The home improvement industry seems to be taking off recently as housing activity improved in the month of July. After a tough winter season, spring brought some relief to the industry players as customers started spending on outdoor equipment. Further, demand is expected to increase because of the holiday season.
The largest home improvement retailer Home Depot (HD, Financial) too is enjoying the upsurge in demand. Its recently reported second-quarter numbers beat the Street’s expectations, making investors happy and share prices surge.
The list of positives
Driven by higher store traffic, revenue surged 6% over last year, clocking in at $23.8 billion. This was higher than the Street’s expectation of $23.6 billion. Not only did the store traffic increase, but also the transaction size. Number of customer transactions rose 4.2% along with an increase of 1.8% in average transaction size. The average ticket size stood at $58.43 for the quarter.
Another key reason for a higher top line was more demand for big ticket items, which boosted revenue. Also, Home Depot’s efforts into advertising its products and other investments helped revenue grow. This resulted in a same store sales growth of 6.4%. This is indeed remarkable, especially when compared to its peer Lowe’s (LOW, Financial), which registered same store sales growth of 4.5% for its recently reported second quarter. But Lowe’s revenue too grew by 6% over the prior year.
A primary driver for Home Depot was it growing e-commerce segment, which grew 38% over the previous year. Online sales make more than 4% of Home Depot’s total revenue and are showing signs of a turnaround. With the growing popularity of online sales, it is important for any retailer to focus on this space and Home Depot is not an exception.
The retailer expanded its e-commerce segment at the right time. It started offering the service of booking products online and getting it picked from any of its stores. This made 33% of its online sales. Further, the company plans to invest $1.5 billion in technology so that it can adapt itself to changing customer needs.
Moreover, the home improvement retailer has shifted its advertising focus to the digital channel. It has cut its spending on print ads and digital ads now make 36% of total ads of the year. Therefore, this should help in expanding its e-commerce business further.
The future
Along with its focus on expansion of online business, Home Depot is expanding its product assortment. This should help in luring in more customers. Moreover, it is making optimum utilization of store space by omitting products in stores, which have a larger demand in the online market. For instance, furniture requires more space and is usually ordered online. Therefore, removing it from displays at stores might help the company use the space more efficiently.
Also, the professional customer market is growing at a fast pace and makes 35% of total revenue. Since this segment is growing faster, Home Depot can take advantage of its larger presence. On the other hand, Lowe’s pro customers make 30% of sales only.
Lastly, Home Depot revised its earnings guidance for the year to $4.52 per share, higher than $4.42 per share declared previously. Hence, it highlights the company’s bright future prospects.
My takeaway
Home Depot is indeed the biggest home improvement player in the industry and an uptick in this activity will benefit the company. Further, its efforts to expand its product portfolio as well as the e-commerce business look interesting. Also, ramped-up marketing should help in attracting more customers. Even when compared to Lowe’s, Home Depot provided a brighter outlook for the year. Hence, investors should definitely give this company a thought.
