The world’s largest home improvement retailer, Home Depot Inc. (NYSE:HD - News), remains on our “Neutral” list despite a strong quarterly performance in the third quarter of 2011 and a raised projection for fiscal 2011.
In the third quarter, Home Depot reported earnings of 60 cents per share, above the Zacks Consensus Estimate of 59 cents and surged 17.6% from the prior period, on the heels of solid comparable sales growth, enhanced market share along with effective cost management.
By strategically closing down the underperforming stores, the company has been able to optimize capital allocation and concentrate on core business activities. Moreover, with the introduction of new warehousing and transportation system, the company has been able to improve its supply chain while minimizing cost.
Following the strong third-quarter performance, the company raised its earnings guidance for fiscal 2011 to $2.38 per share from $2.34 forecasted earlier. Additionally, Home Depot has revised its capital allocation principles and increased its dividend payout ratio to 50% from its previous target of 40%.
Going forward, Home Depot expects to utilize its excess cash for share buyback after meeting the business needs. Apart from this, the company also intends to maintain a high return on invested capital with a target of achieving 15% by the end of fiscal 2013. These strategies will enhance shareholders’ return while boosting the market value of the stock.
However, heavy job losses coupled with reduced access to credit have led to a sharp fall in consumer discretionary spending on big-ticket items. Looking at the current scenario in the U.S., we believe that spending on big remodeling projects will likely remain under pressure in the near term.
The top home improvement company operates in a highly fragmented and competitive environment. The company faces stiff competition from Lowe's Companies Inc. (NYSE:LOW - News), Wal-Mart Inc. (NYSE:WMT - News), and other local, regional and international players. To stay competitive, the company indulges in making selective acquisitions and strategic alliances with third parties, which in turn, increases its operational risks.
Home Depot Inc., with 2,252 retail stores across the globe, offers a diverse range of branded and proprietary home improvement items, building materials, lawn and garden products, and related services. Currently, the company employs more than 300,000 associates. Home Depot currently has a Zacks #2 Rank, implying a short-term Buy rating.
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