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3 Takeaways from Home Depot's Solid Q3

By Demitri Kalogeropoulos - Nov 19, 2020 at 12:15PM

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Growth isn't slowing heading into the final weeks of the fiscal year.

It's not easy for a $110 billion business to consistently grow at an over 20% pace, but Home Depot ( HD -1.47% ) has stepped up to that challenge. The retailer recently announced a second straight quarter of booming sales gains as pandemic-influenced consumers poured cash into their homes.

Home Depot had some good financial news for investors, too, as part of its third-quarter earnings release.

Let's take a closer look.

Sales spike

There was no discernible slowdown in home improvement demand as the COVID-19 pandemic stretched on. In the three months that ended in early November, comparable-store sales jumped 25% in the core U.S. market, matching the second-quarter mark that ran through early August.

Man and woman paint a room together.

Image source: Getty Images.

The details of the growth are slightly different than other national retailers' gains. While companies like Walmart and Target are seeing declining traffic levels and soaring average spending, Home Depot is posting gains on both metrics. Traffic was up 13%, in fact, even as average spending jumped 10% to $73. "The third quarter was another exceptional quarter," CEO Craig Menear said in a press release, as he highlighted the fact that the chain has added $15 billion, or 18%, to its sales base over the past nine months.

Finances are strong

Home Depot is facing extra competition as its industry niche expands, both from traditional peers like Lowe's and e-commerce specialists like Wayfair. The market share battle isn't stressing the chain's finances, though.

Gross profit margin ticked down to 34.1% of sales from 34.5%, but selling expenses fell as a proportion of revenue. These trends allowed operating income to grow at the same pace as overall sales, translating into a steady 14.5% operating margin. Home Depot has generated $10 billion of net income since the start of 2020, compared to $8.8 billion in the prior-year period. Operating cash flow is up by almost $7 billion, too, which helps explain why management recently decided to make its largest acquisition in years.

Home Depot is seeing rising costs in areas like labor and in keeping the supply chain humming through the additional sales volume. These expenses are worthwhile, executives say, despite the pressure they put on profits. "We continue to lean into these investments because we believe they are critical in enabling market share growth in any economic environment," Menear said.

Looking ahead to the holidays

Home Depot spent nothing on stock buybacks for a second straight quarter, which suggests management still sees reasons to be conservative with its capital. While sales have been soaring, economic growth could stay sluggish into 2021 thanks to elevated unemployment and continued pandemic outbreaks.

But for now, the retailer is capitalizing on intense demand spikes that continued even as financial stimulus measures were reduced and despite a flood of e-commerce competition in the home improvement and home furnishings niches. Those wins suggest investors can have confidence that Home Depot will thrive through the next phase of the pandemic, even if that period brings a sharp sales pullback at some point over the next few quarters.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$410.07 (-1.47%) $-6.11
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$255.76 (-0.45%) $-1.15

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