Home Depot (HD, Financial) recently reported strong second quarter results that beat analysts’ expectations. The company reported profits of $3.5 billion for the quarter, or $3.05 per share, which is a 31% increase over the same period last year. The consensus earnings number was for $2.84 per share.
Revenue also came in above expectations, increasing 8.4% from the previous year to $30.5 billion. Analysts were anticipating revenue of $30.03 billion. Comparable store sales increased increase by 8% — the highest level in five years.
The company’s fortunes were helped by increasing sales per customer: The average customer purchase rose 5% to $66.20. While this reflects a favorable trend, it should be noted that a portion of the increase was due to inflation for lumber materials as well as commodities. Nonetheless, Home Depot continues to show robust sales and earnings stability.
Home Depot has benefited from the continuing strong economy, which is currently experiencing 4% growth on top of increased consumer confidence and spending.
The company’s performance was all the more impressive given that the housing market has been particularly weak this year, with home sales running below last year’s levels, as rising interest rates and higher prices making new home purchases less affordable. Today’s weak home sales are in part due to a lack of supply. The decline in new home construction since the housing bubble burst has now impacted a growing population, making it more expensive to move.
Home Depot has experienced a dramatic shift in terms of the source of its revenue. Previously, new home sales were the prime mover for customer purchases at Home Depot. Now, homeowners are spending money at Home Depot stores regardless of whether they have purchased a new home. Customers are comfortable spending the money on improvements because the equity in their homes has increased.
The company has also profited from an ancillary factor due to the limited housing supply: Reduction in new home construction has reduced the overall average age of homes in the U.S. any of those older homes are entering the natural cycle of necessary and unavoidable home repairs, e.g., new roofs, siding, windows and other areas of the home that need replacing. Many of these homeowners will be found shopping for these items in the aisle of their local Home Depot store.
Home Depot has taken steps to deepen its natural moat against any potential encroachment by Amazon. Home Depot is somewhat immune from the dangers of the Amazon Goliath by virtue of the costly to ship heavy manufactured items that it sells in its stores, but it nonetheless has not rested on its laurels in the online ecommerce world of the 21st century. Home Depot has employed a number of improvements for its online shoppers by providing pick-up lockers where customers can pick up goods directly instead of waiting in line at a service desk.
Though many analysts are bullish on the company given the solid results it has produced, its stock is not cheap. It sells at 19.8 times expected earnings compared to 17 times for its competitor Lowe’s (LOW, Financial).
Disclosure: I have no position in any of the securities referenced in this article.
