Home Depot integrates Interline

Along with strong third quarter results, Home Depot execs also offer a strong case for going after the pro market.  

Home Depot, the retailer, is also very much Home Depot, the wholesaler, too. HD reported a strong third quarter last month that marked a first anniversary of sorts since its $1.63 billion acquisition of Interline Brands was finalized during 2015’s third quarter.

“We saw a healthy balance of growth between both our pro and DIY customers with pro sales growing faster than DIY sales in the quarter,” said Craig Menear, HD’s chairman, CEO and president, during an earnings call Nov. 15. “Our pro business continues to be driven by a strong offering of brands that pros demand, consistent product innovation as well as an enhanced delivery and credit offerings to help them more efficiently manage their business.”
 
Interline, for example, contributed about $300 million of year-over-year sales growth to HD, according to Carol Tome, chief financial officer and director of corporate services for HD.

In all, HD posted 3Q sales of $23.15 billion, up 14.1 percent. The company’s gross profit of $8.04 billion was up 6.3 percent from the year before, while operating profit rose 11.4 percent to $3.32 billion.

HD’s purchase of Interline was its biggest acquisition since the company bought Hughes Supply back in 2006. Interline sells more than 160,000 products, with almost half of them used for janitorial and sanitation work. Plumbing supplies make up almost another fifth of its sales, with the remainder split among HVAC, electrical, appliances, security and other categories.

The move was part of HD’s bet to sell more to the professional contracting market. In reviewing the company’s last two quarterly reports as well other remarks made by company executives, HD clearly expects to sell substantially more to its professional contractors through e-commerce and other sales support specifically tailored for the pro.

E-commerce plans

The company has definitely seen an uptick in its digital means to ring up a sale, which HD says has been growing steadily by about $200 million in sales quarterly.

“Our online business had sales growth of approximately 19 percent versus last year and represented 5.6 percent of our sales,” Menear said during the 3Q earnings call. “We continue to leverage our merchandising tools to refine product offerings across channels based on customer preferences. Our goal is to provide customers with the convenient and fulfillment operations they desire.”

Here’s an interesting stat to back up what he means: About 42 percent of online orders are picked up at Home Depot stores. And on the flipside, 90 percent of returns of the company’s online orders are done at the stores.

It’s what the company terms an “interconnected retail experience.” Naturally, the company has had to build out extra space to stage the orders, but HD has also built several fulfillment centers around the country to deliver those orders.

HD currently operates three fulfillment centers in Georgia, Ohio and California. About 10 times the size of a regular retail store, the centers stock about 100,000 SKUs compared to about 35,000 SKUs found at the typical store.

“We can get products to 90 percent of the U.S. in two business days from here,” Stephanie Smith, HD’s vice president of direct fulfillment, told the Atlanta Journal Constitution, last May – (and by “here,” Smith was referring to the center in Georgia.)

The centers represent a big way HD plans to grow sales to a goal of $101 billion by 2018 without opening up store after store as it did in the past. Consider another stat: In 2000, the chain opened 204 new stores. By comparison, the company opened just five stores in 2015.

To add some $25 billion in extra sales in a couple of years, the fulfillment centers and ecommerce plans are vital to squeezing more dollars from existing stores by taking advantage of its already sizable retail footprint without the enormous expense of adding to it.
 
Of course, the company has also invested in its digital engine. For example, HD rolled out an updated HomeDepot.com website this year, adding larger and clearer product pictures, live mobile chat and simplified checkout. It also redesigned its app to make it more responsive to smartphones or tablets. 

“Our online business had strong growth in the quarter with double-digit traffic growth and improvement in conversions,” said Ted Decker, HD’s executive vice president of merchandising in the November earnings call. “Mobile and tablet are more than 50 percent of our traffic and are important tools that our customers use to engage with our products, stores and associates.”

But is the pro going to digital? Menear thinks so. “That is changing and we are seeing traction with the pro customer engaging in the digital world,” he told attendees of the Goldman Sachs 22nd Annual Retailing Brokers Conference in 2015.

One item that proved popular was the ability to check in-store inventory.

“We get a lot of feedback from our pro customers that this is something that they value and benefit,” Menear said, adding that the company’s approach to buying it online and picking it up at the store was a great help to the trade.

“They actually can be home at night, take a look at some things that they need, place their order and we have that ready for them for pickup the next morning when they swing by,” he explained.

Going pro

During the company’s second quarter earnings call, HD discussed a pilot program to offer Interline product in its stores.

In a question-and-answer session with stock analysts, Bill Lennie, executive vice president of outside sales and service for Home Depot, added that the Interline products were currently in 20 stores for a pilot program.

“Our results are exceeding expectations,” he said. “They are really three times expectations.”

In the company’s 2Q earnings call with the investment community, execs elaborated on why Interline was such a good fit with HD.

From Menear’s perspective, HD and Interline can now do what it couldn’t before and take care remodeling and installation sales as well as MRO work.

“If you think about Interline, they actually do that side and don’t have the capability to do the remodel,” Menear said. “So we can take an end-to-end look at how we service the customers and grow our share of the wallet with them overall.”

While HD’s Interline purchase was part of the company’s plan to sell into the MRO market, the larger plan also remains to sell more to the overall professional contracting market. 

“I would say the pro is very strong,” Decker added. “As we look across departments, virtually every department has higher pro spend comp than consumer.”

The retailer targets contractors and other professionals with a loyalty program and dedicated staff to the section of the store they frequent, but by its own admission, its offering has been lacking.

“We don’t serve them completely,” Tome told the Wall Street Journal last year after the Interline deal was announced.

According to Tome, the pro customer is 3 percent of its customer base, but represents more than 40 percent of its sales.

“We also know that the average spend by the pro is $6,200 a year,” she told the Journal. “No pro makes a living spending $6,200 a year. So we aren’t getting 100 percent of his or her wallet. So we should focus on that.”

The good news, at least from HD’s perspective, is that the pro buyer market is a $550 billion one

“There’s plenty of room for us to continue to grow because our market share is less than 20 percent,” Tome added.

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