Home Depot: Do We Believe the Numbers or Management?

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Home Depot’s (NYSE:HD) first-quarter (the quarter ended February 2) figures for 2014 were disappointing. We saw declines in sales, profits, and profit margins. However, management sounded very optimistic in the Q1 earnings press release. Given this apparent mixed message, it is difficult to know what to believe about the nation’s largest home improvement retailer. Let us look at the numbers more closely.

In the first quarter Home Depot reported sales of $17.7 billion, or a 3 percent decline year over year. The decline lead to a fall in the company’s profits, which decreased slightly, from $10.02 billion to $10.01 billion. The company’s profits fell at a lower rate than its sales because its SG&A expenses fell from $4.2 billion to $4 billion. While this is a good thing, investors should keep in mind that this is not sustainable and that ultimately investors need to focus more on the revenue numbers and the gross profit numbers, which came in at $6.2 billion versus $6.37 billion a year earlier.

Investors looking at these numbers out of context would assume that Home Depot’s business is slowing down and that it is therefore unreasonable to pay 21-times earnings for the company’s shares. But the stock has remained relatively strong, as the shares sit within 5 percent of an all-time high. I think the reason for this is the optimism coming from management.

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