Home Depot Inc.'s Best Moves in 2016
With just a few weeks to go in 2016, it's clear that Home Depot (NYSE: HD) will likely notch one of the best performances in the entire retailing industry. Sales are on pace to rise 6% to $93 billion as earnings spike 16% to $6.33 per share, or more than double its profit haul from just three years ago.
Not only has the home improvement giant beat most national retailers on these metrics, but it also trounced industry rival Lowe's (NYSE: LOW) as it continues to soak up valuable market share. Here are the key moves executives made that helped produce such a strong year for Home Depot's business.
Winning professional customers
Several factors contributed to its market-thumping growth pace, including product initiatives that set Home Depot apart from rivals through putting exclusive tools and gadgets on the shelves. The company's biggest win, though, was with the professional subset of customers. These contractors and business owners tend to spend much more cash during a given visit, and their increasing demand fully offset a slowdown in overall customer traffic growth.
Image source: Getty Images.
In the third quarter, for example, transactions valued at over $900 soared higher by 11%, accelerating from the prior quarter's 8% jump. As a result, Home Depot was able to improve its comparable-store sales growth pace to 6% from 5% even in the context of weak customer traffic. Lowe's, in contrast, expanded sales by just 3% in its U.S. stores.
Home Depot believes this customer group will continue to power outsized sales gains in the coming year, which is why it is targeting them with improved product offerings, faster order delivery, and a private-label credit card that carries perks like extended payment options.
Every national retailer agrees that a thriving e-commerce channel is critical to healthy overall sales growth. And most of these businesses are backing up their claims with hefty investments. Target, for one, has dedicated years of effort into trying to become a leader in the digital space. The company plans to lean heavily on its website and shopping apps to give it a boost this holiday shopping season, too.
But Home Depot is seeing better results out of its e-commerce investments. Online sales spiked by 17% last quarter to reach just under 6% of total sales. Target's comparable metric is mired below 4%.
Image source: Home Depot investor presentation.
With nearly half of its online orders picked up at stores, Home Depot can be confident that its physical warehouse base is still relevant to its customer base. However, it isn't just sitting on its prior successes. The retailer is currently rolling out buy-online-ship-from-store functionality, to complete the main pillars of its interconnected retailing offerings.
Home Depot just upgraded its stock buyback spending plans to $7 billion from the $5 billion it had originally targeted for 2016. Already this year the company has retired $4.6 billion of its shares, reducing its outstanding share count by nearly 4%.
This spending has helped supercharge earnings growth while delivering a larger portion of profits to shareholders. Per-share earnings grew by 19% last quarter, for example, outpacing the 14% increase in overall profits.
The key trade off for the business is increased debt, since that's a key source of the buyback funds. Management has demonstrated impressive results with its use of debt, though. The company's return on invested capital (ROIC) has jumped 3 percentage points to 29% -- making the retailer one of the leading stocks in the market on that key metric.
Home Depot's long-term plan calls for ROIC to touch 35% in 2018 at around the same time that profit margin hits 15% and annual sales climb past $100 billion. This year's results suggest that, if anything, those targets might be reached sooner than executives originally thought.
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Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool recommends Home Depot. 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.