Hurricanes Boost Home Depot’s Sales But Pressure Margins

Home Depot (NYSE:HD) has a knack for beating consensus expectations, with a positive earnings surprise record for five years now, and it didn’t let investors down this time around as well. Profit increased to $1.84 per share, exceeding the $1.81 expected. Revenues surged in the wake of the hurricanes; however, as a result of the additional supply chain costs and the customers stocking up on low-margin products, it took a toll on the company’s bottom line. Looking ahead, hurricane-related sales will continue to positively impact the sales in the fourth quarter and in the first half of FY 2018 since that is when the homeowners will start receiving their insurance checks for damage. Furthermore, the rebound in housing prices is also not set to slow down anytime soon, which is another factor that will help Home Depot in the future.

We have a $172 price estimate for Home Depot, which is higher than the current market price. Below are the key takeaways from HD’s earnings report using our interactive platform:

Hurricanes Lift Home Depot’s Sales

HD saw an increased demand for its products as consumers prepared for, and responded to,  the wake of the hurricanes. The company was also negatively impacted by 236 store closures in the affected areas. Despite this, Home Depot managed to increase its overall comparable sales by 7.9%, more than two percentage points above estimates, helped by the hurricane-related gains, which lifted the metric by $282 million in the quarter. The comps for the US stores in the quarter were up by 7.7%. However, the sale of low-margin products, as mentioned earlier, as well as the roughly $104 million hurricane-related expenses, negatively impacted the operating profit by $51 million.

The impressive performance in the quarter, as well as the factors mentioned previously that will positively impact HD’s performance in the next quarter, prompted the company to raise its full-year guidance. HD now expects fiscal 2017 sales to increase by approximately 6.3%, with positive comps of 6.5%, and diluted earnings per share to improve by roughly 14% to $7.36. The impact of the hurricanes will continue to pressure the bottom-line, and as a result, the gross margin is expected to decline by approximately 12 basis points.

HD’s Integrated Channel Strategy Paying Off

One of the key achievements of Home Depot in the past few years has been to grow its sales without investing in additional physical assets. Its integrated retail strategy, which seamlessly connects online and offline channels, is making its stores more efficient leading to higher revenues and profitability. By focusing on an integrated channel strategy, Home Depot has been able to increase revenues per square foot, rather than generating revenues from new square footage. This has ensured that its existing store network is being effectively used to drive revenues. In Q3 2017, Home Depot saw a 19% increase in online sales, which was another key driving factor for revenue growth. Online sales accounted for 6.2% of Home Depot’s total revenues, indicating that the company has made significant progress in its e-commerce initiatives. While it seems that the online growth has slowed down, this was another metric impacted by the hurricanes, as the store closures affected their online penetration.

An interesting point to note is that 45% of the company’s online orders are picked up by customers at the store, indicating that the company’s integrated retail strategy, which allows customers to shop online but pick up from a store, is a driving factor of its e-commerce growth. An additional benefit to be derived from this strategy is that while picking up their orders the customers can see more offers and other products available in the store. As a result, approximately 20% of the times, the customer ends up buying more than just the original product.

See complete analysis for Home Depot’s stock

Have more questions about Home Depot? See the links below.

• Improving Housing Trends Bode Well For Home Improvement Companies
• Home Depot: Winning In The Multichannel Space
• Improved Housing Market And Higher E-Commerce Sales Result In A Stellar Quarter For Home Depot

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