We reiterate our long-term Neutral recommendation on the
world's largest home improvement retailer,
The Home Depot Inc.
(
HD
), given the better-than-expected third quarter results, an
upbeat guidance, and the company's ongoing strategies to boost
top-line growth, offset by the concerns over the sustainability
of the recovery in housing market, amidst ongoing economic
impasse and cautious consumer spending environment.
Home Depot is a leading player in the highly-fragmented home
improvement industry. The company has reinvigorated itself by
emphasizing on square footage growth and maximization of
productivity at its existing stores. In addition, the company has
implemented significant changes to its store operations to make
them simpler and more customer-friendly, thereby inducing more
customer traffic.
Solid comparable sales growth and strong operating performance in
the third quarter drove an earnings growth of 23.3% to 74 cents
per share. Quarterly earnings also exceeded the Zacks Consensus
Estimate of 70 cents per share. Moreover, net sales increased
4.6% year over year to $18.130 billion, primarily due to
increased number of customer transactions and average ticket
size.
Following solid third-quarter results, management raised its
fiscal 2012 adjusted earnings guidance to $3.03, up from $2.95
per share forecasted earlier. Moreover, the company expects net
sales to increase by 5.2% in fiscal 2012, up from the previously
projected growth target of 4.6%.
Home Depot has surpassed the Zacks Consensus Estimate in 3 of the
trailing 4 quarters in the range of 0.0% to 19.1%. The average
surprise over the last 4 quarters remained at 9.6%. Following
strong quarterly performance for the third quarter of fiscal
2012, the Zacks Consensus Estimates has been showing an upward
trend. For fiscal 2012 and 2013, the Zacks Consensus Estimate
raised by 7 cents and 8 cents to $3.03 and $3.46 per share in the
last 60 days, respectively.
Moreover, Home Depot rewards its shareholders through regular
quarterly dividends and share repurchases. Recently, the company
announced its third-quarter 2012 dividend of 29 cents per share,
yielding a solid 1.9%. In the first nine months of fiscal 2012,
Home Depot bought back nearly $1.312 billion worth of its common
stock and intends to spend an additional $700 million towards
share repurchase in the fourth quarter of fiscal 2012.
However, heavy job losses have led to a sharp fall in consumer
discretionary spending on big-ticket items. Looking at the
current situation in the United States, we believe that spending
on big remodeling projects will likely remain under pressure
until the housing market stabilizes and consumer-spending
rebounds.
Due to its exposure to the international market, Home Depot
remains prone to currency fluctuations. 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 consumer demand.
Above all, the company's business is highly competitive,
primarily based on customer services, price, store location and
assortment of merchandise. The company faces stiff competition
from local, regional and international players such as
Lowe's Companies Inc.
(
LOW
). To maintain its market share, the company is making selective
acquisitions and strategic alliances with third parties, which
are increasing its operational risks.
The above mentioned pros weigh greater than the cons, inducing us
to retain a Zacks #2 Rank on the stock, which translates into a
short-term Buy rating.
HOME DEPOT (HD): Free Stock Analysis Report
LOWES COS (LOW): Free Stock Analysis Report
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