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Will Business Momentum Aid Home Depot (HD) Amid Cost Woes?

·6 min read

Home Depot Inc. HD has been gaining from strong demand for home improvement projects, robust housing market trends and ongoing investments. The company has been benefitting from continued strength in both Pro and DIY categories, as well as digital momentum. Its interconnected retail strategy and underlying technology infrastructure have helped consistently boost web traffic for the past few quarters, aiding digital sales.

The investments and endeavors have helped deliver consistently strong earnings performances. The company reported sales and earnings beat for the ninth straight quarter in second-quarter fiscal 2022. The top and bottom lines also improved year over year. The company’s results represented the highest-ever sales and earnings in its history.

However, Home Depot reported a soft gross margin in the fiscal second quarter, driven by higher supply-chain investments. Higher inventory levels and interest expenses also remain concerning.

Shares of Home Depot have lost 4% in the past three months compared with the industry’s decline of 3.2%.

The Zacks Consensus Estimate for the Zacks Rank #3 (Hold) company’s current financial year’s sales and earnings suggests growth of 3.5% and 6.6%, respectively, from the year-ago period’s reported number.

 

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

 

Factors to Aid Home Depot

Home Depot is witnessing significant benefits from the execution of the “One Home Depot” investment plan, which focuses on expanding supply-chain facilities, technology investments and enhancement to the digital experience. The interconnected retail strategy and underlying technology infrastructure have helped consistently boost web traffic for the past few quarters. Sales leveraging the digital platforms rose 12% in the fiscal second quarter. Enhanced search capabilities, an improved Pro site experience, and robust fulfillment capabilities have been driving online conversions.

The company’s strategy of providing an interconnected experience is resonating well with customers, as around 50% of the online orders were fulfilled through stores in the fiscal second quarter. Over the years, the company has created the fastest, most-efficient delivery network in home improvement through options like buy online pickup in store with convenient pickup lockers, buy online deliver from store with express car and van delivery, and the curbside pickup.

The company has rolled out the mixed-cart selling from store capability, eliminating the friction between customers and associates. The mixed-cart feature enables customers to add products from the website as well as stores to a single transaction. This also enables associates to efficiently serve the total project needs of customers. Moreover, Home Depot is looking to enhance interconnected facilities in tool rental through the expansion of rent online pilot chainwide. The capability is likely to enhance the experience for both Pro and DIY customers.

Home Depot’s Pro segment has been a key growth driver, with the Pro segment witnessing robust sales growth for the past several quarters. Pro sales growth outpaced DIY sales in the fiscal second quarter, driven by robust project demand across the business. The company expects continued sales growth from Pros, as project demand is strong and their backlogs are growing.

Home Depot continues to invest in Pro capabilities like enhanced fulfillment, more personalized online experience, and other business management tools to drive deeper engagement with Pro customers. The company is also impressed with the momentum in its pro extra loyalty program. Pro extra members will now have access to the company’s B2B pro-online experience.

Headwinds on the Path

Home Depot has been witnessing significant cost headwinds due to higher supply-chain investments. This, along with higher transportation and product cost pressures, has been denting margins. In the fiscal second quarter, the company contracted 10 bps to 33.1% from 33.2% in the year-ago quarter.

Moreover, Home Depot’s inventories increased $7.2 billion year over year to $26.1 billion in second-quarter fiscal 2022, while inventory turns were 4.5 times, down from 5.7 times last year. More than half of the rise in inventory can be attributed to product cost inflation. The inventory increase also stems from intentional investments in higher in-stock levels and pull forward of inventory for events in the back half of the year due to the ongoing global supply-chain disruptions.  Investment in its new supply chain facilities and carryover of some spring seasonal inventory also led to the increase.

The increased inventory levels may be concerning for Home Depot if the housing environment deteriorates and consumers halt remodeling projects.

Stocks to Bet On

We highlighted three better-ranked stocks in the Retail - Wholesale sector, namely Tecnoglass TGLS, Ulta Beauty ULTA and CVS Health CVS.

Tecnoglass manufactures and sells architectural glass and windows, and aluminum products for the residential and commercial construction industries. TGLS currently sports a Zacks Rank #1 (Strong Buy). The stock has lost 0.2% in the past three months.

You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Tecnoglass’ current financial-year sales and earnings per share suggests growth of 28.2% and 47.7%, respectively, from the year-ago reported figures. TGLS has a trailing four-quarter earnings surprise of 24.4%, on average.

Ulta Beauty, a leading beauty retailer in the United States, currently flaunts a Zacks Rank #1. ULTA has a trailing four-quarter earnings surprise of 32.8%, on average. The stock has risen 2.3% in the past three months.
 
The Zacks Consensus Estimate for Ulta Beauty’s current financial-year sales suggests growth of 13.7% from the = year-ago reported figures. ULTA has an expected EPS growth rate of 11.9% for three-five years.

CVS Health, a pharmacy innovation company with integrated offerings across the entire spectrum of pharmacy care, currently has a Zacks Rank of 2 (Buy). The company has a trailing four-quarter earnings surprise of 6.7%, on average. Shares of CVS have risen 3.8% in the past three months.

The Zacks Consensus Estimate for CVS Health’s current financial-year sales and earnings per share suggests growth of 6.7% and 1.7%, respectively, from the year-ago reported numbers. CVS has an expected EPS growth rate of 7.7% for three-five years.


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The Home Depot, Inc. (HD) : Free Stock Analysis Report
 
CVS Health Corporation (CVS) : Free Stock Analysis Report
 
Ulta Beauty Inc. (ULTA) : Free Stock Analysis Report
 
Tecnoglass Inc. (TGLS) : Free Stock Analysis Report
 
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