Home Depot: Little Room For Growth

Home Depot (HD) is one of the world’s largest retailers of home improvement goods and services. It is a cyclical company whose performance has a direct correlation with the US housing industry. It was founded in 1978, and it currently operates around 2,260 stores throughout the US, Mexico and Canada.

Rising Growth Rates

Home Depot’s stock price has risen approximately 250% since January 2009, following an improvement in housing construction activity. The company’s same store sales (SSS) started improving from the first quarter of fiscal year 2011 (1QFY11), and SSS growth rose 10.7% YoY in 2QFY13.

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Home Depot Vs. Lowe’s: Who Houses Better Performance

The Home Depot (HD) and Lowe’s Companies, Inc. (LOW) compete in the home improvement retail industry in the US, which comprises retailers that sell plumbing, kitchen fittings, hardware, appliances and other home improvement products.

The total size of the US home improvement retail industry is approximately $129.2 billion by revenues, with Home Depot leading the market with a 58.9% share. Together, Home Depot and Lowe’s account for 97% of the market share by revenues.

Although the demand for home improvement retailers is driven by both new housing starts and existing home sales, Home Depot and Lowe’s Inc.’s revenue growth rates are more dependent on existing home sales than housing starts. Existing home sales drive demand for plumbing, electrical and kitchen products, which are major contributors to these companies’ revenues, while housing starts drive demand for building materials, lumber and millwork, which contribute less to their total revenues.

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Home Depot Earnings Review – 3QFY13

Home Depot was able to beat estimates for the third quarter of FY13. The company also raised guidance on the basis of better operating performance and share buyback activity.
Home Depot is up nearly 2% today after beating analysts’ estimates and raising guidance. However, the company faces the risk of a housing slowdown and will not be able to sustain high single digit growth in same store sales as mortgage rates rise.

Earnings Review

Home Depot’s quarterly results for 3QFY13 beat analysts’ estimates for revenues and adjusted EPS by 1.5% and 5.8% respectively.
The company announced an EPS of $0.95 for the quarter vs. estimates of $0.89. Growth in company’s comparable store sales (comps) and share repurchases both contributed towards driving up the company’s EPS. Its comps were up 7.4% with a major contribution from 8.2% growth in comps from US stores. The company repurchased $1.69bn worth of stock (1.5% of the company’s total market cap) during the quarter.

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