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Why Home Depot Stopped Buying Back Its Stock

By Demitri Kalogeropoulos – Aug 21, 2020 at 12:00PM

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The home improvement chain is staying cautious about cash despite surging profits in Q2.

People have been pouring cash into their homes since the start of the coronavirus pandemic, and Home Depot (HD 0.28%) is benefiting from that unusually strong selling environment. The retailer revealed double-digit increases in both customer traffic and average spending per visit, in fact, to push sales higher by 23% in the second quarter.

In a conference call with Wall Street analysts, CEO Craig Menear and his team broke down the key factors influencing that growth rate while aiming to tamper investors' expectations for the rest of 2020.

Let's look at a few highlights from that presentation.

A man installs tiling

Image source: Getty Images.

A new way to shop

Customers are consolidating the number of retailers they visit and are blending the physical and digital elements of the shopping experience more than ever before. As a result, the distinct competitive advantages and overarching benefits of an interconnected "One Home Depot" strategy have never been more relevant.
-- Menear

It is settled Wall Street wisdom by now that the pandemic, plus federal stimulus check income, supported soaring spending in the home furnishings and home improvement niches as consumers scaled back spending in areas like entertainment. Home Depot also noted that shoppers are visiting fewer stores, making fewer trips overall, and concentrating their spending at places that allow for in-store pickup of online orders.

These assets helped sales growth more than triple from quarter to quarter. But Home Depot's increase trailed rival Lowe's (LOW -0.30%) for the second consecutive quarter, with 25% gains falling behind its peer's 35% spike. Executives didn't express any market share concerns, but they noted Home Depot canceled some of its biggest annual promotions in hopes of reducing crowds and promoting social distancing.

Still no stock buybacks

We believe that in this unprecedented environment, it is appropriate for us to maintain a strong liquidity position. During the quarter, we invested approximately $445 million back into our business in the form of capital expenditures, and we repaid approximately $1.75 billion of long-term debt. We also paid $1.6 billion in dividends to our shareholders.
-- CFO Richard McPhail

Home Depot performed no stock buybacks this quarter, choosing instead to repay debt thanks to the unusually shaky consumer economy. That move contributed to a rapidly strengthening financial position, with cash holdings improving to $14 billion compared to $2.5 billion a year ago.

The retailing chain also pushed a few store investment initiatives into fiscal 2021 but remained aggressive in other spending areas. It paid out far more in labor and performance-based wage bonuses while also fitting stores with COVID-19 protective equipment.

No outlook to speak of

We are cautious to extrapolate trends from the first half of the year into a forecast for the remaining of the year, particularly given the tremendous amount of uncertainty we face with regards to the duration and continued impacts of the virus.
-- Menear

Executives closed the chat with one more major way that 2020 is unprecedented when it comes to business trends. Normally, Home Depot would be issuing a bullish forecast after having added $9 billion to its sales base in just the last six months.

But there's no good way to predict where consumer shopping trends go from here. Some of the big question marks include additional COVID-19 outbreaks, volatile unemployment levels, and the uncertain potential for more federal stimulus payments.

Executives are confident that the long-term trends in the industry are strong. But investors shouldn't try to extrapolate the booming demand of the past few months into late 2020 or beyond. That's a prescription for simply holding attractive stocks like Home Depot through the volatility that's likely over the next few quarters.

Demitri 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 and short January 2021 $210 calls on Home Depot. The Motley Fool has a disclosure policy.

Stocks Mentioned

Home Depot Stock Quote
Home Depot
HD
$327.99 (0.28%) $0.92
Lowe's Companies Stock Quote
Lowe's Companies
LOW
$214.84 (-0.30%) $0.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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