Home Depot's (NYSE:HD) third-quarter earnings came in below analysts' expectations, even though there was growth across almost all sectors. The company also lowered its 2019 outlook. This disappointed investors, and the stock price fell when the earnings report was released.
But is this indicative of where the company is headed? Management doesn't think so. Company leaders blamed the newly lowered expectations on a miscalculation of how long it would take to roll out new operational developments that, when they kick in, will also kick-start sales.
Too many excuses
Home Depot actually gave a string of reasons for its weaker-than-expected forecast.
- Fiscal 2018 had 53 weeks instead of 2019's 52 weeks.
- Black Friday came earlier in November 2018 than it did in November 2019.
- Lumber prices are tracking lower.
- The company's planned changes are on track, but there was a miscalculation as to how long they would take.
But there are only so many excuses a company can make. Blue chip companies are supposed to be the leaders, paving the way for smaller, less experienced entrants, not peddling excuses for missed forecasting.
What was positive in the earnings report
There were many positive outcomes from Home Depot's third quarter. These are some of the highlights:
- Third-quarter sales increased 3.5%.
- Comp sales were up 3.6%.
- Online sales were up 22%.
- Appliances, indoor garden, decor and storage, hardware, tools, outdoor garden, paint, and plumbing comps came in better than average. All other departments besides electrical and lumber were positive, although below average.
- One-day delivery reached 20% more of the U.S. population.
The earnings report showed a mixed quarter. While disappointing, it was not acutely negative.
Despite the disappointing report and the apologies, Home Depot certainly has what it takes to get back on track. The company holds a forward-thinking attitude, and it's confident that with some time, it will be able to report more stellar numbers.
CEO Craig Menear said:
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.
Investing in itself
So what is this complicated investment that Home Depot is rolling out? And why is it taking longer than expected to happen?
In December of 2017, the company introduced the One Home Depot strategy, which was meant to interconnect the physical and digital spaces and create a seamless experience for customers. Part of that is enhancing online functionality and options. Home Depot is investing $1.2 billion in the program to enable same-day and next-day delivery for 90% of customers, including big-ticket items.
Menear described it as a "foundational IT work stream supporting many of our strategic initiatives that will significantly enhance our ability to serve our customers in an interconnected way. Much of this IT work requires unwinding our legacy systems and that has proven to be more complex than originally anticipated." An important element of the change is "enhancing features, functionality and category presentations on our website."
In other words, the company is updating its computerized systems to support interconnected channels. Since part of that entails an overhaul of what's already in place, it's proving to be more complicated than the company had envisioned.
He said that while the website update is moving right along, some of the "additional elements of personalization and functionality for our larger Pro customers" are taking longer to complete.
The company has also invested heavily in its physical stores, with more than 60% being remodeled, resulting in higher customer satisfaction scores.
Strengths are getting stronger
Home improvement is an area that still has a very strong physical presence, unlike other retail sectors that are moving more tangibly into digital, such as apparel and electronics. Customers like to see the products before they buy them, and there is a strong interplay between the online venue, where many customers will turn to do their initial research, and the brick-and-mortar store, where the customer is more likely to finish the sale.
Home Depot is working to synergize its various parts to give the customer a more complete experience. The company's website sales continue to grow, with a 22% increase for the third quarter, and half of those orders were picked up in a store.
One of the more advanced features the company offers at 1,300 of its stores is lockers, where customers easily can pick up goods bought online. They're proving popular; 95% of users give the system a five-star rating.
While the stock price decreased on the third-quarter earnings news, we can expect to see a turnaround as the investment yields higher sales and pays for itself.