Analyzing the Sales Drivers Affecting Home Depot’s Outlook
The Home Depot: Potential and Prospects in 2016 and Beyond
4Q16 revenue upside
The Home Depot’s (HD) revenue growth (IWB) in 4Q16 is expected to be spurred by higher online sales, new store openings, and higher same-store store sales in the United States. Sales will also be boosted on a comparable basis by the company’s acquisition of Interline Brands last year.
Based on comments by senior vice president and president of Online Kevin Hofmann, HD is expecting digital sales to grow by nearly $1 billion in fiscal 2016, representing about 5% of revenue.
In comparison, in fiscal 2015, Lowe’s (LOW) derived about 3% of its sales from the web. Restoration Hardware (RH) and Pier I Imports (PIR) derived ~50% and ~11% of their respective sales from the web in the last fiscal year.
HD, LOW, RH, and PIR together make up 8.2% of the portfolio holdings in the Vanguard Consumer Discretionary ETF (VCR). VCR provides exposure to 383 stocks in the consumer discretionary sector.
Foreign expansion: Growth and headwinds
As of the end of 3Q16, HD’s net store count had increased by four from the end of fiscal 2015. Three new stores were added in Mexico and one in Canada during the first three quarters of fiscal 2016. However, international performance has been adversely affected lately due to forex movements. In the company’s 3Q16 earnings call, HD management estimated the impact of the higher US dollar on the full year’s sales to be $1.4 billion.
HD derived ~10.2% of its sales from outside the United States in fiscal 2015. Lowe’s (LOW), which also operates stores in Canada and Mexico, derives a much lower component of its sales from overseas.
Longer-term drivers
Home Depot is projecting annual revenue growth of $101 billion in three years. According to HD CEO Craig Menear, it would take the equivalent of 357 new stores to achieve the incremental revenue. But HD isn’t looking to expand its footprint to that extent. Instead, Home Depot is mostly banking on its professional customer and omni-channel platform to provide the $13 billion upside to sales, taking projected revenue to $101 billion by fiscal 2019. So let’s take a look at how HD is looking at the professional customer to grow revenue.
Browse this series on Market Realist:
