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Earnings Results: Home Depot bounces back up after earnings beat, as inventory improvement offsets implied growth slowdown

Shares of Home Depot Inc. bounced back into positive territory Tuesday, after the home improvement retail giant extended its streak of earnings beats and improved its inventory position, offsetting a somewhat downbeat outlook for the current quarter as the company just affirmed its full-year outlook

“Our results in the quarter reflect continued solid demand for home improvement projects,” Chief Executive Ted Decker said on the post-earnings conference call, according to a FactSet transcript. “While we did see some deceleration in certain products and categories…the project business remains strong across most of our departments.”

Net income for the fiscal third quarter to Oct. 30 rose to $4.34 billion, or $4.24 a share, from $4.13 billion, or $3.94 a share, in the same period a year ago. The FactSet consensus for earnings per share was $4.12, marking the 10th-straight quarter the company beat EPS expectations.

Read the Home Depot earnings preview.

Total sales grew 5.6% to $38.87 billion, above the FactSet consensus of $37.95 billion, to beat expectations for the 12th-straight quarter.

Overall same-store sales growth of 4.3% topped the FactSet consensus for a 3.1% rise, the fifth-straight beat, and U.S. same-store sales were up 4.5% to beat expectations of 3.0% growth.

Of the company’s 14 merchandising departments, 11 posted positive same-store sales. Building materials, plumbing, lumber, millwork, paint and hardware had sales above the company average, while sales of appliances, flooring and indoor garden declined.

The value of the average ticket increased 8.8% even as the number of transactions decreased 4.4%, due to price inflation and demand for new and innovative products.

Cost of sales increased more than total sales, rising 5.7% to $23.65 billion, as gross margin contracted to 34.0% from 34.1%.

Merchandise inventories of $25.72 billion were up 25.0% from a year ago, but was better than the 38.0% growth seen in the second quarter and the 31.9% rise in the first quarter.

The stock

closed up 1.6% at $311.93, reversing an earlier post-open decline of as much as 1.2%, and a premarket drop of as much as 2.6%. The $5.01 price gain added about 33 points to the price of the Dow Jones Industrial Average
which gained 56 points, or 0.2%.

D.A. Davidson’s Michael Baker reiterated his neutral rating, citing macroeconomic concerns, but applauded the company’s “operational prowess” as it put up another strong quarterly result.

“Guidance was maintained and may imply a bit of a downward revision to 4Q22, but [Home Depot’s] track record of beating estimates shows that that should not be overly concerning,” Baker wrote in a note to clients.

The company affirmed its fiscal 2022 EPS guidance of growth in the mid-single digits percentage range and for same-store sales growth of 3.0%. The FactSet EPS consensus of $16.60 implies 6.9% growth, and the consensus for same-store sales is for a 3.1% rise.

Wells Fargo analyst Zachary Fadem said that while third-quarter results were “solid across the board,” the affirmed full-year outlook implies growth deceleration in the current fourth quarter.

He said that sets “a more realistic bar” for the rest of the year, but also gives credence to the notion that “the environment could be softening.”

Fadem reiterated his overweight rating on the stock.

“While the business performed very well and our consumer remained resilient, we are navigating a unique environment,” CEO Decker said on the call. “We can’t predict how the evolving macroeconomic backdrop will impact our customer going forward. However, we continue to closely monitor elasticities and trends across our business and believe we have the tools, the team and the experience to effectively manage in any environment.”

The stock has shed 4.7% lower over the past three months, while the SPDR Consumer Discretionary Select Sector exchange-traded fund

has dropped 16.3% and the Dow has eased 1.6%.

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