Home Depot says peak investments to pressure 2020 margins

(Reuters) - Home Depot Inc HD.N, the No. 1 U.S. home improvement chain, on Wednesday forecast 2020 sales below Wall Street expectations and said major investments in its online overhaul program would pressure margins next year.

The logo of Down Jones Industrial Average stock market index listed company Home Depot is seen in Encinitas, California April 4, 2016. REUTERS/Mike Blake

Company executives at an investor and analyst conference said 2020 is expected to be a peak year of investments for its $11 billion “One Home Depot” program, which was first announced in 2017 to better integrate its online operations with stores.

The company’s total investment in the growth initiative in 2020 will be $3.9 billion, compared to $3.6 billion in 2019 and $3.3 billion in 2018.

“After 2020, this level of investment will decrease and benefits from our investment should increase,” Chief Financial Officer Richard McPhail said.

The company also said inventory theft was expected to weigh on margins next year. Chief Executive Craig Menear told investors the uptick in theft may have something to do with the opioid crisis, according to a transcript of the meeting.

To keep shoppers away from smaller rival Lowe's Cos Inc LOW.N and online options, Home Depot has been adding automated lockers in its stores for shoppers who want to pick up their orders rather than wait for them to be delivered.

“Lowe’s is actually starting to get back on the top of their game and so, we think the days of Home Depot gaining market share is going to be more difficult,” said Brian Yarbrough, an analyst at brokerage Edward Jones.

Home Depot has worked to shorten delivery time and develop a more user-friendly website. Last month, it said the One Home Depot strategy was not yet generating as much revenue as it had expected, prompting it to cut its 2019 sales forecast for the second time.

“There is more work to do to unlock the full value of One Home Depot experience,” Menear said.

“We were perhaps a bit ambitious with regards to the speed with which the benefits would be seen in 2019.”

The company forecast preliminary fiscal 2020 comparable sales and total sales growth of about 3.5% to 4%.

Analysts on average had expected sales growth of 4.3%, according to IBES data from Refinitiv.

Home Depot also said it expects operating margin of about 14% in fiscal 2020, below a target of about 14.4% to 15% it set in 2017.

Shares of the company ended down nearly 2% at $212. They are up about 26% this year.

Reporting by Soundarya J in Bengaluru; Editing by Maju Samuel, Anil D’Silva and Tom Brown