Home Depot (HD 0.02%) had the fortune of being deemed an essential retailer at the onset of the pandemic and was allowed to remain open when many businesses were forced to shut down. That, along with a few other factors, including people spending more time at home, led to surging sales growth.
Now, more businesses are reopening, and consumers have a broader choice of places to spend their dollars. Moreover, consumers may have a decreasing amount of income to spend now that the enhanced unemployment benefits have expired, and the number of people who remain jobless is still elevated. Investors will want to look to these three factors in Home Depot's third-quarter earnings release on Nov. 17 to see if those changes negatively affect the company.
Sales are surging for the home-improvement retailer as people spend more time at home. Image source: Home Depot.
Can Home Depot control costs as sales increase?
The first thing investors will want to check is overall sales, that increased 23.4% in the most recent quarter, from a year ago. That growth rate was the highest the company has posted in the past 20 years. Interestingly, there was a hint of deceleration of sales growth in the latter part of the third quarter when CFO Richard McPhail gave a monthly breakdown in the conference call that followed the earnings release: "Our total company comps were positive 23.4% for the quarter, with positive comps of 24.6% in May, 25.7% in June, and 20.4% in July."
Indeed, the consensus estimate on Wall Street is that Home Depot will report $31 billion in sales, which would be a 15% increase from the previous year.
The next thing shareholders will want to consider is Home Depot's increasing labor costs to deal with COVID-19. In the most recent quarter, the company paid $480 million in additional compensation to its employees due to the coronavirus. Over the previous two quarters combined, the company has paid a total of $1.3 billion in additional compensation. If the company can keep its labor expenses under control, it can send a larger portion of surging sales to the bottom line. In the most recent quarter, the company's operating margin stood at 15.9%, which interestingly was lower than the previous year's 16.1%, even though revenue grew substantially. However, overall operating income increased by 24% on a year-over-year basis.
Finally, those interested in Home Depot will want to hear what management has to say about its progress on the $11 billion multi-year One Home Depot program to bolster digital capabilities. Like many other businesses during the pandemic, Home Depot is experiencing exploding digital sales, which were up over 100%. What's even more impressive for Home Depot shareholders is that 60% of those sales were for buy online pick up in-store, which saves the company the costs of shipping the item to a customer's home. That likely is the reason why consensus EPS expectations on Wall Street for this quarter now stands at $2.98, which would be an 18% increase from the prior year.
What this could mean for investors
Home Depot continues to benefit as people are staying home more often due to the pandemic. Moreover, the increase in remote working may be longer-lasting, which will allow the company to serve those customers looking to build and maintain a home office beyond the pandemic. Home Depot invested quickly and heavily to build out its digital capabilities to accommodate the demand surge during the pandemic. Still, those capabilities may bring in customers even after the pandemic has run its course.
Certainly, sales will not continue to grow 20% for very long, but this consumer discretionary stock doesn't need to increase sales that fast to add shareholder value in the long run.
