Home Depot Inc Earnings Model (Nguyen)
Author: Jay Nguyen, Published: February 23, 2020 1:40pm, Category: Earnings Preview (Prior to Fiscal 4Q2019 earnings)
Summary of Model: In my opinion, the Home Depot’s key value drivers which are used to forecast its earnings model are how Home Depot and the whole retail sector has done in this holiday shopping season, how the prices of lumber and copper behave this 4th quarter, and how the intensity of the trade war between China and the U.S affects the tariffs. At the beginning of 2019, Home Depot strategically invested in improving the customer experience by unifying online and offline operations. In the earnings call in December, the company’s management stated that there are both long-term and short-term investments, so the results could be taking more time to be capitalized. Personally, I decreased the SG&A rate from 18.4% to 18.3% because I believe that management will be able to continue the expense control execution. As Us and China signed a deal to ease trade war in January, the effect of international tariffs will less adversely impact the result. Moreover, as lumber and copper deflation was cited by management as a key reason for falling comp store sales, their significant increase in prices from the last quarter would contribute positively to 4th quarter’s comp store sales and gross margin. Therefore, I increased the gross margin from 33.8% to 34.1%. Last but not least, I project comparable store sales increases in 4th quarter to 4.9%, which is a bit less than the increase in percentage of last year’s 4th quarter due to a shorten holiday shopping season. Overall, I have a bullish view on 2019’s 4th quarter and 2020 projection.
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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.