One of the worst affected sectors in the aftermath of the 2008 recession was the housing sector. In the six years since, the data shows that the recovery is on track, but certainly not without hiccups. Home Depot (HD, Financial), world’s largest home improvement retailer is one of the companies that have benefitted from this recovery. After reporting a robust third quarter, let us see if the company can continue this momentum and keep creating value for its investors.
Performing well
In the third-quarter, sales rose by 5.4% to $20.5 billion. On an YTD basis, sales rose by 4.7% to $64 billion. This growth was aided by a 3.2% quarterly increase in the number of customer transactions to 355 million. On a year to date basis, the number of transactions rose by 3.3% to 1.11 billion. Besides an increase in the volume, the strong revenue growth was also helped by an increase in the average ticket size. In the quarter, the average ticket rose by 2.3% to $57.55, and by 1.6% on a year to date basis to $57.90. On that note, it is also significant to note that big-ticket transactions, which make up for more than 20 percent of US sales, rose by 5.9 percent in the quarter.
One of the most important metrics in retail, same-store sales, also rose by 5.2% in the third quarter, and by 5.8% in the U.S. Same-store sales growth was positive in all merchandising departments, as well as in the service business which had above-average marks due to strength in windows, countertops, and water heaters. Canada’s performance was particularly impressive as the company posted positive same-store sales growth in local currency for the 12th straight quarter.
E-commerce is booming
Fresh data after the holiday season highlighted a significant trend for retailers. Though the sales started days before actual holidays, data analysts have noticed that people are favoring the convenience factor in online shopping. In addition to that, they are not eagerly waiting for holiday season because of the year-long offers given by the retailers. Home Depot has realized the opportunity in e-commerce and strategized well to take leverage of its positioning in the retail industry. For instance, Home Depot is currently using its store network as a distribution center for those who want to pick up online orders locally. By combining its online channel and physical stores, the company has smartly made a bid to benefit from both worlds.
Online sales rose by 40% due to increased web traffic, growth in online conversion, and an increase in the number of orders that are picked up at the store. The management said that 40% of online orders are picked up at the store. To further capitalize on online sales growth, the company opened the second of three planned fulfilment centers to improve efficiency in shipping online orders.
Risk to watch
A big risk that Home Depot carries for now is the probability of a downturn in case the 44 lawsuits that have been filed against the retailer for data breach earlier this year. The data breach was massive considering the fact that it exposed information on more than a million payment cards and e-mail addresses. However, the impact on Home Depot’s direct operations has been contained very well. The data breach hit national headlines in September, but as the results show, the revenue numbers did not take a big hit even after the debacle. This shows that customers are still shopping at Home Depot.
Undoubtedly, Home Depot has managed the crisis quite well up till now and it seems that the breach will not have a huge impact on the company’s sales figures. Yet, it is also true that the company has already spent millions of dollars in connection with this data breach, which is only going to escalate once the final stance on these lawsuits becomes known. As a result, investors will lose a reasonable chunk of money in meeting these claims. With all that known, I am still bullish on the way Home Depot is handling the entire episode with the help of thoughtful communication and other security measures.
Takeaway
Home Depot has seen big gains in the recent quarters because of an improvement in housing markets in the US and its efforts in capitalizing the e-commerce opportunity. The data breach lawsuits are certainly a looming threat, but the company has shown agility and discipline in handling it. Therefore, my advice will be to invest in Home Depot to reap gains from the ongoing recovery in housing.
