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Home Depot (HD) Displays Solid Run-Up, Adds More Than 30% YTD

The Home Depot Inc. HD is one of the investor favorite home improvement stocks, courtesy of sound fundamentals as well as efforts to provide an interconnected shopping experience to customers, with innovative products and improved productivity. We note that shares of the Atlanta, GA-based company have advanced 32.6% year to date compared with the industry’s growth of 27.6%.

The Zacks Rank #3 (Hold) stock has also comfortably outperformed the Retail-Wholesale sector and the S&P 500 Index that grew 18.7% and 15.3%, respectively. Further, the stock hit a 52-week high of $229.27 on Aug 30. In all likelihood, Home Depot, with a long-term earnings growth rate of 10.7%, can reach new heights.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 


Endeavors to Drive Momentum

The company’s fundamental strength is highlighted by its positive earnings surprise trend recorded for more than five years. Progress on strategic investments as well as a favorable consumer environment in the United States and a steady housing market has been contributing to this robust surprise trend.

Home Depot is witnessing significant benefits from the execution of its “One Home Depot” investment plan, focused on delivering an interconnected shopping experience for customers. In-store investments under the plan have resulted in enhanced navigation through the introduction of way-finding sign and store refresh package in more than 1,400 U.S. stores so far. These along with front-end store investments to optimize labor and merchandise space productivity led to improved customer satisfaction scores and improved conversion rates in stores.

Further, the introduction of digital price labels in the appliance department brought the ratings and reviews of the digital world into its store shopping experience. Though physical stores are the key to its business, the company identifies many of in-store purchases to be the result of online visits. Additionally, nearly 50% of the online orders in the United States are picked up from stores, reflecting the relevance of stores amid the growing popularity of e-commerce. The blended customer engagement across both channels forms the basis for the company’s integrated retail strategy that connects offline and online channels.

On the digital front, it is investing in its website and other applications to further enhance online customer experience. It is witnessing higher traffic, better conversion and continued sales growth in the digital business through improved search capabilities, site functionality, category presentation and product content. Moreover, the company continues to roll out automated lockers in stores to make picking-up of online orders easier and convenient. Currently, automated lockers are available in about 1,100 stores.

The company is also making efforts to leverage the digital business to boost sales for new categories like HD Home pool and workwear. These investments across the digital and physical assets are likely to drive its productivity growth, apart from boosting customer experience.

Home Depot is focused on ramping up investments in all facets of business in the wake of rising competition from the likes of Lowe’s Companies LOW, Walmart WMT and Target TGT. We believe that the company’s commitment toward improving customer experiences through its interconnected strategy will continue to drive traffic.

With the “One Home Depot” investment plan on track, it is nearing the financial goals outlined in December 2017. It reiterated the targets for fiscal 2020, anticipating total sales of nearly $115-$120 billion, representing compounded annual sales growth of nearly 4.5-6%. Operating margin is expected to be 14.4-15%. Moreover, the company expects annual average capital spending to be about 2.5% of sales. Alongside achieving these targets, it plans to accelerate investments in the next three years to enhance customer experience and shareholder value.

Pro Segment – A Star Performer

Home Depot’s Pro segment is a key growth driver, with Pro sales outpacing DIY (do-it-yourself) sales for the past several quarters. The Pro segment is benefiting from the company’s efforts to enhance service capabilities for the Pros. Home Depot is focused on simplifying the Pro shopping experience and expanding engagement through services like tool rental, delivery and the new B2B website. The B2B platform brings a more personalized experience to Pro customers based on customer feedback. The company expects to roll out the new Pro online experience to more than a million Pros by 2019.

Additionally, it equipped store personnel with several tools to better understand Pro customers. The latest among these tools is the My View system, which enables associates to access customer data, allowing working proactively to better serve Pro customers.

Wrapping Up

As already detailed, we expect Home Depot’s bottom-line momentum to continue in the quarters ahead. The company’s efforts to catch up with the changing retail landscape positions it in an advantageous position compared with its rivals. Further, favorable economic conditions, anchored by an improving job market and robust consumer spending as well as stable housing market add enough fodder for sustaining growth in the long run.

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Lowe's Companies, Inc. (LOW) : Free Stock Analysis Report
 
The Home Depot, Inc. (HD) : Free Stock Analysis Report
 
Target Corporation (TGT) : Free Stock Analysis Report
 
Walmart Inc. (WMT) : Free Stock Analysis Report
 
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