Lower Credit Card Fees Means Cheaper Prices At Home Depot

by Trefis Team
-2.46%
Downside
94.99
Market
92.65
Trefis
HD
Home Depot
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Home Depot (NYSE:HD) has gradually lowered prices across its 3,000+ products since the cap on debit card swipe fees was passed last October. The home improvement retailer has largely managed to maintain its image as the lower priced retailer compared to Lowe’s (NYSE:LOW), and the price cuts should help it better challenge Lowe’s new ‘everyday low pricing’ strategy. The company has successfully lowered its operating costs over the past few quarters through cost cuts and streamlining of its supply-chain. It is on its way to achieve its operating margin target of 10% this year, a year ahead of schedule and has now raised its operating margin target to 12% by 2015.

Our complete analysis for Home Depot’s stock

Home Depot Passes Fee Cap Savings To Customers Through Lower Prices

The Durbin Amendment to the Dodd-Frank Act passed last year capped the price that retailers pay to accept debit card payments. It has helped reduce the interchange fee, which is the third highest operating cost for home improvement retailers like Home Depot, after real estate costs and employee wages. By passing on savings from this cap to customers, Home Depot has lowered the prices of more than 3,000 of its products since last October.

These price cuts are expected to have helped it compete better against Lowe’s ‘everyday low pricing’ strategy. In fact, Home Depot has consistently managed to maintain its image as the lower priced retailer than Lowe’s, even after Lowe’s lowered its prices. Home Depot has also attracted more sales with better promotions and discounts compared to Lowe’s.

On the other hand, Lowe’s disruptive decision to move away from promotions and discounts to ‘Everyday Low Prices’ negatively impacted its sales last quarter, and its comp gap with Home Depot continued to widen. Home Depot has consistently succeeded in improving its margins through cost cuts, unlike Lowe’s which lost margins in 2011.

Efforts To Make Payments Cheaper And Quicker

Home Depot is now trying to further lower the interchange fee by pushing for the same kind of fee cap for credit card payments. Meanwhile, it is also actively looking for alternatives to the traditional credit card payments and recently rolled out PayPal payment capability across its stores. Home Depot has also initiated multiple checkout options to reduce the time customers spend for payment and checkout, with the roll-out of handheld credit card scanners called First Phones as well as faster self-checkout counters.  In addition, customers can have their items scanned by a store employee while they wait in checkout lines; this way they spend less time waiting at registers.

We have a Trefis price estimate of $56 for Home Depot’s stock, 10% ahead of the current market price.

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