Home Depot Inc Earnings Model (Muratori)
Author: Jack Muratori, Published: February 17, 2020 9:57pm, Category: Earnings Preview (Prior to Fiscal 4Q2019 earnings)
Summary of Model: This model forecasts future revenue based on positive impacts of the implementation of strategic initiatives aimed at improving customer experience, macroeconomic trends, and a recovery in commodity prices in improving comparable store sales. Gross margin projections are based on recent de-escalation of the trade war in stabilizing tariffs, and mitigation of shrink and product mix in increasing expenses.
Model Forecast Description: I expect to see consistent growth in Home Depot Inc. during F4Q2019 and fiscal 2020 earnings seasons. In the F3Q2019 earnings call, Home Depot forecasted total sales growth of 1.8% YoY ($110.15B), comparable store sales growth of 3.5% YoY, and diluted EPS growth of 3.1% to $10.03 for FY2019. I expect to see comparable store sales growth on the upper range of management's guidance for FY2019, specifically due to several factors indicating strong fourth quarter sales that will carry into fiscal 2020. A combined influence of continued benefit from strategic initiatives, a recovery from third quarter commodity deflation, and an outlook for a strong housing market in the coming years all point towards an upward trend in comparable store sales.
Strategic initiatives aiming at improving customer experiences, such as the recent enhancements to Home Depot’s website, have positively affected sales growth. During F3Q2019 the company saw “double-digit online growth,” with more than half of these online orders being picked up in stores with BOPIS lockers. At the same time, comparable transactions increased by 1.8%, and with the implementation of this modified website we will see this growth continue.
Home Depot also stands to benefit from current macroeconomic trends. Reflected by historically low mortgage rates (down 1.2 pt YoY to 3.7% according to the National Census Bureau), in November the number of homes sold in the U.S. was up 0.5% to 245,223, the median sale price of homes was up 5% YoY, and the most recent data provided by the Federal Reserve showed delinquency rates down 0.33%, all of which indicating a strong housing market. Home builders across the country can expect to benefit from these trends, which I anticipate to result in continued growth of Home Depot’s comparable store sales in supplying these contractors.
The recent rise in commodity prices, primarily lumber and copper, also foreshadow growth in comparable store sales for Home Depots F4Q2019 and 2020 earnings. According to Trading Economics, lumber prices were down by 1.8% YoY in October, but since then there has been gradual inflation. The most recent data released by Trading Economics shows an increase of almost 26% from third quarter lumber prices, from $359.8 per 1000 board feet in October to $455.1 in the start of February.
Increased costs arising from tariffs, along with shrink and product mix negatively affected Q3 gross margin. Recent decreases in tariffs and continued mitigation of the impact of these tariffs by Home Depot, combined with strong expense control will limit this decline in gross margin in the upcoming months.
Overall, this model shows a bullish forecast, with sales growth, comparable store sales growth and diluted EPS growth above managements forecast for 2019 that will carry on into fiscal 2020.
Strategic initiatives aiming at improving customer experiences, such as the recent enhancements to Home Depot’s website, have positively affected sales growth. During F3Q2019 the company saw “double-digit online growth,” with more than half of these online orders being picked up in stores with BOPIS lockers. At the same time, comparable transactions increased by 1.8%, and with the implementation of this modified website we will see this growth continue.
Home Depot also stands to benefit from current macroeconomic trends. Reflected by historically low mortgage rates (down 1.2 pt YoY to 3.7% according to the National Census Bureau), in November the number of homes sold in the U.S. was up 0.5% to 245,223, the median sale price of homes was up 5% YoY, and the most recent data provided by the Federal Reserve showed delinquency rates down 0.33%, all of which indicating a strong housing market. Home builders across the country can expect to benefit from these trends, which I anticipate to result in continued growth of Home Depot’s comparable store sales in supplying these contractors.
The recent rise in commodity prices, primarily lumber and copper, also foreshadow growth in comparable store sales for Home Depots F4Q2019 and 2020 earnings. According to Trading Economics, lumber prices were down by 1.8% YoY in October, but since then there has been gradual inflation. The most recent data released by Trading Economics shows an increase of almost 26% from third quarter lumber prices, from $359.8 per 1000 board feet in October to $455.1 in the start of February.
Increased costs arising from tariffs, along with shrink and product mix negatively affected Q3 gross margin. Recent decreases in tariffs and continued mitigation of the impact of these tariffs by Home Depot, combined with strong expense control will limit this decline in gross margin in the upcoming months.
Overall, this model shows a bullish forecast, with sales growth, comparable store sales growth and diluted EPS growth above managements forecast for 2019 that will carry on into fiscal 2020.
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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.