Home Depot Costs Dragged Down Q1 Earnings Despite Increased Sales

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Home Depot Costs Dragged Down Q1 Earnings Despite Increased Sales

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What happened?

Home Depot Inc. (NYSE: HD) shares fell nearly 2% in Tuesday’s premarket after the company reported that first-quarter profits were weighed down by costs related to the coronavirus pandemic. Home Depot missed estimates for quarterly profit on 19th May, as the home improvement chain spent about $850 million on benefits for employees keeping its stores and warehouses running through the COVID-19 pandemic.

Home improvement retailer Home Depot saw solid demand in the first quarter, but earnings took a hit from the pandemic. Sales were up 7.1% to $28.3 billion, ahead of analyst estimates by $690 million. Home Depot Inc.’s first-quarter profit slid 11 percent from a year ago as the company emphasized coronavirus safety measures and enhanced employee benefits.

So what?

Home Depot may be experiencing a surge in demand from those stuck at home undertaking do-it-yourself projects, but how that demand will evolve during a deep recession is unclear. The home-improvement sector had multiple things going its way with its stores staying open because governments deemed them essential. The lockdown started in March, which is its biggest selling season mainly due to warmer temperatures.

The company’s stock bottomed in the first quarter at a $152.15 closing price on March 20 as restrictions were rolling out across the country in the midst of Home Depot’s busy season. However, the stock has bounced back, reaching record highs earlier this week, bringing its market cap to more than $263 billion. Shares are just 2.7% below their 52-week high.

From February to April, foot traffic at Home Depot rose 10% from a year ago, according to data from SafeGraph analyzed by Bloomberg. This came when overall visits to retailers and spending in the U.S. collapsed.

Home Depot Inc. reported an 11% decline in quarterly earnings as costs from boosting workers’ pay and benefits during the coronavirus pandemic offset higher sales from locked-down customers doing more projects around the house.

Home Depot was among a small group of retailers whose stores have remained open as much of the country was forced to shut down. That led to higher sales, driven in part by strong growth online, but also increased expenses as the company took steps to support its employees.

For the first quarter that ended May 3, Home Depot reported that net income fell 10.7% to $2.25 billion, or $2.08 per share, compared with $2.51 billion, or $2.27 per share, a year earlier. Analysts surveyed by Refinitiv expected the company to earn $2.27 per share.

Revenue for the quarter rose 7.1% to $28.26 billion from $26.38 billion a year earlier, topping analyst expectations of $27.54 billion. Home Depot’s same-store sales grew 6.4%, beating expectations of 4.4%, based on StreetAccount estimates.

Home Depot’s sales per square foot were $466.58, up more than 7% from $435.18 a year earlier. Its average ticket also increased to $74.70, up about 11% from $67.31 a year earlier due to a prominent increase in basket size. Early March also saw a pop in sales of cleaning, safety, and security products.

Revenue by Product Line

Now what?

It is difficult to compare reported earnings with analyst estimates for the first quarter because the coronavirus pandemic has changed customers’ shopping patterns and added additional labor and safety costs for companies. The coronavirus and the changes in consumer trends it’s spurned have led to a boom in Home Depot’s e-commerce business.

Home Depot said it took a number of steps to boost wages and keep employees coming in during the pandemic. Home Depot said these measures cost it $640 million after-tax, or about 60 cents a share. The investment in retaining employees with added benefits and boosted wages will prove to be a smart long-term decision.

Home Depot is one of the companies that is benefiting or really capitalizing, performing well through this Covid-19 crisis and is likely to perform well as the crisis headwinds abate. More people are spending more time in their homes, and an increase in spending can be seen as more people spend more time working on their houses.

Looking toward to the second quarter, Home Depot’s performance will be largely tied to its ability to ease restrictions that limit store traffic, Jefferies equity analyst Jonathan Matuszewski said. He added that limiting costs associated with the company’s response to the coronavirus will also be key to protecting earnings.

If the home improvement centers can constrain incremental expenses to meet outsized traffic while still protecting customers and employees, EPS should improve.

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