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Will Home Depot's (HD) Strategies Give Its Margins a Boost?

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Robust earnings history, focus on Pro Customers, strength in core business and a disciplined capital strategy have been the key pillars of success for The Home Depot, Inc. (HD - Free Report) . In fact, the company has to its credit a five-year long trend of beating earnings estimates, which continued in fourth-quarter fiscal 2017. Also, sales topped estimates for the sixth straight quarter.

Shares of this Zacks Rank #3 (Hold) company have rallied 20.1% in the past year, outperforming the industry’s growth of 10.9%. Further, the stock has an impressive Growth Score of A with long-term earnings growth rate of 13.2%, which instills confidence among investors.


Initiatives Undertaken

Atlanta-based Home Depot remains keen on building its interconnected capabilities through its digital assets upgrade for providing its customers with a more seamless experience. Meanwhile, the company has been benefiting from its solid focus on Pro Customers. Notably, the recently acquired Compact Power Equipment marked another step toward enhancing its portfolio of service offerings for its Pro customers. Notably, sales from this category improved double-digits in the fourth quarter of fiscal 2017.

Recently, management has reaffirmed its long-term financial targets, to be achieved in fiscal 2020 while updated the return on invested capital target to reflect the Tax Cuts and Jobs Act of 2017 impacts. It continues to anticipate total sales in the range of $115-$120 billion with compounded annual sales growth of nearly 4.5-6%. It now projects a return on invested capital to be more than 40%, reflecting the impact of the new tax reform. Management also plans to accelerate investments in the next three years to boost customer experience and shareholder value.

Will These Initiatives Lift Margins Higher?

Though Home Depot has been posting sturdy results for a long time, the company’s gross margin looks a little stretched. Last quarter, gross margin contracted 10 basis points (bps) year over year due to impacts from lower margin hurricane-related sales. Prior to this, the company’s gross margin deteriorated 12 bps in the third quarter, 6 bps in the second, and 10 bps each in first-quarter fiscal 2017 and fourth-quarter fiscal 2016.

For fiscal 2018, management expects gross margin of nearly 34%, almost flat with fiscal 2017. Excluding the 53rd week, the company expects gross margin to decline nearly 7 bps. This is mainly due to assumptions of a tightened transportation market and higher fuel costs.

Well, we expect the decline in margins to be temporary, which will be offset by the company’s robust strategies and continue to augment its business.

Want Top-Ranked Stocks in the Same Industry? Check These

Builders FirstSource, Inc. (BLDR - Free Report) delivered a positive earnings surprise of 135.3% in the previous quarter and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Beacon Roofing Supply, Inc. (BECN - Free Report) has an impressive long-term earnings growth rate of 32.5% and a Zacks Rank #2 (Buy).

Fastenal Company (FAST - Free Report) has a long-term earnings growth rate of 14% and a Zacks Rank of 2.

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