Home Depot Glued to Neutral - Analyst Blog

By Zacks | June 14, 2012 AAA

We reiterated our long-term 'Neutral' recommendation on the leading home improvement retailer Home Depot Inc. (HD). We remain encouraged by the company's consistently good quarterly performance, raised management guidance, impressive strategic and long-term goals as well as a strong financial side. Besides, we believe Home Depot's strategy of focusing on developing merchandising tools along with increasing investment in its dot-com platform will boost its top line while gaining market share. However, a sluggish recovery in the economy impacting discretionary spending, and intense competition from specialty stores and mass merchandisers remain causes of concern.

Home Depot posted adjusted earnings of 65 cents per share for first-quarter 2012, in line with the Zacks Consensus Estimate. However, the quarter's result climbed 30% from 50 cents posted in the prior-year quarter, primarily driven by solid comparable sales growth and strong operating performance. Net sales moved up 5.9% year over year to $17,808 million while comparable store sales registered a growth of 5.8%.

Following solid quarterly results, management raised its fiscal 2012 earnings guidance to $2.90 per share, an increase of 17% from the previous fiscal earnings of $2.47 and up from $2.79 forecasted earlier. The company anticipates net sales to increase by 4.6%, up from 4% projected earlier.

Moreover, in its recent 2012 analyst day, Home Depot revealed its plan to accomplish its previously established long-term goal of 10% increase in operating profit and a 15% return on invested capital through the end of this fiscal year. Additionally, the company formulated a new long-term target for fiscal 2015, which expects operating margin of about 12% and return on invested capital of 24%.

We believe Home Depot's new long-term goal for fiscal 2015 and beyond is achievable given the company's robust quarterly performance, strong financial position as well as the company's efficiency in executing its growth plans.

Over the years, 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. We believe these initiatives have induced more customer traffic to its stores while boosting its top line.

However, Home Depot operates in a highly competitive market, facing stiff competition from local, regional and international players. To retain its leading market position and share, the company constantly looks for selective acquisitions and strategic alliances with third parties, which raises its operational risks.

Moreover, Home Depot remains prone to currency fluctuation due to its exposure to international market. The weakening of foreign currencies against the U.S. dollar may require the company to either raise price or contract profit margins in locations outside the U.S. An increase in product price may have a direct impact on consumer demand.

Home Depot, which competes with Lowe's Companies Inc. (LOW), currently has a Zacks #3 Rank, implying a short-term 'Hold' rating. Besides, the company retains a long-term 'Neutral' recommendation.

 
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