After a slow start to 2018, Home Depot bounced back in the second quarter, with sales up by 8.4% to reach USD30.5 billion. Aided by a continued, positive macro backdrop and the long-anticipated arrival of warm weather, the retailer beat sales projections and delivered an impressive profit in Q2, recording USD3.5 billion in net income. While these external factors certainly helped accelerate growth, Home Depot’s steady, strong performance can be attributed to its focused operations and the success of recent internal investments.
External drivers give Home Depot an extra boost
After posting its highest quarterly comps increase since 2013, Home Depot raised its Fiscal 2018 guidance. The retailer now expects sales to increase by 7.0%, comps to increase by 5.3%, and diluted earnings per share to grow 29.2% to USD9.42. Although Home Depot’s core operations performed strongly in the quarter, the boost from weather and macro factors likely influenced guidance reconsideration.
- Warm weather (finally) ignites sales. While a late start to spring weather dampened sales in Q1, Home Depot experienced what it refers to as “the bathtub effect” in Q2, in which most lost sales from Q1 spilled over into Q2. During a critical selling period for the DIY channel, many seasonal categories, such as lawnmowers, watering, and patios, posted strong comps. Notably, the lawn category, which suffered in Q1, posted record comps in Q2, highlighting the benefit from delayed weather.
- Macro backdrop remains strong. Although some measures, such as home affordability, remain cautionary for the channel, other indicators including low unemployment rates, strong disposable income growth, and post-recession home price recovery provide tailwinds. Overall, these trends will continue to provide opportunities for shoppers to invest in their homes and drive growth for the DIY channel.
Investment in internal operations drives consistent performance
While external factors tend to give retailers across the channel a performance lift, Home Depot’s edge over competitors comes from its strength in its core operations. Eight months after announcing an ambitious strategic investment plan, new initiatives began to translate into growth through Home Depot’s interconnected operations and key shoppers in Q2.
- Push for “One Home Depot” shows early success: Home Depot has broken ground on several cross-channel initiatives ahead of schedule in H1 2018. Major milestones include navigational enhancements to 500 stores, with 500 more planned in H2, online sales growth of 26% in the quarter, and the continued rollout of self-serve lockers, which feed into the 47% of online orders that are now picked up in a store.
- Pros continue to lead growth: Home Depot’s recent investment in its in-store pro sales associates began to yield results in Q2. New technology equipping associates with relevant product suggestions for pros helped drive incremental sales, with 45% of the retailer’s sales growth in the quarter coming from pro shoppers. Additionally, big-ticket transactions, traditionally driven by pros, saw a lift. Now classified by Home Depot as transactions over USD1,000 (previously USD900), big-ticket purchases were up 10.6% compared to the same period in 2017, representing 20% of total sales.
Despite beating estimates and raising its FY 2018 guidance, meeting targets in the second half of the year will take work on several fronts.
- Losing hurricane boost from 2017: Last year, Home Depot experienced a lift in sales in the quarters following destructive storms across its operating regions, meaning the retailer must work harder to beat 2017 comps.
Implication: Consider ways you can work with Home Depot to drive traffic by partnering on major seasonal events, creating targeted messaging that resonates with shoppers’ needs and enhancing solutions across channels to build baskets.
- Potential tariffs loom in H2: The continued uncertainty of future tariffs could pressure Home Depot’s operations, especially in categories like appliances and lumber.
Implication: Expect Home Depot to continue to seek “value improvement” as costs potentially rise and the retailer attempts to avoid passing along too many price increases to its shoppers.
- Continued roll-out of new initiatives: Home Depot is moving forward, often ahead of schedule, with new strategic initiatives in the remaining months of 2018, which the retailer has dubbed, its “year of pilots.”
Implication: Be sure to understand how any changes to the retailer’s supply chain may impact your shipping forecasts and what new cross-channel initiatives mean for your product strategy.
As we look ahead to next week, we’ll be keeping an eye out on Lowe’s performance. This quarter marks the first with new CEO Marvin Ellison at the helm, and we expect the retailer will be looking for a strong Q2 as it enters a new era of leadership. For additional implications and predictions on what’s next for home improvement retailers, check back to KRiQ.com for our in-depth analysis of the channel’s second quarter results.