After announcing its fiscal third-quarter results earlier this week, Home Depot (NYSE:HD) shares fell slightly, as investors became nervous about the home-improvement retail giant's ability to keep growing at the pace it has in recent years in light of fallout from its recent customer data breach. Yet in the conference call after the report, new CEO Craig Menear and his team of executives drilled down on some of the key focus areas that Home Depot will need to address in order to make the most of its current opportunities. Let's take a look at the five keys that Home Depot's management just revealed and how the company could better capitalize on each of them.
1. Home Depot needs to give professional home-improvement customers the best experience possible.
Home Depot gets huge gains from catering not just to do-it-yourselfers, but also to professional contracts and builders. Recently, the company has seen huge gains from the professional side of its business. As Menear said in the conference call, "The growth in our pro business continues to be anchored by our large spending pro, which grew at approximately two times the company average."
Gains on the professional side of the business are a direct result of an overall improving economy and a strong housing market in particular. With more homeowners building equity in their homes and facing deferred maintenance that they let slide during the recession, professionals have seen their business ramp up. Home Depot can claim its share of that business as long as it keeps giving professionals the materials and support they need to get the job done.
2. Home Depot customers are willing to pay up for services directly from the company.
Home Depot markets itself as a place for expert homeowners to go to get key jobs done. But increasingly, Home Depot has seen more of its customers want greater amounts of help with their projects, and the corresponding impact on the services side of Home Depot's overall business has been positive. "Our service businesses had comps above the company average, with strength in windows, countertops, and water heaters," according to Menear. The high-ticket nature of those projects has also been good to Home Depot's top and bottom lines.
Home Depot has to be careful in providing services itself, as it doesn't want to alienate its professional customers by competing against them. Yet Home Depot also has to embrace all of its customers, and if anything, the profit potential from adding services to the mix could be greater than simply being a supplier.
3. International markets are a big opportunity for Home Depot.
Home Depot does most of its business in the U.S., but it has nevertheless seen the potential from tapping international markets. In the conference call, Menear noted that the company's Canadian division had posted positive comparable-store sales for the 12th quarter in a row, exceeding Home Depot's overall average gains. In Mexico, the streak has been even longer, with 44 straight quarters of rising same-store sales.
Not all of Home Depot's global expansion efforts have gone according to plan, with a particularly ill-fated move to enter the Chinese market in 2006 proving unsuccessful and forcing the company to make the decision to close its remaining stores in the area in 2012. Yet in areas where the do-it-yourself mentality is stronger, Home Depot clearly has the potential to do much better and bolster its overall growth prospects.
4. The online e-commerce and interconnected retail initiatives could help foster more growth at Home Depot.
Home Depot has made integrating its e-commerce and physical-store channels to the greatest extent possible, with its interconnected retail initiatives aiming at a seamless process for shopping and buying products. Menear said that sales from Home Depot's online channel rose at an almost 40% clip during the quarter, building on even stronger gains the previous year and pointing to the popularity of the online destination.
Yet unlike other retailers, Home Depot thrives on materials that are bulky and difficult for traditional online-retail transportation companies to handle. As a result, it has made its stores a key component of its logistics system, encouraging shoppers to pick up online orders in stores and giving them a reason to pick up incidental items while they've made the trip. That has proven lucrative for Home Depot and should help it with its other initiatives as well.
5. Regaining customers' confidence after the data breach will be a high priority for Home Depot.
Home Depot knows that the data breach has shaken confidence in the company, and Menear noted that the company remains dedicated to putting its customers first. Home Depot has spent considerable money in addressing the breach, and it has a $100 million insurance policy to help cover any expenses resulting from it.
Nevertheless, Home Depot was optimistic about its prospects. Menear pointed to the fact that transaction growth rose in each month of the quarter, suggesting that the data breach didn't have a material impact on customer confidence. Yet Home Depot will have to stay on top of the situation to make sure it doesn't grow into a bigger problem going forward.
Overall, Home Depot has the ability to overcome its challenges and keep growing despite the recent data breach. As long as the overall economy keeps performing well, Home Depot should be able to build its success well into the future.