Home Depot Looks At E-Commerce As a Reason For Increased Earnings

Home Depot posted a fourth quarter profit that exceeded nearly every analysts’ estimates, based on improved customer service and a big surge in e-commerce transactions.

“We had a strong finish to the year, as strength across the store, the recovering U.S. housing market and solid execution aided our business in 2014,” said Craig Menear, CEO and president of Home Depot.

Analysts believed Home Depot would report an .89 increase in stock price, but the DIY chain reported an increase of $1.05.  Revenue for the quarter rose 8.3% to $19.2 billion, which was higher than the projected $18.7 billion in revenue for the quarter.  It was the best quarter for Home Depot in the past year and a half.

“The company is operating as well as can be expected, and execution is strong,” said David Strasser, an analyst with Janney Montgomery Scott LLC in New York.

Of course, it is too soon to predict the extent to which earnings growth driven by e-commerce sales. But, online sales did generate more than $4 billion in sales for Home Depot in 2014. Meanwhile, Home Depot will be able to align its brick-and-mortar locations with consumer demand by way of an enhanced supply chain via direct fulfillment centers. And this will also free up in-store floor space for better-selling products.  Home Depot’s e-commerce platform is an opportunity for the company to continue growing, and analysts believe this will be a good strategy for investors with a long-term view.  Right now, Home Depot has two fulfillment centers, in Atlanta and Southern California, with a third currently under construction.

While Home Depot builds its e-commerce platform, the company also intends to stop opening new stores. While online sales accounted for only 3.5% of the company’s $78.8 billion of sales last year, the pace is picking up. And Home Depot is making a big investment (reported to be $1.5 billion this year) to tighten the bolts between its stores and Internet business, along with the new fulfillment centers.

“We’re seeing large growth online.  The digital capability allows the customer to do things that they would not be able to do in the store,” Menear added. “Almost 40% of our online transactions actually finish in our stores.”

Despite last summer’s security breach, Home Depot is starting to see a return from professional contractors who are shopping both online and in the stores.

“in the pro business overall, when you look at businesses that we have that are heavily penetrated by the pro we have very strong results and we see the pro coming back,” Menear said. “We look to see that continue in 2015, including extending credit for our pro customers.  If a pro applies for credit and is denied we give them a second look and do what we can to approve it.  Pros are responding very well to that.”

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