Home Depot Growth Slows as Customer Traffic Turns Negative

Home Depot (NYSE: HD) announced first-quarter earnings results this week that kept the company on pace to meet its aggressive 2018 growth targets. The retailer also lifted its long-term sales and profitability goals in response to a change in accounting rules.

However, the quarterly report included a few worrying signs for the business, such as a decline in customer traffic and falling operating profit margin.

More on those stumbles in a moment. First, here's how the headline results stacked up against the prior-year period:

What happened with Home Depot this quarter?

Sales growth slowed sharply in comparison to the prior quarter, which had seen elevated demand in response to rebuilding efforts around hurricanes that impacted the southeastern United States. Home Depot's spring selling season also got off to a slow start, but management implied that things had sped right back up in recent weeks.

The key highlights of the quarter:

  • Comparable-store sales rose 4.2% after spiking 7.5% in the prior quarter. Home Depot managed a healthy uptick in average spending per customer visit but shopper traffic turned negative, falling 1.3% compared to a 2% increase in fiscal 2017.
  • Gross profit margin rose to 34.5% from 34.1% as positive pricing trends held up.
  • As management had hinted in late February, expenses rose at a faster pace than sales, which pushed operating margin down to 13.5% of sales from 14% a year ago.
  • Sharply lower tax charges combined with the uptick in gross profit margin to lift net earnings up 19% to $2.4 billion. And, thanks to aggressive stock repurchase spending that reduced the outstanding share count, earnings per share jumped 24.6%.

What management had to say

Management suggested in a press release that the sales growth slowdown was limited to warm weather seasonal product categories. "We are pleased by the strength of our business," CEO Craig Menear said, "despite a slow start to the spring selling season." Menear explained that "outside of our seasonal business, we had solid results in all markets and categories." Meanwhile, executives noted "strong momentum" across the business during the first few weeks of May.

Those early second-quarter trends, they said, plus healthy economic growth and a strong housing market, gave management confidence to affirm their sales and earnings guidance for the year.

Looking forward

Home Depot still believes sales will rise by about 5% this year to mark a minor slowdown from last year's 7% boost. Profitability should hold steady, too, while tax cuts will allow earnings to spike by about 28% to $9.31 per share.

The retailer also updated its 2020 fiscal targets due to a shift in accounting rules that resulted in higher reported sales. The shift means investors can expect better results on a range of core financial metrics. Home Depot now believes sales will reach as high as $120.4 billion by 2020, up from $100 billion last year.

Gross profit margin should pass 34% of sales by 2020 compared to the prior target of 33.6%, too. Executives are still aiming for operating margin of around 15% as return on invested capital, already a stellar 34%, is now set to pass 40% over the next few years.

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Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.