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🔥 Top Movers
🏠 Home Depot: Scope For Improvement?
Home improvement services provider The Home Depot Inc. (HD) reported record sales in the quarter that ended July. The company maintained its forecasts when peers are slashing them due to inflation. But can it continue to emulate its performance amidst a slowing housing market, falling lumber prices, and rising inflation?
Making Hay In A Crisis
Home Depot has become the largest home improvement retailer in the US since its founding in 1978. On its online platform, it sells over a million products. It also has 2.3K stores across the US, all provinces of Canada, and 32 Mexican states.
It also provides same-day and next-day deliveries through 93 distribution centers and over 1.5K associated partners. Serving over 18M customers every week, Home Depot allows customers to either install products themselves or engage the company’s services for a fee.
It also hosts workshops to teach customers to handle DIY home renovation projects. In addition, a network of professional contractors, tradesmen, and remodelers assist in small-to-advanced home improvement projects.
Since customers spent more time at home during the pandemic, they paid attention to improving their homes courtesy of the stimulus checks from the US Federal Reserve. As a result, more customers thronged the Home Depot to improve their homes.
Between May 2020 and May 2021, lumber prices increased by 400%. Lumber mills increased rates due to enormous demand and supply-chain issues that hurt suppliers. The company also had to raise wages to retain employees amid a tight labor market. The low supply, and higher wages, which resulted in increased costs, were passed on to customers.
Armed with the stimulus checks, the customers had no qualms in paying a higher price for buying what they wished to. The company took full advantage of this situation by selling goods at elevated costs, sometimes even at 4x the regular price.
Increased footfalls and higher prices contributed to growing sales. For example, between fiscal 2020 and fiscal 2021, Home Depot’s sales increased by over $40B, equal to the growth between 2009-2018.
Clouds Covering The Sun?
Even as the peak-pandemic explosive growth has cooled, demand from builders and higher prices helped Home Depot beat estimates in Q2. The demand also helped the company cushion the blow from a drop in total transactions due to lower store visits.
Key Highlights From Q2:
- Revenue: $43.79B Vs $43.36B expected
- Earnings Per Share: $5.05 Vs $4.94 expected
- Same Store Sales: 5.8% Vs 4.9% expected
Revenue and earnings in Q2 are the highest in the company’s history. Inflation and supply-chain investments eroded gross margins by 1.5%.
The pro segment continued to outperform DIY as a shorter spring season led to lesser sales of seasonal products like grills, fertilizers, chemicals, and mowers. However, both the Pro and the DIY businesses saw positive sales growth. All 19 regions in the US reported positive comparative sales year-on-year.
Analysts say it is essential for Home Depot to hold on to its Pro segment as customers cut spending due to inflation. The management mentioned on the earnings call that project backlogs are healthy despite the weaker housing market. CEO Ted Decker is confident of demand sustaining for a while, citing that half the US houses are over 40 years old and will need home improvement sooner or later.
Higher prices meant Home Depot’s average ticket size increased 9% from last year to $90.02. However, transactions declined to 467.4M from 481.7M and have fallen in the previous five quarters.
At a time when Home Depot’s peers have slashed future guidance due to inflation pressures and economic uncertainty, the company has no such plans. Instead, it maintained its 3% sales growth guidance in 2022, with operating margins at 15.4%. EPS is likely to grow in the mid-single digits this year. The company also announced a new $15B share buyback program.
US homebuilding has dropped to the lowest level in 18 months, led by higher mortgage rates and construction material prices. Rising interest rates may have also pushed some potential buyers out of the housing market. However, none of this has impacted Home Depot’s sales just yet. While customers have cut spending on products like grills and mowers, they continue to spend on other renovation categories like paints.
Another worry for Home Depot would be the drop in lumber prices, which fell to a nine-month low earlier this month. Analysts expect fewer opportunities for large housing projects due to the market slowdown. On the positive side, those working in the construction sector are back to a record high after a sharp drop during the pandemic.
Sustaining this record-breaking performance is Home Depot’s biggest challenge. The macroeconomic challenges make it difficult to emulate the Q2 performance, but will investors give the company the benefit of the doubt? They are currently on the sidelines with shares down 20% this year and expect more consistency from the retailer. Perhaps, a DIY project can help!
HD ended at $321.32, down 1.20%.
Company Snapshot 📈
HD 321.32 -3.88 (1.20%)
Analyst Ratings (34 Analysts) BUY 71% HOLD 29% SELL 0%
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Today’s Fun Fact
An average Lowe’s store in the US has approximately 112K square feet of retail selling space with an additional 32K square feet of outdoor garden center selling space