If the housing market is starting to soften, then surely the retailers that sell housing-related products – like Home Depot – must be softening, too.
As the big home improvement chain’s numbers released earlier this week prove, Home Depot HD -1.41% is doing just fine, and any direct line between housing starts or home construction and the retailer’s performance should be considered quite circumspect.
Certainly a total housing meltdown, like the Great Recession of 2008-09, is going to take a company like Depot down with it. We saw that happen, and should the sector collapse again, we will no doubt watch stores like Home Depot and its slightly smaller, less successful doppelgänger Lowe’s take it hard—again.
But the recent short-term slowing in housing, while certainly a factor in the overall economy, is nowhere near the kind of home apocalypse of a decade ago.
That’s why any short-term worries about Home Depot are best left for the short-sellers. (And shame on Wall Street for thinking otherwise.) Depot – let’s not forget it is the second-largest retailer in America – is poised to continue to outperform both its own sector and overall retailing for the foreseeable future.
How? Glad you asked.
- While Home Depot gets a decent amount of its business from new home construction, 45% of its overall sales are from what it calls “Pro.” These are the contractors and craftsmen who are just as likely to be working on remodeling projects as they are on from-the-ground-up new housing. And therein lies the critical part of the Depot story. People may be buying fewer homes because of rising interest rates and a shortage of affordable inventory, but they are not by any means ceasing to fix up where they live now. In fact, the case can be made that a slowdown in new homes actually creates more business in remodeling.
- The same goes for the do-it-yourselfer. Even if you’re not hiring a pro to come in and do some projects, you are very likely to be expending your own sweat equity on improving the old family homestead. It’s really quite logical when you think about it: When new car sales tend to slow, it’s often accompanied by a spurt of business in car repairs and refurbishing. The same goes for housing.
- Even if the new home market were on fire, Home Depot would continue to take market share from that prime competitor, Lowe’s. The gap between the performance of the two national chains continues to widen, and the recent turnover at the top of Lowe’s clearly indicates the retailer knows it has to get its sheetrock together to be more competitive. Maybe new CEO Marvin Ellison will make it happen. He carries the Depot DNA with him, having spent a big chunk of his career there. But it’s going to take time—and in the meantime, Home Depot is going to reap the benefits.
- Then there’s Home Depot’s expansion efforts—not in physical stores, but online and in the home decorating and major appliances sectors. Its e-commerce sales increases have been extraordinary. Even on what is still a relatively small base—7% of overall sales—its online business was up 28% in the quarter. The upside potential could be enormous given the total size of Depot. Similar opportunities exist in two merchandising classifications: home décor and major appliances. Seizing on weaknesses in the competition—Bed Bath & Beyond and JC Penney specifically in the former classification and, of course, Sears in the latter—Depot is putting some major effort into both of these areas. Again, this is all new business—and all market share gains.