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Home Depot Defies Industry Trend To Report A Mind-blowing Q2

August 22, 2014 | About:

Home improvement retailing giant Home Depot’s (NYSE:HD) second-quarter results were better than expected. Growing preference for online sales and improved spending for high-end items in the U.S. were the main drivers. The company also revised its fiscal year earnings per share outlook upward. Let’s have a low-down on the quarter’s results.

Revenue improved on higher ticket sales

Before the earnings bell, analysts had expected a notable rise in the second-quarter revenue on the back of pent-up demand and favorable weather. And Home Depot didn’t let them down, posting a 5.7% year over year increase. The revenue of $23.8 billion was above the Street’s estimate of $23.6 billion.

Footfalls in the company’s stores increased, which according to data analysis firm ShopperTrak is a reverse trend from the industry. The firm’s stats show that footfalls across the retail industry have gone down by roughly 5% year over year in the past consecutive 24 months.

Such out-of-the-box improvement was mainly on account of seasonal demand that was held-back during the winter months. Last winter was harsh enough to cut back consumer spending, which hurt the company’s first-quarter revenue. Favorable weather helped consumer spending bounce back.

Home Depot noticed an uptick in the orders for expensive items such as counter-top installations, appliances, windows, water heaters, wood and laminate flooring. Though professional demand was high, the company also observed substantial demand from consumers renovating their houses to avoid new purchases at a higher rate.

The company also benefited from its growing focus on the e-commerce platform. Its "buy online, ship to store" program helped generate additional revenue of $144 million, aiding e-commerce sales to increase 38% from the year-ago quarter.

Cost control efforts paid off well

During the quarter, total operating expenses as a percentage of revenue fell 109 basis points compared to the same quarter last year. Though transportation costs continued to soar, the company managed to keep expenses under control by cutting down on workers’ compensation as well as bonus. Also, favorable product mix and same-store sales growth helped to keep a lid on expenses.

Moreover, the company continued to benefit from lower spending on print advertisement. It has reduced print ad cost by roughly 60% since the 2010 level while spending higher on digital ads.

Double-digit earnings growth was impressive

The quarter’s net income grew 14.2% year over year to $2.05 billion. Earnings per share (EPS) of $1.52 increased 21.6% from $1.25 in the year-ago quarter and was $0.08 per share above the Street’s expectation. The improvement was on account of higher revenue, strict expense control and continuous share buybacks, slightly offset by a tax rate increase.

The company expects to continue its share repurchase program throughout the year, which would support earnings growth in the coming quarters.

Going forward

Home Depot expects the sales momentum to continue throughout the year following the solid second-quarter performance.

During the quarter, the company opened a store in Mexico taking the total store count to 2,264. Mexico has been a very strong contributor toward total revenue and the quarter’s revenue growth marked 43 straight quarters of positive comps. With the growing store counts, this region is expected to boost revenues further.

But it finds recent stats from the housing industry to be little mixed and hence kept the full-year revenue growth projection intact at 4.8%. However, it raised its full-year EPS guidance to $4.52 from previously guided $4.38. Though tax rate is expected to remain at an average of 37%, most of the earnings improvement could come from cost-cutting measures and solid buyback programs.

Summing up

The largest home improvement retailer has not only showed its operating strength, but also outperformed the overall industry. The U.S. housing industry is turning on slowly giving Home Depot enough room to grow. Home Depot also looks well positioned to capitalize the opportunity and make investors happy.

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