Home Depot Falls Most Since 2020 as Margins Spook Investors
Home Depot Falls Most in a Year on Eroding Profitability
(Bloomberg) -- Home Depot Inc. shares fell the most in almost two years Tuesday after fourth-quarter profitability missed Wall Street’s expectations amid supply-chain investments and higher costs.
While sales remained robust for the home-improvement retailer, much of the growth appeared to be driven by higher prices as customer transactions declined and the cost of sales increased. Gross margin, a closely watched gauge of profitability, fell from a year earlier.
“While we are encouraged by the consistent and resilient demand we’ve seen for home improvement, broader uncertainty remains with respect to the impact of inflation, supply-chain dynamics and how consumer spending will evolve through the year,” Chief Financial Officer Richard McPhail told analysts on the company’s conference call.
In an interview, McPhail said transactions fell because stocks of certain goods such as electrical supplies aren’t enough to meet demand, which remains elevated. The company is working to rebuild inventories in those areas, he said.
“Transaction demand does not equal actual demand,” McPhail said. “We’re still operating in what we would call storm-like conditions, where as soon as you put the product on the shelf it sells.”
Home Depot fell 8.9% in New York trading on Tuesday -- the most since March 2020 -- bringing the stock’s decline this year to almost 24%. The home-improvement giant’s market capitalization, which had passed that of Walmart Inc. last year, has since slid back below the value of the world’s largest retailer.
Home Depot offered investors a roadmap for 2022, with comparable-store sales growth expected to be “slightly positive” this year after an 11% gain in the year ended Jan. 30. It projects that earnings per share, after excluding some items, will rise by a low-single-digit percentage following a 30% increase last year. Analysts surveyed by Bloomberg had forecast 2.4% comparable sales growth and about a 5% increase in earnings this year.
Higher Interest Rates
The company should continue to benefit from a tight U.S. housing market that is encouraging homeowners to fix up their dwellings to boost their value. But the impact of potentially higher interest rates on home buying has some investors on edge about companies tied to those changes, Bloomberg Intelligence analyst Drew Reading said.
Home Depot also faces tough comparisons versus a year ago, when sales got a boost from U.S. stimulus checks. Moreover, there might be concern about comparable-sales growth given the role inflation played in boosting the metric in the fourth quarter.
“With that as the backdrop, I think the company needed to deliver a stronger, perhaps more optimistic outlook with greater conviction if they were to change the narrative,” Reading said, adding the comparable-stores sales forecast might prove conservative.
Home Depot forecast a flat operating margin this year. Investors are watching closely to see how the company is navigating a stubborn bout of inflation in the U.S. that has eroded many companies’ profitability.
McPhail said pressure on gross margin will continue as the company continues to invest in supply-chain improvements. The company is creating expansive distribution centers across the U.S. in order to get building materials and suppliers more quickly to contractors, who are a key part of the company’s customer base. It expects the majority to come online this year and next.
Wells Fargo analyst Zachary Fadem said the pronounced decline in the stock is “harsh, yet not a complete surprise in today’s unforgiving market.” In a note to clients, he called the guidance for positive comparable-sales and stable margins a “relative win” for the company. “That said, if relative winners are treated this poorly, it certainly doesn’t bode well for broader retail prints ahead,” he added.
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