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Home Depot's Future Relies on This Key Customer

By Matthew Cochrane - Oct 15, 2017 at 8:25AM

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And this important segment is delivering incredible growth for the company.

In what has proven to be a brutal environment for brick-and-mortar retailers, Home Depot (HD 4.06%) has shown itself to be the exception to the rule. Not only has it survived in this challenging landscape, it's thrived.

Case in point: Home Depot's latest quarterly numbers were quite good. Net sales, earnings, and comparable-store sales all enjoyed robust growth, and unsurprisingly, the stock has also risen, easily outperforming the broad market in 2017.

Home Depot Metrics Q2 2017 Q2 2016 % Change
Net Sales $28.11 billion $26.47 billion 6.2%
Diluted EPS $2.25 $1.97 14.2%
Customer Transactions 441.8 million 430.0 million 2.8%
Average Ticket $63.05 $60.87 3.6%

Data source: Home Depot Q2 2017 quarterly earnings press release.

While the company has had to do a number of things to stay on top of its game, one of the biggest secrets to its success in recent years has been its ability to attract the "Pro" customer.

PROclaiming this customer's importance

Home Depot's professional customers, in comparison to DIY customers, will generally make many more purchases with a far higher average ticket size. In the company's presentation at the Oppenheimer Consumer Conference this past June, Edward Decker, Home Depot's Executive Vice President of Merchandising, stated that the Pro customer penetrated about 40% of the company's overall sales.

While that is a huge number in and of itself, the Pro business is also growing much faster than the DIY customer segment. While the company doesn't give exact figures, in the company's 2017 first-quarter conference call, management said sales to Pro customers were growing twice as fast as DIY sales. In the second-quarter conference call, management said that gap widened even further.

The company's big-ticket sales are also growing much faster than smaller transactions, another indication Pro sales are growing quickly. In the second-quarter call, Decker said transactions over $900 grew by 12.4%. These transactions now represent 22% of all Home Depot revenue and were driven, in part, by "certain Pro heavy categories". Meanwhile, transactions under $50 only grew 1.5% while representing 16% of the top line.

A variety of handheld home improvement tools, like paint brushes, rulers, a light bulb, and hammers, laid out neatly in the shape of a house on top of green astro turf.

Home Depot is capturing the Pro customer, allowing it to consistently achieve out-sized returns. Image source: Getty Images.

PROcuring these valued customers

Home Depot has worked hard to claim Pro market share, but first and foremost, management insists it's consistently offering a strong value to customers. Decker said at the conference:

[I]t all starts with product. You have to have the right value, and we're focused on everyday low price. We make a very big deal about everyday low price. The last thing a Pro wants to do is have a promotional cadence for their daily product requirement.

Beyond value, Home Depot's management understands that Pros need greater service than the average customer, and the company is doing its best to leverage technology to meet this demand. In Home Depot's app, contractors can now send an employee to pick up orders at the front desk, so they don't waste time running around looking for different items. A beefed-up delivery system has also led to all store locations offering either two or four-hour delivery windows for a nominal fee. Home Depot has found Pro customers more than willing to pay this premium, because so many are only on a job site on a given day for a certain amount of time.

Another key to attracting Pro customers has been the Interline Brands acquisition. Management has noted that while there is a great deal of overlap of products between Interline and Home Depot's core customers, these products could be packaged differently to meet each type of customer's needs better. For instance, if a hotel needed to replace 40 toilet flappers on one floor, it doesn't need each flapper to be individually packaged, while a DIY customer probably would only need one flapper complete with instructions.

Home Depot gets with the PROgram

With so much of its business coming from the Pro segment, Home Depot clearly understands how important capturing market share in this key customer demographic is to its future. The company seems to be doing its part in attracting Pro customers, even offering them preferred parking areas for pickup, in addition to the essential tools they need to finish a job quickly and efficiently.

If Home Depot can target this segment and make them increasingly dependent on its products and services, investors should be confident in the company's ability to deliver market-beating returns in the years ahead.

Matthew Cochrane owns shares of Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.

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