Home Depot (NYSE:HD) ended fiscal 2020 with a bang. Shoppers spent aggressively on home upgrades and furnishings in Q4 — as they have through most of the pandemic — while also setting records for holiday decoration demand.
Investors still found reasons to be disappointed by the earnings announcement, though. Home Depot didn’t notch as much market share growth as Lowe’s (NYSE:LOW) did, for example. And the home improvement giant predicted a volatile — and potentially expensive — selling environment ahead.
In a conference call with Wall Street analysts, CEO Craig Menear and his team added context to those forecasts while stressing their bright long-term outlook. Here are a few highlights from that presentation.
Context on growth
“It took us 19 years as a company to achieve the first $20 billion in total sales, and we outgrew that in this year alone,” Menear said.
Home Depot’s fourth quarter tacked $6.5 billion of additional sales on to the business, putting 2020’s total growth at a record-breaking $21 billion. For context, the chain added $2 billion to its annual footprint in 2019.
Comparable-store sales growth sped up in Q4 to hit 25%. And, while that marked the third straight quarter of slower gains than what Lowe’s achieved, management is happy with the performance. “We had a record holiday season,” Menear explained, “as our modified approach to Black Friday clearly resonated with our customers.”
“[Profitability] was negatively impacted during the quarter by several factors, including product mix, shrink, and pressure from rising transportation costs,” CFO Richard McPhail said.
Home Depot’s operating margin took a hit from extra spending in places like wages, IT, and COVID-19 precautions. Surging lumber and transportation costs also pinched profitability. Overall, adjusted operating margin fell to 13.8% of sales compared to 14.4% in 2019.
The decline would have been sharper, too, except the company held back on a few spending projects that will now impact 2021’s earnings.
“We are committed to investing in our business to stay ahead of customer expectations and further enhance the customer experience,” McPhail stated.
Home Depot suggested that profitability wouldn’t bounce back in 2021 because of rising expenses and new spending to upgrade the supply chain and support the e-commerce business. These investments in previous years were a key reason why the chain could meet all the extra demand in 2020, though, and so executives believe they are worth continuing.
There’s a wide range of potential growth ahead as the COVID-19 threat winds down, so investors should brace for a few volatile sales reports and declines for the wider year. In the meantime, Home Depot plans to return more cash to shareholders through the dividend (which just rose 10%) and resumed stock buyback spending. That repurchase channel was on pause through most of the pandemic, but the retailer is confident enough in its financial footing to restart the spending.
Taken together, these outlook comments suggest a weaker sales year as earnings hold steady or fall slightly. That performance has to be considered a win following a fiscal 2020 that saw sales soar to over $130 billion from $110 billion as operating income rose jumped 15%.
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