Last week, Home Depot reported 1Q15 results that exceeded consensus estimates and raised the low end of their guidance for the full year. The highlights for the quarter included a 7.1% US comp, online growth of nearly 30%, and continued margin expansion.
Stepping back from the quarter, the stock has been range-bound in the $110 area since February, and as I've written in the past, Home Depot's upside is somewhat limited given its rich valuation. With that said, many investors view Home Depot as a safe place to park your money, given management's solid track record of execution as well as the positive tailwinds in the housing industry. The company's results this quarter support this notion.
2Q Sales Looking Good as Home Depot Enters All-Important Spring Season
Home Depot's monthly comps and management commentary suggests 2Q is shaping up nicely. The company's monthly comps showed continued acceleration through the quarter, and management noted that they are pleased with trends in May as well. Management also noted that they have a positive bias on their outlook for the year.
As part of the above point, management noted that they've seen a normal spring throughout much of the quarter. Weather is a big risk with Home Depot, as their sales are fairly dependent on weather acting in normal ways. As we saw last year (note the quarterly comps in 1Q14), weather starting earlier or later than normal can disrupt reported sales trends (this is part of the reason why management likes to look at the business as two halves, rather than four quarters). With a normal spring this year, it mitigates a risk during Home Depot's busiest time of the year. As the charts below show, 2Q is the most important quarter for Home Depot, as it represents the largest portion of Home Depot's annual sales and earnings.
Online Growth Continues
- Home Depot ended 2014 with online sales of $3.8 billion, representing 4.5% of their total sales. Their strong growth continued in 1Q, as management noted that the online segment grew nearly 30% and contributed 20% of it sales growth.
- Online traffic to its site grew by double digits.
- The company will look to build on its success by rolling out buy online, ship to store functionality to stores.
As expected, Home Depot was able to manage its way through the West Coast port labor disputes. Remember that the West Coast port disruption made it difficult for numerous retailers to get their international shipments routed to stores. While Home Depot did not see significant business disruption from the port issues, they did note that inventory is thinner than they would like to see. If this continues, there is a slight risk that Home Depot's sales and margins may be affected if they cannot get inventory into their stores (or if they have to spend more money to get the inventory in). (NOTE: The labor dispute was settled on 5/22, so this no longer appears to be a risk.)
Management left the door open for a possible increase in share repurchases for the year. Recall that management guided to $4.5 billion in share repurchases for 2015, and have an authorization for $18 billion over the next three years. If management were to increase their 2015 share repurchases by another $1.5 billion, this would add an additional $0.02 to my 2015 EPS estimate.
Home Depot is currently trading at 18.6x my 2016 EPS estimate of $6.04 (vs. current consensus estimates of $6.02). This might seem like a fairly rich valuation for a retailer that is growing EPS in the low-teens. However, when taking into account the company's consistency and the housing market's tailwinds, valuation seems fair. Using a 20x multiple on 2016 estimates, Home Depot would trade at $121, representing 8% upside from current levels.