Home Depot’s margin warning casts shadow on solid quarter

12:46 pm Tuesday, February 22nd, 2022

By Aditi Sebastian and Uday Sampath Kumar

(Reuters) -Home Depot Inc on Tuesday indicated that it expects gross profit margins to remain under pressure through the year as it spends aggressively to deal with supply-chain bottlenecks and get building tools and materials to store shelves faster.

Shares of the largest U.S. home improvement chain tumbled as much as 8.3% to an over six-month low of $318.18. Rival Lowe’s Cos, set to report on Wednesday, fell 3.2%

Home Depot’s shares have climbed about 50% since the end of February 2020, riding a more than $40 billion jump in sales during the period as stuck-at-home Americans used their time and savings on do-it-yourself home projects.

The company expects operating margins to be flat in 2022, assuming inflation will not get any worse.

Home Depot has rolled out measures such as chartering its own cargo ship and using air freight to move in-demand goods to beat supply chain disruptions and shipping delays.

While bolstering sales, those expenses along with surging costs of everything from fuel to wages led to a 35-basis point decline in fourth-quarter gross margins to 33.2%.

“The margins are being pressured by a number of things including supply chain cost increases, labor cost increases and other cost inflation that they’re able to pass through (to customers), but not fully offset,” said Michael Baker, analyst at D.A. Davidson & Co.

Overall sales rose a higher-than-expected 10.7% in the fourth quarter to $35.72 billion, while earnings per share of $3.21 topped estimates of $3.18.

The company, which last month named chief operating officer Edward Decker as its next top boss, projected full-year sales growth to be “slightly positive”.

Analysts have warned of home improvement sales cooling in 2022 as rising mortgage rates threaten to hit housing demand and prices, potentially making customers less likely to invest in their homes.

(Reporting by Uday Sampath and Aditi Sebastian in Bengaluru; Editing by Sriraj Kalluvila)