Market Overview

Upcoming Earnings: Hurricane Effects Still Trickling Through For Home Depot?

Upcoming Earnings: Hurricane Effects Still Trickling Through For Home Depot?

Earnings season has been slowing down, although there are quite a few retailers left to report. One of the larger ones coming up is Home Depot Inc (NYSE: HD), which is scheduled to report Q4 earnings and close out fiscal 2017 before the market opens on Tuesday, Feb. 20.

When the company last reported, earnings came in a few cents above analyst expectations and revenue beat estimates by $504 million. For Q3, HD reported comp sales had increased 7.9% year-over-year, faster than the 6.1% increase for the first nine months of fiscal 2017. Commodity price inflation in lumber, building materials and copper was one of the factors that management highlighted that added 105 basis points to average transaction growth, which was up 5.1% year-over-year.

In addition to commodity price inflation, part of that comp sales growth was driven by the impact of hurricanes that hit the Southeastern U.S. as well as rebuilding efforts from earthquakes and other natural disasters that occurred around the same time. HD estimated that hurricane-related sales positively impacted comparable store sales by $282 million in Q3.

Management expects some of those effects to continue to trickle through in the fourth quarter and this was one of the factors highlighted when they upped fiscal 2017 guidance to a 6.3% year-over-year sales increase while the company said it expects gross margins to decline by roughly 12 basis points.

For the fourth quarter, HD is expected to report adjusted earnings per share (EPS) of $1.62, up from $1.44 in the prior-year quarter, on revenue of $23.67 billion, according to third-party consensus analyst estimates from the Earnings Analysis tab on the thinkorswim® platform.

HD has also upped earnings-growth guidance in recent quarters, which included the expected impact of stock buybacks. The company had previously indicated it planned to repurchase an additional $2.1 billion of shares in Q4, bringing the total for fiscal 2017 to $8 billion. In December, the board of directors announced a new $15 billion share repurchase program. 

DOWN SLIGHTLY ON THE YEAR. Home Depot (HD) hit an all-time high of $207.61 and then pulled back to a low of $175.42, a large swing in a pretty short span of time as major indices sold off. Since then, it’s recovered a bit and is down 1.47% on the year. The bottom chart shows implied volatility, which has declined slightly heading into Tuesday’s earnings report. Chart source: thinkorswim® from TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Home Depot Options Trading Activity

The options market has priced in an expected share price move of 3.8% in either direction around the earnings release, according to options data on the thinkorswim® platform. Implied volatility is at the 58th percentile as of this morning.

In short-term trading at the Feb. 23 weekly expiration, most of the activity on the call side has been right around the money at the 185 and 187.5 strike prices. There’s been lighter trading volume on the put side recently and most of the activity was at the 180, 182.5 and 185 strikes, with the highest open interest at the 185-strike put.

Further out at the Mar. 16 monthly expiration, calls have been active at the 190 and 200 strike prices. Again, trading has been lighter on the put side with some activity ranging from the 170 strike to the 185 strike.

Overall during yesterday’s session, trading was heavier on the call side with a put/call ratio of 0.508.

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

Earnings season is slowing down, but there's still some large companies across sectors that have yet to release their quarterly results, including some of the larger retailers. Markets are closed on President’s Day, Feb. 19 and then MGM Resorts International (NYSE: MGM), Walmart Inc (NYSE: WMT) join HD in reporting results before the open on Tuesday, Feb. 20.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Posted-In: JJ Kinahan TD AmeritradeEarnings News Previews Options Markets Trading Ideas


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