Home Depot’s Warning for Investors

Home Depot (NYSE:HD) just closed out a record fiscal year that saw the chain post $22 billion in annual sales. Consumers spent aggressively on upgrading and remodeling their homes at a time when other budget categories, like vacations and away-from-home entertainment, slumped.

Those spending priorities might change just as dramatically over the next year as the pandemic winds down, management warned in their latest earnings report. As a result, it’s not possible to predict how the current fiscal year will play out.

Investors were disappointed to hear that cloudy outlook, along with Home Depot’s prediction that costs might be rising over the next few years. The stock price dropped about 5% just after the report was released.

Let’s take a closer look at what Home Depot management had to say.

A customer picks out pieces of lumber.

Image source: Getty Images.

Sales sped up

The spring selling season is Home Depot’s biggest, but the holiday period is still important to the business. That’s why it was good news that sales growth landed at 25% in the fourth quarter to mark an acceleration from the prior quarter’s 23% boost.

The chain worked hard to boost inventory levels heading into the quarter, and that success paid off with some of the fastest sales gains of the year. “The team demonstrated flexibility … in a very challenging environment,” CEO Craig Menear said in a press release, “deliver[ing] record-breaking sales and earnings.” Revenue gains were supported by both rising customer traffic (up 13%) and surging spending per visit (up 11%).

Costs are rising

The news wasn’t as bright around costs, which jumped in areas like labor, fulfillment, and the e-commerce platform. These initiatives pushed profitability lower, but management said the spending was necessary to protect recent sales gains.

“We continue to lean into these investments,” Menear explained, “because we believe they are critical in enabling market share growth in any economic environment.” Operating profit for 2020 landed at $18.3 billion, or 13.9% of sales, compared to $11.2 billion, or 14.4% a year ago.

No clear outlook

Management didn’t venture a sales and profit outlook, as it usually does when it closes out a fiscal year. There’s no telling how consumer demand will play out as the virus threat fades and spending patterns adjust back to more normal rates.

Executives did say that if demand held at the same pace it did in the second half of 2020, then sales would be roughly flat this year and profitability would hold steady at 14%. Yet last year was the most volatile selling environment in modern times, so investors should brace for rocky year-over-year results through 2021.

Home Depot’s stock repurchase spending plummeted last year, too, as the chain marshaled resources to protect against a potentially prolonged slump. The company didn’t signal an end to that cautious approach, but management did announce a 10% increase to the annual dividend payment.

Considering that pre-tax earnings rose at double that rate in 2020, the hike can be taken as another sign that Home Depot is bracing for some tough operating conditions ahead. Like Walmart did earlier in the month, the chain suggested that it will need to spend aggressively to maintain the sales volumes and market share levels it won through the pandemic.

The priority last year was to meet the soaring demand. Fiscal 2021, in contrast, will be pressured by volatility compared to that disruption. Meanwhile, Home Depot is paying extra costs associated with making the business hum along just as efficiently at $132 billion of annual sales as it did in 2019 at $110 billion.