Is the slowing housing market real or is it an exaggeration? Home-price growth has slowed for the last several months. Meanwhile, the number of existing home sales has declined on a year-over-year basis for six straight months.
To what extent will these metrics impact Home Depot (HD), which is set to report third quarter fiscal 2018 earnings results before the opening bell Tuesday? Home Depot stock has pulled back a bit ever since the shares reached an all-time intraday high of $215.43 on Sept. 12. Based on current prices of around $184 the shares are now officially in correction territory as investors digest the new realities of the housing market. But is it really time to panic?
Although analysts expect these trends to continue, especially when combined with rising mortgage rates, Home Depot has been investing heavily in areas to help it prepare for this soft environment. And the numbers the company releases, along with its outlook, should be a stronger indicator about the strength of the housing market. Still, on Tuesday Wall Street will look to see if the company’s improved merchandising, combined with its online strategy can lead to higher same-store sales growth.
In the three months that ended October, the Atlanta, GA.-based company is expected to earn $2.26 per share on revenue of $26.26 billion. This compares to the year-ago quarter when earnings came to $1.84 per share on revenue of $25.03 billion. For the full year, ending in December, earnings of $9.55 per share would rise 28% year over year, while full-year revenue of the $108.28 billion would rise 7.3% year over year.
Beyond the top- and bottom-line numbers, Home Depot profit margins and same-store sales growth will be two major areas of focus. Wall Street is targeting net margin to rise to 10% from 8.8% in the same quarter last year. The gains will be driven by a combination of factors, namely a lower effective tax rate due to the federal tax reforms. The question is, will these gains be offset by higher costs, particularly in the company’s investments in its omni-channel strategy and its increased strategic investments?
In the second quarter, Home Depot delivered impressive same-store sales, which rose 5.3% year over year, while earnings per share of $3.05 cruised by analyst expectations of $2.84. So, despite margin and expense concerns and doubts about the strength of the housing market, Home Depot maintains its best-of-breed status when compared to Lowe’s (LOW) and other retailers that are not as Amazon (AMZN)-proof.
What’s more, the company continues to invest in various technological advancements to enhance the customer experience. It remains to be seen to what extent has these investments will pay off. But with Home Depot stock trading well below its 52-week high, combined with its recent buyback and strong dividend, investors who are willing to buy and hold for the long term can do well here.