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Home Depot Delivers on Sales Promises

By Jennifer Saibil - Mar 8, 2020 at 1:48PM

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A strong showing for fourth-quarter comparable sales mean the company's investments are paying off.

Good things may come to those who wait, but more often, they come to those who sweat and put in the effort. Home Depot (HD -0.18%) has always been a industry-leading retailer, but in the company's fiscal third quarter, sales came in lower than expected as the return on key investments had yet to fully materialize. The company insisted that the benefits would come, and it's now starting to see the fruits of its efforts.

The One Home Depot strategy

In 2018, Home Depot rolled out the One Home Depot strategy, an initiative meant to combine the physical and digital parts of its business for a frictionless, interconnected customer experience. This forward-thinking approach took into account consumers' increasing dependence on digital technology to either support or supplant in-store shopping.

Home Depot paint associate.

Image source: Home Depot.

Management has been touting this as the best thing since cheap lumber at investor meetings and in press releases. It has to, since the launch required an $11 billion investment in all parts of the business, including the product line, website, operations, stores, and supply chain. All of this is meant to create an omnichannel environment where each element supports the other -- buying online and picking up in store, researching online and buying in store, checking out products in store and finishing the sales online, or any other combination.

CEO Craig Menear said in the 2018 letter to shareholders: "... [F]or our customers, a great shopping experience is one that allows them to blend seamlessly the digital and physical worlds."

Staying the course

While Home Depot's top line continues to expand, the third quarter of 2019 saw a squeeze when sales came in below expectations. During a December analyst call, Menear explained that the timing of certain benefits hadn't worked out as planned. "We were perhaps a bit ambitious with regards to the speed with which these benefits would be seen in 2019."

But the company insisted that it was just a matter of timing, and positive results were just around the corner. That started to play out in the company's fourth quarter, when headwinds reversed, and investments began fueling customer traffic and sales. This is what comparable sales and earnings-per-share growth looked like over the past year.

YOY Growth

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Comparable-sales

3.2%

2.5%

3.0%

3.6%

5.2%

Earnings per share

37.5%

9.1%

3.9%

0.8%

9.1%

Data source: Home Depot quarterly earnings reports.

Comps growth has been consistently healthy, even though the metric came in below expectations earlier in the year

Home Depot is still seeing phenomenal online growth as well with 20.8% sales growth in the fourth quarter and a 21.4% increase for the full year. The two are indeed working together with an uptick in online traffic mirroring more store foot traffic.

Some of the specific actions the company is taking include:

  • Taking more control of the supply chain to make customer improvements.
  • Refreshing the majority of stores with "pain points" in checkout and store navigation addressed.
  • A more efficient delivery network.
  • Improvements in the web site for searches and product categories as well as fulfillment options.

Future outlook

With its investments beginning to pay off and stores benefiting from healthy consumer spending, Home Depot is expecting to see even stronger results from its program in fiscal 2020. Comparable sales for fiscal year 2019 increased 3.5%, and the company is guiding to 3.5% to 4% growth for both comps and total revenue in 2020. It's also planning to add six new stores to the existing 2,291.

Home Depot's stock stayed resilient throughout 2019, up 27% for the full year. The company raised its dividend 10% for the fourth quarter and should continue to be a good value for shareholders.

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