Retail

Home Depot Shares Drop Due To Worry Over Competition From Amazon

Home Depot shares dropped more than 3 percent despite a stellar earnings report posting its highest quarterly sales in company history.

CNBC reported news that the stock stumble was due to continuing fears of the "Amazonification" of retail, and the worry that Home Depot might no longer be immune to the “Amazon effect.”

"The Amazon specter is everywhere in retail," said Rob Plaza, retail analyst at Key Private Bank.

Although the online retail giant recently entered into an agreement to sell Sears' Kenmore appliances through its site, many analysts believe concerns for Home Depot are "overblown" — and that it has a significantly more robust product lineup than Amazon.

"By the nature of its business, we consider HD to be Amazon-resistant, notably via customer assistance and rising focus on professional customers,” said independent investment research firm CFRA analyst Efraim Levy. Levy reiterated his opinion of Home Depot on Tuesday, noting "many of HD's products and its services are not offered by Amazon."

In addition, Home Depot has advantages with the do-it-yourself (DIY) and professional contracting crowd, a group which makes up the core of its buyers. Still, that confidence is currently faltering a bit. While auto parts were also considered "safe" from Amazon not so long ago, they are no longer considered so.

"We have to ask the question with Home Depot, particularly as Kenmore is now selling appliances online that are now smart appliances: Is this sector safe as well?" said Stacey Widlitz president of SW Retail Advisors.

However, Amazon isn’t Home Depot’s only issue. Widlitz also noted that despite the stellar earnings report, the home improvement retailer does have a high multiple, and gross margins may have plateaued.

Joe Feldman, assistant director of research at retail analyst firm Telsey Advisory Group, said that while he remains bullish on Home Depot, investors are incrementally more concerned about the threat of share loss to Amazon, especially in consumable areas (batteries, light bulbs and more), as well as disruption in appliances.

Another concern is the longevity of the housing and remodeling market.

"We believe the housing market is not done, given the aged housing stock and younger buyers finally coming into the market," said Feldman. "However, it's likely that the growth may slow in the next couple of years. As such, some investors have begun to reduce their exposure to Home Depot."

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