Home Depot Earnings Review: Strong Q1 Results Even As U.S. Economy Slackens

America’s largest home improvement retailer, Home Depot (NYSE:HD), reported solid fiscal first quarter results on May 19. Sales for the retailer were recorded at $20.90 billion, beating analyst expectations of $20.82 billion, to grow 6.1% on a year-on-year basis. Comps in the quarter also grew 6.1%, with U.S. stores reporting 7.1% growth. ^[1] These results were reported even in the face of slackness in the U.S. economy, harsh winter weather, and difficult trading conditions on the West Coast. Here are the key take aways from Home Depot’s earnings report and what can be expected going forward.

What Worked For Home Depot In Q1?

While an upbeat U.S. economy and housing markets has propelled Home Depot to report stellar performance the past few years, macroeconomic conditions were hardly favorable in the quarter. GDP in the three months grew just 0.2%, instead of the predicted 2.3%, against a harsh winter, trade disruptions on the West Coast, a stronger dollar choking off exports, and a weaker global economy. ^[2] The slow down in the U.S. economy at large, also exerted an impact on the housing markets in the earlier part of the quarter, with the sale of existing houses falling 4.9% in January to a seasonally adjusted average rate (SAAR) of 4.82 million, the lowest recorded since May 2014. ^[3] Even against these circumstances, Home Depot continued to report positive results, with categories such as Tools, Indoor Garden, Outdoor Garden, Décor, Lighting, Plumbing, and Appliances performing better than others. This performance was particularly aided by “special buys” at the retailer’s seventh annual Spring Black Friday event, resulting in a 4.4% increase in transactions and a 1.7% increase in average ticket sizes. ((The Home Depot (HD) Craig A. Menear on Q1 2015 Results – Earnings Call Transcript))

The quarter continued to benefit from strength among Pro customers, with categories such as Siding, Power Tools, Commercial Lighting, Fencing Power Tool Accessories, and Outdoor projects displaying double-digit comps. A strong performance in the Pro category helped an almost 7% increase in transaction tickets of over $900, which currently represent close to 20% of U.S. sales. ^[1] Apart from Pros, Home Depot’s prominent online presence also aided positive results, with the retailer’s online sales growing almost 30% in the quarter. Apart from offering a broader selection of products online, Home Depot continued to use digital marketing to better target customers and customer occasions. Furthermore, Home Depot successfully leveraged its vast distribution network to drive efficiency in its Buy Online, Pick-up In Store (BOPIS), Buy Online, Ship to Store (BOSS), and Buy Online, Return In Store (BORIS) programs.

What’s In Store For Home Depot Going Forward?

We expect Home Depot to continue delivering strong results even in the next quarter. For one, Home Depot is touted to be a market leader in innovations and has constantly introduced new products that aim at driving efficiency among Pros. For instance, according to the fiscal 2014 earnings transcript, Home Depot indicated the launch of a new color center entailing the Behr, Glidden, and the Home Decorators Collection paint brands. Apart from offering a broader selection of products, the new center also aims at enhancing the customer experience by clearly outlining the different paint assortments to bring ease to the selection process. Furthermore, the retailer introduced new products in the tools category that have higher battery life and durability. ^[4]

In the first quarter of 2015, Home Depot introduced a new product line of DEWALT and Makita pneumatic nailers, which apart from being more compact, incorporate a “True Sight nose technology” that will hone speed and efficiency in nail placement to save time for Pro customers. Apart from these, acknowledging Pros’ increasing preference for cordless offerings, Home Depot also added battery operated equipment to its portfolio. These new products, coupled with customer occasions such as Thrill of the Grill, Memorial Day, Father’s Day, and 4th of July events could prove to be big drivers of revenues in the next quarter. ((The Home Depot (HD) Craig A. Menear on Q1 2015 Results – Earnings Call Transcript))

Furthermore, in spite of a relatively slack start to the year, the full year prospects for the U.S. economy continues to remain upbeat, with GDP projected to grow at about 3% and unemployment projected to reach 5.5%. In addition, key drivers such as existing home sales and new home sales are also expected to witness notable gains in 2015 at 6.4% and 33%, respectively, against low interest rates, stability in the job market, and improving consumer confidence. ((U.S. Economic Outlook: April 2015)) Although the housing markets showed a slowdown in the beginning of the quarter, it picked up, with existing home sales surging 6.1% to reach a SAAR of 5.19 million in March, the highest in 18 months. ^[5] In spite of this, existing home sales in absolute numbers have not yet reached their pre-recession levels, which is indicative of immense potential in the years going forward, which bodes very well for the home improvement industry.

Based on these factors and the stellar performance in Q1, we anticipate Home Depot to post revenue growth of over 5% and EBITDA growth of 15-16% in the full year. However, a matter that continues to threaten prospects for the retailer is the data breach, which compromised credit and debit card details of almost 56 million customers. Last year, Home Depot incurred $33 million net of insurance cover in this respect. Even in the quarter, total expenses for the retailer overshot that predicted, by $15 million, predominantly in light of the breach. The company’s fiscal 2015 earnings guidance does not account for losses related to the breach, which could, in fact, continue to 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]

We have a price estimate of $120 for Home Depot’s stock, which is above the current market price.

Our complete analysis for Home Depot’s stock

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1. The Home Depot (HD) Craig A. Menear on Q1 2015 Results – Earnings Call Transcript [↩] [↩]
2. Economic Growth Slows Sharply In Q1 2015: 5 Factors Slowing US GDP [↩]
3. January 2015 Existing-Home Sales [↩]
4. Home Depot’s (HD) CEO, Craig Menear on Q4 2014 Results – Earnings Call Transcript [↩]
5. Existing-Home Sales Spike In March [↩]
6. Home Depot Q3 2014 10-Q, SEC [↩]