uploads/2020/02/home-depot-upcoming-q4-earnings.jpg

Can Home Depot’s Q4 Earnings Continue Its Upward Momentum?

By

Updated

Home Depot (NYSE:HD) will likely report its fourth-quarter earnings on February 25. For the quarter, analysts expect the company’s revenue and EPS to decline.

Article continues below advertisement

Home Depot’s revenue could fall in the fourth quarter

Analysts expect Home Depot to report revenue of $25.77 billion—a fall of 2.7% from $26.49 billion in the fourth quarter of the previous year. Notably, the fourth quarter of 2018 had 14 weeks. So, the company will have one less week of operation in the fourth quarter of 2019, which leads to lower revenue. However, positive SSSG (same-store sales growth) and adding new stores could offset some of the declines. Meanwhile, the company operated 2,290 stores at the end of the third quarter. The number of stores increased by three compared to the stores that the company operated at the end of 2018.

Home Depot’s management wants to provide a frictionless and interconnected experience for its customers. An option for faster fulfillment could drive the company’s SSSG. By the end of the third quarter, the company improved the look and feel of 60% of its stores. Home Depot also announced that 50% of its online customers picked up their orders from stores. So, to improve customers’ convenience, the company implemented automated lockers in approximately 1,300 stores. Along with these initiatives, expanding assortments could drive the company’s sales in the fourth quarter.

Article continues below advertisement

Home Depot’s EPS to fall

Lower revenue, a decline in the EBIT margin, higher interest expenses, and a higher effective tax rate could lower Home Depot’s EPS in the fourth quarter. For the quarter, analysts expect the company to report an EBIT of $3.38 billion, which represents an EBIT margin of 13.1%. Meanwhile, the EBIT margin represents a decline of 0.6% from 13.7% in the fourth quarter of 2018. The increase in the company’s investment in its growth initiatives could lower the EBIT margin. Also, analysts expect the effective tax rate to be at 25.5% compared to 24.8% in the fourth quarter of 2018.

Outlook

For 2020, Home Depot’s management expects its same-store sales and revenue to rise by 3.5% to 4.0%. Management expects the company’s operating margin to be 14.0%. Also, the return on invested capital could be approximately 45%.

Article continues below advertisement

Analysts’ recommendations for Home Depot

Analysts favor a “buy” rating for Home Depot ahead of its fourth-quarter earnings. Among the 33 analysts that cover the stock, 21 recommend a “buy,” 11 recommend a “hold,” and one recommends a “sell.” Overall, analysts have an average target price of $238.04, which implies a fall of 2.9% from its current stock price. Since the beginning of this year, Wells Fargo, Credit Suisse, and Morgan Stanley have all raised their target prices. On February 14, Wells Fargo increased its target price from $240 to $265. In January, Morgan Stanley increased its target price from $225 to $245, while Credit Suisse hiked its target price from $235 to $255.

Stock performance

As of February 17, Home Depot was trading at $245.03, which represents a rise of 2.6% since it reported its third-quarter earnings on November 19. In the third quarter, the company reported a higher-than-expected EPS. However, the revenue fell short of analysts’ expectations. Following the third-quarter earnings, Home Depot’s management lowered its sales guidance for 2019. Management cited a delay in the realization of benefits from its “One Home Depot Strategy.” To learn more, read Home Depot Stock Fell on Guidance Cut, Q3 Sales Miss. The company’s stock price fell due to weak third-quarter sales and a lower 2019 sales guidance. Investors’ optimism about the company’s “One Home Depot Strategy” and increased home sales in December 2019 drove the company’s stock price.

After delivering strong returns of 42.6% in 2019, Home Depot has returned 12.2% this year as of Monday. Meanwhile, Lowe’s (NYSE:LOW), Williams-Sonoma (NYSE:WSM), and RH (NYSE:RH) have returned 4.7%, 0.8%, and 11.6% YTD, respectively.

Advertisement

More From Market Realist