Shares of The Home Depot (HD – Free Home Depot Stock Report) moved higher after the world's largest home-improvement retailer released fiscal second-quarter (ended August 4th) results and updated its outlook for full-year fiscal 2019. In the July period, a better-than-expected bottom-line performance overshadowed softer-than-anticipated sales. Specifically, sales increased 1.2% from a year earlier, to $30.839 billion, versus our $31.200 billion forecast. A shift in the fiscal calendar base was partially to blame (fiscal 2018 was a 53-week year, while fiscal 2019 contains 52 weeks), though a decline in lumber prices also played a role. Comparable-store sales were a bit more robust, rising 3.0% overall and 3.1% in the United States. Customer transactions were flat from a year earlier, but the average ticket rose 1.7% and sales per square foot climbed 1.1%. Strength was broad based across product categories and geographies (all merchandise categories posted positive comps save for lumber, and 17 out of 19 geographies were positive). Moreover, online sales grew 20% and sales to professionals outpaced those to do-it-yourself shoppers.
In terms of profitability, the gross margin contracted 19 basis points, though total operating expenses were flat as a percentage of sales. The tax rate fell 10 basis points, but the bigger aid to share earnings was a lower share count (down 4.4% from a year earlier), which helped earnings climb 4% from the like period of fiscal 2018, to $3.17. This was ahead of our $3.11 call.
Looking ahead, the U.S. consumer appears to be doing well, even as trade disputes, political unrest in Hong Kong, and softness in Europe are raising concerns about the health of the global economy. Indeed, on our shores, the housing market is generally stable and the unemployment rate is low, as are borrowing costs. That said, management did rein in its sales guidance due to lumber price deflation and the “potential impacts to the U.S. consumer arising from recently announced tariffs.” Sales and comps are now expected to increase 2.3% and 4.0%, down from previous guidance of 3.3% and 5.0%, respectively. Earnings guidance, on the other hand, was maintained at $10.03 a share, and our forecast is static at $10.05. Ongoing efforts to improve the supply chain, customer service, and omnichannel selling experience should continue to bear fruit and increase efficiency.
As for Home Depot stock, we still think that it offers broad appeal. While long-term capital gains potential is not head-turning, we believe that the shares can push higher in the near term. Additionally, the equity sports an above-average dividend yield and garners high marks for a host of our proprietary metrics, including Safety, Financial Strength, Price Stability, Price Growth Persistence, and Earnings Predictability.
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
