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Is Home Depot a Safe Bet During the Pandemic?

By Neil Patel – Oct 9, 2020 at 8:30AM

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This leading home improvement chain has benefited from a surge in DIY projects, but its future depends on a different type of customer.

With fiscal second-quarter sales growth of 23.4%, it's safe to say Home Depot (HD -0.93%) has performed quite well during the coronavirus pandemic. As an essential business, the home improvement behemoth was able to keep its doors open to serve the needs of millions of shoppers.

Its stock price has risen 30% so far this year, driven by impressive results from the do-it-yourself (DIY) segment. But for Home Depot to position itself for long-term success, its Pro business is the key.

Pandemic-fueled growth

From fiscal 2009 through fiscal 2019, Home Depot's sales increased at a compound annual rate of 5.2%. The company has largely left its store growth unchanged with less than 50 net additions in that 10-year period, but management introduced initiatives like the One Home Depot strategy to boost efficiency within its existing store network. The company has reported positive comparable-sales growth for 10 years running.

Then, the coronavirus pandemic took hold earlier this year, closing down large swathes of the U.S. economy and at the same time creating an advantageous environment for Home Depot. With Americans stuck inside their homes, many chose to prioritize home improvement projects over other leisure and entertainment spending that has not been available in 2020.

coronavirus headlines sitting on top of 100 dollar bills

Image source: Getty Images.

In the quarter ended Aug. 2, the company generated record-breaking sales of $38.1 billion. Supported by government stimulus measures, including deposits of $1,200 made to most Americans' bank accounts, Home Depot's DIY segment outpaced its Pro segment in the quarter. The money not spent on dining out and travel instead went toward fixing up the home.

Professional customers

The success with the DIY customer is promising for Home Depot, but its future relies on the Pro segment. In 2017, the company began a multiyear, $11 billion program to bolster its digital offerings and to improve its Pro customer experience. These customers are vital to Home Depot as they provide the retailer an opportunity to build long-term, mutually beneficial relationships with professional contractors and property developers that lead to repeat business.

The Pro customer usually makes larger and more frequent purchases, and Home Depot has the opportunity to generate more revenue from this relationship over time. The company sees a significant market opportunity with the Pro segment and has built a comprehensive ecosystem to serve its specific needs. This includes inventory management, volume discounts, best-in-class sales teams, and online business solutions. Pro customers currently represent about 45% of the company's top line.

Although the Pro market has lagged DIY in recent months, revenue did grow double digits year over year in the fiscal second quarter. Property owners were reluctant to undergo major projects during the pandemic since safety was the main focus: Allowing outsiders into the home to complete renovations or other upgrades did not seem prudent.

However, Ted Decker, executive vice president for merchandising, said during the most recent earnings call, "As markets continue to reopen, we see increasing demand from all our Pro customer cohorts." 

Looking forward

There's no doubt that Home Depot has been a safe bet during the pandemic. The DIY business was like a coiled spring that was released in the summer months with record sales for the company and a rising stock price. But in order for Home Depot to position itself for long-term success, the Pro business has to remain a meaningful piece of the overall pie.

The company's One Home Depot strategy has paid off tremendously during the past few months and should continue doing so in the years to come. With a forward price-to-earnings ratio of 24, Home Depot offers reasonable value for a best-in-class retailer, one with sustainable competitive advantages supported by a high return on invested capital. When the economic downturn and health crisis eventually pass, expect the progress seen in 2020 to set the stage for future growth and investor returns.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot. The Motley Fool has a disclosure policy.

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