Home Depot earnings beat as shoppers focus on home, retailer to make pandemic pay raises permanent

Key Points
  • Home Depot on Tuesday reported third-quarter earnings that beat estimates with sales surging about 24% compared with a year ago as coronavirus pandemic home improvement buying continued.
  • The company said some of its temporary employee compensation programs that it implemented during the pandemic will become permanent wage increases.
  • The company said it was continuing to benefit from the stay-at-home spending patterns through the beginning of November.

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Home Depot Q3 earnings beat expectations as sales surge

Home Depot on Tuesday reported third-quarter earnings that beat estimates as consumers continued to focus on home improvement during the coronavirus pandemic and sales surged 24% from a year ago.

The company said some of the temporary employee compensation programs that it implemented during the pandemic will become permanent wage increases, which will result in $1 billion of additional expenses per year. CEO Craig Menear said on a conference call with investors that the company has spent about $1.7 billion on temporary pay and benefits so far this year.

Despite the higher-than-expected earnings, Home Depot stock fell about 3% in early trading. In an interview on CNBC's "Squawk Box," Brian Nagel, senior analyst at Oppenheimer, attributed the slide to concerns that Home Depot's gains during the pandemic aren't sustainable.

Nagel added that the permanent compensation plans Home Depot is now offering to employees are "one more indication" that it's increasingly more expensive to operate as a retailer during the pandemic.

Home Depot did not provide a full-year outlook. Chief Financial Officer Richard McPhail said the company can't comment on 2021 because of macroeconomic uncertainty due to the pandemic.

Here's what the company reported compared with what Wall Street was expecting for the fiscal third quarter, based on a survey of analysts by Refinitiv:

  • EPS: $3.18 vs. $3.06 expected
  • Revenue: $33.54 billion vs. $32.04 billion expected

During the fiscal third quarter ended Nov. 1, Home Depot's net income surged 24% to $3.43 billion, or $3.18 per share, up from $2.77 billion, or $2.53 per share, a year earlier. Analysts surveyed by Refinitiv were expecting earnings per share of $3.06.

Net sales rose 23% to $33.54 billion, from $27.22 billion reported a year ago. The retailer topped analyst expectations of $32.04 billion. Menear said digital sales rose 80% year over year, with customers picking up about 60% of their orders in stores. 

Its U.S. same-store sales soared 24.6% in the quarter. The value of a customer's average purchase rose to $72.98, up 10% compared with the same time last year. Sales per square foot rose more than 23% to $552.85.

Stay-at-home spending stays strong

Sales of big-ticket items like riding mowers and outdoor power equipment remained strong through the quarter, Chief Operating Officer Ted Decker said. He added that the company hosted its "most successful Halloween event" this year, with the company's notorious 12-foot skeleton selling out before October.

The company said it was continuing to benefit from the stay-at-home spending patterns through the beginning of November.

With people spending more time at home and some leaving cities during the pandemic for spacious homes in the suburbs, Home Depot and its rival Lowe's have seen a surge in sales. It began in the spring, when both were deemed essential businesses as other retailers shuttered, and it continued into the summer as people traveled less and tackled more projects at home.

Neil Saunders, managing director of GlobalData, said in a statement that Home Depot was largely unaffected by the end of enhanced unemployment benefits, because "this difficulty is mostly confined to lower income groups who were never particularly big spenders on home improvement."

"Among those still in work, spending on the home continues to be a priority," he said. "Savings from lower outlays on commuting, eating out and not taking vacations have given consumers a pool of cash which they have diverted into home projects and activities."

Supply chain pressures

However, Decker noted that the continued increase in demand has pressured supply chains. He said the company is adapting by introducing new products, adjusting assortments and "in some cases, reducing the number of [stock keeping units] in certain categories to focus on the highest demand products."

"As a result of all these actions, we have seen reduced product lead times and continued improvement in our in-stock positions," he said. "While we are pleased with these results, we are not at pre-pandemic levels."

Still, Decker said the company is "in a great position" heading into the holiday season.

Like other retailers, Home Depot has made changes to its holiday sales events to respond to the pandemic. Black Friday sales are being spread out over an extended period of time, and it is reorganizing product placement on sales floors to create a "safe shopping environment."

As for Home Depot's professional business, it announced Monday that it will acquire HD Supply, a former unit and one of North America's largest industrial products distributors, in a deal valued at $8 billion. Home Depot spun off HD Supply in 2007 to a group of private equity firms that included Carlyle Group, Bain Capital and Clayton, Dubilier & Rice.

Menear said Tuesday that the acquisition will help Home Depot cement its leading position in the maintenance, repair and operations products market. He added that there's more than $55 billion in the space.

"That is a huge opportunity for the Home Depot to continue to grow, not only on the MRO side, but as we build relationships with customers on the MRO side, we build relationships to be able to participate in capital refreshes of those facilities as well, which is something that we're pretty focused on," Menear said.

Lowe's has been trying to capture a greater share of professional business, but Home Depot remains dominant in the segment. Along with do-it-yourself projects, the professionals market has boomed during the pandemic, too.

Lowe's is scheduled to report fiscal third-quarter earnings before the market open on Wednesday.

As of Monday's close, shares of Home Depot are up 28% since Jan. 1. The stock, which has a market value of nearly $301 billion, touched an all-time high on Aug. 27 of $292.95.

Read the full report here.

— CNBC's Melissa Repko contributed to this report.

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