Image Source: Home Depot Inc – Fiscal 2020 Annual Report
By Callum Turcan
On October 6, Home Depot Inc (HD) announced a partnership with Walmart Inc (WMT), becoming the first retail giant to join Walmart’s GoLocal delivery program which was launched back in August 2021. The delivery program utilizes Walmart’s vast distribution and fulfillment network to provide same-day and next-day delivery services.
Home Depot is improving its ability to capitalize on the ongoing proliferation of e-commerce, a trend that really picked up steam in the wake of the coronavirus (‘COVID-19’) pandemic. In our view, this trend has incredibly long legs. Home Depot’s senior vice president of supply chain, Stephanie Smith, noted in the press release that “this partnership brings us even closer to our goal of offering same day or next day delivery to 90 percent of the U.S. population” which highlights Home Depot’s efforts to continuously improve its omni-channel selling capabilities.
We like Home Depot as an idea in the Dividend Growth Newsletter portfolio as the firm’s stellar cash flow generating abilities and promising growth outlook underpin our forecasts that the company will grow its payout at a robust pace in the coming years. As of this writing, shares of HD yield ~2.0%.
Omni-channel Selling Capabilities Supports Growth Runway
Home Depot reported that in the second quarter of fiscal 2021 (period ended August 1, 2021) its comparable sales grew by 4.5% year-over-year, supported by 3.4% comparable sales growth in the US. Bulking up its omni-channel selling capabilities and maintaining recent digital sales gains were key here. During Home Depot’s fiscal second quarter earnings call management noted that (emphasis added, lightly edited):
“Sales leveraging our digital platforms were essentially flat during the second quarter, as we lapped digital sales growth of approximately 100% in the second quarter of last year. On a 2-year stack basis, sales from our digital platforms increased approximately 100%. We’re thrilled with the customer engagement across our interconnected platforms.
We know the vast majority of our customers engage with us in an interconnected manner. Whether it be through project, inspiration, and research, transacting, fulfillment, or support; our customers blend physical and digital worlds.
And while customers have gotten more comfortable buying online, we’ve never been more confident in the importance of our physical stores as they remain the center of our customer experience due to the project nature of our business. For those customers that chose to transact with us online during the [fiscal] second quarter, more than 55% of our online orders were fulfilled through our stores; a testament to the power of our interconnected retail strategy.” — Ted Decker, President and CFO of Home Depot
To build on this momentum, Home Depot is now gravitating towards faster delivery times for both its casual do-it-yourself (‘DIY’) customers and its professional customers (defined by Home Depot as its “Pro” customers). Home Depot already offers home delivery fulfillment options, though its partnership with Walmart’s GoLocal unit should enable Home Depot to offer such services across a wider array of products to a greater portion of the US population. As competition from Lowe’s Companies Inc (LOW) heats up, staying competitive on this front will be key.
As the agreement scales up, Home Depot intends to go from utilizing GoLocal services at “select Home Depot stores” over the “coming weeks” to a larger percentage of its store base going forward as “the company plans to expand the service to multiple markets across the country by the end of the year” according to a recent press release. We like the partnership as it supports Home Depot’s sales growth outlook, though we will caution here that fulfilling sales in-store generally results in stronger margins than home fulfillment options. As Home Depot possesses ample pricing power, the firm should be able to maintain its strong margin performance, in our view.
Concluding Thoughts
We continue to be enormous fans of Home Depot. Our fair value estimate for Home Depot sits at $331 per share and the top end of our fair value estimate range sits at $397 per share. Home Depot has a rock-solid Dividend Cushion ratio of 1.6, earning the firm a “GOOD” Dividend Safety rating, and a stellar payout growth outlook, earning the company an “EXCELLENT” Dividend Growth rating.
To read more about our thoughts on Home Depot, please check out our August 2021 article covering the firm (link here).
Downloads
Home Depot’s 16-page Stock Report (pdf) >>
Home Depot’s Dividend Report (pdf) >>
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Callum Turcan does not own shares in any of the securities mentioned above. Chipotle Mexican Grill Inc (CMG), Dollar General Corporation (DG), Domino’s Pizza Inc (DPZ) and The Walt Disney Company (DIS) are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Dick’s Sporting Goods Inc (DKS) and Home Depot Inc (HD) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Vanguard Consumer Staples ETF (VDC) is included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Long put options on the SPDR S&P 500 ETF Trust (SPY) with an expiration date of December 31, 2021, and strike price of $412 are included in both the simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.