Home Depot Falls On Tepid Outlook, Margin PressuresHome Depot had a good quarter to be sure and but there is a risk to the business other than the analyst's outlook and its impact on share prices. The company reported a record $43.79 billion in revenue for a gain of 6.5% over last year but the gains were expected. The revenue beat the consensus but by a very slim 100 basis points which is below the market average. The revenue was driven by a 5.8% systemwide comp underpinned by a 5.4% increase in the U.S. The company says home improvement trends remain strong and channel checks can attest to that. The issue is with ballooning inventories and the prospect of markdowns and margin contraction as traffic slows. The company reports a 35% increase in YOY inventory to $26 billion which is $6 billion or 31.5% more than the analysts were expecting.
In regard to the margin now, the news is mixed with the gross margin contracting by 14 basis points and the operating margin contracting by 32 basis points to 16.46%. The takeaway here is that GAAP earnings of $5.05 are up 11% versus last year aided by share repurchases and beat the consensus estimate by $0.11. The beat is good news in regard to cash, cash flow, and the dividend payment but again only 220 bps above the consensus and not a catalyst for upward price movement. The truly bad news, however, is in the guidance which was only reaffirmed at the prior levels and includes an expectation for margin contraction that may be optimistic. Walmart is the highest-profile retailer to issue an inventory-related profit warning tied to markdowns and clearance channels and more could be on the way from the Retail Sector including from Home Depot.