Shares of The Home Depot (HD – Free Home Depot Stock Report) pulled back after the world's largest home-improvement retailer released mixed fiscal third-quarter (ended November 3rd) results and reined in its sales guidance for the whole of fiscal 2019. The top line rose 3.5% on a year-over-year basis in the October term, to $27.223 billion, a hair below our $27.480 billion forecast. The bigger issue for investors, however, was comparable-store sales, which increased 3.6% overall and 3.8% in the United States. Wall Street had looked for those figures to rise some 4.6% and 5.4%, respectively. Management noted that sales figures came in below its own expectations due to the timing of certain strategic initiatives that are part of its One Home Depot strategy to grow the business over the long term and enhance its position as an omnichannel retailer. While the company noted that it had been seeing positive results from its investments, some of the benefits were taking longer to materialize than previously expected. Hence the weaker-than-anticipated comps and disappointing sales guidance (discussed below).
That said, it was not necessarily a bad quarter for The Home Depot. Customer transactions were up 1.5%, the average ticket increased 1.9%, and sales per square foot ticked 3.5% higher. Meantime, although the gross margin narrowed by 31 basis points from a year earlier, SG&A expenditures as a percentage of sales fell seven basis points. Likewise, a higher tax rate was partially offset by a lower share count. All told, earnings rose $0.02 from the like period of fiscal 2018, to $2.53 a share, which was ahead of our $2.50 call.
Looking ahead, based on the October-period results, as well as the aforementioned factors impacting sales, leadership now looks for the top line to increase 1.8% in fiscal 2019, while its previous guidance called for growth of 2.3% (recall that fiscal 2019 contains 52 weeks, while fiscal 2018 was 53 weeks). Similarly, comparable-store sales are now expected to climb 3.5%, down from 4.0%. On the other hand, earnings-per-share guidance was unchanged at $10.03, and our forecast remains static at $10.05.
Shares of the Home Depot were trading near their all-time high heading into the release, so it was not shocking that some investors chose to take profits following the lackluster comps and reduced sales guidance. We remain bullish on the company's prospects, though even after this pullback in quotation, the shares offer limited capital appreciation potential over both the 18-month and 3- to 5-year horizons. But with its above-average dividend yield and top mark for Safety, conservative income seekers looking for exposure to the housing market ought to take a gander.
About the Company:The Home Depot, Inc. operates a chain of 2,286 retail building supply/home improvement “warehouse” stores across the United States, Canada, and Mexico. The company's average store size is around 104,000 square feet indoor, plus 24,000 additional square feet in its garden centers. The Home Depot's product lines include building materials, lumber, floor/wall coverings, plumbing, heating, electrical, paint and furniture, seasonal and specialty items, and hardware and tools.
– Matthew E. Spencer, CFA
