Customer Traffic Gains Power a 14% Spike in Home Depot Inc. Earnings

Markets Motley Fool

Home Depot (NYSE: HD) posted quarterly results this week that were highlighted by accelerating sales gains and a double-digit boost in profits. The retailer also raised its top-line and bottom-line outlooks for the full year.

Continue Reading Below

More on that improving forecast in a moment. First, here's how the big-picture operating results stacked up against the prior year:

 Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$28.1 billion

$26.5 billion

6.2%

Net Income

$2.67 billion

$2.44 billion

9.5%

EPS

$2.25

$1.97

14.1%

What happened this quarter?

Thanks to a big assist from an uptick in customer traffic, the home improvement giant managed to improve on last quarter's stellar growth pace to set new quarterly records in revenue and earnings.

Highlights of the quarter included:

Continue Reading Below

  • Comparable-store sales gains were 6.3% overall, including a 6.6% spike in the core U.S. market. The growth figure beat management's expectations and marked a solid acceleration from the prior quarter.
  • Big-ticket sales transactions, including appliances, flooring, and categories aimed at professional customers, rose 12%. The increase helped push average spending higher by 3.6%.
  • Customer traffic gains jumped to a 2.8% pace from 1.6% last quarter.
  • E-commerce sales rose 23% to account for just over 6% of the revenue base.
  • Operating expenses rose at a slower pace than revenue, which allowed operating margin to expand to 15.9% of sales from 15.3%.
  • An almost 10% boost in net income combined with a reduced share count pushed earnings per share higher by 14%.

What management had to say

Executives focused their comments on the headline numbers and pointed out that the figures represented new high marks on both the top and bottom lines. "We were pleased with our results this quarter as our customers rewarded us with the highest quarterly sales in company history," CEO Craig Menear said in a press release. "We also achieved the highest quarterly net earnings in company history."

Management said Home Depot is looking to press its product advantage with new releases in the third quarter that include exclusive offerings like a one-time, wood-staining coating from PPG and vinyl plank flooring by LifeProof.

Looking forward

Menear and his team raised their full-year growth outlook and now see comps improving by 5.5% (up from the prior 4.6% target) to essentially match last year's market-thumping result. Industry rival Lowe's (NYSE: LOW) won't report its second-quarter results for a few days, but its most recent forecast predicted comps of just 3.5% in 2017. Barring a large upward revision in that goal, it's likely Home Depot will continue gaining market share this year.

The retailer hiked its earnings forecast as well, to show a 13% improvement over last year's $7.29 per share of profit.

Home Depot's broader results put it ahead of its long-term growth targets. Revenue over the past six months was $52 billion, which implies it will soon crack the $100 billion annual sales mark. Its operating margin through the first half of the year is 15%, compared to the 14.5% it had hoped to achieve by 2018. The best news for the business is rising customer traffic, though, which is powering a sales growth pace of 5% to significantly outpace the 4% long-term rate management had issued in early 2016.

10 stocks we like better than Home Depot
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Home Depot wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.