Investors shrugged off strong operating and financial results from Home Depot (HD -1.57%) last year to push the stock lower. It wasn't that the retailing chain lost ground to rivals like Lowe's (LOW -1.91%). On the contrary, it expanded its lead against its peer in just about every important business metric. Instead, fears of an impending slowdown in the housing industry have Wall Street worried about the near future for both companies.
Investors should get much more clarity on any slowdown prospect when Home Depot announces its fourth-quarter earnings report on Tuesday, Feb. 26, and issues its initial outlook for 2019.
Check out the latest Home Depot earnings call transcript.
Image source: Getty Images.
Growth checkup
The latest sales growth news has been positive, with organic sales gains surpassing 5% in each of the last two quarters. Lowe's fared much worse, trailing its larger rival by about 4 full percentage points through 2018's first three quarterly reports.
Home Depot CEO Craig Menear and his team predicted that sales gains for the full year would land at 5.5%, up from the initial 5% outlook. While reaching that target is important, investors will be just as interested to see whether growth trends rebounded over the last few months as management predicted they would back in November.
Investors will also be keeping a close eye on customer traffic trends. That metric accelerated slightly last quarter but is running at a modest 1.2% through the first nine months of the year. The combination of healthy pricing and increased spending is allowing for much-faster overall growth, but Home Depot can't rely solely on those trends to offset flat or declining customer traffic.
Profitability gains
CFO Carol Tome warned investors in November not to read too much into Home Depot's rising profitability last quarter. The boost was supported by accounting changes and hurricane-related expenses in the prior-year period, for one. The company also intends to spend aggressively on growth initiatives like the e-commerce buildup. Home Depot has already put nearly all of the U.S. population within its two-day delivery window, and it aims to eventually close that shipping time to just one day through infrastructure spending this year.
That's why the company's outlook on operating margin will be key to follow on Tuesday. The metric is on pace to inch up to a market-thumping 14.5% of sales for the full year but could slip lower in 2019.
Dividend boost and outlook
Home Depot often announces a dividend boost in conjunction with its fourth-quarter earnings report. Conditions are favorable for a head-turning hike for 2019, too, given the 33% profit spike the retailer has produced over the past nine months. Sure, much of that increase has to do with lower taxes. But Home Depot has still seen pre-tax income rise by over 6% in the past nine months. The company promises to return about 55% of earnings to investors in the form of dividends each year, compared to a 35% payout ratio from Lowe's.
Meanwhile, CEO Craig Menear and his team will likely comment on the strength of the housing market in terms of home prices, economic growth, and other key fundamentals like the pace of home-improvement spending. These judgments will form the basis for Home Depot's sales growth guidance. The chain expanded by almost 8% in 2017 (thanks in part to hurricane rebuilding efforts) and is on pace for just a small deceleration to around 6% in 2018. We'll find out on Tuesday whether executives see that rate slowing, stabilizing, or rebounding in the new fiscal year.
