Improved Housing Market And Higher E-Commerce Sales Result In A Stellar Quarter For Home Depot

Home Depot (NYSE:HD) delivered yet another beat, posting strong sales growth of 6.2%, easily surpassing revenue expectations by $300 million. It was also noted to be the highest ever quarterly sales reported by the company in its history. Comparable sales also rose by 6.3%, exceeding consensus estimates which called for a 4.9% gain, with those of the US stores coming in at 6.6%. These factors, together with fiscal discipline, resulted in better earnings, which were up by 14.2% to $2.25 per share.

However, the company’s stock fell over 3% despite the robust earnings announcement. This likely stems from the poor showing of other retail companies, such as Coach and Dicks Sporting Goods. Furthermore, the company’s guidance of 5.5% comparable sales growth for the full year implies a deceleration in the second half of the year. However, this figure exceeds that of a majority of retail companies, with HD continuing to be a standout in this sector, and it has been calculated based on the planned foreign exchange rates for the second half of the year. Given the performance of the US dollar recently, there is a possibility of an upside to the guidance. Below we’ll highlight the key takeaways from the earnings.

Share Repurchases Give A Boost To The EPS

• The EPS received a bump from the share repurchases undertaken by HD, which accelerated marginally in the quarter.
• The diluted share count fell 4.2% as compared to last year.
• However, the stock isn’t cheap at current levels, forcing HD to prop up its debt levels to somewhat alarming levels.
• As long as the interest rate levels remain subdued, it may not pose as much of a concern.
• Although, considering that of the company’s free cash flow of $7 billion this year, over $6 billion have gone towards share buybacks and dividends, something has got to give.

E-Commerce Makes 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 Q2 2017, Home Depot saw a 23% increase in online sales, which was a key driving factor for revenue growth.
• Online sales now account for 6.4% 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, and the company continues to spend more marketing dollars in the digital space than in TV and radio combined.
• An interesting point to note is that over 43% 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 buy 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 future as well, which will be a blessing considering the sharp slowdown in traditional customer traffic.
• Customer traffic growth was noted as 4% in 2015, 3% in 2016, and slipped to below 2% in the first quarter. This metric improved to 2.8% in the second quarter.

Strong Housing Market Drives 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 second quarter, up sequentially from the 6.5% growth recorded in the first quarter.
• This has been led by first time home buyers, which were at the highest level seen since 2005. According to HD, there were approximately 424,000 first time home buyers, constituting 38% of all home buyers, and reflecting an 11% year-on-year growth.
• Another interesting statistic provided by the company was that 51% of the housing stock is older than 4 years, and 66% is over 30 years. As houses age, they require more repairs and remodeling. Furthermore, for homes built before 1980, the average annual spending on home improvement is $3,500, while that for houses built after 2000 is $1,500 per year.
• Moreover, according to John Burns Real Estate Consulting Group, on average, for every percentage point improvement in real wages, there is a 1% increase in the repair and remodel spend. For 2017, the real wages after inflation are up by 2.2%.
• This housing favorability is expected to continue going forward, giving a nice boost to the company’s revenues in the remainder of the year as well.

See complete analysis for Home Depot’s stock

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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