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Will Home Depot Beat Analysts And The Housing Market In The Second Quarter?

July 30, 2014 | About:

World’s biggest home-improvement company Home Depot (NYSE:HD) could not get past analysts’ expectations in the first quarter ended May 4, though earnings went up 20.5%. The company even raised its yearly diluted earnings per share guidance to $4.42 from $4.38 projected previously. Now, with the second quarter results due on August 19, let’s see how it is placed.

Revenue To Go Up

For the second quarter, analysts are looking at revenue of $23.61 billion and earnings of $1.45 per share. Comparable store sales in the first quarter had gone up by 2.6%, with U.S. comp sales up 3.3%. Home Depot CEO Frank Blake in the earnings call had said that revenue for the quarter was below their expectations. The first quarter had borne the brunt of the harsh winter conditions in the U.S. and Canada as people couldn’t visit stores even if they wanted to cater to a requirement. But the good part is that the company expects pent-up demand to drive sales in the subsequent quarter (second quarter).

The weather-effect was more than palpable as areas that experienced extreme winter, did badly, while areas where cold was normal, exceeded expectations. Consequently, in the U.S., Home Depot’s Northern division, which is its largest, comp sales went down. Whereas, the Southern and Western divisions registered positive comp sales that crossed the company’s estimates.

So, in the second quarter, we may see revenue increasing on the back of pent-up demand and favorable weather.

The Effect of the Slowing Housing Market

One concern is also the slowing housing market that is relenting to show any signs of recovery in 2014 in spite of the improving economy. Initially in the year, it was thought that the harsh weather was impinging upon the market’s performance, but even after the weather-effect fading, things are not quite looking up. In June, the index tracking the number of contracts signed by consumers unexpectedly fell, after rising in the previous three months. Home prices have been rising whereas wage growth has been listless.

However, in the company’s own words, first quarter revenue suffered because of the weather and not the slowing housing market. Blake said that the company’s core categories remain strong, which is the reason why it did not change its 2014 sales estimate of a 4.8% rise from 2013.

In fact the CEO’s words were substantiated by the sales growth by the end of May that grew more than 4% against the year-ago period. This rise is significant considering that in the same period last year, sales grew by a good 11%. Home Depot’s chief financial officer Carol Tom described the May sales as “robust”.

The company expects the housing market to grow in the year, though not at the same speed as last year. The main driving factors would be home price appreciation, affordability and aging houses in need of repair. Also, Home Depot’s survey shows that an increasing number of renters wish to own a home, which will work in the company’s favor.

Online Sales Growing

Home Depot’s online presence is adding to sales and is growing at a very healthy pace. CEO Blake said the dotcom platform helped transactions to grow. In the first quarter, online sales had increased 40%. The site is witnessing over three million visits every day, according to the company, with the conversion rate inching up. This would be a contributing factor to the revenue in the second quarter, too.

Wrapping Up

Home Depot is a strong company with 2,263 retail stores and more than 300,000 employees. Since 2008, it has either matched or outdone analysts’ expectations in every quarter. The first quarter of 2014 was an exception to this record, but signs are Home Depot will be back on track this time around.

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