Here’s Why Home Depot Can’t Lose This Crucial Customer

Here’s Why Home Depot Can’t Lose This Crucial Customer

One surprising winner during the pandemic was the home-improvement sector. Stuck inside their homes with extra cash in their pockets, consumers focused on tackling renovation projects. And this has led to a surge in demand at Home Depot (NYSE: HD), which leads the industry in selling the right tools and supplies that customers need.

Speaking of its customer base, there is one specific group that has been extremely important to Home Depot’s past success. And it will continue to push the business to new heights going forward.

Contractor working on a project and using a drill.

Image source: Getty Images.

Catering to Pros is extremely lucrative

Although it is estimated that professionals, including contractors, electricians, plumbers, and the like, are just 5% of Home Depot’s customer base, they represented about 50% of the company’s $151 billion in revenue last fiscal year. Having such a large part of the business come from professionals benefits Home Depot because this group spends much more money than DIY shoppers.

This situation results in better financials for Home Depot, especially when compared to smaller rival Lowe’s, which generates roughly 25% of sales from professionals. Home Depot has better sales per square foot ($572), operating margin (13.5%), and return on invested capital (44.7%). And in the retail sector, it’s all about boosting store-level economics, something that professional customers definitely help achieve.

Home Depot has been investing heavily, to the tune of $11 billion over the past few years across categories — including stores, associates, digital experience, and supply chain — to execute on its One Home Depot Strategy. What’s more, the company is currently still in the process of investing an additional $1.2 billion to bolster its supply chain and delivery networks.

Management deemed these investments necessary because they understand that Home Depot needs to continue being the top choice among professionals. Pros need access to a wide selection of inventory, and they need it fast. Important features like customized pricing, personalized offers, differentiated search results, sales support, tool rental, multi-location delivery, and a loyalty program can all drive stickiness from these customers, who view Home Depot as a mission-critical supplier partner to help them run their own small businesses.

During Home Depot’s fiscal 2021 fourth-quarter earnings call, management highlighted a Pro customer in Dallas whose spending tripled from $100,000 annually to $300,000 simply because they downloaded the mobile app, joined the Pro loyalty program, and started using delivery to make frequent planned purchases.

“While we continue serving this customer for their unplanned immediate-need purchases, we now believe our capabilities are beginning to satisfy important planned purchase occasions,” CEO Ted Decker pointed out on the call, adding, “We believe the ability to serve our Pros’ planned and unplanned purchase occasions will be an important driver of growth as we work toward a $200 billion sales milestone.”

Home Depot is leading a massive market

While it was the DIY customer cohort that propelled Home Depot at the start of the pandemic, it is now the Pro business that has outpaced it in terms of growth over the past few quarters. Homeowners are increasingly willing to take on bigger renovation projects that they might have held off on, which is a boon for Home Depot.

Management believes that the total addressable market for Pros in North America is a whopping $450 billion, meaning that there is a ton of growth potential ahead to continue taking market share in a truly massive industry. Leading Lowe’s — which is itself making great strides in this department — should help Home Depot in the years ahead.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns and recommends Home Depot. The Motley Fool recommends Lowe’s. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.