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Are You Amazon Ready? – Take a look at Home Depot

George Clapham, Arnhem Managing Partner.

The Australian retail sector is in turmoil over the entrance of Amazon into the A$300b Australian retail market. It’s therefore worth looking to the US to see which bricks & mortar retail businesses are dealing with the Amazon threat the best. One such company in both Arnhem Global SMA portfolios, is Home Depot. With sales of US$96 billion, Home Depot is the largest home improvement retailer in the US. The company has 2,278 stores throughout the US, Canada and Mexico. Home Depot has delivered best in class same store sales growth, averaging 5.5% p.a. over the past 5 years. Growth in the number of customers visiting has averaged 3% over the same period. Interestingly, Home Depot has kept its store count fairly stable, adding just 6 stores in 2017. Much of its growth has been driven by improved store sales productivity which has been driven by successful in-store strategies, such as category expansion (e.g. whitegoods, where it now leads the market) but also utilising its store base for online delivery.

Source: Company Report, UBS

Online sales have been growing on average by 20% p.a and are pushing towards 7% of group sales or US$6.5b. Importantly, approximately 45% of online orders are picked up at the store (“Click and Collect”), which reinforces the need for a store network for bulky goods.

Home Depot is clearly very serious about expanding its reach and connecting with the customer in a deeper way. The company continues to deliver a successful omni-channel model. The number of warehouses and distribution centres increased from 263 in 2015 to 274 in 2016; and Home Depot opened 8 Direct Fulfilment Centers (DFCs) over the last 3 years to stock and handle online orders. Today, Home Depot can ship to 90% of the US population from its three eCommerce DFCs. The DFC in Georgia is a 160,000 square metre facility (which is bigger than many of Amazon’s DFCs) and can ship up to 700,000 different stock keeping units (SKUs) online and about 100,000 of these items can be delivered the same day an order is received. An average store, by comparison, has about 35,000 SKUs on hand. That’s a huge shift in Home Depot’s fulfilment capacity, and one that makes the company much more competitive with the likes of Amazon. The DFCs will also be used to ship items directly to stores, if customers prefer to pick up products themselves. We believe Home Depot has not only heeded the warning of rising online sales from Amazon in its home maker categories, but is actively building its business to meet the future needs of its DIY and pro builder customers.

Last week (20 July) retailer Sears announced that they will start selling their home appliances private label brand Kenmore on Amazon. Home appliances are a material segment of Home Depot’s revenues and the company has been growing this business both on-line as well in-store in recent years. As is to be expected, we saw a negative share price reaction for Home Depot based on the Sears announcement. However, the depth of Home Depot’s range is one of the reasons for their success and we therefore see this move by Sears as largely irrelevant. Home Depot remains a prime example of an Amazon ready retailer and we are comfortable with our position in Australia+ and Global Growth.

This article has been prepared by Arnhem Investment Management Pty Limited ABN 17 129 606 775, AFSL 332484. It has no regard to the specific investment objectives, financial position or particular needs of any specific recipient. You should seek your own professional advice in relation to any financial product referred to. You should also obtain the product disclosure statement relating to any financial product referred to and consider the statement before making any decision about whether to acquire the financial product.

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© Arnhem Investment Management, 2017