Home Depot (NYSE:HD) faced some big challenges in its second quarter, mainly centered around an unusual weather pattern that dampened sales growth in April before sending it spiking in May.
In a conference call with investors this week, the retailer's management team said they were happy with their execution in response to that difficult sales environment. They also provided context for shareholders around Home Depot's main growth opportunities, its profitability challenges, and its optimistic outlook.
Below are a few highlights from that discussion.
Spring came roaring in
As expected, the majority of the seasonal sales we missed in the first quarter were recovered in the second quarter. We also continued to see broad-based strength across the store and in all [sales] geographies.
– CEO Craig Menear
Sales gains sped up to an 8% rate from 4% in the prior quarter. Just as executives had predicted back in May, most of the revenue shortfall from the first quarter simply shifted into this quarter as warmer weather hit key parts of the country.
Management said some categories posted soaring sales due to pent-up demand in the garden division. "Navigating a sudden spike like the one we witnessed in May isn't easy," Menear said, but Home Depot executed well around stocking levels and customer service even as revenue growth beat their targets.
Inflation is becoming a drag
In addition to core commodity inflation, we are now experiencing inflation in other areas. These inflationary pressures come in many forms, including rising raw material costs and transportation costs, along with recently enacted tariffs.
– Executive VP Ted Decker
Home Depot returned to customer traffic growth, with shopper volume rising 2.9% this quarter and increasing 1.1% over the last six months. Its 5% boost in average spending per visit, meanwhile, was partly due to rising prices.
Commodity costs increased for materials like lumber and copper, and the company was able to pass those along to shoppers. Inflation is creeping into other areas now, too, and so investors will want to keep an eye on these trends, since they'll likely add pressure to the retailer's profitability.
Hey, big spender
Today we are redefining big-ticket sales as transactions over $1,000, as they now represent approximately 20 percent of U.S. sales. In the second quarter, transactions over $1,000 were up 10.6 percent compared to the second quarter of fiscal 2017.
The retailer sees its core customers as split between do-it-yourself homeowners and professional contractors. But, as has been the case for several years, the pro segment grew faster than the DIY segment again this quarter. Executives credited a stronger relationship with these high-spending shoppers, whose $1,000-or-higher trips to the store now represent one-fifth of the broader sales base. Home Depot's threshold for what it called "big-ticket" transactions used to be $900, but management raised it to better capture the impact that these pro shoppers are having in sales areas like flooring and appliances.
Getting more optimistic
We continue to expect strong economic growth with the backdrop of a healthy home improvement environment. Homeowners continue to enjoy home price appreciation; and rising wages and low unemployment have driven consumer confidence to record high levels. These trends are all supportive of our business.
– CFO Carol Tome
Executives raised their 2018 outlook slightly and now predict comps will rise by 5.3% rather than the 5% they had initially predicted. That boost doesn't reflect much acceleration growth in the second half of the year, management pointed out, mainly because the prior-year period included more than $600 million in sales related to hurricane rebuilding efforts. Home Depot also believes expenses will slightly outpace revenue to push operating margin down slightly for the year.
Still, executives are bullish about the company's short-term and long-term growth outlooks, and they backed up that optimism by lifting their stock repurchase target to $6 billion in 2018 from their initial goal of $4 billion.
Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: short September 2018 $180 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.