Home Depot (HD) Tops Q4 Earnings, Updates Capital Strategy

The Home Depot Inc.HD reported better-than-expected bottom-line results for fourth-quarter fiscal 2016, retaining its four-year long trend of beating earnings estimates. Results gained from the company's focus on affording innovative products, boosting interconnected customer experience and driving productivity. Further, the company continued to reap the benefits of a steady housing market recovery and strong customer demand.

Consequently, shares of this home improvement retailer increased nearly 2% in the pre-market trading session. Moreover, Home Depot's shares have returned 16.4% in the past one year, outperforming the Zacks categorized Building Products-Retail/Wholesale industry that rose 11.9% in the same time frame.

The company posted fiscal fourth-quarter earnings of $1.44 per share, which escalated 23.1% from $1.17 in the year-ago quarter and beat the Zacks Consensus Estimate of $1.33.

Home Depot, Inc. (The) Price, Consensus and EPS Surprise

Home Depot, Inc. (The) Price, Consensus and EPS Surprise | Home Depot, Inc. (The) Quote

Quarterly Details

Net sales advanced 5.8% to $22,207 million from $20,980 million in the year-ago quarter. However, the top line fell short of the Zacks Consensus Estimate of $21,806 million. The company's overall comparable-store sales (comps) increased 5.8%, while comps in the U.S. grew 6.3%. Sales growth can be attributable to a 2.9% increase in both number of customer transactions and average ticket. Further, a 5.7% upside in sales per square foot helped the results.

Gross profit in the reported quarter improved 5.5% to $7,553 million from $7,156 million in the year-ago quarter, primarily driven by higher sales. However, gross profit margin contracted 10 basis points (bps) to 34%.

Improved gross profit led operating income to increase 14.8% to $2,927 million during the fiscal quarter. Further, operating margin expanded 110 bps from the year-ago quarter to 13.2%.

Fiscal 2016 Synopsis

Home Depot's adjusted earnings for fiscal 2016 came in at $6.45 per share, up 18.1% year over year and ahead of the Zacks Consensus Estimate of $6.34. Net sales for the fiscal jumped 6.9% year over year to $94,595 million and cruised ahead of the Zacks Consensus Estimate of $94,161 million.

Balance Sheet and Cash Flow

Home Depot ended fiscal 2016 with cash and cash equivalents of $2,538 million, long-term debt (excluding current maturities) of $22,349 million and shareholders' equity of $4,333 million. In fiscal 2016, the company had generated $9,783 million of net cash from operations.

Further, as a part of its capital allocation strategy, the company raised long-term dividend payout ratio to 55% of net earnings, compared with 50% targeted earlier. Further, the company increased quarterly dividend by 29% to 89 cents per share. This dividend, which marks the company's 120th quarterly dividend, will be paid on Mar 23, 2017 to shareholders with record as of Mar 9, 2017.

Additionally, the company authorized a new $15 billion share repurchase program, which will replace its existing program. The company's commitment to returning value to shareholders is evident from the share buybacks made since 2002 through Jan 29, 2017. In this period, the company repurchased about 1.3 million shares, which makes for total shareholder returns of over $67 million.

Fiscal 2017 Outlook

Following the robust fiscal 2016 performance, Home Depot initiated guidance for fiscal 2017. The company project both sales and comps to grow about 4.6%.

The company's gross profit margin for fiscal 2017 is expected to contract 15 bps, while operating margin is likely to expand 30 bps. The company targets effective tax rate of nearly 36.3%. Consequently, diluted earnings per share are expected to increase 10.5% to $7.13, including share repurchases worth nearly $5 billion.

During the fiscal year, the company anticipates generating cash flow from operating activities of nearly $11.3 billion. Capital spending and depreciation & amortization expense for the fiscal are estimated at about $2 billion each. Further, the company expects opening about six new stores in the fiscal.

Zacks Rank

Currently, Home Depot carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail space are Fastenal Company FAST , Lumber Liquidators Holdings Inc. LL and Zumiez Inc. ZUMZ , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Fastenal has gained nearly 15.5% in the last six months. Moreover, it has a long-term earnings growth rate of 16.3%.

Lumber Liquidators, with a long-term earnings growth rate of 27.5%, has gained nearly 8.1% in the past one year.

Zumiez has jumped 22.5% in the last six months. The stock has a long-term earnings growth rate of 15%.

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

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

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