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Who's the Customer Home Depot Can't Lose?

By Neil Patel - Jun 8, 2021 at 7:28AM

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Catering to the needs of this valuable group is essential for the home-improvement chain.

Home Depot (HD -1.17%) reported another blowout quarter in Q1 2021. Same-store sales jumped 31% from the prior-year period, and revenue totaled $37.5 billion. The company continues to benefit greatly from massive government stimulus, as well as increased consumer discretionary spending on home-improvement projects. 

These developments boosted the do-it-yourself (DIY) side of the business during the pandemic, but the emergence of the other customer group, the professional (or pro), is vital to Home Depot's success. 

Let's find out just why that is. 

a contractor on the job site

Image source: Getty Images.

A mission-critical partner 

In the most recent quarter (ended May 2), the company saw double-digit advances for both customer groups. But the pro segment, registering accelerating gains in four straight quarters, had its highest quarterly growth rate on record. In fact, pro sales even outpaced the DIY group. 

During lockdown people were reluctant to let contractors into their homes to work on big projects. It appears as though that sentiment has changed, which makes sense given the country's reopening progress thus far. On the earnings call, COO Ted Decker mentioned that "project demand is strong." 

So why are these customers so important to Home Depot? I believe there are three main reasons. 

Lowe's (LOW -2.42%), the other major player in the industry, lags far behind Home Depot in servicing pros. Roughly 25% of Lowe's sales are derived from contractors, while about 45% of Home Depot's is. The Atlanta-based retailer's huge lead, bolstered by its recent acquisition of HD Supply, supports its competitive position against Lowe's. 

Second, compared to DIY customers, pros are much more valuable. They generate higher ticket sizes and frequent locations more often, which is absolutely vital in a retail setting where boosting store productivity is the name of the game. 

In Q1, purchases of big-ticket items (those over $1,000) jumped 50%, driven in part by strength in the pro business. Furthermore, sales per square foot soared 29.8%, and Home Depot's profit per store in Q1 ($1.8 million) far exceeded that of Lowe's ($1.18 million), demonstrating the former's operational superiority. 

And third, the pro customer is stickier than the regular DIYer. If I'm a contractor and my business has used Home Depot for years, I'd be very reluctant to switch to Lowe's or any other competitor for whatever reason. Price is not the most important factor for a pro, as their primary objective is to get the right tools and parts needed to get the job done. 

The One Home Depot strategy, launched in late 2017, has resulted in a more seamless omnichannel offering, and Home Depot is better able to serve its customers in ways that are most convenient for them. In Q1, 55% of online orders were actually fulfilled through a store, which showcases the urgency needed by customers. All of this leads to high switching costs for pros, which is a key competitive advantage for Home Depot. 

The investor takeaway 

It's not hard to understand the importance of professional customers to Home Depot's success. Being an essential part of their businesses makes Home Depot that much stronger from a competitive standpoint. The company must continue to cater to them if it hopes to keep its lead in the home-improvement industry. 

As the economy continues its slow reopening, expect the Pros to drive more meaningful gains for the rest of the year. They are a customer Home Depot can't lose. 

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

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$321.41 (-1.17%) $-3.80
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$211.24 (-2.42%) $-5.23

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