No Let Up in Home Depot's Merchandising Prowess
Wide-moat Home Depot (HD) continues to deliver topnotch performance, implying that its merchandising prowess remains intact, with fourth-quarter same-store sales growth of 7.5% and operating margin expansion of 20 basis points, to 13.4%. The positive momentum the company has captured through both its brand positioning and supply chain is set to continue in 2018, with expectations for same-store sales of 5% (not materially different than the 4.8% we had forecast) and flat operating margin performance (14.5%), despite higher levels of investment to support the business. We still expect operating margin moderation over the next two to three years (with operating margins reaching 14.6% in 2020, just above the 2017 level of 14.5%), but believe that investments that weigh on near-term profit expansion (improving existing stores, IT, supply chain) should position the business well for the long term, protecting the brand intangible asset and enhancing the cost leadership position Home Depot has already captured (as spending nearly doubles from a business-as-usual environment to $11.8 billion over the next three years).
We plan to raise our $158 fair value estimate by a mid-single-digit percentage to account for a lower than previously anticipated tax rate (at 26% versus 28% prior), and cash earned since our last update, leaving shares modestly overvalued. Additionally, we expect to increase our 2018 estimate closer to management’s guided estimate of $9.31, as we account for the 53rdweek in the company’s fiscal year with incremental sales and profits (set to accounting for an extra $1.6 billion and sales and $0.19 in EPS) helping boost cost leverage in the period. Longer term, we are maintaining our outlook for 3% comp growth, 4% sales growth, and operating margins that reach 16%, as the housing market normalizes bound by the rising interest-rate environment.
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