Home Depot's Earnings Exceed Expectations But Sales Fall Short

Trouble Is on the Horizon for Retail Chains

Benzinga · 11/19/2019 14:59

Trouble Is on the Horizon for Retail Chains

Home Depot Inc (NYSE: HD) just reported its third quarter earnings. The Atlanta-based company trimmed its fiscal year sales outlook, explaining that its sales fell below expectations because of the timing of benefits of its strategic investments. For the year, the Dow Jones giant still expects earnings per share growth of 3.1% but trimmed its sales growth view to 1.8% from 2.3%. As a result, hares of Home Depot dropped more than 5.8% in premarket trading.

Third Quarter Earnings Report

Revenue rose 3.5% to $27.22 billion, whereas Wall Street expected 27.53 billion. But adjusted earnings came to $2.53, exceeding analysts' forecasts of $2.52. In the same quarter last year, they came to $2.51 per share. A somewhat rocky third quarter left the company with a net income of $2.77 billion.

Competition

Its rival Lowe's Companies Inc. (NYSE: LOW) is reporting earnings on Wednesday. To keep its customers away from its smaller rival, the largest US home improvement chain invested heavily into its online business by improving functions of the website to make in-demand products more easily accessible. The company even added lockers in stores for shoppers who want to pick up their orders as opposed to wait for them to be delivered. They also worked to improve the supply network to shorten delivery times. But the benefits of all these efforts seem to be taking a bit more time to show.

Last quarter, Home Depot lowered its sales outlook for the year due to fears that the trade war will pressure consumer spending down. In the second quarter of 2018, Lowe's said that the company added 35,000 new customers as the company focused more on professional contractors, but did not disclose the total number of customers for competitive reasons. Lowe has a market value of nearly $89 billion and has gained 24% year to date. But Home Depot's rocky third quarter results also pulled shares of smaller Lowe down nearly 3% in premarket trading.

Outlook

The company's shares did hit a 52-week high of $239.31 on Monday. And the stock, which is valued at $262 billion, has surged 39% in 2019. Also on the bright side, Jefferies Financial Group Inc finds that foot traffic in stores and e-commerce website visitations favour Home Depot over Lowe's. But Home Depot already lowered its sales outlook for the year in the last quarter due to fears that the trade war and consequent tariffs will pressure consumer spending down. No company can surely benefit from that scenario.

The earnings season might be nearing its end but there are more retailers to come. Last week, Wall Street rewarded Walmart Inc (NYSE: WMT) that posted strong quarter results as the company shifts in the Amazon era. But its rival Target Corporation (NYSE: TGT) will post earnings tomorrow and it seems to be even better off as its shares rose 70% this year. And then there's Macy's that will report its results later this week and show how is it managing to deal with to the changing retail environment.

The general vibe is that retailers are having difficulties to grow due to companies leaving them to focus on ‘direct-to-consumer' sales, like Nike Inc (NYSE: NKE) leaving Amazon.com, Inc. (NASDAQ: AMZN). So whichever industry you opt for, evolving changes are on the horizon so we need to wait and see how will retailers recover from these blows.

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