Sales surged for Home Depot (HD 0.74%) at the pandemic's onset. Folks took on home improvement projects at a blistering pace after the outbreak forced people to work, learn, and entertain themselves at home. Suddenly, houses needed to adapt to fit the changes in people's lifestyles.
Since the economic reopening started gaining momentum in 2021, Home Depot has been expecting sales to moderate. For fiscal 2022, management had forecast sales to remain flat for the year. However, consumer demand for home improvement has remained resilient, leading Home Depot to raise its sales outlook for the rest of 2022.
The good news has some investors are asking if Home Depot stock is a buy as a result. Let's take a look.
Image source: Getty Images.
Sales have improved, but there's a catch
Indeed, Home Depot said it now expects sales to increase by 3% in its 2022 fiscal year. That was up from the previous guidance of flat to slightly positive growth for the year. The optimism comes after Home Depot observed better-than-expected sales results in its first quarter that ended on May 1.
In that quarter, revenue increased by 3.8% from the same quarter in the prior year. Recall that Home Depot's sales jumped by 32.7% in Q1 of 2021, so growing 3.8% on top of that tough comparison pleasantly surprised management. That said, investors need to know the reason for the boost in sales this year.
HD Revenue (Quarterly YoY Growth) data by YCharts.
Sales jumped primarily because of inflation. Home Depot Executive Vice President Jeff Kinnaird said as much in the company's conference call that follows its earnings release:
"During the first quarter, our comp [comparative store] average ticket increased 11.2 percent, and comp transactions decreased 8.4 percent. The growth in our comp average ticket was driven primarily by inflation across several product categories as well as demand for new and innovative products."
In other words, people are buying less stuff, but they are paying more for what they are purchasing. This is not necessarily a bad thing for Home Depot. On the contrary, it can be positive if the higher sales come without sacrificing profit margins. In the quarter just ended, gross profit margin and operating profit margin fell by 20 basis points from the same quarter in the prior year.
The fall in margins does highlight the difference between an increase in sales due to rising demand and an increase in sales due to passing along inflation. Typically, when sales increase, it leverages Home Depot's fixed costs and delivers profit margin expansion. For instance, Home Depot's sales increased from $75 billion to $151 billion in the previous decade. Meanwhile, its operating profit margin expanded from 10.4% to 15.2% in that same time.
HD Revenue (Annual) data by YCharts.
The real reasons to Home Depot's stock
There are plenty of good reasons to buy Home Depot stock. It has increased sales, expanded margins, and boosted earnings per share, to name a few. However, the recent increase in its sales outlook should not be the sole reason to buy Home Depot stock. Sure, it's good news that sales are expected to grow more than previously expected, but the reason for the increase offsets the impact.
