Home Depot (HD -1.77%) stock has barely kept pace with the market's rally over the last year, even losing ground to peers across the retailing industry. But the home improvement giant has a chance to shift that investing narrative in a few days when it closes out its fiscal 2020 year and issues an outlook for 2021.
Let's look at some key trends to watch in Home Depot's report, set for early on Tuesday, Feb. 23.
Image source: Getty Images.
Fighting off rivals
The pandemic has sped growth in the home improvement and home furnishings niches, and Home Depot wasn't left out of that rally. The chain added $18 billion to its sales footprint over the first nine months of 2020, including with a 23% increase in Q3. "The third quarter was another exceptional quarter," CEO Craig Menear told investors in late November.
But the chain still lost ground to rivals. Wayfair boosted sales by nearly 70% and Lowe's saw a 28% Q3 increase. All three companies will announce earnings this week, so Home Depot's market share results will be judged against these broader industry results.
The good news is that the retailer entered the period with plenty of inventory, giving it a good competitive footing to start the holidays. Most investors who follow the stock are looking for sales to rise by 18% to just over $30 billion.
Market-leading profitability
Home Depot is the clear leader when it comes to profitability. Operating margin held steady at 14.5% of sales last quarter despite extra spending on supply chain, labor, and COVID-19 safety. Lowe's is closing the gap but still far behind. The same goes for Wayfair and Target.
W Operating Margin (TTM) data by YCharts
Look for Home Depot to lead the industry again this week. Management isn't greedily allowing margins to soar, though, choosing instead to reinvest extra profits into the business.
The industry outlook
Home Depot's last update contained lots of good news for shareholders. "Our customers tell us their homes have never been more important," CFO Richard McPhail said in a conference call, "and they intend to continue their investment in the improvement of their homes."
At the same time, COVID-19 outbreaks continued to pressure many of its biggest markets in late 2020 and will play a role in the next few quarters' traffic levels. There's a looming growth slowdown on the way once the pandemic ends, too. CEO Craig Menear even warned investors not to expect 2020's historic sales spike to extend into future years.
Yet the most likely scenario involves solid returns to investors as Home Depot consolidates its hold on the industry while pushing into growing niches like maintenance and supply. Its focus on consumer discretionary products makes it a cyclical business, even though there hasn't been a downturn in more than a decade. Even a slowdown in 2021 won't keep investors from seeing good returns from holding this retailer through those inevitable rallies and contractions.
