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What Led Home Depot’s Net Margin to Contract in Q1?

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First-quarter performance

For the first quarter of 2019, Home Depot (HD) has posted a gross margin, EBIT margin, and net margin of 34.2%, 13.6%, and 9.5%, respectively. In comparison, these margins were 34.5%, 13.6%, and 9.6%, respectively, in the corresponding quarter of 2018. The company’s lower gross margin, increased interest expenses, and higher effective tax rate lowered its net margin. However, some of the decline was offset by lower operating expenses.

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During the quarter, Home Depot’s gross margin contracted 36 basis points due to an unfavorable product mix, higher shrink costs than in the previous year, and higher supply chain and fulfillment expenses. The company’s operating expenses fell 44 basis points during the quarter. The improvement in its operational productivity lowered its operating expenses. However, the expenses associated with its strategic investment plan offset some of the declines in its operating expenses.

Home Depot’s interest expenses rose $27 million during the quarter. Its effective tax rate for the quarter was 24.4% compared to 23.5% in the corresponding quarter of 2018.

Peer comparison and outlook

For the same period, analysts expect Lowe’s (LOW), Williams-Sonoma (WSM), and Bed Bath & Beyond (BBBY) to post net margins of 5.9%, 4.4%, and 0.4%, respectively.

In fiscal 2019, analysts expect Home Depot’s net margin to contract from 10.4% in 2018 to 10.0%. The contraction in its gross margin, its increased interest expenses, and its higher effective tax rate are likely to lower its net margin in fiscal 2019.

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