Home Depot Q2 Earnings Preview: Flat Sales Growth Expected

Home Depot (NYSE:HD), the largest U.S. home improvement retailer, is due to announce its Q2 results on August 14. With slowing U.S. GDP growth, weak consumer spending and lower fixed residential investments, we expect Home Depot to report moderate same store sales growth this quarter. Last quarter, it posted a 6% improvement in same store sales benefiting from the uncharacteristically warm winter and increased business from contractors. However, this pulled forward the seasonal purchases of plants and outdoor equipment from Q2 to Q1 leading to moderation of monthly sales from April and lower growth forecast for the latest quarter. Home Depot competes with Lowe’s (NYSE:LOW) in the home improvement market.

Our complete analysis for Home Depot’s stock

Moderation Of Residential Fixed Investments in Q2

According to the bureau of economic analysis, U.S.’s GDP grew at a sequential rate of 1.5% in Q2 compared to 2% in Q1. This, coupled with the slowdown in consumer spending also reflected in the residential fixed investments made last quarter, which increased 9.7% last quarter compared with a 20.5% increase in Q1. Residential fixed investments bear a strong correlation with the home improvement sales for retailers like Home Depot. Also, after Q1, Home Depot estimated that warmer winter pulled forward up to 1 percentage point of sales from the second quarter to the first and that retail sales normalized in April after recording sharp gains in the first three months of the year. We expect these trends to reflect in Home Depot’s upcoming earnings.

Still Home Depot Outpaces Lowe’s

Nonetheless, with efforts focused on better service, technology support and store remodeling, Home Depot has outperformed the sector, taking away market share from its largest competitor Lowe’s in a still mixed housing market, by making its operations and supply-chain more efficient. Despite the slow economic recovery, Home Depot’s same store sales growth has gradually improved from 2.9% in 2010 to 3.4% in 2011. 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 better pricing strategy, and we expect the trend to continue.

Home Depot also recently reaffirmed its fiscal 2012 earnings and revenue forecasts. It 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.

We have a Trefis price estimate of $55 for Home Depot’s stock, 5% ahead of the current market price.

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