The pandemic brought on a huge surge in sales for Home Depot (HD 0.94%), but that growth has slowed now as people take on fewer renovation projects than they did a couple of years ago. The retailer's revenue is forecast to fall between 2% and 5% for the current fiscal year, reflecting this new reality.
This soft outlook hasn't helped the top retail stock. It's down 2% this year -- far worse than the S&P 500's 14% gain. But the recent performance shouldn't distract investors from the one key factor that has contributed greatly to the company's long-term success: Its focus on professionals. Let's see why.
Understanding different customers
Home Depot sells home improvement products to both DIY and professional customers. The goal is to get the right tools, parts, and supplies in customers' hands to tackle whatever projects they need to complete. With a network of about 2,000 stores in the U.S. and trailing 12-month revenue of $155 billion, it is easily the top player in the industry.
The company's ability to cater specifically to pros, though, is really what sets it apart. Home Depot offers pros -- contractors, plumbers, electricians, and the like -- a rewards program, discounted volume pricing, the ability to rent tools, a dedicated customer service line, and delivery options to various job sites, among other perks.
It is estimated that pros only make up 10% of Home Depot's customer base. But they represent 50% of total sales. So naturally, they should remain a top priority for the management team. By providing all these valuable services and benefits, Home Depot is able to drive loyalty from its pros as a mission-critical partner.
Home Depot has focused on bolstering its omnichannel capabilities. In the latest fiscal quarter (Q2 2023, ended July 30), almost half of all online orders were picked up in store. This is a trend that was certainly propelled by the pandemic, which increased customer preferences for greater accessibility and convenience.
And in 2017, the business announced a $1.2 billion investment to improve its supply chain. The intention was to speed up delivery times and enhance product assortment, something that pros definitely value.
Better financial metrics
Lowe's Companies (LOW -0.04%), Home Depot's smaller rival in the industry, only gets 25% of its revenue from professionals. This has resulted in superior financial metrics for Home Depot.
In the latest fiscal quarter, Home Depot's most critical retail figure, sales per square foot ($685), was better than what Lowe's was able to produce ($513). And zooming out from the store-level numbers, Home Depot's operating margin and return on invested capital have generally been much higher than its peer historically.
These superior metrics for Home Depot are due to its standing with pro customers. They spend much more than the average DIY customer, and they visit stores more frequently. From a retailing perspective, a transaction that's worth $1,000 versus just $50, for example, is much more lucrative because it requires less time and labor to complete. This is exactly the advantage Home Depot has.
And growing the pro business helps explain why the company's store count has only risen 3% in total in the past decade, but overall revenue has increased 91%. Of course, those previously mentioned supply chain investments help with gaining operational efficiency, but it's the ability to drive greater sales per store that has mattered.
To its credit, Lowe's, under the leadership of Marvin Ellison, who was previously an executive at Home Depot, is pushing heavily to grow its pro business. But it has a lot of catching up to do in this area. And until it does, Home Depot's key profitability metrics will likely continue to be better for the foreseeable future.
