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Can Growth Initiatives Aid Home Depot Despite Sales Woes?

Zacks Equity Research

The Home Depot Inc. HD has been performing well lately as evident from 14.7% rise in the stock price in the past three months. This growth stemmed from progress on its integrated retail strategy that connects offline and online channels. Further, the company’s omni-channel expansion efforts and momentum in the Pro business supported this momentum.

However, this Zacks Rank #3 (Hold) stock has witnessed a snag in the past month, owing to lower-than-expected sales and comparable store sales (comps) reported in fourth-quarter fiscal 2018. Tough comparisons, hurricane-related sales gains in the prior year, currency headwinds and commodity price inflation in the first three quarters of fiscal 2018 deterred comps growth.

While these headwinds were factored in the company’s guidance, an unexpected impact of wet winter weather in all regions throughout the quarter largely weighed on comps. The wet weather caused project delays, thus reducing demand, which negatively impacted comp sales in the fiscal fourth quarter by nearly 85 bps.

Clearly, the stock has declined 4% in the past month against the sector’s growth of 2.5%.

 



Nonetheless, there are more positive factors that can cushion the performance of Home Depot’s stock despite the aforementioned deterrents. Let’s get a detailed view of factors that may aid the stock’s growth moving ahead.

Integrated Retail Strategy on Track

Home Depot’s integrated retail strategy is well received by customers as clear from improved customer satisfaction scores and conversion rates through investments in interconnected capabilities that encompass digital properties and physical store assets. Online sales, representing nearly 7.9% of total sales, increased about 22.7% and 24.1%, respectively, in the fourth quarter and fiscal 2018. Further, as a testament to its interconnected retail strategy, physical stores continue to be relevant to shoppers as nearly 50% of the online orders in the United States were picked up in stores.

Moreover, the company continues to roll out automated lockers in its stores to make picking-up of online orders easier and convenient. Currently, automated lockers are available in about 1,000 stores. The company expects to roll out more lockers in 2019.

Pro Sales Outpace DIY Sales

Home Depot’s Pro segment is key growth driver, with Pro sales outpacing DIY (do-it-yourself) sales for the past several quarters. The Pro segment is benefiting from the company’s efforts to enhance service capabilities for Pros. The fiscal fourth quarter was marked by the rollout of a consolidated go-to-market approach for Pro customers under the Home Depot Pro banner. Further, the company is investing to bring more personalized experience for Pro customers through new B2B website. It expects to roll out this new Pro online experience to more than a million Pros in 2019.

Robust Outlook — Long-Term Targets Reiterated

Driven by strong close to fiscal 2018, the company outlined a solid view for fiscal 2019 and reaffirmed long-term financial targets. For fiscal 2019, it expects sales growth of nearly 3.3%, with comps growth of about 5%. The company anticipates earnings per share of $10.03, up nearly 3.1% year over year.

Home Depot is tracking well with the “one Home Depot” investment plans that were outlined in December 2017. It is benefiting from efforts to provide an interconnected shopping experience to customers, with localized and innovative products, and improved productivity.

As a result, the company continues to anticipate total sales of nearly $115-$120 billion by fiscal 2020, representing compounded annual sales growth of nearly 4.5-6%. Operating margin is expected to be 14.4-15%. Moreover, it expects annual average capital spending to be about 2.5% of sales, with return on invested capital of more than 40%, reflecting the impact of the new tax reform.

Conclusion

A detailed review of the company’s growth strategies suggests that the stock is definitely poised to regain traction in the future. This view is further supported by our VGM Score of A and a long-term earnings growth rate of 11.6%. Our research shows that stocks with a VGM Score of A or B combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best investment opportunities.

3 Better-Ranked Stocks in the Same Industry With Potential to Grow

Beacon Roofing Supply, Inc. BECN has long-term earnings per share growth rate of 21% and a Zacks Rank #1 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Fastenal Company FAST has long-term earnings per share growth rate of 16% and a Zacks Rank #2 currently.

Tecnoglass Inc. TGLS has long-term earnings per share growth rate of 20% and a Zacks Rank #2 presently.

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