Home Depot (HD) Up 9.3% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Home Depot (HD). Shares have added about 9.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Home Depot due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Home Depot Beats on Q2 Earnings & Sales, Ups View

Home Depot posted top- and bottom-line beat in second-quarter fiscal 2018. Notably, the company retained its five-year-long trend of beating earnings estimates. Moreover, sales reverted to a positive surprise trend after a miss in the last-reported quarter. With this, the company has delivered positive sales surprise in seven out of the last eight quarters.

The company posted fiscal second-quarter earnings of $ 3.05 per share, which escalated 35.6% from $ 2.25 recorded in the year-ago quarter. The figure also surpassed the Zacks Consensus Estimate of $ 2.84.

Results gained from a rebound in the seasonal business compared with the fiscal first quarter and the solid execution of its team of store associates, merchants, suppliers and supply chain. The company’s relentless focus on affording innovative products, boosting interconnected customer experience and driving productivity seems to be paying off. Further, it continued to reap the benefits of a steady housing-market recovery and strong customer demand.

Quarterly Details

Net sales grew 8.4% to $ 30,463 million from $ 28,108 million in the year-ago quarter and beat the Zacks Consensus Estimate of $ 29,981 million. The company's overall comparable-store sales (comps) increased 8% while comps in the United States grew 8.1%.

During the reported quarter, comps benefited from 5% rise in average ticket and 3.1% increase in customer transactions. Moreover, sales per square foot rose 8.6%.

Gross profit margin expanded 30 basis points (bps) to 34%. In dollar terms, gross profit improved 9.6% to $ 10,365 million from $ 9,461 million in the year-ago quarter, primarily driven by higher sales. Excluding the impact of the ASU No. 2014-09 revenue recognition standards adopted in first-quarter fiscal 2018, gross margin was 33.6%.

Operating income increased 9.8% to $ 4,901 million while operating margin expanded 20 bps from the year-ago quarter to 16.1%.

Balance Sheet and Cash Flow

Home Depot ended second-quarter fiscal 2018 with cash and cash equivalents of $ 3,490 million, long-term debt (excluding current maturities) of $ 23,295 million and shareholders' equity of $ 2,009 million. In the first half of fiscal 2018, the company generated $ 7,997 million of net cash from operations.

Outlook

Backed by the solid performance in the first half of fiscal 2018, the company raised its earnings and sales forecast for fiscal 2018.

Home Depot now expects sales growth of nearly 7% for fiscal 2018, including the 53rd week, compared with the previous forecast of 6.7% growth. Comps growth is now estimated to be 5.3% versus the prior guidance of 5% increase. Further, the company anticipates 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%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Home Depot has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Home Depot has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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