Earnings Preview: Home Depot

Zacks

World’s largest home specialty retailer, The Home Depot Inc. (HD), is scheduled to report its financial results for the second quarter of fiscal 2012, before the opening bell on Tuesday, August 14. The current Zacks Consensus Estimate for earnings for the second quarter is 97 cents a share, which is better than 86 cents delivered in the prior-year quarter. Revenue, as per the Zacks Consensus Estimate, is pegged at $20,730 million.

With respect to earnings surprises, Home Depot has topped the estimate over the trailing four quarters in the range of flat to 19.1%. The average surprise over the last four quarter remained at 8.5%.

First-Quarter Synopsis

Home Depot’s adjusted earnings of 65 cents a share, for the first quarter of fiscal 2012, climbed 30% from 50 cents earned in the year-ago quarter. However, the adjusted earnings were in line with the Zacks Consensus Estimate.

Moreover, the quarterly results were amplified by the increased number of centralized distribution centers and better merchandising tools. Further, a mild winter season forced the spring demand to come forward, benefiting the quarter’s performance.

During the reported quarter, net sales moved up 5.9% to $17,808 million compared with $16,823 million in the prior-year quarter. This increase was a result of an improvement of 5.8% in overall comparable store sales. Comparable store sales in U.S. stores grew 6.1% during the first quarter. However, net sales for the quarter fell short of the Zacks Consensus Estimate of $18,000 million.

Fiscal 2012 Outlook

In its Analyst Day meeting on June 6, 2012, Home Depot reaffirmed its fiscal 2012 earnings per share guidance of $2.90, reflecting an increase of 17% from the previous fiscal’s earnings. Moreover, the company anticipates net sales to increase by 4.6% for the year, owing to an additional 53rd week.

Furthermore, Home Depot revised its fiscal 2012 share repurchase guidance, projecting share repurchases to the tune of nearly $4.0 billion, and representing an upside of $500 million from the guidance provided in May 2012.

Earnings Estimate Revisions

Agreement

We do not see any major estimate revisions at this point for the second quarter of fiscal 2012. Of the 20 estimates, one revised downward, while one moved in the opposite direction in the last 30 days, for the second quarter. In the last 7 days, one estimate has been upgraded towards positive direction while no movement noticed in negative direction for the quarter.

For fiscal 2012, of the 20 estimates, 3 revised in the negative direction, while only 3 moved in the opposite direction, in the last 30 days. In the last 7 days, 3 estimates revised in the upward direction, while 2 were downgraded.

Magnitude

The magnitude of estimate revisions for Home Depot depicts a neutral outlook for the upcoming second quarter. Over the last 7 and 30 days, estimates for the upcoming quarter remained unchanged at 97 cents per share. For fiscal 2012, estimates were up by a penny to $2.92 per share.

Our Recommendation

Home Depot is the leading player in the highly fragmented home-improvement industry. The company has reinvigorated itself with a shift in focus from new square footage growth to maximization of productivity through its existing store base. In addition, the company has implemented significant changes to its store operations to make them simpler and more customer-friendly, thereby inducing more customer traffic. We expect these initiatives to attract more traffic to its stores and in turn, boost its top line.

Moreover, with the introduction of a new warehousing and transportation system, the company has been able to improve its supply chain while minimizing cost. This has also helped Home Depot improve its Central Automated Replenishment System to facilitate immediate refilling of stock while reducing investments in inventory.

Home Depot will remain focused on optimum capital allocation, which will further enable it to increase shareholders’ wealth. However, given the current economic environment, we believe that spending on big remodeling projects will likely to remain under pressure in the near term. This leads us to keep our long-term recommendation on the stock at ‘Neutral’. Home Depot, which competes with Lowe's Companies Inc. (LOW) currently, maintains a Zacks #3 Rank, which translates into a short-term Hold rating.

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