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May 17, 2022

Home Depot raises forecast on surprise gain in comparable sales

Stan Wong discusses Home Depot vs. Lowe's

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Home Depot Inc. jumped between losses and gains on Tuesday as investors balanced the big-box retailer’s rosier outlook with concerns about inflation and slowing growth in the second half. 

The home-improvement retailer boosted its annual outlook after an unexpected jump in first-quarter same-store sales showed that demand for home-improvement supplies is persisting, even as mortgage rates rise. Some of that increase, however, is due to inflation.  

Home Depot now predicts comparable-sales growth of 3 per cent this year, compared with a prior expectation of “slightly positive” sales growth. It also projects that earnings per share, excluding some items, will rise by mid-single digits after forecasting a low-single-digit increase last quarter.

While Monday’s results were better than expected, enthusiasm was likely tempered by inflation’s pinch as well as pressure on profitability from due to Home Depot’s ongoing investment to improve its supply chain. Unseasonably cold spring weather also crimped sales transactions.

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The shares rose 1.8 per cent at 2:01 p.m. in New York trading. The stock fell earlier in the session, erasing an earlier advance after the company’s earnings call with analysts. It had slumped 29 per cent year-to-date through Monday’s close, about twice the S&P 500’s decline over the same period.

Comments on the call that sales growth would be slower in the second half of the year may have contributed to the reversal, according to Bloomberg Intelligence analyst Drew Reading.

Since Home Depot’s previous earnings report, when disappointing profit margins sent the stock to its biggest drop in almost two years, the Federal Reserve has hiked rates twice, fueling concern that home-financing costs could pressure demand. Home Depot has benefited from a robust US housing market as rising home prices fuel spending on improvement projects. 

 

HOME APPRECIATION

In the earnings call with analysts, Chief Financial Officer Richard McPhail said appreciating home values have helped drive consumer spending despite inflation. “They’ve seen the price appreciation, and they have the means to spend,” he said.

Analysts surveyed by Bloomberg News had predicted same-store sales would decline 2.4 per cent. Instead, that gauge rose 2.2 per cent. Revenue was US$38.9 billion in the first quarter, a 3.8 per cent increase from the year-earlier period. Earnings per share of US$4.09 exceeded analysts’ average estimate.

While inflation remains a concern, first-quarter data show that sticker shock hasn’t scared away customers. Although the number of customer transactions fell 8.2 per cent, the average purchase price surged about 11 per cent year over year -- a sign that higher-end consumers and professional contractors are still forking out cash despite higher prices. 

However, GlobalData’s Neil Saunders pointed to the decline in customer transaction numbers as a warning sign. Citing industry data, he noted that customers are pulling back on home-related project spending -- particularly big-ticket purchases -- due to rising prices.

“The era of easy growth has ended,” Saunders said. “Home Depot is going to have to work increasingly hard just to hold on to the gains it made over the past two years.”

In an interview with Bloomberg News, McPhail said the drop in transactions wasn’t because of inflation, but rather the result of colder spring weather and the lack of stimulus payments, which bolstered spending a year earlier. 

The retailer is facing higher prices for key commodities, including lumber, but McPhail said he expects lumber prices will normalize later in the year.

The quarter marked the Atlanta-based company’s first full earnings period with Chief Executive Officer Ted Decker at the helm.