We have maintained our long-term Neutral recommendation on The Home Depot Inc. (HD) with a target price of $35.00 per share. Moreover, the company has a Zacks #3 Rank, implying a short-term Hold rating on the stock.
Home Depot is the world’s largest home improvement specialty retailer with 2,248 retail stores across the globe, offering a diverse range of branded and proprietary home improvement items, building materials, lawn and garden products, and related services.
Moreover, Home Depot 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 driving more customer traffic.
Furthermore, Home Depot through its strategic alliances with selected suppliers across the globe offers 30,000 to 40,000 proprietary and exclusive brands annually. The company follows a global sourcing merchandise program that enables it to purchase the market’s leading innovative products directly from the manufacturers, providing Home Depot an edge over its competitors in terms of pricing of products.
Additionally,with the introduction of new warehousing and transportation system, the company has been able to improve its supply chain while minimizing cost. This has also helped Home Depot in improving its Central Automated Replenishment System and facilitate immediate refill of stock while reducing the investment in inventory.
Besides, Home Depot has surprised with its second-quarter 2011 adjusted earnings of 86 cents a share. The adjusted earnings not only surpassed the prior-year quarters’ earnings of 72 cents per share (an increment of 19.4%), but also outpacedthe Zacks Consensus Estimate of 82 cents.
Bolstered by better-than-expected quarterly result, the company has raised its earnings guidance for fiscal 2011 to $2.34 per share from $2.24 forecasted earlier, on the back of an increase of 2.5% in sales.
However, 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.
Above all, 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 such as Lowe’s Companies Inc. (LOW). To maintain its market share, the company is making selective acquisitions and strategic alliances with third parties, which may also increase its operational risks.
