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Dow-30 Earnings: The Home Depot – Fiscal Fourth Quarter 2013
Shares of The Home Depot (HD – Free Home Depot Stock Report) moved higher after the world's largest home-improvement retailer reported better-than-expected fiscal fourth-quarter (ended February 3rd) earnings. Sales of $17.7 billion were slightly below our $17.8 billion call and fell 3% from a year earlier. However, this was because the fourth quarter of fiscal 2013 contained 14 weeks, versus 13 weeks in the final period of fiscal 2014. Excluding the additional week of sales, revenues actually increased 4%.
Despite the modest top-line miss relative to our forecast, earnings came in at $0.73 a share, $0.03 ahead of our call and up 9% on a year-over-year basis. The gross margin increased 10 basis points from a year earlier (thanks to productivity improvements in the supply chain and a more profitable product mix) and total operating expenses as a percentage of sales dipped 26 basis points. These positive factors, along with a lower share count, enabled earnings to increase nicely, despite the lower sales figure.
Once again, sales were driven by recovery in the housing market, as this sector of the economy continues to improve. However, severe winter weather across much of the country hurt the top line, especially in categories such as lumber and building materials, but other departments helped pick up the slack. Indeed, sales of LED lighting, seasonal products, and big ticket items, such as appliances and sales to professional customers, were up nicely. Online operations were also strong. All told, comparable-store sales rose a solid 4.4% in the January term, with stores in the United States up 4.9%. Too, the average ticket rose 1.1% year to year, with a 1.9% gain in sales per square foot.
Elsewhere, management reinforced its commitment to shareholder return and announced a 21% increase in the quarterly cash dividend, to $0.47 a share. The first payment in the new amount is scheduled to be made on March 27th. This is in line the management's stated goal of having a dividend payout ratio of roughly 50%. Also, the company expects to repurchase $5 billion of its stock in fiscal 2014.
Looking at the current year, our thinking hasn't changed too much since our last full-page report went to press in late December. Inclement weather in February will likely hurt sales in the first month of fiscal 2014, but comps are still expected to be positive. Moreover, spring sales will probably get a boost when homeowners are able to assess and repair damage from harsh winter storms. Sales for the whole of fiscal 2014 may come in a touch lighter than we had previously thought, but we are maintaining our earnings estimate of $4.40 a share, $0.02 ahead of management's guidance. Seven new stores are slated to open this year, and comps are liable to climb some 4.6%. The gross margin is apt to be flat, but the operating margin is expected to expand some 70 basis points. Higher comps, efforts to improve the supply chain, and the use of technology to support interconnected retail and online operations all underpin our forecast for greater profitability.
As for the stock, we continue to believe it is a good selection for conservative investors looking for exposure to the housing market. Although capital appreciation potential is not too exciting at the recent quotation, these high-quality shares sport a below-market beta and a good dividend yield.
About the Company: The Home Depot, Inc. operates a chain of 2,263 retail building supply/home improvement “warehouse” stores across the United States, Canada, and Mexico. The company's average store size is around 104,000 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.