Home Depot (NYSE:HD) is set to report second-quarter earnings on Tuesday, Aug. 17. The company has been experiencing a surge in sales since the pandemic onset. Now that economies are reopening, it will make it tough for Home Depot to improve last year’s sales growth.
Adding to Home Depot’s difficulties will be supply chain issues and rising costs for labor, which should be top of mind for investors interested in the stock upon the earnings release.
Is the pandemic sales boost over?
Over the past decade, Home Depot has grown revenue at a compounded annual rate of 6.9%. But, during the past four quarters, it has grown revenue at 23%, 23%, 25%, and 33% — such was the magnitude of the pandemic boost. The upcoming earnings report will be in comparison to Q2 last year, when revenue grew 23%. To some investors, if the company can keep revenue from decreasing compared with last year, it would be a win.
The second quarter consisted of a significant reopening of economies. Folks had more options on what they could do with their time and money, and some may have forgone home-improvement projects as a result. After being stuck at home for over a year, people may have wanted to make up for lost time by eating at restaurants, going to ball games, or watching a movie in a theater.
The other challenge arising for Home Depot is managing shortages in labor and supplies. Both issues are plaguing businesses across the board. For labor, folks are less enthusiastic about working for several reasons, including continued fear of contracting COVID-19, boosted unemployment benefits, and lack of child care. Home Depot already permanently increased wages in November of last year; so far, that has been enough to secure the labor it needs. Here is what CEO Craig Menear said on the issues in the company’s Q1 conference call:
As it relates to labor in total, this is spring, we’re hiring up. We’ve been able to hire more folks this year than last year, even though we were ramping last year to cover the demand. And so that’s something that we work on a week-to-week basis. To be flexible and agile right now is incredibly important, and the two areas that we’re focused on, not knowing exactly how all this will play out, is inventory flow and labor.
Shareholders will want to look for management’s update on the hiring season in its earnings report.
What this could mean for investors
Wall Street analysts expect Home Depot to report revenue of $40.4 billion and earnings per share of $4.39, which would be increases of 6% and 9%, respectively, from the same quarter a year ago.
Home Depot’s stock price is already up 25.3% year to date. The company is putting up some remarkable sales and earnings figures, but it looks like investors have recognized that fact. The stock is trading at a price-to-earnings ratio of 24.6, near the higher end of its range over the past decade. It could mean the risk is to the downside if it spooks investors when reporting earnings. Still, Home Depot has excellent prospects for long-term investors. It just may be prudent to wait until after earnings are released to buy shares of Home Depot stock.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/08/13/home-depot-q2-earnings-preview-sales-growth-slows/