Home Depot Earnings: Housing Recovery And Cost Discipline Boost Results

Home Depot (NYSE:HD), the largest U.S. home improvement retailer, reported its Q3 earnings on November 13. The company reported quarterly revenues of $18.1 billion, higher by 4.6% year-over-year. Net earnings stood at $947 million, up from $934 million in the comparable quarter last year. These results reflect a nonrecurring charge of approximately $165 million, net of tax, due to the previously announced closing of seven stores in China. On an adjusted basis, Home Depot reported net earnings of $1.1 billion, a 23.3% increase from the same period in the prior year.

A key performance metric in the retail industry is comparable-store sales. It is used to gauge activity at store locations that have been open for at least a year. Comparable-store sales at Home Depot for the third quarter were 4.2%, and comparable sales for U.S. stores were 4.3%. ^[1]

Home Depot’s good performance in the third quarter can be attributed to the recovery in the housing market as well as its efforts to reduce costs in the supply chain, improve distribution, and localize marketing and merchandising activities. The nascent recovery in the housing market has encouraged professional contractors to buy more in recent months. The company admitted that there has been an increase in demand for its products due to the impact caused by Hurricane Sandy. However, it contended that it is too early to gauge the full extent of increase in demand on sales. ^[2]

Our complete analysis for Home Depot’s stock

Potential Impact Due To Sandy

Hurricane Irene last year resulted in increased demand for Home Depot’s products. The company estimates that Irene related sales were $230 million in Q3 2011 and $130 million in Q4 2011. The property damage due to Irene was estimated to be about $16 billion. The damage caused by Sandy has been pegged at approximately $20 billion. Hence, the sales should definitely be higher than worth $360 million but Home Depot refused to put a figure to it. Since Sandy was largely coastal in nature and Home Depot doesn’t have stores along the coast, there has been little or no damage in its stores. Hence, it doesn’t expect any storm-related expense in the fourth quarter which might impact its bottom line. ^[3]

Key Points To Take Note Of

Home Depot lays special emphasis on selling to professional contractors who drive big ticket purchases. It continued to see recovery in its Pro business in the third quarter. Pro sales grew during the quarter, though at a slower rate than the consumer business, due in part to comparisons to the strong sales in roofing from last year. On a regional basis, Pro sales growth matched consumer segment sales growth in key areas like northern California and Phoenix.

In the third quarter, Home Depot completed the purchase of U.S. Home Systems, a kitchen and bath refacing business. This company’s business was already effectively 100% Home Depot-based. The acquisition will allow it to create more effective interconnection between its stores and the U.S. Home Systems in-home selling platform, just as it has done with its roofing, siding and windows businesses.

Home Depot believes that the U.S. is still working through the issues associated with the housing crisis. It says that credit availability remains a major issue. However, it thinks that it can start looking at the housing market as an assist to its growth rather than an anchor. This is consistent with national statistics which now show housing as a positive contributor to GDP.

Home Depot employs over 300,000 associates and hence the proposed healthcare regulation in 2013 is expected to have significant implications for the company. However, it said that it is still in the process of analyzing the potential impact of the legislation, should it go through.

The company management thinks that the market price of the company stock is much below what it’s worth, given the growth opportunities in the near future on account of Hurricane Sandy and the housing market recovery. However, the management is reluctant to add more debt at this stage in order to buy back the stock at what it thinks is a low price. The reason given was the fiscal cliff issue, which Home Depot management says makes the environment high beta in nature and it would like to avoid raising debt at such a time. It may opt to increase debt in December next year once the fiscal cliff issue is resolved and the conditions are favorable.

With efforts focused on better service, technology support and store remodeling, Home Depot has historically 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. We expect it to outperform Lowe’s in the future as well, given the problems Lowe’s has been facing due to its confused business strategy.

We have a Trefis price estimate of $56 for Home Depot’s stock, which will be revised now that the third quarter earnings results are out.

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1. 8-K Filing, SEC [↩]
2. Home Depot Earnings Q3 2012: Improved Housing Market Boost’s Retailer’s Sales, Profits, Huffington Post [↩]
3. Q3 2012 Earnings Call Transcript, Seeking Alpha [↩]