Housing Fundamentals Support Sales at Home Depot
The wide-moat retailer saw a solid quarter with same-store sales growth of 6.3%.
As key home improvement factors have remained supportive in recent periods (including turnover, rising prices, and low interest rates), wide-moat retailer Home Depot (HD) has been a beneficiary of these positive trends. With the books closed on another solid quarter where the company delivered same-store sales growth of 6.3% on top of 6.5% last year, and earnings per share expansion of 14% (thanks to cost leverage and share buybacks), we plan to tick our 2017 outlook up modestly to reflect second quarter outperformance relative to our model. Even factoring in management’s updated guidance, which calls for same-store sales in 2017 of 5.5% (from 4.6% prior) and EPS guidance of $7.29 (from $7.19 previously), we don’t plan any material change to our $156 fair value estimate and view shares as fairly valued at this time, trading at more than 20 times our 2017 EPS estimate.
The firm’s current outlook implies the same-store sales growth will slow over the remainder of 2017 to a mid-single-digit pace (around 5%), which we still view as impressive, given the rather lengthy housing cycle upswing and the maturity of this particular business model. However, in the longer term and over cycles, we forecast Home Depot same-store sales averaging around 3%, leading to operating margins that rise to more than 16% over our forecast, from 14.2% in 2016. We view Home Depot as a best-of-breed business that should continue to benefit from a still-rising headship rate, household formations, and existing home sales, which should remain on the upswing for the next few years, before normalizing at a lower pace over the long term (including top-line improvement of 3% and 10 basis points of operating margin expansion over the last five years of our forecast).
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Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.