The world’s largest home improvement retailer, The Home Depot Inc. (HD) continues to deliver better-than-expected results. The company’s earnings of 60 cents per share climbed 17.6% from the prior-period earnings of 51 cents, primarily driven by solid comparable sales growth, enhanced market share and strong operating performance. Quarterly earnings also beat the Zacks Consensus Estimate by a penny.
Moreover, the quarterly results were amplified by the increased number of centralized distribution centers and better merchandising tools. Further, the benefits coming from the improvement in the housing markets in certain regions where the company has a greater market share also boosted the quarterly result.
Following better-than-expected third-quarter results, management raised its earnings guidance for the remainder of fiscal 2011. Management now expects earnings to grow by 18.0% to $2.38 per share, up from $2.34 per share forecasted earlier on sales growth of 2.5%.
During the reported quarter, net sales moved up 4.4% to $17,326.0 million compared with $16,598.0 million in the prior-year quarter, ahead of the Zacks Consensus Estimate of $17,123.0 million. The increase in net sales resulted from a growth of 4.2% in comparable store sales driven by improved sales of core categories and storm related products. Comparable store sales in U.S. stores jumped 3.8% during the third quarter.
Operating margin expanded 60 basis points (bps) to 9.3% compared with 8.7% in the prior-year quarter. Improvement in operating margin was primarily driven by effective cost management.
Balance Sheet and Cash Flow
Home Depot ended its third-quarter 2011 with cash and cash equivalents of $2,234.0 million and long-term debt of $10,783.0 million. Year-to-date, the company generated $5,691.0 million of cash from operations and deployed $3,056.0 million toward share buyback, $1,021.0 million for debt repayment and $820.0 million as capital expenditures.
Dividend
Home Depot has always been committed to create value for its shareholders by returning capital in the form of dividends and share repurchase program. To improve shareholders’ wealth, the company has declared an increase of 16.0% in its quarterly dividend. The company will pay a dividend of 29 cents per share on December 15, 2011 to shareholders of record as of December 1, 2011, indicating the company’s 99th consecutive quarter of cash dividend payment.
Improvising Shareholders’ Return
Home Depot has revised its capital allocation principles following the strong third-quarter performance. The company has increased its dividend payout ratio to 50.0% from the previous target level of 40.0%. Moreover, Home Depot will utilize its excess cash for share buyback after meeting the business needs.
Apart from this, the company also intends to maintain a high return on invested capital with a target of achieving 15.0% by the end of fiscal 2013. These strategies will enhance shareholders’ return while boosting the market value of the stock.
Moreover, the company has set a target to achieve a total adjusted debt/EBITDAR ratio of 2.0x.
Zacks Rank
Home Depot, which competes with Lowe’s Companies Inc. (LOW) currently, has a Zacks #2 Rank, implying a short-term Buy rating. Besides, the company retains a long-term Neutral’ recommendation.
