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Want Stocks that Can Beat Retail Woes? Buy Home Depot (HD)

Zacks Equity Research

Home improvement retailer, The Home Depot Inc. HD has been putting up a good show of late with its stock not having witnessed a downside in a long time. This could be mainly attributed to strong earnings trends, robust outlook, efforts to improve customer experience along with promising capital strategy. Additionally a recovering housing market and the rehabilitation process following the hurricanes have been aiding its performance.

Superb Stock Performance

Shares of Home Depot, which seems unhindered at the moment, have surged 30.6% in the past year, outperforming the industry’s upside of 25.2%. This solid growth comes on the back of a spectacular surprise history and growth strategies, including an interconnected strategy and focus on Pro customers. Moreover, the company’s Growth Score of A suggests that the stock is bound to leap further.



Robust Surprise History and Outlook Drive Optimism

Home Depot has been reporting strong financial figures since 2008, with steady improvement in revenues and earnings per share. Notably, the company’s second-quarter fiscal 2017 results marked the 13th straight sales beat, while it also retained the five-year long trend of delivering positive earnings surprise. The company is gaining from solid growth across all regions, both in stores and online. Further, Pro category sales continue to outperform, driven by constant efforts to enrich customers’ experiences. Additionally, housing market recovery remains a tailwind. The sturdy first half and expectations of improved home prices and re-emergence of first-time homebuyers, encouraged the company to raise fiscal 2017 view.

Home Depot, Inc. (The) Price, Consensus and EPS Surprise

Home Depot, Inc. (The) Price, Consensus and EPS Surprise | Home Depot, Inc. (The) Quote

Interconnected Strategy — The Core Growth Plan

Home Depot has been implementing several initiatives to drive long-term growth. The most prominent among them is building its interconnected capabilities to cater to the evolving retail backdrop, where digital and physical stores go hand in hand. In sync with this trend, the company has redesigned its website, upgraded mobile app, and introduced speedy checkout, which resulted in online sales growth of nearly 23% in second-quarter fiscal 2017. The dot.com sales also represented nearly 6.4% of the company’s top-line. Moreover, Home Depot’s interconnected strategy goes beyond the dot.com investments as it continues to invest in fulfillment options to cater to customers’ demand. We believe that these efforts will drive the company’s top and bottom-line in the long run.

Pro Customers Remain Key Driving Factor

Home Depot has been gaining from its focus on Professional Customers, or Pro Customers. Notably, sales from this category continued to outperform in second-quarter fiscal 2017. Notably, the company has undertaken several strides in this regard, which has helped it reap significant benefits. It is evident from Home Depot’s recent acquisition of Compact Power Equipment, which marked another step toward improving portfolio service offerings to Pro customers. This buyout is likely to have a positive impact on the gross margin in fiscal 2017.

Disciplined Capital Strategy to Appease Shareholders

Home Depot has always maintained a disciplined capital allocation strategy, focused on making investments to develop business while using the excess cash to enhance shareholder returns through dividend payouts and share buybacks. As evidence of progress on the strategic initiatives and commitment to reward shareholders, the company targets a dividend payout ratio of about 55% of earnings. The company bought back 17.3 million shares for nearly $2.6 billion in second-quarter fiscal 2017, which took its year-to-date buybacks to $3.9 billion. Moreover, management raised fiscal 2017 buyback target from $5 billion to $7 billion.

Bottom Line

While all is well with Home Depot, its margins look troubled. However, the aforementioned strategic initiatives and other measures clearly position it for an impending growth. Aptly, Home Depot currently carries a Zacks Rank #2 (Buy).

Want More of Retail? Buy these Trending Stocks

Some other top-ranked stocks in the retail space include Beacon Roofing Supply, Inc. BECN, Lumber Liquidators Holdings, Inc LL and American Eagle Outfitters Inc. AEO, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Beacon Roofing has a long-term EPS growth rate of 8.5%. Further, the stock has returned 14.4% year to date.

Lumber Liquidators has gained a whopping 119% year to date. Moreover, it has a long-term earnings growth rate of 27.5%.

American Eagle has improved 9.2% in three months. Further, the company has a long-term earnings growth rate of 8.7%.

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