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The Home Depot Inc HD

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Economic Moat

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Home Depot Takes Share of Wallet Thanks to Essential Status of Business, but Costs Hinder Profits

Jaime M. Katz, CFA Senior Equity Analyst

Analyst Note

| Jaime M. Katz, CFA |

Wide-moat Home Depot was able to grow its top line nicely in its fiscal first quarter, as one of the few retail operators that remained open. Sales grew 7%, with total same-store sales printing a 6.4% uptick, and the average ticket up a whopping 11%, as consumers stocked up on cleaning products as well as do-it-yourself products (as installment services was limited in some locations). However, Home Depot couldn’t escape the incremental costs associated with ensuring a safe work environment amid the coronavirus pandemic though, digesting $640 million in after-tax expenses ($0.60 per share) to support its front-line employees, expanding time off, offering weekly bonuses and extending certain benefits. These costs increased the selling general and administrative expense ratio to 20.6%, marking a 190-basis-point expansion versus last year’s first quarter. This led to an operating margin of 11.6%, which was the lowest first-quarter performance since 2014, but evidence exists that the underlying business remains strong. Excluding COVID-19 expenses, Home Depot could have posted earnings per share growth of 14%, and the selling general and administrative ratio would have leveraged, indicating prior investment was stimulating demand.

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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 sector, while the tie-up with Company Store brought textile exposure to the lineup.

Contact
2455 Paces Ferry Road
Atlanta, GA, 30339
T +1 770 433-8211
Sector Consumer Cyclical
Industry Home Improvement Retail
Most Recent Earnings Apr 30, 2020
Fiscal Year End Feb 2, 2021
Stock Type High Yield
Employees 415,700

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