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Home Depot Misses Q1 Earnings Expectations, Stock Falls

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Today, Home Depot (NYSE:HD) reported its first-quarter earnings, which ended on May 3. For the quarter, the company reported revenue of $28.3 billion driven by an impressive SSSG of 6.4%. The company beat analysts’ revenue expectations of $27.54 billion and SSSG expectations of 4.4%. Meanwhile, Home Depot’s diluted EPS declined from $2.27 in the first quarter of 2019 to $2.08. Amid the COVID-19 outbreak, the company took several initiatives to support its employees. The initiatives increased the company’s expenses by approximately $640 million after-tax or $0.60 per share.

Management withdrew its fiscal 2020 guidance due to uncertainty about the impact of COVID-19 on the broader economy. The lower-than-expected first-quarter earnings led to a fall in the company’s stock price. Home Depot was trading 2.0% lower in today’s pre-market trading hours. Let’s look at the company’s first-quarter performance in more detail.

Home Depot’s revenue rises YoY

Home Depot’s first-quarter revenue grew by 7.1% YoY (year-over-year) from $26.38 billion in the first quarter of 2019. The positive SSSG and adding new stores in the trailing four quarters drove the company’s revenue. As I stated earlier, the company reported an SSSG of 6.4% due to the higher average ticket size. The company’s average ticket size for the quarter was $74.40—an increase of 11.0% from $67.31 in the same quarter of the previous year. Meanwhile, the company’s customer transactions fell 3.9% from 390.0 million to 374.8 million. By the end of the quarter, the company operated 2,293 stores compared to 2,289 stores at the end of the first quarter of 2019.

Home Depot’s management announced that it canceled all of its promotions during the quarter to limit customer traffic amid the pandemic. Management added that despite these measures, the company reported an impressive sales performance. Management credited the company’s interconnected infrastructure for strong sales growth.

Home Depot’s EPS falls

Despite strong top-line growth, Home Depot’s EPS declined by 8.4% during the quarter. The lower gross margin, higher operating cost, and increased interest expenses dragged the company’s EPS down. However, lower provisions for income taxes and a decline in the number of shares outstanding offset some of the EPS declines.

For the quarter, Home Depot’s gross margin declined marginally from 34.2% to 34.1%. Meanwhile, the company’s operating expenses increased by 17.1% from $5.42 billion to $6.35 billion during the same period. Higher SG&A expenses and D&A expenses drove the company’s operating expenses. During the quarter, the company’s SG&A expenses increased by 18.0% to $5.83 billion due to its initiatives to support employees amid the outbreak. The D&A expenses increased by 8.3% to $520 million. Home Depot’s interest expenses increased by 12.5% to $307.0 million.

Due to share repurchases in the trailing four quarters, Home Depot’s weighted average number of shares declined by 2.6% to 1.08 billion from $1.11 billion, which offset some of EPS declines.

Dividends and outlook

Today, Home Depot’s board announced quarterly dividends of $1.50 per share with an annualized payout rate of $6.00 per share. The dividends will be paid on June 18 to shareholders recorded as of June 4. The company’s dividend yield is 2.45% with its stock trading at $245.35. Meanwhile, Lowe’s (NYSE:LOW) dividend yield is 1.88%.

Citing the uncertainty about the impact of COVID-19, Home Depot withdrew its earlier announced guidance for 2020. Meanwhile, the company added that its sales were strong in the first two weeks of the second quarter.

YTD stock performance

So far this year, Home Depot has returned 12.4% as of May 18. Many businesses closed temporarily due to the pandemic. However, Home Depot kept its stores open since it sells essential products. Growth expectations in the company’s consumer staples led to a rise in its stock price. Home Depot has beat its peers and the broader equity markets this year. Lowe’s, Williams-Sonoma (NYSE:WSM), and Bed Bath & Beyond (NASDAQ:BBBY) have fallen by 2.5%, 4.3%, and 63.7%, respectively. The S&P 500 Index has also declined by 8.6%.

I have been bullish on Home Depot for some time. Despite the weak first-quarter EPS, I’m still bullish on the stock. With a strong stock supply chain and integrated shopping experience, the company could gain market share in the home improvement segment. So, investors with long-term prospects should utilize the dips to accumulate the stock. On Wednesday, Lowe’s will likely report its first-quarter earnings. For analysts’ expectations, read Why Lowe’s Is a ‘Buy’ before Its Q1 Earnings.

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