Home Depot Inc Earnings Model (Frayne)
Author: Hunter Frayne, Published: February 23, 2020 2:14pm, Category: Earnings Preview (Prior to Fiscal 4Q2019 earnings)
Summary of Model: The main reasons behind my assumptions of the home depot model are comp-store sales, operating expenses and cost of goods sold. Comp-store sales plays a more pertinent factor in my model, as estimates of operating expenses and cost of goods sold are not expected to change drastically. In the 3Q earnings call Home Depot appealed to its strong expense control and continued productivity in their business model as reasons for a strong operating expense performance. I believe that any benefit accrued from those factors will likely be eroded by the costs of changing their legacy IT system, as it is very expensive as workflow, dependency and ROI issues present themselves during this change. I take a similar view when examining cost of goods sold, which had previously been an issue for home depot as the trade war levied by Trump has increased the costs of inputs and shrink issues which put increased pressure on margins. Again, these issues will once again still be present but I don’t expect any changes in the magnitude in which they affect the business. With the 2020 presidential election on the horizon, Trump would be wise not to accelerate the trade war. Home Depot has already found ways to minimize tariff costs by requiring suppliers to absorb increased input costs. As for the shrink issue, even though theft tends to increase during the holiday season Home Depot has put initiatives in place at high risk stores to minimize the short term impact. Comp-store sales is where my more bullish projections lie. I believe that the increase in lumber and copper over the 3rd quarter, will reverse the downward trend in comp-store sales caused in part by the depreciation of those inputs. I also think that increasing sales in the area of big ticket transactions will continue therefore increasing comp-store sales. The strong economy and housing market will ensure that there is incentive to continue to build and purchase big ticket items. This is also evident by record low interest rates enabling entrepreneurs to borrow more money to fund real estate projects and the friendly mortgage terms that we continue to see. Black Friday sales is another factor that influences my bullish projection on comp-store sales. Home Depot has historically been successful in their Black Friday offerings and I see no reason why that would change. The offerings combined with a booming economy that has created more disposable income, which is evident when looking at the holiday shopping season numbers, offer reason to believe home depot had a favorable outcome in terms of Black Friday sales. The result of this model is 3.8% comp-store sales growth which is in line with management's prediction of between 3.5% and 4%, a 14.8% operating margin, and 114.7 billion in gross sales.
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.