The fate of Home Depot (HD 1.38%) and the overall home improvement industry have been one of the significant surprise outcomes of the pandemic. Sales have surged for Home Depot as folks spending more time at home took on home improvement projects at a blistering pace.
Home Depot thought that trend would slow down considerably in 2022 as consumers left their homes more often. When it reported its first-quarter results on May 17, investors were pleasantly surprised that robust consumer spending persisted.
Home Depot's robust sales persist
In its fiscal first quarter, which ended on May 1, Home Depot's sales totaled $38.9 billion, up by 3.8% from the same quarter last year. This time last year, consumer balance sheets were in better shape after having just received stimulus checks from the government.
It's somewhat surprising then that sales this year surpassed previous year's stimulus-boosted quarter. Ted Decker, CEO and president of Home Depot, said, "The solid performance in the quarter is even more impressive as we were comparing against last year's historic growth and faced a slower start to spring this year."
Home Depot management has often highlighted that one of the most substantial incentives for home improvement spending is rising home values. When home prices are rising, as they are now, consumers view spending on their homes as an investment. When values are falling, consumers view it as an expense.
Further boosting spending at Home Depot is the increasing importance of the home. Folks are now working, exercising, learning, and entertaining there significantly more often than before the outbreak. To accommodate those lifestyle changes, folks have updated their living spaces -- perhaps adding a home office, an entertaining outdoor space, or a gym. Previously, a home office was not necessarily for the vast majority of the population. Now, it's almost a requirement.
The rise in sales boosted Home Depot's profits. It earned an operating profit margin of 15.4% in the quarter ended in March. Management expects the 15.4% operating margin to persist for the rest of the year. In perspective, Home Depot's highest annual operating profit margin in the last decade was 15.2% in its fiscal year, which ended in January 2022.
What this could mean for investors
The quarter's sales were better than management was expecting. Before Q1, Home Depot was forecasting that sales would be flat for 2022. After Q1, Home Depot upgraded the sales growth target to 3% for 2022. That went a long way to assuage investor concerns that Home Depot's sales would abruptly slow down as economies reopen.
Home Depot's stock is down 31% year to date due to the concerns mentioned above. The near term will likely be volatile as consumer behavior evolves from the pandemic's sudden changes. The changes are unprecedented, so there is no telling if spending will return to pre-pandemic habits, maintain patterns developed during the pandemic, or a mixture of both.