Valuentum Exclusive Analysis for the Discerning Investor

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Image Source: Home Depot Inc – First Quarter of Fiscal 2021 Earnings Press Release

By Callum Turcan

New home construction activity along with do-it-yourself (‘DIY’) and do-it-for-me (‘DIFM’) activities remains robust in the US, which is great news for Home Depot Inc (HD). On May 18, Home Depot reported first quarter fiscal 2021 earnings (period ended May 2, 2021) that beat both consensus top- and bottom-line estimates. Home Depot’s GAAP revenues rose by 33% year-over-year and its GAAP operating income grew by 76% year-over-year as the home improvement and construction retailer reported strong demand from both its professional and retail customer base. We are huge fans of Home Depot and include the company as an idea in our Dividend Growth Newsletter portfolio. Shares of HD yield ~2.1% as of this writing.

Earnings Update

Last fiscal quarter, Home Depot’s customer transactions were up over 19% and its average ticket was up over 10% year-over-year. This strength is in part due to Home Depot’s impressive omni-channel selling capabilities with an eye towards its booming e-commerce business and impressive digital operations. Retailers with top-notch digital platforms are best positioned to remain relevant in the face of the proliferation of e-commerce. Home Depot generated $5.8 billion in free cash flow during the first quarter of fiscal 2021 (up from $5.2 billion in the same period the prior fiscal year) while spending $1.8 billion covering its dividend obligations and $3.8 billion towards share repurchases during this period.

Home Depot acquired HD Supply, billed as “a leading national distributor of maintenance, repair and operations (‘MRO’) products in the multifamily and hospitality end markets,” through an all-cash deal worth ~$8 billion by enterprise value. We like the move as it significantly grew Home Depot’s exposure to the MRO space and further reinforced its dominant position in the professional side of the company’s industry. Home Depot had a $29.2 billion net debt load at the end of the first quarter of fiscal 2021, though its cash and cash equivalents position of $6.6 billion combined with the company’s stellar free cash flow generating abilities and promising outlook should enable it to stay on top of that burden going forward.

The MRO industry is highly fragmented and has a total addressable market (‘TAM’) of ~$55 billion according to Home Depot, providing the firm an opportunity to further enhance its growth runway. Home Depot closed the acquisition in December 2020, and the deal is expected to be accretive to the firm’s EPS in fiscal 2021. The company noted that its MRO-specific distribution system in the US and Canada was expansive and supported by robust product offerings along with value-add service capabilities.

Management Commentary

During Home Depot’s latest earnings call, management had this to say (emphasis added, moderately edited):

“Our results this quarter were once again driven by broad-based strength across the business and geographies. All of our top 40 markets posted double-digit comps, while Canada posted comps above the company average and Mexico posted double-digit comps. Both ticket and transactions were up double digits in the quarter… we saw strong double-digit growth from both our Pro and DIY customers…

…[W]e continue to see strong level of engagement across our digital platforms… Sales leveraging our digital platforms increased approximately 27% versus the first quarter last year and approximately 55% of online orders were fulfilled through a store.

We continue to rollout new capabilities, such as mixed cart selling from store that remove friction for both our customers and associates. The mix cart feature enables associates to more efficiently and effectively serve the total project needs for a customer, as products from both the website and store can be added to a single transaction.” --- Craig Menear, CEO of Home Depot

We appreciate that Home Depot is fulfilling the majority of its online sales in-store, as sales fulfilled in that manner (generally speaking) carry stronger margins than home delivery fulfillment services. Additionally, Home Depot’s digital sales have continued to grow at a brisk pace of late even as coronavirus (‘COVID-19’) pandemic-related lockdown measures were eased in many jurisdictions. Here is additional management commentary from Home Depot’s latest earnings call (emphasis added):

“Moving to the broader demand environment for home improvement. The strong demand that we’ve seen for more than a year now has continued. During the first two weeks of May, on a two-year stacked basis, we’ve seen comps in the U.S. above 30%. Housing remains strong, homeowners balance sheets are healthy and our customers continue to tell us that they are planning on spending of variety -- on a variety of home improvement projects.” --- Richard McPhail, CFO of Home Depot

Home Depot is firing on all cylinders, and the macro environment remains cooperative, which in our view highlights the company’s promising outlook. Management indicated that Home Depot started the fiscal second quarter (current) strong, which we appreciate.

Concluding Thoughts

We continue to have a very favorable view towards Home Depot’s dividend growth potential. Its Dividend Cushion ratio of 1.6 is a result of its stellar free cash flow generating abilities, though that ratio would be stronger if Home Depot were to delever the balance sheet in the wake of its latest acquisition. Our fair value estimate sits at $331 per share of HD with room for upside as the top end of our fair value estimate range sits at $397 per share. We like Home Depot as an idea in the Dividend Growth Newsletter portfolio.

Downloads

Home Depot's 16-page Stock Report (pdf) >>

     Home Depot's Dividend Report (pdf) >>

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Callum Turcan does not own shares in any of the securities mentioned above. Chipotle Mexican Grill Inc (CMG), Dollar General Corporation (DG), Domino’s Pizza Inc (DPZ) and The Walt Disney Company (DIS) are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Dick’s Sporting Goods Inc (DKS) and Home Depot Inc (HD) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.