Like most stocks, Home Depot Inc (NYSE:HD) shares got the year started on the right foot. But, also like most stocks, Home Depot stock peaked in late January and tumbled to multi-week lows in April despite reporting a Q4 earnings beat in February.
Things changed this month though. With the first quarter earnings report just a few days out, investors have slowly but surely decided it would be better to be in HD stock in front of Tuesday’s Home Depot earnings report rather than on the sidelines. Home Depot stock is up more than 10% from its April lows, and still reaching for higher highs.
Whether that was the right or the wrong call will ultimately be determined by four key factors, not all of which will be quantified within the company’s accounting statements.
Home Depot Earnings Preview
For the quarter ending in April, analysts expect Home Depot to report a profit of $2.06 per share on sales of $25.2 billion. Both figures would be well up from year-ago levels, when the home improvement retailer turned $23.9 billion worth of revenue into earnings of $1.67 per share of HD stock.
That growth extends an already long an impressive streak, and the company hasn’t missed a quarterly earnings estimate since Q3 of 2015.
To that end, the low earnings bar is largely understood and accepted as an inevitability in most regards, and won’t necessarily thrill investors. Home Depot stock is going to sink or swim mostly by how it makes investors feel on 4 specific fronts. Get a firm grip on these, and you’ll have a firm grip and what lies ahead for the stock.
One of the pleasant surprises from Home Depot in an environment where Amazon.com, Inc. (NASDAQ:AMZN) has proven disruptive to most brick and mortar retailers is that the home improvement retailer has proven relatively immune to the e-commerce giant. That’s largely because Home Depot developed and executed a very deliberate omnichannel plan of its own, including the use of own stores as online-order fulfillment centers.
It’s paid off too. In the Q4, online sales were up 21%. Additionally, 46% of the company’s online purchases were picked up in a store — which sets the stage for add-on sales.
2. Connecting with millennials
By and large, the millennial crowd has shunned big-box stores, mostly as a matter of principle and preference. Home Depot has proven something of an exception to this trend, however.
A recent Bank of America survey delivers the details. As it turns out, most millennials aren’t living with mom and dad, nor do they live in big cities. B of A says about half of all millennials (specifically those aged 26 to 35) live outside of an urban environment, and 40% of them owned a home. And, surprisingly, 64% of these millenials said Home Depot was their go-to spot when it’s time for a home improvement project.
It matters. Today’s millennials are about to enter their high-earnings years.
3. Payroll costs
The multi-year low unemployment levels and consistent rise in hourly wages is a two-edged sword for Home Depot. On the one hand it means consumers have more reason and money to spend in its stores. On the other hand, it means Home Depot also has to compete for employees, and that often means paying them more than they had in the recent past.
It wasn’t a problem during the fourth quarter. Selling and administrative costs were only up 6.1%, versus a 7.5% increase in revenue. Prevailing wages have grown considerably over the course of the past three months though, and could start to chip away at the retailer’s margins.
4. State of the housing market
Last but not least, something that won’t be found anywhere within the press release but it will almost assuredly come up within the Home Depot earnings call. That is, the retailer’s outlook for the United States’ housing market, and how it may be affected by interest rates.
In the Q4 conference call, CFO Carol Tomé commented:
“Eighty percent of US households have more money due to tax reform and the increase to the standard deduction,” adding “Corporations are taking cash and investing in people. Those two things offset any negatives.”
Tome also thinks it would take 30-year mortgage interest rates of 7% to really create a palpable headwind for Home Depot’s business.
It doesn’t appear matters have changed much in the meantime, though investors would still be wise to listen for any nuanced shifts in the company’s housing outlook rhetoric.
Bottom Line for Home Depot Stock
Of course other factors matter in terms the value of Home Depot stock. But investors and the media can only focus on a limited number of factors before overwhelming themselves and others. And these 4 will be the biggies. The only other factor to chew on will be same-store sales, which the company expects to grow 5.0% for the full year. It would be unusual and surprising if the first quarter’s same-store sales growth wasn’t somewhere near that target.
Even so, investors mostly know same-store sales are a bit of guesswork, and can’t worry too much about a minor shortcoming there.
The bottom line is, the first quarter’s earnings report is Home Depot’s to botch. Investors are ready for, and even expecting, the same caliber of solid results they’ve seen in the pace, and will reward good results and a respectable outlook accordingly.
Rival Lowe’s Companies, Inc. (NYSE:LOW) will report its first quarter numbers on Wednesday, May 23rd, before the market opens.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.