we believe the housing market will be choppy, underlying demand for home improvement remains relatively strong. Our survey indicators suggest there are still many households – both newly moved and long established – that have projects they want to undertake. For the majority of these people, Home Depot remains the destination of choice. Second, the investments in omnichannel, along with Home Depot’s strong customer service ethic, mean it will grow its share of the digital market, even against online specialists such as Amazon. Third, back-end improvements are increasing efficiency and offsetting margin compression from higher costs.
Taken together, these factors suggest that Home Depot is in a favorable position. As such, we expect it to advance further in the coming fiscal year.
That said, we also believe a material slowdown in the housing market – where both sales and prices have been under pressure for some time – has stymied demand for home improvement products. In our view, this has likely affected the momentum of growth at Home Depot. However, we also believe that, in light of this, Home Depot’s comparable sales increases actually look even more respectable – in essence, they show the company is able to pull other levers to secure growth, even as economic fundamentals weaken.
Over this quarter, one of those levers was Christmas. Once again, Home Depot pulled out all the stops to create destination status for sundries like decorations, trees and various home accessories. Our data show that the company was rewarded with an increase in the number of customers shopping for festive goods; something that produced a small bump in trade. Notably, the number of people buying holiday gifts at Home Depot also increased, largely thanks to the company’s various special offers and deals in categories like tools and DIY accessories.
Another helpful lever was the cold, snowy start to the year across much of the country. While the weather is outside of Home Depot’s control, the company’s ability to quickly capitalize on the demand for winter goods such as ice melt and snow shovels remains impressive and it is, in our view, far quicker off the mark than many of its rivals. This means it is more successful at securing consumer spending on cold weather purchases.
Outside of seasonal factors, the turmoil at Sears over the quarter was beneficial to Home Depot’s sales of appliances. It, along with Best Buy, remains one of the main beneficiaries of Sears’ ceding of share and despite the resolution of Sears’ woes, the shrinking of the business is likely to yield further gains over the remainder of this year.
Looking ahead, it would be logical to take a more negative stance on Home Depot’s fortunes mainly because it is up against some tough prior year numbers and a somewhat slower economy. However, Home Depot itself has put out fairly optimistic guidance which forecasts a 5% increase in comparable sales for the new fiscal year. On balance we are supportive of the guidance for a number of reasons.
First, although we believe the housing market will be choppy, underlying demand for home improvement remains relatively strong. Our survey indicators suggest there are still many households – both newly moved and long established – that have projects they want to undertake. For the majority of these people, Home Depot remains the destination of choice. Second, the investments in omnichannel, along with Home Depot’s strong customer service ethic, mean it will grow its share of the digital market, even against online specialists such as Amazon. Third, back-end improvements are increasing efficiency and offsetting margin compression from higher costs.
Taken together, these factors suggest that Home Depot is in a favorable position. As such, we expect it to advance further in the coming fiscal year.