Home Depot Investment Show Niches Contain the Riches

Home Depot missing their revenue is not news - the home sector is down and has been for over a year. Most times I don't listen to earnings calls for the backward-looking stuff, but instead I look for the forward-looking.

In this case, Home Depot recently announced that it would acquire SRS Distribution for $18B - the largest acquisition in its history - to tackle the home professionals market.

I saw it as a way to diversify away from consumers further. But management has revealed more -- the company is doubling down within certain niches of professionals. The lessons in this call apply to a wide array of businesses right now.

All this reflects the changing of retail. In the past, retailers could rely on private label credit cards and extended warranties to make an extra buck. While these days are not gone, top retailers need various alternative monetization tactics - often in addition to a private label card.

Here are some of them:

Amazon: Subscription membership, AWS, Advertising, Third-Party Seller Fees, Fulfillment

Walmart: See above (replace Prime with Walmart+) ^^

Target: Advertising, Experimenting with Selling Own Brands in Other Retailers

Costco: Subscription membership

Home Depot needed more. Like Lowes, they will have ads and recently announced the Orange Apron Media network. Moving further up the supply chain into fulfillment, distribution, and complex projectds follows similar investments in HD Supply, so this is not HD's first rodeo.

A few points I heard on the call:

* With SRS, Home Depot is niching down - pool contractor, roofer, and landscaping - seems like lucrative segments and reasons someone uses Home Depot.

* Gives Home Depot a way to serve the complex project occasion with a specialty trade pro customers.

* Any kind of project that needs financing - e.g., kitchen/bath remodels - are under pressure.

* The company has seen positive comps where they have been investing in supply chain teams.

* These complex pro capabilities will go from 17 markets by end of year to about 40 markets in the near future.

* Consumers are either not doing projects or deferring projects due to interest rates and inflation pressures. Even higher income consumers think rates might come down, which contributes to deferral.

* Addressing this market is not just about creating distribution centers. The marketing to professionals and attracting and serving those customers. Shows that Home Depot is not just in a "build it and they will come" mode. Goto-market motion is important when trying to gain share of wallet in a new market segment.

Here is another way to think about this. How does Home Depot survive the twin onslaught of Amazon and Walmart? De-emphasize the consumer market and start serving the professional. But not just any professional - get very specific and think about their entire value chain.

I feel this thinking could apply to a lot of different businesses.