Please ensure Javascript is enabled for purposes of website accessibility

Home Depot Earnings: What to Watch

By Demitri Kalogeropoulos – Nov 8, 2018 at 8:50AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors have big questions heading into Tuesday's earnings report.

Investors have had many reasons to look forward to Home Depot (HD -1.64%) earnings reports lately. That's because, except for an unusually weak spring selling season, the home improvement giant has generally beaten sales and profit expectations for most of the last two years.

Given rising mortgage rates and slowing industry growth, that track record could be tested when the retailer announces third-quarter results on Tuesday, Nov. 13 and issues an updated outlook for 2018.  

Let's take a closer look at the key metrics to follow.

Customer traffic

Steady market share gains at existing locations are the foundation of Home Depot's growth strategy, since its physical store base is mostly set. The company has had no trouble here in recent years, with comparable-store sales rising 7% in fiscal 2017 compared to the 4% uptick of rival Lowe's Companies (LOW -0.80%). That performance gap has held into 2018, too, as comps jumped 8% in the most recent quarter while Lowe's expanded by 5%.

A cart sitting in a home improvement aisle.

Image source: Getty Images.

Beyond the headline growth number, keep an eye on customer traffic levels, since they'll be the best showcase of Home Depot's broader business strength. Volatile weather patterns have made it tough to get a good read here, as customer traffic slipped by 1% in the first quarter and improved by 3% in the second quarter. The broader six-month result is a 1.1% traffic increase, and Home Depot will need that trend to hold at least modestly positive to stay on track. 

Meanwhile, Lowe's is mounting a direct challenge to Home Depot's industry position that might start showing up in slower sales or reduced profitability. Sure, the two chains have always been in competition, and Home Depot routinely comes out on top in that matchup. However, Lowe's new CEO worked as a top executive for Home Depot over many years, and that history could open the door for more comparable results between the two home improvement giants.

Cash returns

Investors should see signs of aggressive stock buybacks this quarter after Home Depot hiked its 2018 repurchase plan to $6 billion from $4 billion. The move fits a familiar pattern for the retailer, which has directed $15 billion toward that cash return channel over the last two fiscal years compared to initial plans for $10 billion of spending.

The stock spending helps per-share earnings rise and also tends to lift Home Depot's return on invested capital, which is one of the highest in the market. And given the stock's flat performance so far this year, it's likely management found many opportunities to reduce the retailer's outstanding share count over the last few months.

Updated outlook

Home Depot's last official outlook called for sales to rise by 5.3%, or a bit more than the 5% that it had initially predicted. "We continue to expect strong economic growth," CFO Carol Tome told investors in a conference call in August, "with the backdrop of a healthy home improvement environment." Management pointed to several economic metrics that were supporting the industry, including home prices, wages, unemployment, and consumer confidence.  

Since that outlook was issued, several homebuilders have noted slowing sales growth, in part thanks to rising mortgage rates. Broader trends like unemployment and wages, meanwhile, have held up well. We'll find out on Tuesday whether those shifting trends combined to lift, or lower, Home Depot's outlook for the remainder of fiscal 2018.

Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: short February 2019 $185 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$266.51 (-1.64%) $-4.43
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$186.63 (-0.80%) $-1.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.