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Home Depot (HD) to Report Q1 Earnings: What's in the Offing?

Zacks Equity Research

The Home Depot, Inc. HD is slated to report first-quarter fiscal 2019 results on May 21, before the opening bell. In fourth-quarter fiscal 2018, it delivered a positive earnings surprise of 4.2%.

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 5.8%. This can be attributed to spectacular growth strategies, including an interconnected strategy and focus on Pro customers. Let’s see how things are shaping up prior to this announcement.

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 earnings for the fiscal first quarter is pegged at $2.18, up nearly 4.8% from the year-ago quarter. However, earnings estimates for the fiscal first quarter moved down in the last seven days. The Zacks Consensus Estimate for revenues is pegged at $26.4 billion, reflecting a year-over-year increase of 5.7%.

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

Home Depot has witnessed 7.1% decline in the past month, wider than the industry’s 5.8% decline. This reflects a negative sentiment on the stock ahead of the earnings release.

Factors at Play

The company 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 results in the to-be-reported quarter through enhanced digital sales.

Apart from enhanced digital portals, the scope of the integrated retail strategy extends to the supply-chain system, and investments for enhancing delivery and fulfillment options for customers. Further, as a testament to its interconnected retail strategy, physical stores of the company continue to be relevant to shoppers as nearly 50% of the online orders in the United States are 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. Its efforts to enhance the fulfillment of online orders and retain the relevance of stores are likely to attract more traffic, both online and offline, which should aid its top line in the upcoming quarterly results.

Additionally, 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. 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 a more personalized experience for Pro customers through the new B2B website. It currently has more than 100,000 Pro customers and plans to expand this number by introducing features and capabilities. Based on customer feedback, the company is continuously enhancing its online account management and ordering capabilities for the Pros. It expects to roll out this new Pro online experience to more than a million Pros in 2019. This should be accretive to earnings and sales in the quarters ahead.

Furthermore, 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.

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, soft sales and comparable store sales (comps) performances in the last reported quarter are concerning investors. Comps were negatively impacted by currency headwinds due to the robust U.S. dollar and commodity price inflation in the first three quarters of fiscal 2018. Additionally, the company faced tough year over year comparisons due to nearly $400 million of hurricane-related sales recorded in the prior-year quarter.

While these headwinds were factored in Home Depot’s guidance, an unexpected impact of wet winter weather in all regions throughout the quarter largely weighed on comps. The wet weather caused delays in projects, thus, reducing demand, which negatively impacted fourth-quarter comp sales by nearly 85 bps. While these factors seem temporary, we would like to wait and see if these impacts persist in first-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 an Earnings ESP of -0.12% and a Zacks Rank #3. While a positive rank increases the predictive power of ESP, a negative ESP 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 +0.42% and it currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The TJX Companies, Inc. TJX has an Earnings ESP of +0.79% and a Zacks Rank #2 at present.

Dollar Tree, Inc. DLTR currently has an Earnings ESP of +0.51% and a Zacks Rank #3.

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