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Why Is Everyone Talking About Home Depot Stock?

By Nicholas Rossolillo – Jun 11, 2020 at 10:23AM

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The home improvement dividend-paying stalwart was exceptionally positioned for the crisis.

The Home Depot (HD -2.71%) has been garnering plenty of attention as of late. Perhaps it's because the stock is up 16.5% so far in 2020 compared with a negative 2.3% return for the S&P 500. That's impressive, as this is already a massive retailer -- and it's even more impressive given that the retail industry overall is in various stages of rebounding from disaster. But not Home Depot.

Because of shelter-in-place orders to combat the spread of the coronavirus, the company was forced to scrap its "Spring Black Friday," an important season for home improvement stores as households spruce up their properties and stock up on what's needed for summer projects. Potentially missing out on one of its busiest events of the year meant trouble, as was reflected by a brief tumble in the company's share price in March and April. But it ultimately was no sweat -- years of investment in e-commerce capabilities equated to a stellar fiscal 2020 first quarter (the three months ended May 3, 2020) for the big-box store, and management reported online traffic was consistently above Black Friday levels (the actual Black Friday in November) in the last three weeks of April.

In fact, the whole home improvement industry has done quite well with so many people stuck at home. According to the U.S. Census Bureau, home improvement retail was up 4.4% through April compared to 2019. In contrast, retail and food service overall is down 4.3% year to date. But Home Depot is faring better than average, posting a 7.5% growth rate in U.S. comparable-store sales last quarter. As far as home improvement stocks go, Home Depot remains ahead of the pack in my book.

Someone sitting on the floor with their dog working on a construction project.

Image source: Getty Images.

Higher sales, higher expenses

It wasn't all rosy, though, at least not from a purely financial standpoint. Total revenue in the first quarter increased 7.1% to $28.3 billion, but earnings per share fell 8.4% from the prior year. Higher interest expense was one reason as Home Depot expanded its short-term credit facility and short-term borrowings (which it has since paid off), not to mention the issuance of $5 billion in new long-term debt at the end of March. Product mix also took a bite out of the bottom line with lower margin cleaning supply sales surging, and home installation taking a big tumble in the weeks leading up to the economic lockdown. Online order fulfillment was growing at a triple-digit rate by the end of April, but pivoting to that many online orders while maintaining social distancing when customers made pick-ups in-store cost some extra coin. 

The other big component will create some goodwill for Home Depot, though. The company took $850 million in charges to pay its employees higher wages and bonuses, in addition to providing additional paid time off (which will get paid out as a bonus at the end of 2020 if unused). All told, though earnings fell from a year ago, that wasn't the case with free cash flow (revenue less cash operating and capital expenses). Free cash flow increased 28% year over year to $5.15 billion. Management said it indefinitely suspended its share repurchase program in March, but the current dividend yield of 2.3% is on solid footing.

A great stay-at-home stock for the long-haul

Home Depot pulled the plug on any financial guidance for its current quarter or full-year fiscal 2020, even though its higher-than-usual growth extended into May. That's prudent given how fast-moving this crisis has been, and there's no word on when share repurchases will return either. 

Nevertheless, as the economy slowly starts to put itself back together in the months ahead, Home Depot has a solid foundation to build on. Retail, particularly any involving home-improvement spending, often takes a serious hit during a recession. This current downturn is by no means normal, but the fact that Home Depot is doing well speaks to the big-box store's resilient customer base, as well as the power of its e-commerce business and investments in flexible order fulfillment. The stay-at-home bump isn't going to last forever, but this retailer is one of the best ones around.

Nicholas Rossolillo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot and recommends the following options: long January 2021 $120 calls on Home Depot and short January 2021 $210 calls on Home Depot. The Motley Fool has a disclosure policy.

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