Air conditioners manufactured in China are among the items sold at Home Depot that are slated to be hit with tariffs. (Photo by Mario Tama/Getty Images)
Photo: Mario Tama
Photo: Mario Tama

Home Depot earnings strong, but taking a tariff hit

Home Depot reported better than expected profits on Tuesday, but company officials forecast a modest slowdown in growth in the coming months.

The Atlanta-based company announced sales of $30.8 billion for the quarter that just ended, slightly shy of what analysts expected, while earnings for the period hit $3.48 billion, better than had been predicted.

“We are pleased with these results,” company chief executive Craig Menear said during a Tuesday conference call with analysts and reporters.

However, the company downgraded its projections for sales next year, citing falling lumber prices and the trade war with China. It now predicts that 2020 sales will be 4% higher than this year, compared to a previous prediction of 5% growth.

The company took a conservative approach to calculating its expectations, said Carol Tomé, the company’s chief financial officer.

One big unknown is the effect of tariffs. Already, tariffs have been levied on many goods from China, and more could be coming. So far, the trade war has increased Home Depot’s yearly cost by $2 billion, Tomé said.

It’s a big number that needs to be seen in perspective, she said. “That’s the math of it, and any number starting with a ‘b’ gets your attention. But it’s really about 2% of our sales. We can manage through it.”

That means negotiating with suppliers and sometimes shifting operations, she said. The company, for example, has recently opened an office in Vietnam, a country that has picked up some manufacturing that’s moved out of China.

Home Depot also analyzes its own prices to see where it can raise them without dampening sales, she said.

More of a problem than tariffs have been lumber prices, she said. A shortfall in home-building has led to a market glut. Home Depot doesn’t sell to home-builders, but it does get business from other professionals.

Despite the slide in lumber prices, a boost to sales has come from selling more home repair and renovation items to those professionals. They now account for 45% of Home Depot customers, Tomé said.

Home Depot has more than 2,200 stores, more than half of them in the United States, and 400,000 employees. In Georgia, Home Depot has 27,000 employees, 90 retail stores, 13 distribution centers and 10 offices.

Many analysts have praised Home Depot’s performance thus far. However, Bank of America Merrill Lynch analysts were more pessimistic than others that the retailers profit margins could be under more pressure in coming months. And analyst Ken Leon of CFRA Research in New York said he recommends selling the stock.

Home Depot stock price rose Tuesday morning after the earnings announcement. A year ago, Home Depot sold for $197.93 a share.

Strong consumer spending in general has buoyed both the larger economy and the business at Home Depot. But economists have begun saying the now record-long economy may be running out of steam.

To counter that possibility, White House officials this week were reportedly talking about a payroll tax cut, which could give the economy a second wind. However, Tomé declined to speculate on what those cuts might entail or what impact they might have on consumers.

“We only work on what we know,” she said.

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