The stock market was on a big win streak in early-to-mid May as a flurry of positive earnings reports added fuel to the bull thesis.
But then retail giant Home Depot Inc (NYSE:HD) reported first quarter numbers. While this company has been a staple of consistency for the past several quarters (the company has reported nothing but double beat quarters), HD’s first quarter numbers didn’t live up to that consistency standard.
Earnings beat. But revenues missed. That was the first revenue miss Home Depot has reported since August 2016.
But in August 2016, it was a slight $10 million miss. This past quarter, HD missed revenue estimates by a whopping $270 million. HD hasn’t reported a revenue miss of comparable magnitude since May 2014, when the company missed sales estimates by $250 million.
Due to the poor headline numbers, Home Depot stock sunk. It dragged the rest of the market down with it, and all major indices are currently having one of their roughest days in May thus far.
Does the pain in Home Depot stock make sense? What about the sell-off in the rest of the market?
In short, the sell-off in both HD stock and the broader market makes sense. Home Depot’s numbers weren’t as good as expected, and that means a bunch of other retailers will likely report sub-par numbers.
But, HD’s bad numbers were mostly just a result of adverse weather conditions which pushed Spring shopping back. Thus, next quarter’s numbers should be much better, and we could see a rebound in both HD stock and the broader market.
Here’s a deeper look:
The Implications For HD Stock
HD’s $270 million revenue miss isn’t pretty. But it also shouldn’t be taken out of context.
When you break down the revenue miss, you”ll find that the big culprit of the sales weakness was a weak April. In April, comparable sales were up just 2.2%, which is really weak for Home Depot. Usually, Home Depot reports comparable sales growth of 5% and up. Recently, those numbers have been in the 7% and up range.
Why was April so weak? Bad weather. Unusually cold weather persisted in April, and pushed back the critical Spring shopping season. That is why, according to management, May comparable sales are already up 10%-plus.
In other words, Home Depot’s big revenue miss was due to adverse weather. But that weather has become less adverse, and sales that were missed in April are now being recaptured at an impressive rate in May. Thus, the long-term growth thesis remains in-tact.
Overall, HD stock may trade with some choppiness in the near future, but investors shouldn’t lose sight of the big picture. With May comparable sales growth already up 10%-plus, it looks like Q2 numbers could be quite good. If so, then HD stock will rebound strongly from this temporary sell-off.
The Implications For The Rest Of The Market
Because of its size and reach, Home Depot is often seen as a gauge for consumer strength. Therefore, when HD reports weak sales, consumer strength across the board is assumed to be weak, and retailers of all shapes and sizes drop.
But that isn’t really happening this time around. As of this writing, Lowe’s Companies, Inc. (NYSE:LOW) is down. But Walmart Inc (NYSE:WMT) and Target Corporation (NYSE:TGT) are actually up. Indeed, the SPDR S&P Retail (ETF) (NYSEARCA:XRT) is up as of this writing.
All of the aforementioned securities opened up in the red after HD’s sales miss. Since then, though, investors have heard and accepted the fact that weather was the only bad thing about HD’s report. Consequently, those stocks are in rebound mode.
It is unclear how long this rally will last for retailers. I suspect LOW, WMT, TGT, and other retailers could get dinged on weaker than expected first quarter numbers, much like HD is getting dinged today. But thereafter, assuming those reports shape out like HD’s report, most of those stocks should rebound with a strong Q2 report on the horizon.
Bottom Line on HD Stock
Let the dust settle. Buy the dip in HD stock.
Do the same with other retailers that report weak Q1 numbers but point to strength in early Q2.
As of this writing, Luke Lango was long LOW and TGT.