Home Depot's (NYSE:HD) Q2 results and outlook echoed Walmart's (NYSE:WMT) and in a much clearer fashion that suggests not only a peak in consumer spending but the possibility of underperformance in the second half of the year. Home Depot, like Walmart, reported better than expected results and offered light guidance that indicates much of the year's strength has already been seen but there is a difference. While Walmart raised its guidance ever so slightly Home Depot's outlook more than suggests revenue growth will come in below the consensus estimates and margin compression is still present. Competitor Lowe's (NYSE:LOW) also reports this week and could easily follow suit.
Home Depot Falls On Tepid Outlook, Margin Pressures
Home 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.
Home Depot's Dividend Is Safe But Comes At A Price
Home Depot's dividend payment is safe and expected to grow but it comes at a price. the 2.25% yield costs about 19X the company's earnings compared to only 15X for Lowe's. Lowe's 15X is more in-line with the broad market, however, but also comes with a lower 2.0% yield. In regards to growth, both are on track to extend a double-digit streak of distribution increases but Lowe's payout ratio, distribution growth rate, and 58-year track record are all better than what you can get with Home Depot. If you're looking for a true value and high yield in the retail sector and are not stuck on home-decor stocks Foot Locker (NYSE:FL) is a name to investigate. That stock pays roughly 4.5% while trading below 8X its earnings.
The Technical Outlook: Home Depot Capped By Resistance?
After a shaky start, shares of Home Depot moved higher in the wake of the earnings report but the gains may have already hit the top. The stock is trading just below an important resistance target at the $324 level and the market may have a hard time getting above it. If the market can not get above this level Home Depot share price should trend sideways within the current trading range. If, however, the price can move above $324 and stay there, a move up to the $340 to $360 range is possible.
