Home Depot’s earnings guidance and consensus estimates in 1Q 2016
Home Depot’s (HD) slated to report its 1Q16 earnings on May 19. Consensus Wall Street analysts’ estimates project adjusted earnings per share (or EPS) of $1.15 in 1Q16, up 20.3% from 1Q15. The company has beaten consensus Wall Street estimates in 27 of the last 28 quarters. HD missed estimates in 1Q15, primarily due to the cold snap that affected results for almost all sectors of the US economy. The company’s results in fiscal 2015 were also affected by data breach expenses.
Peers Lowe’s (LOW) and Williams-Sonoma (WSM) will both declare earnings on May 20, while Bed, Bath & Beyond (BBBY) will report results on June 24. Pier 1 Imports (PIR) is slated to declare earnings in the third week of June.
Earnings growth drivers
Home Depot’s earnings run rate should outpace the company’s sales. Home Depot is projecting full-year comps sales growth of about 3.3% to 4.5% in fiscal 2016—about 150 basis points above gross domestic product (or GDP) growth. As I mentioned in Part 2 of this series, growth should come from the company’s spring initiatives and omni-channel efforts. Home Depot is also looking at opening six new stores in Mexico and Canada.
The company’s operating costs should grow at a slower pace than its revenue. Home Depot is looking at operating margin expansion of 0.6% to over 13% in fiscal 2016. Higher profitability should come from higher same-store sales, inventory management, an increase in the company’s proprietary product assortment, and lower energy prices.
However, the higher US dollar will likely hit Home Depot’s earnings. The company operates in Canada and Mexico, which account for ~11% of the retailer’s revenue. Sales from these countries should be affected since the US dollar has appreciated versus the Mexican peso and the Canadian dollar. The company estimates an impact of $1 billion on its full-year sales, or $0.06 per share due to adverse currency movements[1. At the currency exchange rate levels prevailing at the time of Home Depot’s last earnings call.].
HD and LOW together constitute ~1.1% of the SPDR S&P 500 ETF’s (SPY) portfolio holdings. HD is also a member of the elite 30-stock Dow. Approximately 4.1% of the SPDR Dow Jones Industrial Average ETF’s (DIA) portfolio holdings are invested in HD.