Shares of Home Depot (HD, Financial) have gained more than 21% since I last looked at the company back in March. At that time, I was looking for shares to fall before adding the stock to my portfolio.
While the stock did break below my target price, I was not in a position to be able to buy Home Depot as I was focused on adding to what I already owned. In hindsight, I wish I had bought, as the share price has increased more than $130 since the mid-March lows.
Home Depot just reported an excellent quarter and the stock barely moved, but this may have been due more to comments/guidance from management then anything that was seen in the results.
Quarterly highlights
Home Depot reported earnings results for its second quarter of fiscal 2021 on Tuesday. Revenue was higher by 23.4% year over year to $38.1 billion, which was $3.4 billion ahead of what the analyst community had expected. Currency headwinds reduced results by $200 million. Earnings per share increased 85 cents, or 27%, to $4.02. This was 30 cents above estimates. The share count was slightly lower compared to the previous year. Net earnings increased nearly 23% to $4.3 billion.
Comparable same store sales were off the charts at 23.4%. The expectation for comparable sales was high at 10.9%, but Home Depot easily surpassed consensus estimates. U.S. sales grew 25%, with all of the company's 19 regions recording positive same-store sales. Canada reported record sales results and Mexico turned positive by the end of the quarter.
Customer transactions grew more than 12% to 511.5 million and the average ticket increased 10.1% to $74.12. This was attributed to larger basket size, but also to customer trade ups to more expensive products. Sales per retail square foot climbed 23.5% to $629.38. Sales of items costing at least $1.000 improved 16%, with appliances, riding lawn mowers and patio furniture being singled out as areas of strength on the conference call. Digital sales were up year over year, with 60% of customers ordering online and picking up products at the store.
Growth was broad based across the company as 13 out of 14 merchandising departments had double-digit comparables. The kitchen and bath department was the lone department not to achieve this growth, but it still had a high-single-digit increase.
Achieving gains like this requires strong engagement from customers, and Home Depot managed this quite successfully in several ways. Professional and do-it-yourself customers both had excellent growth. Pro customer spending was up double-digits and DIY was even better, with strength in both exterior projects and indoor projects.
Home Depot's mobile app had a record number of downloads, which led to a very high conversion rate. Existing customer engagement rate more than doubled and a third of new customers made an additional purchase. This ability to turn new customers into repeat customers will go a long way in in future quarters as well.
Gross margins improved 20 basis points to 34%, while expenses increased 10 basis points to 18.1%.
The company's response to the pandemic required $480 million in additional costs in the quarter. Despite this increase in costs, operating margins managed to improve 10 basis points to 15.9%.
Home Depot's balance sheet appears to be in good shape half way through the fiscal year. As of Aug. 2, Home Depot had $31.4 billion in total current assets. Included in this figure is $13.5 billion of inventory, but this was down by 8.4% from the prior year. The company also had $14.1 billion of cash and cash equivalents. Home Depot ended the quarter with $24.2 billion of current liabilities. Debt due over the next year is $2.5 billion, with total debt of $32.4 billion.
Home Depot had free cash flow of $8.6 billion in the quarter. The company distributed $1.6 billion of dividends, but did not buy back any stock during the quarter.
Valuation
Shareholders might have expected a much better stock performance with a quarter that simply blew away the numbers. Some of this lackluster response is likely because shares had a run more than 87% off of the March 20 price of $152.12.
Also contributing to a tepid response from investors was comments and guidance from leadership. CEO Craig Menear on how the rest of the year might look:
"That being said, as we discussed in the first quarter, we are cautious to extrapolate trends from the first half of the year into a forecast for the remaining of the year, particularly given the tremendous amount of uncertainty we face with regards to the duration and continued impacts of the virus."
While management doesn't expect to produce same-store sales on the level of the most recent quarter, they did say that sales for the first two weeks of the third quarter were comparable to the second quarter. I'll be looking to see what comparable sales looks like next quarter.
Shares of Home Depot closed Tuesday's session at $285, down 1.1% for the day. Consensus estimates for earnings per share have increased to $11.28 from $10.62 after the earnings release, producing a forward price-earnings ratio of 25.3. This compares unfavorably to the five-year average price-earnings ratio of 20.7.
Final thoughts
Home Depot produced an incredible quarter. Growth was abundant on nearly every metric as the company has adapted well to an unusual business environment. Results show that home improvement projects are in high demand from customers, with customer engagement remaining a strong point.
Shares of Home Depot has become expensive following an incredible gain in share price since March. I definitely missed my opportunity on the stock. The current valuation is higher than I would like, so I will continue to monitor Home Depot for a more attractive entry point.
Author disclosure: the author is not long any stock mentioned in this article.
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