Home Depot (NYSE:HD), the largest U.S. home-improvement retailer, posted a 6% improvement in same store sales last quarter benefiting from the uncharacteristically warm winter and increased business from contractors. However, sales and margin improvements and raised outlook missed heightened market expectations, sending the stock lower after earnings. Also, since this quarter pulled forward the seasonal purchases of plants and outdoor equipment, the company now expects next quarter sales to be slower than previously expected. Nonetheless, with efforts focused on better service, technology support and store remodeling, Home Depot has outperformed the sector and its largest competitor Lowe’s (NYSE:LOW) in a still mixed housing market, by making its operations and supply-chain more efficient.
Seasonal Sales Pulled Forward From Q2
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The warmest winter in 12 years prompted several homeowners to move ahead with repair and renovation projects. It aided Home Depot’s U.S. same store sales by 3 percentage points last quarter, including as much as 1 percentage point of sales that it estimated was pulled forward from the second quarter. Retail sales normalized in April after sharp gains in the first three months of the year, hurt by cooler spring weather and an early Easter that pulled demand early into March. The bottom-line benefited from cost-cutting initiatives, supply-chain improvements, upgraded technology and improved customer service, though it fell a bit short of expectations.
Upbeat Homebuilder Sentiment & Big Ticket Contractor Spends
Home Depot also noted some recovery in its professional-contractor business, led by larger contractor customers, which represents about 4% of its customer base but 35% of sales. In particular, transactions for tickets above $900, one-fifth of its sales, were up 6.7% – the biggest increase in at least five quarters.
The update coincided with the Housing Market Index (National Association of Home Builders/Wells Fargo housing-market index) posting its highest reading in the last five years as builders reported improved buyer traffic in several markets despite a decline in April. While the housing market still has quite a way to go toward a fully healthy recovery, the strong trend in the index is a positive sign of improving home values, employment and lower mortgage rates. The performance of home improvement retailers is closely tied to the housing market recovery. In the meantime, it has also benefited from improvements in private residential spending, which is highly correlated to home improvement comparable sales in the U.S.
We are in the process of revising our Trefis price estimate of $40 for Home Depot’s stock.