Why Home Depot’s Net Margin Fell in 4Q17

In 4Q17, Home Depot (HD) posted gross margin, EBIT (earnings before interest and tax) margin, and net margin of 33.9%, 13.4%, and 7.4%, respectively. In 4Q16, those margins were 34%, 13.2%, and 7.9%, respectively.

The contraction in Home Depot’s net margin was due to a fall in gross margins and a higher effective tax rate. Its gross margin fell 0.12% due to an increase in lower-margin, hurricane-related sales. In 4Q17, its effective tax rate was 39.6% compared to 35.2% in 4Q16. However, some of the declines were offset by a contraction in its operating margin. The company’s SG&A (selling, general, and administrative) expenses fell 0.2%, from 18.8% in 4Q16 to 18.6% in 4Q17. D&A (depreciation and amortization) expenses fell from 2% to 1.9%.

For 4Q17, Lowe’s (LOW), Williams-Sonoma (WSM), and Bed Bath & Beyond (BBBY) are expected to post net margins of 4.6%, 8.3%, and 5.3%, respectively.

For 2018, analysts are expecting Home Depot to post gross margin, EBIT margin, and net margin of 34%, 14.7%, and 9.8%, respectively. Comparatively, in 2017, those margins were 32.2%, 14.6%, and 8.6%, respectively. The expansion of net margins is expected to be driven by a lower effective tax rate. Management expects the company’s effective tax rate for 2018 to be 26% compared to 37% in 2017.

Next, we’ll look at Home Depot’s 4Q17 EPS (earnings per share).