Home Depot falls most since 2020 as margins bogle investors

Bloomberg

Home Depot Inc shares fell the most in almost two years after fourth-quarter profitability missed Wall Street’s expectations amid supply-chain investments and higher costs.
While sales remained robust for the home-improvement retailer, much of the growth appeared to be driven by higher prices as customer transactions declined and the cost of sales increased. Gross margin, a closely watched gauge of profitability, fell from a year earlier.
“While we are encouraged by the consistent and resilient demand we’ve seen for home improvement, broader uncertainty remains with respect to the impact of inflation, supply-chain dynamics and how consumer spending will evolve through the year,” Chief Financial Officer Richard McPhail told analysts on the company’s conference call.
In an interview, McPhail said transactions fell because stocks of certain goods such as electrical supplies aren’t enough to meet demand, which remains elevated. The company is working to rebuild inventories in those areas, he said.
“Transaction demand does not equal actual demand,” McPhail said. “We’re still operating in what we would call storm-like conditions, where as soon as you put the product on the shelf it sells.”
The home-improvement giant’s market capitalisation, which had passed that of Walmart Inc last year, has since slid back below the value of the world’s largest retailer.
Home Depot offered investors a roadmap for 2022, with comparable-store sales growth expected to be “slightly positive” this year after an 11% gain in the year ended on January 30. It projects that earnings per share, after excluding some items, will rise by a low-single-digit percentage following a 30% increase last year. Analysts surveyed by Bloomberg had forecast 2.4% comparable sales growth and about a 5% increase in earnings this year.
The company should continue to benefit from a tight US housing market that is encouraging homeowners to fix up their dwellings to boost their value. But the impact of potentially higher interest rates on home buying has some investors on edge about companies tied to those changes, Bloomberg Intelligence analyst Drew Reading said.
Home Depot also faces tough comparisons versus a year ago, when sales got a boost from US stimulus checks. Moreover, there might be concern about comparable-sales growth given the role inflation played in boosting the metric in the fourth quarter.
“With that as the backdrop, I think the company needed to deliver a stronger, perhaps more optimistic outlook with greater conviction if they were to change the narrative,” Reading said, adding the comparable-stores sales forecast might prove conservative.