Home Depot (HD 1.96%) kicks off its fiscal 2017 year with a first-quarter earnings report slated for release before the market opens on Tuesday, May 16. Here's what investors will be watching for in the announcement.
Unlike rival Lowe's (LOW 2.56%), the home-improvement giant isn't aggressively adding to its store base. In fact, it added just one new location in the U.S. market since 2013. While that puts pressure on existing stores to deliver all of the sales gains, Home Depot has consistently found ways to deliver on this score. Comps improved by over 5% in each of the last three fiscal years.
Executives in late February predicted another year of solid growth in 2017 -- but not at the same meaty pace. Comparable-store sales are forecast to rise 4.6% this year, while Lowe's is targeting a 4.1% increase.
The balance between customer traffic and average spending will be key to watch, since Home Depot's transactions last year increased by just 2.8% compared to 4% in 2015. The retailer made up for that slump by achieving a strong boost in average spending as the professional side of the business grew. Big-ticket purchases by these clients make up about a fifth of all sales, and they spiked 12% last quarter. The pro customers may have an even bigger gap to fill if overall traffic slows again in 2017, though.
Home Depot's profitability has soared over the past few years, with operating income jumping to 14% of sales in 2016 from roughly 5% during the worst of the housing crisis. That's an unusually high number, not only among retailers, but also in the home-improvement industry. Lowe's comparable figure is less than 9%.
Home Depot is targeting 15% operating margin by 2018, so investors will be looking for more improvements on the metric this week. However, the company also needs to invest heavily in its e-commerce sales channel to fend off rising competition from online-only businesses.
Home Depot has met this challenge better than most retailers lately. Its e-commerce segment has risen to 6% of sales, compared to 4% for peers like Costco and Target. The company hasn't yet had to sacrifice profitability in exchange for building one of the biggest online sales presences, and management hopes it can keep that momentum going even as the retailing industry shifts toward e-commerce shopping.
The economic outlook
Both Home Depot and Lowe's are optimistic that economic conditions will support strong industry growth at least for the next few years. Lowe's described a "favorable macroeconomic backdrop for home improvement" in its fourth-quarter release, which nicely describes an industry that's rebounded to $750 billion in annual spending -- up from below $400 billion in early 2010. As impressive as that surge has been, the industry is still well below its $900 billion peak set just before the housing crises hit.
Home Depot last year identified several economic metrics that point to strong gains ahead for home improvement, including home price appreciation, an aging housing stock, and the prospect of surging household formation numbers following almost a decade of below-average growth.
Their latest long-run forecast calls for these trends to help push sales past $100 billion by next year. Also in 2018, Home Depot plans to reach a 15% operating margin and a return on invested capital of at least 35%.