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Dow 30 Earnings: The Home Depot – Fiscal Second Quarter 2011
The Home Depot (HD – Free Home Depot Stock Report), the world's largest home-improvement retailer, has announced strong fiscal second-quarter results (ended July 31st). Earnings were $0.86 a share, a bit above our $0.82 estimate and 19% higher than the year-earlier figure. Sales came in at $20.23 billion, slightly ahead of our $20.05 billion forecast and up 4.2% year to year. Comparable-store sales rose 4.3% in the period, while stores in the United States experienced 3.5% comp growth. Home Depot stock moved modestly higher on the news.
The solid performance was the result of several factors. Sales of seasonal items rebounded strongly from the fiscal first quarter, when cold, wet weather persisted across much of the U.S. and the tornado season was particularly severe, causing consumers to delay outdoor projects. Indeed, storm-related repairs added to the top line in the July term. Too, the gross margin expanded to 34.0%, from 33.9% in the year-earlier period, and SG&A expenses as a percentage of sales declined by about 57 basis points. A lower share count aided the bottom line, as well.
Moreover, management sounded sanguine in its outlook for the second half of the fiscal year. The company will likely face a challenging operating environment in the months ahead, as GDP growth appears to be headed for a soft patch, unemployment remains persistently high, and the housing market continues to languish. However, The Home Depot is executing well and we believe that there is still pent-up demand for maintenance and repair projects. Also, gasoline prices are forecast to decline as we head into fall, which may ease some strain on consumers' budgets. All told, the company reiterated its forecast for top-line growth of about 2.5% this fiscal year and raised its bottom-line target by a dime, to $2.34 a share. This figure excludes the impact of future stock buybacks, though the company will likely repurchase about $2.5 billion worth of its shares this fiscal year. In sum, our share-earnings estimate has moved from $2.30 to $2.40.
The Home Depot's results stood in stark contrast to those of its main rival, Lowe's (LOW), the number two home-improvement retailer. That company recently reported July-period numbers that fell short of expectations. True, earnings of $0.68 a share (excluding $0.04 in charges related to the closing of seven underperforming stores) were a few pennies above our estimate, but sales came in below our target and comps fell 0.3%. Too, the gross margin contracted. Moreover, management once again trimmed its sales and earnings guidance. Although the operating environment is challenging, Lowe's is struggling to keep up with its larger competitor. Indeed, The Home Depot appears to be gaining market share and executing better thanks to good inventory management, merchandising, marketing, promotions, and customer service. These are all things Lowe's is working on, though we think that The Home Depot will continue to be the relative outperformer over the next few quarters.
About the Company: The Home Depot, Inc. operates a chain of 2,245 retail building supply/home improvement “warehouse'' stores across the United States and in Canada, Mexico, and China. The company's average store size is around 105,000 square feet indoor, plus 24,000 additional square feet in its garden centers. The Home Depot's product lines include building materials, lumber, floor/wall coverings, plumbing, heating, electrical, paint and furniture, seasonal and specialty items, and hardware and tools.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.