Home Depot (HD) and Kohl's (KSS) reported earnings this morning. HD reported growth, but it wasn't the most inspiring. Kohl's reported a surprisingly poor miss. Thus far the retail earnings season has not been the brightest.
Home Depot reported first quarter earnings that beat estimates. To me, the king of home improvement goods continues to walk a line between growth (though slower) and liabilities. Home Depot reported strong continued numbers in terms of driving sales, increasing ticket, and improving earnings for shareholders. The weak spot that continues to give me concern is the balance sheet. Home Depot's debts are very high, and are causing HD to run a stockholder's deficit in terms of equity.
Net sales increased 5.7% to $26.38 billion. The cost of those sales did outpace the gains with a 6.3% increase, but we won't get too picky. Gross profits increased 4.6% to a little over $9 billion. Operating income increased 6.4% to $3.95 billion. Net earnings increased 4.5% to $2.51 billion, and coupled with the 4.5% decline in diluted shares outstanding, earnings broke down to $2.27 per diluted share. That's a 9.1% increase year over year.
Same store sales are an important metric for a name like Home Depot, and the retailer reported some sales gains that were weaker than usual. With comparable sales growth of 2.5% in what is arguably the most important quarter for HD, it could explain the timid pre-market performance of the stock this morning. Home Depot did point out that growth was affected by the calendar shift from 53 weeks in fiscal 2018 to 52 weeks in fiscal 2019 along with difficult weather. Nevertheless, it's still something to consider. U.S. based comp sales increased 3%.
The results were enough for Home Depot to reaffirm its 2019 full year guidance. The retailer expects full year sales growth of 3.3% with 5% comp sales growth. Annually, 3.3% sales growth would be the slowest rate of expansion seen by Home Depot in the last five years. It adds one more piece of evidence to the notion that housing is weakening. The retailer expects full year earnings per share of $10.03 per diluted share. That would mark a 3.1% increase year over year. That would also mark the slowest rate of earnings growth for HD in the last five years.
Personally, I don't see the appeal in HD. We're too far along in the economic cycle, and this stock is dependent on continual investment in homes/startups. I think the company has driven earnings through stock buybacks, and racked up a lot of debt to do it. The balance sheet is running a deficit of $2.14 billion. Trading at around 19x full year earnings, the premium isn't bad. But I think there's a reason for that.
Kohl's earnings' direction was much clearer. The retailer missed estimates, and lowered its full year guidance. This is a tough one for me, as I have been bullish on the name as an area of potential strength within retail. Revenues fell 2.9% year over year to $4.08 billion. Same store sales declined 3.4%. Coupled with higher SG&A expenses, net income came in at $62 million vs. $75 million a year ago. That's a 17% decline year over year. On a per share basis, earnings declined 16% to $0.38 per share vs. $0.45 per share in 2018. On a non-GAAP basis, diluted earnings declined 5%.
This is definitely a disappointing story for me, as I had held the view that Kohl's growing partnership with Amazon (AMZN) to serve as a location for returns would provide a springboard for higher in-store sales. Granted the initiative is just getting started. The stock was down 9.2% pre-market (at the time of writing) off of the news. Like many retailers, the valuation for the stock is not very high, so I do think the downside this week will be limited to a degree. Nonetheless, a decrease in full year guidance leads me to believe the upside for KSS is also rather limited. Comp sales are becoming ever more crucial to retail stock performance, and Kohl's just disappointed in a big way.
The company now expects full year earnings of $5.15 to $5.45 per diluted share. That's in contrast to previous guidance of $5.80 to $6.15. Conservatively, the new guidance range now means that the stock is trading at 11x full year earnings. Again, that's still pretty darn cheap assuming guidance doesn't suffer any further declines. The next few quarters are now even more crucial for Kohl's. CEO Michelle Gass stated that the year started out "slower than we'd like" but pushed the narrative over the potential of their Amazon returns program/some brand launches, and what they could mean for the second half of the year.
As a whole, I think we're seeing some mildly concerning signs from retail. Macy's (M) did not excite with its first quarter results. J.C. Penney (JCP) announced earnings this morning that essentially amounted to bleeding money. It doesn't paint a pretty picture for the start of 2019.