We reiterated our long-term 'Neutral' recommendation on the
leading home improvement retailer
Home Depot Inc.
We remain encouraged by the company's consistently good
quarterly performance, raised management guidance, impressive
strategic and long-term goals as well as a strong financial side.
Besides, we believe Home Depot's strategy of focusing on developing
merchandising tools along with increasing investment in its dot-com
platform will boost its top line while gaining market share.
However, a sluggish recovery in the economy impacting discretionary
spending, and intense competition from specialty stores and mass
merchandisers remain causes of concern.
Home Depot posted adjusted earnings of 65 cents per share for
first-quarter 2012, in line with the Zacks Consensus Estimate.
However, the quarter's result climbed 30% from 50 cents posted in
the prior-year quarter, primarily driven by solid comparable sales
growth and strong operating performance. Net sales moved up 5.9%
year over year to $17,808 million while comparable store sales
registered a growth of 5.8%.
Following solid quarterly results, management raised its fiscal
2012 earnings guidance to $2.90 per share, an increase of 17% from
the previous fiscal earnings of $2.47 and up from $2.79 forecasted
earlier. The company anticipates net sales to increase by 4.6%, up
from 4% projected earlier.
Moreover, in its recent 2012 analyst day, Home Depot revealed
its plan to accomplish its previously established long-term goal of
10% increase in operating profit and a 15% return on invested
capital through the end of this fiscal year. Additionally, the
company formulated a new long-term target for fiscal 2015, which
expects operating margin of about 12% and return on invested
capital of 24%.
We believe Home Depot's new long-term goal for fiscal 2015 and
beyond is achievable given the company's robust quarterly
performance, strong financial position as well as the company's
efficiency in executing its growth plans.
Over the years, Home Depot has reinvigorated itself with a shift
in focus from new square footage growth to maximization of
productivity through its existing store base. In addition, the
company has implemented significant changes to its store operations
to make them simpler and more customer-friendly. We believe these
initiatives have induced more customer traffic to its stores while
boosting its top line.
However, Home Depot operates in a highly competitive market,
facing stiff competition from local, regional and international
players. To retain its leading market position and share, the
company constantly looks for selective acquisitions and strategic
alliances with third parties, which raises its operational
Moreover, Home Depot remains prone to currency fluctuation due
to its exposure to international market. The weakening of foreign
currencies against the U.S. dollar may require the company to
either raise price or contract profit margins in locations outside
the U.S. An increase in product price may have a direct impact on
Home Depot, which competes with
Lowe's Companies Inc.
), currently has a Zacks #3 Rank, implying a short-term 'Hold'
rating. Besides, the company retains a long-term 'Neutral'
HOME DEPOT (HD): Free Stock Analysis Report
LOWES COS (LOW): Free Stock Analysis Report
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