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Why Is Home Depot (HD) Down 1.3% Since Last Earnings Report?

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A month has gone by since the last earnings report for Home Depot (HD - Free Report) . Shares have lost about 1.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Home Depot due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Home Depot Q3 Earnings Beat, Sales Miss

Home Depot posted better-than-expected earnings results for third-quarter fiscal 2019, retaining its positive earnings trend. However, the company’s top line lagged the Zacks Consensus Estimate but improved year over year. The top line lagged primarily due to timing issues related to the receipt of certain benefits from the One Home Depot investments. Based on the delays, the company slashed its sales and comparable sales (comps) view for fiscal 2019.

Q3 Highlights

Adjusted earnings of $3.53 per share grew 0.8% from $2.51 registered in the year-ago quarter. The bottom line also surpassed the Zacks Consensus Estimate of $2.52.

Net sales rose 3.5% to $27,223 million from $26,302 million in the year-ago quarter but missed the Zacks Consensus Estimate of $27,472.2 million. Lower-than-expected sales resulted from timing issues related to 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 planned to be realized. The company's overall comps grew 3.6%, with a 3.8% improvement in the United States.

In the reported quarter, comps were aided by 1.9% rise in average ticket and a 1.5% increase in customer transactions. Moreover, sales per square foot rose 3.5%.

In dollar terms, gross profit improved 2.6% to $9,387 million from $9,151 million in the year-ago quarter, primarily driven by higher sales. However, gross profit margin contracted 30 basis points (bps) to 34.5%.

Operating income rose 2% to $3,947 million, while operating margin contracted 20 bps to 14.5%.

Balance Sheet and Cash Flow

Home Depot ended the quarter with cash and cash equivalents of $2,193 million, long-term debt (excluding current maturities) of $26,597 million, and shareholders' deficit of $1,082 million. In the first nine months of fiscal 2019, it generated $10,664 million of net cash from operations.

Further, the company paid out cash dividends of $4,477 million and repurchased shares worth $3,909 million in the first nine months of fiscal 2019.

Outlook

Driven by the aforementioned delay in realizing benefits from the One Home Depot investments, the company lowered sales and comps guidance for fiscal 2019. It now expects sales growth of 1.8% for fiscal 2019 compared with 2.3% rise stated earlier. It now anticipates comps (for the comparable 52-week period) growth of 3.5% compared with 4% improvement mentioned previously.

However, the company reiterated earnings view for fiscal 2019. It continues to project earnings per share of $10.03 for fiscal 2019, suggesting 3.1% growth from the year-ago reported figure.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

Currently, Home Depot has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Home Depot has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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