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Home Depot Earnings: What to Watch

By Demitri Kalogeropoulos - Updated May 11, 2018 at 4:15PM

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Investors have big questions heading into the retailer's earnings report next week.

Fresh from its first $100 billion sales year ever, Home Depot (HD 2.75%) is set to kick off fiscal 2018 with more positive news for shareholders. The home improvement retailer's first-quarter results, due out on May 15, likely benefited from U.S. economic growth and more market share gains that were just slightly offset by challenges like increased competition and higher mortgage rates.

Let's look at what investors can expect from this report.

A customer picks out a piece of lumber.

Image source: Getty Images.

Market-leading growth

Unlike rival Lowe's (LOW 3.69%), Home Depot is done expanding its store base, and so its comparable-store sales metric, describing sales at existing locations, is the key growth figure to follow. That rate is expected to slow to about 5% in 2018 from last year's scorching 7% result. But management may update that target on Tuesday to reflect the latest demand trends. Lowe's current forecast calls for a more modest 3.5% comps improvement this year.

Home Depot executives expressed optimism back in February that broader economic trends, including home price appreciation, housing demand, and job growth, should continue pushing the home improvement industry forward. Recent economic news has supported that view, and so it's unlikely that investors will hear about an industry slowdown in this report.

In addition to those broader trends, keep an eye on Home Depot's e-commerce sales. This digital channel is becoming a crucial operating segment, with 22% gains last year. The retailer will need to continue that positive momentum into 2018 if it wants to protect its overall market-thumping growth pace.

Healthy profits

Gross profit margin might see more pressure from hurricane rebuilding efforts, which management predicted would lift sales results (while hurting profitability) at least through the first quarter of 2018. Meanwhile, Home Depot has promised to direct more cash toward growth initiatives like its digital sales channel. Finally, Lowe's has announced a strategic shift aimed at ending its market share slide, with a focus on getting back to customer traffic gains.

LOW Operating Margin (TTM) Chart

LOW operating margin  data by YCharts. (TTM = trailing 12 months).

These issues together could pose a challenge to Home Depot's market-leading profitability. Thus, it would be good news for shareholders if the retailer can defend its nearly 15% operating margin this year even as Lowe's comparable figure stays stuck in the single digits.

Cash returns and outlook

Home Depot's initial 2018 cash-return forecast predicted higher dividend payments but far less spending on stock repurchases, which are slated to fall to $4 billion this year from $8 billion in 2017. However, CEO Craig Menear and his team initially forecast allocating just $5 billion last year toward buybacks before eventually landing on that $8 billion. They also outspent their first 2016 annual target by $2 billion. That's why, if sales and earnings growth stay strong, I'd expect the retailer to boost its cash return plans for a third consecutive year, perhaps as part of its quarterly report on Tuesday.

Home Depot's long-term targets aren't likely to change, though, and the company should continue aiming for an annual revenue base as high as $120 billion by 2020 while operating margin holds steady at roughly 15% of sales. The retailer hopes to take a big step toward that sales result this year as revenue climbs 6.5% to about $107 billion.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$283.00 (2.75%) $7.58
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$182.84 (3.69%) $6.51

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