Home Depot caters to pros and consumers in the digital world

New digital initiatives, such as the “buy online, pick up in store” sales channel, are important drivers in attracting long-term, repeat customers.

After speaking with Home Depot Inc.’s (NYSE─HD) management, equity analyst Seth Sigman is bumping his 2016 EPS estimate up to $5.78 from $5.70. He also increased his 12-month target price to $120 from $110 while reiterating his “outperform” recommendation.

Mr. Sigman, New York-based vice-president, equity research at Credit Suisse, says these meetings “highlighted many reasons to be optimistic on this story.”

These include “macro” factors, such as an improving U.S. economy, strengthening employment picture, rising wages and a rebound in American housing markets.

At the same time, there are a number of positive company-specific factors such as efforts to boost business and improve margins at the company’s professional and contracting services (“Home Depot Pro”).

Mr. Sigman says, “This may be the [company’s] biggest opportunity over the next few years.”

Home Depot Pro is currently testing changes in credit terms, new delivery services, and technology upgrades, all of which–if successful–it may roll out to more stores this year.

These initiatives are aimed at improving both market share and profitability (i.e., margins) in this large and growing market.

On the main, consumer side of the business, Home Depot is also pursing a number of initiatives intended to increase sales, market share and profitability.

One basic project is to upgrade the mobile devices sales associates use. That should pay off over the long term by building customer loyalty.

Home Depot is also reassessing how it uses its shelf space. It turns out that customers tend to buy certain items online rather than in person. In response, Home Depot is shrinking the amount of shelf space it allots to some products (shifting them to warehouses and pickup areas for online shoppers) and using the extra shelf space for items that are popular with in-store shoppers.

In another initiative, being rolled out at about 550 stores, Home Depot is working to make the “buy online, pick up in store” option more attractive. As Mr. Sigman notes, this sales channel is “an important driver, as 40 per cent of online sales are picked up in the store, with high attachment rates”. (That is, people who do this tend to be long-term, repeat customers.)

At the same time, the company is adding new brands to its stable and is expanding into new categories such as auto parts.

Mr. Sigman says that, as part of its bid to expand sales and margins at the core consumer operations, the company is also adding some higher priced items. 

 

Investor’s Digest of Canada, MPL Communications Inc.
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