Home Depot reported earnings today and had a better than expected third quarter, which led to them guiding up on the year. Beyond their financial performance, they had some interesting comments on their omnichannel efforts, the state of the housing market, and on tariffs.
Online Sales Success
Home Depot is still feeling the impacts of a stretched consumer, but one are that continues to be successful is their online business. They saw growth in online sales last quarter and that trend continued this quarter.
Turning to total company online sales, sales leveraging our digital platforms increased 4 percent compared to the third quarter of last year and for those customers that chose to transact with us online during the third quarter, nearly half of our online orders were fulfilled through our stores. In addition, as you heard from Ted, we are focused on continuing to improve our interconnected retail experience. Whether it is our faster delivery speeds, our more relevant and personalized search results or our enhanced product review summaries powered by AI….All of which are leading to greater purchasing confidence for our customers.
Billy Bastek, EVP, Merchandising at The Home Depot
In addition to partnering with different same-day shipping services, Home Depot has been building out their downstream supply chain facilities. This has led them to have the capability to reach 90% of the U.S. population with same or next day delivery. That’s an impressive stat that should pay dividends, especially with the holiday shopping season around the corner.
Recall that over the last several years, we built a network of downstream supply chain facilities, including 19 Direct Fulfillment Centers, allowing us to reach 90% of the U.S. population with same or next day delivery. Recently, we expanded our assortment in these facilities to allow for faster delivery speeds across more products. And we made significant website enhancements to better communicate faster delivery options.
Many customers were not aware of our robust delivery options. In the third quarter, we launched a marketing campaign that builds awareness of our faster delivery speeds. And while this has just launched, we are seeing the intended results – greater customer engagement, higher conversion, and incremental sales.
Ted Decker, President and CEO at The Home Depot
Housing Market
Finding a bottom and a recovery in the housing market is obviously important for growth at Home Depot. Their insight on it is important not only as the largest grill retailer, but because of the correlation overall between a strong housing market and grill purchases.
The issue we continue to watch are the macroeconomic uncertainties and the higher rate environment that continues to pressure larger remodeling projects. So, we look at the reversion of personal consumption from goods to services. That’s largely worked its way out. And we’ve largely navigated our way through the pull forward of demand that we saw during the pandemic. So again, today, this higher rate environment is pressuring the larger normally debt-financed remodeling projects, as well as existing home sales.
So, we all know that the Feds cut interest rates, two cycles here. But from the cut in September, mortgage rates has actually increased about 60 basis points. So, two rate cuts of combined 75 basis points, yet the 10-year and then therefore, the mortgage rates were up about 60 basis points. That continues to impact housing turnover which were just about 3% of homes turning over, which is a 40-year low at this point. And you might say that the worst is behind us, how much lower are we going to go? Usually, we’re at about 4.5%, 5% turnover. I think we actually touched on sort of 2.99%. So, one could argue we’re near the low there.
But then the larger projects often require financing, whether it’s cash out financing or home equity lines of credit, those are down. So, our HELOCs, those track more directly the drop in short-term rates. So, those are down 75 basis points, but still historically high at over 8%. So with that, we’re encouraged with certain green shoots, if you will, in the business with the pull forward working its way through, the categories that Billy just went through.
But what we’re looking for is just one is the timing of homeowners starting those larger remodeling projects. So, we remain super bullish on the outlook for home improvement. We’ll have to work our way through this current macro uncertainty and the interest rates pressuring home improvement demand. But this is a market after all and markets return to equilibrium and remodeling will as well. We just don’t think we’re quite there yet.
Ted Decker, President and CEO at The Home Depot
Despite waiting for a bottom and recovery in housing, there was some good news in Ted’s comments that’s applicable to the grill market. He believes that the Pandemic pull-ahead has worked its way through the system, and the consumer spending switch from goods to services has ended.
Tariffs
Tariffs are a hot topic know, enough so that we wrote an article yesterday about what outdoor cooking manufacturers are saying about tariffs. Home Depot was also asked about tariffs and the impact on their business.
Their model is a little different because they have a much larger domestic supply base. Given that, they are strategizing how to modify their supply chain if they need to.
I would say, first and foremost, whatever happens in tariffs will be an industry-wide impact. It won’t discriminate against different retailers and distributors who are importing goods.
The type of product as an industry is generally sourced from the same countries. There has been some diversification of those sources, but clearly, a bit of concentration in Southeast Asia and China in particular. We source well more than half of our goods domestically and in North America, but there certainly will be an impact.
But again, given our scale, our experience going through the previous tariffs on – 25% on, I guess, it was couple of hundred billion dollars of industry import goods going back a number of years ago, I’d bet on this team’s ability to work with the type of suppliers we have to work through this in a differentiated manner than others in the industry.
Ted Decker, President and CEO at The Home Depot