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What Home Depot Wants You to Know

By Demitri Kalogeropoulos – Updated Apr 12, 2019 at 5:01PM

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The home-improvement giant explains why sales missed management's expectations this past quarter.

Home Depot (HD -0.62%) recently closed out another solid financial year that saw the home-improvement leader gain market share, boost profitability, and return nearly $15 billion to shareholders in the form of dividends and stock buybacks.

The final few months of 2018 were marked by a rare sales growth underperformance, though, and CEO Craig Menear and his executive team explained the factors behind that miss in a conference call with investors. The management team also provided detail on their short-and-long term outlooks that call for sales to reach as high as $120 billion by 2020.

Here are a few highlights from that presentation to investors.

Check out all our earnings call transcripts.

A customer picks out a piece of lumber.

Image source: Getty Images.

Weather is unpredictable

It was cold, it was snowy, and perhaps worst of all, it was wet. Wet weather delays projects, and this was evidenced in our sales performance in the quarter.
-- Menear

Home Depot's sales rose by 3.2%, which again landed the company ahead of rival Lowe's (LOW 0.56%) during the period. The market leader ended up with 5.2% gains for the year, or a bit more than the 5% growth it had predicted at the start of 2018. However, that final result trailed the 5.5% that management forecast just three months ago.

Executives placed the blame squarely on rainy weather across the country, which delayed larger outdoor construction projects. Sales gains for big-ticket transactions, the company said, grew 4.8% to mark a slowdown from the prior quarter. Customer traffic gains overall slowed to 0.9% from 1.2% in the third quarter. "We did not expect such a wet winter," CFO Carole Tome explained.

Laying the groundwork

As part of our journey to enhance the One Home Depot experience, we are significantly investing in our digital assets to provide a frictionless, interconnected shopping experience.
-- Merchandising executive Ted Decker

Executives were happy with the progress they made moving Home Depot toward a fully multichannel shopping experience this year. Online sales rose 23% in the fourth quarter, and about half of those orders involved a customer picking up the products at a physical store location. The company spent $700 million on projects aimed at improving this interconnected retailing network, on everything from shipping to a redesign of its main website. Investors can expect continued aggressive spending here for several years. Home Depot's fulfilment network, for example, isn't expected to be fully up to speed until fiscal 2022.

Take growth targets with a grain of salt

We use a directionally correct but imperfect model to project our sales growth.
-- Tome

Executives shared details about the main factors they use to determine their annual growth outlook, which relies heavily on the projected strength of the wider economy along with some specific metrics describing the housing industry. There are indications of a flattening of growth in housing, they warned, but management sees plenty of positive trends offsetting that headwind, including robust levels of home equity and an aging stock of homes.

Altogether, this formula suggests Home Depot will boost comps at about a 5% rate in 2019, or roughly even with this past year's result. The forecast assumes modest growth in the economy and the housing industry and some added benefits from the retailer's strategic initiatives. Operating margin should hold steady at about 14.5% of sales, which would yield about $14 billion of cash flow from a sales base of around $112 billion.

Assuming things go roughly to that plan, almost $3 billion of that cash flow will go back into the business, with the remaining $11 billion returning to investors through about $5 billion of stock repurchases and $6 billion of dividend payments.

Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.

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