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Home Depot Plans To Offer Same-Day Delivery To Customers

By: Trefis
Posted: 12/13/2013 1:36:00 PM
Referenced Stocks: COST;HD;LOW;TGT

Home Depot ( HD ) has announced that it is planning to put in place infrastructure that will enable the same-day delivery of orders. The new systems will also allow the company to boost its online sales in general and perhaps capture a chunk of rival, Lowe's' customer base.

Home Depot intends to spend around $300 million on building new fulfillment centers, a new warehouse management system and a new material handling system. Apart from providing same-day delivery, Home Depot also intends to reduce the time it takes to fulfill online orders in general.

The latest initiative will likely strengthen Home Depot's grip on the professional contractor segment which accounts for around 35% of its sales and includes those customers who wouldn't mind paying a small premium to save an extra trip in the middle of a home improvement job.

We have a Trefis price estimate of $77 for Home Depot's stock , which represents a 2% downside to the current market price.

Our complete analysis for Home Depot's stock

The Rationale

After extensive surveying of the market, Home Depot says that costs being equal, its customers prefer faster delivery of goods. When asked to choose between faster delivery and low costs, most customers display a preference for low cost. However, if the premium for speed is not too high, they may be willing to pay a little extra. Therefore, Home Depot is building its fulfillment centers to meet customer needs by balancing cost and speed.

When people are in the middle of executing a home improvement job, they find it very inconvenient and annoying to make a trip to the nearest Home Depot store to source extra lumber, tiles, screws or other materials. Professional contractors, in particular, want to complete their tasks in a time-bound manner to allow them to move to the next job quickly. Such customers may not be averse to paying a reasonable premium in exchange for faster delivery of goods which will save them the time and extra effort needed to make a physical trip.

What Home Depot Is Planning

The home improvement retailer plans to open three new fulfillment centers in California, Atlanta and Ohio over the next two years. It wants the shoppers to place orders by 5 pm so that delivery for these can be initiated the same evening. For orders placed later than 5 pm, delivery will be initiated the next day. The aim is to fulfill at least 90% of the orders within two days. The geographical locations of the fulfillment centers have been decided in a manner that would allow the company to leverage its parcel freight carriers' network for its goals.

The new fulfillment centers will range in size from a little under a million square feet to over 1.5 million square feet. Each center will have the capability to hold as many as 100,000 Stock Keeping Units (SKUs) to begin with, which may be scaled up in future. This is huge, considering that a typical Home Depot store has around 30,000 SKUs.

The Advantages

We think that professional contractors are likely to find Home Depot's quick delivery service very attractive. While contractors make up just 3% of Home Depot customers, they are responsible for 35% of its sales. Therefore, we expect the initiative to boost Home Depot's online sales considerably. After attracting new customers in this segment, Home Depot can work on building long term relationships with them to ensure repeat orders on a sustained basis. (( Home Depot Q3 2013 Earnings Conference Call , Seeking Alpha))

We also think that Home Depot will lead over Lowe's, its closest competitor in the home improvement market, by virtue of its first mover advantage in the same-day delivery segment. It may even be able to poach some of Lowe's existing customers with this initiative. Apart from using fulfillment centers, Home Depot is planning to use its existing network of 2,000 brick and mortar stores to fulfill online orders by integrating them within the system. If it is successful in doing so, it will have created a single interconnected retail system that will result in efficiency gains and higher margins.

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