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Is Home Depot (HD) Poised to Retain Earnings Beat Trend in Q2?

Zacks Equity Research

The Home Depot, Inc. HD is slated to report second-quarter fiscal 2019 results on Aug 20, before the opening bell. In first-quarter fiscal 2019, it delivered a positive earnings surprise of 5.1%.

Moreover, the company has a spectacular positive earnings surprise record for five years now. For the trailing four quarters, it delivered average positive earnings surprise of 6.8%. This can be attributed to the company’s spectacular growth strategies, including an interconnected strategy and focus on Pro customers. Let’s see how things are shaping up prior to this announcement.

The Home Depot, Inc. Price and EPS Surprise

 

The Home Depot, Inc. Price and EPS Surprise

The Home Depot, Inc. price-eps-surprise | The Home Depot, Inc. Quote

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 company’s earnings for the fiscal second quarter is pegged at $3.09, up nearly 1.3% from the year-ago quarter’s reported figure. Moreover, earnings estimates for the company’s fiscal second quarter remained unchanged in the last 30 days. The Zacks Consensus Estimate for its revenues is pegged at $31 billion, suggesting a1.8% increase from the year-ago reported number.

Factors at Play

Home Depot has displayed strength over the past several quarters, driven by robust strategies and solid execution. Among the strategies, smooth execution of the integrated retail strategy, which connects offline and online channels, has significantly aided results in the past few quarters. The company considerably improved customer satisfaction scores and conversion rates through investments in interconnected capabilities, which encompass digital properties and physical store assets. We believe that progress on these efforts is likely to boost Home Depot’s results in the to-be-reported quarter through enhanced digital sales.

Additionally, the company remains focused on using its digital platforms in adjacent categories such as HD Home and pool. Further, as a testament to its interconnected retail strategy, its physical stores continue to be relevant to shoppers as nearly 54% 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. These strategies are likely to play its part in boosting results in the fiscal second quarter.

Home Depot’s Pro segment has been a 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 the Pros. Home Depot has been making investments to bring a more personalized experience for Pro customers through its new B2B website.

Based on customer feedback, the company is continuously enhancing its online account management and ordering capabilities for the Pros. Home Depot expects to roll out this new Pro online experience to more than a million Pros by 2019. This should be accretive to earnings and sales in the quarters ahead.

Overall, the company’s to-be-reported quarter is poised to benefit from positive customer response for assortments as well as enhancements to drive integrated shopping experience. It is also likely to gain from strength across store operations as well as digital portals, which reflect strong customer demand in the home improvement markets.

Nonetheless, a soft comparable store sales (comps) performance in the last reported quarter is concerning investors. Comps were negatively impacted by adverse weather in February and deflation in lumber prices. Lumber prices continued to fall in the fiscal first quarter and hurt sales growth by roughly $200 million. Further, two of the company’s U.S. regions delivered negative comps, resulting from tough year-over-year comparisons, owing to hurricane-related sales.

While these factors seem temporary, we would like to wait and see if these impacts persist in second-quarter fiscal 2019.

What the Zacks Model Unveils

Our proven model does not conclusively predict that Home Depot is likely to beat earnings estimates this quarter. This is because it has the right combination for reporting an earnings beat namely — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Home Depot currently has a Zacks Rank #3 and an Earnings ESP of 0.00%. While the Zacks Rank increases the chances of beating estimates, an Earnings ESP of 0.00% makes surprise prediction difficult.

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:

Target Corp. TGT has an Earnings ESP of +1.04% 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 +0.73% and a Zacks Rank #3.

The Children’s Place Inc. PLCE has an Earnings ESP of +47.06% and a Zacks Rank #3.

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