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Will Soft Margins Hurt Home Depot's (HD) Earnings in Q1?

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The Home Depot, Inc. (HD - Free Report) is slated to report first-quarter fiscal 2018 results on May 15, before the opening bell. In fourth-quarter fiscal 2017, the company delivered a positive earnings surprise of 4.3%.

Moreover, the company has a spectacular positive earnings surprise record for five years now. For the trailing four quarters, the company delivered an average positive earnings surprise of 2.9%. Let’s see how things are shaping up prior to this announcement.

What to Expect?

The question lingering in investors’ minds now is whether Home Depot will be able to post positive earnings surprise in the quarter to be reported. The Zacks Consensus Estimate for the quarter under review is $2.07 per share, up nearly 24% from the year-ago quarter. We note that the Zacks Consensus Estimate for the quarter has moved down in the last 30 days. Analysts polled by Zacks anticipate revenues of $25.2 billion, reflecting a year-over-year increase of 5.6%.

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

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

Moreover, we note that the stock has outperformed the industry in the past month. The company’s shares have increased 6.4% while the industry improved 3.6%. This growth comes on the back of a spectacular surprise history and growth strategies, including an interconnected strategy and a focus on Pro customers, which is boosting investors’ sentiment ahead of earnings.



Factors at Play

Robust earnings history, focus on Pro Customers, strength in core business and a disciplined capital strategy have been key pillars for the success of Home Depot. The company remains keen on building its interconnected capabilities through its digital assets, upgrade for providing 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 in double digits in the fourth quarter of fiscal 2017.

Further, 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. Management also plans to accelerate investments in the next three years to boost customers’ experience and shareholder value.

Though Home Depot has been posting sturdy results for a long time, its gross margin looks a little strained. In the last reported quarter, gross margin contracted 10 basis points (bps) year over year due to impacts from lower 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.

While the company’s robust earnings history is encouraging, we would wait and see if soft margins can impact earnings this time around.

What the Zacks Model Unveils

Our proven model does not conclusively show that Home Depot is likely to beat earnings estimates this quarter. This is because, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Home Depot currently has an Earnings ESP of -2.36% and a Zacks Rank #4 (Sell). The company’s negative Earnings ESP and unfavorable Rank make surprise prediction impossible.

Stocks With Favorable Combination

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Dollar General Corporation (DG - Free Report) has an Earnings ESP of +1.38% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Urban Outfitters Inc. (URBN - Free Report) has an Earnings ESP of +1.70% and a Zacks Rank #2.

Ross Stores Inc. (ROST - Free Report) has an Earnings ESP of +2.83% and a Zacks Rank #3.

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