Home Depot Reports Strong Results On Housing Recovery, Raises Outlook

Home improvement retailer Home Depot (NYSE:HD) released its Q2 results on August 20. Earnings for the quarter stood at $1.8 billion compared to $1.5 billion million in Q2 2012, an increase of nearly 22.8%. Net earnings were propelled by top line growth with a steady recovery in the U.S. housing market driving consumer appetite for home improvement products. The company’s net sales for the quarter stood at $22.5 billion, an increase of about 9.5% over Q2 2012. ^[1]

Based on the solid performance and outlook for the balance of the year, Home Depot raised its sales expectations. It now expects sales to be up by approximately 4.5% year-over-year with a rise in comparable store sales of approximately 6%. Earlier, the company estimated sales would be around 2.8% higher year-over-year and a comparable store sales would gain approximately 4%.

The key factors that drove the company’s performance were strong summer events, a recovering seasonal business, and commodity inflation. Home Depot expects a good third quarter as well based on innovations it is carrying out in various departments and plans to offer great deals on Labor Day.

Our complete analysis for Home Depot’s stock

Housing Market Recovery Boosts 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 rise were well above 450,000 per month this quarter 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. ^[2]

The Federal Emergency Management Agency has approved $1.38 billion in assistance for Hurricane Sandy victims, which has resulted in an uptick in demand for lumber in the affected areas. Sales related to Hurricane Sandy were approximately $47 million in the second quarter. As the rebuilding continues, additional storm-related sales in the second half of the year are expected but the year-over-year benefit will diminish as the company begins lapping hurricane sales in the third quarter.

Quarterly Performance

In the maintenance and repair categories, Home Depot continued to improve its sales of light bulbs, wiring devices, cleaning, plumbing repair, fasteners, doors hardware, clock and adhesives. It also saw traction in categories like  special order carpets, special order cabinets, floor tile and lighting as well as faucets.

Home Depot did well on event days like the Memorial Day, Father’s Day and the Fourth of July. Categories like appliances and riding mowers showed double-digit growth due to a positive customer response to special offers. The company claimed that its investments in the supply chain made over the past several years gave it the flexibility to respond quickly to spikes in demand by enabling efficient coordination among its merchants, stores and vendors.

Total comparable transactions rose by 5.7% in the second quarter driven by traffic related to seasonal factors. Sales attributed to transactions amounting to less than $50 per transaction, representing approximately 20% of the company’s U.S. sales, rose by 3.8% for the second quarter, mainly due to the garden business. Sales for transactions over $900 per transaction. which also represent approximately 20% of Home Depot’s U.S. sales, rose by 15.5% in the second quarter. Growth in this category was driven by higher sales of appliances, riding mowers, flooring business products as well as continued improvement in the pro business category that targets large customers. ((Home Depot Q2 2013 Earnings Conference Call, Seeking Alpha))

Margins Remain Strong

Home Depot’s gross margin was 34.3 % for the quarter, an increase of 12 basis points (0.12%) from Q2 2012. The increase in gross margins was driven by the company’s U.S. business and was attributed to various factors.

Home Depot reported an improvement of approximately 22 basis points in gross margin due to the impact of gross margin accretive businesses that it acquired in the first half of 2012. Also, margins improved by 13 basis points due to expense leverage within the company’s supply chain. Better shrink performance led to an expansion of 10 basis points in gross margins. However, Home Depot also saw a contraction of 32 basis points in margins due to a change in the product mix. Overall, the U.S. business reported a 13 basis point increase in margins.

Home Depot’s gross margins for the first six months of the year increased by 16 basis points and the company expects a further improvement of about 8 basis points in the second half of the year. This expectation is based on the assumptions that the housing recovery is in its early stages and that the GDP will grow by less than 2% for the year.

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

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1. Home Depot Q2 2013 8-K, SEC [↩]
2. Home Sales Data, National Association Of Home Builders [↩]