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Home Depot's Q2 Results Show an Extraordinary Measure to Address Supply Chain Issues

By Parkev Tatevosian, CFA – Aug 19, 2021 at 9:24AM

Key Points

  • Home Depot's inventory level is 40% higher than last year.
  • The move could be a strategic one in an attempt to keep and gain market share.
  • This comes at a time when customer enthusiasm for home-improvement projects is decelerating.

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The home improvement retail giant is taking no chances on securing the products its customers want.

Like many other businesses, Home Depot (HD 0.28%) is grappling with supply chain issues. The coronavirus pandemic limited options of where folks could spend money. No longer able to spend on concerts, theme parks, and ball games, some consumers spent heavily on physical goods instead of services.  

The problem was exacerbated by multiple rounds of government-sponsored stimulus checks and generous unemployment benefits. People had more money to spend and fewer places to spend it. Sales surged at Home Depot as it was deemed an essential retailer and allowed to stay open during economic lockdowns. While the surge has slowed, sales have grown by $12 billion in the first half of 2021 for Home Depot. 

Two people in a hardware store looking at a tablet.

Home Depot's merchandise inventories are currently 40% higher than they were at the same time last year. Image source: Getty Images.

Not taking any chances

Trying to keep up with the demand from customers, Home Depot is taking one particularly creative step. The home improvement retailer secured several container vessels for its exclusive use. And still, management is not thrilled with the item availability in stores. 

During 2021's second-quarter earnings call, president and COO Ted Decker said, "While our in-stock levels are still not where we want them to be, we are maintaining the improvements we made over the last few quarters and building depth in key categories, as evidenced by inventory growing faster than sales compared to the same period last year."

Indeed, inventory levels at the end of the second quarter were 40% higher than at the same time last year. Importantly, this increase is coming at a time when revenue growth is decelerating. Economies are reopening, people have more places to spend their money, and the impact of stimulus checks is fading away. Still, management could be thinking it would rather have this inventory on the shelf. Most of the items Home Depot sells are not perishable, so there is little risk of obsolescence. And not having an item in stock could mean losing a customer.

What this could mean for investors

This extraordinary measure taken by Home Depot to secure inventory is likely to go over well with customers. This will especially be true of Home Depot's most valuable customers -- professionals. The smaller group only makes up roughly 4% to 5% of Home Depot's total customers, but professionals account for 45% of sales.

Management wants to do all it can to make the professionals feel confident about finding what is needed for a job. Losing even a few high-value customers to competitors because you did not have the item they came looking for can have major long-term negative consequences.

Additionally, if competitors have difficulty keeping up with customer demand, Home Depot's robust inventory level could gain some new customers. In fact, by securing such vast inventory quantities, Home Depot may make it more difficult for competitors to acquire the products they need. 

Overall, the rise in inventories is likely to be a good thing for Home Depot shareholders. It's a prudent decision from management and one that takes advantage of the long-lasting nature of the products it sells. How positive it ends up being for the stock will depend on how successful competitors are at stocking their shelves. The more difficulties they have in their supply chain, the smarter this move will appear in hindsight. 

Parkev Tatevosian 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.

Stocks Mentioned

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