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Interactive Brokers - Home Depot's Stock Falls as Sales Slip Amid Erratic Housing and Spending Data

Home Depot (HD) topped analysts’ estimates with higher-than-expected earnings for the first quarter of 2018, but disappointed those who were looking for bigger net sales.

The Atlanta-based home improvement giant earned US$2.08 a share on net sales of US$24.95bn. The company beat Street estimates by about US$0.03 a share, but slipped below the US$25.17bn dollar mark many hoped to find in their top line.

Shares of Home Depot fell around 2% after the news Tuesday, and its 5-year CDS widened by roughly 0.70bp to around 25.80bps.

Analysts generally say housing data and consumer spending patterns have been erratic recently and likely led to Home Depot’s miss on the sales front, while others think the target may have simply been too aggressive.

Economists at Jefferies noted housing starts, for example, have been on a choppy but steady upward trend for more than six years.

They say the primary source of volatility tends to be the erratic nature of multifamily starts, however as natural disasters in the Gulf region and California recently caused a mini-boom in construction – single family starts also experienced volatility late last year into early this year.

From mid-late April, the value of Home Depot’s stock rose nearly 6.5% against the Vanguard Real Estate ETF (VNQ), but has lost more than 6% since late January – highlighting its irregular relationship with the real estate business.

Meanwhile, the real estate sector was the worst performer on the S&P 500 Tuesday, with a drop of 1.45% by late morning. Companies such as Simon Property Group (SPG) and Kimco Realty (KIM) saw their stocks fall by more than 2% on the day, with VNQ off 1.3%.

Housing starts data for April are due out Wednesday, with analysts calling for a 0.45% rise from the prior month to 1.325m.

On the consumer spending side, April’s retail sales data was widely considered encouraging after a weak patch in the first quarter.

The rosier spending picture has come into focus amid an improved labor market and better consumer confidence, strengthening analysts’ arguments for an accelerated pace of Fed rate hikes this year.

April retail sales rose 0.30 % from the previous month, as expected, while sales from furniture stores and building materials were generally considered strong.

Against this backdrop, Home Depot expects its fiscal 2018 sales to grow by around 6.7% and comp sales to rise by roughly 5%. The company also reaffirmed its earnings guidance for the year for an increase of about 28% over the prior year to US$9.31.



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