Home Depot rounded out 2018 with another quarter of growth despite missing analyst expectations. Despite cold, wet weather and a slower housing market, Home Depot’s sales increased 10.9% in the fourth quarter, enough to solidify another year of record sales and net earnings. While external factors have the potential to dampen the home improvement channel’s performance, Home Depot’s continued investment in omnichannel initiatives and key shopper segments is bolstering the retailer’s strong core business.

Macro Factors Weigh on Results

In a year of noteworthy weather impacts (including a late start to spring weather in Q1), environmental variables continued to impact Home Depot’s Q4 performance. In particular, Q4 2018 did not see a repeat of the approximately USD400 million in hurricane-related spending that Q4 2017 did. On the macroeconomic front, the home improvement channel faced uncertainty heading into 2019 as the U.S. housing market started to show signs of slowing. While the market is not currently giving cause for alarm, the fourth quarter highlighted the impact that a slower market has on the home improvement channel’s results. Still, our outlook for the housing market in 2019 is steady.

‘The Year of the Pilot’ Shifts to Broader Initiatives

One year after announcing its “One Home Depot” strategy, the retailer reported a fair amount of success in moving beyond pilot programs to more widespread launches of new initiatives, including store refreshes and installing pickup lockers in 1,000 stores. On the fulfillment side, the retailer opened more market delivery operations, detailed plans for a broader rollout of specialized direct fulfillment centers, and expanded its third-party on-demand fulfillment capabilities. Some initiatives, such as updating in-store technology and building out new delivery infrastructure, put more pressure on margins than originally forecasted. Even so, the retailer highlighted the positive impact these pilots have played in underpinning productivity and growth.

Pro Contractor Business Model Begins to Take Shape

Home Depot continued to find strength in its pro contractor shopper segment in Q4 as pro sales growth grew faster than the retailer’s average comp. Pro-heavy categories such as tools and building materials performed above the company’s average, and transactions over USD1,000 were also up 4.8% in the quarter. As Home Depot leans in further with this key shopper segment, its pro services rollout began to take shape in Q4. Under the banner “Home Depot Pro,” the retailer is creating a more personalized experience for pro shoppers, starting with its dedicated website. In Q4, the retailer gave 100,000 pros early access to the website to gather feedback; it will roll out the site to its extended pro shopper base this year.

Looking Forward

Many questions remain about the state of the broader housing economy in 2019. What is certain is the extent to which Home Depot has positioned itself internally for continued growth. The retailer’s continued investment in building an interconnected retail business and increasing value for key shoppers has created a strong foundation, despite swings in the macro environment. Suppliers should expect Home Depot to double down on its financially disciplined ways of working and continue to efficiently roll out new strategic initiatives to generate more growth organically in the face of a potentially changing housing market.

Today, we turn our attention to Lowe’s performance. We will be watching for how the company’s major strategic changes have impacted overall performance as well as any status updates from CEO Marvin Ellison and his new leadership team. For additional implications, stay tuned to KRIQ for our in-depth analysis of the channel’s fourth-quarter and full-year results.

For more information, please contact:

Hannah Hayes, Analyst

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