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The Home Depot Inc HD

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Morningstar’s Analysis

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Wide-Moat Home Depot Comps Normalize, but Profitability Remains Solid; Shares Rich

Jaime M. Katz, CFA Senior Equity Analyst

Analyst Note

| Jaime M. Katz, CFA |

We don’t plan to materially alter our $220 fair value estimate for wide-moat Home Depot and view shares as rich, even after a mid-single-digit post-print decline. Investors focused on the company’s slower same-store sales pace in its second quarter, with 4.5% comp growth down materially from the 31% comp it posted in its first quarter. We had forecast a more severe slowdown (with estimated comp performance of 0%), as the company lapped a healthy 23% figure in the second quarter of 2020, but the return of pro sales (at the expense of DIY) helped lift demand more than anticipated. The gross margin of 33.2% was 60 basis points lower than we expected, but the metric saw 60 basis points of pressure from lumber prices during the period, largely accounting for the change. Operating expenses, however, were 90 basis points better than we expected, at 15.6%, as COVID-19-related costs receded from year-ago levels. All in, this led to an operating margin of 16.1%, 60 basis points ahead of our projection and the highest quarterly profit metric since second-quarter 2018.

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Company Profile

Business Description

Home Depot is the world's largest home improvement specialty retailer, operating nearly 2,300 warehouse-format stores offering more than 30,000 products in store and 1 million products online in the United States, Canada, and Mexico. Its stores offer numerous building materials, home improvement products, lawn and garden products, and decor products and provide various services, including home improvement installation services and tool and equipment rentals. The acquisition of distributor Interline Brands in 2015 allowed Home Depot to enter the maintenance, repair, and operations business, which has been expanded through the tie-up with HD Supply. The addition of the Company Store brought textile exposure to Home Depot's lineup.

2455 Paces Ferry Road
Atlanta, GA, 30339
T +1 770 433-8211
Sector Consumer Cyclical
Industry Home Improvement Retail
Most Recent Earnings Jul 31, 2021
Fiscal Year End Jan 30, 2022
Stock Type Cyclical
Employees 504,800