Home Depot shares fall after earnings miss and retailer's expectations of slowing sales in 2019

Key Points
  • Home Depot's quarterly earnings and sales come up short of analysts' expectations.
  • The nation's largest home improvement retailer also offers a weaker-than-anticipated profit and sales outlook for fiscal 2019.
Oppenheimer analyst breaks down Home Depot's earnings report
Oppenheimer analyst breaks down Home Depot's earnings report

Home Depot on Tuesday reported fourth-quarter earnings and sales that missed analysts' expectations and offered a weaker-than-anticipated outlook for fiscal 2019.

With U.S. home sales and prices under pressure, fewer shoppers are heading out to buy materials for home projects and renovations. The company also said that it was unprepared for the "extent of unfavorable weather" nationwide during the quarter.

"Wet weather delays projects, and that is evidenced in our sales performance in the quarter," CEO Craig Menear told analysts on the conference call.

Home Depot shares fell less than 3 percent trading on the news. Rival Lowe's shares dipped nearly 2 percent before recovering.

Here's what Home Depot reported for the fourth quarter compared with what analysts were expecting, based on data from Refinitiv:

  • Earnings per share, adjusted: $2.09 vs. $2.16 expected
  • Revenue: $26.49 billion vs. $26.57 billion expected
  • Same-store sales: up 3.2 percent vs. growth of 4.5 percent expected

Home Depot reported net income for the quarter ended Feb. 3 of $2.34 billion, or $2.09 per share, compared with $1.78 billion, or $1.52 a share, a year earlier. The latest results included a pretax impairment charge of roughly $247 million, or 16 cents per share, tied to Home Depot's wholesale business, Interline Brands. Analysts were calling for earnings of $2.16 a share, according to a poll by Refinitiv.

Revenue for the quarter climbed nearly 11 percent from a year earlier, to $26.49 billion from $23.88 billion. That also came in short of analysts expectations for $26.57 billion. Chief Financial Officer Carol Tome said that the weather-driven demand negatively impacted sales by 0.85 percent.

"We saw through the quarter warmer weather in the month of December," said Brian Nagel, Oppenheimer senior equity research analyst. "For home improvement that's a negative."

Sales at stores open for at least 12 months were up 3.2 percent, missing expected growth of 4.5 percent. Home Depot said customer transactions were up 7.7 percent during the quarter, while the average shopper's ticket increased 2.5 percent, and sales per square foot were up 4.9 percent.

Home Depot also announced a dividend increase of 32 percent, to $1.36 a share, and a new $15 billion share repurchase program.

Looking to fiscal 2019, which includes 52 weeks compared with 53 in 2018, the company said it expects to earn $10.03 per share, 23 cents short of analysts' forecasts, according to Refinitiv data. Home Depot is calling for same-store sales to be up 5 percent in fiscal 2019, with revenue climbing roughly 3.3 percent. In fiscal 2018, same-store sales climbed 5.2 percent, and revenue was up 7.2 percent.

CEO Craig Menear said "the health of the economy and the consumer, as well as the momentum of our strategic investments" should help the retailer meet its new targets.

The company has been spending aggressively to bulk up its e-commerce business and narrow the delivery window, or time it takes to get shipments to customers' homes. In July, Home Depot said it planned to spend $1.2 billion over the next five years on its supply chain.

A year ago, Home Depot benefited during the fourth quarter from selling more appliances. As Sears' store base continues to shrink, and with J.C. Penney pulling out of the appliance category, Home Depot is expected to continue to take a larger share of that market. But that also means Home Depot faced a tough comparison this fourth quarter compared with 2017.

"Home Depot and Lowe's face tough year-over-year comparisons in the fourth quarter that included hurricane-related sales and a strong year ago December that was negatively impacted by weather in 2018," Wells Fargo analyst Zachary Fadem said in a note to clients ahead of Tuesday's report.

"The housing market remains delicate," he added.

For much of last year, confidence in the U.S. housing market soared, benefiting Home Depot and Lowe's. But with mortgage rates climbing, attitudes have since started to turn sour. This may lead to home prices rising at a slower rate and the market cooling down, which has sparked some fears for the sector.

As of Monday's market close, Home Depot shares are up nearly 11 percent this year, bringing its market cap to roughly $214.6 billion. Lowe's, which has a market cap of about $84.3 billion, has seen its shares rise roughly 14 percent this year.