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Home Depot (HD) Up 6% in a Month: Can the Momentum Continue?


The Home Depot Inc. HD has been a strong performer, which is clear from the company’s robust earnings surprise history and the stock momentum. Moreover, investors remain confident about its relentless focus on affording innovative products, boosting interconnected customer experience and driving productivity. It also continues to reap the benefits of a steady housing market recovery and strong customer demand.

The company has witnessed an upsurge in the stock price, which hovers close to its 52-week high. This Zacks Rank #3 (Hold) stock has rallied 6.3% since reporting top- and bottom-line beat for second-quarter fiscal 2018 on Aug 14. Further, the stock has outperformed the sector’s growth of 2.4%.

Notably, the company retained its five-year-long trend of beating earnings estimates. Moreover, sales reverted to a positive surprise trend after a reporting miss in the last-reported quarter. With this, the company has delivered positive sales surprise in seven out of the last eight quarters. Results gained from a recovery in the seasonal business that impacted sales in the fiscal first quarter and the solid execution. Backed by the solid performance in the first half of fiscal 2018, the company raised its earnings and sales forecast for fiscal 2018.

Estimate Trend Up

Driven by the robust earnings outlook, analysts remain optimistic about the stock. This is quite evident from the uptrend in earnings estimates over the last 30 days. The Zacks Consensus Estimate of $9.57 and $10.25 for fiscal 2018 and fiscal 2019 moved north by 10 cents and 6 cents, respectively. Management envisions earnings per share for fiscal 2018 to be up nearly 29.2% from $9.42 in fiscal 2017. It earlier projected earnings per share growth rate of 28%.

Strategies Supporting Home Depot’s Growth

Home Depot’s integrated retail strategy, which connects offline and online channels, has been well received by the customers. The company is witnessing improved customer satisfaction scores and conversion rates through investments in interconnected capabilities that encompass both digital properties and physical store assets. Consequently, digital sales in second-quarter fiscal 2018 increased about 26%, backed by strong growth in online traffic. However, the scope of the integrated retail strategy also extends to the supply chain system, and investments for enhancing the delivery and fulfillment options for customers.

In this regard, the company is continually developing and rolling out delivery capabilities. For example, it recently rolled out the small parcel express delivery from store via car and van in almost all of its key U.S. markets, and expects to expand it further in days to come. As part of its supply chain transformation over the next five years through its “One Home Depot Supply Chain” initiative, the company opened its first supply chain facility (market delivery operations) that are stockless locations, acting as delivery hubs for big and bulky products in the fiscal first quarter. It plans to open more of these facilities in the second half of fiscal 2018.

Moreover, the company’s Pro segment is a key growth driver, with Pro sales outpacing DIY (do-it-yourself) sales. The Pro segment continues to gain traction due to focus on improving portfolio service offerings for Pro customers through the enhancement of maintenance, repair and operations (MRO) products, which witnessed double-digit growth in second-quarter fiscal 2018.

Notably, the company’s professional sales force (mainly the Interline brands and outside sales forces) is focused on strengthening relationships with Pro customers, resulting in a deeper level of engagement and incremental spending. This has, in turn, boosted sales for this category. Sales to Pro customers improved in double digits in the fiscal second quarter, with Pro heavy categories like lumber, in-stock kitchens, power tools, windows, and concrete all recording double-digit comps.

Possible Deterrents

We note that commodity cost inflation, including rising raw material and transportation costs, as well as recently enacted tariffs, are likely to pressure margins. Though Home Depot delivered gross margin growth of nearly 30 bps in second-quarter fiscal 2018, it included about a 16 bps negative impact from higher transportation and fuel costs in its supply chain. Further, the company has slightly trimmed its gross margin forecast for fiscal 2018 to about a 41 bps expansion due to the higher-than-anticipated transportation costs.

Despite the margin concerns, we believe, the above-mentioned growth factors clearly profess that Home Depot still has significant growth potential in the days ahead. This is also evident from the company’s Growth Score of A and long-term earnings growth rate of 13.3%.

Looking for Trending Picks? Look at These

Some better-ranked stocks in the retail sector are Fastenal Company FAST, Tecnoglass Inc. TGLS and Canada Goose Holdings Inc. GOOS, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Fastenal has pulled off an average positive earnings surprise of 3% in the last four quarters. The company has long-term earnings growth rate of 14%.

Tecnoglass, with an impressive earnings growth rate of 20%, has delivered an average positive earnings surprise of 16.5% in the trailing four quarters.

Canada Goose has long-term earnings growth rate of 26.3%. Further, the company’s earnings have outpaced the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 73.1%.

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