Like its retail business, Home Depot (NYSE:HD) as an investment is something you typically don’t dwell on. However, it’s always there when you need it. For HD stock, this translates to consistently solid returns. And lately, Home Depot has outperformed its retail peers. Last year, shares of Home Depot gained 43.5%.
That said, all rallies eventually incur a correction. Heading into the company’s second-quarter fiscal 2019 earnings report, some analysts were concerned that the present run was getting long in the tooth. Since the first half of June, HD stock entered a frustrating consolidation pattern featuring significant movement, but no definitive trajectory.
Additionally, shares closed down more than 1% just prior to the earnings disclosure. Interestingly at the same time, the options market for HD stock lit up, suggesting an unusually large swing.
Fundamentally speaking, the technical gyrations appear unjustified. In my opinion, Home Depot has made substantial steps toward competitiveness in light of a tough retail environment.
Specifically, HD invested heavily into its supply chain and distribution channels to combat Amazon (NASDAQ:AMZN), the ultimate disruptor. Analysts nevertheless view the home-improvement market as impervious to the threat of e-commerce. Of course, that hasn’t stopped Amazon from trying. Moreover, studies reveal that home-improvement sales are increasingly occurring online.
One critical disadvantage Amazon suffers against Home Depot is, ironically, a lack of a physical presence. The reliable demand that has pushed HD stock in the markets isn’t just dependent on power tools and related products. Rather, customers love going to Home Depot to inspect the products and materials they’re about to buy.
Also, a convenient return policy helps greatly.
Still, management takes nothing for granted. In June, Home Depot announced a $1.2 billion investment to accelerate its e-commerce deliveries. This move and an unambiguously positive earnings report should continue to propel HD stock.
Home Depot Delivers Resounding Win for Q2
If investors had any doubts about Home Depot’s nearer-term viability, the Q2 report should dispel all of them. It was the perfect response to fears that HD stock could be overextended.
Let’s go over the key metrics. Heading into the disclosure, consensus estimates pegged earnings per share at $2.84. Actuals came in at $3.05, or a 7.4% positive surprise. Moreover, the result exceeded the highest individual estimate, which was $2.91.
The revenue storyline was equally significant. The home-improvement retailer brought in $30.46 billion in sales, up 1.4% from the consensus $30.03 billion. Like the EPS landscape, the revenue haul also exceeded the highest analyst forecast of $30.3 billion.
A major reason for the lift in both profitability and revenue was that growth surpassed expectations across the board. Same-store sales jumped 8% worldwide, versus analysts’ consensus target of 6.6%. Furthermore, U.S. same-store sales increased 8.1%, which also beat consensus calling for 6.4%.
The underlying reasons for the exceptionally robust figures was an early start temperature-wise to the summer season. In addition, the bullish housing market boosted home-improvement sentiment, an issue I will discuss later.
With this backdrop, management added the cherry on top. Providing guidance for the full year, Home Depot expects revenues to rise 7%. This compares favorably to the prior forecast indicating 6.5% growth. Also, HD expects same-store sales to increase by 5.3% compared to an earlier target of 5%.
Management announced that it will buy back $6 billion worth of HD stock this year. Last December, the company disclosed a $15 billion share buyback plan.
Positive Tailwinds boost HD stock, but Risks Exist
As the earnings report affirmed, HD stock enjoys two big tailwinds. First, the labor market is exceptionally robust, with unemployment sitting on multi-year lows. Not only that, companies have reported a strong hiring season in the summer.
Clearly, we’re not talking about people simply making up the numbers in temporary or low-paying jobs. Naturally, a strong consumer base lifts all retail sectors. However, HD stock particularly benefits because consumers don’t have as much incentive to put off home-improvement projects.
When the labor market wasn’t as strong, families were forced to tolerate the squeaky doors or similar annoyances. Now, with extra money in their pockets, they can tackle their personal projects with aplomb.
Second, a major financial incentive exists to initiate and complete home renovations. Since 2013, average home prices have skyrocketed. As of the first quarter of 2018, the average sale price stood at $374,700.
It doesn’t take a real-estate expert to understand that home improvement can dramatically lift those prices. Sellers have the most leverage right now, and they can milk this advantage for all it’s worth.
So this is all a net positive for HD stock, right? In the long run, I’m bullish. Home Depot enjoys both cyclical and secular demand that other companies and industries can’t duplicate.
With that said, labor-market growth could slow, which may impact home sales. Both metrics have ridden a long rally, and both could be due for at least a modest correction. If that happens, HD stock could also correct.
Ultimately, I view Home Depot as a steady partner for your portfolio. The steps that management has taken ensures that this reputation will remain alive and well.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.