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Home Depot Executives Break Down a "Noisy" Quarter

Demitrios Kalogeropoulos, The Motley Fool

Home Depot (NYSE: HD) surprised investors this week by posting a second straight quarter of slowing sales growth. Yes, the retailer faced a difficult comparison to a prior-year period that included hurricane rebuilding efforts. But management still aimed for a slight acceleration when compared to the prior quarter's weak results. Instead, comparable-store sales fell to about half the rate Home Depot had predicted for the full fiscal year.

CEO Craig Menear and his team said in a conference call with Wall Street analysts that the slump doesn't jeopardize their wider outlook, though, and below we'll look at a few quotes from that presentation that explain management's stable 2019 forecast.

A man selects a piece of lumber off a shelf

Image source: Getty Images.

Another strange quarter

There is no doubt it was a noisy quarter, but when you look through the noise to the core business, we are pleased with the underlying performance.
-- Menear

Three months ago, Home Depot said an unusually wet winter was to blame for its fiscal fourth-quarter slowdown, as construction projects were delayed. That suggested growth would accelerate in the following quarter, but instead it slowed again.

Executives pinned the blame mostly on the weather again, and they backed that argument up with data. February was the second-wettest on record in the U.S., management noted, and the cadence of comparable-store sales reflected that unusual situation. Comps were down 2% that month but jumped 6% in March and rose 3% in April.

At the same time, lumber prices have collapsed in the past year, which pressured sales to the tune of $200 million. If not for these two trends, comps would have landed at around 4.5% in the U.S. rather than the 3% rate the retailer actually reported.

Targeting pro customers

During the first quarter, we saw growth with both our Pro and Do-It-Yourself customers. Pros are complex customers. We are investing in a number of different initiatives and services to help our Pros get their jobs done.
-- VP Ted Decker

The professional contractor segment of the industry is an attractive target for Home Depot and for rival Lowe's, the latter which credited that niche for helping deliver faster sales growth this quarter. Home Depot has big plans in place aimed at extending its lead here in the coming quarters, and executives highlighted the company's rental program as a key example. When contractors rent tools, they tend to spend more on other areas supporting the project, and so Home Depot is pouring resources into this part of the store in hopes of expanding its market share.

Affirming the outlook

The relevant housing metrics that drive home improvement spending -- notably home price appreciation, existing home turnover, household formation, and the age of the housing stock -- continue to be supportive of our outlook.
-- CFO Carol Tome

Home Depot affirmed its full-year outlook, and that stability adds weight to management's claim that this past quarter's results don't reflect any weakening of the core business trends. Still, there are two important caveats to that 2019 prediction that investors should understand.

First, tariff increases that might take effect in the coming weeks aren't accounted for in the outlook. Second, Home Depot didn't shift its guidance to try to incorporate potentially lower lumber prices, which could cleave as much as $800 million from reported sales if they don't rebound from recent lows.

These trends might cause a sales target downgrade in the coming quarters, executives implied, but the retailer's broader outlook is positive. Specifically, a healthy housing industry and continued market share gains should allow comps to rise by about 5% for the second straight year as financial metrics like operating margin and return on invested capital continue to far outpace rivals inside and outside of the industry.

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Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.