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Factors Setting the Tone for Home Depot's (HD) Q2 Earnings

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The Home Depot, Inc. HD is slated to report second-quarter fiscal 2018 results on Aug 14, before the opening bell. In first-quarter fiscal 2018, the company delivered a positive earnings surprise of 0.97%.

Moreover, the company has a spectacular positive earnings surprise record for five years now. For the trailing four quarters, the company delivered an average positive earnings surprise of 2.2%. This growth comes on the back of spectacular growth strategies, including an interconnected strategy and a focus on Pro customers. Let’s see how things are shaping up prior to this announcement.

What to Expect?

The question lingering in investors’ minds now is whether Home Depot will be able to post positive earnings surprise in the quarter to be reported. The Zacks Consensus Estimate for the quarter under review is $2.85 per share, up nearly 26.7% from the year-ago quarter. We note that the Zacks Consensus Estimate for the fiscal second quarter has been stable in the last 30 days. Analysts polled by Zacks anticipate revenues of $30 billion, reflecting a year-over-year increase of 6.7%.

The Home Depot, Inc. Price and EPS Surprise


The Home Depot, Inc. Price and EPS Surprise | The Home Depot, Inc. Quote

However, we note that the stock has declined 0.2% in the past month, reflecting a negative sentiment ahead of the earnings release. Further, this marks an underperformance against the industry’s increase of 0.5% in the same period.

Factors at Play

Robust earnings history, focus on Pro Customers, strength in core business and a disciplined capital strategy have been the key pillars for the success of Home Depot. The company remains keen on building its interconnected capabilities by upgrading its digital assets, in order to provide a more seamless experience to customers. Meanwhile, the company has been benefiting from its solid focus on Pro Customers.

Further, management has reaffirmed its long-term financial targets for fiscal 2020 while updating the return on invested capital target to reflect the impacts of Tax Cuts and Jobs Act of 2017. Management also plans to accelerate investments in the next three years to boost customers’ experience and shareholder value.

Though Home Depot has been posting sturdy results for a long time, its top line for the first quarter of fiscal 2018 lagged estimates, mainly due to the softness in the spring season categories as the weather across the United States was colder than normal. The extreme winter weather in the fiscal first quarter negatively impacted its garden categories, which usually represent 15-20% of sales. Softness in chemicals, fertilizer, mulch and live goods were among the few departments within the garden segment, which led to lower comps. Further, this softness in the garden business resulted in a decline in comparable transactions, which dipped 1.5%.

Nonetheless, the company witnessed strength in all lines of business in the first few weeks of May, which marked the start of the fiscal second quarter. This robust momentum, along with a favorable housing market and macroeconomic backdrop, led the company to retain its earnings and sales forecast for fiscal 2018.

While the soft top line in the fiscal first quarter has impacted investors’ optimism, we continue to see immense potential in the stock. However, given the mixed sentiments, we would wait and see what this home improvement giant has in store for in the upcoming earnings release.

What the Zacks Model Unveils

Our proven model does not conclusively show that Home Depot is likely to beat earnings estimates this quarter. This is because, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Home Depot currently has an Earnings ESP of -0.04% and a Zacks Rank #4 (Sell). The company’s negative Earnings ESP and unfavorable Rank make surprise prediction impossible.

Stocks With Favorable Combination

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Lowe’s Companies Inc. LOW has an Earnings ESP of +0.45% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Macy’s Inc. M has an Earnings ESP of +0.21% and a Zacks Rank #2.

Ross Stores Inc. ROST has an Earnings ESP of +2.72% and a Zacks Rank #2.

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The Home Depot, Inc. (HD) : Free Stock Analysis Report
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