Home Depot Finds a Home in Pandemic

It turns out the pandemic has been good for business at Home Depot ((HD) -Get Report), but the real story of digital transformation is bigger than lockdowns, and it is only getting started.

On Tuesday the Atlanta, Ga.-based home improvement giant posted blowout earnings. Sales surged 23%, profits jumped 25% despite hefty spending to keep employees and customers safe.

Managers transformed the way they manage inventories, using data analytics.

Home Depot used to rely on lingerers. Suburban moms and dads, in neighborhoods all over the country, gathered in the garden center and studied toolkits for in store demonstrations, and advice from knowledgeable, friendly staff. It was the no-brainer destination for grabbing mulch, a tool, or maybe even a new grill.

The pandemic hampered that strategy, but behind the scenes Home Depot managers were getting reimagining the business. They has spent billions investing in new digital tools. They moved more parts of the business online, with more shipping options for professionals, and new inventory management using data analytics to make sure the things customers want were always in stock.

The also focused on the other side of that equation. Profitability at Home Depot depends on not holding products customers don’t want.

The new digital experience for contractors began rolling out in 2018. Eventually, professionals all over the country will be able to order products online, or with a mobile app. Those purchases will instantly show up in their pro accounts. They will also be able to arrange delivery to job sites, and in some cases, pickup items at automated lockers, bypassing checkout lines altogether.

Contractors are key. Despite Home Depot’s success with average shoppers, the professional market remains extremely fragmented. Smaller regional hardware chains still command large parts of the marketplace. Consolidating that business, with Home Depot’s superior economies of scale represents a big opportunity.

Digital investment on the consumer side has been ongoing since 2016. The One Home Depot plan, intertwines its digital and physical stores. Customers can start an order online and pick up at the store, or vice versa. They can also check real-time inventory, and find the in-store location of items, all from their smartphones.

When going into the store is not possible, Home Depot has been focused on delivery to make it easier for customers get the things they need to complete small renovations.

The Wall Street Journal reported June 2018 that the home improvement chain began a $1.2 billion expansion to add 170 distribution sites. The goal was to provide 1-day service to 90% of the U.S. population.

Given the pandemic, pursuing contractors and average consumers with digital tools has definitely helped the core home improvement business. But the real juice, the digital transformation, is the way Home Depot gained control over inventories.

Tuesday the company reported Q2 sales surged to $38 billion, up 23% versus a year ago. The number of overall customer transactions grew 12.3%, to 511.5 million, while the average purchase price per customer visit rose to $74.12, a gain of 10.1%.

However, the key Q2 improvement is inventories. Profitability depends of making sure customers can get what they want, when they want it, without the company holding a lot of extra stuff.

Merchandise inventory was down 8.4%, to $13.5 billion. Profits bounced 25% to $4.3 billion.

Long ago, Home Depot managers discovered they could get people into their clean, well-lit suburban stores with DYI demonstrations. Foot traffic is always a good thing in retail, but longer-term profitability isn’t only about finding new ways to get customers into the store. The best retailers also find tools to make sure products are turning over efficiently.

Home Depot managers embraced transformative digital strategies early. Tuesday’s financial results show that prescience is paying off.

Shares trade at 25x forward earnings, and 2.7x sales. While these metrics may seem high for a traditional retailer, Home Depot is much more than that. The home improvement chain is in the early stages of becoming a premier digital business. As investors realize this, shares will be valued like a technology business.

Buy Home Depot into any significant weakness.

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