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Home Depot (HD) Beats on Q4 Earnings, Sales Lag Hurts Stock

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The Home Depot, Inc. HD posted better-than-expected earnings for fourth-quarter fiscal 2018, retaining its five-year-long trend of delivering positive earnings surprises. However, the company’s top line lagged the Zacks Consensus Estimate while comparable store sales (comps) growth was below analysts’ expectations. This led shares of this home-improvement retailer to decline nearly 2.1% in the pre-market session.

Net sales grew 10.9% to $26.49 billion from $23.88 billion in the year-ago quarter but lagged the Zacks Consensus Estimate of $26.56 billion. The additional 14th week in fourth-quarter fiscal 2018 contributed an incremental $1.7 billion to sales. The company's overall comps increased 3.2% and comps in the United States grew 3.7%.

During the reported quarter, comps were aided by 2.5% rise in average ticket and 7.7% increase in customer transactions. Moreover, sales per square foot rose 4.9%.

Meanwhile, this Zacks Rank #3 (Hold) company’s adjusted earnings of $2.25 per share increased 48% from $1.52 recorded in the year-ago quarter. Moreover, the bottom line beat the Zacks Consensus Estimate of $2.16. Earnings benefited from the contribution of nearly 21 cents per share from the additional 14th week in fiscal 2018 compared with fiscal 2017.

Excluding a non-recurring pre-tax charge of nearly 16 cents per share related to impairment loss incurred by certain trade names at Interline Brands, GAAP earnings per share for the fiscal fourth quarter was $2.09, up 37.5% year over year.

The company is on track with 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.

Other Quarterly Details

Gross profit margin expanded 20 basis points (bps) to 34.1%. In dollar terms, gross profit improved 11.5% to $9,027 million from $8,093 million in the year-ago quarter, primarily driven by higher sales. Excluding the impact of the ASU No. 2014-09 revenue recognition standards adopted in first-quarter fiscal 2018, gross margin contracted 30 bps to 33.6%.

Adjusted operating income increased 13.7% to $3,625 million while adjusted operating margin expanded 30 bps year over year to 13.7%.

Balance Sheet and Cash Flow

Home Depot ended fiscal 2018 with cash and cash equivalents of $1,778 million, long-term debt (excluding current maturities) of $26,807 million, and shareholders' deficit of $1,878 million. In fiscal 2018, it generated $13,038 million of net cash from operations.

Further, the company remains committed to rewarding shareholders through dividends and share repurchases. This is clear from the recent 32% hike in its quarterly dividend to $1.36 per share, which is payable on Mar 28 to shareholders with record as of Mar 14. This marked the 128th straight quarter of dividend payment for the company.

Moreover, the company authorized new $15-million share buyback program, which replaces its existing authorization.

Outlook

Home Depot outlined a solid view for fiscal 2019 and reaffirmed long-term financial targets. For fiscal 2019, which has 52 weeks, the company expects sales growth of nearly 3.3%, with comps growth of about 5% (for the comparable 52-week period).

Further, the company projects gross margin of approximately 34% and operating margin of 14.4%. Other assumptions include net interest expenses of approximately $1.2 billion, with effective tax rate estimated to be about 25.5%. The company anticipates earnings per share of $10.03 for fiscal 2019, up nearly 3.1% year over year.

The company estimates capital expenditure of nearly $2.7 billion, with nearly five net new stores planned for the fiscal year. Cash flow from operations is expected to be $14.1 billion while depreciation and amortization are likely to be $2.3 billion. Moreover, it plans to repurchase shares worth nearly $5 billion in the fiscal year.

The company reiterated its targets for fiscal 2020, anticipating total sales of nearly $115-$120 billion. Further, it expects operating margin of 14.4-15%. Return on invested capital is estimated to be more than 40%.

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