The Home Depot Inc. (HD) is the leading player in the highly fragmented home improvement industry. The company has reinvigorated itself with a shift in focus from new square footage growth to maximization of productivity through its existing store base.
In addition, the company has implemented significant changes to its store operations to make them simpler and more customer-friendly, thereby inducing more customer traffic.
Driven by solid comparable sales growth and strong operating performance, the company’s reported earnings of 50 cents per share for fourth-quarter 2011, handily surpassed the Zacks Consensus Estimate of 42 cents and climbed nearly 39% from the prior-year quarter.
Following better-than-expected fourth-quarter results, management anticipates 2012 diluted earnings per share to increase by 13% year over year to $2.79 (after share repurchases) on the back of an increase of 2.5% in sales, primarily resulting from low-single-digit comparable sales growth.
Moreover, following the strong fourth-quarter performance, Home Depot intends to remain focused on its capital allocation principles in fiscal 2012. Since the last quarter, the company has increased its dividend payout ratio to 50% from its previous target of 40%.
Home Depot intends to utilize its excess cash for share buybacks after meeting its business needs. The company plans to open 11 new stores and repurchase nearly $3,500 million of its common stock in fiscal 2012. Apart from this, the company also intends to maintain a high return on invested capital with a target of achieving 15% by the end of fiscal 2013. These strategies will enhance shareholders’ return while boosting the market value of the stock.
Further, with the introduction of new warehousing and transportation systems, the company has been able to improve its supply chain while minimizing the cost. This has also helped Home Depot to improve its Central Automated Replenishment System for immediate refill of stock while reducing the investment in inventory.
However, heavy job losses have led to a sharp fall in consumer discretionary spending on big-ticket items. Looking at the current situation in the United States, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes and consumer-spending rebounds.
Due to its exposure to international market, Home Depot remains prone to currency fluctuation. The weakening of foreign currencies against the U.S. dollar may require the company to either raise price or contract profit margins in locations outside the U.S. An increase in product price may have a direct impact on consumer demand.
Above all, the company’s business is highly competitive, primarily based on customer services, price, store location and assortment of merchandise. The company faces stiff competition from local, regional and international players such as Lowe’s Companies Inc. (LOW). To maintain its market share, the company is making selective acquisitions and strategic alliances with third parties, which are increasing its operational risks.
Given the above pros and cons, we reiterate our long-term Neutral recommendation on Home Depot. Our long-term recommendation on the stock is supported by a Zacks #2 Rank, which translates into a short-term Buy rating.
HOME DEPOT (HD): Free Stock Analysis Report
LOWES COS (LOW): Free Stock Analysis Report
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