Home Depot Delivers But Can't Get Comfortable
(Bloomberg Opinion) -- Who would have thought power tools and patio sets would be big holiday-season winners?
After big-box retailers such as Walmart Inc. and even superstar Target Corp. came up short during the 2019 holiday shopping sprint, Home Depot Inc. rebounded with a better-than-expected fourth quarter. Same-store sales rose 5.2%, ahead of consensus expectations of a 4.7% gain.
The gains indicate the home-improvement chain is back on track after a third-quarter stumble. Then, same store sales were below estimates, and growth was slow enough to prompt the company to cut its full-year guidance on this measure.
A strong housing market helped in the latest quarter. Consumers are more likely to renovate when prices are rising; moving to a new home also is a catalyst for spending. Meanwhile, warm weather prompted some projects to be brought forward, although this was offset by fewer winter storms, which typically drive repairs. Lumber deflation also eased.
The upbeat results are also a sign that an $11 billion effort it announced in 2017 to modernize the company’s stores, upgrade digital options and enhance offerings for its key trade customers is starting to bear fruit.
Home Depot is right to invest. Do-it-yourself stores can be soulless sheds if not updated regularly and managed properly. What’s more, the focus on the trade market is sensible. Many consumers, particularly young people, are shunning DIY in favor of “do-it-for-me” – hiring a tradesman to carry out a job. But the group needs to ensure the benefits of its spending continue to filter through to its results.
And there are risks. The first is from the deadly coronavirus. About 70% of the company’s products are sourced from the U.S.; the rest come from elsewhere, much from China, where supply chains are being affected by the spread of the disease. A large amount of first-quarter merchandise is already in stores, and the company is working with suppliers to ensure a continued flow of stocks.
The bigger danger, however, is that the epidemic has a broader effect on global economic growth and consumer confidence. Monday’s stock market plunge will do little to make Americans feel good about their wealth, something that is essential for purchasing expensive items such as new kitchen. Meanwhile, Lowe’s Cos. — which is working on its own renovation project under new chief executive Marvin Ellison —could become a more muscular rival.
Investors seem to be shrugging off these concerns right now. The shares rose almost 2 percent on Tuesday morning, and now trade on a forward price earnings ratio of about 23 times, a premium to about 18 times for Lowe’s.
Home Depot may have put its rough patch behind it. But at its current valuation, the risks can’t be swept entirely under a graphic print rug.
To contact the author of this story: Andrea Felsted at afelsted@bloomberg.net
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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