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Earnings: Can Home Depot (HD) Nail a Strong Quarter of Growth?

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August 15, 2016
Investment outlook for home-improvement retailers.

Home Depot (HD) Chief Executive Craig Menear recently stated that sales across his stores, including merchandise and services, were robust amid a housing industry that’s firming up.

“We’re in a space where consumers are willing to spend,” he said on CNBC. “Overall, the environment in housing has been gold.” In the last two quarters, HD executives have noted that sales, boosted by new household formation, housing turnover, and home-value appreciation, were ringing up strong receipts. While sales of kitchen cabinets, rugs, paint, and garden tools were seeing increases, Menear said sales of big-ticket items in the $900-plus range were also helping the top line. Overall, some analysts say good news out of the likes of home-improvement retailers can be a sign of consumer confidence and insight into how consumers are spending their discretionary, and to a lesser degree, nondiscretionary dollars.

Some analysts note the current economic environment of low unemployment and slow, but expanding wage growth, coupled with cheap prices at the gas pumps are giving consumers as well as professionals an opportunity to turn to neglected home-improvement projects. They also remarked that HD, as well as its biggest rival, Lowe’s (LOW), are not subject to the same kinds of sales pressures spawned by e-commerce rivals like Amazon (AMZN) that other brick-and-mortar stores are because it’s just too tough to order, and have delivered, hefty and heavy building materials.   

In Q1, HD raised its sales and earnings projections for the full-year, prompting analysts to raise estimates. Those reporting to Thomson Reuters are forecasting a per-share profit of $1.97, up better than 15% from year-ago results, on revenues that are projected to climb 7% to $26.5 billion. The bigger percentage jump in earnings is expected to be driven by tighter controls on margin returns and a stock buyback program.

Short-term options traders have priced in a 3% potential share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform from TD Ameritrade.

Options trading activity picked up in recent sessions with activity at the 130-strike puts. Trading in calls was running three times the normal activity. This activity was seen in the 135- and 140-strike calls. The implied volatility is at the 17th percentile. (Please remember past performance is no guarantee of future results.)

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.

FIGURE 1: HD HOLDING NEAR 52-WEEK HIGH.

HD shares reached a new 52-week high at $139 two weeks ago and have since been holding in a tight range between $135 and $137.50. Data source: Standard & Poor’s. Image source: the TD Ameritrade thinkorswim® platform. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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