What To Expect From Home Depot’s Earnings

by Trefis Team
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Home Depot (NYSE:HD) is scheduled to report earnings on February 20. Through the first nine months of 2017, the company’s sales and comparable sales accelerated. Revenues surged in the wake of the hurricanes in the third quarter; however, as a result of the additional supply chain costs and the customers stocking up on low-margin products, it took a toll on the company’s bottom line. In the fourth quarter, hurricane-related sales will continue to positively impact the sales, as well as in the first half of FY 2018, since that is when many homeowners will receive insurance checks for damage. Furthermore, the rebound in housing prices does not look like it will be slowing down anytime soon, which is another factor that should help Home Depot.

We have a $187 price estimate for Home Depot, which is below the current market price. The charts below have been made using our new, interactive model. You can click here to modify our driver assumptions to see what impact it will have on the company’s revenues, EPS, and price estimate.

HD’s Sizable Investments Paying Off

Home Depot’s integrated retail strategy, which seamlessly connects the online and offline channels, is making its stores more efficient, leading to higher revenues and profitability. The company has also observed improved customer satisfaction scores as it continues to invest in this initiative. The company has stated that 60% of all its sales, whether in-store or online, are influenced by a digital visit. Moreover, the company’s online traffic was expected to cross 1.8 billion visits in 2017. HD’s online revenues have increased by approximately $1 billion in each of the last four financial years, with the online penetration reaching 6.4%, nearly double that of its nearest traditional competitor. The online channel has also been one of the driving factors behind the impressive growth rates the company has seen, contributing to 20% of HD’s growth over the past few years.

Given the fact that customers today are more digitally engaged, and want more convenience and simplicity, the focus on the digital channel is imperative. More than 50% of Home Depot’s marketing spend is now digital, such as on Google search, Spotify, and Pandora, with the balance expended on TV, radio, and print. Moreover, the company has made significant investments to improve the online experience for its customers. For example, its new expedited online checkout process has cut down the average checkout time of customers by 20%. The online channel also gives customers access to over a million products, compared with about 35,000 items in a typical Home Depot store. The company also has a new feature in its app which helps customers to virtually try out products. For instance, if someone wants to buy a piece of furniture, but has no idea how it will look in their home, the app, using the phone’s camera and augmented reality, can place the item in the room, which can be seen on the phone. The app also allows customers to find products more easily in the stores.

Hurricanes Prompted Home Depot To Lift Guidance

HD saw increased demand for its products as consumers prepared for and responded to in the wake of the hurricanes in the third quarter. The company was also negatively impacted by 236 store closures in the affected areas. Home Depot managed to increase its overall comparable sales by 7.9%, more than two percentage points above estimates, helped by the hurricane-related gains, which lifted the metric by $282 million in the quarter. The comps for the U.S. stores in the quarter were up by 7.7%. However, the sale of low-margin products, as mentioned earlier, as well as the roughly $104 million hurricane-related expenses, negatively impacted the operating profit by $51 million.

The impressive performance in the third quarter, as well as the factors mentioned previously that will positively impact HD’s performance in the fourth quarter, prompted the company to raise its full year guidance. HD expects fiscal 2017 sales to increase by approximately 6.3%, with positive comps of 6.5%, and diluted earnings per share to improve by roughly 14% to $7.36. The impact of the hurricanes will continue to pressure the bottom line.

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