Home Depot's Sales Rebound Muted by Inflation in Fuel and Lumber

(Bloomberg) -- Home Depot Inc.’s sales rebounded last quarter as Americans took on more remodeling projects, but rising costs for lumber and transportation are weighing on profitability.

The home-improvement chain said same-store sales increased 8 percent in the three months ended July 29, topping the projected 6.5 percent increase compiled by Consensus Metrix. The results signal a rebound from the previous quarter’s disappointment, when a longer winter pushed off outdoor renovations.

But investors’ reaction to the robust sales gain was muted, with the shares rising less than 1 percent on Tuesday morning after an earlier decline. The company said inflation on everything from raw materials to fuel and transportation led it to slightly cut its outlook for gross margin; it now expects the gauge to expand by 41 basis points this year, down from a previous forecast of 44 basis points.

“We are doing our best to manage through it, but there is a real issue in the transportation markets in our country,” Chief Financial Officer Carol Tome said in a call with analysts after reporting second-quarter results.

This didn’t stop the company from increasing its annual forecast. Home Depot sees this year’s revenue gaining 7 percent and earnings at $9.42 a share. It had previously projected a sales gain of 6.7 percent and profit of $9.31 a share.

Home Depot's Sales Rebound Muted by Inflation in Fuel and Lumber

Home Depot and its smaller rival Lowe’s Cos. are often seen as proxies for the health of the housing sector because property owners spend more on their homes when they believe values are rising. But for several quarters there’s been increasing concern that years of robust home-price gains are cooling. For its part, Home Depot has continually said that a shortage of available homes in many markets would actually underpin higher home-improvement spending.

While Home Depot’s first-quarter results were hurt by prolonged cold temperatures and snow, the company said at the time that property owners had embraced big projects as the weather warmed up in May.

“Not only did our seasonal business rebound from the first quarter, but our overall results exceeded our expectations,” Chief Executive Officer Craig Menear said in a statement Tuesday.

Rising wages, consumer sentiment and home values continued to give Americans confidence to invest in their homes, Tome said. Edward Decker, executive vice president of merchandising, cited a 10.6 percent increase in the period of purchases over $1,000. And revenue from professional contractors grew more than the overall business, another signal that homeowners are taking on big projects.

Earnings in the quarter amounted to $3.05 a share, Atlanta-based Home Depot said. Analysts had estimated $2.84.

Related: Home Depot’s Guide for 2H Deceleration Expected, Goldman Says

Even as the overall housing market looks to be cooling, several trends are driving demand for home-improvement products. A shortage of available listings has slowed property purchases, causing some owners to opt for sprucing up their homes instead. Additionally, more people are staying longer in their homes, which also supports the uptick.

The labor market also plays a role: A strong run of hiring, coupled with moderate wage growth, has boosted Americans’ wherewithal to spend money on fixing up their homes. Spending on home improvement -- which accounts for about 38 percent of private residential construction outlays -- surged 13.8 percent in June from a year earlier to reach $221 billion, according to Commerce Department data.

Going forward, the job market may continue to propel housing and remodeling demand. But potential hurdles include a pickup in mortgage rates, a shortage of skilled workers for building and remodeling projects, and rising costs for construction materials such as lumber, which is affected by tariffs.

Home Depot’s current pace of sales growth “will be hard to sustain,” said Joe Feldman, an analyst for Telsey Advisory, on Bloomberg Television. He cited the company’s forecast for comparable-store sales growth at a mid-single digit percentage rate for the next few years.

Nonetheless, “housing may be slowing down in terms of home sales, but home prices are OK,” he said.

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