Can this blue chip action handle soaring inflation?

In November, the Consumer Price Index, a widely used measure of inflation, jumped 6.8% from a year ago. Triggered by supply chain disruptions and labor shortages in the economy, this is the biggest increase in almost 40 years.

For a company like Home deposit (NYSE: HD) which has performed extremely well during the pandemic, the threat of rising costs is a real challenge as the new year approaches, possibly having negative implications ahead of what is traditionally a busy spring and summer for the ‘business.

Read on to find out how it works. top notch stocks faces the current situation.

Image source: Getty Images.

Wood prices are on the rise

Lumber is an important product that has a significant impact on The Home Depot’s business. From April 2020 to May 2021, wood prices have skyrocketed at nearly $ 1,700 per thousand board feet, an all-time record. Prices fell over the following months, but rose again from mid-November to mid-December, hitting just over $ 1,000 per thousand board feet today. It’s still extremely high historically.

“Lumber is a driver of projects across the company, and it certainly continues,” said Managing Director Craig Menear of the company. call for third quarter results. During Home Depot’s fiscal second quarter that ended on August 1 (when lumber prices were very high), the company posted record quarterly sales of $ 41.1 billion. The gross margin of 33.2%, although slightly lower compared to previous quarters, remains very healthy and in line with past results.

This is a positive indicator of The Home Depot’s ability to handle unpredictable price fluctuations for a commodity like lumber. As prices skyrocketed, unit sales declined. Despite this, the company has registered a historic district. Now, as lumber prices rise, especially before the busy spring and summer homebuilding and remodeling season, don’t be surprised if unit lumber sales start to drop again.

Still, other product categories like outdoor garden, home appliances, kitchen and bathroom are expected to be strong. And thanks to a robust real estate market characterized by low interest rates, consumers are increasingly looking to undertake home improvement projects to increase the value of their existing homes. This underlying trend is supporting demand for the products and services offered by The Home Depot.

“We have effectively managed inflationary environments in the past and are pleased with our ability to continue to manage in the current environment,” President and COO Ted Decker said on the last conference call with Wall Street analysts.

Home Depot’s success is undeniable

One of The Home Depot’s primary goals is to be the low cost supplier to the home improvement industry. This means the company wants to lag behind its competition when it raises prices and leads when it cuts prices. Obviously, this has a negative impact on short-term profitability, as the company is reluctant to pass the higher costs on to consumers.

But if we look at The Home Depot’s historic performance, we see that this is definitely the right strategy to take. In recent years, as revenues have grown in average numbers on an annual basis, net income has skyrocketed due to increasing margins. In fiscal 2015, profits totaled $ 7 billion. In the past 12 months, it stood at almost $ 16 billion.

And the company is popular among entrepreneurs and other professionals, who account for about 45% of sales. Instead of immediately passing on higher input costs, which could alienate these high-value customers and push them into competitors, The Home Depot understands that building long-term relationships with them is crucial to the success of the business. ‘business. Sacrificing the margin at unusual times like today to retain customers is the right decision.

The current economic environment is fraught with uncertainty, with issues such as the omicron variant of the coronavirus and tightening monetary policy receiving most of the attention of investors. When it comes to inflation in particular, I have no reason to believe Home Depot will not be able to meet the challenges of 2022.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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