Why Profitability Rose for Home Depot and Lowe’s in Fiscal 3Q16



Margin drivers for Home Depot in fiscal 3Q16

Home Depot’s (HD) operating margin expanded by 122 basis points to 13.7% in 3Q16. The increase came about due to improved supply chain productivity and lower payroll and utility costs, among other factors. However, gross margins fell by 35 basis points year-over-year to 34.7%, driven by higher sales of lower margin products.[1. According to comments by Carol Tomé – The Home Depot, Inc. – EVP, Corporate Services & CFO]

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Williams-Sonoma (WSM), which reported fiscal 3Q16 results on November 19, also saw gross margins contract to 36.6% in fiscal 3Q16 from 37.7% in 3Q15. The decline came about partly due to slightly lower merchandising margins, a greater mix of revenue stemming from franchising in the quarter, and higher fulfillment and delivery costs.[1. According to Julie Whalen, CFO and EVP, Williams-Sonoma]

Expense leverage at Lowe’s

Lowe’s (LOW) also reported operating expense leverage in 3Q16. Operating margin expanded by 130 basis points to 9.2%. The increase was driven by higher gross margin, up 26 basis points, stemming primarily from higher sales of seasonal merchandise and product cost deflation. Lower advertising, payroll, and maintenance costs, among other factors, also contributed to margin expansion for LOW.

Profitability outlook

Home Depot expects gross margins to decline in the fourth quarter as well.[3. According to comments by Carol Tomé – The Home Depot, Inc. – EVP, Corporate Services & CFO] That would come about primarily due to a slightly unfavorable merchandising mix and partly due to the integration of Interline Brands, which has a lower profitability than HD.

Lowe’s is anticipating an operating margin expansion of 80-100 basis points in fiscal 2016, partly due to higher sales growth, relatively lower payroll and marketing costs, and economies arising from scale.[3. According to Robert F. Hull, CFO of Lowe’s]

The Home Depot and Lowe’s together constitute 1.2% of the portfolio holdings in the iShares Core S&P 500 ETF (IVV) and 2% in the iShares S&P 100 ETF (OEF).

The next article will look at the outlook for both Home Depot and Lowe’s.


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