Home Depot investors bail on the stock, despite signs the housing recovery has more steam

A employee at a Home Depot store in Brooklyn, New York.
Ramin Talaie | Bloomberg | Getty Images

Home Depot's sales blew past Wall Street's expectations in the fiscal third quarter, as consumers continued to pour money into their houses — yet even as the retailer reiterated its confidence in internal initiatives and a robust economy, investors weren't impressed.

Shares of the home improvement chain fell more than 2 percent in early trading Tuesday, as management said it expects comparable-store sales to increase roughly 3 percent in the holiday period. That's slightly slower growth than analysts were calling for, with FactSet estimates forecasting a 4 percent increase for the period.

Home Depot is facing a tough fourth-quarter comparison from 2015, when unseasonably warm weather boosted its U.S. comparable sales 8.9 percent higher. But the anticipated slowdown also comes as investors are questioning how much runway the housing recovery has left.

"We are up against big numbers," CEO Craig Menear admitted to investors. "[But] we feel confident in the programs that the merchant teams have laid out."

In its own stores, Menear said, new, exclusive products should drive consumer and professional interest during the current quarter. A more efficient supply chain and redesigned website should also serve as catalysts. Home Depot continues to enhance these types of digital offerings, including a broader rollout of its ability to ship merchandise from its stores. That functionality allows retailers to deliver online orders faster.

Meanwhile, Home Depot's market share gains should continue in the fourth quarter, CFO Carol Tome said. Even as a slew competitors hone in on appliances — including J.C. Penney's recent entrance into the category — Home Depot logged another double-digital sales gain. This type of ongoing share grab should help boost the retailer's fiscal fourth-quarter sales, as the period is typically robust for appliance sales.

Home Depot beats Street on top and bottom line

On a macroeconomic level, management pointed to a slew of data they argue should continue to boost home improvement retailers more broadly. They include home price appreciation, housing turnover, household formation and an aging supply of homes.

In markets where there has been a substantial uptick in home prices, such as San Francisco Bay, the retailer hasn't seen a slowdown in big-ticket spending, Tome said. Other markets such as Chicago and Atlanta are still down double-digits from their peak.

"We see real opportunity for continued improvement [in those markets]," Tome said.

Management also addressed concerns about the spike in mortgage rates following the election of Donald Trump, saying the company has a "long way to go" before its business is hurt by rising interest rates. Back in 2000, Tome said, 22 percent of homeowners' incomes were used for mortgage payments; now, that number is about 14 percent.

Menear added he doesn't anticipate a change in broader economic growth drivers as a result of Trump's election.

Home Depot's sales rose 6.1 percent during the fiscal third quarter, coming in at $23.2 billion and topping Wall Street's expectation of $23.05 billion. The company also beat on the bottom line, reporting earnings of $1.60 a share, adjusted, compared with $1.36 a year ago. That 2 cents per share earnings beat — and subsequent increase in full-year guidance — were boosted by a lower-than-expected share count and a more modest tax rate.

Despite those caveats, analysts were impressed by Home Depot's results. Not only should they reassure the market that the housing recovery is on solid footing, but they show its internal initiatives should help power it forward.

"We continue to believe that Home Depot will distinguish itself in the market over the coming years with share gains," Jefferies analyst Daniel Binder said. "As a result, we believe it could still be a rare outperformer in retail even as the Fed raises rates."

Fellow home improvement retailer Lowe's is scheduled to report its results Wednesday.

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