Please ensure Javascript is enabled for purposes of website accessibility

Here's the Defining Characteristic of Home Depot's Success

By Neil Patel – Jun 17, 2020 at 9:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The home improvement retailer's competitive advantage has nothing to do with numbers.

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 (HD -1.61%), 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.

Aerial shot of the word culture printed on one letter per page arranged on a wooden conference table at which six people in business attire sit.

Image Source: Getty Images.

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:

  1. 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
  2. Provided additional paid time off for associates who are 65 and older or deemed to be at higher risk according to CDC guidelines
  3. Provided weekly bonuses for hourly associates in stores and distribution centers, and doubled overtime pay
  4. 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.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot and recommends the following options: long January 2021 $120 calls on Home Depot and short January 2021 $210 calls on Home Depot. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$266.58 (-1.61%) $-4.36

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.