Home Depot Inc (HD -0.31%) once again showed why it is one of the best retailers on the planet as shares trounced the market last year, gaining 41% in 2017, more than double the S&P 500's returns. Of course, the gap between Home Depot's and the index's returns only widens as the comparison period lengthens; the home improvement retailer has a long history of out-performing the market.
Home Depot's latest quarter acts as a microcosm of the store's success. During the quarter, revenue rose to $25.03 billion, an 8.1% increase year over year, and diluted earnings per share grew to $1.84, up 15% from the previous year's quarter. The growth was driven by a 2.5% increase in customer transactions to almost 390 million and a 5.1% increase in average ticket price to $62.84.
| Home Depot Metrics | Q3 2017 | Q3 2016 | % Change |
|---|---|---|---|
| Net sales | $25.03 billion | $23.15 billion | 8.1% |
| Diluted earnings per share | $1.84 | $1.60 | 15% |
| Customer transactions | 389.5 million | 380 million | 2.5% |
| Average ticket | $62.84 | $59.78 | 5.1% |
Data source: Home Depot Inc.
Several dynamics go into Home Depot's outsized gains, but you would be hard-pressed to come up with three more important than the company's success with Pro customers, its integrated omnichannel retail experience dubbed "One Home Depot," and the exclusive and innovative products line it offers that keep customers coming back. Let's take a closer look at all three of these factors to better understand Home Depot's continued success.
One of Home Depot's keys to its success is offering exclusive and innovative products. Image source: Home Depot Inc.
Getting with the Pro-gram
While Home Depot will never ignore the DIY weekend warrior, it is clear that the future of the company is tied to its success with what it calls its Pro customers. In the company's annual 10-K filing with the Securities and Exchange Commission, Home Depot defines Pros as those who "are primarily professional renovators/remodelers, general contractors, handymen, property managers, building service contractors and specialty tradesmen, such as installers."
At the Oppenheimer Consumer Conference last summer, management stated this market represented about 40% of all sales. But sales to the Pro demographic are far outgrowing sales to DIY customers. In 2017's first quarter, management said Pro sales were growing twice as fast as DIY sales, and in the second quarter, this gap increased. In the third quarter, management only noted that Pro sales were again "outpacing" sales to other customers. This is important because, as a customer segment whose livelihood depends on the supplies Home Depot sells, Pros make more frequent and larger purchases than the average DIY customer.
The "One" secret to Home Depot's success
Home Depot's e-commerce operations have grown so much that it is now the seventh-largest online retailer in the United States. Management does not see its online retail experience as a separate entity from its brick-and-mortar operations, but rather as one holistic shopping experience. At the company's recent investor and analyst conference, transcribed by S&P Global Market Intelligence, CEO Craig Menear said:
The front door of our store is no longer at the front door of our stores. It's in the customer's pocket. It's on the job site. It's in their home. Developing the One Home Depot experience by bringing the physical and digital worlds together, with ability to handle the scale of Home Depot, required us to complete a replatform of our website. This replatform gives us the ability to create differentiated experiences for the customers going forward.
To highlight the integration of its operations, at the same conference, management said 45% of its online orders are now picked up in its stores, and 85% of online returns are completed in stores. But it works the other way as well; nearly 10% of all online transactions originate in a store from a customer interaction with a sales associate. E-commerce now makes up about 6.4% of all Home Depot sales, and the company has grown its online sales by about $1 billion in each of the past four years.
Where product is king
In the company's 2017 awards for innovation, Home Depot recognized such products as Lifeproof Vinyl Plank Flooring, Petproof Carpet, and a Diablo SandNet 5" Disc that promises to last ten times longer than standard sanding discs. Not only do these products offer customers offer innovation, they are also only available at Home Depot locations.
At the Oppenheimer Consumer Conference last spring, Executive Vice President of Merchandising Edward Decker said, "We firmly believe that product is king. We spend just an inordinate amount of time on product and innovation and value for the customer." Decker added that he believes the amount of product innovation is "staggering" and can be found in nearly every department of the store. While a lot of work goes into product selection, the merchandising executive said it was a differentiator for the store.
Is the amount of innovation worth it? Decker firmly believes it is. He stated the customer always pays up for innovation, and the company has now tested not only premium pricing but also what Decker called "super-premium" pricing.
Hit a home run with this investment
Not only has Home Depot outperformed the market for years, it also looks poised to do so for years to come. The company is showing it knows what it takes to attract valued Pro customers to its stores, operate a growing online business in an ever-increasing digital retail landscape, and offer products that its customers not only want but are willing to pay premium prices to get. Other retailers should take note, because that's a recipe for prolonged success. Investors should pay attention, too: If you're looking for an investment that knows what it takes to succeed in an evolving retail landscape, Home Depot could be a home run for your portfolio.
