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Home Depot Earnings Preview: What's on Tap

Demitrios Kalogeropoulos, The Motley Fool

Home Depot (NYSE: HD) is set to post its quarterly results before the market opens on Tuesday, Feb. 20. Here's what investors can expect from the home improvement giant's report.

Healthy growth

With comparable-store sales growth having accelerated in each of the past two quarters, it's likely that Home Depot enjoyed strong gains in the most recent period. Comps jumped by 7.9% in the fiscal third quarter in part thanks to surging demand around rebuilding efforts spurred by natural disasters across the United States, including hurricanes, earthquakes, and wildfires.

A customer with a cart picks out a piece of lumber.

Image source: Getty Images.

Those recovery efforts should lift results at least into the first half of 2018, which means they'll play a role in the current quarter. Overall, executives are projecting comps of 6.5% in 2017 to trounce their initial 4.6% forecast. That result would also keep a healthy lead over rival Lowe's, whose forecast calls for just a 3.5% comps gain in 2017.

Within that growth figure, keep an eye on the balance between customer traffic and average spending per visit. Ideally, Home Depot can manage healthy gains in both metrics. Customer traffic growth edged down in the third quarter, though, and another decline might point to a slowing home improvement market or imply that Lowe's is finding traction in its attempts to end a string of market share losses to the industry leader.

Rising profits

The hurricane-related revenue boost has a mixed impact on the business since those sales are focused on lower-margin products like generators and lumber. Still, CEO Craig Menear and his team believe earnings will rise by a solid 14% to $7.36 per share for the full year.

That increase should come from the combination of three positive trends. First, look for the retailer's gross profit margin to tick up as it continues to win business from its professional customer niche. Second, operating margin should keep climbing toward 15% of sales as expenses rise at a slower pace than revenue. And finally, Home Depot's profits are getting a nice boost from its sharply reduced share count.

Through the first nine months of the year, earnings rose at a 15% pace on a per-share basis even though net income improved by a more modest 10%.

Capital returns and outlook

Home Depot is likely to have dedicated $2 billion toward buying back its own shares during the fourth quarter, bringing annual repurchase spending up to a massive $8 billion. Its earnings announcement will include a forecast for this capital return channel in 2018 as well, but investors shouldn't read too much into that figure.

A man installing a window.

Image source: Getty Images.

After all, the company started the 2016 fiscal year targeting $5 billion of buybacks before boosting the goal to $7 billion. Menear and his team had forecast $5 billion in spending again in early 2017, but will likely end up with an actual number that's at least 60% higher.

Home Depot's dividend raise is more predictable since it's tied directly to earnings growth. The retailer aims to deliver 55% of profits to shareholders in the form of dividend payments and, since income is slated to increase by more than 10%, investors can expect a double-digit payout boost this week following last year's 29% surge.

The initial sales outlook for 2018 might be cautious. It would be risky to project gains at the same 7% rate that natural disasters helped the retailer achieve last year, especially as the home improvement market's recovery ages. Yet Home Depot's business is stronger than ever as it enters this uncertain period. Profitability is at a new high, and the retailer is about to pass $100 billion in annual sales -- up from $67 billion just eight years ago.

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Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.