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Home Depot Earnings Preview: What to Watch

By Demitri Kalogeropoulos – Aug 18, 2019 at 3:30PM

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The retailer announces its second-quarter results on Tuesday.

Investors in Home Depot (HD 0.67%) have good reasons to pay attention to its upcoming earnings report. The home improvement leader's last two announcements added uncertainty to its outlook, with growth slowing to below the pace that management has predicted for the full 2019 year.

On Tuesday, Aug. 20, shareholders will find out whether that outlook was too optimistic or right on point. Below, we'll look at things investors will be watching.

Inside a home improvement store.

Image source: Getty Images.

A growth rebound

Comparable-store sales growth was 2.5% in the fiscal first quarter. That was disappointing because it was only half the rate that management had predicted for the year. It was also surprisingly weak given that CEO Craig Menear and his team had forecast a rebound following a weather-fueled slowdown at the end of 2018.

Investors will be looking for a stronger result for the fiscal second quarter that matches or exceeds the 5% the company logged through 2018. Many projects that were rained out in the winter and early spring may have been completed in the quarter, and that could power an unusually strong growth result.

Cost pressures

Home Depot has a wide enough portfolio that it can weather increased prices on many specific products. Lumber is a special case, though, and spiking costs for that basic material pressured results in the first quarter. Investors saw a few clues to that negative impact, including flat average spending and declining gross profit margin.

Lumber pricing is volatile, so it's likely that cost movements showed up again in this quarter's results. The good news is that, while rising prices would hurt earnings, the impact is likely to be short-term.

Updated outlook

Executives affirmed their 2019 outlook in May, and cited strength in the housing market and the economy as support for that bright forecast. They issued two caveats to that prediction. The first was the lumber price challenge noted above. The second involved tariff increases, which weren't incorporated into their earnings or sales predictions.

On Tuesday we'll learn how these issues have changed over the last few months. More importantly, Home Depot will factor the latest demand trends it's seeing into its official outlook. Today, that prediction calls for sales gains to land at 5%, or roughly even with last year's strong result. Looking further out, executives have predicted that they'll reach $115 billion to $120 billion in annual sales by 2020.

That wide range reflects significant uncertainty about movements in the home improvement industry and the wider economy. But if the retailer still sees key factors like home price appreciation, existing-home turnover, household formation, and the age of the housing stock as supporting the business, then it's likely to affirm its short-term and long-term outlooks. That optimistic heading would keep Home Depot on pace to nearly double its sales in just the 10 years following the post-housing-crisis low in 2010.

Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: short August 2019 $195 calls on Home Depot and long January 2021 $120 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.

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