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We take a look at the third quarter results of the worlds largest home improvement retailer, The Home Depot.
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About The Home Depot
For those that dont know. The Home Depot is by far the biggest home improvement retailer in the world. With a market capital currently sitting at $205.2 billion (in South African Rand that gives the firm a market capital of around R2.9 trillion), or roughly 80% 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: $26.3 billion (up 5.1% from $25.026 billion in the prior year)
- Gross profit: $9.151 billion (up 5.8% from $8.65 billion in the prior year)
- Net earnings: $2.867 billion (up 32.4% from $2.16 billion in the prior year, largely due to significantly lower provision for income tax)
- Diluted earnings per share: $2.51 (up 36.4% from $1.84 in the prior year)
- Number of transactions in quarter 394.8 million (up 1.4% from 389.5 million in prior year)
- Average ticket value: $65.11 (up 3.6% from $62.84 in prior year)
- Sales per square foot: $433.99 (up 5.2% from $412.49 in the prior year)
A few numbers we would like to highlight
- Cash generated from operations (Net earnings from operating activities): $8.77 billion (or $7.69 per share)
- No dividend was declared for the quarter, but forward dividend yield is sitting at 2.3%
- Receivables sitting at $2.171 billion (up ever so slightly from $2.166 billion in the prior year). At least this number is not ballooning which would indicate people are struggling to pay their bills.
- Operating margin predicted to end the full year at close to 14.5%
- Share repurchase program at end of fiscal year 2018 said to be around $8 billion (The impact of the share repurchase program can be seen by the weighted average number of outstanding shares declining by 2.8% from 1.174 billion shares in the prior year to 1.141 billion currently)
So any comments or guidance from management on the results?
The group released the following guidance with their 3rd quarter earnings report.
“We are pleased with our third quarter results and the growth that we saw from both our professional and do-it-yourself customers. Our customers continue to respond to our expansive assortment and enhancements we are making to drive an interconnected shopping experience. We saw continued strength across the store, as well as healthy growth in our digital business,” said Craig Menear, chairman, CEO and president. “We believe this is a testament to the overall strength of demand in the home improvement market.”
“We are pleased with our third quarter results and the growth that we saw from both our professional and do-it-yourself customers. Our customers continue to respond to our expansive assortment and enhancements we are making to drive an interconnected shopping experience. We saw continued strength across the store, as well as healthy growth in our digital business,” said Craig Menear, chairman, CEO and president. “We believe this is a testament to the overall strength of demand in the home improvement market.”
Based on its year-to-date performance, the Company updated its fiscal 2018 guidance. The Company will have 53 weeks of operating results in fiscal 2018 and now expects:
Sales growth of approximately 7.2 percent
Comp sales growth of approximately 5.5 percent for the comparable 52-week period
Operating margin of approximately 14.5 percent
Tax rate of approximately 24 percent
Fiscal 2018 share repurchases of approximately $8 billion
Diluted earnings-per-share growth of approximately 33.8 percent from fiscal 2017 to $9.75.
Sales growth of approximately 7.2 percent
Comp sales growth of approximately 5.5 percent for the comparable 52-week period
Operating margin of approximately 14.5 percent
Tax rate of approximately 24 percent
Fiscal 2018 share repurchases of approximately $8 billion
Diluted earnings-per-share growth of approximately 33.8 percent from fiscal 2017 to $9.75.
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 $9.75, it places the group at a forward PE ratio of 18.35, which while not extremely expensive, it is not at the cheap end of the 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. Investors should keep an eye on this. If that number starts rising 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 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 $178 a share on Home Depot based on their 3rd quarter 2018 results and the guidance provided for the full year. This places them on a PE ratio of 18.3 and a dividend yield of close to 2.4%. We therefore feel the group is fully valued and does not present a buying opportunity for investors at its current price. The image below shows the share price performance of Home Depot over the last 3 months.
The Home Depot share price performance over the last 3 months
And based on our valuation it is no surprise the market has been punishing its share price recently. Its down from highs reached of $213 a share to its current trading price. And we wont be surprised if it loses a bit more steam after the market processes their latest financial results. We do think the market ran hot with the share, and we would recommend investors look to buy the share at values closer to $160 a share.