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Home Depot (HD) Witnesses Positive Trends in 2020: Will It Stay?

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The Home Depot Inc. (HD - Free Report) has been resilient throughout 2020 mainly as the demand for home-improvement and do-it-yourself (DIY) has been on the rise due to the pandemic-led restrictions on movement. Notably, there has been a marked increase in repairs and home-remodeling projects in the past few months, as people continue to work from home and consequently spend more time at home. While the situation is likely to improve in 2021, experts believe that not all pandemic-led habits will change.

The work-from-home practices are likely to remain a prominent feature in 2021 as well. Moreover, the pandemic-induced habits of keeping homes well-maintained are likely to stay. Such practices are likely to keep favoring the demand for home-improvement products.

Apart from this, home-improvement retailers like Home Depot are poised to benefit from rapid urbanization trends, the demand for DIY project-related products and the ramping of omni-channel offerings due to increased inclination toward online shopping.

Citing gains from these trends, shares of Home Depot have gained 18.2% in the past year, outpacing the S&P 500 composite’s growth of 16.3%. The Zacks Rank #3 (Hold) company has a market capitalization of $44.7 billion.



Key Growth Drivers

Amid the pandemic, the company noted accelerated customer engagement for home improvement, which led to strong growth in its Pro and DIY customer categories. In third-quarter fiscal 2020, it witnessed an increased demand for exterior and interior projects like garden seasonal categories, garage and organization, ceiling fans, vanities, and power tools. Additionally, it witnessed strong growth during its Halloween events, both in stores and online, during the fiscal third quarter. As a result, DIY sales grew faster than Pro sales growth in the third quarter.

In the Pro category, sales accelerated on a sequential basis and grew in double-digits year over year in the fiscal third quarter. Moreover, the third quarter marked strongest growth for the Pro business this year. The company witnessed notable strength in smaller pro customers despite market closures due to the pandemic. Notably, the smaller Pro customers delivered consistent growth, with strong double-digit growth each month this year.

Going forward, the company expects a rise in demand for all Pro customer associates as markets reopen. It remains on track with its investments to build a Pro ecosystem that includes professional-grade products, exclusive brands, enhanced delivery, credit, digital capabilities, field sales support, HD rental and more. The company expects its differentiated Pro ecosystem to aid deeper engagement with Pro customers in the long term.

Moreover, Home Depot is benefiting from the execution of its “One Home Depot” investment plan. Amid the pandemic, customers have been blending the physical and digital elements of the shopping experience more than ever, before making the company’s interconnected One Home Depot strategy the most relevant. Its interconnected retail strategy and underlying technology infrastructure have helped consistently boost web traffic in the past six months. Sales, leveraging the digital platforms, grew 80% in the fiscal third quarter, and about 60% of the online orders were delivered from stores.

Another key component of delivering an interconnected experience is enhanced delivery and fulfillment options. Over the years, the company has created the fastest, most-efficient delivery network in home improvement. It has enabled multiple fulfillment options, including buy online pickup in store with convenient pickup lockers, buy online deliver from store with express car and van delivery, and most recently, the curbside pickup option. The company witnessed increased usage of the fulfillment options as customers increasingly adopted the interconnected shopping experience.

Pandemic-Related Cost Headwinds

Meanwhile, increased costs related to the pandemic continue to hurt the company’s results to some extent. Home Depot is providing enhanced payments to hourly associates, including expanded paid time-off, additional paid time-off for older associates who are at high risk, weekly bonuses for store and distribution center workers, doubled overtime pay, and extended dependent care benefits. These led to expense deleverage during the fiscal third quarter. The company incurred $355 million in the fiscal third quarter for enhanced benefits to associates, which resulted in about 105 basis points of expense deleverage.

3 Better-Ranked Retail Stocks

L Brands, Inc. has a long-term earnings growth rate of 13% and it sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Tapestry, Inc. (TPR - Free Report) , also a Zacks Rank #1 stock, has a long-term earnings growth rate of 11.7%.

The Children’s Place, Inc. (PLCE - Free Report) has a long-term earnings growth rate of 8%. It presently carries a Zacks Rank #2 (Buy).

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