Home Depot Inc. (HD, Financial) stock rose 1.99% on Thursday to close the shortened trading week at $178.24 a share. The company's stock rose 1.62% between Monday, March 26 and Thursday, March 29. Home Depot's rise this week still has the company's stock ending the quarter down 5.2%, marking its worst quarter since 2011.
The home improvement store may also have a difficult first quarter financially when looking at the Bureau of Labor Statistics' retail sales in the Building and Plumbing Materials, Garden Equipment and Suppliers Dealers sector.
The figures are not a 100% correlation between sector sales and Home Depot sales, but the data does give investors insights into what Home Depot sales may reflect. January and February sales estimates have slowed to 4.49% and 4.62%, respectively.
New housing starts will also have an impact on the company’s sales, with some economists expecting new housing starts to potentially move into negative territory in 2018 versus 2017. Housing starts fell 7% in February, with many economists suggesting the setback may be a temporary lull.
Multi-family home construction was primarily to blame, with an increase in single-family projects being posted. Future home permits fell 5.7% to a rate of 1.298 million in February. The housing market appears to be slowing down, with new and previously owned sales slumping as a lack of housing inventory keeps prices high.
First-time homebuyers are also unable to enter the market due to high prices putting a strain on market sales.
Single-family homebuilding remained strong during the first two months of the year, giving hope to higher sales at Home Depot. Single-family home building rose by 2.9% in February, with many contractors choosing Home Depot and Lowe's (LOW) for their lumber, plumbing supplies, roofing materials and other housing materials.
An increase in the number of potential sellers staying in their homes longer and choosing to renovate is a positive factor for the home improvement market.
Home Depot's quarterly sales may be supported by the company's investment focus on e-commerce, supply chain improvements and customer service channels. Annual earnings and earnings per share have also increased dramatically between 2013 and 2017. Revenue rose from $78.8 billion to $100.9 billion, with earnings per share rising from $3.79 to $7.29.
The company has beat earnings estimates over the last five years and has vastly outpaced the industry's growth of 10.9% in the past year. Home Depot has also put a focus on digital asset updates to offer online customers a more streamlined shopping experience.
The new tax reform is also expected to help Home Depot with a projected return on investment capital of 40%. Management will increase investments over the next three years in an effort to increase shareholder value and boost customer experience.
Home Depot's gross margins contracted 10 basis points last quarter, with many analysts suggesting the company's gross margins are stretched. Gross margins have been declining over the last year, with a loss of 12 basis points in the third quarter of 2017. The losses are attributed to hurricane-related sales drops.
Gross margins are expected to be relatively flat at 34% in 2018.
Disclsure: The author does not have any stake in the listed equities.
