Natural disasters depress sales results for most retailers, but they have the opposite impact on Home Depot's (HD 0.37%) operations. That helps explain why the home improvement giant recently posted its best sales growth result in years. Customers flocked to its stores during rebuilding and recovery efforts in the wake of hurricanes, wildfires, and earthquakes that impacted the U.S. and Mexico during the third quarter.
Here's how the big-picture results stacked up against the prior year :
|
Metric |
Q3 2017 |
Q3 2016 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$25 billion |
$23 billion |
8% |
|
Net income |
$2.2 billion |
$2 billion |
10% |
|
EPS |
$1.84 |
$1.60 |
15% |
Data source: Home Depot. EPS = earnings per share.
What happened this quarter?
Sales growth accelerated from an already strong pace thanks to increased demand around disaster recovery efforts in the U.S and Mexico.
Image source: Getty Images.
Highlights of the quarter included:
- Comparable-store sales gains sped up for the second straight quarter, rising to a 7.9% pace from 6.3% in the second quarter.
- Customer traffic growth edged down to a 2.5% increase from 2.8% last quarter. Yet Home Depot offset that decline by posting a 5% jump in average spending per visit.
- Gross profit margin slipped due to the spike in hurricane-related sales that were less profitable than the company's average sales.
- Operating expenses grew at a slower pace than revenue, leading to an improvement in bottom-line profitability. Operating margin rose to 14.7% from 14.3%.
- Return on invested capital jumped to 32.5% from 29.1%.
- Home Depot's 15% EPS improvement was partly thanks to aggressive stock repurchases that reduced the share count by nearly 5 percentage points. The company is now targeting $8 billion in buyback spending this year, compared to $7 billion in each of the last two years.
What management had to say
Executives said the booming results were driven by dramatic weather events that generated elevated demand for home improvement materials. Yet Home Depot's core operations performed well, too. "Though this quarter was marked by an unprecedented number of natural disasters, including multiple hurricanes, wildfires in the West, and earthquakes in Mexico," CEO Craig Menear said in a press release, "the underlying health of our core business remains solid."
The hurricane sales reduced operating profit slightly, management explained, but allowed the retailer to contribute to the recovery efforts. "I am proud of our team and suppliers for their extraordinary efforts to support those in the path of the various natural disasters throughout the quarter," Menear said. "Our support of the impacted communities continues."
Looking forward
Menear and his team raised their full-year growth outlook for the second time this year -- and by a wide margin. They now project comps rising 6.5%, up from the 5.5% they targeted last quarter and the 4.6% gain they had estimated at the beginning of the fiscal year. By comparison, Home Depot's comps were up 5.6% in fiscal 2016. Earnings should improve by 14% rather than the 13% they predicted three months ago, management said, thanks in part to $8 billion of stock buyback spending.
Rival Lowe's (LOW 1.10%) will report its results in a few days, and that announcement should show whether the company has stopped ceding market share to Home Depot. The fact that customer traffic growth slowed this quarter leaves open that possibility, given that Lowe's announced a plan back in August to boost traffic at the expense of operating profit.
Yet, considering Home Depot's healthy sales and profit growth, it's likely that both retailers enjoyed large, but temporary, boosts from natural disasters in the third quarter while their core businesses continued along the same path that's included steady market share gains for the industry leader.
