Home Depot Poised for Strong 2020 Comp Sales Growth Amid Encouraging Consumer Spending, Housing Data
Author: Matthew Rossi, Published: January 26, 2020 2:50pm, Category: Earnings Preview (Prior to the Fiscal 4Q2019 earnings release)
Following a beat on Q3 consensus EPS by $0.01 alongside Q3 ticket and transaction growth and strong online sales growth (22% growth YoY), Home Depot (NYSE:HD) is well-positioned for continued strong same-store sales growth through Q4 2019 and fiscal 2020.
In the most recent Investor and Analyst Conference, management reaffirmed its guidance for fiscal 2019, with total sales growth projected at 1.8%, comparable store sales growth at 3.5%, and diluted earnings-per-share growth of approximately 3.1% to $10.03.
In addition, management provided an initial fiscal 2020 forecast as follows:
(DPI) increased by $87.7 billion (0.5%) and Personal Consumption Expenditures (PCE) increased by $64.9 billion (0.4%) from the previous month. Other data from the University of Michigan shows the Index of Consumer Sentiment (ICS) at 99.3 in December, up from 96.8 in
November and the highest level since May.
Recent housing and homebuilding data also suggest a positive macroeconomic climate for comp sales growth through 2020. The Census Bureau’s most recent residential construction report found privately-owned housing units started in the US (an indicator of homebuilding) up
13.6% YoY in November, and the National Association of Home Builders (NAHB) December Housing Market Index (HMI) reported builder confidence at a 20-year high. Alongside historically low mortgage rates (the latest data on the 30-year fixed rate average is 3.72% with an average 0.7 point), the expectation of an unmoving federal funds rate following the December FOMC meeting, a strong labor market (steady job growth and unemployment at 3.5%) and an already tight housing market, builders are well-positioned to serve a greater number of homebuyers despite rising prices.
Home Depot serves to benefit from both of these positive trends, which may drive comparable store sales in fiscal 2020 to the top of management’s forecast range. I am now projecting 4.0% comp sales growth for fiscal 2020, up from my previous estimate of 3.7%.
In the most recent Investor and Analyst Conference, management reaffirmed its guidance for fiscal 2019, with total sales growth projected at 1.8%, comparable store sales growth at 3.5%, and diluted earnings-per-share growth of approximately 3.1% to $10.03.
In addition, management provided an initial fiscal 2020 forecast as follows:
- Total sales growth of approximately 3.5 percent to 4.0 percent.
- Comparable sales growth of approximately 3.5 percent to 4.0 percent.
- Operating margin of approximately 14.0 percent.
- Return on invested capital of approximately 45 percent.
(DPI) increased by $87.7 billion (0.5%) and Personal Consumption Expenditures (PCE) increased by $64.9 billion (0.4%) from the previous month. Other data from the University of Michigan shows the Index of Consumer Sentiment (ICS) at 99.3 in December, up from 96.8 in
November and the highest level since May.
Recent housing and homebuilding data also suggest a positive macroeconomic climate for comp sales growth through 2020. The Census Bureau’s most recent residential construction report found privately-owned housing units started in the US (an indicator of homebuilding) up
13.6% YoY in November, and the National Association of Home Builders (NAHB) December Housing Market Index (HMI) reported builder confidence at a 20-year high. Alongside historically low mortgage rates (the latest data on the 30-year fixed rate average is 3.72% with an average 0.7 point), the expectation of an unmoving federal funds rate following the December FOMC meeting, a strong labor market (steady job growth and unemployment at 3.5%) and an already tight housing market, builders are well-positioned to serve a greater number of homebuyers despite rising prices.
Home Depot serves to benefit from both of these positive trends, which may drive comparable store sales in fiscal 2020 to the top of management’s forecast range. I am now projecting 4.0% comp sales growth for fiscal 2020, up from my previous estimate of 3.7%.
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Summary of Model: This model projects future earnings based on comp sales growth, driven by recent data on consumer spending, retail sales and key commodity prices, gross margin assumptions relating to tariff impacts, product mix, and shrink improvements, and operating expenses, driven by the timing of strategic initiatives and their associated costs.
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Disclosure: The author of this article/model has no financial investment or other conflict of interest related to the subject company or other companies discussed. Any views made or implied in the content represent the author’s opinions.