Home Depot Inc Earnings Model (Antoon)
Author: Fady Antoon, Published: February 23, 2020 2:25pm, Category: Earnings Preview (Prior to Fiscal 4Q2019 earnings)
Summary of Model: Home Depot is on track to deliver $110 billion in revenue in 2019 as it continues to reap the benefit of a stable housing market driving by a combination of easy U.S monetary conditions and falling bond yields. In addition, Home Depot’s internal growth is driven by the company $11 billion, a multiyear investment plan to improve the digital experience as well as supply chain. Home Depot will continue to capture growth in 2020, bolstered by macro factors including unemployment rate as it fell to 3.5% in December 2019, lowest unemployment rate since 1969, U.S 10 note fell to 1.92 percent (as of December 2019 which is the main factor to drive home sales, and housing starts to increase by 3 percent in January of 2020. I am projecting 4.2 percent sales growth in 2020 based on the macro factors. I expect gross margin to be 34%, which is lower than 2019 by 16 basis points, while the selling, general, and administrative expenses to be 19.88 percent. However, the firm is expected to deleverage SG&A expenses as the firm continues to capitalize on its scale and supply chain improvement initiatives. Operating margins projected to be 14 percent, which aligns with management guidance. Model Summary The model projects a 4.8 percent comp growth in the 4th quarter based on a prediction model that used google trends as a variable. Moreover, google trends became a significant factor in projecting Home Depot’s revenue as the online sales increased by 22 percent in the 3rd quarter, and more than 50 percent of online orders picked in store. Home Depot’s google trends have increased in the 4th by 2 percent The gross margin is 34.29 percent in the 4th quarter based on a prediction model that used lumber price PPI and Truck Transportation of Freight PPI as variables. As the lumber price increases by a quarter over quarter, home depot’s Cost of Goods Sold decreases due to First-In, First-Out Inventory method was used to value inventory. Thus, Home Depot’s old prices will be reviewed on the income statement, while the first batch of raw materials will be recorded on the balance sheet.
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Disclosure of Potential Conflicts of Interest: 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.