Having gained 10% in the last year, Home Depot HD’s investment in improving its customer offering could boost its stock price performance. As part of this, it is improving the appearance of its stores, while increasing the personalization of its professional customer offering.
Omnichannel growth is expected to remain high, with the company investing in an improved website and fulfillment opportunities. Alongside increased product innovation, this could help to offset potentially weaker sales growth in the wider retail sector.
Having performed in line with the S&P 500 in the last year, the company appears to offer investment potential.
Improved customer offering
Further investment in its professional customer offering could improve the company’s differentiation versus sector peers. It is seeking to build an increasingly personalized offering for its professional customers through a new business-to-business website experience. It is offering a wider range of features that include the ability to provide enhanced account management, as well as simpler ordering capabilities. The new service has been rolled out to over 100,000 professional customers, and set to be available to over 1 million professional customers by the end of 2019.
Home Depot is seeking to differentiate itself from sector peers through increased investment in the appearance of its stores. Around 40% of its stores now have an upgraded appearance, with generally positive customer feedback. Changes to its store appearance have also increased employee engagement and productivity, which may further improve the customer experience.
Omnichannel opportunity
Investment in Home Depot’s omnichannel experience could strengthen its competitive position. It has continued to improve its website and mobile applications through putting in place higher-quality content and better site functionality. This contributed to a rise in online sales of 22.7% in the most recent quarter.
Changes to its website have been undertaken alongside enhanced delivery and fulfillment options. A key part of this is the use of pilot facilities, with the company testing out various options as it seeks to create a better-connected shopping experience for customers. The pilot stage forms the first part of a $1.2 billion investment across its delivery network that is expected to be rolled out by fiscal 2022.
Automated lockers also continue to be added to stores. They have proved popular among customers, and been used to collect 50% of online U.S. orders placed in the most recent period. Since 94% of customers using the automated lockers rate their experience as 5 out of 5 stars, their continued rollout could lead to increasing levels of customer loyalty.
Risks
The company’s sales performance in the most recent quarter missed expectations. Comparable store sales increased 3.2% for the quarter, with U.S. sales rising 3.7% compared to the same quarter of the previous year. During recent months, the wider U.S. retail sector has posted mixed performance. In fact, between August 2018 and March 2019, U.S. retail sales increased 1.3% overall as consumers adopted a cautious stance. This trend may continue over the near term, and could negatively affect Home Depot’s sales prospects.
In response, the company is seeking to become increasingly innovative to improve its appeal relative to industry rivals. For example, it is investing in the in-store paint experience through the rollout of a new color solutions center in all stores during fiscal 2019. Increasingly innovative products within the roofing and grilling categories are encouraging customers to trade up to higher price points that offer improved margins for the business. Further innovation is anticipated across the company’s product lines, which may help to offset general weakness in the retail segment.
Outlook
In the current fiscal year, Home Depot is forecast to post a rise in earnings per share of 4%. This is due to be followed by growth of 9% next year.
Although its price-earnings ratio of 21 is relatively high, over the long run its strategy changes could improve its financial performance. Its investment in omnichannel opportunities, alongside increased personalization for professional customers and an improved store appearance, could strengthen its competitive advantage.
Having matched the S&P 500’s performance in the last year, the stock could offer investment appeal for the long term.
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