Home Depot Raises Outlook Despite Weak Home Builder Sentiment
Home Depot (NYSE:HD) announced solid results and raised guidance despite pessimism in the home improvement segment. Despite continued sluggishness in the U.S. economy, product launches and new initiatives like driving move online sales will help the company improve profit margins in the coming quarters. The company offers a wide range of products and installation services to both individual home owners and professional builders and competes primarily with Lowe’s (NYSE:LOW), Sears (NYSE:SHLD) and Wal-Mart (NYSE:WMT) in home improvement.
We have a $39 Trefis price estimate for Home Depot, which is around 15% ahead of the current market price.
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Optimism despite weak home builder sentiment
Home Depot raised its revenue guidance for 2011 despite the dramatically changing macroeconomic environment and equity market volatility following the S&P downgrade of U.S. debt. The recent events seem to have further weighed on already weak consumer sentiment, especially in the home builder and home improvement segment (Home builder sentiment stuck at a low level in August).
New product launches to drive up sales
Even as consumers remain cautious on spending, Home Depot is relying on a series of new product launches to drive up its sales. The company recently rolled out new product lines such as the range of new DEWALT hand tools, the Home Decorators Collection, new Martha Stewart Living specialty finishes and Glidden’s Trim and Door Paints.
To boost its margins, Home Depot has been optimizing its supply chain and has digitized its catalogs to promote web sales. It has also rolled out the “Buy Online Pickup In-Store” capability which is expected to help increase sales.
The firm expects to cope with slowing demand on the back of product innovation, building on previous performance amid similar weak market conditions. Nonetheless, Home Depot is highly exposed to a recovery in U.S. retail spending as 88% of its stores are based in North America and thus a slowdown in consumer spending will likely impact the company significantly.