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Home Depot (HD) Tops Q3 Earnings & Sales Estimates, Stock Down

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The Home Depot, Inc. (HD - Free Report) has posted third-quarter fiscal 2020 results, wherein earnings and sales beat the Zacks Consensus Estimate and improved year over year. The company gained from the continued strong demand for home improvement projects as customers spent more time at home during the coronavirus pandemic.

Home Depot has undertaken significant actions to support and reward associates all through the pandemic, with expanded paid time-off, and the temporary weekly bonus program for hourly associates in stores and distribution centers. The company is now moving from the temporary programs and plans to invest in a permanent compensation enhancement program for frontline hourly associates. This is likely to result in the company recording about $1 billion toward incremental compensation on an annualized basis.

Shares of the home-improvement retailer declined 2.4% in the pre-market session despite better-than-expected results in third-quarter fiscal 2020. Moreover, the Zacks Rank #3 (Hold) stock has rallied 28% year to date compared with the industry’s growth of 28.2%.



Q3 Highlights

Earnings of $3.18 per share improved 25.7% from $2.53 registered in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate of $3.08.

Net sales rose 23.2% to $33,536 million from $27,223 million in the year-ago quarter and beat the Zacks Consensus Estimate of $32,032.3 million. Sales benefited from the continued robust demand for home improvement projects. The company is effectively adapting to the high-demand environment, driven by investments in its business over the years and the dedication of its associates to serve customers. The company's overall comps grew 24.1%, with a 24.6% improvement in the United States.

The Home Depot, Inc. Price, Consensus and EPS Surprise


The Home Depot, Inc. Price, Consensus and EPS Surprise

The Home Depot, Inc. price-consensus-eps-surprise-chart | The Home Depot, Inc. Quote

In the reported quarter, comps were aided by a 10.1% rise in average ticket and a 13% increase in customer transactions. Moreover, sales per square foot rose 23.1%.

In dollar terms, gross profit increased 22% to $11,456 million from $9,387 million in the year-ago quarter, primarily driven by robust sales growth. Meanwhile, gross profit margin contracted 32 basis points (bps) to 34.2%.

Operating income increased 22.9% to $4,852 million, while operating margin declined 3 bps to 14.47%. Despite gains from the robust top line, operating margin was hurt by gross margin decline as well as higher SG&A and other operating expenses.

Balance Sheet and Cash Flow

Home Depot ended third-quarter fiscal 2020 with cash and cash equivalents of $14,652 million, long-term debt (excluding current maturities) of $32,831 million, and shareholders' deficit of $1,535 million. In the first nine months of fiscal 2020, it generated $17,415 million of net cash from operations.

In the first nine months of fiscal 2020, the company paid out cash dividends of $4,837 million and repurchased shares worth $791 million.

Other Developments

On Nov 16, Home Depot has signed an agreement to acquire HD Supply Holdings Inc. The acquisition will place Home Depot as a premier provider of maintenance, repair and operations (MRO) products in the marketplace. HD Supply’s business will fully complement Home Depot’s existing MRO business with robust products and service capabilities, an experienced workforce, and an extensive MRO-specific distribution network across the United States and Canada. It will help accelerate sales growth by effectively serving existing and new customers.

Per the merger agreement, a subsidiary of Home Depot will initiate a cash tender offer to purchase all outstanding shares of HD Supply for $56 per share for a total enterprise value of $8 billion. The closing of the tender offer is dependent on the fulfillment of customary closing conditions, including regulatory approvals. The transaction is likely to close during Home Depot’s fourth-quarter fiscal 2020, which ends on Jan 31, 2021. Home Depot expects to fund the transaction through cash on hand and debt. Moreover, the company expects the transaction to be accretive to its fiscal 2021 earnings.

3 Better-Ranked Retail Stocks

Tecnoglass Inc. (TGLS - Free Report) has a long-term earnings growth rate of 20% and a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Kroger Co. (KR - Free Report) has a long-term earnings growth rate of 6.2%. It presently carries a Zacks Rank #2.

Target Corporation (TGT - Free Report) , also a Zacks Rank #2 stock, has a long-term earnings growth rate of 7.2%.

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