Recession Fears Take a Rest at Home Depot

When a company releases results that can be described as "mixed," the natural inclination is to ask how far the stock fell. For Home Depot (HD), however, a mixed second quarter was enough to send its stock sharply higher Tuesday.

The home-improvement retailer said that it earned $3.17 a share in its fiscal second quarter (https://www.wsj.com/ articles/home-depot-cuts-sales-forecast-posts-slightly-lower-profit-11566298171?mod=searchresults&page=1&pos=4) ended Aug. 4, topping analyst estimates. But its sales of $30.8 billion were a bit light, and same-store sales growth of 3% also was short of estimates.

Additionally, the company lowered its sales forecast for the entire fiscal year, saying it now expects 4% same-store- sales growth, down from an earlier forecast of 5%. This was partly due to the effects of lower lumber prices. But the company also warned that the effects of tariffs on consumers could weigh on growth.

Yet investors had apparently steeled themselves for worse. Home Depot (HD) shares rose over 4% in early trading.

Investors' low expectations may reflect ingrained skepticism over Home Depot's (HD) ability to weather a weak housing market. Home sales were down in the first half of this year from a year earlier and home-price gains have moderated, so it is natural to worry the company has experienced a dent in demand.

But Home Depot (HD) appears far less tied to home sales than it was prior to the housing bust. This seems to be driven in part by many homeowners' decision to invest in the house they already have rather than going out and buying a new one.

It also is a reflection of how old homes in the U.S. are getting. As of 2016, the median age of owner-occupied homes in the U.S. was 37 years, according to a National Association of Home Builders' analysis (https://www.housingwire.com/ articles/46427-housing-stock-age-shows-desperate-need-for-new-construction), compared with 31 years a decade earlier. The regular upkeep these aging homes require to maintain their value provides a steady source of income for Home Depot (HD).

Home Depot (HD) also is benefiting from the travails of Sears(SHLDQ), a once formidable seller of appliances and tools, which filed for bankruptcy last fall and continues to close stores. Lowe's (LOW)Cos. also has been paring back stores as part of its turnaround plan, easing the competitive pressure.

That isn't to say that Home Depot (HD) is immune to trouble. If tariffs start hurting consumers, then consumers aren't going to be so ready to get started on big home-improvement projects and Home Depot's (HD) sales will suffer.

So far, however, Home Depot (HD) says its real-time sales figures haven't registered any tariff effects. Its caution seems directed at what might happen, rather than anything it is actually seeing. For investors who have been spending the past month worrying that the economy already is sliding into a tariff-induced slowdown, that counts as great news.

Write to Justin Lahart at justin.lahart@wsj.com (mailto:justin.lahart@wsj.com)

-Justin Lahart; 415-439-6400; AskNewswires@dowjones.com


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  08-20-19 1321ET
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