Why Home Depot acquired SRS Distribution

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

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

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

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

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

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

In an interview with CNBC, CEO Ted Decker said Home Depot bought the company not to offset the softer do-it-yourself market, but because it fits into its strategy to sell 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 item. 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 deliver 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 different area of expertise: Catering to home improvement pros with specialties, Decker said.

SRS CEO Dan Tinker said the specialty distributor brings a deeper catalog of merchandise, a dedicated sales force and a large network that delivers to about 15,000 job sites per day. It also offers trade credit, a financing arrangement that allows a customer to receive a big order and pay later. Home 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 strategy,” he said.

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

SRS came with a steep price tag but could add rocket fuel to Home Depot’s pro growth, said Joe Feldman, a senior research analyst for Telsey Advisory Group. He compared the deal 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 move 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 a completely new market with a very established player,” he said. “It will take a few years to see if it pays off.”

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

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

Home Depot’s “biggest challenge — and really, their only 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 senior analyst who covers retail for Gordon Haskett.

Home Depot’s stock has underperformed the S&P 500. As of Thursday’s close, shares 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 Advisory Group’s Feldman recently upgraded Home Depot’s stock. While he said he expects negative comparable sales next quarter and perhaps even in the first quarter of next year, he said he anticipates a return to growth next spring.

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

Grom said Home Depot’s growing pro business is what helps to attract investors and set it apart from its main competitor, Lowe’s. 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 businesses they serve better weather ups and downs in the economy.

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

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

“There’s such a huge 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 Home Depot. Those sales include only the period after the deal closed in mid-June.

The SRS deal and the focus on pro does not mean Home Depot is abandoning efforts to jolt the rest of its business. Decker said the retailer is still trying to attract 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 early February.