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Home Depot (HD) Q1 Earnings Miss Despite Strong Sales & Comps

Zacks Equity Research

The Home Depot, Inc. HD has posted first-quarter fiscal 2020, wherein earnings missed the Zacks Consensus Estimate, while sales beat the same. The top line benefited from strong interconnected presence, which helped adapt to changing customer preference during the coronavirus pandemic in late March. However, the bottom-line results reflected the impacts of higher costs to steer through the environment.

Despite the robust top-line trends in the fiscal first quarter and strong initial results in the second quarter, the company suspended its previously outlined guidance for fiscal 2020, citing the unprecedented impacts of the pandemic.

Notably, the company incurred about $850 million of pre-tax expenses (or $640 million after-tax) in first-quarter fiscal 2020 related to actions taken to support associates during the pandemic. This resulted in an impact of 60 cents per share on earnings per share during the first quarter of fiscal 2020.

In the wake of the coronavirus pandemic in mid-March, the company implemented several actions to prioritize the safety of associates and provide enhanced benefits to them. Among these, the company implemented early store closures to ensure the sanitization of stores and replenishment of shelves. Further, it took steps like limiting customer traffic in stores and canceling high-traffic events like Spring Black Friday. Additionally, the company took to providing enhanced payments to hourly associates, including expanded paid time-off, additional paid time-off for older associates who are at high risk, weekly bonuses for store and distribution center workers, doubled overtime pay, and extended dependent care benefits. The actions led to an increase in operating expenses, which impacted the bottom line in the fiscal first quarter.

Shares of the home-improvement retailer declined 1.7% in the pre-market session, following the dismal first-quarter fiscal 2020 earnings. However, the Zacks Rank #3 (Hold) stock has rallied 12.3% year to date, outpacing the industry’s growth of 4.1%.

 



 

Q1 Highlights

Earnings of $2.08 per share declined 8.4% from $2.27 registered in the year-ago quarter. The bottom line missed the Zacks Consensus Estimate of $2.26. Results were mostly hurt by the higher costs incurred to reward store associates during the coronavirus pandemic, which more than offset strong top-line gains.

Net sales rose 7.1% to $28,260 million from $26,381 million in the year-ago quarter and beat the Zacks Consensus Estimate of $27,610.6 million. Sales benefited from the company’s robust and flexible interconnected infrastructure, which helped it quickly adapt to changing customer preferences amid the coronavirus pandemic. The company's overall comps grew 6.4%, with a 7.5% improvement in the United States.

The Home Depot, Inc. Price, Consensus and EPS Surprise

 

The Home Depot, Inc. Price, Consensus and EPS Surprise

The Home Depot, Inc. price-consensus-eps-surprise-chart | The Home Depot, Inc. Quote

In the reported quarter, comps were aided by an 11% rise in average ticket, offset by a 3.9% decline in customer transactions. Moreover, sales per square foot rose 7.2%.

In dollar terms, gross profit increased 6.7% to $9,625 million from $9,017 million in the year-ago quarter, primarily driven by robust sales growth. However, gross profit margin contracted 13 basis points (bps) to 34.05%.

Operating income declined 8.9% to $3,276 million, while operating margin contracted 200 bps to 11.6%. The decline in operating margin resulted from soft gross margin as well as higher operating expenses in the quarter, including an 18% increase in SG&A expenses. The increase in SG&A expenses can be attributed to higher remunerations to staff to recognize their efforts amid the pandemic.

Balance Sheet and Cash Flow

Home Depot ended first-quarter fiscal 2020 with cash and cash equivalents of $8,696 million, long-term debt (excluding current maturities) of $31,622 million, and shareholders' deficit of $3,490 million. In first-quarter fiscal 2020, it generated $5,737 million of net cash from operations.

In first-quarter fiscal 2020, the company paid out cash dividends of $1,611 million and repurchased shares worth $791 million.

Concurrently, it declared the fiscal first-quarter dividend of $1.50 per share, which is payable Jun 18, 2020, to shareholders of record as of Jun 4.

3 Better-Ranked Retail Stocks

Sprouts Farmers Market, Inc. SFM has a long-term earnings growth rate of 3.7%. It presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Kroger Co. KR has a long-term earnings growth rate of 4.9% and a Zacks Rank #2 (Buy) at present.

Office Depot, Inc. ODP, also a Zacks Rank #2 stock, has a long term earnings growth rate of 6.8%.

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