Home Depot to Gain from Hardware & Seasonal Sales

Home Depot (NYSE:HD) is the world’s largest retailer of home improvement products primarily competing with Lowe’s (NYSE:LOW) in this business. We have a $35.66 price estimate for Home Depot and estimate that Hardware & Seasonal products account for around 26% of Home Depot’s stock value. We includes items like gardening and lawn care products as well as seasonal items like grills, outdoor cooking devices patio furniture in this category. Given recent catalysts such as a raised outlook from rating agencies on Home Depot, and macro data that support a recovery in the U.S. economy, Home Depot should benefit as more data supports the recovery.

Positive Catalysts

Last month, Fitch Ratings raised its outlook on Home Depot to positive from stable. This move has increased the chances of the rating agency upgrading Home Depot’s credit rating from the current BBB+. ^[1] In a similar move, Moody’s Investors Service is also raising its outlook on Home Depot from to positive from stable, though it plans to keep Home Depot’s existing credit ratings. ^[2]

The improved outlook comes on the back of strong fourth quarter and full year results reported by Home Depot in February. In the fourth quarter, Home Depot’s profit increased 72% from the same period last year, with net sales as well as comparable store sales also rising. For the full fiscal year 2010, its comparable store sales increased for the first time in three years. The improvement in the retailer’s earnings have largely been driven by its focus on improving the customer experience of its stores as well as optimizing its supply chain.

Outlook for Hardware & Seasonal Market Share

Going forward, as the economic environment further improves, the company is expected to perform well. This spring season, home improvement retailers like Home Depot and Lowe are expected to see an uptick in demand for gardening and lawn care products as well as seasonal items like grills, outdoor cooking devices patio furniture, etc. Home Depot appears to be well prepared to leverage the improving consumer sentiment to further improve its earnings. It plans to offer an array of discounts across several seasonal items for an extended period this spring. ^{[3] [4]}

Due to strong competition from Lowe’s and closure of HD supply stores which were targeted at professional customers, Home Depot’s Hardware & Seasonal market share decreased from near 29% in 2005 to 23% in 2007, and it maintained this market share was over 20% even during the peak of recession. Going forward, we expect this market share to be around 23% during our forecast period.

As the economic environment improves, we expect increased demand for gardening and landscaping tools and hardware as well as outdoor power equipments and other seasonal items discussed above. We include these items are represented in our Hardware & Seasonal division. A broader recovery in the housing market and consumer sentiment over the next few years will further aid sales of these items.

As a result, there can be an upside to our forecasts for Home Depot’s Hardware & Seasonal market share. If this market share increases to around 25% by the end of our forecast period, this translates to around 2.5% increase in our current price estimate for Home Depot’s stock.

See our full analysis for Home Depot.

1. Fitch Boosts Outlook On Home Depot, Citing Better Results [↩]
2. Moody’s boosts Home Depot outlook to positive [↩]
3. Home Depot, Lowe’s Boost Seasonal Hiring [↩]
4. Savings at Gap and Home Depot [↩]