The Home Depot Inc. (NYSE: HD) hit a new 52-week high on Wednesday, with shares reaching $83.35. The world's leading home improvement retailer has a market cap of $113.8 billion and a P/E ratio of $21.08. The company posted its first quarter earnings results on May 20th - reporting one cent ahead of the consensus estimate with $1.00 EPS. Revenue came below the consensus estimate of $19.96 billion with revenues of $19.70 billion for the quarter. However, revenues are still up 2.9% compared to this quarter last year. The Home Depot will report its second quarter earnings for 2014 on Tuesday, August 19 at 9am ET. I am optimistic about the future of the company largely due to growth in ecommerce and growth in the United States home improvement retail sector.
The Home Depot is investing heavily in improving its online presence, and rightfully so. From 2013 to the end of 2014, total ecommerce revenues are expected to grow by 20% to $1.51 trillion. Home Depot wants a slice of that pie, so the company is investing $1.5 billion over 2014 towards improving supply chain and technology. The goal of the investment is to create a seamless experience between shopping online and shopping in the physical store.
A perk of selling through ecommerce is that it allows the company to offer a wider assortment of merchandise due to less inventory constraints. There are over 600,000 items available online vs. 35,000 in the typical store. Ecommerce also provides much desired convenience for customers. Of that customer base, contractors and builders make up 35 percent. The company plans to target them with their online channel by providing the convenience of selecting purchases online and picking up right at the front of the store. This eliminates having to search through the store and the possibility of the store not carrying the exact product needed.
Another huge advantage of The Home Depot's online presence is the delivery. A lot of the company's customers don't have trucks or large cars - making transporting large purchases difficult. By offering free delivery directly to your door, this offers a huge value proposition for those customers.
The Home Depot saw an increase in online sales of 50% between 2012 and 2013. Yet, these sales only accounted for 3.5% of revenues - so there is definitely room for growth. According to Q1 earnings report, online sales are still continuing to grow:
"Our dotcom business had sales growth of almost 40% for the quarter. We are consistently seeing over 3 million visits per day and our conversion rate continues to increase. Also, our dotcom presence was a contributing factor to our transaction growth." (Excerpt from Q1 Earnings Report)
I think that there is a lot of learning and listening to consumer demands before we will see significant sales coming from ecommerce. There is a learning curve involved because the home improvement retail sector does not currently have a strong presence on ecommerce for The Home Depot to model upon. However, once the company figures out how to give the customers what they want when and how they want it, I foresee ecommerce seriously increasing sales volume. The company is making strong investments to capitalize on growing consumer interest in online shopping, which should in turn result in a growing customer base and growing sales volume. In next week's earning report, a close eye should be kept on what the company says about ecommerce.
Growing Home Improvement Market
The home improvement market is seeing healthy growth, and should continue to grow. According to a report by MarketLine, the United States home improvement sector increased 4.2% to $244.1 billion in 2013. The sector is forecasted to grow 30.4% to $318.3 billion by 2018.
One contributing factor to the home improvement market growth is the rising immigrant population. According to the US Census Bureau, the Hispanic population is anticipated to grow from 53 million in 2013 to 128.8 million in 2060. This is important since the Hispanic population has serious economic influence. Their purchasing power in 2011 exceeded $1 trillion and industry sources estimate it to increase to $1.5 trillion by 2015. The rising immigrant population in the US increases demand for new homes - likely increasing sales for The Home Depot.
With The Home Depot's earning report scheduled for next week, we can anticipate some movement in the stock price. However, any short-term movement should be overlooked and the emphasis should be placed on the long-term potential growth for the company. As the company invests heavily in ecommerce, it should be able to capture more market share in an industry already forecasted for growth.
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