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Home Depot's $1.2 Billion Investment to Amazon-Proof Its Business

By Matthew Cochrane - Jun 23, 2018 at 11:48AM

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The home improvement retailer has thrived in recent years. But, far from resting, it has doubled down on building out its already impressive logistics infrastructure.

Over the past several years, Home Depot Inc. (HD 0.91%) has consistently used technology to counter potential disruptors, such as Amazon.com Inc. (AMZN 0.19%), while staying several steps ahead of traditional rivals like Lowe's Companies Inc. (LOW 2.20%).

With ideas like its e-commerce operation known as One Home Depot, and its innovative use of big data, Home Depot has consistently incorporated technology to drive strong business results and reward shareholders. This adoption of technology requires constant investment, something the company has not shied away from. And it looks like the company will keep it up.

A Home Depot associate carries two paint buckets down a store aisle.

Home Depot is investing $1.2 billion in its delivery infrastructure. Image source: Home Depot Inc.

Investing in delivery

The Wall Street Journal reports that the company plans to invest $1.2 billion over the next five years to significantly beef up its supply chain infrastructure. The funds will be used to add over 170 new distribution facilities across the U.S., allowing 90% of the country's population to have same-day or next-day delivery. The company can now only reach about 30% of the country with that type of service.

The new distribution centers will have a mix of products. Some of the centers will specialize in products that are most frequently ordered, while others will concentrate on larger, more difficult-to-ship items like building materials and appliances. At a recent investor conference, Home Depot's Northern Division president, Crystal Hanlon, said the company needs specialized distribution centers in order to give customers the options they want, including paying a premium for faster delivery. With this investment, Hanlon said, the company would be able to offer these options within the next three to five years.

Only the paranoid survive

Reading between the lines, much of this investment seems designed to keep Amazon, the all-devouring world conqueror, out of the home improvement market. At the same investor conference, Hanlon conceded, "We've been competing against Amazon with our strategy for some time." While Amazon's logistic services are legendary, they are not outfitted for the specific demands of many home improvement products.

The commitment to being "the best delivery agent in home improvement" will give Home Depot delivery capabilities it has never had before. And the investment does more than that in fighting off its feared competitor. It also improves the in-store experience, something Amazon cannot offer. Hanlon explained this benefit using roof shingles as an example:

Today, if we were to sell a delivery of shingles, you're going to pull those shingles off of the shelf in the store potentially during business hours, right, disrupting the customer experience who wants to be in that aisle shopping shingles. You're going to bring it to the back, you're going to load it on a truck, that truck's going to go out to the customer. If you think about the future state, the future state involves essentially what we'll call a warehouse for ease of understanding, where those are already staged. And so now we're not disrupting the experience in the store. We're also centralizing where all of those delivery trucks are going to. So it becomes much more efficient, gives us greater capacity, and makes the experience better.

Is Home Depot a buy?

Home Depot is right to focus on Amazon and other potential digital disruptors. By building out its moat against such competitors, it strengthens its position in its industry.

The company already has a state-of-the-art supply chain and has recognized several efficiencies in this area. For instance, what used to take three trucks to deliver, now only takes two. The company also provides detailed instructions to employees on where to stand around the conveyor belt when unloading a truck, cutting in half the time it takes to unload a shipment.

The company's continuous reinvestment in improved customer service makes me confident as a shareholder. The strategy certainly appears to be working. In the company's first quarter, sales rose 4.4% and earnings nearly 25% year over year -- and that was after a major hit to its gardening and outdoor sections due to April's unseasonably cold weather.

Over the trailing one-, three-, and five-year periods, Home Depot has more than doubled the S&P 500 index's returns. But the company doesn't seem too concerned about short-term price movements. Its latest investment in its supply chain shows that it is much more focused on the long game. And because of that, I expect the company's market-beating performance to continue.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$287.76 (0.91%) $2.58
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,146.38 (0.19%) $4.13
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$187.86 (2.20%) $4.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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