Buying a brick-and-mortar retailer is certainly a risky bet nowadays. Just look at GameStop Corp. (NYSE:GME), which posted grim news in its latest quarterly report. The stock lost nearly 14% on the news.
The fact is that the ecommerce revolution — led by the fiercely competitive Amazon.com, Inc. (NASDAQ:AMZN) — continues to take a brutal toll. And it seems like no retailer is immune, as seen with the problems with companies like Macy’s Inc (NYSE:M) and Target Corporation (NYSE:TGT).
According to data from the Commerce Department, department store sales dropped 6% last year whereas online sales rose by 11%.
Kind of grim, right? Sure is. Yet this does not mean investors should completely avoid the sector. For the most part, there are still attractive opportunities, especially for companies that have natural synergies with a storefront presence.
A prime example of this: Home Depot Inc (NYSE:HD). As seen with the latest quarter, there are few signs of any problems with the core business. Same-store sales jumped 5.8% and profits came to $1.74 billion, or $1.44 per share, up from $1.47 billion, or $1.17 per share on a year-over-year basis. The company also authorized a $15 billion share buyback and raised the dividend by 29% on HD stock.
Of course, this standout performance has been fairly consistent. Note that the company has beat or met earnings expectations for nine consecutive quarters. So it should be no surprise that HD stock has been a winner, with a 100%-plus return over the past three years.
HD Stock and Ecommerce
Going forward, the ecommerce revolution is likely to be a major catalyst for HD stock. And yes, the company is already showing great traction with its investments. Home Depot has nearly finished with the transformation of its main website, which has much better features for search as well as faster checkouts. It has also refreshed its mobile app, allowing for dynamic estimates of arrival times.
All in all, the efforts are translating into solid financial results. In the latest quarter, ecommerce sales jumped by 19% on a year-over-year basis. Nearly 6% of total sales are from digital transactions.
Then again, HD has some tremendous advantages that would be tough for a company like AMZN to replicate.
One is the massive supply chain that can manage over 1 million SKUs, which are often large items. But of course, HD has the leverage of its footprint — about 2,278 locations — to allow customers for convenient pick-ups or deliveries. Note that 45% of online orders involve store visits. HD calls this the “interconnected retail strategy.”
Oh, and the company has the benefit of strong cash flows, which are expected to hit about $11.3 billion this year. In other words, Home Depot has more than enough resources to make aggressive investments in R&D and IT infrastructure as well as engage in aggressive marketing on digital channels like Pinterest and Facebook Inc (NASDAQ:FB).
Bottom Line on Home Depot
InvestorPlace.com’s Richard Saintvilus recently set out the key factors for HD stock, writing: “Unlike Macy’s and Sears Holdings Corp (NASDAQ:SHLD), which continue to suffer at the hands of Amazon.com, Inc., HD stock only has to worry about two things: Rival Lowe’s Companies, Inc. (NYSE:LOW) and the housing market. That is, of course, until Amazon figures out it can package lumber and drywall with free two-day shipping.”
The good news for Home Depot stock is that the macro environment still looks healthy, even if there will likely be more increases in interest rates from the Federal Reserve. But more importantly, the company still has lots of runway left for growth.
After all, HD has only about 15% of the market in the U.S. — with the total size at a whopping $550 billion.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including Taxes 2017: Saving A Bundle. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
