Home Depot Outpaces Lowe’s As Housing Recovery Boosts Sales

by Trefis Team
-2.46%
Downside
94.99
Market
92.65
Trefis
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Home Depot
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Home improvement retailer Home Depot’s (NYSE:HD) excellent run of results over the first three quarters of 2012 has been capped off with another strong performance in the final quarter. Earnings for Q4 2012 crossed the $1 billion mark compared to $774 million in Q4 2011 – a healthy increase of nearly 32%. Net earnings were propelled by top-line growth, with a steady recovery in the US housing market driving consumer appetite for home improvement products. HD’s net sales for the final quarter stood at $18.2 billion, an increase of about 13.9% over Q4 2011. Investors should note, however, that the company’s Q4 2012 also gained from an extra week in the fiscal year 2012. Adjusting for extra income provided by the week, HD’s sales were up by 6.8% – which is still much higher than the sales growth clocked during Q3 2012 (4.6%) and over the first nine months of 2012 (3.9%).

Our complete analysis for Home Depot’s stock

Home Depot Eats Up The Housing Market Growth, Shutting Out Lowe’s

Home Depot’s results are primarily compared against Lowe’s (NYSE:LOW), its key competitor and the second largest home improvement retailer in North America. The respective companies’ 2012 figures, however, declare only one clear winner – Home Depot. HD recorded comparable same-store sales growth of 7% during the final quarter and 4.6% for the full year. Compared to this, Lowe’s comparable same-store sales growth was below 2% for both the final quarter and the full year. HD’s full year sales growth stood at 6.2% compared to around 2.2% for Lowe’s – a clear sign that the company’s ability to address the US home improvement industry is only growing stronger. Investors have also maintained their confidence in HD’s ability throughout 2012 – the company’s stock has risen by over 40% over the year.

The basic macro-level enablers for  HD’s growth in the fourth quarter remained the US housing market rebound – bringing along increased home occupancy rates, higher rates of home construction and spending as well as new home sales. A 5.6% increase in average ticket price during the final quarter also shows how buyers have been gradually moving towards bigger purchases – further confirming the general improvement in consumer confidence.

Total sales were also boosted by repair-related spending linked to the aftermath of Hurricane Sandy. This is also made evident by the fact that New York and New Jersey – areas worst affected by Sandy – were also the company’s best performing regions in the final quarter.  This should provide added confidence to HD investors.

Outlook For 2013 Remains Positive, More Stores To Capture Housing Rebound

HD’s outlook for 2013 remains strong with the US housing industry expected to continue on its recovering trajectory over the next year. Growth in new home sales and construction should help demand for home improvement products stay strong, and the 2012 results should certainly give investors enough confidence in the company’s ability to grab a major share of this growth. Meanwhile, we expect the sales effect due to Sandy to carry over well into the latter months of 2013, as only a fraction of the total repair work would have been initiated in the months immediately following the hurricane.

Investors will also be pleased to know that the company plans to continue expanding its store network to stake its claim on new growth avenues. Around 9 new stores are in the pipeline for 2013. Capital spending is expected to rise to about $1.5 billion compared to $1.3 billion in 2012.

We have a Trefis price estimate of $65 for Home Depot’s stock, which is just below the current market price.

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