Home Depot tops estimates, raises guidance

The news boosts shares of the home-improvement retailer over 4%.

By Zacks.com Aug 14, 2012 2:02PM

copyright CorbisThe world's largest home-improvement retailer, Home Depot (HD), reported earnings climbed 17.4% to $1.01 per share for the second quarter of fiscal 2012, from 86 cents per share a year ago.


The growth was driven primarily by an improvement in comparable store sales and a strong operating performance. The quarterly earnings surpassed the Zacks consensus estimate of 97 cents a share.


During the reported quarter, net sales inched up 1.7% to $20.57 billion, compared with $20.23 billion in the prior-year quarter. The company's second-quarter sales were marginally affected by a mild winter season that forced the spring demand to come earlier, thereby benefiting the first quarter's performance.


Global same-store sales improved marginally, up 2.1%, while same-store sales in the U.S. grew 2.6%. However, net sales for the quarter fell short of the Zacks consensus estimate of $20.73 billion.


During the quarter, gross profit increased 2.2% to $7.026 billion from $6.876 billion reported in the prior-year quarter. Consequently, gross profit margin expanded by 20 basis points (bps) to 34.2%.


Operating profit during the quarter increased robustly by 12%, compared to the year-ago period. Operating margin expanded 120 bps to 12.5% compared with 11.3% in the prior-year quarter. The improvement in operating margin was primarily driven by elevated gross profit margin and effective cost management.


Home Depot ended the quarter with cash and cash equivalents of $2.810 billion, long-term debt of $10.771 billion and shareholder's equity of $17.634 billion.


Revised outlook for fiscal 2012

Following solid first-quarter results, management raised its fiscal 2012 earnings guidance to $2.95 per share, an increase of 19% from the previous fiscal's earnings of $2.47 and up from the previous forecast of $2.90. The current Zacks consensus estimate for fiscal 2012 stands at $2.92 per share, which is in between the company's guidance range. Moreover, the company reiterates its net sales growth guidance of 4.6%.


Our recommendation

Home Depot is a 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. We believe these initiatives will encourage more customer traffic to its stores while boosting its top line.


Moreover, with the introduction of new warehousing and transportation systems, the company has been able to improve its supply chain while minimizing cost. This has facilitated Home Depot to improve its Central Automated Replenishment System for immediate refilling of stock while reducing its investment in inventory.


However, the company's business is highly competitive, primarily based on customer services, price, store location and assortment of merchandise. It faces stiff competition from local, regional and international players as well. To maintain its market share, the company is making selective acquisitions and strategic alliances with third parties, which are increasing its operational risks.


Home Depot, which competes with Lowe's Companies Inc. (LOW), currently has a Zacks No. 2 Rank, implying a "short-term buy" rating. Besides, the company retains a long-term "neutral" recommendation.


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