Home Depot results FY2022/23 H1

US big-box home improvement retailer The Home Depot (HD) has released its results for the second quarter of its FY2022/23, which means the results from the company's first half are available for comparison.

During the more severe quarters of the pandemic, there was a broad divergence between the US and Australian home improvement markets, and the responses of retailers. For example, the US market had already heavily invested in online e-commerce, where the Australian market had not. It's also necessary to always point out that the US market is far more diverse than the Australian market, in terms of many factors, including weather and culture.

However, as we begin to enter the pandemic exit-strategy stage, there are more similarities emerging, including inflation caused by both demand and supply shortages, and strong governmental action to curtail that inflation. In fact, Richard McPhail, chief financial officer at HD, summed up US situation that sounds familiar to Australian retailers:

We find ourselves in a unique environment with many cross currents. We are operating in a broad-based inflationary environment not seen in four decades while managing through constrained global supply chain conditions, all against a backdrop of monetary policy shifts intended to moderate demand. We also see engaged and resilient homeowners who have strong balance sheets, consumers spending more time in their homes, and continued structural support for home improvement project demand.

From that viewpoint, the results from US retailers provide some interesting perspective on past and emerging markets.

The numbers

While the quarterly numbers are interesting, we'll mostly look at the numbers for half, as these provide a more comprehensive overview.

Sales at HD for the half ending 31 July 2022 were USD43,792 million, an increase of 6.5% over the previous corresponding period (pcp), which was the six months to 1 August 2021. Operating income (much the same as earnings before interest and taxation) was USD7210 million, up by 6.0% over the pcp. Net earnings were USD5173 million, up by 7.6% on the pcp.

Interestingly, in terms of customer transactions, these fell by 3.0% to 467.4 million, but increased their average value from USD82.48 to USD90.02, up 9.1%. This resulted in an increase in sales per retail square foot of USD700.62, up by 5.7% on the pcp.

According to Jeff Kinnaird, the executive vice-president of merchandising:

Big-ticket comp transactions, or those over $1,000, were up 11.6% compared to the second quarter of last year. We saw big-ticket strength across many Pro [tradie] heavy categories like pipe and fittings, gypsum and fasteners.

He said that the ticket gains were largely driven by inflation, but noted also that tickets were deflated by 0.14% due to falling lumber prices.

Mr McPhail clarified in response to an analyst's question, that much of the growth in HD's Pro business was coming from larger Pro customers.

According to HD's CEO, Ted Decker, there was disappointing growth in seasonal items, but this was made up for by ongoing growth in larger housing projects. As Mr Kinnaird pointed out, the seasonal areas that disappointed included BBQ grills, fertilisers, chemicals, and mowers. One reason these trended down was that the 2021 comps were quite high.

The categories that did much better, according to Mr Kinnaird, included building materials, plumbing, millwork, paint and hardware, while electrical, de´cor and storage, kitchen and bath, outdoor garden, tools, appliances, indoor garden, lumber, and flooring posted positive gains, but were below the overall average for growth.

In answer to an analyst's question, Mr Kinnaird also provided some details about shifting demand:

As Ted [Decker] commented, there's COVID pull-forward, there's stimulus effect. We went from a very wet and cold spring, to a very hot summer in the majority of our markets, and the consumer is focusing on other projects... You think of the last year, it was all about the backyard. This year, it's about categories like paint and other large renovation categories, and we're seeing that across our business.

And then, I'll also say we continue to see the consumer and the Pro trade-up around innovation, and couldn't be more proud of the merchants and our supplier partners on what we delivered around innovation for our customers. We've got a lot of products helping our Pros finish the job faster and simplifying the project for consumers, so no significant trade-down taking place.

Mr McPhail also set out the forecast for FY2022/23. Sales are expected to be 3.0% up over sales for the prior year, with sales coming off their first half increase.

Analysts questions

Michael Lasser of UBS asked the core question that everyone in the industry asks, which is how are sales continuing to grow even as the demand for new housing contracts, due to higher interest rates?

As Mr Decker stated:

Our customer in our markets has been incredibly resilient. As Jeff said, project demand is incredibly strong. Our Pro in particular is very strong, and their backlog remains healthy. In DIY, we did see some seasonal weakness. But as we parse through that, it's difficult to say is that weakness in the seasonal businesses the overlap of the two prior incredibly strong years? Is it the weather where we had a really bad and late spring and then it turned incredibly hot across the country? Or are they fundamental demand pressures? Again, we have not seen a broad-based fundamental demand pressure in the business.

Mr Decker elaborated further on this theme in response to a question about the potential for reversion to pre-pandemic levels of sales:

Clearly, the US consumer has re-engaged in activities outside the house and travel is incredibly strong right now and eating out and hospitality... But home improvement in particular has been, again, just incredibly strong as Richard laid out, which led us to increase our guidance from what was essentially flat at the start of the year to the 3% we just affirmed.

But we just don't - we don't see a slowdown from that and remain incredibly bullish about the engagement level. It's really all the dynamic of the home improvement. Again, so many cross-currents in the economy. But when you think of the wealth, our core customers, and their home equity up $9-odd billion; the excess savings rates; the strong jobs and earnings growth of wages; and the fact that we're just continuing to spend more time at home in general, people are still super-engaged in improving that home that they're spending more time in. So, we're certainly benefiting from that longer-term dynamic.

Analysis

Perhaps the most interesting section of the presentation, from an analytical perspective, was where Mr Kinniard detailed some of the newly released products that HD expects to perform well. There were four that he called out specifically: a paint, a bathroom shower/bath insert, a power tool series, and a smarthome system.

The paint is Henry's Tropi-Cool Roof coatings, which increases reflectivity, to help keep buildings cooler. The bathroom kits are the Delta Classic 500 series, which is not stocked by rival Lowe's.

The tool is Makita's XGT 40-volt and 80-volt system. According to Mr Kinniard:

The XGT system is engineered to achieve the optimum power required for heavier load applications without sacrificing run time. And these one-battery solution tools are exclusive to The Home Depot in the big box channel.

The smarthome system is HD's own Hubspace platform.

These four products provide a look forward into where HD sees the market heading. While HD is careful to describe Tropi-Cool as being useful for reducing the electricity costs of air-conditioning, it is also, of course, and ecologically aware, global warming prevention product. That trend is likely to be a growing one through 2022/23.

The bathroom kits are an interesting choice, as these are in the somewhat grey area between DIY and DIFM. The kits enable customers to put together complete waterproofing floor/wall systems made from acrylic. This is really a direct pointer to a reviving part of the market in both the US and Australia, which is the acutely cost-conscious DIYer.

Obviously, the Makita XGT system is a trade product, but it's interesting that this won out for promotion over a Milwaukee/Ridgid tool system.

As interesting as these are, it is actually the last product, the smarthome system, that is more revealing as regards HD. Smaller home appliances are rapidly approaching the stage where, if not all of them offer smarthome connectivity, that will at least be a range option. Hubspace is a loose alliance between some regular suppliers to HD to make their appliances directly network via Bluetooth or Wifi, and controllable through a shared smartphone app.

What is surprising, however, is that by the end of 2022 the connected smarthome standard known as Matter will be available - indeed, serious smarthome companies such as IKEA have already announced their Matter hubs. Matter is an "everything" protocol, that will enable just about any smarthome device to communicate with any system.

Matter uses a communication protocol known as Thread, which overcomes the difficulties inherent to Bluetooth and Wifi systems (such as poor connectivity response times), while also building in more functionality that the pre-existing low-power standard, Zigbee (such as direct internet connectivity).

While HD has been clear that Hubspace is designed for people who want some connectivity without any fuss, it's just difficult to see those standard surviving very long. Similar standards, from both HD's main competitor Lowe's (Iris) and the electronics big-box BestBuy have failed in the past, angering customers who invested in them, even though conditional refunds were offered.

The reality behind this is that the US market is set to not so much bifurcate in the future, as to develop definite clustering. One cluster is going to want the most advanced systems of smarthome management it can get, along with, most likely, more climate change aware products. The other cluster is going to want the benefits of technology without having to understand much about it, and probably not be that interested in climate change.

It's being able to predict for than level and type of variance while will likely determine those home improvement big boxes prosper in the future.