Earnings Preview: Home Depot Reports Before Tuesday’s Open

Home improvement retailer Home Depot (HD) reports first-quarter earnings before market open on Tuesday, May 15. Here’s a look at what might be expected from its report.

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Home Depot (HD) reports first-quarter earnings before market open on Tuesday, May 15. A strong U.S. economy, tight labor market and recent tax reform have been some of the tailwinds the company has highlighted in recent quarters.

Mortgage rates have continued to climb higher in recent months, but management didn’t seem particularly concerned about the impact they would have on the housing market. On last quarter’s earnings call, HD CFO Carol Tomé said: “We expect higher job growth, higher income growth and, yes, higher mortgage rates, but with that comes higher home price appreciation and rising housing demand, which should drive home improvement spending.”

When the company last reported, revenue increased 7.5% year over year to $23.9 billion and adjusted EPS came in at $1.69. Comparable-store sales were up 7.5%, driven by a 5.5% increase in transaction size and a 1.9% increase in the number of transactions compared to last year. Online sales grew 21% year over year in Q4, slightly below the 21.5% growth rate the company reported for all of 2017.

Commodity price inflation in copper, building materials and lumber helped boost average transaction growth by 105 basis points, according to management. HD also said it benefited somewhat from a weaker U.S. dollar, which tacked on 42 basis points to transaction growth. 

Effects from the string of hurricanes that hit the southeastern U.S. in late 2017 continued to trickle through, adding approximately $380 million in sales last quarter, although management highlighted the fact that many of these sales are at lower gross margins than the company average. Management previously said it expects hurricane-related sales to remain elevated through the end of Q1. 

For Q1, HD is expected to report adjusted EPS of $2.07 on revenue of $25.23 billion, according to third-party consensus estimates. In the same quarter last year, HD earned $1.67 on revenue of $23.9 billion.

For all of fiscal 2018, management has issued guidance for adjusted EPS to be approximately $9.31. Overall, sales are projected to climb 6.5% and comparable-store sales are expected to increase 5%. HD’s pace of store openings has slowed significantly over the years and the company said it plans to open three new locations this year, compared to six new store openings in 2017.

Home Depot 2018 Stock Chart

HOME DEPOT IN 2018.

Shares of HD hit an all-time high of $207.61 in late January. After a sharp decline in early February amid the broader market selloff, the stock continued to decline and hit a recent low of $170.42 in early April. HD has climbed higher since then and closed just above $190 on Friday, May 11. Chart source: thinkorswim® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Options Trading Activity

Around the upcoming earnings release, the options market has priced in about a 2.9% stock price move in either direction according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was on the low end at the 35th percentile as of this morning.

In short-term trading at the May 18 monthly expiration, calls have been active at the 185 and 190 strike prices, while activity on the put side has been concentrated at the 182.5 strike. Further out at the June 15 monthly expiration, recent call trading has also been concentrated at the 185 and 190 strikes, whereas the 185-strike put has been more heavily traded.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

What’s Coming Up

Earnings season continues to wind down. Some of the major reports this week include Macy’s (M) before the open on Wednesday, Wal-Mart (WMT) before the open on Thursday, and Deere (DE) before the open on Friday. Next week, both Lowe’s (LOW) and Target (TGT) report before the open on Wednesday, May 23. If you have time, make sure to check out today’s market update for a look at what else is going on.

Good Trading,
JJ
@TDAJJKinahan

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