Why Home Depot acquired SRS Distribution

PLANO, Texas — Huge buckets of pool disinfectant and boxed heaters and pumps line the shelves in a suburban warehouse.

this is, home depot But these aisles and the companies behind them will shape the success of home improvement retailers for the next decade.

Earlier this year, Home Depot made its biggest bet yet on expanding its business by acquiring SRS Distribution, a Texas-based company that sells products to roofing, pool and landscaping professionals. The company has more than 11,000 employees and more than 780 branches in 47 states, including the Dallas area.

With the $18.25 billion deal completed in June, Home Depot signaled to investors that the company’s growth won’t just come from big-box stores. It also relies on large volumes of online orders from home professionals who need long lists of specific supplies to tackle pool installations, roof repairs and complex renovations.

The deal has boosted Home Depot’s business in the first few months, as consumers are taking on fewer home improvement projects on their own.. Earlier this week, the retailer said the acquisition had gained momentum. Sales rose more than 6% in the fiscal third quarter, even though shoppers went to stores fewer times and spent less money per transaction compared to the same period last year.

Excluding SRS sales, Home Depot’s sales would have declined year over year in each of the past two quarters.

CEO Ted Decker said in an interview with CNBC that Home Depot didn’t buy the company to offset a weak do-it-yourself market, but because: . This fits with the company’s strategy of selling more to professionals.

Home Depot has long served as a convenience store for professionals who stop by to buy tools and last-minute items. Over the past four years, the company has built a national distribution network with locations in metropolitan areas such as Dallas, Atlanta and Los Angeles, allowing it to deliver truckload-sized orders to the job sites of contractors and other professionals. Now available for direct delivery.

Still, Decker said SRS attracted retailers’ attention because it offered a different specialty: catering to specialized home improvement professionals.

SRS CEO Dan Tinker said the specialty distributor brings a richer product catalog, a dedicated sales force and an extensive network that delivers to approximately 15,000 sites a day. Ta. We also offer trade credit, which is a financing arrangement that allows customers to pick up large orders and pay for them later. Home Depot has just started offering that option to a small portion of its professional customers.

“What we bring to them is something that will accelerate their professional strategy,” he said.

At the time of the acquisition, Home Depot estimated that the deal would increase its total addressable market by about $50 billion to about $1 trillion.

Joe Feldman, senior research analyst at Telsey Advisory Group, said SRS’s price is high, but could add a rocket to Home Depot’s professional growth. He compared the deal to Walmart’s $3.3 billion acquisition of e-commerce giant Jet.com. Some industry insiders and Walmart’s own CEO credited the move with accelerating Walmart’s online business, even though it ultimately shut down the standalone Jet.com. .

“They see this as an opportunity to enter 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, its expansion into the professional business comes at a difficult time. Professional businesses are also feeling the pressure as home sales turnover rates near the lowest levels in decades.

The company raised its full-year forecast on Tuesday, but that’s only due to near-term business growth. Hurricane-related preparations and repairs, as well as homeowners taking advantage of the warm, dry weather to make outdoor-related purchases and small projects, further boosted sales in the third quarter.

Customers are waiting for lower mortgage and borrowing rates to put off selling or buying a home or jump into more expensive projects.

Home Depot’s “The biggest challenge, and really the only challenge, is when will we get back to the great retail we’ve had over the past few years?” Gordon Haskett, senior retail analyst , Chuck Grom says:

Home Depot stock underperforms the S&P 500. As of Thursday’s close, the company’s stock had risen 17% since the beginning of the year, but lagged the S&P 500’s gain of about 25%.

But investors are expressing some optimism. Mr. Feldman of Telsey Advisory Group recently upgraded his stake in Home Depot. He said he expects comparable sales to be negative next quarter, and perhaps even in the first quarter of next year, but expects to return to growth next spring.

In other interest rate easing cycles, it typically takes six to nine months for housing demand to recover, he said. The Fed began cutting interest rates in September and has cut one more time since then, with further cuts expected.

Grom said the growth of Home Depot’s professional business is what attracts investors and helps differentiate the company from its core business. competitors, lowe’s. About half of the company’s business comes from home pros, compared to about 20 to 25 percent at Lowe’s.

Professionals usually tend to be more stable and larger spenders, and some of the businesses they offer cope better with the ups and downs of the economy.

For example, about 80% of its roofing business comes from repair and reroofing projects, rather than new home construction, Decker said. He cited that as one of the factors that made SRS attractive.

Tinker said SRS is more insulated from economic fluctuations than Home Depot. As families prepare to move, SRS says it is getting deals from investment companies that are buying properties for renovations and rentals.

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

According to Home Depot, SRS is expected to contribute about $6.4 billion in increased sales this year. These sales only include the period after the transaction closed in mid-June.

The deal with SRS and the focus on professionals doesn’t mean Home Depot is abandoning efforts to shake up other businesses. Decker said retailers are still trying to attract more do-it-yourself sales. The company has opened 10 new stores in the U.S. since late January and plans to open two more by early February.

Home Depot is already starting to realize the synergies the deal will bring.

SRS brings a larger and more mature logistics network, enabling faster delivery and lower costs. The company has a fleet of approximately 4,000 trucks. Home Depot, on the other hand, relies primarily on third-party deliveries and has just started using its own drivers, Decker said.

Tinker said SRS also sells a larger catalog of products used by professionals to meet a variety of customer demands, including surf blue-colored roofing and a large selection of outdoor fire pits. .

Tinker said the newly acquired business has other benefits, including a dedicated sales force with domain expertise and deep relationships with professional frequent buyers. Mr. Tinker said the company has about 2,500 professional salespeople, making it larger than Home Depot, which has several hundred employees. Home Depot does not disclose the size of its sales force.

In Los Angeles, Home Depot and SRS are in the early stages of testing how their existing operations can be combined. As part of the pilot project, SRS will use space in Home Depot distribution centers to expand sales in areas of the country where the company has a smaller footprint, Tinker said.

“It’s a huge opportunity, but it doesn’t even touch or integrate them,” he said. “It’s just using some of their assets.”

SRS also enjoys other business benefits by joining the home improvement giant. Home Depot’s larger stores feature Pro Desks where contractors can receive professional help and place orders. Those prodesks are now promoting and selling SRS’s more detailed product catalog, Decker said.

SRS, which has made more than 100 acquisitions in that time, continues to acquire small, family-owned businesses in the pool, landscaping and roofing businesses. Tinker said the company has averaged 15 acquisitions a year over the past four to five years.

Decker said Home Depot took a more liberal approach, allowing SRS to operate more independently after the acquisition.

“We’re getting them to focus on the growth equation, but at the same time, without disrupting what they’re doing, we’re starting to look at where there are obvious synergies,” he said. I did.

SRS-owned Texas Pool Supply in Plano caters exclusively to home professionals, and the product aisle includes many items you won’t find at your local home improvement store. Contractors can purchase bulk items such as a wide range of tiles for the bottom of a pool or 100-pound buckets of pool disinfectant.

When Home Depot acquired SRS, Texas Pool Supply branch manager Jeff Cavell said he received a lot of questions from customers. Some asked if Home Depot would soon carry the same products or worried that the business would change. Some employees asked if their uniforms would be changed to Home Depot’s signature orange aprons.

In both cases, Cavell says, the answer is no.