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The Home Depot (HDFree Home Depot Stock Report), the world's largest home-improvement retailer, has reported another round of stronger-than-anticipated results. In the fiscal second quarter (ended August 4th), sales increased 9.5% from a year earlier, to $22.52 billion, a bit ahead of our $21.70 billion call. This impressive advance came despite a calendar shift that resulted in one less week of spring sales in the July period compared with the same quarter last year. This shift weighed on the top line to the tune of about $249 million.

Regardless, demand for The Home Depot's goods was very strong and broad based across both categories and geographies, thanks to a rebound in sales of seasonal merchandise (weather in April wasn't conducive to outdoor projects, so sales of certain items, such as lawn and garden supplies, were pushed into the July period) and the recovery in the housing market. Sales of appliances were also solid, while commodity cost inflation helped drive selling prices for items, such as lumber and copper higher. Indeed, comparable-store sales surged 10.7%, overall, and 11.4% in the United States.

Virtually all of the retailer's other operating statistics were impressive, as well. The number of customer transactions climbed 4.9% year-over-year, while the average ticket grew 4.3%, to $57.39. Also, weighted average weekly sales per operating store jumped 9.1%. In sum, The Home Depot did an excellent job of adjusting to stronger-than-expected demand and was able to work effectively with vendors, stores, and its supply chain to meet demand.

Moving down the income statement, the gross margin increased slightly (12 basis points), due to gross margin accretive businesses acquired last year, expense leverage in the supply chain, and better shrink management, offset by a shift in the product mix, while operating expenses as a percentage of sales fell 79 basis points. All told, the operating margin rose 91 basis points. Greater interest expenses and a slightly higher tax rate were modest headwinds, but stock repurchases aided per-share comparisons. Adding it all up, earnings climbed 23% from a year earlier, to $1.24 a share, which compared favorably with our estimate of $1.20.

Looking ahead, the second half of fiscal 2013 ought to remain strong, though the company is facing some headwinds. First, comparisons will be tougher in the back half of the year than they were in the first, as the retailer laps hurricane spending in both 2011 and 2012, as well as last year's expansion of the appliance selection. Additionally, inflation is moderating and is unlikely to remain a tailwind in the second half. Finally, a calendar shift pulls a week from the holiday period relative to last fiscal year. Consequently, comps are expected to climb about 4% in the back half of the year, versus a gain of about 8% in the first half. Moreover, gross margin expansion will probably be about eight basis points in the second half, versus 16 basis points in the first half of fiscal 2013. Regardless, ongoing recovery in housing and internal improvements (better appliance selection, customer service, supply chain management, buy online, pick up in store, etc.) should keep demand strong from both homeowners and professionals.

Looking at fiscal 2013 in its entirety, we now expect The Home Depot to earn $3.65 a share on sales of approximately $78.25 billion, up from our prior calls of $3.60 and $77.50 billion, respectively. Comparable-store sales will likely climb about 6%. Our earnings estimate remains slightly above management's guidance, which is now $3.60 a share. Also, our forecasts reflect year-to-date share repurchases of $4.3 billion and the company's plan to buy back about $2.2 billion more over the rest of the fiscal year.

Despite the excellent July-period results and increased guidance, investors were apparently looking for even more, and after an initial bounce, HD stock moved slightly lower following the report. For our part, we continue to like these shares for conservative investors looking for exposure to the housing market. However, given the equity's recent quotation, capital appreciation potential over the pull to 2016-2018 is unimpressive.

About the Company: The Home Depot, Inc. operates a chain of 2,258 retail building supply/home improvement “warehouse” stores across the United States, Canada, and Mexico. The company's average store size is around 104,000 square feet indoor, plus 24,000 additional square feet in its garden centers. The Home Depot's product lines include building materials, lumber, floor/wall coverings, plumbing, heating, electrical, paint and furniture, seasonal and specialty items, and hardware and tools.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.