Investors have pushed the stock of Home Depot (HD -1.77%) far above the return of the wider market in 2020. Even though U.S. economic conditions would normally imply a difficult selling period ahead for the company, Wall Street is more focused on booming demand for home improvement projects. The recessionary pressure from collapsing employment numbers and falling incomes, meanwhile, might only be temporary.
That optimistic reading will be put to the test when the retailer announces its fiscal second-quarter earnings results on Tuesday, Aug. 18. Below, we'll look at a few metrics that will determine whether or not that report is celebrated by Home Depot shareholders.
Market share
Home Depot remained open through the COVID-19 shutdown in the fiscal first quarter, and so its sales growth was strong compared with nonessential retailers like TJX Companies, which posted a 50% revenue slump in the period. The home improvement chain's growth landed at 7.5% in the core U.S. market, in fact, or about double its prior expansion rate.
Image source: Getty Images.
The big question this week is whether that growth rate moderated by much as the wider retail industry reopened in May, June, and July. Investors will also be watching to see if Lowe's (LOW -1.40%) again outgrew its bigger rival after having notched a 12% sales spike in Q1. Lowe's will announce its latest results a day after Home Depot does.
Home Depot hasn't reinstated any financial outlook, but most investors who follow the stock are expecting global sales to rise by about 9% to $33.5 billion.
Multichannel retailing costs
The chain is experiencing elevated costs related to the pandemic, including higher labor and cleaning expenses. Home Depot is also pouring cash into its online fulfillment network, which is operating under unusually high volumes. Almost each day in April, for example, was equivalent to Black Friday levels of demand.
HD Operating Margin (TTM) data by YCharts. TTM = trailing-12-months.
It's not clear yet how these shifts will impact Home Depot's profitability over the next few years. Management had predicted slightly lower operating margin in 2020 before COVID-19 struck, and this week's report will offer the clearest evidence yet on whether investors can expect bigger drops ahead. That key metric fell to 11.6% last quarter compared with 13.6% a year earlier. Home Depot had been steadily pushing profitability up toward 15% of sales before the pandemic began scrambling cost and demand trends.
Cloudy outlook
CEO Craig Menear and his team usually rely on a few crucial economic metrics when they comment on annual growth forecasts. The biggest is gross domestic product, which plunged at an over 30% annual rate in the second quarter. On the other hand, consumer incomes surged in April thanks to economic stimulus measures, before dipping slightly in May and June.
The big swings in these core growth fundamentals likely mean Home Depot will again decline to issue short-term sales and profit guidance for the rest of 2020. But the risks of continued slumping economic trends might have executives sounding unusually cautious about their targets for the next quarters. Yes, the retailer likely just ended one the strongest six-month periods it has seen in years. But there are some good reasons for investors to brace for weaker results at least into early 2021.
