Home Depot: Expanding Its Online Presence

Apr.29.14 | About: Home Depot, (HD)

Summary

Home Depot Inc. (HD), U.S. home improvement retailer, recently declared it would invest $1.5 billion in developing its online store in the current fiscal year.

NRF forecasts the U.S. overall retail sales will rise by 4.1% (excluding restaurants, gas stations and automobile sales), and projects U.S. online sales to grow between 9%-12% in 2014.

The persistent growth in e-commerce is making many retailers reconsider business models that focus on real estate portfolios for the generation of sales.

The company has also recently acquired various e-commerce websites, including Blinds.com, in January 2014, and is undertaking various initiatives to improve its online footprint.

Home Depot, Inc. (NYSE:HD) recently declared it would invest $1.5 billion in developing its online store in the current fiscal year. The announcement reflects the company's farsightedness, as it is striving to move along with the emerging trend among consumers towards online shopping platforms. Therefore, in this article, I will discuss the forecasts related to shopping trends in the U.S., and the initiatives Home Depot is taking to get in line with the changing trends.

Let us begin by discussing the emerging trends of shopping among the U.S. shoppers in terms of shopping medium.

Emerging Trends among the U.S. Shoppers

According to Forrester Research, the online retail sales in the U.S. are expected to rise to $248.7 billion in 2014, and a compounded growth of 10% has been projected for the next five years. A survey of U.S. online customers indicated that 82% of those surveyed are pleased with buying experiences that were initiated and concluded on the online store. On the other hand, satisfaction fell to 61% of those surveyed for products researched online and then purchased in a store.

The NRF forecasts the U.S. retail sales to rise by 4.1% (excluding restaurants, gas stations and automobile sales), and projects the U.S. online retail sales to grow between 9%-12% in 2014. This reflects the fact that that U.S. online retail sales are anticipated to grow at a much higher rate in comparison to the overall growth in the retail sales in FY 2014.

This persistent growth of e-commerce reflects the alteration in the purchasing patterns of consumers, and this is making many retailers reconsider business models that focus on real estate portfolios for the generation of sales. The shift to online platforms from relying totally on brick-and-mortar stores has been very intense amongst traditional hard-goods retailers.

Source: Cassidy Turley 2014 Retail Forecast

The online sales in the U.S. are forecasted to grow about 15% in 2014, in comparison to the 5% growth in traditional retail stores sales growth (see chart above). This is making many traditional retailers allocate more of their capital expenditure budgets to the construction of their e-commerce platforms and supply chains, rather than expanding their brick-and-mortar stores. Therefore, Home Depot's recent initiative to allocate more of its capital spending to enhance its online platform is in line with the industry trend.

After determining the outlook of shopping trends in terms of mediums in the U.S., let us have a look at the current contribution of online sales to the company, along with initiatives the company is undertaking that will benefit it in the coming periods.

Home Depot: Impacts and Initiatives

Up until now, Home Depot has focused on covering the U.S. market with more and more stores in order to grow its revenue. The company's business model previously focused on increasing its sales by opening additional units, but the company has observed that more and more stores to a limited group of households makes each store less profitable. Therefore, the company has decided to develop its online platform.

The company is reported to have 2263 retail stores in the United States (including Puerto Rico and the U.S. Virgin Islands and the territory of Guam), Canada, and Mexico by the end of FY 2013. The company generated 96.5% of its total revenue of $78.8 billion from stores and 3.5% (up from 2.4% in FY 2012) from the company's online operations in FY 2013. The company recorded a 52.60% growth in its online sales in FY 2013 in comparison to FY 2012 (see table below). This is a much higher growth rate in comparison to the overall growth of 5.4% in the total net sales recorded by the company in FY 2013.

Source: HD 2013 10K Filing

This reflects the fact that currently, the company's online sales account for a small portion of the company's annual sales, but an enhanced online presence through increased investment will accelerate the company's revenue growth in the coming periods. Purchasing patterns have significantly changed in the age of internet. The following charts show that the company has also recorded rapid growth in traffic from mobile devices, tablets, and PCs, along with the rise in application downloads from FY 2010-2013. The company's website and mobile sites are both part of the company's online operations.

Click to enlarge

Source: 2013 Home Depot Investor Conference

Therefore, the company has announced it would invest a lot of money to augment its online presence during the current fiscal year. The company declared it would spend around $1.5 billion this fiscal year in order to enhance its supply chain and technology to connect its business to the internet and penetrate into the online distribution.

The company has also recently acquired various e-commerce websites, including Blinds.com, the market frontrunner in online sales of window coverings, in January 2014, with an aim of expanding its online presence. The company believes that this acquisition will allow it to offer customers a captivating shopping, sales, and service experience for purchasing window coverings online, and assist the company in developing industry-leading capabilities for selling customizable and configurable products online.

In FY 2013, the company also concluded its rollout of Buy Online, Ship to Store ("BOSS") and Buy Online, Return In Store ("BORIS"), the counterparts of Buy Online, Pick Up In Store ("BOPIS") that was introduced in FY 2011. The company also has initiated the preliminaries for Buy Online, Deliver From Store ("BODFS"), that will provide the company with the ability to deliver orders placed online from the company's stores to the customer's home or job site. The company expects to launch BODFS in FY 2014.

Additionally, in order to further facilitate direct-to-customer delivery, the company has opened a new direct fulfillment center in Georgia in February 2014, and has planned to construct two additional facilities by the end of 2015. The company expects these facilities to provide it with the ability to deliver 90% of its customers' parcel orders in the U.S. within two days.

The paybacks from the development of the online business for the company are anticipated to be limitless. The company will be able to reduce its overhead costs and considerably cut its expenses budget, thanks to this alteration in the business model. Additionally, the recovery in the U.S. housing sector and growth in the home improvement market will also help the company to grow and enhance its financial performance and position.

Forecasts on Housing Recovery and Concluding Remarks

According to Home Depot's CFO, Carol Tome, the U.S. house prices are one of the company's primary business drivers, and are derived according to the supply and demand for houses. The following chart shows that the inventory of existing homes for sale has declined to its early 2000 level. In 2014, that will increase the prices of homes and create an advantage for the company.

Source: Fool

Clear Capital projects U.S. home prices to rise by 3%-5% in 2014, while Kiplinger expects the U.S. home prices to increase by 4%. Home Depot expects the home price appreciation to contribute to its growth by 200 basis points in FY 2014, as the company expects the home prices to rise by 6% in 2014.

According to the 2013 IHS Global Insight/HIRI Home Improvement Products Market Forecast, the U.S. home improvement market is expected to record a 6.5% growth to $309 billion sales from 2014-2015. The forecast believes the existing home sales will grow slowly in 2014, but the housing starts will rally and the real income growth will also be much stronger. In 2015, the further improvement in the U.S. housing starts, the existing home sales, and the real income growth are expected to increase the total home improvement product sales by 7.0% in comparison to the previous year.

Overall, the company is preparing itself to capitalize from the recovery and growth in the U.S. housing sector. The company's recent announcement to allocate more capital spending to enhance its online operations is in line with the emerging shopping trend. This will not only support the company's top line in the coming years, but will also contribute positively to the company's bottom line. Therefore, diverting its capital investments to expand its online presence makes the company a good buy due to its future prospects from this initiative.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.