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Here's Why the Home Depot (HD) Stock Still Holds Potential

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The Home Depot Inc. (HD - Free Report) is in rough waters lately, with an 8.9% decline in the stock, following its third-quarter fiscal 2019 results on Nov 19. The company’s earnings beat the Zacks Consensus Estimate but sales lagged the same. Lower-than-expected sales resulted from timing issues related to the receipt of some benefits from its One Home Depot investments. Though these investments are delivering positive results, some of the benefits from these initiatives will take longer than originally planned to be realized. Further, commodity deflation in lumber and copper partly hurt the company’s comparable sales (comps) performance.

Based on the aforementioned delays, Home Depot slashed its sales and comparable sales (comps) view for fiscal 2019. It now expects sales growth of 1.8% for fiscal 2019 compared with 2.3% rise stated earlier. The company anticipates comps (for the comparable 52-week period) growth of 3.5% compared with 4% improvement mentioned previously.

Moreover, its margins remained soft in third-quarter fiscal 2019. Gross margin contracted 31 bps in third-quarter fiscal 2019 due to impacts of changes in the mix of products sold and higher shrink. Meanwhile, operating expenses declined 10 bps, owing to efficient expense control and continued productivity in the business along with investments in strategic initiatives. However, expenses related to the strategic investment plan of $277 million were up about $44 million year over year, resulting in 13 bps of operating expense deleverage. Moreover, operating margin declined 21 bps mostly due to soft gross margin.

Nevertheless, the company kept its earnings beat streak alive in the fiscal third quarter. Earnings benefited from progress on strategic investments. Its efforts to provide an interconnected shopping experience to customers, with innovative products and improved productivity, are aiding growth.

Driven by these, the Home Depot stock has surged 26.6% year to date compared with the Retail-Wholesale sector’s increase of 23.2%. Further, the Zacks Rank #3 (Hold) company’s long-term earnings growth rate of 9.9% indicates further growth potential.


Key Reasons to Hold the Stock

Including its positive earnings streak, Home Depot is witnessing significant benefits from the “One Home Depot” investment plan. The plan is focused on delivering an interconnected shopping experience to customers through in-store investments and expansion of the digital ecosystem.

The company enhanced navigation within the store through the introduction of way-finding sign and store refresh package. It also increased the speed of checkout to enhance store experiences. These along with front-end store investments to optimize labor and merchandise space productivity led to improved customer satisfaction scores and conversion rates in stores.

On the digital front, the company is investing in its website and other applications to further enhance online customer experience. It is witnessing higher traffic, better conversion and continued sales growth in the digital business through improved search capabilities, site functionality, category presentation and product content. Moreover, the company continues to roll out automated lockers in stores to make pickup of online orders easier and convenient. Currently, automated lockers are available in about 1,300 stores. Notably, stores with these lockers witnessed an increase of 280 basis points (bps) in checkout scores.

The company is also making efforts to leverage the digital business to boost sales for adjacent categories like HD Home, Cool and Workwear. These investments across digital and physical assets are likely to drive  Home Depot’s productivity growth apart from boosting customer experience.

With the “One Home Depot” investment plan on track, the company is benefiting from efforts to provide an interconnected shopping experience to customers, with localized and innovative products, and improved productivity. Home Depot reiterated its long-term targets outlined in December 2017, anticipating total sales of $115-$120 billion for fiscal 2020. This suggests compounded annual sales growth of 4.5-6%. Operating margin is expected to be 14.4-15%. Moreover, the company expects annual average capital spending to be about 2.5% of sales.

Additionally, Home Depot’s Pro segment is a key growth driver, with Pro sales outpacing DIY (do-it-yourself) sales for the past several quarters. Strong growth in Pro-heavy categories like fasteners, pneumatics, concrete and installation mainly aided Pro customer sales in the fiscal third quarter. The Pro segment is benefiting from efforts to enhance service capabilities for the Pros. The company is focused on simplifying the Pro shopping experience and expanding engagement through services like tool rental, delivery and the new B2B website. The B2B platform provides a more personalized experience to Pro customers based on customer feedback. The company expects to roll out the Pro online experience to more than a million Pros by the end of fiscal 2019.

3 Better-Ranked Stocks From the Same Industry

BMC Stock Holdings, Inc BMCH delivered a positive earnings surprise of 29.3%, on average, for the trailing four quarters. It presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Fastenal Company FAST has a long-term earnings growth rate of 14%. It currently carries a Zacks Rank #2 (Buy).

GMS Inc GMS has a long-term earnings growth rate of 7% and a Zacks Rank #2 at present.

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