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Why Home Depot Looks Promising After Its Second Quarter Earnings

August 20, 2014 | About:

The world’s largest home improvement chain, Home Depot (NYSE:HD), released its second-quarter earnings on August 19 beating analysts’ estimates and showing improvement in both top and bottom line. Let’s dive into the numbers to gain a better insight on the promising aspects.

A quick number recap

Revenue saw an increase of 5.7% to $23.81 billion from $22.52 billion a year ago. Also net income moved forward to $2.1 billion in the second quarter, which was comparable with $1.8 billion reported last year similar quarter. Earnings per share shot up to $1.52 a share from $1.24 per share a year back, exceeding Thomson Reuters’ analysts’ estimate of $1.45 per share for the quarter.

It is interesting to note that, while the comparable same-store sales in the U.S. increased 6.4% for the quarter, Home Depot’s same-store sales improved almost 5.8% this quarter.

CEO, Frank Blake stated during the earnings call, “The second quarter, our spring seasonal business rebounded, and we saw strong performance in the core of the store and across all of our geographies.”

With rival Lowe’s (NYSE:LOW) scheduled to report earnings today, Home Depot’s earnings have set the bar high for the home improvement industry. The stellar performance of Home Depot surely came as an assurance for its investors who were worried about its performance after the first-quarter earnings which were bleak and hit by the severe winter in the U.S.

Management outlook remains firm

The company has confirmed that the overall sales would be approximately up by 4.8% for the fiscal year. Based on the better performance in the second quarter, the management has raised its earnings per share outlook by 20.2% to $4.52 per share.

This revised guidance also includes the effect of year-to-date share repurchase of $3.5 billion, and the intent to repurchase an additional $3.5 billion of outstanding shares in the remaining part of the year. The share repurchase program does serve as a cherry to the worried investors.

Success in “buy online, pick up in store”

Home Depot’s e-commerce and Internet sales saw a turnaround, though it mainly operates through the conventional brick and mortar route. Online sales rose by more than 38% this quarter and accounted for almost 4.2% of the total sales. A third of all items ordered online were picked up by customers themselves.

The company is aware that to pull up sales online it has to invest in technology. This year, Home Depot plans $1.5 billion in capital expenditure for interconnecting retail and technology for meeting the changing customer demands.

To capture online sales, the company has shifted its advertising dollars to digital channels. Since 2010, Home Depot has cut its print ad spending by 60%. Currently digital ads account for nearly 36% of the company’s total ads outlay for the year and are trending higher.

Solid strategies for advocating online sales

The company is reallocating space in its conventional stores depending on the products bought from store and those which are usually sold online. For example, patio furniture has more sells online than in the store; thus, Home Depot is reducing the space allocated to this product within the store and allowing selective customization when booked online.

Meanwhile, Home Depot has expanded its assortment of appliances in 800 stores and has plans of rolling out a widened assortment at 183 more outlets. Appliance sales have contributed to half a percentage point of comparable sales growth in the quarter.

Thus, Home Depot is all set to keep a watch on the mixed buying signals and will adjust its inventory in the stores according to the customer’s buying behavior.

Final word

In the age of e-commerce and online marketing, Home Depot has been proactive enough to take adequate steps to keep its numbers intact. The top and bottom line of the company have seen a clear boost in the second quarter. Surely there is more to watch for in the upcoming quarters, so let’s stay tuned!

About the author:

We are a group of analysts exploring and analyzing different domains of business and writing reviews based on information available in public domain web portals. We do not hold any stock or investment position in any of the companies that we write for.

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