Home Depot Inc Earnings: A Solid Beat on Sales and Profits

Home Depot (HD -0.31%) posted quarterly results this week that topped management's growth forecast by a wide margin. The home improvement retailer also announced a huge boost in both its dividend payout and its stock buyback plans.

Here's how the big-picture operating results stacked up against the prior year period:

Data source: Home Depot financial filings. 

What happened this quarter?

Home Depot benefited from solid industry growth that even caught the executive team by surprise.

Image source: Getty Images.

Highlights of the quarter included:

• Comparable-store sales jumped by 6% to put the company ahead of its full-year growth goal. Comps improved by 5.6% in 2016, on par with the prior year's blockbuster gains and above the 4.9% that management had forecast. That should be enough to easily trounce rival Lowe's (LOW -0.14%) and the 3.5% full-year comps it is expected to report in early March.
• Growth came from an even mix of customer traffic gains and higher average spending per visit, although Home Depot's traffic growth did slow to a 2.9% pace for the year from 4% in 2015.
• E-commerce sales rose at a 19% pace to mark an acceleration from the prior quarter's 17% increase.
• Gross profit margin ticked down to 34% of sales from 34.1% a year ago.
• Home Depot kept a lid on expenses, and operating income jumped 14% to nearly $3 billion.
• Net earnings rose by almost 20% and a shrinking share count boosted that growth pace to 24% on a per-share basis.
• The retailer's $6.45 per share of profit exceeded management's target of $6.33 from three months ago.

What management had to say

Executives were pleased with the full-year performance. "Our focus on providing localized and innovative product selection, improving the interconnected customer experience, and driving productivity resulted in record sales and net earnings for 2016," CEO Craig Menear said in a press release, while citing "a healthy housing market and strong consumer demand."

Home Depot was especially pleased with its success at integrating e-commerce into its retailing strategy. Digital sales represent roughly 6% of the business, and nearly half of those orders involve a customer trip to a physical store location.

Looking forward

Menear and his team forecast sales growth of just under 5% in 2017, which is consistent with management's goal of passing $100 billion of annual revenue by 2018. Earnings should improve at a faster rate since a small decline in gross margin will be offset by higher operating profitability. Home Depot expects its bottom-line profit to rise 10.5% to $7.13 per share.

The retailer aims to return a growing chunk its earnings to shareholders over the coming years. In fact, Home Depot raised its dividend by 29% -- its biggest raise since a 34% spike in 2013 -- to $0.89 per share while also boosting its dividend commitment. The company now aims to return 55% of earnings to investors as dividends, up from the 50% it had targeted over the last few years. Lowe's target payout ratio is just 35%.

Home Depot executives also plan to continue spending aggressively to pare down its outstanding share count. It announced a new $15 billion stock repurchase plan that should proceed at a $5 billion annual pace -- down slightly from the $7 billion management allocated in each of the last two fiscal years.