Home Depot Has Good News for Investors

Sales growth slowed at the end of 2018, but executives projected another year of record results ahead.

Demitrios Kalogeropoulos
Demitrios Kalogeropoulos
Feb 26, 2019 at 9:19AM
Consumer Goods

Home Depot (NYSE:HD) this week announced double-digit sales growth and a huge spike in earnings for the fiscal fourth quarter. The retailer's headline numbers were positively impacted by some unusual factors, including a longer selling period and sharply reduced taxes. However, the home improvement giant's underlying business trends remained strong and gave management the confidence to project more solid growth in the year ahead.

Here's a look at the big-picture metrics:

 Metric

Q4 2018

Q4 2017

Year-Over-Year Growth

Revenue

$26.5 billion

$23.9 billion

11%

Net income

$2.3 billion

$1.8 billion

32%

Earnings per share

$2.10

$1.53

37%

Data source: Home Depot's financial filings. 

What happened this quarter?

Sales growth slowed for the second straight quarter, after accounting for the extra selling week in this year's period compared to the prior year. On the bottom line, rising operating expenses were more than offset by a plunging tax rate.

An empty cart sits in the aisle at a home improvement store.

Image source: Getty Images.

The key highlights of the quarter:

  • Comparable-store sales gains decelerated to 3.2% from 4.8% last quarter and 8% in the fiscal second quarter. That slowdown resulted in a 5.2% increase for the full year, which was ahead of management's initial 5% target but slightly behind the 5.5% executives projected in mid-November. Customer traffic gains ended up at 2.7% for the year while average spending improved by 4.2%
  • Gross profit margin improved slightly but two other factors offset those gains to send operating income lower as a percentage of sales. First, Home Depot took a $247 million charge tied to recent acquisitions. Second, selling expenses rose 11% as the retailer invested more cash in building out its online infrastructure. These issues sent operating margin to 14.4% of sales, down slightly from last year's 14.5%.
  • Tax expenses dove to $769 million from $1.2 billion a year ago. Home Depot also spent aggressively on stock repurchases. These trends resulted in a 32% boost in net income and a 27% spike in earnings per share. 

What management had to say

Executives didn't directly address the growth slowdown in their initial comments, focusing instead on the big-picture wins the retailer notched in 2018. "We achieved record sales and net earnings," CEO Craig Menear said in a press release, "while making great progress on the strategic investments we laid out in December of 2017."

"We focused on enhancing the interconnected retail experience for our customers," Menear continued, "providing localized and innovative product, and delivering best in class productivity."

Check out the latest Home Depot earnings call transcript.

Looking forward

Home Depot's management team sees generally healthy consumer trends supporting another year of growth, with comparable-store sales gains projected to reach 5%. Other clues to the retailer's confidence include a 32% boost in the quarterly dividend payout and a newly authorized $15 billion share repurchase plan. Executives affirmed a medium-term outlook that sees sales rising to between $115 billion and $120 billion by 2020.

The company is only projecting to spend $5 billion on stock buybacks in 2019 to mark a sharp decrease from the almost $10 billion it directed toward that return channel last year. More cash instead will flow toward growth projects, including the launch of three new stores and added fulfillment capabilities. Together, these initiatives are set to push capital spending up to $2.7 billion from $2.4 billion last year and $1.9 billion in 2017.