Please ensure Javascript is enabled for purposes of website accessibility

Home Depot's 2019 Outlook Takes a Cautious Turn

By Demitri Kalogeropoulos - Updated Aug 20, 2019 at 4:58PM

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

The home improvement leader reduced its sales outlook as its growth rebound came up short.

Home Depot (HD 1.87%) investors had been bracing for some potential bad news in the home improvement giant's second-quarter report. While management in late May predicted a growth rebound following a sluggish start to the year, executives also pointed to a few challenges that could threaten the growth forecast they had laid out for 2019.

On Tuesday, the retailer confirmed that these issues have impacted demand and will likely hurt sales results for the rest of the year.

More on that updated growth forecast in moment. First, here's a look at how Home Depot's business fared in the second quarter.

 Metric

Q2 2019

Q2 2018

Change

Revenue

$30.8 billion

$30.5 billion

1%

Net income

$3.48 billion

$3.51 billion

(1%)

Earnings per share

$3.18

$3.06

4%

Data source: Home Depot financial filings.

What happened with Home Depot this quarter?

Sales growth rebounded after slowing for three consecutive quarters. However, the expansion pace remained well below management's forecast for the full fiscal year. Earnings weakened, too, as customer traffic and average spending metrics softened.

Man with a shopping cart picking up a piece of lumber from a shelf

Image source: Getty Images.

The key highlights of the quarter:

  • Comparable-store sales rose 3% to mark an acceleration over the prior quarter's 2.5% uptick. That result put growth at about 3% so far this year compared to over 5% in each of the last two years.
  • Gross profit margin contracted slightly, dipping to 33.8% of sales from 34% a year ago.
  • Customer traffic was flat and the growth in average order spending was also weaker than investors have seen in recent quarters.
  • Home Depot held the line on operating expenses, but the falling gross profit margin led to a decline in operating income that translated into modestly lower net income. Continued aggressive stock repurchase spending, meanwhile, allowed per-share earnings to rise by 4%. 

What management had to say

Executives said broader industry trends were positive over the last few months. "We are encouraged by the momentum we are seeing from our strategic investments," CEO Craig Menear said in a press release, "and believe that the current health of the U.S. consumer and a stable housing environment continue to support our business." Menear went on to say that the team was "pleased with our results as we delivered accelerating comp performance throughout the quarter."

However, executives noted that lumber prices have fallen significantly over the last few months, and the move is still pressuring sales results.

Newly announced tariffs are also creating a tougher shopping environment for consumers. "As a result," Menear explained, "today we are updating our sales guidance to account primarily for continued lumber price deflation, as well as potential impacts ... arising from recently announced tariffs."

Looking forward

Home Depot lowered its growth forecast and now sees comparable-store sales rising by about 4% rather than the 5% it had projected as recently as late May. The company left its earnings outlook unchanged at a 3% increase.

This marked the first time in several years that investors have seen the home improvement giant reduce its annual comp target. Yet the good news is that the slowdown is mostly due to short-term issues like lumber price volatility and temporary tariff spikes. So far, these challenges aren't threatening the health of the wider industry, which explains why Home Depot still expects to increase its sales and profits this year following a banner 2018.

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
$308.46 (1.87%) $5.65

*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 service.

Stock Advisor Returns
356%
 
S&P 500 Returns
124%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

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.