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We take a look at the first quarter of the 2019 fiscal year results of the worlds largest home improvement retailer, The Home Depot. Has the booming US economy helped the group's earnings and share price along?
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About The Home Depot
For those that don't know. The Home Depot is by far the biggest home improvement retailer in the world. With a market capital currently sitting at around $226 billion (in South African Rand that gives the firm a market capital of around R2.9 trillion), or roughly 83% the value of South Africa's GDP. To put things in perspective. According to the group's website this is how they started.
"Bernie Marcus and Arthur Blank dreamed up The Home Depot from a coffee shop in Los Angeles in 1978. Avid DIYers, they envisioned a superstore that would offer a huge variety of merchandise at great prices and with a highly trained staff. Employees would not only be able to sell, but they would also be able to walk customers at every skill level through most any home repair or improvement.
With help from investment banker Ken Langone and merchandising guru Pat Farrah, Marcus and Blank opened the first two Home Depot stores in Atlanta the following year. The 60,000-square-foot warehouses dwarfed the competition with more items than any other hardware store. But the heart of Home Depot was the expertly trained floor associates who could teach customers how to handle a power tool, change a fill valve or lay tile. It wasn’t enough to sell or even tell — associates also had to be able to show. Soon, The Home Depot began offering DIY clinics, customer workshops and one-on-one sessions with customers.
Marcus and Blank implemented a customer “bill of rights,” which stated that customers should always expect the best assortment, quantity and price, as well as the help of a trained sales associate, when they visit a Home Depot store. These commitments were an extension of the company’s “whatever it takes” philosophy.
But that philosophy extended beyond the store walls. After The Home Depot went public in 1981, Marcus and Blank made a commitment to give back to the communities where their stores were located. Following through on that commitment, legions of Team Depot volunteers, backed by The Home Depot Foundation, work tirelessly on their own free time to help our nation’s veterans and communities across the country.
From those two stores in Atlanta, Home Depot has grown to more than 2,200 stores in three countries, but in every store, our goal is the same: to earn our customers’ respect by offering the highest level of service, the broadest selection of products and the most competitive prices. As Marcus says in his and Blank’s book, “Built From Scratch,” “At the end of the day, we’re in the people business.”
Below what Home Depot calls their "Values Wheel"
"Bernie Marcus and Arthur Blank dreamed up The Home Depot from a coffee shop in Los Angeles in 1978. Avid DIYers, they envisioned a superstore that would offer a huge variety of merchandise at great prices and with a highly trained staff. Employees would not only be able to sell, but they would also be able to walk customers at every skill level through most any home repair or improvement.
With help from investment banker Ken Langone and merchandising guru Pat Farrah, Marcus and Blank opened the first two Home Depot stores in Atlanta the following year. The 60,000-square-foot warehouses dwarfed the competition with more items than any other hardware store. But the heart of Home Depot was the expertly trained floor associates who could teach customers how to handle a power tool, change a fill valve or lay tile. It wasn’t enough to sell or even tell — associates also had to be able to show. Soon, The Home Depot began offering DIY clinics, customer workshops and one-on-one sessions with customers.
Marcus and Blank implemented a customer “bill of rights,” which stated that customers should always expect the best assortment, quantity and price, as well as the help of a trained sales associate, when they visit a Home Depot store. These commitments were an extension of the company’s “whatever it takes” philosophy.
But that philosophy extended beyond the store walls. After The Home Depot went public in 1981, Marcus and Blank made a commitment to give back to the communities where their stores were located. Following through on that commitment, legions of Team Depot volunteers, backed by The Home Depot Foundation, work tirelessly on their own free time to help our nation’s veterans and communities across the country.
From those two stores in Atlanta, Home Depot has grown to more than 2,200 stores in three countries, but in every store, our goal is the same: to earn our customers’ respect by offering the highest level of service, the broadest selection of products and the most competitive prices. As Marcus says in his and Blank’s book, “Built From Scratch,” “At the end of the day, we’re in the people business.”
Below what Home Depot calls their "Values Wheel"
The Home Depot Values Wheel
So to the numbers we go
The following highlights were reported by Home Depot in their 3rd quarter 2018 earnings report.
A few numbers we would like to highlight
- Net sales: $26.38 billion (up 5.7% from $24.947 billion in the prior year)
- Gross profit: $9.017 billion (up 4.6% from $8.61 billion in the prior year)
- Net earnings: $2.513 billion (up 4.5% from $2.404 billion in the prior year)
- Diluted earnings per share: $2.27 (up 9.1% from $2.08 in the prior year)
- Number of transactions in quarter 390 million (up 3.8% from 375.9 million in prior year)
- Average ticket value: $67.31 (up 2% from $66.02 in prior year)
- Sales per square foot: $435.18 (up 5.6% from $412.03 in the prior year)
- Dividend per share: $1.36
A few numbers we would like to highlight
- Cash generated from operations (Net earnings from operating activities): $4.575 billion (or $4.13per share)
- PE ratio: 22.6
- Dividend yield: 2.6% (assuming the $1.36 dividend is paid in each quarter of the fiscal year)
- Receivables sitting at $2.317 billion (up ever so slightly from $2.296 billion in the prior year). At least this number is not ballooning which would indicate people are struggling to pay their bills.
- Net profit margin: 9.56%
- Share repurchase program has seen number of shares outstanding declining from 1.158 billion shares a year ago to 1.106 billion as at their latest results released in May 2019.
So any comments or guidance from management on the results?
The group released the following guidance with their 3rd quarter earnings report.
““We were pleased with the underlying performance of the core business despite unfavorable weather in February and significant deflation in lumber prices compared to a year ago,” said Craig Menear, chairman, CEO and president. “Looking ahead, we remain excited about the momentum we are seeing with our strategic investments. As a result of these initiatives, and the current macroeconomic and housing backdrop, today we are reaffirming our sales and earnings guidance for fiscal 2019. I would like to thank our associates for their hard work and continued dedication to our customers.”
““We were pleased with the underlying performance of the core business despite unfavorable weather in February and significant deflation in lumber prices compared to a year ago,” said Craig Menear, chairman, CEO and president. “Looking ahead, we remain excited about the momentum we are seeing with our strategic investments. As a result of these initiatives, and the current macroeconomic and housing backdrop, today we are reaffirming our sales and earnings guidance for fiscal 2019. I would like to thank our associates for their hard work and continued dedication to our customers.”
The Company reaffirmed its guidance for fiscal 2019, a 52-week year compared to fiscal 2018, a 53-week year. The Company expects its fiscal 2019 sales to grow by approximately 3.3 percent and comp sales for the comparable 52-week period to be up approximately 5.0 percent. The Company also reaffirmed its diluted earnings-per-share growth guidance for the year and expects diluted earnings-per-share growth of approximately 3.1 percent from fiscal 2018 to $10.03.
The Home Depot (NYSE: HD) share price history
The Home Depot (NYSE:HD) share price history since 2014. As the graphic shows its been a pretty steep upwards trajectory for the group's share price over the last couple of years. Enjoying the fruits of the strong growing US economy.
The Home Depot share price performance over the last 5 years
So should you buy their shares?
The fact that Home Depot is the largest home improvement retailer in the world does give them some buying power when acquiring goods and they can use their size to bargain for the best prices when acquiring stock. This will always count in their favour. Based on the guidance provided by the group for the full year, and predicted diluted earnings per share coming in at $10.03 it places the group at a forward PE ratio of 20.5, which while not extremely expensive, it is not at the cheap end of the stock market. Guess they allowed that premium considering their size of the market and their bargain position. Receivables to the group has been well managed and it seems to be stable although increasing slightly during every reporting period. Investors should keep an eye on this. If that number starts rising at a faster rate we know consumers are starting to struggle to pay their accounts, and the potential for large scale write offs of debt could enter Home Depot's books.
The Home Depot (NYSE: HD) stock valuation
With all things considered regarding their footprint, their size of the market, their share repurchase program as well as their latest earnings and cash generated numbers, our valuation model places a value of $209 a share on Home Depot based on their 1st quarter 2019 results and the guidance provided for the full year.
This places them on a PE ratio of 23 and a dividend yield of close to 2.6%. We therefore feel the group is very close to fully valued and does not present a buying opportunity for investors at its current price. Investors should look to enter Home Depot (HD) at around 10-15% below our valuation of the group to ensure enhanced long term returns from HD. Thus look to buy the group's shares at $177- $185 a share. As this represents a decent discount to their full value and greater chance of strong gains for investors over the longer term.