Oftentimes, the strongest competitive advantages we see in the world of business are built from intangible assets. These are characteristics that may not seem obvious at first, but that can seriously impact a company's long-term success. This is the case for Home Depot (NYSE:HD), which has a robust organizational culture that has played a key role in the stock's sevenfold rise over the past decade.
Despite the onslaught of the novel coronavirus that began in March, the largest home improvement retailer in the United States still managed to have a solid quarter ending May 3, 2020. Sales were up 7.1% from the prior-year period, and comparable sales in the U.S. were up 7.5%. CEO Craig Menear highlighted the success of investments made over the years that have enhanced the company's ability "to quickly adapt to shifts in customer needs, preferences, and behaviors." Although earnings fell 10.7% compared to the first quarter of 2019, this was due to $850 million spent on actions taken to support employees.
Home Depot goes above and beyond when it comes to taking care of its employees, and this, in turn, affects customers. I urge long-term investors to focus on just how critical this winning culture is to the prosperity of not only this business, but to that of other high-quality companies as well.
Response to COVID-19
It's no surprise that the retail industry is extremely difficult to survive in, let alone thrive in. Growing profits and free cash flow over the long haul requires staying power -- and exceptional customer delivered by happy employees can help.
Home Depot's response to COVID-19 demonstrated its core value of Taking Care of Our People. As part of the $850 million expense mentioned earlier, the company took the following initiatives:
- Expanded paid time off for all hourly associates, with additional hours that can be used at their discretion and that will be paid out at year-end if not used
- Provided additional paid time off for associates who are 65 and older or deemed to be at higher risk according to CDC guidelines
- Provided weekly bonuses for hourly associates in stores and distribution centers, and doubled overtime pay
- Extended dependent care benefits and waived related copays
I'm impressed by the comprehensiveness of these actions. Associates need to feel like they are valued and being taken care of, especially at a time when safety and well-being are priorities. Only then will they be willing and able to pass the goodwill on to consumers, resulting in a positive shopping experience.
Culture as a competitive advantage
Home Depot's culture is guided by a leadership style known as the inverted pyramid. The needs of customers and employees come first, while those of managers and executives come last. This contrasts with the typical top-down hierarchy of many other large organizations.
When speaking to Emory University's Goizueta Business School students four years ago, Menear said, "One of the true competitive advantages we have in our business is our culture. We are a values-based business." Ninety percent of store leadership started their careers as hourly associates, validating a business model that empowers employees and provides ample opportunities for career growth. Investors in Home Depot stock should be pleased that their hard-earned savings and wealth are in good hands, just like the retailer's everyday customers.