Home Depot Sales, Profit Benefit From Housing Rebound

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The U.S. housing industry's rebound isn't just good for homebuilders, construction companies and the like. It's also good for retailers that supply builders with the tools of the trade.

One of those retailers,Home Depot ( HD ), delivered its best performance in years in 2012 amid a rebound in many of the country's housing markets.

Home Depot is the nation's biggest home improvement chain with $75 billion in annual revenue and more than 2,200 stores in North America.

The company posted a year-over-year sales increase of 6% in fiscal 2012, while earnings climbed 26%. The sales gain was Home Depot's biggest since 2006. It has been even longer than that since the company grew annual profit at a faster clip.

Same-store sales for the year rose 4.5%. Home Depot also raised its quarterly dividend 34% to 39 cents per share, the fourth dividend increase in as many years.

The company has now delivered three straight years of sales and profit gains following four straight years of declines. Sales and earnings growth have accelerated each of the last two quarters.

Home Occupancy

Home Depot can thank both internal and external factors for the financial turnaround, experts say.

"The basic macro-level enablers for Home Depot's growth remained the U.S. housing market rebound, bringing along increased home occupancy rates, higher rates of home construction and spending, as well as new home sales," analysts at Trefis noted in a report.

According to data from the Commerce Department, sales of new single-family homes in the U.S. reached their highest level in three years in 2012. Americans bought 367,000 new homes during the year, up 20% from 2011.

In January, U.S. new-home sales climbed 16% to their highest level in more than four years. Although new-home sales slipped 4.6% in February -- the biggest drop in two years -- poor weather in the Northeast played a major role in the decline.

Meanwhile, the National Association of Home Builders' Remodeling Market Index reached a reading of 55 during the fourth quarter of 2012 -- the highest reading since the first quarter of 2004.

A reading above 50 indicates that more remodelers report market activity is higher vs. the prior quarter than those that report it is lower.

These kinds of positive trends go a long way toward explaining why Home Depot has seen a steady rise in sales and profit and why its stock price trades near an all-time high.

It also helps that Home Depot continues to outperform the competition, including top rivalLowe's ( LOW ).

"Home Depot is well-positioned for an ongoing recovery in the U.S. housing market and is generating industry-leading revenue growth, margins and cash flow," said James Ragan, an analyst at Crowell, Weedon & Co.

During the fiscal 2012 fourth quarter, Home Depot posted revenue of $18.2 billion. That was up 14% from the prior year and above Wall Street estimates for $17.7 billion.

It was the company's first double-digit quarterly sales gain in years. Excluding the $1.2 billion impact of an extra week during the quarter vs. the prior year, revenue rose 6%.

Earnings for the quarter grew 34% to 67 cents a share, topping views by 3 cents. Same-store sales climbed a robust 7%.

"Comp sales were positive in all three major regions and in 38 of 40 regional markets," Ragan said. "The strongest region was New York/New Jersey, which benefited from sales related to Hurricane Sandy."

Home Depot's numbers compare favorably to those at Lowe's, which posted Q4 declines in revenue and earnings and a 1.9% increase in same-store sales.

Home Depot's fourth-quarter results were helped by a 5.6% increase in average ticket prices.

"(The increase) shows how buyers have been gradually moving towards bigger purchases, further confirming the general improvement in consumer confidence," Trefis noted.

Despite the rosy macro outlook, Home Depot officials remain cautious in their assessment of the U.S. housing market.

'Gradual Thawing'

On a conference call with analysts, Chief Executive Frank Blake said he expects the path to a full housing recovery "will resemble a gradual thawing."

Chief Financial Officer Robert Hall added, "While recovering, we do not believe the housing market will fully recover in 2013."

Home Depot guided fiscal 2013 earnings of $3.37 a share and revenue of $76.21 billion. That compares with Wall Street expectations of $3.51 a share and revenue of $76.24 billion.

Many analysts reckon that management's projections are on the conservative side. They cite the impact an improved homebuilding market will have on results as well as Home Depot's own marketing initiatives designed to improve sales of appliances and other items.

"Home Depot appears poised to capture additional upside by expanding its appliance program to another 120 stores, adding new innovation to categories -- including LED technology to power tools -- and aggressively expanding its seasonal/decor business," JPMorgan analyst Christopher Horvers noted in a Q4 earnings report.

Analysts polled by Thomson Reuters expect Home Depot to log first-quarter earnings of 65 cents a share, up 30% from a year earlier.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: HD , LOW

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