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Why Home Depot’s Sales Expectations Rose in 3Q16

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Home Depot’s sales guidance for fiscal 2016

As we discussed in Part 1, Home Depot (HD) will release its third quarter earnings for fiscal 2016 on November 17. The expectations for revenue growth are upbeat. According to forward guidance provided by the company, Home Depot’s sales are expected to grow at 5.2%–6.0% YoY (year-over-year) in fiscal 2016. The sales expectations were revised upwards at the end of 2Q16, partly due to the company’s acquisition of Interline Brands earlier this year.

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Wall Street analysts’ revenue estimates

Wall Street analysts’ consensus sales expectations for 3Q16 exceeded the high end of the company’s projected guidance range for fiscal 2016. Wall Street analysts are projecting sales of $21.8 billion in the quarter. That’s up 6.2% YoY. The growth estimates also rose from the 4.6% projected a few months earlier—partly due to the company’s better-than-expected performance in 1H16. It was also due to the projected upside from the Interline acquisition.

Analyzing Home Depot’s 1H16 sales performance

In 1H16, sales grew 5.1% YoY to $45.7 billion. The sales growth was spurred by higher spending by wealthier individuals on big-ticket items. The company saw broad growth across the categories. The company achieved records for the average ticket size and the number of transactions in 2Q16. The recovery in the US housing market also benefited home improvement retailers like Home Depot.

Firms in the home furnishing industry, catering to the higher-end of the market, also had strong sales traction. Companies like Restoration Hardware (RH) and Williams-Sonoma (WSM) increased their top line by 16.9% and 8.5%, respectively, in their last quarters. They also showed a willingness to expand their store footprint and embark on new product lines. Restoration Hardware launched RH Modern and RH Teen this year. Williams-Sonoma’s Pottery Barn launched its Peanuts-inspired collection, among other collections, this year. William-Sonoma also increased its store count by 23 over the past year[1. As of the quarter ending August 2, 2015].

Home Depot’s arch-rival, Lowe’s (LOW) also reported higher spending trends on big-ticket items this fiscal year.

Home Depot is the sixth-largest holding in the iShares U.S. Home Construction ETF (ITB). It accounts for ~5% of ITB’s portfolio. Home Depot is also the sixth-largest holding in the SPDR Dow Jones Industrial Average ETF (DIA). It accounts for ~4.7% of DIA’s portfolio.

In the next part, we’ll discuss the same-store sales expectations for Home Depot and other key sales drivers.

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