Home Depot (HD 2.18%) has given investors plenty to celebrate in its last few quarterly announcements, including market share gains and steadily rising profitability. Yet the home improvement giant's late-August report contained some warning flags that led management to reduce its outlook for the full year.
Executives said at the time that the downgrade mostly had to do with temporary issues and was not a reflection of a weaker industry or worsening competitive position against peers like Lowe's (LOW 1.11%). Investors will find out if those bullish comments were right when the company posts its fiscal third-quarter results on Tuesday, Nov. 19.
Let's take a closer look.
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Earnings updates
Home Depot's 3% comparable-store sales uptick over the past six months trailed expectations. Growth was closer to 5% in each of the last two fiscal years, after all. Underlying sales gains are better than they appear, though, executives said in late August. An unusually wet month of May combined with lumber price inflation to pressure reported results, they explained. Thus, investors are looking for strong comps numbers on Tuesday that approach the 5% figure that the retailer notched in July.
The financial outlook is a bit more stable, with most investors who follow the stock expecting earnings to inch up to $2.52 per share from $2.51 a year ago. That figure is also pressured by the lumber price spike and by new tariffs on Chinese imports over the past few months. We'll get a good idea of how well Home Depot navigated those pricing challenges by following gross and operating profit margins on Tuesday. These metrics have been climbing for several consecutive years, but they each turned lower last quarter in what might have been just a temporary slump.
Capital returns
The combination of its massive sales footprint and highly efficient business gives management plenty of excess capital that it can direct back to shareholders, and Home Depot likely made aggressive moves in this arena over the last few months.
CEO Craig Menear and his team are expecting to spend at least $2.5 billion on share repurchases in the second half of 2019 to bring annual buybacks up to $5 billion. Look for that spending to help lift per-share earnings this quarter while continuing to support the chain's market-leading returns on invested capital.
An updated outlook
Home Depot executives said last quarter that fundamentals of the industry, including rising home prices and wages, are still pointing to more growth ahead. But their downgraded sales outlook reflected extra caution tied to issues like volatile lumber prices and tariffs.
Investors this week will find out whether management still has the confidence it projected back in August when it said that all the "building blocks of [the] financial model remain in place." The company will make updated comments about the strength of the consumer, but Home Depot will also have to back up any optimistic forecasts by showing acceleration in key trends like customer traffic, sales growth, and gross profit margin.
