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Home Depot (HD) Stock Takes a Hit on Soft Fiscal 2020 View

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Shares of The Home Depot Inc. (HD - Free Report) declined nearly 2% on Dec 11, after the company outlined its preliminary guidance for fiscal 2020 in an analyst meet held to provide updates on its “One Home Depot” plan. The issuance of a softer-than-expected sales forecast for the company’s fiscal 2020 performance has spooked analysts. Home Depot expects its investments for the One Home Depot strategy to weigh on margins in fiscal 2020.

During the meet, the company outlined that it expects investments under the $11 billion-One Home Depot program to be the highest in fiscal 2020. It envisions to have invested $5 billion in its stores, $2.5 billion in technology and remain on track to invest $1.2 billion in its supply chain network by the end of fiscal 2020. Beyond 2020, Home Depot expects the level of investments to decline, while it will start realizing benefits from the investments made under the plan.

The company's total investment in the plan is estimated to be $3.9 billion in 2020 versus $3.6 billion in 2019 and $3.3 billion last year. Home Depot stated that its guidance for margin reflects the increased investments planned for 2020. Additionally, the company expects margins in fiscal 2020 to be hurt by product mix due to outsized growth in categories like appliances, power tools and outdoor power equipment. Further, it expects margins to be hurt by increased shrink due to product theft.

For fiscal 2020, Home Depot expects sales and comparable sales (comps) growth of 3.5-4% each.  The Zacks Consensus Estimate for sales for fiscal 2020 is pegged at $114.7 billion, suggesting a growth of 4.1% year over year. Operating margin is expected to be 14%. Further, the company expects to continue returning value to its shareholders through dividends and share repurchases.

Notably, the company expects to return more than $35 billion, in the form of dividends and share repurchases, over the three years ending in 2020. Further, it expects return on invested capital to be nearly 45%.

Moreover, the company reaffirmed its guidance for fiscal 2019. It expects sales growth of 1.8% for fiscal 2019, with comps (for the comparable 52-week period) growth of 3.5%. Home Depot continues to project earnings of $10.03 per share for fiscal 2019, suggesting 3.1% growth from the year-ago reported figure.

One Home Depot Plan

Home Depot’s “One Home Depot” investment plan, which was announced in 2017, focuses on delivering an interconnected shopping experience for customers. Investments under the plan include leveraging the convenience of stores, enhancing digital experience, expanding product offerings into new categories, extending its leadership position with the Pro and allowing customers to receive their goods in the way they choose.

Price Performance

Shares of this Zacks Rank #3 (Hold) company have rallied 22% in the past year compared with the industry’s 22.4% growth.

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