Home Depot reported its FY4Q earnings on the morning of February 26th with several crosscurrents. The quarter itself was weaker than expected, while bullish revenue guidance was offset by disappointing margin guidance. We analyzed the commentary on the conference call through the Amenity text analytics platform, and highlight 5 key takeaways.

1. Overall Sentiment is Consistent With Recent Quarters

As shown below in the Home Depot Company View, the Amenity Score, which measures the sentiment of the earnings call, was a value of 20, up from 12 last quarter, and consistent with the range over the last four quarters. For broader context, the score of 20 is also roughly equivalent with the overall market average over the last two quarters. The Key Drivers identified in the Amenity NLP model tell the high-level story: external headwinds and downward guidance (discussed below) offset by a new buyback, as well as bullish commentary on the end-market and market share.

2. Weather Shoulders the Blame for a Weak 4Q

We discussed some potential Q4 challenges in last week's HD/LOW Preview, including a then-hawkish Fed, stubbornly high mortgage rates, and stock market volatility. On the earnings call, Home Depot narrowed in on one headwind in the quarter, Weather:

3. Is Weather Being Used as a Scapegoat for Supply Chain Challenges?

Supply chain costs have been a pesky margin headwind across the retail landscape. When pressed in Q&A, Home Depot management acknowledged steeper supply chain headwinds:

Home Depot (2/26/19):

• "I think the first comment I’d have as it relates to the margin rate, was a difference in what we anticipated, a little bit more sustained pressure in supply chain maybe than what we initially anticipated in 2017."
• "But I will tell you, within the performance in the fourth quarter, there were a few surprises relative to the guidance that we gave at the end of the third quarter. First, the supply chain contraction of 19 basis points was a bit higher than we had anticipated. We had 3 basis points of fuel pressure come through and about 5 basis points of higher fees related to third party delivery agents."

4. Did the Plunge in December Housing Starts Impact Business?

Data released in the earnings call showed that housing starts declined 11% in December. Home Depot management, however, maintains there has not been an impact on home improvement demand:

Home Depot (11/13/18):

• "As we look to 2019, most housing metrics are trending positive, albeit heading toward stability."
• "So we’re not seeing any impact to our performance in a negative way because of the housing environment."

5. Tax Refund Remains a Wild Card for Q1

One unforeseen impact of last year’s tax code changes appears to be smaller (and delayed) refunds this tax season.   As of the most recent data released last week, the total refund dollars processed is down 39% year-over-year, comprised of 17% smaller average refunds and 27% fewer returns thus far. On the Q3 call in November, Home Depot had stated that their analysis pointed to a better tax season for their customers, while the IRS data thus far suggests the opposite.  When asked in yesterday's call, management deferred until next quarter, saying there has been no impact yet:

Home Depot (11/13/18):

• "We believe that many consumers are going to have a nice tax surprise next year."

Home Depot (2/26/19):

• "No, we wouldn’t say that there was an impact to our business from tax in February."

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This communication does not represent investment advice. Transcript text provided by S&P Global Market Intelligence.

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