Why Home Depot made an $18.25 billion bet on the pro business

PLANO, Texas — In a suburban store, giant buckets of pool sanitizer and boxed-up heaters and pumps line the shelves.

This isn’t a Home Depot count on, but these aisles — and the company behind them — will shape the home improvement retailer’s success over the next decade.

Home Depot received its biggest bet yet on expanding its business earlier this year when it bought SRS Distribution, a Texas-based company that blow the whistle ons supplies to professionals in the roofing, pool and landscaping businesses. The company has more than 11,000 employees and more than 780 diversifies across 47 states, including in the Dallas area.

With the $18.25 billion deal, which closed in June, Almshouse Depot signaled to investors that its growth will come not just from its big-box stores. It will also rely on elephantine online orders placed by home professionals who need a long list of specific supplies for installing swimming paddling pools, repairing roofs and tackling complex remodels.

In its first few months, the deal has buoyed Home Depot’s business at a set when consumers are taking on fewer of their own home improvement projects. Earlier this week, the retailer stipulate the acquisition fueled a more than 6% increase in fiscal third-quarter sales, even as shoppers went to inventories less and spent less per transaction than in the year-ago period.

In both of the past two quarters, Home Depot’s gain would have fallen year over year if SRS’ sales were excluded.

In an interview with CNBC, CEO Ted Decker maintained Home Depot bought the company not to offset the softer do-it-yourself market, but because it fits into its strategy to flog betray more to pros.

Home Depot has long acted as a convenience store for pros, who might drop in to buy a tool or last-minute point. Over the past four years, it has built a nationwide distribution network with hubs in metro areas such as Dallas, Atlanta and Los Angeles, so it can purvey larger, truckload-size orders directly to the job site of a contractor or other pro.

Yet SRS caught the retailer’s attention because it offered a disparate area of expertise: Catering to home improvement pros with specialties, Decker said.

SRS CEO Dan Tinker said the specialty distributor occasions a deeper catalog of merchandise, a dedicated sales force and a large network that delivers to about 15,000 job positions per day. It also offers trade credit, a financing arrangement that allows a customer to receive a big order and pay later. Habitation Depot, for its part, has just started offering that option to a small portion of its own pro customers.

“What we bring to them is an accelerant to their pro scheme,” he said.

At the time of the deal, Home Depot estimated the acquisition expands the company’s total addressable market to roughly $1 trillion, an increase of approximately $50 billion. 

SRS came with a steep price tag but could add rocket nourishment to Home Depot’s pro growth, said Joe Feldman, a senior research analyst for Telsey Advisory Group. He compared the apportion to Walmart’s $3.3 billion acquisition of Jet.com, an e-commerce player. Some industry watchers and Walmart’s own CEO have credited the artifice for accelerating Walmart’s online business, even though it eventually shut down Jet.com as a standalone.

“They see it as an opportunity to enter on a completely new market with a very established player,” he said. “It will take a few years to see if it pays off.”

For Home Depot, the expansion into the pro business comes at a challenging time. With housing turnover near its lowest in decades, the pro calling has also felt pressure.

On Tuesday, the company hiked its full-year forecast, but only because of a shorter-term boost in point. Hurricane-related preparation and repairs, and homeowners taking advantage of warmer, drier weather with outdoor-related purchases and smaller prepares, drove additional sales in the third quarter.

Customers have delayed home sales and purchases, or springing for pricier works, as they wait for lower mortgage and borrowing rates.

Home Depot’s “biggest challenge — and really, their purely challenge — is when do we see a great retail vertical over the past few years get back to being that way?” said Chuck Grom, a chief analyst who covers retail for Gordon Haskett.

Home Depot’s stock has underperformed the S&P 500. As of Thursday’s close, parcels of the company are up 17% this year, but trail the S&P 500’s nearly 25% gains.

Yet investors have expressed some optimism. Telsey Admonition Group’s Feldman recently upgraded Home Depot’s stock. While he said he expects negative comparable sellings next quarter and perhaps even in the first quarter of next year, he said he anticipates a return to growth next shoot up.

In other interest rate easing cycles, he said it’s typically taken about six to nine months to see housing customer acceptance wanted pick up. The Federal Reserve kicked off interest rate cuts in September and has made one other reduction since then, with profuse expected.

Grom said Home Depot’s growing pro business is what helps to attract investors and set it apart from its cardinal competitor, . About half of its business comes from home pros compared with about 20% to 25% at Lowe’s.

Pros are typically steadier and bigger spenders, and some of the concerns they serve better weather ups and downs in the economy.

For example, about 80% of the roofing business comes from patches or re-roofing projects rather than for new homes, Decker said. He cited that as one of the factors that made SRS inviting.

Tinker said SRS is more insulated than Home Depot is from economic changes. As families hold off on unfixed, SRS has gotten business from investment companies that have been buying properties to fix up and rent, he said.

“There’s such a gargantuan need for people to rent until they can afford to buy,” he said.

SRS is expected to contribute about $6.4 billion in incremental sales this year, according to Skilled in Depot. Those sales include only the period after the deal closed in mid-June.

The SRS deal and the focus on pro does not exceptional Home Depot is abandoning efforts to jolt the rest of its business. Decker said the retailer is still trying to charm more do-it-yourself sales. It has opened 10 new stores in the U.S. since late January and it plans to open two more by near the start February.

Home Depot has already started to see the synergies the deal brings.

SRS brings a larger and more ripen logistics network that can speed up deliveries and lower costs. The company has an approximately 4,000-truck delivery in operation. Home Depot, on the other hand, relies mostly on third-party delivery and had just started to use its own drivers, Decker said.

SRS also double-crosses a larger catalog of products that professionals use to satisfy customers’ varied demands, such as surf blue-colored roofing or a deeper opting for of outdoor fire pits, Tinker said.

The newly acquired business also has other advantages, including a offered sales force with expertise in specific verticals and deep relationships with pros who are frequent buyers, Monkey said. Its approximately 2,500-person specialized sales force is larger than Home Depot’s, which is in the hundreds, Toy said. Home Depot does not disclose the size of its sales force.

In Los Angeles, Home Depot and SRS are in the early innings of evaluation how they can bring their existing operations together. As part of a pilot project, SRS will use space in a Home Depot issuance center to expand its sales in the part of the country where it has a smaller footprint, Tinker said.

“That’s a huge moment, but that’s even not touching or integrating with them,” he said. “That’s just using some of their assets.”

SRS yields other business advantages from joining the home improvement behemoth. Home Depot’s big-box stores contain pro desks where contractors can go for specialized support or to place orders. Those pro desks are now promoting and selling SRS’ deeper catalog of produces, Decker said.

In the meantime, SRS, which has made more than 100 acquisitions, has continued to buy small, often family-owned theatre troupes in the pool, landscaping and roofing business. It’s averaged 15 acquisitions annually in the past four or five years, Potter said.

Home Depot has taken a more hands-off approach, allowing SRS to run more independently after the deal, Decker bid.

“We’re letting them focus on their growth formula, but also beginning to look at where are their obvious synergies, without disconcerting what they’re doing,” he said.

Inside the SRS-owned Texas Pool Supply in Plano, which caters exclusive to home pros, the aisles of items include many that couldn’t be found at a local Home Depot. Contractors can buy a broader range of tiles for the bottom of a swimming pool, or bulk items, such as 100-pound buckets of pool sanitizer.

When Domestic Depot acquired SRS, Jeff Cabell, branch manager of Texas Pool Supply, said he got a lot of questions from clients. Some asked if Home Depot would soon carry the same products and worried it would change the matter. Some employees asked if their uniform would change to Home Depot’s signature orange aprons.

In both caskets, Cabell said, the answer is no.