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Home Depot Returns to Form With Latest Earnings Report

By Demitri Kalogeropoulos – Feb 26, 2020 at 10:01AM

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The home-improvement giant reported a growth rebound for the fiscal fourth quarter.

Home Depot (HD -2.09%) on Tuesday announced fourth-quarter earnings results that included good news for shareholders. The home improvement giant avoided the late-2019 growth slowdown that pinched many of its retailing peers. And, despite expectations for elevated capital spending over the next few quarters, the chain still sees another year of record sales, profits, and cash returns ahead in 2020.

Let's dive right in and see what else the report had to say.  

A man and a woman painting a room

Image source: Getty Images.

Growth rebounded

Sales gains accelerated to 5% from 4%, which allowed Home Depot to hit management's reduced 2019 guidance. Comps landed right at 3.5% for the year, just as executives predicted back in late November, when they said sales gains would accelerate thanks to help from stabilizing lumber prices and strong consumer demand in general.

That boost stood in contrast to peers such as Walmart and Target, which each reported slowing sales gains during the peak holiday shopping season. Home Depot's management credited several factors for its better showing. "We had a strong finish to the year," CEO Craig Menear said in a press release, "reflect[ing] strength in the core business, solid execution around our holiday events, and the overall health of the consumer."

Profit pinches

The news was more mixed on the financial side of the ledger, as gross and operating profit margins both fell. Part of the decline can be pinned on an extra selling week in the year-ago period. However, Home Depot still ended 2019 with uncharacteristically sluggish earnings gains. Operating income just kept pace with sales growth by rising 2% for the full year. Gross profit expanded at half that rate, mainly due to lumber price deflation.

The company also spent heavily on upgrading its IT systems and adding more offerings to its home delivery and e-commerce portfolio. Executives said the growth initiatives are well worth the extra spending since they're "creating a value proposition that is unique to the marketplace and will extend our leadership position for years to come." Management cited the $9 billion of added annual sales over the last two years as a prime example of the process working.

Looking out to 2020

Home Depot's 2020 outlook assumes that much of the chain's recent positive momentum will carry through to the new year. Sales are projected to rise by between 3.5% and 4%, which leaves the door open for accelerating annual gains following last year's slowdown. Operating profit margin should hold steady at about 14% of sales thanks to another year of elevated spending. That's below the almost 15% rate investors saw in 2018, but it's still far ahead of peers such as Lowe's.

Home Depot's market-leading returns on invested capital should provide plenty of resources for management to direct toward the business and toward shareholders. The chain plans to spend $2.8 billion on capital investments in 2020 while allocating $5 billion to stock repurchase spending. The retailer also raised its dividend 10% to $6 per share. Executives said the move was "a testament to our commitment to create value for our shareholders and a demonstration of confidence in the business going forward." It marked Home Depot's 11th consecutive annual hike since pausing employee raises during the worst of the housing crisis in 2007 through 2009.

Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool owns shares of and recommends Home Depot. The Motley Fool recommends Lowe's and recommends the following options: long January 2021 $120 calls on Home Depot. The Motley Fool has a disclosure policy.

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