Home Depot's Light 1st-Quarter Sales Not Troubling
We expect sales at the wide-moat retailer to rise over the rest of the year.
With spring off to a late start, we weren’t surprised that wide-moat Home Depot’s (HD) first-quarter same store sales came in a little light (at 4.2% versus our 4.8% estimate). This marks the lowest comp store growth in 11 quarters (since the second quarter of 2015) and is trending toward to our long-term normalized growth rate of around 3%. However, with the company bumping the sales forecast modestly to 6.7% (from 6.5%) and keeping its full-year comp outlook at 5%, we expect delayed spring sales will be captured throughout the second quarter, where we have forecast 6% comp growth. Furthermore, with the back half helped by an extra week in the fourth quarter, our prognosis is that sales will rise over the remainder of the year from solid first-quarter levels, levering expenses better over the back half (the extra week is expected to add about another $300 million to operating profit). We don’t plan any material change to our full-year forecast for more than 6% sales growth and $9.36 in earnings per share, or our $165 fair value estimate and view shares as modestly overvalued. For investors seeking exposure to the space, Lowe’s currently provides a better relative valuation, at 16.5 times our 2018 EPS estimate (versus 18 times for HD).
Given the plan to spend double the amount ($11.1 billion between 2018 and 2020, versus $5.7 billion in a business as usual environment) on strategic initiatives (supply chain, stores, IT), levering expenses will remain difficult, leading to minimal operating expansion over this period (we forecast operating margin of 14.8% in 2020 versus 14.5% in 2017). While this provides significantly slower operating expansion than over the last five years, which averaged 80 basis points per year, we believe these investments are set to bolster the brand intangible asset and provide longer term opportunities for operating margin expansion with a more dynamic supply chain intact. Over the next decade we see operating margins climbing to 16%.
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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.
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