Wednesday, May 20, 2020

Home Depot Comes Unstuck on Profits

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What’s happening: Shares of Home Depot slid on Tuesday, despite the home improvement retailer reporting stronger-than-expected sales for its fiscal first quarter.

What happened: With lockdown imposed to curb the spread of covid-19, there has been a steep rise in spending on DIY (do it yourself) equipment for house maintenance tasks. The US government’s stimulus checks also boosted consumer spending.

The uptick in demand helped Home Depot beat estimates for revenue and same-store sales in the fiscal first quarter. However, the Atlanta, Georgia-based company delivered a profit miss. The US witnessed the steepest decline in homebuilding activity in its history in April and permits for home construction also fell. In fact, experts are forecasting an economic recession to cause a massive hit to home-improvement spending going ahead.

So far, Home Depot has witnessed strong sales even in the second quarter.

How were the results: The home improvement chain reported a decline in earnings, even as revenues grew.

  • Home Depot’s quarterly net income declined to $2.25 billion, or $2.08 per share, from $2.51 billion, or $2.27 per share, in the same quarter last year. This missed the consensus estimate of $2.27 per share.
  • Sales climbed 7.1% to $28.26 billion, exceeding the consensus view of $27.56 billion.
  • Overall same-store sales spiked 6.4%, surpassing expectations of 4.3% growth.

Why it matters: Home Depot disclosed that it spent around $850 million on providing benefits to its workers to keep its outlets running during the coronavirus outbreak. The risks associated with the crisis led the company to provide extra bonuses and higher overtime payments to its staff.

Home Depot exceeded sales expectations despite putting a limit on the number of people allowed at its outlets, to comply with the government guidelines.

The company witnessed a surge in traffic on its website and its online sales exceeded the sales recorded on Black Friday. At the end of April, Home Depot recorded a triple-digit spike in its ecommerce sales and witnessed substantial sales growth in the first two weeks of the current quarter.

Home Depot announced a regular dividend of $1.50 per share for the quarter, at a time when most companies are scrapping dividend payments in a bid to increase liquidity. However, management withdrew their guidance for the full year citing virus-related uncertainties.

How the shares responded: Home Depot’s shares slipped 3% during the regular session on Tuesday, following the release of its quarterly results. Much of this may have been due to profit taking, rather than investor concerns, as the stock has gained around 14% over the past month and risen by more than 9% year to date.

What to watch: With the company achieving strong sales in the first two weeks of its fiscal second quarter, investors expect the momentum to continue through the three-month period. However, weakness in Home Depot’s pro business, meant for contractors, is likely to affect the company’s overall business.

The Markets Today

     

Crude oil will be in focus today, ahead of the EIA’s (Energy Information Administration) report on crude inventories.

Context: US oil futures rose on Tuesday, driven by global supply cuts and prospects of an improvement in overall demand. WTI crude oil settled higher in the previous session with the expiration of the oil contract for June.

Details: An agreement between the OPEC+ group (Organization of Petroleum Exporting Countries and its allies) to lower crude production by 9.7 million barrels per day until the end of June has helped control the flood of crude supplies into the economy despite a decline in demand.

After a volatile session on Tuesday, June WTI crude rose 2.1% to settle at $32.50 per barrel on Tuesday, after posting an 8.1% gain on Monday. However, prices for the front month contract for July gained 1% to reach $31.96 per barrel.

Crude production in the US has also been declining, with expectations of more cuts in coming months. The EIA expects a drop of 197,000 barrels per day in crude-oil production for June from 7 chief US shale plays.

The API (American Petroleum Institute) also reported late Tuesday that there had been a decline of 4.8 million barrels in US crude stockpiles for the week ended May 15.

In other commodities, June gasoline gained 1.9% to $1.0452 a gallon, with June heating oil slid 3.3% to 97.36 cents a gallon.

What to watch: Investors await the EIA’s report on petroleum supplies. Analysts expect crude supplies to rise 2.4 million for the week ended May 15. Gasoline inventories are expected to drop 3.5 million barrels, while distillate stocks are likely to rise by 3.2 million barrels last week.

Other Markets: European indices were trading lower at 9:00am GMT, with the FTSE 100, German 30 and French 40 down by 0.5%, 0.6% and 1.1%, respectively.

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Futures at 0400 (GMT)

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What else to watch today

     

Turkey’s motor vehicles production and government debt, South Africa’s retail sales, Canada’s inflation rate and wholesale sales, Brazil’s federal tax revenues and business confidence, Argentina’s leading economic index and economic activity index as well as the US MBA mortgage applications and FOMC minutes.