There were a few unwelcome surprises in Home Depot's (NYSE:HD) recent earnings report. Sales growth slowed sharply in the retailer's first quarter and customer traffic turned negative. Profitability dipped, too, thanks to elevated spending in the online sales channel.
Yet the bad news was limited to just one area of the business, executives said in a conference call with analysts. Below are a few key quotes from the management team that explain why they think the weak first quarter won't threaten their short- or long-term outlooks.
Spring weather was delayed
The extreme winter weather in the quarter had a negative impact on our garden categories, which historically represent around 15 to 20 percent of our first quarter sales. Our garden departments had negative [comparable-store sales] in the quarter, driven by softness in chemicals, fertilizer, mulch, and live goods, just to name a few.
-- VP Ted Decker
Colder weather stuck around longer this year than it did in 2017, and that factor pushed demand down in Home Depot's garden department. The winter impact also showed up in the retailer's regional sales, as its northern division posted flat comparable-store sales while its other geographies expanded. "A delay in the spring selling season is not without its challenges," CEO Craig Menear explained.
Excluding our seasonal business, sales exceeded our expectations.
Yet after stripping out the garden business, customer traffic would have risen in the quarter rather than declining 1.3%. Executives noted strength in non-seasonal product categories such as its professional business, interior projects, and maintenance and repair.
Management also explained that in past years that included unusually long winters, sales that would have typically occurred in the first quarter just moved into the second quarter. Trends during the first few weeks of May appear to be following that pattern. "As spring has finally arrived throughout the U.S. and Canada," Menear said, "we're seeing strong customer demand."
Our interconnected retail strategy continues to resonate with our customers.
Online sales grew 20%, or at about the same solid pace as over the holiday season period. Home Depot continues to pour resources into improving and expanding its digital offerings, which is reducing profitability while strengthening this important channel.
For example, customers in many markets can now easily opt for installation services while purchasing a faucet online.
For its professional clients, the retailer shortened its fulfillment times in many instances to same-day car and van delivery. Improvements to the website and Home Depot app yielded a significant boost in sales conversion rates, too.
Demand has raced back
While spring was a reluctant bride, she has arrived and our stores have the inventory necessary to meet demand, which is a good thing, as month to date, for the company, our May comp sales are double digit positive.
-- CFO Carol Tome
The bounce in demand that executives have seen over the last few weeks has been substantial, and the spike gave management enough confidence to confirm their full-year outlook. Comparable-store sales are still expected to rise by 5% in 2018 to mark just a slight slowdown from last year's 7% increase. Earnings, which will be boosted by tax reform, are on pace to jump 28% to $9.31 per share.
The new accounting standard will not affect our earnings per share guidance, but it will impact sales growth and the gross margin and expense growth factor guidance we gave at the beginning of the year.
Home Depot adopted a new accounting standard that impacted reported sales and expenses. And while the shift will result in higher operating expenses, executives said it won't materially change its long-term sales and profitability targets.
Assuming no sharp downturn in the housing industry, the retailer should achieve annual sales as high as $120 billion in 2020, up from $100 billion last year, as its market-thumping operating margin holds steady at 14% of sales.
Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.