Analyst Note| Jaime M. Katz, CFA |
Wide-moat Home Depot was able to grow its top line nicely in its fiscal first quarter, as one of the few retail operators that remained open. Sales grew 7%, with total same-store sales printing a 6.4% uptick, and the average ticket up a whopping 11%, as consumers stocked up on cleaning products as well as do-it-yourself products (as installment services was limited in some locations). However, Home Depot couldn’t escape the incremental costs associated with ensuring a safe work environment amid the coronavirus pandemic though, digesting $640 million in after-tax expenses ($0.60 per share) to support its front-line employees, expanding time off, offering weekly bonuses and extending certain benefits. These costs increased the selling general and administrative expense ratio to 20.6%, marking a 190-basis-point expansion versus last year’s first quarter. This led to an operating margin of 11.6%, which was the lowest first-quarter performance since 2014, but evidence exists that the underlying business remains strong. Excluding COVID-19 expenses, Home Depot could have posted earnings per share growth of 14%, and the selling general and administrative ratio would have leveraged, indicating prior investment was stimulating demand.