Specialist
Former manager at The Home Depot Inc
Agenda
- Home Depot’s (NYSE: HD) current progress and stages of project backlog for pro segment, highlighting depletion rates and new project additions
- DIY segment analysis, discussing merchandising and performance of key categories vs Lowes (NYSE: LOW)
- Channel dynamics, touching on omnichannel strategy and promotions
- 6-12-month outlook considering macroeconomic environment and workface expansion
Questions
1.
What are your general impressions from Home Depot’s Q4 2022 earnings? What are we seeing from the consumer and DIY segment as well as the project backlog for the pro segment?
2.
Thinking about the DIY categories where consumers are pulling back most significantly, it’s fair to group it in by big-ticket items, especially given how that number has trended from Home Depot’s Q4 2022 earnings. What categories are seeing considerable weakness, if we think about appliances, outdoor, etc? What element of seasonality plays into this, with consideration to what we can expect from spring season, which is typically a boom period for home improvement?
3.
How would you split the appliances category between inelastic and elastic demand? Thinking about what you called out in terms of garden, patio, grills and so on, what portions of revenue are made up of these inelastic vs elastic items?
4.
If you were at Home Depot as a senior leader, how would you address the decline in higher-ticket items from a merchandising standpoint with the spring season approaching,? What strategic levers would you pull in terms of moving merchandise across tiers to meet where the consumer is?
5.
If we’re thinking about the margin differentiation between in-store and online channels, what could be the impact of Home Depot having to rely on online significantly more?
6.
What are your impressions of the supply chain environment for home improvement retailers? Have we seen significant normalisation? What are some key considerations or risks for Home Depot heading into 2023?
7.
There’s been a significant improvement in fill rates compared to YoY comps. Could you comment on that?
8.
What is Home Depot’s positioning in terms of inventory? Where do you see the greatest general weakness in terms of turnover vs strengths? Could you talk about the company’s product mix beyond appliances?
9.
We’ve seen a rise in homebuilders’ confidence since the end of December 2022. It’s at the highest point we’ve seen since the housing market’s drop in September 2022. In regards to new projects that could be starting, or new business that could be secured, do you see this as more of a blip on the radar? This has a heavy reaction element in terms of what the Fed is doing. Inflation has been more resilient than anticipated and so has consumer demand, up to a certain point. If the Fed becomes more hawkish in its future rate hikes, could this confidence just be an anomaly that will disappear in the rest of 2023?
10.
For the next 6-12 months, how heavily could the consumer prioritise repair and maintenance expenditures towards home improvement vs other basket goods? Where are your impressions of consumer dollars and their trajectory?
11.
With consideration to consumer price sensitivity, how do you see Home Depot vs Lowe’s positioning in terms of the percentage higher-ticket items make up for both companies and their broad base portfolios, considering what they can offer to consumers at opening price? Who do you think is better-positioned in that regard?
12.
Ahead of Lowe’s reporting towards the end of February 2023, what do you anticipate for the company in terms of general weakness? Do you see its story coinciding with Home Depot’s in terms of the DIY and pro segments respectively? What are special considerations for it?
13.
Where is market share being taken from Home Depot by Lowe’s? What would you estimate for geographies or specific sorts of projects where Lowe’s is offering a better value proposition?
14.
How big of a contributor to top line is Home Depot’s tool rental business? What is the long-term opportunity for Lowe’s if it’s looking to penetrate further into that particular market?
15.
What is a fair estimate of top-line revenue for rental tools? How significant a segment do you think that is for Home Depot?
16.
Thinking about the segmentation of Home Depot’s product mix from building to décor, etc, what is the relationship between commodity-based and value-added products? In 2022, there was a huge emphasis on a continued push to value-added to fuel margin expansion. Do you see the company committed to that long-term strategy now, even as inflation finally seems to be taking its effect?
17.
What do you make of Home Depot’s announcement to spend USD 1bn on hiring expansion? What are the main immediate synergies with consideration to the strategy the company has consistently touted? What do you make of this in a recessionary environment?
18.
How do you think Home Depot’s new approach to compensation and push to hire more employees and fill stores impacts its competitive dynamics vs Lowe’s?
19.
Considering where Home Depot’s new hirings will be most concentrated, what portion of the operations outside of front line warrant a great strategic importance to put more feet on the ground?
20.
You called out that Lowe’s is particularly better-positioned vs Home Depot in digital platforms and selling channels. What couple of initiatives taken by either retailer in the past number of years would you say have had the strongest ROI? How have you seen online evolve in recent years?
21.
How has the split between physical in-store and online selling evolved and been trending in the past couple of years for Home Depot and the greater home improvement market? What would you anticipate for the next 1-2 years around digital penetration making up a greater and greater proportion of top line?
22.
How much digital penetration has been driven by the consumer vs investments by the retailers themselves? Is this a necessary adaption they have to make? If so, what particular categories are still under-penetrated in terms of online?
23.
Thinking about CAPEX investment for Home Depot and the in-store experience, what are very important considerations around continuing to grow the pros business? What strategic initiatives did the company take that helped that segment take off in terms of recruiting more members into pro or loyalty programmes?
24.
In terms of the value proposition of pro in the next 6-12 months, you noted that there will be a fundamental risk of cancellations due to inflation’s effects. In our previous Interview [see North America Home Improvement – Market Outlook & Implications of Real Estate Volatilities – Home Depot & Lowe’s – 31 October 2022], you anticipated that the pro backlog will withstand at least into the mid-point of 2023. Do you still hold this sentiment?
25.
What are you anticipating in terms of the nature of projects adding to Home Depot’s book of business? In previous Interviews, we’ve talked about the shift from single-family and multi-family home constructions, but could you also discuss what the consumer will be seeking?
26.
Do you see Home Depot getting particularly aggressive on pro segment pricing during an economic downturn? Could you contrast this to past recessions you’ve been through at the company? How does it typically view economic contractions?
27.
What do you make of Home Depot’s real estate and physical location strategy? We’ve talked about the emphasis of the online business in the long term. At what point could we reach an inflection stage where the company needs to address how many physical locations it has, or perhaps begin to experiment with smaller-scale stores if more of the product mix could be allocated online?
28.
If inflation starts to relax and interest rate hikes begin to lessen, how could that fuel a rebound for Home Depot? Do you see that as viable towards the end of 2023, or is this more of a mid-2024 scenario?
29.
What do you make of Home Depot’s general promotional activity? Do you see that as held fairly stable? It seems there’s not much aggressive pricing that would be worth pushing within pro, but how about DIY?
30.
How have Home Depot’s same-store growth and metrics along these lines typically performed in spring, coming off the colder months? What’s a fair historical comp?
31.
What is Home Depot’s private label opportunity? Across the greater CPG sector, we saw a great expansion of private label, but what would be your specific call-outs across the core lines and what’s particularly strong in the company’s portfolio vs Lowe’s?
32.
How significant a tailwind is the in-store private label vs branded dynamic for Home Depot in terms of keeping the consumers it captures during economic contractions? What is the stickiness of private label once the company has lured in consumers?
33.
You noted in our last Interview that, in the 2007 global financial crisis and the resulting housing market collapse, the volumes of home improvement retailers dropped 25-30%. How much do you see that in alignment for Home Depot? Do you expect the beginning of that trajectory through the next 6-12 months, or do you feel this will be materially less significant?
34.
What’s a fair outlook for Home Depot’s average unit and ticket prices, top lines and margins in the next six months or foreseeable future, in terms of single-, mid-digit declines, ups and downs?
35.
We discussed inflation and the factors to observe going forward. What would be another 2-3 significant risks or KPIs observers should pay attention to in the current market?
36.
What should we expect in terms of possible DIY SKU rationalisation activity from Home Depot? For pro itself, how does the company handle the scale-back or expansion of one service to another? You talked about services in general, but could you expand?
37.
How big of a volume loss could the decline in installation and general services due to issues for higher-ticket items be in terms of Home Depot’s top line?
38.
We’re seeing greater consumers reliance on credit cards. What did you see in past recessions in terms of the typical percentages of consumers buying on credit for Home Depot or a general home improvement retailer? What are some special considerations there?
39.
What are some key factors if we’re thinking about Lowe’s upcoming earnings in terms of consumer sentiment for home improvement? What are the competitive dynamics for smaller-scale, regional competitors such as Menards? Is there a risk that consumers may move away from Home Depot to seek deals?
40.
How do you see Home Depot coming out of a downturn scenario? What are your thoughts on market share shifts between the company and Lowe’s, depending on who you think could play this downturn market better?
41.
How does Lowe’s seek to address go-to-market in its position? Of course, there is the comparison of the undersized pros business and how, comparatively, the company will have more attractive growth rates there, but in terms of DIY and its exposure to higher-ticket items, what 2-3 initiatives would you push if you were in a leadership position?
