Home Depot earnings Q3 2019

Earnings


Home Depot shares tumbled about 5% on Tuesday after the company said it would take more time for its investments to pay off.

The Atlanta-based home improvement retailer once again cut its 2019 forecast and reported same-store sales well below estimates. Although earnings came in a penny better than expected, the company said revenue, which also missed analysts’ targets, was hurt by spending on improvements to its IT systems, stores and supply chain.

“We are largely on track with these investments and have seen positive results, but some of the benefits anticipated for fiscal 2019 will take longer to realize than our initial assumptions,” CEO Craig Menear said in the release.

Here’s what Home Depot reported compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv:

  • Earnings per share: $2.53, adjusted, vs. $2.52 expected
  • Revenue: $27.22 billion vs. $27.53 billion expected
  • Same-store sales growth, global: 3.6% vs. 4.7% expected

Despite the lower forecast, the market for home improvement products remains strong, Oppenheimer analyst Brian Nagel said on CNBC’s “Squawk Box.” He attributed the sales miss to an internal company issue, which he noted is rare for Home Depot, rather than a miss due to economic headwinds, tariffs or lumber price deflation.

“The backdrop of home improvement was quite good,” Nagel said. “The lumber price issue is not as big a deal anymore, weather has been favorable and then we have this, what I have been really been excited about, is this improving overall housing environment.”

Among the internal issues is that more work needs to be done to improve its digital platforms. The process “has proven to be more complex than originally anticipated,” Menear said during the company’s earnings call.

For example, Home Depot’s B2B website, which was created mostly for the company’s professional contractor customers, still requires underlying technical work before the company can move forward with additional elements for the site.

About 45% of Home Depot’s business comes from its professional customers, according to Jonathan Matuszewski, an analyst at Jefferies. Lowe’s has been trying to gain ground in this space, but still only gets about 20% to 25% of its sales from this group, he said.

Home Depot’s efforts to strength its B2B site are aimed at keeping its stronghold in the professional space.

In the third quarter ended Nov. 3, Home Depot said net income fell to $2.8 billion, or $2.53 per share, from $2.9 billion, or $2.51 per share, a year earlier. Analysts had expected the company to earn $2.52 per share, according to a Refinitiv survey.

Sales increased 3.5% to $27.22 billion, just shy of analysts estimates of $27.53 billion.

Sales at U.S. stores open at least 12 months rose 3.8%. Analysts were expecting a 4.7% gain.

During the quarter, Home Depot said its average customer ticket was $66.36, which was higher than it saw in the quarter a year earlier. Sales per square foot also rose to $449.17 from the year-earlier period.

For the fiscal year, it lowered its sales forecast to 1.8% growth, down from a prior estimate of 2.3%. The company also cut its same-store sales estimate for the fiscal year, to an increase of 3.5%. Previously, it forecast 4% growth.

The outlook for earnings per share remains unchanged.

Last quarter, when Home Depot trimmed its full-year revenue outlook, it cited potential tariff impacts and lumber deflation as contributing factors.

Jefferies analysts also said the industry remains strong, and pointed to improving home affordability, lower interest rates, aging baby boomers spending money on remodeling, millennials entering the housing market, and product innovation.

U.S. housing starts rebounded in October, rising 3.8%, while permits for future home construction jumped to a more than 12-year high.

Home Depot said it is managing to soften the blow from higher tariffs.

“As expected during the third quarter, we saw increased costs arising from tariffs,” Ted Decker, executive vice president of merchandising said. “Our merchants, finance and data analytics teams are doing an incredible job mitigating cost impacts.”

Lumber prices, which had hurt its performance in the second quarter, remained depressed compared to last year. Chief Financial Officer Richard McPhail said the lower prices hurt same-store sales growth by $175 million in the quarter.

Shares of Home Depot hit a 52-week high on Monday of $239.31. The stock, which is valued at $262 billion, has risen 39% as of Monday’s close. Rival Lowe’s, which has a market value of nearly $89 billion, has gained 24% year to date. Shares rival Lowe’s, shed about 1%.

Read the full press release here.

Correction: An earlier version of this story misstated the forecast for global same-store sales. Analysts were predicting a gain of 4.7%.



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