The Home Depot, Inc. (NYSE:HD) is now basking in its own glory. It has proved that not only is it well prepared to play the housing recovery, but its efficient and effective strategies give it an extra edge over its competitors. The company has beaten all analyst expectations hands down in the recently concluded first quarter of 2013.
Revenue grew by a solid 7.4% year-over-year to $19.1 billion while net income rose by 18% to $1.23 billion or $0.83 per share. US stores reported a positive same store sales growth of 4.8%. Analysts at Thomson Reuters were expecting earnings of $0.77 per share on revenue of $18.68 billion.
There are many factors which have contributed to the robust results, like the recovery in the housing industry, proper planning, and good strategies. Let us take a closer look.
Housing industry is recovering
There is no denying the fact that people in the US are buying houses. In a recent report by the National Association of Realtors, it is indicated that in April the sales of previously owned U.S. homes was up by 0.6% to an annual rate of 4.97 million. These are the best figures since November 2009.
The property prices are also on the rise. Federal Housing Finance Agency has indicated that in the first quarter of 2013, US house prices have gone up by 1.9% from the fourth quarter of 2012 and by 6.72% from the first quarter of 2012. This is creating strong consumer sentiments for starting new housing projects and pouring money into them.
All this creates a perfect backdrop for The Home Depot, Inc. (NYSE:HD) to have a solid year ahead. On the basis of its excellent first quarter performance and expectation of higher sales and earnings in the second quarter, the company has revised upwards its revenue and earnings guidance.
It is expecting 2.8% higher revenue and 17% increase in diluted earnings per share to $3.52. Analysts expect earnings of $3.60 per share and around 3.4% revenue growth.
Significant exposure to professional segment
A true housing recovery play is only possible through a good exposure to professional customers like professional re-modelers, general contractors, repairmen, etc. The Home Depot, Inc. (NYSE:HD) understands the significance of this customer group and has developed several attractions for its professional customers.
Thus the company offers special programs like delivery and ‘will-call’ services, expanded credit programs, dedicated checkout lines, loading services, bulk pricing programs, etc. While the company does not disclose its exact sales figures from this customer group, JPMorgan estimates this to be around 35% of the company’s total sales.
Already in the first quarter the pro segment has outperformed the general consumer segment. This is first time this has happened since 2008. This can be a significant trend going forward once the housing recovery starts gathering more steam.
Being tech savvy
The Home Depot, Inc. (NYSE:HD) has done wonders with its mobile and online selling initiatives.
With smart phone penetration rising to over 50% in the US, mobile selling has become extremely effective. Through its mobile services customers can access real-time inventory, price and aisle location of any store.
Similarly with its online ordering service not only can customers order online, they can also route their orders to any other nearby store at any time. This latest initiative known as BOSS or ‘Buy Online Ship to Store’ provides added flexibility to customers. The company has also found out that one in five such customers end up buying more stuff when they go to pick up their deliveries.
In the first quarter online traffic was up 50% while mobile traffic doubled compared to last year.
Cost leadership
The Home Depot, Inc. (NYSE:HD) is always looking for avenues to minimize costs which enables it the power to provide the best prices to its customers and keep its margins healthy. Whether it is opening a new store, hiring employees, or choosing suppliers, the focus is always on going lean.
It is simple strategies which do the trick like hiring experienced personnel and thus lowering training costs or building a good rapport with the suppliers to gain their loyalty and in the process get good bargains in the long run.
The company also improved inventory turnover to 4.4 times in the first quarter from 4.3 times a year ago.
The Home Depot, Inc. (NYSE:HD) is aiming to achieve 12% operating margins by 2015 riding on its operating leverage, cost management, and productivity gains.
Competition
Home Depot’s closest competitor is Lowe’s Companies, Inc. (NYSE:LOW), which is the second largest home improvement retailer in the US. The company also competes with other retailers in the home improvement space like Sears Holdings Corp (NASDAQ:SHLD).
Home Depot has recently secured a big win over Lowe’s Companies, Inc. (NYSE:LOW) in terms of their quarterly performances. Where the former has stood tall with its revenue and earnings beat, the latter could not meet analyst expectations.
Lowe’s has reported 0.5% decline in its first quarter revenue to $13.1 billion while its net income inched up 2.5% to $540 million or $0.49 per share. Analysts were expecting $0.51 per share on sales of $13.4 billion.
Lowe’s has cited unfavorable weather as its key deterrent. However, it is clear that the company is missing winning strategies like further developing a customer base of contractors and professionals, offering niche online experiences, or just achieving faster inventory turnover. Lowe’s too stands to gain from the housing recovery and we will wait to see how the remaining year shapes up.
Meanwhile, Sears Holdings Corp (NASDAQ:SHLD) has reported sales of $8.5 billion in the first quarter, down 9% year-over-year and trailing expectations of $8.74 billion by analysts at Thomson Reuters.
More significant is the fact that it has reported a much wider loss than expected. It reported a net loss of $279 million or $2.63 per share no comparison to its profit of $189 million or $1.78 per share in the year ago quarter. Analysts had foreseen a loss of $0.60 per share.
Sears also blamed the weather but the true story is falling sales and poor profitability.
Conclusion
Home Depot’s pillars of success have been built on the strong foundation of customer satisfaction. Customers keep returning to its stores for more. The company will continue to gain from the housing recovery while its well planned strategies will create value for itself and its stakeholders.
The article Home Depot’s Inside Story originally appeared on Fool.com.
Gaurav Basu has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe’s. Gaurav is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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