Home Depot’s fiscal 2018 first quarter results came in short of expectations largely due to adverse weather conditions in many parts of the country, but the company reiterated its full-year guidance in a vote of confidence from management.
By Kris Rosemann
Home improvement retailer Home Depot’s (HD) fiscal first quarter results, released May 15, were impacted by Mother Nature as many consumers delayed purchases of seasonal products. The slow start to the spring selling season resulted in a 1.3% drop in customer transactions in the quarter on a year-over-year basis, but the company was still able to realize comparable sales growth of 4.2% (US-only comps growth was 3.9%). The company expects to see a strong second quarter as consumers begin to make up for their delayed home projects, and management indicated that comparable store sales are up at a double-digit rate thus far in the month of May.
Net sales at Home Depot grew 4.4% from the year-ago period in the quarter, and diluted earnings per share leapt nearly 25% to $2.08 thanks in large part to a materially reduced tax bill. Free cash flow in the quarter fell by almost 17% on a year-over-year basis to just over $3.4 billion but was still easily sufficient in covering cash dividends paid of less than $1.2 billion. The company was also able to reduce its net debt load to just under $22.2 billion at the end of the fiscal first quarter from more than $23.4 billion one quarter earlier. This debt load, along with its sizable dividend obligations, weighs on its Dividend Cushion ratio, which sat at 1.4 at last check. Shares yield ~2.2% as of this writing, and management targets a payout ratio of roughly 55%.
Image source: Valuentum. Note: Dividend Cushion calculation ignores the impact of short-term debt.
Home Depot’s update on its progress thus far in the month of May and its reiteration of its full-year guidance are indicative of the fundamental strength currently driving its business. Clearly it is not insulated from risks beyond its control as was the case in the first quarter of fiscal 2018 as it battled unusually challenging weather conditions, especially in the month of April, but the company’s progress thus far in the second quarter of its fiscal year coupled with its observations of a favorable housing and macroeconomic backdrop suggest the issues faced in the first quarter are transient. Management continues to expect fiscal 2018 net sales growth of ~6.7%, comparable sales growth of ~5%, and diluted earnings per share growth of ~28%. We value shares at $158 each.
—–
Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.
Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.