5 Things Home Depot Inc.'s Management Wants You to Know

By Fool.com

Shares of home-improvement giant Home Depot hit an all-time high this week after it posted strong second-quarter earnings results. Sales and profits both beat Wall Street's expectations and management raised its outlook on both measures for the second time this year.

After the announcement, CEO Craig Menear and his executive team held a conference call with analysts to discuss the results. Here are five key points from that chat for investors to keep an eye on.

Continue Reading Below

Party like it's 2006

The strength of the housing market is a key driver of Home Depot's business, and these results show evidence of broad improvement in the industry. Menear's reference to 2006 is also important for two reasons. First, it shows an almost full recovery from the housing crisis since that year marked a peak for the market.

Annual spending pace on home-improvement projects. Source: U.S. Bureau of Economic Analysis viaFederal Reserve Bank of St. Louis.

Second, it's impressive that Home Depot is booking 2006-level average spending in its stores even though the market is still $300 billion below the spending peak set that year.

Appliances led the way

Home Depot's successful Fourth of July and Memorial Day promotional events helped it log 3% higher customer traffic. And those additional shoppers spent heavily on everything from tools to plumbing, interior design, and lighting.

But the category that led them all was appliances: Home Depot's big-ticket purchases, those of $900 or more, jumped by 6.3%. Overall comps growth was 5.7%, below the prior quarter's 7% bounce but still ahead of management's plan.

Strong online growth

Management's investments in the online experience are paying off. E-commerce sales rose 25% and the company posted higher customer satisfaction scores for both its buy-online-pick-up-in-store and buy-online-ship-to-store options.

The digital sales channel represents 5% of Home Depot's business, compared to less than 3% for Target. That percentage should rise as Home Depot opens two massive new online fulfillment centers in the next few months. Once those are running, Home Depot will be able to reach 90% of its U.S. customers within two delivery days or less.

More debt on the way

Management took on new debt this quarter so that it could fund a major increase in its stock buyback plans. Investors can expect the debt level to keep growing. The company plans to tap the long-term bond markets again next quarter to support its $1.6 billion acquisition of Interline Brands. Those moves will, at least temporarily, push Home Depot's debt ratio above management's target of two times adjusted annual earnings.

Rising outlook

As impressive as the overall 6% comps number was, investors should be more excited about the accelerating growth trend through the quarter. Home Depot logged 8.2% comps in July, which shows strong momentum heading into the cooler fall months.

That's likely a key reason why management raised its sales and profit outlook for the year. "We continue to see positive signs in the housing market," Tome said. "Home prices continue to appreciate and housing turnover and household formation are now slightly ahead of the assumptions we use to build our [original 2015] plan."

The article 5 Things Home Depot Inc.'s Management Wants You to Know originally appeared on Fool.com.

Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.