How Home Depot's $18.25 billion bet on the pro business is paying off.

• Home Depot's major acquisition is benefiting the business despite slow home improvement demand.
• In March, the retailer announced the acquisition of SRS Distribution, a supplier to roofing, pool, and landscaping professionals, for $18.25 billion. The deal was completed in June.
• Home Depot is testing collaboration with companies to sell a broader range of products, including shingles and landscaping items, at their pro desks.

In a suburban warehouse, large containers of pool sanitizer and heating equipment are stored on the shelves.

The success of the home improvement retailer over the next decade will be determined by these aisles and the company behind them, rather than the store itself.

Earlier this year, Home Depot made its largest expansion bet by acquiring SRS Distribution, a Texas-based company that supplies professionals in the roofing, pool, and landscaping industries. SRS Distribution has over 11,000 employees and more than 780 branches across 47 states, including in the Dallas area.

Home Depot's $18.25 billion deal, completed in June, indicated to investors that its growth would not solely come from its big-box stores. Instead, the company will also depend on large online orders from home professionals requiring specific supplies for tasks such as installing swimming pools, repairing roofs, and undertaking complex remodels.

Despite a decline in consumer spending on home improvement projects, Home Depot's acquisition has boosted its sales by more than 6% in the third quarter.

If SRS' sales were included, Home Depot's revenue would have increased year over year in both of the past two quarters.

In an interview with CNBC, CEO Ted Decker stated that Home Depot acquired the company not to counteract the weaker DIY market, but as part of its plan to increase sales to professionals.

Home Depot has evolved from a convenience store for professionals to a nationwide distributor, with hubs in major metropolitan areas like Dallas, Atlanta, and Los Angeles, enabling it to deliver large, truckload-sized orders directly to contractors and other pros on job sites.

Decker said that SRS caught the retailer's attention because it specialized in catering to home improvement professionals with unique expertise.

SRS CEO Dan Tinker stated that the specialty distributor offers a comprehensive catalog of merchandise, a dedicated sales force, and a vast network that serves approximately 15,000 job sites daily. Additionally, it provides trade credit, a financing arrangement that enables customers to receive large orders but pay later. Home Depot has recently started offering this to a small portion of its own professional customers.

He stated that we provide an accelerant to their pro strategy.

The acquisition by Home Depot was estimated to increase the company's total addressable market by approximately $50 billion, bringing it to approximately $1 trillion at the time of the deal.

According to Joe Feldman, a senior research analyst for Telsey Advisory Group, SRS, despite its high cost, could significantly boost Home Depot's growth potential. He compared the deal to Walmart's $3.3 billion acquisition of Jet.com, an e-commerce player. While some industry-watchers and Walmart's CEO have attributed the move to accelerating Walmart's online business, it eventually shut down Jet.com as a standalone.

"He stated that they view it as a chance to enter a new market with an established player, but it may take several years to determine if it is profitable."

A jolt to the business

The pro business of Home Depot is facing pressure due to low housing turnover.

The company increased its full-year forecast due to a temporary increase in business during the third quarter, caused by hurricane-related preparation and repairs, as well as homeowners taking advantage of the warmer, dryer weather for outdoor-related purchases and smaller projects.

As they wait for lower mortgage and borrowing rates, customers have delayed home sales and purchases, opting instead for pricier projects.

Chuck Grom, a senior analyst who covers retail for Gordon Haskett, stated that their biggest challenge is determining when a great retail vertical will return to its former state.

Despite a 17% increase in stock value this year, Home Depot's performance has fallen short of the S&P 500's nearly 25% gains.

Despite some pessimism among investors, Telsey Advisory Group's Feldman recently upgraded Home Depot's stock. Although he expects negative comparable sales in the next quarter and possibly in the first quarter of next year, he anticipates a return to growth next spring.

The Federal Reserve has made two interest rate cuts since September, with more expected, and it typically takes about six to nine months to see housing demand pick up in other interest rate easing cycles.

Home Depot's expanding professional business is what distinguishes it from its primary competitor, Lowe's, with about half of its revenue coming from home professionals compared to approximately 20% to 25% at Lowe's.

Some businesses benefit more from the stability and larger spending of pro customers.

One of the factors that attracted Decker to SRS was that about 80% of the roofing business comes from repairs or re-roofing projects rather than for new homes.

SRS has been receiving business from investment companies that have been purchasing properties to renovate and rent, according to Tinker. He stated that SRS is more insulated from the fluctuations of the economy and interest rates compared to Home Depot.

He stated that there is a great demand for renting until one can afford to purchase.

Home Depot anticipates that SRS will generate approximately $6.4 billion in additional sales this year, starting from the time the deal was completed in mid-June.

Despite the SRS deal and emphasis on professional sales, Home Depot is not abandoning its efforts to increase DIY sales. Decker stated that the retailer is still working to attract more DIY customers. Since late January, Home Depot has opened 10 new stores in the US and plans to open two more by early February.

Combining forces

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

SRS has a larger and more mature logistics network that can speed up deliveries and lower costs. The company has an approximately 4,000-truck delivery force. In contrast, Home Depot mostly relies on third-party delivery and had only recently started using its own drivers, according to Decker.

Tinker stated that SRS offers a wider range of products for professionals to cater to diverse customer needs, including a blue-colored surf roof and a more extensive selection of outdoor fire pits.

The newly acquired business has a dedicated sales force with expertise in specific verticals and deep relationships with frequent buyers, Tinker said. Its approximately 2,500-person specialized sales force is larger than Home Depot's, which is in the hundreds, Tinker said.

In Los Angeles, Home Depot and SRS are collaborating on a pilot project to integrate their operations. SRS will utilize space in a Home Depot distribution center to increase its sales in the region where it has a smaller presence, as stated by Tinker.

"He stated that it was a significant opportunity, but it did not involve or incorporate with them; instead, it only utilized some of their resources."

SRS gains additional business benefits from partnering with Home Depot's large-scale stores. Home Depot's pro desks provide specialized assistance and allow contractors to place orders, and now they are promoting and selling SRS' extensive product line, according to Decker.

Over the past four or five years, SRS has averaged 15 acquisitions annually, mainly small, family-owned companies in the pool, landscaping, and roofing business.

After the deal, SRS has been given more independence by Home Depot, according to Decker.

He stated that they would allow the team to concentrate on their growth strategy while simultaneously examining their evident synergies, without disrupting their current activities.

At the SRS-owned Texas Pool Supply in Plano, which is exclusively for home professionals, the aisles are filled with a variety of items that cannot be found at a local Home Depot. Contractors can purchase a wider selection of tiles for the bottom of a swimming pool, as well as bulk items such as 100-pound buckets of pool sanitizer.

After Home Depot bought SRS, Jeff Cabell, the branch manager of Texas Pool Supply in Plano, received numerous inquiries from customers. Some were concerned about whether Home Depot would offer the same products and if it would alter the business. Additionally, some employees questioned if their uniforms would be changed to match Home Depot's signature orange aprons.

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