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Earnings Results: Home Depot stock climbs toward 5-month high as ‘incredibly resilient’ customers, inflation boost sales above expectations

Shares of Home Depot Inc. got a big boost Tuesday, as “incredibly resilient” customers helped the home improvement retail giant report record earnings that beat expectations.

The company stressed that it achieved record results while navigating a rather “unique” operating environment of inflation, high interest rates and supply chain disruptions, as well as a tight labor market and signs of a slowdown in the housing market.

The stock

shot up 4.3% in afternoon trading, to put it on track for the highest close since March 18. The stock has now soared 22.0% since closing at a 15-month low of $268.98 on June 22.

The company reported net income for the quarter to July 31 that rose to $5.17 billion, or $5.05 a share, from $4.81 billion, or $4.53 a share, in the same period a year ago. That beat the FactSet consensus for earnings per share of $4.95.

Sales grew 6.5% to $43.79 billion, to exceed the FactSet consensus of $43.36 billion.

Overall same-store sales increased 5.8%, topping the FactSet consensus of 4.9% growth, while U.S. same-store sales rose 5.4% to top expectations of a 4.8% rise.

Sales increased even through the number of transactions decreased 3.1%, because the average ticket increased by 9%, said Jeff Kinnaird, executive vice president of merchandising, on the post-earnings conference call with analysts. The growth in average ticket was driven primarily by inflation across the company’s product categories, he said.

On the downside, “deflation from core commodity categories,” such as lumber, hurt the growth in average ticket by 14 basis points (0.14 percentage points), Kinnaird said, according to a FactSet transcript.

Meanwhile, cost of sales increased 6.8% to $29.31 billion, as gross margin contracted 15 basis points to 33.1%.

For the full year, the company affirmed its previous guidance for overall sales and same-store sales to grow about 3%, and for EPS to increase in the mid-single digits percentage range.

When asked on the conference call if a slowdown in the housing market has started to leak into the home improvement market, management said “we have not seen that yet.”

Wells Fargo analyst Zachary Fadem reiterated the overweight rating on Home Depot’s stock and the $350 price target, citing “solid” margins and “encouraging” forward commentary.

“All in, the housing overhang remains, yet we see valuation discounted accordingly…and considering a business firing on most cylinders, we believe the shares can work nicely from here,” Fadem wrote in a note to clients.

Home Depot’s stock has run up 10.9% over the past three months, while the Dow Jones Industrial Average

has tacked on 5.9%. Shares of rival Lowe’s Companies Inc.
which reports results before Wednesday’s open, hiked up 3.3% on Tuesday, and have advanced 10.4% over the past three months.

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