Home Depot Earnings: What to Watch

Investors had many reasons to wait Home warehouse (NYSE: HD) earnings reports recently. That’s because, outside of an unusually weak spring sales season, the home improvement giant has generally beaten sales and earnings expectations for most of the past two years.

Given rising mortgage rates and slowing industry growth, this performance could be put to the test when the retailer reports third-quarter earnings on Tuesday, November 13, and issues an updated 2018 outlook.

Let’s take a closer look at the key metrics you should follow.

Customer traffic

Steady market share growth in existing locations is the cornerstone of Home Depot’s growth strategy because its physical store base is largely established. The company hasn’t had any issues here in recent years, with comparable store sales up 7% in fiscal 2017 compared to 4% growth for competitors. Lowe’s Companies (NYSE: LOW). This performance gap continued into 2018, with desktops up 8% in the final quarter and Lowe’s up 5%.

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Beyond headline growth numbers, keep an eye on customer traffic levels, as they will be the best indication of Home Depot’s broader business strength. Variable weather conditions make it difficult to read well, as customer traffic dropped 1% in the first quarter and increased 3% in the second quarter. The broader six-month result is a 1.1% increase in traffic, and Home Depot will need to keep this trend at least moderately positive to stay on track.

Lowe’s, meanwhile, is facing a direct challenge to Home Depot’s industry position, which could start to show up in slower sales or reduced profitability. Of course, the two chains have always competed, with Home Depot routinely coming out on top in that battle. But Lowe’s new CEO spent years as a Home Depot executive, and that history could open the door to more comparable results between the two home improvement giants.

Cash refunds

Investors should see signs of aggressive share repurchases this quarter after Home Depot raised its 2018 share repurchase plan from $4 billion to $6 billion. The move follows a familiar pattern for the retailer, which has directed $15 billion into this cash back channel over the past two fiscal years compared with initial spending plans of $10 billion.

Stock spending helps boost earnings per share and also tends to boost Home Depot’s return on invested capital, which is among the highest in the market. Given the stock’s steady performance this year, it’s likely management has found plenty of opportunities to reduce the retailer’s outstanding shares over the past few months.

Updated Perspective

Home Depot’s last official forecast was for sales growth of 5.3%, slightly higher than the 5% initially forecast. “We continue to expect strong economic growth,” Chief Financial Officer Carol Tome told investors on a conference call in August, “in the context of a healthy home improvement environment.” Management pointed to several economic indicators that support the industry, including home prices, wages, unemployment and consumer confidence.

Since that forecast was issued, several homebuilders have seen sales growth slow, partly because of rising mortgage rates. Meanwhile, broader trends like unemployment and wages have remained strong. On Tuesday, we’ll find out whether these changing trends will collectively lift or lower Home Depot’s outlook for the rest of fiscal 2018.

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Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: short February 2019 $185 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe’s. The Motley Fool has a disclosure policy.