Home Depot Thinks About Next Move

After a staggering 70% bounce from March’s lows and with shares back trading at pre-coronavirus levels, the only thing that could have rapidly undone the recovery for The Home Depot (NYSE: HD) was a dismal earnings report. And with the release of the home improvement retailer’s Q1 earnings before Tuesday’s bell, that uncertainty has been removed.

It’s almost hard to credit but shares fell more than 40% in just 4 weeks through the middle of March as the coronavirus pandemic took hold of the world’s economies. With enforced lockdowns and shelter-in-place orders becoming the name of the game, not to mention soaring unemployment and falling income as a result, Wall Street saw trouble ahead for Home Depot. However with Tuesday’s release, it looks like they’ve been able to weather the initial storm fairly well and with states starting to reopen and roll back restrictions, maybe the initial doomsday scenarios that were priced into the collapse have finally been put to bed.

EPS Miss, Revenue Beat

Earnings were expected to come in around $2.26 per share and a final print of $2.08 isn’t the biggest miss in the world. It was made up for with revenue topping expectations and showing an (all things considered) healthy enough 7% increase compared to Q1 2019.

Management pointed out with the release that the company incurred about $850 million in pre-tax expenses as they responded to COVID-19. They increased paid time off for their associates, provided weekly bonuses to hourly workers, doubled overtime pay and extended dependent care benefits. They figured this unexpected expense equated to around $0.60 a share which more than helps to fill in the gap on the topline EPS miss.

CEO Craig Meaner commented; "as the COVID-19 pandemic evolved, we anchored to the core values of our Company by focusing on two key priorities: working to ensure the safety and well-being of our associates and customers, and providing our customers and communities with essential products.  We took early and decisive action to intentionally limit customer traffic in our stores which we believe had a significant impact to sales in many markets. Even with these actions, the robust and flexible interconnected infrastructure that we have invested in for over a decade allowed us to quickly adapt to changing customer preferences and achieve strong sales performance in the quarter.”

It certainly looks like they were able to achieve their goals here and went so far as to announce a first quarter dividend of $1.50/share, making it the 133rd quarter in a row that the company has paid out a cash dividend. They’re carrying good momentum into Q2 also, with CNBC reporting management saying there was "significant acceleration to double-digit comp sales growth" in the last three weeks of April and into the first two weeks of the company’s FQ2.

Are Shares a Buy?

Shares opened up at fresh all time highs on the release after the bell rang but were quickly hit by some profit-taking and finished the day down 3% from Monday’s close. In Wednesday’s pre-market trading they were up over 1% as Wall Street continues to digest the numbers and tries to get a sense of where to from here. With the stock acting as though nothing happened last quarter, it does feel a little scary to be getting involved for the first time here.

Bank of America warned that some portion of the company’s FQ1 and FQ2 sales were being pulled forward from FQ3 and FQ4 and reiterated their Neutral rating on the stock. With upwards of a 38% drop, and according to some reports a 43% drop, forecasted for US GDP, there has to be some future economic fallout coming that will directly impact Home Depot’s sales in a way that the swift drop and bounce crash of last quarter couldn’t. Savings are still being depleted, people are still being laid off and DIY projects are still being put on hold as families bunker down and focus on getting the next meal on the table.

With Home Depot stock trading right up at all-time highs, I’m inclined to suggest a cautious approach to getting involved at these levels, with a long and uncertain macroeconomic road ahead.