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This Home Improvement Store’s Move Toward E-Commerce Could Be a Game Changer

By Marshall Hargrave – Feb 20, 2014 at 3:00PM

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While e-commerce has taken consumer electronics by storm, it's just now heating up in home improvement.

Home Depot (HD -1.25%) has finally opened its first e-commerce fulfillment center, a big move to help drive its renewed focus on mobile and online sales. However, the one big question I have is "Why now?" This comes more than three years after top competitor Lowe's (LOW -1.79%) implemented its "flexible fulfillment" strategy. With that said, is Home Depot's new strategy of focusing more on e-commerce coming too little too late?

Why e-commerce matters
Many investors might be scratching their heads wondering why a home-improvement retailer would be getting into e-commerce. In 2011, Lowe's introduced "flexible fulfillment" to expedite order processing and shipping. A year later the company increased its online sales by 50%. While Lowe's already had fulfillment centers, this new strategy allowed online orders to be shipped not only from distribution centers but warehouses and stores themselves. If Lowe's success is any indication, then yes, Home Depot's move should be more than worthwhile.

The recent e-commerce fulfillment center that Home Depot opened is the first of three. It'll build another two multi-million square foot centers to help process online orders. However, the move will not only support e-commerce but also mobile commerce. This is something Home Depot calls the "interconnected" retail experience, where customers can order via the web or mobile devices and have products arrive quickly. In addition, with the introduction of these distribution facilities, Home Depot will be able to increase its product offerings. While its typical store carries some 35,000 products, its distribution facilities will stock more than 100,000.

Home Depot will also be able to better align its stores with customers' needs thanks to a better supply chain; where the company can now move products that are best sold online out of its stores, freeing up floor space for higher-margin and better selling products. 

What took so long?
The home-improvement business is a bit different than consumer electronics. Moving large appliances and lawn equipment has not always been all that affordable. That's where fulfillment centers come into play. Putting items in central locations helps bring down the costs of shipping. The other thing finally driving home improvement to e-commerce is the broad-based move by shoppers to purchase goods online.

Also, a number of "pros" and contractors who are constantly on the go are now looking for quick and easy ways to order supplies. As a result, Home Depot introduced a mobile app for contractors last year that will allow them to place orders, and if necessary, pick up orders, more quickly. Contractors can also see store inventory at multiple locations.

Still room for growth?
Home Depot and Lowe's should also manage to capture market share as Sears Holdings (SHLDQ) closes stores. Home Depot already has 25% of the retail home-improvement market, and this number should grow with Sears closures. There should also be continued demand related to the housing recovery in 2014, but the real potential is in the "pro" market.  

One big overhang is after a recovery in the housing market is accounted for in the stock price, what drives Home Depot higher? Well, there appears to be the "pro" market that remains largely untapped. Home Depot only owns about 10% of this market, which is worth more than $260 billion. What's more is that its pro customers are likely not using Home Depot as their primary source, where its average pro customer only spends $6,000 annually at Home Depot. I look for Home Depot to continue investing in the pro and am encouraged by its latest innovation mentioned above, the app for contractors.

It's one of the best investments in the space
Home Depot is trading roughly in-line with major peer Lowe's; even so, Home Depot is still one of the best plays in the industry. They both trade at roughly 17.5 times next year's earnings. Meanwhile, Sears trades with a price-to-earnings multiple that's incalculable given the company's negative earnings. What separates Home Depot from Lowe's is its dividend; Home Depot has a dividend yield that's at 2%, while Lowe's is at 1.5%. Home Depot's stock is just off all-time highs, as is Lowe's. With the continued rebound in housing, these stocks could continue hitting new highs in 2014.

Foolish bottom line
Home Depot's move to fulfillment centers tells me two things. One, the company is gearing up for the continued shift toward online sales. Two, investors can no longer look to just the storefronts to compare Lowe's and Home Depot. And despite the fact that Lowe's is already active in the e-commerce space, Home Depot still has an opportunity in the e-commerce market. History has proven that the market is big enough for both of the major home-improvement retailers. For investors with a long-term horizon, Home Depot could be a great investment as it finds new ways to sell its products.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Home Depot. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Home Depot Stock Quote
Home Depot
$323.89 (-1.25%) $-4.10
Sears Holdings Stock Quote
Sears Holdings
Lowe's Companies Stock Quote
Lowe's Companies
$210.99 (-1.79%) $-3.85

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

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