A miss on existing home sales estimates and the threat of tariffs are not stopping Home Depot's (HD) post earnings push toward positive territory.
Shares of the Atlanta-based home improvement giant are battling back from a bearish open after management explained weather impacts that are set to roll off later this year and mitigation strategies for upcoming tariffs.
As was expected, tariffs were quickly addressed in the Q&A section of the company's first quarter earnings call on Tuesday morning.
"On the tariffs, so we increased the Phase III tariffs on all products shipped out of China from May 10, so nothings landed yet," management commented. "Think of three-odd weeks to cross the Pacific ocean so we're looking at the end of this month, the increase on the tariffs of $200 billion of product going from 10% to 25%."
They clarified that the initial tariffs exacted about a $1 billion impact and could see an incremental $1 billion impact for the newest tariffs.
"Should these new tariffs hold, it will be an incremental $1 billion, so call it less than 1% of our total sales. So it will certainly be more acute in certain categories, but as we repeatedly say we run the businesses as a portfolio and 1% in aggregate of sales little harder to manage but still I would call it the manageable category," the management team explained.
The executives clarified that the impact of the latest tariffs will not be seen for some time, much the same as was observed in the tariff impositions levied last year.
Overall, analysts are encouraged about the company's ability to deal with the risks related to the trade war and sought to put them in context of just how little impact they carry overall for the company.
"With just ~3.5% of COGS directly imported from China and over $100b in annual revenue, HD has among the lowest tariff exposure in our space and the scale to effectively offset tariff-related cost headwinds," Morgan Stanley analyst Simeon Gutman wrote in a note to clients. "HD is one of the best positioned and most defensible businesses from a tariff perspective in both home improvement and overall retail, in our view."
Hurt by Home Sales?
However, the existing home sales data that came up short of estimates and could have hurt the stock and a corresponding quick dip in shares post-release realized that risk.
In a release on Tuesday morning, the Realtors group said demand for housing remains strong, but supply of homes on the market remains relatively tight.
"First, we are seeing historically low mortgage rates combined with a pent-up demand to buy, so buyers will look to take advantage of these conditions," Lawrence Yun, the NAR's chief economist said. "Also, job creation is improving, causing wage growth to align with home price growth, which helps affordability and will help spur more home sales."
The supply misalignment and a reticence of millennials to buy properties were blamed for the headline miss.
Yun explained that college student debt continues to hinder millennial homebuyers in particular.
"Given the record high job openings in the construction sector, some may want to take a gap year to work there and save, and thereby lessen the student debt burden," he added.
While the market initially reacted negatively, the lower than expected sales could present a positive factor for the company.
More simply, if consumers are purchasing fewer new homes it would stand to reason that many would instead make improvements or modifications to the homes they currently occupy. Following that logic, both Home Depot and Lowe's (LOW) stand to benefit from the trend.
The increase in home prices is additive as well, as management outlined in the earnings call.
"The relevant housing metrics that drive home improvement spending, notably home price appreciation, existing home turnover, household formation, and the age of the housing stock, continued to be supportive of our outlook," CFO Carol Tome commented. "The building blocks of our 2019 plan are in place."
The issue in the long term would be if the lack of millennial homebuyers is leading to a larger share of renters within the underlying population as existing home prices marked their 86th straight month of year over year gains. Those individuals would be far less likely to visit either HD or LOW.
According to Apartment List, this could well be part of the equation, as nine out of 10 millennial renters want to purchase a home, but many simply do not have the means to do so near term.
The report states that just 4.9% of those surveyed expect to purchase a home in the next year, delaying gratification for home improvement retailers looking to cash in on the burgeoning population segment.
Still, as the sales statistics are essentially a double-edged sword, they are difficult to figure in for any firm thesis on a stock like Home Depot, short of a pronounced drop off in sales. A small miss is not overly concerning and aside from a surge in renting, it's simply not enough to get into a tizzy over.
In short, with management guiding through the conference call well and the metrics not suggesting any significant weakness to materially damage the company's reaffirmed guidance that should be aided by weather improvement, it should be little surprise that shares have recovered quickly amidst the noise.
Wall Street remains overwhelmingly bullish on the stock, with the consensus price target set at $206.29 per share, suggesting significant upside for investors eyeing the retailer on earnings day.
"At the current price of ~$190, this implies a 19x forward P/E multiple. With decent visibility into a 2H recovery and an improving housing backdrop, 19x seems attractive for this high quality bellwether," Morgan Stanley's Gutman concluded.
At least for one stock in recent weeks, the evolving macro picture shouldn't shade this outlook much at all.