3 Things to Watch in Home Depot's Earnings Report

Investors are approaching Home Depot's (NYSE: HD) upcoming earnings report with cautious optimism. The retailer had a strong fiscal 2018, with sales gains beating management's initial target and reflecting market share gains against Lowe's (NYSE: LOW). However, Home Depot saw a slowdown at the end of the year that surprised many investors who follow the stock.

CEO Craig Menear and his team said at the time that growth should rebound, but that short-term results would be influenced by factors like industry growth and the strength of the broader economy. Weather also plays a key role in determining the timing of home improvement projects. With those thoughts in mind, let's look at a few important metrics Home Depot will provide investors in its first-quarter report on May 21.

1. Filling the aisles

Home Depot edged past its initial full-year sales guidance in 2018 as comparable-store sales rose 5.2%. That result compares favorably to Lowe's 2.4% uptick and included other signs of strength, such as a 3% boost in customer traffic for the year.

Yet the chain announced a rare growth miss last quarter, with gains slowing to below 4%. Management said poor weather was the main problem as rain and snow delayed large construction projects across the country. "We did not expect such a wet winter," CFO Carole Tome told investors in February. Investors had good reasons to believe that explanation, since peers like Lowe's also saw sluggish fourth-quarter results. But accelerating comps in this week's report would confirm that Home Depot's slow winter merely set the stage for a stronger spring.

2. Capital updates

As one of the most efficient companies on the market, Home Depot tends to have lots of cash available each year for management to direct toward growth initiatives and capital return programs. Fiscal 2019 should include hefty helpings of each. Business investments are set to rise to $2.7 billion from $2.4 billion as the retailer adds new stores and spends aggressively on the digital sales channel. Home Depot has also indicated that it will direct $5 billion toward stock repurchases in a sharp decrease from the $10 billion it spent last year.

That stock buyback target is subject to large revisions, and it has far outpaced management's initial target in each of the last two fiscal years. Meanwhile, investors will want to see more signs that the chain's business spending is paying off through growth -- and healthy profitability -- both online and in its physical store base.

3. The economy

Home Depot's strong market position and efficient capital spending can only go so far in boosting returns, with industry growth trends playing an even bigger role. That's why the chain's updated outlook will be key to watch on Tuesday.

As it stands today, its forecast calls for positive trends like rising home equity and aging houses to offset a flatter home-selling market in 2019. These factors should support growth of 5%, or around the same result as last year, as profitability holds steady at just under 15% of sales. Home Depot's last few months of sales data could shift those top- and bottom-line targets, particularly as its critical spring selling season gets underway.

Any adjustment to those figures, in either direction, might spur volatility in the stock this week as investors reset their expectations for this retailing giant.

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