Inflation from skyrocketing lumber prices had a big impact on Home Depot Inc.’s fiscal first-quarter results, but some Wall Street analysts appear surprised at just how willing the home improvement retailer was to pass the higher costs onto its customers.
reported earlier Tuesday profit, net sales and same-stores sales for the quarter to May 2 that were well above expectations, citing “unprecedented demand” for home improvement projects.
Cost of sales jumped 32.9%, more than double average increase of 15.4% over the past four quarters, but that was only slightly more than sales growth of 32.7%, with meant gross margin declined just 8 basis points (0.08 percentage points) 33.98%.
That was even as the average daily closing price of lumber futures
during the quarter nearly tripled to $1,044.13 per 1,000 board feet (mbft) from $361.50 in the same period a year ago, according to a MarketWatch calculation of FactSet data. Lumber futures ended the quarter at a record $1,500.50/mbft, after ending the year-ago quarter at $319.70/mbft.
“Gross margin was a notable standout…as rising lumber inflation, shrink and supply chain investments did not crimp margins are nearly as much as feared,” wrote Wells Fargo analyst Zachary Fadem in a research note to clients.
Fadem has an overweight rating on Home Depot, and a stock price target of $360.
The stock fell 1.1% in afternoon trading Tuesday, and has been up as much as 1.4% at its intraday high and down as much as 1.6% at its intraday low.
Home Depot isn’t the only retailer passing higher costs onto its customers, as the latest government data showed that consumer prices rose in April at an annual rate of 4.2%, the highest rate since 2008, while wholesale prices increased at a 6.2% annual rate.
On the company’s post-earnings conference call with analysts, Edward Decker, executive vice president of merchandising, provided an example of what the “record-setting quarter for lumber prices” meant for one of the company’s core lumber shopkeeping units (SKUs):
“At the end of the first quarter of last year, a sheet of 7/16 OSB [oriented strand board] was approximately $9.55,” said Decker said, according to a FactSet transcript. “As we exited the first quarter this year, that same sheet of OSB more than quadrupled in price to $39.76.”
Decker added that inflation from core commodity boosted average ticket growth by 375 basis points, or more than a third of the year-over-year increase of 10.3%.
The company said the reason it was able to pass the big increase in prices on to customers was because demand has kept pace: “When we bring the product into the store, it sells.”