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5 Things Home Depot Wants You to Know

By Demitri Kalogeropoulos - Feb 27, 2018 at 9:33AM

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The home improvement leader told investors the secret to its market-thumping growth in fiscal 2017.

Home Depot (HD -0.04%) recently wrapped up a record fiscal year that pushed the home improvement giant past the $100 billion annual sales mark. Following those results, executives held a conference call with Wall Street analysts to put the numbers in context. CEO Craig Menear and his team also outlined why they see more significant growth coming in 2018.

Here are some highlights from the call.

A man installs a new window in a home under renovation

Image source: Getty Images.

Breaking down the growth

Both ticket and transactions grew in the quarter and we saw growth in both pro and [do-it-yourself] categories. We were pleased with the growth of sales to our DIY customers who also gave us a likelihood to shop again score of 86%, up almost 150 basis points from last year.
-- Menear

The retailer outperformed management's fourth-quarter sales targets, which had crept higher throughout 2017. Beginning with a full-year comps forecast of 4.6%, that number was 6.5% as of mid-November. Home Depot credited a mix of increased customer traffic and higher average spending with pushing the actual figure to 6.8% for 2017 to mark an acceleration over the prior year's 4.6% in comparable-sales growth.

Online sales

Online sales grew 21% in the fourth quarter and 21.5% in fiscal 2017, now representing 6.7% of our total sales. While we are seeing significant growth in our online sales, these online shoppers see the relevance of our stores, as approximately 46% of our online U.S. orders are picked up in our store, a testament to the power of our interconnected retail strategy.
-- Menear

The e-commerce segment sped up, too, with sales rising 21.5% for the year compared to a 19% gain in 2016. As a result, digital sales now account for 6.7% of the business versus 5.9% a year ago. Home Depot sees this channel as being complementary to its traditional retailing channel, especially since it drives traffic to its stores without sacrificing overall profitability.

Steady profit margin

Our gross margin was 33.9%, a decline of 12 basis points from last year. We attribute the modest decline in our gross margin primarily to lower-margin hurricane-related sales.
-- CFO Carol Tome

Hurricane rebuilding activities lifted sales growth by just under 2 percentage points, management estimated. But these sales also boosted expenses and tilted toward lower-margin products like generators and wet/dry vacs.

Man with a shopping cart removing a piece of lumber from a store shelf

Image source: Getty Images.

The shift reduced gross profitability slightly, but the full-year figure still met expectations at a healthy 34% of sales. Thanks to discipline on expenses, operating margin was 14.6% -- just ahead of Home Depot's target.

Capital returns

In fiscal 2017, we generated approximately $12.3 billion of cash from the business and used that cash, as well as the proceeds from $3.3 billion of both short- and long-term debt issuances, to invest in the business, repurchase our shares, and pay dividends to our shareholders.
-- Tome

Management had nearly $16 billion of cash to work with last year, split between $12.3 billion of operating cash and $3.3 billion of debt. Its biggest spending priority was stock repurchases, which weighed in at $8 billion. After that came dividends of $4.2 billion, followed by capital investments and acquisitions of just over $2 billion.

Optimistic guidance

The U.S. economy is strong and tax reform is net positive for the housing industry. We expect higher job growth, higher income growth and yes, higher mortgage rates, but with that comes higher home price appreciation and rising housing demand, which should drive home improvement spending.
-- Tome

Home Depot is calling for comps to rise by about 5% in 2018 while operating and gross profit margins both hold steady. That, plus a lower tax rate, should translate into a 28% earnings spike as per-share profit reaches $9.31.

Meanwhile, its capital priorities are shifting away from stock buybacks and toward more aggressive spending on the business. These strategies will mean less direct cash returns for shareholders, but they should support Home Depot's goal of reaching between $115 billion and $120 billion in annual revenue by 2020.

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