Recent first-quarter results released by Home Depot (HD, Financial) showed that revenue increased 4.4% versus the same period in the previous year. The home improvement retailer’s comparable sales growth was 4.2%, which boosted total revenue to $24.9 billion. In the U.S., comparable sales increased by 3.9%.
Diluted earnings per share increased by 24.6% to $2.08. Despite a slow start to the spring selling season, the company maintained guidance for the full year. It expects fiscal 2018 sales to grow 6.7%, with comparable sales forecast to move 5% higher. Earnings per share is expected to rise 28% versus fiscal 2017 to reach $9.31.
Evolutionary potential
Since the release of its first-quarter results, Home Depot's stock price has risen by 3%. This takes its rise in the last year to 28%, which is ahead of the S&P 500’s capital gain of 15% over the same period.
A potential catalyst on the company’s financial performance and stock price could be a continued focus on omnichannel innovation. The company estimates that around 60% of all of its sales are influenced by a digital visit, which suggests that investment in this area could boost its overall performance. With the company’s online sales growing by 20% in the first quarter of 2018 and by 22% in fiscal 2017, they may become an even larger part of the business over the medium term.
As a result, Home Depot is installing lockers in its stores for customers to collect items they have ordered online. Given that 46% of the company’s online sales are collected in store, lockers could provide added convenience and efficiency for customers in future. They may also help the company to generate stronger growth in the home furnishings segment following its acquisition of The Company Store. Lockers may also boost customer traffic and provide additional cross-selling opportunities.
Service focus
As a means of differentiating itself from sector peers, Home Depot also continues to target improved levels of customer service. It is focusing investment on expanding its delivery options, which could include two-hour and four-hour options in specific markets for professional customers. It also plans to invest $11 billion in its stores, online and IT platforms, while making improvements to its supply chain.
This could provide it with a competitive advantage over rivals when it comes to customer convenience. Approximately 90% of the U.S. population already lives within 10 miles of a Home Depot store, with a $1.2 billion investment over the next five years set to bring same-day delivery to them. At the moment, around 30% of the U.S. population benefits from that level of service from Home Depot. Being able to offer greater speed and convenience to customers could lead to increased engagement – especially among professional customers. This could translate into additional spending, as well as greater loyalty.
Amazon threat
One potential threat facing the company is the expansion of Amazon (AMZN, Financial) into the home improvement sector. Given the increasing online sales expansion recorded by Home Depot, it would be unsurprising for online-focused companies such as Amazon to try and grab market share of what has been a lucrative industry since the financial crisis. Since casual do-it-yourselfers are likely to be highly price conscious, Amazon’s efficient supply chain could mean that it is able to compete effectively on price. This could provide it with a competitive advantage versus incumbents.
Home Depot has identified the ongoing risk from Amazon, with its strategy being at least partially focused on keeping the retail giant out of the home improvement market. It has invested heavily in its supply chain, with a number of efficiencies being delivered in recent years. Its focus on providing an improved in-store experience also differentiates it from online-only operators, with further investment in this area helping to boost its competitive advantage. Providing better customer service and an interconnected business, which offers a more seamless customer experience between online and in-store, could also help to build a wider economic moat.
Verdict
The performance of Home Depot's stock price in the last year has been relatively impressive. Further growth could be ahead, with the company focused on boosting its online performance. This could catalyze its sales and profitability, while a continued focus on customer service may improve loyalty and incremental spending. It may also help to counter the threat from Amazon, with an efficient business and improving in-store experience also helping to boost the competitive advantage enjoyed by the business. Therefore, its investment potential could be high, with further outperformance of the wider index seemingly ahead.
