After a strong second quarter in which TheHome Depot 's (NYSE: HD) sales rose 8.4% and earnings surged 35.6%, the home-improvement giant's senior leadership team used its earnings conference call to explain some key trends that were impacting results. Here are the major takeaways for investors.
Fewer home sales aren't cause for concern
Let's just look at the math of housing turnover. With 4% of units turning, that's about 5 million households turning. And I'm looking at occupied households today. That's 5 million units turning. The average spend is $3,500 per unit. That means the market opportunity for housing turnover is $17.5 billion. If you use our NAICS market share of 28%, that gets you $5 billion-ish of sales. So, $5 billion-ish of sales on our base of $100 billion suggests that turnover just isn't that important. Just for fun, I modeled what could happen, using that simple math, if turnover were to decline 15%. No one's projecting that. But model it just for fun. The impact on comps -- again, it's not very big -- was less than 1%.-- CFO Carol Tome
A low supply of for-sale properties is having a negative impact on home sales. Housing turnover -- transactions involving the transfer of ownership -- currently stands at about 4% of homes in the U.S., down from a historical average of around 7.5%.
With the typical buyer spending about $3,500 on home goods after purchasing a new house, housing turnover is a multibillion-dollar market opportunity for home-improvement retailers like Home Depot. It's therefore understandable that Wall Street would be worried that lower-than-normal housing turnover might dent Home Depot's sales and profit. Yet CFO Carol Tome made it clear during the call that housing turnover actually has less of an impact on Home Depot's business than many analysts believed, and that even a worse-than-expected decline in turnover would have a muted effect on the retailer's business.
Tome also explained that investors would be better served by looking at the housing market as a whole rather than at any one metric in isolation. For example, although a low supply of for-sale homes is negatively impacting housing turnover, it's also leading to home price appreciation. And when home prices rise, homeowners tend to invest more in their houses. So while Home Depot may see fewer turnover-related sales, it benefits when homeowners spend more on home improvement projects as the values of their homes rise.
In fact, it's these homeowners that are having the largest impact on Home Depot's revenue. "... [I]t's the 96% of the housing units that are in place that are driving the home improvement spend and not so much the marginal turnover that the media tends to pay attention to," Tome said during the call. As such, Home Depot CEO Craig Menear feels "very positive about the strength of the home-improvement sector and the customer's willingness to spend."
Judging by Home Depot's second-quarter results, Menear has reason to be optimistic.
Fast delivery is making Home Depot a powerful force in e-commerce
Our digital business continued to be a source of growth. Online traffic growth was healthy and second-quarter online sales grew approximately 26% from the second quarter of 2017. Customers continue to respond to ongoing investments and enhancements we're making in support of the customer experience.-- CEO Craig Menear
Home Depot's stores remain the foundation of its business. Yet the home-improvement titan has also become a leader in online retail. In fact, Home Depot is now the fifth-largest e-commerce retailer in the U.S., behind Amazon , eBay , Apple , and Walmart , according to research company eMarketer .
Fast and convenient delivery options are proving popular among Home Depot's most valuable customers: professional contractors . The company now offers same-day delivery services across nearly all of its major markets. In that regard, Senior Vice President of Supply Chain and Product Development Mark Holifield said that Home Depot offers the "fastest, most efficient delivery in home improvement."
Holifield also highlighted the company's broad coverage area. "We'd match our coverage of same-day delivery up against anyone in the marketplace, and we'd say that our home-improvement capability is unmatched in the marketplace," Holifield said. These fast delivery options are helping to fuel growth in Home Depot's online sales.
Better still, Home Depot's e-commerce growth is also boosting in-store traffic, as 47% of its online orders are picked up in its stores.
Dividends and buybacks will remain an important part of shareholder wealth creation
Year-to-date, we have repurchased approximately $3 billion of our outstanding shares and now we expect to repurchase approximately $6 billion of our outstanding shares for the year.-- Tome
The outstanding performance of its stores and online operations is helping Home Depot deliver bountiful profits. Net earnings jumped 26% year over year during the first six months of 2018, to $5.9 billion.
In addition, Home Depot's cash flow production remains robust. During the first half of the year, free cash flow checked in at a whopping $6.9 billion. Management remains committed to passing much of this cash on to shareholders via stock buybacks and a rising dividend income stream. And with Home Depot's cash dividend payments accounting for only about a third of its free cash flow, investors can expect more dividend increases in the years ahead.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short February 2019 $185 calls on Home Depot, and long January 2020 $110 calls on Home Depot. The Motley Fool recommends eBay and Home Depot. The Motley Fool has a disclosure policy .