Why Investors Are Shunning Home Depot After Q3 Results

Home Depot Inc. (NYSE: HD) reported third-quarter 2020 results before markets opened Tuesday. The home improvement store posted diluted net earnings per share (EPS) of $3.18 in the quarter on revenues of $33.5 billion. In the same quarter last year, the company reported EPS of $2.53 and revenues of $27.2 billion. Consensus estimates called for EPS of $3.05 and revenues of $32.0 billion.

Same-store sales in the United States rose by 24.6% year over year, and by 24.1% including international stores.

While revenues rose by 23.2%, costs rose by 23.8%. Gross profit was up 22% year over year to $11.5 billion, and operating income rose 22.9% to $4.9 billion. Net income rose 23.9% to $3.4 billion.

Calling the quarter “exceptional,” CEO Craig Menear noted that Home Depot’s “ability to effectively adapt to this high-demand environment is a testament to both the investments we have made in the business as well as our associates’ focus on customers.”

Home Depot said that it plans to transition the temporary programs it has put in place for employees during the COVID-19 pandemic into “permanent compensation enhancements for frontline” employees. That transition is expected to add $1 billion annually in compensation costs.

Store traffic, as measured by customer transactions, rose 13% year over year to 453.2 million. The average ticket rose 10% to $72.98 and sales per square foot rose 23.1% to $552.85.

Home Depot’s cash hoard rose from $2.2 billion a year ago to $14.7 billion, and long-term debt rose from $26.6 billion to $32.8 billion.

Cash flow from operations rose from $10.8 billion to $17.4 billion, and cash flow from investing dipped slightly to $1.5 billion a year ago.

The company paid cash dividends totaling $4.8 billion in the quarter and repurchased $791 million worth of stock. Dividend payments were higher by about $400 million year over year, and buybacks were down by about $3.2 billion.

On Monday, Home Depot announced that it would begin an all-cash tender offer for all outstanding shares of HD Supply Holdings Inc. (NASDAQ: HDS). Including HD Supply’s debt, the deal is valued at around $8 billion.

Spending on employee benefits instead of boosting the dividend or buying back more shares never sits well with shareholders. And Home Depot plans to make permanent some of the extra payments it has been making during the pandemic. That’s $1 billion out of shareholders’ pockets. It should be no surprise that the stock traded down in Tuesday’s premarket.

Home Depot did not offer guidance, but consensus estimates for the fourth quarter call for EPS of $2.38 and sales of $28.4 billion. For the full year, analysts are looking for EPS of $11.5 and sales of $126.1 billion. These estimates are likely to rise.

Shares of Home Depot traded down 2.6% to $272.65 Tuesday morning, within the stock’s 52-week range of $140.63 to $292.95. The consensus price target on the stock is $304.39. Home Depot pays an annual dividend of $6.00, for a yield of 2.16%.

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