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Earnings Preview: Home Depot Reports Q1 Results Tomorrow

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May 15, 2017
Home Depot Store Exterior
iStockphoto.com/ChristopheLedent

If recent retail earnings are any indication, it’s a tough market out there. Growing e-commerce competition and a sluggish economic recovery has resulted in mixed results from some of the biggest companies in brick and mortar retail. But there’s one area that doesn’t seem to be feeling the crunch and that’s home-improvement retailers. The housing market has continued its steady recovery since the 2008 crisis, and home prices continue to recover as construction activity grows.

“Rising home prices can give homeowners equity they tap to splurge on cabinets, floors and appliances”, according to the Wall Street Journal. With higher prices and lower home inventories, sellers might be tempted to spend on improving their properties to squeeze extra dollars out of their asking prices and potential new-home buyers might decide to stay put and renovate instead of house hunting with limited selection and high prices. We’ll see if that economic backdrop trickles down to home improvement chain Home Depot Inc. (HD) when it reports first-quarter earnings before market open on May 16.  

For the first quarter, the company is expected to report earnings of $1.61 per share, up from $1.44 in Q1 2016, on revenue of $23.7 billion, according to consensus third-party analyst estimates. Looking ahead to the rest of fiscal 2017, management issued guidance for sales growth of approximately 4.6%--slightly below the 6.9% sales growth it reported in fiscal 2016.

Management is projecting comparable store sales, an important industry measure of sales at stores open longer than a year, at 4.6% for the remainder of the year. When the company reports tomorrow, analysts will likely be focused on how comp store sales come in compared to management’s projections. Another analyst focus will likely be how the company’s professional business grew, which makes up a fifth of all sales, according to company reports. 

Company Plans

Last quarter, management announced a new $15 billion share repurchase program and said it would repurchase approximately $5.0 billion worth of shares during the first quarter. Management also announced it would open just six new stores in fiscal 2017, according to a company press release. That’s a minor store expansion when compared to how many stores the company currently has. At the end of the fourth quarter, the company operated a total of 2,278 retail stores throughout the United States and several international markets.

Home Depot Options Activity

On the options side, traders have priced in just about a 2.5% potential stock move in either direction around HD’s earnings release, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term options trading at the May 19 monthly expiration, calls were active at the 155 and 157.5 strike prices while puts were active at the 145 and 152.5 strikes. As of Monday morning, the implied volatility sits at the 62nd percentile.   

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. 

Home Depot (HD) Stock Performance Compared to Lowe's (LOW)

FIGURE 1: HOME IMPROVEMENT PERFORMANCE.

Home Depot (gray line)  shares are up about 11% since last quarter’s earnings report, roughly matching Lowe’s (purple line) 12% return over the same period. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

HD’s counterpart, Lowe’s (LOW), reports first-quarter results next week and that’ll give investors more to consider in home-improvement retail.

Good Trading,
JJ
@TDAJJKinahan

NC