Online Growth To Boost Home Depot’s Revenues In The Second Quarter

Home Depot (NYSE:HD) is set to release its second quarter earnings (three months ended July 2017) on August 15. The company has an incredible earnings surprise record of over four years now, and hence, whether HD will deliver an earnings beat this time around is the question on every investor’s mind. A 5% growth in revenue and double-digit growth in EPS is expected, implying that some of the earnings growth is set to be a result of margin improvement. Given the impressive first quarter performance, the company raised its full year EPS guidance to $7.15, reflecting an 11% growth. Despite a 4.9% growth reported in the revenues, the results had been depressed due to weather conditions, with a less than 1% comps growth in March being offset with an 8% growth in April. The improved conditions are expected to provide an uptick to the sales, and better expense control may help to improve the margins. Below we’ll highlight some key trends to watch out for in the quarter.

See complete analysis for Home Depot’s stock

Strong Housing Market To Boost Home Improvement Sales

• New home sales have been on an upward trajectory, indicating a healthy sector.
• Government census data has indicated a 7% rise in building materials, hardware, and garden supply sales in the quarter, up sequentially from the 6.5% growth recorded in the first quarter.
• This has prompted Daniel Binder, analyst at Jefferies, to increase the comps expectation, from 4.5% to 5%, while Wall Street consensus has the metric expectation pegged at 4.8%.

E-Commerce to Make Up For Reduced Store Traffic

• In order to keep companies such as Amazon at bay, Home Depot has undertaken a number of steps, and invested a considerable amount of money, to seamlessly integrate and cohere its different channels.
• Its investment has been mostly focused on upgrading its e-commerce offerings in terms of an improved distribution system, better supply chain management, and fully integrating its web and in-store inventory.
• In Q1 2017, Home Depot saw a 23% increase in online sales, which was a key driving factor for revenue growth.
• Online sales accounted for 6.6% of Home Depot’s total revenues, indicating that the company has made significant progress in its e-commerce initiatives.
• Given the fact that customers today are more digitally engaged, and want more convenience and simplicity, the focus on the digital channel is imperative.
• An interesting point to note is that 45% of the company’s online orders are picked up by customers at the store, indicating that the company’s integrated retail strategy which allows customers to shop online but pick up from a store is a driving factor of its e-commerce growth.
• Another benefit of the integrated strategy is that it prompts customers to purchase additional items when they come to the store to pick up their purchases which had been made online.
• E-commerce growth is expected to drive sales growth in the second quarter as well, which will be a blessing considering the sharp slowdown in customer traffic.
• Customer traffic growth was noted as 4% in 2015, 3% in 2016, and slipping to below 2% in the first quarter.

Improved Margins: Expense Control To Offset E-Commerce

• A drawback from the focus on e-commerce is the increased pressure it creates on the margins.
• The company has undertaken considerable efforts to boost its e-commerce infrastructure, which has involved substantial investment.
• While these investments have paid off in terms of increased sales, Home Depot cannot afford to sit back now, as companies such as Amazon are always going to remain a threat.
• However, the company has initiated a number of steps to control the expenses.
• Given the first quarter expense performance, when the expenses grew at 39% of its sales growth, the company was able to lift its earnings guidance.
• It also prompted the company to guide the ratio to 43% for the year, down from 49% estimated earlier.

Have more questions on Home Depot? See the links below.

• Home Depot: Winning In The Multichannel Space
• Here’s Why Home Depot Will Continue To Pay High Dividends
• The Year That Was: Home Depot
• Why Home Depot Is Doing Better Than Lowe’s In 2016

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