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Home Depot’s Online Performance and What It Means

By Dan Moskowitz - Jul 30, 2014 at 1:00PM

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Most people don’t think of Home Depot as an online retailer. But that will eventually change, and it will be good news for investors.

HomeDepot.com

The nation's largest home improvement retailer, Home Depot (NYSE: HD) has been experiencing lackluster growth as of late. This fact, perhaps a product of its success in becoming so large, has inevitably left investors wondering if the company's best days are behind it. However, fortunately for the company's shareholders, its initiatives to boost its online sales results are beginning to bear fruit and may be just what the company's bottom line needs. 

Online sales growth
In the first quarter, Home Depot increased its online sales 39% year over year. Online sales might not seem like a big deal at this point in time, but you always want to be ahead of the curve. 

The 39% growth might seem impressive, but it's not the number that matters most. The more important number is that online sales now account for 4.2% of total net sales, significantly higher than the 3.1% of total net sales reported in the year-ago quarter. However, those aren't the only benefits Home Depot is seeing online.

Reasons for optimism
As mentioned above, Home Depot didn't meet expectations in the first quarter due to severe winter weather. It was also difficult for Home Depot to meet expectations because it was up against the year-ago quarter when Hurricane Sandy hit the Northeast and demand was extraordinarily high for its home improvement products. .

The theme here is severe weather. While online sales were affected by winter weather, they weren't nearly as affected as physical stores were. Therefore, if online sales continue to grow its percentage of sales, severe weather isn't as likely to impact Home Depot in the future. Rather than brave severe weather to visit a home-improvement store, customers can simply order online and have their merchandise delivered straight to their homes.

Another big positive is that Home Depot's BOSS initiative, or Buy Online Ship to Store, is performing very well in its early going. In fact, on the company's first-quarter conference call, one analyst asked why online sales growth slowed to 39% from 50% in the year-ago quarter. The reason was that Home Depot launched BOSS in the year-ago quarter. Therefore, online sales were expected to decline somewhat. Additionally, BOSS delivered $100 million of the $232 million in online sales in Home Depot's first quarter, and Home Depot stated that it's a growing aspect of the business in which it will invest. 

This brings us to an important point. When a retailer plans on investing in a new growth channel, it's most often either going to succeed in a big way or fall flat on its face. As a whole, consumers are rarely on the fence. They either love a new feature at a retailer or hate it. So...how do we determine if this investment is likely to pay off?  

The best indicator
Home Depot and Lowe's (LOW 2.92%) are, needless to say, rivals. Home Depot must thwart Lowe's ever-advancing threat, while Lowe's must find ways to catch the dominant player in the industry. To this point, Home Depot has remained the comfortable leader, but it can never put its guard down or slip up. Otherwise, being a well-run company, Lowe's will take advantage of the opportunity.

This all relates to return on invested capital, which is an excellent sign of efficiency. It helps us determine which company is more effective with its capital investments in regard to generating cash flow and using that cash flow for capital expenditures and shareholder returns (dividends and stock buybacks). 

The chart below compares return on invested capital for Home Depot and Lowe's over the past five years:

HD Return on Invested Capital (Annual) Chart

Home Depot Return on Invested Capital (Annual) data by YCharts

However, it's difficult to tell from the above chart which company has been growing its return on invested capital faster. Home Depot is still the leader:

HD Return on Invested Capital (Annual) Chart

Home Depot Return on Invested Capital (Annual) data by YCharts

The bottom line
Online sales are only a small piece to the Home Depot investing puzzle right now, but it's a puzzle piece that continues to grow in size and is highly likely to play a bigger role in the company's success in the future. Given Home Depot's impressive history for return on invested capital, the increased investments in online sales and Buy Online Ship to Store are much more likely to succeed than fail. This is a positive for Home Depot investors and almost certainly makes the company worth a closer look by Foolish investors.

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. 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.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$327.38 (4.06%) $12.77
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$214.12 (2.92%) $6.08

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