Home Depot Inc. (NYSE:HD) could deliver continued stock price growth after its 29% rise over the past year.
The home improvement retailer is investing in its website, differentiating its product line from competitors and is improving the shopping experience for its customers.
Investing for growth
The company continued to make improvements to its stores in the third quarter. For example, it installed automated lockers to make the process of collecting products easier for its customers. It now has automated lockers in 1,300 of its stores across the U.S. and plans to complete the rollout to all of its stores over the medium term.
The automated lockers contributed to an increase in Home Depot's customer service scores in the third quarter. It reported an increase in its "checkout time satisfaction" score of 2.8 percentage points when compared to the same period of the previous year. Its ongoing refurbishment of the appearance of its stores could further catalyze its customer satisfaction scores, with around 60% of its stores having been upgraded so far.
Differentiation
The retailer is seeking to differentiate itself from competitors to enhance its market position. For example, in the third quarter, it added a range of outdoor power equipment tools to its product assortment that could attract customers to its stores. This may lead to cross-selling opportunities for the business within higher-margin segments that improve its financial performance.
In addition, Home Depot's status as the exclusive partner of power equipment manufacturer Makita could improve its competitive position. The home improvement retailer plans to add more Makita tools to its product line, which could attract consumers with whom it does not already have an existing relationship to its stores.
Online opportunities
The company has rolled out an improved business-to-business website for its professional customers. This contributed to an increase in Home Depot's revenue per professional customer. This trend could continue as the company plans to make further improvements to its professional website, including additional functionality and personalization.
In addition, Home Depot is making improvements to its retail website that is aimed at non-professional consumers. For instance, it has introduced new category presentation pages that allow customers to easily view a wide range of its products. This contributed to a 22% increase in online sales in the third quarter.
Potential challenges
The outlook for U.S. retailers could be challenging in the short term, which could negatively impact Home Depot's financial prospects. For example, consumer confidence has declined in each of the last three months. As a result, this trend could lead to a reduction in demand for non-essential home improvement products sold by Home Depot since consumers may decide to delay their purchases where possible. In addition, labor costs are rising for retailers across the country as higher minimum wage rules come into effect. This could cause a reduction in margins across the home improvement retail industry.
The company reported in its third-quarter update that it is mitigating higher costs caused by tariffs. This could widen Home Depot's economic moat in an industry where consumers remain sensitive to price increases. The retailer may be able to gain market share at the expense of its rivals who are unable to offset higher costs, which could lead to a stronger profit outlook in the long run.
Outlook
Analysts forecast Home Depot will increase earnings per share by 8% in fiscal 2021. Its forward price-earnings ratio of 21.5 may not be cheap, but its growth strategy could deliver stock price growth in the long run.
Disclosure: The author has no positions in any stocks mentioned.
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This article first appeared on GuruFocus.