The Home Depot on Tuesday reported that third quarter sales rose 8.1% to $25 billion. Hurricanes helped and hurt in the quarter, as storms helped add $282 million to same-store sales, though that was more than offset by the "considerably" lower gross margin in hurricane-related sales plus hurricane-related expenses that dinged profits by $51 million, according to a company press release.
Company-wide same-store sales in the third quarter rose 7.9%, and at U.S. stores rose 7.7%, beating the Retail Metrics consensus 5.5% estimate, according to a note emailed to Retail Dive. The same-store sales rise was its largest since its 10.7% increase in the second quarter of 2013, Retail Metrics President Ken Perkins wrote in an email to Retail Dive.
Earnings in the quarter were $1.84 per share, beating Retail Metrics expectations by 2 cents per share, and with that Home Depot has matched or beat analyst expectations for 12 consecutive quarters and in 37 of the last 39 quarters, Perkins said. Operating income (excluding one-time items) rose what Perkins calls "a very respectable 10%" from the year-ago quarter, the seventh straight double-digit increase.
This year’s natural disasters in the U.S., most notably hurricanes, have been showing up in retail earnings reports as factors in less-than-optimal results, but The Home Depot has the somewhat regrettable fortune of also seeing a benefit. "Though this quarter was marked by an unprecedented number of natural disasters, including multiple hurricanes, wildfires in the West, and earthquakes in Mexico, the underlying health of our core business remains solid," CEO Craig Menear said in a statement. "I am proud of our team and suppliers for their extraordinary efforts to support those in the path of the various natural disasters throughout the quarter. Our support of the impacted communities continues."
But the company’s strong same-store sales showing indicates that there’s more going on. The retailer had a high bar to clear considering its already strong same-store sales baseline, according to Gordon Haskett analyst Chuck Grom, and cleared it. "Despite an extremely high bar on the comp front, we believe [Home Depot] exceeded expectations and, equally important, demonstrated better-than-expected [key performance indicators]."
Indeed, the devastation is hardly the secret to the home improvement retailer’s success, analysts said. "Home Depot’s recent comparable store sales performance and improved sales and earnings guidance is a good indicator that the home improvement sector continues to paint a better outlook as it sidesteps broader retail woes," Moody’s Vice President Bill Fahy said in an email to Retail Dive. "Home improvement has remained a retail bright spot even as a myriad of headaches continue to afflict the broader retail industry."
Moody’s Investors Service analysts expect the home improvement retail sector overall to sustain its performance over the next 12 to 18 months, with operating income growth of between 5% and 7% in 2017 and 6% and 8% in 2018, significantly higher than their call for the broader retail industry, expected to grow at the much slower pace of 1.0% to 2.0% in 2017 and 3.5% to 4.5% in 2018.
GlobalData Retail Managing Director Neil Saunders said that the quarter’s unexpected additional sales just added to an already strong set of circumstances for the retailer, both internal and external. "The revenue benefits from rebuilding activity are helpful but, for Home Depot, they are the icing on the cake of an already strong business, which has been on an upward trajectory for many years," Saunders said in a note an email to Retail Dive. "Fortunately, we see few signs that this direction of travel will change over the next fiscal and beyond."
Like hurricanes and wildfires, some of the other factors boosting Home Depot are out of its control, including a strong U.S. housing market that is poised to continue into next year. "A shortage of housing in many U.S. markets is keeping prices inflated and activity levels high," Saunders noted. "This will fuel both the need and willingness of consumers to make home improvement related purchases. In our view, Home Depot will be the primary beneficiary of this growth."
Another phenomenon helping Home Depot (along with rival Lowe’s) is the decline of Sears, which is ceding market share in key categories like appliances, tools and outdoor products, and Saunders believes that Home Depot will be the primary beneficiary of that next year.
But Home Depot isn’t just sitting there reaping benefits of outside forces — it’s building a business that maintains a firewall against Amazon. "As much as online currently plays a relatively small role in home improvement purchasing, its influence is rising, and it is now becoming a more significant engine of growth across many categories," Saunders said. "Home Depot has created a proposition that ensures it is the go-to destination online and is successfully defending its business from the rise of Amazon and other internet players."
Plus, the retailer has positioned itself well with professionals, which has even more potential that the consumer market, Saunders said. "The short-term uplift from disaster-related spending, robust underlying demand, a good seasonal holiday offer, gathering momentum with pros, and strong traction online, all bode well for Home Depot," he said. "Looking ahead, we expect the business to end this fiscal year on a high."
The company lifted its fiscal 2017 sales growth guidance and now expects sales to increase some 6.3% and same-store sales to grow about 6.5%, according to a press release. Home Depot also raised its diluted earnings growth guidance for the year and now expects it to be approximately 14% percent from fiscal 2016 to $7.36 per share. Diluted earnings growth guidance includes the impact of $8 billion of share repurchases for fiscal 2017, the company said.