U.S. based home improvement retailer Home Depot reported very positive financial performance results for Q2 2018. Included in the narrative were very positive aspects of supply chain performance and integration with other functional and business

 

areas, the result of ongoing multi-year investments in various tenets of supply and demand network capabilities.

Financial performance highlights included an 8.4 percent year-over-year increase of total revenues amounting to $20.5 billion. Comparable same-store sales were up 8.4 percent, which exceeded management and analyst expectations. Gross margin was reported as 34 percent, an increase of 36 basis points from last year. Inventory turns increased one-tenth to 5.4 turns in the quarter.

CEO Craig Menear noted in the earnings call that Q2 represented the highest quarterly sales and net earnings results in company history. He attributed the home improvement retailer’s stellar performance as follows:

Our solid performance was driven by the outstanding execution of our store associates, merchants, suppliers and supply chain teams.

Q2 online sales were reported as a growth of 26 percent in the quarter. Regarding this channel, Menear indicated to analysts:

Delivering a best-in-class interconnected shopping experience encompasses much more than our digital properties and physical store assets. Our supply chain and the investments that we are making to enhance the delivery and fulfillment options available for customers is also an important area of focus. We have continued to develop and roll out new delivery capabilities. We have now rolled small parcel express delivery from store via car and van in nearly all major markets in the U.S., with plans for further expansion.

The CEO further indicated the opening of what is termed as the first Market Delivery Option (MDO), pilot new customer fulfillment center. These facilities are described as a cross-functional endeavor involving real estate, IT and supply chain teams including the deployment of proprietary software that manages and runs such facilities.

We highlighted the above statements in entirety for our Supply Chain Matters readers because, by our lens,  they best express articulation what appears to be a differentiated strategy for competing in today’s online, Omni-channel  retail environment. For Home Depot, interconnected retail is resonating with increased online conversion rates. During Q2, 47 percent of online orders were picked-up at a physical store.

Other Supply Chain Factors

In other areas related to supply chain strategy, executives pointed up to 40 percent increases in lumber prices impacting unit sales in the quarter, further was up to a 25-odd basis points of cost pressure due to imposed tariffs on products such as home laundry washing machines. Noted were requests from suppliers for increased retail pricing to cover added costs, and the presence of mid-teen increases in pricing, but executives noted the overall size is manageable so-far. Optimism was expressed that Korean based manufacturers will soon have their U.S. based manufacturing facilities up and running to produce most home laundry machines domestically.

In the area of ongoing inflated transportation costs, the home improvement retailer indicated an 8-basis point increase in such costs during the quarter. The retailer’s CFO noted that efforts to best manage such increases are underway but there is a real issue in the transportation markets in the U.S.

Outlook

As a result of the positive financial performance in Q2, Home Depot increased its outlook for the remainder of 2018. Overall 2018 sales growth is expected to be approximately 7 percent with comparable same store sales expected to be in the range of 5.3 percent.  Earning per share is expected to grow approximately 29 percent.

Home Depot clearly appears to be firing on all cylinders and reaping the benefit of multiple multiyear investments in supply chain physical, IT and Omni-channel online customer fulfillment focused investments.

Meanwhile, arch rival Lowes Home Improvement is under more intense pressure to match such performance. Supply Chain Matters has previously highlighted a series of supply chain focused executive leadership changes.

 

End Goal

Competing in the new retail economy requires closing the gaps between sales, marketing, supplier, and supply chain teams in responding to actual B2B and B2C required customer experiences and expected service levels. How such experiences are supported, managed, and synchronized leads to what we have termed as Digitally Enabled Response Networks.

The online customer expects fulfillment expectations to be seamlessly met across multiple retail channels, either online, or combined online and physical retail presence. It requires a purview that extends beyond supply chain planning or supply chain physical execution to dimensions of network response management that literally integrate multi-enterprise or B2C planning and execution capabilities towards synchronized action and response. It requires retailers and service providers to be able to continually monitor point-of-sales product demand, and dynamically align the response network to changing customer preferences or inventory needs at the lowest possible cost.

The Home Depot is fast becoming one of the retail industry’s benchmark manifestation of the multiyear rollout of a Digitally Enabled Response Network addressing customer fulfillment needs.

 

Bob Ferrari

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