Shares of The Home Depot (HD – Free The Home Depot Stock Report) pulled back after the world's largest home-improvement retailer released mixed fiscal fourth-quarter (ended February 3rd) results and issued lackluster guidance. Sales in the final stanza of the year rose 10.9% from a year earlier, to $26.491 billion, nearly matching our $26.488 billion target. However, the figure fell short of the Wall Street consensus. (Note that the fourth quarter of fiscal 2018 consisted of 14 weeks, while the year-earlier period housed 13 weeks.) Likewise, comparable-store sales growth of 3.2% (up 3.7% in the United States) failed to meet investors' expectations. Weather was cited as the main culprit for the ho-hum sales figures. Cold, wet conditions across much of the country caused project delays and weighed on sales. The retailer estimated that unfavorable weather hurt fourth-quarter comps to the tune of 85 basis points. The stronger U.S. dollar was another headwind, and the commodity price inflation that was a tailwind though the first three quarters of the fiscal year dried up in the January term. A slowdown in the housing market probably didn't help, though it didn't appear to be the primary culprit, either.
Below the top line, the gross margin expanded 19 basis points from a year earlier, though this was entirely due to a new accounting standard. A lower tax rate also helped the bottom line, but a $0.16-a-share impairment charge related to certain trade names at Interline Brands hurt the GAAP figure, which was $2.09. Excluding this nonrecurring charge, share net was $2.25, up sharply from the year-earlier tally of $1.69 and above our $2.16 forecast.
Looking ahead, fiscal 2019 may well prove to be more of an uphill climb than we had thought, though there is reason for optimism, as well. Management's latest guidance calls for same-store sales growth of 5.0% and top-line expansion of 3.3%. This would put the sales figure at roughly $111.775 billion, a bit below our previous call of $112.700 billion. Housing ought to remain a tailwind (albeit not to the same degree as in recent years), thanks to still-favorable trends in household formation, high levels of home equity, housing turnover, and the age of the housing stock. The gross margin is apt to narrow slightly, but the operating margin should remain flat with fiscal 2018. All told, leadership is looking for share net of $10.03 this year, while our call had been $10.15. We think that there is more upside than downside to the retailer's forecast and have cut a dime from our estimate.
In other news, management announced plans to return more money to shareholders through dividends and stock repurchases. Specifically, the quarterly cash dividend was raised 32%, to $1.36 a share, with the first payment in the new amount set to be made on March 28th. A new $15 billion share-repurchase authorization was also announced, replacing the previous authorization.
As for the stock, we still like it for conservative investors looking for exposure to the housing/remodeling markets.
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
