Home Depot (NYSE:HD) released its results for the second quarter of 2021 last week, beating Wall Street estimates for revenue and earnings per share. But the stock price fell 5% following the news. Investors expressed their disappointment over what appears to be a major slowdown after the recent hypergrowth performance, when sales soared more than 20% in each of the previous four quarters.
The home-improvement chain was a big winner during the pandemic, and it’s now facing tough comparisons to a year ago when consumers, flush with stimulus cash, spent on renovation projects instead of travel, entertainment, or other leisure activities.
But long-term investors shouldn’t be worried. There is still a lot to like about Home Depot.
A slowdown was inevitable
During the most recent quarter, revenue jumped 8.1% versus the prior-year period, with U.S. same-store sales (or comps) rising just 3.4%. This is right after Home Depot registered impressive 30% comps in the U.S. in Q1. Naturally, investors weren’t happy with the news. Adding fuel to the fire was a 5.8% year-over-year drop in customer transactions in the quarter, which is clearly not a good sign for any retail business.
But there were some bright spots. Home Depot eclipsed $40 billion in quarterly sales, a first for the company. Profitability is also better than it was a year ago, as the operating margin of 16.2% and net income margin of 11.7% in Q2 highlight Home Depot’s ability to pass on higher commodity costs to its customers. Additionally, the average ticket rose 11.3% in the three-month period.
Investors shouldn’t be surprised at the meaningful deceleration for Home Depot. A business this size, with a market capitalization of $350 billion, can’t grow in excess of 20% forever. Lowe‘s, its biggest competitor in the industry, actually posted a 2.2% year-over-year decrease in U.S. comps, supporting the argument that Home Depot is doing just fine in the grand scheme of things.
As you can see, long-term shareholders have a lot to be happy about.
The pro is back
Home Depot’s professional customer is vital to the success of the organization, and for the past two quarters, this segment’s sales growth outpaced the DIY cohort. Pros consist of small contractors who depend on Home Depot as a mission-critical partner to supply the right parts and tools in a timely manner.
Pros generate slightly less than half of Home Depot’s revenue, but they are a stickier customer base that spends more than the do-it-yourselfer. Big-ticket transaction (those over $1,000) comps in Q2 increased 24%, driven by pro-heavy categories like lumber, vinyl plank flooring, and gypsum. It’s a tailwind for Home Depot that consumers are now taking on larger and more-involved home-improvement projects, something that was held off during the pandemic due to the health and safety concerns of letting outsiders into your home.
Speed and reliability matter, and Home Depot’s ongoing investments in its supply chain and omnichannel capabilities keep pros satisfied and their businesses operating smoothly. Roughly 55% of online orders were fulfilled through a store, which not only demonstrates customers’ urgency of needing items quickly but also defends Home Depot against e-commerce rivals.
CEO Craig Menear displayed his optimism about the company’s near-term outlook on the earnings call: “Pros tell us their backlogs are bigger than ever. Consumers continue to tell us the home is more important than ever and that they have a laundry list of projects.”
Sure, Home Depot’s second-quarter performance slowed from previous quarters, but that was inevitable. What matters most is if the business is still in a position to succeed over many years. Home Depot shareholders have nothing to worry about.
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.
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