Investors are optimistic heading into the fourth-quarter earnings announcement from Home Depot (HD 1.35%). The economy is growing at a solid clip, and key industry metrics such as home prices and the average age of housing stock suggest more sales gains ahead for this massive retailer.
With that big picture in mind, let's look at what investors can expect to hear from Home Depot next week, when management closes out fiscal 2019 and issues a fresh outlook for the new year.
The third time's a charm?
Home Depot missed management's growth targets in each of the last two quarters, and that raises the stakes on the upcoming report. CEO Craig Menear said back in late November that the slump was mainly tied to temporary issues such as falling lumber prices, and not due to any worsening of demand trends. In fact, the retailer's mid-2019 expansion pace was healthy after adjusting for these challenges.
Executives expressed confidence that growth would pick back up in the fourth quarter so that comparable-store sales will land at roughly 3.5% for the full year. Since then, though, Target (NYSE: TGT) and a few other major retailers have warned that consumer spending gains slowed over the holiday shopping season. Home Depot's business isn't as exposed to that holiday peak, but the company might still have been affected if shoppers decided to scale back on retailing trips over the last few months.
The consumer retailing chain reported a rare profitability drop last quarter as operating income rose by 2%, or about half the rate of sales growth. The challenge was partly driven by lower gross margins, which were affected by lumber price changes. Yet Home Depot also saw higher spending across the board. Net earnings are flat through the first nine months of the year, while sales are up 3.3%.
The profit outlook isn't expected to brighten in the fourth quarter. Most investors who follow the stock are targeting earnings of $2.11 per share, down from $2.25 per share a year ago. That should result in annual profits rising about 3% overall, to just over $10 per share. Investors can't expect a quick return to profitability growth, either, since Home Depot is projecting another heavy year of spending in 2020.
Management will comment on the general strength of the home improvement industry on Tuesday while also making any appropriate updates to their initial 2020 outlook. As it stands today, that prediction calls for comps of between 3.5% and 4% and an operating margin that ticks down to 14% of sales from about 14.5%. The low end of that growth forecast leaves the door open for a potential second straight year of slowing sales gains, even as Home Depot sets another revenue record.
As for earnings, Menear and his team believe their elevated spending pace will begin to slow after 2020, at which point investors might start seeing more robust returns, including higher dividends. That bright outlook will depend on continued strength in the housing market and the broader economies of the U.S., Mexico, and Canada.