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Home Depot Beats EPS, Ups Guidance

Zacks Equity Research

World's largest home improvement retailer, The Home Depot Inc.’s (HD) earnings for the second quarter of fiscal 2012 came in at $1.01 per share, climbing 17.4% from the prior-period earnings of 86 cents, primarily driven by comparable-sales growth and strong operating performance. Moreover, quarterly earnings surpassed the Zacks Consensus Estimate of 97 cents a share.

Quarterly Details

During the reported quarter, net sales inched up 1.7% to $20,570 million compared with $20,232 million in the prior-year quarter. The company’s second-quarter sales were marginally affected by mild winter season that forced the spring demand to come forward, thereby benefiting the first quarter’s performance. Sales, at the company’s comparable stores, marginally improved 2.1%, while comparable store sales in the U.S. stores grew 2.6%. However, net sales for the quarter fell short of the Zacks Consensus Estimate of $20,730 million.

During the quarter, gross profit increased 2.2% to $7,026 million from $6,876 million reported in the prior-year quarter. Consequently, gross profit margin expanded by 20 basis points (bps) to 34.2%.

Operating profit, during the quarter, increased robustly by 12% to $2,569 million, compared with $2,294 million in the year-ago period. Operating margin expanded 120 bps to 12.5% compared with 11.3% in the prior-year quarter. The improvement in operating margin was primarily driven by elevated gross profit margin and effective cost management.

Balance Sheet and Cash Flow

Home Depot ended the quarter with cash and cash equivalents of $2,810 million, long-term debt of $10,771 million and shareholder’s equity of $17,634 million. During the first six months of fiscal 2012, the company generated $4,261 million of cash from operations and deployed $2,630 million towards share buyback, $880 million for dividend payment, and $551 million as capital expenditures.

Revised outlook for fiscal 2012

Following solid first-quarter results, management raised its fiscal 2012 earnings guidance to $2.95 per share, an increase of 19% from the previous fiscal’s earnings of $2.47 and up from $2.90 forecasted earlier. The current Zacks Consensus Estimate for fiscal 2012 stands at $2.92 per share, which is in between the company’s guidance range. Moreover, the company reiterates its net sales growth guidance of 4.6%.

Our Recommendation

Home Depot is a 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. We believe these initiatives will induce more customer traffic to its stores while boosting its top line.

Moreover, with the introduction of new warehousing and transportation system, the company has been able to improve its supply chain while minimizing cost. Further, this has facilitated Home Depot to improve its Central Automated Replenishment System for immediate refilling of stock while reducing its investment in inventory.

However, the company’s business is highly competitive, primarily based on customer services, price, store location and assortment of merchandise. It faces stiff competition from local, regional and international players as well. To maintain its market share, the company is making selective acquisitions and strategic alliances with third parties, which are increasing its operational risks.

Home Depot, which competes with Lowe's Companies Inc. (LOW), currently has a Zacks #2 Rank, implying a short-term Buy rating. Besides, the company retains a long-term ‘Neutral’ recommendation.

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