Home Depot’s Earnings Will Gain As The Housing Recovery Continues

Home Depot (NYSE:HD), the nation’s largest home improvement retailer, is scheduled to release its Q2 earnings results on August 20. The company is expected to continue to benefit from the housing market recovery and improved consumer sentiment. The positive sentiment is reflected in the company’s strong stock performance in recent months due to encouraging data on key housing metrics such as record levels of home construction, declining vacancies, lower mortgage default rates and rising home prices.

Home Depot certainly seems to have leveraged the increased demand for homes and home-related products well. Its total sales were up about 7.4% year-over-year in Q1 2013. Meanwhile, it has also done well to complement top-line growth with key cost reduction strategies, boosting the bottom-line. In short, investors have a good reason to look forward to strong results when the company reports its second quarter results on Tuesday.

Our complete analysis for Home Depot’s stock

Housing Recovery Remains Strong, Hurricane Sandy To Further Boost Sales

The housing market recovery continued in the second quarter of 2013, spurred by strong consumer confidence and mortgage rates at near record lows. New home sales rose were well above 450,000 per month in the first three months of the year and touched nearly 500,000 per month in June. Sales of existing homes continued to be strong as well during this period. The National Association of Realtors is expected to report existing home sales data for July shortly, which may provide further boost to Home Depot’s stock price. The reason that sales of new as well as existing homes benefit Home Depot is the spending on home improvement by new occupants. ^[1]

Meanwhile, sales related to household repairs following the damage caused by Hurricane Sandy should also factor in to solid second quarter results, further boosting the top-line. Although a majority of the repair work commenced towards the end of 2012, the sales effect of Sandy will most likely be spread throughout 2013. The Federal Emergency Management Agency has approved $1.38 billion in assistance for Sandy victims, which has resulted in an uptick in demand for lumber in the affected areas. As the nation’s largest home improvement chain, Home Depot is poised to capture a good chunk of the spending.

As the rebuilding continues, additional storm-related sales in the second quarter are expected. Home Depot pegged the figure at $80 million in its previous quarter’s earnings conference call. ((Home Depot Q1 2013 Earnings Conference Call, Seeking Alpha))

Margins To Remain Strong With Cost Reduction Programs Leading The Way

Home Depot’s earnings in Q1 2013 kept improving from last year due to the company’s focus on reducing costs, including efforts to reduce complexity in the supply chain, improve distribution, and localize marketing and merchandising activities. Operating income as a percent of net sales was 10.9% for Q1 2013 compared to 9.6% for Q1 2012. This is largely a result of reduced selling, general and administrative expenses (SG&A), which fell from 22.9% of total revenues in Q1 2012 to 21.9% of total revenues in Q1 2013. Operating margins are expected to continue strengthening throughout 2013. ((Home Depot Q1 2013 8-K, SEC))

We have a Trefis price estimate of $66 for Home Depot’s stock, which we will revise once the company’s second quarter results are out.

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1. Home Sales Data, National Association Of Home Builders [↩]