The largest home improvement chain, Home Depot (HD, Financial), reported its third quarter results on Nov. 18 and analysts had a mixed reaction. Sales beat expectations but profit missed it by an inch. For investors, the results were not impressive and the stock slipped soon after the earnings results.
Looking into the quarter
The retailer showed better revenue generation in the quarter with sales being slightly higher than expected due to an improving job market which has encouraged home owners to increase spending on renovations. Earnings, however, took a hit.
Quarterly revenue rose to $20.5 billion from $19.5 billion, while same store sales increased 5.2% and comparable sales in the U.S. rose 5.8%. Third quarter net income rose to $1.54 billion, from $1.35 billion reported a year earlier.
The recent data breach reported in September has caused the company to incur $28 million in net expenses. However, Home Depot remained well prepared as it had a $100 million insurance policy for breach-related expenses. After insurance, the cost of data breach just breaks down to about $6 million which is a meagre sum for the company in terms of exceptional expenditure.
Despite the breach, the loyal customer base remains intact for the company as the number of transactions rose by 3% from last year’s third quarter. The total number of transactions in this quarter roughly stood at 355,000 transactions improving the yearly count till date to about 1.74 billion. Average customer ticket also rose 2.3% from last year’s similar quarter growing 1.8% in the nine month period.
CEO Craig Menear stated during the earnings call, “It is very difficult for us to determine if there is any impact [from the data breach on sales]… We have had positive transaction growth for each month during the quarter. That represents consumers’ confidence.”
Excluding both the $100 million gain in the sale of its stake in HD Supply, and $28 million in expenses in the quarter related to the recent data breach, the company posted adjusted earnings of $1.12 per share during the quarter, narrowly missing the $1.13 estimate.Ă‚
According to a research note, “HD reported Q3 operating EPS of $1.12, excluding a net benefit of $0.03 as the sale of a portion of its HD Supply investment ($100M pre-tax) offset charges related to the data breach ($28M pre-tax), this was $0.01 above our estimate, and it fell short of the consensus forecast by the same amount."
Currently, the retailer is facing several lawsuits in the U.S. and Canada due to this data breach; this might have taken a toll on the earnings to the certain extent.
Guidance is still intact
The retailer has reaffirmed its fiscal 2014 forecast of earnings of $4.54 per share, with sales expected to grow by 4.8% for the year. The CEO remains optimistic about the growth of the company going into the holiday season. He said that the company’s online sales continues to grow, but that 40% of the customers who order online still chose to pick up from the store. This shows the importance of the conventional business of Home Depot. The company has invested to ensure proper security measures being taken and continues to provide free credit monitoring and ID theft protection to those impacted by such breaches. Thus, the confidence of the consumers are not at stake and the company remains upbeat on improvement of top line in the coming fourth quarter as well.
Final thoughts
According to the management, the company has seen strong performance across all geographies led by growth in transactions and continued strength in the core of the store. Surely, there could be further growth in the top and bottom line as anticipated by the company.Ă‚
