Aggression. We like it. The question is… do investors like it? Home Depot (HD) released the firm’s third quarter financial performance on Tuesday morning, just one day after announcing the all cash $8 billion deal ($56 per share) acquisition, or re-acquisition of HD Supply (HDS) . Home Depot had spun off the unit, which was one of North America’s largest industrial products distributors back in 2007. The boards of both companies have already unanimously approved the deal, which is expected to close prior to the end of Home Depot’s current fiscal quarter. That quarter expires one month into the calendar year.
For the quarter reported, Home Depot posted EPS of $3.18, which beat Wall Street by about 15 cents. Revenue generation landed at $33.54 billion, beating the tar out of consensus view in the mid to high $31 billions. Sales amounted to growth of 23.3% year over year, matching the growth that the firm experienced last quarter as Americans have flooded their way out of urban areas during the pandemic, creating a dramatic increase in demand for what firm’s like Home Depot and Lowe’s (LOW) offer.
What caught my attention right away was comparable store sales, which exploded 24.1% higher for the quarter (24.6% in the U.S.), absolutely crushing estimates of 16.9%. Transactions increased 13%, while the average ticket price increased 10%. Sales per square foot jumped 23.1%, while total store count grew 5%. Know a lot of retailers still increasing their store count? Well, here’s one. Can’t wait to see what Lowe’s throws through the hoop tomorrow.
There is a problem however, but a good one, which leads us back to the top of the first paragraph. Aggression. Gross margin of 34.2% missed expectations of 34.5%. Operating margin of 14.5% just missed the 14.6% that the street was looking for. What gives? People. That’s what. The firm had told us previously that through early August, it had spent $1.3 billion on additional employee compensation due to the impacts of the Covid-19 pandemic. The firm told us today that at least some of these employee compensation programs will become permanent, This will result in about $1 billion in additional payroll expenses per year moving forward.
There is no doubt that the firm is executing at an outstanding level. The best word would be excellent. Why is the stock trading lower? The answer is threefold. One, this is a down morning across equity markets, and this is a name where traders have sizable profits. Two, the firm has flat out told investors that they are going to be aggressive. They are going to spend money on re-acquiring a business that should solidify and strengthen the firm’s market share among professionals, and then spend some more on their employees. This breeds “esprit de corps”, this breeds loyalty, and will pay off down the road. However, this hurts margin right now, and for the short term.
Third, and perhaps most importantly… is the outperformance of the past two quarters sustainable post-pandemic? The folks may stop moving out to the suburbs. Folks may have less time to work on their homes. The increased expenses will not disappear though, at least not right away should there be a post-pandemic precipitous drop in demand. I am long the name. Despite today’s drop, I do not yet see this as a buying opportunity. I think it best to wait and see what Lowe’s says, and then compare.
Readers will note that coming out of the pandemic-induced cup with handle pattern, these shares did break out, peaking around $292. HD has been in a trading range (basing pattern) since late July/early August. Nothing has changed. Our pivot remains $292, our panic point… $262. I do not buy here (yet), I do not sell here. I do buy on momentum around the just surrendered 50 day SMA of $278, which seems far away, but the shares did trade there yesterday. Remember, Home Depot does pay a $1.50 quarterly dividend. That’s six bucks a year, or 2.15%. I would prefer to hang on, than be forced out. Plus, we have Amazon (AMZN) and Tesla (TSLA) in inventory which allows us to tough out some negativity in names such as this, Walmart (WMT) , and CVS Health (CVS) .
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