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.”

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

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.