Home Depot Deals With The Winter Blues In The First Quarter

A “slow start to the spring selling season” can be blamed for a rare revenue miss posted by Home Depot (NYSE:HD) in the first quarter. Despite that, the company still delivered a sales increase of 4.4%, and a comparable sales improvement of 4.2%, growth figures that aren’t so common in the retail industry. The sales shortfall had no impact on the earnings, which came in above consensus estimates, helped by a decline in the effective tax rate. Improving home improvement and new housing trends have continued to help the company post strong growth figures, and should benefit Home Depot in the remainder of the financial year, as well. The company has guided for sales growth of 6.7%, comps improvement of 5%, and an EPS increase of 28%.

We have a $212 price estimate for Home Depot, which is higher than the current market price. The charts have been made using our new, interactive model. You can click here for our interactive dashboard to modify our driver assumptions to see what impact it will have on the company’s revenues, earnings, and price estimate.

Factors That May Have An Impact In FY 2018

1. Colder Than Normal Weather Conditions: Home Depot had a case of the winter blues in the first quarter, where snowy conditions even in April resulted in just a 2.2% rise in comparable sales growth in the month. In the first quarter, the comps improved 4.2% for the company as a whole, and 3.9% in the U.S., lower than the 5.6% and 5.5% anticipated by analysts. On the other hand, the fall in the traffic during the quarter is counterbalanced by expected strength in the second quarter. In May so far, the company has witnessed double-digit comps growth, and consequently, the company has not changed its guidance for the year, expecting the slightly poor performance in Q1 to be overcome in the forthcoming quarters.

2. Pro Sales Outpacing DIY (Do It Yourself) Sales: The company’s Pro-segment is a key driver of its growth, with Pro-sales outpacing the sales of the DIY segment. According to a senior executive, while pros account for just 3% of the customer base of Home Depot, they make up 40% of the sales. As a result, a focus on this segment is imperative for ensuring future growth. Home Depot has been increasing its investments to deepen its relationship with such customers, including enhanced associate tools in the stores and expanded delivery options. For example, in the case of the latter, the company has started two-hour and four-hour deliveries in some markets.

3. Interconnected Retail Strategy: Home Depot has made a concerted effort to focus on its integrated retail strategy, which seamlessly connects online and offline channels, making its stores more efficient. This has resulted in improved revenues and profitability, with the online space being a key driver of the impressive growth Home Depot has witnessed in recent times. In the quarter, online traffic improved at a healthy rate, sales increased 20% versus Q1 2017, and 46% of online orders were picked up in-store. By focusing on an integrated channel strategy, Home Depot has been able to increase revenues per square foot, rather than generating revenues from new square footage. This has ensured that its existing store network is being effectively used to drive revenues.

4. Strong Macroeconomic Conditions: Unemployment is at its lowest since 2000, and wages are improving. Although interest rate hikes make mortgages more expensive, on the whole, it is indicative of a strong economy. These factors signal a solid U.S. economy, and have given rise to supportive housing fundamentals. This bodes well for a company like Home Depot that is heavily reliant on the improvement of the housing industry.

5. Higher Transportation Costs: The company faced transportation headwinds in the first quarter which had an eight basis points negative impact on the gross margins. While Home Depot isn’t the only company facing higher transportation costs, the increasing shift toward the online space, as well as the addition of features such as same-day delivery, can result in a pressure in the gross margins through the financial year.

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