Home Depot Providing Insight

Home Depot Investor and Analyst Conference

Today, Home Depot (HD - Analyst Report) is holding its 2009 Investor and Analyst Conference. The company is webcasting the event here. The company is going to discuss its Strategic Priorities, outline its Long-Term Operating Targets and update its 2009 EPS Guidance.

Strategic Priorities

Home Depot’s Strategic Priorities include customer service, product authority, productivity and efficiency driven by disciplined capital allocation.

Customer service - Taking care of associates, putting customers first, and simplifying the business.
Product Authority - An emphasis on re-establishing a merchandising driven business, providing product that meets customer project needs, and building tools for effective implementation.
Productivity and Efficiency - Disciplined capital allocation focused on the existing core retail business, transforming the supply chain, and improving information technology.

Our take: These initiatives all make sense and could be made by just about any retailer. There is little doubt that Home Depot, along with Lowe’s (LOW - Analyst Report), will survive the current housing downturn and continue to take market share from smaller, less capitalized competitors. That said, we agree with Home Depot’s decision to focus on internal improvements because overall industry growth will be nonexistent as the housing bubble is deflating.

Long-Term Operating Targets

The company believes that its strategic priorities, along with a correction in the home improvement market, will allow Home Depot to achieve an operating margin of approximately 10% and a return on invested capital (ROIC) of approximately 15%.

Our take: At first blush, the company’s long-term targets look reasonable. Since 2000, Home Depot’s operating margin averaged 9.8%, and its ROIC averaged 12.8%. But we need to keep in mind that the company’s results were boosted by an inflated housing market.

During the current housing downturn, Home Depot’s operating margin and ROIC have both declined substantially. In fiscal 2008, Home Depot had an operating margin of 6.1% and an ROIC of 2.9%. We think it is reasonable to assume that Home Depot’s recent profitability measures are below what the company could earn on a "normalized" basis.

However, we do not think the company’s profit margins and returns on capital are going to return to levels that it enjoyed thanks to unsustainable growth in the housing. As a result, we think Home Depot may fall short of its long-term operating targets.

Updated FY2009 EPS Guidance

The company reaffirmed its sales, comparable-store sales and gross margin guidance for fiscal year 2009. The company expects sales to decline by approximately 9%, a comp-store sales decrease in the high single digits, and gross margin to be flat to slightly higher. This translates to total sales of $64.9 billion in fiscal 2009. The company now expects EPS from continuing operations to be flat to down 7% from last year, compared to its prior EPS guidance of down 7%.

Home Depot also expects adjusted earnings per share to be down 20% to 26%. Its previous outlook was for a 26%. In fiscal year 2008, the company earned $1.37/share from continuing operations. Home Depot’s updated guidance implies EPS from continuing operations of $1.27 to $1.37. On an adjusted basis, Home Depot earned $1.78/share in fiscal 2008. Its updated guidance implies fiscal 2009 EPS of $1.32-$1.42.

Our take: Nothing too surprising here, as analyst estimates were already above Home Depot’s previous guidance. The Zacks consensus estimate for fiscal 2009 was $1.41 before the company issued updated guidance. We would expect to see consensus estimates move up slightly on the company’s updated outlook.

For those interested, today’s webcast (which will be available for replay) should be worth listening to. Home Depot’s management will provide more detail about sales and margin trends in its stores, but we are also interested in what management has to say about macro trends such as housing, consumer spending, credit availability and higher oil/gas prices. Home Depot has over 2,200 stores all across the US and can provide valuable insight on the state of the consumer.

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