The Home Depot Inc.
) is the leading player in the highly fragmented home improvement
industry. The company 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, thereby inducing more customer traffic.
Driven by solid comparable sales growth and strong operating
performance, the company's reported earnings of 50 cents per share
for fourth-quarter 2011, handily surpassed the Zacks Consensus
Estimate of 42 cents and climbed nearly 39% from the prior-year
Following better-than-expected fourth-quarter results,
management anticipates 2012 diluted earnings per share to increase
by 13% year over year to $2.79 (after share repurchases) on the
back of an increase of 2.5% in sales, primarily resulting from
low-single-digit comparable sales growth.
Moreover, following the strong fourth-quarter performance, Home
Depot intends to remain focused on its capital allocation
principles in fiscal 2012. Since the last quarter, the company has
increased its dividend payout ratio to 50% from its previous target
Home Depot intends to utilize its excess cash for share buybacks
after meeting its business needs. The company plans to open 11 new
stores and repurchase nearly $3,500 million of its common stock in
fiscal 2012. Apart from this, the company also intends to maintain
a high return on invested capital with a target of achieving 15% by
the end of fiscal 2013. These strategies will enhance shareholders'
return while boosting the market value of the stock.
Further, with the introduction of new warehousing and
transportation systems, the company has been able to improve its
supply chain while minimizing the cost. This has also helped Home
Depot to improve its Central Automated Replenishment System for
immediate refill of stock while reducing the investment in
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 international market, Home Depot remains
prone to currency fluctuation. 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
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.
). To maintain its market share, the company is making selective
acquisitions and strategic alliances with third parties, which are
increasing its operational risks.
Given the above pros and cons, we reiterate our long-term
Neutral recommendation on Home Depot. Our long-term recommendation
on the stock is supported by a Zacks #2 Rank, which translates into
a short-term Buy rating.
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