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Here's What Keeps Home Depot (HD) Attractive for Long Term
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The Home Depot Inc. (HD - Free Report) is an attractive bet for the long term, owing to its strong fundamentals, robust housing market trends and continued investments. The company looks well-poised to gain from the strength in its digital business and efforts to improve the Pro experience.
Home Depot stands to capitalize on the demand for home improvement projects, driven by its interconnected retail strategy and underlying technology infrastructure that have helped consistently boost web traffic for the past few quarters.
These investments and endeavors have helped the company deliver consistently strong earnings performances. It reported sales and earnings beat for the 10th straight quarter in third-quarter fiscal 2022. The top and bottom lines also improved year over year.
However, Home Depot reported a soft gross margin in the fiscal third quarter, driven by higher supply-chain investments. Higher inventory levels and interest expenses also remain concerning.
Shares of Home Depot have rallied 22.6% in the past three months compared with the industry’s growth of 16.6%. The stock’s performance also compared favorably against the Retail-Wholesale sector’s fall of 3.8% and the S&P 500’s growth of 1.6% in the same period.
The Zacks Consensus Estimate for the Zacks Rank #3 (Hold) company’s current financial year’s sales and earnings suggests growth of 4.2% and 7.2%, respectively, from the year-ago period’s reported number.
Image Source: Zacks Investment Research
Home Depot’s Strategies on Track
Home Depot is witnessing significant benefits from the execution of the “One Home Depot” investment plan, which focuses on expanding supply-chain facilities, technology investments and enhancement to the digital experience. The interconnected retail strategy and underlying technology infrastructure have helped consistently boost web traffic for the past few quarters.
Sales, leveraging digital platforms, rose 10% year over year in the fiscal third quarter. Enhanced search capabilities and improved Pro site experience, and more robust fulfillment capabilities have been driving improved online conversions.
The company’s strategy of providing an interconnected experience is resonating well with customers, as around 50% of the online orders were fulfilled through stores in the fiscal third quarter. Over the years, the company has created the fastest, most efficient delivery network in home improvement through options like buy online pickup in store with convenient pickup lockers, buy online deliver from store with express car and van delivery, and curbside pickup.
Home Depot’s Pro segment has also been a key growth driver, with the Pro segment witnessing robust sales growth for the past several quarters. Pro sales growth outpaced DIY sales in the fiscal third quarter, driven by robust project demand across the business. The company expects continued sales growth from Pros as project demand is strong and their backlogs are growing.
In the fiscal third quarter, HD witnessed big-ticket strength across many Pro-heavy categories like fasteners, pipe and fittings, and gypsum. The company remains on track with its investments to build a Pro ecosystem that includes professional-grade products, exclusive brands, enhanced delivery, credit, digital capabilities, field sales support and HD rental.
The company continues to invest in Pro capabilities like enhanced fulfillment, more personalized online experience, and other business management tools to drive deeper engagement with Pro customers. The company is impressed with the momentum in its pro extra loyalty program.
The company remains on track with the building of a unique, interconnected pro ecosystem and expects this to increase its ability to expand its share in a $450-billion addressable pro space.
Home Depot’s guidance for fiscal 2022 is impressive. HD anticipates year-over-year sales and comps growth of 3% for fiscal 2022. Our estimate for HD’s fiscal 2022 sales stands at $157.3 billion, suggesting year-over-year growth of 4.1%. We estimate comps growth of 3.2% for fiscal 2022.
We expect the company’s operating margin to be 15.4% in fiscal 2022, in sync with management’s guidance. HD estimates earnings per share growth in the mid-single digits for fiscal 2022. We anticipate earnings per share for fiscal 2022 to be $16.57, suggesting a 6.7% year-over-year increase.
Headwinds to Address
Home Depot has been witnessing significant cost headwinds due to higher supply-chain investments. This, along with higher transportation and product cost pressures, has been denting margins. The gross profit margin contracted 10 basis points (bps) to 34% from 34.1% in the year-ago quarter mainly due to higher supply-chain investments.
The company has been making efforts to offset transportation and product cost pressures, while maintaining value for customers. Driven by these efforts, we anticipate the gross margin for fiscal 2022 to be flat year over year at 33.6%.
Moreover, the company is witnessing a rise in inventory due to product cost inflation and strategic decisions in response to continued global supply-chain disruption. The inventory increase also stems from intentional investments in higher in-stock levels and pull forward of inventory for events in the back half of the year due to the ongoing global supply-chain disruptions, investment in its new supply chain facilities, and carryover of some spring seasonal inventory.
The increased inventory levels may be concerning for Home Depot if the housing environment deteriorates and consumers halt remodeling projects.
Stocks to Bet On
We highlighted three better-ranked stocks in the Retail - Wholesale sector, namely Tecnoglass (TGLS - Free Report) , Build-A-Bear Workshop (BBW - Free Report) and Ulta Beauty (ULTA - Free Report) .
Tecnoglass manufactures and sells architectural glass and windows, and aluminum products for the residential and commercial construction industries. TGLS currently sports a Zacks Rank #1 (Strong Buy). The stock has rallied 41.8% in the past three months.
The Zacks Consensus Estimate for Tecnoglass’ current financial-year sales and earnings per share suggests growth of 43.4% and 82.2%, respectively, from the year-ago reported figures. TGLS has a trailing four-quarter earnings surprise of 26.9%, on average.
Build-A-Bear, a multi-channel retailer of plush animals and related products, currently flaunts a Zacks Rank of 1. The company has a trailing four-quarter earnings surprise of 14.7%, on average. Shares of BBW have risen 82.3% in the past three months.
The Zacks Consensus Estimate for Build-A-Bear’s current financial-year sales and earnings per share suggests growth of 11.9% and 21.5%, respectively, from the year-ago reported numbers.
Ulta Beauty, a leading beauty retailer in the United States, currently has a Zacks Rank #2 (Buy). ULTA has a trailing four-quarter earnings surprise of 26.2%, on average. The stock has risen 9.9% in the past three months.
The Zacks Consensus Estimate for Ulta Beauty’s current financial-year sales suggests growth of 15.4% from the year-ago reported figures. ULTA has an expected EPS growth rate of 13.8% for three-five years.
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Here's What Keeps Home Depot (HD) Attractive for Long Term
The Home Depot Inc. (HD - Free Report) is an attractive bet for the long term, owing to its strong fundamentals, robust housing market trends and continued investments. The company looks well-poised to gain from the strength in its digital business and efforts to improve the Pro experience.
Home Depot stands to capitalize on the demand for home improvement projects, driven by its interconnected retail strategy and underlying technology infrastructure that have helped consistently boost web traffic for the past few quarters.
These investments and endeavors have helped the company deliver consistently strong earnings performances. It reported sales and earnings beat for the 10th straight quarter in third-quarter fiscal 2022. The top and bottom lines also improved year over year.
However, Home Depot reported a soft gross margin in the fiscal third quarter, driven by higher supply-chain investments. Higher inventory levels and interest expenses also remain concerning.
Shares of Home Depot have rallied 22.6% in the past three months compared with the industry’s growth of 16.6%. The stock’s performance also compared favorably against the Retail-Wholesale sector’s fall of 3.8% and the S&P 500’s growth of 1.6% in the same period.
The Zacks Consensus Estimate for the Zacks Rank #3 (Hold) company’s current financial year’s sales and earnings suggests growth of 4.2% and 7.2%, respectively, from the year-ago period’s reported number.
Image Source: Zacks Investment Research
Home Depot’s Strategies on Track
Home Depot is witnessing significant benefits from the execution of the “One Home Depot” investment plan, which focuses on expanding supply-chain facilities, technology investments and enhancement to the digital experience. The interconnected retail strategy and underlying technology infrastructure have helped consistently boost web traffic for the past few quarters.
Sales, leveraging digital platforms, rose 10% year over year in the fiscal third quarter. Enhanced search capabilities and improved Pro site experience, and more robust fulfillment capabilities have been driving improved online conversions.
The company’s strategy of providing an interconnected experience is resonating well with customers, as around 50% of the online orders were fulfilled through stores in the fiscal third quarter. Over the years, the company has created the fastest, most efficient delivery network in home improvement through options like buy online pickup in store with convenient pickup lockers, buy online deliver from store with express car and van delivery, and curbside pickup.
Home Depot’s Pro segment has also been a key growth driver, with the Pro segment witnessing robust sales growth for the past several quarters. Pro sales growth outpaced DIY sales in the fiscal third quarter, driven by robust project demand across the business. The company expects continued sales growth from Pros as project demand is strong and their backlogs are growing.
In the fiscal third quarter, HD witnessed big-ticket strength across many Pro-heavy categories like fasteners, pipe and fittings, and gypsum. The company remains on track with its investments to build a Pro ecosystem that includes professional-grade products, exclusive brands, enhanced delivery, credit, digital capabilities, field sales support and HD rental.
The company continues to invest in Pro capabilities like enhanced fulfillment, more personalized online experience, and other business management tools to drive deeper engagement with Pro customers. The company is impressed with the momentum in its pro extra loyalty program.
The company remains on track with the building of a unique, interconnected pro ecosystem and expects this to increase its ability to expand its share in a $450-billion addressable pro space.
Home Depot’s guidance for fiscal 2022 is impressive. HD anticipates year-over-year sales and comps growth of 3% for fiscal 2022. Our estimate for HD’s fiscal 2022 sales stands at $157.3 billion, suggesting year-over-year growth of 4.1%. We estimate comps growth of 3.2% for fiscal 2022.
We expect the company’s operating margin to be 15.4% in fiscal 2022, in sync with management’s guidance. HD estimates earnings per share growth in the mid-single digits for fiscal 2022. We anticipate earnings per share for fiscal 2022 to be $16.57, suggesting a 6.7% year-over-year increase.
Headwinds to Address
Home Depot has been witnessing significant cost headwinds due to higher supply-chain investments. This, along with higher transportation and product cost pressures, has been denting margins. The gross profit margin contracted 10 basis points (bps) to 34% from 34.1% in the year-ago quarter mainly due to higher supply-chain investments.
The company has been making efforts to offset transportation and product cost pressures, while maintaining value for customers. Driven by these efforts, we anticipate the gross margin for fiscal 2022 to be flat year over year at 33.6%.
Moreover, the company is witnessing a rise in inventory due to product cost inflation and strategic decisions in response to continued global supply-chain disruption. The inventory increase also stems from intentional investments in higher in-stock levels and pull forward of inventory for events in the back half of the year due to the ongoing global supply-chain disruptions, investment in its new supply chain facilities, and carryover of some spring seasonal inventory.
The increased inventory levels may be concerning for Home Depot if the housing environment deteriorates and consumers halt remodeling projects.
Stocks to Bet On
We highlighted three better-ranked stocks in the Retail - Wholesale sector, namely Tecnoglass (TGLS - Free Report) , Build-A-Bear Workshop (BBW - Free Report) and Ulta Beauty (ULTA - Free Report) .
Tecnoglass manufactures and sells architectural glass and windows, and aluminum products for the residential and commercial construction industries. TGLS currently sports a Zacks Rank #1 (Strong Buy). The stock has rallied 41.8% in the past three months.
You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Tecnoglass’ current financial-year sales and earnings per share suggests growth of 43.4% and 82.2%, respectively, from the year-ago reported figures. TGLS has a trailing four-quarter earnings surprise of 26.9%, on average.
Build-A-Bear, a multi-channel retailer of plush animals and related products, currently flaunts a Zacks Rank of 1. The company has a trailing four-quarter earnings surprise of 14.7%, on average. Shares of BBW have risen 82.3% in the past three months.
The Zacks Consensus Estimate for Build-A-Bear’s current financial-year sales and earnings per share suggests growth of 11.9% and 21.5%, respectively, from the year-ago reported numbers.
Ulta Beauty, a leading beauty retailer in the United States, currently has a Zacks Rank #2 (Buy). ULTA has a trailing four-quarter earnings surprise of 26.2%, on average. The stock has risen 9.9% in the past three months.
The Zacks Consensus Estimate for Ulta Beauty’s current financial-year sales suggests growth of 15.4% from the year-ago reported figures. ULTA has an expected EPS growth rate of 13.8% for three-five years.