Home Depot Q3 Earnings Miss Mark

Home Depot’s third-quarter earnings report showed it missed the mark slightly, but the company appears to have been shielded a bit financially — at least temporarily — following the massive September data breach that impacted 56 million debit and credit cards.

Although Home Depot’s CFO Carol Tome said the breach caused the company to incur $28 million in net expenses, Home Depot was prepared as it has a $100 million insurance policy for breach-related expenses. Tome also provided an earnings-per-share guidance that includes an estimate of net breach-related costs of approximately $34 million for the year, that included costs between April and September. She gave guidance for next quarter’s breach-related expenses, which Home Depot predicts will be $27 million. After insurance, however, that breaks down to costing the company just about $6 million.

Despite the scale of the breach, Home Depot appears to have not lost its loyal customer base as the number of transactions grew just above 3 percent from last year’s third quarter. The total number of customer transactions in this year’s third quarter was roughly 355,000 transactions, with the total for the year hitting roughly 1.74 billion. Average customer ticket also rose 2.3 percent from last year’s third quarter, growing 1.8 percent in a nine-month period. Net sales for the quarter also grew 5.7 percent, and the company confirmed its guidance for the 2014 of 4.8 percent sales growth.

“It is very difficult for us to determine if there is any impact [from the data breach on sales],” Chief Executive Officer Craig Menear said during Tuesday’s (Nov. 18) earnings call. “We have had positive transaction growth for each month during the quarter. That represents consumers’ confidence.”

The full impact of the breach is yet to be known, though, since other costs stemming from it could include liabilities to payment card networks for reimbursements, liabilities related to the company’s private label credit card fraud and card re-issuance, potential litigation costs, and other legal proceeding costs that may be brought against Home Depot once more details are known. Home Depot is facing at least 44 civil lawsuits in the United States and Canada as a result of the breach.

“Other than the breach-related costs contained in the Company’s updated fiscal 2014 diluted earnings-per-share guidance, at this time the Company is not able to estimate the costs, or a range of costs, related to the breach…Those costs may have a material adverse effect on the Company’s financial results in the fourth quarter of fiscal 2014 and/or future periods,” Home Depot said in its earnings release.

Still, Menear, who was appointed to the role in August, spoke optimistically about the growth of the company going into the holiday season. He said that the company’s online sales continue to grow, but that 40 percent of customers who order online still choose to pick up in store — showing the importance of Home Depot’s brick-and-mortar side. Menear took the time during Tuesday’s (Nov. 18) earnings call to apologize to anyone impacted by the data breach, but said Home Depot has invested in ensuring proper security measures are being taken and continues to offer free credit monitoring and ID theft protection to those impacted. Overall, he was optimistic about the quarter going into the holiday season.

“During the quarter we saw strong performance across all geographies led by growth in transactions and continued strength in the core of the store,” Menear said.

Overall earnings for Home Depot beat sales expectations but missed profit expectations. Quarterly revenue rose to $20.5 billion, up from $19.5 billion, while same-store sales increased 5.2 percent and comparable-store sales in the U.S. rose 5.8 percent. Third-quarter net income rose to $1.54 billion, up from $1.35 billion, year over year. And according to Reuters, Home Depot’s shares were “down 1.9 percent at $96.20 in afternoon trading. Besides the earnings miss, analysts also attributed the weakness to a recent run-up in the stock. As of Monday’s close, it had risen 6.5 percent since Home Depot revealed the data breach.”