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Why Did Home Depot’s Net Margin Expand in Q4?

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Fourth-quarter performance

During the fourth quarter, Home Depot (HD) posted a gross margin, EBIT (earnings before interest and tax) margin, and net margin of 34.1%, 13.7%, and 9.5%, respectively. The margins were at 33.9%, 13.4%, and 8.3% in the fourth quarter of 2017, respectively.

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Net margin expansion

During the fourth quarter, Home Depot’s net margin rose 1.2% due to the expanded gross margin, adjusted EBIT margin, and lower effective tax rate.

In the fourth quarter, the company’s gross margin rose 0.19%. The adoption of the new accounting standard contributed 0.53%, which was partially offset by higher supply chain and fulfillment expenses and an unfavorable product mix.

The company’s adjusted EBIT margin rose 0.3% due to the implementation of cost control initiatives and the payment of a one-time bonus of $117 million to hourly associates last year. Some of the expansions were offset by the implementation of a new accounting standard and the company’s strategic investments for its growth initiatives.

Home Depot’s effective tax rate for the fourth quarter was 24.7%—compared to 32.8% in the fourth quarter of 2017.

Peer comparison and outlook

For the same period, analysts expect Lowe’s (LOW), Williams-Sonoma (WSM), and Bed Bath & Beyond (BBBY) to post a net margin of 4.0%, 8.8%, and 4.4%, respectively.

For 2019, analysts expect Home Depot’s net margin to fall from 10.4% in 2018 to 10%.

Next, we’ll discuss Home Depot’s fourth-quarter EPS.

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