The Home Depot on Wednesday set out a series of long-term goals during its Investor Day, with executives saying the retailer plans an incremental investment of $5.4 billion, of which $3.4 billion is capital and $2 billion is expense. Related to stores, the accelerated investment is $2.6 billion, of which 67% is capital and the remaining is expense, including fixed assets and labor, according to Carol Tomé, Home Depot EVP of Corporate Services and CFO.
Overall, key areas of investment include stores, associates, the interconnected customer experience, and the company's supply chain and delivery capabilities, according to a press release. The company expects a capital investment of about $1.2 billion in its supply chain over the 5-year period, Mark Holifield, The Home Depot's EVP of supply chain and product development, told analysts, according to a transcript from the company.
The home improvement retailer's new long-term, fiscal 2020 financial targets are for total sales ranging from approximately $114.7 billion to $119.8 billion; a compounded annual sales growth rate from the end of fiscal 2017 ranging from approximately 4.5% to 6%; operating margin ranging from approximately 14.4% to 15%; annual capital spending of approximately 2.5% of sales; and return on invested capital ranging from approximately 36.4% to 39.6%, according to the release.
Home Depot executives painted a picture of a confident retailer prepared to weather economic downturn or a slack in the housing market, which since the Great Recession has catapulted the home improvement retailer to robust sales both on and offline. The company still has $1 billion of sales that have not recovered from the last recession, and those are stuck in a "very low-margin category," Tomé noted. "So we expect those sales to grow. That puts pressure on the margin."
The retailer last month reported that third quarter sales rose 8.1% to $25 billion. Hurricanes helped and hurt in the quarter, as storms added $282 million to same-store sales, though that was more than offset by the "considerably" lower gross margin in hurricane-related sales plus hurricane-related expenses that dinged profits by $51 million, according to the company.
For the future, though, executives are laser-focused on addressing how to meet today's challenges in retail, according to CEO Craig Menear. "The retail landscape is changing at unprecedented rates and we plan to invest for the future to address the evolving needs of our customers," he said in a statement. "We will accelerate our investments, while continuing to focus on delivering the value our shareholders expect from The Home Depot."
The moves are offensive rather than defensive, noted Gordon Haskett analyst Chuck Grom in an email, which he said is important. "Said differently, [Home Depot] continues to take steps to stay ahead of its competition, which should translate into continued market share gains and likely upside to its 4.5%-6% [same-store sales] view through 2020."
Indeed, the company reaffirmed its sales and diluted earnings guidance for fiscal 2017, saying it expects sales to rise some 6.3% for the year, with same-store sales of approximately 6.5%. The company also expects fiscal 2017 diluted earnings to grow approximately 14% to $7.36 per share, including the benefit of its intent to repurchase an additional $2.1 billion of shares in the fourth quarter, bringing total fiscal 2017 share repurchases to $8 billion, according to a press release.
The home improvement retailer is continuing to work to blur channels and is prepared to address the needs of consumers and professionals alike, executives said. That involves more personalization to address each type of customer's individual demand.
"The world of traditional one-size-fits-all messaging is quickly falling behind us. We've got diverse customer groups," Kevin Hofmann, SVP and president of e-commerce said, according to a company transcript. "[A]s our ability to know the customer matures, we no longer have to hope that one message is sufficient for millions of different customers. We are building the capability and investing to tailor our messages and scale."
Online is an important growth area for the retailer as well. Nearly two-thirds (60%) of both online and store-based sales are influenced by a digital visit, Hofmann noted, saying online sales of 6.4% are double its nearest competitor, presumably Lowe's. "We've grown the online business by approximately $1 billion in each of the last four years… so these interconnected retail efforts continue to be a key growth engine for our overall business. And over the last few years, they've contributed approximately 20% of the company's total growth."
The retailer will also likely garner attention from customers as it improves its marketing on multiple platforms, Grom noted. "From a marketing standpoint, [Home Depot] is focused on driving visits (60% of all sales are influenced by digital; expected to surpass 1.8 billion visit this year) by getting in front of shoppers on all of their devices (understanding media consumption occurs on multiple platforms for today’s customers). Beyond this, the marketing team is investing to get to know the customer at the transactional-level in order to deliver a personalized message at the right time," he wrote. "Once the company has drawn the customer in the 'front door,' HD offers customers the ability to interact at any time and on any device."
Tomé said that the company is a proponent of tax reform, which she said will free up funds to invest in the business. She downplayed any effect of proposed changes to mortgage deductions, which help many consumers finance spending on their homes.
"Not to say there wouldn't be some impact, but in terms of a significant impact to our overall business, we just think it's overblown," she said.