The world’s largest home improvement retailer, The Home Depot Inc. (HD), recently posted its first-quarter 2011 results. The street analysts had nearly a week to ponder on the news. In the subsequent paragraphs that follow, we will cover the recent earnings announcement, analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.
Quarterly Review
On May 17, 2011, Home Depot posted its first-quarter 2011 adjusted earnings of 50 cents a share. The adjusted earnings not only surpassed the prior-year quarters’ earnings of 45 cents (an increment of 11.1%), but also outpaced the Zacks Consensus Estimate by a penny.
During the reported quarter, net sales inched down 0.2% to $16,823.0 million compared with $16,863.0 million in the prior-year quarter, missing the Zacks Consensus Estimate of $16,998.0 million. The reduction in net sales resulted from a decline of 0.6% in comparable store sales. Comparable store sales for the U.S. stores slipped marginally 0.7% during the reported quarter.
However, operating margin for the reported quarter has witnessed an improvement of 80 basis points (bps) to 8.5% compared with 7.7% in the prior-year quarter. Improvement in operating margin was primarily driven by effective cost management.
Management’s Guidance for 2011
Home Depot raised its fiscal 2011 adjusted earnings guidance to $2.24 per share from $2.20, forecasted earlier on the back of a 2.5% increase in sales.
(Read our full coverage on this earnings report:Home Depot Profits Up, Revs Down)
Agreement of Analysts
Estimate revision trends for the upcoming second-quarter 2011 portrayed a negative sentiment among most of the analysts covering the stock. However, for the third quarter of fiscal 2011, analysts have mixed outlook on the stock. Over the last 7 days, 12 out of 25 analysts following the stock revisited their estimates, of which 7 downgraded and 5 have upgraded their estimates for the second quarter of 2011. Moreover, for third-quarter 2011, 3 analysts have downgraded and 3 have upgraded their estimates in the last 7 days.
For fiscals 2011 and 2012, estimate revision trends portrayed a positive sentiment among most of the analysts covering the stock. Over the last 7 days, 13 out of 25 analysts following the stock revisited their estimates, of which 10 upgraded and 3 downgraded their estimates for fiscal 2011. Besides, 9 out of 13 analysts have upgraded and 4 have downgraded their estimates for fiscal 2012.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for Home Depot remains unchanged for second and third quarter of fiscal 2011 and full fiscal 2011. However, magnitude of estimate revisions for fiscals 2011 and 2012 depicts an optimistic outlook. Over the last 7 days, estimated earnings for fiscal 2011 and 2012 have been increased by 1 cent and 2 cents, respectively to $2.30 and $2.67 per share.
Our Recommendation
Home Depot is the leading player in the highly fragmented home improvement industry. The company has reinvigorated itself with a shift in focus from new square footage growth to maximization of productivity through its existing store base. In addition, the company has implemented significant changes to its store operations to make them simpler and more customer-friendly, thereby inducing more customer traffic.Moreover, with the introduction of new warehousing and transportation system, the company has been able to improve its supply chain while minimizing the cost. This has also helped Home Depot to improve its Central Automated Replenishment System to facilitate immediate refill of stock while reducing the investment in inventory.
However, the company’s business is highly competitive, primarily based on customer services, price, store location and assortment of merchandise. The company faces stiff competition from local, regional and international players. To maintain its market share, the company is making selective acquisitions and strategic alliances with third parties, which are increasing its operational risks.Furthermore, heavy job losses and reduced access to credit have led to a sharp fall in consumer discretionary spending on big-ticket items. Although the economy is showing signs of revival, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes and consumer-spending rebounds.
Home Depot, which competes with Lowe’s Companies Inc. (LOW) and Target Corporation (TGT), currently, has a Zacks #3 Rank, implying a short-term ‘Hold’ rating on the stock. Besides, the company retains a long-term ‘Neutral’ recommendation.
HOME DEPOT (HD): Free Stock Analysis Report
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