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Can Home Depot Sustain Global Position amid Economic Uncertainty?

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2Q16 results

Home Depot (HD) is set to announce its earnings results for fiscal 2Q16 on August 16, 2016. The stock price of the world’s largest home improvement retailer has grown by 3.9% on a YTD (year-to-date) basis to $136.21 as of August 8, 2016. The company’s stock price has risen by 3.2% since the announcement of its 1Q16 results on May 17, 2016. Home Depot beat the market estimates for earnings and revenues for 1Q16, which ended on May 1, 2016. The company also raised its fiscal 2016 guidance.

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Peer comparison

The stock prices of Bed Bath & Beyond (BBBY) and Williams-Sonoma (WSM) fell by 7.2% and 7.1% on a YTD basis, respectively, while the stock price of Lowe’s Companies (LOW) has risen by 8.4% as of August 8.

The VanEck Vectors Retail ETF (RTH) invests 7.6%, 5.0%, and 0.8% of its portfolio in Home Depot, Lowe’s Companies, and Bed Bath & Beyond, respectively. On a YTD basis, Home Depot’s stock has underperformed the S&P 500 Index, which has risen by 8.4% since the start of the year.

Positive indicators

The National Association of Home Builders’ Remodeling Market Index (or RMI) has come up with a rating of 50 plus for 13 successive quarters in July 2016. Harvard’s Leading Indicator of Remodeling Activity (or LIRA) projected an annual renovation expenditure of $321 billion by mid-2017. Americans are opting to renovate their kitchens, rooms, and bathtubs instead of investing in new housing amid uncertainties in housing prices and mortgage rates. All of this further consolidated the positions of house improvement retailers like Home Depot and Lowe’s Companies while other luxury retailers and stores struggled for market share.

However, the house improvement retailers will also have to withstand the potential effects of Brexit and the US presidential election on the housing market.

Series overview

In this preview series on Home Depot’s 2Q16 results, we’ll analyze expectations for Home Depot’s sales, earnings, and margins. The series will also discuss the company’s leverage position and valuation. Finally, we’ll discuss the analysts’ estimates for the stock.

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