Please ensure Javascript is enabled for purposes of website accessibility

Home Depot Talks Hurricanes, Fulfillment Costs, and the Housing Market

By Demitri Kalogeropoulos - Nov 15, 2018 at 6:30PM

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

Here are the highlights from the home improvement retailer's latest conference call with investors.

Home Depot (HD 1.75%) is facing a few big impediments to its growth right now, including a slowdown in the homebuilding industry. The home improvement giant is also going up against a prior fiscal year that included hundreds of millions of dollars of sales tied to rebuilding efforts following two hurricanes that impacted large portions of its U.S. and Mexican sales bases.

Yet Home Depot still managed to boost revenue and profitability in the fiscal third quarter at a faster rate than management expected. In a conference call with investors, CEO Craig Menear and his executive team detailed the drivers behind that outperformance and explained why they believe Home Depot is on pace for another record fiscal year.

Below are a few highlights from that discussion.

Hurricanes are impacting growth

Recall that we are lapping almost $300 million of hurricane-related sales from the third quarter of last year. While this quarter brought Hurricanes Florence and Michael, the scope of devastation was more compact from a geographical perspective than what we experienced in prior-year.
-- Menear

Home Depot's sales growth slowed to a 4.8% rate from 8% in the prior quarter. The deceleration became more pronounced as the quarter progressed, too, as comparable-store sales gains started off at 6.7% in August before slipping to 4.1% in September and dropping again to 3.8% in October.

A cart sits in a home improvement aisle.

Image source: Getty Images.

Executives blamed the swings on last year's spike of hurricane-related sales that peaked in October. Stripping out those temporary boosts, overall demand looked strong, with almost all of Home Depot's geographic selling regions growing. Customer traffic trends stayed positive, and average spending per visit benefited from higher demand in the retailer's professional contractor segment.

Margins are falling slightly

Our strong leverage in the core of our business was driven by good expense control but also reflects some year-over-year benefit due to certain hurricane-related expenses that did not repeat this year.
-- CFO Carol Tome 

Investors shouldn't get used to seeing profit margins rise as much as they did this quarter, since most of that gain came from temporary factors like accounting changes. Core profitability instead will likely drop over the next few quarters as the company spends cash on growth initiatives like revamping its supply chain for multichannel retailing.

These moves have put about 95% of the U.S. population within its two-day delivery window, for example, but the retailer is aiming to eventually get at least 90% of the country within a one-day shipping time frame.

The latest industry trends

We now expect fiscal 2018 sales growth of approximately 7.2% and diluted earnings per share of $9.75. We faced the headwinds from last year's storm-related sales in the fourth quarter. But we believe the drivers of home improvement spend are supportive of our business. 
-- Menear

Home Depot raised its top- and bottom-line outlook for the second straight quarter, and executives now project sales will rise by 5.5% rather than by the 5% they initially projected. Economic metrics supporting that optimistic reading include high consumer sentiment, rising wages, and a healthy GDP. These are offset a bit by slowing industry growth for homebuilders and rising mortgage rates.

Overall, the management team is bullish about Home Depot's market position and its finances, and the best indication of that confidence is the fact that executives plan to spend $8 billion this year -- up from last quarter's $6 billion target -- on stock repurchases in 2018. Combined with lower taxes, the boost from this spending should keep per-share earnings surging despite the additional growth investment.

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
$279.08 (1.75%) $4.81

*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
311%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

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.