The Covid-19 pandemic and the resulting lockdown has provided a significant boost for home improvement retailers, with consumers carrying out a significant amount of repair work.
The industry leader, Home Depot Inc. (HD, Financial), has performed exceptionally well with strong growth in comparable-store sales as well as a huge jump in revenues through the online channel to meet the high demand. However, as the market expects the company's product demand to normalize with time, it remains to be seen how the management will cope with the higher employee costs while trying to maintain its margins.
Company overview
Founded in 1978, Home Depot has its headquarters in Atlanta, Georgia. Home Depot operates more than 2,000 stores across the world and has a base of 415,700 employees. The company's core target group includes two types of customers: do-it-yourself (DIY) customers and professional customers. DIY Customers include homeowners who purchase products and complete their own projects and installations whereas professional customers are mainly professional renovators, handymen, building service contractors, property managers, etc.
Home Depot is one of the largest home improvement retailers in the world. It offers a wide assortment of building materials, home improvement products, lawn and garden products and decor products to customers across the U.S., Canada, Mexico and other countries. The company also provides a number of services, including home improvement installation services for flooring, cabinets, etc. It acts as a general contractor to provide installation services to its "do-it-for-me" customers through third-party installers and also provides tool and equipment rental.
Strong macro-economic tailwinds
Home Depot has a number of tailwinds benefitting its business as well as its stock price. Among the most recent ones is Hurricane Laura hitting Louisiana providing a significant impetus to stocks like Home Depot and Lowe's (LOW, Financial). It is worth highlighting that Home Depot's market is essentially duopolistic with it being the dominant player, followed by Lowe's, which has also managed to deliver a string of surprisingly good results in 2020 highlighting that strength of the macroeconomic environment for home improvement retailers.
Home improvement tasks which could have been procrastinated for long have been taken up in the past six months amidst the lockdown. Also, the trend of people moving into rural areas and suburbs away from larger cities to avoid the coronavirus has benefited the company. New data about U.S. home sales from Trading Economics shows a 24.7% rise in new homes which could also benefit the company in the long term.
Recent results
Home Depot's second quarter was a huge winner for the company, where it continued with the momentum from the first qaurter and beat the analyst estimates in terms of both revenue as well as profitability.
The company reported revenue of $38.05 billion, about $3.5 billion above the analyst consensus estimate of $34.53 billion and a 23.4% increase compared to the corresponding quarter of 2019. The top-line was largely driven by a huge jump in comparable-store sales, which were up by 23%, with the U.S. market alone witnessing a 25% jump in this regard. Over and above this, the average ticket sales were up 10.1% to $74.12 whereas the average sales per square foot were up 23.5%.
Source: Company Infographic – Q2 2020
As we can see in the above snapshot, the company's online sales doubled with 60% of the online orders picked up at the store implying no delivery cost. This is again a big tailwind from the pandemic.
In terms of profitability, the company had delivered an earnings miss in the first quarter, but this wasn't the case in the second quarter. Home Depot delivered earnings per share (EPS) of $4.02, which was significantly above the analyst consensus estimate of $3.68.
Final thoughts
Home Depot has had a dream run over the past six months as the stock has gone up by as much as 24%.
The company generated excellent cash flows in the past quarter which was driven by a huge jump in cash from operations from $8.5 billion to $14.8 billion and free cash flow worth $13.8 billion.
Home Depot's management had made a conservative move by issuing close to $5 billion in debt in the first quarter and temporarily halting share buybacks after completing $790 million of share repurchases, significantly lower than the previous years. However, the situation has changed now as the company is flush with cash. With close to $14.1 billion of cash on the balance sheet and continuing growth in the home improvement retail space, I expect Home Depot to continue its run as a provider of excellent returns to both yield investors as well as large-cap value investors, though the management of the company itself has issued more conservative guidance as they expect this growth will slow down.
Disclosure: No positions.
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