Market Overview

Home Improvement Retailer Home Depot Reports Q2 Earnings Tomorrow Morning

Home Improvement Retailer Home Depot Reports Q2 Earnings Tomorrow Morning

Home improvement retailer Home Depot Inc (NYSE: HD) reports second-quarter earnings before the opening bell on Tuesday, August 15. Over the past several years, the company has benefited from the housing market’s ongoing recovery.

Rising home prices combined with tight inventories is typically a positive environment for the home improvement retailers as consumers might be starting new projects to get their homes ready to sell or just renovating to stay where they’re at.

The growing number of older homes is another positive factor for home improvement stores. According to CFRA analysts, homes that are 25 years or older are generally in the “sweet spot” for refurbishment spending, which makes up 24% of do-it-yourself home improvement spending. Those analysts highlighted the fact that approximately 71% of homes are more than 25 years old and the median age of homes is 35 years old, according to 2014 Census data, which analysts have indicated could help support remodeling trends over the long term.

The housing market recovery has been one factor widely cited by analysts that has helped boost HD’s revenue and comparable store sales over the past several years. In the first quarter of 2017, revenue increased 4.9% year over year to $23.9 billion and comparable store sales increased 5.5% compared to the first quarter of 2016. For all of fiscal 2017, the company has said it expects revenue and comparable store growth of approximately 4.6%.

In the last quarter, management highlighted growth in its e-commerce business as well as its professional business as two drivers of growth. Online sales grew 23% year over year in the first quarter and now make up 6% of its overall business, according to company reports. Appliances, flooring and roofing were also highlighted as the primary big ticket drivers that helped drive 15.8% growth in the company’s transactions that are over $900.

Over the past several years, HD has returned a large amount of cash to shareholders as its revenue and earnings have grown. The company has bought back $7 billion worth of shares in each of the past three years and has said it anticipates repurchasing $5 billion in 2017. After a recent 29% dividend hike, the stock offers a quarterly payment of $0.89 per share, about a 2.30% yield.

FIGURE 1: HOME DEPOT YTD PERFORMANCE HD is up 15.32% year to date, compared to an 8.13% increase in the S&P 500 (SPX). The stock hit a new all-time high of $160.86 after reporting first-quarter earnings, but it remains a bit off those highs in recent trading. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Home Depot Earnings and Trading Activity

For the second quarter, HD is expected to report earnings of $2.21 per share, up from $1.97 in Q2 2016, on revenue of $27.8 billion, according to Wall Street consensus analyst estimates. The revenue and earnings estimates are the highest they have been in the past eight quarters.

After reporting first-quarter earnings, HD hit a new all-time high of $160.86 on May 16. On July 20, the stock dropped 4% after Sears Holding Corp. (SHLD) announced it would sell Kenmore appliances on, Inc. (NASDAQ: AMZN). It has since recovered from that mid-July drop and is up 15.32% year to date.

Around the upcoming earnings release, options traders have priced in about a 3% potential share price move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term options trading at the August 18 expiration, calls have been active at the 160 and 165 strike prices, while puts have been active at the 150 and 155 strikes. As of this morning, the implied volatility is at the 65th percentile. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

Later in the week we’ll see more retail results from Target Corporation (NYSE: TGT) before market open on Wednesday and Wal-Mart Stores Inc (NYSE: WMT) before the opening bell on Thursday. Next week, the other major home improvement retailer, Lowe’s Companies. Inc. (NYSE: LOW), reports second-quarter earnings on August 23.

Turning to economic data, the government retail sales report for July comes out on Tuesday. Retail sales fell for a second month in a row in June and this report will likely be watched for further insights into consumer spending. If you have time, make sure to check out today’s market update to see what else is happening.


Photo by Ildar Sagdejev via Wikimedia Commons
Image used under creative commons


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