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This Is Not 2008. Home Depot Stock Is Still a Solid Buy

By Nicholas Rossolillo – Aug 21, 2019 at 9:01AM

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Full-year sales expectations were lowered in the retailer's latest earnings report, but the stock rose anyway.

Trade wars, inverted yield curves, and global economic slowdown ... oh my. The news lately has been dominated by fears of a looming recession, sending some investors to the hills. It's understandable. The memory of the financial crisis and the Great Recession that started in 2008 is still present in many investors' minds.

It may seem surprising then that Home Depot's (HD 0.67%) stock has been so resilient, and actually rose following the release of the company's Q2 2019 report on Tuesday.

The report did show slowing sales and earnings growth. But not because the economy and housing market are facing a crisis spurred by bad subprime mortgage loans. Rather it was likely tied to a normal and healthy pullback in spending by consumers. U.S. consumer spending is still strong, a rock-solid Home Depot e-commerce segment is well-integrated into the business, and this stock still looks like a good pick for investors.

Stable housing and healthy consumers

Home Depot's revenue and earnings per share increased a meager 1% and 4%, respectively, in the second quarter of 2019. That's a slowdown from the 6% sales and 9% earnings increase in the first quarter.

Additionally, management lowered its guidance for full-year 2019 sales, expecting a 2.3% increase versus the 3.3% increase it had previously announced. The outlook for earnings remained unchanged, with a forecast for a 3.1% year-over-year increase. There are several reasons for the lowered sales guidance, including a possible negative impact on consumers from U.S. tariffs on goods from Chinese manufacturers as well as falling lumber prices.

A man working inside a house. As holds a level up to a wall, various tools and a dog lay on the floor next to him.

Image source: Getty Images.

Those headwinds notwithstanding, Home Depot is still in solidly positive territory when it comes to comparable-store sales. Comps -- a combination of traffic and average customer ticket size at existing stores -- are a key metric to watch for at an established retailer like Home Depot, as growing sales per location are the primary way the company will generate sales and profit growth. Though comps are down from the mid- to high-single-digit pace set a year ago, Home Depot saw an acceleration in the metric in Q2 as the springtime weather warmed and homeowners got to work on new projects.

Quarter

Overall comps change (YOY)

U.S. comps change (YOY)

Q1 2018

4.2%

3.9%

Q2 2018

8%

8.1%

Q3 2018

4.8%

5.4%

Q4 2018

3.2%

3.7%

Q1 2019

2.5%

3%

Q2 2019

3%

3.1%

YOY-year over year. Data source: Home Depot.

E-commerce investments that keep giving

Management did reduce its full-year 2019 guidance from 5% comparable-store sales growth to 4%, but that still bakes in an acceleration from the reported numbers so far. That implies that, though lumber prices are falling, Home Depot is more than making up for it elsewhere. It's also one of the big reasons the company sees its profits continuing to rise, even if revenue falters. 

Also wrapped up in Home Depot's comps are its online sales strategy, one of the more successful omnichannel strategies out there. During the second-quarter earnings call, CEO Craig Menear said that half of the online orders are picked up at a local Home Depot location, so the company continues to invest in its physical footprint to make visits faster and more convenient.

Years into its omnichannel strategy, the investments are still yielding big results. Online sales grew another 20% in the second quarter over a year ago. Digital price tags on bigger-ticket items in-store have also helped the home improvement retailer make the best use of its personnel, refocusing employees on helping the customer rather than managing inventory.

Simply put, even if the economy is headed for a slowdown, Home Depot is in good shape, its customer base is healthy, and a best-in-class online sales model is in place. Profits are on the rise, and that bottom-line expansion is leading to bigger investor paydays (remember the 32% dividend hike in early 2019?).

This is not 2008. Home Depot stock is worth a look.

Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool has the following options: 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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