Home Depot (NYSE:HD) last week posted third quarter earnings results that sent the stock soaring to fresh all-time highs.
An improving housing market is lifting the business, but management is also making the most of that favorable economic backdrop. Profitability, cash flow, and earnings growth all logged significant third quarter gains.
CEO Craig Menear and his executive team held a conference call with investors to put those results into perspective while issuing fresh guidance on the coming holiday quarter. Here are the key points that management discussed during the call.
Broad retailing gains
In the third quarter, as we saw in the second quarter, we had broad-based growth across our geographies. All three of our U.S. divisions recorded mid to high-single digit [comparable-store sales]. Every region posted positive comps in the quarter as did all of our top 40 markets. -- Menear
Home Depot's growth pace is accelerating, even from the strong base it had set earlier in the year. Comps rose by 7.3% in the U.S., compared to 5.7% last quarter. That's enough to trounce most other national retailers, including industry rival Lowe's (NYSE:LOW), whose comps were 5% over the same time period. Home Depot executives said that its regional sales growth gains are tracking in much closer sync to each other right now. That suggests the housing market rebound is becoming more of a national -- rather than regional -- event.
Our customers are changing the way they shop for our products and services. Our goal is to provide our customers with the convenience and fulfillment options they require. Whether they buy products online through a personal computer, a tablet or their mobile phone, we're enabling them to pick up product in our stores or have products shipped to their home. We're investing in making the process easier and frictionless. -- Menear
E-commerce is an important piece of Home Depot's growth story, which is why the retailer is spending heavily on adding online-focused fulfillment centers. The strategy is paying off: Digital sales rose 25% this quarter and now make up 5.1% of its business.
Despite its bulkier products, the company is beating other retailers in both its online growth rate and in the amount of business that it does online. Target (NYSE:TGT), for example, posted 20% digital sales gains in the quarter. And its online channel, which Target's management has called a critical priority, still accounts for just 2.7% of sales.
We are very pleased with our gross margin performance in the quarter. -- CFO Carol Tome
Home Depot's gross profit margin ticked up to 35% of sales. Higher selling volume helped, as did improvements in the supply chain and a lower level of shrink (lost or stolen merchandise). But operating margin has been on a tear, jumping higher by two percentage points to 14% of sales. That gain put even more distance between Home Depot and retail rivals such as Lowe's and Target:
We now believe that fiscal 2015 sales will grow by approximately 5.7% with comps of approximately 4.9%. Our sales and earnings per share growth guidance is higher than the low end of our previous guidance as it includes our third quarter outperformance and continued momentum in the US. -- Tome
For the third straight time this year, Home Depot raised its full-year sales outlook (Lowe's affirmed its slightly lower 4.25% comps figure while Target issued a conservative forecast). Home Depot's management came into 2015 projecting 3.9% comps growth, but that number has steadily crept up to its current 4.9%.
Customer traffic is the one metric that best shows why executives believe they'll continue their streak of market-thumping growth. Home Depot processed 4.4% more transactions last quarter, up from an already strong 3% traffic gain in the second quarter. "We view our growth in transactions as a positive sign of our continued relevance with our customers," Menear said.
Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.