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Why Home Depot Is Willing to Spend $2.8 Billion On Its Business in 2020

By Demitri Kalogeropoulos - Mar 5, 2020 at 10:30AM

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The home improvement giant is bullish about the housing market.

Home Depot (HD 1.75%) recently finished its fiscal 2019 in an impressive fashion. The home improvement retailer announced its strongest quarterly sales growth rate of the year while winning market share both in its stores and through its massive online selling platform.

In a conference call with Wall Street analysts, CEO Craig Menear and his team discussed the main reasons for that successful holiday period, and why they're optimistic that Home Depot can set further sales and earnings records in 2020. Let's look at some highlights from the call.

A couple painting a room.

Image source: Getty Images.

Putting it in perspective

We grew sales by approximately $3.7 billion in fiscal 2019, a level of growth unmatched in our market. For the year, total company comp[arable] sales increased 3.5% and U.S. comp sales increased 3.8%.
-- CFO Richard McPhail

Home Depot's 5% sales gain for the quarter allowed it to reach the full-year target that management laid out three months ago. Yes, that 3.5% annual increase was well below the initial 5% target the retailer predicted a year ago. Yet it was still impressive given the unforeseen industry challenges, including huge swings in the price of lumber.

Home Depot gained market share, meanwhile, especially in the online business, which grew 20% for the quarter and the year. Rival Lowe's (LOW 1.54%) has noted flat results in this key channel over the last six months. Executives sought to put the growth in perspective by highlighting the fact that Home Depot has added $9 billion to its annual sales base over just the last two years. "Store investments are driving higher customer satisfaction scores," Menear said, "which we believe is translating into market share gains."

Mounting costs

Fiscal 2020 represents the peak year of our investment program. And as a result, we expect our fiscal 2020 operating expenses to grow at 1.2 times the rate of our expected sales growth.
-- McPhail

Home Depot maintained profitability in 2019 as operating margin held at about 14.5% of sales, where it has been for the last three years. Given that stability, investors should brace for a significant change on this score as the margin drops to roughly 14% of sales.

Management said the decline is tied to the investment program that's aimed at dramatically improving the online shopping experience. Home Depot is taking control over more of the fulfillment and delivery process, which is costing more but likely to support higher customer satisfaction. Overall, the consumer discretionary giant plans to spend $2.8 billion on capital improvements in 2020, up from $2.7 billion last year.

Looking ahead

We see an environment that is healthy and stable. Our 2020 sales guidance also assumes that we will continue to gain share in the marketplace.
-- McPhail

Home Depot sees several positive metrics -- including economic growth, home price increases, and the average age of housing stock -- suggesting another record growth year ahead. Comps are expected to rise by between 3.5% and 4%, meaning a likely modest acceleration over last year's result. Lowe's, by comparison, is expecting sales gains of between 3% and 3.5%.

If management is right about the growth strategy, then fiscal 2021 could deliver unusually strong earnings growth as Home Depot simultaneously pulls back on its elevated spending while benefiting from years of investments in its stores and its supply chain. The biggest risk to that optimistic outlook is a sustained break in the positive industry growth that has lifted the retailer's results for the past decade.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$279.08 (1.75%) $4.81
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$177.36 (1.54%) $2.69

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