Home Depot(NYSE: HD) this week announced solid sales and profit growth as the retailer took full advantage of a continued rebound in the housing market. Following the results, CEO Craig Menear and his executive team held a conference call with Wall Street analysts to put the latest business trends into perspective. Here are the key points management wanted to get across to investors in that presentation.
"All of our merchandising departments posted positive comps, led by appliances, which had double-digit comps in the quarter. Lumber, tools, outdoor garden, indoor garden, lighting, decor, and flooring were above the company's average comp." -- Merchandising Executive Ted Decker
Image source: Getty Images.
Management stressed the balanced nature of growth this quarter. Not only did all of its product departments expand, but gains were broad-based geographically as well. Every region of the county posted positive comps, led by the south. The Mexican and Canadian markets churned higher, too, and posted their 52nd and 20th consecutive positive comp quarters, respectively.
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Home Depot also enjoyed a healthy mix of customer traffic gains and average spending increases. The company served 2.4% more customers this quarter, customers who on average spent 3.1% per trip. That produced a 6% overall comps gain that trounced rival Lowe's(NYSE: LOW) 3% increase.
Winning with the pro customer
"Pro sales grew faster than the company's average comp. This led to strong comps in commercial and industrial lighting, fencing, plywood, pressure treated decking, and interior doors." -- Decker
Home Depot dominates the consumer side of the home-improvement business, but much of its growth lately has come from professional contractors. Executives refer to this segment as the "pro" niche to distinguish it from do-it-yourself shoppers.
Pro sales grew faster than the DIY segment, with transactions valued at over $900 spiking higher by 11%. That marked an acceleration over the prior quarter's 8% uptick and largely explains how the company managed to speed up its overall comps growth to 6% this quarter from 5% last quarter.
"Online sales grew over 17 percent, and represented 5.6 percent of overall sales. Over 40 percent of our online orders are picked up in the store, which we view as a positive sign of our physical store's continued relevance with our customers." -- Menear
Image source: Home Depot investor presentation.
Home Depot poured resources and management time into the e-commerce sales channel this quarter. To name just a few examples, it launched a complete redesign of its website, rolled out new buy-online-ship-from-store functionality, and shifted products between its three fulfillment centers. As a result, delivery costs and times have both declined, improving the customer experience in the process. The impressive 6% of sales that e-commerce represents for Home Depot shows that investments like these are paying off for the business.
Buying more stock
"During the quarter we took advantage of an attractive interest rate environment and raised $2 billion of incremental long-term debt. We will use the proceeds of this debt issuance to repurchase outstanding shares." -- Chief Financial Officer Carol Tome
The business is generating plenty of money, with operating cash flow reaching $7.9 billion through the first three quarters of the year, up from $7.4 billion last year. Home Depot decided to supplement those funds with more debt this quarter, though. Reflecting its strong retailing position, the company secured half of the debt at a record 3.5% interest rate paired with a 40-year maturity.
All of the proceeds will go toward stock buybacks, which means the company will now return $7 billion to shareholders through that channel (up from the $5 billion original plan) and $3.5 billion through dividends.
Tough fourth quarter ahead
"We remain encouraged by the strength of our core business. Our outlook for the remainder of the year reflects modest GDP growth, continued benefit from the U.S. housing market and, candidly, some market share gains. While we have tough fourth-quarter comparisons ... we plan for them." -- Tome
Home Depot faces a difficult fourth-quarter for growth because the comparable period last year was powered by unusually warm winter weather. Comps soared 9% to end fiscal 2015 thanks mainly to a December that was the hottest on record going back 121 years.
The company isn't likely to post huge gains over those inflated figures this time around, but management still sees comps rising by 5% for the full fiscal year. That's easily enough to ensure more market share gains over Lowe's, which projects its comps will rise by just 3.5% in 2016.
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