Source: Home Depot
Investors in home-improvement giant Home Depot (HD -0.31%) have been euphoric over the past couple of months, as the stock bounced back from a brief October swoon to climb to new all-time record highs last week. With solid earnings results, Home Depot remains the leader of the space, and even after the huge long-term gains that shareholders have enjoyed over the years, many believe that Home Depot has more room to run higher if it keeps its current business model on track. Let's take a look at a few reasons why Home Depot's bull run could still be in the early stages.
1. Home Depot's e-commerce strategy gives the company the best of both worlds.
Many major retailers have struggled with the threat of online competition from e-commerce specialists. By avoiding the massive costs of maintaining physical store locations, online retailers have more flexibility to pass savings on to customers, and in response, big-box retailers have had to come up with e-commerce strategies of their own in order to compete.
Yet Home Depot has come up with an extremely successful solution to the online threat, using its store network as a distribution center for those who want to pick up online orders locally. Because many items that consumers buy at Home Depot are bulky and ill-suited to traditional shipping methods, the convenience of having orders prepared for pickup in advance adds value for some of the retailer's customers, especially the professionals on whom Home Depot has increasingly relied for its accelerating growth. Some critics argue that the online-big-box hybrid strategy introduces challenges of its own, including inventory management and difficulties in handling the service demands at high-traffic times. Offsetting those challenges, though, are the benefits of getting people into stores, where they'll often buy additional items as well.
By fleshing out its online channel, Home Depot can cater to tech-savvy consumers who want instant access to information about the purchases they want to make while also meeting customers' needs to look at those items in real life. With its stores essentially being an optional showroom for its online channel, Home Depot has found an elegant way to make the most of both e-commerce and traditional retail.
2. Strength in housing is bolstering results across the home-improvement industry.
Home Depot has done a good job of competing against rival Lowe's (LOW -0.14%) and other players in the industry, but there's no doubt that things are best for Home Depot when conditions throughout the industry are solid. In its most recent quarterly report, Lowe's confirmed the same things that Home Depot had said about the strength of the housing market, citing increasing spending among homeowners on remodeling and renovation projects. The gains helped Lowe's boost its same-store sales by more than 5%, leading the company to raise its guidance for its full fiscal year.
Some analysts fear that growth rates in the housing market are slowing, though, which could put pressure on long-term results in the industry. Yet at least so far, median sales prices for single-family homes have continued to rise at a mid-single-digit percentage pace. More importantly, Home Depot has demonstrated its ability to cater to homeowners regardless of their intentions, with the stock seeing strong returns even during the most sluggish times for the housing industry. As long as homeowners feel like things are improving, they'll be willing to spend to make their homes a little better -- and that demand will go straight to Home Depot's top line.
3. The long-term impact from the data breach probably won't be as bad for Home Depot as many fear.
One of the biggest uncertainties that Home Depot is facing right now is how much fallout it will suffer from its massive data breach earlier this year. Especially after the big downturn in business that big-box peer Target (TGT -0.54%) suffered following a similar breach, investors worry that Home Depot could see the same downturn and loss of confidence from customers.
Source: Home Depot
Yet at least so far, Home Depot appears to be handling the crisis better than Target did. Rather than repeating Target's mistake of trying to handle the worst of the damage through financial institutions, Home Depot did a better job of communicating directly with its customers. In addition, the nature of the information that Home Depot lost wasn't as sensitive as what was involved in the Target breach, with Target having to deal with having had encrypted personal identification numbers stolen.
Moreover, Home Depot has protection from the financial consequences of the data breach. In the company's most recent conference call last month, CEO Craig Menear noted that Home Depot has a $100 million insurance policy that it can use to help cover some of the costs resulting from the breach, including legal expenses and some fraud-related costs.
Home Depot is already facing lawsuits related to the breach, and dealing with it will be a distraction in the short term. Given the heightened storage of financial information online, consumers are getting more used to the threat of hackers. With the fraud protections usually resulting in customers paying nothing even if their information leads to unauthorized charges, Home Depot has every reason to think it should survive its data breach and move forward in 2015 and beyond.
Home Depot's recent gains have shown the long-term confidence that may investors have in the company, and from an execution standpoint, Home Depot has stepped up its game to bounce back from weaker times earlier in the year. Investors need to expect normal cyclical ups and downs from Home Depot, especially after a long recovery in the housing market. Yet for those with a longer time horizon, Home Depot continues to show the positive attributes that have brought it so much success in the past.
