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The Home Depot, Inc.'s Worst Segment in 2015

By Dan Caplinger - Jan 5, 2016 at 1:34PM

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Like many companies, the home-improvement retailer saw weakness in this one area.

Home-improvement giant Home Depot (HD -0.38%) posted extremely strong returns for shareholder in 2015, climbing almost 30% and proving the resiliency of the U.S. consumer. Even as other economies across the world faltered, the housing market in the U.S. continued to sustain Home Depot's ambitious growth rate objectives. Yet unlike rival Lowe's (LOW 0.35%), Home Depot has store locations abroad. Some of the same factors that helped Home Depot do so well close to home have hampered its efforts to grow abroad, and that's one reason why the retailer's international business was its worst segment in 2015.

Ferreting out the international segment's struggles
Home Depot operates nearly 2,300 stores, and its footprint covers the entire U.S., including possessions and territories like Puerto Rico, Guam, and the U.S. Virgin Islands. The retailer also has stores in Canada and Mexico.

Home Depot isn't crystal clear in revealing its international results on a quarterly basis, but even when you read between the lines, you can see signs that the retailer's stores overseas don't do as well as the rest of the company. For instance, in looking at comparable-store sales throughout the year, Home Depot has consistently reported overall comparable-store sales growth that was slower than the growth rate for U.S. store comps. In the first quarter, U.S. store comps rose 7.1% compared to 6.1% for the company as a whole. In the second quarter, that disparity grew to a percentage point and a half, with the U.S. coming in up 5.7% compared to up 4.2% for the full company. By the third quarter, the gap had widened above 2 full percentage points, with overall comps up 5.1% and U.S. store comps jumping 7.3%.

Dealing with the dollar
Home Depot's conference calls give more color on the international business, and there, the company's upbeat attitude shows that management is pleased with its results. In the third quarter, for instance, CEO Craig Menear noted that the Canadian business has posted 16 consecutive quarters of positive comps in local-currency terms, and the Mexican business climbed at double-digit growth rates in comps, marking the 48th straight quarter of comp gains.

The key thing to hone in on in Home Depot's comments is the reference to local currencies. The strong dollar has had a sizable impact on the business in Canada and Mexico, with the Canadian dollar in particular weakening substantially over the past couple of years. Home Depot said in the third quarter that the strength of the dollar cost it $0.03 per share of earnings. Compared to total earnings of $1.35 per share, that might seem small. But bear in mind that out of Home Depot's $83 billion in sales during fiscal 2015, only $8.5 billion came from outside the U.S., and so on a proportional basis, the dollar's impact on international-segment earnings has been a lot more substantial.

Investing in international
Those headwinds haven't stopped Home Depot from remaining committed to its international business. The company opened three new stores in Mexico during the third quarter, and it has worked on initiatives to widen its reach across the home-improvement market in both Canada and Mexico. It replatformed its website in Canada during the most recent quarter, and it went live last October. In Mexico, Home Depot rolled out its digital commerce site during the first half of 2015, and early results suggest that the offering is gaining steam among customers.

Even though current financial conditions are weighing on Home Depot's international segment doesn't mean it should do anything differently. Once the dollar starts behaving better, Home Depot's efforts outside the U.S. are likely to show up much more prominently in its financial results in the future, and that could give it another key advantage over rival Lowe's in the long run.

Dan Caplinger has no position in any stocks mentioned. 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.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$324.51 (-0.38%) $-1.25
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$216.13 (0.35%) $0.76

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