By Neil Saunders
Since Home Depot’s numbers were boosted by various natural disasters last quarter, it would be hard for the company to beat such growth in the current period. Even so, the world’s largest home improvement player managed to post an impressive set of numbers that underline its continued strength.
While it is far from being a key destination for holiday purchases, Home Depot’s improved marketing and strong in-store execution and displays helped to edge up holiday-related sales.
On a total basis, net sales rose by 7.5%, underpinned by a 7.2% increase in U.S. comparables. While these figures are slightly weaker than last quarter, they remain well above average – mostly because Home Depot is still getting some benefit from the ongoing rebuilding work after the natural disasters. This advantage will continue to have a tangible impact into the next quarter, before dissipating.
The extremely cold weather over large parts of the country at the start of this year also aided sales. Demand for winter products like snowblowers, shovels, and ice melt were all elevated, and customer data shows that Home Depot was the number one choice for many of these purchases. Frigid conditions are expected to necessitate an above average amount of repair and renovation work in February and March, which will provide a little uptick to sales over the next quarter.
Favorable economic tailwinds power growth
The holidays also provided a boost to Home Depot. While it is far from being a key destination for holiday purchases, Home Depot increased its share of customers buying decorations and household holiday accessories this past season. Improved marketing and strong in-store execution and displays helped to edge up holiday-related sales.
While unexpected or one-off events are helpful to Home Depot, they are not the only reason for its success. Favorable economic tailwinds, especially from the housing market, have been the fuel powering its growth. This dynamic looks set to continue into 2018 as a shortage of housing in many U.S. markets is keeping prices inflated while demand remains strong.
Meanwhile, high levels of consumer confidence will continue to boost home improvement spending from those not moving. Survey data shows that more people are planning big improvement projects this year than last and Home Depot expects to be the main beneficiary of this trend.
Prospects for bottom line look healthy
Less-intense tailwinds will also help performance. This includes the difficulties of Sears, which continues to cede market share in categories like appliances, tools, and outdoor products. While gains from Sears’ demise will be spread among many retailers, it still looks likely that Home Depot will take the biggest chunk of share in 2018.
Total sales growth is expected to fall back from the current elevated level to a more normalized 6.6% across the coming fiscal year. Similarly, comparables will trend downward to a still perfectly respectable 5.2%. These numbers are our initial forecasts, but we see more of an upside from unexpected severe weather or natural disasters than a downside from deteriorating economic conditions.
The prospects for the bottom line also look healthy. Admittedly, the 2% net earnings growth posted this quarter looks anemic. However, as this is the result of higher tax charges, rather than any deterioration in operating income, it gives no cause for concern.
In 2017, Home Depot was one of the success stories of U.S. retail. This narrative is expected to continue in 2018.
Neil Saunders is managing director of GlobalData Retail.