Home Depot digital transformation plan takes longer to pay off

Home Depot said that its One Home Depot plan is taking longer than expected to create sales growth in 2019.

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Home Depot said that its One Home Depot digital transformation project is delivering returns slower than expected and will cut into sales growth.

As a refresher, Home Depot last year outlined an ambitious strategy to meld its supply chain, digital footprint, and physical store experience. Analytics and data would be the glue of this digital transformation.

In a graphic, here's the retailer's One Home Depot strategy.

However, Home Depot said its third-quarter sales didn't reap the benefits of its digital investments. Home Depot reported third-quarter net income of $2.8 billion, or $2.53 a share, on revenue of $27.2 billion, up 3.5% from a year ago. Same-store sales were up 3.6% globally and 3.8% in the US.

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Craig Menear, CEO of Home Depot, said the retailer saw growth across its business, but "sales were below our expectations driven by the timing of certain benefits associated with our One Home Depot strategic investments."

Menear added that Home Depot is on track with its technology investments, but returns "will take longer to realize than our initial assumptions."

Home Depot last year projected that its digital transformation efforts would deliver 2020 sales of $115 billion and $120 billion with a return on invested capital as high as 40%.

For 2019, Home Depot said it expects sales growth of 1.8% with same-store sales up 3.5%. Home Depot previously projected sales growth of 2.3% for 2019 with same-store sales of 4%. Home Depot maintained its earnings targets for 2019 at about $10.03 a share.

On a conference call with analysts, Menear outlined a few moving parts. Here's the roundup:

  • "We think we're getting about half of the investment benefit in 2019. And as we continue to add additional features and benefits as we unwind some of the complexities of our legacy systems, we'll see that continue to grow," said Menear.
  • The issue with the One Home Depot plan isn't necessarily the new systems, but unwinding the legacy IT without interruption. Menear said:

We have foundational IT work streams supporting many of our strategic initiatives that will significantly enhance our ability to serve our customers in an interconnected way. Much of this IT work requires unwinding our legacy systems, and that has proven to be more complex than originally anticipated.

Take the B2B website experience, for example. Our investments in a personalized B2B website experience is a significant component of the unique value proposition we are creating for our pros. As you would expect, the most engaged customer cohort is 135,000 pros that we on-boarded at the beginning of the year, and we are seeing meaningful lift in spend as these customers become more familiar with the new experience. The rollout of the B2B site experience itself is on track, but underlying IT work must be completed before turning on additional elements of personalization and functionality for our larger pro customers.

  • Pro sales outpaced do it yourself demand in the third quarter. Ticket and transactions grew in the quarter.
  • The Home Depot one site has seen traffic growth and better conversion rates due to fulfillment options and the omnichannel experience. Online sales were up 22% in the third quarter and "we also continue to leverage our digital platforms to drive incremental growth from adjacent categories like HD Home, Cool, and Workwear and are seeing good traction across all of these categories."
  • More than 50% of online orders were picked up in stores.

"As we approach the end of the second year of our transformative One Home Depot investments, we have even more conviction today that we are making the right long-term investments for the business to extend our competitive advantage in the marketplace. As with any transformation, the work we are doing is complex, and I'm proud of the way our team is consistently up for the challenge," said Menear.