Just days before Christmas, Home Depot (NYSE:HD) investors found an unexpectedly large gift under their trees: The Company Store, a leading online retailer of home decor and textile products. Home Depot announced it would be acquiring the Lacrosse, Wisconsin-based company for an undisclosed amount from Hanover Direct. Not included in the deal were The Company Store's five retail locations.
The deal shows Home Depot is ready to get in touch with its softer side. While Home Depot is best known for products such as cordless drills, laminate flooring, and lumber, a quick perusal of The Company Store's website shows the company is more focused on home goods such as bedding, sheets, rugs, and pillows. In the press release announcing the deal, Home Depot CEO Craig Menear said, "The acquisition of The Company Store provides product development and sourcing capabilities to help us expand our online decor business into broader categories across the entire home."
Home Depot's decor opportunity
The acquisition should not come as a surprise to anyone who paid attention during the company's Investor and Analyst Conference, held just a few weeks before the acquisition was announced. In Executive Vice President Edward Decker's presentation, he highlighted Home Depot's evolution in selling décor-oriented products. For instance, Decker noted that the company began by selling Christmas trees and a few lights during the holiday season. That effectively meant the company's shoppers had to make at least one extra stop to complete their holiday purchases. As time marched on, Home Depot added more and more holiday decorating items to its product line until it had "a destination assortment of innovative products with great design and value."
Decker said the company sees a similar opportunity in other home decor categories. Taken from the transcript provided by S&P Global Market Intelligence, he stated:
...[W]e completed extensive research on customer shopping intent and found we have the authority to play and the right to win in several home decor categories. We believe we are well positioned to help our customers ... complete their decor-oriented projects with items like housewares, tabletop, interior furniture, wall decor and textiles. And consumers are increasingly purchasing decor categories online, so our efforts will largely be digital, where we will leverage our traffic and customer base for a natural scale advantage ... We're also investing in our interconnected decor shopping experience, with enhanced photography, shop-by-room or collection capabilities and style guides. And we are leveraging our existing capabilities to reintroduce home decor ... We're pleased with our results and are accelerating our decor investments.
Decker said that over the past 12 months, the company has introduced over 180,000 decor products from 500 different suppliers. The results are impressive. This year Home Depot will sell more than $25 billion in decor-related products which includes everything from flooring and lighting to window treatments.
Finishing what it started
Decker went on to say that this decor-related opportunity was all about "the customer taking us to project completion." In other words, when customers remodel a room they are already going to Home Depot for building materials, paint, and flooring; now Home Depot wants to ensure that customers stay when selecting the right drapes, rugs, and throw pillows to finish the project. This is what the acquisition of The Company Store is intended to accomplish.
For all intents and purposes, Home Depot is done expanding its domestic store base, yet its sales and earnings guidance continue to rise. Despite the steady store locations, management believes Home Depot's full fiscal 2017 year earnings per share (EPS) will increase 14% to $7.36, marking the fourth year in a row the company will report its highest EPS in company history. The company is able to grow earnings like this because of its remarkable ability to introduce new product lines, such as decor-related products, both organically and inorganically. Here is a look at some of the company's other growth metrics.
|Home Depot Metrics||3Q 2017||3Q 2016||% Change|
|Net sales||$25.03 billion||$23.15 billion||8.1%|
|Customer transactions||389.5 million||380 million||2.5%|
In 2015, Home Depot was able to do something similar by acquiring Interline Brands, which broadened its product line and expanded its customer base to facilities and maintenance staff at large multifamily residences, hotels, hospitals, college dormitories, and prisons. Similarly, though in a completely different direction, The Company Store will extend Home Depot's product line to include a broad new array of soft material products. While there are obviously several key factors to Home Depot's success over the years, smart acquisitions that bring in new customers through an expanded product line is a great way to continue growth in this phase of Home Depot's maturity.
Matthew Cochrane owns shares of Home Depot. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.