Sales have been surging in the past few years for Home Depot (HD 0.79%) as consumers have been paying a lot more attention to the condition of their homes. With the onset of the coronavirus pandemic, the trend was amplified as many were asked to social distance and ended up spending more time at home. This led them to notice things that need to be fixed or improved upon. For others, the home has been substituting for the gym, the office, and the school, and they realized they needed to upgrade existing spaces or add new spaces entirely.
But as vaccinations against the coronavirus have ramped up and social distancing guidelines are being relaxed a bit in the U.S., the factors amplifying the trend are beginning to ease or go away. This return to normalcy could be a headwind for Home Depot as folks have more options on where they can spend their money.
With these factors in mind, when Home Depot reports first-quarter earnings on Tuesday, investors will want to pay close attention to the company's overall revenue growth.
How long will surging sales last?
Revenue for the home improvement retailer increased by 25.1% in the fourth quarter from the same time the previous year. To put that performance into perspective, Home Depot's compounded annual growth rate for sales over the last decade is 6.9%. It's only a matter of time before sales revert closer to the long-run trend, but shareholders would like to ride this wave for as long as possible.
Interestingly, before the start of Home Depot's fiscal year 2020, management guided investors to expect revenue growth of between 3.5% to 4%. Then the coronavirus pandemic happened. Home Depot was deemed an essential retailer and allowed to stay open when other businesses were forced to close their doors. And by the end of 2020, sales grew by 20% for the year.
Elevated sales, therefore, can be primarily attributed to the effects of the pandemic. Still, there is no telling how long these effects will last. That's why when the company reports first-quarter earnings on Tuesday, revenue growth will be what you will want to examine first.
What this could mean for investors
Analysts on Wall Street expect Home Depot to report revenue of $34.17 billion and earnings per share of $2.98, which would be increases of 24.1% and 43.3%, respectively, from last year. Shares of Home Depot are up 19% year to date, as investors believe it can sustain this momentum for at least a little while longer.
The stock is now trading at a trailing 12-month price-to-earnings ratio of 26. That's near the highest it traded for in that metric over the last decade. In other words, the stock is not cheap when compared to its historical average. Still, Home Depot is an efficiently run company that has performed well for a long time. Sometimes, it's better to pay for quality than to look for bargains. Investors looking for a company that can increase their wealth over the long run can add Home Depot to their list of stocks to watch.