Home Depot Beats Consensus Expectations On The Back Of A Strong Housing Market

by Trefis Team
Home Depot
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Home Depot‘s (NYSE:HD) fourth quarter results came in higher than expected, spurred on by an improving housing market. Excluding the $127 million charge related to a one-time tax, the earnings per share came in at $1.69. A strong economy, as well as the benefit to be received from the tax reform, prompted Home Depot to provide an upbeat guidance for FY 2018. Comparable same store sales growth of 5%, EPS improvement of 28%, and a dividend hike of 16%, are being expected. Looking ahead, the improving housing market, as a result of increasing demand for houses and appreciating prices for homes, will continue to boost HD’s revenues. Moreover, the tax reform will not only improve the company’s bottom-line, but it will also result in higher disposable income for consumers, which may have a positive impact on Home Depot.

We have a $207 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.

Online Sales Continue to Accelerate

Home Depot has made a concerted effort to focus on its integrated retail strategy, which seamlessly connects online and offline channels, making its stores more efficient. This has resulted in improved revenues and profitability, and the online space has been a key driver to the impressive growth Home Depot has witnessed in recent times. In FY 2017, HD implemented a new e-commerce platform, enhanced its search and mobile functionality, increased check out speed, and expanded its chat functionality to improve the customer experience with the company’s online contact centers. These efforts resulted in increased traffic and conversion, with the online sales increasing 21% in the fourth quarter and 21.5% in fiscal 2017, accounting for 6.7% of the total sales. 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.

By focusing on an integrated channel strategy, Home Depot has been able to increase revenues per square foot, rather than generating revenues from new square footage. This has ensured that its existing store network is being effectively used to drive revenues. Home Depot has been specifically focused on products that are e-commerce unfriendly and where customers need advice from experienced associates in the store. By integrating its online and offline channels, the company has ensured that customers can come to stores for a demo or advice, and then buy the product online. For orders placed online, the customer can pick up the product in store and seek advice at the time of pick up. An interesting point to note is that 46% of the company’s online orders are picked up by customers at the store, indicating that the company’s integrated retail strategy which allows customers to shop online but pick up from a store, is a driving factor of its e-commerce growth.

Hurricanes Carry On Providing A Boost To Top Line, Pressures Bottom-Line

HD continued to see an increased demand for its products as consumers responded to the wake of the hurricanes in the fourth quarter. The company estimates the hurricane-related sales positively impacted total company sales growth in the quarter by 1.7% or $380 million, which came in higher than expected, and $652 million for the second half. This benefit, of a comparable sum, is set to continue in FY 2018 as well, with a majority of it occurring in the first half of the year. However, the sale of low-margin products, as well as the roughly $66 million hurricane-related expenses, negatively impacted the gross margin, which declined 12 basis points in the fourth quarter. On the other hand, in FY 2018, the hurricane-related sales are expected to be more profitable, which should ease the pressure on the margins.

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