Home Depot's Building Block

Instead of overreaching, it's focusing on what it does best.
At Closing, June 18th
83.00 USD

Pulling Ahead

Home Depot's shares have risen 293% in the past 5 years.

Source: Bloomberg

Home Depot this week laid out a three-year plan to grow annual sales to $101 billion by 2018, from $83 billion last year, by connecting its stores to its website and focusing on its professional customers.

More telling, however, are the things the home improvement retailer vowed not to do: Expand outside North America, build a bunch of new stores, roll out new store formats, or make any big acquisitions. 

Other retailers should take notice. The growth tactics Home Depot rejected happen to be de rigueur in retail these days, where chains struggling to attract customers are trying all sorts of tricks, from snack bars to photo booths. The problem is, these tactics don't seem to be working.

Expanding abroad has come back to bite some companies, exposing them to a strengthening dollar and slowdowns in key markets like China. Target's splendid failure in Canada was a big factor in its former CEO's undoing. Even Walmart, which has grown sales for years by planting flags abroad, has seen international sales fall to 25 percent of total revenue from 29 percent two years ago. As I wrote last month, currency pain will keep biting as the Fed raises interest rates and the dollar rises. Retailers expanding abroad had better be in it for the long haul. Home Depot has been appropriately cautious overseas: Though it's doing well in Mexico and Canada, it smartly closed its China stores in 2012 when it realized shoppers there weren't into the whole DIY thing.

Home Depot's aggressive sales growth goals would be "the equivalent of adding 357 stores," CEO Craig Menear told shareholders at the company's annual meeting on Tuesday. Rather than going that route, the retailer will try to squeeze more growth from existing stores. 

America is over-stored, over-malled and over-retailed. But Home Depot, at 2,269 stores, actually had five fewer stores at the end of 2014 than in 2008. 

Building Stop

Source: Bloomberg

In contrast, competitor Lowe's added 191 stores between 2008 and 2014. The store count at Macy's, which has touted its store closings, is actually at its highest point ever as it bets on a new outlet-store concept called "Backstage" to jump-start growth.

Home Depot's restraint is all the more remarkable given that shopper dollars are increasingly shifting to building-materials stores from clothing stores and other chains.

Retail Divide

Year-Over-Year Change In Sales

Source: First Data and Bloomberg

Given consumer demand, Home Depot could be forgiven for practicing the time-honored retail tradition of juicing sales by adding locations. Instead, it plans to give customers more reasons to come to the stores that already exist and integrate those stores more with its thriving e-commerce operations. Naysayers said people wouldn't order actual bricks and mortar on the web. But Home Depot has successfully migrated inventory for many of those unattractive, space-hogging items online, giving it more room for new products like cleaning supplies, as well as showrooms for patio furniture.

It's also rolling out delivery and other services to win over professional customers who work in building maintenance or construction and account for 3 percent of customers but 40 percent of sales. The same goes for a suite of offerings for millennials and aging consumers who increasingly want Home Depot to do their home projects for them rather than do it themselves. According to Home Depot, it only controls 15 percent of this estimated $550 billion market. 

Home Depot also has no plans to launch new store formats, a strategy it has tried to varying degrees of failure over the past few decades, with now-shuttered concepts like home-furnishing outlets and landscaping stores. "We've gone down that road before," Menear said with a laugh.

And despite a healthy balance sheet, Home Depot isn't looking to grow by mega-acquisitions. Instead, it's spending on smaller, bolt-on deals, such as its purchase of online retailer Blinds.com last year to boost its web offerings. 

More retailers could benefit from Home Depot's approach of learning from past failures. Throwing out the old rules of retail -- where building more stores at home and abroad boosted sales for decades -- will help chains embrace changing shopper habits and start winning some of those customers back. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shelly Banjo in New York at sbanjo@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.