Home Depot (HD) isn't inspiring a ton of home improvement retail spirit Tuesday morning. While the company's third-quarter numbers essentially met expectations, management cast a small doubt on the impact of online sales in the home improvement sector. Earnings of $2.53 per share on $27.2 billion against expectations of $2.52 per share on $27.53 billion doesn't line up well on the side of history for HD. If we examine how well the company has performed against EPS expectations over the past two years, we see the following beats: $0.09, $0.08, $0.07, $0.25, $0.21, $0.02, $0.07, and this quarter's beat of $0.01. Outside of the May 2018 results, the bottom line beat isn't close to what the market is accustomed to seeing and the "worst" beat in two years.
While I'm sure many companies would like to have this problem, beating estimates for two years straight, once traders get used to seeing it, they come to expect it. As far as guidance goes, Home Depot didn't light up the scoreboard there either. We already had earnings lowered to $10.03 back in May and management is staying with those numbers. That equates to the potential for a penny or two miss in Q4; however, given the history of the company beating I would anticipate investors will see this as an in-line EPS. Again, that may not be good enough although forward-looking investors should bake that into the price before Christmas.
The bigger concern may be the revenue guidance. Full-year numbers have basically come down from $120 billion to $110 billion as the company's One Home Depot strategic investments appear to be taking longer than expected to materialize. Those benefits won't be seen until FY2020. The problem is this isn't a delayed contract that simply got kicked out a quarter. It's the actual impact on sales that isn't growing close to expectations.
Like other brick and mortar retailers, Home Depot wants to cash in on online sales. We've seen other huge names like Walmart (WMT) and Target (TGT) crushing numbers on the online side. Even grocers are getting into the mix and doing well. So, Home Depot added lockers in stores for customers to pick up orders rather than milling about the stores for a purchase or having it delivered. The thinking is customers may want to eliminate the time to shop, but still may want advice on use and installation.
I'm not sure I get the logic here. If you are already seeking advice on use or installation, then finding the item should be the least time-consuming part of the process as the person assisting you can help with that. While they are doing it, they can begin the explanation process. I've found finding someone you can explain items to you is usually the longest part of the process. The idea of "click and collect" for expensive or complex items seems flawed. I understand it for low-cost and simple items but based on the lower revenue guidance and slow-uptake of the new initiatives I get the sense management came into this overly optimistic.
Despite the roughly 5% drop this morning, bulls are by no means dead. Home Depot has one of the strongest uptrend lines of any stock in 2019. Support was tested in May, June, and August. All three times it held. Interestingly enough, that line coincides with the 21-week simple moving average. Unfortunately for bulls, the $240 level has morphed into staunch resistance. A weekly close under $225 introduced downside risk of 5% to 10%. The current upside target is around 5%, so risk does outweigh reward. I can understand trying to trade long here playing on support and using a tight stop, but I certainly wouldn't be stubborn about my stop. For bears, you'd want to see that support lost before shorting, otherwise, you are shorting into support, generally not advisable. The biggest key is not where the stock closes today, but where it closes this week. Focus on that.
(Home Depot is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells HD? Learn more now.)
