On Tuesday, Home Depot (HD) reported solid third-quarter results, increased its 2011 guidance, and lifted its dividend 16%. We continue to feel that Home Depot is better positioned that peer Lowe’s (LOW) and are maintaining our $35 fair value estimate on the home-improvement retailer.
The firm’s revenue jumped 4.4% from the third quarter led by comparable store sales of 4.2% (total transactions were up 1.2%, while average ticket price accounted for the balance of the increase). Comp sales for US stores were also strong at 3.8%. Storm-related sales—Hurricane Irene—bolstered results, and the firm noted positive comps in all but 5 of its top 40 markets (New Jersey and South Atlantic regions were particularly strong). Though these two regions benefited from storm-related demand (generators, pumps, extension cords, etc.), management noted that its strongest division was actually its western one, which was not impacted by Hurricane Irene, suggesting its core categories remain on track. Home Depot noted that tools, electrical, indoor garden, building materials and plumbing were outperformers, while lumber, outdoor garden, bath and millwork were weak during the period. This solid same-store-sales performance came in better than Lowe’s for the same period, a streak that now has continued for ten consecutive quarters.
The company’s gross margin expanded slightly due to supply chain improvements offset in part by the mix of products and services sold. The firm’s operating margin also expanded during the period thanks to positive expense leverage (expenses are increasing at about 20% of the sales growth rate). Such strong gross-margin performance fell to the bottom line, as earnings per share jumped about 18% from the same period last year, to $0.60 (consensus was at $0.59).
Looked ahead, the company maintained its fiscal 2011 sales guidance of up approximately 2.5%, but raised its bottom-line yearly outlook to 18% growth, or $2.38 per diluted share (was $2.34). And while Home Depot will face tough year-over-year comparisons due to the expirations of an energy-efficient tax credit in the US and strong performance from its gift centers, the home-improvement retailer expects positive comps for the period. We also share below what management had to say about the US housing market and economy on its conference call:
In the U.S., we still don’t see and we don’t expect to see in the near term any meaningful tailwind from the housing market. Inventories remain high, pricing is under pressure and credit is still difficult. Private fixed residential investment, PFRI, as a percent of GDP, is still at a historic low.
With this relatively bearish outlook for housing, execution in the form of customer service and supply chain improvements will be critical to the home retailer’s success in coming periods. As it relates to capital allocation, Home Depot also upped its quarterly dividend by 16%, to 29 cents per share, a move we applaud for income investors. The firm raised its targeted dividend payout ratio to 50% (from 40%), a level we think is manageable. Home Depot will continue to buy back shares and complete the remaining $6.8 billion of share repurchases that have been authorized through 2014.