Home Depot Earnings Review: Solid Growth On Positive Economic Prospects

America’s largest home improvement retailer, Home Depot (NYSE:HD), reported solid Q4 and fiscal 2014 results on February 25, backed by an improving U.S. economy and housing market. Sales for the retailer grew 8.3% on a year-on-year basis in the quarter with comp sales registering a 7.9% growth over the same time to beat analyst expectations. In the full year, sales increased 5.5% to $83.2 billion with comp sales growing 5.3%. Overall, 2014 shaped up to be a fantastic year for Home Depot, with the highest retail sales and net earnings to be recorded in its history.

We have a price estimate of $100 for Home Depot’s stock, which is slightly below the current market price. We will be updating our model after the recent earnings.

Our complete analysis for Home Depot’s stock

What Clicked For Home Depot In Q4?

Home Depot’s stellar performance this quarter seems to reflect the improving prospects in the U.S. economy in general and the housing market in particular. Although the quarter witnessed slower growth in GDP at 2.6%, consumer spending continued to increase from $10,999.50 billion in the third quarter to $11,114.90 billion in the fourth quarter, with unemployment rates reaching a six-year low at 5.6% in December. ^[1] Furthermore, new home sales also increased to a SAAR of 481,000 in December, the highest recorded in over a year. Clearly, the home improvement industry got the best of this, as higher incomes and job stability encouraged Americans to spend more on home renovations.

After only a 2.6% comparable sales growth in Q1 last year amid unfavorable weather conditions, higher consumer spending boosted Home Depot’s comps by 5.8%, 5.2%, and 8.3% in the following quarters. The incredible performance in the last quarter came with a 4.9% increase in comp transactions and a 2.9% increase in ticket prices, in lieu of higher spending in holiday decor, gift centers, and black Friday events. This year, black Friday recorded the highest sales day in the retailer’s history, with customers spending a whopping $500 million, driving up comps in categories such as appliances. ^[2] Furthermore, pro categories and millwork categories contributed to the sales growth with comps in compressor, sliding, roofing, ladders, concrete, lumber, windows, and doors registering double-digit growth over the three months. The quarter also witnessed higher online sales, which grew by 36% to add over $1 billion to revenues.

Positive Outlook For The Next Year Backed By Optimism In Housing Markets

In 2015, the company has indicated the housing market recovery to propel sales by 4.5%, which may be dragged down slightly due to weaker performance in international stores with the dollar continuing to strengthen. Home Depot also opened two new stores in Mexico and one in Canada, which is expected to aid a 4.7% growth in new store sales. Gross margins are expected to remain flat due to higher than average growth in low margin categories such as building materials. Additionally, the management indicated slight increases in costs in the ensuing year. Last year, costs grew at 25% of sales, lower than the anticipated 33% due to “casualty reserve benefits,” which are not likely to persist going forward. Furthermore, they indicated plans of investment in IT security post the massive data breach, which could contribute to higher costs at around 40% of sales next year. ^[3]

We expect Home Depot to deliver on their sales figures backed by a supportive external environment and strong internal policies. According to the IMF, the U.S. economy is expected to grow at 3.1% in 2015 guided by higher demand, better consumer confidence, and a reduction in fiscal deficits. ^[4] Furthermore, the unemployment rate is expected to trend downward to remain below 6% even next year. Based on these factors, the National Association of Realtors project existing house sales, to grow at 7.7% next year. ((In Need of Housing Improvement)) Backed by positive economic expectations and an upbeat housing market, we could expect Home Depot to continue gaining in the next year.

Productivity Growth To Aid Sales Going Forward

The company has also undertaken a number of strategies internally to drive sales going forward. Home Depot has historically driven revenues by maximizing productivity, which they will continue to do.  For instance, the management has scheduled the launch of their new color solution center, which will clearly enlist their paint and color offerings to improve customer experience by “simplifying the selection process.”  They are also looking to grow their pro sales by offering same-day delivery through “Home Depot Delivers,” which could benefit those customers who would not mind paying a small premium to save an extra trip in between home improvement jobs. Furthermore, they are also introducing new products in Milwaukee, Makita, and DeWalt. These include tools with higher battery life, power and resistance, which could save time for pro customers on job sites. ((Home Depot’s (HD) CEO, Craig Menear on Q4 2014 Results – Earnings Call Transcript)) Home Depot is also going to use its second generation of FIRST phones, which will help associates in conducting faster checkouts through “line busting,” locating products, checking inventory, and explaining product features to improve in-store efficiency. ^[5] These productivity enhancing strategies could do a great deal for the retailer in the coming year.

In other news, Home Depot announced that it would replace its $17 billion share buyback program authorized in 2013 with one worth $18 billion, which could contribute to higher returns for investors in the future. The management also put numbers on the cost of the data breach earlier in 2014, which compromised credit and debit card details of almost 56 million customers. Home Depot incurred $33 million net of insurance cover in this respect in the full year, with $5 million net of insurance cover in the last quarter. The company’s fiscal 2015 earnings guidance does not account for losses related to the breach, which could in fact pull up expenses in terms of “legal help, credit card fraud, and card re-issuance costs” to impact prospects for the retailer in the future. ^[6] However, for now, Home Depot has clearly reaped the benefits of an improving U.S. economy, with the stock climbing as much as 5% on the news of the earnings.

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1. United States Consumer Spending)) The general optimism in the economy further seeped into the housing market with existing home sales reaching a seasonally adjusted annual rate (SAAR) of 5.25 million in October, the highest sales figure in over twelve months. ((“New and existing home sales, U.S.,” National Association of Home Builders [↩]
2. Black Friday was the biggest sales day at Home Depot [↩]
3. Home Depot’s (HD) CEO, Craig Menear on Q4 2014 Results – Earnings Call Transcript [↩]
4. World Economic Outlook [↩]
5. Home Depot: Four Factors To Watch Out For In 2015 [↩]
6. Home Depot Q3 2014 10-Q, SEC [↩]