Home Depot Easily Beats Earnings – Stock Surges
It was Home Depot’s turn to release earnings this week, and it beat expectations on all metrics Revenue rose at $33.54 billion on $31.81 billion estimate. Also, adjusting EPS reached $3.18 when compared to $3.05 estimate. What’s even more important, is that U.S. comparable sales reached 24.6%. The expectations for this metric were a little over 19%, and the outcome was enough to send the stock price higher.
However, Home Depot is no Tesla or any other technology company that experienced significant stock market price appreciation during the pandemic. Instead, this is a home improvement retailer – the world’s largest, nevertheless. Its YTD stock price performance of 24.06% may not impress many, but the steady growth during the pandemic is nothing short of impressive.
One more thing – Home Depot just declared a $1.50/share quarterly dividend and has a forward yield of 2.21%. The dividend is to be paid to shareholders of record on December 3rd, so the ex-dividend de-facto date is December 2nd.
On the bright side, the comparable-store sales growth easily topped consensus estimates. Moreover, the number of customer transactions jumped 13%, and so did the average ticket price, albeit it grew only by 10%.
On the flip side, Home Depot reported a decline in the gross margin rate to 34.2% from 34.5%, while the operating margin rate remained more or less flat at 14.5%.
The Macro Perspective
The construction industry is of paramount importance for an economy. It has ripple effects throughout the economy, as it influences other sectors too – think real estate, home design, furniture outlets, etc. During economic recessions, central banks (and this time governments too), ease the monetary policy so that consumers (and businesses) have access to cheap credits.
Cheap credits also mean cheaper mortgages. As such, households are able to refinance old mortgages or to take one at the newly advantageous conditions. Hence, the side effects are seen on the retailers like Home Depot, increasing their average ticket and sales. This is a solid sign that the economy is recovering or, at least, it is on a good track.
Building Permits, for instance, is a leading indicator of a recovery. It shows the turn in the business cycle and is directly connected to the housing industry. For this reason, when retailers like Home Depot report earnings in a quarter dominated by an economic recession, the other market participants are watching to see the implications for the overall economy.
So far, so good.