Home Depot Rises as Performance Seen Improving in Second Half

(Bloomberg) --

Home Depot Inc.’s shares rallied amid signs of a stronger second half, in spite of a lower sales forecast from falling lumber prices and uncertainty about tariffs.

• Same-store sales -- a key gauge of a retailer’s performance -- rose 3% in the second quarter, trailing the average 3.2% projection, according to Consensus Metrix. The company now sees 4% growth for the full year in that measure, down from a previous forecast for 5%. It also sees full-year revenue growth of 2.3%, down from about 3.3%. Earnings per share exceeded analysts’ average estimate.

Key Insights

• While concerns are growing that the economy is slowing, Home Depot sees a market that’s doing well: “The current health of the U.S. consumer and a stable housing environment continue to support our business,” Chief Executive Officer Craig Menear said. Still, he cited lumber deflation and the tariff outlook for the lower sales outlook.
• The key observation, according to Chuck Grom, an analyst from Gordon Haskett, is that bad weather hurt sales one month, but performance improved after that. “It’s one of these situations where the report was no worse than feared,” Grom said. Growth improved every month -- an indication that the problems were mostly weather related, he added.
• Brian Yarbrough, an analyst with Edward Jones, said Home Depot demonstrated “good cost controls” and margins in the quarter. The lowered sales guidance due to lumber costs was already factored in by investors, he said.
• There’s about a two-quarter lag for orders, meaning the follow-through of slowing home building is hitting companies like Home Depot that are closely tied to housing. Still, the company maintained its earnings per share forecast for the year.

Market Reaction

• Home Depot rose as much as 2.7% in premarket trading Tuesday after the announcement, reversing earlier declines. The stock had advanced 21% this year through Monday’s close, exceeding gains in the S&P 500 Index.

Get More

• For more on the results, click here.
• For the company statement, click here.

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