Home Depot: Riding the wave

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FAT PROPHETS: Home Depot (NYSE: HD, initial buy $61.38) shares got a boost from yet another strong set of quarterly results this week, with the shares up 4% in trading on Tuesday following the announcement and hitting an all-time high. While a number of other retailers have been downbeat and facing relatively soft demand, the world’s largest home improvement retailer is benefiting from homeowners willingness to keep spending on fixing up a few things around the house or the garden.

Of the quarter, CEO Craig Menear said, “We saw broad-based growth across our geographies and product categories, led by growth in transactions from both our DIY and Pro customers.”

Home Depot posted sales of $21.8 billion for the quarter, representing a 6.4 percent increase over the prior year quarter. Comparable store sales also impressed, exhibiting 5.1 percent growth at the group level, with US stores posting an even stronger positive comparison of 7.3 percent. Foot traffic and the average spend increased by 4.4 percent and 0.8 percent respectively. Home Depot continues to execute well and squeezed $366.37 in sales per square foot in the quarter, an increase of 5.3 percent year on year.

The strong performance was broad-based, with all three of the company’s US divisions recording mid-to-high single digit ‘comps’ and all 19 regions delivering positive comparable growth in sales.

Management also reported that its online channel continues to do brisk business, with sales up approximately 25 percent. And at around 5.1 percent of total sales in the second quarter the online channel has plenty of scope for growth. Almost half (42%) of all online orders were picked up by the customer.

Departments that had comparable growth that exceeded the company average in the quarter included appliances, tools, plumbing, building materials, decor, lighting, hardware and indoor garden.

Home Depot put in strong margin performances in the quarter, with the gross margin of 34.7 percent some 34 basis points higher than in the year ago quarter. Operating expense as a percentage of sales decreased by 88 basis points to 21.0 percent, and this helped operating income surge 16.8 percent.  

Net earnings of $1.725 billion were up 12.2 percent on the prior year quarter and diluted earnings per share of $1.35 represented an increase of 17.4 percent year on year.

The US housing market continues to be a bright spot in the US economy in our view with significant runway left for a number of exposures to the theme. Besides Home Depot other names across our portfolios include homebuilders D.R. Horton (NYSE: DHI, initial buy at $22.65) and Lennar (NYSE: LEN, initial buy at $32.03), as well as leading fibre-cement maker James Hardie (ASX: JHX, initial buy $8.05).

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