Home Depot (NYSE:HD) Update: Raises Buyback, Reaffirms 2012 Outlook

Home Depot (NYSE:HD), the largest U.S. home-improvement retailer, raised its 2012 stock repurchase target by $500 million to $4 billion this week and reaffirmed its fiscal 2012 earnings and revenue forecasts. It now expects to achieve its target of 10% operating profit and 15% return on invested capital (announced in 2009) by the end of fiscal 2012 and has announced new long-term goals, including 12% operating margin with 24% return on invested capital by fiscal 2015.

By adapting and better capitalizing the depressed market demand for home improvement products amid a weak housing market, Home Depot has been consistently outpacing competitor Lowe’s (NYSE:LOW) over the last few quarters. Nonetheless, the home improvement stocks have seen some price moderation in May as they were initially being priced for a recovery, but that does not seem to be happening as quickly as expected.

Our complete analysis for Home Depot’s stock

Last Quarter Sales Benefited from Seasonal Trends, But Fell Short on Heightened Market Expectations of Housing Recovery

Last quarter, Home Depot posted a 6% improvement in same store sales benefiting from the uncharacteristically warm winter and increased business from contractors. However, sales and margin improvements and raised outlook missed heightened market expectations, sending the stock lower after the earnings release. Also, since this quarter pulled forward the seasonal purchases of plants and outdoor equipment, the company now expects next quarter sales to be slower than previously expected.

Still Home Depot Outpaces Lowe’s

Nonetheless, with efforts focused on better service, technology support and store remodeling, Home Depot has outperformed the sector and its largest competitor Lowe’s (NYSE:LOW) in a still mixed housing market, by making its operations and supply-chain more efficient. Q1 2012 was the 12th straight quarter that Home Depot outpaced Lowe’s in terms of same store sales growth with significant improvements in service levels and efficiency as well as more successful pricing strategy, and we expect the trend to continue.

In December 2011, Lowe’s decided to move away from promotions to everyday low prices to establish itself as the retailer offering most competitive prices. However, Lowe’s sales have struggled more than they already would have in a depressed housing market as customers continue to seek discounts, particularly for discretionary and big-ticket purchases – a case where Home Depot has been grabbing market share from Lowe’s due to a better pricing model.

Understand How a Company’s Products Impact its Stock Price at Trefis