We reiterate our long-term Neutral recommendation on the world's largest home improvement retailer, The Home Depot Inc. (HD - Analyst Report), given the better-than-expected third quarter results, an upbeat guidance, and the company’s ongoing strategies to boost top-line growth, offset by the concerns over the sustainability of the recovery in housing market, amidst ongoing economic impasse and cautious consumer spending environment.
Home Depot is a leading player in the highly-fragmented home improvement industry. The company has reinvigorated itself by emphasizing on square footage growth and maximization of productivity at its existing stores. In addition, the company has implemented significant changes to its store operations to make them simpler and more customer-friendly, thereby inducing more customer traffic.
Solid comparable sales growth and strong operating performance in the third quarter drove an earnings growth of 23.3% to 74 cents per share. Quarterly earnings also exceeded the Zacks Consensus Estimate of 70 cents per share. Moreover, net sales increased 4.6% year over year to $18.130 billion, primarily due to increased number of customer transactions and average ticket size.
Following solid third-quarter results, management raised its fiscal 2012 adjusted earnings guidance to $3.03, up from $2.95 per share forecasted earlier. Moreover, the company expects net sales to increase by 5.2% in fiscal 2012, up from the previously projected growth target of 4.6%.
Home Depot has surpassed the Zacks Consensus Estimate in 3 of the trailing 4 quarters in the range of 0.0% to 19.1%. The average surprise over the last 4 quarters remained at 9.6%. Following strong quarterly performance for the third quarter of fiscal 2012, the Zacks Consensus Estimates has been showing an upward trend. For fiscal 2012 and 2013, the Zacks Consensus Estimate raised by 7 cents and 8 cents to $3.03 and $3.46 per share in the last 60 days, respectively.
Moreover, Home Depot rewards its shareholders through regular quarterly dividends and share repurchases. Recently, the company announced its third-quarter 2012 dividend of 29 cents per share, yielding a solid 1.9%. In the first nine months of fiscal 2012, Home Depot bought back nearly $1.312 billion worth of its common stock and intends to spend an additional $700 million towards share repurchase in the fourth quarter of fiscal 2012.
However, heavy job losses have led to a sharp fall in consumer discretionary spending on big-ticket items. Looking at the current situation in the United States, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes and consumer-spending rebounds.
Due to its exposure to the international market, Home Depot remains prone to currency fluctuations. The weakening of foreign currencies against the U.S. dollar may require the company to either raise price or contract profit margins in locations outside the U.S. An increase in product price may have a direct impact on consumer demand.
Above all, the company’s business is highly competitive, primarily based on customer services, price, store location and assortment of merchandise. The company faces stiff competition from local, regional and international players such as Lowe’s Companies Inc. (LOW - Analyst Report). To maintain its market share, the company is making selective acquisitions and strategic alliances with third parties, which are increasing its operational risks.
The above mentioned pros weigh greater than the cons, inducing us to retain a Zacks #2 Rank on the stock, which translates into a short-term Buy rating.