If you're going to invest in a retailer, then it's imperative that you look at comparable store sales growth.
Comparable store growth measures sales at stores that have been open at least one year. By negating sales at stores open within the past year, you're better able to determine customer loyalty and demand for a retailer's merchandise.
Comparable store sales are a better measurement than revenue growth because the latter can be deceiving. For instance, if Home Depot (NYSE:HD) were struggling and it wanted to show top-line growth in order to excite investors, then Home Depot could simply open new stores. This would lead to more sales, which would then drive the top line higher.
The good news and the bad news
Today's economy features a hesitant consumer. Therefore, it's difficult to find retailers that are capable of showing comparable store growth. Fortunately, Home Depot fits into this category, and this story goes deeper than you might realize. But let's start with the basics.
In the first quarter, Home Depot delivered comps growth of 2.6% year over year. That's the good news. The bad news is that this wasn't as impressive as the comps growth of 4.3% in the year-ago quarter. But don't be concerned.
First off, positive comps growth is always a plus. Secondly, the year-ago quarter featured Hurricane Sandy, which led to extreme demand for home- improvement items and services. It's difficult for Home Depot to compete with a quarter that featured a once-in-a-generation storm.
Here's the really interesting part of the story. Home Depot's overall comps came in at 2.6%, but despite the super-storm, U.S. comps grew at a 3.3% clip. This number would have been even better if it wasn't up against the year-ago quarter (Hurricane Sandy) and the Northeast hadn't been hit so hard by severe weather this past winter, which kept many consumers from making trips to the store.
What drove that domestic 3.3% growth? Comps almost doubled in the West and South -- regions not hit by severe winter weather. This tells us that if the Northeast hadn't suffered severe winter weather, it's likely that domestic comps would have been superb. What about Lowe's (NYSE:LOW)? Did it also manage to show comps growth in a quarter hit with severe winter weather?
Lowe's reported a first-quarter comps gain of 0.9%. Robert A. Niblock, Lowe's chairman, president, and CEO, also noted difficulty due to severe winter weather:
We executed well during the quarter, despite an unexpectedly prolonged winter in many areas of the country. While poor weather dampened traffic and negatively affected performance of exterior categories, results for indoor categories were solid. We effectively aligned inventory, staffing[,] and marketing resources by climatic zone to best serve customers' needs.
Home Depot and Lowe's were both able to show comps growth despite a difficult atmospheric environment but for different reasons. On Home Depot's first-quarter conference call, Carol Tome, Home Depot's executive vice president and chief financial officer, noted that harsh winter weather challenged the supply chain but that the team did a great job of managing those challenges. She stated the following: "While some companies experienced deleverage from their supply chain costs in the first quarter, we did not."
And while Lowe's didn't deliver as much comps growth as Home Depot, it was wise to call an audible and begin selling merchandise in the Northeast that would help people better deal with the harsh winter. Despite this impressive maneuver, Home Depot still outperformed Lowe's. Therefore, let's keep the focus on Home Depot.
Comps growth everywhere
For overall comps, Home Depot showed growth in February (2.2%), March (3.8%), and April (2%). Domestically, Home Depot also showed growth in February (2.8%), March (4.6%), and April (2.8%). April would have been 200 basis points higher if not for the timing of Easter.
Looking at a much bigger picture, Home Depot has delivered four consecutive years of comps growth. And if you look internationally, then you're still likely to be impressed. In Canada, Home Depot has shown positive comps for two consecutive years. And in Mexico, Home Depot has delivered positive comps growth every quarter since 2003.
Worried about the future? Not need to worry. Home Depot expects fiscal-year comps growth of 4.6%. This is to go along with an expected return on invested capital of 24%, sales growth of 4.8%, and diluted earnings-per-share growth of 70 basis points to $4.42.
The bottom line
Home Depot has consistently delivered on one of the most important key metrics in retail investing: comparable store sales. This simple fact makes Home Depot worthy of a closer look by Foolish investors.
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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.