Shares of The Home Depot (HD- Free Home Depot Stock Report) were little changed after the world's largest home-improvement retailer announced fiscal fourth-quarter (ended January 29th) results, updated its outlook, and increased its shareholder return initiatives.
In the January period, the top line came in at $22.207 billion, up nearly 6% from a year earlier and above our $21.712 forecast. Comparable-store sales rose 5.8%, with stores in the United States posting a 6.3% comp gain. Sales growth was strong across categories and geographies, as all merchandise departments saw positive comps, with particular strength in flooring and tools. Big ticket sales (over $900) were also strong, rising 11.6% thanks to flooring, appliances, and several pro categories. On point, sales to professionals grew faster than those to DIY customers, as efforts to court this group have been bearing fruit. Finally, the number of customer transactions, the average ticket, and sales per square foot all increased from a year earlier (up 2.9%, 2.9%, and 5.7%, respectively).
In terms of profitability, the gross margin was down slightly (10 basis points) from a year ago in the January term, but total operating expenses as a percentage of sales were down 113 basis points. Interest costs also moved marginally lower as a percentage of sales, and the tax rate came down 118 basis points. Finally, a lower share count helped the bottom line on a per-share basis, which came to $1.44, 23% higher than the prior-year tally and $0.12 above our estimate. For the whole of fiscal 2016, The Home Depot earned $6.45 a share on sales of $94.595 billion.
Looking to fiscal 2017, we think that more of the same will be on tap. Namely, GDP growth and ongoing strength in the U.S. housing market (favorable trends in home price appreciation, housing turnover, and household formation) should keep things humming along. Aforementioned efforts to drive sales to professionals, as well as initiatives to improve interconnected retail, online sales, and customer service, should push sales and earnings higher this year. Specifically, management is calling for both sales and comps to increase 4.6% in fiscal 2017. The gross margin is apt to narrow some 15 basis points due to faster growth in lower-margined categories (appliances, certain building materials, etc.), but the operating margin ought to expand about 30 basis points. Assuming a 36.3% tax rate, $5 billion in share repurchases, and six new stores, earnings ought to climb 11%, to $7.13 a share. We are maintaining our slightly more bullish call of $7.15.
In other news, the retailer raised its targeted dividend payout ratio to 55% from 50%. In that vein, the quarterly cash payout was increased 29%, to $0.89 a share. The first distribution in this new amount will be paid on March 23rd. Moreover, the board authorized a $15 billion share-repurchase authorization, replacing its previous one.
As for HD stock, it appears fairly valued at the recent quotation, though very conservative investors looking for exposure to the housing market and some income might want to take a closer look.
About the Company: The Home Depot, Inc. operates a chain of 2,275 retail building supply/home improvement “warehouse” stores across the United States, Canada, and Mexico. The company's average store size is around 104,000 square feet indoor, plus 24,000 additional square feet in its garden centers. The Home Depot's product lines include building materials, lumber, floor/wall coverings, plumbing, heating, electrical, paint and furniture, seasonal and specialty items, and hardware and tools.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
