How Home Depot Prepped For Pandemic Pain, Until People Decided To Remodel

Stuck at home, tired of watching tv and with stimulus checks to spend, Americans decided to invest in their dwellings - and Home Depot has cashed in. JL

Sarah Nassauer reports in the Wall Street Journal:

Americans, stuck at home without much to do, started painting, building, fixing and decorating. Government stimulus checks buoyed long-delayed home improvements, as did less money spent on restaurants and summer travel.Daily foot traffic to Home Depot stores since April has been running 35% above last year’s. (Companies) have had to abandon pre-pandemic business models. Old systems can’t forecast demand for products and services or track consumer trends.

In the spring of 2019, shoppers filled Home Depot Inc. HD 1.24% aisles to grab deals on mulch, patio furniture and everything needed to get a garden ready for summer.

This year, as the coronavirus pandemic started to spread through the U.S., Home Depot canceled its spring sale events. Staff cleared aisles of discounted goods to make room for social distancing, abandoning the linchpin of the retailer’s peak season.

“It’s a really interesting time when you tell your field leadership team that right now our job isn’t to focus on driving sales,” said Home Depot Chief Executive Craig Menear. “We said, ‘We can’t do things normally and drive huge amounts of traffic to the stores.’ ”

The abnormal times drove traffic anyway. Americans, stuck at home without much to do, started painting, building, fixing and decorating. Government stimulus checks buoyed long-delayed home improvements, as did less money spent on restaurants and summer travel.

Daily foot traffic to Home Depot stores since April has been running at least 35% above last year’s, according to Unacast Inc., which tracks location data from 25 million cellphones on any given day. In 26 states, traffic doubled following a surge in late May.

While the coronavirus pandemic has battered parts of the U.S. retail landscape and forced long-struggling chains like J.C. Penney Co. into bankruptcy, it has given a boost to others. Restrictions meant to slow the virus’s spread squeezed many small businesses and accelerated the yearslong shift to online shopping allowing Amazon.com Inc. and Walmart Inc. to flourish. It also strengthened giants like Home Depot and Lowes, which largely remained open earning sales as customers came to stores.

Even the winners, though, have had to quickly abandon pre-pandemic business models and instincts. Old systems can’t forecast demand for products and services or track consumer trends. Companies staff differently with health in mind, and many are spending heavily to manage the crisis.

“All of the historical benchmarks that we’ve used to think about the business and what the growth in the business would be, like GDP and housing...none of that has a correlation anymore,” Mr. Menear, 63, said in a July interview.

Instead, “we’re watching consumer demand very, very carefully,” he said. “This is our number one thing.”

Uncertainty abounds for Home Depot and other retailers as summer winds down and the virus continues to spread in parts of America. Costs are mounting to try to keep front-line workers safe, and delivery giants like United Parcel Service Inc. are raising their fees for e-commerce packages. Unemployment benefits have ended for millions of Americans; a new round of benefits ordered by President Trump extends the aid, but at reduced amounts. The economic outlook is murky at best.

Possible consumer-spending weakness later this year is a cloud on the horizon, said some retail analysts. “With stimulus waning and unemployment still elevated, discretionary spending seems likely to slow somewhat,” said Peter Benedict, retail analyst at Baird Equity Research. Still, he said, spending on homes versus other activities such as travel and restaurants is likely to stick.

Frozen economy

Home Depot is already among North America’s largest retailers, employing more than 400,000 people and generating more than $100 billion in annual sales.

Until this year, its growth closely mirrored the U.S. economy and housing market. When the U.S. economy froze early in the pandemic, though, Home Depot grew. Its comparable sales—including stores and digital channels operating for at least a year—rose 6.4% in the quarter ended May 3, more than double the growth in the year-ago quarter.

Behind Home Depot’s surge are people like Dallas residents Kelly and Bob Waterman. Since the pandemic started, they have replaced their front door and painted and redecorated their daughter’s room in a sky-blue motif. They are remodeling their kitchen and replacing their deck, after waiting for a contractor to become available, said Ms. Waterman.

They have headed to Home Depot frequently for plants, potting soil, a tool rack and air conditioning filters, said Ms. Waterman, 59. “We have spent so much time at home,” she said. “You start noticing the things you’ve always wanted to change, but never had the time to do.”

At rival Lowe’s Cos ., comparable sales rose 11.2% in the spring quarter. Lowe’s didn’t cancel its spring sales events and relies less on professional contractors, who couldn’t go into homes for weeks in some states.

Analysts predict record growth when both companies this week report results for May through July. Comparable sales are expected to climb 10.9% at Home Depot and 14.3% at Lowe’s, according to average estimates collected by FactSet. Home Depot’s and Lowe’s shares have climbed to records, with Home Depot’s hitting $280 on Friday, up 40% from a year ago.

Spending on homes is also boosting sales of products ranging from throw pillows to scented candles, helping retailers like At Home Group Inc., a home-décor chain with 219 big-box stores. Customers “are doing the projects around the house first and then the decorating second,” said At Home CEO Lee Bird.

When At Home stores closed from late March through April, it rushed to roll out online sales and let customers pick up from store parking lots, said Mr. Bird. Once stores reopened, sales surged, he said; comparable sales rose 42% in the quarter ended July 25 after falling 47% in the previous quarter, when its stores shut.

Home Depot, since opening its first stores in 1979 for do-it-yourself homeowners, has remodeled to focus on professional contractors who now account for roughly 45% of its revenue. The 2008 housing slump forced it to shrink, closing stores and units including its Expo chain of high-end remodeling stores.

The company halted new store openings and today operates roughly the same number of outlets, about 2,300, as it did a decade ago. The retrenchment worked. Since 2010, comparable sales have been growing steadily. It generates about $450 in revenue a square foot, up from about $350 in 2015.

Mr. Menear, a soft-spoken Michigan native, joined Home Depot in 1997 and rose through the ranks. He took over as CEO in 2014, winning a succession race to become the third CEO since the company’s co-founders retired. The other contenders, Marvin Ellison and Carol Tomé, are now CEOs of Lowe’s and UPS, respectively.

Essential retailer

Early in the pandemic, Home Depot fought for municipal governments to deem it an essential retailer and remain open, said Mr. Menear. At one point, he said, it navigated more than 600 restrictions that regulated staying open across the country. Executives emphasized to local officials that “if you are sitting in your home and your hot-water heater breaks, as mine did during this time, I was darn glad we were open,” said Mr. Menear, who has been working largely from home since March.

Home Depot knew some hourly workers would come in sick, putting everyone at risk, without the guarantee of a continued paycheck, said Ann-Marie Campbell, executive vice president of its U.S. stores. In March, it started offering full-time workers 80 hours’ paid leave and workers over age 65 or with high-risk conditions a total of 240 hours’ paid leave, which could be paid out if left unused. The benefit accounted for most of a $850 million coronavirus-related labor expense in the May-ended quarter.

Stores in early hot spots like New York were first to limit opening hours or shut to all but online curb-pickup orders, fearful of packing shoppers inside as well as of worker shortages, Ms. Campbell said.At stores that were open, Home Depot couldn’t find enough hand sanitizer for staff. Executives got one of their paint suppliers, PPG Industries Inc., to make 100,000 gallons.

Home Depot’s online sales had been a small slice of its revenue, and it never had curbside pickup. It rolled out the service in 48 hours in late March. “We literally had associates handmake signs, ‘Curbside Pickup, Park Here,’ ” Ms. Campbell said.

Executives working mostly from home and communicating in daily video calls debated whether to cancel the spring sales event. Aisles would be stacked with discounted items, a crowding risk. In many stores, every other register was closed to promote social distancing, which could slow checkout lines.

Executives also feared the political repercussions of driving sales of nonessential products in ads or circulars, and drawing crowds to its stores. On the other hand, spring products had already moved through the supply chain and would arrive in stores, clogging backrooms with inventory that wouldn’t sell as fast without a sales event.

“We did not think it would create the safest environment for associates, a safe environment for customers,” said Ms. Campbell. Home Depot’s profit margins got a boost in the May quarter from canceling the event because it sold fewer discounted products.

Some customers, labor activists and workers criticized Home Depot and other retailers for not quickly doing more to protect workers and customers, such as immediately requiring shoppers to wear masks or further limiting crowds when sales surged.

“I’m worried that if there is a second stimulus check, things will start up again” and too many shoppers will be in stores, said a worker who has been with Home Depot for four years and believes the safety protocols now in place still aren’t sufficient.

A Home Depot spokeswoman said it was early to put customer limits on stores. The stores are so large, that locations rarely exceed current social distancing guidelines or regulations. Store managers currently set crowd limits because stores have varying sizes and configurations.

“On the mask front, the CDC recommendations changed,” she said, referring to the U.S. Centers for Disease Control and Prevention. “At first it was, we don’t recommend masks, and we were working with the CDC.”

Like many retailers, the company adopted a nationwide mask policy for customers in July.

Home Depot said it confronted supply shortages of some products such as masks and cleaning products. Customers found some items such as lumber in short supply. Some lumber companies reduced inventories early in the pandemic as GDP fell and unemployment skyrocketed—historical indicators of less building activity.

Instead, Americans’ remodeling caused a lumber shortage at some retailers and rising lumber prices. “When you saw so much production come out and demand picked up more quickly, nobody had inventory in the channel, and it’s just been a scramble ever since,” said Devin Stockfish, CEO of wood-products producer Weyerhaeuser Co., during a July earnings presentation. Production and capacity is starting to come back online, he said.

Home Depot, a Weyerhaeuser customer, declined to comment on how it handled shortages.

Stimulus checks

By early May, Home Depot started letting more shoppers inside stores. It updated its app and supply chain to improve curbside pickup. Then government stimulus checks started boosting sales.

On Friday, the Commerce Department reported U.S. households’ retail spending rose 1.2% in July, the third straight monthly increase. Fresher data suggest spending slowed in August, in part after the July 31 expiration of an enhanced $600 unemployment benefit: Only 36% of consumers tracked by research firm GlobalData spent more or the same amount on retail purchases during the first week of August as they did the same week a year ago, down from 57% who did so during the last week of June.

All Home Depot locations are operating, including in coronavirus hot spots like Arizona, Texas and Florida. Staff remind shoppers to wear masks at the entrance but won’t stop a shopper without one.

“There’s 1% of the customers that are going to be contentious about it,” said Ms. Campbell. “If it becomes physical, we’ve told our associates not to engage,” she said. “You can call the local police,” she said. “They may not respond. But you can make that call.”

Home Depot is considering the best ways to monitor Covid-19 among employees, which for now won’t include testing. “One of the biggest challenges with the testing,” Mr. Menear said, “is it’s good for that moment in time and only that moment in time.”

The company gave all employees thermometers to check their temperatures at home before shifts. In half of stores, workers take an online health survey before coming in, then have their temperatures checked once at work—a protocol the company plans to implement at all stores in coming weeks, the spokeswoman said.

Home Depot declined to say how many workers have tested positive for Covid-19. When a worker gets sick, Home Depot does contact tracing, continues to pay the sick worker and lets coworkers know, said the spokeswoman.

Mr. Menear said he previously thought he would look back at the 2008 recession and think, “Wow, that’s the most challenging time frame in my career.”

Now, he said, “not so much.”