Shares of The Home Depot (HD – Free The Home Depot Stock Report) moved slightly higher after the world's largest home-improvement retailer reported better-than-expected fiscal second-quarter (ended July 29th) results. The top line increased 8.4% from a year earlier, to $30.463 billion, a bit ahead of our $30.350 billion forecast. Comparable-store sales rose 8.0%, with the metric climbing 8.1% in the United States. Moreover, the number of customer transactions advanced 3.1% from a year earlier, while the average ticket was up 5.0%, and sales per square foot jumped 8.6%. After a cold, wet April weighed on demand for outdoor and seasonal items, more favorable weather conditions in the July term enabled sales of these goods to rebound nicely. In fact, it appeared that the majority of seasonal sales lost in the April term were recovered in the July period. The good news did not stop there, as strength was also broad based across geographies and product categories (lumber, garden, power tools, windows, and electrical were just some of the standouts). Growth in sales to professionals outpaced those to do-it-yourself (DIY) customers, while online sales surged 26%. Large-ticket sales (now defined as those over $1000, up from $900 previously) rose 20%, driven by appliances and vinyl plank flooring.
On the profitability front, the gross margin expanded 36 basis points from a year earlier, helped by a new accounting standard and partially offset by higher transportation and fuel costs. Depreciation and interest expenses also ticked lower as a percentage of the top line. A lower tax rate and stock repurchases were also boons to the per-share tally, which clocked in at $3.05. This was nicely ahead of our $2.85 forecast and up 36% from a year earlier.
Looking ahead, the good times seem apt to continue for The Home Depot. The macroeconomic environment ought to remain favorable, given stout GDP growth, low unemployment, and rising wages and home prices, all of which have contributed to high levels of consumer confidence. The company's investments in its digital capabilities and its efforts to court professional customers should continue to drive sales, as well. Additionally, $6 billion in expected stock repurchases this year, along with a roughly 10-percentage-point decline in the tax rate and modest gross-margin expansion, should give a nice lift to the bottom line, as will an extra week of sales versus last year (fiscal 2018 is a 53 week year). In sum, management raised its forecasts and now looks for sales growth of 7%, a comp increase of 5.3%, and earnings of $9.42 a share. We're tentatively adding a dime to our bottom-line call, to $9.45 a share, but even this estimate is likely to be on the conservative side.
All told, it was an excellent quarter for The Home Depot, and we continue to like this blue-chip stock for a variety of investors, especially those with a conservative bent that are looking for a decent level of current income.
About the Company: The Home Depot, Inc. operates a chain of 2,286 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.
- Matthew E. Spencer, CFA
