3 Brilliant Ways Home Depot Inc. Is Investing in the Future

By Markets Fool.com

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Image source: Home Depot.

Home Depot (NYSE: HD) is downright frugal when it comes to store-expansion plans. The home improvement giant expects to open no new warehouses in 2016, even as smaller rival Lowe's (NYSE: LOW) adds 45 shops to its base.

While happy with its retailing square footage in the U.S. right now, Home Depot is plowing money into other growth initiatives. In fact, the company plans to spend significantly more cash this yearon a few key priorities that management sees as well-deserving of increased investment dollars.

Building up the online business

Executives know that a national retailer can't thrive without a robust e-commerce business, and that's why they're dedicating major resources to achieving that goal. Shipping distribution centers, including a high-tech 16 million-square-foot facility that opened last September, now mean that the company can reach 90% of U.S. customers within two business days of an online order being placed.

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Image source: Getty Images.

Home Depot has spent heavily to deliver a seamless buy-online, pick-up-at-store functionality that nearly half of its e-commerce shoppers choose to use.

The results have been impressive so far. Home Depot's online sales are up 20% through the first six months of the year and account for 6% of sales -- compared to around 3% for peers like Targetand Costco.

Executives hope to keep that momentum going by rolling out major new online options over the next few months, including the ability to buy online and have your product shipped directly from your local store.

Targeting the professional segment

At $120 billion a year, the professional segment of the home improvement industry is nearly as big as the do-it-yourself segment, making it another important growth target.

MRO = Maintenance, repair, and operations. Image source: Home Depot investor presentation.

Success with pros starts with acquiring the right brands, which are in many cases sold exclusively at Home Depot. Whereas Costco talks a lot about achieving "pricing authority" in its warehouses, Home Depot execs say that "product authority" in areas like fencing, doors, and decking is what really drives business in this professional shopper category.

So far the segment has been growing faster than the overall store, which is great news for Home Depot's operations. Last quarter its big-ticket purchases, those that run greater than $900, spiked higher by 8%. That was a big factor in overall growth coming in at 5% --compared to Lowe's 2% uptick.

Going forward, Home Depot aims to continue locking in the strongest assortment of product offerings available on a national level. Its private-label loyalty card should make a difference as well, thanks to added perks like higher credit limits and more relaxed return policies. Finally, the retailer is rolling out next-day delivery options for many bulk products directly to job sites.

Making smart acquisitions

Home Depot recently spent nearly $2 billion acquiring Interline Brands, a leading distributor in the segment of maintenance, repair, and operations products. Beyond that initial hefty price tag, major costs include integrating the company into the retailing business. The slightly lower profit margin profile has also pinched earnings. Gross profit margin has ticked down in each of the past two quarters due to the Interline acquisition.

The purchase gives Home Depot access to a new $50 billion market niche, though, and executives are optimistic about the growth potential that brings, especially as it boosts sales in the pro segment. "We have outlined a path to truly realize the value of the Interline acquisition and the total pro opportunity over the next 18 to 24 months," CEO Craig Menear told investors in May.

The good news is that surging cash flow means that Home Depot can make these aggressive investments while still delivering higher direct returns to shareholders. Operating cash recently passed a $10 billion annual pace, in fact, about double Lowe's result.

LOW Cash from Operations (TTM) data by YCharts.

Growth there easily funded a double-digit dividend payout hike to $3.4 billion, and Home Depot should still have plenty of money left over to meet its target of spending $5 billion on share buybacks in 2016.

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Demitrios Kalogeropoulos owns shares of COST and HD. The Motley Fool owns shares of and recommends COST. The Motley Fool recommends HD. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.