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Home Depot Inc Earnings Soar on Customer Traffic Gains

By Demitri Kalogeropoulos - May 18, 2016 at 11:26AM

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The home-improvement giant turned in another market-leading performance in Q1.

Home-improvement titan Home Depot (HD -0.46%) posted first-quarter earnings results this week that showed just how much stronger its business is than that of many national retailers. Sales, earnings, and profitability all spiked higher, trouncing expectations for the fifth straight quarter, and providing a stark contrast with recent results from struggling chains like Macy's and Nordstrom.

Here's how the big-picture results stacked up against the prior year:

Metric 

Q1 2016 Actuals

Q1 2015 Actuals

Growth (YOY)

Revenue

$22.8 billion

$21 billion

9%

Net income

$1.8 billion

$1.6 billion

14%

EPS

$1.45

$1.22

19%

YOY = year over year. Data source: Home Depot's financial filings.

What happened this quarter?

Sales at existing U.S. locations bounced 7.4% higher -- on top of a 7.1% jump in the prior-year period, beating management's expectations. In contrast, Macy's Q1 comps shrunk by 6% and Nordstrom's fell 2%. Home Depot is outpacing these retailers, in part thanks to a stronger e-commerce business.

Other highlights of the quarter include:

  • Customer traffic rose by 4% and average spending per transaction improved by 2% to reach $60. Together, those positive trends pushed sales per square foot higher by nearly 7% (a slight deceleration from the 8% jump in Q4).
  • Gross profit margin held steady at 34% of sales, but slow growth in expenses produced a 19% spike in operating income. Operating margin jumped to 14% of sales from 12% a year ago.
  • Despite higher interest costs from a growing debt balance, net income rose 14% and pushed net margin up to 7.9% of sales from 7.5%.
  • Management's spending on stock buybacks lowered the outstanding share count by 4%, which contributed to the retailer's 19% spike in earnings per share.

What management had to say

Home Depot outperformed executives' target for Q1. "We were pleased with our stronger than expected start to the year," CEO Craig Menear said in a press release. As he did in the prior quarter, Menear noted that sales gains occurred across the company's home-improvement lines.

The market-thumping comps improvement was "driven by solid execution and broad-based growth across the store," Menear said. "This was made possible by our hard working associates and their continued dedication to our customers in a quarter marked by week-to-week demand spikes caused by weather variability."

Looking forward

A steady, long-running rebound in the housing market is giving the company confidence that it can keep up this strong momentum. In fact, Home Depot raised its sales growth forecast to 4.9%, compared to the 4.1% uptick it had projected in late February. That would be an impressive result, especially coming off the prior two years of above-5% comps.

Home Depot hiked its earnings forecast as well, and sees profits rising 15% to $6.27 per share -- up from the prior outlook of $6.15 per share. The good news for income investors is that, because the retailer aims to deliver 50% of profits as dividends, they can look forward to another double-digit payout hike next year. Home Depot boosted its dividend by 17% this year, by 26% in 2015, and by 21% in 2014.

HD Operating Margin (TTM) Chart

HD Operating Margin (TTM) data by YCharts.

Looking further out, the company is right on pace to reach its target return on invested capital of 35% by the end of 2018 while at the same time pushing its operating margin deeper into double digits. These improving efficiency figures are widening the gap between Home Depot and many other retailers, including rival home-improvement specialist Lowe's.

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