Home Depot Earnings Preview: Did Late Spring Selling Season Help Boost Q2?

Home improvement retailer Home Depot reports earnings before market open on Tuesday, August 14. Here’s a look at what might be expected from its quarterly results.

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Home Depot (HD) reports earnings before market open on Tuesday, August 14. Unlike most retailers whose busy time is during the holidays in Q4, this is historically the busiest quarter for HD as it includes the busy spring selling season. 

For Q2, HD is expected to report adjusted EPS of $2.84, up from $2.25 in the prior-year quarter, and revenue is projected to increase 6.8% year over year to $30 billion, according to third-party consensus analyst estimates. 

When HD reported first-quarter results, the company beat earnings estimates, but missed revenue estimates slightly. Management attributed the revenue miss to cold weather in several regions, which had a negative impact on sales in outdoor and garden categories. On the earnings call, CEO Craig Menear said they were seeing some of those sales shift into the second quarter a couple of weeks in. 

In Q1, HD reported a 4.2% increase in comp sales—sales at stores open a year or more. That was driven by a 5.8% increase in average ticket, although the number of transactions was down 1.5%. HD also said online sales were up approximately 20% year over year. 

Two factors that HD has highlighted that have had a positive impact on average ticket growth in recent quarters are commodity price inflation and foreign exchange effects. Higher prices of lumber, building materials, and copper tacked accounted for 111 basis points of average ticket growth and positive foreign exchange impacts tacked on 41 basis points. 

Management has been optimistic in recent quarters, stating they’re encouraged by “what we’re seeing in housing and the broader economic environment.” Unemployment has remained low, wages continue to climb higher, and home prices have increased while housing inventory remains tight. 

Fiscal 2018 Guidance

With HD’s Q1 report, management reiterated their guidance for fiscal 2018. The company expects revenue to grow roughly 6.7% and comp sales to increase around 5%. And the retailer projects adjusted EPS will grow 28% year over year to $9.31. 

HD is also getting a boost this year from U.S. Tax Reform and said it expects its effective tax rate to be 26% in fiscal 2018. In Q1 2018, the company reported it had a 23.5% effective tax rate, down from 35.2% in Q1 2017. 

Management also recently upped their 2020 revenue target to $120 billion in annual sales, up $20 billion from their previous target.

Home Depot in 2018. Towards the beginning of July, HD had climbed back closer to its all-time high of $207.61 that it hit at the start of the year, but it has yet to retest that level. Shares have pulled back a bit since and they’re a little over $11 away from the all-time high heading into tomorrow’s earnings. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Home Depot Options Trading Activity

Around the upcoming earnings release, options traders have priced in a 4% stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 32nd percentile as of this morning. 

In short-term trading at the August 17 monthly expiration, calls have been active at the 195 and 200 strike prices, while puts have been active at the 195 strike. 

Looking further out at the September 21 monthly expiration, volume has been heavier on the call side, although recent trading hasn’t been concentrated at any particular strike. For calls, most of the trading has been spread out between the 180 and 210 strike prices. For puts, activity has been mostly between the 180 and 200 strike prices. 

Overall during Friday’s session, there were about twice as many calls traded as puts, with a put/call ratio of 0.546. 

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

In addition to HD, there are several other retailers reporting this week. Macy’s (M) reports before the market opens on Wednesday, August 15—the U.S. Commerce Department’s July retail sales figures are scheduled to be released that morning as well. On Thursday, August 16, Walmart (WMT) reports before the open and Nordstrom’s (JWN) reports after the close. 

For a look at what else is going on, check out today’s Market Update.

Good Trading,
JJ

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