Home Depot (HD -1.44%) this past week issued a rare downgrade of its growth outlook. It marked the second straight quarter that the retailer had lowered its 2019 projection, and that miss raised questions for investors about the strength of the home improvement industry.
Executives said in the quarterly announcement that they weren't seeing an industry slowdown and that the downgrade simply reflected a timing issue tied to the projected sales lift from some e-commerce initiatives. CEO Craig Menear and his team went into more detail about their optimism in a conference call with investors, and below are a few highlights from that presentation.
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Solid growth but below expectations
During the third quarter, we saw balanced growth with both transactions and ticket. Comp transactions increased 1.8% during the third quarter, an acceleration from what we saw in the first half of 2019.
-- Executive VP Ted Decker
Home Depot's growth landed at below 4%, which slightly underperformed management's targets but still translated into a strong market share performance. Executives listed a few reasons why they believe their sales momentum is still strong, including the fact that customer traffic sped up, professional contractor spending rose, and e-commerce sales were booming, with 22% gains during the quarter.
Offsetting these successes were a few headwinds, including falling lumber prices and the shift of Black Friday timing on the calendar. Adjusting for that lumber shift, comps would have been almost a full percentage point higher for the full quarter. Likewise, the Black Friday timing shift pushed comps in October to 3.3% when they would have been 4.4%. "We continue to see broad-based growth in our business," Menear said.
The problem
These investments are significant and long-term in nature, and we expect that the momentum we've seen will continue to build. Our rollout is largely on track and we are realizing benefits. It's just taking a little longer than our original assumptions.
-- Menear
Executives expounded on the "timing of certain benefits" that they cited in the press release when explaining why sales growth targets are heading lower again. The issue is mainly tied to upgrading old tech systems to work better with Home Depot's multichannel selling strategy. That shift has temporarily depressed sales from some of the chain's most engaged professional customers, who have to get used to the new system.
The upgrade is also keeping a few key selling options offline for now. As a result, the consumer stock's management team believes only about half of the expected sales benefit they targeted for this year will come in 2019, while the rest will likely occur in early fiscal 2020.
Looking to the fourth quarter
We are thrilled about the upcoming holiday season. Our merchants have worked hard to establish Home Depot as the holiday shopping destination.
-- Decker
Home Depot is now targeting comps of roughly 3.5% for the year, which is about 1.5 percentage points below its original goal and the growth the retailer managed in 2018. About one percentage point of that gap can be explained by falling lumber prices, and the rest apparently is tied to the tech platform upgrade disruption rather than softening demand trends. In fact, while management said rising tariff prices might threaten consumer confidence in general, there's no material downgrade to Home Depot's long-term growth outlook. Investors can expect more detail on that, though, when the retailer holds its annual investor conference on Dec. 11.
